Jack Henry & Associates (JKHY) 10-Q2022 Q2 Quarterly report

Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). Forward-looking statements may appear throughout this report, including without limitation, in Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “seek,” “anticipate,” “estimate,” “future,” “intend,” “plan,” “strategy,” “predict,” “likely,” “should,” “will,” “would,” “could,” “can,” “may,” and similar expressions. Forward-looking statements are based only on management’s current beliefs, expectations and assumptions regarding the future of the Company, future plans and strategies, projections, anticipated events and trends, the economy and other future conditions. Because forward-looking statements relate to the future, they are subject to inherent risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q, those discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2021, in particular, those included in Item 1A, “Risk Factors” of such report, and those discussed in other documents we file with the Securities and Exchange Commission (“SEC”). Any forward-looking statement made in this report speaks only as of the date of this report, and the Company expressly disclaims any obligation to publicly update or revise any forward-looking statement, whether because of new information, future events or otherwise.

Jack Henry & Associates, Inc. and subsidiaries ("Jack Henry," "JKHY," or the "Company") is a leading provider of technology solutions and payment processing services primarily for the financial services industry. The Company has developed and acquired a number of banking and credit union software systems. The Company's revenues are predominately earned by marketing those systems to financial institutions nationwide, by providing the conversion and implementation services for financial institutions to utilize JKHY systems, and by providing payment processing and other related services. JKHY also provides continuing support and services to customers using on-premise or JKHY private and public cloud-based systems.

The condensed consolidated financial statements include the accounts of JKHY and its subsidiaries, all of which are wholly owned. All intercompany accounts and transactions have been eliminated.

Comprehensive income for the three and six months ended December 31, 2021, and 2020, equals the Company’s net income.

The Company adopted Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 326, Financial Instruments - Credit Losses, ("CECL") with an adoption date of July 1, 2020. As a result, the Company changed its accounting policy for allowance for credit losses. The accounting policy pursuant to CECL is disclosed below. The adoption of CECL resulted in an immaterial cumulative effect adjustment recorded in retained earnings as of July 1, 2020.

The Company monitors trade and other receivable balances and contract assets and estimates the allowance for lifetime expected credit losses. Estimates of expected credit losses are based on historical collection experience and other factors, including those related to current market conditions and events.

Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets.  Accumulated depreciation at December 31, 2021, totaled $453,439 and at June 30, 2021, totaled $435,169.

Intangible assets consist of goodwill, customer relationships, computer software, and trade names acquired in business acquisitions in addition to internally developed computer software. The amounts are amortized, with the exception of those intangible assets with an indefinite life (such as goodwill), over an estimated economic benefit period, generally three to twenty years.  Accumulated amortization of intangible assets totaled $983,626 and $921,050 at December 31, 2021, and June 30, 2021, respectively.

At December 31, 2021, and June 30, 2021, the Company had an investment in the preferred stock of Automated Bookkeeping, Inc. ("Autobooks") of $13,250, which represented a non-controlling share of the voting equity as of each date. The total investment was recorded at cost and is included within other non-current assets on the Company's balance sheet. There have been no events or changes in circumstances that would indicate an impairment and no price changes resulting from observing a similar or identical investment. An impairment and/or an observable price change would be an adjustment to recorded cost. Fair value will not be estimated unless there are identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment.

The Board of Directors has authorized the Company to repurchase shares of its common stock. Under this authorization, the Company may finance its share repurchases with available cash reserves or borrowings on its existing line-of-credit. The share repurchase program does not include specific price targets or timetables and may be suspended at any time. At December 31, 2021, there were 31,043 shares in treasury stock and the Company had the remaining authority to repurchase up to 3,948 additional shares. The total cost of treasury shares at December 31, 2021, was $1,807,119. During the first six months of fiscal 2022, the Company repurchased 1,250 shares. At June 30, 2021, there were 29,793 shares in treasury stock and the Company had authority to repurchase up to 5,198 additional shares. The total cost of treasury shares at June 30, 2021, was $1,613,202. During the first six months of fiscal 2021, the Company repurchased 675 shares.

Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement basis and tax basis of assets and liabilities. A valuation allowance would be established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized.

The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based upon the technical merits of the position. The tax benefit recognized in the financial statements from such a position is measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Also, interest and penalties expense are recognized on the full amount of unrecognized benefits for uncertain tax positions. The Company's policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.

