CASH 2018 Annual Report

89 Comparison of Operating Results for the Years Ended September 30, 2018, and September 30, 2017 General The Company recorded net income of $51.6 million, or $1.67 per diluted share, for the year ended September 30, 2018, compared to $44.9 million, or $1.61 per diluted share, for the year ended September 30, 2017, an increase of $6.7 million. The increase in net income was primarily caused by an increase in net interest income of $37.3 million, a reduction of $10.2 million in intangible impairment expense, and increases in rental income of $7.3 million, tax advance fee income of $3.8 million, deposit fees of $3.7 million, and refund advance fee income of $2.9 million . The net income increase was offset in part by an increase in compensation and benefits expense of $20.3 million, loss on sale of securities of $7.7 million, legal and consulting expense of $6.7 million, other expense of $4.9 million, and occupancy and equipment expense of $3.3 million. Net Interest Income Net interest income for fiscal 2018 increased by $37.3 million, or 40%, to $130.5 million from $93.2 million for the prior year. Net interest margin increased to 3.41% in fiscal 2018 as compared to 3.05% in fiscal 2017. The increase in net interest income was primarily due to an increase in interest income of $50.4 million to $158.5 million from $108.1 million for the prior year. The increase in interest income was primarily due to an increase in the Company’s average earning assets of $539.2 million, or 15%, to $4.16 billion during fiscal 2018 from $3.62 billion during 2017. This increase was primarily driven by a combination of strong loan growth in the Company's existing portfolios and the acquired loans and leases from the Crestmark Acquisition. Interest income on investment securities was also a contributing factor. The increase in interest income was partially offset by an increase in interest expense of $13.1 million, to $28.0 million for fiscal 2018 from $14.9 million for the prior year. Overall, when using a taxable equivalent yield (“TEY”), the Company’s interest earning asset yield increased by 62 basis points primarily due to a continued shift in the earning asset mix driven by growth in existing loan balances along with acquired Crestmark loans and leases. The Company experienced growth in its commercial finance, consumer finance, tax services and community bank portfolios. The yield on the national lending portfolio increased by 192 basis points while the yield on the community banking loan portfolio increased by 17 basis points. The yield on the investment securities portfolio decreased by eight basis points on a tax equivalent basis. Had corporate tax rates not changed due to the Tax Act, the reported securities portfolio TEY would have increased by 25 basis points. The Company’s average balance of total deposits and interest-bearing liabilities increased $523.0 million, or 15%, to $4.02 billion during fiscal 2018 from $3.49 billion during 2017. The increase was driven by a combination of both wholesale deposits and short-term borrowings in order to fund the Company's loan growth and acquired loan and lease portfolios. The average outstanding balance of non-interest-bearing deposits increased from $2.29 billion in fiscal 2017 to $2.46 billion in fiscal 2018. The Company’s cost of total deposits and interest-bearing liabilities increased 27 basis points to 0.70% during fiscal 2018 from 0.43% during 2017. This increase was primarily due to a rise in short- term interest rates as well as higher average overall funding balances when compared to the prior year. 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 and Lease Losses In fiscal 2018, the Company recorded $29.4 million in provision for loan and lease losses, compared to $10.6 million in fiscal 2017. The increase in provision expense was driven by a combination of higher seasonal tax services loans held on the balance sheet, growth in the existing community bank and commercial insurance premium finance loan portfolios, provision related to the Company's student loan portfolio and provision related to the acquired Crestmark loans and leases. Non Interest Income Non-interest income increased by $12.4 million, or 7%, to $184.5 million for fiscal 2018 from $172.2 million for fiscal 2017. This increase was primarily due to rental income, tax advance fee income, deposit fee income and refund transfer fee income, which increased $7.3 million, $3.8 million , $3.7 million and $2.9 million, respectively. Rental income is a new line item for fiscal year 2018 related to operating leases that are attributable to the Crestmark division. The increase in tax advance fee income was primarily due to retaining all tax advance loans originated during the 2018 tax season. The increase in deposit fee income was primarily related to the growth and transition of certain product fee income from card fees to deposit fees, attributable to the Company's Payments division. Partially offsetting the above mentioned increases was a loss on sale of securities of $7.7 million due in large part to the Company's balance sheet restructuring related to the Crestmark Acquisition.