What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-06 compared with 2021-02-08 · 187 added, 142 removed, 295 unchanged (53% of the section changed)

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expectations in connection with the impact of the ongoing COVID-19 pandemic and related governmental actions on the Company and MetaBank;

industry and the capital markets;

customer retention;

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expectations concerning acquisitions and divestitures;

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

new products and services;

credit quality;

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

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

and the Company's employees.

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our relationship with, and any actions which may be initiated by our regulators;

the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry and recent and potential changes in response to the ongoing COVID-19 pandemic such as the CARES Act and the rules and regulations that may be promulgated thereunder;

the impact of changes in financial services laws and regulations, including, but not limited to, laws and regulations relating to the tax refund industry and the insurance premium finance industry and recent and potential changes in response to the ongoing COVID-19 pandemic, including various laws and the rules and regulations that may be promulgated thereunder;

technological changes, including, but not limited to, the protection of our electronic systems and information;

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the growth of the Company’s business, as well as expenses related thereto;

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;

continued maintenance by MetaBank of its status as a well-capitalized institution;

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;

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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 December 31, 2020, compared to September 30, 2020, and the consolidated results of operations for the three months ended December 31, 2020 and 2019.

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2021, compared to September 30, 2020, and the consolidated results of operations for the three and six months ended March 31, 2021 and 2020.

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.

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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.

The following highlights certain business developments during the quarter ended March 31, 2021:

• Increased revenue included the benefits of H&R Block's suite of financial services products.

• Partnered with the U.S.

Department of the Treasury's Bureau of the Fiscal Service ("Fiscal Service") to disperse Economic Income Payment ("EIP") stimulus payments through the distribution of prepaid cards.

During the quarter, the Company began distributing cards under the authorizations for the second round on January 4, 2021 and for the third round on March 23, 2021.

• Selected as the issuing bank for Walgreens' newly launched bank-account product with InComm Payments and MasterCard, adding to the Bank's diverse suite of Banking as a Service relationships.

• Expanded our solar lending business, increasing our solar lending originations for the first six months of the fiscal year 2021 by 65% to $58.5 million .

• Dedicated additional resources to our Environmental, Social, and Governance ("ESG") activities to include the hiring a Chief People and Inclusion Officer, Kia Tang.

Financial Highlights for the 2021 Fiscal Second Quarter

Total revenue for the fiscal 2021 second quarter was $187.3 million, a slight decrease compared to $188.3 million for the same quarter in fiscal 2020, which benefited from the one-time $19.3 million gain from the divestiture of the Community Bank division.

Net interest income for the second quarter was $73.9 million, compared to $67.7 million in the comparable quarter of the prior year.

The increase was primarily driven by a reduction in total interest expense, partially offset by lower overall yields realized on investments and loans and leases.

Net interest margin ("NIM") decreased to 3.07% for the fiscal 2021 second quarter from 4.78% during the same period of last year, chiefly reflecting excess cash associated with the Company's participation in the EIP program, as described further below.

The Company's total gross loans and leases at March 31, 2021 increased $37.2 million, or 1% , to $3.65 billion, compared to March 31, 2020.

Average deposits from the payments divisions for the fiscal 2021 second quarter increased nearly 181% to $9.29 billion when compared to the same quarter of the prior year.

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

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'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.

The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021 second quarter, compared to 0.83% during the prior year quarter, primarily due to an increase in the average balance of the Company's noninterest-bearing deposits from the EIP program.

Noninterest income for the three months ended March 31, 2021 decreased to $113.5 million, compared to $120.5 million for the same period of the prior year.

This decrease was primarily due to the $19.3 million gain on divestiture of the Community Bank division, which was recognized during the fiscal 2020 second quarter.

Partially offsetting the decrease were increases in total tax product fee income and payment card and deposit fee income.

Noninterest expense increased 5% to $96.0 million for the fiscal 2021 second quarter, from $91.7 million for the same quarter of last year, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals and additional employees to support growth.

The Company repurchased 734,984 shares during the second quarter at an average price of $40.78.

For the 2021 tax season, the Bank originated $1.79 billion in refund advance loans compared to $1.33 billion during the 2020 tax season.

During the fiscal 2021 second quarter, total tax services product revenue was $67.0 million, an increase of 17% compared to the fiscal 2020 second quarter.

While the 2021 tax services results have thus far been favorable compared to the prior year's tax season, it has been below the Company's expectations as a result of reduced overall demand for refund advances due to consumers having access to EIP stimulus funds, which have been partially offset by higher payments fee income.