The accompanying condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q of the Securities and Exchange Commission ("SEC") and in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") applicable to interim condensed consolidated financial statements and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes, which are included in its Annual Report on Form 10-K (“Form 10-K”) for the fiscal year ended June 30, 2021. The accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements included in its Form 10-K for the fiscal year ended June 30, 2021, with updates to certain policies included in this Note 1.

In the opinion of the management of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments necessary (consisting of normal recurring adjustments) to state fairly in all material respects the financial position of the Company as of December 31, 2021, the results of its operations for

the three and six months ended December 31, 2021, and 2020, changes in stockholders' equity for the three and six months ended December 31, 2021, and 2020, and its cash flows for the six months ended December 31, 2021, and 2020. The condensed consolidated balance sheet at June 30, 2021, was derived from audited annual financial statements but does not contain all of the footnote disclosures from the annual financial statements.

The results of operations for the three and six months ended December 31, 2021, are not necessarily indicative of the results to be expected for the entire fiscal year.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The extent to which the COVID-19 pandemic will directly or indirectly impact our business and financial results, including revenue, expenses, cost of revenues, research and development, and selling, general and administrative expenses, will depend on future developments that are highly uncertain, such as new information that may emerge concerning COVID-19 and the actions taken to contain or treat COVID-19 (including the efficacy of vaccines against new variants and the development and effectiveness of treatments), as well as the economic impact on local, regional, national and international customers and markets. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of December 31, 2021, and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for credit losses, as well as the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s condensed consolidated financial statements as of and for the fiscal quarter ended December 31, 2021, the Company’s future assessment of the magnitude and duration of COVID-19, as well as other factors, could result in material impacts to the Company’s condensed consolidated financial statements in future reporting periods.

The Company generates revenue from data processing, transaction processing, software licensing and related services, professional services, and hardware sales.

The tables below present the Company's revenue disaggregated by type of revenue. Refer to Note 10, Reportable Segment Information, for disaggregated revenue by type and reportable segment. The majority of the Company’s

revenue is earned domestically, with revenue from customers outside the United States comprising less than 1% of total revenue.

The following table provides information about contract assets and contract liabilities from contracts with customers.

Contract assets primarily result from revenue being recognized when or as control of a solution or service is transferred to the customer, except where invoicing is contingent upon the completion of other performance obligations or payment terms differ from the provisioning of services. The current portion of contract assets is reported within prepaid expenses and other in the condensed consolidated balance sheet, and the non-current portion is included in other non-current assets. Contract liabilities (deferred revenue) primarily relate to consideration received from customers in advance of delivery of the related goods and services to the customer. Contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.

The Company analyzes contract language to identify if a significant financing component does exist and adjusts the transaction price for any material effects of the time value of money if the timing of payments provides either party to the contract with a significant benefit of financing the transaction.

During the three months ended December 31, 2021 and 2020, the Company recognized revenue of $89,257 and $79,421, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods. For the six months ended December 31, 2021 and 2020, the Company recognized revenue of $157,781 and $156,666, respectively, that was included in the corresponding deferred revenue balance at the beginning of the periods.

Amounts recognized that relate to performance obligations satisfied (or partially satisfied) in prior periods were immaterial for each period presented. These adjustments are primarily the result of transaction price re-allocations due to changes in estimates of variable consideration.

As of December 31, 2021, estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period totaled $5,154,912. The Company expects to recognize approximately 26% over the next 12 months, 20% in 13-24 months, and the balance thereafter.

The Company incurs incremental costs to obtain a contract as well as costs to fulfill contracts with customers that are expected to be recovered. These costs consist primarily of sales commissions, which are incurred only if a contract is obtained, and customer conversion or implementation-related costs. Capitalized costs are amortized based on the transfer of goods or services to which the asset relates, in line with the percentage of revenue recognized for each performance obligation to which the costs are allocated.

Capitalized costs totaled $347,867 and $314,807 at December 31, 2021 and June 30, 2021, respectively.

For the three months ended December 31, 2021 and 2020, amortization of deferred contract costs was $32,154 and $28,794, respectively. During the six months ended December 31, 2021, and 2020, amortization of deferred contract costs totaled $67,998 and $62,620, respectively.

