What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-07 compared with 2024-02-08 · 150 added, 84 removed, 261 unchanged (47% of the section changed)

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future operating results including our performance expectations;

impacts of our improved data analytics, underwriting, and monitoring processes;

expected nonperforming loan resolutions and net charge-off rates;

the performance of our securities portfolio;

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

the potential adverse effects of unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflicts in Ukraine and the Middle East, 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;

the potential adverse effects of unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflicts in Ukraine and the Middle East, weather-related disasters, or public health events, such as pandemics, and any governmental or societal responses thereto;

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

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the growth of the Company’s business, as well as expenses related thereto;

continued maintenance by Pathward of its status as well capitalized;

continued maintenance by Pathward of its status as a well-capitalized institution;

changes in consumer borrowing, spending, and saving habits;

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We caution you not to place undue reliance on these forward-looking statements.

The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise.

The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof.

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” and in other sections of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2023, 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.

The Company expressly disclaims any intent or obligation to update, revise, or clarify 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.

The Company, a registered bank holding company that has elected to be a financial holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a chartered national bank, the accounts of which are insured up to applicable limits by the FDIC as administrator of the Deposit Insurance Fund.

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

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2024, compared to September 30, 2023, and the consolidated results of operations for the three and six months ended March 31, 2024 and 2023.

This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the fiscal year ended September 30, 2023 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, 2023.

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Company Highlights

• On January 16, 2024, the Company announced a multi-year extension with a long-standing partner that allows for collaboration on product innovation and expanded product offerings for a range of programs in market and under development.

Financial Highlights for the 2024 Fiscal First Quarter

• Total revenue for the first quarter was $162.8 million, an increase of $13.0 million, or 9%, compared to the same quarter in fiscal 2023, d riven by an increase in net interest income, partially offset by a decrease in noninterest income.

• Net interest margin ("NIM") increase d 61 basis points to 6.23% for the first quarter from 5.62% 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 December 31, 2023 increased $916.6 million to $4.43 billion compared to December 31, 2022 and increased $60.2 million when compared to September 30, 2 023.

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

The primary driver for the sequential increase was growth in seasonal consumer finance loans related to a tax partnership.

• During the 2024 fiscal first quarter, the Company repurchased 232,588 shares of common stock at an average share price of $47.25.

• On February 27.

2024, the Board of Directors (the "Board') of Pathward Financial appointed Neeraj Mehta as a member of the Board.

• On April 3, 2024, Pathward®, N.A.

announced it became Certified™ by Great Place to Work® for the second year in a row.

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

Financial Highlights for the 2024 Fiscal Second Quarter

• Total revenue for the second quarter was $247.2 million, an increase of $18.8 million, or 8%, compared to the same quarter in fiscal 2023, d riven by an increase in both net interest income and noninterest income.

• Net interest margin ("NIM") increase d 11 basis points to 6.23% for the second quarter from 6.12% 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 March 31, 2024 increased $683.8 million to $4.41 billion compared to March 31, 2023 and decreased $16.9 million when compared to December 31, 2 023.

The increase compared to the prior year quarter was primarily due to growth across all loan portfolios.

The primary driver for the sequential decrease was a reduction in the commercial and consumer finance portfolios, partially offset by growth in the warehouse finance and seasonal tax services loan portfolios.

• During the 2024 fiscal second quarter, the Company repurchased 764,185 shares of common stock at an average share price of $51.20.

For the six months ended March 31, 2024, total tax services product revenue was $72.9 million, an increase of 1% compared to the same period of the prior year.

Total tax services product fee income increased marginally compared to the prior year, while total tax services product expense and net interest income on tax services loans decreased.

Provision for credit losses for the tax services portfolio decreased $6.5 million for the six months ended March 31, 2024 when compared to the same period of the prior year, due to improvements in data analytics, underwriting and monitoring which helped lead to net recoveries of $4.9 million recognized in the tax services portfolio during the first six months of 2024.

Total tax services product income, net of losses and direct product expenses, increased 24% to $36.9 million from $29.7 million, when comparing the first six months of fiscal 2024 to the same period of the prior fiscal year.

