What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-09 · 115 added, 117 removed, 311 unchanged (43% of the section changed)

11 unchanged sentences

future operating results including our performance expectations;

the impact of measures expected to increase efficiencies or reduce expenses;

the performance of our securities portfolio;

the impact of card balances related to government stimulus programs;

customer retention;

loan and other product demand;

expectations concerning acquisitions and divestitures;

new products and services;

1 unchanged sentence

the level of net charge-offs and the adequacy of the allowance for credit losses;

and the Company's employees.

and technology.

The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements:

1 unchanged sentence

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

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

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

our ability to achieve brand recognition for Pathward equal to or greater than we enjoyed for MetaBank;

our ability to successfully implement measures designed to reduce expenses and increase efficiencies;

changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate;

changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios;

changes in tax laws;

the strength of the United States' economy, and the local economies in which the Company operates;

adverse developments in the financial services industry generally such as the recent bank failures, inflation, market, and monetary fluctuations;

adverse developments in the financial services industry generally such as bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior;

inflation, market, and monetary fluctuations;

the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users;

16 unchanged sentences

All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section.

Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022, and in the Company's other filings made with the SEC.

Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022, and in the Company's other filings made with the SEC.

The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.

2 unchanged sentences

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, 2023, compared to September 30, 2022, and the consolidated results of operations for the three and six months ended March 31, 2023 and 2022.

The following discussion focuses on the consolidated financial condition of the Company at June 30, 2023, compared to September 30, 2022, and the consolidated results of operations for the three and nine months ended June 30, 2023 and 2022.

This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the fiscal year ended September 30, 2022 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, 2022.

1 unchanged sentence

Company Highlights

• On April 5, 2023, Pathward®, N.A.

announced it became Certified™ by Great Place to Work® for the first time.

Great Place to Work holds itself out as the global authority on workplace culture, employee experience, and the leadership behaviors proven to deliver market-leading revenue, employee retention and increased innovation.

• On February 28, 2023, the Board of Directors (the "Board") of Pathward Financial appointed Christopher Perretta as a member of the Board.

Financial Highlights for the 2023 Fiscal Second Quarter

• Total revenue for the second quarter was $228.4 million, an increase of $34.9 million, or 18%, compared to the same quarter in fiscal 2022, primarily driven by an increase in both noninterest income and net interest income.

• Net interest margin ("NIM") increase d 132 basis points to 6.12% for the second quarter from 4.80% during the same period of last year p rimarily driven by an increase in loan and lease and investment securities yields.

• Total gross loans and leases at March 31, 2023 decreased $4.6 million to $3.73 billion compared to March 31, 2022 and increased $215.9 million , or 6%, when compared to December 31, 2 022.

The decrease compared to the prior year quarter was primarily due to a reduction in consumer finance loans driven by the sale of the $81.5 million student loan portfolio during the fiscal 2022 fourth quarter and a reduction in warehouse finance loans, partially offset by growth in the commercial finance portfolio.

The primary drivers for the increase on a linked quarter basis was growth in commercial finance and warehouse finance loans.

• During the 2023 fiscal second quarter, the Company recognized a total of $6.8 million in pre-tax adverse financial impacts attributable to the disposal or change in depreciable life of several mobile solar generators related to a single relationship.

In fiscal year 2019, the business incurred a large impairment expense associated with one company with which it had legacy transactions that turned out to be fraudulent.

At that time, the assets were written down to their market value and redeployed under an equipment lease agreement to new participants.

Upon the return of the leased assets, the Company performed a due diligence assessment, which led to the determination to dispose certain generators based on their condition and adjust the depreciable life for the remaining generators to better reflect the service period based on market conditions and advancements in technology.

This was an isolated event limited to this equipment type and is not indicative of the remaining Rental Equipment portfolio.

The remaining value of the generators on the balance sheet is $1.3 million.

• During the 2023 fiscal second quarter, the Company repurchased 1,172,700 shares of common stock at an average share price of $46.60.

For the six months ended March 31, 2023, total tax services product revenue was $72.4 million, an increase of 2% compared to the same period of the prior year.

