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

http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12683427&doc=12
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.


5

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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Table of Contents

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.


10

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