What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-11-21 compared with 2022-11-22 · 84 added, 134 removed, 279 unchanged (44% of the section changed)

5 unchanged sentences

EXECUTIVE SUMMARY

Business Highlights

• On October 27, 2022, the Company announced that Sonja Theisen, currently Executive Vice President of Governance, Risk and Compliance, has been appointed to succeed Glen Herrick as the Chief Financial Officer effective April 30, 2023.

Ms.Theisen, who joined Pathward in 2013, has held leaderships roles across the organization including Chief Accounting Officer, Chief of Staff, and EVP of Governance, Risk and Compliance.

Additional details can be found in the related press release available at www.pathwardfinancial.com.

• On October 4, 2022, the Company announced the unveiling of its new corporate brand, marked by the transition to its new name, Pathward™, N.A.

("Pathward" or the "Bank"), and the launch of the Company's new website, Pathward.com.

As part of the corporate rebrand, the Company recognized $6.9 million of pre-tax expenses related to rebranding efforts during the fourth quarter of fiscal 2022.

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

• As part of its strategy to continue to optimize interest-earning assets, the Company sold the entirety of its student loan portfolio during the fourth quarter of fiscal 2022.

The sale generated an unfavorable pre-tax impact of approximately $0.5 million after netting the $4.3 million reversal of provision from the portfolio's allowance and the loss on sale of $4.8 million.

The balance of the portfolio at time of sale was $81.5 million.

• On September 26, 2022, the Company announced the completion of a private placement of $20 million of its 6.625% Fixed-to-Floating Rate Subordinated Notes due 2032 to certain qualified institutional buyers and accredited investors.

The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.

• The Company announced on October 10, 2022 that the American Bankers Association ("ABA") Foundation awarded it the 2022 Community Commitment Award during the ABA's Annual Convention on October 4.

Pathward's Community Impact Program partners with organizations that provide resources for the unbanked and underbanked and aid to historically marginalized populations.

The Community Impact Program delivers on Pathward's purpose of powering financial inclusion for all™ by lifting up the communities it serves.

Company Highlights

• On October 5, 2023, the Company announced Gregory A.

Sigrist was appointed as Executive Vice President ("EVP"), Chief Financial Officer-Designee of the Company and the Bank, beginning November 1, 2023.

Immediately after the filing of the Company’s Form 10-K for fiscal year ended September 30, 2023, Mr.

Sigrist will transition to EVP, Chief Financial Officer, succeeding Glen W.

Herrick, who will retire but continue his employment with the Company as EVP, Executive Advisor to the Chief Executive Officer through December 29, 2023 to transition his duties and responsibilities and assist with various projects.

• On August 25, 2023, the Company announced a new share repurchase program to repurchase up to 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028.

Financial Highlights for the 2023 Fiscal Fourth Quarter

• Total revenue for the fourth quarter was $123.2 million, an increase of $3.0 million, or 3%, compared to the same quarter in fiscal 2021, primarily driven by an increase in interest income, partially offset by a decrease in noninterest income.

• Net interest margin ("NIM") increased to 5.21% for the fourth quarter from 4.35% during the same period of last year.

The prior year period was impacted by excess cash associated with the Company's participation in the U.S.

Treasury Department's Economic Impact Program.

• Total gross loans and leases at September 30, 2022 decreased $78.5 million, to $3.53 billion, or 2%, compared to September 30, 2021 and decreased $154.2 million, or 4%, when compared to June 30, 2022.

The decrease compared to the prior year quarter was primarily due to the sale of all remaining community banking loans during the fiscal 2022 first quarter, the sale of the 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 driver for the decrease on a linked quarter basis was the sale of the student loan portfolio, a reduction in warehouse finance loans, and the seasonal decline in tax services loans.

• The Company resumed share repurchases on July 1, 2022, and during the fiscal 2022 fourth quarter repurchased 573,200 shares of common stock at an average share price of $37.05.

• Total revenue for the fourth quarter was $161.0 million, an increase of $37.8 million, or 31%, compared to the same quarter in fiscal 2022, driven by an increase in both net interest income and noninterest income.

• Net interest margin ("NIM") increased 98 basis points to 6.19% fo r the fourth quarter from 5.21% during the same period of last year, p rimarily driven by increased yields and an improved earning asset mix from the continued optimization of the portfolio.

• Total gross loans and leases at September 30, 2023 increased $829.8 million , to $4.37 billion compared to September 30, 2022.

