What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-02-08 compared with 2020-08-06 · 237 added, 378 removed, 200 unchanged (75% of the section changed)

15 unchanged sentences

new products and services, including those offered by the Meta Payment Systems, Refund Advantage, EPS Financial and Specialty Consumer Services divisions;

credit quality and adequacy of reserves;

credit quality;

the level of net charge-offs on loans and leases and the adequacy of the allowance for credit losses;

and the Company's employees.

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expected growth opportunities may not be realized or may take longer to realize than expected;

the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events;

the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto including the deployment and efficacy of the COVID-19 vaccines, or other unusual and infrequently occurring events;

actual changes in interest rates and the Fed Funds rate;

additional changes in tax laws;

the strength of the United States' economy, in general, and the strength of the local economies in which the Company conducts operations;

the strength of the United States' economy, in general, and the strength of the local economies in which the Company operates;

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”);

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continued maintenance by MetaBank of its status as a well-capitalized institution, particularly in light of our growing deposit base, a portion of which has been characterized as “brokered;” changes in consumer spending and saving habits;

the impact of our participation as prepaid card issuer for the EIP program and potentially similar programs in the future;

losses from fraudulent or illegal activity;

technological risks and developments, and cyber threats, attacks or events;

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.

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We caution you not to place undue reliance on these forward-looking statements.

The forward-looking statements included in this Quarterly Report speak only as of the date hereof.

The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section.

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The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.”

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2020, compared to September 30, 2019, and the consolidated results of operations for the three and nine months ended June 30, 2020 and 2019.

The following discussion focuses on the consolidated financial condition of the Company at December 31, 2020, compared to September 30, 2020, and the consolidated results of operations for the three months ended December 31, 2020 and 2019.

This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2020 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

EXECUTIVE SUMMARY

Business Developments

The following highlights certain business developments during the quarter ended December 31, 2020:

• Began our new three-year program with Emerald Financial Services, LLC, a wholly-owned indirect subsidiary of H&R Block, Inc., which the Company announced in the fourth quarter of fiscal 2020.

Have already moved more than $150 million in deposits and began issuing Emerald Prepaid Mastercard® to applicants.

• Completed negotiations with the Fiscal Service to disperse a second round of EIP stimulus payments through the distribution of prepaid cards.

The Company began distributing cards under this authorization on January 4, 2021.

• Expanded our solar lending business, increasing our solar credit balance 29% to $323.9 million.

• Increased resources dedicated to our Environmental, Social, and Governance ("ESG") activities by hiring an experienced Vice President of ESG and Community Impact and forming a Board-level ESG committee to provide oversight.

Financial Highlights for the 2021 Fiscal First Quarter

The Company recorded net income of $28.0 million, or $0.84 per diluted share, for the three months ended December 31, 2020, compared to net income of $21.1 million, or $0.56 per diluted share, that was recorded for the fiscal 2020 first quarter.

Total revenue for the fiscal 2021 first quarter was $111.5 million, compared to $102.1 million for the same quarter in fiscal 2020, an increase of 9%.

During the fiscal 2021 first quarter, the Company recognized net interest income of $66.0 million, NIM of 4.65% and net interest margin, tax-equivalent ("NIM, TE") of 4.67%.

The Company's average gross loans and leases decreased by $239.5 million, or 6%, while average noninterest-bearing deposits increased by $2.15 billion, or 79%, when compared to the same quarter in fiscal 2020.

Average deposits from the payments divisions for the fiscal 2021 first quarter increased nearly 83% to $5.07 billion when compared to the same quarter in fiscal 2020.

A significant portion of the year-over-year increase reflected the Company's participation in the EIP program, as described further below.

The growth in deposits led to excess cash balances held at the Federal Reserve during the fiscal 2021 first quarter.

This increase in lower yielding cash balances resulted in a net drag to the net interest margin.

Overall, the Company's cost of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021 first quarter, compared to 1.01% during the prior year quarter, primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits.

Noninterest income for the three months ended December 31, 2020 was $45.5 million, compared to $37.5 million for the same period of the prior year.

This was primarily due to an increase within gain on sale of other, an increase in other income, and an increase in payments cards and deposit fees, partially offset by a decrease in rental income.

The increase within gain on sale of other was primarily due to a loss on sale of foreclosed and repossessed assets recognized during the first quarter of fiscal year 2020.

Noninterest expense decreased 4% to $72.6 million for the fiscal 2021 first quarter, from $75.8 million for the same quarter of last year, primarily driven by decreases in compensation and benefits, other expense, tax product expense, operating lease depreciation, and amortization expense, partially offset by increases within impairment expense, legal and consulting expense, and card processing expense.

The Company repurchased 1,864,474 shares during the first quarter at an average price of $29.46.

Through January 20, 2021, the Company repurchased an additional 300,000 of its shares, at a weighted average price of $38.73.

COVID-19 Business Update

The Company continues to focus on the well-being of its employees, partners and customers.

Preventative health measures remain in place to protect employees and customers including mandating remote work options and social distancing measures where possible, restricting non-essential business travel and enhancing preventative cleaning services at all office locations.

The Company's COVID-19 Crisis Command Center consisting of leadership and business continuity planning resources throughout the organization continues to effectively monitor possible interruptions related to the pandemic and to ensure business continuity.

The Company is participating in the PPP, which is being administered by the SBA.

As of June 30, 2020, the Company had 686 loans outstanding with a total of $215.5 million in loan balances that were originated as part of the program.

From a credit perspective, the Company continues to monitor each of its lending portfolios through these unprecedented times.

Significant focus has been placed on the Company's hospitality loans and its small ticket equipment finance relationships.

The credit management team has increased the monitoring of these relationships and has been in regular contact with these borrowers.

The Company's community bank hospitality loan balances increased to $169.0 million as of June 30, 2020 from $160.1 million as of March 31, 2020 and based on the most recently obtained appraisals, the average loan-to-value ratio on those loans improved to 60% at June 30, 2020 from 61% at March 31, 2020.

67% of the loan balances for these hotel relationships received PPP loans and 51% received some form of COVID-19 related payment deferral modification.

As of June 30, 2020, the Company had $245.9 million in small ticket equipment finance balances, of which $217.3 million were categorized within term lending and $28.6 million were categorized within lease financing.

27% of the loan balances on these small ticket equipment finance relationships received some form of COVID-19 related payment deferral or other modifications.

The Company has granted deferral payments on a total of $352.1 million of loan, lease and rental equipment balances through June 30, 2020 as a result of interagency guidance issued on March 22, 2020 encouraging companies to work with customers impacted by COVID-19.

As of June 30, 2020, $292.2 million of those balances were still in their deferment period.

In addition, the Company has made other COVID-19 related modifications on a total of $52.9 million, of which $34.6 million were still active as of June 30, 2020.

As of December 31, 2020, the Company had 612 loans outstanding with total loan balances of $194.3 million originated as part of the PPP, compared with 689 loans outstanding with total loan balances of $219.0 million for the quarter ended September 30, 2020.

As of December 31, 2020, $84.2 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period.

As of September 30, 2020, loans and leases totaling $170.0 million were within their deferment period.

In addition, the Company has made other COVID-19 related modifications, of which $1.1 million were still active as of December 31, 2020 compared to $23.3 million at September 30, 2020.

The majority of the other modifications were related to adjusting the type or amount of the customer's payments.

The Company increased its allowance for loan and lease losses during the fiscal third quarter primarily as a result of the ongoing economic uncertainty related to COVID-19 pandemic.

The Company will continue to diligently monitor the allowance for loan and lease losses and adjust as necessary in future periods to maintain an appropriate and supportable level.

The Company's capital position remained strong as of June 30, 2020, even while absorbing the temporary impact from the Economic Impact Payment ("EIP") program, as described further below.

As of June 30, 2020, the Bank's capital leverage ratio based on average assets was 6.89%.

In addition, the Company has options available that can be used to effectively manage capital levels through these turbulent times, including a very strong and flexible balance sheet.

The Company's capital leverage ratio was impacted by approximately 278 basis points due to the increase in total asset balances as a result of the EIP program.

For additional related information, see "Regulation and Supervision" and "Risk Factors."

