PATHWARD FINANCIAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. META FINANCIAL GROUP, INC.® AND SUBSIDIARIES FORWARD-LOOKING STATEMENTS Meta Financial Group, Inc.® ("Meta" or "the Company" or "us") and its wholly-owned subsidiary, MetaBank®, National Association ("MetaBank" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and MetaBank, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results; 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; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto including the deployment and efficacy of the COVID-19 vaccines, or other unusual and infrequently occurring events; actual changes in interest rates and the Fed Funds rate; additional changes in tax laws; the strength of the United States' economy, in general, and the strength of the local economies in which the Company operates; changes in trade, monetary, and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”); inflation, market, and monetary fluctuations; the timely and efficient development of, and acceptance of, new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s refund advance business, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Meta’s strategic partners’ refund advance products; 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, 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; the impact of acquisitions and divestitures; litigation risk; 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; changes in consumer spending and saving habits; 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; technological risks and developments, and cyber threats, attacks or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase. The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2020, and in other filings made with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason. 47 Table of Contents GENERAL The Company, a registered bank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Meta and the Bank, and all direct or indirect subsidiaries of Meta on a consolidated basis. The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.” The following discussion focuses on the consolidated financial condition of the Company at June 30, 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 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. 48 Table of Contents 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 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 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 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 June 30, 2021 were issued by a U.S. Government agency or instrumentality. 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 $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. 49 Table of Contents 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 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 $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. 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 Condensed Consolidated Statements of Financial Condition. Negative balances can relate to any of the following payments functions: – Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20. – Discount fundings: The Company funds cards in an amount that is estimated to be less than final breakage values on card programs. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to one partner. – Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category. The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the payments division: (Dollars in Thousands) June 30, 2021 September 30, 2020 Noninterest-bearing deposits $ 5,756,589 $ 4,960,276 Prefunding (344,417) (528,131) Discount funding (13,097) (62,443) DDA overdrafts (13,506) (13,072) Noninterest-bearing checking, net $ 5,385,569 $ 4,356,630 50 Table of Contents RESULTS OF OPERATIONS General 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 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 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. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield. 51 Table of Contents Three Months Ended June 30, 2021 2020 (Dollars in Thousands) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Interest-earning assets: Cash & fed funds sold $ 1,867,988 $ 528 0.11 % $ 2,692,270 $ 783 0.12 % Mortgage-backed securities 882,042 3,446 1.57 % 342,174 2,269 2.67 % Tax exempt investment securities 263,401 884 1.70 % 417,042 1,658 2.02 % Asset-backed securities 438,163 1,651 1.51 % 336,562 1,770 2.11 % Other investment securities 246,493 1,187 1.93 % 197,643 1,014 2.06 % Total investments 1,830,099 7,168 1.62 % 1,293,420 6,711 2.22 % Total commercial finance 2,616,942 48,641 7.46 % 2,160,175 40,375 7.52 % Total consumer finance 241,813 3,916 6.50 % 247,824 4,635 7.52 % Total tax services 91,804 604 2.64 % 39,845 — — % Total warehouse finance 332,759 5,151 6.21 % 304,839 4,582 6.05 % National Lending loans and leases 3,283,318 58,312 7.12 % 2,752,683 49,592 7.25 % Community Banking loans 335,415 3,975 4.75 % 870,245 10,319 4.77 % Total loans and leases 3,618,733 62,287 6.90 % 3,622,928 59,911 6.65 % Total interest-earning assets 7,316,820 $ 69,983 3.85 % 7,608,618 $ 67,406 3.59 % Noninterest-earning assets 841,738 830,589 Total assets $ 8,158,558 $ 8,439,206 Interest-bearing liabilities: Interest-bearing checking (2) $ 336,576 $ — — % $ 226,382 $ — — % Savings 107,803 5 0.02 % 55,572 1 0.01 % Money markets 58,517 66 0.45 % 40,091 33 0.33 % Time deposits 11,877 27 0.91 % 25,392 113 1.78 % Wholesale deposits 86,295 90 0.42 % 817,414 2,983 1.47 % Total interest-bearing deposits 601,068 188 0.13 % 1,164,852 3,130 1.08 % Overnight fed funds purchased 11 — 0.25 % 59,055 48 0.33 % FHLB advances — — — % 110,000 670 2.45 % Subordinated debentures 73,907 1,148 6.23 % 73,738 1,153 6.29 % Other borrowings 20,657 172 3.35 % 27,032 268 3.98 % Total borrowings 94,575 1,320 5.60 % 269,825 2,139 3.19 % Total interest-bearing liabilities 695,643 1,508 0.87 % 1,434,677 5,269 1.48 % Noninterest-bearing deposits 6,380,371 — — % 6,057,314 — — % Total deposits and interest-bearing liabilities 7,076,014 $ 1,508 0.09 % 7,491,991 $ 5,269 0.28 % Other noninterest-bearing liabilities 225,862 122,940 Total liabilities 7,301,876 7,614,931 Shareholders' equity 856,682 824,276 Total liabilities and shareholders' equity $ 8,158,558 $ 8,439,206 Net interest income and net interest rate spread including noninterest-bearing deposits $ 68,475 3.76 % $ 62,137 3.30 % Net interest margin 3.75 % 3.28 % Tax-equivalent effect 0.02 % 0.02 % Net interest margin, tax-equivalent (3) 3.77 % 3.31 % (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. (3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 52 Table of Contents Nine Months Ended June 30, 2021 2020 (Dollars in Thousands) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Interest-earning assets: Cash & fed funds sold $ 2,279,550 $ 2,461 0.14 % $ 992,935 $ 1,934 0.26 % Mortgage-backed securities 620,919 8,176 1.76 % 358,942 7,151 2.66 % Tax exempt investment securities 298,276 3,232 1.83 % 454,202 6,130 2.28 % Asset-backed securities 384,397 4,141 1.44 % 315,000 6,395 2.71 % Other investment securities 232,852 3,373 1.94 % 195,851 3,718 2.54 % Total investments 1,536,444 18,922 1.72 % 1,323,994 23,394 2.52 % Total commercial finance 2,501,911 140,570 7.51 % 2,053,414 126,799 8.25 % Total consumer finance 245,627 15,632 8.51 % 260,950 15,811 8.09 % Total tax services 274,706 7,156 3.48 % 192,971 6,384 4.42 % Total warehouse finance 310,593 14,930 6.43 % 294,852 13,542 6.13 % National Lending loans and leases 3,332,837 178,288 7.15 % 2,802,186 162,536 7.75 % Community Banking loans 409,869 14,127 4.61 % 1,048,689 36,571 4.66 % Total loans and leases 3,742,706 192,415 6.87 % 3,850,875 199,106 6.91 % Total interest-earning assets 7,558,700 $ 213,798 3.80 % 6,167,804 $ 224,434 4.90 % Noninterest-earning assets 858,088 886,320 Total assets $ 8,416,788 $ 7,054,124 Interest-bearing liabilities: Interest-bearing checking (2) $ 258,020 $ 1 — % $ 222,772 $ 480 0.29 % Savings 79,095 11 0.02 % 50,308 16 0.04 % Money markets 55,816 146 0.35 % 63,077 390 0.83 % Time deposits 14,046 118 1.12 % 75,231 1,134 2.01 % Wholesale deposits 174,715 1,153 0.88 % 1,224,090 18,690 2.04 % Total interest-bearing deposits 581,692 1,429 0.33 % 1,635,478 20,712 1.69 % Overnight fed funds purchased 7 — 0.25 % 245,030 2,805 1.53 % FHLB advances — — — % 110,000 2,019 2.45 % Subordinated debentures 73,864 3,442 6.23 % 73,698 3,471 6.29 % Other borrowings 22,307 603 3.61 % 29,792 903 4.05 % Total borrowings 96,178 4,045 5.62 % 458,520 9,197 2.68 % Total interest-bearing liabilities 677,870 5,474 1.08 % 2,093,998 29,909 1.91 % Noninterest-bearing deposits 6,727,627 — — % 3,991,561 — — % Total deposits and interest-bearing liabilities 7,405,497 $ 5,474 0.10 % 6,085,559 $ 29,909 0.66 % Other noninterest-bearing liabilities 184,825 136,722 Total liabilities 7,590,322 6,222,281 Shareholders' equity 826,466 831,843 Total liabilities and shareholders' equity $ 8,416,788 $ 7,054,124 Net interest income and net interest rate spread including noninterest-bearing deposits $ 208,324 3.70 % $ 194,525 4.24 % Net interest margin 3.68 % 4.21 % Tax-equivalent effect 0.02 % 0.04 % Net interest margin, tax-equivalent (3) 3.70 % 4.25 % (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. (3) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. 