PATHWARD FINANCIAL, INC.
AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS
Meta Financial Group , Inc.® ("Meta" or "the Company" or "us") and its
wholly-owned subsidiary, MetaBank®, National Association ("MetaBank" or "the
Bank") may from time to time make written or oral "forward-looking statements,"
including statements contained in this Quarterly Report on Form 10-Q, the
Company's other filings with the Securities and Exchange Commission (the "SEC"),
the Company's reports to stockholders, and other communications by the Company
and MetaBank, which are made in good faith by the Company pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by words such as "may," "hope,"
"will," "should," "expect," "plan," "anticipate," "intend," "believe,"
"estimate," "predict," "potential," "continue," "could," "future," or the
negative of those terms, or other words of similar meaning or similar
expressions. You should carefully read statements that contain these words
because they discuss our future expectations or state other "forward-looking"
information. These forward-looking statements are based on information currently
available to us and assumptions about future events, and include statements with
respect to the Company's beliefs, expectations, estimates, and intentions, which
are subject to significant risks and uncertainties, and are subject to change
based on various factors, some of which are beyond the Company's control. Such
risks, uncertainties and other factors may cause our actual growth, results of
operations, financial condition, cash flows, performance and business prospects
and opportunities to differ materially from those expressed in, or implied by,
these forward-looking statements. Such statements address, among others, the
following subjects: future operating results; expectations in connection with
the impact of the ongoing COVID-19 pandemic and related governmental actions on
the Company and MetaBank; industry and the capital markets; customer retention;
loan and other product demand; expectations concerning acquisitions and
divestitures; new products and services; credit quality; the level of net
charge-offs and the adequacy of the allowance for credit losses; technology; and
the Company's employees. The following factors, among others, could cause the
Company's financial performance and results of operations to differ materially
from the expectations, estimates, and intentions expressed in such
forward-looking statements: maintaining our executive management team; expected
growth opportunities may not be realized or may take longer to realize than
expected; the potential adverse effects of the ongoing COVID-19 pandemic and any
governmental or societal responses thereto including the deployment and efficacy
of the COVID-19 vaccines, or other unusual and infrequently occurring events;
actual changes in interest rates and the Fed Funds rate; additional changes in
tax laws; the strength of the United States' economy, in general, and the
strength of the local economies in which the Company operates; changes in trade,
monetary, and fiscal policies and laws, including interest rate policies of the
Board of Governors of the Federal Reserve System (the "Federal Reserve");
inflation, market, and monetary fluctuations; the timely and efficient
development of, and acceptance of, new products and services offered by the
Company or its strategic partners, as well as risks (including reputational and
litigation) attendant thereto, and the perceived overall value of these products
and services by users; the Bank's ability to maintain its Durbin Amendment
exemption; the risks of dealing with or utilizing third parties, including, in
connection with the Company's refund advance business, the risk of reduced
volume of refund advance loans as a result of reduced customer demand for or
usage of Meta's strategic partners' refund advance products; our relationship
with, and any actions which may be initiated by our regulators; the impact of
changes in financial services laws and regulations, including, but not limited
to, laws and regulations relating to the tax refund industry and the insurance
premium finance industry and recent and potential changes in response to the
ongoing COVID-19 pandemic, including various laws and the rules and regulations
that may be promulgated thereunder; technological changes, including, but not
limited to, the protection of our electronic systems and information; the impact
of acquisitions and divestitures; litigation risk; the growth of the Company's
business, as well as expenses related thereto; continued maintenance by MetaBank
of its status as a well-capitalized institution; changes in consumer spending
and saving habits; the impact of our participation as prepaid card issuer for
the EIP program and potentially similar programs in the future; losses from
fraudulent or illegal activity; technological risks and developments, and cyber
threats, attacks or events; and the success of the Company at maintaining its
high quality asset level and managing and collecting assets of borrowers in
default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place
undue reliance on these forward-looking statements. The forward-looking
statements included in this Quarterly Report on Form 10-Q speak only as of the
date hereof, and the Company does not undertake any obligation to update,
revise, or clarify these forward-looking statements whether as a result of new
information, future events or otherwise. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are expressly qualified in its entirety by the cautionary statements contained
or referred to in this section. Additional discussions of factors affecting the
Company's business and prospects are reflected under the caption "Risk Factors"
and in other sections of the Company's Annual Report on Form 10-K for the
Company's fiscal year ended September 30, 2020 , and in other filings made with
the SEC . The Company expressly disclaims any intent or obligation to update any
forward-looking statements, whether written or oral, that may be made from time
to time by or on behalf of the Company or its subsidiaries, whether as a result
of new information, changed circumstances, or future events or for any other
reason.
49-------------------------------------------------------------------------------- Table of Contents GENERAL The Company, a registered bank holding company, is aDelaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis.
The Company's common stock trades on the NASDAQ Global Select Market under the symbol "CASH."
