What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-09 compared with 2021-05-06 · 114 added, 135 removed, 347 unchanged (42% of the section changed)

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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;

the impact of our participation as prepaid card issuer for government stimulus and other programs and potentially similar programs in the future;

losses from fraudulent or illegal activity;

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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 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.

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

EXECUTIVE SUMMARY

Business Developments

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 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.

Business Development Highlights for the 2021 Fiscal Third Quarter

The following highlights certain business developments during the quarter ended June 30, 2021:

• Published our inaugural 2020 Environmental, Social and Governance ("ESG") Report, highlighting the Company's vision, culture, and mission of financial inclusion for all®.

The Company's 2020 ESG report can be downloaded at https://www.metafinancialgroup.com/environmental-social-governance.

• Launched the Company's Community Impact Program, focused on financial inclusion, personal and family financial empowerment, educational support, and disaster relief.

Concentrating on these four areas positions MetaBank to encourage long-lasting positive impact in our communities.

• Expanded our renewable energy investment tax credit ("ITC") financing, originating $72.0 million for the first nine months of fiscal 2021, resulting in $18.9 million in total net ITC.

• Entered into a new Banking as a Service ("BaaS") partnership with Clair, a social impact embedded fintech startup.

The Company will act as both the issuing bank and bank services provider, offering digital banking services for users of Clair.

Financial Highlights for the 2021 Fiscal Third Quarter

Total revenue for the third quarter was $130.9 million, an increase of $27.7 million compared to $103.2 million for the same quarter in fiscal 2020, primarily driven by a timing shift of refund transfer product fee and additional payments card fee income from government stimulus programs.

Net interest income for the third quarter was $68.5 million, an increase of $6.4 million compared to $62.1 million in the third quarter last year, reflecting a decrease in deposit interest expense.

Net interest margin ("NIM") improved to 3.75% for the third quarter from 3.28% during the same period of last year, chiefly due to the decrease of cash associated with the Company's participation in the EIP program and an increase in national lending loans and leases.

Total gross loans and leases at June 30, 2021 decreased $1.5 million, to $3.50 billion, compared to June 30, 2020 and decreased $152.8 million, or 4%, when compared to March 31, 2021.

The decrease compared to the linked quarter was primarily driven by the seasonal nature of the taxpayer advance loans.

Average deposits from the Payments division for the fiscal 2021 third quarter increased nearly 8% to $6.79 billion when compared to the prior year quarter largely driven by excess cash on consumer cards related to government stimulus programs.

Tax Season Recap

During the fiscal 2021 third quarter, total tax services product revenue was $13.6 million compared to $4.6 million in the prior year quarter.

The significant increase for the quarter was mostly related to delayed timing of refund transfer income due to the extension of the tax filing deadline by the Internal Revenue Service ("IRS").

Total tax services product income, net of losses and direct product expen ses, increased 19% when comparing the first nine months of fiscal 2021 to the prior year period.

The 2021 tax season benefited by the addition of the H&R Block relationship and has been successful despite the challenges caused by an increase in consumer liquidity due to stimulus payments throughout the 2021 tax season.

EIP Program Update

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

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 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.

Of the 16.5 million prepaid cards issued in conjunction with the three EIP stimulus programs, totaling approximately $24.15 billion, $2.81 billion remain outstanding as of June 30, 2021, of which only $98.1 million remain on Meta's balance sheet with the remainder being held at other banks.

FINANCIAL CONDITION

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.

At June 30, 2021, the Company’s total assets increased by $959.7 million to $7.05 billion compared to September 30, 2020, primarily due to increases of $649.5 million in investment securities available for sale and $292.9 million in cash and cash equivalents.

Total cash and cash equivalents was $720.2 million at June 30, 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.

At June 30, 2021, the Company did not have any federal funds sold.

The total investment portfolio increased $621.1 million, or 46%, to $1.98 billion at June 30, 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 March 31, 2021 were issued by a U.S.

All MBS held by the Company at June 30, 2021 were issued by a U.S.

Government agency or instrumentality.

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.

Of the total MBS at June 30, 2021, $1.06 billion, at fair value, were classified as available for sale, and $4.0 million, at cost, were classified as held to maturity.

Of the total investment securities at June 30, 2021, $854.0 million, at fair value, were classified as available for sale and $60.2 million, at cost, were classified as held to maturity.

During the nine months ended June 30, 2021, the Company purchased $976.5 million of investment securities.

Loans held for sale at June 30, 2021 totaled $87.9 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 nine months ended June 30, 2021.

The Company’s total loans and leases increased $181.1 million, or 5%, to $3.50 billion at June 30, 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 $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 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.

National lending loans and leases increased $362.7 million, or 13% to $3.19 billion at June 30, 2021 compared to September 30, 2020.

Within the National Lending portfolios, commercial finance loans and leases increased $278.5 million, tax services loans increased $38.2 million, consumer finance increased $3.6 million and warehouse finance increased $42.3 million at June 30, 2021 compared to September 30, 2020.

