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%. 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 those imposed by Fannie Mae, Ginnie Mae, and Freddie Mac. The Company typically holds all fixed-rate mortgage loans and does not engage in secondary market sales. The Company also currently offers five- and ten-year ARM loans.

In underwriting one-to-four family real estate loans, the Company evaluates both the borrower’s ability to make monthly payments and the value of the property securing the loan. Properties securing real estate loans made by the Company are appraised by independent appraisers approved by the Board of Directors of the Company. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, as well as fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. Real estate loans originated by the Company generally contain a “due on sale” clause that allows the Company to declare the unpaid principal balance due and payable upon the sale of the security property. The Company has not engaged in sub-prime residential mortgage originations.

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

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

Agricultural Real Estate and Operating. The Company originates loans to finance the purchase of farmland, livestock, farm machinery and equipment, seed, fertilizer, and other farm-related products, primarily in its market areas. Agricultural operating loans are originated at either an adjustable- or fixed-rate of interest for up to a one-year term or, in the case of livestock, are due upon sale. Agricultural real estate loans are frequently originated with adjustable rates of interest. Generally, such loans provide for a fixed rate of interest for the first five to 10 years, after which the loan will balloon or the interest rate will adjust annually. These loans generally amortize over a period of 20 to 25 years. Fixed-rate agricultural real estate loans typically have terms up to 10 years. Agricultural real estate loans are generally limited to 75% of the value of the property securing the loan.

Payments on loans are dependent on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. The success of the loan may also be affected by many factors outside the control of the borrower such as weather, government support programs and grain and livestock prices. These risks may be reduced, by the farmer, with the use of crop insurance coverage and futures contracts or options to mitigate price risk, both of which the Company frequently requires of the borrowers to help ensure loan repayment. Many farms are also dependent on a limited number of key individuals whose injury or death may result in an inability to successfully operate the farm.

Past due loans and leases at March 31, 2019 and September 30, 2018 were as follows:



	Accruing and Non-accruing Loans and Leases												Non-performing Loans and Leases
Past Due Loans and Leases	30-59 Days Past Due		60-89 Days Past Due		> 89 Days Past Due		Total Past Due		Current		Total Loans and Leases Receivable		> 89 Days Past Due and Accruing		Non-accrual balance		Total
March 31, 2019	(Dollars in Thousands)
National Lending
Asset based lending	$	799	$	1,712	$	78	$	2,589	$	569,621	$	572,210	$	—	$	266	$	266
Factoring	—		—		—		—		287,955		287,955		—		716		716
Lease financing	9,291		1,227		1,761		12,279		309,135		321,414		645		1,802		2,447
Insurance premium finance	2,009		767		1,640		4,416		303,459		307,875		1,640		—		1,640
SBA/USDA	1,078		—		—		1,078		76,403		77,481		—		—		—
Other commercial finance	—		—		—		—		98,956		98,956		—		—		—
Commercial finance	13,177		3,706		3,479		20,362		1,645,529		1,665,891		2,285		2,784		5,069
Consumer credit products	1,080		667		420		2,167		137,450		139,617		420		—		420
Other consumer finance	1,256		504		1,853		3,613		167,211		170,824		1,853		—		1,853
Consumer finance	2,336		1,171		2,273		5,780		304,661		310,441		2,273		—		2,273
Tax services	667		—		—		667		84,157		84,824		—		—		—
Warehouse finance	—		—		—		—		186,697		186,697		—		—		—
Total National Lending	16,180		4,877		5,752		26,809		2,221,044		2,247,853		4,558		2,784		7,342
Community Banking
Commercial real estate and operating	271		—		—		271		869,646		869,917		—		—		—
Consumer one-to-four family real estate and other	110		250		76		436		256,643		257,079		—		76		76
Agricultural real estate and operating	—		—		2,200		2,200		57,967		60,167		2,200		—		2,200
Total Community Banking	381		250		2,276		2,907		1,184,256		1,187,163		2,200		76		2,276
Total Loans and Leases	$	16,561	$	5,127	$	8,028	$	29,716	$	3,405,300	$	3,435,016	$	6,758	$	2,860	$	9,618