For the 2024 tax season through March 31, 2024, Pathward originated $1.56 billion in refund advance loans compared to $1.46 billion during the 2023 tax season.

FINANCIAL CONDITION

At December 31, 2023, the Company’s total assets increased to $7.93 billion compared to September 30, 2023, primarily due to growth of $296.0 million in cash and cash equivalents, $60.2 million in total loans and leases, and $46.4 million in securities AFS, partially offset by a reduction of $11.8 million in other assets.

Total cash and cash equivalents were $671.6 million at December 31, 2023, increasing from $375.6 million at September 30, 2023.

At March 31, 2024, the Company’s total assets decreased to $7.44 billion compared to September 30, 2023, primarily due to reductions of $51.8 million in loans held for sale, $27.7 million in cash and cash equivalents, and $24.8 million in securities AFS.

Total cash and cash equivalents were $347.9 million at March 31, 2024, decreasing from $375.6 million at September 30, 2023.

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

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

The total investment portfolio increased $45.2 million, or 2%, to $1.89 billion at December 31, 2023, compared to $1.84 billion at September 30, 2023.

At March 31, 2024, the Company did not have any federal funds sold.

The total investment portfolio decreased $26.7 million, or 1%, to $1.81 billion at March 31, 2024, compared to $1.84 billion at September 30, 2023.

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 three months ended December 31, 2023, the Company made no purchases of investment securities.

During the six months ended March 31, 2024, the Company made no purchases of investment securities.

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 was $23.7 million at December 31, 2023 and $28.2 million at September 30, 2023, as redemptions were partially offset by purchases of FHLB membership stock during the three months ended December 31, 2023.

Loans held for sale at December 31, 2023 totaled $69.5 million, decreasing from $77.8 million at September 30, 2023.

This decrease was primarily driven by a reduction in consumer credit products held for sale at December 31, 2023 compared to September 30, 2023.

Total gross loans and leases totaled $4.43 billion at December 31, 2023, as compared to $4.37 billion at September 30, 2023 .

The primary drivers for the increase was an increase in seasonal consumer finance loans, seasonal tax services loans and commercial finance loans, partially offset by a decrease in warehouse finance loans.

The Company’s investment in these stocks was $25.8 million at March 31, 2024 and $28.2 million at September 30, 2023, as redemptions were partially offset by purchases of FHLB membership stock during the six months ended March 31, 2024.

Loans held for sale at March 31, 2024 totaled $25.9 million, decreasing from $77.8 million at September 30, 2023.

This decrease was primarily driven by a reduction in consumer credit products held for sale at March 31, 2024 compared to September 30, 2023.

Total gross loans and leases totaled $4.41 billion at March 31, 2024, as compared to $4.37 billion at September 30, 2023 .

The increase was due to growth in the consumer finance, seasonal tax services, and warehouse finance loan portfolios, partially offset by a reduction in the commercial loan portfolio.

See Note 4 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

Commercial finance loans, which comprised 85% of the Company's gross loan and lease portfolio, totaled $3.73 billion at December 31, 2023 , reflecting an increase of $11.4 million from September 30, 2023.

The increase in commercial finance loans was primarily driven by a $144.1 million increase in the term lending portfolio and a $21.3 million increase in the SBA/USDA portfolio, partially offset by a $129.0 million decrease in the insurance premium finance portfolio.

Total end-of-period deposits increased 5% to $6.94 billion at December 31, 2023, compared to $6.59 billion at September 30, 2023, primarily driven by increases in noninterest-bearing deposits of $215.9 million and wholesale deposits of $135.7 million, partially offset by a decrease in savings deposits of $4.9 million.

As of December 31, 2023, the Company had $837.6 million in deposits related to government stimulus programs.

Commercial finance loans, which comprised 83% of the Company's gross loan and lease portfolio, totaled $3.66 billion at March 31, 2024 , reflecting a decrease of $67.1 million from September 30, 2023.

