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; progress on key strategic initiatives; expected results of our partnerships; 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; 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 June 30, 2024, compared to September 30, 2023, and the consolidated results of operations for the three and nine months ended June 30, 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 April 30, 2024, Pathward Financial was recognized on Keefe, Bruyette & Woods, Inc.'s (also known as "KBW") honor roll list of the top banks producing "industry-leading and consistent earnings growth for investors." • During the quarter, Pathward announced the expansion and transformation of its Solutions for Financial Institutions, which previously only provided prepaid cards to banks and credit unions. With this expansion, Pathward can now also provide Commercial Finance Solutions to their business clients that do not qualify for traditional financing or when a product is not offered. Pathward also provides financial institutions the ability to offer merchant services to business clients. Financial Highlights for the 2024 Fiscal Third Quarter • Total revenue for the third quarter was $176.7 million, an increase of $11.5 million, or 7%, compared to the same quarter in fiscal 2023, d riven by an increase in net interest income, partially offset by a reduction in noninterest income. • Net interest margin ("NIM") increase d 38 basis points to 6.56% for the third quarter from 6.18% during the same period of last year, p rimarily driven by increased yields on earning assets and an improved earning asset mix from the continued optimization of the portfolio. • Total gross loans and leases at June 30, 2024 increased $539.7 million to $4.61 billion compared to June 30, 2023 and increased $203.2 million when compared to March 31, 2 024. The increase compared to the prior year quarter was due to growth across the commercial finance, consumer finance, and warehouse finance loan portfolios, partially offset by a slight reduction in the seasonal tax services portfolio. The primary driver for the sequential increase was growth in the commercial and warehouse finance loan portfolios, partially offset by a reduction in the consumer finance and seasonal tax services loan portfolios. • During the 2024 fiscal third quarter, the Company repurchased 286,920 shares of common stock at an average share price of $52.24. Tax Season For the nine months ended June 30, 2024, total tax services product revenue was $82.0 million, an increase of 3% compared to the same period of the prior year. The increase in revenue was primarily driven by an increase in refund advance fee income, partially offset by decreases in net interest income and refund transfer product fees. Provision for credit losses for the tax services portfolio decreased $9.5 million for the nine months ended June 30, 2024 when compared to the same period of the prior year, due to improvements in data analytics, underwriting and monitoring. 39 Table of Contents Total tax services product income, net of losses and direct product expenses, increased 33% to $47.1 million from $35.3 million, when comparing the first nine months of fiscal 2024 to the same period of the prior fiscal year. FINANCIAL CONDITION At June 30, 2024, the Company’s total assets decreased slightly to $7.53 billion compared to $7.54 billion at September 30, 2023, primarily due to reductions of $78.8 million in securities AFS, $76.7 million in cash and cash equivalents, and $48.4 million in loans held for sale, partially offset by growth of $246.4 million in loans and leases. Total cash and cash equivalents were $298.9 million at June 30, 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 June 30, 2024, the Company did not have any federal funds sold. The total investment portfolio decreased $81.3 million, or 4%, to $1.76 billion at June 30, 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 nine months ended June 30, 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 $24.4 million at June 30, 2024 and $28.2 million at September 30, 2023, as redemptions were partially offset by purchases of FHLB membership stock during the nine months ended June 30, 2024. Loans held for sale at June 30, 2024 totaled $29.4 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 June 30, 2024 compared to September 30, 2023. Total gross loans and leases totaled $4.61 billion at June 30, 2024, as compared to $4.37 billion at September 30, 2023 . The increase was due to growth in the commercial finance, seasonal tax services, and warehouse finance loan portfolios, partially offset by a reduction in the consumer 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 84% of the Company's loan and lease portfolio, totaled $3.86 billion at June 30, 2024 , reflecting an increase of $137.0 million from September 30, 2023. The increase in commercial finance loans was primarily driven by a $225.6 million increase in the term lending portfolio and a $90.9 million increase in the asset-based lending portfolio, partially offset by a $183.0 million decrease in the insurance premium finance portfolio. Total end-of-period deposits decreased 2% to $6.43 billion at June 30, 2024, compared to $6.59 billion at September 30, 2023, primarily driven by decreases in noninterest-bearing deposits of $176.3 million and money market deposits of $15.4 million, partially offset by an increase in wholesale deposits of $37.4 million. As of June 30, 2024, the Company had $575.7 million in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $236.9 million are on activated cards while $338.8 million are on inactivated cards. During the remainder of fiscal year 2024, the inactive deposit balances are expected to decline by approximately $180 million as the Company actively returns unclaimed balances to the U.S. Treasury. The Company's total borrowings decreased $13.6 million from $46.9 million at September 30, 2023 to $33.3 million at June 30, 2024, primarily driven by a decrease in short-term borrowings of $13.0 million. At June 30, 2024, the Company’s stockholders’ equity totaled $765.2 million, an increase of $114.6 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 June 30, 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. 40 Table of Contents 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) June 30, 2024 September 30, 2023 Noninterest-bearing deposits $ 6,475,675 $ 6,608,137 Prefunding (236,633) (230,749) Discount funding (70,419) (34,351) DDA overdrafts (12,018) (10,096) Noninterest-bearing checking, net $ 6,156,605 $ 6,332,941 Off-Balance Sheet Custodial 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 June 30, 2024, the Company managed $352.8 million 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 June 30, 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 $ 224,987 $ 2,053 3.67 % $ 248,865 $ 2,441 3.93 % Mortgage-backed securities 1,438,683 9,748 2.73 % 1,533,122 10,234 2.68 % Tax exempt investment securities 128,117 911 3.62 % 145,474 989 3.45 % Asset-backed securities 220,461 3,148 5.74 % 188,039 2,120 4.52 % Other investment securities 282,966 2,211 3.14 % 292,025 2,320 3.19 % Total investments 2,070,227 16,018 3.16 % 2,158,660 15,663 2.96 % Commercial finance 3,756,152 78,353 8.39 % 3,268,780 68,174 8.37 % Consumer finance 286,476 6,865 9.64 % 225,470 4,665 8.30 % Tax services 56,836 55 0.39 % 52,477 25 0.19 % Warehouse finance 407,210 10,598 10.47 % 372,498 8,378 9.02 % Total loans and leases 4,506,674 95,871 8.56 % 3,919,225 81,242 8.31 % Total interest-earning assets 6,801,888 $ 113,942 6.75 % 6,326,750 $ 99,346 6.31 % Noninterest-earning assets 537,525 574,840 Total assets $ 7,339,413 $ 6,901,590 Interest-bearing liabilities: Interest-bearing checking $ 684 $ — 0.14 % $ 339 $ — 0.22 % Savings 56,565 3 0.02 % 69,310 7 0.04 % Money markets 178,255 584 1.32 % 126,994 76 0.24 % Time deposits 4,265 3 0.32 % 6,224 3 0.19 % Wholesale deposits 74,167 1,099 5.96 % 5,794 78 5.38 % Total interest-bearing deposits (a) 313,936 1,689 2.16 % 208,661 164 0.32 % Overnight fed funds purchased 52,374 730 5.61 % 78,320 1,057 5.42 % Subordinated debentures 19,651 355 7.26 % 19,549 355 7.28 % Other borrowings 13,705 309 9.07 % 14,850 305 8.24 % Total borrowings 85,730 1,394 6.54 % 112,719 1,717 6.11 % Total interest-bearing liabilities 399,666 3,083 3.10 % 321,380 1,881 2.35 % Noninterest-bearing deposits (b) 5,947,054 — — % 5,686,581 — — % Total deposits and interest-bearing liabilities 6,346,720 $ 3,083 0.20 % 6,007,961 $ 1,881 0.13 % Other noninterest-bearing liabilities 252,763 206,708 Total liabilities 6,599,483 6,214,669 Shareholders' equity 739,930 686,921 Total liabilities and shareholders' equity $ 7,339,413 $ 6,901,590 Net interest income and net interest rate spread including noninterest-bearing deposits $ 110,859 6.56 % $ 97,465 6.19 % Net interest margin 6.56 % 6.18 % Tax-equivalent effect 0.01 % 0.02 % Net interest margin, tax-equivalent (2) 6.57 % 6.20 % Total cost of deposits (a+b) 6,260,990 1,689 0.11 % 5,895,242 164 0.01 % (1) Tax rate used to arrive at the TEY for the three months ended June 30, 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 Nine Months Ended June 30, 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 $ 392,882 $ 13,578 4.62 % $ 345,268 $ 10,000 3.87 % Mortgage-backed securities 1,463,441 29,795 2.72 % 1,551,208 30,972 2.67 % Tax exempt investment securities 132,455 2,773 3.54 % 150,065 2,959 3.34 % Asset-backed securities 236,070 10,081 5.70 % 162,049 4,541 3.75 % Other investment securities 287,659 