Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2018

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to

Commission File Number:  0-22140

metalogoa13.jpg
META FINANCIAL GROUP, INC.®
(Exact name of registrant as specified in its charter)
Delaware
42-1406262
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108
(Address of principal executive offices and Zip Code)

(605) 782-1767
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒  NO☐

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  YES ☒  NO ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company See the definitions of "large accelerated filer." "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer☒
Accelerated filer☐
Non-accelerated filer☐
Smaller Reporting Company☐
Emerging growth company☐
 
 
 




If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ☐ YES  ☒ NO

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class:
Outstanding at February 1, 2019:
Common Stock, $.01 par value
39,419,991 shares
Nonvoting Common Stock, $.01 par value
0 Nonvoting shares
 
 
 
 
 



META FINANCIAL GROUP, INC.
FORM 10-Q

Table of Contents
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.  
 
 
 
Item 6.
 
 

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Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements.
META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(Dollars in Thousands, Except Share Data(1))
(Unaudited)
 
 
ASSETS
December 31, 2018
 
September 30, 2018
Cash and cash equivalents
$
164,169

 
$
99,977

Investment securities available for sale, at fair value
1,340,870

 
1,484,160

Mortgage-backed securities available for sale, at fair value
354,186

 
364,065

Investment securities held to maturity, at cost
153,075

 
163,893

Mortgage-backed securities held to maturity, at cost
7,661

 
7,850

Loans held for sale
33,560

 
15,606

Loans and leases
3,329,498

 
2,944,739

Allowance for loan and lease losses
(21,290
)
 
(13,040
)
Federal Home Loan Bank Stock, at cost
15,600

 
23,400

Accrued interest receivable
22,076

 
22,016

Premises, furniture, and equipment, net
44,299

 
40,458

Rental equipment, net
146,815

 
107,290

Bank-owned life insurance
87,934

 
87,293

Foreclosed real estate and repossessed assets
31,548

 
31,638

Goodwill
303,270

 
303,270

Intangible assets
66,366

 
70,719

Prepaid assets
31,483

 
27,906

Deferred taxes
23,607

 
18,737

Other assets
48,038

 
35,090

 


 
 
Total assets
$
6,182,765

 
$
5,835,067

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 
 
 
 
 
LIABILITIES
 

 
 
Noninterest-bearing checking
$
2,739,757

 
$
2,405,274

Interest-bearing checking
128,662

 
111,587

Savings deposits
52,229

 
54,765

Money market deposits
54,559

 
51,995

Time certificates of deposit
170,629

 
276,180

Wholesale deposits
1,790,611

 
1,531,186

Total deposits
4,936,447

 
4,430,987

Short-term debt
231,293

 
425,759

Long-term debt
88,983

 
88,963

Accrued interest payable
11,280

 
7,794

Accrued expenses and other liabilities
144,034

 
133,838

Total liabilities
5,412,037

 
5,087,341

 
 
 
 
STOCKHOLDERS’ EQUITY
 

 
 

Preferred stock, 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2018 and September 30, 2018, respectively

 

Common stock, $.01 par value; 90,000,000 and 90,000,000 shares authorized, 39,494,919 and 39,192,063 shares issued, 39,405,508 and 39,167,280 shares outstanding at December 31, 2018 and September 30, 2018, respectively
394

 
393

Common stock, Nonvoting, $.01 par value; 3,000,000 shares authorized, no shares issued or outstanding at December 31, 2018 and September 30, 2018, respectively

 

Additional paid-in capital
572,156

 
565,811

Retained earnings
228,453

 
213,048

Accumulated other comprehensive loss
(29,186
)
 
(33,111
)
Treasury stock, at cost, 89,411 and 24,783 common shares at December 31, 2018 and September 30, 2018, respectively
(4,356
)
 
(1,989
)
Total equity attributable to parent
767,461

 
744,152

Noncontrolling interest
3,267

 
3,574

Total stockholders’ equity
770,728

 
747,726

 
 
 
 
Total liabilities and stockholders’ equity
$
6,182,765

 
$
5,835,067

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.

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Table of Contents


META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in Thousands, Except Share and Per Share Data(1))
Three Months Ended December 31,
 
2018
 
2017
Interest and dividend income:
 
 
 
Loans and leases, including fees
$
60,498

 
$
16,443

Mortgage-backed securities
2,698

 
3,758

Other investments
11,780

 
10,656

 
74,976

 
30,857

Interest expense:
 

 
 

Deposits
10,596

 
1,885

FHLB advances and other borrowings
4,108

 
2,776

 
14,704

 
4,661

 
 
 
 
Net interest income
60,272

 
26,196

 
 
 
 
Provision for loan and lease losses
9,099

 
1,068

 
 
 
 
Net interest income after provision for loan and lease losses
51,173

 
25,128

 
 
 
 
Noninterest income:
 

 
 

Refund transfer product fees
261

 
192

Tax advance product fees
1,685

 
1,947

Card fees
19,351

 
25,247

Rental income
10,890

 

Loan and lease fees
1,247

 
1,292

Bank-owned life insurance
642

 
669

Deposit fees
1,938

 
848

Loss on sale of securities available-for-sale, net (Includes ($22) and ($1,010) reclassified from accumulated other comprehensive income (loss) for net gains (losses) on available for sale securities for the three months ended December 31, 2018 and 2017, respectively)
(22
)
 
(1,010
)
Gain on sale of loans and leases
867

 

Gain (loss) on foreclosed real estate
15

 
(19
)
Other income
877

 
102

Total noninterest income
37,751

 
29,268

 
 
 
 
Noninterest expense:
 

 
 

Compensation and benefits
33,010

 
22,340

Refund transfer product expense
10

 
101

Tax advance product expense
452

 
280

Card processing
7,085

 
6,540

Occupancy and equipment
6,458

 
4,890

Operating lease equipment depreciation
7,765

 

Legal and consulting
3,969

 
2,416

Marketing
539

 
553

Data processing
437

 
414

Intangible amortization
4,383

 
1,681

Other expense
10,187

 
4,827

Total noninterest expense
74,295

 
44,042

 
 
 
 
Income before income tax expense
14,629

 
10,354

 
 
 
 
Income tax (benefit) expense (Includes ($5) and ($380) reclassified from accumulated other comprehensive loss for the three months ended December 31, 2018 and 2017, respectively)
(1,691
)
 
5,684

 
 
 
 
Net income before noncontrolling interest
16,320

 
4,670

Net income attributable to noncontrolling interest
922

 

Net income attributable to parent
$
15,398

 
$
4,670

 
 
 
 
Earnings per common share
 

 
 

Basic
$
0.39

 
$
0.16

Diluted
$
0.39

 
$
0.16

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.


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Table of Contents

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
Three Months Ended December 31,
 
2018
 
2017
Net income before noncontrolling interest
$
16,320

 
$
4,670

 
 
 
 
Other comprehensive (loss) income:
 

 
 

Change in net unrealized gain (loss) on debt securities
6,171

 
(7,480
)
(Gains) losses realized in net income
22

 
1,010

 
6,193

 
(6,470
)
Unrealized gains (loss) on currency translation
(360
)
 

Deferred income tax effect
1,433

 
(3,086
)
Total other comprehensive (loss) income
4,400

 
(3,384
)
Total comprehensive income
20,720

 
1,286

Total comprehensive income attributable to noncontrolling interest
922

 

Comprehensive income attributable to parent
$
19,798

 
$
1,286

See Notes to Condensed Consolidated Financial Statements.


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Table of Contents

META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
For the Three Months Ended December 31, 2018 and 2017
 
Meta Financial Group Stockholders' Equity
 
 
 
 
 
(Dollars in Thousands, Except Share and Per Share Data(1))
 
 
Common
Stock
 
 
Additional
Paid-in
Capital
 
 
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
 
 
Treasury
Stock
 
Total
Stockholders’
Equity
 
Noncontrolling Interest
 
Total Equity
Balance, September 30, 2017
$
288

 
$
258,144

 
$
167,164

 
$
9,166

 
$
(266
)
 
$
434,496

 
$

 
$
434,496

Cash dividends declared on common stock ($0.04 per share)

 

 
(1,256
)
 

 

 
(1,256
)
 

 
(1,256
)
Issuance of common shares due to restricted stock
1

 

 

 

 

 
1

 

 
1

Issuance of common shares due to ESOP
1

 
1,605

 

 

 

 
1,606

 

 
1,606

Shares repurchased for tax withholdings on stock compensation

 
(314
)
 

 

 
(1,357
)
 
(1,671
)
 

 
(1,671
)
Stock compensation

 
3,243

 

 

 

 
3,243

 

 
3,243

Total other comprehensive (loss)

 

 

 
(3,384
)
 

 
(3,384
)
 

 
(3,384
)
Net income

 

 
4,670

 

 

 
4,670

 

 
4,670

Balance, December 31, 2017
$
290

 
$
262,678

 
$
170,578

 
$
5,782

 
$
(1,623
)
 
$
437,705

 
$

 
$
437,705

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2018
$
393

 
$
565,811

 
$
213,048

 
$
(33,111
)
 
$
(1,989
)
 
$
744,152

 
$
3,574

 
$
747,726

Adoption of Accounting Standards Update 2014-09, net of income taxes

 

 
1,502

 

 

 
1,502

 

 
1,502

Adoption of Accounting Standards Update 2016-01

 

 
475

 
(475
)
 

 

 

 

Cash dividends declared on common stock ($0.05 per share)

 

 
(1,970
)
 

 

 
(1,970
)
 

 
(1,970
)
Issuance of common shares due to exercise of stock options

 
54

 

 

 

 
54

 

 
54

Issuance of common shares due to restricted stock
2

 

 

 

 

 
2

 

 
2

Issuance of common shares due to ESOP

 
2,010

 

 

 

 
2,010

 

 
2,010

Shares repurchased for tax withholdings on stock compensation
(1
)
 
1

 

 

 
(2,367
)
 
(2,367
)
 

 
(2,367
)
Stock compensation

 
4,280

 

 

 

 
4,280

 

 
4,280

Total other comprehensive income

 

 

 
4,400

 

 
4,400

 

 
4,400

Net income

 

 
15,398

 

 

 
15,398

 
922

 
16,320

Net investment by (distribution to) noncontrolling interests

 

 

 

 

 

 
(1,229
)
 
(1,229
)
Balance, December 31, 2018
$
394

 
$
572,156

 
$
228,453

 
$
(29,186
)
 
$
(4,356
)
 
$
767,461

 
$
3,267

 
$
770,728

See Notes to Condensed Consolidated Financial Statements.
(1)All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.


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Table of Contents


META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
 
Three Months Ended December 31,
(Dollars in Thousands)
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
16,320

 
$
4,670

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Depreciation, amortization and accretion, net
14,616

 
9,561

Stock compensation
4,280

 
3,243

Provision (recovery):
 
 
 
Loan and lease losses
9,099

 
1,068

Deferred taxes
(6,787
)
 
6,807

Loans held for sale:
 
 
 
Originations
(7,469
)
 

Proceeds from sales
22,611

 

Net change
6,571

 

Fair value adjustment of foreclosed real estate

 
23

Net realized (gain) loss:
 
 
 
Other assets
(24
)
 
(8
)
Foreclosed real estate or other assets
(15
)
 
19

Available for sale securities, net
22

 
1,010

Loans held for sale
(550
)
 

Leases receivable and rental equipment
(677
)
 

Net change:
 
 
 
Other assets
(18,004
)
 
(1,102
)
Accrued interest payable
3,486

 
1,785

Accrued expenses and other liabilities
9,454

 
(14,462
)
Accrued interest receivable
(60
)
 
(1,709
)
Change in bank-owned life insurance value
(641
)
 
(669
)
Net cash provided by operating activities
52,232

 
10,236

 
 
 
 
Cash flows from investing activities:
 

 
 

Available for sale securities:
 
 
 
Purchases
(51,430
)
 
(105,327
)
Proceeds from sales
171,927

 
65,941

Proceeds from maturities and principal repayments
34,557

 
35,065

Held to maturity:
 
 
 
Proceeds from maturities and principal repayments
10,423

 
12,021

Loans and leases:
 
 
 
Purchases
(122,668
)
 
(75,163
)
Proceeds from Sales
378

 
5,916

Net change
(299,400
)
 
(114,827
)
Proceeds from sales of foreclosed real estate or other assets
105

 
122

Federal Home Loan Bank stock:
 
 
 
Purchases
(235,000
)
 
(249,920
)
Redemption
242,800

 
253,600

Rental Equipment:
 
 
 
Purchases
(46,153
)
 

Proceeds from Sales
1,466

 

Net change
(611
)
 
 
Premises and equipment:
 
 
 
Purchases
(5,729
)
 
(2,593
)
Proceeds from Sales
19

 

Net cash (used in) investing activities
(299,316
)
 
(175,165
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change:
 
 
 
Checking, savings, and money market deposits
353,642

 
341,407

Time deposits
(105,632
)
 
4,583

Wholesale deposits
259,430

 
(55,769
)
FHLB and other borrowings

 
(205,000
)
Federal funds
(195,000
)
 
113,000

Securities sold under agreements to repurchase
532

 
867

Net investment by (distribution to) noncontrolling interests
(1,229
)
 

Principal payments:
 
 
 
Other liabilities
(2,847
)
 


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Table of Contents

Capital lease obligations
(16
)
 
(16
)
Cash dividends paid
(1,970
)
 
(1,256
)
Purchase of shares by ESOP
2,010

 
1,606

Issuance of restricted stock
2

 
1

Proceeds from exercise of stock options & issuance of common stock
54

 

Shares repurchased for tax withholdings on stock compensation
(2,367
)
 
(1,671
)
Net cash provided by financing activities
311,636

 
197,752

 
 
 
 
Effect of exchange rate changes on cash
(360
)
 

 
 
 
 
Net change in cash and cash equivalents
64,192

 
32,823

 
 
 
 
Cash and cash equivalents at beginning of year
99,977

 
1,267,586

Cash and cash equivalents at end of year
$
164,169

 
$
1,300,409



META FINANCIAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Con't.)
 
Three Months Ended December 31,
 
2018
 
2017
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for:
 

 
 

Interest
$
18,190

 
$
6,446

Income taxes
595

 
218

Franchise taxes

 
31

Other taxes
49

 
1

 
 
 
 
Supplemental schedule of non-cash investing activities:
 

 
 

Loans transferred to held for sale
39,452

 

Securities transferred from held-to-maturity to available-for-sale

 
(306,000
)
See Notes to Condensed Consolidated Financial Statements.

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Table of Contents


NOTE 1. BASIS OF PRESENTATION

The interim unaudited Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2018 included in Meta Financial Group, Inc.’s (“Meta” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 29, 2018.  Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X.  Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the three month period ended December 31, 2018 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2019.

All share and per share data reported in this Form 10-Q has been adjusted to reflect the 3-for-1 forward stock split of the Company's common stock effected by the Company on October 4, 2018.

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.

Certain amounts in the Recorded Investment table presented in Note 4 to the consolidated financial statements have been restated from what was previously reported as of September 30, 2018 on Form 10-K.

Loan and lease tables have been conformed to be consistent with the Company's updated presentation of its lending portfolio. The new presentation includes expanding the commercial and consumer finance portfolio to present the lending categories that are included in each, presenting the warehouse finance portfolio as its own category, and condensing the community bank loan categories. Warehouse finance loans were previously included in the consumer finance portfolio. All current and prior period numbers are reflective of this new presentation and total loan and lease balances remained unchanged.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES ("ASU")

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of September 30, 2018 remain substantially unchanged with the exception of the policies impacted by the adoption of noted ASUs below.

Revenue Recognition - Effective October 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), subsequent related Updates (collectively, ASU 2014-09), and ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage of Certain Prepaid Stored-Value Products. ASU 2014-09 modifies the guidance used to recognize revenue from contracts with customers for transfers of goods or services and transfers of non-financial assets, unless those contracts are within the scope of other guidance. Upon adoption, the Company recorded a cumulative-effect adjustment that increased retained earnings by $1.5 million, net of tax, due to changes in the timing of recognition of revenue from breakage on unregistered, unused prepaid cards in the Company’s Meta Payment Systems ("MPS") division. Breakage represents the estimated amount that will not be redeemed by the cardholder for goods or services. Previously, the Company recognized breakage revenue predominantly after the month of the card balance expiration. Upon adoption of ASU 2014-09, this revenue is recognized ratably over the life of the prepaid card. Recognition of all other revenue streams was substantially unchanged. The impact of adoption was immaterial to the Company’s operations for the three months ended December 31, 2018. Refer to Note 10. Revenue from Contracts with Customers for additional information.


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Financial Instruments - Effective October 1, 2018, the Company adopted ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities, and related Updates (collectively, ASU 2016-01). ASU 2016-01 makes revisions to several elements of Subtopic 825-10, including that ASU 2016-01: (1) requires equity investments to be measured at fair value with changes in fair value to be recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair value, (3) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the consolidated statement of financial condition, (4) requires public business entities to use the exit price notion when measuring fair value of financial instruments for disclosure purposes, and (5) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or accompanying notes. Upon adoption, the Company recorded a cumulative-effect adjustment that reclassed $0.5 million, net of tax, from accumulated other comprehensive income to retained earnings, due to the Company's cumulative change in fair value of equity securities with readily determinable fair values previously recognized in accumulated other comprehensive income. The impact of adoption was immaterial to the Company’s operations for the three months ended December 31, 2018. Refer to Note 5. Securities for additional information.

