| LOANS AND LEASES, NET | 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 March 31, 2019 and September 30, 2018 were as follows: March 31, 2019 September 30, 2018 National Lending (Dollars in Thousands) Asset based lending $ 572,210 $ 477,917 Factoring 287,955 284,221 Lease financing 321,414 265,315 Insurance premium finance 307,875 337,877 SBA/USDA 77,481 59,374 Other commercial finance 98,956 85,145 Commercial finance 1,665,891 1,509,849 Consumer credit products 139,617 80,605 Other consumer finance 170,824 189,756 Consumer finance (1) 310,441 270,361 Tax services 84,824 1,073 Warehouse finance (1) 186,697 65,000 Total National Lending 2,247,853 1,846,283 Community Banking Commercial real estate and operating 869,917 790,890 Consumer one-to-four family real estate and other 257,079 247,318 Agricultural real estate and operating 60,167 60,498 Total Community Banking 1,187,163 1,098,706 Total gross loans and leases 3,435,016 2,944,989 Allowance for loan and lease losses (48,672 ) (13,040 ) Net deferred loan origination fees (costs) 2,964 (250 ) Total loans and leases, net (2) $ 3,389,308 $ 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 March 31, 2019, the remaining balance of acquired loans and leases from the Crestmark acquisition was $591.1 million and the remaining balances of the credit and interest rate mark discounts related to the acquired loans and leases held for investment were $8.7 million and $4.5 million , respectively, while the remaining balance of the interest rate mark premium related to the acquired loans held for sale was $0.8 million . 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 six months ended March 31, 2019, the Company transferred $39.5 million of consumer credit product loans to held for sale and originated $43.0 million of SBA/USDA and consumer credit product loans as held for sale. The Company sold held for sale loans resulting in proceeds of $36.5 million and gains on sale of $1.7 million during the six months ended March 31, 2019. During the six months ended March 31, 2018, the Company did not designate any loans as held for sale or sell any held for sale loans. Loans purchased and sold by portfolio segment, including participation interests, for the three and six months ended March 31, 2019 and 2018 were as follows: Three Months Ended Six Months Ended March 31, 2019 March 31, 2018 March 31, 2019 March 31, 2018 Loans Purchased (Dollars in Thousands) Loans held for sale $ 5,940 $ — $ 5,940 $ — Loans held for investment: Total National Lending 10,621 — 125,591 72,751 Total Community Banking 7,432 13,823 18,513 16,235 Total purchases 23,933 13,823 150,044 88,986 Loans Sold Loans held for sale 28,051 — 34,904 — Loans held for investment: Total Community Banking 10,479 3,666 10,857 9,582 Total sales $ 38,530 $ 3,666 $ 45,761 $ 9,582 The net investment in direct financing and sales-type leases is comprised of the following as of March 31, 2019 and September 30, 2018 . March 31, 2019 September 30, 2018 (Dollars in Thousands) Minimum lease payments receivable $ 366,361 $ 301,835 Estimated residual value of leased equipment 11,328 12,406 Unamortized initial direct costs 4,190 1,806 Premium on acquired leases 9 26 Unearned income (56,266 ) (48,949 ) Net investment in direct financing and sales-type leases $ 325,622 $ 267,124 Future minimum lease payments receivable on noncancelable direct financing and sales-type leases were as follows as of March 31, 2019 . As of March 31, 2019 (Dollars in thousands) Remaining in 2019 $ 69,316 2020 115,307 2021 90,333 2022 55,328 2023 29,147 2024 and thereafter 6,930 Total $ 366,361 The Company did not record any contingent rental income from sales-type and direct financing leases in the six months ended March 31, 2019 . Activity in the allowance for loan and lease losses and balances of loans and leases by portfolio segment for each of the three and six months ended March 31, 2019 and 2018 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 March 31, 2019 (Dollars in Thousands) National Lending Asset based lending $ 2,065 $ 1,365 $ — $ 69 $ 3,499 Factoring 1,062 1,799 (1,125 ) 25 1,761 Lease financing 1,084 1,671 (1,044 ) 254 1,965 Insurance premium finance 972 1,797 (1,877 ) 27 919 SBA/USDA 253 221 — — 474 Other commercial finance 291 234 — — 525 Commercial finance 5,727 7,087 (4,046 ) 375 9,143 Consumer credit products 1,151 163 — — 1,314 Other consumer finance 4,222 3,336 (2,456 ) 28 5,130 Consumer finance 5,373 3,499 (2,456 ) 28 6,444 Tax services 1,546 22,473 (1 ) 84 24,102 Warehouse finance 176 9 — — 185 Total National Lending 12,822 33,068 (6,503 ) 487 39,874 Community Banking Commercial real estate and operating 6,570 103 — — 6,673 Consumer one-to-four family real estate and other 719 259 (20 ) — 958 Agricultural real estate and