The increase compared to the prior year quarter was primarily due to growth in the commercial and consumer finance portfolios.

• During the 2023 fiscal fourth quarter, the Company repurchased 311,727 shares of common stock at an average share price of $51.29.

Subsequent Events

2 unchanged sentences

FINANCIAL CONDITION

At September 30, 2022, the Company’s total assets increased by $56.8 million to $6.75 billion compared to September 30, 2021.

Total cash and cash equivalents was $388.0 million at September 30, 2022, increasing from $314.0 million at September 30, 2021.

At September 30, 2023, the Company’s total assets increased by $788.1 million to $7.54 billion compared to September 30, 2022, primarily due to growth of $829.8 million in total loans and leases and $56.7 million in loans held for sale, partially offset by reductions of $78.6 million in securities available for sale and $20.3 million in other assets.

Total cash and cash equivalents were $375.6 million at September 30, 2023, decreasing 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 September 30, 2023, the Company did not have any federal funds sold.

The total investment portfolio increased $3.0 million to $1.92 billion at September 30, 2022, compared to $1.92 billion at September 30, 2021, as purchases exceeded maturities and principal pay downs.

The total investment portfolio decreased $83.7 million to $1.84 billion at September 30, 2023, compared to $1.92 billion at September 30, 2022, as maturities and principal pay downs exceeded purchases.

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.

Of the total $1.35 billion MBS held by the Company at September 30, 2022, $1.10 billion were issued by a U.S.

Government agency or instrumentality.

During the fiscal year ended September 30, 2023, the Company purchased $156.9 million of investment securities.

Loans held for sale at September 30, 2022 totaled $21.1 million, decreasing from $56.2 million at September 30, 2021.

This decrease was primarily driven by a reduction in SBA/USDA loans held for sale at September 30, 2022 compared to September 30, 2021.

The Company’s total loans and leases decreased $78.5 million, or 2%, to $3.53 billion at September 30, 2022, from $3.61 billion at September 30, 2021.

The decrease was primarily driven due the sale of all remaining community banking loans during the fiscal 2022 first quarter, the sale of the student loan portfolio during the fiscal 2022 fourth quarter, and a reduction in warehouse finance loans, partially offset by growth in our commercial finance portfolio.

Loans held for sale at September 30, 2023 totaled $77.8 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 September 30, 2023 compared to September 30, 2022.

Total gross loans and leases totaled $4.37 billion at September 30, 2023, as compared to $3.54 billion at September 30, 2022.

The increase was primarily due to increases in commercial finance, consumer finance, and warehouse finance loans, partially offset by a slight reduction in seasonal tax services loans.

See Note 4 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Commercial finance loans, which comprised 86% of the Company's gross loan and lease portfolio, totaled $3.02 billion at September 30, 2022 , reflecting growth of $298.2 million , or 11% , from September 30, 2021 .

When excluding PPP loans, the community bank portfolio and the student loan portfolio, total loans and leases grew 9 % a t September 30, 2022 when compared to the same period of the prior year.

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.

Commercial finance loans, which comprised 85% of the Company's gross loan and lease portfolio, totaled $3.72 billion at September 30, 2023 , reflecting an increase of $699.5 million , or 23% , from September 30, 2022 .

The increase was primarily driven by increases in the insurance premium finance, SBA/USDA, term lending, and asset-based lending portfolios, partially offset by reductions in the factoring and lease financing portfolios.

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 FRB.

The FHLB requires a level of stock investment based on a pre-determined formula.

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

The Company’s investment in these stocks decreased $0.6 million, or 2%, to $28.2 million at September 30, 2023 from $28.8 million at September 30, 2022, resulting from redemptions exceeding purchases of FHLB membership stock.

Total end-of-period deposits increased 12% to $6.59 billion at September 30, 2023, compared to $5.87 billion at September 30, 2022.

The increase in end-of-period deposits was primarily driven by an increase in noninterest-bearing deposits of $628.9 million, partially offset by decreases in interest-bearing checking of $254.3 million and in wholesale deposits of $73.6 million.

The Company's total borrowings decreased $56.8 million, or 61%, from $92.8 million at September 30, 2021 to $36.0 million at September 30, 2022.

The increase in end-of-period deposits was primarily driven by increases in noninterest-bearing deposits of $685.8 million and money market deposits of $47.4 million, partially offset by decreases in savings deposits of $8.1 million and certificate of deposits of $2.1 million.

