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Item 2. Management’s Discussion and Analysis

2022-08-09 compared with 2022-05-09 · 140 added, 112 removed, 320 unchanged (44% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

META FINANCIAL GROUP, INC.®

PATHWARD FINANCIAL, 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.

PATHWARD FINANCIAL, INC.

TM ("Pathward" or the "Company" or "us") and its wholly-owned subsidiary, Pathward TM , National Association ("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 Pathward, National Association, 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.

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the risks of dealing with or utilizing third parties, including, in connection with the Company’s tax 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;

the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products;

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

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

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

continued maintenance by Pathward, National Association of its status as a well-capitalized institution;

changes in consumer spending and saving habits;

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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.

Unless the context otherwise requires, references herein to the Company include Pathward and the Bank, and all direct or indirect subsidiaries of Pathward 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 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.

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

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.

Business Development Highlights for the 2022 Fiscal Third Quarter

• On July 13, 2022, the Company announced it changed its name to Pathward Financial, Inc.™, and its bank subsidiary, MetaBank®, N.A., changed its name to Pathward™, N.A.

("Pathward" or the "Bank").

Certain changes were 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 recognized $3.4 million of pre-tax expenses related to rebranding efforts during the third quarter of fiscal 2022.

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

• As part of the Company's priority to work with partners that use a broader suite of the capabilities and multi-product solutions that it provides, the Company will not be renewing its agreements with Liberty Tax and Jackson Hewitt.

This change is expected to boost operational efficiencies over time.

Taxpayer advance volumes are expected to be reduced by approximately 30% next year.

No significant impact is anticipated to refund transfer volumes.

During the quarter, the Company recognized $1.2 million of pre-tax one-time partner termination related expenses.

Financial Highlights for the 2022 Fiscal Third Quarter

• Total revenue for the third quarter was $126.1 million, a decrease of $4.8 million, or 4%, compared to the same quarter in fiscal 2021, primarily driven by a decrease in noninterest income, partially offset by an increase in interest income.

• Net interest income for the third quarter was $72.2 million, an increase of $3.7 million compared to $68.5 million in the third quarter last year.

• Net interest margin ("NIM") increased to 4.76% for the third quarter from 3.75% during the same period of last year.

The prior year period 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.

• Total gross loans and leases at June 30, 2022 increased $188.3 million, to $3.68 billion, or 5%, compared to June 30, 2021 and decreased $42.6 million, or 1%, when compared to March 31, 2022.

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

The primary driver for the decrease on a linked quarter basis was the seasonal decline in tax services loans.

• The Company originated $4.4 million in a ggregate principal of renewable energy loan financing for the third quarter of fiscal 2022, resulting in $1.0 million in total net investment tax credits.

During the third quarter of fiscal 2021.

the Company originated $13.5 million in aggregate principle of renewable energy loan financing resulting in $3.4 million in total net investment tax credits.

• On May 15, 2022, the Company retired the outstanding $75.0 million subordinated debt, which was due August 15, 2026.

As a result of the retirement, the company will save more than $4 million of interest expense per year.

• The Company resumed share repurchases on July 1, 2022, and through August 2, 2022, the Company repurchased 305,700 shares of common stock at an average share price of $40.74.

There are 4,562,477 shares available for repurchase under the common stock share repurchase program announced during the fourth quarter of fiscal year 2021.

Tax Season Recap

During the third quarter of fiscal 2022, total tax services product revenue was $10.3 million, compared to $13.6 million in the prior year quarter.

Total tax services product income, net of losses and direct product expenses, increase d 9% to $43.5 million from $40.0 m illion, when comparing the first nine months of fiscal 2022 to the same period of the prior fiscal year.

While taxpayer advances came in below the Company's expectations, overall refund transfer revenues grew 9% year-over-year.

Looking ahead to next year, the Company continues to expect strong refund transfer volumes and greater efficiency in its tax line of business as a result of the non-renewal of the Company's two aforementioned tax partner relationships.

FINANCIAL CONDITION

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.