Total tax services product fee income, total tax services product expense, and net interest income on tax services loans all increased slightly compared to the prior year period.

Provision for tax services products was $33.1 million, an increase of 17% when compared to the same period of the prior year, primarily due to an expected shift in mix in refund advances from national franchise channels to independent tax providers.

Total tax services product income, net of losses and direct product expenses, decreased 14% to $29.7 million from $34.4 million, when comparing the first six months of fiscal 2023 to the same period of the prior fiscal year.

For the 2023 tax season, Pathward originated $1.46 billion in refund advance loans compared to $1.83 billion during the 2022 tax season.

When excluding the two partners the Company did not renew after the 2022 tax season, loan originations increased $116.2 million this tax season compared to the previous year.

• The Company launched a new line of credit for consumers with Propel Holdings Inc.

and paired with Clair to offer spending and savings accounts as well as earned wage advances.

Additionally, the Company announced a new partnership where it has become the banking partner to Finix to support their launch as a payments processor.

• On July 24, 2023, the Company published its third annual ESG report, which can be found on its website.

The report documents the Company's progress over fiscal year 2022 showing the implementation of plans, programs and policies that built on its culture as well as the Company's purpose to power Financial Inclusion for All.

Financial Highlights for the 2023 Fiscal Third Quarter

• Total revenue for the third quarter was $165.2 million, an increase of $39.1 million, or 31%, compared to the same quarter in fiscal 2022, d riven by an increase in both net interest income and noninterest income.

• Net interest margin ("NIM") increase d 142 basis points to 6.18% for the third quarter from 4.76% during the same period of last year p rimarily driven by increased yields and an improved earnings asset mix from the continued optimization of the portfolio.

• Total gross loans and leases at June 30, 2023 increased $384.3 million to $4.07 billion compared to June 30, 2022 and increased $347.3 million , or 9%, when compared to March 31, 2 023.

The increase compared to the prior year quarter was primarily due to growth in the commercial finance portfolio, partially offset by a reduction in consumer finance loans driven by the sale of the $81.5 million student loan portfolio during the fiscal 2022 fourth quarter and a reduction in warehouse finance loans.

The primary drivers for the increase on a linked quarter basis was growth in both commercial finance and consumer finance loans.

• During the 2023 fiscal third quarter, the Company repurchased 490,120 shares of common stock at an average share price of $43.83.

Tax Season Recap

For the nine months ended June 30, 2023, total tax services product revenue was $79.7 million, a decrease of 3% compared to the same period of the prior year.

This was driven by a decrease in refund advance fee income partially offset by an increase in refund transfer fee income.

Provision expense for refund advances increased 17% compared to the prior year.

This increase was due to a mix shift from partnerships channels to independent tax providers, which was expected.

Total tax services product income, net of losses and direct product expenses, decreased 19% to $35.3 million from $43.5 million, when comparing the first nine months of fiscal 2023 to the same period of the prior fiscal year.

The overall decrease in tax services product income was primarily due to higher provision expense and the two tax partners that the Company did not renew heading into the 2023 tax season, as previously disclosed.

FINANCIAL CONDITION

At March 31, 2023, the Company’s total assets increased by $120.8 million to $6.87 billion compared to September 30, 2022, primarily due to growth of $189.3 million in total loans and leases, partially offset by a reduction of $57.3 million in securities available for sale.

Total cash and cash equivalents was $432.6 million at March 31, 2023, increasing from $388.0 million at September 30, 2022.

At June 30, 2023, the Company’s total assets increased by $711.2 million to $7.46 billion compared to September 30, 2022, primarily due to growth of $536.6 million in total loans and leases, $127.2 million in cash and cash equivalents, and $66.3 million in loans held for sale, partially offset by a reduction of $22.8 million in other assets.

Total cash and cash equivalents was $515.3 million at June 30, 2023, increasing from $388.0 million at September 30, 2022.

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

At March 31, 2023, the Company did not have any federal funds sold.

The Company's investment security balances decreased $60.3 million, or 3%, to $1.86 billion at March 31, 2023, compared to $1.92 billion at September 30, 2022, due to maturities and principal pay downs.

