What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-09 compared with 2022-02-08 · 169 added, 96 removed, 263 unchanged (50% of the section changed)

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

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

the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine;

successfully completing our announced rebranding and our ability to achieve brand recognition equal to or greater than we currently enjoy;

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

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

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2022, compared to September 30, 2021, and the consolidated results of operations for the three and six months ended March 31, 2022 and 2021.

This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the year ended September 30, 2021 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, 2021.

EXECUTIVE SUMMARY

Business Development Highlights for the 2022 Fiscal First Quarter

• Entered into an agreement with Beige Key LLC to sell the Meta names and trademarks for $60 million, of which $50 million was recognized as noninterest income in the first fiscal quarter.

The Company plans to use a portion of the proceeds to implement its new corporate name and brand, which is expected to be completed by the end of 2022, and estimates its rebranding expenses will range between $15.0 million to $20.0 million.

The remainder of the proceeds will be used for general corporate purposes including tax-efficient capital allocation.

• Sold all remaining $192.5 million of community banking loans, reducing this portfolio to zero and generating a favorable pre-tax impact of approximat ely $3.9 million after netting the recovery of provision expense from the portfolio's $12.3 million allowance and the loss on sale of loans of $8.4 million .

• Extended the agreement with Emerald Financial Services, LLC, a wholly-owned, indirect subsidiary of H&R Block, through June 30, 2025.

The agreement adds valuable new financial product offerings and capabilities for customers, including Spruce Accounts, a spending account with an attached debit card, and a connected savings account.

These innovative products, designed to help a consumer better manage their financial resources, are powered by MetaBank.

• Originated $21.2 million in aggregate principal of renewable energy loan financing for the first quarter of fiscal 2022, resulting in $5.7 million in total net investment tax credits.

• Repurchased 1,711,501 shares, at an average price of $58.97, in the first fiscal quarter.

The company purchased an additional 230,000 shares through February 3, 2022 at an average share price of $59.85 and has 5,374,375 shares available for repurchase under the common stock share repurchase program announced during the fourth quarter of fiscal year 2021.

Financial Highlights for the 2022 Fiscal First Quarter

Total revenue for the first quarter was $158.2 million, an increase of $46.7 million, or 42%, compared to the same quarter in fiscal 2021, primarily driven by the gain on sale of Meta names and trademarks.

Net interest income for the first quarter was $71.6 million, an increase of $5.6 million compared to $66.0 million in the first quarter last year.

Net interest margin ("NIM") was essentially unchanged, declining to 4.59% for the first quarter from 4.65% during the same period of last year.

The increase in higher-yielding loans and leases was offset by an increase in lower-yielding investment securities balances and the continued low interest rate environment.

Total gross loans and leases at December 31, 2021 increased $243.0 million, to $3.68 billion, or 7%, compared to December 31, 2020 and increased $74.8 million, or 2%, when compared to September 30, 2021.

The increase was driven by growth across our loan portfolios, partially offset by the sale of all remaining community banking loans during the quarter.

For the 2022 tax season, the Bank originated $1.83 billion in refund advance loans compared to $1.79 billion during the 2021 tax season.

The Company expects taxpayer advance volumes to return to more normalized levels in the 2023 tax season, absent further stimulus or additional changes to tax credit payments.

During the second quarter of fiscal 2022, total tax services product revenue was $68.3 million, an increase of 2% compared to the second quarter of fiscal 2021.

Both total tax services product fee income and total tax services product expense were approximately flat compared to the prior year period.

Net interest income on tax services loans increased $1.5 million during the second quarter of fiscal 2022 compared to the second quarter last year.

Total tax services product income, net of losses and direct product expenses, increased 6% to $34.4 million from $32.6 million, when comparing the first six months of fiscal 2022 to the same period of the prior fiscal year.

Business Development Highlights for the 2022 Fiscal Second Quarter

• On March 29, 2022, the Company announced it is changing its name to Pathward Financial, Inc.™, and its bank subsidiary, MetaBank®, N.A., will be changing its name to Pathward™, N.A.

