What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2024-11-26 compared with 2023-11-21 · 99 added, 91 removed, 272 unchanged (41% of the section changed)

2 unchanged sentences

Part I, Item 1 “Business,” Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” and Part II, Item 8 “Financial Statements and Supplementary Data.”

The Company, a registered bank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank.

The Company, a registered BHC 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 DIF.

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.

EXECUTIVE SUMMARY

Company Highlights

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

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

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

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

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

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

Company Highlights and Business Developments

• On August 28, 2024, Pathward announced the sale of its commercial insurance premium finance business.

The sale was completed on October 31, 2024.

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

• On September 25, 2024, the Bank celebrated its 20th year serving the payments industry with the announcement it renamed its "Banking as a Service" business line to "Partner Solutions."

• On September 30, 2024, Pathward Financial and Pathward announced the Bank’s Partner Solutions line of business won the 2024 Finovate Award for Best Banking as a Service Provider.

According to Finovate, its awards recognize the companies driving fintech innovation forward and the individuals bringing new ideas to life.

Financial Highlights for the 2024 Fiscal Fourth Quarter

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

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

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

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

• Total revenue for the fourth quarter was $167.9 million, an increase of $6.9 million, or 4%, compared to the same quarter in fiscal 2023, driven by an increase in net interest income, partially offset by a reduction in noninterest income.

• Net interest margin ("NIM") increased 47 basis points to 6.66% fo r the fourth quarter from 6.19% 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 September 30, 2024 decreased $290.9 million , to $4.08 billion compared to September 30, 2023.

When excluding the insurance premium finance loans of $800.1 million at September 30, 2023, total gross loans and leases at September 30, 2024 increased $509.2 million, or 14%, when compared to September 30, 2023.

• During the 2024 fiscal fourth quarter, the Company repurchased 236,308 shares of common stock at an average share price of $63.44.

As of September 30, 2024, there were 7,000,000 shares available for repurchase under the current common stock share repurchase program.

Subsequent Events

2 unchanged sentences

FINANCIAL CONDITION

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

At September 30, 2024, the Company’s total assets increased slightly to $7.55 billion compared to $7.54 billion at September 30, 2023, primarily due to an increase of $611.1 million in loans held for sale and $8.1 million in accrued interest receivable, partially offset by decreases of $290.9 million in loans and leases, $217.2 million in cash and cash equivalents, $63.0 million in securities available for sale and $32.3 million in other assets.

Total cash and cash equivalents were $158.3 million at September 30, 2024, decreasing from $375.6 million at September 30, 2023.

1 unchanged sentence

At September 30, 2024, the Company did not have any federal funds sold.

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

The total investment portfolio decreased $66.5 million to $1.77 billion at September 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 fiscal year ended September 30, 2023, the Company purchased $156.9 million of investment securities.

Loans held for sale at September 30, 2023 totaled $77.8 million, increasing from $21.1 million at September 30, 2022.

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

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

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

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

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

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

During the fiscal year ended September 30, 2024, the Company made $3.5 million 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 decreased $0.6 million, or 2%, to $28.2 million at September 30, 2023 from $28.8 million at September 30, 2022, resulting from redemptions exceeding purchases of FHLB membership stock.

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

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

The Company’s investment in these stocks was $36.0 million at September 30, 2024, an increase from $28.2 million at September 30, 2023, as purchases of FHLB membership stock were partially offset by redemptions during the fiscal year.

Loans held for sale at September 30, 2024 totaled $688.9 million, increasing from $77.8 million at September 30, 2023.

This increase was primarily related to the commercial insurance premium finance portfolio moving to held for sale at September 30, 2024.

Total gross loans and leases totaled $4.08 billion at September 30, 2024, as compared to $4.37 billion at September 30, 2023.

The decrease was primarily related to the commercial insurance premium finance portfolio moving to held for sale, partially offset by growth in commercial finance loans excluding commercial insurance premium finance loans and warehouse finance loans.

When excluding commercial insurance premium finance loans, total gross loan and leases at September 30, 2024 increased $509.2 million, or 14%, when compared to September 30, 2023.

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

Commercial finance loans, which comprised 81% of the Company's loan and lease portfolio, totaled $3.30 billion at September 30, 2024 , reflecting a decrease of $427.6 million , or 11% , from September 30, 2023 .

The decrease was primarily driven by the aforementioned commercial insurance premium finance loans along with a decrease in lease financing.

This decrease was partially offset by increases in term lending, asset-based lending, SBA/USDA, and other commercial finance portfolios.

When excluding commercial insurance premium finance loans, commercial finance loans at September 30, 2024 increased $372.5 million, or 13%, compared to September 30, 2023.

Total end-of-period deposits decreased 11% to $5.88 billion at September 30, 2024, compared to $6.59 billion at September 30, 2023.