At June 30, 2023, the Company did not have any federal funds sold.

The Company's investment security balances increased $27.4 million, or 1%, to $1.95 billion at June 30, 2023, compared to $1.92 billion at September 30, 2022, 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.

During the six months ended March 31, 2023, the Company made no purchases of investment securities.

Loans held for sale at March 31, 2023 totaled $24.8 million, increasing from $21.1 million at September 30, 2022.

This increase was driven by growth in consumer credit products held for sale at March 31, 2023 compared to September 30, 2022.

Total gross loans and leases totaled $3.73 billion at March 31, 2023, as compared to $3.54 billion at September 30, 2022.

The primary driver for the increase was due to growth in commercial finance, warehouse finance, and the seasonal tax services portfolio, partially offset by a decrease in the consumer finance portfolio.

During the nine months ended June 30, 2023, the Company made $150.8 million purchases of investment securities.

Loans held for sale at June 30, 2023 totaled $87.4 million, increasing from $21.1 million at September 30, 2022.

This increase was primarily driven by growth in consumer credit products held for sale at June 30, 2023 compared to September 30, 2022.

Total gross loans and leases totaled $4.07 billion at June 30, 2023, as compared to $3.54 billion at September 30, 2022 .

The primary driver for the increase was due to increases in commercial finance, consumer finance, warehouse finance, and seasonal tax services loans.

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

Commercial finance loans, which comprised 84% of the Company's gross loan and lease portfolio, totaled $3.13 billion at March 31, 2023 , reflecting an increase of $109.0 million, or 4%, from September 30, 2022.

Commercial finance loans, which comprised 85% of the Company's gross loan and lease portfolio, totaled $3.44 billion at June 30, 2023 , reflecting an increase of $417.1 million, or 14%, from September 30, 2022.

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 was $29.4 million at March 31, 2023 and $28.8 million at September 30, 2022, as purchases were partially offset by redemptions of FHLB membership stock during the six months ended March 31, 2023.

Total end-of-period deposits increased 1% to $5.90 billion at March 31, 2023, compared to $5.87 billion at September 30, 2022, primarily driven by an increase in noninterest-bearing deposits of $35.5 million.

As of March 31, 2023 , the Company had $1.0 billion in deposits related to government stimulus programs.

The Company’s investment in these stocks was $30.9 million at June 30, 2023 and $28.8 million at September 30, 2022, as purchases were partially offset by redemptions of FHLB membership stock during the nine months ended June 30, 2023.

Total end-of-period deposits increased 8% to $6.31 billion at June 30, 2023, compared to $5.87 billion at September 30, 2022, primarily driven by an increase in noninterest-bearing deposits of $435.5 million.

As of June 30, 2023 , the Company had $966.6 million in deposits related to government stimulus programs.

Of the total amount of government stimulus program deposits, $349.4 million are on activated cards while $617.2 million are on inactivated cards.

These card balances are expected to run down by approximately $500 million over the next 18 months as recipients continue to spend them and the Company begins to return unclaimed balances to the U.S.

The Company's total borrowings increased $41.5 million from $36.0 million at September 30, 2022 to $77.5 million at March 31, 2023, primarily driven by an increase in short-term borrowings of $43.0 million partially offset by payments on long-term borrowings.

At March 31, 2023, the Company’s stockholders’ equity totaled $673.2 million, an increase of $28.1 million, from $645.1 million at September 30, 2022.

The increase was primarily attributable to a change in accumulated other comprehensive income ("AOCI").

The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2023, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

Between July 2023 and the end of fiscal year 2024, the inactive card balances are expected to decrease by approximately $450 million as the Company actively returns unclaimed balances to the U.S.

The Company's total borrowings increased $228.2 million from $36.0 million at September 30, 2022 to $264.2 million at June 30, 2023, primarily driven by an increase in short-term borrowings of $230.0 million partially offset by payments on long-term borrowings.

At June 30, 2023, the Company’s stockholders’ equity totaled $677.7 million, an increase of $32.6 million, from $645.1 million at September 30, 2022.