The following discussion focuses on the consolidated financial condition of the Company atMarch 31, 2021 , compared toSeptember 30, 2020 , and the consolidated results of operations for the three and six months endedMarch 31, 2021 and 2020. This discussion should be read in conjunction with the Company's consolidated financial statements, and notes thereto, for the year endedSeptember 30, 2020 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2020 .
EXECUTIVE SUMMARY
Business Developments The following highlights certain business developments during the quarter endedMarch 31, 2021 :
•Increased revenue included the benefits of H&R Block's suite of financial services products.
•Partnered with theU.S. Department of the Treasury's Bureau of the Fiscal Service ("Fiscal Service") to disperse Economic Income Payment ("EIP") stimulus payments through the distribution of prepaid cards. During the quarter, the Company began distributing cards under the authorizations for the second round onJanuary 4, 2021 and for the third round onMarch 23, 2021 .
•Selected as the issuing bank for Walgreens' newly launched bank-account product with InComm Payments and MasterCard, adding to the Bank's diverse suite of Banking as a Service relationships.
•Expanded our solar lending business, increasing our solar lending originations
for the first six months of the fiscal year 2021 by 65% to
•Dedicated additional resources to our Environmental, Social, and Governance
("ESG") activities to include the hiring a Chief People and Inclusion Officer,
Kia Tang .
Financial Highlights for the 2021 Fiscal Second Quarter
Total revenue for the fiscal 2021 second quarter was $187.3 million , a slight
decrease compared to $188.3 million for the same quarter in fiscal 2020, which
benefited from the one-time $19.3 million gain from the divestiture of the
Community Bank division.
Net interest income for the second quarter was $73.9 million , compared to $67.7
million in the comparable quarter of the prior year. The increase was primarily
driven by a reduction in total interest expense, partially offset by lower
overall yields realized on investments and loans and leases. Net interest margin
("NIM") decreased to 3.07% for the fiscal 2021 second quarter from 4.78% during
the same period of last year, chiefly reflecting excess cash associated with the
Company's participation in the EIP program, as described further below.
The Company's total gross loans and leases at March 31, 2021 increased $37.2
million , or 1%, to $3.65 billion , compared to March 31, 2020 . Average deposits
from the payments divisions for the fiscal 2021 second quarter increased nearly
181% to $9.29 billion when compared to the same quarter of the prior year. A
significant portion of the year-over-year increase reflected the Company's
participation in the EIP program, as described further below. The Company's cost
of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021
second quarter, compared to 0.83% during the prior year quarter, primarily due
to an increase in the average balance of the Company's noninterest-bearing
deposits from the EIP program.
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Noninterest income for the three months ended March 31, 2021 decreased to $113.5
million , compared to $120.5 million for the same period of the prior year. This
decrease was primarily due to the $19.3 million gain on divestiture of the
Community Bank division, which was recognized during the fiscal 2020 second
quarter. Partially offsetting the decrease were increases in total tax product
fee income and payment card and deposit fee income.
Noninterest expense increased 5% to $96.0 million for the fiscal 2021 second
quarter, from $91.7 million for the same quarter of last year, primarily driven
by increases in compensation and benefits due to a return to more normalized
incentive accruals and additional employees to support growth.
The Company repurchased 734,984 shares during the second quarter at an average
price of
Tax Season For the 2021 tax season, the Bank originated$1.79 billion in refund advance loans compared to$1.33 billion during the 2020 tax season.
During the fiscal 2021 second quarter, total tax services product revenue was
While the 2021 tax services results have thus far been favorable compared to the prior year's tax season, it has been below the Company's expectations as a result of reduced overall demand for refund advances due to consumers having access to EIP stimulus funds, which have been partially offset by higher payments fee income. We do expect overall tax season refund transfer volumes and revenue to be similar to last year. We believe the impacts to the tax advance product are unique to this tax season and the Company anticipates more normalized results from its H&R Block andJackson Hewitt relationships will be achieved in the 2022 tax season and beyond. Despite these stimulus-related impacts, total tax services product income, net of losses and direct product expenses, increased 14% when comparing the first six months of fiscal 2021 to the same period of the prior fiscal year. EIP Program Update The Bank is serving as the sole Financial Agent for distributing prepaid debit cards used in the EIP program. In 2020, the Bank dispensed approximately$6.42 billion of the first round of EIP payments under the CARES Act through the distribution of 3.6 million Bank-issued prepaid cards, and earlier this year dispensed approximately$7.10 billion of the second round of EIP payments under the CAA through the distribution of 8.1 million Bank-issued prepaid cards. OnMarch 11, 2021 , theU.S. Congress , through the ARP Act, directed the Internal Revenue Service, to distribute a third round of EIP via theU.S. Treasury