53 Table of Contents Provision for Credit Losses 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. 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 third quarter. 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 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 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 $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. The timing and impact of future solar tax credits are expected to vary from period to period, and Meta intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria. Nonperforming Assets and Allowance for Loan and Lease Losses Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful. Loans and leases, or portions thereof, are charged-off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and taxpayer advance loans if such loans have not been collected by the end of the calendar year. Non-accrual loans and troubled debt restructurings are generally considered impaired. 54 Table of Contents 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. See the section below titled “Allowance for Credit Losses” for further information. The table below sets forth the amounts and categories of nonperforming assets in the Company’s portfolio as of the dates set forth below. Foreclosed assets include assets acquired in settlement of loans. (Dollars in Thousands) June 30, 2021 September 30, 2020 Nonperforming loans and leases Nonaccruing loans and leases: Term lending $ 14,470 $ 16,274 Factoring 37 1,096 Lease financing 2,208 3,583 SBA/USDA 600 600 Commercial finance 17,315 21,553 Total National Lending 17,315 21,553 Commercial real estate and operating 17,896 580 Consumer one-to-four family real estate and other 108 50 Agricultural real estate and operating 1,769 1,769 Total Community Banking 19,773 2,399 Total 37,088 23,952 Accruing loans and leases delinquent >89 days past due: Term lending 2,073 266 Lease financing 1,403 4,344 Insurance premium finance 874 2,364 SBA/USDA — 427 Commercial finance 4,350 7,401 Consumer credit products 469 499 Other consumer finance — 373 Consumer finance 469 872 Tax services — 1,743 Total National Lending 4,819 10,016 Commercial real estate and operating — 50 Total Community Banking — 50 Total 4,819 10,066 Total nonperforming loans and leases 41,907 34,018 Other assets Nonperforming operating leases 1,995 4,045 Foreclosed and repossessed assets: Commercial finance 1,204 9,957 Total 1,204 9,957 Total other assets 3,199 14,002 Total nonperforming assets $ 45,106 $ 48,020 Total as a percentage of total assets 0.63 % 0.79 % 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. 55 Table of Contents 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. Classified Assets . Federal regulations provide for the classification of loans, leases, and other assets such as debt and equity securities considered by our primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The 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. 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. Allowance for Credit Losses . Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which changes the impairment model for most financial assets, including trade and other receivables, debt securities held-to-maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a CECL methodology to determine the ACL for loans and debt securities held-to-maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for impairment, generally this means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for impairment. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition. Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures impairment on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, impairment is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate. 56 Table of Contents 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. The following table presents the Company's allowance for loan and lease losses as a percentage of its total loans and leases. As of the Period Ended June 30, 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 % Consumer finance 3.80 % 4.70 % 4.39 % 4.31 % 1.64 % 1.75 % Tax services 58.99 % 12.90 % 1.53 % 0.06 % 0.06 % 59.67 % Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % National Lending 2.44 % 2.57 % 1.89 % 1.86 % 1.20 % 1.68 % Community Banking 4.36 % 4.03 % 4.01 % 3.37 % 4.59 % 2.55 % Total loans and leases 2.61 % 2.71 % 2.10 % 2.08 % 1.70 % 1.88 % (1) Represents the Company's allowance coverage ratio upon the adoption of the Accounting Standards Update 2016-13 using September 30, 2020 loan and lease and allowance balances plus the CECL allowance adjustment. Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company'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 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. In addition, the Company’s determination of the ACL is subject to review by the OCC, which can require the establishment of additional general or specific allowances. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations, and include those for the ACL, goodwill and identifiable intangible assets. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended September 30, 2020. There were no significant changes to these critical accounting policies and estimates during the first nine months of fiscal 2021. 57 Table of Contents LIQUIDITY AND CAPITAL RESOURCES The Company’s primary sources of funds are deposits, derived principally through its payments divisions, borrowings, principal and interest payments on loans and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposits and loan commitments, to maintain liquidity, and to meet operating expenses. At June 30, 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. Pursuant to the Basel III Capital Rules, the Company and the Bank, respectively, are subject to regulatory capital adequacy requirements promulgated by the Federal Reserve and the OCC. The Basel III Capital Rules became effective for us and the Bank on January 1, 2015, subject to phase-in periods for certain of their components and other provisions. Failure by the Company or Bank to meet minimum capital requirements could result in certain mandatory and discretionary actions by our regulators that could have a material adverse effect on our consolidated financial statements. Under the capital requirements and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). At June 30, 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; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analysis. Minimum to be Minimum to be Adequately Well Capitalized Capitalized Under Under Prompt Prompt Corrective Corrective Action At June 30, 2021 Company Bank Action Provisions Provisions Tier 1 leverage capital ratio 6.85 % 7.83 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 12.76 % 14.94 % 4.50 % 6.50 % Tier 1 capital ratio 13.11 % 14.96 % 6.00 % 8.00 % Total capital ratio 16.18 % 16.22 % 8.00 % 10.00 % 58 Table of Contents The following table provides certain non-GAAP financial measures used to compute certain of the ratios included in the table above, as well as a reconciliation of such non-GAAP financial measures to the most directly comparable financial measure in accordance with GAAP: (Dollars in Thousands) Standardized Approach (1) June 30, 2021 Total stockholders' equity $ 876,633 Adjustments: LESS: Goodwill, net of associated deferred tax liabilities 301,179 LESS: Certain other intangible assets 35,100 LESS: Net deferred tax assets from operating loss and tax credit carry-forwards 17,753 LESS: Net unrealized gains on available-for-sale securities 14,750 LESS: Noncontrolling interest 1,490 ADD: Adoption of Accounting Standards Update 2016-13 13,913 Common Equity Tier 1 Capital (1) 520,274 Long-term borrowings and other instruments qualifying as Tier 1 13,661 Tier 1 minority interest not included in common equity tier 1 capital 932 Total Tier 1 Capital 534,867 Allowance for loan and lease losses 51,317 Subordinated debentures (net of issuance costs) 73,936 Total Capital $ 660,119 (1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes are being fully phased in through the end of 2021. The following table provides a reconciliation of tangible common equity and tangible common equity excluding AOCI, each of which is used in calculating tangible book value data, to Total Stockholders' Equity. Each of tangible common equity and tangible common equity excluding AOCI is a non-GAAP financial measure that is commonly used within the banking industry. (Dollars in Thousands) June 30, 2021 Total Stockholders' Equity $ 876,633 LESS: Goodwill 309,505 LESS: Intangible assets 34,898 Tangible common equity 532,230 LESS: AOCI 15,222 Tangible common equity excluding AOCI $ 517,008 Since January 1, 2016, the Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively. Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. CONTRACTUAL OBLIGATIONS See "Item 7. 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 June 30, 2021. 59 Table of Contents OFF-BALANCE SHEET FINANCING ARRANGEMENTS 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.