The increase was primarily attributable to a change in additional paid-in capital and retained earnings.

The Company and Bank remained above the federal regulatory minimum capital requirements at June 30, 2023, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

See “Liquidity and Capital Resources” for further information.

8 unchanged sentences

These discounts are netted at a pooled partner level using ASC 210-20.

The majority of these discount fundings relate to a small number of partners, and analyzed on an ongoing basis.

The majority of these discount fundings relate to a small number of partners and are analyzed on an ongoing basis.

– Demand Deposit Account ("DDA") overdrafts:

3 unchanged sentences

The following table summarizes the Company's negative deposit balances within the BaaS business line:

(Dollars in thousands) March 31, 2023 September 30, 2022

(Dollars in thousands) June 30, 2023 September 30, 2022

Noninterest-bearing deposits $ 6,428,523 $ 5,916,142

10 unchanged sentences

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

For the three and six months ended March 31, 2023, the Company recognized $18.2 million and $31.1 million, respectively, in servicing fee income as compared to an insignificant amount for the three and six months ended March 31, 2022.

For the three and nine months ended June 30, 2023, the Company recognized $14.6 million and $45.7 million, respectively, in servicing fee income as compared to an insignificant amount for the three and nine months ended June 30, 2022.

The Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.

As of March 31, 2023, the Company managed $1.96 billion of customer deposits at other banks in its capacity as custodian.

As of June 30, 2023, the Company managed $781.0 million of customer deposits at other banks in its capacity as custodian.

These deposits provide the Company with excess deposits that can earn record keeping service fee income, typically reflective of the EFFR.

Approximately 47% of the deposit portfolio as of March 31, 2023 are subject to variable card processing expenses that are derived from the terms of contractual agreements with certain BaaS partners.

Approximately 48% of the deposit portfolio was subject to these higher card processing expenses during the 2023 fiscal third quarter that are derived from the terms of contractual agreements with certain BaaS partners.

These agreements are tied to a rate index, typically the EFFR.

RESULTS OF OPERATIONS

The Company recorded net income of $54.8 million, or $1.99 per diluted share, for the three months ended March 31, 2023, compared to net income of $49.3 million, or $1.66 per diluted share, for the three months ended March 31, 2022.

Total revenue for the fiscal 2023 second quarter was $228.4 million, an increase of $34.9 million, or 18%, compared to the same quarter in fiscal 2022, primarily driven by an increase in both noninterest income and net interest income, partially offset by an increase in noninterest expense.

The Company recorded net income of $82.6 million, or $2.95 per diluted share, for the six months ended March 31, 2023, compared to net income of $110.6 million, or $3.66 per diluted share, for the six months ended March 31, 2022.

Total revenue for the six months ended March 31, 2023 was $378.3 million , an increase of $26.5 million , or 18%, compared to the same period of the prior fiscal year.

The increase is primarily driven by increases in interest income and card and deposit fees along with the $10.0 million gain on sale of trademarks recognized during the six months ended March 31, 2023, partially offset by the $50.0 million gain on sale of trademarks recognized during the prior fiscal year period.

The Company recorded net income of $45.1 million, or $1.68 per diluted share, for the three months ended June 30, 2023, compared to net income of $22.4 million, or $0.76 per diluted share, for the three months ended June 30, 2022.

Total revenue for the fiscal 2023 third quarter was $165.2 million, an increase of $39.1 million, or 31%, compared to the same quarter in fiscal 2022, primarily driven by an increase in both noninterest income and net interest income.

The Company recorded net income of $127.7 million, or $4.62 per diluted share, for the nine months ended June 30, 2023, compared to net income of $133.0 million, or $4.44 per diluted share, for the nine months ended June 30, 2022.

Total revenue for the nine months ended June 30, 2023 was $543.5 million , an increase of $65.6 million , or 31%, compared to the same period of the prior fiscal year.

The increase is primarily driven by increases in interest income and card and deposit fees along with the $10.0 million gain on sale of trademarks recognized during the nine months ended June 30, 2023, partially offset by the $50.0 million gain on sale of trademarks recognized during the prior fiscal year period.