Economic Impact Payment Program Update

On April 29, 2020, the Bank entered into an amendment of its existing agreement with the U.S.

Department of the Treasury’s Bureau of the Fiscal Service (“Fiscal Service”) to provide debit card services to support the distribution of a segment of the Economic Impact Payments payable by the Internal Revenue Service under the CARES Act.

Under the EIP program, 3.6 million cards were delivered with total loads of $6.42 billion.

As a result of the program, the Company saw a quick influx of deposits to its balance sheet in mid-May 2020 with limited visibility into the duration of those deposits.

While this program's impact to earnings was negligible, it did have a significant impact on cash and deposit balances, leading to a net drag on the net interest margin along with pressuring the Company's leverage capital ratios.

The total balances remaining on the EIP cards as of June 30, 2020 were $2.68 billion and $1.72 billion as of July 31, 2020.

The funds on these cards increased the Company's quarterly average noninterest deposit balances by $2.32 billion, leading to an overall improvement in cost of deposits.

This short term influx of deposits also led to excess cash balances held at the Federal Reserve during the current period, which yielded approximately 10 basis points in interest income, and increased the quarterly average of interest-earning assets compared to previous periods.

This increase of lower yielding cash balances resulted in a drag to the overall yield on total interest-earning assets during the current period.

The net impact to NIM was approximately 140 basis points.

Conversions of the Bank and the Company

Following receipt of the necessary regulatory approvals from the Office of the Comptroller of the Currency and the Federal Reserve Bank of Minneapolis (the "FRB"), on April 1, 2020, the Bank converted from a federal thrift charter to a national bank charter and the Company converted from a savings and loan holding company to a bank holding company that has elected treatment as a financial holding company.

The Bank now operates under the name "MetaBank, National Association".

The Company and the Bank effected these conversions in order to more closely align the Bank's regulatory charter to its current and planned focus on national business that provides innovative financial solutions to consumers and businesses in niche markets often overlooked by traditional banks.

See "Regulation and Supervision" and "Risk Factors" for additional related information.

Business Developments

The sale of MetaBank's Community Bank division to Central Bank closed on February 29, 2020 and included all of the Community Bank's deposits, branch locations, fixed assets, employees, and a portion of the Community Bank’s loan portfolio.

The final deposit and loan balances included in the transaction totaled $290.5 million and $268.6 million, respectively.

The remaining Community Bank loans, which totaled $799.4 million at June 30, 2020, have been retained by the Company and are under a servicing agreement with Central Bank.

As of June 30, 2020 the Company also held $48.1 million in Community Bank loan balances as held for sale.

On August 5, 2020, MetaBank, N.A., a wholly-owned subsidiary of the Company (“MetaBank”) entered into a three-year program management agreement (the “PMA”) with Emerald Financial Services, LLC (“EFS”), a wholly owned indirect subsidiary of H&R Block, Inc.

(“H&R Block”), pursuant to which MetaBank will serve as a facilitator for H&R Block’s suite of financial services products, which include:

Emerald Prepaid MasterCard®, Refund Transfers, Refund Advances, Emerald Advance® lines of credit, and other products through H&R Block’s distribution channels.

EFS has the right to terminate the PMA under certain circumstances, including if the Bank should lose its exemption from certain provisions of the Dodd-Frank Act known as the “Durbin Amendment.” Based on current projections (or forecasts) MetaBank does not anticipate losing its Durbin Amendment exemption during the initial term of the PMA.

Upon termination of the PMA or any of the related product schedules, EFS has the right to purchase or arrange the purchase of all of the affected accounts related to its ongoing product offerings.

On June 23, 2020, Brett Pharr was promoted to Co-President and Chief Operating Officer of MetaBank to better align business lines with Meta’s strategic initiatives.

Brad Hanson remains Co-President and Chief Executive Officer of MetaBank and President and Chief Executive Officer of the Company.

During the fiscal 2020 third quarter, the Company extended its agreement with Blackhawk Network, Inc.

("BlackHawk") through 2040.

Blackhawk is a leading prepaid and payments company, which supports the program management and distribution of gift cards, prepaid telecom products and financial service products in a number of different retail, digital and incentive channels.

Financial Highlights

The Company recorded net income of $18.2 million, or $0.53 per diluted share, for the three months ended June 30, 2020, compared to net income of $29.3 million, or $0.75 per diluted share, that was recorded for the fiscal 2019 third quarter.

Total revenue for the fiscal 2020 third quarter was $103.2 million, compared to $110.8 million for the same quarter in fiscal 2019, a decrease of 7%.

During the fiscal 2020 third quarter, the Company recognized net interest income of $62.1 million, net interest margin ("NIM") of 3.28% and net interest margin, tax-equivalent ("NIM, TE") of 3.31%.

The Company's average gross loans and leases increased by $23.8 million, or 1%, while average noninterest-bearing deposits increased by $3.35 billion, or 123%, when compared to the same period in fiscal 2019.

Average deposits from the payments divisions increased nearly 131% to $6.32 billion when compared to the same period in fiscal 2019.

The significant increase in deposits led to excess cash balances held at the Federal Reserve during the third quarter of fiscal 2020.

This increase in lower yielding cash balances resulted in a net drag to the net interest margin of approximately 140 basis points.

Overall, the Company's cost of funds averaged 0.28% during the fiscal 2020 third quarter, compared to 1.14% during the prior year period, primarily due to a decrease in overnight borrowings rates along with an increase in the average balance of the Company's noninterest-bearing deposits.

Noninterest income for the three months ended June 30, 2020 was $41.0 million, compared to $43.8 million for the same period of the prior year.

This year-over-year decrease was primarily due to lower total tax product fee income and a reduction in gains on loan sales, partially offset by an increase in rental income.

For the three months ended June 30, 2020, noninterest expense was $71.2 million, compared to $72.5 million for the same period of the prior year.

The decrease in noninterest expense over the prior year fiscal third quarter was primarily driven by lower compensation and benefits, intangible amortization, total tax product expense, and occupancy and equipment expenses, partially offset by higher card processing expenses and operating lease equipment depreciation.

The Company's capital position remained strong as of December 31, 2020, even while absorbing the temporary impact resulting from the receipt of deposits in conjunction with EIP payments described below.

In addition, the Company has options available that can be used to effectively manage capital levels, including a strong and flexible balance sheet.

EIP Program Update

The Bank is serving as the sole Financial Agent for distributing prepaid debit cards used in the EIP program.

Under the first round of EIP, approximately $6.42 billion in stimulus payments on 3.6 million prepaid cards were mailed to individuals across the United States.

The total balances remaining on the first round of EIP cards were $605.1 million as of December 31, 2020 and $569.2 million as of January 20, 2021.

On December 27, 2020, the U.S.

Congress, through the CAA, directed the Internal Revenue Service (“IRS”) to distribute a second round of EIP via the U.S.

Treasury to persons in the U.S.

eligible to receive them.

The Bank entered into an amendment of its existing agreement with the Fiscal Service, under which the Bank will act as a Financial Agent to Fiscal Service in connection with the provision of prepaid debit card services to disburse a portion of the EIP payments to eligible recipients via Bank-issued prepaid cards.

Under the second round, the Bank disbursed approximately $7.10 billion of EIP payments, with initial payments having begun January 4, 2021.

The total balances remaining on the second round of EIP cards were $5.80 billion as of January 20, 2021.

While the EIP Program's impact to earnings is expected to be slightly positive, it continues to temporarily have a significant impact on cash and deposit balances, leading to a reduced NIM along with a corresponding impact on the Company's leverage capital ratios.

In conjunction with the Program and its balance sheet impacts, the Bank was granted temporary exemption from its requirements to maintain minimum regulatory capital leverage ratios by the Officer of the Comptroller of the Currency due to deposits received as part of the EIP program.

The influx of EIP deposits is not expected to have any material impact on the Company's risk-weighted capital ratios.

The Company is working with other banks to transfer deposits off-balance sheet in an effort to relieve the impact of the substantial influx of deposits related to the second round of EIP.

FINANCIAL CONDITION

At June 30, 2020, the Company’s total assets increased by $2.60 billion to $8.78 billion compared to September 30, 2019, primarily due to a $2.98 billion increase in cash and cash equivalents partially offset by decreases in loans and leases and investments.