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

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

Community banking loans decreased $181.6 million, or 37%, at June 30, 2021 compared to September 30, 2020, primarily attributable to loan portfolio sales along with continued principal payments and payoffs.

As of June 30, 2021, the Company had $18.1 million 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 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.

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

Total end-of-period deposits increased $909.7 million, or 18%, at June 30, 2021 to $5.89 billion as compared to September 30, 2020, primarily driven by an increase in noninterest-bearing deposits of $1.03 billion, which was largely attributable to the balances on the EIP cards.

The increase in deposits has been mitigated as a result of Meta's ability to shift most of the remaining EIP program card balances from its balance sheet to other banks.

As of June 30, 2021, EIP program card balances outstanding totaled $2.81 billion, of which Meta held $98.1 million on its balance sheet.

The average balance of total deposits and interest-bearing liabilities was $7.41 billion for the nine-months ended June 30, 2021, compared to $6.09 billion for the same period of the prior fiscal year.

The average balance of noninterest-bearing deposits for the nine-months ended June 30, 2021 increased $2.74 billion, or 69%, to $6.73 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 $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.

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.

The Company's total borrowings decreased $4.6 million, or 5%, from $98.2 million at September 30, 2020 to $93.6 million at June 30, 2021.

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, 2021.

At June 30, 2021, the Company’s stockholders’ equity totaled $876.6 million, an increase of $29.3 million, from $847.3 million at September 30, 2020.

The increase was primarily attributable to growth in retained earnings and an increase in additional paid-in capital.

The Company and Bank remained above the federal regulatory minimum capital requirements at June 30, 2021, continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

See “Liquidity and Capital Resources” for further information.

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

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

(Dollars in Thousands) June 30, 2021 September 30, 2020

Noninterest-bearing deposits $ 5,756,589 $ 4,960,276

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RESULTS OF OPERATIONS

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%.

The Company recorded net income of $38.7 million, or $1.21 per diluted share, for the three months ended June 30, 2021, compared to net income of $18.2 million, or $0.53 per diluted share, for the three months ended June 30, 2020.

Total revenue for the fiscal 2021 third quarter was $130.9 million, compared to $103.2 million for the same quarter in fiscal 2020.

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

The Company recorded net income of $125.8 million, or $3.87 per diluted share, for the nine months ended June 30, 2021, compared to $91.6 million, or $2.54 per diluted share, compared to the same period in the prior year.

Total revenue for the nine months ended June 30, 2021 was $429.7 million, compared to $393.6 million for the same period of the prior year, an increase of 9%.

Net Interest Income

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.

Net interest income for the fiscal 2021 third quarter was $68.5 million, an increase of 10%, from $62.1 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.

For the nine months ended June 30, 2021, net interest income was $208.3 million, an increase of 7%, from $194.5 million compared to the same period in the prior year.

During the fiscal 2021 third quarter, interest expense decreased $3.8 million, and loan and lease interest income increased $2.4 million.

The third quarter average outstanding balance of loans and leases decreased by $4.2 million compared to the prior year quarter, primarily due to the decrease in community bank and healthcare receivable loan portfolios offset by growth of the remaining commercial loan portfolios.

The Company’s average interest-earning assets for the fiscal 2021 third quarter decreased by $291.8 million, to $7.32 billion compared with the prior year quarter, primarily due to the decrease in cash and fed funds sold, total investments, and community bank loans offset by growth of the national lending loans and leases.

Fiscal 2021 third quarter NIM increased to 3.75% from 3.28% for the third quarter last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased by 26 basis points to 3.85% compared to the prior year quarter, primarily driven by a reduction in low-yielding cash held at the Federal Reserve.

The TEY on the securities portfolio was 1.62% compared to 2.22% for the comparable period last year.

For the nine months ended June 30, 2021, NIM was 3.68%, decreasing 53 basis points from 4.21% compared to the same period in the prior year.

Net interest margin, tax-equivalent for the nine months ended June 30, 2021 was 3.70%, a decrease of 55 basis points compared to the same period in the prior year.

The Company's cost of funds for all deposits and borrowings averaged 0.09% during the fiscal 2021 third quarter, compared to 0.28% during the prior year quarter, primarily driven by a reduction in wholesale deposit balances.

The Company's overall cost of deposits was 0.01% in the fiscal 2021 third quarter, compared to 0.17% 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 March 31,

Three Months Ended June 30,

(Dollars in Thousands) Average

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3.77 % 3.31 %

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

(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2021 and 2020 was 21%.

(2) Of the total balance, $336.2 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,

Nine Months Ended June 30,

(Dollars in Thousands) Average

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3.70 % 4.25 %

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

(1) Tax rate used to arrive at the TEY for the six months ended June 30, 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.

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Provision for Credit Losses

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.

The Company recorded a $4.6 million and a $41.0 million provision for credit losses for the three and nine months ended June 30, 2021, as compared to a $15.1 million and $55.8 million provision for credit losses for the same period of the prior year.

Net charge-offs were $12.3 million for the quarter ended June 30, 2021, compared to $14.7 million for the quarter ended June 30, 2020.

