UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑K
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2018
OR
☐ | 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.
META FINANCIAL GROUP, INC.® |
(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, SD | 57108 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number: (605) 782-1767
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Class | Name of each exchange on which registered | |
Common Stock, par value $0.01 per share | NASDAQ Global Market | |
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 and Section 15(d) of the Act. YES ☐ NO ☒
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K.☐
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. (Check one):
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 standard 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
As of March 31, 2018, the aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and asked prices of such stock on the NASDAQ Global Market as of such date, was $979.7 million.
As of November 26, 2018, there were 39,406,938 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of Stockholders to be held January 30, 2019 are incorporated by reference into Part III of this report.
META FINANCIAL GROUP, INC.
FORM 10-K
Table of Contents
Page No. | ||
PART I | ||
Item 1. | ||
Item 1A. | ||
Item 1B. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II | ||
Item 5. | ||
Item 6. | ||
Item 7. | ||
Item 7A. | ||
Item 8. | ||
Item 9. | ||
Item 9A. | ||
Item 9B. | ||
PART III | ||
Item 10. | ||
Item 11. | ||
Item 12. | ||
Item 13. | ||
Item 14. | ||
PART IV | ||
Item 15. | ||
Item 16. | ||
i
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 Annual Report on Form 10-K, in its 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 the Bank or the Company's Payments divisions (which includes Meta Payment Systems (“MPS”), Refund Advantage, EPS Financial (“EPS”) and Specialty Consumer Services (“SCS”)); 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: the risk that we are unable to recoup a significant portion of the lost earnings associated with the non-renewal of the agreement with H&R Block through agreements with new tax partners and expanded relationships with existing tax partners; the risk that loan production levels and other anticipated benefits related to the agreement with Jackson Hewitt Tax Service®, as extended, may not be as much as anticipated; 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 Crestmark acquisition may not be fully realized or may take longer to realize than expected; customer losses and business disruption related to the Crestmark acquisition; unanticipated or unknown losses and liabilities may be incurred by the Company following the completion of the Crestmark acquisition; the strength of the United States' economy, in general, and the strength of the local economies in which the Company conducts operations; 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 U.S. Congress, 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 the Bank’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 the Bank's divisions; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by the Bank 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.
These statements are based on information currently available to us and are subject to various risks, uncertainties, and other factors, including, but not limited to, those discussed herein under the caption “Risk Factors” that could 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 statements.
2
The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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 contained herein, including under the caption “Risk Factors,” and in the Company’s periodic filings 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.
PART I
Item 1. Business
GENERAL
Meta, a registered unitary savings and loan holding company, was incorporated in Delaware on June 14, 1993, the principal assets of which are all the issued and outstanding shares of the Bank, a federal savings bank, the accounts of which are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") as administrator of the Deposit Insurance Fund (“DIF”). Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all subsidiaries of Meta, direct or indirect, on a consolidated basis.
The Bank, a wholly-owned full-service banking subsidiary of Meta, operates through three reportable segments (Payments, Banking, and Corporate Services/Other). The diagram below reflects the Company's divisions and how they fall within the Company's segment structure. The Company works with high-value niche industries, strategic-growth companies and technology adopters to grow their businesses and build more profitable customer relationships. The Company tailors solutions for bank and non-bank businesses, and provides a focused collaborative approach.
The business of the Bank consists of attracting deposits and investing those funds in its National Lending and Community Banking loan and lease portfolios. In addition to originating loans and leases, the Bank also occasionally contracts to sell loans, such as tax refund advance loans and government guaranteed loans, to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities ("MBS") and other investments permissible under applicable regulations.
In addition to its lending and deposit gathering activities, the Bank’s divisions issue prepaid cards, design innovative consumer credit products, sponsor automated teller machines (“ATMs”) into various debit networks, and offer tax refund-transfer services and other payment industry products and services. Through its activities, the Meta Payment Systems (“MPS”) division generates both fee income and low- and no cost deposits for the Bank.
3
On September 8, 2015, the Bank purchased substantially all of the assets and related liabilities of Fort Knox Financial Services Corporation and its subsidiary, Tax Product Services, LLC (together “Refund Advantage”). The assets acquired by the Bank in the acquisition include the Fort Knox operating platform and trade name, Refund Advantage®, and other assets. On November 1, 2016, the Bank purchased substantially all of the assets and certain liabilities of EPS Financial, LLC ("EPS") from privately held Drake Enterprises, Ltd. ("Drake"). The assets acquired by the Bank in the EPS acquisition include the EPS trade name, operating platform, and other assets. On December 14, 2016, the Bank purchased substantially all of the assets and specified liabilities of privately-held Specialty Consumer Services LP ("SCS") relating to its consumer lending and tax advance business. All of these transactions expanded the Company’s business into providing tax refund-transfer and lending services for its customers. On August 1, 2018, the Company completed the acquisition of Crestmark Bancorp, Inc. ("Crestmark") and its Michigan state-charted bank subsidiary, Crestmark Bank (the "Crestmark Acquisition"). Through its Crestmark division, the Bank provides business-to-business commercial financing.