As of September 30, 2023 , the Company had $897.5 million in deposits related to government stimulus programs.

Of the total amount of government stimulus program deposits, $340.7 million are on activated cards while $556.8 million are on inactivated cards.

During fiscal year 2024, the inactive card balances are expected to decrease by approximately $380 million as the Company actively returns unclaimed balances to the U.S.

The Company's total borrowings increased $10.9 million, or 30%, from $36.0 million at September 30, 2022 to $46.9 million at September 30, 2023.

See Note 11 to the “Notes to Consolidated Financial Statements,” which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

At September 30, 2022, the Company’s stockholders’ equity totaled $645.1 million, a decrease of $226.7 million, from $871.9 million at September 30, 2021.

The decrease was primarily attributable to a reduction in accumulated other comprehensive income and a reduction in retained earnings related to activity from the Company's share repurchase programs.

At September 30, 2023, the Company’s stockholders’ equity totaled $650.6 million, an increase of $5.5 million, from $645.1 million at September 30, 2022.

The increase was primarily attributable to an increase in additional paid-in capital and retained earnings related to activity from the Company's share repurchase programs partially offset by an increase in accumulated other comprehensive loss.

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

9 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:

15 unchanged sentences

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

As of September 30, 2023, the Company managed $267.6 million of customer deposits at other banks in its capacity as custodian.

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

For the fiscal year ended September 30, 2022, the Company recognized $6.4 million in servicing fee income.

In prior periods, the Servicing Fee was not significant.

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

As of September 30, 2022, the Company managed $1.31 billion 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 37% of the deposit balances at September 30, 2022 are subject to variable card processing expenses that are derived from the terms of contractual agreements with certain BaaS partners.

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

The Servicing Fee has been typically reflective of the EFFR.

For the fiscal year ended September 30, 2023, the Company recognized $53.4 million in servicing fee income compared to $6.4 million for the prior fiscal year.

The increase when compared to the prior year was driven by several factors, including the interest rate environment, increased balances, and fiscal year 2023 being the first full year that the Company received the Servicing Fee.

RESULTS OF OPERATIONS

2 unchanged sentences

The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan and lease demand and deposit flows.

Notwithstanding that a significant amount of the Company’s deposits, primarily those attributable to the BaaS business line, pay relatively low rates of interest or none at all, the Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities and that card processing expense derived from contractual agreements with certain BaaS partners are tied to a rate index and servicing fees the Company recognizes for custodial off-balance sheet deposits are typically reflective of the EFFR.

The provision for credit losses is the adjustment to the allowance for credit losses balance for the applicable period.

The allowance for credit losses represents management’s current estimate of credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date.

The Company’s noninterest income is derived primarily from tax product fees, prepaid cards, credit products, deposit and ATM fees attributable to the BaaS business line and fees charged on bank loans, leases and transaction accounts.

The Company’s noninterest income is derived primarily from tax product fees, card and deposit fees, credit products, and ATM fees attributable to the BaaS business line and fees charged on bank loans, leases and transaction accounts.

Noninterest income is also derived from rental income, net gains on the sale of securities, net gains on the sale of loans and leases, as well as the Company’s holdings of bank-owned life insurance.

This income is offset by noninterest expenses, such as compensation and occupancy expenses associated with additional personnel and office locations, as well as card processing expenses and tax product expenses attributable to the Baas business line.

Noninterest expense is also impacted by acquisition-related expenses, operating lease equipment depreciation expense, occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses.

This income is offset by noninterest expenses, such as compensation and benefits associated with personnel, as well as card processing expenses and tax product expenses attributable to the Baas business line.

Noninterest expense is also impacted by operating lease equipment depreciation expense, occupancy and equipment expense, legal and consulting expenses, and regulatory expense.

Average Balances, Interest Rates and Yields

34 unchanged sentences

Overnight fed funds purchased 74,812 3,922 5.24 % 32,414 235 0.73 % 6 — 0.25 %

FHLB Advances — — — % — — — % 106,093 2,638 2.49 %

Subordinated debentures 19,560 1,422 7.27 % 46,441 3,375 7.27 % 73,886 4,507 6.10 %

47 unchanged sentences

Interest-bearing liabilities:

Interest-bearing checking $ — $ — $ — $ 66 $ (324) $ (258)

Savings $ 1 $ — $ 1 $ (1) $ 9 $ 8

4 unchanged sentences

Overnight fed funds purchased 644 3,043 3,687 235 — 235

FHLB Advances — — — (1,319) (1,319) (2,638)

Subordinated debentures (1,952) (1) (1,953) (1,887) 755 (1,132)

4 unchanged sentences

Comparison of Operating Results for the Fiscal Years Ended September 30, 2023 and September 30, 2022

The Company recorded net income of $156.4 million, or $5.26 per diluted share, for the fiscal year ended September 30, 2022, compared to $141.7 million, or $4.38 per diluted share, for the fiscal year ended September 30, 2021, an increase of $14.7 million.