At June 30, 2022, the Company’s total assets increased by $37.5 million to $6.73 billion compared to September 30, 2021, primarily due to an increase of $91.6 million in securities available for sale and an increase of $79.0 million in total loans and leases, partially offset by a decrease in cash and cash equivalents of $156.8 million.

Total cash and cash equivalents was $157.3 million at June 30, 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 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.

At June 30, 2022, the Company did not have any federal funds sold.

The total investment portfolio increased $78.8 million, or 4%, to $2.00 billion at June 30, 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 March 31, 2022 were issued by a U.S.

All MBS held by the Company at June 30, 2022 were issued by a U.S.

Government agency or instrumentality.

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.

During the nine months ended June 30, 2022, the Company purchased $689.5 million of investment securities.

Loans held for sale at June 30, 2022 totaled $67.6 million, increasing from $56.2 million at September 30, 2021.

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

The Company’s total loans and leases increased $75.7 million, or 2%, to $3.68 billion at June 30, 2022, from $3.61 billion at September 30, 2021.

The increase was primarily driven by growth in the commercial finance, 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.

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 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.

Commercial finance loans increased $222.4 million, tax services loans increased $31.2 million, warehouse finance increased $14.8 million, and consumer finance increased $6.4 million at June 30, 2022 compared to September 30, 2021.

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

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

Community banking loans decreased $199.1 million, or 100%, at June 30, 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 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 Company’s investment in these stocks increased $0.4 million, or 1% to $28.8 million at June 30, 2022 from $28.4 million at September 30, 2021, resulting from the purchase of FHLB membership stock.

Total end-of-period deposits increased 4% to $5.71 billion at June 30, 2022, compared to September 30, 2021, primarily driven by an increase in noninterest-bearing deposits of $502.1 million partially offset by a decrease in interest-bearing checking of $254.4 million and a decrease in wholesale deposits of $72.7 million.

As of June 30, 2022, the Company placed $1.22 billion of customer deposits at other banks in its capacity as custodian, as compared to $1.85 billion at March 31, 2022 and $1.27 billion at June 30, 2021.

In placing those excess deposits at other banks, the Company can earn record keeping service fee income that has a contractual rate index that is consistent with the federal funds effective rate ("EFFR"), which is recognized as part of payments card and deposit fee income.

The Company's total borrowings decreased $76.2 million, or 82%, from $92.8 million at September 30, 2021 to $16.6 million at June 30, 2022.

During the third quarter of fiscal 2022, the Company retired the outstanding $75.0 million subordinated debt, which was due August 15, 2026.

At June 30, 2022, the Company’s stockholders’ equity totaled $724.8 million, a decrease of $147.1 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.

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

(Dollars in thousands) June 30, 2022 September 30, 2021

Noninterest-bearing deposits $ 5,952,197 $ 5,492,646

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Noninterest-bearing checking, net $ 5,520,296 $ 5,018,233

Custodial Deposit Transference

The Bank utilizes a custodial deposit transference structure for certain prepaid and deposit programs whereby the Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a “Program Bank”).

Accounts opened at Program Banks are established in the Bank’s name as custodian, for the benefit of the Bank’s cardholders.

The Bank remains the issuer of all cards and holder of all accounts under the applicable cardholder agreements and has sole custodial control and transaction authority over the accounts opened at Program Banks.

The Bank maintains the records of each cardholder’s deposits maintained at Program Banks.

Program Banks undergo robust due diligence prior to becoming a Program Bank and are also subject to continuous monitoring.

In return for record keeping services at Program Banks, the Bank receives a servicing fee (“Servicing Fee”).

In prior periods, the Servicing Fee was not significant.

As of July 31, 2022, the Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.

RESULTS OF OPERATIONS

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.

The Company recorded net income of $22.4 million, or $0.76 per diluted share, for the three months ended June 30, 2022, compared to net income of $38.7 million, or $1.21 per diluted share, for the three months ended June 30, 2021.

Total revenue for the fiscal 2022 third quarter was $126.1 million, compared to $130.9 million for the same quarter in fiscal 2021.