Certain changes will be made immediately, with a full transition to Pathward expected by the end of this calendar year, including the launch of a new brand identity and website.

The Company will continue to serve its customers under existing brand names during the transition.

The Company recognized $2.8 million of pre-tax expenses related to rebranding efforts during the second quarter of fiscal 2022.

The Company continues to estimate total rebranding expenses will range between $15 million and $20 million.

• On April 27, 2022, Meta published its second annual ESG report.

In addition to detailing the Company's community impact program and its diversity, equity, and inclusion initiatives, it contains enhanced quantitative reporting, which will be used to measure progress.

Financial Highlights for the 2022 Fiscal Second Quarter

• Total revenue for the second quarter was $193.6 million, an increase of $6.2 million, or 3%, compared to the same quarter in fiscal 2021, primarily driven by an increase in interest income, partially offset by a reduction in noninterest income.

• Net interest income for the second quarter was $83.8 million, an increase of $10.0 million compared to $73.9 million in the second quarter last year.

• Net interest margin ("NIM") increased to 4.80% for the second quarter from 3.07% during the same period of last year.

The prior year was impacted by excess cash associated with the Company's participation in the U.S.

Treasury Department's Economic Impact Program ("EIP").

• Total gross loans and leases at March 31, 2022 increased $78.1 million, to $3.73 billion, or 2%, compared to March 31, 2021 and increased $43.5 million, or 1%, when compared to December 31, 2021.

The increase compared to the prior year quarter was driven by growth across our loan portfolios, partially offset by the sale of all remaining community banking loans during the fiscal 2022 first quarter.

• The Company originated $1.3 million in aggregate principal of renewable energy loan financing for the second quarter of fiscal 2022, resulting in $0.3 million in total net investment tax credits.

• The Company repurchased 736,198 shares, at an average price of $57.01, in the second fiscal quarter and has 4,868,177 shares available for repurchase under the common stock share repurchase program announced during the fourth quarter of fiscal year 2021.

• On March 24, 2022, the Company's Board of Directors approved the redemption at par of $75.0 million of the 5.75% fixed to floating rate note due August 15, 2026.

The redemption date is set for May 15, 2022.

FINANCIAL CONDITION

At December 31, 2021, the Company’s total assets increased by $919.0 million to $7.61 billion compared to September 30, 2021, primarily due to an increase of $916.1 million in cash and cash equivalents.

Total cash and cash equivalents was $1.23 billion at December 31, 2021, increasing from $314.0 million at September 30, 2021, primarily resulting from an increase in noninterest-bearing deposits of $808.2 million and the net cash proceeds from the sale of our remaining legacy community bank loans of $147.1 million.

At March 31, 2022, the Company’s total assets increased by $196.6 million to $6.89 billion compared to September 30, 2021, primarily due to an increase of $178.6 million in securities available for sale.

Total cash and cash equivalents was $237.7 million at March 31, 2022, decreasing from $314.0 million at September 30, 2021, primarily resulting from a decrease in excess cash associated with the Company's participation in the EIP in the prior year.

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

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

The total investment portfolio decreased $87.8 million, or 5%, to $1.83 billion at December 31, 2021, compared to $1.92 billion at September 30, 2021, as maturities and principal pay downs exceeded purchases.

At March 31, 2022, the Company did not have any federal funds sold.

The total investment portfolio increased $169.2 million, or 9%, to $2.09 billion at March 31, 2022, compared to $1.92 billion at September 30, 2021, as purchases exceeded maturities and principal pay downs.

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

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

All MBS held by the Company at March 31, 2022 were issued by a U.S.

Government agency or instrumentality.

During the three months ended December 31, 2021, the Company purchased $20.9 million of investment securities.

Loans held for sale at December 31, 2021 totaled $36.2 million, decreasing from $56.2 million at September 30, 2021.