Total cash and cash equivalents was $3.11 billion at June 30, 2020, increasing from $126.5 million at September 30, 2019.

The increase stemmed from the large influx of EIP deposits in the third quarter of fiscal 2020.

At December 31, 2020, the Company’s total assets increased by $1.17 billion to $7.26 billion compared to September 30, 2020, primarily due to a $1.16 billion increase in cash and cash equivalents.

Total cash and cash equivalents was $1.59 billion at December 31, 2020, increasing from $427.4 million at September 30, 2020.

The increase primarily resulted from the receipt of EIP related deposits in the fiscal 2021 first quarter.

The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the FRB.

At June 30, 2020, the Company did not have any federal funds sold.

The total investment portfolio decreased $138.8 million, or 10%, to $1.27 billion at June 30, 2020, compared to $1.41 billion at September 30, 2019, as maturities, sales, and principal pay downs exceeded purchases.

At December 31, 2020, the Company did not have any federal funds sold.

The total investment portfolio decreased $51.3 million, or 4%, to $1.31 billion at December 31, 2020, compared to $1.36 billion at September 30, 2020, as maturities and principal pay downs exceeded purchases.

The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities.

All MBS held by the Company at June 30, 2020 were issued by a U.S.

All MBS held by the Company at December 31, 2020 were issued by a U.S.

Government agency or instrumentality.

Of the total MBS at June 30, 2020, $338.3 million, at fair value, were classified as available for sale, and $6.4 million, at cost, were classified as held to maturity.

Of the total investment securities at June 30, 2020, $825.6 million, at fair value, were classified as available for sale and $98.2 million, at cost, were classified as held to maturity.

During the nine-months ended June 30, 2020, the Company purchased $60.0 million of investment securities.

Loans held for sale at June 30, 2020 totaled $79.9 million, decreasing from $148.8 million at September 30, 2019.

This decrease was primarily driven by the sale of held for sale loans resulting in proceeds of $168.8 million during the fiscal 2020 first quarter, which was primarily comprised of $111.7 million of consumer credit product loans sold.

The Company’s portfolio of gross loans and leases decreased by $154.7 million, or 4%, to $3.50 billion at June 30, 2020, from $3.65 billion at September 30, 2019.

The decrease was primarily driven by the sale of community banking loans, partially offset by an increase in national lending loans and leases.

See Note 3 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

National Lending loans and leases increased $247.7 million, or 10% to $2.70 billion at June 30, 2020 compared to September 30, 2019.

Within the National Lending portfolios, commercial finance loans and leases increased $242.7 million, tax services loans increased $16.9 million, and warehouse finance portfolio increased $14.7 million, while the consumer finance portfolio decreased $26.6 million at June 30, 2020 compared to September 30, 2019.

The increase in commercial finance loan balances was largely driven by $215.5 million in PPP loans as of June 30, 2020.

The seasonality of the Company's tax services business led to the increase in tax services loans at June 30, 2020 compared to September 30, 2019.

Community banking loans decreased $402.4 million, or 33%, at June 30, 2020 compared to September 30, 2019, primarily due to the aforementioned sale of the Community Bank division in the second quarter of fiscal 2020.

Of the total MBS at December 31, 2020, $430.8 million, at fair value, were classified as available for sale, and $5.2 million, at cost, were classified as held to maturity.

Of the total investment securities at December 31, 2020, $797.4 million, at fair value, were classified as available for sale and $76.2 million, at cost, were classified as held to maturity.

During the three-months ended December 31, 2020, the Company purchased $24.0 million of investment securities.

Loans held for sale at December 31, 2020 totaled $133.7 million, decreasing from $183.6 million at September 30, 2020.

This decrease was primarily driven by the sale $129.8 million of the retained Community Bank loan portfolio to Central Bank during the fiscal 2021 first quarter.

The Company’s total loans and leases increased by $125.4 million, or 4%, to $3.44 billion at December 31, 2020, from $3.31 billion at September 30, 2020.

The increase was primarily driven by increases in national lending loans and leases, partially offset by a decrease in community banking loans.

See Note 6 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

The remainder of the decrease is attributable to the classification of $48.1 million in loan balances as held for sale along with continued principal payments and payoffs.

National lending loans and leases increased $257.0 million, or 9% to $3.09 billion at December 31, 2020 compared to September 30, 2020.

Within the National Lending portfolios, commercial finance loans and leases increased $115.1 million, tax services loans increased $89.5 million, consumer finance increased $26.9 million and warehouse finance increased $25.6 million at December 31, 2020 compared to September 30, 2020.

The increase in commercial finance loan balances was largely driven by the term lending and asset based lending categories.

The seasonality of the Company's tax services business led to the increase in tax services loans at December 31, 2020 compared to September 30, 2020.

Community banking loans decreased $131.6 million, or 27%, at December 31, 2020 compared to September 30, 2020, primarily attributable to $100.4 million of loan balances classified as held for sale along with continued principal payments and payoffs.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the Federal Reserve Bank.

The FHLB requires a level of stock investment based on a pre-determined formula.

The Company’s investment in these stocks increased $0.9 million, or 3%, to $31.8 million at June 30, 2020, from $30.9 million at September 30, 2019.

The increase in stock was driven by the addition of stock in the Federal Reserve Bank as part of the conversion of the Bank from a federal thrift charter to a national bank charter.

Partially offsetting that increase was a decrease in FHLB stock, which directly correlates with lower overnight borrowings balances from the FHLB at June 30, 2020 compared to September 30, 2019.

Total end-of-period deposits increased $3.25 billion, or 75%, at June 30, 2020 to $7.59 billion as compared to September 30, 2019, primarily driven by an increase in noninterest bearing deposits of $4.18 billion, of which $2.68 billion was attributable to balances on the EIP cards.

Lower levels of consumer spending and various stimulus payments loaded on partner cards also contributed to the overall increase in total deposits.

Partially offsetting those increases were decreases of $813.5 million in wholesale deposits, $84.3 million in certificates of deposit, and $36.1 million in money market deposits.

The decrease in wholesale deposits was primarily due to a shift in the Company's deposit balances from wholesale deposits to noninterest bearing deposits stemming from the balances on the EIP cards.

The decrease in certificate of deposits and money market deposits was related to the sale of $290.5 million of total deposits included in the sale of the Community Bank division.

See Note 4 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

The average balance of total deposits and interest-bearing liabilities was $6.09 billion for the nine-months ended June 30, 2020, compared to $5.37 billion for the same period of the prior fiscal year.

The average balance of noninterest-bearing deposits for the nine-months ended June 30, 2020 increased by $1.28 billion, or 47%, to $3.99 billion compared to the same period in the prior year.

These increases were primarily attributable to the deposit balances on the EIP cards.

The Company's total borrowings decreased $652.1 million, or 76%, from $861.9 million at September 30, 2019 to $209.8 million at June 30, 2020, primarily due to the increase in total deposits.

The Company’s short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base, primarily related to payroll processing timing with a higher volume of short-term borrowings on Monday and Tuesday, which are typically paid down throughout the week.

This predictable fluctuation may be augmented near a month-end by a prefunding of certain programs.

The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at June 30, 2020.

At June 30, 2020, the Company’s stockholders’ equity totaled $829.9 million, an decrease of $14.0 million, from $844.0 million at September 30, 2019.

The Company’s investment in these stocks remained unchanged from September 30, 2020 at $27.1 million to December 31, 2020.

Total end-of-period deposits increased $1.23 billion, or 25%, at December 31, 2020 to $6.21 billion as compared to September 30, 2020, primarily driven by an increase in noninterest-bearing deposits of $1.22 billion, which was largely attributable to the balances on the EIP cards.

The average balance of total deposits and interest-bearing liabilities was $5.52 billion for the three-months ended December 31, 2020, compared to $5.13 billion for the same period of the prior fiscal year.

The average balance of noninterest-bearing deposits for the three-months ended December 31, 2020 increased $2.15 billion, or 79%, to $4.88 billion compared to the same period in the prior year.

These increases were primarily attributable to EIP related deposit balances.

