PATHWARD FINANCIAL, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS PATHWARD FINANCIAL, INC. ("Pathward Financial" or the "Company" or "us") and its wholly-owned subsidiary, Pathward ® , National Association ("Pathward ® , N.A" or "Pathward" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and Pathward, N.A, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” "target," or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: 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; future effective tax rate; the impact of card balances related to government stimulus programs; progress on key initiatives; expected results of our partnerships; customer retention; loan and other product demand; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; 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: maintaining our executive management team; 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 pandemics, and any governmental or societal responses thereto; 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, 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 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; our liquidity and capital positions, including the sufficiency of our liquidity; 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 and acceptance of these products and services by users; Pathward's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by, our regulators; changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by Pathward of its status as a well-capitalized institution; changes in consumer borrowing, spending, and saving habits; losses from fraudulent or illegal activity; technological risks and developments and cyber threats, attacks, or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase. The foregoing list of factors is not exclusive. 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. 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, 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. 38 Table of Contents GENERAL 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. Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all direct or indirect subsidiaries of Pathward Financial on a consolidated basis. 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, 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. EXECUTIVE SUMMARY Company Highlights • 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. Tax Season 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. 39 Table of Contents 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 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 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 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 $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 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. Treasury. 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. 40 Table of Contents 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 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. Noninterest-bearing Checking Deposits. The Company may hold negative balances associated with cardholder programs in the BaaS business line that are included within noninterest-bearing deposits on the Company's Condensed Consolidated Statements of Financial Condition. Negative balances can relate to any of the following payments functions: – Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20. – Discount fundings: The Company funds cards in alignment to expected breakage values on the card. Consumers may spend more than is estimated. 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 are analyzed on an ongoing basis. – Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category. The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the BaaS business line: (Dollars in thousands) March 31, 2024 September 30, 2023 Noninterest-bearing deposits $ 6,414,550 $ 6,608,137 Prefunding (329,117) (230,749) Discount funding (62,552) (34,351) DDA overdrafts (10,858) (10,096) Noninterest-bearing checking, net $ 6,012,023 $ 6,332,941 Custodial Off-Balance Sheet Deposits. The Bank utilizes a custodial deposit transference structure for certain prepaid and deposit programs whereby the Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a “Program Bank”). Accounts opened at Program Banks are established in the Bank’s name as custodian, for the benefit of the Bank’s cardholders. The Bank remains the issuer of all cards and holder of all accounts under the applicable cardholder agreements and has sole custodial control and transaction authority over the accounts opened at Program Banks. The Bank maintains the records of each cardholder’s deposits maintained at Program Banks. Program Banks undergo robust due diligence prior to becoming a Program Bank and are also subject to continuous monitoring. 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. 41 Table of Contents RESULTS OF OPERATIONS The following table presents, 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. The balances presented in the table below are calculated on a daily average balance. Tax-equivalent adjustments have been made in yields on interest-bearing assets and NIM. Nonaccruing loans and leases have been included in the table as loans or leases carrying a zero yield. Three Months Ended March 31, 2024 2023 (Dollars in thousands) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Interest-earning assets: Cash and fed funds sold $ 616,288 $ 7,422 4.84 % $ 564,656 $ 5,843 4.20 % Mortgage-backed securities 1,464,530 9,998 2.75 % 1,549,240 10,326 2.70 % Tax exempt investment securities 132,733 932 3.57 % 149,912 990 3.39 % Asset-backed securities 237,421 3,368 5.71 % 141,968 1,273 3.64 % Other investment securities 281,695 2,291 3.27 % 298,030 2,376 3.23 % Total investments 2,116,379 16,589 3.20 % 2,139,150 14,965 2.89 % Commercial finance 3,650,845 74,330 8.19 % 3,056,293 60,765 8.06 % Consumer finance 351,459 9,144 10.46 % 187,826 6,301 13.60 % Tax services 493,168 9,014 7.35 % 448,659 10,555 9.54 % Warehouse finance 407,703 10,262 10.12 % 321,334 6,258 7.90 % Total loans and leases 4,903,175 102,750 8.43 % 4,014,112 83,879 8.47 % Total interest-earning assets 7,635,842 $ 126,761 6.69 % 6,717,918 $ 104,687 6.34 % Noninterest-earning assets 600,354 612,020 Total assets $ 8,236,196 $ 7,329,938 Interest-bearing liabilities: Interest-bearing checking $ 266 $ — 0.31 % $ 267 $ — 0.33 % Savings 59,914 5 0.04 % 70,024 6 0.03 % Money markets 190,143 598 1.26 % 125,193 71 0.23 % Time deposits 5,027 4 0.29 % 6,948 2 0.11 % Wholesale deposits 439,785 6,078 5.56 % 186,421 2,017 4.39 % Total interest-bearing deposits 695,135 6,685 3.87 % 388,853 2,096 2.19 % Overnight fed funds purchased 79,484 1,107 5.60 % 46,735 543 4.71 % Subordinated debentures 19,625 355 7.27 % 19,523 354 7.34 % Other borrowings 13,901 313 9.07 % 15,283 289 7.68 % Total borrowings 113,010 1,775 6.32 % 81,541 1,186 5.90 % Total interest-bearing liabilities 808,145 8,460 4.21 % 470,394 3,282 2.83 % Noninterest-bearing deposits 6,473,538 — — % 5,997,739 — — % Total deposits and interest-bearing liabilities 7,281,683 $ 8,460 0.47 % 6,468,133 $ 3,282 0.21 % Other noninterest-bearing liabilities 223,560 191,360 Total liabilities 7,505,243 6,659,493 Shareholders' equity 730,953 670,445 Total liabilities and shareholders' equity $ 8,236,196 $ 7,329,938 Net interest income and net interest rate spread including noninterest-bearing deposits $ 118,301 6.22 % $ 101,405 6.13 % Net interest margin 6.23 % 6.12 % Tax-equivalent effect 0.01 % 0.02 % Net interest margin, tax-equivalent (2) 6.24 % 6.14 % (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. 