6,790 3.15 % 297,278 7,104 3.19 % Total investments 2,119,625 49,439 3.16 % 2,160,600 45,576 2.87 % Commercial finance 3,723,447 228,028 8.18 % 3,111,814 187,038 8.04 % Consumer finance 333,730 26,595 10.64 % 203,928 15,279 10.02 % Tax services 192,084 9,057 6.30 % 173,905 10,637 8.18 % Warehouse finance 398,886 29,904 10.01 % 327,982 20,563 8.38 % Total loans and leases 4,648,147 293,584 8.44 % 3,817,629 233,517 8.18 % Total interest-earning assets 7,160,654 $ 356,601 6.67 % 6,323,497 $ 289,093 6.13 % Noninterest-earning assets 555,812 592,064 Total assets $ 7,716,466 $ 6,915,561 Interest-bearing liabilities: Interest-bearing checking $ 458 $ 1 0.23 % $ 352 $ 1 0.29 % Savings 57,079 14 0.03 % 67,287 19 0.04 % Money markets 183,882 1,757 1.28 % 130,403 225 0.23 % Time deposits 4,939 10 0.28 % 6,791 7 0.14 % Wholesale deposits 241,633 10,118 5.59 % 65,314 2,150 0.41 % Total interest-bearing deposits (a) 487,991 11,900 3.26 % 270,147 2,402 1.19 % Overnight fed funds purchased 83,128 3,493 5.61 % 49,865 1,845 4.95 % Subordinated debentures 19,625 1,066 7.26 % 19,555 1,065 7.28 % Other borrowings 13,930 946 9.07 % 15,319 854 7.46 % Total borrowings 116,683 5,505 6.30 % 84,739 3,764 5.94 % Total interest-bearing liabilities 604,674 17,405 3.84 % 354,886 6,166 2.32 % Noninterest-bearing deposits (b) 6,174,245 — — % 5,699,937 — — % Total deposits and interest-bearing liabilities 6,778,919 $ 17,405 0.34 % 6,054,823 $ 6,166 0.14 % Other noninterest-bearing liabilities 228,863 192,240 Total liabilities 7,007,782 6,247,063 Shareholders' equity 708,684 668,498 Total liabilities and shareholders' equity $ 7,716,466 $ 6,915,561 Net interest income and net interest rate spread including noninterest-bearing deposits $ 339,196 6.32 % $ 282,927 5.99 % Net interest margin 6.33 % 5.98 % Tax-equivalent effect 0.01 % 0.02 % Net interest margin, tax-equivalent (2) 6.34 % 6.00 % Total cost of deposits (a+b) 6,662,236 11,900 0.24 % 5,970,084 2,402 0.05 % (1) Tax rate used to arrive at the TEY for the nine months ended June 30, 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 $41.8 million, or $1.66 per diluted share, for the three months ended June 30, 2024, compared to net income of $45.1 million, or $1.68 per diluted share, for the three months ended June 30, 2023. The Company recorded net income of $134.8 million, or $5.27 per diluted share, for the nine months ended June 30, 2024, compared to net income of $127.7 million, or $4.62 per diluted share, for the nine months ended June 30, 2023. Net Interest Income Net interest income for the third quarter of fiscal 2024 was $110.9 million, an increase of 14% 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 nine months ended June 30, 2024, net interest income was $339.2 million, an increase of 20%, from $282.9 million compared to the same period in the prior fiscal year. The Company’s average interest-earning assets for the third quarter of fiscal 2024 increased by $475.1 million to $6.80 billion compared to the same quarter in fiscal 2023, due to growth in loans and leases, partially offset by a decrease in total investment security balances and a decrease in cash balances. The third quarter average outstanding balance of loans and leases increased $587.4 million compared to the same quarter of the prior fiscal year, due to an increase across all loan portfolios. Fiscal 2024 third quarter NIM increased to 6.56% from 6.18% in the third fiscal quarter of last year. The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increase d 44 basis points to 6.75% compared to the prior year quarter, driven by an improved earning asset mix. The yield on the loan and lease portfolio was 8.56% compared to 8.31% for the comparable period last year and the TEY on the securities portfolio was 3.16% compared to 2.96% over that same period. For the nine months ended June 30, 2024, NIM was 6.33%, an increase of 35 basis points from 5.98% compared to the same period in the prior fiscal year. The Company's cost of funds for all deposits and borrowings averaged 0.20% during the fiscal 2024 third quarter, as compared to 0.13% during the prior year quarter. The Company's overall cost of deposits was 0.11% in the fiscal third quarter of 2024, as compared to 0.01% during the prior year quarter. Provision for Credit Loss The Company recognized a provision for credit loss of $5.9 million for the three months ended June 30, 2024, compared to $1.8 million for the comparable period in the prior fiscal year. The period-over-period increase in provision for credit losses was primarily due to an increase in provision for credit losses in the commercial finance portfolio of $6.5 million , partially offset by a decrease of $3.1 million in the tax services portfolio . The Company recognized n et charge-offs of $6.6 million for the quarter ended June 30, 2024, compared to net charge-offs of $4.2 million for the quarter ended June 30, 2023. Net charge-offs attributable to the commercial finance portfolio for the current quarter were $7.0 million, while net recoveries of $0.4 million were recognized in the tax services portfolio. Net charge-offs attributable to the consumer finance portfolio for the current quarter were insignificant. Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same quarter of the prior year were $2.6 million and $1.9 million, respectively, while a net recovery of $0.3 million was recognized in the tax services portfolio. The Company recognized a provision for credit loss of $41.8 million for the nine months ended June 30, 2024, compared to $48.3 million for the comparable period in the prior fiscal year. The period-over-period decrease in provision for credit losses was primarily due to a decrease in provision for credit losses in the tax services portfolio of $9.5 million, partially offset by increases in the commercial finance portfolio of $1.4 million, the consumer finance portfolio of $0.8 million and unfunded commitment reserves of $0.8 million. The Company recognized net charge-offs of $11.0 million for the nine months ended June 30, 2024, compared to net charge-offs of $12.4 million for the same period of the prior year. Net charge-offs attributable to the commercial finance portfolio and consumer finance portfolio for the nine months ended June 30, 2024, were $16.2 million and $0.1 million, respectively, while net recoveries of $5.4 million were recognized in the tax services portfolio. Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same period of the prior year were $10.5 million and $2.2 million, respectively, while net recoveries of $0.3 million was recognized in the tax services portfolio. 44 Table of Contents Noninterest Income Fiscal 2024 third quarter noninterest income decreased 3% to $65.9 million, compared to $67.7 million for the same period of the prior year. The decrease was primarily driven by a decrease in card and deposit fees. The period-over-period decrease was partially offset by an increase in gain on sale of other and tax services product fees. The period-over-period decrease in card and deposit fee income was primarily related to lower servicing fee income due to a reduction in custodial deposits. Servicing fee income totale d $8.6 million during the 2024 fiscal third quarter, compared to $14.6 million for the same period of the prior year. Noninterest income for the nine months ended June 30, 2024 decreased to $247.6 million from $260.5 million for the same period of the prior year. The period-over-period decrease was primarily driven by a decrease in card and deposit fees and the gain on sale of trademarks recognized in the prior period, partially offset by increases in gain on sale of other, tax services product fees, other income, and rental income. Noninterest Expense Noninterest expense increased 8% to $123.7 million for the fiscal 2024 third quarter, from $114.6 million for the same quarter last year. The increase was primarily attributable to increases in card processing expense, other expense and compensation and benefits. The period-over-period increase was partially offset by a decrease in impairment 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 57% of the deposit portfolio was subject to these rate-related processing expenses during the 2024 fiscal third quarter. For the fiscal quarter ended June 30, 2024, contractual, rate-related processing expenses were $27.6 million, as compared to $30.1 million for the fiscal quarter ended March 31, 2024 and $20.5 million for the fiscal quarter ended June 30, 2023. Noninterest expense for the nine months ended June 30, 2024 increased to $383.4 million from $346.8 million for the same period of the prior year. The period-over-period increase was primarily driven by an increase in card processing expense and compensation and benefits expense. Income Tax Expense The Company recorded income tax expense of $5.1 million, representing an effective tax rate of 10.9%, for the fiscal 2024 third quarter, compared to $3.2 million, representing an effective tax rate of 6.6%, for the third quarter last fiscal year. The current quarter increase in income tax expense compared to the prior year quarter was primarily due to a decrease in investment tax credits recognized ratably when compared to the prior year quarter. The Company originated $4.3 million in renewable energy leases during the fiscal 2024 third quarter, resulting in $1.2 million in total net investment tax credits. During the third quarter of fiscal 2023, the Company originated $21.4 million in renewable energy leases resulting in $5.8 million in total net investment tax credits. For