For cash equivalents, certificates of deposit, amounts receivable or payable, and short-term borrowings, fair values approximate carrying value, based on the short-term nature of the assets and liabilities.

The Company's estimates of the fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets, and requires that observable inputs be used in the valuations when available. The three levels of the hierarchy are as follows:

Fair value of financial assets included in current assets is as follows:

Lease payments included $5,464 related to options to extend lease terms that are reasonably certain of being exercised. At December 31, 2021, the Company had $60 in legally binding lease payments for one lease that was signed but not yet commenced. The lease commencement date is March 1, 2022, and the lease term is 36 months.

Provision for income taxes increased for the three months ended December 31, 2021, compared to the three months ended December 31, 2020, with an effective tax rate of 23.6% of income before income taxes, compared to 23.1% in the prior-year fiscal quarter. The increase in the effective tax rate comparing the three-month periods ended December 31 was primarily due to the impact of increases in operating income relative to the impact of other items affecting the effective tax rate in the current period.

For the six months ended December 31, 2021, provision for income taxes increased compared to the six months ended December 31, 2020, with an effective tax rate of 23.5% of income before income taxes, compared to 22.7% for the same period last fiscal year. The increase in the effective tax rate comparing the fiscal year-to-date periods ended December 31 was primarily due to the relative impact of the increase in operating income in the current fiscal year-to-date period and a larger excess tax benefit received from share-based compensation in the prior fiscal year-to-date period.

The Company paid income taxes, net of refunds, of $40,687 and $24,794 in the six months ended December 31, 2021, and 2020, respectively.

At December 31, 2021, the Company had $9,594 of gross unrecognized tax benefits before interest and penalties, $8,891 of which, if recognized, would affect our effective tax rate. The Company had accrued interest and penalties of $1,425 and $1,896 related to uncertain tax positions at December 31, 2021, and 2020, respectively.

The U.S. federal and state income tax returns for fiscal 2018 and all subsequent years remain subject to examination as of December 31, 2021, under statute of limitations rules. The Company believes it is reasonably possible that the liability for unrecognized tax benefits could reduce by $3,500 to $4,500 within twelve months of December 31, 2021, due to lapsing statutes of limitations and examination closures.

Our operating income for the three months ended December 31, 2021, and 2020, included $6,956 and $5,127 of stock-based compensation costs, respectively. Our operating income for the six months ended December 31, 2021, and 2020, included $13,027 and $9,752 of stock-based compensation costs, respectively.

On November 10, 2015, the Company adopted the 2015 Equity Incentive Plan ("2015 EIP") for its employees and non-employee directors. The plan allows for grants of stock options, stock appreciation rights, restricted stock shares or units, and performance shares or units. The maximum number of shares authorized for issuance under the plan is 3,000. For stock options, terms and vesting periods of the options are determined by the Compensation Committee of the Board of Directors when granted. The option period must expire not more than ten years from the option grant date. The options granted under this plan are exercisable beginning three years after the grant date at an exercise price equal to 100% of the fair market value of the stock at the grant date. The options terminate upon surrender of the option, ninety days after termination of employment, upon the expiration of one year following notification of a deceased optionee, or ten years after grant.

A summary of option plan activity under this plan is as follows:

At December 31, 2021, there was no compensation cost yet to be recognized related to outstanding options. For options currently exercisable, the weighted average remaining contractual term (remaining period of exercisability) as of December 31, 2021, was 4.50 years.

The Company issues unit awards under the 2015 EIP. The following table summarizes non-vested performance and restricted stock unit awards as of December 31, 2021:

The 130 unit awards granted in fiscal 2022 had service requirements and performance targets, with 82 having only service requirements. The unit awards with only service requirements were valued at the weighted average fair value of the non-vested units based on the fair market value of the Company’s equity shares on the grant date, less the present value of expected future dividends to be declared during the vesting period, consistent with the methodology for calculating compensation expense on such awards.