The Company also adopted each of the following ASUs effective October 1, 2018, none of which had a material impact on the Company’s consolidated financial statements.
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
ASU 2017-01, Clarifying the Definition of a Business
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Non-Financial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Non-Financial Assets
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting

Refer to the Company’s most recently audited consolidated financial statements for the fiscal year ended September 30, 2018 for additional information on these ASUs and for the latest update on ASUs relevant to the Company and not yet adopted as of December 31, 2018.

NOTE 3. ACQUISITIONS

The Company completed the acquisition of Crestmark Bancorp, Inc. ("Crestmark") and its bank subsidiary, Crestmark Bank, on August 1, 2018 for a purchase price of $295.8 million paid by issuance of 9,919,512 shares of Meta common stock. The transaction included, at fair value, total assets of $1.32 billion, including $1.05 billion of loan and lease receivables held for investment, and $1.12 billion of deposits. The Company recorded provisional goodwill of $204.5 million associated with the acquisition due to expected operational synergies and expanded product lines. There has been no adjustment to or impairment recognized to goodwill during the three months ended December 31, 2018. Refer to the Company’s most recent audited financial statements as of September 30, 2018 included in the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2018 for additional information on the Crestmark acquisition. There were no business combinations pending as of December 31, 2018.




Table of Contents

NOTE 4. LOANS AND LEASES, NET
Loan and lease tables have been conformed to be consistent with the Company's updated categorization of its lending portfolio between National Lending and Community Banking.
Loans and leases at December 31, 2018 and September 30, 2018 were as follows:
 
December 31, 2018
 
September 30, 2018
National Lending
(Dollars in Thousands)
Asset based lending
$
554,072

 
$
477,917

Factoring
284,912

 
284,221

Lease financing
290,889

 
265,315

Insurance premium finance
330,712

 
337,877

SBA/USDA
67,893

 
59,374

Other commercial finance
89,402

 
85,145

Commercial finance
1,617,880

 
1,509,849

Consumer credit products
96,144

 
80,605

Other consumer finance
182,510

 
189,756

Consumer finance(1)
278,654

 
270,361

Tax services
76,575

 
1,073

Warehouse finance(1)
176,134

 
65,000

Total National Lending
2,149,243

 
1,846,283

Community Banking
 
 
 
Commercial real estate and operating
863,753

 
790,890

Consumer one-to-four family real estate and other
256,341

 
247,318

Agricultural real estate and operating
58,971

 
60,498

Total Community Banking
1,179,065

 
1,098,706

Total gross loans and leases
3,328,308

 
2,944,989

 
 
 
 
Allowance for loan and lease losses
(21,290
)
 
(13,040
)
Net deferred loan origination fees (costs)
1,190

 
(250
)
Total loans and leases, net(2)
$
3,308,208

 
$
2,931,699

(1) Warehouse finance loans are presented in their own line. Previously these balances were included with consumer finance loans. Prior period balances have also been adjusted to reflect this change.
(2) As of December 31, 2018, the remaining balance of acquired loans and leases from the Crestmark acquisition was $889.0 million and the remaining balances of the credit and interest rate mark discounts related to the acquired loans and leases were $10.1 million and $4.8 million, respectively. On August 1, 2018, the Company acquired loans and leases from the Crestmark acquisition totaling $1.06 billion and recorded related credit and interest rate mark discounts of $12.3 million and $6.0 million, respectively.

During the three months ended December 31, 2018, the Company transferred $39.5 million of consumer credit product loans to held for sale and originated $7.5 million of SBA/USDA loans as held for sale. The Company sold held for sale loans resulting in proceeds of $22.6 million and gains on sale of $0.6 million during the three months ended December 31, 2018. During the three months ended December 31, 2017, the Company did not designate any loans as held for sale or sell any held for sale loans.

During the three months ended December 31, 2018 and December 31, 2017, the Company purchased loans totaling $122.7 million and $75.2 million, respectively. During the three months ended December 31, 2018 and December 31, 2017, the Company sold loans totaling $0.4 million and $5.9 million, respectively.


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Table of Contents

The net investment in direct financing and sales-type leases is comprised of the following as of December 31, 2018 and September 30, 2018.
 
December 31, 2018
 
September 30, 2018
 
(Dollars in Thousands)
Minimum lease payments receivable
$
330,273

 
$
301,835

Estimated residual value of leased equipment
12,460

 
12,406

Unamortized initial direct costs
(9
)
 
(3
)
Premium on acquired leases
16

 
26

Unearned income
(51,851
)
 
(48,949
)
Net investment in direct financing and sales-type leases
$
290,889

 
$
265,315

Future minimum lease payments receivable on noncancelable direct financing and sales-type leases were as follows as of December 31, 2018.
 
As of December 31, 2018
 
(Dollars in thousands)
2019
$
92,158

2020
96,326

2021
73,057

2022
43,861

2023
21,037

2024 and thereafter
3,834

Total
$
330,273

The Company did not record any contingent rental income from sales-type and direct financing leases in the three months ended December 31, 2018.


11

Table of Contents

Activity in the allowance for loan and lease losses and balances of loans and leases by portfolio segment for each of the three months ended December 31, 2018 and 2017 was as follows:
Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Three Months Ended December 31, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
107

 
$
2,164

 
$
(262
)
 
$
56

 
$
2,065

Factoring
64

 
1,223

 
(250
)
 
26

 
1,062

Lease financing
59

 
(130
)
 
(418
)
 
1,572

 
1,084

Insurance premium finance
1,031

 
93

 
(208
)
 
56

 
972

SBA/USDA
13

 
240

 

 

 
253

Other commercial finance
28

 
263

 

 

 
291

Commercial finance
1,302

 
3,853

 
(1,138
)
 
1,710

 
5,727

Consumer credit products
785

 
366

 

 

 
1,151

Other consumer finance
2,820

 
3,023

 
(1,624
)
 
3

 
4,222

Consumer finance
3,605

 
3,389

 
(1,624
)
 
3

 
5,373

Tax services

 
1,496

 
(42
)
 
92

 
1,546

Warehouse finance
65

 
111

 

 

 
176

Total National Lending
4,972

 
8,849

 
(2,804
)
 
1,805

 
12,822

Community Banking
 
 
 
 
(2,804
)
 
 
 
 
Commercial real estate and operating
6,220

 
350

 

 

 
6,570

Consumer one-to-four family real estate and other
632

 
87

 

 

 
719

Agricultural real estate and operating
1,216

 
(187
)
 

 
150

 
1,179

Total Community Banking
8,068

 
250

 

 
150

 
8,468

Total
$
13,040

 
$
9,099

 
$
(2,804
)
 
$
1,955

 
$
21,290


Allowance for loan and lease losses:
Beginning balance
 
Provision (recovery) for loan and lease losses
 
Charge-offs
 
Recoveries
 
Ending balance
Three Months Ended December 31, 2017
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
Insurance premium finance
$
796

 
$
51

 
$
(129
)
 
$
7

 
$
725

Other commercial finance
4

 

 

 

 
4

Commercial finance
800

 
51

 
(129
)
 
7

 
729

Tax services
5

 
1,017

 

 
413

 
1,435

Total National Lending
805

 
1,068

 
(129
)
 
420

 
2,164

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
2,820

 
329

 

 

 
3,149

Consumer one-to-four family real estate and other
809

 
(113
)
 
(31
)
 

 
665

Agricultural real estate and operating
2,574

 
(590
)
 

 

 
1,984

Unallocated
526

 
374

 

 

 
900

Total Community Banking
6,729

 

 
(31
)
 

 
6,698

Total
$
7,534

 
$
1,068

 
$
(160
)
 
$
420

 
$
8,862




12

Table of Contents

 
Allowance
 
Loans and Leases
Recorded Investment
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
 
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
As of December 31, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$

 
$
2,065

 
$
2,065

 
$
2,371

 
$
551,701

 
$
554,072

Factoring
134

 
928

 
1,062

 
1,680

 
283,232

 
284,912

Lease financing

 
1,084

 
1,084

 
5,000

 
285,889

 
290,889

Insurance premium finance

 
972

 
972

 

 
330,712

 
330,712

SBA/USDA

 
253

 
253

 

 
67,893

 
67,893

Other commercial finance

 
291

 
291

 

 
89,402

 
89,402

Commercial finance
134

 
5,593

 
5,727

 
9,051

 
1,608,829

 
1,617,880

Consumer credit products

 
1,151

 
1,151

 

 
96,144

 
96,144

Other consumer finance

 
4,222

 
4,222

 

 
182,510

 
182,510

Consumer finance

 
5,373

 
5,373

 

 
278,654

 
278,654

Tax services

 
1,546

 
1,546

 

 
76,575

 
76,575

Warehouse finance

 
176

 
176

 

 
176,134

 
176,134

Total National Lending
134

 
12,688

 
12,822

 
9,051

 
2,140,192

 
2,149,243

Community Banking
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating

 
6,570

 
6,570

 
402

 
863,351

 
863,753

Consumer one-to-four family real estate and other

 
719

 
719

 
138

 
256,203

 
256,341

Agricultural real estate and operating

 
1,179

 
1,179

 
1,511

 
57,460

 
58,971

Total Community Banking

 
8,468

 
8,468

 
2,051

 
1,177,014

 
1,179,065

Total
$
134

 
$
21,156

 
$
21,290

 
$
11,102

 
$
3,317,206

 
$
3,328,308



13

Table of Contents

 
Allowance
 
Loans and Leases
Recorded Investment
Ending balance: individually evaluated for impairment(1)
 
Ending balance: collectively evaluated for impairment(1)
 
Total
 
Ending balance: individually evaluated for impairment
 
Ending balance: collectively evaluated for impairment
 
Total
As of September 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$

 
$
107

 
$
107

 
$
1,404

 
$
476,513

 
$
477,917

Factoring

 
64

 
64

 
3,331

 
280,890

 
284,221

Lease financing

 
59

 
59

 
8,877

 
256,438

 
265,315

Insurance premium finance

 
1,031

 
1,031

 

 
337,877

 
337,877

SBA/USDA

 
13

 
13

 

 
59,374

 
59,374

Other commercial finance

 
28

 
28

 

 
85,145

 
85,145

Commercial finance

 
1,302

 
1,302

 
13,612

 
1,496,237

 
1,509,849

Consumer credit products

 
785

 
785

 

 
80,605

 
80,605

Other consumer finance

 
2,820

 
2,820

 

 
189,756

 
189,756

Consumer finance

 
3,605

 
3,605

 

 
270,361

 
270,361

Tax services

 

 

 

 
1,073

 
1,073

Warehouse finance

 
65

 
65

 

 
65,000

 
65,000

Total National Lending

 
4,972

 
4,972

 
13,612

 
1,832,671

 
1,846,283

Community Banking
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating

 
6,220

 
6,220

 
451

 
790,439

 
790,890

Consumer one-to-four family real estate and other

 
632

 
632

 
94

 
247,224

 
247,318

Agricultural real estate and operating

 
1,216

 
1,216

 
1,454

 
59,044

 
60,498

Total Community Banking

 
8,068

 
8,068

 
1,999

 
1,096,707

 
1,098,706

Total
$

 
$
13,040

 
$
13,040

 
$
15,611

 
$
2,929,378

 
$
2,944,989

(1) Balances have been restated from what was previously reported as of September 30, 2018 on the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2018.

Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the Bank's primary regulator, the Office of the Comptroller of the Currency (the “OCC”), to be of lesser quality as “substandard,” “doubtful” or “loss.”  The loan and lease classification and risk rating definitions are as follows:
 
Pass- A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

Watch- A watch asset is generally a credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures.  Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management’s attention.  These assets are of better quality than special mention assets.
 
Special Mention- Special mention assets are a credit with potential weaknesses deserving management’s close attention and, if left uncorrected, may result in deterioration of the repayment prospects for the asset.  Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.  Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.
 
The adverse classifications are as follows:
 
Substandard- A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position.  Assets so classified will have well-defined weaknesses creating a distinct possibility the Bank will sustain some loss if the weaknesses are not corrected.  Loss potential does not have to exist for an asset to be classified as substandard.


14

Table of Contents

Doubtful- A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort.  Due to pending factors, the asset’s classification as loss is not yet appropriate.
 
Loss- A loss asset is considered uncollectible and of such little value that the asset’s continuance on the Bank’s balance sheet is no longer warranted.  This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

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 Company 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 Company'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.
 
The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans and leases to an individual, a specific industry, or a geographic location.  Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Company’s Tier 1 Capital plus the Allowance for Loan and Lease Losses.
 
The asset classification of loans and leases at December 31, 2018 and September 30, 2018 were as follows:
Asset Classification
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
December 31, 2018
(Dollars in Thousands)
 
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
498,694

 
$

 
$
53,007

 
$
2,371

 
$
554,072

Factoring
244,992

 

 
38,240

 
1,680

 
284,912

Lease financing
284,239

 

 
1,650

 
5,000

 
290,889

Insurance premium finance
329,131

 

 
1,581

 

 
330,712

SBA/USDA
53,539

 

 
14,354

 

 
67,893

Other commercial finance
89,049

 

 
353

 

 
89,402

Commercial finance
1,499,644

 

 
109,185

 
9,051

 
1,617,880

Consumer credit products
96,144

 

 

 

 
96,144

Other consumer finance
182,510

 

 

 

 
182,510

Consumer finance
278,654

 

 

 

 
278,654

Tax services
76,575

 

 

 

 
76,575

Warehouse finance
176,134

 

 

 

 
176,134

Total National Lending
2,031,007

 

 
109,185

 
9,051

 
2,149,243

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
848,456

 
15,297

 

 

 
863,753

Consumer one-to-four family real estate and other
254,458

 
1,496

 
308

 
79

 
256,341

Agricultural real estate and operating
40,558

 
1,590

 
4,836

 
11,987

 
58,971

Total Community Banking
1,143,472

 
18,383

 
5,144

 
12,066

 
1,179,065

Total loans and leases
$
3,174,479

 
$
18,383

 
$
114,329

 
$
21,117

 
$
3,328,308




15

Table of Contents

Asset Classification
Pass
 
Watch
 
Special Mention
 
Substandard
 
Total
September 30, 2018
(Dollars in Thousands)
 
National Lending
 
 
 
 
 
 
 
 
 
Asset based lending
$
418,635

 
$

 
$
57,877

 
$
1,405

 
$
477,917

Factoring
248,246

 

 
32,644

 
3,331

 
284,221

Lease financing
252,487

 

 
3,951

 
8,877

 
265,315

Insurance premium finance
336,296

 

 
1,581

 

 
337,877

SBA/USDA
39,093

 

 
20,281

 

 
59,374

Other commercial finance
85,145

 

 

 

 
85,145

Commercial finance
1,379,902

 

 
116,334

 
13,613

 
1,509,849

Consumer credit products
80,605

 

 

 

 
80,605

Other consumer finance
189,756

 

 

 

 
189,756

Consumer finance
270,361

 

 

 

 
270,361

Tax services
1,073

 

 

 

 
1,073

Warehouse finance
65,000

 

 

 

 
65,000

Total National Lending
1,716,336

 

 
116,334

 
13,613

 
1,846,283

Community Banking
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
778,445

 
12,251

 
194

 

 
790,890

Consumer one-to-four family real estate and other
246,463

 
537

 
239

 
79

 
247,318

Agricultural real estate and operating
42,292

 
2,447

 
4,872

 
10,887

 
60,498

Total Community Banking
1,067,200

 
15,235

 
5,305

 
10,966

 
1,098,706

Total loans and leases
$
2,783,536

 
$
15,235

 
$
121,639

 
$
24,579

 
$
2,944,989


National Lending (Commercial Finance, Consumer Finance, Tax Services and Warehouse Finance)

Commercial Finance
The Company's commercial finance product lines include asset-based lending, factoring, leasing, commercial insurance premium finance, and other commercial finance products offered on a nationwide basis. Asset-based lending and factoring primarily service small businesses that are startups, distressed and/or generally that may not otherwise qualify for traditional bank financing. Leasing focuses on providing equipment finance solutions to mid-market companies. These product offerings supplement the asset generation capacity in our community bank and tax services divisions and enhance the overall yield of our loan and lease portfolio, enabling us to earn attractive risk-adjusted net interest margins.

Asset-Based Lending. Through its Crestmark division, the Bank provides asset-based loans secured by debtors' short-term assets such as inventory, accounts receivable, and work-in-process. Asset-based loans may also be secured by real estate and equipment. The primary sources of repayment are the operating income of the borrower, the collection of the receivables securing the loan, and/or the sale of the inventory securing the loan. Loans are typically revolving lines of credit with terms of one to three years, whereby the Bank withholds a contingency reserve representing the difference between the amount advanced and the fair value of the invoice amount or other collateral value. Credit risk is managed through advance rates appropriate for the collateral, standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the debtors' cash receipts. The Bank also originates collateralized term loans and notes receivable, with terms ranging from three to 25 years.