First Midwest Financial Capital Trust I, also a wholly-owned subsidiary of the Company, was established in July 2001 for the purpose of issuing trust preferred securities.
Through the Crestmark Acquisition, the Company acquired floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company.
In April 2017, the Company formed a new entity, Meta Capital, LLC ("Meta Capital"), that is a wholly-owned service corporation subsidiary of MetaBank. Meta Capital was formed for the purpose of making minority equity investments. Meta Capital focuses on investing in companies in the financial services industry.
The Company is subject to comprehensive regulation and supervision. See “Regulation” herein.
The principal executive office of the Company is located at 5501 South Broadband Lane, Sioux Falls, South Dakota 57108. Its telephone number at that address is (605) 782-1767.
MARKET AREAS
The MPS, Refund Advantage, EPS and SCS divisions operate out of Sioux Falls, South Dakota, with offices in Louisville, Kentucky, Easton, Pennsylvania and Hurst, Texas. AFS/IBEX operates out of its headquarters in Dallas, Texas with other offices throughout the country. Crestmark operates out of its headquarters in Troy, Michigan, with other offices throughout the country. The community bank’s locations and primary market areas include 10 branch offices in Storm Lake, Iowa, Brookings, South Dakota, Sioux Falls, South Dakota and the Des Moines, Iowa area.
4
LENDING ACTIVITIES
General
The diagram below shows the composition of the Company's lending portfolio by loan type. The Company emphasizes credit quality and seeks to avoid undue concentrations of loans and leases to a single industry or based on a single class of collateral. The Company has established lending policies that include a number of underwriting factors that it considers in making a loan, including loan-to-value ratio, cash flow, interest rate and credit history of the borrower.
5
The Company has recently focused its lending activities on the origination of commercial finance loans, commercial and multi-family real estate loans, one-to-four family mortgage loans, consumer finance loans and taxpayer advance loans. The Company also continues to originate traditional commercial operating loans, consumer loans and agricultural-related loans. The Company originates most of its community banking loans in its primary market areas. At September 30, 2018, the Company’s loans and leases receivable, net of allowance for loan and lease losses, totaled $2.93 billion, or 50% of the Company’s total assets, as compared to $1.32 billion, or 25%, at September 30, 2017. The Bank signed an agreement extension in August 2017 to originate taxpayer advance loans to customers of Jackson Hewitt Tax Service through the 2020 tax season. The Bank also purchased two separate student loan portfolios, one in fiscal year 2017 and one in the beginning of fiscal year 2018. Meta entered into agreements with third parties to originate a greater volume of consumer credit products on a broader national scale during the third quarter of fiscal year 2018. Through the Crestmark Acquisition, the Company engages in a national platform of commercial finance lending activities.
Loan and lease applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan or lease. The Company has a loan committee structure in place for oversight of its lending activities. Loans and leases in excess of certain amounts require approval by at least two members of the loan committee, a majority of the loan committee, or by the Company’s Board Loan Committee, which has responsibility for the overall supervision of the loan and lease portfolio. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors.
At September 30, 2018, the Company’s largest lending relationship to a single borrower or group of related borrowers totaled $65.0 million. The Company had 24 other lending relationships in excess of $10.3 million as of September 30, 2018.
Loan and Lease Portfolio Composition
The following table provides information about the composition of the Company’s loan and lease portfolio in dollar amounts and in percentages as of the dates indicated. In general, for the fiscal year ended September 30, 2018, the aggregate principal amounts in all categories of loans and leases discussed below, except agricultural loans, increased over levels from the prior fiscal year.
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.