The decrease in commercial finance loans was primarily driven by a $277.2 million decrease in the insurance premium finance portfolio and a $21.9 million decrease in the factoring portfolio, partially offset by a $180.9 million increase in the term lending portfolio and a $47.2 million increase in the asset-based lending portfolio.

Total end-of-period deposits decreased 3% to $6.37 billion at March 31, 2024, compared to $6.59 billion at September 30, 2023, primarily driven by a decrease in noninterest-bearing deposits of $320.9 million, partially offset by an increase in wholesale deposits of $96.0 million.

As of March 31, 2024, the Company had $740.8 million in deposits related to government stimulus programs.

Of the total amount of government stimulus program deposits, $323.3 million are on activated cards while $417.5 million are on inactivated cards.

During the remainder of fiscal year 2024, the inactive deposit balances are expected to decline by approximately $219 million as the Company actively returns unclaimed balances to the U.S.

The Company's total borrowings decreased $13.3 million from $46.9 million at September 30, 2023 to $33.6 million at December 31, 2023, primarily driven by a decrease in short-term borrowings of $13.0 million.

At December 31, 2023, the Company’s stockholders’ equity totaled $729.3 million, an increase of $78.7 million, from $650.6 million at September 30, 2023.

The Company's total borrowings increased $17.5 million from $46.9 million at September 30, 2023 to $64.4 million at March 31, 2024, primarily driven by an increase in short-term borrowings of $18.0 million.

At March 31, 2024, the Company’s stockholders’ equity totaled $739.5 million, an increase of $88.8 million, from $650.6 million at September 30, 2023.

The increase was primarily attributable to an increase in accumulated other comprehensive income and retained earnings.

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

The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2024, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

See “Liquidity and Capital Resources” for further information.

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

(Dollars in thousands) December 31, 2023 September 30, 2023

(Dollars in thousands) March 31, 2024 September 30, 2023

Noninterest-bearing deposits $ 6,414,550 $ 6,608,137

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

As of December 31, 2023, the Company managed $1.1 billion of customer deposits at other banks in its capacity as custodian.

As of March 31, 2024, the Company managed $1.2 billion of customer deposits at other banks in its capacity as custodian.

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

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Nonaccruing loans and leases have been included in the table as loans or leases carrying a zero yield.

Three Months Ended December 31,

Three Months Ended March 31,

(Dollars in thousands) Average

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6.24 % 6.14 %

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

(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2024 and 2023 was 21%.

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

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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.

The Company recorded net income of $27.7 million, or $1.06 per diluted share, for the three months ended December 31, 2023, compared to net income of $27.8 million, or $0.98 per diluted share, for the three months ended December 31, 2022.

Six Months Ended March 31,

(Dollars in thousands) Average

Balance Interest

Interest-earning assets:

Cash and fed funds sold $ 476,371 $ 11,525 4.84 % $ 393,469 $ 7,559 3.85 %

Mortgage-backed securities 1,475,753 20,047 2.72 % 1,560,251 20,738 2.67 %

Tax exempt investment securities 134,612 1,862 3.50 % 152,359 1,970 3.28 %

Asset-backed securities 243,831 6,933 5.69 % 149,055 2,422 3.26 %

Other investment securities 283,168 4,579 3.23 % 299,905 4,783 3.20 %

Total investments 2,137,364 33,421 3.17 % 2,161,570 29,913 2.82 %

Commercial finance 3,707,184 149,675 8.07 % 3,033,331 118,865 7.86 %

Consumer finance 357,228 19,729 11.05 % 193,157 10,614 11.02 %

Tax services 259,338 9,003 6.94 % 234,619 10,612 9.07 %

Warehouse finance 394,747 19,306 9.78 % 305,724 12,184 7.99 %

Total loans and leases 4,718,497 197,713 8.38 % 3,766,831 152,275 8.11 %

Total interest-earning assets 7,332,232 $ 242,659 6.63 % 6,321,870 $ 189,747 6.04 %

Noninterest-earning assets 571,730 600,676

Total assets $ 7,903,962 $ 6,922,546

Interest-bearing liabilities:

Interest-bearing checking $ 346 $ 1 0.33 % $ 358 $ 1 0.33 %

Savings 57,334 11 0.04 % 66,275 12 0.04 %

Money markets 186,681 1,173 1.26 % 132,108 148 0.23 %

Time deposits 5,273 7 0.27 % 7,075 4 0.11 %

Wholesale deposits 324,909 9,019 5.55 % 95,074 2,073 4.37 %

Total interest-bearing deposits 574,543 10,211 3.55 % 300,890 2,238 1.49 %

Overnight fed funds purchased 98,421 2,763 5.61 % 35,638 787 4.43 %

Subordinated debentures 19,613 711 7.25 % 19,558 711 7.28 %

Other borrowings 14,040 637 9.07 % 15,553 549 7.09 %

Total borrowings 132,074 4,111 6.23 % 70,749 2,047 5.80 %

Total interest-bearing liabilities 706,617 14,322 4.05 % 371,639 4,285 2.31 %

Noninterest-bearing deposits 6,287,220 — — % 5,706,615 — — %

Total deposits and interest-bearing liabilities 6,993,837 $ 14,322 0.41 % 6,078,254 $ 4,285 0.14 %

Other noninterest-bearing liabilities 216,979 185,005

Total liabilities 7,210,816 6,263,259

Shareholders' equity 693,146 659,287

Total liabilities and shareholders' equity $ 7,903,962 $ 6,922,546

Net interest income and net interest rate spread including noninterest-bearing deposits $ 228,337 6.22 % $ 185,462 5.89 %

Net interest margin 6.23 % 5.88 %

Tax-equivalent effect 0.01 % 0.02 %

Net interest margin, tax-equivalent (2)

6.24 % 5.90 %

(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2024 and 2023 was 21%.

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

The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income.

The Company recorded net income of $65.3 million, or $2.56 per diluted share, for the three months ended March 31, 2024, compared to net income of $54.8 million, or $1.99 per diluted share, for the three months ended March 31, 2023.

The Company recorded net income of $92.9 million, or $3.61 per diluted share, for the six months ended March 31, 2024, compared to net income of $82.6 million, or $2.95 per diluted share, for the six months ended March 31, 2023.

Net Interest Income

Net interest income for the first quarter of fiscal 2024 was $110.0 million, an increase of 31% from the same quarter in fiscal 2023.

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 the first quarter of fiscal 2024 increased by $1.10 billion to $7.03 billion compared to the same quarter in fiscal 2023, primarily due to growth in loans and leases and an increase in cash balances, partially offset by a decrease in total investment security balances.

The first quarter average outstanding balance of loans and leases increased $1.01 billion compared to the same quarter of the prior fiscal year, primarily due to an increase in commercial, consumer, and warehouse finance portfolios.

Fiscal 2024 first quarter NIM increased to 6.23% from 5.62% in the first fiscal quarter of last year.

The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increased 87 basis points to 6.57% compared to the prior year quarter, driven by an increase in loan and lease, investment securities and cash yields.

Net interest income for the second quarter of fiscal 2024 was $118.3 million, an increase of 17% from the same quarter in fiscal 2023.

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

For the six months ended March 31, 2024, net interest income was $228.3 million, an increase of 23%, from $185.5 million compared to the same period in the prior fiscal year.

The Company’s average interest-earning assets for the second quarter of fiscal 2024 increased by $917.9 million to $7.64 billion compared to the same quarter in fiscal 2023, primarily due to growth in loans and leases and an increase in cash balances, partially offset by a decrease in total investment security balances.

The second quarter average outstanding balance of loans and leases increased $889.1 million compared to the same quarter of the prior fiscal year, primarily due to an increase across all loan portfolios.

Fiscal 2024 second quarter NIM increased to 6.23% from 6.12% in the second fiscal quarter of last year.

The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increase d 35 basis points to 6.69% compared to the prior year quarter, driven by an improved earning asset mix.

The yield on the loan and lease portfolio was 8.43% compared to 8.47% for the comparable period last year and the TEY on the securities portfolio was 3.20% compared to 2.89% over that same period.