to persons in theU.S. eligible to receive them. The Bank has entered into an amendment of its existing agreement with the Fiscal Service under which the Bank acts as its Financial Agent in connection with the provision of prepaid debit card services to disburse a portion of the EIP payments to eligible recipients via Bank-issued prepaid cards. Through this third round, the Bank disbursed approximately$10.64 billion of EIP payments through the distribution of 4.7 million Bank-issued prepaid cards. ThroughMarch 31, 2021 the Bank has issued a combined total of 16.5 million prepaid cards totaling approximately$24.15 billion related to three stimulus programs, of which$11.64 billion is still outstanding as ofMarch 31, 2021 . Of that balance, only$869.2 million remained on Meta's balance sheet, as MetaBank has been working with other banks to transfer these temporary deposits off the balance sheet. The Company anticipates that participating in the EIP card distribution program will continue to have a slightly positive impact on earnings and it does not expect any material impact on its risk-based capital ratios due to the participation in the card distribution program. Additionally, the Company does not expect these conditions will be sustained over the long-term. COVID-19 Business Update As ofMarch 31, 2021 , the Company had 576 loans outstanding with total loan balances of$208.6 million originated as part of the PPP, compared with 612 loans outstanding with total loan balances of$194.3 million for the quarter endedDecember 31, 2020 . 51
-------------------------------------------------------------------------------- Table of Contents As ofMarch 31, 2021 ,$66.5 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As ofDecember 31, 2020 , loans and leases totaling$84.2 million were within their deferment period. The Company's capital position remained in good standing as ofMarch 31, 2021 , even while continuing to absorb the temporary impact resulting from the receipt of deposits in conjunction with EIP payments described below. In addition, the Company has options available that can be used to effectively manage capital levels, including a strong and flexible balance sheet.
FINANCIAL CONDITION
At
Total cash and cash equivalents was$3.72 billion atMarch 31, 2021 , increasing from$427.4 million atSeptember 30, 2020 , primarily resulting from the receipt of EIP related deposits. The Bank has been working with other banks to transfer these temporary deposits off the balance sheet. Otherwise, the Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB ofDes Moines and the FRB. AtMarch 31, 2021 , the Company did not have any federal funds sold. The total investment portfolio increased$192.2 million , or 14%, to$1.55 billion atMarch 31, 2021 , compared to$1.36 billion atSeptember 30, 2020 , as purchases exceeded maturities and principal pay downs. The Company's portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. All MBS held by the Company atMarch 31, 2021 were issued by aU.S. Government agency or instrumentality. Of the total MBS atMarch 31, 2021 ,$558.8 million , at fair value, were classified as available for sale, and$4.4 million , at cost, were classified as held to maturity. Of the total investment securities atMarch 31, 2021 ,$921.9 million , at fair value, were classified as available for sale and$67.7 million , at cost, were classified as held to maturity. During the six months endedMarch 31, 2021 , the Company purchased$411.5 million of investment securities. Loans held for sale atMarch 31, 2021 totaled$67.6 million , decreasing from$183.6 million atSeptember 30, 2020 . This decrease was primarily driven by sales of the retainedCommunity Bank loan portfolio toCentral Bank during the six months endedMarch 31, 2021 .
The Company's total loans and leases increased
National lending loans and leases increased$471.4 million , or 17% to$3.30 billion atMarch 31, 2021 compared toSeptember 30, 2020 . Within the National Lending portfolios, commercial finance loans and leases increased$197.9 million , tax services loans increased$222.9 million , consumer finance increased$11.5 million and warehouse finance increased$39.1 million atMarch 31, 2021 compared toSeptember 30, 2020 . The increase in commercial finance loan balances was largely driven by the term lending and asset based lending categories. The seasonality of the Company's tax services business led to the increase in tax services loans atMarch 31, 2021 compared toSeptember 30, 2020 . Community banking loans decreased$137.5 million , or 28%, atMarch 31, 2021 compared toSeptember 30, 2020 , primarily attributable to loan portfolio sales along with continued principal payments and payoffs. As ofMarch 31, 2021 , the Company had no community banking loans classified as held for sale. Through the Bank, the Company owns stock in the FHLB due to the Bank's membership and participation in this banking system as well as stock in theFederal Reserve Bank . The FHLB requires a level of stock investment based on a pre-determined formula. The Company's investment in these stocks increased$1.3 million , or 5%, to$28.4 million atMarch 31, 2021 from$27.1 million atSeptember 30, 2020 , resulting from the purchase of FHLB membership stock. 52