This decrease was primarily driven by a reduction in SBA/USDA loans held for sale during the three months ended December 31, 2021.

The Company’s total loans and leases increased $74.8 million, or 2%, to $3.68 billion at December 31, 2021, from $3.61 billion at September 30, 2021.

The increase was primarily driven by growth in the commercial finance and warehouse finance portfolios, partially offset by the sales of the remaining community banking loans.

During the six months ended March 31, 2022, the Company purchased $470.1 million of investment securities.

Loans held for sale at March 31, 2022 totaled $31.4 million, decreasing from $56.2 million at September 30, 2021.

This decrease was primarily driven by the balance of SBA/USDA loans held for sale as of March 31, 2022 as compared to September 30, 2021.

The Company’s total loans and leases increased $118.3 million, or 3%, to $3.73 billion at March 31, 2022, from $3.61 billion at September 30, 2021.

The increase was primarily driven by growth in the commercial finance, tax services, warehouse finance, and consumer finance portfolios, partially offset by the sales of all remaining community banking loans.

See Note 5 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

Tax services loans increased $89.9 million, commercial finance loans increased $72.3 million, consumer finance increased $64.9 million, and warehouse finance increased $46.9 million at December 31, 2021 compared to September 30, 2021.

Commercial finance loans increased $189.3 million, tax services loans increased $75.6 million, consumer finance increased $30.9 million, and warehouse finance increased $21.6 million at March 31, 2022 compared to September 30, 2021.

The increase in commercial finance loan balances was largely driven by the term lending category.

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

Community banking loans decreased $199.1 million, or 100%, at December 31, 2021 compared to September 30, 2021, attributable to the sales of the remaining community banking loans.

The seasonality of the Company's tax services business led to the increase in tax services loans at March 31, 2022 compared to September 30, 2021.

Community banking loans decreased $199.1 million, or 100%, at March 31, 2022 compared to September 30, 2021, as all remaining community banking loans were sold during the fiscal 2022 first quarter.

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

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

The Company’s investment in these stocks remained unchanged from $28.4 million at September 30, 2021 to December 31, 2021.

Total end-of-period deposits increased 18% to $6.53 billion at December 31, 2021, compared to September 30, 2021, primarily driven by an increase in noninterest-bearing deposits of $1.25 billion partially offset by a decrease in interest-bearing checking of $254.3 million.

The increase in noninterest-bearing deposits was driven by government stimulus-related dollars loaded on various partner cards.

As of December 31, 2021, EIP program card balances outstanding totaled $1.38 billion, of which only $28.1 million was on Meta's balance sheet with the remainder being held by other banks.

The Company's total borrowings decreased $0.6 million, or 1%, from $92.8 million at September 30, 2021 to $92.3 million at December 31, 2021.

At December 31, 2021, the Company’s stockholders’ equity totaled $826.2 million, a decrease of $45.7 million, from $871.9 million at September 30, 2021.

The decrease was primarily attributable to a reduction in retained earnings related to activity from the Company's share repurchase programs.

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

The Company’s investment in these stocks increased $0.4 million, or 1% to $28.8 million at March 31, 2022 from $28.4 million at September 30, 2021, resulting from the purchase of FHLB membership stock.

Total end-of-period deposits increased 6% to $5.83 billion at March 31, 2022, compared to September 30, 2021, primarily driven by an increase in noninterest-bearing deposits of $592.1 million partially offset by a decrease in interest-bearing checking of $254.4 million.

As of March 31, 2022, the Company managed $1.85 billion of customer deposits at other banks in its capacity as custodian.

The Company's total borrowings decreased $1.4 million, or 2%, from $92.8 million at September 30, 2021 to $91.4 million at March 31, 2022.

At March 31, 2022, the Company’s stockholders’ equity totaled $763.4 million, a decrease of $108.5 million, from $871.9 million at September 30, 2021.

The decrease was primarily attributable to a reduction in accumulated other comprehensive income ("AOCI") and a reduction in retained earnings related to activity from the Company's share repurchase programs.