operating 1,179 (112 ) — 100 1,167 Total Community Banking 8,468 250 (20 ) 100 8,798 Total $ 21,290 $ 33,318 $ (6,523 ) $ 587 $ 48,672 Allowance for loan and lease losses: Beginning balance Provision (recovery) for loan and lease losses Charge-offs Recoveries Ending balance Six Months Ended March 31, 2019 (Dollars in Thousands) National Lending Asset based lending $ 107 $ 3,528 $ (262 ) $ 126 $ 3,499 Factoring 64 3,022 (1,375 ) 50 1,761 Lease financing 59 1,542 (1,462 ) 1,826 1,965 Insurance premium finance 1,031 1,890 (2,085 ) 83 919 SBA/USDA 13 461 — — 474 Other commercial finance 28 497 — — 525 Commercial finance 1,302 10,940 (5,184 ) 2,085 9,143 Consumer credit products 785 529 — — 1,314 Other consumer finance 2,820 6,359 (4,079 ) 30 5,130 Consumer finance 3,605 6,888 (4,079 ) 30 6,444 Tax services — 23,969 (43 ) 176 24,102 Warehouse finance 65 120 — — 185 Total National Lending 4,972 41,917 (9,306 ) 2,291 39,874 Community Banking Commercial real estate and operating 6,220 453 — — 6,673 Consumer one-to-four family real estate and other 632 346 (20 ) — 958 Agricultural real estate and operating 1,216 (299 ) — 250 1,167 Total Community Banking 8,068 500 (20 ) 250 8,798 Total $ 13,040 $ 42,417 $ (9,326 ) $ 2,541 $ 48,672 Allowance for loan and lease losses: Beginning balance Provision (recovery) for loan and lease losses Charge-offs Recoveries Ending balance Three Months Ended March 31, 2018 (Dollars in Thousands) National Lending Insurance premium finance $ 725 $ 214 $ (339 ) $ 146 $ 746 Other commercial finance 4 — — — 4 Commercial finance 729 214 (339 ) 146 750 Tax services 1,435 18,129 — 9 19,573 Total National Lending 2,164 18,343 (339 ) 155 20,323 Community Banking Commercial real estate and operating 3,149 951 — — 4,100 Consumer one-to-four family real estate and other 665 233 — 3 901 Agricultural real estate and operating 1,984 (1,273 ) — 54 765 Unallocated 900 89 — — 989 Total Community Banking 6,698 — — 57 6,755 Total $ 8,862 $ 18,343 $ (339 ) $ 212 $ 27,078 Allowance for loan and lease losses: Beginning balance Provision (recovery) for loan and lease losses Charge-offs Recoveries Ending balance Six Months Ended March 31, 2018 (Dollars in Thousands) National Lending Insurance premium finance $ 796 $ 265 $ (468 ) $ 153 $ 746 Other commercial finance 4 — — — 4 Commercial finance 800 265 (468 ) 153 750 Tax services 5 19,146 — 422 19,573 Total National Lending 805 19,411 (468 ) 575 20,323 Community Banking Commercial real estate and operating 2,820 1,280 — — 4,100 Consumer one-to-four family real estate and other 809 120 (31 ) 3 901 Agricultural real estate and operating 2,574 (1,863 ) — 54 765 Unallocated 526 463 — — 989 Total Community Banking 6,729 — (31 ) 57 6,755 Total $ 7,534 $ 19,411 $ (499 ) $ 632 $ 27,078 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 March 31, 2019 (Dollars in Thousands) National Lending Asset based lending $ 62 $ 3,437 $ 3,499 $ 5,965 $ 566,245 $ 572,210 Factoring 12 1,749 1,761 6,034 281,921 287,955 Lease financing 67 1,898 1,965 2,299 319,115 321,414 Insurance premium finance — 919 919 — 307,875 307,875 SBA/USDA — 474 474 — 77,481 77,481 Other commercial finance — 525 525 — 98,956 98,956 Commercial finance 141 9,002 9,143 14,298 1,651,593 1,665,891 Consumer credit products — 1,314 1,314 — 139,617 139,617 Other consumer finance — 5,130 5,130 1,236 169,588 170,824 Consumer finance — 6,444 6,444 1,236 309,205 310,441 Tax services — 24,102 24,102 — 84,824 84,824 Warehouse finance — 185 185 — 186,697 186,697 Total National Lending 141 39,733 39,874 15,534 2,232,319 2,247,853 Community Banking Commercial real estate and operating — 6,673 6,673 — 869,917 869,917 Consumer one-to-four family real estate and other — 958 958 134 256,945 257,079 Agricultural real estate and operating — 1,167 1,167 1,220 58,947 60,167 Total Community Banking — 8,798 8,798 1,354 1,185,809 1,187,163 Total $ 141 $ 48,531 $ 48,672 $ 16,888 $ 3,418,128 $ 3,435,016 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. 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 March 31, 2019 and September 30, 2018 were as follows: Asset Classification Pass Watch Special Mention Substandard Total March 31, 2019 (Dollars in Thousands) National Lending Asset based lending $ 493,351 $ — $ 72,894 $ 5,965 $ 572,210 Factoring 237,880 — 44,041 6,034 287,955 Lease financing 303,742 — 14,652 3,020 321,414 Insurance premium finance 307,875 — — — 307,875 SBA/USDA 63,428 — 14,053 — 77,481 Other commercial finance 98,380 — 576 — 98,956 Commercial finance 1,504,656 — 146,216 15,019 1,665,891 Consumer credit products 139,617 — — — 139,617 Other consumer finance 170,824 — — — 170,824 Consumer finance 310,441 — — — 310,441 Tax services 84,824 — — — 84,824 Warehouse finance 186,697 — — — 186,697 Total National Lending 2,086,618 — 146,216 