6
At September 30, | ||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||||||||||||
Real estate loans: | ||||||||||||||||||||||||||||||||||
National Lending | ||||||||||||||||||||||||||||||||||
Commercial finance | $ | 14,971 | 0.5 | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | $ | — | — | % | ||||||||||||||
Total National Lending | 14,971 | 0.5 | % | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||||||
Community Banking | ||||||||||||||||||||||||||||||||||
Commercial and multi-family | 748,579 | 25.4 | % | 585,510 | 44.1 | % | 422,932 | 45.7 | % | 310,199 | 43.5 | % | 224,302 | 44.9 | % | |||||||||||||||||||
1-4 family | 223,482 | 7.7 | % | 196,706 | 14.8 | % | 162,298 | 17.5 | % | 125,021 | 17.5 | % | 116,395 | 23.3 | % | |||||||||||||||||||
Agricultural | 36,780 | 1.2 | % | 61,800 | 4.7 | % | 63,612 | 6.9 | % | 64,316 | 9.0 | % | 56,071 | 11.3 | % | |||||||||||||||||||
Total Community Banking | 1,008,841 | 34.3 | % | 844,016 | 63.6 | % | 648,842 | 70.1 | % | 499,536 | 70.0 | % | 396,768 | 79.5 | % | |||||||||||||||||||
Total real estate loans | 1,023,812 | 34.8 | % | 844,016 | 63.6 | % | 648,842 | 70.1 | % | 499,536 | 70.0 | % | 396,768 | 79.5 | % | |||||||||||||||||||
Other loans and leases: | ||||||||||||||||||||||||||||||||||
National Lending | ||||||||||||||||||||||||||||||||||
Commercial finance | 1,494,878 | 50.8 | % | 255,308 | 19.2 | % | 174,034 | 18.8 | % | 106,505 | 14.9 | % | — | — | % | |||||||||||||||||||
Consumer finance | 335,361 | 11.4 | % | 140,229 | 10.6 | % | 14,300 | 1.5 | % | 13,261 | 1.9 | % | 11,933 | 2.4 | % | |||||||||||||||||||
Tax services | 1,073 | — | % | 192 | — | % | 190 | — | % | — | — | % | — | — | % | |||||||||||||||||||
Total National Lending | 1,831,312 | 62.2 | % | 395,729 | 29.8 | % | 188,524 | 20.4 | % | 119,766 | 16.8 | % | 11,933 | 2.4 | % | |||||||||||||||||||
Community Banking | ||||||||||||||||||||||||||||||||||
Agricultural | 23,718 | 0.8 | % | 33,594 | 2.5 | % | 37,083 | 4.0 | % | 43,626 | 6.1 | % | 42,258 | 8.5 | % | |||||||||||||||||||
Commercial operating | 42,311 | 1.4 | % | 30,718 | 2.3 | % | 28,651 | 3.1 | % | 29,893 | 4.2 | % | 30,846 | 6.2 | % | |||||||||||||||||||
Consumer | 23,836 | 0.8 | % | 22,775 | 1.7 | % | 22,794 | 2.5 | % | 20,266 | 2.8 | % | 17,396 | 3.5 | % | |||||||||||||||||||
Total Community Banking | 89,865 | 3.0 | % | 87,087 | 6.6 | % | 88,528 | 9.6 | % | 93,785 | 13.2 | % | 90,500 | 18.1 | % | |||||||||||||||||||
Total other loans and leases | 1,921,177 | 65.2 | % | 482,816 | 36.4 | % | 277,052 | 29.9 | % | 213,551 | 30.0 | % | 102,433 | 20.5 | % | |||||||||||||||||||
Total loans and leases | $ | 2,944,989 | 100.0 | % | $ | 1,326,832 | 100.0 | % | $ | 925,894 | 100.0 | % | $ | 713,087 | 100.0 | % | $ | 499,201 | 100.0 | % | ||||||||||||||
7
The following table shows the composition of the Company’s loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.
September 30, | ||||||||||||||||||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | ||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||
Fixed-rate loans and leases: | ||||||||||||||||||||||||||||||||||
National Lending | ||||||||||||||||||||||||||||||||||
Commercial finance | $ | 956,920 | 32.5 | % | $ | 250,459 | 18.9 | % | $ | 171,604 | 18.5 | % | $ | 106,505 | 14.9 | % | $ | — | — | % | ||||||||||||||
Consumer finance | 21,093 | 0.7 | % | 16,489 | 1.2 | % | 14,300 | 1.5 | % | 12,811 | 1.8 | % | 10,948 | 2.2 | % | |||||||||||||||||||
Tax services (1) | 1,073 | — | % | — | — | % | — | — | % | — | — | % | — | — | % | |||||||||||||||||||
Total National Lending | 979,086 | 33.2 | % | 266,948 | 20.1 | % | 185,904 | 20.0 | % | 119,316 | 16.7 | % | 10,948 | 2.2 | % | |||||||||||||||||||