The Company's cost of funds for all deposits and borrowings averaged 0.35% during the fiscal 2024 first quarter, as compared to 0.07% during the prior year quarter.

The Company's overall cost of deposits was 0.21% in the fiscal first quarter of 2024, as compared to 0.01% during the prior year quarter.

For the six months ended March 31, 2024, NIM was 6.23%, an increase of 35 basis points from 5.88% compared to the same period in the prior fiscal year.

The Company's cost of funds for all deposits and borrowings averaged 0.47% during the fiscal 2024 second quarter, as compared to 0.21% during the prior year quarter.

The Company's overall cost of deposits was 0.38% in the fiscal second quarter of 2024, as compared to 0.13% during the prior year quarter.

Provision for Credit Loss

The Company recognized a provision for credit loss of $9.9 million for the quarter ended December 31, 2023, compared to $9.8 million for the comparable period in the prior fiscal year.

Net charge-offs were $5.5 million for the quarter ended December 31, 2023, compared to $3.2 million for the quarter ended December 31, 2022.

Net charge-offs attributable to the commercial finance, tax services, and consumer finance portfolios for the current quarter were $4.6 million, $0.8 million, and $0.1 million, respectively.

Net charge-offs attributable to the commercial finance, tax services, and consumer finance portfolios for the same quarter of the prior year were $2.0 million, $1.0 million, and $0.2 million, respectively.

The Company recognized a provision for credit loss of $26.1 million for the three months ended March 31, 2024, compared to $36.8 million for the comparable period in the prior fiscal year.

The period-over-period decrease in provision for credit loss was due to improvements in the Company's data analytics, underwriting and monitoring within the tax services portfolio along with a decrease in provision for credit losses in the commercial finance portfolio primarily du e to a mix shift in the loan portfolio and a benign credit environment .

The Company recognized n et recoveries of $1.1 million for the quarter ended March 31, 2024, compared to net charge-offs of $5.0 million for the quarter ended March 31, 2023.

Net charge-offs attributable to the commercial finance portfolio for the current quarter were $4.7 million, while recoveries of $5.8 million were recognized in the tax services portfolio.

Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same quarter of the prior year were $5.9 million and $0.2 million, respectively, while a recovery of $1.1 million was recognized in the tax services portfolio.

The Company recognized a provision for credit loss of $35.9 million for the six months ended March 31, 2024, compared to $46.5 million for the comparable period in the prior fiscal year.

The decrease was primarily due to reductions in the tax services and commercial finance portfolios.

The Company recognized net charge-offs of $4.4 million for the six months ended March 31, 2024, compared to net charge-offs of $8.2 million for the six months ended March 31, 2023.

Net charge-offs attributable to the commercial finance portfolio for the current six months were $9.3 million, while net recoveries of $4.9 million were recognized in the tax services portfolio.

Net charge-offs attributable to the commercial finance portfolio were $7.9 million for the same six months of the prior year, while net recoveries in the tax services portfolio were insignificant.

Noninterest Income

Fiscal 2024 first quarter noninterest income decreased 20% to $52.8 million, compared to $65.8 million for the same period of the prior year.

The decrease was primarily attributable to the $10.0 million gain on sale of trademarks recognized during the prior year period, along with a decrease in card and deposit fees.

The period-over-period decrease was partially offset by increases in gain on sale of other, other income, and rental income.

The increase in gain on sale of other was driven by a $2.5 million gain related to an investment in the Pathward Venture Capital business.

The decrease in card and deposit fee income was primarily related to servicing fee income on off-balance sheet deposits, which totale d $5.1 million during the 2024 fiscal first quarter, as compared to $7.8 million for the fiscal quarter ended September 30, 2023 and $12.9 million for the same period of the prior year.

The decrease in servicing fee income was due to a reduction in off-balance sheet deposits that the Company manages at other banks.

Fiscal 2024 second quarter noninterest income increased 2% to $128.9 million, compared to $127.0 million for the same period of the prior year.

The increase was primarily driven by an increase in refund advance fee income.

The period-over-period increase was partially offset by a decrease in card and deposits fees.