We do expect overall tax season refund transfer volumes and revenue to be similar to last year.

We believe the impacts to the tax advance product are unique to this tax season and the Company anticipates more normalized results from its H&R Block and Jackson Hewitt relationships will be achieved in the 2022 tax season and beyond.

Despite these stimulus-related impacts, total tax services product income, net of losses and direct product expenses, increased 14% when comparing the first six months of fiscal 2021 to the same period of the prior fiscal year.

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.

In 2020, the Bank dispensed approximately $6.42 billion of the first round of EIP payments under the CARES Act through the distribution of 3.6 million Bank-issued prepaid cards, and earlier this year dispensed approximately $7.10 billion of the second round of EIP payments under the CAA through the distribution of 8.1 million Bank-issued prepaid cards.

On Ma rch 11, 2021, the U.S.

Congress, through the ARP Act, directed the Internal Revenue Service, to distribute a third 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.

The Bank has entered into an amendment of its existing agreement with the Fiscal Service under which the Bank acts as its Financial Agent 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.

Through this third round, the Bank disbursed approximately $10.64 billion of EIP payments through the distribution of 4.7 million Bank-issued prepaid cards.

Through March 31, 2021 the Bank has issued a combined total of 16.5 million prepaid cards totaling approximately $24.15 billion related to three stimulus programs, of which $11.64 billion is still outstanding as of March 31, 2021.

Of that balance, only $869.2 million remained on Meta’s balance sheet, as MetaBank has been working with other banks to transfer these temporary deposits off the balance sheet.

The Company anticipates that participating in the EIP card distribution program will continue to have a slightly positive impact on earnings and it does not expect any material impact on its risk-based capital ratios due to the participation in the card distribution program.

Add itionally, the Company does not expect these conditions will be sustained over the long-term.

COVID-19 Business Update

As of March 31, 2021, the Company had 576 loans outstanding with total loan balances of $208.6 million originated as part of the PPP, compared with 612 loans outstanding with total loan balances of $194.3 million for the quarter ended December 31, 2020.

As of March 31, 2021, $66.5 million of the loans and leases that were granted deferral payments by the Company were still in their deferment period.

As of December 31, 2020, loans and leases totaling $84.2 million were within their deferment period.

The Company's capital position remained in good standing as of March 31, 2021, even while continuing to absorb 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.

FINANCIAL CONDITION

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 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.

At March 31, 2021, the Company’s total assets increased by $3.70 billion to $9.79 billion compared to September 30, 2020, primarily due to a $3.30 billion increase in cash and cash equivalents.

Total cash and cash equivalents was $3.72 billion at March 31, 2021, increasing from $427.4 million at September 30, 2020, primarily resulting from the receipt of EIP related deposits.

The Bank has been working with other banks to transfer these temporary deposits off the balance sheet.

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

At March 31, 2021, the Company did not have any federal funds sold.

The total investment portfolio increased $192.2 million, or 14%, to $1.55 billion at March 31, 2021, compared to $1.36 billion at September 30, 2020, as purchases exceeded maturities and principal pay downs.

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 December 31, 2020 were issued by a U.S.

All MBS held by the Company at March 31, 2021 were issued by a U.S.

Government agency or instrumentality.

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.

Of the total MBS at March 31, 2021, $558.8 million, at fair value, were classified as available for sale, and $4.4 million, at cost, were classified as held to maturity.

Of the total investment securities at March 31, 2021, $921.9 million, at fair value, were classified as available for sale and $67.7 million, at cost, were classified as held to maturity.

During the six months ended March 31, 2021, the Company purchased $411.5 million of investment securities.

Loans held for sale at March 31, 2021 totaled $67.6 million, decreasing from $183.6 million at September 30, 2020.

This decrease was primarily driven by sales of the retained Community Bank loan portfolio to Central Bank during the six months ended March 31, 2021.

The Company’s total loans and leases increased $333.9 million, or 10%, to $3.65 billion at March 31, 2021, from $3.31 billion at September 30, 2020.

The increase was primarily driven by growth in the commercial finance and tax services portfolios partially offset by the continued decrease in community banking loan balances.

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

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.

National lending loans and leases increased $471.4 million, or 17% to $3.30 billion at March 31, 2021 compared to September 30, 2020.

Within the National Lending portfolios, commercial finance loans and leases increased $197.9 million, tax services loans increased $222.9 million, consumer finance increased $11.5 million and warehouse finance increased $39.1 million at March 31, 2021 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.

The seasonality of the Company's tax services business led to the increase in tax services loans at March 31, 2021 compared to September 30, 2020.