Community Banking | ||||||||||||||||||||||||||||||||||
Commercial and multi-family real estate | 729,290 | 24.8 | % | 566,157 | 42.7 | % | 404,888 | 43.7 | % | 284,586 | 39.9 | % | 203,840 | 40.8 | % | |||||||||||||||||||
1-4 family real estate | 210,965 | 7.2 | % | 185,597 | 14.0 | % | 152,232 | 16.4 | % | 116,171 | 16.3 | % | 105,870 | 21.2 | % | |||||||||||||||||||
Agricultural | 46,940 | 1.6 | % | 80,419 | 6.1 | % | 86,651 | 9.4 | % | 95,021 | 13.3 | % | 74,634 | 15.0 | % | |||||||||||||||||||
Commercial operating | 19,968 | 0.7 | % | 13,935 | 1.1 | % | 12,393 | 1.3 | % | 15,520 | 2.2 | % | 13,659 | 2.7 | % | |||||||||||||||||||
Consumer | 9,198 | 0.3 | % | 8,168 | 0.6 | % | 8,724 | 0.9 | % | 8,031 | 1.1 | % | 8,331 | 1.7 | % | |||||||||||||||||||
Total Community Banking | 1,016,361 | 34.6 | % | 854,274 | 64.5 | % | 664,888 | 71.7 | % | 519,329 | 72.8 | % | 406,334 | 81.4 | % | |||||||||||||||||||
Total fixed-rate loans and leases | 1,995,447 | 67.8 | % | 1,121,222 | 84.5 | % | 850,792 | 91.7 | % | 638,645 | 89.5 | % | 417,282 | 83.6 | % | |||||||||||||||||||
Adjustable-rate loans and leases: | ||||||||||||||||||||||||||||||||||
National Lending | ||||||||||||||||||||||||||||||||||
Commercial finance | 552,929 | 18.8 | % | 4,849 | 0.4 | % | 2,430 | 0.3 | % | — | — | % | — | — | % | |||||||||||||||||||
Consumer finance | 314,268 | 10.6 | % | 123,742 | 9.3 | % | — | — | % | 450 | 0.1 | % | 985 | 0.2 | % | |||||||||||||||||||
Tax services (1) | — | — | % | 192 | — | % | 190 | — | % | — | — | % | — | — | % | |||||||||||||||||||
Total National Lending | 867,197 | 29.4 | % | 128,783 | 9.7 | % | 2,620 | 0.3 | % | 450 | 0.1 | % | 985 | 0.2 | % | |||||||||||||||||||
Community Banking | ||||||||||||||||||||||||||||||||||
Commercial and multi-family real estate | 19,289 | 0.6 | % | 19,354 | 1.5 | % | 18,044 | 1.9 | % | 25,613 | 3.6 | % | 20,461 | 4.1 | % | |||||||||||||||||||
1-4 family real estate | 12,517 | 0.4 | % | 11,110 | 0.8 | % | 10,066 | 1.1 | % | 8,850 | 1.2 | % | 10,525 | 2.1 | % | |||||||||||||||||||
Agricultural | 13,558 | 0.5 | % | 14,975 | 1.1 | % | 14,044 | 1.5 | % | 12,921 | 1.8 | % | 23,696 | 4.7 | % | |||||||||||||||||||
Commercial operating | 22,343 | 0.8 | % | 16,782 | 1.3 | % | 16,258 | 1.8 | % | 14,373 | 2.0 | % | 17,187 | 3.4 | % | |||||||||||||||||||
Consumer | 14,638 | 0.5 | % | 14,606 | 1.1 | % | 14,070 | 1.5 | % | 12,235 | 1.7 | % | 9,065 | 1.8 | % | |||||||||||||||||||
Total Community Banking | 82,345 | 2.8 | % | 76,827 | 5.8 | % | 72,482 | 7.8 | % | 73,992 | 10.3 | % | 80,934 | 16.1 | % | |||||||||||||||||||
Total adjustable-rate loans and leases | 949,542 | 32.2 | % | 205,610 | 15.5 | % | 75,102 | 8.1 | % | 74,442 | 10.4 | % | 81,919 | 16.3 | % | |||||||||||||||||||
Total loans and leases | 2,944,989 | 100.0 | % | 1,326,832 | 100.0 | % | 925,894 | 99.8 | % | 713,087 | 99.9 | % | 499,201 | 99.9 | % | |||||||||||||||||||
Deferred fees and discounts | (250 | ) | (1,461 | ) | (789 | ) | (577 | ) | (797 | ) | ||||||||||||||||||||||||
Allowance for loan and lease losses | (13,040 | ) | (7,534 | ) | (5,635 | ) | (6,255 | ) | (5,397 | ) | ||||||||||||||||||||||||
Total loans and leases receivable, net | $ | 2,931,699 | $ | 1,317,837 | $ | 919,470 | $ | 706,255 | $ | 493,007 | ||||||||||||||||||||||||
(1) Certain tax services loans do not bear interest.
8
The following table illustrates the maturity analysis of the Company’s loan and lease portfolio at September 30, 2018. The table reflects management’s estimate of the effects of loan and lease prepayments or curtailments based on data from the Company’s historical experiences and other third-party sources.