The Company reported net income of $163.6 million, or $5.99 per diluted share, for the fiscal year ended September 30, 2023, compared to $156.4 million, or $5.26 per diluted share, for the fiscal year ended September 30, 2022, an increase of $7.2 million.

Total revenue for fiscal 2023 was $704.5 million, compared to $601.1 million for fiscal 2022, an increase of 17%.

The increases in net income was primarily due to an increase in noninterest income and a decrease in provision for credit losses, partially offset by an increase in non-interest expense.

The increase in net income was driven by an increase in both net interest income and noninterest income.

Net Interest Income

Net interest income for fiscal 2022 increased by $28.3 million, or 10%, to $307.3 million from $279.0 million for the same period of the prior year.

The increase in net interest income was mainly attributable to increased yields and an improved earning asset mix.

NIM was 4.84% for fiscal 2022, an increase of 101 basis points from 3.83% in fiscal 2021.

The increase in NIM in fiscal 2022, compared to the same period of the prior year was primarily attributable to the decrease in noninterest-bearing deposit balances related to government stimulus-related dollars.

The overall reported tax equivalent yield ("TEY") on average interest-earning assets increased by 99 basis points to 4.93% when comparing fiscal 2022 to fiscal 2021.

The growth was driven primarily by an increase in loan and lease and investment securities yields, along with a decrease in lower-yielding cash balances.

The overall yield on the loan and lease portfolio increased primarily related to increased yields in the tax services portfolio.

The increase in tax services yields for fiscal 2022 compared to fiscal 2021 was due to a change in mix between interest and fee income.

The fiscal 2022 TEY on the securities portfolio increased by 39 basis points to 2.05% as compared to the same period of the prior year.

The Company's average interest-earning assets for fiscal 2022 decreased $924.0 million, or 13%, to $6.35 billion, from $7.28 billion during fiscal 2021.

The decrease was primarily attributable to a decrease in average cash balances of $1.42 billion, partially offset by increases in total average investment securities of $390.4 million, and in average loan and lease balances of $109.0 million.

The increase in the Company's average loan and lease balances was driven by growth of $335.3 million and $102.9 million in commercial finance and warehouse finance loans, respectively, partially offset by the sale of the remaining community bank portfolio of $340.5 million.

The Company’s average balance of total deposits and interest-bearing liabilities decreased $973.8 million, or 14%, to $6.12 billion during fiscal 2022, from $7.09 billion during fiscal 2021.

This decrease was primarily due to decreases in average interest-bearing deposits of $310.7 million and noninterest-bearing deposits of $664.0 million, partially offset by an increase in the average balance of total borrowings of $0.9 million.

Overall, the Company’s cost of funds for all deposits and borrowings averaged 0.08% during fiscal 2022, compared to 0.10% during fiscal 2021.

The cost of deposits was 0.01% during fiscal 2022, the same as during fiscal 2021.

The Company believes that its growing, lower-cost deposit base gives it a distinct and significant competitive advantage, and even more so if interest rates rise, because the Company anticipates that its cost of funds will likely remain relatively low, increasing less than at many other banks.

Net interest income for fiscal 2023 was $387.9 million, an increase of 26%, from $307.3 million for the same period of the prior year.

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

The Company's average interest-earning assets for fiscal 2023 increased by $72.2 million to $6.42 billion compared with 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 Company's average outstanding balance of loans and leases increased $108.8 million compared to the prior fiscal year, primarily due to an increase in commercial finance loans, partially offset by decreases in consumer finance loans, tax services loans, and warehouse finance loans.

The Company’s average balance of total deposits and interest-bearing liabilities increased $18.5 million to $6.14 billion during fiscal 2023 from $6.12 billion during fiscal 2022.

This increase was primarily due to increases in average interest-bearing deposits of $43.1 million and total borrowings of $13.1 million, partially offset by a decrease in the average noninterest-bearing deposits of $37.8 million.