The remaining 48 unit awards granted in fiscal 2022 have performance targets along with service requirements. 19 of these performance and service requirement unit awards were valued at grant by estimating 100% payout at release and using the fair market value of the Company equity shares on the grant date, less the present value of expected future dividends to be declared during the vesting period. The payout at release of approximately half of these unit awards will be determined based on the Company's compound annual growth rate (CAGR) for revenue (excluding adjustments) for the three-year vesting period compared against goal thresholds as defined in the award agreement. The performance payout at release of the other half of these unit awards will be determined based on the expansion of the Company's non-GAAP operating margin over the three-year vesting period compared against goal thresholds as defined in the award agreement. The other 29 performance and service requirement unit awards were valued at grant using a Monte Carlo pricing model as of the measurement date customized to the specific provisions of the Company’s plan design. Per the Company's award vesting and settlement provisions, the awards that utilized a Monte Carlo pricing model were valued at grant on the basis of Total Shareholder Return (TSR) in comparison to the custom peer group comprised of participants approved by the Compensation Committee of the Company's Board of Directors for fiscal year 2022. The Monte Carlo inputs used in the model to estimate fair value at the measurement date and resulting values for these performance unit awards are as follows.

At December 31, 2021, there was $29,290 of compensation expense, excluding forfeitures, that has yet to be recognized related to non-vested restricted stock unit awards, which will be recognized over a weighted average period of 1.39 years.

The following table reflects the reconciliation between basic and diluted earnings per share.

Per share information is based on the weighted average number of common shares outstanding for the three and six months ended December 31, 2021, and 2020. Stock options and restricted stock units have been included in the calculation of earnings per share to the extent they are dilutive. There were 28 and 23 anti-dilutive stock options or restricted stock units excluded for the three and six months ended December 31, 2021, respectively, and 21 were excluded for both the three and six months ended December 31, 2020.

The Company is a provider of integrated computer systems that perform data processing (available for on-premise installations or JKHY cloud-based services) for banks and credit unions.

The Company’s operations are classified into 4 reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card transaction processing services, online and mobile bill pay solutions, Automated Clearing House ("ACH") origination and remote deposit capture processing, and risk management products and services. The Complementary segment provides additional software and services that can be integrated with our core solutions, and many can be used independently. The Corporate and Other segment includes hardware revenue and costs, as well as operating costs not directly attributable to the other three segments.

The Company evaluates the performance of its segments and allocates resources to them based on various factors, including performance against trend, budget, and forecast. Only revenue and costs of revenue are considered in the evaluation for each segment.

This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included in this Form 10-Q for the fiscal quarter ended December 31, 2021.

Jack Henry & Associates, Inc. ("JKHY") is a leading provider of technology solutions and payment processing services primarily for financial services organizations. Its solutions are marketed and supported through three primary brands. Jack Henry Banking® provides innovative solutions to community and regional banks. Symitar® provides industry-leading solutions to credit unions of all sizes. ProfitStars® offers highly specialized solutions to financial institutions of every asset size, as well as diverse corporate entities outside of the financial services industry, to mitigate and control risks, optimize revenue and growth opportunities, and contain costs. JKHY's integrated solutions are generally available for on-premise installation and delivery in our JKHY private or the public cloud.

Since its outbreak in early calendar 2020, COVID-19 has rapidly spread and continues to represent a public health concern. The health, safety, and well-being of our employees and customers is of paramount importance to us. In March 2020, we established an internal task force composed of executive officers and other members of management to frequently assess updates to the COVID-19 situation and recommend Company actions. We offered remote working as a recommended option to employees whose job duties allowed them to work off-site, and we suspended all non-essential business travel. This company-wide recommendation initially extended until July 1, 2021, at which point we began transition to a return to our facilities and normalization of travel activities. However, we reimplemented our company-wide recommendation for remote work on August 3, 2021, based on new virus variants and increased infection rates. This remote work recommendation remains in effect as of February 4, 2022. For those employees who are at our facilities, we have introduced enhanced sanitation procedures and require face masks for both vaccinated and unvaccinated employees. We have not required employees who return to our facilities to receive vaccinations, but we have provided information on vaccine providers, as well as hosted on-site COVID-19 vaccination clinics at several of our facilities for our employees and their families. As of February 4, 2022, the majority of our employees were continuing to work remotely either full time or in a hybrid capacity. Once the remote work recommendation is lifted, individual decisions on returning to the office will be manager-coordinated and based on conversations with specific teams and departments. A large number of our employees have requested to remain fully remote or participate in a hybrid approach where they would split their time between remote and in-person working. While our business travel has increased in recent months, we continue to encourage a cautious approach to business travel activities.