The decrease in end-of-period deposits was primarily driven by decreases in noninterest-bearing deposits of $715.8 million, money market deposits of $10.6 million, and savings deposits of $10.3 million, partially offset by an increase in wholesale deposits of $20.1 million.

As of September 30, 2024, the Company had $433.3 million in deposits related to government stimulus programs.

Of the total amount of government stimulus program deposits, $198.2 million are on activated cards while $235.1 million are on inactivated cards.

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

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

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

The Company's total borrowings increased $363.5 million to $410.4 million at September 30, 2024 from $46.9 million at September 30, 2023, primarily driven by an increase in short-term borrowings of $364.0 million.

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

At September 30, 2024, the Company’s stockholders’ equity totaled $839.6 million, an increase of $189.0 million, from $650.6 million at September 30, 2023.

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

The increase was primarily attributable to a decrease in accumulated other comprehensive loss and increases in additional paid-in capital and retained earnings.

The Company and Bank remained above the federal regulatory minimum capital requirements at September 30, 2024, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies.

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

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

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 Consolidated Statements of Financial Condition.

The Company may hold negative balances associated with cardholder programs in the Partner Solutions business line that are included within noninterest-bearing deposits on the Company's Consolidated Statements of Financial Condition.

Negative balances can relate to any of the following payments functions:

10 unchanged sentences

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:

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

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

4 unchanged sentences

Noninterest-bearing checking, net $ 5,617,097 $ 6,332,941

Custodial Off-Balance Sheet Deposits.

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”).

4 unchanged sentences

As of September 30, 2024, the Company managed $201.9 million of customer deposits at other banks in its capacity as custodian.

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

The Servicing Fee has been typically reflective of the EFFR.

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

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

These deposits provide the Company with the ability to earn servicing fee income, typically reflective of the EFFR.

Servicing fee income totaled $27.2 million during fiscal 2024, compared to $53.4 million for fiscal 2023.

RESULTS OF OPERATIONS

The Company’s results of operations are dependent on net interest income, provision for credit losses, noninterest income, noninterest expense and income tax expense.

The Company’s results of operations are dependent on net interest income, provision for credit loss, noninterest income, noninterest expense and income tax expense.

Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities.

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

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

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

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

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

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

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

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

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

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

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

33 unchanged sentences

Wholesale deposits 191,276 10,670 1.18 % 81,153 3,859 4.75 % 63,529 223 0.35 %

Total interest-bearing deposits 290,195 4,356 1.50 % 247,085 500 0.20 % 557,805 1,593 0.29 %

Total interest-bearing deposits (a) 432,645 13,019 3.01 % 290,195 4,356 1.50 % 247,085 500 0.20 %

Overnight fed funds purchased 99,290 5,538 5.58 % 74,812 3,922 5.24 % 32,414 235 0.73 %

3 unchanged sentences

Total interest-bearing liabilities 565,435 21,233 3.76 % 399,675 10,874 2.72 % 343,430 4,872 1.42 %

Noninterest-bearing deposits 5,739,084 — — % 5,776,852 — — % 6,440,830 — — %

Noninterest-bearing deposits (b) 6,113,217 — — % 5,739,084 — — % 5,776,852 — — %

Total deposits and interest-bearing liabilities 6,678,652 $ 21,233 0.32 % 6,138,759 $ 10,874 0.18 % 6,120,282 $ 4,872 0.08 %

8 unchanged sentences

6.42 % 6.05 % 4.85 %

(1) Tax rate used to arrive at the TEY for the fiscal years ended September 30, 2023, 2022, and 2021 was 21%.

Total cost of deposits (a+b) 6,545,862 13,019 0.20 % 6,029,279 4,356 0.07 % 6,023,937 500 0.01 %

(1) Tax rate used to arrive at the tax-equivalent yield ("TEY") for the fiscal years ended September 30, 2024, 2023, and 2022 was 21%.

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

44 unchanged sentences

The Company reported net income of $168.4 million, or $6.62 per diluted share, for the fiscal year ended September 30, 2024, compared to $163.6 million, or $5.99 per diluted share, for the fiscal year ended September 30, 2023, an increase of $4.7 million.

The increase in net income was driven by an increase in net interest income and a decrease in provision for credit losses, partially offset by a decrease in noninterest income and increases in noninterest expense and income tax expense.

Total revenue for fiscal 2024 was $754.7 million, compared to $704.5 million for fiscal 2023, an increase of 7%.

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

Net Interest Income

Net interest income for fiscal 2024 was $455.1 million, an increase of 17%, from $387.9 million for the same period of the prior year.