Due in one year or less | Due after one year through five years | Due after five years | Total | |||||||||||||||||||||
Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | Weighted Average Rate | Amount | ||||||||||||||||||
(Dollars in Thousands) | ||||||||||||||||||||||||
National Lending | ||||||||||||||||||||||||
Commercial finance | $ | 1,013,866 | 6.94 | % | $ | 366,821 | 8.80 | % | $ | 129,162 | 9.87 | % | $ | 1,509,849 | ||||||||||
Consumer finance | 90,385 | 6.20 | % | 167,358 | 7.10 | % | 77,618 | 6.29 | % | 335,361 | ||||||||||||||
Tax services | 1,073 | — | % | — | — | % | — | — | % | 1,073 | ||||||||||||||
Total National Lending | 1,105,324 | 7.01 | % | 534,179 | 8.26 | % | 206,780 | 8.41 | % | 1,846,283 | ||||||||||||||
Community Banking | ||||||||||||||||||||||||
Commercial and multi-family real estate | 154,220 | 4.39 | % | 301,669 | 4.46 | % | 292,690 | 4.56 | % | 748,579 | ||||||||||||||
1-4 family real estate | 43,949 | 4.49 | % | 81,775 | 3.81 | % | 97,758 | 3.83 | % | 223,482 | ||||||||||||||
Agricultural | 25,580 | 5.44 | % | 18,836 | 4.47 | % | 16,082 | 4.77 | % | 60,498 | ||||||||||||||
Commercial operating | 11,100 | 5.26 | % | 21,550 | 5.53 | % | 9,661 | 4.72 | % | 42,311 | ||||||||||||||
Consumer | 6,536 | 5.44 | % | 12,923 | 5.53 | % | 4,376 | 5.54 | % | 23,836 | ||||||||||||||
Total Community Banking | 241,386 | 4.50 | % | 436,754 | 4.43 | % | 420,567 | 4.41 | % | 1,098,706 | ||||||||||||||
Total | $ | 1,346,710 | 6.56 | % | $ | 970,933 | 6.54 | % | $ | 627,347 | 5.79 | % | $ | 2,944,989 | ||||||||||
9
National Lending (Commercial Finance, Consumer Finance and Tax Services)
Commercial Finance
Our 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 be otherwise qualified 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 which 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 which result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable.
Leasing. 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.
Commercial 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 to small businesses and professionals with what the Bank believes are lower risk characteristics.
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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 SCS, 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.
Through September 30, 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. Meta and Liberty Lending market the program jointly through a wide variety of marketing channels. The loan products under this agreement are closed-end installment loans ranging from $3,500 to $45,000 in initial principal amount with durations of between 13 and 60 months. The Bank expects to apply a provision of approximately 1% on outstanding loan balances within this program.
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. The Bank expects to apply a provision for loan and lease losses of approximately 1% on outstanding loan balances within this program.
The Company estimates in order for the 1% allowance for loan losses for its current consumer loan programs not to be adequate, 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. 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.
Warehouse Lending. In fiscal 2018, the Bank entered into a first-out participation agreement in a highly-secured, consumer receivable asset-based warehouse line of credit. The Bank holds a senior position, providing up to $65.0 million, with the subordinate party contributing up to $100.0 million, thereby enhancing the Bank’s position with significant subordination.
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Student Loans. 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. Due to the cancellation of the Company’s insurance coverage with respect to the purchased student loan portfolios, the Company adjusted the allowance for loan and lease losses attributable to the purchased student loan portfolios to $2.8 million at September 30, 2018.
Tax Services
The Bank's tax services division provides short-term, interest free 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.
Community Banking
Commercial and Multi-Family Real Estate. 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. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
One-to-Four Family Residential Mortgage. One-to-four family residential mortgage 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 residential mortgage originations are secured primarily by properties located in the community bank's primary market areas and surrounding areas.
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The Company originates one-to-four family residential mortgage 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 residential 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 allowing 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. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Agricultural Lending. 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. See “Non-Performing Assets, Other Loans of Concern and Classified Assets.”
Commercial Operating Lending. 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 character, 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, but not always, 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.
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Consumer Lending. 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 which, 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.
ORIGINATIONS, SALES AND SERVICING OF LOANS AND LEASES
Loans and leases are generally originated by the Company’s staff of lending officers. Loan and lease applications are taken and processed in the branches, loan production offices, and the main office of the Company. While the Company originates both adjustable-rate and fixed-rate loans and leases, its ability to originate loans and leases is dependent upon the relative customer demand for loans and leases in its market. Demand is affected by the interest rate and economic environment.