We work closely with our customers who are scheduled for on-site visits to ensure their needs are met while taking necessary safety precautions when our employees are required to be at a customer site. Delays of customer system installations due to COVID-19 have been limited, and we have developed processes to handle remote installations when available. We expect these processes to provide flexibility and value both during and after the COVID-19 pandemic. Even though a substantial portion of our workforce has worked remotely during the outbreak and business travel has been limited, we have not yet experienced significant disruption to our operations. We

believe our technological capabilities are well positioned to allow our employees to work remotely without materially impacting our business.

Despite the changes and restrictions caused by COVID-19, the overall financial and operational impact on our business has been limited and our liquidity, balance sheet, and business trends remain strong. We experienced positive operating cash flows during fiscal 2021 and the first six months of fiscal 2022, and we do not expect that to change in the near term. However, we are unable to accurately predict the future impact of COVID-19 due to a number of uncertainties, including further government actions; the duration, severity and recurrence of the outbreak, including the onset of variants of the virus; the effectiveness of vaccines against new variants; the development and effectiveness of treatments; the effect on the economy generally; the potential impact to our customers, vendors, and employees; and how the potential impact might affect future customer services, processing and installation-related revenue, and processes and efficiencies within the Company directly or indirectly impacting financial results. We will continue to monitor COVID-19 and its possible impact on the Company and to take steps necessary to protect the health and safety of our employees and customers.

For the second quarter of fiscal 2022, total revenue increased 17%, or $71,535, compared to the same quarter in fiscal 2021. Total revenue less deconversion fee and acquisition and divestiture revenues of $26,903 and $96, respectively, for the current fiscal quarter and less deconversion fee revenues of $2,155 for the prior fiscal quarter, results in an increase of 11%, quarter over quarter. This increase was primarily driven by growth in public and private cloud revenue, card, transaction and digital, and remittance processing revenues, and increased implementation fee revenue.

Operating expenses increased 12% for the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021, primarily due to increased direct costs, higher personnel costs, and increased operating licenses and fees. The increase in direct costs was primarily related to our card payment processing platform and Jack Henry digital and were in alignment with the increases in revenue described above. Higher personnel costs were primarily related to salary increases in the trailing twelve months.

Operating income increased 34% for the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021. Operating income less deconversion fee operating income of $24,356 and adjusted for acquisition and divestiture operating loss of $21 for the current fiscal quarter, and less deconversion fee operating income of $1,919 and a gain on disposals of $2,040 for the prior fiscal quarter, results in a 13% increase for the second quarter of fiscal 2022, quarter over quarter. This increase in operating income was primarily driven by revenue growth partially offset by increased operating expenses, as detailed above.

The provision for income taxes increased 37% for the second quarter of fiscal 2022 compared to the prior fiscal second quarter. The effective tax rate for the second quarter of fiscal 2022 was 23.6% compared to 23.1% for the same quarter a year ago. The increase in the effective tax rate was primarily due to the relative impact of the increase in operating income, quarter over quarter.

Due to the above changes, net income increased 33% for the second quarter of fiscal 2022 compared to the second quarter of fiscal 2021.

For the six months ended December 31, 2021, total revenue increased 12%, or $107,791, over the six months ended December 31, 2020. Total revenue less deconversion fee and acquisition and divestiture revenues of $30,627 and $202, respectively, for the current fiscal year period and deconversion fee and acquisition and divestiture revenues of $8,037 and $1,182, respectively, for the prior fiscal year period, results in a 10% increase for the period compared to the same period a year ago. This total revenue increase was primarily driven by growth in public and private cloud revenue, card, remittance, and transaction and digital processing revenues, and increased implementation fee revenue.

Operating expenses for the six months ended December 31, 2021, increased 9% compared to the equivalent period in the prior fiscal year, primarily due to increased direct costs, higher personnel costs, and increased operating licenses and fees. The increased direct costs were primarily related to our card payment processing platform and Jack Henry digital and were in alignment with the increases in revenue described above. Higher personnel costs were primarily related to salary increases in the trailing twelve months.

Operating income increased 23% for the six months ended December 31, 2021, compared to the six months ended December 31, 2020. Operating income less deconversion fee operating income of $27,540 and adjusted for acquisition and divestiture operating loss of $66 for the current fiscal year period, and less deconversion fee operating income of $7,138 and income from divestitures and a gain on disposals totaling $2,409 for the prior fiscal

year period, results in a 15% increase for the six months ended December 31, 2021, compared to the same period a year ago. This increase was primarily driven by revenue growth described above partially offset by increased operating expenses, as detailed above.