For fiscal 2023, NIM was 6.04%, an increase of 120 basis points from 4.84% in fiscal 2022.

NIM, tax-equivalent for fiscal 2023 increased to 6.05% from 4.85% in fiscal 2022.

See the table in section above titled "Average Balances, Interest Rates and Yields."

The Company’s cost of funds for all deposits and borrowings averaged 0.18% during fiscal 2023, as compared to 0.08% during fiscal 2022.

The Company's overall cost of deposits was 0.12% in fiscal 2023, as compared to 0.01% during fiscal 2022.

Provision for Credit Losses

During fiscal 2022, the Company recorded $28.5 million in provision for credit losses, compared to $49.8 million in fiscal 2021.

The decrease in provision was primarily driven by a reversal of provision for credit losses related to the community bank and student loan portfolio sales, along with a decrease in commercial finance provision expense.

The Company recognized a provision for credit losses of $57.4 million for fiscal 2023 compared to $28.5 million in fiscal 2022.

The increase in provision for credit losses was primarily driven by growth in the commercial finance portfolio.

Also see Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Noninterest Income

Noninterest income increased by $22.9 million, or 8%, to $293.8 million for fiscal 2022 from $270.9 million for fiscal 2021.

The increase in noninterest income was primarily driven by gain on sale of trademarks, partially offset by loss on sale of other and a reduction in other income.

Within payment card and deposit fee income, the Company recognized $6.4 million from servicing fee income on off-balance sheet deposits during the fiscal year ended September 30, 2022.

The amount of servicing fee income recognized during the prior period was not significant.

Noninterest income increased 8% to $316.6 million for fiscal 2023 from $293.8 million for fiscal 2022.

The increase was primarily attributable to increases in card and deposit fees, rental income, gain on sale of other, and other income, partially offset by decrease in gain on sale of trademarks.

The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $53.4 million during the fiscal year ended September 30, 2023, as compared to $6.4 million for the fiscal year ended September 30, 2022.

Noninterest Expense

Noninterest expense increased by $41.6 million, or 12%, to $385.3 million for fiscal 2022 from $343.7 million for fiscal 2021.

This increase in noninterest expense was primarily driven by an increase in compensation expense of $20.0 million, in card processing expense of $11.6 million, and in legal and consulting expense of $9.3 million.

The card processing expense increase was due to structured agreements with banking as a service ("BaaS") partners.

Noninterest expense increased 21% to $465.0 million for fiscal 2023 from $385.3 million for fiscal 2022.

The increase in noninterest expense was primarily attributable to increases in card processing expense, compensation and benefits expense, and operating lease equipment depreciation, partially offset by a decrease in legal and consulting expense.

The card processing expense increase was due to rate-related agreements with BaaS partners.

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

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

Approximately 37% of the deposit portfolio was subject to these higher card processing expenses.

For the fiscal year ended September 30, 2022, card processing expenses related to these structured agreements were $9.9 million, as compared to $0.4 million for the fiscal year ended September 30, 2021.

Approximately 49% of the deposit portfolio was subject to these higher rate-related processing expenses.

For fiscal 2023, contractual, rate-related processing expenses were $77.4 million, as compared to $9.9 million for the fiscal year ended September 30, 2022.

Income Tax Expense

The Company recorded an income tax expense of $28.0 million for fiscal 2022, resulting in an effective tax rate of 15.2%, compared to an income tax expense of $10.7 million and an effective tax rate of 7.0%, in fiscal 2021.

The increase in recorded income tax expense during the period was primarily due to a decrease in the investment tax credit.

For the fiscal year ended September 30, 2022, the Company originated $62.8 million in solar leases, compared to $101.1 million for the comparable prior year period.

The timing and impact of future solar tax credits are expected to vary from period to period, and the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

The Company recorded an income tax expense of $16.3 million, representing an effective tax rate of 9.0%, for fiscal 2023, compared to an income tax expense of $28.0 million, representing an effective tax rate of 15.2%, in fiscal 2022.

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

For the fiscal year ended September 30, 2023, the Company originated $93.6 million in renewable energy tax credits, compared to $62.8 million for the prior fiscal year.

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.