Community banking loans decreased $137.5 million, or 28%, at March 31, 2021 compared to September 30, 2020, primarily attributable to loan portfolio sales along with continued principal payments and payoffs.

As of March 31, 2021, the Company had no community banking loans classified as held for sale.

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 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.

The Company’s investment in these stocks increased $1.3 million, or 5%, to $28.4 million at March 31, 2021 from $27.1 million at September 30, 2020, resulting from the purchase of FHLB membership stock.

Total end-of-period deposits increased $3.66 billion, or 74%, at March 31, 2021 to $8.64 billion as compared to September 30, 2020, primarily driven by an increase in noninterest-bearing deposits of $3.57 billion, which was largely attributable to the balances on the EIP cards.

The average balance of total deposits and interest-bearing liabilities was $7.57 billion for the six-months ended March 31, 2021, compared to $5.39 billion for the same period of the prior fiscal year.

The average balance of noninterest-bearing deposits for the six-months ended March 31, 2021 increased $3.94 billion, or 133%, to $6.90 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 Company's total borrowings decreased $2.9 million, or 3%, from $98.2 million at September 30, 2020 to $95.3 million at March 31, 2021.

The Company also has an available no-fee line of credit with JP Morgan of $25.0 million with no funds advanced at March 31, 2021.

At March 31, 2021, the Company’s stockholders’ equity totaled $835.3 million, a decrease of $12.1 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 December 31, 2020, the Bank continued to exceed all regulatory requirements for classification as a well-capitalized institution.

The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2021, continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

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 division 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 Condensed Consolidated Statements of Financial Condition.

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

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

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

(Dollars in Thousands) March 31, 2021 September 30, 2020

Noninterest-bearing deposits $ 8,338,473 $ 4,960,276

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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.

The Company recorded net income of $59.1 million, or $1.84 per diluted share, for the three months ended March 31, 2021, compared to net income of $52.3 million, or $1.45 per diluted share, for the three months ended March 31, 2020.

Total revenue for the fiscal 2021 second quarter was $187.3 million, compared to $188.3 million for the same quarter in fiscal 2020, a slight decrease.

The increase in net income was primarily driven by an increase in net interest income and a decrease in provision for credit loss expense.

The Company recorded net income of $87.1 million, or $2.65 per diluted share, for the six months ended March 31, 2021, compared to $73.4 million, or $2.00 per diluted share, compared to the same period in the prior year.

Total revenue for the six months ended March 31, 2021 was $298.8 million, compared to $290.4 million for the same period of the prior year, an increase of 3%.

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.

Net interest income for the fiscal 2021 second quarter was $73.9 million, an increase of 9%, from $67.7 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 yields realized on investments and loans and leases.

For the six months ended March 31, 2021, net interest income was $139.8 million, an increase of 6%, from $132.4 million compared to the same period in the prior year.

During the fiscal 2021 second quarter, interest expense decreased $9.8 million which was partially offset by decreases in loan and lease interest income of $2.0 million and investment securities and cash interest income of $1.7 million, when comparing to the prior year quarter.

The quarterly average outstanding balance of loans and leases increased by 8% on a linked quarter basis primarily due to seasonal tax services loans with growth from Term Lending, Asset Based Lending, and SBA/USDA, partially offset by lower community bank loan balances.

The Company’s average interest-earning assets for the fiscal 2021 second quarter increased by $4.07 billion, to $9.77 billion compared with the second quarter in fiscal 2020, primarily due to the effects of the EIP program.

NIM decreased to 3.07% in the fiscal 2021 second quarter from 4.78% for the comparable quarter last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 249 basis points to 3.15% for the fiscal 2021 second quarter compared to the prior year quarter, driven primarily by excess low-yielding cash held at the Federal Reserve, as well as the lower interest rate environment.

The fiscal 2021 second quarter TEY on the securities portfolio was 1.78% compared to 2.68% for the comparable period last year.

For the six months ended March 31, 2021, NIM was 3.65%, decreasing 121 basis points from 4.86% compared to the same period in the prior year.

Net interest margin, tax-equivalent for the six months ended March 31, 2021 was 3.67%, a decrease of 123 basis points compared to the same period in the prior year.

The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2021 second quarter, compared to 0.83% during the prior year quarter.

This reflected primarily an increase in the average balance of the Company's noninterest-bearing deposits, mainly due to the EIP program noted above.

The Company's overall cost of deposits was 0.02% in the fiscal 2021 second quarter, compared to 0.66% in the same quarter last year.

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.