The Company's total borrowings decreased $1.5 million, or 1%, from $98.2 million at September 30, 2020 to $96.8 million at December 31, 2020.

The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at December 31, 2020.

At December 31, 2020, the Company’s stockholders’ equity totaled $813.2 million, a decrease of $34.1 million, from $847.3 million at September 30, 2020.

The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs, offset in part by an increase in additional paid-in capital.

At June 30, 2020, the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution.

At December 31, 2020, the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution.

See “Liquidity and Capital Resources” for further information.

Payments Noninterest-bearing Checking Deposits

The Company may hold negative balances associated with cardholder programs in the payments divisions that are included within noninterest-bearing deposits on the Company's consolidated statement of financial condition.

The Company may hold negative balances associated with cardholder programs in the payments division that are included within noninterest-bearing deposits on the Company's consolidated statement of financial condition.

Negative balances can relate to any of the following payments functions:

– Prefundings:

The Company deploys funds to consumer cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20.

The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20.

– Discount fundings:

The Company funds prepaid cards in an amount less than the face value as a form of revenue sharing with partners.

The Company funds cards in an amount that is estimated to be less than final breakage values on card programs.

Consumers may spend more than is estimated.

These discounts are netted at a pooled partner level using ASC 210-20.

The majority of these discount fundings relate to one partner.

– Demand Deposit Account ("DDA") overdrafts:

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The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts.

The following table summarizes the Company's negative deposit balances within the payments division at June 30, 2020 and September 30, 2019:

(Dollars in Thousands) June 30, 2020 September 30, 2019

The following table summarizes the Company's negative deposit balances within the payments division:

(Dollars in Thousands) December 31, 2020 September 30, 2020

Noninterest-bearing deposits $ 6,101,971 $ 4,960,276

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Noninterest-bearing checking, net $ 5,581,597 $ 4,356,630

RESULTS OF OPERATIONS

Total revenue for the fiscal 2021 first quarter was $111.5 million, compared to $102.1 million for the same quarter in fiscal 2020, an increase of 9%.

The increase in net income was primarily driven by an increase in noninterest income and a decrease in noninterest expense.

Net Interest Income

Net interest income for the fiscal 2021 first quarter increased by 2%, to $66.0 million from $64.7 million for the same quarter in fiscal 2020.

The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall balances and yields realized on interest earning assets.

The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months ended December 31, 2020 decreased to 62%, from 72% for the three months ended December 31, 2019, while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 23% from 26% over that same period.

These decreases were primarily due to the increase in interest-earning cash balances related to the EIP program.

NIM was 4.65% in the fiscal 2021 first quarter, a decrease of 29 basis points from 4.94% in the fiscal 2020 first quarter.

NIM,TE was 4.67% in the fiscal 2021 first quarter, a decrease of 32 basis points from 4.99% in the fiscal 2020 first quarter.

The decreases in NIM and NIM, TE in the fiscal 2021 first quarter, compared to the same period of the prior year were primarily driven by the effects of the EIP program.

The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 116 basis points to 4.82% when comparing the fiscal 2021 first quarter to the same period of the prior fiscal year.

The fiscal 2021 first quarter TEY on the securities portfolio decreased by 86 basis points to 1.79% compared to the same period of the prior year TEY of 2.65%.

The decrease in TEY on the securities portfolio was primarily due to a lower interest rate environment during the current period compared to the prior year period while the decrease in TEY on average earning assets was primarily driven by excess low-yielding cash held at the Federal Reserve.

The Company’s average interest-earning assets for the fiscal 2021 first quarter increased by $432.9 million to $5.64 billion, from the comparable quarter in 2020.

The increase was primarily attributable a significant increase in interest-earning cash driven by the effects of the EIP program.

Total investment securities continued to decrease through sales of securities and cash flow from the Company's amortizing securities portfolio.

Quarterly average loans and leases decreased $239.5 million, of which $665.0 million was related to a decrease in Community Banking loans partially offset by a $425.5 million increase in National Lending loans.

The Company’s average balance of total deposits and interest-bearing liabilities was $5.52 billion for the three months ended December 31, 2020, compared to $5.13 billion for the same period in the prior year, representing an increase of 8%.

This increase was primarily driven by an increase in average noninterest-bearing deposits of $2.15 billion.

The increase in average noninterest-bearing deposits was largely driven by the EIP related funding.

Partially offsetting those increases were decreases in average wholesale deposits of $1.21 billion, average balances of total borrowings of $422.3 million, average time deposits of $97.5 million, and average money market deposits of $27.9 million.

Overall, the Company's cost of funds for all deposits and borrowings averaged 0.15% during the fiscal 2021 first quarter, compared to 1.01% for the fiscal 2020 first quarter.

This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits.

The Company's overall cost of deposits was 0.06% in the fiscal 2021 first quarter, compared to 0.81% in the same quarter of 2020.

The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin.

Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.

Three Months Ended December 31,

(Dollars in Thousands) Average

Balance Interest

Interest-earning assets:

Cash & fed funds sold $ 820,108 $ 842 0.41 % $ 99,597 $ 412 1.65 %

Mortgage-backed securities 438,610 2,123 1.92 % 376,358 2,389 2.53 %

Tax exempt investment securities 333,729 1,215 1.83 % 490,982 2,339 2.40 %

Asset-backed securities 326,315 1,200 1.46 % 303,885 2,354 3.08 %

Other investment securities 221,986 1,111 1.98 % 197,513 1,429 2.88 %

Total investments 1,320,640 5,649 1.79 % 1,368,738 8,511 2.65 %

Total commercial finance 2,417,691 45,630 7.49 % 1,980,509 44,781 9.00 %

Total consumer finance 239,618 4,748 7.86 % 270,612 5,790 8.51 %

Total tax services 25,104 8 0.13 % 24,429 33 0.54 %

Total warehouse finance 284,199 4,933 6.89 % 265,564 4,174 6.25 %

National Lending loans and leases 2,966,612 55,319 7.40 % 2,541,114 54,778 8.58 %

Community Banking loans 529,085 6,336 4.75 % 1,194,082 13,924 4.64 %

Total loans and leases 3,495,697 61,655 7.00 % 3,735,196 68,702 7.32 %

Total interest-earning assets 5,636,445 $ 68,146 4.82 % 5,203,531 $ 77,625 5.98 %

Noninterest-earning assets 845,378 918,973

Total assets $ 6,481,823 $ 6,122,504

Interest-bearing liabilities:

Interest-bearing checking (2)

$ 162,748 $ — — % $ 163,693 $ 153 0.37 %

Savings 52,198 2 0.01 % 48,776 9 0.08 %

Money markets 52,620 39 0.30 % 80,528 205 1.01 %

Time deposits 17,390 57 1.30 % 114,924 595 2.06 %

Wholesale deposits 261,136 699 1.06 % 1,472,820 8,378 2.26 %

Total interest-bearing deposits 546,092 797 0.58 % 1,880,741 9,340 1.98 %

Overnight fed funds purchased 11 — 0.25 % 302,804 1,450 1.91 %

FHLB advances — — — % 110,000 678 2.45 %

Subordinated debentures 73,822 1,147 6.16 % 73,658 1,160 6.26 %

Other borrowings 23,870 203 3.37 % 33,589 346 4.10 %

Total borrowings 97,703 1,350 5.48 % 520,051 3,634 2.78 %

Total interest-bearing liabilities 643,795 2,147 1.32 % 2,400,792 12,974 5.15 %

Noninterest-bearing deposits 4,880,352 — — % 2,732,062 — — %

Total deposits and interest-bearing liabilities 5,524,147 $ 2,147 0.15 % 5,132,854 $ 12,974 1.01 %

Other noninterest-bearing liabilities 151,528 150,319

Total liabilities 5,675,675 5,283,173

Shareholders' equity 806,148 839,331

Total liabilities and shareholders' equity $ 6,481,823 $ 6,122,504

Net interest income and net interest rate spread including noninterest-bearing deposits $ 65,999 4.67 % $ 64,651 4.97 %

Net interest margin 4.65 % 4.94 %

Tax-equivalent effect 0.02 % 0.05 %

Net interest margin, tax-equivalent (3)

4.67 % 4.99 %

(1) Tax rate used to arrive at the TEY for the three months ended December 31, 2020 and 2019 was 21%.

(2) Of the total balance, $162.5 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.

(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure.

The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income.

The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.

Provision for Credit Losses

The Company recorded a $6.1 million provision for loan and lease losses for the three months ended December 31, 2020, as compared to a $3.4 million provision for loan and lease losses for the same period of the prior year.

The increase in provision for the quarter ended December 31, 2020 compared to the same period of the prior year was primarily driven by the commercial finance and consumer finance portfolios, partially offset by a decrease within the retained community bank portfolio.

The Company adopted CECL effective October 1, 2020, and its day one entry to increase the allowance for credit losses was $12.8 million.

While this specific adoption amount did not have a direct impact to provision for credit loss for the December 31, 2020 quarter as the cumulative effect adjustment was recorded to retained earnings, the CECL accounting standard does accelerate the recognition of the reserves due to the forward-looking elements of the modeling.

See Note 2 and Note 6 to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

Noninterest Income

Noninterest income for the fiscal 2021 first quarter increased to $45.5 million from $37.5 million for the same period in the prior fiscal year.

This was due primarily to an increase within gain on sale of other, an increase in other income, and an increase in payments cards and deposit fees, partially offset by a decrease in rental income.

The increase within gain on sale of other was primarily due to a loss on sale of foreclosed and repossessed assets recognized during the first quarter of fiscal year 2020.

The increase within other income was primarily due to the receipt of a portion of the Company’s liquidation insurance claims of unearned premiums on the ReliaMax estate related to the Company’s student loan portfolio.

The amount received in the first quarter of fiscal 2021 was $3.5 million.

Noninterest Expense

Noninterest expense decreased 4% to $72.6 million for the fiscal 2021 first quarter, from $75.8 million for the same quarter of fiscal 2020.

The decrease in noninterest expense when comparing the fiscal 2021 first quarter to the same period of the prior year was primarily driven by decreases in compensation and benefits, other expense, tax product expense, operating lease depreciation, and amortization expense, partially offset by increases within impairment expense, legal and consulting expense, and card processing expense.

Income Tax Expense

T he Company recorded an income tax expense of $3.5 million, representing an effective tax rate of 10.8%, for the fiscal 2021 first quarter, compared to an income tax expense of $0.7 million, representing an effective tax rate of 3.0%, for the fiscal 2020 first quarter.

The recorded income tax expense during the current quarter was primarily due to ratably recognized investment tax credits and lower forecast earnings due to COVID-19.

The Company originated $38.5 million in solar leases during the fiscal 2021 first quarter, compared to $17.9 million during the fiscal 2020 first quarter.

Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year.

The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

Nonperforming Assets and Allowance for Loan and Lease Losses

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Non-accrual loans and troubled debt restructurings are generally considered impaired.

The Company believes that the level of allowance for loan and lease losses at June 30, 2020 was appropriate and reflected probable losses related to these loans and leases;

The Company believes that the level of allowance for credit losses at December 31, 2020 was appropriate and reflected probable losses related to these loans and leases;

however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future.

See the section below titled “Allowance for Loan and Lease Losses” for further information.

See the section below titled “Allowance for Credit Losses” for further information.

The table below sets forth the amounts and categories of nonperforming assets in the Company’s portfolio as of the dates set forth below.

Foreclosed assets include assets acquired in settlement of loans.

(Dollars in thousands) June 30, 2020 September 30, 2019

(Dollars in Thousands) December 31, 2020 September 30, 2020

Nonperforming loans and leases

1 unchanged sentence

Term lending $ 13,741 $ 16,274

Asset based lending 917 —

Factoring 842 1,096

8 unchanged sentences

Total 39,096 23,952

Accruing loans and leases delinquent 90 days or more:

Accruing loans and leases delinquent >89 days past due:

Held for sale loans — —

17 unchanged sentences

Commercial finance 7,178 9,957

Agricultural real estate and operating — 28,122

Commercial real estate and operating 8 —

Total 7,186 9,957

2 unchanged sentences

Total as a percentage of total assets 0.73 % 0.79 %

Through June 30, 2020, the Company has granted deferral payments on a total of $352.1 million of loan, lease and rental equipment balances as a result of interagency guidance issued on March 22, 2020 encouraging companies to work with customers impacted by COVID-19.

As of June 30, 2020, $292.2 million of those balances were still in their deferment period.

At June 30, 2020, nonperforming loans and leases totaled $39.3 million, representing 1.10% of total loans and leases, compared to $26.5 million, or 0.70% of total loans and leases at September 30, 2019.

During the fiscal 2020 first quarter, the Company disposed of assets related to a previously disclosed Community Bank agricultural relationship that were held in other real estate owned (“OREO”), which represented 46 basis points of nonperforming assets as of September 30, 2019.

At December 31, 2020, nonperforming loans and leases totaled $42.3 million, representing 1.18% of total loans and leases, compared to $34.0 million, or 0.97% of total loans and leases at September 30, 2020.

As of December 31, 2020, $84.2 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period.

As of September 30, 2020, loans and leases totaling $170.0 million were within their deferment period.

In addition, the Company has made other COVID-19 related modifications, of which $1.1 million were still active as of December 31, 2020 compared to $23.3 million at September 30, 2020.

The majority of the other modifications were related to adjusting the type or amount of the customer's payments.

Classified Assets .

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The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2020, the Company had classified $52.5 million of its assets as substandard, $4.1 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at December 31, 2020, the Company had classified $78.6 million of its assets as substandard, $3.5 million as doubtful and none as loss.

At September 30, 2020, the Company classified $61.6 million of its assets as substandard, $6.3 million as doubtful and none as loss.

Allowance for Loan and Lease Losses .

The allowance for loan and lease losses is established through a provision for loan and lease losses based on management’s evaluation of the risk inherent in its loan and lease portfolio and changes in the nature and volume of its loan and lease activity, including those loans and leases that are being specifically monitored by management.

Such evaluation, which includes a review of loans and leases for which full collectability may not be reasonably assured, includes consideration of, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan and lease loss experience and other factors that warrant recognition in providing for an appropriate loan and lease loss allowance.

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.

The Bank’s average loss rates over the past three years were low relative to industry averages for such years.

The Bank does not believe it is likely that these low loss conditions will continue indefinitely.

At June 30, 2020, the Company had established an allowance for loan and lease losses totaling $65.7 million, compared to $29.1 million at September 30, 2019.

The increase in the Company's allowance for loan and lease losses was driven primarily by increases in the allowance of $14.8 million in commercial finance, $12.3 million in the community banking portfolio, and $11.4 million in tax service loans, partially offset by a decrease of $1.9 million in consumer finance.

Allowance for Credit Losses .

Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures.

ASU 2016-13 requires the use of a CECL methodology to determine the ACL for loans and debt securities held-to-maturity.

CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions.

The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date.

The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, generally this means loans and leases identified as troubled debt restructures or loans and leases on nonaccrual status.

All other loans and leases are evaluated collectively for impairment.

A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.

Individually evaluated loans and leases are a key component of the ACL.

Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent.

If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.

At December 31, 2020, the Company had established an ACL totaling $72.4 million, compared to $56.2 million at September 30, 2020.

The increase in the allowance at December 31, 2020 when compared to September 30, 2020, was primarily due to the adoption of the CECL accounting standard noted above, as well as additional increases during the fiscal 2021 first quarter in the commercial finance portfolio of $2.8 million, tax services portfolio of $1.4 million, and consumer finance portfolio of $1.4 million, partially offset by an additional decrease within the retained community bank portfolio of $2.2 million.

The CECL methodology requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions, which led to the increase in the ACL as of the October 1, 2020 adoption date.

The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases.

As of the Period Ended

June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019

December 31, 2020 October 1, 2020 (1)

September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019

Commercial finance 1.88 % 1.85 % 1.30 % 1.36 % 1.28 % 0.80 %

5 unchanged sentences

Total loans and leases 2.10 % 2.08 % 1.70 % 1.88 % 1.81 % 0.84 %

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 Company continued to assess each of its loan and lease portfolios during the fiscal third quarter and increased its allowance for loan and lease losses as a percentage of total loans and leases in the community bank and commercial finance portfolios primarily as a result of the ongoing COVID-19 pandemic.