The period-over-period decrease in card and deposit fee income was primarily related to servicing fee income on off-balance sheet deposits, which totale d $10.4 million during the 2024 fiscal second quarter, compared to $18.2 million for the same period of the prior year.

The decrease in servicing fee income when compared to the prior year period was due to a reduction in off-balance sheet deposits.

Noninterest income for the six months ended March 31, 2024 decreased to $181.7 million from $192.8 million for the same period of the prior year.

Noninterest Expense

Noninterest expense increased 14% to $119.3 million for the fiscal 2024 first quarter, from $105.1 million for the same quarter last year.

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

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

Noninterest expense increased 10% to $140.4 million for the fiscal 2024 second quarter, from $127.1 million for the same quarter last year.

The increase was primarily attributable to increases in card processing expense, compensation and benefits expense, impairment expense, legal and consulting expense, and occupancy and equipment expense.

The period-over-period increase was partially offset by decreases in operating lease equipment depreciation, other expense, refund transfer product expense, and intangible amortization expense.

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

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Generally, this rate index is based on a percentage of the Effective Federal Funds Rate ("EFFR") and reprices immediately upon a change in the EFFR.

Approximately 53% of the deposit portfolio was subject to these rate-related processing expenses during the 2024 fiscal first quarter.

For the fiscal quarter ended December 31, 2023, contractual, rate-related processing expenses were $26.8 million, as compared to $22.5 million for the fiscal quarter ended September 30, 2023 and $14.0 million for the fiscal quarter ended December 31, 2022.

Approximately 56% of the deposit portfolio was subject to these rate-related processing expenses during the 2024 fiscal second quarter.

For the fiscal quarter ended March 31, 2024, contractual, rate-related processing expenses were $30.1 million, as compared to $26.8 million for the fiscal quarter ended December 31, 2023 and $20.4 million for the fiscal quarter ended March 31, 2023.

Noninterest expense for the six months ended March 31, 2024 increased to $259.7 million from $232.2 million for the same period of the prior year.

Income Tax Expense

The Company recorded an income tax expense of $5.7 million, representing an effective tax rate of 17.0%, for the fiscal 2024 first quarter, compared to $6.6 million, representing an effective tax rate of 18.8%, for the first quarter last fiscal year.

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

The Company originated $12.2 million in renewable energy leases during the fiscal 2024 first quarter, resulting in $4.4 million in total net investment tax credits.

During the first quarter of fiscal 2023, the Company originated $11.4 million in renewable energy leases resulting in $3.1 million in total net investment tax credits.

The Company recorded an income tax expense of $15.2 million, representing an effective tax rate of 18.9%, for the fiscal 2024 second quarter, compared to $9.2 million, representing an effective tax rate of 14.2%, for the second quarter last fiscal year.

The current quarter increase in income tax expense compared to the prior year quarter was primarily due to increased earnings and also a decrease in investment tax credits recognized ratably when compared to the prior year quarter.

The Company originated $25.9 million in renewable energy leases during the fiscal 2024 second quarter, resulting in $7.0 million in total net investment tax credits.

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

For the six months ended March 31, 2024, the Company originated $38.1 million in renewable energy leases, compared to $29.5 million for the comparable prior year period.

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

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The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as modifications or loans and leases on nonaccrual status.

The Company believes that the level of allowance for credit losses at December 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 March 31, 2024 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) December 31, 2023 September 30, 2023

(Dollars in thousands) March 31, 2024 September 30, 2023

Nonperforming Loans and Leases

14 unchanged sentences

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

The Company's nonperforming assets at December 31, 2023 were $42.4 million, representing 0.53% of total assets, compared to $58.0 million, or 0.77% of total assets at September 30, 2023.

The decrease in the nonperforming assets as a percentage of total assets at December 31, 2023 compared to September 30, 2023, was primarily driven by paydowns within the commercial finance portfolio.

The Company's nonperforming loans and leases at December 31, 2023 were $39.5 million, representing 0.88% of total gross loans and leases, compared to $56.2 million, or 1.26% of total gross loans and leases at September 30, 2023.