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Total end-of-period deposits increased$3.66 billion , or 74%, atMarch 31, 2021 to$8.64 billion as compared toSeptember 30, 2020 , primarily driven by an increase in noninterest-bearing deposits of$3.57 billion , which was largely attributable to the balances on the EIP cards. The average balance of total deposits and interest-bearing liabilities was$7.57 billion for the six-months endedMarch 31, 2021 , compared to$5.39 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the six-months endedMarch 31, 2021 increased$3.94 billion , or 133%, to$6.90 billion compared to the same period in the prior year. These increases were primarily attributable to EIP related deposit balances. The Company's total borrowings decreased$2.9 million , or 3%, from$98.2 million atSeptember 30, 2020 to$95.3 million atMarch 31, 2021 . The Company also has an available no-fee line of credit with JP Morgan of$25.0 million with no funds advanced atMarch 31, 2021 . AtMarch 31, 2021 , the Company's stockholders' equity totaled$835.3 million , a decrease of$12.1 million , from$847.3 million atSeptember 30, 2020 . The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital.The Company and Bank remained above the federal regulatory minimum capital requirements atMarch 31, 2021 , continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See "Liquidity and Capital Resources" for further information. Payments Noninterest-bearing Checking Deposits The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's Condensed Consolidated Statements of Financial Condition. Negative balances can relate to any of the following payments functions: -Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20. -Discount fundings: The Company funds cards in an amount that is estimated to be less than final breakage values on card programs. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to one partner. -Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category. The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the payments division: (Dollars in Thousands) March 31, 2021 September 30,
2020
Noninterest-bearing deposits$ 8,338,473 $ 4,960,276 Prefunding (325,640) (528,131) Discount funding (73,127) (62,443) DDA overdrafts (11,471) (13,072)
Noninterest-bearing checking, net
RESULTS OF OPERATIONS
General
The Company recorded net income of$59.1 million , or$1.84 per diluted share, for the three months endedMarch 31, 2021 , compared to net income of$52.3 million , or$1.45 per diluted share, for the three months endedMarch 31, 2020 . Total revenue for the fiscal 2021 second quarter was$187.3 million , compared to$188.3 million for the same quarter in fiscal 2020, a slight decrease. The increase in net income was primarily driven by an increase in net interest income and a decrease in provision for credit loss expense. 53
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The Company recorded net income of$87.1 million , or$2.65 per diluted share, for the six months endedMarch 31, 2021 , compared to$73.4 million , or$2.00 per diluted share, compared to the same period in the prior year. Total revenue for the six months endedMarch 31, 2021 was$298.8 million , compared to$290.4 million for the same period of the prior year, an increase of 3%. Net Interest Income Net interest income for the fiscal 2021 second quarter was$73.9 million , an increase of 9%, from$67.7 million for the same quarter in fiscal 2020. The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall yields realized on investments and loans and leases. For the six months endedMarch 31, 2021 , net interest income was$139.8 million , an increase of 6%, from$132.4 million compared to the same period in the prior year. During the fiscal 2021 second quarter, interest expense decreased$9.8 million which was partially offset by decreases in loan and lease interest income of$2.0 million and investment securities and cash interest income of$1.7 million , when comparing to the prior year quarter. The quarterly average outstanding balance of loans and leases increased by 8% on a linked quarter basis primarily due to seasonal tax services loans with growth from Term Lending, Asset Based Lending, and SBA/USDA , partially offset by lower community bank loan balances. The Company's average interest-earning assets for the fiscal 2021 second quarter increased by$4.07 billion , to$9.77 billion compared with the second quarter in fiscal 2020, primarily due to the effects of the EIP program. NIM decreased to 3.07% in the fiscal 2021 second quarter from 4.78% for the comparable quarter last year. The overall reported tax equivalent yield ("TEY") on average earning assets decreased by 249 basis points to 3.15% for the fiscal 2021 second quarter compared to the prior year quarter, driven primarily by excess low-yielding cash held at theFederal Reserve , as well as the lower interest rate environment. The fiscal 2021 second quarter TEY on the securities portfolio was 1.78% compared to 2.68% for the comparable period last year. For the six months endedMarch 31, 2021 , NIM was 3.65%, decreasing 121 basis points from 4.86% compared to the same period in the prior year. Net interest margin, tax-equivalent for the six months endedMarch 31, 2021 was 3.67%, a decrease of 123 basis points compared to the same period in the prior year.
The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021 second quarter, compared to 0.83% during the prior year quarter. This reflected primarily an increase in the average balance of the Company's noninterest-bearing deposits, mainly due to the EIP program noted above. The Company's overall cost of deposits was 0.02% in the fiscal 2021 second quarter, compared to 0.66% in the same quarter last year.
The following tables present, for the periods indicated, the Company's total
dollar amount of interest income from average interest-earning assets and the
resulting yields, as well as the interest expense on average interest-bearing
liabilities, expressed both in dollars and rates. Tax-equivalent adjustments
have been made in yield on interest-bearing assets and net interest
margin. Nonaccruing loans and leases have been included in the table as loans
carrying a zero yield.