Net Interest Income

Net interest income for the second quarter of fiscal 2023 was $101.4 million, an increase of 21% from the same quarter in fiscal 2022.

The increase was mainly attributable to increased yields and an improved earning asset mix.

For the six months ended March 31, 2023, the net interest income was $185.5 million, an increase of 19%, from $155.4 million compared to the same period in the prior fiscal year.

The Company’s average interest-earning assets for the second fiscal quarter decreased by $364.5 million to $6.72 billion compared with the same quarter in fiscal 2022, primarily due to a reduction in cash balances as a result of elevated cash levels during the prior fiscal year period related to the Company's participation in government stimulus programs along with a decrease in loans and leases, partially offset by an increase in total investment balances.

The second quarter average outstanding balance of loans and leases decreased $230.5 million compared to the same quarter of the prior fiscal year, primarily due to a reduction in tax services loans, warehouse finance loans, and consumer finance loans, partially offset by an increase in the commercial finance loans.

Fiscal 2023 second quarter NIM increased to 6.12% from 4.80% in the second fiscal quarter of last year.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased 145 basis points to 6.34% compared to the prior fiscal year quarter, primarily driven by an increase in loan and lease and investment securities yields, along with a decrease in cash balances.

Net interest income for the third quarter of fiscal 2023 was $97.5 million, an increase of 35% from the same quarter in fiscal 2022.

The increase was mainly attributable to increased yields, higher interest-earning asset balances and an improved earning asset mix.

For the nine months ended June 30, 2023, the net interest income was $282.9 million, an increase of 24%, from $227.6 million compared to the same period in the prior fiscal year.

The Company’s average interest-earning assets for the third fiscal quarter increased by $244.4 million to $6.33 billion compared with the same quarter in fiscal 2022, primarily due to growth in loans and leases and an increase in total investment balances, partially offset by a decrease in cash balances.

The third quarter average outstanding balance of loans and leases increased $171.6 million compared to the same quarter of the prior fiscal year, primarily due to an increase in commercial finance loans, partially offset by decreases in consumer finance loans, warehouse finance loans, and tax services loans.

Fiscal 2023 third quarter NIM increased to 6.18% from 4.76% in the third fiscal quarter of last year.

When including contractual card processing expense, adjusted NIM would have been 4.88% in the fiscal 2023 third quarter compared to 4.62% during the fiscal 2022 third quarter.

The overall reported tax equivalent yield (“TEY”) on average earning assets increased 142 basis points to 6.31% compared to the prior fiscal year quarter, primarily driven by an increase in loan and lease, investment securities, and cash yields.

The yield on the loan and lease portfolio was 8.31% compared to 6.69% for the comparable period last year and the TEY on the securities portfolio was 2.96% compared to 2.14% over that same period.

For the six months ended March 31, 2023, NIM was 5.88%, an increase of 118 basis points from 4.70% compared to the same period in the prior fiscal year.

NIM, tax-equivalent for the six months ended March 31, 2023 increased to 5.90% from 4.72% in the same period of the prior fiscal year.

The Company's cost of funds for all deposits and borrowings averaged 0.21% during the fiscal 2023 second quarter, as compared to 0.08% during the prior fiscal year quarter.

The Company's overall cost of deposits was 0.13% in the fiscal second quarter of 2023, as compared to 0.01% during the prior year quarter.

For the nine months ended June 30, 2023, NIM was 5.98%, an increase of 126 basis points from 4.72% compared to the same period in the prior fiscal year.

NIM, tax-equivalent for the nine months ended June 30, 2023 increased to 6.00% from 4.73% in the same period of the prior fiscal year.

The Company's cost of funds for all deposits and borrowings averaged 0.13% during the fiscal 2023 third quarter, as compared to 0.12% during the prior fiscal year quarter.

The Company's overall cost of deposits was 0.01% in the fiscal third quarter of 2023, as compared to 0.01% during the prior year quarter.

When including contractual card processing expense, the Company's overall cost of deposits was 1.41% in the fiscal 2023 third quarter, as compared to 0.16% during 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.