The Company's nonperforming assets at March 31, 2024 were $37.2 million, representing 0.50% of total assets, compared to $58.0 million, or 0.77% of total assets at September 30, 2023.

The decrease in the nonperforming assets as a percentage of total assets at March 31, 2024 compared to September 30, 2023, was primarily driven by a decrease in nonperforming loans in the commercial finance portfolio.

The Company's nonperforming loans and leases at March 31, 2024 were $34.4 million, representing 0.78% of total gross loans and leases, compared to $56.2 million, or 1.26% of total gross loans and leases at September 30, 2023.

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 December 31, 2023, the Company had classified loans and leases of $197.7 million as substandard, $10.1 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at March 31, 2024, the Company had classified loans and leases of $218.1 million as substandard, $9.3 million as doubtful and none as loss.

At September 30, 2023, the Company classified loans and leases of $208.2 million as substandard, $8.2 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 $53.8 million at December 31, 2023, an increase compared to $49.7 million at September 30, 2023.

The increase in the ACL at December 31, 2023, when compared to September 30, 2023, wa s primarily due to a $2.0 million increase in the allowance related to the consumer finance portfolio and a $1.6 million increase in the allowance related to the commercial finance portfolio.

The Company's ACL totaled $80.8 million at March 31, 2024, an increase compared to $49.7 million at September 30, 2023.

The increase in the ACL at March 31, 2024, when compared to September 30, 2023, wa s primarily due to a $31.5 million increase in the allowance related to the seasonal tax services portfolio.

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

As of the Period Ended

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

March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023

Commercial finance 1.21 % 1.30 % 1.26 % 1.35 % 1.53 %

4 unchanged sentences

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

The Company's ACL as a percentage of total loans and leases increased to 1.22% at December 31, 2023 from 1.14% at September 30, 2023.

The increase in the total loans and leases coverage ratio was primarily driven by an increase in the consumer finance portfolio due to seasonal activity and an increase in the seasonal tax services portfolio.

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

The Company's ACL as a percentage of total loans and leases increased to 1.83% at March 31, 2024 from 1.14% at September 30, 2023.

The increase in the total loans and leases coverage ratio was primarily driven by seasonality in both the tax services portfolio and consumer finance portfolio.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

5 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, 2023.

There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2024.

There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2024.

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 December 31, 2023, the Company had unfunded loan and lease commitments of $1.51 billion.

At March 31, 2024, the Company had unfunded loan and lease commitments of $1.45 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 December 31, 2023 include $1.1 billion in off-balance sheet deposits and $672 million in cash and cash equivalents.

When factoring in additional resources, such as the Federal Home Loan Bank, the Federal Reserve Discount Window and other unsecured funding and wholesale options, the Company has over $3.8 billion in total available liquidity as of December 31, 2023.

The liquidity sources as of March 31, 2024 include $1.2 billion in off-balance sheet deposits and $348 million in cash and cash equivalents.

When factoring in additional resources, such as the Federal Home Loan Bank, the Federal Reserve Discount Window and other unsecured funding and wholesale options, the Company has over $3.6 billion in total available liquidity as of March 31, 2024.

The Company and the Bank are required to comply with the regulatory capital rules administered by federal banking agencies (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 December 31, 2023, the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

At March 31, 2024, 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;

4 unchanged sentences

to be Adequately Capitalized Under Prompt Corrective Action Provisions Minimum to be Well Capitalized Under Prompt Corrective Action Provisions

At December 31, 2023

At March 31, 2024

Tier 1 leverage capital ratio 7.75 % 7.92 % 4.00 % 5.00 %

9 unchanged sentences

Standardized Approach (1)

(Dollars in thousands) December 31, 2023 September 30, 2023

(Dollars in thousands) March 31, 2024 September 30, 2023

Total stockholders' equity $ 739,462 $ 650,625

16 unchanged sentences

those changes were fully phased in through the end of 2021.

Since January 1, 2016, the Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers.

The Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers.

The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio.

3 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, 2023 for a summary of our contractual obligations as of September 30, 2023.

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

There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2023 through March 31, 2024.

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