	Accruing and Non-accruing Loans and Leases												Non-performing Loans and Leases
Past Due Loans and Leases	30-59 Days Past Due		60-89 Days Past Due		> 89 Days Past Due		Total Past Due		Current		Total Loans and Leases Receivable		> 89 Days Past Due and Accruing		Non-accrual balance		Total
September 30, 2018	(Dollars in Thousands)
National Lending
Asset based lending	$	1,235	$	2,151	$	94	$	3,480	$	474,437	$	477,917	$	94	$	—	$	94
Factoring	—		—		—		—		284,221		284,221		—		—		—
Lease financing	16,542		532		2,921		19,995		245,320		265,315		726		2,864		3,590
Insurance premium finance	1,864		1,019		2,981		5,864		332,013		337,877		2,981		—		2,981
SBA/USDA	1,067		—		—		1,067		58,307		59,374		—		—		—
Other commercial finance	—		—		—		—		85,145		85,145		—		—		—
Commercial finance	20,708		3,702		5,996		30,406		1,479,443		1,509,849		3,801		2,864		6,665
Consumer credit products	532		284		147		963		79,642		80,605		147		—		147
Other consumer finance	2,677		1,311		2,237		6,225		183,531		189,756		2,237		—		2,237
Consumer finance	3,209		1,595		2,384		7,188		263,173		270,361		2,384		—		2,384
Tax services	—		—		1,073		1,073		—		1,073		1,073		—		1,073
Warehouse finance	—		—		—		—		65,000		65,000		—		—		—
Total National Lending	23,917		5,297		9,453		38,667		1,807,616		1,846,283		7,258		2,864		10,122
Community Banking
Commercial real estate and operating	—		—		—		—		790,890		790,890		—		—		—
Consumer one-to-four family real estate and other	105		—		79		184		247,134		247,318		79		—		79
Agricultural real estate and operating	—		—		—		—		60,498		60,498		—		—		—
Total Community Banking	105		—		79		184		1,098,522		1,098,706		79		—		79
Total Loans and Leases	$	24,022	$	5,297	$	9,532	$	38,851	$	2,906,138	$	2,944,989	$	7,337	$	2,864	$	10,201

Certain loans and leases 89 days or more past due as to interest or principal continue to accrue because they are (1) well-secured and in the process of collection or (2) one-to-four family real estate loans or consumer loans exempt under regulatory rules from being classified as non-accrual until later delinquency, usually 120 days past due.

When analysis of borrower or lessee operating results and financial condition indicates that underlying cash flows of the borrower’s business are not adequate to meet its debt service requirements, the loan or lease is evaluated for impairment. Often, this is associated with a delay or shortfall in scheduled payments, as described above.

Impaired loans and leases at March 31, 2019 and September 30, 2018 were as follows:



March 31, 2019	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans and leases without a specific valuation allowance	(Dollars in Thousands)
National Lending
Asset based lending	$	4,887	$	5,399	$	—
Factoring	6,009		7,084		—
Lease financing	2,209		2,209		—
Commercial finance	13,105		14,692		—
Other consumer finance	1,236		1,304		—
Consumer finance	1,236		1,304		—
Total National Lending	14,341		15,996		—
Community Banking
Consumer one-to-four family real estate and other	134		153		—
Agricultural real estate and operating	1,220		1,220		—
Total Community Banking	1,354		1,373		—
Total	$	15,695	$	17,370	$	—
Loans and leases with a specific valuation allowance
National Lending
Asset based lending	$	1,078	$	1,078	$	62
Factoring	25		25		12
Lease financing	90		90		67
Commercial finance	1,193		1,193		141
Total National Lending	1,193		1,193		141
Total	$	1,193	$	1,193	$	141