The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2022, 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) December 31, 2021 September 30, 2021

(Dollars in thousands) March 31, 2022 September 30, 2021

Noninterest-bearing deposits $ 6,084,769 $ 5,492,646

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RESULTS OF OPERATIONS

The Company recorded net income of $61.3 million, or $2.00 per diluted share, for the three months ended December 31, 2021, compared to net income of $28.0 million, or $0.84 per diluted share, for the three months ended December 31, 2020.

Total revenue for the fiscal 2022 first quarter was $158.2 million, compared to $111.5 million for the same quarter in fiscal 2021.

The increase in net income was primarily driven by the gain on sale of the Meta names and trademarks.

The Company recorded net income of $49.3 million, or $1.66 per diluted share, for the three months ended March 31, 2022, compared to net income of $59.1 million, or $1.84 per diluted share, for the three months ended March 31, 2021.

Total revenue for the fiscal 2022 second quarter was $193.6 million, compared to $187.3 million for the same quarter in fiscal 2021.

The decrease in net income was primarily driven by an increase in noninterest expense, an increase in income tax expense, and a decrease in noninterest income, partially offset by an increase in net interest income.

The Company recorded net income of $110.6 million, or $3.66 per diluted share, for the six months ended March 31, 2022, compared to $87.1 million, or $2.65 per diluted share, compared to the same period in the prior year.

Total revenue for the six months ended March 31, 2022 was $351.8 million, compared to $298.8 million for the same period of the prior year.

The increase in net income was primarily driven by an increase in net interest income and noninterest income, partially offset by increases in both income tax expense and noninterest expense.

Net Interest Income

Net interest income for the fiscal 2022 first quarter was $71.6 million, an increase of 9%, from the same quarter in fiscal 2021.

The increase was mainly attributable to an improved earning asset and liability mix, along with increased loan balances.

The first quarter average outstanding balance of loans and leases increased $211.3 million compared to the same quarter of the prior year, primarily due to increases in our core loan and lease portfolios, partially offset by the sale of the remaining community bank portfolio.

The Company’s average interest-earning assets for the first quarter increased by $547.2 million to $6.18 billion compared with the same quarter in fiscal 2021, primarily due to growth in total investments and total loans and leases.

Fiscal 2022 first quarter NIM decreased to 4.59% from 4.65% in the first quarter of last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets decreased by 13 basis points to 4.69% compared to the prior year quarter, primarily driven by an increase in lower-yielding investment securities balances of $561.4 million.

The TEY on the securities portfolio was 1.58% compared to 1.79% for the comparable period last year.

The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2022 first quarter, compared to 0.15% during the prior year quarter, primarily driven by a reduction in wholesale deposit balances along with an increase in noninterest-bearing deposits.

The Company's overall cost of deposits was 0.01% in the fiscal 2022 first quarter, compared to 0.06% in the same quarter last year.

Net interest income for the fiscal 2022 second quarter was $83.8 million, an increase of 13%, from the same quarter in fiscal 2021.

The increase was mainly attributable to an improved earning asset mix, together with increased loan balances.

For the six months ended March 31, 2022, net interest income was $155.4 million, an increase of 11%, from $139.8 million compared to the same period in the prior year.

The second quarter average outstanding balance of loans and leases increased $124.1 million compared to the same quarter of the prior year, primarily due to increases in core loan and lease portfolios, partially offset by the sale of the remaining community bank portfolio.

The Company’s average interest-earning assets for the second quarter decreased by $2.69 billion to $7.08 billion compared with the same quarter in fiscal 2021, primarily due to a reduction in cash balances as a result of high cash levels during the prior year period related to the Company's participation in government stimulus programs.

The decrease in interest-earnings assets was partially offset by growth in total investments and total loans and leases.

Fiscal 2022 second quarter NIM increased to 4.80% from 3.07% in the second quarter of last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased by 174 basis points to 4.89% compared to the prior year quarter, primarily driven by a decrease in lower-yielding cash balances.