Factoring. Through its Crestmark division, the Bank provides factoring lending where clients provide detailed inventory, accounts receivable, and work-in-process reports for lending arrangements. The factoring clients are diversified as to industry and geography. With these loans, the Crestmark division withholds a contingency reserve, which is the difference between the fair value of the invoice amount or other collateral value and the amount advanced. This reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable.


16

Table of Contents

Lease Financing. Through its Crestmark division, the Bank provides creative, flexible lease solutions for technology, capital equipment and select transportation assets like tractors and trailers. Direct financing leases and sales-type leases substantially transfer the benefits and risks of equipment ownership to the lessee.  The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value.  Residual values are estimated at the inception of the lease.  Lease maturities are generally no greater than 84 months. The focus in this lease financing category is to support middle market companies by providing a variety of financing products to help them meet their business objectives.

Insurance Premium Finance. Through its AFS/IBEX division the Bank provides, on a national basis, short-term, primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk, otherwise known as insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk.  Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term.  The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to 10 months on average.  The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest. The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation.

Small Business Administration ("SBA") and United States Department of Agriculture ("USDA"). The Bank originates loans through programs partially guaranteed by the SBA or USDA. These loans are made to small businesses and professionals with what the Bank believes are lower risk characteristics.

Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans to customers of the Crestmark division.

Consumer Finance
Consumer Credit Products. Through the acquisition of Specialty Consumer Services, the Bank acquired a platform that provides a total solution for marketplace lending, including underwriting and loan management in the direct-to-consumer credit business. The acquired platform allows the Bank to provide innovative lending solutions through consumer credit products. The Company designs and structures its credit programs in an effort to insulate the Company from program losses and to potentially increase the liquidity attributes of such lending programs' marketability to potential bank or other purchasers. While each program is different, all contain one or more types of credit enhancements, loss protections, or trigger events. When determining the applicable program enhancement, generally, the Company uses proprietary data provided by the Company’s partner, with respect to such program, supplemented with public data to design and shape appropriate loss curves, as well as implement stresses significantly higher than base to provide protection in changing credit cycles. Credit enhancements are typically built through holding excess program interest and fees in a reserve account to pay program credit losses. Cash flow waterfall positioning allows for losses and Company program principal and interest to be paid, under certain circumstances, before servicing or other program expenses. Trigger events allow programs and originations to be suspended if certain vintage loss limits, during a specific period of time, are triggered or if cumulative loss percentages are triggered. These triggers are designed to allow the Company to address potential issues quickly. Other trigger events in certain programs provide for excess credit or reserve enhancements, which could be beyond excess interest amounts, if certain loss triggers are breached. The Bank applies a reserve for loan losses of approximately 1% on outstanding loan balances within each of the consumer credit product programs.

Through December 31, 2018, the Bank has launched two consumer credit programs. During the second quarter of fiscal 2018, the Bank entered into a three-year program agreement with Liberty Lending, LLC ("Liberty Lending") whereby the Bank provides personal loans to Liberty Lending customers. The Bank and Liberty Lending market the program jointly through a wide variety of marketing channels. The loan products under the agreement with Liberty Lending are closed-end installment loans ranging from $3,500 to $45,000 in initial principal amount with durations of between 13 and 60 months.


17

Table of Contents

The Bank entered into a three-year agreement with Health Credit Services ("HCS") during the third quarter of fiscal 2018. The Bank approves and originates loans for elective medical procedures for select HCS provider offices throughout the United States. HCS works with its provider partners to market the loans, as well as provide servicing for them. The loan products offered are unsecured, closed-end installment loans with terms between 12 and 84 months and revolving lines of credit with durations between six and 60 months.

Other Consumer Finance. The Bank's purchased student loan portfolios are seasoned, floating rate, private portfolios that are serviced by a third-party servicer. The portfolio purchased during the first quarter of fiscal year 2018 is indexed to one-month LIBOR, while the portfolio purchased in the first quarter of fiscal year 2017 is indexed to three-month LIBOR plus various margins. The Company received written notification on June 18, 2018 from ReliaMax Surety Company ("ReliaMax"), the company that provided insurance coverage for the student loan portfolios, which informed policy holders that the South Dakota Division of Insurance filed a petition to have ReliaMax declared insolvent and to adopt a plan of liquidation. An Order of Liquidation was entered on June 27, 2018 by the Sixth Circuit Court in Hughes County, South Dakota, declaring ReliaMax insolvent and appointing the South Dakota Division of Insurance as liquidator to adopt a plan of liquidation. The Company expects to ultimately recover a portion of the unearned premiums, which could take a year or longer.

Tax Services
The Bank's tax services division provides short-term taxpayer advance loans. Taxpayers are underwritten to determine eligibility for these unsecured loans. Due to the nature of taxpayer advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. The Bank will charge off the balance of a taxpayer advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful.

Through its tax services division, the Bank provides short-term electronic return originator ("ERO") advance loans on a nationwide basis. These loans are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. ERO loans are not collateralized. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.

Warehouse Finance
In fiscal 2018, the Bank entered into a first-out participation agreement in a consumer receivable asset-backed warehouse line of credit, with the Bank holding a senior collateral position enhanced by a subordinate party structure. During the first quarter of fiscal 2019, the Bank entered into two additional first-out participation agreements in asset-backed warehouse lines of credit, including consumer loan receivables and small business loan receivables. The senior collateral position of the Bank is supported by a subordinate party position.

Community Banking

Commercial Real Estate and Operating. The Company engages in commercial and multi-family real estate lending in the community bank's primary market areas and surrounding areas. These loans are secured primarily by apartment buildings, office buildings, and hotels.  Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property securing the loan, and are typically secured by guarantees of the borrowers.  The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio.  Commercial and multi-family real estate loans provide for a margin over a number of different indices.  In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan.  Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.
 
The repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project.  If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired.



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Table of Contents

The Company originates its community banking commercial operating loans primarily in its market areas.  Most of these commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable.  Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment.  Generally, the maximum term on non-mortgage lines of credit is one year. 

The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s management ability, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower.  Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis. Commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.  As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment).  The Company’s commercial operating loans are usually secured by business assets and personal guarantees.  However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Consumer One-to-Four Family Real Estate and Other. One-to-four family real estate loan originations are typically generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate loans and adjustable-rate mortgage ("ARM") loans for both permanent structures and those under construction. The Company’s one-to-four family real estate loan originations are secured primarily by properties located in the community bank's primary market areas and surrounding areas.

The Company originates one-to-four family real estate loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the property securing the loan or the contract price. However, the vast majority of these loans are originated with loan-to-value ratios below 80%. The Company generally requires that private mortgage insurance be obtained in an amount sufficient to reduce the Company’s exposure to at or below the 80% loan‑to‑value level. Due to consumer demand, the Company also offers fixed-rate mortgage loans with terms up to 30 years, which may conform to secondary market standards such as Fannie Mae, Ginnie Mae, and Freddie Mac standards.  The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales.  The Company also currently offers five- and ten-year ARM loans.
 
In underwriting one-to-four family real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan.  Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors of the Company.  The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan.  Real estate loans originated by the Company generally contain a “due on sale” clause that allows the Company to declare the unpaid principal balance due and payable upon the sale of the security property.  The Company has not engaged in sub-prime residential mortgage originations.

The Company originates a variety of secured consumer loans, including home equity, home improvement, automobile and boat loans, as well as loans secured by savings deposits in its primary market areas and surrounding areas. Substantially all of the Company’s home equity loans and lines of credit are secured by second mortgages on principal residences.  The Bank will lend amounts that, together with all prior liens, may be up to 90% of the appraised value of the property securing the loan.  Home equity loans and lines of credit generally have maximum terms of five years.

Consumer loan terms vary according to the type and value of collateral, length of contract and creditworthiness of the borrower.  The underwriting standards employed by the Bank for consumer loans include an application, a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan.  Although creditworthiness of the applicant is a primary consideration, the underwriting process also may include a comparison of the value of the security, if any, in relation to the proposed loan amount.


19

Table of Contents

Agricultural Real Estate and Operating. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer, and other farm-related products, primarily in its market areas. Agricultural operating loans are originated at either an adjustable- or fixed-rate of interest for up to a one-year term or, in the case of livestock, are due upon sale.  Agricultural real estate loans are frequently originated with adjustable rates of interest.  Generally, such loans provide for a fixed rate of interest for the first five to 10 years, after which the loan will balloon or the interest rate will adjust annually.  These loans generally amortize over a period of 20 to 25 years.  Fixed-rate agricultural real estate loans typically have terms up to 10 years.  Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.
  
Payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized.  The success of the loan may also be affected by many factors outside the control of the borrower such as weather, government support programs and grain and livestock prices. These risks may be reduced, by the farmer, with the use of crop insurance coverage and futures contracts or options to mitigate price risk, both of which the Company frequently requires of the borrowers to help ensure loan repayment. Many farms are also dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.
 
Past due loans and leases at December 31, 2018 and September 30, 2018 were as follows:
 
Accruing and Non-accruing Loans and Leases
 
Non-performing Loans and Leases
Past Due Loans and Leases
30-59 Days
Past Due
 
60-89 Days
Past Due
 
>
89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans and Leases
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
December 31, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
739

 
$

 
$
336

 
$
1,075

 
$
552,997

 
$
554,072

 
$

 
$
1,007

 
$
1,007

Factoring

 

 

 

 
284,912

 
284,912

 

 
307

 
307

Lease financing
9,685

 
4,205

 
5,259

 
19,149

 
271,740

 
290,889

 
1,335

 
4,841

 
6,176

Insurance premium finance
1,579

 
789

 
2,796

 
5,164

 
325,548

 
330,712

 
2,796

 

 
2,796

SBA/USDA
483

 

 

 
483

 
67,410

 
67,893

 

 

 

Other commercial finance

 

 

 

 
89,402

 
89,402

 

 

 

Commercial finance
12,486

 
4,994

 
8,391

 
25,871

 
1,592,009

 
1,617,880

 
4,131

 
6,155

 
10,286

Consumer credit products
701

 
369

 
310

 
1,380

 
94,764

 
96,144

 
310

 

 
310

Other consumer finance
2,879

 
1,497

 
3,196

 
7,572

 
174,938

 
182,510

 
3,196

 

 
3,196

Consumer finance
3,580

 
1,866

 
3,506

 
8,952

 
269,702

 
278,654

 
3,506

 

 
3,506

Tax services

 

 

 

 
76,575

 
76,575

 

 

 

Warehouse finance

 

 

 

 
176,134

 
176,134

 

 

 

Total National Lending
16,066

 
6,860

 
11,897

 
34,823

 
2,114,420

 
2,149,243

 
7,637

 
6,155

 
13,792

Community Banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating
25

 

 

 
25

 
863,728

 
863,753

 

 

 

Consumer one-to-four family real estate and other
67

 
20

 
79

 
166

 
256,175

 
256,341

 
79

 

 
79

Agricultural real estate and operating

 

 

 

 
58,971

 
58,971

 

 

 

Total Community Banking
92

 
20

 
79

 
191

 
1,178,874

 
1,179,065

 
79

 

 
79

Total Loans and Leases
$
16,158

 
$
6,880

 
$
11,976

 
$
35,014

 
$
3,293,294

 
$
3,328,308

 
$
7,716

 
$
6,155

 
$
13,871



20

Table of Contents

 
Accruing and Non-accruing Loans and Leases
 
Non-performing Loans and Leases
Past Due Loans and Leases
30-59 Days
Past Due
 
60-89 Days
Past Due
 
>
89 Days Past Due
 
Total Past
Due
 
Current
 
Total Loans and Leases
Receivable
 
> 89 Days Past Due and Accruing
 
Non-accrual balance
 
Total
September 30, 2018
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset based lending
$
1,235

 
$
2,151

 
$
94

 
$
3,480

 
$
474,437

 
$
477,917

 
$
94

 
$

 
$
94

Factoring

 

 

 

 
284,221

 
284,221

 

 

 

Lease financing
16,542

 
532

 
2,921

 
19,995

 
245,320

 
265,315

 
726

 
2,864

 
3,590

Insurance premium finance
1,864

 
1,019

 
2,981

 
5,864

 
332,013

 
337,877

 
2,981

 

 
2,981

SBA/USDA
1,067

 

 

 
1,067

 
58,307

 
59,374

 

 

 

Other commercial finance

 

 

 

 
85,145

 
85,145

 

 

 

Commercial finance
20,708

 
3,702

 
5,996

 
30,406

 
1,479,443

 
1,509,849

 
3,801

 
2,864

 
6,665

Consumer credit products
532

 
284

 
147

 
963

 
79,642

 
80,605

 
147

 

 
147

Other consumer finance
2,677

 
1,311

 
2,237

 
6,225

 
183,531

 
189,756

 
2,237

 

 
2,237

Consumer finance
3,209

 
1,595

 
2,384

 
7,188

 
263,173

 
270,361

 
2,384

 

 
2,384

Tax services

 

 
1,073

 
1,073

 

 
1,073

 
1,073

 

 
1,073

Warehouse finance

 

 

 

 
65,000

 
65,000

 

 

 

Total National Lending
23,917

 
5,297

 
9,453

 
38,667

 
1,807,616

 
1,846,283

 
7,258

 
2,864

 
10,122

Community Banking
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial real estate and operating

 

 

 

 
790,890

 
790,890

 

 

 

Consumer one-to-four family real estate and other
105

 

 
79

 
184

 
247,134

 
247,318

 
79

 

 
79

Agricultural real estate and operating

 

 

 

 
60,498

 
60,498

 

 

 

Total Community Banking
105

 

 
79

 
184

 
1,098,522

 
1,098,706

 
79

 

 
79

Total Loans and Leases
$
24,022

 
$
5,297

 
$
9,532

 
$
38,851

 
$
2,906,138

 
$
2,944,989

 
$
7,337

 
$
2,864

 
$
10,201


Certain loans and leases 89 days or more past due as to interest or principal continue to accrue because they are (1) well-secured and in the process of collection or (2) one-to-four family real estate loans or consumer loans exempt under regulatory rules from being classified as non-accrual until later delinquency, usually 120 days past due.
When analysis of borrower or lessee operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan or lease is evaluated for impairment.  Often, this is associated with a delay or shortfall in scheduled payments, as described above.


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Table of Contents

Impaired loans and leases at December 31, 2018 and September 30, 2018 were as follows:
December 31, 2018
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
Loans and leases without a specific valuation allowance
(Dollars in Thousands)
National Lending
 
 
 
 
 
Asset based lending
$
2,371

 
$
2,871

 
$

Factoring
885

 
1,453

 

Lease financing
5,000

 
5,000

 

Commercial finance
8,256

 
9,324

 

Total National Lending
8,256

 
9,324

 

Community Banking
 
 
 
 
 
Commercial real estate and operating
402

 
402

 

Consumer one-to-four family real estate and other
138

 
138

 

Agricultural real estate and operating
1,511

 
1,511

 

Total Community Banking
2,051

 
2,051

 

Total
$
10,307

 
$
11,375

 
$

Loans and leases with a specific valuation allowance
 
 
 
 
 
National Lending
 
 
 
 
 
Factoring
$
795

 
$
795

 
$
134

Commercial finance
795

 
795

 
134

Total National Lending
795

 
795

 
134

Total
$
795

 
$
795

 
$
134


September 30, 2018
Recorded
Balance
 
Unpaid Principal
Balance
 
Specific
Allowance
Loans and leases without a specific valuation allowance
(Dollars in Thousands)
National Lending
 
 
 
 
 
Asset based lending
$
1,325

 
$
1,325

 
$

Factoring
1,383

 
1,713

 

Lease financing
5,491

 
5,491

 

Commercial finance
8,199

 
8,529

 

Total National Lending
8,199

 
8,529

 

Community Banking
405

 
405

 

Commercial real estate and operating
140

 
140

 

Consumer one-to-four family real estate and other
1,454

 
1,454

 

Agricultural real estate and operating
1,999

 
1,999

 

Total
$
10,198

 
$
10,528

 
$

Loans and leases with a specific valuation allowance
 
 
 
 
 
National Lending
 
 
 
 
 
Asset based lending
$
79

 
$
79

 
$
22

Factoring
1,948

 
2,198

 
49

Lease financing
3,386

 
3,386

 
517

Commercial finance
5,413

 
5,663

 
588

Total National Lending
5,413

 
5,663

 
588

Total
$
5,413

 
$
5,413

 
$
588


22

Table of Contents

The following table provides the average recorded investment in impaired loans and leases for the three month periods ended December 31, 2018 and 2017.
 