September 30, 2018	Recorded Balance		Unpaid Principal Balance		Specific Allowance
Loans and leases without a specific valuation allowance	(Dollars in Thousands)
National Lending
Asset based lending	$	1,325	$	1,325	$	—
Factoring	1,383		1,713		—
Lease financing	5,491		5,491		—
Commercial finance	8,199		8,529		—
Total National Lending	8,199		8,529		—
Community Banking	405		405		—
Commercial real estate and operating	140		140		—
Consumer one-to-four family real estate and other	1,454		1,454		—
Agricultural real estate and operating	1,999		1,999		—
Total	$	10,198	$	10,528	$	—
Loans and leases with a specific valuation allowance
National Lending
Asset based lending	$	79	$	79	$	22
Factoring	1,948		2,198		49
Lease financing	3,386		3,386		517
Commercial finance	5,413		5,663		588
Total National Lending	5,413		5,663		588
Total	$	5,413	$	5,413	$	588

The following table provides the average recorded investment in impaired loans and leases for the three and six month periods ended March 31, 2019 and 2018.



Three Months Ended March 31,	2019				2018
	Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
	(Dollars in Thousands)
National Lending
Asset based lending	$	3,569	$	95	$	—	$	—
Factoring	3,131		—		—		—
Lease financing	4,100		7		—		—
Commercial finance	10,800		102		—		—
Other consumer finance	1,232		10		—		—
Consumer finance	1,232		10		—		—
Total National Lending	12,032		112		—		—
Community Banking
Commercial real estate and operating	268		—		705		5
Consumer one-to-four family real estate and other	137		—		229		6
Agricultural real estate and operating	1,414		10		1,680		50
Total Community Banking	1,819		10		2,614		61
Total loans and leases	$	13,851	$	122	$	2,614	$	61



Six Months Ended March 31,	2019				2018
	Average Recorded Investment		Recognized Interest Income		Average Recorded Investment		Recognized Interest Income
	(Dollars in Thousands)
National Lending
Asset based lending	$	2,648	$	174	$	—	$	—
Factoring	2,956		5		—		—
Lease financing	5,842		17		—		—
Commercial finance	11,446		196		—		—
Other consumer finance	1,227		10		—		—
Consumer finance	1,227		10		—		—
Total National Lending	12,673		206		—		—
Community Banking
Commercial real estate and operating	336		4		840		10
Consumer one-to-four family real estate and other	138		2		165		9
Agricultural real estate and operating	1,443		35		1,015		64
Total Community Banking	1,917		41		2,020		83
Total loans and leases	$	14,590	$	247	$	2,020	$	83

The Company’s troubled debt restructurings ("TDRs") typically involve forgiving a portion of interest or principal on existing loans, making loans at a rate materially less than current market rates, or extending the term of the loan. There were $1.5 million of national lending loans and leases that were modified in a TDR during the three months ended March 31, 2019, all of which were modified to extend the term of the loan, and no community banking loans that were modified in a TDR. There were $2.6 million of community banking loans that were modified in a TDR during the three months ended March 31, 2018.

There were $1.6 million of national lending loans and leases and $0.1 million of community banking loans that were modified in a TDR during the six months ended March 31, 2019, all of which were modified to extend the term of the loan. There were $3.8 million of community banking loans that were modified in a TDR during the six months ended March 31, 2018. During the six months ended March 31, 2019, the Company had $0.9 million of community banking loans that were modified as a TDR within the previous 12 months and for which there was a payment default. During the six months ended March 31, 2018, the Company had $0.1 million of community banking loans that were modified as a TDR within the previous 12 months and for which there was a payment default.

At March 31, 2019, foreclosed and repossessed assets totaled $29.5 million, compared to $31.6 million at September 30, 2018. There were no impairments on or valuation allowances established for any foreclosed and repossess assets at either date. The Company did not have any loans or leases in the process of foreclosure at March 31, 2019.