the nine months ended June 30, 2024, the Company originated $42.4 million in renewable energy leases, compared to $50.9 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 June 30, 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) June 30, 2024 September 30, 2023 Nonperforming Loans and Leases Nonaccruing loans and leases: Commercial finance $ 27,613 $ 37,372 Total nonaccruing loans and leases 27,613 37,372 Accruing loans and leases delinquent 90 days or more: Loans held for sale — 306 Commercial finance 8,427 11,242 Consumer finance 8,588 2,210 Tax services (1) — 5,082 Total accruing loans and leases delinquent 90 days or more 17,015 18,840 Total nonperforming loans and leases 44,628 56,212 Other Assets Nonperforming operating leases 1,677 1,764 Total other assets 1,677 1,764 Total nonperforming assets $ 46,305 $ 57,976 Total as a percentage of total assets 0.61 % 0.77 % (1) Certain tax services loans do not bear interest. The Company's nonperforming assets at June 30, 2024 were $46.3 million, representing 0.61% 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 June 30, 2024 compared to September 30, 2023, was primarily driven by a decrease in nonperforming loans in the tax services portfolio and commercial finance portfolio, partially offset by an increase in the consumer finance portfolio. The Company's nonperforming loans and leases at June 30, 2024 were $44.6 million, representing 0.96% of total gross loans and leases, compared to $56.2 million, or 1.26% of total gross loans and leases at September 30, 2023. 46 Table of Contents 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. 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 June 30, 2024, the Company had classified loans and leases of $192.5 million as substandard, $8.2 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 $79.8 million at June 30, 2024, an increase compared to $49.7 million at September 30, 2023. The increase in the ACL at June 30, 2024, when compared to September 30, 2023, wa s primarily due to a $28.7 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 June 30, 2024 March 31, 2024 December 31, 2023 September 30, 2023 June 30, 2023 Commercial finance 1.17 % 1.21 % 1.30 % 1.26 % 1.35 % Consumer finance 2.23 % 1.71 % 1.45 % 0.92 % 0.92 % Tax services 66.35 % 37.31 % 1.52 % 0.04 % 70.20 % Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % Total loans and leases 1.73 % 1.83 % 1.22 % 1.14 % 2.01 % Total loans and leases excluding tax services 1.12 % 1.14 % 1.21 % 1.14 % 1.21 % 47 Table of Contents The Company's ACL as a percentage of total loans and leases increased to 1.73% at June 30, 2024 from 1.14% at September 30, 2023. The increase in the total loans and leases coverage ratio was primarily driven by both the seasonal tax services portfolio and consumer finance portfolio, partially offset by a decrease in commercial finance portfolio. The decrease in the commercial finance loan and lease coverage ratio was due to a mix shift within the portfolio with higher balances in term lending and SBA/USDA loans, which typically carry lower reserve rates. 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 nine 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 June 30, 2024, the Company had unfunded loan and lease commitments of $1.39 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 June 30, 2024 include $298.9 million in cash and cash equivalents and $352.8 million in off-balance sheet custodial deposits. 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 $2.5 billion in total available liquidity as of June 30, 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 June 30, 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 June 30, 2024 Tier 1 leverage capital ratio 9.13 % 9.36 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 12.44 13.02 4.50 6.50 Tier 1 capital ratio 12.70 13.02 6.00 8.00 Total capital ratio 14.33 14.27 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) June 30, 2024 September 30, 2023 Total stockholders' equity $ 765,248 $ 650,625 Adjustments: LESS: Goodwill, net of associated deferred tax liabilities 296,496 297,679 LESS: Certain other intangible assets 18,315 21,228 LESS: Net deferred tax assets from operating loss and tax credit carry-forwards 11,880 19,679 LESS: Net unrealized (losses) on available for sale securities (206,584) (254,294) LESS: Noncontrolling interest (506) (1,005) ADD: Adoption of Accounting Standards Update 2016-13 1,345 2,017 Common Equity Tier 1 (1) 646,992 569,355 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 (374) (826) Total Tier 1 capital 660,279 582,190 Allowance for credit losses 65,182 47,960 Subordinated debentures, net of issuance costs 19,668 19,591 Total capital $ 745,129 $ 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 June 30, 2024.