Tax services coverage rates were driven only by typical seasonal activity and are not expected to be materially impacted by COVID-19 as the tax lending season is now complete.

The Company expects to continue to diligently monitor the allowance for loan and lease losses and adjust as necessary in future periods to maintain an appropriate and supportable level.

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 June 30, 2020 reflected an appropriate allowance against probable incurred 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.

(1) Represents the Company's allowance coverage ratio upon the adoption of the Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and allowance balances plus the CECL allowance adjustment.

Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL.

The Company continued to assess each of its loan and lease portfolios during the fiscal 2021 first quarter.

The increase from September 30, 2020 to December 31, 2020 was primarily due to the adoption of ASU 2016-13 on October 1, 2020.

The increase in the tax services coverage rates were driven by typical seasonal activity.

The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.

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 ACL at December 31, 2020 reflected an appropriate allowance against inherent credit losses from the lending portfolio.

Although the Company maintains its ACL 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 ACL is subject to review by the OCC, which can require the establishment of additional general or specific allowances.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

1 unchanged sentence

The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred.

Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the allowance for loan and lease losses, goodwill and identifiable intangible assets.

These policies involve complex and subjective decisions and assessments.

1 unchanged sentence

A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended September 30, 2020.

There were no significant changes to these critical accounting policies and estimates during the first nine months of fiscal year 2020.

RESULTS OF OPERATIONS

Total revenue for the fiscal 2020 third quarter was $103.2 million, compared to $110.8 million for the same quarter in fiscal 2019, a decrease of 7%.

The decrease in net income was primarily due to an increase in provision expense along with a decrease in interest income.

The Company recorded net income of $91.6 million, or $2.54 per diluted share, for the nine months ended June 30, 2020, compared to $76.8 million, or $1.95 per diluted share, for the same period in fiscal year 2019 .

Total revenue for the nine months ended June 30, 2020 was $393.6 million, compared to $385.2 million for the same period of the prior year, an increase of $8.4 million, or 2%.

The increase in net income was primarily due to an increase in noninterest income and a decrease in noninterest expense.

Net interest income for the fiscal 2020 third quarter decreased by 7%, to $62.1 million from $67.0 million for the same quarter in fiscal 2019.

The decrease was driven primarily by lower overall balances and yields realized on the loan and lease portfolios along with a decrease in investment securities balances, partially offset by a reduction in total interest expense.

The quarterly average outstanding balance of loans and leases as a percentage of interest-earning assets for the three months ended June 30, 2020 decreased to 48%, from 68% for the three months ended June 30, 2019, while the quarterly average balance of total investments as a percentage of interest-earning assets decreased to 17% from 31% over that same period.

These decreases were primarily due to the $2.31 billion increase in quarterly average interest-earning cash balances related to the EIP program.

For the nine months ended June 30, 2020, net interest income was $194.5 million compared to $198.6 million for the same period in the prior year.

Net interest margin was 3.28% in the fiscal 2020 third quarter, a decrease of 179 basis points from 5.07% in the fiscal 2019 third quarter.

NIM,TE was 3.31% in the fiscal 2020 third quarter, a decrease of 184 basis points from 5.15% in the fiscal 2019 third quarter.

The decreases in NIM and NIM, TE in the fiscal 2020 third quarter, compared to the same period of the prior year, were primarily driven by excess low-yielding cash held at the Federal Reserve stemming from the short term influx of EIP deposits, along with a lower interest rate environment.

The increase of lower yielding cash balances resulted in a drag to the overall yield on total interest-earning assets during the current period.

The net impact to NIM was approximately 140 basis points.

The net effect of purchase accounting accretion contributed two basis points to NIM for the fiscal 2020 third quarter as compared to 25 basis points for the same period of the prior year.

For the nine months ended June 30, 2020, NIM was 4.21%, a decrease of 69 basis points from 4.90% during the comparable prior year period.

NIM, TE for the nine months ended June 30, 2020 was 4.25%, a decrease of 77 basis points for the same period of the prior year.

The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 267 basis points to 3.59% when comparing the fiscal 2020 third quarter to the same period of the prior fiscal year.

The fiscal 2020 third quarter TEY on the securities portfolio decreased by 87 basis points to 2.22% compared to the same period of the prior year TEY of 3.09%.

The decrease TEY on the securities portfolio was primarily due to a lower interest rate environment during the current period compared to the prior year period while the decrease on the TEY on average earning assets most primarily driven by excess low-yielding cash held at the Federal Reserve.

The Company’s average interest-earning assets for the fiscal 2020 third quarter increased by $2.31 billion to $7.61 billion, from the comparable quarter in 2019.

The increase was primarily attributable a significant increase in interest-earning cash driven by the effects of the EIP program.

Total investment securities continued to decrease through sales of securities and cash flow from the Company's amortizing securities portfolio.

Quarterly average loans and leases increased $23.8 million, of which $343.5 million was related to an increase in National Lending loans, partially offset by a $319.7 million decrease in Community Banking loans.

The Company’s average balance of total deposits and interest-bearing liabilities was $7.49 billion for the three months ended June 30, 2020, compared to $5.14 billion for the same period in the prior year, representing an increase of 46%.

This increase was primarily driven by increases in average noninterest-bearing deposits of $3.35 billion and average interest-bearing checking of $88.4 million.

The increase in average noninterest-bearing deposits was largely driven by $2.32 billion in funds on EIP cards.

Partially offsetting those increases were decreases in average wholesale deposits of $704.2 million, average balances of total borrowings of $262.6 million, average time deposits of $102.8 million, and average money market deposits of $18.7 million.

Overall, the Company's cost of funds for all deposits and borrowings averaged 0.28% during the fiscal 2020 third quarter, compared to 1.14% for the fiscal 2019 third quarter.

This decrease was primarily due to a decrease in overnight borrowings rates as well as an increase in the average balance of the Company's noninterest-bearing deposits.

The Company's overall cost of deposits was 0.17% in the fiscal 2020 third quarter, compared to 0.90% in the same quarter of 2019.

Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin.

Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.

Three Months Ended June 30,

(Dollars in Thousands) Average

Balance Interest

Interest-earning assets:

Cash & fed funds sold $ 2,692,270 $ 783 0.12 % $ 80,100 $ 521 2.61 %

Mortgage-backed securities 342,174 2,269 2.67 % 421,725 3,063 2.91 %

Tax exempt investment securities 417,042 1,658 2.02 % 690,732 4,058 2.98 %

Asset-backed securities 336,562 1,770 2.11 % 307,581 2,701 3.52 %

Other investment securities 197,643 1,014 2.06 % 199,681 1,557 3.13 %

Total investments 1,293,420 6,711 2.22 % 1,619,719 11,379 3.09 %

Total commercial finance 2,160,175 40,375 7.52 % 1,775,905 44,332 10.01 %

Total consumer finance 247,824 4,635 7.52 % 364,633 8,178 9.00 %

Total tax services 39,845 — — % 45,142 — — %

Total warehouse finance 304,839 4,582 6.05 % 223,546 3,491 6.26 %

National Lending loans and leases 2,752,683 49,592 7.25 % 2,409,226 56,001 9.32 %

Community Banking loans 870,245 10,319 4.77 % 1,189,912 13,731 4.63 %

Total loans and leases 3,622,928 59,911 6.65 % 3,599,138 69,732 7.77 %

Total interest-earning assets 7,608,618 $ 67,406 3.59 % 5,298,957 $ 81,632 6.26 %

Noninterest-earning assets 830,589 820,474

Total assets $ 8,439,206 $ 6,119,431

Interest-bearing liabilities:

Interest-bearing checking (2)