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Three Months Ended March 31,
2021 2020
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 4,187,558 $ 1,090 0.11 % $ 196,754 $ 739 1.51 %
Mortgage-backed securities 543,256 2,607 1.95 % 358,103 2,493 2.80 %
Tax exempt investment securities 297,299 1,132 1.96 % 454,177 2,132 2.39 %
Asset-backed securities 389,406 1,290 1.34 % 304,674 2,271 3.00 %
Other investment securities 230,168 1,077 1.90 % 192,379 1,275 2.67 %
Total investments 1,460,129 6,106 1.78 % 1,309,333 8,171 2.68 %
Total commercial finance 2,471,694 46,299 7.60 % 2,020,358 41,643 8.29 %
Total consumer finance 255,625 6,968 11.06 % 264,307 5,386 8.20 %
Total tax services 714,789 6,544 3.71 % 516,491 6,351 4.95 %
Total warehouse finance 315,162 4,845 6.23 % 314,474 4,785 6.12 %
National Lending loans and leases 3,757,270 64,656 6.98 % 3,115,630 58,165 7.51 %
Community Banking loans 363,285 3,817 4.26 % 1,080,142 12,328 4.59 %
Total loans and leases 4,120,555 68,473 6.74 % 4,195,772 70,493 6.76 %
Total interest-earning assets 9,768,242 $ 75,669 3.15 % 5,701,859 $ 79,403 5.64 %
Noninterest-earning assets 887,610 909,040
Total assets $ 10,655,852 $ 6,610,899
Interest-bearing liabilities:
Interest-bearing checking(2) $ 275,982 $ - - % $ 182,107 $ 105 0.23 %
Savings 77,562 4 0.02 % 46,592 6 0.05 %
Money markets 56,352 42 0.30 % 68,421 153 0.90 %
Time deposits 12,820 34 1.07 % 84,940 427 2.02 %
Wholesale deposits 175,777 365 0.84 % 1,476,085 7,551 2.06 %
Total interest-bearing deposits 598,493 445 0.30 % 1,858,145 8,242 1.78 %
Overnight fed funds purchased - - - % 372,596 1,307 1.41 %
FHLB advances - - - % 110,000 670 2.45 %
Subordinated debentures 73,864 1,147 6.30 % 73,698 1,158 6.32 %
Other borrowings 22,377 227 4.12 % 28,714 289 4.04 %
Total borrowings 96,241 1,374 5.79 % 585,008 3,424 2.35 %
Total interest-bearing liabilities 694,734 1,819 1.06 % 2,443,153 11,666 1.92 %
Noninterest-bearing deposits 8,967,067 - - % 3,199,148 - - %
Total deposits and interest-bearing
liabilities 9,661,801 $ 1,819 0.08 % 5,642,301 $ 11,666 0.83 %
Other noninterest-bearing liabilities 177,372 136,759
Total liabilities 9,839,173 5,779,060
Shareholders' equity 816,679 831,839
Total liabilities and shareholders'
equity $ 10,655,852 $ 6,610,899
Net interest income and net interest
rate spread including
noninterest-bearing deposits $ 73,850 3.08 % $ 67,737 4.81 %
Net interest margin 3.07 % 4.78 %
Tax-equivalent effect 0.01 % 0.04 %
Net interest margin, tax-equivalent(3) 3.08 % 4.82 %
(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2021
and 2020 was 21%.
(2) Of the total balance, $275.7 million are interest-bearing deposits where
interest expense is paid by a third party and not by the Company.
(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net
interest margin, tax-equivalent") is a non-GAAP financial measure. The
tax-equivalent adjustment to net interest income recognizes the estimated income
tax savings when comparing taxable and tax-exempt assets and adjusting for
federal and state exemption of interest income. The Company believes that it is
a standard practice in the banking industry to present net interest margin
expressed on a fully taxable equivalent basis and, accordingly, believes the
presentation of this non-GAAP financial measure may be useful for peer
comparison purposes.