December 31, 2018
 
December 31, 2017
 
Average
Recorded
Investment
 
Recognized Interest Income
 
Average
Recorded
Investment
 
Recognized Interest Income
 
(Dollars in Thousands)
National Lending
 
 
 
 
 
 
 
Asset based lending
$
1,726

 
$
79

 
$

 
$

Factoring
2,780

 
5

 

 

Lease financing
7,585

 
10

 

 

Commercial finance
12,091

 
94

 

 

Total National Lending
12,091

 
94

 

 

Community Banking
 
 
 
 
 
 
 
Commercial real estate and operating
404

 
4

 
975

 
5

Consumer one-to-four family real estate and other
139

 
2

 
100

 
2

Agricultural real estate and operating
1,473

 
25

 
351

 
14

Total Community Banking
2,016

 
31

 
1,426

 
21

Total loans and leases
$
14,107

 
$
125

 
$
1,426

 
$
21


The Company’s troubled debt restructurings ("TDRs") typically involve forgiving a portion of interest or principal on existing loans, making loans at a rate materially less than current market rates, or extending the term of the loan. There were two community banking loans with an aggregate balance of $0.1 million and one national lending lease with a balance of $0.1 million that was modified in a TDR during the three months ended December 31, 2018, all of which were modified to extend the term of the loan, and no loans modified in a TDR during the three months ended December 31, 2017.

At December 31, 2018, foreclosed and repossessed assets totaled $31.5 million, compared to $31.6 million at September 30, 2018. There were no impairments on or valuation allowances established for any foreclosed and repossess assets at either date. The Company did not have at December 31, 2018 any loans or leases in the process of foreclosure.

NOTE 5. EARNINGS PER COMMON SHARE

Earnings per share is computed after deducting dividends. The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the earnings per share calculation. Basic earnings per share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company’s stock options and after the allocation of earnings to the participating securities. Antidilutive options are disregarded in earnings per share calculations. The share and per share amounts for fiscal year 2018 have been restated to reflect the 3-for-1 forward stock split of the Company's common stock that was effected by the Company on October 4, 2018.


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Table of Contents

A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share for the three months ended December 31, 2018 and 2017 is presented below.
Three Months Ended December 31,
2018
 
2017
(Dollars in Thousands, Except Share and Per Share Data)
 
 
 
Basic income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
15,398

 
$
4,670

Weighted average common shares outstanding
39,335,054

 
28,970,334

     Basic income per common share
0.39

 
0.16

 
 
 
 
Diluted income per common share:
 
 
 
     Net income attributable to Meta Financial Group, Inc.
$
15,398

 
$
4,670

Weighted average common shares outstanding
39,335,054

 
28,970,334

     Outstanding options - based upon the two-class method
71,453

 
168,189

Weighted average diluted common shares outstanding
39,406,507

 
29,138,523

     Diluted income per common share
0.39

 
0.16

 
 
 
 
NOTE 6. SECURITIES

On October 1, 2018, the Company adopted ASU 2016-01 on a prospective basis, which redefined the definition of equity securities and required their segregation from available for sale debt securities. While changes in the fair value of debt securities continue to be recorded in the equity category of accumulated other comprehensive income, the new guidance requires that changes in fair value of equity securities with readily determinable fair value be recorded in current earnings. As required by the new guidance, the unrealized gain in fair value on equity securities with readily determinable fair value (recorded in accumulated other comprehensive income at September 30, 2018) was reclassified to retained earnings on October 1, 2018. The amount of the reclassification was $0.5 million, net of tax. Equity securities with readily determinable fair value include mutual funds of $1.8 million at cost and $1.8 million at fair value at December 31, 2018.

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale ("AFS") and held to maturity ("HTM") debt securities at December 31, 2018 and September 30, 2018 are presented below.
At December 31, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
Small business administration securities
$
94,242

 
$
165

 
$
(351
)
 
$
94,056

Obligations of states and political subdivisions
15,023

 
73

 
(146
)
 
14,950

Non-bank qualified obligations of states and political subdivisions
970,288

 
2,787

 
(28,504
)
 
944,571

Asset-backed securities
287,247

 
1,261

 
(1,215
)
 
287,293

Mortgage-backed securities
366,467

 
157

 
(12,438
)
 
354,186

Total debt securities AFS
$
1,733,267

 
$
4,443

 
$
(42,654
)
 
$
1,695,056

Common equities and mutual funds(1)(2)
$
3,494

 
$
357

 
$
(14
)
 
$
3,837

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at December 31, 2018.


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Table of Contents

At September 30, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
Small business administration securities
$
45,591

 
$
1

 
$
(1,255
)
 
$
44,337

  Obligations of states and political subdivisions
17,154

 
49

 
(293
)
 
16,910

Non-bank qualified obligations of states and political subdivisions
1,140,884

 
826

 
(31,825
)
 
1,109,885

Asset-backed securities
310,700

 
2,585

 
(257
)
 
313,028

Mortgage-backed securities
378,301

 

 
(14,236
)
 
364,065

Total debt securities AFS
$
1,892,630

 
$
3,461

 
$
(47,866
)
 
$
1,848,225

Common equities and mutual funds(1)
3,172

 
635

 
(7
)
 
3,800

Total AFS securities(1)
$
1,895,802

 
$
4,096

 
$
(47,873
)
 
$
1,852,025

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.

Held to Maturity
 
 
 
 
 
 
 
At December 31, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
153,075

 
$

 
$
(8,820
)
 
$
144,255

Mortgage-backed securities
7,661

 

 
(326
)
 
7,335

Total held to maturity securities
$
160,736

 
$

 
$
(9,146
)
 
$
151,590

At September 30, 2018
AMORTIZED
COST
 
GROSS
UNREALIZED
GAINS
 
GROSS
UNREALIZED
(LOSSES)
 
FAIR
VALUE
 
(Dollars in Thousands)
Debt securities
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
163,893

 
$

 
$
(10,758
)
 
$
153,135

Mortgage-backed securities
7,850

 

 
(422
)
 
7,428

Total held to maturity securities
$
171,743

 
$

 
$
(11,180
)
 
$
160,563


Management has implemented a process to identify securities with potential credit impairment that are other-than-temporary.  This process involves evaluation of the length of time and extent to which the fair value has been less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook of the security, monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not the Company will be required to sell the security before the recovery of its amortized cost which, in some cases, may extend to maturity.  To the extent the Company determines that a security is deemed to be other-than-temporarily impaired, an impairment loss is recognized.

For all securities considered temporarily impaired, the Company does not intend to sell these securities, and it is not more likely than not that the Company will be required to sell the security before recovery of its amortized cost, which may occur at maturity.  The Company believes it will collect all principal and interest due on all investments with amortized cost in excess of fair value and considered only temporarily impaired.


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Table of Contents

GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: AFS, HTM or trading. AFS securities are carried at fair value on the consolidated statements of financial condition, and unrealized holding gains and losses are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (“AOCI”). HTM debt securities are measured at amortized cost. Both AFS and HTM are subject to review for other-than-temporary impairment. The Company did not have any trading securities at December 31, 2018 or September 30, 2018.

Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2018 and September 30, 2018, were as follows:
 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At December 31, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
 
 
 
 
Small business administration securities
$

 
$

 
$
28,318

 
$
(351
)
 
$
28,318

 
$
(351
)
Obligations of states and political subdivisions
2,089

 
(6
)
 
7,198

 
(140
)
 
9,287

 
(146
)
Non-bank qualified obligations of states and political subdivisions
112,208

 
(2,443
)
 
525,831

 
(26,061
)
 
638,039

 
(28,504
)
Asset-backed securities
162,550

 
(1,215
)
 

 

 
162,550

 
(1,215
)
Mortgage-backed securities
4,063

 
(16
)
 
321,021

 
(12,422
)
 
325,084

 
(12,438
)
Total debt securities AFS
$
280,910

 
$
(3,680
)
 
$
882,368

 
$
(38,974
)
 
$
1,163,278

 
$
(42,654
)
Common equities and mutual funds(1)(2)
2,001

 
(14
)
 

 

 
2,001

 
(14
)
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at December 31, 2018.

 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At September 30, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities AFS
 
 
 
 
 
 
 
 
 
 
 
Small Business Administration securities
$
43,097

 
$
(1,255
)
 
$

 
$

 
$
43,097

 
$
(1,255
)
Obligations of state and political subdivisions
11,036

 
(279
)
 
881

 
(14
)
 
11,917

 
(293
)
Non-bank qualified obligations of states and political subdivisions
626,693

 
(13,539
)
 
358,095

 
(18,286
)
 
984,788

 
(31,825
)
Asset-backed securities
146,638

 
(257
)
 

 

 
146,638

 
(257
)
Mortgage-backed securities
121,217

 
(3,292
)
 
242,849

 
(10,944
)
 
364,066

 
(14,236
)
Total debt securities AFS
$
948,681

 
$
(18,622
)
 
$
601,825

 
$
(29,244
)
 
$
1,550,506

 
$
(47,866
)
Common equities and mutual funds(1)
1,818

 
(7
)
 

 

 
1,818

 
(7
)
Total debt AFS securities(1)
$
950,499

 
$
(18,629
)
 
$
601,825

 
$
(29,244
)
 
$
1,552,324

 
$
(47,873
)
(1)Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.


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Table of Contents

Held To Maturity
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At December 31, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities
 
 
 
 
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$

 
$

 
$
144,255

 
$
(8,820
)
 
$
144,255

 
$
(8,820
)
Mortgage-backed securities

 

 
7,335

 
(326
)
 
7,335

 
(326
)
Total held to maturity securities
$

 
$

 
$
151,590

 
$
(9,146
)
 
$
151,590

 
$
(9,146
)

 
LESS THAN 12 MONTHS
 
OVER 12 MONTHS
 
TOTAL
At September 30, 2018
Fair
Value
 
Unrealized
(Losses)
 
Fair
Value
 
Unrealized
(Losses)
 
Fair Value
 
Unrealized
(Losses)
 
(Dollars in Thousands)
Debt securities
 
 
 
 
 
 
 
 
 
 
 
Non-bank qualified obligations of states and political subdivisions
$
5,767

 
$
(287
)
 
$
147,368

 
$
(10,471
)
 
$
153,135

 
$
(10,758
)
Mortgage-backed securities

 

 
7,428

 
(422
)
 
7,428

 
(422
)
Total held to maturity securities
$
5,767

 
$
(287
)
 
$
154,796

 
$
(10,893
)
 
$
160,563

 
$
(11,180
)

At December 31, 2018, the investment portfolio included securities with current unrealized losses that have existed for longer than one year.  All of these securities are considered to be acceptable credit risks. Because (i) the declines in fair value were due to changes in market interest rates, not in estimated cash flows, (ii) the Company does not intend or has not made a decision to sell these securities and (iii) it is not more likely than not that the Company will be required to sell the securities before recovery of their amortized cost basis, which may occur at maturity, no other-than-temporary impairment was recorded at December 31, 2018.

The amortized cost and fair value of debt securities by contractual maturity as of the dates set forth below are shown below.  Certain securities have call features which allow the issuer to call the security prior to maturity.  Expected maturities may differ from contractual maturities in mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  Therefore, mortgage-backed securities are not included in the maturity categories in the following maturity summary.  The expected maturities of certain housing related municipal securities, Small Business Administration and asset-backed securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.
Securities at Fair Value
AMORTIZED
COST
 
FAIR
VALUE
 
At December 31, 2018
(Dollars in Thousands)
 
 
 
 
Due in one year or less
$
1,585

 
$
1,581

Due after one year through five years
25,283

 
25,483

Due after five years through ten years
250,025

 
251,933

Due after ten years
1,089,907

 
1,061,873

 
1,366,800

 
1,340,870

Mortgage-backed securities
366,467

 
354,186

Total securities at fair value
$
1,733,267

 
$
1,695,056


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Table of Contents

 
AMORTIZED
COST
 
FAIR
VALUE
At September 30, 2018
(Dollars in Thousands)
 
 
 
 
Due in one year or less
$
2,532

 
$
2,529

Due after one year through five years
41,415

 
41,504

Due after five years through ten years
352,099

 
350,143

Due after ten years
1,118,283

 
1,089,984

 
1,514,329

 
1,484,160

Mortgage-backed securities
378,301

 
364,065

Common equities and mutual funds(1)
3,172

 
3,800

Total securities at fair value
$
1,895,802

 
$
1,852,025

(1)Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.

Held To Maturity
AMORTIZED
COST
 
FAIR
VALUE
 
At December 31, 2018
(Dollars in Thousands)
 
 
 
 
Due after ten years
$
153,075

 
$
144,255

 
153,075

 
144,255

Mortgage-backed securities
7,661

 
7,335

Total held to maturity securities at cost
$
160,736

 
$
151,590

 
AMORTIZED
COST
 
FAIR
VALUE
At September 30, 2018
(Dollars in Thousands)
Due after ten years
$
163,893

 
$
153,135

 
163,893

 
153,135

Mortgage-backed securities
7,850

 
7,428

Total held to maturity securities at cost
$
171,743

 
$
160,563


Other investments, at cost, which are included in other assets on the consolidated statement of financial condition, include equity securities without a readily determinable fair value and shares of stock in the Federal Home Loan Bank ("FHLB") of Des Moines. Equity securities without a readily determinable fair value totaled $2.0 million at December 31, 2018 and $2.0 million at September 30, 2018, respectively. FHLB of Des Moines stock at December 31, 2018 and September 30, 2018 totaled $15.6 million and $23.4 million, respectively. The decrease in FHLB stock directly correlates with lower short-term borrowings balances at December 31, 2018 compared to September 30, 2018. The Company’s wholly-owned subsidiary, MetaBank, is required by federal law to maintain FHLB stock as a member of FHLB of Des Moines. These equity securities are ‘restricted’ in that they can only be sold back to the respective institution from which they were acquired or another member institution at par. Therefore, FHLB stock is less liquid than other marketable equity securities, and the fair value approximates cost. The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value. No impairment was recognized for such investments for the three months ended December 31, 2018.



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Table of Contents

NOTE 7. RENTAL EQUIPMENT, NET
Rental equipment was as follows as of December 31, 2018 and September 30, 2018.
 
December 31, 2018
 
September 30, 2018
 
(Dollars in thousands)
Computers and IT networking equipment
$
50,122

 
$
55,215

Motor vehicles and other
50,259

 
45,293

Office furniture and equipment
3,756

 
3,738

Solar panels and equipment
102,105

 
65,938

Total
206,242

 
170,183

 
 
 
 
Accumulated depreciation
(59,427
)
 
(62,893
)
Net book value
$
146,815

 
$
107,290

Future minimum lease payments receivable on equipment under operating leases was as follows as of December 31, 2018.
 
December 31, 2018
 
(Dollars in thousands)
2019
$
22,679

2020
19,444

2021
14,679

2022
9,283

2023
7,808

2024 and thereafter
18,882

Total
$
92,775


NOTE 8. STOCK COMPENSATION

The Company maintains the amended and restated Meta Financial Group, Inc. 2002 Omnibus Incentive Plan, as amended (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of stock options and nonvested (restricted) shares to certain officers and directors of the Company.  Awards are granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of the grant. The exercise price of options or fair value of non-vested (restricted) shares granted under the Company’s incentive plan is equal to the fair market value of the underlying stock at the grant date. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.


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Table of Contents

The following tables show the activity of options and nonvested (restricted) shares granted, exercised, or forfeited under the 2002 Omnibus Incentive Plan for the three months ended December 31, 2018:
 
Number of Shares
 
Weighted Average Exercise Price
 
Weighted Average Remaining Contractual Term (Yrs)
 
Aggregate Intrinsic Value
 
(Dollars in Thousands, Except Per Share Data (1))
Options outstanding, September 30, 2018
155,961

 
$
8.48

 
1.78

 
$
2,974

Granted

 

 

 

Exercised
(45,132
)
 
8.95

 

 
742

Forfeited or expired

 

 

 

Options outstanding, December 31, 2018
110,829

 
$
8.29

 
1.67

 
$
1,230

 
 
 
 
 
 
 
 
Options exercisable, December 31, 2018
110,829

 
$
8.29

 
1.67

 
$
1,230


 
Number of Shares
 
Weighted Average Fair Value at Grant
(Dollars in Thousands, Except Per Share Data (1))
Nonvested (restricted) shares outstanding, September 30, 2018
1,005,813

 
$
29.89

Granted
224,102

 
25.11

Vested
(245,842
)
 
27.29

Forfeited or expired

 

Nonvested (restricted) shares outstanding, December 31, 2018
984,073

 
$
29.45

(1) All share and per share data has been adjusted to reflect the 3-for-1 forward stock split effected by the Company on October 4, 2018.

At December 31, 2018, stock-based compensation expense not yet recognized in income totaled $18.3 million, which is expected to be recognized over a weighted average remaining period of 3.11 years.

NOTE 9. INCOME TAXES

The Company recorded an income tax benefit of $1.7 million for the three months ended December 31, 2018, resulting in an effective tax rate of (11.56%), compared to an income tax expense of $5.7 million, or an effective tax rate of 54.90%, for the three months ended December 31, 2017. The Company’s effective tax rate is lower than the U.S. statutory rate of 21% primarily because of the anticipated effect of investment tax credits during fiscal year 2019. The Company’s effective tax rate in the future will depend in part on actual investment tax credits earned as part of its financing of solar energy projects.