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 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. 42 Table of Contents Six Months Ended March 31, 2024 2023 (Dollars in thousands) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) 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 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. 43 Table of Contents General 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 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. 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 $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. 44 Table of Contents Noninterest Income 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 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. 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 is based on a percentage of the Effective Federal Funds Rate ("EFFR") and reprices immediately upon a change in the EFFR. 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 $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. Asset Quality Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a nonaccrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on nonaccrual status, but are instead written off when the collection of principal and interest become doubtful. 45 Table of Contents Loans and leases, or portions thereof, are generally charged-off when collection of principal becomes doubtful. Typically, this is associated with a delay or shortfall in payments of 210 days or more for insurance premium finance, 120 days or more for consumer credit products and leases, and 90 days or more for commercial finance loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year. 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 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. See the section below titled “Allowance for Credit Losses” for further information. The table below sets forth the amounts and categories of the Company's nonperforming assets. (Dollars in thousands) March 31, 2024 September 30, 2023 Nonperforming Loans and Leases Nonaccruing loans and leases: Commercial finance $ 27,781 $ 37,372 Total nonaccruing loans and leases 27,781 37,372 Accruing loans and leases delinquent 90 days or more: Loans held for sale 843 306 Commercial finance 2,679 11,242 Consumer finance 3,093 2,210 Tax services (1) — 5,082 Total accruing loans and leases delinquent 90 days or more 6,615 18,840 Total nonperforming loans and leases 34,396 56,212 Other Assets Nonperforming operating leases 2,782 1,764 Total other assets 2,782 1,764 Total nonperforming assets $ 37,178 $ 57,976 Total as a percentage of total assets 0.50 % 0.77 % (1) Certain tax services loans do not bear interest. 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 . Federal regulations provide for the classification of certain loans, leases, and other assets such as debt and equity securities considered by the Bank's primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. 46 Table of Contents General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. 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, 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. Allowance for Credit Losses . The ACL represents management’s estimate of current 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 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. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition. Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. 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 $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 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 % Consumer finance 1.71 % 1.45 % 0.92 % 0.92 % 1.99 % Tax services 37.31 % 1.52 % 0.04 % 70.20 % 53.77 % Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % Total loans and leases 1.83 % 1.22 % 1.14 % 2.01 % 2.27 % 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 1.83% 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. 47 Table of Contents CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. 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 six months of fiscal 2024. LIQUIDITY AND CAPITAL RESOURCES The Company’s primary sources of funds are deposits, derived principally through its BaaS business line, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. 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, 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 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"). Under the Capital Rules and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. 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, 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; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. 48 Table of Contents The table below includes certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. 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. Company Bank Minimum to be Adequately Capitalized Under Prompt Corrective Action Provisions Minimum to be Well Capitalized Under Prompt Corrective Action Provisions At March 31, 2024 Tier 1 leverage capital ratio 7.75 % 7.92 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 12.30 12.83 4.50 6.50 Tier 1 capital ratio 12.56 12.83 6.00 8.00 Total capital ratio 14.21 14.09 8.00 10.00 At September 30, 2023 Tier 1 leverage capital ratio 8.11 % 8.32 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 11.25 11.81 4.50 6.50 Tier 1 capital ratio 11.50 11.81 6.00 8.00 Total capital ratio 12.84 12.76 8.00 10.00 The following table provides a reconciliation of the amounts included in the table above for the Company. Standardized Approach (1) (Dollars in thousands) March 31, 2024 September 30, 2023 Total stockholders' equity $ 739,462 $ 650,625 Adjustments: LESS: Goodwill, net of associated deferred tax liabilities 296,889 297,679 LESS: Certain other intangible assets 19,146 21,228 LESS: Net deferred tax assets from operating loss and tax credit carry-forwards 15,862 19,679 LESS: Net unrealized (losses) on available for sale securities (205,460) (254,294) LESS: Noncontrolling interest (420) (1,005) ADD: Adoption of Accounting Standards Update 2016-13 1,345 2,017 Common Equity Tier 1 (1) 614,790 569,355 Long-term borrowings and other instruments qualifying as Tier 1 13,661 13,661 Tier 1 minority interest not included in common equity Tier 1 capital (311) (826) Total Tier 1 capital 628,140 582,190 Allowance for credit losses 62,715 47,960 Subordinated debentures, net of issuance costs 19,642 19,591 Total capital $ 710,497 $ 649,741 (1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes were fully phased in through the end of 2021. 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. The required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively. 49 Table of Contents Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. CONTRACTUAL OBLIGATIONS See "Item 7. 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 March 31, 2024.