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Six Months Ended March 31,
2021 2020
Average Interest Average Interest
Outstanding Earned / Yield / Outstanding Earned / Yield /
(Dollars in Thousands) Balance Paid Rate(1) Balance Paid Rate(1)
Interest-earning assets:
Cash & fed funds sold $ 2,485,330 $ 1,932 0.16 % $ 147,910 $ 1,151 1.56 %
Mortgage-backed securities 490,358 4,730 1.93 % 367,280 4,882 2.66
%
Tax exempt investment securities 315,714 2,348 1.89 % 472,680 4,471 2.39 % Asset-backed securities 357,514 2,490 1.40 % 304,278 4,626 3.04 % Other investment securities 226,032 2,186 1.94 % 194,960 2,704 2.77 % Total investments 1,389,618 11,754 1.79 % 1,339,198 16,683 2.67 % Total commercial finance 2,444,396 91,928 7.54 % 2,000,325 86,423 8.64 % Total consumer finance 247,534 11,716 9.49 % 267,477 11,176 8.36 % Total tax services 366,157 6,553 3.59 % 269,115 6,385 4.74 % Total warehouse finance 299,510 9,778 6.55 % 289,885 8,960 6.18 % National Lending loans and leases 3,357,597 119,975 7.17 % 2,826,802 112,944 7.99 % Community Banking loans 447,096 10,153 4.55 % 1,137,423 26,251 4.62 % Total loans and leases 3,804,693 130,128 6.86 % 3,964,225 139,195 7.02 % Total interest-earning assets 7,679,641$ 143,814 3.77 % 5,451,333$ 157,029 5.80
%
Noninterest-earning assets 866,262 914,034 Total assets$ 8,545,903 $ 6,365,367 Interest-bearing liabilities: Interest-bearing checking(2)$ 218,743 $ - - %$ 172,850 $ 259 0.30 % Savings 64,741 6 0.02 % 47,690 16 0.07 % Money markets 54,466 81 0.30 % 74,507 357 0.96 % Time deposits 15,130 91 1.20 % 100,014 1,022 2.04 % Wholesale deposits 218,925 1,063 1.97 % 1,474,444 15,929 2.16 % Total interest-bearing deposits 572,005 1,241 0.44 % 1,869,505 17,583 1.88
%
Overnight fed funds purchased 6 - 0.25 % 337,509 2,757 1.63 % FHLB advances - - - % 110,000 1,348 2.45 % Subordinated debentures 73,841 2,294 6.23 % 73,678 2,318 6.29 % Other borrowings 23,132 430 3.73 % 31,165 635 4.08 % Total borrowings 96,979 2,724 5.63 % 552,352 7,058 2.56 % Total interest-bearing liabilities 668,984 3,965 1.19 % 2,421,857 24,641 2.03
%
Noninterest-bearing deposits 6,901,255 - - % 2,964,329 - -
%
Total deposits and interest-bearing liabilities 7,570,239$ 3,965 0.11 % 5,386,186$ 24,641 0.91
%
Other noninterest-bearing liabilities 164,307 143,576 Total liabilities 7,734,546 5,529,762 Shareholders' equity 811,357 835,605 Total liabilities and shareholders' equity$ 8,545,903 $ 6,365,367 Net interest income and net interest rate spread including noninterest-bearing deposits$ 139,849 3.67 %$ 132,388 4.89 % Net interest margin 3.65 % 4.86 % Tax-equivalent effect 0.02 % 0.04 % Net interest margin, tax-equivalent(3) 3.67 % 4.90
%
(1) Tax rate used to arrive at the TEY for the six months endedMarch 31, 2021 and 2020 was 21%. (2) Of the total balance,$218.5 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company. (3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 56 -------------------------------------------------------------------------------- Table of Contents Provision for Credit Losses The Company recorded a$30.3 million and a$36.4 million provision for credit losses for the three and six months endedMarch 31, 2021 , as compared to a$37.3 million and$40.7 million provision for credit losses for the same period of the prior year. The decrease in the overall provision compared to the prior year was due in large part to the increase in the allowance as part of the Company's response to the emerging COVID-19 pandemic during the fiscal 2020 second quarter. Partially offsetting that decrease was an increase in provision expense related to originating higher volumes of tax services loans for the fiscal 2021 second quarter, compared to the comparable quarter of the prior year. Noninterest Income Noninterest income for the fiscal 2021 second quarter decreased to$113.5 million from$120.5 million for the same period in the prior fiscal year. This was due primarily to the$19.3 million gain on divestiture of theCommunity Bank division, which was recognized during the fiscal 2020 second quarter. Partially offsetting the decrease were increases in total tax product fee income and payment card and deposit fee income.
Noninterest income for the six months ended
Noninterest Expense Noninterest expense increased 5% to$96.0 million for the fiscal 2021 second quarter, from$91.7 million for the same quarter of fiscal 2020, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals and additional employees to support growth.
Noninterest expense for the six months ended
Income Tax Expense The Company recorded an income tax expense of$1.1 million , representing an effective tax rate of 1.9%, for the fiscal 2021 second quarter, compared to an income tax expense of$5.6 million , representing an effective tax rate of 9.5%, for the fiscal 2020 second quarter. The Company originated$20.0 million in solar leases during the fiscal 2021 second quarter, compared to$17.6 million during the fiscal 2020 second quarter. The investment tax credit for the second quarter reflected an adjustment to the full fiscal year's projected investment tax credit volumes, which contributed to the overall reduction in income tax expense compared to the prior year. Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
Nonperforming Assets and Allowance for Loan and Lease Losses
Generally, when a loan or lease becomes delinquent 90 days or more or when the
collection of principal or interest becomes doubtful, the Company will place the
loan or lease on a non-accrual status and, as a result, previously accrued
interest income on the loan or lease is reversed against current income. The
loan or lease will generally remain on a non-accrual status until six months of
good payment history has been established or management believes the financial
status of the borrower has been significantly restored. Certain relationships in
the table below are over 90 days past due and still accruing. The Company
considers these relationships as being in the process of collection. Insurance
premium finance loans, consumer finance and tax services loans are generally not
placed on non-accrual status, but are instead written off when the collection of
principal and interest become doubtful.