The table below compares the income tax expense components for the periods presented.
Three Months Ended December 31,
2018
 
2017
(Dollars in Thousands)
 
 
 
Provision at statutory rate
$
3,072

 
$
2,540

Tax-exempt income
(1,201
)
 
(2,068
)
State income taxes
701

 
718

Interim period effective rate adjustment
5,263

 
717

Tax credit investments, net - federal
(9,568
)
 

Tax Reform rate adjustment

 
3,635

Other, net
42

 
142

Income tax expense
$
(1,691
)
 
$
5,684

Effective tax rate
(11.56
%)
 
54.90
%


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Table of Contents

NOTE 10. COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Bank makes various commitments to extend credit that are not reflected in the accompanying Consolidated Financial Statements.

At December 31, 2018 and September 30, 2018, unfunded loan commitments approximated $858.1 million and $748.8 million, respectively, excluding undisbursed portions of loans in process. Commitments, which are disbursed subject to certain limitations, extend over various periods of time.  Generally, unused commitments are canceled upon expiration of the commitment term as outlined in each individual contract.

The Company had no commitments to purchase securities at December 31, 2018 and $1.4 million in commitments to purchase securities at September 30, 2018. The Company had no commitments to sell securities at December 31, 2018 or September 30, 2018.

The exposure to credit loss in the event of non-performance by other parties to financial instruments for commitments to extend credit is represented by the contractual amount of those instruments.  The same credit policies and collateral requirements are used in making commitments and conditional obligations as are used for on-balance-sheet instruments. At December 31, 2018 and at September 30, 2018, the Company had an allowance for credit losses on off-balance sheet credit exposures of $0.1 million. This amount is maintained as a separate liability account within other liabilities.
Since certain commitments to make loans and to fund lines of credit and loans in process expire without being used, the amount does not necessarily represent future cash commitments.  In addition, commitments used to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Legal Proceedings

The Bank was served on April 15, 2013, with a lawsuit captioned Inter National Bank v. NetSpend Corporation, MetaBank, BDO USA, LLP d/b/a BDO Seidman, Cause No. C-2084-12-I filed in the District Court of Hidalgo County, Texas. The Plaintiff’s Second Amended Original Petition and Application for Temporary Restraining Order and Temporary Injunction adds both MetaBank and BDO Seidman to the original causes of action against NetSpend. NetSpend acts as a prepaid card program manager and processor for both Inter National Bank ("INB") and MetaBank. According to the Petition, NetSpend has informed INB that the depository accounts at INB for the NetSpend program supposedly contained $10.5 million less than they should. INB alleges that NetSpend has breached its fiduciary duty by making affirmative misrepresentations to INB about the safety and stability of the program, and by failing to timely disclose the nature and extent of any alleged shortfall in settlement of funds related to cardholder activity and the nature and extent of NetSpend’s systemic deficiencies in its accounting and settlement processing procedures. To the extent that an accounting reveals that there is an actual shortfall, INB alleges that MetaBank may be liable for portions or all of said sum due to the fact that funds have been transferred from INB to MetaBank, and thus MetaBank would have been unjustly enriched. The Bank is vigorously contesting this matter. In January 2014, NetSpend was granted summary judgment in this matter which is under appeal. Because the theory of liability against both NetSpend and the Bank is the same, the Bank views the NetSpend summary judgment as a positive in support of its position. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.

The Bank was served, on October 14, 2016, with a lawsuit captioned Card Limited, LLC v. MetaBank dba Meta Payment Systems, Civil No. 2:16-cv-00980 in the United States District Court for the District of Utah. This action was initiated by a former prepaid program manager of the Bank, which was terminated by the Bank in fiscal year 2016. Card Limited alleges that after all of the programs were wound down, there were two accounts with a positive balance to which they are entitled. The Bank’s position is that Card Limited is not entitled to the funds contained in said accounts. The total amount to which Card Limited claims it is entitled is $4.0 million. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.


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Table of Contents

On February 9, 2018, the Bank’s AFS/IBEX division filed a lawsuit in the United States District Court for the Eastern District of New York captioned AFS/IBEX, a division of MetaBank v. Aegis Managing Agency Limited ("AMA"), Aegis Syndicate 1225 (together with AMA, the "Aegis defendants"), CRC Insurance Services, Inc. ("CRC"), and Transportation Underwriters, Inc. The suit was filed against commercial insurance underwriters and brokers that facilitated the issuance of commercial insurance policies to Red Hook Construction Group-II, LLC (“Red Hook”). The Bank’s position is that both CRC and Transportation Underwriters represented to the Bank that, upon cancellation of the insurance policies prior to their stated terms, any unearned premiums would be refunded. The Bank then provided insurance premium financing to Red Hook, and Red Hook executed a written premium finance agreement pursuant to which Red Hook assigned its rights to any unearned premiums to the Bank. After the policies were cancelled, the Aegis defendants failed to return the unearned insurance premiums totaling just over $1.6 million owed to the Bank under the insurance policies and the premium finance agreement. The Bank is seeking recovery of all amounts to which it is entitled at law or equity and intends to vigorously pursue its claims against the defendants.

The Bank was served on December 24, 2018, with a lawsuit captioned The Ohio Valley Bank Company v. MetaBank dba Refund Advantage, Case No. 18 CV 134 in the Court of Common Pleas, Gallia County, Ohio. This action alleges that MetaBank breached a contract with The Ohio Valley Bank Company by terminating the contract before the term expired, resulting in over $3.0 million in damages. The Bank intends to vigorously defend this claim. An estimate of a range of reasonably possible loss cannot be made at this stage of the litigation because discovery is still being conducted.

From time to time, the Company or its subsidiaries are subject to certain legal proceedings and claims in the ordinary course of business. Accruals have been recorded when the outcome is probable and can be reasonably estimated. While management currently believes that the ultimate outcome of these proceedings will not have a material adverse effect on the Company’s financial position or its results of operations, legal proceedings are inherently uncertain and unfavorable resolution of some or all of these matters could, individually or in the aggregate, have a material adverse effect on the Company’s and its subsidiaries’ respective businesses, financial condition or results of operations.

NOTE 11. REVENUE FROM CONTRACTS WITH CUSTOMERS

On October 1, 2018, the Company adopted ASC 606 on a modified retrospective basis. Prior period amounts have not been adjusted to reflect the adoption of ASC 606 and continue to be reported in accordance with the Company’s historical accounting policies. The impact of the Company’s adoption of ASC 606 was limited to the MPS division within the Payments reporting segment. Upon adoption, Meta recorded a cumulative-effect adjustment that increased retained earnings by $1.5 million, net of tax.

ASC 606 applies to all contracts with customers unless such revenue is specifically addressed under existing guidance. The table below presents the Company’s revenue by operating segment. For additional descriptions of the Company’s operating segments, including additional financial information and the underlying management accounting process, see Note 13. Segment Reporting to the Consolidated Financial Statements.

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Table of Contents

(Dollars in thousands)
Payments
 
Banking
 
Corporate Services/Other
 
Consolidated Company
Quarter Ended December 31,
2018
2017
 
2018
2017
 
2018
2017
 
2018
2017
Net interest income(1)
$
9,400

$
4,669

 
$
51,792

$
15,597

 
$
(920
)
$
5,930

 
$
60,272

$
26,196

Noninterest income:
 
 
 
 
 
 
 
 
 
 
 
Refund transfer product fees
261

192

 


 


 
261

192

Tax advance product fees(1)
1,685

1,947

 


 


 
1,685

1,947

Card fees
19,273

25,174

 
78

73

 


 
19,351

25,247

Rental income(1)


 
10,890


 


 
10,890


Loan and lease fees(1)


 
1,247

1,292

 


 
1,247

1,292

Bank-owned life insurance(1)


 


 
642

669

 
642

669

Deposit fees
1,534

728

 
404

120

 


 
1,938

848

Loss on sale of securities AFS(1)


 


 
(22
)
(1,010
)
 
(22
)
(1,010
)
Gain of loans and leases(1)


 
867


 


 
867


Gain (loss) on foreclosed real estate(1)


 
15

(19
)
 


 
15

(19
)
Other income(1)
73

60

 
768

19

 
36

23

 
877

102

Total noninterest income
22,826

28,101

 
14,269

1,485

 
656

(318
)
 
37,751

29,268

Revenue
$
32,226

$
32,770

 
$
66,061

$
17,082

 
$
(264
)
$
5,612

 
$
98,023

$
55,464

(1) These revenues are not within scope of ASC 606. Additional details are included in other footnotes to the accompanying financial statements. The scope of ASC 606 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including loans, leases, and securities.

Following is a discussion of key revenues within the scope of ASC 606. The Company provides services to customers that have related performance obligations that must be completed to recognize revenue. Revenues are generally recognized immediately upon the completion of the service or over time as services are performed. Any services performed over time generally require that the Company renders services each period, therefore the Company measures progress in completing these services based upon the passage of time. Revenue from contracts with customers did not generate significant contract assets and liabilities.

Refund Transfer Product Fees
Refund transfer fees are specific to the tax products offered by Refund Advantage and EPS. These fees are for products, services such as payment processing, and product referral commissions. Software partner fees paid and/or incurred are recorded on a net basis. The Company’s obligation for product fees and commissions is satisfied at the time of the product delivery and obligation for payment processing is satisfied at the time of processing. The transaction price for such activity is based upon stand-alone fees within the terms and conditions. Receivables related to refund transfer fees, which reflect earned revenue with unconditional rights to payment for product fee income, were $113,935 and $827,039 as of December 31, 2018 and September 30, 2018, respectively. All refund transfer fees are recorded within the Payments reporting segment.


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Table of Contents

Card Fees
Card fees relate to MPS, retail bank, Refund Advantage and EPS products. These fees are for products and services such as card activation, product support, processing, and servicing. The Company earns these fees based upon the underlying terms and conditions with each cardholder over the contract term. Agreements with the Company’s cardholders are considered daily service contracts as they are not fixed in duration. The Company’s obligation for card activation and product support fees is satisfied at the time of product delivery, while the obligation for processing and servicing is satisfied over the course of each month. The transaction price for such activity is based upon the stand-alone fees within the terms and conditions of the cardholder agreements. Card fee revenue also includes income from sponsorships, associations and networks, and interchange income. Sponsorship income relates to fees charged to the Company’s ATM sponsorship partners, where the obligation is satisfied over the course of each month. Association and network income reflect incentives, performance bonuses and rebates with MasterCard and Visa. The obligation for such income is satisfied at the time when certain thresholds of transaction volume have been met. Interchange income is generated by cardholder activity, and therefore the Company’s obligations are satisfied as activity occurs. The transaction price for such activity is based on underlying rates and activity thresholds within the terms and conditions of the applicable agreements. Card fee revenue also includes breakage revenue. Breakage represents the estimated amount that will not be redeemed by the holder of unregistered, unused prepaid cards for goods or services. Breakage revenue is recognized ratably over the expected customer usage period and is an estimate based on cardholder behavior and breakage rates and is impacted by escheatment laws. Card fees are recorded within the Payments and Banking reporting segments.

Deposit Fees
Fees are earned on depository accounts for commercial and consumer customers and include fees for account services, overdraft services, safety deposit box rentals, and event-driven services (i.e. returned checks, ATM surcharge, card replacement, wire transfers, and stop pays). The Company’s obligation for event-driven services is satisfied at the time of the event when the service is delivered, while its obligation for account services is satisfied over the course of each month. The Company’s obligation for overdraft services is satisfied at the time of overdraft. The transaction price for such activity is based upon stand-alone fees within the terms and conditions of the deposit agreements. Deposit fees are recorded within the Payments and Banking reporting segment.

Principal vs Agent
The Payments reporting segment includes principal/agent relationships. Within this segment, MPS relationships are recorded on a gross basis within the income statement, as Meta is the principal in the contract, with the exception of association/network contracts and partner/processer contracts for prepaid cards, which are recorded on a net basis within the income statement as Meta is the agent in these contracts. Also within this segment, Tax service relationships are recorded on a gross basis within the income statement, as Meta is the principal in the contract, with the exception of contracts with software providers and merchants, which are recorded on a net basis within the income statement as Meta is the agent in these contracts.

NOTE 12. FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement.  It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.

The fair value hierarchy is as follows:

Level 1 Inputs - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.

Level 2 Inputs - Valuation is based upon (1) quoted prices for similar instruments in active markets, (2) quoted prices for identical or similar instruments in markets that are not active and (3) model-based valuation techniques for which significant assumptions are observable in the market.

Level 3 Inputs - Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available.  These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.  Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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Table of Contents

Debt Securities Available for Sale and Equity Securities.  Debt securities available for sale and equity securities are recorded at fair value on a recurring basis and securities held to maturity are carried at amortized cost.  Fair value measurement is based upon quoted prices, if available.  If quoted prices are not available, fair values are measured using an independent pricing service.  For both Level 1 and Level 2 securities, management uses various methods and techniques to corroborate prices obtained from the pricing service, including but not limited to reference to dealer or other market quotes, and by reviewing valuations of comparable instruments.  The Company’s Level 1 securities include equity securities and mutual funds.  Level 2 securities include U.S. Government agency and instrumentality securities, U.S. Government agency and instrumentality mortgage-backed securities, municipal bonds and corporate debt securities.  The Company had no Level 3 securities at December 31, 2018 or September 30, 2018.

The fair values of securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or valuation based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model based valuation techniques for which significant assumptions are observable in the market (Level 2 inputs).  The Company considers these valuations supplied by a third party provider which utilizes several sources for valuing fixed-income securities.  These sources include Interactive Data Corporation, Reuters, Standard and Poor’s, Bloomberg Financial Markets, Street Software Technology, and the third party provider’s own matrix and desk pricing.  The Company, no less than annually, reviews the third party’s methods and source’s methodology for reasonableness and to ensure an understanding of inputs utilized in determining fair value.  Sources utilized by the third party provider include but are not limited to pricing models that vary based by asset class and include available trade, bid, and other market information.  This methodology includes but is not limited to broker quotes, proprietary models, descriptive terms and conditions databases, as well as extensive quality control programs. Monthly, the Company receives and compares prices provided by multiple securities dealers and pricing providers to validate the accuracy and reasonableness of prices received from the third party provider. On a monthly basis, the Investment Committee reviews mark-to-market changes in the securities portfolio for reasonableness.
 
The following table summarizes the fair values of debt securities available for sale and equity securities at December 31, 2018 and September 30, 2018, as they are measured at fair value on a recurring basis.
 
Fair Value At December 31, 2018
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Debt securities AFS
 
 
 
 
 
 
 
Small business administration securities
$
94,056

 
$

 
$
94,056

 
$

Obligations of states and political subdivisions
14,950

 

 
14,950

 

Non-bank qualified obligations of states and political subdivisions
944,571

 

 
944,571

 

Asset-backed securities
287,293

 

 
287,293

 

Mortgage-backed securities
354,186

 

 
354,186

 

Total debt securities AFS
1,695,056

 

 
1,695,056

 

Common equities and mutual funds(1)(2)
$
3,837

 
$
3,837

 
$

 
$

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.
(2) ASU 2016-01 adopted on October 1, 2018, on a prospective basis, removed equity securities from AFS category at December 31, 2018.
 
Fair Value At September 30, 2018
 
Available For Sale
 
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
 
Debt securities AFS
 
 
 
 
 
 
 
 
Small business administration securities
$
44,337

 
$

 
$
44,337

 
$

 
Obligations of states and political subdivisions
16,910

 

 
16,910

 

 
Non-bank qualified obligations of states and political subdivisions
1,109,885

 

 
1,109,885

 

 
Asset-backed securities
313,028

 

 
313,028

 

 
Mortgage-backed securities
364,065

 

 
364,065

 

 
Total debt securities AFS
1,848,225

 

 
1,848,225

 

 
Common equities and mutual funds(1)
3,800

 
3,800

 

 

 
Total securities
$
1,852,025

 
$
3,800

 
$
1,848,225

 
$

 
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.

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The Company did not transfer any AFS debt securities or equity securities between fair value hierarchy categories at December 31, 2018 or September 30, 2018.

Loans and Leases.  The Company does not record loans and leases at fair value on a recurring basis.  If a loan or lease is identified as individually impaired, management then measures impairment in accordance with ASC 310, Receivables. See Note 4 Loans and Leases, Net for further information.

The following table summarizes the assets of the Company that were measured at fair value in the consolidated statements of financial condition on a non-recurring basis as of December 31, 2018 and September 30, 2018.
 