2 unchanged sentences

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

39 unchanged sentences

6.20 % 4.77 %

(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2023 and 2022 was 21%.

(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2023 and 2022 was 21%.

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

1 unchanged sentence

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

40 unchanged sentences

6.00 % 4.73 %

(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2023 and 2022 was 21%.

(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2023 and 2022 was 21%.

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

2 unchanged sentences

Provision for Credit Losses

The Company recognized a provision for credit losses of $36.8 million and $46.5 million for the three and six months ended March 31, 2023, compared to $32.3 million and $32.5 million for the comparable period in the prior fiscal year.

T he increase in provision for credit losses during the current quarter compared to the prior fiscal year period was primarily driven by increases in the commercial finance portfolio and the seasonal tax services portfolio.

Net charge-offs were $5.0 million for the quarter ended March 31, 2023, compared to $11.2 million for the quarter ended March 31, 2022.

The Company recognized a provision for credit losses of $1.8 million and $48.3 million for the three and nine months ended June 30, 2023, compared to a reversal of provision for credit losses expense of $1.3 million and a provision of $31.2 million for the comparable periods in the prior fiscal year.

T he increase in provision for credit losses during the current quarter compared to the prior fiscal year period was primarily driven by increases in the commercial finance portfolio.

Net charge-offs were $4.2 million for the quarter ended June 30, 2023, compared to $12.2 million for the quarter ended June 30, 2022.

Net charge-offs attributable to the commercial finance and consumer finance portfolios for the current quarter were $2.6 million and $1.9 million, respectively, while a recovery of $0.3 million was recognized in the tax services portfolio.

Noninterest Income

Fiscal 2023 second quarter noninterest income increased to $127.0 million, compared to $109.8 million for the same period of the prior fiscal year.

The increase was primarily attributable to increases in card and deposit fees, rental income, tax product fee income, and other income.

The period-over-period increase was partially offset by reductions in gain (loss) on sale of other and gain on sale of investments.

Included in gain (loss) on sale of other during the quarter, was a $2.0 million loss on the disposal of mobile solar generators in connection with legacy solar transactions.

The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $18.2 million during the 2023 fiscal second quarter, as compared to $12.9 million for the fiscal quarter ended December 31, 2022 and an insignificant amount for the fiscal quarter ended March 31, 2022.

Noninterest income for the six months ended March 31, 2023 decreased to $192.8 million from $196.4 million for the same period of the prior fiscal year.

Fiscal 2023 third quarter noninterest income increased to $67.7 million, compared to $54.0 million for the same period of the prior fiscal year.

The increase was primarily attributable to increases in card and deposit fees, rental income, and other income.

The period-over-period increase was partially offset by a reduction in tax services fee income.

The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $14.6 million during the 2023 fiscal third quarter, as compared to $18.2 million for the fiscal quarter ended March 31, 2023 and $0.5 million for the fiscal quarter ended June 30, 2022.

Noninterest income for the nine months ended June 30, 2023 increased to $260.5 million from $250.4 million for the same period of the prior fiscal year.

Noninterest Expense

Noninterest expense increased 23% to $127.1 million for the fiscal 2023 second quarter, from $103.2 million for the same quarter last year.

The increase was primarily attributable to increases in card processing expense, operating lease equipment depreciation, compensation expense, total tax services expense, and impairment expense.

The period-over-period increase was partially offset by decreases in legal and consulting expense, amortization expense, and other expense.

The increase in operating lease equipment depreciation was due to $4.8 million of accelerated depreciation on mobile solar generators in connection with the aforementioned legacy solar transactions.

During the second quarter of fiscal year 2023 , the Company recognized $0.5 million of impairment expense related to its Pathward Venture Capital business.

Noninterest expense increased 19% to $114.6 million for the fiscal 2023 third quarter, from $96.7 million for the same quarter last year.

The increase was primarily attributable to increases in compensation expense, card processing expense, operating lease equipment depreciation, impairment expense, and other expense.

The period-over-period increase was partially offset by a decrease in legal and consulting expense and tax services expense.