The Company, from time to time, sells loan participations, generally without recourse. At September 30, 2018, there were no outstanding loans sold by the Company with recourse. When loan participations are sold, the Company may retain the responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. The Company services loans that it originated and sold totaling $134.0 million at September 30, 2018, of which $98.9 million were sold to SBA/USDA, $2.3 million were sold to Fannie Mae, and $32.7 million were sold to others.
We generally sell the guaranteed portion of our SBA 7(a) loans and USDA program loans in the secondary market. These sales have resulted in premium income for us at the time of sale and created a stream of future servicing income. When we sell the guaranteed portion of our loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on the loan, we share any loss and recovery related to the loan pro-rata with the SBA or USDA, as applicable. If the SBA or USDA establishes that a loss on a guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA or USDA may seek recovery of the principal loss related to the deficiency from us, which could materially adversely affect our business, results of operations and financial condition.
In periods of economic uncertainty, the Company’s ability to originate large dollar volumes of loans and leases may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company’s ability to sell loans may substantially decrease if potential buyers (principally government agencies) reduce their purchasing activities.
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The following table shows the loan and lease originations (including draws, loan and lease renewals, and undisbursed portions of loans and leases in process), purchases, and sales and repayment activities of the Company for the periods indicated.
Years Ended September 30, | |||||||||||
2018 | 2017 | 2016 | |||||||||
Originations: | (Dollars in Thousands) | ||||||||||
Adjustable-rate: | |||||||||||
Commercial finance | $ | 816,283 | $ | — | $ | — | |||||
Consumer finance | 81,686 | — | — | ||||||||
Total National Lending | 928,026 | 23,032 | — | ||||||||
Commercial and multi-family real estate | 5,935 | 6,014 | 2,460 | ||||||||
1-4 family real estate | 24,152 | 21,324 | 15,276 | ||||||||
Agricultural | 35,679 | 23,513 | 21,954 | ||||||||
Commercial operating | 166,408 | 168,136 | 35,433 | ||||||||
Consumer | 7 | 9 | 13 | ||||||||
Total Community Lending | 232,180 | 218,996 | 75,136 | ||||||||
Total adjustable rate | 1,160,206 | 242,028 | 75,136 | ||||||||
Fixed-rate: | |||||||||||
Commercial finance | 1,218,436 | 535,339 | 357,252 | ||||||||
Consumer finance | 347,508 | 242,503 | 221,468 | ||||||||
Tax services(1) | 1,256,237 | 1,261,825 | 31,537 | ||||||||
Total National Lending | 2,822,180 | 2,039,667 | 610,257 | ||||||||
Commercial and multi-family real estate | 285,415 | 190,618 | 154,478 | ||||||||
1-4 family real estate | 71,344 | 74,294 | 81,218 | ||||||||
Agricultural | 31,226 | 21,373 | 35,105 | ||||||||
Commercial operating | 14,279 | 31,834 | 11,238 | ||||||||
Consumer | 1,360 | 919 | 923 | ||||||||
Total Community Lending | 403,624 | 319,038 | 282,962 | ||||||||
Total fixed-rate | 3,225,804 | 2,358,705 | 893,219 | ||||||||
Total loans and leases originated | 4,386,010 | 2,600,733 | 968,355 | ||||||||
Acquired: | |||||||||||
Commercial finance | 1,063,504 | — | — | ||||||||
Total National Lending | 1,063,504 | — | — | ||||||||
Total loans and leases acquired | 1,063,504 | — | — | ||||||||
Purchases: | |||||||||||
Consumer finance | 137,751 | 133,785 | — | ||||||||
Total National Lending | 137,751 | 133,785 | — | ||||||||
Commercial and multi-family real estate | — | 7,078 | — | ||||||||
1-4 family real estate | — | 540 | — | ||||||||
Commercial operating | 27,919 | — | — | ||||||||
Total Community Lending | 27,919 | 7,618 | — | ||||||||
Total loans and leases purchased | 165,670 | 141,403 | — | ||||||||
Sales and repayments: | |||||||||||
Sales: | |||||||||||
Commercial finance | 17,621 | — | — | ||||||||
Tax services | — | 685,934 | 17,611 | ||||||||
Total National Lending | 17,621 | 685,934 | 17,611 | ||||||||
Commercial and multi-family real estate | 22,571 | 4,720 | — | ||||||||
Agricultural | 40 | — | 83 | ||||||||
Total Community Lending | 22,611 | 4,720 | 83 | ||||||||
Total loan sales | 40,232 | 690,654 | 17,694 | ||||||||
Repayments: | |||||||||||
Loan and lease principal repayments | 3,949,780 | 1,652,674 | 737,853 | ||||||||
Total principal repayments | 3,949,780 | 1,652,674 | 737,853 | ||||||||
Total reductions | 3,990,012 | 2,343,328 | 755,547 | ||||||||
(Decrease) increase in other items, net | 4,295 | (441 | ) | 408 | |||||||
Net increase | $ | 1,629,468 | $ | 398,367 | $ | 213,216 | |||||
1) Certain tax services loans do not bear interest.