The provision for income taxes increased 27% for the six months ended December 31, 2021, compared to the prior fiscal year-to-date period. The effective tax rate for the six months ended December 31, 2021, was 23.5% compared to 22.7% for the prior fiscal year-to-date period. The effective tax rate increase was primarily driven by the relative impact of the increase in operating income in the current fiscal year-to-date period and a larger excess tax benefit received from share-based compensation in the prior fiscal year-to-date period.

The result of the above changes led to net income that increased 21% for the six months ended December 31, 2021, compared to the same period in the prior fiscal year.

We move into the third quarter of fiscal 2022 with optimism following strong performance in the second quarter, but with some uncertainty as to the future impact of the COVID-19 pandemic (see "COVID-19 Impact and Response" section above). Significant portions of our business continue to come from recurring revenues and our sales pipeline also remains encouraging. Our customers continue to face regulatory and operational challenges which our products and services address, and in these uncertain times, we believe they have an even greater need for our solutions that directly address institutional profitability, efficiency, and security. Our strong balance sheet, access to extensive lines of credit, the continued strength of our existing lines of revenue, and an unwavering commitment to superior customer service should position us well to address current and future opportunities.

A detailed discussion of the major components of the results of operations for the three and six months ended December 31, 2021, follows. Discussions compare the current fiscal year's three and six months ended December 31, 2021, to the prior fiscal year's three and six months ended December 31, 2020.

Services and support revenue increased 18% for the second quarter of fiscal 2022 compared to the same quarter a year ago. Total services and support revenue less deconversion fee revenue for the current and prior fiscal quarter of $26,903 and $2,155, respectively, results in growth of 8%, quarter over quarter. This increase was primarily driven by growth in data processing and hosting fee revenues as new customers were added and volumes continued to expand, as well as higher implementation and conversion/merger revenues when compared to the prior fiscal quarter.

For the six months ended December 31, 2021, services and support revenue increased 12% compared to the same period a year ago. Total services and support revenue less deconversion fee revenue for the current and prior fiscal periods of $30,627 and $8,037, respectively, and for revenue from acquisitions and divestitures of $1,181 from the prior fiscal year period, results in growth of 8% period over period. This increase was primarily driven by growth in data processing and hosting fee revenues, as new customers were added and volumes continued to expand, as well as higher implementation fee and software usage fee revenues when compared to the prior fiscal period.

Processing revenue increased 15% for the second quarter of fiscal 2022 compared to the same quarter a year ago. The increase was driven by growth in card, Jack Henry digital, and remittance processing revenues, as customers were added and volumes expanded during the fiscal quarter compared to the prior fiscal quarter.

Each processing revenue component also experienced customer additions and volume growth in the fiscal year-to-date period, leading to an increase in processing revenue of 13% for the six months ended December 31, 2021, compared to the six months ended December 31, 2020.

Cost of revenue for the second quarter of fiscal 2022 increased 10% over the prior fiscal year second quarter. Total cost of revenue less the effects of deconversion fees, which were $1,601 for the current fiscal quarter and $213 for the prior fiscal quarter, and the effects of acquisitions and divestitures of $67 for the current fiscal quarter, results in a 9% increase quarter over quarter. This increase was primarily due to higher direct costs associated with our card processing platform, higher personnel costs, and increased operating licenses and fees. Cost of revenue decreased 4% compared to the prior fiscal quarter as a percentage of total revenue.

For the current fiscal year-to-date period, cost of revenue increased 7% over the prior fiscal year-to-date period. This increase in costs was primarily due to higher costs associated with our card processing platform and operating licenses and fees. Cost of revenue decreased 3% compared to the prior fiscal year-to-date period as a percentage of total revenue.

Research and development expense increased 12% for the second quarter of fiscal 2022 over the prior fiscal second quarter. The increase was primarily due to higher personnel costs, net of capitalization, quarter over quarter. Research and development expense remained consistent compared to the prior fiscal second quarter as a percentage of total revenue.

For the current fiscal year-to-date period, research and development expense increased 7% over the prior fiscal year-to-date period. The increase was primarily due to higher personnel costs, net of capitalization, period over period. Research and development expense remained consistent compared to the prior fiscal year-to-date period as a percentage of total revenue.