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

The Company recorded net income of $133.0 million, or $4.44 per diluted share, for the nine months ended June 30, 2022, compared to $125.8 million, or $3.87 per diluted share, for the same period in the prior year.

Total revenue for the nine months ended June 30, 2022 was $477.9 million, compared to $429.7 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 noninterest expense and income tax expense.

Net Interest Income

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.

Net interest income for the fiscal 2022 third quarter was $72.2 million, an increase of 5%, from the same quarter in fiscal 2021.

The increase was mainly attributable to investment interest income, an improved earning asset mix, and increased loan balances.

For the nine months ended June 30, 2022, net interest income was $227.6 million, an increase of 9%, from $208.3 million compared to the same period in the prior year.

The third quarter average outstanding balance of loans and leases increased $128.9 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 third quarter decreased by $1.23 billion to $6.08 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.

Fiscal 2022 third quarter NIM increased to 4.76% from 3.75% in the third quarter of last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased by 104 basis points to 4.89% compared to the prior year quarter, primarily driven by a decrease in lower-yielding cash balances.

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The yield on the loan and lease portfolio was 6.69% compared to 6.90% for the comparable period last year and the TEY on the securities portfolio was 2.14% compared to 1.62% 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 commercial finance portfolio volumes and yields are impacted by market conditions, competitive landscape, product demand, spread between short- and long-term interest rates, and structures, which include floor interest rates and varied loan maturity terms.

At June 30, 2022, $93.7 million of the portfolio had structures where the interest rate charged was at a floor level as compared to $370.0 million as of March 31, 2022 and $268.6 million as of June 30, 2021.

Once the interest rate on a loan goes above the floor level, yields on those loans will begin to increase.

For the nine months ended June 30, 2022, NIM was 4.72%, an increase of 104 basis points from 3.68% compared to the same period in the prior year.

NIM, tax-equivalent for the nine months ended June 30, 2022 increased to 4.73% from 3.70% in the same period of the prior year.

The Company's cost of funds for all deposits and borrowings averaged 0.12% during the fiscal 2022 third quarter, as compared to 0.09% during the prior year quarter.

The increase in cost of funds was primarily related to accelerated interest expense of $0.9 million during the fiscal 2022 third quarter associated with the retirement of the subordinated debt.

The Company's overall cost of deposits was 0.01% in the fiscal 2022 third quarter, the same as the prior year quarter.

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

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

Three Months Ended March 31,

Three Months Ended June 30,

(Dollars in thousands) Average

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4.77 % 3.77 %

(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.

(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2022 and 2021 was 21%.

(2) At June 30, 2021, $336.2 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,

Nine Months Ended June 30,

(Dollars in thousands) Average

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4.73 % 3.70 %

(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.

(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2022 and 2021 was 21%.

(2) At June 30, 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.

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Provision for Credit Losses

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 .

The Company recognized a reversal of provision for credit losses of $1.3 million for the quarter ended June 30, 2022, compared to a provision for credit losses of $4.6 million for the same quarter last year.

The Company recognized a provision for credit losses of $31.2 million for the nine months ended June 30, 2022, and $41.0 million for the comparable period in the prior fiscal year.

Net charge-offs were $12.2 million for the quarter ended June 30, 2022, compared to $12.3 million for the quarter ended June 30, 2021.

Net charge-offs attributable to the tax services, consumer finance, and commercial finance portfolios for the quarter were $8.0 million, $2.3 million, and $1.9 million, respectively.

Noninterest Income

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.

Fiscal 2022 third quarter noninterest income decreased to $54.0 million from $62.5 million for the same period of the prior year.

The decrease was driven by a reduction in gain on sale of loan and leases by $4.8 million , a decrease in payments fee income of $4.5 million, and a decrease in tax services product fee income of $2.7 million.

These decreases were partially offset by an increase in rental income of $2.1 million and an increase in other income of $1.3 million.

The prior year’s quarter benefited from greater card fee income associated with stimulus activity as well as a delayed tax season.

Furthermore, the company recorded fewer gains on loan sales in the current fiscal year as the SBA and USDA sale volumes have been impacted by supply chain constraints within the solar construction market .

Noninterest income for the nine months ended June 30, 2022 increased to $250.4 million from $221.4 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 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.

Noninterest expense increased 19% to $96.7 million for the fiscal 2022 third quarter, from $81.5 million for the same quarter last year.

The increase in expense was primarily driven by an increase in compensation expense, legal and consulting expense, card processing, occupancy and equipment expense, and operating lease equipment depreciation.

These increases were partially offset by a decrease in other expense.

Compensation expense for the third quarter of fiscal 2022 inclu des $3.1 million o f separation-related expenses stemming from expense reduction initiative s.

In addition, the Company recognized $3.4 million in rebranding expenses and $1.2 million in expenses related to the non-renewal of the aforementioned tax partner agreements.

Certain card processing expenses are derived from the terms of contractual agreements with some BaaS partners.

The amount of expense paid under those agreements is based on an agreed upon rate index which varies depending on the deposit levels, floor rates, market conditions, and other performance conditions.

Generally this rate index averages between 50% to 85% of the EFFR.

Approximately 42% of the deposit portfolio may be subject to these higher card processing expenses.

For the fiscal quarter ended June 30, 2022, card processing expenses related to these structured agreements were $2.2 million, as compared to $0.2 million for the fiscal quarter ended March 31, 2022 and $0.1 million for the fiscal quarter ended June 30, 2021.

Noninterest expense for the nine months ended June 30, 2022 increased to $282.2 million from $250.1 million for the same period of the prior year.

Income Tax Expense

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 Company recorded an income tax expense of $7.0 million, representing an effective tax rate of 22.6%, for the fiscal 2022 third quarter, compared to $4.9 million, representing an effective tax rate of 11.0%, for the third 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.

The Company originated $4.4 million in solar leases during the fiscal 2022 third quarter, compared to $13.5 million in last year's third 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.

For the nine months ended June 30, 2022, the Company originated $26.9 million in solar leases, compared to $72.0 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 the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

Asset Quality

8 unchanged sentences

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;

The Company believes that the level of allowance for credit losses at June 30, 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) March 31, 2022 September 30, 2021

(Dollars in thousands) June 30, 2022 September 30, 2021

Nonperforming Loans and Leases

17 unchanged sentences

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

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.

At June 30, 2022, nonperforming loans and leases totaled $26.6 million, representing 0.71% of total loans and leases, compared to $55.9 million, or 1.16% 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 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.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2022, the Company had classified loans and leases of $172.7 million as substandard, $4.9 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 $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 Company's ACL totaled $75.2 million at June 30, 2022, an increase compared to $68.3 million at September 30, 2021.

The increase in the ACL at June 30, 2022 was driven primarily by the seasonal allowance build in the tax services loan portfolio.

This increase was partially offset by the disposition of the community bank portfolio along with decreases in the commercial and consumer finance loan portfolios.

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

As of the Period Ended

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

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

Commercial finance 1.56 % 1.66 % 2.04 % 1.77 % 1.73 %

6 unchanged sentences

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 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's ACL as a percentage of total loans and leases decreased to 2.04% at June 30, 2022 from 2.38% at March 31, 2022 and increased from 1.89% at September 30, 2021.

The decrease in the total loans and leases coverage ratio was primarily driven by a decrease in the seasonal tax services loan portfolio, along with a decrease in the coverage ratio for both the commercial and consumer finance portfolios.

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

Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at March 31, 2022 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 June 30, 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 six months of fiscal 2022.

There were no significant changes to these critical accounting policies and estimates during the first nine 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 March 31, 2022, the Company had unfunded loan and lease commitments of $1.33 billion.

At June 30, 2022, the Company had unfunded loan and lease commitments of $1.28 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 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.

At June 30, 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;

5 unchanged sentences

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

At June 30, 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)

March 31, 2022

June 30, 2022

Total stockholders' equity $ 724,774

17 unchanged sentences

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 March 31, 2022

(Dollars in thousands) At June 30, 2022

Total stockholders' equity $ 724,774

10 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 March 31, 2022.

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

There were no material changes from September 30, 2021 through June 30, 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