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

Three Months Ended December 31,

Three Months Ended March 31,

(Dollars in Thousands) Average

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3.08 % 4.82 %

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

(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2021 and 2020 was 21%.

(2) Of the total balance, $275.7 million are interest-bearing deposits where interest expense is paid by a third party and not by the Company.

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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.

Six Months Ended March 31,

(Dollars in Thousands) Average

Balance Interest

Interest-earning assets:

Cash & fed funds sold $ 2,485,330 $ 1,932 0.16 % $ 147,910 $ 1,151 1.56 %

Mortgage-backed securities 490,358 4,730 1.93 % 367,280 4,882 2.66 %

Tax exempt investment securities 315,714 2,348 1.89 % 472,680 4,471 2.39 %

Asset-backed securities 357,514 2,490 1.40 % 304,278 4,626 3.04 %

Other investment securities 226,032 2,186 1.94 % 194,960 2,704 2.77 %

Total investments 1,389,618 11,754 1.79 % 1,339,198 16,683 2.67 %

Total commercial finance 2,444,396 91,928 7.54 % 2,000,325 86,423 8.64 %

Total consumer finance 247,534 11,716 9.49 % 267,477 11,176 8.36 %

Total tax services 366,157 6,553 3.59 % 269,115 6,385 4.74 %

Total warehouse finance 299,510 9,778 6.55 % 289,885 8,960 6.18 %

National Lending loans and leases 3,357,597 119,975 7.17 % 2,826,802 112,944 7.99 %

Community Banking loans 447,096 10,153 4.55 % 1,137,423 26,251 4.62 %

Total loans and leases 3,804,693 130,128 6.86 % 3,964,225 139,195 7.02 %

Total interest-earning assets 7,679,641 $ 143,814 3.77 % 5,451,333 $ 157,029 5.80 %

Noninterest-earning assets 866,262 914,034

Total assets $ 8,545,903 $ 6,365,367

Interest-bearing liabilities:

Interest-bearing checking (2)

$ 218,743 $ — — % $ 172,850 $ 259 0.30 %

Savings 64,741 6 0.02 % 47,690 16 0.07 %

Money markets 54,466 81 0.30 % 74,507 357 0.96 %

Time deposits 15,130 91 1.20 % 100,014 1,022 2.04 %

Wholesale deposits 218,925 1,063 1.97 % 1,474,444 15,929 2.16 %

Total interest-bearing deposits 572,005 1,241 0.44 % 1,869,505 17,583 1.88 %

Overnight fed funds purchased 6 — 0.25 % 337,509 2,757 1.63 %

FHLB advances — — — % 110,000 1,348 2.45 %

Subordinated debentures 73,841 2,294 6.23 % 73,678 2,318 6.29 %

Other borrowings 23,132 430 3.73 % 31,165 635 4.08 %

Total borrowings 96,979 2,724 5.63 % 552,352 7,058 2.56 %

Total interest-bearing liabilities 668,984 3,965 1.19 % 2,421,857 24,641 2.03 %

Noninterest-bearing deposits 6,901,255 — — % 2,964,329 — — %

Total deposits and interest-bearing liabilities 7,570,239 $ 3,965 0.11 % 5,386,186 $ 24,641 0.91 %

Other noninterest-bearing liabilities 164,307 143,576

Total liabilities 7,734,546 5,529,762

Shareholders' equity 811,357 835,605

Total liabilities and shareholders' equity $ 8,545,903 $ 6,365,367

Net interest income and net interest rate spread including noninterest-bearing deposits $ 139,849 3.67 % $ 132,388 4.89 %

Net interest margin 3.65 % 4.86 %

Tax-equivalent effect 0.02 % 0.04 %

Net interest margin, tax-equivalent (3)

3.67 % 4.90 %

(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2021 and 2020 was 21%.

(2) Of the total balance, $218.5 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.

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.

The Company recorded a $30.3 million and a $36.4 million provision for credit losses for the three and six months ended March 31, 2021, as compared to a $37.3 million and $40.7 million provision for credit losses for the same period of the prior year.

The decrease in the overall provision compared to the prior year was due in large part to the increase in the allowance as part of the Company's response to the emerging COVID-19 pandemic during the fiscal 2020 second quarter.

Partially offsetting that decrease was an increase in provision expense related to originating higher volumes of tax services loans for the fiscal 2021 second quarter, compared to the comparable quarter of the prior year.

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 income for the fiscal 2021 second quarter decreased to $113.5 million from $120.5 million for the same period in the prior fiscal year.

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

Partially offsetting the decrease were increases in total tax product fee income and payment card and deposit fee income.