The growth of this expense category in both the second quarter and year-to-date fiscal periods reflects our continuing commitment to the development of strategic products.

Selling, general, and administrative expense increased 26% in the second quarter of fiscal 2022 over the same quarter a year ago. Total selling, general, and administrative expenses less deconversion-related expenses, which were $946 for the current fiscal quarter and $24 for the prior fiscal quarter, and the effects of acquisitions and divestitures of $10 in the current fiscal quarter and an adjustment for gain on disposals in the prior fiscal quarter of $2,040, results in an 18% increase quarter over quarter. This increase was primarily due to higher personnel costs related to a 2% growth in headcount and salary increases in the trailing twelve months. Selling, general, and administrative expense increased 1% as a percentage of total revenue in fiscal second quarter versus the prior fiscal second quarter.

For the fiscal year-to-date period, selling, general, and administrative expense increased 19% over the prior fiscal year-to-date period. Total selling, general, and administrative expenses less deconversion-related expenses from each period, which were $1,149 for the current fiscal period and $250 for the prior fiscal period, and less the effects of acquisitions and divestitures, which were $20 for the current fiscal period and $28 for the prior fiscal period, and adjusted for a gain on disposals of $2,040 in the prior fiscal period, results in a 16% increase period over period. This increase was primarily due to higher personnel costs related to a 2% growth in headcount and salary increases

in the trailing twelve months. Selling, general, and administrative expense increased 1% as a percentage of total revenue for the current fiscal period versus the year-ago fiscal period.

Interest income fluctuated due to changes in invested balances and yields on invested balances during the second quarter of fiscal 2022 compared to the second quarter a year ago. Interest expense increased when compared to the prior fiscal quarter due to interest rate fluctuations, length of borrowing time, and amounts borrowed. There was a $240,000 outstanding balance under the credit facility at December 31, 2021, and no outstanding balance at December 31, 2020. The credit facility balance increase was primarily due to the increase in the Company's repurchases of common stock for the treasury during the trailing twelve months.

The increase in the effective tax rate for the second quarter of fiscal 2022 compared to the same quarter a year ago was primarily due to the relative impact of the increase in operating income, quarter over quarter.

Net income increased 21% to $197,783, or $2.68 per diluted share, for the current fiscal year-to-date period, compared to $163,198, or $2.13 per diluted share in the prior fiscal year-to-date period, resulting in a 25% increase in diluted earnings per share.

The Company’s operations are classified into four reportable segments: Core, Payments, Complementary, and Corporate and Other. The Core segment provides core information processing platforms to banks and credit unions, which consist of integrated applications required to process deposit, loan, and general ledger transactions, and maintain centralized customer/member information. The Payments segment provides secure payment processing tools and services, including ATM, debit, and credit card processing services; online and mobile bill pay solutions; ACH origination and remote deposit capture processing; and risk management products and services. The Complementary segment provides additional software, hosted processing platforms, and services, including call center support, and network security management, consulting, and monitoring, that can be integrated with our core solutions, and many can be used independently. The Corporate and Other segment includes revenue and costs from hardware and other products not attributed to any of the other three segments, as well as operating costs not directly attributable to the other three segments.

Revenue in the Core segment increased 15% and cost of revenue increased 10% for the three months ended December 31, 2021, compared to the three months ended December 31, 2020. Core revenue less deconversion fee revenue for the second quarter of $10,853 and less deconversion fee revenue of $882 for the prior fiscal second quarter, results in a 7% increase, quarter over quarter. This increase was primarily driven by growth in data processing and hosting fee revenue. Cost of revenue decreased 2% as a percentage of revenue for the second quarter of fiscal 2022 compared to the prior fiscal second quarter.

For the six months ended December 31, 2021, revenue in the Core segment increased 11% compared to the prior fiscal year-to-date period. Core revenue less deconversion fee revenue in both periods, which totaled $13,021 for the current fiscal period and $2,934 for the prior fiscal period and revenue from acquisitions and divestitures of $1,182 from the prior fiscal period, results in an 8% increase, period over period. This increase was primarily driven by the growth in data processing and hosting fee revenue. Cost of revenue decreased 1% as a percentage of revenue for year-to-date fiscal 2022 compared to the year-ago period.