Fair Value At December 31, 2018
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Impaired Loans and Leases, net
 
 
 
 
 
 
 
Asset Based Lending
$
761

 
$

 
$

 
$
761

Factoring
724

 

 

 
724

Commercial finance
1,485

 

 

 
1,485

Total National Lending
1,485

 

 

 
1,485

     Total Impaired Loans and Leases
1,485

 

 

 
1,485

Foreclosed Assets, net
31,548

 

 

 
31,548

Total
$
33,033

 
$

 
$

 
$
33,033

 
Fair Value At September 30, 2018
(Dollars in Thousands)
Total
 
Level 1
 
Level 2
 
Level 3
Impaired loans and leases, net
 
 
 
 
 
 
 
Asset Based Lending
$
57

 
$

 
$

 
$
57

Factoring
1,899

 

 

 
1,899

Lease Financing
2,869

 

 

 
2,869

Commercial finance
4,825

 

 

 
4,825

Total National Lending
4,825

 

 

 
4,825

     Total impaired loans and leases
4,825

 

 

 
4,825

Foreclosed assets, net
31,638

 

 

 
31,638

Total
$
36,463

 
$

 
$

 
$
36,463

 
Quantitative Information About Level 3 Fair Value Measurements
(Dollars in Thousands)
Fair Value at
December 31, 2018
 
Fair Value at
September 30, 2018
 
Valuation
Technique
 
Unobservable Input
 
Range of Inputs
Impaired loans and leases, net
$
1,485

 
4,825

 
Market approach
 
Appraised values (1)
 
4.00 - 10.00%
Foreclosed Assets, net
$
31,548

 
31,638

 
Market approach
 
Appraised values (1)
 
4.00 - 10.00%
(1) 
The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs in a range of 4% to 10%.

The following table discloses the Company’s estimated fair value amounts of its financial instruments as of the dates set forth below.  It is management’s belief that the fair values presented below are reasonable based on the valuation techniques and data available to the Company as of December 31, 2018 and September 30, 2018, as more fully described below.  The operations of the Company are managed from a going concern basis and not a liquidation basis.  As a result, the ultimate value realized for the financial instruments presented could be substantially different when actually recognized over time through the normal course of operations.  Additionally, a substantial portion of the Company’s inherent value is the Bank’s capitalization and franchise value.  Neither of these components have been given consideration in the presentation of fair values below.


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The following presents the carrying amount and estimated fair value of the financial instruments held by the Company at December 31, 2018 and September 30, 2018.
 
December 31, 2018
(Dollars in Thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
164,169

 
$
164,169

 
$
164,169

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Debt securities available for sale
1,695,056

 
1,695,056

 

 
1,695,056

 

Debt securities held to maturity
160,736

 
151,590

 

 
151,590

 

Equity securities (1)
3,837

 
3,837

 
3,837

 

 

Total securities
1,859,629

 
1,850,483

 
3,837

 
1,846,646

 

 
 
 
 
 
 
 
 
 
 
Loans held for sale
33,560

 
33,560

 

 
33,560

 

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Asset based lending
554,072

 
541,707

 

 

 
541,707

Factoring
284,912

 
281,731

 

 

 
281,731

Lease financing
290,889

 
291,205

 

 

 
291,205

Insurance premium finance
330,712

 
329,753

 

 

 
329,753

SBA/USDA
67,893

 
67,891

 

 

 
67,891

Other commercial finance
89,402

 
89,859

 

 

 
89,859

Commercial finance
1,617,880

 
1,602,146

 

 

 
1,602,146

Consumer credit products
96,144

 
95,310

 

 

 
95,310

Other consumer finance
182,510

 
178,616

 

 

 
178,616

Consumer finance
278,654

 
273,926

 

 

 
273,926

Tax services
76,575

 
76,568

 

 

 
76,568

Warehouse finance
176,134

 
173,488

 

 

 
173,488

Total National Lending
2,149,243

 
2,126,128

 

 

 
2,126,128

Commercial real estate and operating
863,753

 
849,384

 

 

 
849,384

Consumer one to four family real estate and other
256,341

 
252,230

 

 

 
252,230

Agricultural real estate and operating
58,971

 
56,906

 

 

 
56,906

Total Community Banking
1,179,065

 
1,158,520

 

 

 
1,158,520

Total loans and leases
3,328,308

 
3,284,648

 

 

 
3,284,648

 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank stock
15,600

 
15,600

 

 
15,600

 

Accrued interest receivable
22,076

 
22,076

 
22,076

 

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
2,739,757

 
2,739,757

 
2,739,757

 

 

Interest-bearing demand deposits, savings, and money markets
235,450

 
235,450

 
235,450

 

 

Certificates of deposits
170,629

 
169,397

 

 
169,397

 

Wholesale non-maturing deposits
146,227

 
146,227

 
146,227

 

 

Wholesale certificates of deposits
1,644,384

 
1,640,910

 

 
1,640,910

 

Total deposits
4,936,447

 
4,931,741

 
3,121,434

 
1,810,307

 

 
 
 
 
 
 
 
 
 
 
Advances from Federal Home Loan Bank

 

 

 

 

Federal funds purchased
227,000

 
227,000

 
227,000

 

 

Securities sold under agreements to repurchase
4,226

 
4,226

 

 
4,226

 

Capital leases
1,860

 
1,860

 

 
1,860

 

Trust preferred securities
13,662

 
13,867

 

 
13,867

 

Subordinated debentures
73,528

 
75,000

 

 
75,000

 

Accrued interest payable
11,280

 
11,280

 
11,280

 

 

(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at December 31, 2018 and September 30, 2018.

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September 30, 2018
(Dollars in Thousands)
Carrying
Amount
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
99,977

 
$
99,977

 
$
99,977

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Securities available for sale
1,852,025

 
1,852,025

 
3,800

 
1,848,225

 

Securities held to maturity
172,154

 
160,974

 

 
160,974

 

Total securities
2,024,179

 
2,012,999

 
3,800

 
2,009,199

 

 
 
 
 
 
 
 
 
 
 
Loans held for sale
15,606

 
15,606

 

 
15,606

 

 
 
 
 
 
 
 
 
 
 
Loans and leases:
 
 
 
 
 
 
 
 
 
Asset based lending
477,917

 
477,471

 

 

 
477,471

Factoring
284,221

 
283,424

 

 

 
283,424

Lease financing
265,315

 
264,679

 

 

 
264,679

Insurance premium finance
337,877

 
337,212

 

 

 
337,212

SBA/USDA
59,374

 
61,072

 

 

 
61,072

Other commercial finance
85,145

 
83,111

 

 

 
83,111

Commercial finance
1,509,849

 
1,506,969

 

 

 
1,506,969

Consumer credit products
80,605

 
80,633

 

 

 
80,633

Other consumer finance
189,756

 
197,320

 

 

 
197,320

Consumer finance
270,361

 
277,953

 

 

 
277,953

Tax services
1,073

 
1,073

 

 

 
1,073

Warehouse finance
65,000

 
64,978

 

 

 
64,978

Total National Lending
1,846,283

 
1,850,973

 

 

 
1,850,973

Commercial real estate and operating
790,890

 
773,203

 

 

 
773,203

Consumer one to four family real estate and other
247,318

 
244,730

 

 

 
244,730

Agricultural real estate and operating
60,498

 
58,849

 

 

 
58,849

Total Community Banking
1,098,706

 
1,076,782

 

 

 
1,076,782

Total loans and leases
2,944,989

 
2,927,755

 

 

 
2,927,755

 
 
 
 
 
 
 
 
 
 
Federal Home Loan Bank stock
23,400

 
23,400

 

 
23,400

 

Accrued interest receivable
22,016

 
22,016

 
22,016

 

 

 
 
 
 
 
 
 
 
 
 
Financial liabilities
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
2,405,274

 
2,405,274

 
2,405,274

 

 

Interest-bearing demand deposits, savings, and money markets
218,347

 
218,347

 
218,347

 

 

Certificates of deposits
276,180

 
273,800

 

 
273,800

 

Wholesale non-maturing deposits
94,384

 
94,384

 
94,384

 

 

Wholesale certificates of deposits
1,436,802

 
1,432,146

 

 
1,432,146

 

Total deposits
4,430,987

 
4,423,951

 
2,718,005

 
1,705,946

 

 
 
 
 
 
 
 
 
 
 
Advances from Federal Home Loan Bank

 

 

 

 

Federal funds purchased
422,000

 
422,000

 
422,000

 

 

Securities sold under agreements to repurchase
3,694

 
3,694

 

 
3,694

 

Capital leases
1,876

 
1,876

 

 
1,876

 

Trust preferred securities
13,661

 
13,866

 

 
13,866

 

Subordinated debentures
73,491

 
75,563

 

 
75,563

 

Accrued interest payable
7,794

 
7,794

 
7,794

 

 





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The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at December 31, 2018 and September 30, 2018.
 
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
 
DEBT SECURITIES AVAILABLE FOR SALE AND EQUITY SECURITIES
Debt securities available for sale and equity securities are recorded at fair value on a recurring basis. Fair values for these investment securities are based on obtaining quoted prices on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities.

LOANS HELD FOR SALE
The carrying amount of loans held for sale is assumed to approximate the fair value.

LOANS AND LEASES, NET
Upon adoption of ASU 2016-01, the fair value of loans and leases were estimated using an exit price methodology. The exit price estimation of fair value is based on the present value of expected cash flows, which are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk. In comparison, loan and lease fair values as of September 30, 2018 were estimated on an entrance price methodology, which discounts future cash flows using the then-current rates at which a similar loan would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of non-impaired loans and leases as of December 31, 2018 and September 30, 2018 are not comparable.

FEDERAL HOME LOAN BANK (“FHLB”) STOCK
The fair value of FHLB stock is assumed to approximate book value since the Company is only able to redeem this stock at par value.
 
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to approximate the fair value.
 
DEPOSITS
The carrying values of noninterest-bearing checking deposits, interest-bearing checking deposits, savings, money markets, and wholesale non-maturing deposits are assumed to approximate fair value since deposits are immediately withdrawable without penalty. The fair value of time certificate deposits and wholesale certificate deposits are estimated using a discounted cash flows calculation that applies the FHLB Des Moines curve to aggregated expected maturities of time deposits. In accordance with ASC 825, Financial Instruments, no value has been assigned to the Company’s long-term relationships with its deposit customers (core value of deposits intangible) since such intangible is not a financial instrument as defined under ASC 825.
 
ADVANCES FROM FHLB
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.
 
FEDERAL FUNDS PURCHASED
The carrying amount of federal funds purchased is assumed to approximate the fair value.
 
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND SUBORDINATED DEBENTURES
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.
 
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
 

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LIMITATIONS
Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instrument.  Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments.  These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time.  Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors.  These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision.  Changes in assumptions as well as tax considerations could significantly affect the estimates.  Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.

NOTE 13. SEGMENT REPORTING

An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.

The Company reports its results of operations through the following three business segments: Payments, Banking, and Corporate Services/Other. The Meta Payment Systems and Tax Services divisions are reported in the Payments segment. The Community Banking, Commercial Finance and Consumer Finance divisions are reported in the Banking segment. Certain shared services, including the investment portfolio, wholesale deposits and borrowings, are included in Corporate Services/Other.

The following tables present segment data for the Company for the three months ended December 31, 2018 and 2017, respectively.
 
Payments
 
Banking
 
Corporate
Services/Other
 
Total
Three Months Ended December 31, 2018
 
 
 
 
 
 
 
Net interest income (loss)
$
9,400

 
$
51,792

 
$
(920
)
 
$
60,272

Provision for loan and lease losses
1,495

 
7,604

 

 
9,099

Noninterest income
22,826

 
14,269

 
656

 
37,751

Noninterest expense
21,362

 
33,843

 
19,090

 
74,295

Income (loss) before income tax expense (benefit)
9,369

 
24,614

 
(19,354
)
 
14,629

 
 
 
 
 
 
 
 
Total assets
302,368

 
3,793,647

 
2,086,750

 
6,182,765

Total goodwill
87,145

 
216,125

 

 
303,270

Total deposits
2,753,702

 
554,939

 
1,627,806

 
4,936,447

 
 
 
 
 
 
 
 

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Payments
 
Banking
 
Corporate
Services/Other
 
Total
Three Months Ended December 31, 2017
 
 
 
 
 
 
 
Net interest income
$
4,669

 
$
15,597

 
$
5,930

 
$
26,196

Provision for loan losses
1,017

 
51

 

 
1,068

Noninterest income
28,101

 
1,485

 
(318
)
 
29,268

Noninterest expense
26,934

 
6,568

 
10,540

 
44,042

Income (loss) before income tax expense (benefit)
4,819

 
10,463

 
(4,928
)
 
10,354

 
 
 
 
 
 
 
 
Total assets
380,442

 
1,478,693

 
3,558,828

 
5,417,963

Total goodwill
87,145

 
11,578

 

 
98,723

Total deposits
2,768,736

 
236,494

 
508,415

 
3,513,645

 
 
 
 
 
 
 
 

NOTE 14. SUBSEQUENT EVENTS

As previously disclosed, J. Tyler Haahr stepped down as Chief Executive Officer of the Company and MetaBank effective as of October 30, 2018 and assumed the role of Non-Executive Chairman of each of the Boards of Directors of the Company and MetaBank (together, the “Boards”). The Company entered into a Transition and General Release Agreement (the “Transition Agreement”) with Mr. Haahr as of January 16, 2019. The Transition Agreement provided for Mr. Haahr's continued service as Non-Executive Chairman of the Boards and as an employee of the Company and MetaBank until the date of the Company’s Annual Meeting of Stockholders, which was held on January 30, 2019 (the “Annual Meeting”). The Transition Agreement also provided for, among other things, the Company's payment to Mr. Haahr a lump sum payment in cash, accelerated vesting of certain equity awards, and the continued vesting of certain other equity awards, resulting in $6.1 million in compensation expense which the Company will incur in the second quarter of fiscal year 2019. Effective as of the date of the Annual Meeting, Mr. Haahr’s employment with the Company and MetaBank terminated, and he has been deemed to have resigned as a director of the Company and MetaBank and from all other offices and positions with the Company, MetaBank and their affiliates.



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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

META FINANCIAL GROUP, INC®.
AND SUBSIDIARIES
 
FORWARD LOOKING STATEMENTS
 
Meta Financial Group, Inc.®, (“Meta” or “the Company” or “us”) and its wholly-owned subsidiary, MetaBank® (the “Bank” or “MetaBank”), may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, in the Company's other filings with the Securities and Exchange Commission (“SEC”), in its reports to stockholders, and in other communications by the Company and the Bank, 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; customer retention; loan and other product demand; important components of the Company's statements of financial condition and operations; growth and expansion; new products and services, such as those offered by MetaBank or the Company's Payments divisions (which include Meta Payment Systems, Refund Advantage, EPS Financial and Specialty Consumer Services); credit quality and adequacy of reserves; 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: risks relating to the recently-announced management transition; maintaining our executive management team; the expected growth opportunities, beneficial synergies and/or operating efficiencies from the acquisition of Crestmark Bancorp, Inc. and its wholly-owned subsidiary, Crestmark Bank (the "Crestmark acquisition"), may not be fully realized or may take longer to realize than expected; unanticipated or unknown losses and liabilities may be incurred by the Company following the Crestmark acquisition; 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 conducts operations; risks relating to the recent U.S. government shutdown and any potential future government shutdown, including any adverse impact on our ability to originate or sell SBA/USDA loans and any delay by the Internal Revenue Service in processing taxpayer refunds, thereby increasing the cost to us of our refund advance loans; the effects of, and 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”), as well as efforts of the United States Congress and the United States Treasury in conjunction with bank regulatory agencies to stimulate the economy and protect the financial system; inflation, interest rate, 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 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 acceptance of usage of Meta’s strategic partners’ refund advance products; any actions which may be initiated by our regulators in the future; 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; our relationship with our primary regulators, the Office of the Comptroller of the Currency and the Federal Reserve, as well as the Federal Deposit Insurance Corporation, which insures MetaBank’s deposit accounts up to applicable limits; technological changes, including, but not limited to, the protection of electronic files or databases; acquisitions; litigation risk, in general, including, but not limited to, those risks involving MetaBank's divisions; 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, particularly in light of our growing deposit base, a portion of which has been characterized as “brokered;” changes in consumer spending and saving habits; 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 speak only as of the date hereof.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  Additional discussions of factors affecting the Company’s business and prospects are included under the caption "Risk Factors" and in other sections of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2018 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.



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GENERAL
 
The Company, a registered unitary savings and loan holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings 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 at December 31, 2018, compared to September 30, 2018, and the consolidated results of operations for the three months ended December 31, 2018 and 2017.  This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2018 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 ended September 30, 2018.

EXECUTIVE SUMMARY

On October 30, 2018, the Company announced that it appointed Brad Hanson, President of Meta Financial Group, MetaBank and Meta Payment Systems, to the additional role of Chief Executive Officer. Hanson also continues to serve on the Meta Board. Mr. Hanson replaces J. Tyler Haahr, who stepped down as Chief Executive Officer. Mr. Haahr remained Chairman of the Board and an employee through the Company’s Annual Meeting of Stockholders, which was held January 30, 2019. Frederick V. Moore, previously Lead Director and Vice Chairman, was appointed to serve as Chairman of the Board effective January 30, 2019.

In January 2019, the Company announced three key elements to its near term plan that management expects will enhance long-term value for shareholders. The three key initiatives within the plan are as follows:

1) Increase the percentage of balance sheet funding from core deposits.

2) Optimize the earning asset mix of the balance sheet.

3) Improve operating efficiencies.