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NON-PERFORMING ASSETS, OTHER LOANS AND LEASES OF CONCERN AND CLASSIFIED ASSETS
The following table sets forth the Company’s loan and lease delinquencies by type, by amount and by percentage of type at September 30, 2018.
Loans and Leases Delinquent For: | |||||||||||||||||||||||||||||
30-59 Days | 60-89 Days | 90 Days and Over | |||||||||||||||||||||||||||
Number | Amount | Percent of Category | Number | Amount | Percent of Category | Number | Amount | Percent of Category | |||||||||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||||||||||||
Commercial finance | 397 | $ | 20,708 | 86.2 | % | 237 | $ | 3,702 | 69.9 | % | 983 | $ | 5,996 | 62.9 | % | ||||||||||||||
Consumer finance | 318 | 3,209 | 13.4 | 155 | 1,595 | 30.1 | 158 | 2,384 | 25.0 | ||||||||||||||||||||
Tax services (1) | — | — | — | — | — | — | — | 1,073 | 11.3 | ||||||||||||||||||||
Total National Lending | 715 | 23,917 | 99.6 | 392 | 5,297 | 100.0 | 1,141 | 9,453 | 99.2 | ||||||||||||||||||||
1-4 family real estate | 2 | 105 | 0.4 | — | — | — | 1 | 79 | 0.8 | ||||||||||||||||||||
Total Community Banking | 2 | 105 | 0.4 | — | — | — | 1 | 79 | 0.8 | ||||||||||||||||||||
Total | 717 | $ | 24,022 | 100.0 | % | 392 | $ | 5,297 | 100.0 | % | 1,142 | $ | 9,532 | 100.0 | % | ||||||||||||||
(1) The tax services loans past due represented the aggregate remaining balance of the tax services loan portfolio.
Delinquencies 90 days and over constituted 0.3% of total loans and leases and 0.16% of total assets.
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 above are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Commercial 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.
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The table below sets forth the amounts and categories of the Company’s non-performing assets.
At September 30, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
Non-performing loans and leases | (Dollars in Thousands) | ||||||||||||||||||
Non-accruing loans and leases: | |||||||||||||||||||
Commercial finance | $ | 2,864 | $ | — | $ | — | $ | — | $ | — | |||||||||
Total National Lending | 2,864 | — | — | — | — | ||||||||||||||
Commercial and multi-family real estate | — | 685 | — | 904 | 312 | ||||||||||||||
1-4 family real estate | — | — | 83 | 24 | 281 | ||||||||||||||
Agricultural | — | — | — | 5,132 | 340 | ||||||||||||||
Total Community Banking | — | 685 | 83 | 6,060 | 933 | ||||||||||||||
Total | 2,864 | 685 | 83 | 6,060 | 933 | ||||||||||||||
Accruing loans and leases delinquent 90 days or more: | |||||||||||||||||||
Commercial finance | 3,801 | 1,205 | 965 | 1,728 | — | ||||||||||||||
Consumer finance | 2,384 | 1,387 | — | — | — | ||||||||||||||
Tax services (1) | 1,073 | — | — | — | — | ||||||||||||||
Total National Lending | 7,258 | 2,592 | 965 | 1,728 | — | ||||||||||||||
1-4 family real estate | 79 | — | — | — | — | ||||||||||||||
Agricultural | — | 34,295 | — | — | — | ||||||||||||||
Consumer | — | 19 | 53 | 13 | 54 | ||||||||||||||
Total Community Banking | 79 | 34,314 | 53 | 13 | 54 | ||||||||||||||
Total | 7,337 | 36,906 | 1,018 | 1,741 | 54 | ||||||||||||||
Total non-performing loans and leases | 10,201 | 37,591 | 1,101 | 7,801 | 987 | ||||||||||||||
Other assets | |||||||||||||||||||
Foreclosed and repossessed assets: | |||||||||||||||||||
Commercial finance | 1,626 | — | — | — | — | ||||||||||||||
Commercial and multi-family real estate | — | 62 | 76 | — | — | ||||||||||||||
1-4 family real estate | 90 | 230 | — | — | 15 | ||||||||||||||
Agricultural | 29,922 | — | — | — | — | ||||||||||||||
Total | 31,638 | 292 | 76 | — | 15 | ||||||||||||||
Total other assets | 31,638 | 292 | 76 | — | 15 | ||||||||||||||
Total non-performing assets | $ | 41,839 | $ | 37,883 | $ | 1,177 | $ | 7,801 | $ | 1,002 | |||||||||
Total as a percentage of total assets | 0.72 | % | 0.72 | % | 0.03 | % | 0.31 | % | 0.05 | % | |||||||||
(1) Certain tax services loans do not bear interest.