$ 226,382 $ — — % $ 137,950 $ 85 0.25 %

Savings 55,572 1 0.01 % 54,247 9 0.07 %

Money markets 40,091 33 0.33 % 58,782 107 0.73 %

Time deposits 25,392 113 1.78 % 128,165 633 1.98 %

Wholesale deposits 817,414 2,983 1.47 % 1,521,594 9,561 2.52 %

Total interest-bearing deposits 1,164,852 3,130 1.08 % 1,900,738 10,395 2.19 %

Overnight fed funds purchased 59,055 48 0.33 % 363,857 2,368 2.61 %

FHLB advances 110,000 670 2.45 % 54,341 324 2.39 %

Subordinated debentures 73,738 1,153 6.29 % 73,583 1,163 6.34 %

Other borrowings 27,032 268 3.98 % 40,653 414 4.08 %

Total borrowings 269,825 2,139 3.19 % 532,434 4,269 3.22 %

Total interest-bearing liabilities 1,434,677 5,269 1.48 % 2,443,172 14,664 2.42 %

Noninterest-bearing deposits 6,057,314 — — % 2,710,288 — — %

Total deposits and interest-bearing liabilities 7,491,991 $ 5,269 0.28 % 5,143,460 $ 14,664 1.14 %

Other noninterest-bearing liabilities 122,940 149,207

Total liabilities 7,614,931 5,292,667

Shareholders' equity 824,276 826,764

Total liabilities and shareholders' equity $ 8,439,206 $ 6,119,431

Net interest income and net interest rate spread including noninterest-bearing deposits $ 62,137 3.30 % $ 66,968 5.12 %

Net interest margin 3.28 % 5.07 %

Tax-equivalent effect 0.02 % 0.08 %

Net interest margin, tax-equivalent (3)

3.31 % 5.15 %

(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2020 and 2019 was 21%.

(2) Of the total balance, $226.1 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.

(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure.

Nine Months Ended June 30,

(Dollars in Thousands) Average

Balance Interest

Interest-earning assets:

Cash & fed funds sold $ 992,935 $ 1,934 0.26 % $ 148,751 $ 2,989 2.69 %

Mortgage-backed securities 358,942 7,151 2.66 % 392,395 8,622 2.94 %

Tax exempt investment securities 454,202 6,130 2.28 % 952,501 17,999 3.20 %

Asset-backed securities 315,000 6,395 2.71 % 297,316 8,090 3.64 %

Other investment securities 195,851 3,718 2.54 % 150,888 3,301 2.93 %

Total investments 1,323,994 23,394 2.52 % 1,793,100 38,012 3.19 %

Total commercial finance 2,053,414 126,799 8.25 % 1,662,322 125,566 10.10 %

Total consumer finance 260,950 15,811 8.09 % 327,700 21,697 8.85 %

Total tax services 192,971 6,384 4.42 % 140,515 8,206 7.81 %

Total warehouse finance 294,852 13,542 6.13 % 168,081 7,912 6.29 %

National Lending loans and leases 2,802,186 162,536 7.75 % 2,298,618 163,382 9.50 %

Community Banking loans 1,048,689 36,571 4.66 % 1,175,667 40,519 4.61 %

Total loans and leases 3,850,875 199,106 6.91 % 3,474,285 203,901 7.85 %

Total interest-earning assets 6,167,804 $ 224,434 4.90 % 5,416,137 $ 244,902 6.16 %

Noninterest-earning assets 886,320 877,130

Total assets $ 7,054,124 $ 6,293,267

Interest-bearing liabilities:

Interest-bearing checking (2)

$ 222,772 $ 480 0.29 % $ 129,656 $ 220 0.23 %

Savings 50,308 16 0.04 % 54,643 28 0.07 %

Money markets 63,077 390 0.83 % 56,987 263 0.62 %

Time deposits 75,231 1,134 2.01 % 160,740 2,229 1.85 %

Wholesale deposits 1,224,090 18,690 2.04 % 1,832,237 32,990 2.41 %

Total interest-bearing deposits 1,635,478 20,712 1.69 % 2,234,264 35,731 2.14 %

Overnight fed funds purchased 245,030 2,805 1.53 % 287,985 5,485 2.55 %

FHLB advances 110,000 2,019 2.45 % 18,114 324 2.39 %

Subordinated debentures 73,698 3,471 6.29 % 73,543 3,486 6.34 %

Other borrowings 29,792 903 4.05 % 43,690 1,286 3.93 %

Total borrowings 458,520 9,197 2.68 % 423,332 10,581 3.34 %

Total interest-bearing liabilities 2,093,998 29,909 1.91 % 2,657,595 46,312 2.33 %

Noninterest-bearing deposits 3,991,561 — — % 2,715,870 — — %

Total deposits and interest-bearing liabilities 6,085,559 $ 29,909 0.66 % 5,373,465 $ 46,312 1.15 %

Other noninterest-bearing liabilities 136,722 128,924

Total liabilities 6,222,281 5,502,389

Shareholders' equity 831,843 790,878

Total liabilities and shareholders' equity $ 7,054,124 $ 6,293,267

Net interest income and net interest rate spread including noninterest-bearing deposits $ 194,525 4.24 % $ 198,590 5.01 %

Net interest margin 4.21 % 4.90 %

Tax-equivalent effect 0.04 % 0.12 %

Net interest margin, tax-equivalent (3)

4.25 % 5.02 %

(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2020 and 2019 was 21%.

(2) Of the total balance, $226.1 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.

(3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure.

Provision for Loan and Lease Losses .

The Company recorded a $15.1 million and a $55.8 million provision for loan and lease losses for the three and nine months ended June 30, 2020, as compared to a $9.1 million and a $51.5 million provision for loan and lease losses for the same period of the prior year.

The increase in provision for the quarter ended June 30, 2020 compared to the same period of the prior year was primarily driven by the community banking and commercial finance portfolios, partially offset by decreases in the consumer finance and tax services portfolios.

Provision increases in the community banking and commercial finance portfolios was primarily attributable to the increased stress that the hospitality loans and the small ticket equipment finance relationships have experienced stemming from the ongoing economic uncertainty related to the COVID-19 pandemic.

Loans and leases that received short-term payment deferrals were also analyzed and additional provision was applied as appropriate.

Also see Note 6 to the Condensed Consolidated Financial Statements included in this quarterly report.

Noninterest Income .

Noninterest income for the fiscal 2020 third quarter decreased to $41.0 million from $43.8 million for the same period in the prior fiscal year.

This year-over-year decrease was primarily due to lower tax product fee income and a reduction in gains on loan sales, partially offset by an increase in rental income.

Noninterest income for the nine months ended June 30, 2020 of $199.0 million, increased $12.5 million, or 7%, from $186.6 million in the same period in the prior fiscal year.

This increase was primarily due to a $19.3 million gain on divestiture of the Community Bank division during the fiscal 2020 second quarter.

See Note 4 to the Condensed Consolidated Financial Statements included in this quarterly report.

Noninterest Expense .

Noninterest expense decreased 2% to $71.2 million for the fiscal 2020 third quarter, from $72.5 million for the same quarter of fiscal 2019.

The decrease in noninterest expense when comparing the fiscal 2020 third quarter to the same period of the prior year was primarily driven by lower compensation and benefits, intangible amortization, total tax product expense, and occupancy and equipment expenses, partially offset by higher card processing expenses and operating lease equipment depreciation.

Noninterest expense for the nine months ended June 30, 2020 decreased by $18.2 million, or 7%, to $238.8 million compared to the same period in the prior fiscal year.

The Company recorded an income tax benefit of $2.4 million, representing an effective tax rate of (14.4%), for the fiscal 2020 third quarter, compared to an income tax benefit of $1.2 million, representing an effective tax rate of (4.0)%, for the fiscal 2019 third quarter.

The recorded income tax expense during the current quarter was primarily due to ratably recognized investment tax credits and lower forecast earnings due to COVID-19.

The Company originated $1.3 million in solar leases during the fiscal 2020 third quarter, compared to $49.1 million during the fiscal 2019 third quarter.

Investment tax credits related to solar leases are recognized ratably based on income throughout each fiscal year.

Insignificant income tax impacts are expected related to COVID-19.

There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2021.

LIQUIDITY AND CAPITAL RESOURCES

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The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses.

At June 30, 2020, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.12 billion.

At December 31, 2020, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.35 billion.

The Company believes that loan repayments and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs.

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Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined).