The Company recorded net income of $15.4 million, or $0.39 per diluted share for the quarter ended December 31, 2018 comparing favorably to net income of $4.7 million of $0.16 per diluted share that was recorded during the fiscal 2017 first quarter. Total revenue for the fiscal 2019 first quarter was $98.0 million, compared to $55.5 million for the same quarter in fiscal 2018, an increase of $42.5 million, or 77%. The improvement in revenue and net income was driven primarily by the Company's improved earning asset mix in connection with the acquisition of Crestmark in the fourth quarter of fiscal 2018.

During the first quarter of fiscal 2019, the Company began issuing tax refund transfers, ERO advances and taxpayer advances for the upcoming 2018 income tax season. The balance of tax services loans at December 31, 2018 was $76.6 million and the Company recorded $1.9 million in refund transfer and tax advance product fees.

The Company entered into two new warehouse finance lines of credit during the first quarter of fiscal 2019. With the addition of these two new lines of credit, warehouse finance loans grew to $176.1 million at December 31, 2018. Along with the growth in the warehouse finance portfolio, commercial finance loans and leases increased to $1.62 billion at the end of the 2019 first quarter. Total gross loans and leases totaled $3.33 billion at December 31, 2018.

The growth in loans and leases during the first quarter of fiscal 2019 led to net interest income of $60.3 million and net interest margin tax-equivalent ("NIM, TE") of 4.76%. The net effect of purchase accounting accretion attributable to the Crestmark acquisition contributed 18 basis points to NIM,TE for the first quarter of fiscal 2019. The Company's average assets increased to $5.98 billion during the first quarter of fiscal 2019. Management anticipates that NIM, TE will continue to increase as the loan and lease portfolio continues to grow along with the Company's noninterest-bearing checking deposits.



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Noninterest income for the quarter ended December 31, 2018 increased to $37.8 million. Contributing to the increase were increases in rental income, deposit fees, other income, gain on sale of loans and leases and a lower loss on sale of securities. For the quarter ended December 31, 2018, noninterest expense was $74.3 million. The increase in noninterest expense over the prior year fiscal first quarter was primarily due to the addition of the Crestmark division which was not present in the comparable quarter in the prior fiscal year.

The Company affirms its previously stated estimates that, within its consumer credit products portfolio, net cumulative program loan losses would need to be between 15% to 20% for the current prime program and between 25% to 30% for the current non-prime program in order for the 1% allowance for loan losses for its current consumer loan programs not to be adequate.  Expected cumulative net loss rates are estimated to be under 8% for the prime program and under 10% for the non-prime program. Program loss rates are dependent on curvature of the loss curve. A quicker, or steeper curve, may impact these rates. Current curvature is based on historical or like-program statistics. In constructing its contracts with its current partners, the Company instituted the ability to suspend or terminate any new originations if net cumulative loss rates exceed certain levels. These suspension or termination loss rates are set well below the estimated net cumulative loss rate levels which would lead to the inadequacy of the 1% allowance for loan losses.

FINANCIAL CONDITION
 
At December 31, 2018, the Company’s total assets increased by $347.7 million, or 6%, to $6.18 billion compared to $5.84 billion at September 30, 2018, primarily due to an increase in loans and leases.

Total cash and cash equivalents was $164.2 million at December 31, 2018, an increase of $64.2 million, or 64%, from $100.0 million at September 30, 2018. The increase was primarily the result of the Company's increased balances maintained at other banking institutions. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the Federal Reserve Bank.

The total investment portfolio decreased $164.2 million, or 8%, to $1.86 billion at December 31, 2018, compared to $2.02 billion at September 30, 2018, as maturities, sales, and principal pay downs exceeded purchases. 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 (“NBQ”), 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 at December 31, 2018 were issued by a U.S. Government agency or instrumentality. Of the total MBS, $354.2 million, at fair value, were classified as available for sale, and $7.7 million, at cost, were classified as held to maturity. Of the total investment securities, $1.34 billion, at fair value, were classified as available for sale and $153.1 million, at cost, were classified as held to maturity. During the three month period ended December 31, 2018, the Company purchased $51.4 million of investment securities available for sale and no investment securities held to maturity or MBS securities.

The Company’s portfolio of gross loans and leases increased by $383.3 million, or 13%, to $3.33 billion at December 31, 2018, from $2.94 billion at September 30, 2018.

National lending loans and leases increased $303.0 million, or 16% to $2.15 billion at December 31, 2018 compared to September 30, 2018. Within the national lending portfolios, commercial finance loans and leases increased $108.0 million, warehouse finance portfolio increased $111.1 million, tax services loans increased $75.5 million, and the consumer finance portfolio increased $8.3 million at December 31, 2018 compared to September 30, 2018. Community banking loans grew $80.4 million, or 7%, at December 31, 2018 compared to September 30, 2018, primarily due to growth in commercial real estate loans.

As of December 31, 2018, the remaining balance of acquired loans and leases from the Crestmark acquisition was $889.0 million and the remaining balances of the credit and interest rate mark discounts related to the acquired loans and leases were $10.1 million and $4.8 million, respectively. On August 1, 2018, the Company acquired loans and leases from the Crestmark acquisition totaling $1.06 billion and recorded related credit and interest rate mark discounts of $11.4 million and $5.5 million, respectively.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking
system. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in such stock decreased $7.8 million, or 33%, to $15.6 million at December 31, 2018, from $23.4 million at September 30, 2018. The decrease in FHLB stock directly correlates with lower short-term borrowings balances at December 31, 2018 compared to September 30, 2018.

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Total end-of-period deposits increased $505.5 million, or 11%, at December 31, 2018 to $4.94 billion from $4.43 billion at September 30, 2018, primarily related to increases of $334.5 million in noninterest-bearing deposits, $259.4 million in wholesale deposits, and $17.1 million in interest-bearing checking deposits. The increase in total deposits was partially offset by a $105.6 million decrease in certificates of deposit.

The average balance of total deposits and interest-bearing liabilities was $5.10 billion for the three month period ended December 31, 2018, compared to $3.62 billion for the same period of the prior fiscal year. The average balance of noninterest-bearing deposits for the three month period ended December 31, 2018 increased by $161.0 million, or 7%, to $2.49 billion compared to the same period in the prior year.
 
The Company's total borrowings decreased $194.4 million, or 38%, from $514.7 million at September 30, 2018 to $320.3 million at December 31, 2018, primarily due to a decrease in short-term borrowings. The Company’s short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base, primarily related to payroll processing timing with a higher volume of short-term borrowings on Monday and Tuesday, which are typically paid down throughout the week. This predictable fluctuation may be augmented near a month-end by a prefunding of certain programs. The Company also has an available no fee line of credit with JP Morgan of $25.0 million with no funds advanced at December 31, 2018.

At December 31, 2018, the Company’s stockholders’ equity totaled $770.7 million, an increase of $23.0 million, from $747.7 million at September 30, 2018.  The increase was attributable to net earnings, an increase in additional paid-in capital and lower losses in accumulated other comprehensive income, partially offset by a decrease in treasury stock. At December 31, 2018, the Bank continued to exceed all regulatory requirements for classification as a well‑capitalized institution.  See “Liquidity and Capital Resources” for further information.

Non-performing 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.
 
The Company believes that the level of allowance for loan and lease losses at December 31, 2018 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 “Allowance for Loan and Lease Losses” below.
 

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The table below sets forth the amounts and categories of non-performing assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans.
 
Non-Performing Assets As Of
 
December 31, 2018
 
September 30, 2018
Non-performing loans and leases
(Dollars in Thousands)
 
 
 
 
Non-accruing loans and leases:
 
 
 
Asset based lending
$
1,007

 
$

Lease financing
4,841

 
2,864

Commercial finance
6,155

 
2,864

Total National Lending
6,155

 
2,864

Total
6,155

 
2,864

 
 
 
 
Accruing loans and leases delinquent 90 days or more:
 
 
 

Asset based lending

 
94

Lease financing
1,335

 
726

Insurance premium finance
2,796

 
2,981

Commercial finance
4,131

 
3,801

Consumer credit products
310

 
147

Other consumer finance
3,196

 
2,237

Consumer finance
3,506

 
2,384

Tax services

 
1,073

Total National Lending
7,637

 
7,258

Consumer one-to-four family real estate and other
79

 
79

Total Community Banking
79

 
79

Total
7,716

 
7,337

 
 
 
 
Total non-performing loans and leases
13,871

 
10,201

 
 
 
 
Other assets
 
 
 

Foreclosed and repossessed assets:
 
 
 

Commercial finance
1,626

 
1,626

Consumer one-to-four family real estate and other

 
90

Agricultural real estate and operating
29,922

 
29,922

Total
31,548

 
31,638

 
 
 
 
Total other assets
31,548

 
31,638

 
 
 
 
Total non-performing assets
$
45,419

 
$
41,839

Total as a percentage of total assets
0.73
%
 
0.72
%
 

At December 31, 2018, non-performing loans and leases totaled $13.9 million, representing 0.42% of total loans and leases, compared to $10.2 million, or 0.35% of total loans and leases at September 30, 2018.

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.

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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, at December 31, 2018, the Company had classified $21.1 million of its assets as substandard and did not classify any assets as doubtful or loss. At September 30, 2018, the Company classified $24.6 million of its assets as substandard and did not classify any assets as doubtful or loss.
 
Allowance for Loan and Lease Losses. The allowance for loan and lease losses is established through a provision for loan and lease losses based on management’s evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management. Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance.

Management closely monitors economic developments both regionally and nationwide, and considers these factors when assessing the appropriateness of its allowance for loan and lease losses. The current economic environment continues to show signs of stability and improvement in the Bank’s markets. The Bank’s average loss rates over the past three years were low relative to industry averages for such years, offset, in the case of fiscal 2016, with a higher agricultural loss rate driven by the charge-off of one relationship. The Bank does not believe it is likely these low loss conditions will continue indefinitely. Each loan and lease segment is evaluated using both historical loss factors as well as other qualitative factors, in order to determine the amount of risk the Company believes exists within that segment.

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 allowance for loan and lease losses at December 31, 2018 reflected an appropriate allowance against probable losses from the lending portfolio. Although the Company maintains its allowance for loan and lease losses 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 allowance for loan and lease losses is subject to review by the OCC, which can require the establishment of additional general or specific allowances.

At December 31, 2018, the Company had established an allowance for loan and lease losses totaling $21.3 million, compared to $13.0 million at September 30, 2018. The increase in the Company's allowance for loan and lease losses was driven primarily by increases in the allowance of $4.4 million in the commercial finance portfolio, $1.8 million in consumer finance loans, and $1.5 million in tax services loans. Growth in the commercial finance portfolio was largely attributable to the Crestmark division. The increase in consumer finance is related to the Company now taking on all of the risk of the student loan portfolio, while the change in the tax services portfolio was driven by tax loan originations occurring in the first quarter of fiscal year 2019.

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 allowance for loan and lease losses, 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 ended September 30, 2018. There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal year 2019.


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Table of Contents

RESULTS OF OPERATIONS
 
General. The Company recorded net income of $15.4 million, or $0.39 per diluted share, for the three months ended December 31, 2018, compared to net income of $4.7 million, or $0.16 per diluted share, for the three months ended December 31, 2017. Total revenue for the fiscal 2019 first quarter was $98.0 million, compared to $55.5 million for the same quarter in fiscal 2018, an increase of $42.5 million, or 77%. The increase in net income and revenue was primarily due to improvement in net interest income attributable to the acquisition of Crestmark in the fourth quarter of fiscal 2018.

Net Interest Income.  Net interest income for the fiscal 2019 first quarter increased by $34.1 million, or 130%, to $60.3 million from $26.2 million for the same quarter in 2018, primarily due to growth in loan and lease balances and expansion in net interest margin. The quarterly average outstanding balance of loans and leases from all sources as a percentage of interest-earning assets increased from 37% as of the end of the first fiscal quarter of 2018 to 60% as of the end of the first fiscal quarter of 2019.

Net interest margin ("NIM") was 4.60% in the fiscal 2019 first quarter, an increase of 184 basis points from 2.76% in the fiscal 2018 first quarter. NIM,TE was 4.76% in the fiscal 2019 first quarter, an increase of 170 basis points from 3.06% in the fiscal 2018 first quarter. The increase in NIM and NIM, TE in the fiscal 2019 first quarter compared to the same period of the prior year was primarily attributable to higher net loan and lease yields attained through the Crestmark division.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased by 234 basis points to 5.89% when comparing the fiscal 2019 first quarter to the same period of the prior fiscal year. The improvement was driven primarily by the Company's improved earning asset mix, which reflects increased balances in the national lending portfolio. The fiscal 2019 first quarter TEY on the securities portfolio increased by 20 basis points to 3.13% compared to the same period of the prior year TEY of 2.93%.
The Company’s average interest-earning assets for the fiscal 2019 first quarter increased by $1.43 billion, or 38%, to $5.19 billion, from the comparable quarter in 2018. The increase was primarily attributable to growth in the Company's loan and lease portfolio of $1.71 billion, of which $1.50 billion was related to an increase in national lending loans and leases and $215.9 million was related to community banking loans. This increase was partially offset by a decrease in total investment securities of $226.4 million, which decreased as the Company continued to utilize sales of securities and cash flow from its amortizing securities portfolio to fund loan growth.
The Company’s average balance of total deposits and interest-bearing liabilities was $5.10 billion for the three-month period ended December 31, 2018, compared to $3.62 billion for the same period in the prior year, representing an increase of 41%. This increase was primarily due to increases in average wholesale deposits of $1.21 billion, average noninterest-bearing deposits of $161.0 million, average time deposits of $76.6 million, and average interest-bearing checking of $31.4 million, partially offset by a decrease in average balance of total borrowings of $7.5 million.

Overall, the Company's cost of funds for all deposits and borrowings averaged 1.14% during the fiscal 2019 first quarter, compared to 0.51% for the 2018 first fiscal quarter. This increase was primarily due to a rise in short-term interest rates affecting overnight borrowing rates, other wholesale funding, and the interest-bearing time deposits acquired by the Company in connection with the Crestmark acquisition in the fourth quarter of fiscal 2018. The Company's overall cost of deposits was 0.91% in the 2019 fiscal first quarter, compared to 0.24% in the same quarter of 2018.

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.  Non-accruing loans and leases have been included in the table as loans carrying a zero yield.

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Three Months Ended December 31,
2018
 
2017
(Dollars in Thousands)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate
(1)
 
Average
Outstanding
Balance
 
Interest
Earned /
Paid
 
Yield /
Rate
(2)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash & fed funds sold
$
45,383

 
$
555

 
4.85
%
 
$
100,321

 
$
607

 
2.40
%
Mortgage-backed securities
381,285

 
2,698

 
2.81
%
 
673,411

 
3,758

 
2.21
%
Tax exempt investment securities
1,237,198

 
7,803

 
3.17
%
 
1,408,552

 
8,698

 
3.25
%
Asset-backed securities
298,445

 
2,712

 
3.61
%
 
93,631

 
765

 
3.24
%
Other investment securities
110,879

 
710

 
2.54
%
 
78,584

 
586

 
2.96
%
Total investments
2,027,807

 
13,923

 
3.13
%
 
2,254,178

 
13,807

 
2.93
%
Total commercial finance
1,562,054

 
39,281

 
9.98
%
 
249,927

 
2,868

 
4.55
%
Total consumer finance
291,421

 
6,230

 
8.48
%
 
204,024

 
3,109

 
6.04
%
Total tax services
11,009

 
2

 
0.07
%
 
12,378

 

 
%
Total warehouse finance
99,818

 
1,632

 
6.49
%
 

 

 
%
National Lending loans and leases
1,964,302

 
47,145

 
9.52
%
 
466,329

 
5,977

 
5.09
%
Community Banking loans
1,156,072

 
13,353

 
4.58
%
 
940,161

 
10,466

 
4.42
%
Total loans and leases
3,120,374

 
60,498

 
7.69
%
 
1,406,490

 
16,443

 
4.64
%
Total interest-earning assets
5,193,564

 
$
74,976

 
5.89
%
 
3,760,989

 
$
30,857

 
3.55
%
Noninterest-earning assets
787,973

 
 
 
 
 
361,960

 
 
 
 
Total assets
$
5,981,537

 
 
 
 
 
$
4,122,949

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing checking
$
102,880

 
$
58

 
0.23
%
 
$
71,448

 
$
50

 
0.28
%
Savings
53,661

 
10

 
0.07
%
 
53,084

 
8

 
0.06
%
Money markets
54,288

 
64

 
0.47
%
 
47,899

 
27

 
0.22
%
Time deposits
205,049

 
881

 
1.71
%
 
128,496

 
366

 
1.13
%
Wholesale deposits
1,698,492

 
9,583

 
2.24
%
 
483,878

 
1,434

 
1.18
%
Total interest-bearing deposits
2,114,370

 
10,596

 
1.99
%
 
784,805

 
1,885

 
0.95
%
Overnight fed funds purchased
393,315

 
2,481

 
2.50
%
 
139,152

 
525

 
1.50
%
FHLB advances

 

 
%
 
268,913

 
937

 
1.38
%
Subordinated debentures
73,504

 
1,161

 
6.27
%
 
73,359

 
1,113

 
6.02
%
Other borrowings
30,058

 
466

 
6.15
%
 
22,982

 
201

 
3.47
%
Total borrowings
496,877

 
4,108

 
3.28
%
 
504,406

 
2,776

 
2.18
%
Total interest-bearing liabilities
2,611,247

 
14,704

 
2.23
%
 
1,289,211

 
4,661

 
1.43
%
Noninterest-bearing deposits
2,489,148

 

 
%
 
2,328,159

 

 
%
Total deposits and interest-bearing liabilities
5,100,395

 
$
14,704

 
1.14
%
 
3,617,370

 
$
4,661

 
0.51
%
Other noninterest-bearing liabilities
128,900

 
 
 
 
 
71,398

 
 
 
 
Total liabilities
5,229,295

 
 
 
 
 
3,688,768

 
 
 
 
Shareholders' equity
752,242

 
 
 
 
 
434,181

 
 
 
 
Total liabilities and shareholders' equity
$
5,981,537

 
 
 
 
 
$
4,122,949

 
 
 
 
Net interest income and net interest rate spread including noninterest-bearing deposits
 
 
$
60,272

 
4.75
%
 
 
 
$
26,196

 
3.04
%
 
 
 
 
 
 
 
 
 
 
 
 
Net interest margin
 
 
 
 
4.60
%
 
 
 
 
 
2.76
%
Tax-equivalent effect
 
 
 
 
0.16
%
 
 
 
 
 
0.30
%
Net interest margin, tax-equivalent(3)
 
 
 
 
4.76
%
 
 
 
 
 
3.06
%
(1) Tax rate used to arrive at the TEY for the three months ended December 31, 2018 was 21%.
(2) Tax rate used to arrive at the TEY for the three months ended December 31, 2017 was 24.53%.
(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. We believe that it is a standard practice in the banking industry to present net interest margin expressed on a fully-taxable-equivalent basis, and accordingly believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.