During the third quarter of fiscal year 2023 , the Company recognized $2.7 million of impairment expense related to its Pathward Venture Capital business.

The card processing expense increase was due to structured agreements with BaaS partners.

1 unchanged sentence

Generally, this rate index averages between 50% to 85% of the EFFR and reprices immediately upon a change in the EFFR.

Approximately 47% of the deposit portfolio was subject to these higher card processing expenses.

For the fiscal quarter ended March 31, 2023, card processing expenses related to these structured agreements were $20.4 million, as compared to $14.0 million for the fiscal quarter ended December 31, 2022 and $0.2 million for the fiscal quarter ended March 31, 2022.

Noninterest expense for the six months ended March 31, 2023 increased to $232.2 million from $185.6 million for the same period of the prior fiscal year.

Approximately 48% of the deposit portfolio was subject to these higher card processing expenses during the 2023 fiscal third quarter.

For the fiscal quarter ended June 30, 2023, card processing expenses related to these structured agreements were $20.5 million, as compared to $20.4 million for the fiscal quarter ended March 31, 2023 and $2.2 million for the fiscal quarter ended June 30, 2022.

Noninterest expense for the nine months ended June 30, 2023 increased to $346.8 million from $282.2 million for the same period of the prior fiscal year.

Income Tax Expense

The Company recorded an income tax expense of $9.2 million, representing an effective tax rate of 14.2%, for the fiscal 2023 second quarter, compared to income tax expense of $8.0 million, representing an effective tax rate of 13.8%, for the second quarter last year.

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

The Company originated $18.1 million in renewable energy leases during the fiscal 2023 second quarter, resulting in $4.9 million in total net investment tax credits.

During the second quarter of fiscal 2022, the Company originated $1.3 million in renewable energy leases resulting in $0.3 million in total net investment tax credits.

The Company recorded an income tax expense of $3.2 million, representing an effective tax rate of 6.6%, for the fiscal 2023 third quarter, compared to income tax expense of $7.0 million, representing an effective tax rate of 22.6%, for the third quarter last fiscal year.

The current quarter decrease in income tax expense was primarily due to an increase in investment tax credits recognized ratably when compared to the prior year quarter.

The Company originated $21.4 million in renewable energy leases during the fiscal 2023 third quarter, resulting in $5.8 million in total net investment tax credits.

During the third quarter of fiscal 2022, the Company originated $4.4 million in renewable energy leases resulting in $1.0 million in total net investment tax credits.

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

For the six months ended March 31, 2023, the Company originated $29.5 million in renewable energy leases, compared to $22.5 million for the comparable prior year period.

For the nine months ended June 30, 2023, the Company originated $50.9 million in renewable energy leases, compared to $26.9 million for the comparable prior year period.

The timing and impact of future renewable energy 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.

9 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, 2023 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, 2023 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, 2023 September 30, 2022

(Dollars in thousands) June 30, 2023 September 30, 2022

Nonperforming Loans and Leases

16 unchanged sentences

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

The Company's nonperforming loans and leases at March 31, 2023 were $28.5 million, representing 0.76% of total gross loans and leases, compared to $29.2 million, or 0.82% of total gross loans and leases at September 30, 2022.

The decrease in the nonperforming assets as a percentage of total assets at March 31, 2023 compared to September 30, 2022, was driven by a decrease in the tax services portfolio partially offset by an increase in the commercial finance portfolio.

The Company's nonperforming loans and leases at June 30, 2023 were $38.8 million, representing 0.93% of total gross loans and leases, compared to $29.2 million, or 0.82% of total gross loans and leases at September 30, 2022.

The increase in the nonperforming assets as a percentage of total assets at June 30, 2023 compared to September 30, 2022, was primarily driven by an increase nonperforming loans in the commercial finance portfolio.

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, 2023, the Company had classified loans and leases of $230.0 million as substandard, $5.7 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2023, the Company had classified loans and leases of $189.7 million as substandard, $13.8 million as doubtful and none as loss.

At September 30, 2022, the Company classified loans and leases of $203.7 million as substandard, $4.0 million as doubtful and none as loss.