Noninterest income for the six months ended March 31, 2021 increased by $0.9 million, or 1%, to $158.9 million compared to the same period in the prior fiscal year.

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.

Noninterest expense increased 5% to $96.0 million for the fiscal 2021 second quarter, from $91.7 million for the same quarter of fiscal 2020, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals and additional employees to support growth.

Noninterest expense for the six months ended March 31, 2021 increased by $1.0 million, or 1%, to $168.5 million compared to the same period in the prior fiscal year.

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.

The Company recorded an income tax expense of $1.1 million, representing an effective tax rate of 1.9%, for the fiscal 2021 second quarter, compared to an income tax expense of $5.6 million, representing an effective tax rate of 9.5%, for the fiscal 2020 second quarter.

The Company originated $20.0 million in solar leases during the fiscal 2021 second quarter, compared to $17.6 million during the fiscal 2020 second quarter.

The investment tax credit for the second quarter reflected an adjustment to the full fiscal year's projected investment tax credit volumes, which contributed to the overall reduction in income tax expense compared to the prior year.

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

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

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;

The Company believes that the level of allowance for credit losses at March 31, 2021 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.

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Foreclosed assets include assets acquired in settlement of loans.

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

(Dollars in Thousands) March 31, 2021 September 30, 2020

Nonperforming loans and leases

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Accruing loans and leases delinquent >89 days past due:

Held for sale loans — —

Term lending 353 266

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Commercial real estate and operating — 50

Agricultural real estate and operating — —

Total Community Banking — 50

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Commercial finance 1,483 9,957

Commercial real estate and operating 8 —

Total 1,483 9,957

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Total as a percentage of total assets 0.48 % 0.79 %

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.

At March 31, 2021, nonperforming loans and leases totaled $43.5 million, representing 1.17% of total loans and leases, compared to $34.0 million, or 0.97% of total loans and leases at September 30, 2020.

As of March 31, 2021, $66.5 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 December 31, 2020, the Company had classified $78.6 million of its assets as substandard, $3.5 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at March 31, 2021, the Company had classified $79.4 million of its assets as substandard, $2.4 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.

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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.

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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.

At March 31, 2021, the Company had established an ACL totaling $98.9 million, compared to $56.2 million at September 30, 2020.

The increase in the allowance at March 31, 2021 was driven primarily by the adoption of the CECL accounting standard noted above, along with the seasonal allowance build in the tax services portfolio.

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.

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As of the Period Ended

December 31, 2020 October 1, 2020 (1)

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

March 31, 2021 December 31, 2020 October 1, 2020 (1)

September 30, 2020 June 30, 2020 March 31, 2020

Commercial finance 1.77 % 1.88 % 1.85 % 1.30 % 1.36 % 1.28 %

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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 Company's allowance for credit losses as a percentage of total loans and leases increased to 2.71% at March 31, 2021 from 2.10% at December 31, 2020.

The increase in the total loans and leases coverage ratio was primarily driven by the seasonal tax services loan portfolio.

The coverage ratios for the other non-tax-related loan categories remained relatively similar to the December 31, 2020 quarter.

The change in the year-over-year tax services coverage ratio is primarily due to higher outstanding principal balances as of March 31, 2021 due in large part to the delayed start to the 2021 tax season.

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.

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 March 31, 2021 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.

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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 three months of fiscal 2021.

There were no significant changes to these critical accounting policies and estimates during the first six 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 December 31, 2020, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.35 billion.

At March 31, 2021, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.28 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 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;

At March 31, 2021, both the Bank and the Company remained above the applicable federal regulatory minimum capital requirements, continued to be classified as well-capitalized, and remained in good standing with the regulatory agencies.

A temporary exemption was granted by the OCC related to the financial impacts of distributing prepaid debit cards as part of the EIP program.

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

under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components.

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Prompt Corrective Corrective Action

At December 31, 2020 Company Bank Action Provisions Provisions

At March 31, 2021 Company Bank Action Provisions Provisions

Tier 1 leverage capital ratio 4.75 % 5.47 % 4.00 % 5.00 %

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(Dollars in Thousands) Standardized Approach (1)

December 31, 2020

March 31, 2021

Total stockholders' equity $ 835,258

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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) December 31, 2020

(Dollars in Thousands) March 31, 2021

Total Stockholders' Equity $ 835,258

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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, 2020 through December 31, 2020.

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2020 through March 31, 2021.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

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.

For discussion of the Company’s off-balance sheet financing arrangements at March 31, 2021, 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.

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