At June 30, 2020, both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

At December 31, 2020, both the Bank and the Company exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

The Company and the Bank took the accumulated other comprehensive income (“AOCI”) opt-out election;

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Prompt Corrective Corrective Action

At June 30, 2020 Company Bank Action Provisions Provisions

At December 31, 2020 Company Bank Action Provisions Provisions

Tier 1 leverage capital ratio 7.39 % 8.60 % 4.00 % 5.00 %

4 unchanged sentences

(Dollars in Thousands) Standardized Approach (1)

June 30, 2020

December 31, 2020

Total stockholders' equity $ 813,210

4 unchanged sentences

Noncontrolling interest 1,536

Adoption of Accounting Standards Update 2016-13 10,439

Common Equity Tier 1 Capital (1)

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Each of tangible common equity and tangible common equity excluding AOCI is a non-GAAP financial measure that is commonly used within the banking industry.

(Dollars in Thousands) June 30, 2020

(Dollars in Thousands) December 31, 2020

Total Stockholders' Equity $ 813,210

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Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations " in the Company’s Annual Report on Form 10-K for its fiscal year ended September 30, 2020 for a summary of our contractual obligations as of September 30, 2020.

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2019 through June 30, 2020.

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2020 through December 31, 2020.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

For discussion of the Company’s off-balance sheet financing arrangements at June 30, 2020, see Note 15 to our consolidated financial statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

For discussion of the Company’s off-balance sheet financing arrangements at December 31, 2020, see Note 15 to our Condensed Consolidated Financial Statements included in Part I, Item 1 “Financial Statements” of this Quarterly Report on Form 10-Q.

Depending on the extent to which the commitments or contingencies described in Note 15 occur, the effect on the Company’s capital and net income could be significant.

REGULATION AND SUPERVISION

The following information is intended to update, and should be read in conjunction with, the information contained under the caption “Regulation and Supervision” in the Company’s Annual Report on Form 10-K.

Updates Related to COVID-19

The CARES Act

In response to the COVID-19 pandemic, the CARES Act was signed into law by President Trump on March 27, 2020.

The CARES Act provides for approximately $2.2 trillion in emergency economic relief measures.

Many of the CARES Act’s programs are dependent upon the direct involvement of U.S.

financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.

Department of Treasury, the Federal Reserve and other federal bank regulatory authorities, including those with direct supervisory jurisdiction over the Company and the Bank.

Furthermore, as the COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19.

In addition, it is possible that Congress will enact supplementary COVID-19 response legislation, including new bills comparable in scope to the CARES Act, prior to the end of 2020.

The following description of certain provisions of the CARES Act and other regulations and supervisory guidance related to the COVID-19 pandemic that are applicable to the Company and the Bank is qualified in its entirety by reference to the full text of CARES Act and the statutes, regulations, and policies described herein.

Future amendments to the provisions of the CARES Act or changes to any of the statutes, regulations, or regulatory policies applicable to the Company and its subsidiaries could have a material effect on the Company.

Such legislation and related regulations and supervisory guidance will be implemented over time and will remain subject to review by Congress and the implementing regulations issued by federal regulatory authorities.

The Company continues to assess the impact of the CARES Act and other statues, regulations and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program.

The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19.

On June 5, 2020, the President signed the Paycheck Protection Program Flexibility Act (“PPPFA”) into law, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds.

Shortly thereafter, and due to the evolving impact of the COVID-19 pandemic, the President signed additional legislation authorizing the SBA to resume accepting PPP applications on July 6, 2020 and extending the PPP application deadline to August 8, 2020.

It is anticipated that additional revisions to the SBA’s interim final rules on forgiveness and loan review procedures will be forthcoming to address these and related changes.

As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto.

Troubled Debt Restructuring and Loan Modifications for Affected Borrowers.

The CARES Act permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019.

Federal bank regulatory authorities also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so.

The Company is applying this guidance to qualifying loan modifications.

Subsequent Events for further information about the COVID-19-related loan modifications completed by the company.

Temporary Community Bank Leverage Ratio Relief.

Pursuant to the CARES Act, federal bank regulatory authorities adopted an interim rule, effective until the earlier of the termination of the coronavirus emergency declaration and December 31, 2020, to (i) reduce the minimum Community Bank Leverage Ratio from 9% to 8% percent and (ii) give community banks two-quarter grace period to satisfy such ratio if such ratio falls out of compliance by no more than 1%.

Federal Reserve Programs and Other Recent Initiatives

Main Street Lending Program.

The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities.

On April 9, 2020, the Federal Reserve proposed the creation of the Main Street Lending Program (“MSLP”) to implement certain of these recommendations.

On June 15, 2020, the Federal Reserve Bank of Boston opened the MSLP for lender registration.

The MSLP supports lending to small and medium-sized businesses that were in sound financial condition before the onset of the COVID-19 pandemic.

The MSLP operates through three facilities:

the Main Street New Loan Facility, the Main Street Priority Loan Facility, and the Main Street Expanded Loan Facility.

The Federal Reserve is currently working to refine the MSLP’s operational infrastructure and facilities and is expected to release further rules and operational guidance.

The Bank continues to monitor developments thereto.

Temporary Regulatory Capital Relief related to Impact of CECL.

Concurrent with enactment of the CARES Act, federal bank regulatory authorities issued an interim final rule that delays the estimated impact on regulatory capital resulting from the adoption of CECL.

The interim final rule provides banking organizations that implement CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay.

The Company does expect to elect this option.

Updates Related to the Conversions of the Company and the Bank

As a result of the April 1, 2020 conversions, the Company is a bank holding company that has elected to be a financial holding company, which is supervised and examined by the FRB and the Bank is a national bank supervised and examined by the OCC.

Except as otherwise noted, the Company’s and the Bank’s post-conversion regulatory obligations under the National Bank Act (“NBA”) and under the BHC Act and Regulation Y, respectively, are substantially consistent with the pre-conversion regulatory obligations of the Bank and the Company under HOLA and Regulation LL.

Regulation and Supervision.

As a BHC that has elected to become a FHC, the Company is supervised by the Federal Reserve and may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the Federal Reserve).

Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.

As a result of the conversion of the Bank to a national bank charter, the Bank derives its lending and investment powers from the National Bank Act (“NBA”) and the OCC’s implementing regulations promulgated thereunder.

Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets.

The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC’s regulatory requirements and limitations.

In general, the Bank’s legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the “combined general limit”).

At June 30, 2020, the Bank was in compliance with the combined general limit.

No Qualified Thrift Lender Test.

As a national bank, the Bank is no longer required to be a qualified thrift lender (a “QTL”) or satisfy any element of the QTL test applicable to federal savings associations.

Limitations on Dividends and Other Capital Distributions.

The NBA and related federal regulations govern the permissibility of dividends and capital distributions by a national bank.

As a national bank, the Bank’s board of directors may declare and pay dividends of as much of the undivided profits as the directors judge to be expedient, subject to the certain key restrictions, including:

• unless approved by the OCC, the Bank may not declare a dividend if the total amount of all dividends (common and preferred), including the proposed dividend, declared in any current year exceeds the total of the Bank’s net income of the current year to date, combined with the retained net income of current year minus one and current year minus two, less the sum of transfers required by the OCC (if any) and transfers required to be made to a fund for the retirement of any preferred stock (if any);

• the Bank may not declare a dividend if the Bank has sustained losses at any time that equal or exceed its undivided profits (i.e., retained earnings);

• the Bank may not declare or pay any dividend if, after making the dividend, the Bank would be “undercapitalized” as defined in the OCC’s Prompt Corrective Action regulations.

Acquisitions.

Federal law prohibits a BHC directly or indirectly, from:

(a) acquiring control (as defined under the BHC Act) of another depository institution (or a holding company parent) without prior Federal Reserve approval;

or (b) through merger, consolidation or purchase of assets, acquiring another depository institution or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior Federal Reserve approval.

In evaluating applications by bank holding companies to acquire insured depository institutions, the Federal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.

On April 1, 2020, the Federal Reserve’s final rule for determining whether a company has control over a bank or other company for purposes of the BHC Act and the control presumptions promulgated under Regulation Y (the “Control Rule”) became effective.

The Control Rule provides specific guidance in place of the Federal Reserve’s prior facts-and-circumstances approach to control evaluations under the BHC Act and Regulation Y.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis