CASH 2017 Annual Report

80 Net Interest Income. Net interest income for fiscal 2017 increased by $15.9 million, or 21%, to $93.2 million from $77.3 million for the prior year. Net interest margin decreased to 3.05% in fiscal 2017 as compared to 3.19% in 2016. The increase in net interest income was primarily due to an increase in interest income of $26.7 million to $108.1 million from $81.4 million for the prior year. The increase in interest income was primarily due to an increase in the Company’s average earning assets of $796.8 million, or 28%, to $3.62 billion during fiscal 2017 from $2.82 billion during 2016. This was due to a significant increase in volume in commercial real estate loans and specialty finance loans, which includes premium finance loans and the December 2016 purchased student loan portfolio. Growth in investment security balances and yields attained on those investment securities also contributed to the increase in net interest income. The increase in interest income was partially offset by an increase in interest expense of $10.8 million, to $14.9 million from $4.1 million for the prior year. Overall, when using a taxable equivalent yield (“TEY”), the Company’s interest earning asset yield increased by 12 basis points due to improved yields achieved within the securities portfolio and a shift in the earning asset mix due to increased volume in loans. The yield on non-MBS investment securities increased by 19 basis points on a TEY basis. The yield on government- related MBS increased six basis points while longer-term interest rates generally decreased throughout the fiscal year. Average TEY on the securities portfolio increased by 20 basis points in fiscal 2017 compared to fiscal 2016. The increased volume in loans receivable reflects the growth in specialty finance loans, which includes premium finance loans and the purchased student loan portfolio, as well as growth in the typical retail banking sectors. The Company’s average balance of total deposits and interest-bearing liabilities increased $829.7 million, or 31%, to $3.49 billion during fiscal 2017 from $2.66 billion during 2016. Aportion of this increase was due to the utilization of advantageous pricing and strategic maturities on certain wholesale deposits, an increase in average non-interest bearing deposits and the Company's completion of the public offering of its subordinated notes inAugust 2016, which are dueAugust 15, 2026. This increase was partially offset by a decrease of $79.7 million in the average balance of overnight fed funds purchased. The average outstanding balance of non-interest-bearing deposits increased from $2.02 billion in fiscal 2016 to $2.29 billion in fiscal 2017. The Company’s cost of total deposits and interest-bearing liabilities increased 28 basis points to 0.43% during fiscal 2017 from 0.15% during 2016. This increase was primarily due to a combination of the issuance of the Company's subordinated debt in the fourth quarter of fiscal 2016, the addition of wholesale deposits, an increase in the overnight borrowing rates and higher average overall funding balances due to the Company's utilization of more of its capital during non-tax season with higher investment balances and funding. Notwithstanding this increase, the Company believes that its growing, lower-cost deposit base gives it a distinct and significant competitive advantage, and even more so if interest rates continue to rise, because the Company anticipates that its cost of funds will likely remain relatively low, increasing less than at many other banks. Provision for Loan Losses. In fiscal 2017, the Company recorded $10.6 million in provision for loan losses, compared to $4.6 million in 2016. The increase in provision expense was primarily driven by higher seasonal volumes in tax season loans. The growth in the Banking segment loans, as well as the downgrade of a significant agriculture relationship during the second quarter of fiscal 2017 also contributed to an increased provision in fiscal 2017. Non Interest Income. Non-interest income increased by $71.4 million, or 71%, to $172.2 million for fiscal 2017 from $100.8 million for 2016. This increase was primarily due to an increase in tax advance fee income of $30.3 million, a $24.2 million increase in card fee income, and a $15.6 million increase in refund transfer product fee income. The increases in tax advance fee income and refund transfer product fee income were related to the acquisitions of EPS and SCS during the fiscal 2017 first quarter. Card fee income primarily grew due to a wind-down of one of our non-strategic partners and also due to continued strong growth in our core business relationships. Non-Interest Expense. Non-interest expense increased by $65.0 million, or 48%, to $199.7 million for fiscal 2017 from $134.6 million for fiscal 2016. This increase in non-interest expense from 2016 to 2017 was largely driven by an increase in compensation expense of $27.1 million, an increase in amortization expense of $7.5 million, and an increase in other expense of $5.5 million. The increases in these categories were principally due to the EPS Financial and SCS acquisitions, which occurred in the first quarter of fiscal 2017. The increase in compensation was also driven by non-cash stock-related compensation expense associated with three executive officers signing long-term employment agreements in the first and second quarters of fiscal 2017. Also leading to the increase in non-interest expense when comparing 2017 to 2016 was a $10.2 million intangible impairment charge related to the non-renewal of the H&R Block relationship during the fiscal 2017 fourth quarter. In addition, and to a lesser extent, non- interest expense also increased year over year due to increases in legal and consulting expense, tax advance product expense, refund transfer product expense, occupancy and equipment expense, and card processing expense. Income Tax Expense. Income tax expense for fiscal 2017 was $10.2 million, resulting in an effective tax rate of 18.6%, compared to a tax expense of $5.6 million and an effective tax rate of 14.4%, in fiscal 2016. The increase in the Company’s recorded income tax expense for 2017 was primarily attributable to an increase in earnings; however, the increase was partially offset by the effects of adopting ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” for recording excess tax benefits as a reduction to income tax expense.