Comparison of Operating Results for the Fiscal Years Ended September 30, 2022, and September 30, 2021

19 unchanged sentences

Commercial finance $ 37,372 $ 13,375

Community banking — 14,915

Total nonaccruing loans and leases 37,372 13,375

Accruing loans and leases delinquent 90 days or more:

Loans held for sale 306 —

Commercial finance 11,242 4,142

11 unchanged sentences

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

At September 30, 2022, nonperforming loans and leases totaled $29.2 million, representing 0.82% of total loans and leases, compared to $55.9 million, or 1.52% of total loans and leases at September 30, 2021.

The Company's nonperforming loans and leases at September 30, 2023, were $56.2 million, representing 1.26% 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 nonperforming assets as a percentage of total assets at September 30, 2023 compared to September 30, 2022 was primarily due to one sizable relationship moving to nonaccrual within the commercial finance portfolio, partially offset by a decrease in nonperforming loans in the seasonal tax services portfolio and the consumer finance portfolio.

Classified Assets .

8 unchanged sentences

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.

Further, at September 30, 2023, the Company did not own any real estate or other assets as a result of foreclosure of loans, as compared to owning an insignificant amount at September 30, 2022.

Allowance for Credit Losses .

6 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 $45.9 million at September 30, 2022, a decrease compared to $68.3 million at September 30, 2021.

Th e $22.3 million year-o ver-year decrease in the ACL was primarily driven by a $12.3 million decrease attributable to the disposition of the community banking portfolio, along with a $5.9 million decrease in the consumer finance portfolio and a $4.1 million decrease in the commercial finance portfolio.

The Company's ACL totaled $49.7 million at September 30, 2023, an increase compared to $45.9 million at September 30, 2022.

Th e $3.8 million year-o ver-year increase in the ACL was primarily driven by a $2.8 million increase in the allowance related to the commercial finance portfolio and a $0.9 million increase in the allowance related to the consumer finance portfolio.

The year-over-year increase in the allowance related to both the commercial finance and consumer finance portfolios was primarily attributable to loan growth in each respective portfolio.

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

5 unchanged sentences

Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %

Community banking — % — % — % — % 6.16 %

Total loans and leases 1.14 % 2.01 % 2.27 % 1.50 % 1.30 %

Total loans and leases excluding tax services 1.14 % 1.21 % 1.40 % 1.50 % 1.30 %

The Company's ACL as a percentage of total loans and leases decreased to 1.30% at September 30, 2022 from 2.04% at June 30, 2022.

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

The decrease in the consumer finance portfolio coverage ratio was attributable to the sale of the student loan portfolio.

The Company's ACL as a percentage of total loans and leases decreased to 1.14% at September 30, 2023 from 1.30% at September 30, 2022.

The decrease in the total loans and leases coverage ratio was primarily driven by a decrease in the commercial finance portfolio which was due to both quantitative and qualitative factors.

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

15 unchanged sentences

The cohort loss rate is a life of loan loss rate that immediately reverts to historical loss information for the remaining maturity of the financial asset.

Management has elected to use a twelve-month reasonable and supportable forecast for forward-looking information.

Management has elected to use a twelve to twenty-four month reasonable and supportable forecast for forward-looking information.

Factors utilized in the determination of the allowance include historical loss experience, current and forecasted economic conditions, and measurement date credit characteristics such as product type, delinquency, and industry.

The unfunded credit commitments depend on these same factors, as well as estimates of lines of credit usage.

The collective evaluation of expected credit losses for certain consumer lending portfolios utilize different methodologies when estimating expected credit losses.

The Company’s student loan portfolio utilizes a roll-rate historical loss rate and adjustments for forward-looking information, including macroeconomic conditions.

Management has elected to use a twelve-month reasonable and supportable forecast with an immediate reversion to historical loss rates.

The collective evaluation of expected credit losses for certain consumer lending portfolios utilizes different methodologies when estimating expected credit losses.

Investment debt securities held to maturity include implicit and explicit guarantees by government agencies and have an expected zero risk of loss, therefore no provision for credit loss for debt securities held to maturity has been included in the Company’s Consolidated Statement of Operations.

19 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.

The Bank is required by regulation to maintain sufficient liquidity to assure its safe and sound operation.

In the opinion of management, the Bank is in compliance with this requirement.

Liquidity management is both a daily and long-term function of the Company’s management strategy.

The Company adjusts its investments in liquid assets based upon management’s assessment of (i) expected loan demand, (ii) the projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the objectives of its asset/liability management program.

Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency or instrumentality obligations.

If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and other wholesale funding sources.

The Company is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company’s liquidity or its ability to borrow additional funds.

The primary investing activities of the Company are the origination of loans and leases and the purchase of securities.

During the fiscal years ended September 30, 2022, 2021 and 2020, the Company originated loans and leases totaling $14.98 billion, $12.62 billion and $9.79 billion, respectively.

Purchases of loans and leases totaled $115.4 million, $311.3 million, and $151.4 million during the fiscal years ended September 30, 2022, 2021 and 2020.

During the fiscal years ended September 30, 2022, 2021 and 2020, the Company purchased MBS and other securities in the amount of $907.4 million, $1.04 billion and $229.3 million, respectively.

Of these purchases, there were no securities designated as held to maturity in fiscal 2022, 2021 and 2020.

At September 30, 2023, the Company had unfunded loan and lease commitments of $1.31 billion.

Certificates of deposit scheduled to mature in one year or less at September 30, 2022 totaled $5.9 million, of which $0.1 million were wholesale time deposits and $5.8 million were non-wholesale time deposits.

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

The liquidity sources as of September 30, 2023 include $375 million in cash and cash equivalents and $268 million in off-balance sheet deposits.

When factoring in all resources, such as the FHLB, the FRB Discount Window and other unsecured funding and wholesale options, the Company has over $2.6 billion in available liquidity.

The following table summarizes the Company’s significant contractual obligations at September 30, 2023.

(Dollars in thousands) Total Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years

(Dollars in thousands) Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total

Time deposits $ 5,165 $ 369 $ — $ — $ 5,534

Wholesale time deposits 99 99 — — —

Short-term debt 13,000 — — — 13,000

Long-term debt 621 — — 33,252 33,873

1 unchanged sentence

Total $ 18,786 $ 8,000 $ 6,287 $ 51,891 $ 84,964

During July 2001, the Company’s unconsolidated trust subsidiary, First Midwest Financial Capital Trust I, sold $10.3 million in floating-rate cumulative preferred securities.

Proceeds from the sale were used to purchase trust preferred securities of the Company, which mature in 2031, and are redeemable at any time after five years.

The capital securities are required to be redeemed on July 25, 2031;

however, the Company has the option to redeem them earlier.

On May 15, 2022, the Company retired the outstanding $75.0 million of its 5.75% fixed-to-floating rate subordinated debentures due August 15, 2026.

On September 23, 2022, the Company completed a private placement of $20.0 million of its 6.625% fixed-to-floating rate subordinated debentures due 2032 to certain qualified institutional buyers and accredited investors.

These notes will mature on September 30, 2032, unless earlier redeemed.

Beginning on September 30, 2027, the notes may be redeemed, in whole or in part, at the Company's option subject to regulatory approval, on any scheduled interest payment date.

Prior to September 30, 2027, the notes may be redeemed, in whole but not in part, at any time upon certain other specified events.

The Company has used and intends to continue to use the net proceeds of the offering for general corporate purposes and repurchases of the Company's common stock.

Through the Crestmark Acquisition, consummated in the fourth quarter of fiscal 2018, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the company.

The subordinated debentures bear interest at LIBOR plus 3.00%, have a stated maturity of 30 years and are redeemable by the Company at par, with regulatory approval.

See Note 8 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

For more information on the Company’s short-term and long-term borrowings, see “Funding Activities – Borrowings” within Item 1 “Business,” which is included in Part I of this Annual Report on Form 10-K and Note 11 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.”

The Company and the Bank met regulatory requirements for classification as well-capitalized institutions at September 30, 2023.

3 unchanged sentences

Prior to authorizing such transactions, the Board of Directors considers the effect the dividend or repurchase of shares would have on liquidity and regulatory capital ratios.

On August 16, 2022, the Inflation Reduction Act of 2022 ("IRA") was signed into law.

The IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations, including the Company.

The excise tax is imposed on the value of net stock repurchased or treated as repurchased and will apply to stock repurchases occurring after December 31, 2022.

See "Regulation and Supervision - Limitations on Dividends and Other Capital Distributions" within Item 1 "Business", which is included in Part I of this Annual Report on Form 10-K.

No assurance can be given that our regulators will consider our liquidity level, or our capital level, though substantially in excess of current rules pursuant to which the Company and the Bank are considered “well-capitalized,” to be sufficiently high in the future.

See Note 15 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.

Impact of New Accounting Standards

1 unchanged sentence

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-K

Item 7. Management’s Discussion and Analysis