Growth in loan and lease and investment securities balances also contributed to the year-over-year TEY increase.

The yield on the loan and lease portfolio was 7.22% compared to 6.74% for the comparable period last year and the TEY on the securities portfolio was 1.83% compared to 1.78% for that same period.

For the six months ended March 31, 2022, NIM was 4.70%, an increase of 105 basis points from 3.65% compared to the same period in the prior year.

NIM, tax-equivalent for the six months ended March 31, 2022 increased to 4.72% from 3.67% in the same period of the prior year.

The Company's cost of funds for all deposits and borrowings averaged 0.08% during the fiscal 2022 second quarter, the same as the prior year quarter.

The Company's overall cost of deposits was 0.01% in the fiscal 2022 second quarter, compared to 0.02% in the same quarter last year.

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

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

Three Months Ended December 31,

Three Months Ended March 31,

(Dollars in thousands) Average

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4.81 % 3.08 %

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

(2) At December 31, 2020, $162.5 million of the total balance were interest-bearing deposits where interest expense was paid by a third party and not by the Company.

(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2022 and 2021 was 21%.

(2) At March 31, 2021, $275.7 million of the total balance were interest-bearing deposits where interest expense was paid by a third party and not by the Company.

On October 1, 2021, the Company reclassified the balances related to that program to noninterest bearing checking due to the product moving to noninterest bearing.

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

Six Months Ended March 31,

(Dollars in thousands) Average

Balance Interest

Interest-earning assets:

Cash and fed funds sold $ 701,548 $ 1,280 0.37 % $ 2,485,330 $ 1,932 0.16 %

Mortgage-backed securities 1,094,729 9,310 1.71 % 490,358 4,730 1.93 %

Tax exempt investment securities 198,518 1,723 2.20 % 315,714 2,348 1.89 %

Asset-backed securities 379,212 2,295 1.21 % 357,514 2,490 1.40 %

Other investment securities 281,232 2,885 2.06 % 226,032 2,186 1.94 %

Total investments 1,953,691 16,213 1.71 % 1,389,618 11,754 1.79 %

Commercial finance 2,813,348 97,894 6.98 % 2,444,396 91,928 7.54 %

Consumer finance 323,724 14,006 8.68 % 247,534 11,716 9.49 %

Tax services 310,805 13,073 8.44 % 366,157 6,553 3.59 %

Warehouse finance 455,271 14,077 6.20 % 299,510 9,778 6.55 %

Community banking 69,707 1,525 4.39 % 447,096 10,153 4.55 %

Total loans and leases 3,972,855 140,575 7.10 % 3,804,693 130,128 6.86 %

Total interest-earning assets 6,628,094 $ 158,068 4.80 % 7,679,641 $ 143,814 3.77 %

Noninterest-earning assets 827,143 866,262

Total assets $ 7,455,237 $ 8,545,903

Interest-bearing liabilities:

Interest-bearing checking (2)

$ 339 $ 1 0.32 % $ 218,743 $ — — %

Savings 81,822 11 0.03 % 64,741 6 0.02 %

Money markets 88,921 105 0.24 % 54,466 81 0.30 %

Time deposits 8,651 25 0.58 % 15,130 91 1.20 %

Wholesale deposits 119,855 164 0.28 % 218,925 1,063 1.97 %

Total interest-bearing deposits 299,588 306 0.21 % 572,005 1,241 0.44 %

Overnight fed funds purchased 47,490 63 0.26 % 6 — 0.25 %

Subordinated debentures 74,017 1,987 5.38 % 73,841 2,294 6.23 %

Other borrowings 18,259 299 3.28 % 23,132 430 3.73 %

Total borrowings 139,766 2,349 3.37 % 96,979 2,724 5.63 %

Total interest-bearing liabilities 439,354 2,655 1.21 % 668,984 3,965 1.19 %

Noninterest-bearing deposits 5,996,650 — — % 6,901,255 — — %

Total deposits and interest-bearing liabilities 6,436,004 $ 2,655 0.08 % 7,570,239 $ 3,965 0.11 %