7 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 $84.3 million at March 31, 2023, an increase compared to $45.9 million at September 30, 2022.

The increase in the ACL at March 31, 2023, when compared to September 30, 2022, was primarily due to a $33.1 million increase in the seasonal tax services loan portfolio, a $3.7 million increase in the commercial finance portfolio, and a $1.5 million increase in the consumer finance portfolio.

The Company's ACL totaled $81.9 million at June 30, 2023, an increase compared to $45.9 million at September 30, 2022.

The increase in the ACL at June 30, 2023, when compared to September 30, 2022, was primarily due to a $33.1 million increase in the seasonal tax services loan portfolio and a $2.4 million increase in the commercial finance portfolio.

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

As of the Period Ended

March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022

June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022

Commercial finance 1.35 % 1.53 % 1.62 % 1.46 % 1.56 %

4 unchanged sentences

Total loans and leases excluding tax services 1.21 % 1.40 % 1.50 % 1.30 % 1.44 %

The Company's ACL as a percentage of total loans and leases increased to 2.27% at March 31, 2023 from 1.50% at December 31, 2022 and from 1.30% at September 30, 2022.

The increase in the total loans and leases coverage ratio was primarily driven by the seasonal tax services portfolio, and to a lesser extent the consumer finance portfolio.

The increase in the consumer finance coverage ratio was related to seasonal activity.

The Company's ACL as a percentage of total loans and leases decreased to 2.01% at June 30, 2023 from 2.27% at March 31, 2023 and increased from 1.30% at September 30, 2022.

The decrease in the total loans and leases coverage ratio at June 30, 2023 compared to March 31, 2023 was primarily driven by the commercial finance and consumer finance portfolios, partially offset by an increase in the seasonal tax services portfolio.

The decrease in the consumer finance was related to seasonal activity.

The increase in the total loans and leases coverage ratio at June 30, 2023 when compared to September 30, 2022 was primarily driven by the seasonal tax services portfolio.

The year-over-year increase in the allowance related to the seasonal tax services portfolio was primarily attributable to prior year charge-off activity related to a partner the Company did not renew after the 2022 tax season.

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

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, 2022.

There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2023.

There were no significant changes to these critical accounting policies and estimates during the first nine months of fiscal 2023.

LIQUIDITY AND CAPITAL RESOURCES

3 unchanged sentences

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

At March 31, 2023, the Company had unfunded loan and lease commitments of $1.61 billion.

At June 30, 2023, the Company had unfunded loan and lease commitments of $1.71 billion.

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

The liquidity sources as of March 31, 2023 include nearly $2 billion in off-balance sheet deposits and $433 million in cash and cash equivalents.

When factoring in additional resources, such as the Federal Home Loan Bank, the Fed Discount Window and other unsecured funding and wholesale options, the Company has over $4 billion in total available liquidity options as of March 31, 2023.

The liquidity sources as of June 30, 2023 include $781 million in off-balance sheet deposits and $515 million in cash and cash equivalents.

When factoring in additional resources, such as the Federal Home Loan Bank, the Fed Discount Window and other unsecured funding and wholesale options, the Company has over $3 billion in total available liquidity options as of June 30, 2023.

banking organizations, the Company and the Bank are required to comply with the regulatory capital rules adopted by the Federal Reserve and the OCC (the "Capital Rules") that became effective on January 1, 2015, subject to phase-in periods for certain requirements and other provisions of the Capital Rules.

2 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, 2023, 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, 2023, 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;

2 unchanged sentences

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

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

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

1 unchanged sentence

The Company does not intend to sell these securities, or recognize the unrealized losses on its income statement, to fund future loan growth.

At March 31, 2023 Company Bank Minimum

At June 30, 2023 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, 2023

June 30, 2023

Total stockholders' equity $ 677,721

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, 2023

(Dollars in thousands) At June 30, 2023

Total stockholders' equity $ 677,721

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, 2022 for a summary of our contractual obligations as of September 30, 2022.

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2022 through March 31, 2023.

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2022 through June 30, 2023.

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