Loans and leases, or portions thereof, are charged-off when collection of
principal becomes doubtful. Generally, this is associated with a delay or
shortfall in payments of greater than 210 days for insurance premium finance,
180 days for tax and other specialty lending loans, 120 days for consumer credit
products and 90 days for other loans. Action is taken to charge off ERO loans if
such loans have not been collected by the end of June and taxpayer advance loans
if such loans have not been collected by the end of the calendar year.
Non-accrual loans and troubled debt restructurings are generally considered
impaired.
57
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The Company believes that the level of allowance for credit losses at March 31,
2021 was appropriate and reflected probable losses related to these loans and
leases; however, there can be no assurance that all loans and leases will be
fully collectible or that the present level of the allowance will be adequate in
the future. See the section below titled "Allowance for Credit Losses" for
further information.
The table below sets forth the amounts and categories of nonperforming assets in the Company's portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.
(Dollars in Thousands) March 31, 2021 September 30, 2020 Nonperforming loans and leases Nonaccruing loans and leases: Term lending$ 14,665 $ 16,274 Asset based lending 382 - Factoring 35 1,096 Lease financing 2,623 3,583 SBA/USDA 600 600 Commercial finance 18,305 21,553 Total National Lending 18,305 21,553 Commercial real estate and operating 17,896 580 Consumer one-to-four family real estate and other 159 50 Agricultural real estate and operating 1,769 1,769 Total Community Banking 19,824 2,399 Total 38,129 23,952
Accruing loans and leases delinquent >89 days past due:
Term lending 353 266 Lease financing 2,043 4,344 Insurance premium finance 2,414 2,364 SBA/USDA - 427 Commercial finance 4,810 7,401 Consumer credit products 243 499 Other consumer finance 274 373 Consumer finance 517 872 Tax services - 1,743 Total National Lending 5,327 10,016 Commercial real estate and operating - 50 Total Community Banking - 50 Total 5,327 10,066 Total nonperforming loans and leases 43,456 34,018 Other assets Nonperforming operating leases 1,799 4,045 Foreclosed and repossessed assets: Commercial finance 1,483 9,957 Total 1,483 9,957 Total other assets 3,282 14,002 Total nonperforming assets$ 46,738 $ 48,020 Total as a percentage of total assets 0.48 % 0.79 % 58
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At
As ofMarch 31, 2021 ,$66.5 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period. As ofSeptember 30, 2020 , loans and leases totaling$170.0 million were within their deferment period. Classified Assets. Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as "substandard," "doubtful" or "loss," with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the Bank will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as "loss," the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank's determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management's review of its loans, leases, and other assets, atMarch 31, 2021 , the Company had classified$79.4 million of its assets as substandard,$2.4 million as doubtful and none as loss. AtSeptember 30, 2020 , the Company classified$61.6 million of its assets as substandard,$6.3 million as doubtful and none as loss. Allowance for Credit Losses. EffectiveOctober 1, 2020 , the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively "Topic 326"), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a CECL methodology to determine the ACL for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. The ACL represents management's estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, generally this means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition. Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate. 59 -------------------------------------------------------------------------------- Table of Contents AtMarch 31, 2021 , the Company had established an ACL totaling$98.9 million , compared to$56.2 million atSeptember 30, 2020 . The increase in the allowance atMarch 31, 2021 was driven primarily by the adoption of the CECL accounting standard noted above, along with the seasonal allowance build in the tax services portfolio. The CECL methodology requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions, which led to the increase in the ACL as of theOctober 1, 2020 adoption date.
The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases.
As of the Period Ended
October 1,
March 31, 2021 December 31, 2020 2020(1) September 30, 2020 June 30, 2020 March 31, 2020
Commercial finance 1.77 % 1.88 % 1.85 % 1.30 % 1.36 % 1.28 %
Consumer finance 4.70 % 4.39 % 4.31 % 1.64 % 1.75 % 1.74 %
Tax services 12.90 % 1.53 % 0.06 % 0.06 % 59.67 % 22.22 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
National Lending 2.57 % 1.89 % 1.86 % 1.20 % 1.68 % 1.92 %
Community Banking 4.03 % 4.01 % 3.37 % 4.59 % 2.55 % 1.49 %
Total loans and leases 2.71 % 2.10 % 2.08 % 1.70 % 1.88 % 1.81 %
(1) Represents the Company's allowance coverage ratio upon the adoption of the
Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and
allowance balances plus the CECL allowance adjustment.
Management closely monitors economic developments and considers these factors
when assessing the appropriateness of its ACL. The Company's allowance for
credit losses as a percentage of total loans and leases increased to 2.71% at
March 31, 2021 from 2.10% at December 31, 2020 . The increase in the total loans
and leases coverage ratio was primarily driven by the seasonal tax services loan
portfolio. The coverage ratios for the other non-tax-related loan categories
remained relatively similar to the December 31, 2020 quarter. The change in the
year-over-year tax services coverage ratio is primarily due to higher
outstanding principal balances as of March 31, 2021 due in large part to the
delayed start to the 2021 tax season. The increase from September 30, 2020 to
December 31, 2020 was primarily due to the adoption of ASU 2016-13 on October 1,
2020 . The Company expects to continue to diligently monitor the ACL and adjust
as necessary in future periods to maintain an appropriate and supportable level.