Other noninterest-bearing liabilities 198,278 164,307

Total liabilities 6,634,282 7,734,546

Shareholders' equity 820,955 811,357

Total liabilities and shareholders' equity $ 7,455,237 $ 8,545,903

Net interest income and net interest rate spread including noninterest-bearing deposits $ 155,413 4.72 % $ 139,849 3.67 %

Net interest margin 4.70 % 3.65 %

Tax-equivalent effect 0.02 % 0.02 %

Net interest margin, tax-equivalent (3)

4.72 % 3.67 %

(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2022 and 2021 was 21%.

(2) At March 31, 2021, $218.5 million of the total balance were interest-bearing deposits where interest expense was paid by a third party and not by the Company.

On October 1, 2021, the Company reclassified the balances related to that program to noninterest bearing checking due to the product moving to noninterest bearing.

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

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

Provision for Credit Losses

The Company recognized provision for credit losses of $0.2 million for the three months ended December 31, 2021, as compared to $6.1 million for the comparable period in the prior fiscal year.

Net charge-offs were $1.1 million for the quarter ended December 31, 2021, compared to $2.8 million for the quarter ended December 31, 2020.

The majority of the net charge-offs for the quarter were attributable to the commercial finance portfolio .

The Company recognized provision for credit losses of $32.3 million and $32.5 million for the three and six months ended March 31, 2022, as compared to $30.3 million and $36.4 million for the comparable period in the prior fiscal year.

Net charge-offs were $11.2 million for the quarter ended March 31, 2022, compared to $3.7 million for the quarter ended March 31, 2021.

Net charge-offs attributable to the commercial finance portfolio for the quarter were $10.7 million and net charge-offs attributable to the consumer finance portfolio were $0.7 million .

Noninterest Income

Fiscal 2022 first quarter noninterest income increased to $86.6 million from $45.5 million for the same period of the prior year.

The significant increase was driven by the $50 million gain on sale of the Meta names and trademarks and to a lesser extent an increase in payments fee income and rental income.

The Company also recognized a loss on sale of other during the quarter of $3.5 million , a $6.3 million decrease from the prior year period, primarily consisting of a $8.4 million loss attributable to the sale of the remaining community bank loans and a $3.4 million gain on sale of SBA loans.

Also partially offsetting the increase in noninterest income during the quarter was a decrease in other income, which includes a net unrealized loss of $3.3 million on a prior investment in MoneyLion Inc.

This loss partially offsets a net unrealized gain o f $4.1 million recognized by the Company during the fourth quarter of fiscal 2021 following the completion of MoneyLion's de-SPAC process and listing on the New York Stock Exchange on September 22, 2021.

Fiscal 2022 second quarter noninterest income decreased to $109.8 million from $113.5 million for the same period of the prior year.

The decrease was driven by a reduction in payments fee income of $3.6 million and a net loss on our MoneyLion investment of $1.3 million, partially offset by an increase in rental income of $1.5 million .

During the second quarter of fiscal year 2022, the Company sold the entirety of its equity investment in MoneyLion, recognizing a net loss of $1.3 million during the current period.

Following the completion of MoneyLion's de-SPAC process and listing on the New York Stock Exchange on September 22, 2021, the Company recognized a cumulative loss of approximately $0.4 million on the investment dating back to the fourth quarter of fiscal year 2021.

The Company continues to be a strategic BaaS provider to MoneyLion.

Noninterest income for the six months ended March 31, 2022 increased to $196.4 million from $158.9 million for the same period of the prior year, primarily driven by the gain on sale of Meta names and trademarks during the first quarter of fiscal 2022.

Noninterest Expense

Noninterest expense increased 14% to $82.4 million for the fiscal 2022 first quarter, from $72.6 million for the same quarter last year.