15,019 2,247,853 Community Banking Commercial real estate and operating 857,897 6,672 5,348 — 869,917 Consumer one-to-four family real estate and other 253,698 2,999 306 76 257,079 Agricultural real estate and operating 43,260 5,331 3,038 8,538 60,167 Total Community Banking 1,154,855 15,002 8,692 8,614 1,187,163 Total loans and leases $ 3,241,473 $ 15,002 $ 154,908 $ 23,633 $ 3,435,016 Asset Classification Pass Watch Special Mention Substandard Total September 30, 2018 (Dollars in Thousands) National Lending Asset based lending $ 418,635 $ — $ 57,877 $ 1,405 $ 477,917 Factoring 248,246 — 32,644 3,331 284,221 Lease financing 252,487 — 3,951 8,877 265,315 Insurance premium finance 336,296 — 1,581 — 337,877 SBA/USDA 39,093 — 20,281 — 59,374 Other commercial finance 85,145 — — — 85,145 Commercial finance 1,379,902 — 116,334 13,613 1,509,849 Consumer credit products 80,605 — — — 80,605 Other consumer finance 189,756 — — — 189,756 Consumer finance 270,361 — — — 270,361 Tax services 1,073 — — — 1,073 Warehouse finance 65,000 — — — 65,000 Total National Lending 1,716,336 — 116,334 13,613 1,846,283 Community Banking Commercial real estate and operating 778,445 12,251 194 — 790,890 Consumer one-to-four family real estate and other 246,463 537 239 79 247,318 Agricultural real estate and operating 42,292 2,447 4,872 10,887 60,498 Total Community Banking 1,067,200 15,235 5,305 10,966 1,098,706 Total loans and leases $ 2,783,536 $ 15,235 $ 121,639 $ 24,579 $ 2,944,989 National Lending (Commercial Finance, Consumer Finance, Tax Services and Warehouse Finance) Commercial Finance The Company's commercial finance product lines include asset-based lending, factoring, leasing, commercial insurance premium finance, and other commercial finance products offered on a nationwide basis. Asset-based lending and factoring primarily service small businesses that are startups, distressed and/or generally that may not otherwise qualify for traditional bank financing. Leasing focuses on providing equipment finance solutions to mid-market companies. These product offerings supplement the asset generation capacity in our community bank and tax services divisions and enhance the overall yield of our loan and lease portfolio, enabling us to earn attractive risk-adjusted net interest margins. Asset-Based Lending . Through its Crestmark division, the Bank provides asset-based loans secured by debtors' short-term assets such as inventory, accounts receivable, and work-in-process. Asset-based loans may also be secured by real estate and equipment. The primary sources of repayment are the operating income of the borrower, the collection of the receivables securing the loan, and/or the sale of the inventory securing the loan. Loans are typically revolving lines of credit with terms of one to three years, whereby the Bank withholds a contingency reserve representing the difference between the amount advanced and the fair value of the invoice amount or other collateral value. Credit risk is managed through advance rates appropriate for the collateral, standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the debtors' cash receipts. The Bank also originates collateralized term loans and notes receivable, with terms ranging from three to 25 years. Factoring. Through its Crestmark division, the Bank provides factoring lending where clients provide detailed inventory, accounts receivable, and work-in-process reports for lending arrangements. The factoring clients are diversified as to industry and geography. With these loans, the Crestmark division withholds a contingency reserve, which is the difference between the fair value of the invoice amount or other collateral value and the amount advanced. This reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements that result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable. Lease Financing. Through its Crestmark division, the Bank provides creative, flexible lease solutions for technology, capital equipment and select transportation assets like tractors and trailers. Direct financing leases and sales-type leases substantially transfer the benefits and risks of equipment ownership to the lessee. The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value. Residual values are estimated at the inception of the lease. Lease maturities are generally no greater than 84 months. The focus in this lease financing category is to support middle market companies by providing a variety of financing products to help them meet their business objectives. Insurance Premium Finance. Through its AFS/IBEX division the Bank provides, on a national basis, short-term, primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk, otherwise known as insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk. Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to 10 months on average. The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest. The AFS/IBEX division markets itself to the insurance community as a competitive option based on service, reputation, competitive terms, cost and ease of operation. Small Business Administration ("SBA") and United States Department of Agriculture ("USDA"). The Bank originates loans through programs partially guaranteed by the SBA or USDA. These loans are made to small businesses and professionals with what the Bank believes are lower risk characteristics. Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans to customers of the Crestmark division. Consumer Finance Consumer Credit Products. Through the acquisition of Specialty Consumer Services, the Bank acquired a platform that provides a total solution for marketplace lending, including underwriting and loan management in the direct-to-consumer credit business. The acquired platform allows the Bank to provide innovative lending solutions through consumer credit products. The Company designs and structures its credit programs in an effort to insulate the Company from program losses and to potentially increase the liquidity attributes of such lending programs' marketability to potential bank or other purchasers. While each program is different, all contain one or more types of credit enhancements, loss protections, or trigger events. When determining the applicable program enhancement, generally, the Company uses proprietary data provided by the Company’s partner, with respect to such program, supplemented with public data to design and shape appropriate loss curves, as well as implement stresses significantly higher than base to provide protection in changing credit cycles. Credit enhancements are typically built through holding excess program interest and fees in a reserve account to pay program credit losses. Cash flow waterfall positioning allows for losses and Company program principal and interest to be paid, under certain circumstances, before servicing or other program expenses. Trigger events allow programs and originations to be suspended if certain vintage loss limits, during a specific period of time, are triggered or if cumulative loss percentages are triggered. These triggers are designed to allow the Company to address potential issues quickly. Other trigger events in certain programs provide for excess credit or reserve enhancements, which could be beyond excess interest amounts, if certain loss triggers are breached. The Bank applies a reserve for loan losses of approximately 1% on outstanding loan balances within each of the consumer credit product programs. Through March 31, 2019 , the Bank has launched two consumer credit programs. During the second quarter of fiscal 2018, the Bank entered into a three-year program agreement with Liberty Lending, LLC ("Liberty Lending") whereby the Bank provides personal loans to Liberty Lending customers. The Bank and Liberty Lending market the program jointly through a wide variety of marketing channels. The loan products under the agreement with Liberty Lending are closed-end installment loans ranging from $3,500 to $45,000 in initial principal amount with durations of between 13 and 60 months. The Bank entered into a three-year agreement with Health Credit Services ("HCS") during the third quarter of fiscal 2018. The Bank approves and originates loans for elective medical procedures for select HCS provider offices throughout the United States. HCS works with its provider partners to market the loans, as well as provide servicing for them. The loan products offered are unsecured, closed-end installment loans with terms between 12 and 84 months and revolving lines of credit with durations between six and 60 months. Other Consumer Finance. The Bank's purchased student loan portfolios are seasoned, floating rate, private portfolios that are serviced by a third-party servicer. The portfolio purchased during the first quarter of fiscal year 2018 is indexed to one-month LIBOR, while the portfolio purchased in the first quarter of fiscal year 2017 is indexed to three-month LIBOR plus various margins. The Company received written notification on June 18, 2018 from ReliaMax Surety Company ("ReliaMax"), the company that provided insurance coverage for the student loan portfolios, which informed policy holders that the South Dakota Division of Insurance filed a petition to have ReliaMax declared insolvent and to adopt a plan of liquidation. An Order of Liquidation was entered on June 27, 2018 by the Sixth Circuit Court in Hughes County, South Dakota, declaring ReliaMax insolvent and appointing the South Dakota Division of Insurance as liquidator to adopt a plan of liquidation. The Company expects to ultimately recover a portion of the unearned premiums, which could take a year or longer. Tax Services The Bank's tax services division provides short-term taxpayer advance loans. Taxpayers are underwritten to determine eligibility for these unsecured loans. Due to the nature of taxpayer advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. The Bank will charge off the balance of a taxpayer advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful. Through its tax services division, the Bank provides short-term electronic return originator ("ERO") advance loans on a nationwide basis. These loans are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. ERO loans are not collateralized. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful. Warehouse Finance In fiscal 2018, the Bank entered into a first-out participation agreement in a consumer receivable asset-backed warehouse line of credit, with the Bank holding a senior collateral position enhanced by a subordinate party structure. During the first quarter of fiscal 2019, the Bank entered into two additional first-out participation agreements in asset-backed warehouse lines of credit, including consumer loan receivables and small business loan receivables. The senior collateral position of the Bank is supported by a subordinate party position. Community Banking Commercial Real Estate and Operating . The Company engages in commercial and multi-family real estate lending in the community bank's primary market areas and surrounding areas. These loans are secured primarily by apartment buildings, office buildings, and hotels. Commercial and multi-family real estate loans generally are underwritten with terms not exceeding 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property securing the loan, and are typically secured by guarantees of the borrowers. The Company has a variety of rate adjustment features and other terms in its commercial and multi-family real estate loan portfolio. Commercial and multi-family real estate loans provide for a margin over a number of different indices. In underwriting these loans, the Company analyzes the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers. The repayment of loans secured by commercial and multi-family real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced (for example, if leases are not obtained or renewed, or a bankruptcy court modifies a lease term, or a major tenant is unable to fulfill its lease obligations), the borrower’s ability to repay the loan may be impaired. The Company originates its community banking commercial operating loans primarily in its market areas. Most of these commercial operating loans have been extended to finance local and regional businesses and include short-term loans to finance machinery and equipment purchases, inventory and accounts receivable. Commercial loans also may involve the extension of revolving credit for a combination of equipment acquisitions and working capital in expanding companies. The maximum term for loans extended on machinery and equipment is based on the projected useful life of such machinery and equipment. Generally, the maximum term on non-mortgage lines of credit is one year . The Company’s commercial operating lending policy includes credit file documentation and analysis of the borrower’s management ability, capacity to repay the loan, the adequacy of the borrower’s capital and collateral as well as an evaluation of conditions affecting the borrower. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s current credit analysis. Commercial operating loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial operating loans may be substantially dependent on the success of the business itself (which, in turn, is likely to be dependent upon the general economic environment). The Company’s commercial operating loans are usually secured by business assets and personal guarantees. However, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. Consumer One-to-Four Family Real Estate and Other . One-to-four family real estate loan originations are typically generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. The Company offers fixed-rate loans and adjustable-rate mortgage ("ARM") loans for both permanent structures and those under construction. The Company’s one-to-four family real estate loan originations are secured primarily by properties located in the community bank's primary market areas and surrounding areas. The Company originates one-to-four family real estate loans with terms up to a maximum of 30 years and with loan-to-value ratios up to 100% of the lesser of the appraised value of the property securing the loan or the contract price. However, the vast majority of these loans are originated with loan-to-value ratios below 80% . |