For the year ended September 30, 2018, gross interest income that would have been recorded had the non-accruing loans and leases been current in accordance with their original terms amounted to approximately $0.1 million, none of which was included in interest income.
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Non-Accruing Loans and Leases
At September 30, 2018, the Company had $2.9 million in non-accruing loans and leases, which constituted less than 0.1% of the Company's gross loan and lease portfolio and total assets. At September 30, 2017, the Company had $0.7 million in non-accruing loans which also constituted less than 0.1% of its gross loans portfolio and total assets. The fiscal 2018 increase in non-accruing loans and leases relates to an increase in non-accruing loans and leases in the commercial finance portfolio.
Accruing Loans and Leases Delinquent 90 Days or More
At September 30, 2018, the Company had $7.3 million in accruing loans and leases delinquent 90 days or more, compared to $36.9 million at September 30, 2017. This balance of accruing loans and leases 90 days or more past due was mainly comprised of National Lending loans and leases.
Classified Assets
Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
On the basis of management’s review of its classified assets, at September 30, 2018, the Company had classified loans and leases of $24.6 million as substandard and none as doubtful or loss. Further, at September 30, 2018, the Company owned real estate or other assets as a result of foreclosure of loans with a value of $31.6 million.
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.
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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 September 30, 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
Real estate properties acquired through foreclosure are recorded at fair value. If fair value at the date of foreclosure is lower than the balance of the related loan, the difference will be charged to the allowance for loan and lease losses at the time of transfer. Valuations are periodically updated by management and, if the value declines, a specific provision for losses on such property is established by a charge to operations.
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The following table sets forth an analysis of the Company’s allowance for loan and lease losses.
September 30, | |||||||||||||||||||
2018 | 2017 | 2016 | 2015 | 2014 | |||||||||||||||
(Dollars in Thousands) | |||||||||||||||||||
Balance at beginning of period | $ | 7,534 | $ | 5,635 | $ | 6,255 | $ | 5,397 | $ | 3,930 | |||||||||
Charge-offs: | |||||||||||||||||||
Commercial finance | (2,643 | ) | (626 | ) | (726 | ) | (285 | ) | — | ||||||||||
Consumer finance | (1,443 | ) | — | (728 | ) | — | — | ||||||||||||
Tax services | (21,802 | ) | (7,841 | ) | (249 | ) | — | — | |||||||||||
Total National Lending charge-offs | (25,888 | ) | (8,467 | ) | (1,703 | ) | (285 | ) | — | ||||||||||
Commercial and multi-family real estate | — | (138 | ) | (385 | ) | (214 | ) | — | |||||||||||
1-4 family real estate | (45 | ) | — | (32 | ) | (45 | ) | — | |||||||||||
Agricultural | — | — | (3,252 | ) | (186 | ) | (50 | ) | |||||||||||
Commercial operating | — | (390 | ) | — | — | — | |||||||||||||
Consumer | (31 | ) | (2 | ) | — | — | — | ||||||||||||
Total Community Banking charge-offs | (76 | ) | (530 | ) | (3,669 | ) | (445 | ) | (50 | ) | |||||||||
Total charge-offs | (25,964 | ) | (8,997 | ) | (5,372 | ) | (730 | ) | (50 | ) | |||||||||
Recoveries: | |||||||||||||||||||
Commercial finance | 1,169 | 61 | 107 | 114 | — | ||||||||||||||
Consumer finance | — | — | 11 | — | — | ||||||||||||||
Tax services | 453 | 229 | — | — | — | ||||||||||||||
Total National Lending recoveries | 1,622 | 290 | 118 | 114 | — | ||||||||||||||
Commercial and multi-family real estate | — | — | 27 | 6 | 347 | ||||||||||||||
1-4 family real estate | — | — | — | — | 2 | ||||||||||||||
Agricultural | 411 | 12 | 2 | — | — | ||||||||||||||
Commercial operating | — | 5 | — | 3 | 18 | ||||||||||||||
Consumer | 3 | — | — | — | — | ||||||||||||||
Total Community Banking recoveries | 414 | 17 | 29 | 9 | 367 | ||||||||||||||
Total recoveries | 2,037 | 307 | 147 | 123 | 367 | ||||||||||||||
Net (charge-offs) recoveries | (23,927 | ) | (8,690 | ) | (5,225 | ) | (607 | ) | 317 | ||||||||||
Provision charged to expense | 29,433 | 10,589 | 4,605 | 1,465 | 1,150 | ||||||||||||||
Balance at end of period | $ | 13,040 | |||||||||||||||||