The increase in expense was primarily driven by an increase in compensation expense, other expense, occupancy and equipment expense, and card processing expense.

When comparing the fiscal 2022 first quarter to the fourth quarter of 2021, non-interest expense decreased by $11.2 million.

Noninterest expense increased 7% to $103.2 million for the fiscal 2022 second quarter, from $96.0 million for the same quarter last year.

The increase in expense was primarily driven by an increase in consulting expense, software expense, operating lease equipment depreciation and compensation expense.

Compensation expense for the second quarter of fiscal 2022 includes $0.9 million of separation-related expenses.

When comparing the fiscal 2022 second quarter to the first quarter of 2022, non-interest expense increased by $20.7 million.

Of the $2.8 million in rebranding expenses the Company incurred during the quarter, $2.0 million is recognized in other expense and $0.8 million is related to legal and consulting expense.

Noninterest expense for the six months ended March 31, 2022 increased to $185.6 million from $168.5 million for the same period of the prior year.

Income Tax Expense

The Company recorded an income tax expense of $14.3 million, representing an effective tax rate of 18.9%, for the fiscal 2022 first quarter, compared to $3.5 million, representing an effective tax rate of 10.8%, for the first quarter last year.

The increase in income tax expense was primarily due to increased earnings.

The Company originated $21.2 million in solar leases during the fiscal 2022 first quarter, compared to $38.5 million during last year's first quarter.

The Company recorded an income tax expense of $8.0 million, representing an effective tax rate of 13.8%, for the fiscal 2022 second quarter, compared to $1.1 million, representing an effective tax rate of 1.9%, for the second quarter last year.

The current quarter increase in income tax expense was primarily due to a reduction in renewable energy investment tax credit lending volume compared to the prior year period.

The Company originated $1.3 million in solar leases during the fiscal 2022 second quarter, compared to $20.0 million in last year's second quarter.

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

For the six months ended March 31, 2022, the Company originated $22.5 million in solar leases, compared to $58.5 million for the comparable prior year period.

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.

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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.

Insurance premium finance loans, consumer finance and tax services loans are generally not placed on nonaccrual 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.

1 unchanged sentence

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.

The Company believes that the level of allowance for credit losses at December 31, 2021 was appropriate and reflected probable losses related to these loans and leases;

Nonaccrual loans and troubled debt restructurings are generally considered impaired.

The Company believes that the level of allowance for credit losses at March 31, 2022 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.

1 unchanged sentence

The table below sets forth the amounts and categories of the Company's nonperforming assets.

(Dollars in thousands) December 31, 2021 September 30, 2021

(Dollars in thousands) March 31, 2022 September 30, 2021

Nonperforming Loans and Leases

17 unchanged sentences

(1) Certain tax services loans do not bear interest.

At December 31, 2021, nonperforming loans and leases totaled $43.2 million, representing 1.2% of total loans and leases, compared to $55.9 million, or 1.52% of total loans and leases at September 30, 2021.

At March 31, 2022, nonperforming loans and leases totaled $35.8 million, representing 0.95% of total loans and leases, compared to $55.9 million, or 1.52% of total loans and leases at September 30, 2021.

Classified Assets .

6 unchanged sentences

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

On the basis of management’s review of its loans, leases, and other assets, at December 31, 2021, the Company had classified loans and leases of $176.3 million as substandard, $19.9 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at March 31, 2022, the Company had classified loans and leases of $167.9 million as substandard, $4.0 million as doubtful and none as loss.

At September 30, 2021, the Company classified loans and leases of $264.2 million as substandard, $12.1 million as doubtful and none as loss.

11 unchanged sentences

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

The Company's ACL totaled $67.6 million at December 31, 2021, a decrease compared to $68.3 million at September 30, 2021.

The reduction in the ACL at December 31, 2021 was primarily due to a $12.3 million decrease attributable to the community banking portfolio, as all loans have now been sold.