The majority of the net charge-offs for the quarter were attributable to seasonal tax-related loan products .

Noninterest Income

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 income for the fiscal 2021 third quarter increased to $62.5 million from $41.0 million for the same period of the prior year.

This increase was primarily related to card fee income and refund transfer fee income.

Card fees benefited from increased card balances related to stimulus programs.

Refund transfer fee income was higher compared to last year due to refund transfer volume shift from the second fiscal quarter because of the delay in the 2021 tax season.

Noninterest income for the nine months ended June 30, 2021 increased by $22.3 million, or 11%, to $221.4 million compared to the same period in the prior fiscal year.

Noninterest 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.

Noninterest expense increased 14% to $81.5 million for the fiscal 2021 third quarter, from $71.2 million for the same quarter last year, primarily driven by increases in compensation and benefits due to a return to more normalized incentive accruals in fiscal year 2021 and additional employees to support growth.

Refund transfer product expense was also higher than the same quarter last year, due largely to a shift in volume into the fiscal 2021 third quarter as a result of the delayed IRS filing date.

Noninterest expense for the nine months ended June 30, 2021 increased by $11.3 million, or 5%, to $250.1 million compared to the same period in the prior year.

Income Tax Expense

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.

The Company recorded an income tax expense of $4.9 million, representing an effective tax rate of 11.0%, for the fiscal 2021 third quarter, compared to an income tax benefit of $2.4 million, representing an effective tax rate of (14.4)%, for the fiscal 2020 third quarter.

The increase in the recorded income tax expense reflected an increase in fiscal 2021 third quarter earnings, whereas the prior year’s income tax benefit was chiefly the result of adjustments needed for the ratably recognized investment tax credits and lower earnings forecast at that time due to COVID-19.

The Company originated $13.5 million in solar leases during the fiscal 2021 third quarter, compared to $1.3 million during last year's third quarter.

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 March 31, 2021 was appropriate and reflected probable losses related to these loans and leases;

The Company believes that the level of allowance for credit losses at June 30, 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) March 31, 2021 September 30, 2020

(Dollars in Thousands) June 30, 2021 September 30, 2020

Nonperforming loans and leases

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Term lending $ 14,470 $ 16,274

Asset based lending 382 —

Factoring 37 1,096

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Total as a percentage of total assets 0.63 % 0.79 %

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.

At June 30, 2021, nonperforming loans and leases totaled $41.9 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 June 30, 2021, $41.5 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.

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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 March 31, 2021, the Company had classified $79.4 million of its assets as substandard, $2.4 million as doubtful and none as loss.

Meta is now revising its credit administration policies and reviewing its loan portfolio to better align with OCC guidance for national banks, a process that began during the quarter ending June 30, 2021 and is expected to be completed by September 30, 2021.

We expect these credit policy revisions will have an impact on our loan and lease risk ratings, resulting in downgrades of certain credits in several categories.

Our loan and collateral management practices have proven effective in managing losses during previous economic cycles;

and while we expect this process will result in setting a new baseline for portfolio metrics going forward, it does not indicate a deterioration in our portfolio's expected performance.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2021, the Company had classified $135.1 million of its assets as substandard, $7.2 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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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 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.

At June 30, 2021, the Company had established an ACL totaling $91.2 million, compared to $56.2 million at September 30, 2020.

The increase in the allowance at June 30, 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

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

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

June 30, 2021 March 31, 2021 December 31, 2020 October 1, 2020 (1)

September 30, 2020 June 30, 2020

Commercial finance 1.73 % 1.77 % 1.88 % 1.85 % 1.30 % 1.36 %

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

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 Company's allowance for credit losses as a percentage of total loans and leases decreased to 2.61% at June 30, 2021 from 2.71% at March 31, 2021.

The decrease in the total loans and leases coverage ratio reflected a seasonal reduction in the allowance of the tax services loan portfolios.

The coverage ratios for the other non-tax-related loan categories remained relatively similar to the March 31, 2021 quarter.

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 March 31, 2021 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 June 30, 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 six months of fiscal 2021.

There were no significant changes to these critical accounting policies and estimates during the first nine 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 March 31, 2021, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.28 billion.

At June 30, 2021, the Company had commitments to originate and purchase loans and unused lines of credit totaling $1.32 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 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.

At June 30, 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.

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

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Prompt Corrective Corrective Action

At March 31, 2021 Company Bank Action Provisions Provisions

At June 30, 2021 Company Bank Action Provisions Provisions

Tier 1 leverage capital ratio 6.85 % 7.83 % 4.00 % 5.00 %

4 unchanged sentences

(Dollars in Thousands) Standardized Approach (1)

March 31, 2021

June 30, 2021

Total stockholders' equity $ 876,633

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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) March 31, 2021

(Dollars in Thousands) June 30, 2021

Total Stockholders' Equity $ 876,633

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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 March 31, 2021.

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

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

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.

For discussion of the Company’s off-balance sheet financing arrangements at June 30, 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