Management believes that, based on a detailed review of the loan and lease
portfolio, historic loan and lease losses, current economic conditions, the size
of the loan and lease portfolio and other factors, the level of the ACL at
March 31, 2021 reflected an appropriate allowance against inherent credit losses
from the lending portfolio. Although the Company maintains its ACL at a level it
considers to be appropriate, investors and others are cautioned that there can
be no assurance that future losses will not exceed estimated amounts, or that
additional provisions for loan and lease losses will not be required in future
periods. In addition, the Company's determination of the ACL is subject to
review by the OCC, which can require the establishment of additional general or
specific allowances.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the ACL, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company's critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year endedSeptember 30, 2020 . There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2021. 60
-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, derived principally through its payments divisions, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. AtMarch 31, 2021 , the Company had commitments to originate and purchase loans and unused lines of credit totaling$1.28 billion . The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by theFederal Reserve and the OCC. The Basel III Capital Rules became effective for us and the Bank onJanuary 1, 2015 , subject to phase-in periods for certain of their components and other provisions. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). AtMarch 31, 2021 , both the Bank and the Company remained above the applicable federal regulatory minimum capital requirements, continued to be classified as well-capitalized, and remained in good standing with the regulatory agencies. A temporary exemption was granted by the OCC related to the financial impacts of distributing prepaid debit cards as part of the EIP program. The Company and the Bank made the accumulated other comprehensive income ("AOCI") opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis. Minimum to be Minimum to be Adequately Well Capitalized Capitalized Under Under Prompt Prompt Corrective Corrective Action At March 31, 2021 Company Bank Action Provisions Provisions Tier 1 leverage capital ratio 4.75 % 5.47 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 11.29 % 13.39 % 4.50 % 6.50 % Tier 1 capital ratio 11.63 % 13.40 % 6.00 % 8.00 % Total capital ratio 14.65 % 14.66 % 8.00 % 10.00 % 61
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The following table provides certain non-GAAP financial measures used to compute
certain of the ratios included in the table above, as well as a reconciliation
of such non-GAAP financial measures to the most directly comparable financial
measure in accordance with GAAP:
Standardized
Approach(1)
(Dollars in Thousands) March 31, 2021
Total stockholders' equity $ 835,258
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities 301,602
LESS: Certain other intangible assets 36,779
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
19,306
LESS: Net unrealized gains on available-for-sale securities 12,458
LESS: Noncontrolling interest 1,092
ADD: Adoption of Accounting Standards Update 2016-13 10,439
Common Equity Tier 1 Capital (1) 474,460
Long-term borrowings and other instruments qualifying as Tier 1 13,661
Tier 1 minority interest not included in common equity tier 1 capital
690
Total Tier 1 Capital 488,811
Allowance for loan and lease losses 53,232
Subordinated debentures (net of issuance costs) 73,892
Total Capital $ 615,935
(1) Capital ratios were determined using the Basel III capital rules that became
effective on January 1, 2015 . Basel III revised the definition of capital,
increased minimum capital ratios, and introduced a minimum common equity tier 1
capital ratio; those changes are being fully phased in through the end of 2021.
The following table provides a reconciliation of tangible common equity and
tangible common equity excluding AOCI, each of which is used in calculating
tangible book value data, to Total Stockholders' Equity. Each of tangible common
equity and tangible common equity excluding AOCI is a non-GAAP financial measure
that is commonly used within the banking industry.
(Dollars in Thousands) March 31, 2021
Total Stockholders' Equity $ 835,258
LESS: Goodwill 309,505
LESS: Intangible assets 36,903
Tangible common equity 488,850
LESS: AOCI 12,809
Tangible common equity excluding AOCI
SinceJanuary 1, 2016 , the Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively. Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. CONTRACTUAL OBLIGATIONS See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in the Company's Annual Report on Form 10-K for its fiscal year endedSeptember 30, 2020 for a summary of our contractual obligations as ofSeptember 30, 2020 . There were no material changes outside the ordinary course of our business in contractual obligations fromSeptember 30, 2020 throughMarch 31, 2021 . 62
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Table of Contents OFF-BALANCE SHEET FINANCING ARRANGEMENTS For discussion of the Company's off-balance sheet financing arrangements atMarch 31, 2021 , see Note 15 to our Condensed Consolidated Financial Statements included in Part I, Item 1 "Financial Statements" of this Quarterly Report on Form 10-Q. Depending on the extent to which the commitments or contingencies described in Note 15 occur, the effect on the Company's capital and net income could be significant.
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