This decrease was partially offset by increases within commercial finance of $8.7 million, tax services of $1.6 million, and consumer finance of $1.2 million.

The Company's ACL totaled $88.6 million at March 31, 2022, an increase compared to $68.3 million at September 30, 2021.

The increase in the ACL at March 31, 2022 was primarily due to the seasonal tax services loan portfolio, which increased $29.2 million during the fiscal 2022 second quarter .

The following table presents the Company's ACL as a percentage of its total loans and leases.

As of the Period Ended

December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020

March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021

Commercial finance 1.66 % 2.04 % 1.77 % 1.73 % 1.77 %

4 unchanged sentences

Total loans and leases 2.38 % 1.84 % 1.89 % 2.61 % 2.71 %

Total loans and leases excluding tax services 1.59 % 1.84 % 1.90 % 1.94 % 2.04 %

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

The Company's ACL as a percentage of total loans and leases decreased to 1.84% at December 31, 2021 from 1.89% at September 30, 2021.

The decrease in the total loans and leases coverage ratio reflected the release of the community banking portfolio allowance.

The coverage ratio for the commercial finance portfolio increased compared to September 30, 2021 quarter due to specific reserves on two individually evaluated loan relationships.

The consumer finance coverage decreased primarily due to an improved overall macroeconomic outlook.

The Company's ACL as a percentage of total loans and leases increased to 2.38% at March 31, 2022 from 1.84% at December 31, 2021 and from 1.89% at September 30, 2021.

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

The coverage ratio for the commercial finance portfolio decreased compared to December 31, 2021 due to reduction of specific reserves on two individually evaluated loan relationships.

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

Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at December 31, 2021 reflected an appropriate allowance against expected credit losses from the lending portfolio.

Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at March 31, 2022 reflected an appropriate allowance against expected 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 credit losses will not be required in future periods.

6 unchanged sentences

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, 2021.

There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2022.

There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2022.

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

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

At December 31, 2021, the Company had unfunded loan and lease commitments of $1.36 billion.

At March 31, 2022, the Company had unfunded loan and lease commitments of $1.33 billion.

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

3 unchanged sentences

The Capital Rules require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined).

At December 31, 2021, both the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

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

At March 31, 2022, both the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

The Company and the Bank took the AOCI opt-out election;

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

1 unchanged sentence

Management reviews these measures along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and corresponding reconciliation to total equity.

At December 31, 2021 Company Bank Minimum

The decrease in Tier 1 leverage capital ratio for the period is the result of higher quarterly average assets related to its seasonal tax business.

Regulatory Capital is not affected by the unrealized loss on AOCI.

The securities portfolio is made up of nearly all amortizing securities that should provide consistent cash flow and is not expected to require sales to realize the losses to fund future loan growth.

At March 31, 2022 Company Bank Minimum

to be Adequately Capitalized Under Prompt Corrective Action Provisions Minimum to be Well Capitalized Under Prompt Corrective Action Provisions

5 unchanged sentences

(Dollars in thousands) Standardized Approach (1)

December 31, 2021

March 31, 2022

Total stockholders' equity $ 763,406

14 unchanged sentences

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.

those changes were 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) At December 31, 2021

(Dollars in thousands) At March 31, 2022

Total stockholders' equity $ 763,406

2 unchanged sentences

Tangible common equity 424,611

AOCI (69,374)

Tangible common equity excluding AOCI $ 493,985

5 unchanged sentences

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, 2021 for a summary of our contractual obligations as of September 30, 2021.

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

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2021 through March 31, 2022.

OFF-BALANCE SHEET FINANCING ARRANGEMENTS

1 unchanged sentence

Financial Statements and Supplementary Data" in the Company's Annual Report on Form 10-K for its fiscal year ended September 30, 2021 for discussion of the Company’s off-balance sheet financing arrangements as of September 30, 2021.

There were no material changes from September 30, 2021 through December 31, 2021.

There were no material changes from September 30, 2021 through March 31, 2022.

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