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

The Company's average interest-earning assets for fiscal 2023 increased by $72.2 million to $6.42 billion compared with fiscal 2022, primarily due to growth in loans and leases and an increase in total investment balances, partially offset by a decrease in cash balances.

The Company's average outstanding balance of loans and leases increased $108.8 million compared to the prior fiscal year, primarily due to an increase in commercial finance loans, partially offset by decreases in consumer finance loans, tax services loans, and warehouse finance loans.

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

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

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

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

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

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

The Company's average interest-earning assets for fiscal 2024 increased by $677.0 million to $7.10 billion compared with fiscal 2023, primarily due to growth in average outstanding balances of loans and leases and cash balances, partially offset by a decrease in total investment security balances.

The Company's average outstanding balance of loans and leases increased $723.6 million compared to the prior fiscal year due to increases across all loan portfolios.

The Company’s average deposits and interest-bearing liabilities increased $539.9 million to $6.68 billion during fiscal 2024 from $6.14 billion during fiscal 2023.

This increase was primarily due to increases in average noninterest-bearing deposits of $374.2 million, interest-bearing deposits of $142.5 million, and total borrowings of $23.3 million.

Fiscal 2024 NIM increased to 6.41% from 6.04% in fiscal 2023.

The overall reported TEY on average earning asset yields increased 37 basis points to 6.42% compared to the prior fiscal year primarily driven by an improved earning asset mix.

The yield on the loan and lease portfolio was 8.50% compared to 8.22% for the prior fiscal year and the TEY on the securities portfolio was 3.15% compared to 2.94% for the prior fiscal year.

The Company’s cost of funds for all deposits and borrowings averaged 0.32% during fiscal 2024, as compared to 0.18% during fiscal 2023.

The Company's overall cost of deposits was 0.20% in fiscal 2024, as compared to 0.07% during fiscal 2023.

Provision for Credit Losses

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

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

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

Provision for Credit Loss

The Company recognized a provision for credit loss of $42.7 million for fiscal 2024, compared to $57.4 million in fiscal 2023.

The period-over-period decrease in provision for credit loss was primarily due to decreases in the tax services portfolio of $12.8 million and the commercial finance portfolio of $3.3 million, partially offset by an increase of $0.8 million in provision for credit loss in the consumer finance portfolio.

The decrease in provision for credit loss in the commercial finance portfolio was primarily due to the commercial insurance premium finance portfolio moving to held for sale and reversing out the provision for credit loss on that portfolio.

The Company recognized net charge-offs of $46.6 million for the fiscal year ended September 30, 2024, compared to net charge-offs of $53.7 million for the fiscal year ended September 30, 2023.

Net charge-offs attributable to the tax services, commercial finance, and consumer finance portfolios for fiscal 2024 were $23.0 million, $19.5 million, and $4.1 million, respectively.

Net charge-offs attributable to the tax services, commercial finance, and consumer finance portfolios for fiscal 2023 were $35.8 million, $15.6 million, and $2.3 million, respectively.

Loans and Leases, Net for further information on the provision for credit loss.

Noninterest Income

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

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

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

Fiscal 2024 noninterest income decreased 5% to $299.6 million, compared to $316.6 million for fiscal 2023.

The decrease was primarily driven by a decrease in card and deposit fees and the gain on sale of trademarks recognized in the prior year, partially offset by increases in gain on sale of other and tax services product fees.

The 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 totaled $27.2 million during fiscal 2024, compared to $53.4 million for fiscal 2023.

Noninterest Expense

Noninterest expense increased 10% to $513.3 million for fiscal 2024 from $465.0 million for fiscal 2023.

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

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

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

The card processing expense increase was due to rate-related agreements with Partner Solutions relationships.

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

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

Generally this rate index is based on a percentage of the EFFR and reprices immediately upon a change in the EFFR.

Approximately 57% of the deposit portfolio was subject to these higher rate-related processing expenses.

1 unchanged sentence

Income Tax Expense

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

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

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

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

The Company recorded an income tax expense of $29.1 million, representing an effective tax rate of 14.7%, for fiscal 2024, compared to an income tax expense of $16.3 million, representing an effective tax rate of 9.0%, for fiscal 2023.

The increase in income tax expense was primarily due a decrease in investment tax credits.

For the fiscal year ended September 30, 2024, the Company originated $68.4 million in renewable energy leases, compared to $93.6 million for the prior fiscal year.

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

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

7 unchanged sentences

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.

Loans and leases, or portions thereof, are charged-off when collection of principal becomes doubtful.

Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans.

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 commercial 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.

Nonaccrual loans and troubled debt restructurings are generally considered impaired.