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Provision for Loan and Lease Losses.  The Company recorded a $9.1 million provision for loan and lease losses for the three month period ended December 31, 2018, as compared to a $1.1 million provision for loan and lease losses for the three month period ended December 31, 2017. Also see Note 4 to the Condensed Consolidated Financial Statements included in this quarterly report.

Noninterest Income.  Noninterest income for the fiscal 2019 first quarter increased by $8.5 million, or 29%, to $37.8 million from $29.3 million for the same period in the prior fiscal year, largely due to increases in rental income of $10.9 million, deposit fees of $1.1 million, gain on sale of loans and leases of $0.9 million, and other income of $0.8 million. Lower losses on sale of securities also contributed to the overall increase in noninterest income. Partially offsetting the increase in noninterest income, card fee income decreased $5.9 million, or 23%, to $19.4 million from the same quarter of the prior fiscal year. This expected reduction in residual fee income was related to the wind-down of the Company's relationships with two non-strategic payments partners.

Noninterest Expense.  Noninterest expense increased $30.3 million, or 69%, to $74.3 million for the 2019 fiscal first quarter, compared to the same quarter in 2018. This increase was primarily caused by increases of $10.7 million in compensation and benefits expense, $7.8 million in operating lease equipment depreciation expense. Increases in intangible amortization expense, occupancy and equipment, legal and consulting, and other expense also contributed to the increase on noninterest expense. The increase in compensation and benefits was primarily due to the addition of the Crestmark division along with increased staffing to support the Company's other growing business line initiatives.

Income Tax. The Company recorded an income tax benefit for the fiscal 2019 first quarter of $1.7 million, resulting in an effective tax rate of (11.56%), compared to an income tax expense of $5.7 million, or an effective tax rate of 54.90%, for the fiscal 2018 first quarter. The Company originated $35.6 million in solar leasing initiatives and recorded a related income tax benefit in the fiscal first quarter of 2019. Investment tax credits related to these solar leasing initiatives and future originations in fiscal 2019 will be recognized ratably based on income over the duration of the current 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 criteria.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are deposits, derived principally through its Payments divisions, and to a lesser extent through its Community Banking division 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.  At December 31, 2018, the Company had commitments to originate and purchase loans and unused lines of credit totaling $858.1 million.  The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.

In July 2013, the Company’s primary federal regulator, the Federal Reserve and the Bank’s primary federal regulator, the OCC, approved final rules (the “Basel III Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations, which replaced earlier frameworks adopted in 1988 ("Basel I") and 2004 (Basel II). The Basel III Capital Rules generally implement the Basel Committee on Banking Supervision’s (the “Basel Committee”) December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Basel III Capital Rules substantially revised the risk-based capital requirements applicable to financial institution holding companies and their depository institution subsidiaries, including us and the Bank, as compared to U.S. general risk-based capital rules. The Basel III Capital Rules revised the definitions and the components of regulatory capital, as well as addressed other issues affecting the numerator in banking institutions’ regulatory capital ratios. In addition, the Basel III Capital Rules implemented certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the requirements of Section 939A to remove references to credit ratings from the federal agencies’ rules. The Basel III Capital Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions.





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Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to new regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. 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. Prior to January 1, 2015, the Bank was subject to capital requirements under Basel I and there were no capital requirements for the Company. 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). At December 31, 2018, both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.  The Company and the Bank took 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 December 31, 2018
Company
 
Bank
 
Action Provisions
 
Provisions
 
 
 
 
 
 
 
 
Tier 1 leverage ratio
7.90
%
 
9.01
%
 
4.00
%
 
5.00
%
Common equity Tier 1 capital ratio
10.11

 
11.87

 
4.50

 
6.50

Tier 1 capital ratio
10.47

 
11.91

 
6.00

 
8.00

Total qualifying capital ratio
12.69

 
12.41

 
8.00

 
10.00


Due to the predictable, quarterly cyclicality of noninterest-bearing deposits in conjunction with tax season business activity, management believes that a six-month capital calculation is a useful metric to monitor the Company’s overall capital management process. As such, the Bank’s six-month average Tier 1 leverage ratio, Common Equity Tier 1 capital ratio, Tier 1 capital ratio, and Total qualifying capital ratio as of December 31, 2018 were 9.46%, 13.42%, 13.47%, and 14.03%, respectively.


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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)
December 31, 2018
 
(Dollars in Thousands)
Total stockholders' equity
$
770,728

Adjustments:


LESS: Goodwill, net of associated deferred tax liabilities
299,037

LESS: Certain other intangible assets
61,317

LESS: Net deferred tax assets from operating loss and tax credit carry-forwards
4,720

LESS: Net unrealized gains (losses) on available-for-sale securities
(28,829
)
LESS: Noncontrolling interest
3,267

LESS: Unrealized currency gains (losses)
(357
)
Common Equity Tier 1(1)
431,573

Long-term debt and other instruments qualifying as Tier 1
13,661

Tier 1 minority interest not included in common equity tier 1 capital
1,796

Total Tier 1 capital
447,030

Allowance for loan and lease losses
21,422

Subordinated debentures (net of issuance costs)
73,528

Total qualifying capital
541,980

(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 at December 31, 2018. 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.
 
December 31, 2018
 
(Dollars in Thousands)
Total Stockholders' Equity
$
770,728

LESS: Goodwill
303,270

LESS: Intangible assets
66,366

     Tangible common equity
401,092

LESS: AOCI
(29,186
)
     Tangible common equity excluding AOCI
430,278

Since January 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 for 2018. 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 implementation of the capital conservation buffer by annual increments finished on January 1, 2019, with the Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios now being 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 targeted capital ratios required by the revised requirements, as they become effective.



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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 ended September 30, 2018 for a summary of our contractual obligations as of September 30, 2018. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2018 through December 31, 2018.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

For discussion of the Company’s off-balance sheet financing arrangements as of December 31, 2018, see Note 10 to our 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 10 occur, the effect on the Company’s capital and net income could be significant.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

MARKET RISK

The Company derives a portion of its income from the excess of interest collected over interest paid. The rates of interest the Company earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, the Company’s results of operations, like those of most financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. The risk associated with changes in interest rates and the Company’s ability to adapt to these changes is known as interest rate risk and is the Company’s only significant “market” risk.

The Company monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and risk policies established by the Board of Directors, and in order to preserve stockholder value. In monitoring interest rate risk, the Company analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency, maturity date and likelihood of prepayment.

If the Company’s assets mature or reprice more rapidly or to a greater extent than its liabilities, then economic value of equity and net interest income would tend to increase during periods of rising rates and decrease during periods of falling interest rates. Conversely, if the Company’s assets mature or reprice more slowly or to a lesser extent than its liabilities, then economic value of equity and net interest income would tend to decrease during periods of rising interest rates and increase during periods of falling interest rates.

The Company currently focuses lending efforts toward originating and purchasing competitively priced adjustable-rate and fixed-rate loan products with short to intermediate terms to maturity, and may originate loans with terms longer than five years for borrowers that have a strong credit profile and typically lower loan-to-value ratios. This approach allows the Company to better maintain a portfolio of loans that will have less sensitivity to changes in the level of interest rates, while providing a reasonable spread to the cost of liabilities used to fund the loans.

The Company’s primary objective for its investment portfolio is to provide a source of liquidity for the Company. In addition, the investment portfolio may be used in the management of the Company’s interest rate risk profile. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company’s need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings and to fulfill the Company’s asset/liability management goals.

The Company’s cost of funds responds to changes in interest rates due to the relatively short-term nature of its wholesale deposit portfolio, and due to the relatively short-term nature of its borrowed funds. The Company believes that its growing portfolio of longer duration, low-cost deposits generated from its prepaid division provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest rate environment than it would otherwise have without this portfolio. This risk is due to the fact that, while asset yields may decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with these deposits, which thereby compress the Company’s net interest margin. As a result of the Company’s interest rate risk exposure in this regard, the Company typically does not enter into any new longer-term wholesale borrowings, and generally has not emphasized longer-term time deposit products.


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The Board of Directors and relevant government regulations establish limits on the level of acceptable interest rate risk at the Company, to which management adheres. There can be no assurance, however, that, in the event of an adverse change in interest rates, the Company’s efforts to limit interest rate risk will be successful.

Interest Rate Risk (“IRR”)

Overview. The Company actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The Bank, like other financial institutions, is subject to interest rate risk to the extent that its interest-bearing liabilities mature or reprice more rapidly than its interest-earning assets. The Company's interest rate risk analysis is designed to compare income and economic valuation simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as well as the slope of the yield curve. The Company does not currently engage in trading activities to control interest rate risk although it may do so in the future, if deemed necessary, to help manage interest rate risk.

Earnings at risk and economic value analyses. As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to monitor interest rate risk, the Board of Directors has created an Investment Committee whose principal responsibilities are to assess the Bank’s asset/liability mix and implement strategies that will enhance income while managing the Bank’s vulnerability to changes in interest rates.

The Company uses two approaches to model interest rate risk: Earnings at Risk (“EAR analysis”) and Economic Value of Equity (“EVE analysis”). Under EAR analysis, net interest income is calculated for each interest rate scenario to the net interest income forecast in the base case. EAR analysis measures the sensitivity of interest-sensitive earnings over a one-year minimum time horizon. The results are affected by projected rates, prepayments, caps and floors. Management exercises its best judgement in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricing, as well as events outside of management's control, such as customer behavior on loan and deposit activity and the effect that competition has on both loan and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude, and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. We perform various sensitivity analyses on assumptions of deposit attrition and deposit re-pricing. Market-implied forward rates and various likely and extreme interest rate scenarios can be used for EAR analysis. These likely and extreme scenarios can include rapid and gradual interest rate ramps, rate shocks and yield curve twists.

The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management. It models -100, +100, +200, +300, and +400 basis point parallel shifts in market interest rates over the next one-year period. Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.

The Company was within Board policy limits for all interest rate scenarios using the snapshot as of December 31, 2018 as required by regulation.  The table below shows the results of the scenarios as of December 31, 2018:
 
 
 
 
 
 
 
 
 
 
Net Sensitive Earnings at Risk
 
 
 
Change in Interest Income/Expense
for a given change in interest rates
 
 
 
Over / (Under) Base Case Parallel Shift
(Dollars in thousands)
Book Value
 
-100
 
Base
 
100
 
200
 
300
 
400
Total Interest-Sensitive Income
5,209,294

 
273,926

 
296,035

 
317,810

 
339,058

 
360,043

 
381,008

Total Interest-Sensitive Expense
2,429,777

 
42,769

 
56,704

 
70,965

 
85,225

 
99,485

 
113,745

Net Interest-Sensitive Income
2,779,517


231,157


239,331


246,845


253,833


260,558


267,263

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basis Point Change Scenario
 
-3.4
 %
 
 
3.1
 %
 
6.1
 %
 
8.9
 %
 
11.7
 %
Board Policy Limits
 
-8.0
 %
 
 
-8.0
 %
 
-10.0
 %
 
-15.0
 %
 
-20.0
 %

The EAR analysis reported at December 31, 2018, shows that in all rising rate scenarios, more assets than liabilities would reprice over the modeled one-year period.

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IRR is a snapshot in time. The Company’s business and deposits are very predictably cyclical on a weekly, monthly and yearly basis. The Company’s static IRR results could vary depending on which day of the week and timing in relation to certain payrolls, as well as time of the month in regard to early funding of certain programs, when this snapshot is taken. The Company’s overnight federal funds purchased fluctuates on a predictable daily and monthly basis due to fluctuations in a portion of its noninterest-bearing deposit base, primarily related to payroll processing and timing of when certain programs are prefunded and when the funds are received.
The Company believes that its growing portfolio of noninterest-bearing deposits provides a stable and profitable funding vehicle and a significant competitive advantage in a rising interest rate environment as the Company’s cost of funds would likely remain relatively low, with less increase expected relative to many other banks.
Under EVE analysis, the economic value of financial assets, liabilities and off-balance sheet instruments, is derived under each rate scenario. The economic value of equity is calculated as the difference between the estimated market value of assets and liabilities, net of the impact of off-balance sheet instruments.
The EVE analysis used in the following table reflects the required analysis used no less than quarterly by management. It models immediate -100, +100, +200, +300 and +400 basis point parallel shifts in market interest rates. Due to the current low level of interest rates, only a -100 basis point parallel shift is represented.
The Company was within Board policy limits for all scenarios. The table below shows the results of the scenarios as of December 31, 2018:

Economic Value Sensitivity as of December 31, 2018
 
Standard (Parallel Shift)
 
Economic Value of Equity at Risk%
 
-100
 
100
 
200
 
300
 
400
Basis Point Change Scenario
-1.0
 %
 
-0.9
 %
 
-2.6
 %
 
-5.1
 %
 
-6.5
 %
Board Policy Limits
-10.0
 %
 
-10.0
 %
 
-20.0
 %
 
-30.0
 %
 
-40.0
 %

The EVE at risk reported at December 31, 2018 shows that as interest rates increase, the economic value of equity position will decrease from the base, primarily due to the degree of the economic value of its base asset size in relation to the economic value of its base liability size. When viewing total asset versus total liability economic value, projected total assets are affected similarly on a percentage basis as compared to projected total liabilities in a rising rate environment.

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Table of Contents


Item 4.    Controls and Procedures.

CONTROLS AND PROCEDURES

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met.  Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.

DISCLOSURE CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s “disclosure controls and procedures”, as such term is defined in Rules 13a - 15(e) and 15d - 15(e) of the Securities Exchange Act of 1934 (“Exchange Act”) as of the end of the period covered by this quarterly report.
 
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, at December 31, 2018, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that (i) the information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (ii) information required to be disclosed by us in our reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

INTERNAL CONTROL OVER FINANCIAL REPORTING

With the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the Company’s fiscal quarter ended December 31, 2018, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on such evaluation, management concluded that, as of the end of the period covered by this report, there have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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META FINANCIAL GROUP, INC.
PART II - OTHER INFORMATION

FORM 10-Q


Item 1. Legal Proceedings. - See “Legal Proceedings” under Note 10 to the Notes to Condensed Consolidated Financial Statements, which is incorporated herein by reference.


Item 1A. Risk Factors. - A description of our risk factors can be found in "Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018. There were no material changes to those risk factors during the three months ended December 31, 2018.


Item 6. Exhibits.

Exhibit
Number
Description
 
 
Transition and General Release Agreement, dated as of January 16, 2019, by and among J. Tyler Haahr, Meta Financial Group, Inc. and MetaBank, filed on January 17, 2019 as an exhibit to the Registrant's Current Report on Form 8-K, is incorporated herein by reference.
 
 
Section 302 certification of Chief Executive Officer.
 
 
Section 302 certification of Chief Financial Officer.
 
 
Section 906 certification of Chief Executive Officer.
 
 
Section 906 certification of Chief Financial Officer.
 
 
101.INS
Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document


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META FINANCIAL GROUP, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
META FINANCIAL GROUP, INC.
 
 
 
Date: February 7, 2019
By:
/s/ Bradley C. Hanson
 
 
Bradley C. Hanson,
 
 
President, Chief Executive Officer and Director
 
 
 
Date: February 7, 2019
By:
/s/ Glen W. Herrick
 
 
Glen W. Herrick, Executive Vice President
 
 
and Chief Financial Officer

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