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 September 30, 2024 was appropriate and reflected probable losses related to these loans and leases;

15 unchanged sentences

Nonperforming operating leases 1,471 1,764

Foreclosed and repossessed assets:

Commercial finance — 1

Total foreclosed and repossessed assets — 1

Total other assets 1,471 1,764

2 unchanged sentences

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

The Company's nonperforming assets at September 30, 2024 were $43.0 million, representing 0.57% 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 September 30, 2024 compared to the prior fiscal year, was primarily driven by a decrease in nonperforming loans in the commercial finance portfolio, partially offset by increases in the tax services and consumer finance portfolios.

The Company's nonperforming loans and leases at September 30, 2024, were $41.6 million, representing 0.87% of total gross loans and leases, compared to $56.2 million, or 1.26% of total gross loans and leases at September 30, 2023.

The increase in nonperforming assets as a percentage of total assets at September 30, 2023 compared to September 30, 2022 was primarily due to one sizable relationship moving to nonaccrual within the commercial finance portfolio, partially offset by a decrease in nonperforming loans in the seasonal tax services portfolio and the consumer finance portfolio.

Classified Assets .

8 unchanged sentences

At September 30, 2023, the Company classified loans and leases of $208.2 million as substandard, $8.2 million as doubtful and none as loss.

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

Allowance for Credit Losses .

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 troubled debt restructurings or loans and leases on nonaccrual status.

All other loans and leases are evaluated collectively for credit loss.

3 unchanged sentences

If an individually evaluated loan or lease is not collateral dependent, credit loss is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.

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

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

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

The Company's ACL totaled $45.3 million at September 30, 2024, a decrease compared to $49.7 million at September 30, 2023.

Th e $4.4 million year-o ver-year decrease in the ACL was primarily driven by a $4.4 million decrease in the allowance related to the commercial finance portfolio and a $0.1 million decrease in the allowance related to the consumer finance portfolio, partially offset by a $0.1 million increase in the allowance related to the warehouse finance portfolio.

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

8 unchanged sentences

The Company's ACL as a percentage of total loans and leases decreased to 1.11% at September 30, 2024 from 1.14% at September 30, 2023.

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

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

The decrease in the total loans and leases coverage ratio was primarily driven by the tax services and consumer finance portfolios, partially offset by an increase in the commercial finance portfolio.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

4 unchanged sentences

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.

Summary of Significant Accounting Policies and Note 4.

Loans and Leases, Net to the "Notes of Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for more information.

Allowance for Credit Losses

2 unchanged sentences

The majority of the Company's loans and leases subject to individual evaluation are considered collateral dependent.

Only loans and leases that are on nonaccrual status or are designated as a TDR are subject to individual evaluation.

Only loans and leases that are on nonaccrual status or are designated as a modification are subject to individual evaluation.

Management has also identified certain structured finance credits for alternative energy projects in which a substantial cash collateral account has been established to mitigate credit risk.

7 unchanged sentences

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

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

Investment debt securities available for sale are recorded at fair value and are assessed quarterly for credit loss.

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

Debt securities AFS are recorded at fair value and are assessed quarterly for credit loss.

Any such credit loss is recorded in the Company’s Provision for Credit Loss on the Company’s Consolidated Statement of Operations.

13 unchanged sentences

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.

The Company’s primary sources of funds are deposits, derived principally through its Partner Solutions 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.

1 unchanged sentence

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.

Subsequent Events to the "Notes of Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for more information on the closing of the sale of the commercial insurance premium finance business.

At September 30, 2024, the Company had unfunded loan and lease commitments of $1.29 billion.

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

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

The liquidity sources as of September 30, 2024 include $158.3 million in cash and cash equivalents and $201.9 million in off-balance sheet custodial deposits.

When factoring in all resources, such as the FHLB, the FRB Discount Window and other unsecured funding and wholesale options, the Company has over $2.1 billion in available liquidity.

Due to the characteristics of the Company's deposit portfolio, uninsured deposits remained less than 15% of total deposits during fiscal year 2024 and below the Company's available liquidity.

The following table summarizes the Company’s significant contractual obligations at September 30, 2024.

1 unchanged sentence

Time deposits $ 3,104 $ 1,102 $ — $ — $ 4,206

Wholesale time deposits — 25,000 — — 25,000

Short-term debt 377,000 — — — 377,000

2 unchanged sentences

Total $ 384,089 $ 32,689 $ 5,936 $ 46,057 $ 468,771

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

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

The Company and the Bank met regulatory requirements for classification as well-capitalized institutions at September 30, 2024.

Based on current and expected continued profitability and subject to continued access to capital markets, management believes that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios.

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

The payment of dividends and repurchase of shares have the effect of reducing stockholders’ equity.

2 unchanged sentences

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

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

Impact of New Accounting Standards

See Note 1 to the "Notes of Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for information regarding recently issued accounting pronouncements.

Summary of Significant Accounting Policies to the "Notes of Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for information regarding recently issued accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis