Item 1. Business
Item 1. Business.
General
Pathward Financial, a registered bank holding company ("BHC") that has elected to be a financial holding company ("FHC"), was incorporated in Delaware on June 14, 1993. Pathward Financial's principal assets 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 Federal Deposit Insurance Corporation ("FDIC") as administrator of the Deposit Insurance Fund (“DIF”). Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all subsidiaries of Pathward Financial, direct or indirect, on a consolidated basis.
As a nationwide provider of payments and commercial finance products, the Company has offices across the country. The principal executive office is located at 5501 South Broadband Lane, Sioux Falls, South Dakota, 57108. Its telephone number at that address is (877) 497-7497. The Company is subject to comprehensive regulation and supervision. See "Regulation and Supervision" herein.
The Company's purpose of powering financial inclusion means individuals and businesses deserve access to financial solutions. It is why for the past two decades Pathward Financial has been building solutions to help those who have been underserved by traditional banking providers.
The Company strives to remove barriers to financial access and promote economic mobility by working with third parties to provide responsible, secure, high quality financial products that contribute to the social and economic benefit of communities at the core of the real economy. Pathward Financial aims to increase financial availability, choice, and opportunity across two business lines: Partner Solutions and Commercial Finance. These strategic business lines provide end-to-end support to individuals and businesses.
As a nationally chartered bank, Pathward sits at the hub of the financial ecosystem where traditional banking and financial technology intersect. With expert talent and access to world-class partners, Pathward moves money seamlessly across a multitude of solutions while mitigating risk and anticipating changes to a complicated, regulatory landscape.
The Bank, a wholly-owned full-service banking subsidiary of Pathward Financial, operates through three reportable segments (Consumer, Commercial, and Corporate Services/Other). See Note 16. Segment Reporting for further information on the reportable segments.
The business of the Bank is to collaborate with partners through the Partner Solutions business line to provide solutions that attract stable deposits and generate fee income. The deposits are primarily invested into loan and lease products offered through the Commercial Finance business line. In addition to originating loans and leases, the Bank also occasionally contracts to sell loans, such as consumer credit product loans, government guaranteed loans, and other commercial loans to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities ("MBS") and other investments permissible under applicable regulations.
The Consumer segment includes the Partner Solutions business line, which collaborates with partners to navigate payment and lending needs. With capabilities ranging from prepaid cards and deposit accounts to payment processing and consumer lending, the Company enables its partners to deliver programs that provide a financial path forward for all.
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The Company delivers a diversified portfolio of offerings including issuing, acquiring, digital payments, financial institution solutions, credit solutions, and professional tax solutions. With its issuing solutions, Pathward is one of the leading debit and prepaid card issuers in the country and holds funds for the programs of its partners in order to provide the consumer protections of a traditional bank account. Acquiring solutions focuses on optimizing the core banking activities to ensure secure, compliant, and seamless transactions through merchant acquiring and ATM sponsorship. Digital payments solutions accept and process payments for customers' personal and business needs. The Bank moves funds daily through high speed banking rails, including ACH, wire transfers, and push to debit. Through its financial institution solutions, Pathward offers innovative, cost-effective banking and lending solutions designed to fill product gaps and add value for community banks and credit unions. Credit solutions enable the Bank's partners' lending solutions that serve the borrowing needs of customers in a diverse credit pool. Professional tax solutions offer tax-related financial products, such as electronic refund advances and refund transfers, that ease the pressure of tax season and help over 38,000 independent tax offices stay competitive in a crowded marketplace.
The Commercial segment includes the Company's Commercial Finance business line, which helps businesses access funds they need to launch, operate, and grow. Pathward's innovative approach and customized financial products offer the flexibility traditional bank products cannot. This diverse range of commercial finance products is available through the following lending solutions: working capital, equipment finance, structured finance, and insurance premium finance.
Working capital provides ready cash for liquidity needs to new or growing companies or companies in cyclical or seasonal industries. Working capital financing is secured by business collateral (assets) such as accounts receivable, inventory, and equipment. Equipment finance provides financing in the form of leases and loans for equipment needs. Structured finance assists small- and mid-sized business and rural borrowers to fund growth, expansion, and restructuring. Products include alternative energy financing, conventional loans, and loans administered through partnerships with the Small Business Administration (" SBA") and United States Department of Agriculture ("USDA"). Insurance premium finance is short-term financing to facilitate the purchase of property, casualty, and liability insurance premiums.
On October 31, 2024 (the "Closing Date"), the Bank completed the sale of substantially all of the assets and liabilities related to its commercial insurance premium finance business to AFS IBEX Financial Services, LLC, a subsidiary of Honor Capital Holdings, LLC. See Note 20. 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 sale and transaction.
Other Subsidiaries
Pathward Venture Capital, LLC ("Pathward Venture Capital"), a wholly-owned service corporation subsidiary of the Bank was formed in 2017 for the purpose of making minority equity investments. Pathward Venture Capital focuses on investing in companies in the financial services industry.
First Midwest Financial Capital Trust I, a wholly-owned subsidiary of Pathward Financial, was established in July 2001 and Crestmark Capital Trust I, a wholly-owned subsidiary of Pathward Financial and acquired by the Company in August 2018, was established in June 2005. Both subsidiaries were established for the purpose of issuing trust preferred securities.
Lending Activities
The Company focuses its lending activities on the origination of commercial finance loans and leases, consumer finance loans and tax services loans. The Company emphasizes credit quality and seeks to avoid undue concentrations of loans and leases to a single industry or based on a single class of collateral. The Company has established lending policies that include a number of underwriting factors it considers in making a loan, including loan-to-value ratio, cash flow, interest rate and credit history of the borrower. At September 30, 2024, the Company’s loans and leases receivable, net of allowance for credit losses, totaled $4.03 billion, or 53% of the Company’s total assets, as compared to $4.32 billion, or 57%, at September 30, 2023.
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Loan and lease applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan or lease as directed by the Bank's lending policies. The Company has a loan committee structure in place for oversight of its lending activities. Loans and leases in excess of certain amounts require approval by an Executive Credit Committee. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors.
At September 30, 2024, the Company’s largest lending relationship to a single borrower or group of related borrowers totaled $119.6 million. The Company had 24 other lending relationships in excess of $22.5 million as of September 30, 2024.
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Loan and Lease Portfolio Composition
The following table shows the composition of the Company’s loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.
At September 30,
2024 2023
(Dollars in thousands) Amount Percent Amount Percent
Fixed-rate loans and leases
Commercial finance $ 1,544,745 38.0 % $ 2,426,782 55.8 %
Consumer finance 77,591 1.9 % 254,416 5.8 %
Tax services 8,825 0.2 % 5,192 0.1 %
Warehouse finance 33,789 0.8 % 141,421 3.2 %
Total fixed-rate loans and leases 1,664,950 40.9 % 2,827,811 64.9 %
Adjustable-rate loans and leases
Commercial finance 1,750,854 43.0 % 1,296,376 29.7 %
Consumer finance 171,209 4.2 % — — %
Warehouse finance 484,058 11.9 % 235,494 5.4 %
Total adjustable-rate loans and leases 2,406,121 59.1 % 1,531,870 35.1 %
Total loans and leases 4,071,071 100.0 % 4,359,681 100.0 %
Deferred fees and discounts 4,124 6,435
Allowance for credit losses (45,336) (49,705)
Total loans and leases receivable, net $ 4,029,859 $ 4,316,411
The following table illustrates the contractual maturities of the Company’s loan and lease portfolio and the distribution by changes in interest rates for loans with a contractual maturity greater than one year at September 30, 2024.
Loan Maturities Loans Maturing After 1 Year
(Dollars in thousands) Due in 1 Year or Less Due After 1 Year Through 5 Years After 5 Years Through 15 Years After 15 Years Total Fixed Interest Rate Variable Interest Rate
Commercial finance $ 417,612 $ 1,932,753 $ 592,228 $ 353,006 $ 3,295,599 $ 1,469,846 $ 1,408,140
Consumer finance 30,506 218,294 — — 248,800 48,578 169,716
Tax services 8,825 — — — 8,825 — —
Warehouse finance — 517,847 — — 517,847 33,789 484,059
Total loans and leases $ 456,943 $ 2,668,894 $ 592,228 $ 353,006 $ 4,071,071 $ 1,552,213 $ 2,061,915
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Commercial Finance
The Company's Commercial Finance business line offers a variety of products through its working capital, equipment finance, structured finance, and insurance premium finance lending solutions. These products include term lending, asset-based lending, factoring, lease financing, insurance premium finance, government guaranteed lending, and other commercial finance products offered on a nationwide basis.
Term Lending . The Bank originates a variety of collateralized conventional term loans and notes receivable. While terms range from three years to 12 years, the weighted average life of these loans is approximately 59 months. These term loans may be secured by equipment, recurring revenue streams, or real estate. Credit risk is managed through setting loan amounts appropriate for the collateral based on information including equipment cost, appraisals, valuations, and lending history. The Bank follows standardized loan policies and established and authorized credit limits and applies attentive portfolio management, which includes monitoring past dues, financial performance, financial covenants, and industry trends. As of September 30, 2024, 41% of the term lending portfolio exposure is concentrated in solar/alternative energy, most of which are construction projects that will convert to longer term government guaranteed facilities upon completion of the construction phase. Equipment finance agreements make up 39% of the term lending total as of September 30, 2024. The remaining 20% are a variety of other general purpose commercial loans.
Asset-Based Lending . The Bank provides asset-based loans secured by short-term assets such as accounts receivable and inventory. Asset-based loans may also be secured by equipment supported by third party independent appraisals. The primary sources of repayment are the collection of the receivables and/or the sale of the inventory securing the loan, as well as the operating income of the borrower. Loans are typically revolving lines of credit with terms of one year to three years. Credit risk is managed through advance rates appropriate for the collateral (generally, advance rates on accounts receivable ranges from 80% to 90% and inventory advance rates range from 40% to 60%). In certain cases, inventory advances are supported by the third party independent appraisals. Collateral is further supported and verified via field audits conducted up to three times per year. All asset-based facilities have standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the debtors' cash receipts. As of September 30, 2024, approximately 65% of asset-based loans were backed by accounts receivable.
Factoring. The Bank provides factoring lending where customers provide detailed accounts receivable reporting for lending arrangements. The factoring customers are diversified as to industry and geography. With these loans, the Commercial Finance business lends a percentage of eligible accounts receivable invoices. Advance rates generally range between 80% and 95%. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the customer's cash receipts. In addition, customers generally guarantee the payment of purchased accounts receivable.
Lease Financing. The Bank provides creative, flexible lease solutions for equipment needs of its customers. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are accounted for as sales-type or direct financing leases. The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value. Residual values are estimated at the inception of the lease. Lease maturities are generally no greater than 84 months.
Insurance Premium Finance. Effective on the Closing Date of the commercial insurance premium finance business sale to AFS IBEX Financial Services, LLC, the Company no longer holds or originates insurance premium finance loans. Until the Closing Date, the Bank provided, on a national basis, short-term, primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk, otherwise known as insurance premium financing. This included, but was not limited to, policies for commercial property, casualty and liability risk. Premiums were advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally made a 20% to 25% down payment to the insurance broker and financed the remainder over nine to 10 months on average. The down payment was set such that if the policy is canceled, the unearned premium was typically sufficient to cover the loan balance and accrued interest and was returned by the insurer to the Bank on a pro rata basis. Over 95% of the portfolio finances policies were provided by investment grade-rated insurance company partners.
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Government Guaranteed Lending. The Bank originates loans through programs partially guaranteed by the SBA or USDA. SBA loans are made to small businesses and professionals. Generally, the Bank provides USDA loans to alternative energy project developers and the hotel industry. Certain guaranteed portions of these loans may be sold to the secondary market. See "Originations, Sales and Servicing of Loans and Leases" below for further details.
Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans.
Consumer Finance
The Bank offers a variety of installment and revolving consumer lending products through its credit solutions. The Bank designs its credit program relationships with certain desired outcomes, including liquidity, credit protection, and risk retention by the program partner. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement. See "Originations, Sales and Servicing of Loans and Leases" below for further details.
Tax Services
The Bank's Partner Solutions business line offers professional tax solutions, which includes short-term refund advance loans and short-term electronic return originator ("ERO") advance loans.
Refund Advance Loans. Refund advance loans are unsecured loans to taxpayers that are determined to be eligible based on underwriting criteria designed for this product. Due to the nature of refund advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the taxpayer. When collection of principal becomes doubtful, the Bank will charge off the balance of a refund advance loan on September 30. Any remaining balances are charged off at the end of the calendar year. The Bank may record recoveries of previously charged off loans if collected in subsequent tax years.
ERO Advance Loans. ERO advance loans are unsecured advances that are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.
Warehouse Finance
The Bank participates in several collateral-based warehouse lines of credit whereby the Bank is in a senior, secured position as the first out participant. These facilities are primarily collateralized by consumer receivables, with the Bank holding a senior collateral position enhanced by a subordinate party structure.
Originations, Sales and Servicing of Loans and Leases
The Company, from time to time, sells loans and leases, and in some cases, loan participations, generally without recourse. At September 30, 2024, there were no outstanding loans sold by the Company with recourse. When loans or leases are sold, the Company may retain the responsibility for collecting and remitting loan payments, making certain that escrow payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. As of September 30, 2024, the Company was servicing $350.7 million of SBA/USDA loans and $13.8 million of term lending loans.
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The Company may sell the guaranteed portion of its SBA 7(a) loans and USDA program loans in the secondary market. These sales have resulted in gains for the Company at the time of sale and created a stream of future servicing income. When the Company sells the guaranteed portion of its loans, it retains credit risk on the non-guaranteed portion of the loans, and, if a customer defaults on the loan, the Company shares any loss and recovery related to the loan pro-rata with the SBA or USDA, as applicable. If the SBA or USDA establishes that a loss on a guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by the Company, the SBA or USDA may seek recovery of the principal loss related to the deficiency from the Company, which could materially adversely affect our business, results of operations and financial condition.
On October 31, 2024, as part of the insurance premium finance business sale, the Company sold $588.4 million of commercial insurance premium finance loans. See Note 20. 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 sale and transaction.
In the normal course of business, the Company enters into off-balance sheet transactions with special purpose entities ("SPEs"). See Note 1. 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 more information on these transactions.
In periods of economic uncertainty, the Company’s ability to originate large dollar volumes of loans and leases may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company’s ability to sell loans may substantially decrease if potential buyers reduce their purchasing activities.
The following table shows the loan and lease originations (including draws, loan and lease renewals, and undisbursed portions of loans and leases in process), purchases, and sales and repayment activities of the Company for the periods indicated.
Fiscal Year Ended September 30,
(Dollars in thousands) 2024 2023
Originations
Commercial finance $ 11,691,809 $ 11,268,857
Consumer finance 2,535,736 1,842,021
Tax services 1,596,136 1,493,109
Total loans and leases originated 15,823,681 14,603,987
Purchases
Commercial finance 13,782 480
Warehouse finance 284,480 212,706
Total loans and leases purchased 298,262 213,186
Sales and Repayments
Sales:
Commercial finance 99,005 16,610
Consumer finance 1,937,079 1,123,271
Total loans and leases sales 2,036,084 1,139,881
Repayments:
Loan and lease principal repayments 13,759,262 12,798,879
Total principal repayments 13,759,262 12,798,879
Total reductions 15,795,346 13,938,760
Increase (decrease) in other items, net (2,058) 4,348
Net increase $ 324,539 $ 882,761
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Nonperforming Assets, Other Loans and Leases of Concern and Classified Assets
The following table sets forth the Company’s loan and lease delinquencies by type, by amount and by percentage of type at September 30, 2024.
30-59 Days 60-89 Days > 89 Days Past Due
(Dollars in thousands) Number of Loans Amount Percent of Category Number of Loans Amount Percent of Category Number of Loans Amount Percent of Category
Loans held for sale 236 $ 2,266 7.7 % 170 $ 1,361 11.1 % 760 $ 1,050 3.2 %
Commercial finance 128 23,381 79.0 % 140 7,671 62.8 % 329 19,975 60.9 %
Consumer finance 2,064 3,962 13.3 % 805 3,186 26.1 % 754 3,053 9.3 %
Tax services (1)
— — — % — — — % — 8,733 26.6 %
Warehouse finance — — — % — — — % — — — %
Total loans and leases held for investment 2,192 $ 27,343 92.3 % 945 $ 10,857 88.9 % 1,083 $ 31,761 96.8 %
Total loans and leases 2,428 $ 29,609 100.0 % 1,115 $ 12,218 100.0 % 1,843 $ 32,811 100.0 %
(1) The tax services loans past due represented the aggregate remaining balance of the tax services loan portfolio.
Delinquencies 90 days and over constituted 0.69% of total loans and leases and 0.43% of total assets.
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 non-accrual 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 above 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 non-accrual status, but are instead written off when the collection of principal and interest become doubtful.
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The table below sets forth the amounts and categories of the Company’s nonperforming assets.
At September 30,
(Dollars in thousands) 2024 2023
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance $ 26,412 $ 37,372
Total nonaccruing loans and leases 26,412 37,372
Accruing loans and leases delinquent 90 days or more:
Loans held for sale 1,050 306
Commercial finance 2,314 11,242
Consumer finance 3,053 2,210
Tax services (1)
8,733 5,082
Total accruing loans and leases delinquent 90 days or more 15,150 18,840
Total nonperforming loans and leases 41,562 56,212
Other Assets
Nonperforming operating leases 1,471 1,764
Total other assets 1,471 1,764
Total nonperforming assets $ 43,033 $ 57,976
Total as a percentage of total assets 0.57 % 0.77 %
(1) Certain tax services loans do not bear interest.
For the fiscal year ended September 30, 2024, gross interest income, which would have been recorded had the nonaccruing loans and leases been current in accordance with their original terms, was insignificant, none of which was included in interest income.
Nonaccruing Loans and Leases. At September 30, 2024, the Company had $26.4 million in nonaccruing loans and leases, which constituted 0.6% of the Company's gross loan and lease portfolio. At September 30, 2023, the Company had $37.4 million in nonaccruing loans which constituted 0.8% of its gross loan and lease portfolio. The fiscal 2024 decrease in nonaccruing loans and leases was primarily driven by one sizable relationship within the commercial finance portfolio that was nonaccrual during the prior period and not reported as such as of September 30, 2024.
Accruing Loans and Leases Delinquent 90 Days or More. At September 30, 2024, the Company had $15.2 million in accruing loans and leases delinquent 90 days or more, compared to $18.8 million at September 30, 2023. The decrease in the balance of accruing loans and leases 90 days or more past due was primarily within the commercial finance portfolio, partially offset by increases within the consumer finance and seasonal tax services portfolios.
For information on classified assets, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Asset Quality” of this Annual Report on Form 10-K.
Allowance for Credit Losses. ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments requires the use of a current expected credit losses ("CECL") methodology to determine the allowance for credit losses ("ACL") for loans and debt securities held to maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. See Note 1. 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 more information of the ACL.
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The following table sets forth an analysis of the Company’s ACL.
At September 30,
(Dollars in thousands) 2024 2023
Balance at beginning of period $ 49,705 $ 45,947
Charge-offs:
Commercial finance (22,837) (18,894)
Consumer finance (4,064) (2,263)
Tax services (30,780) (38,741)
Total charge-offs (57,681) (59,898)
Recoveries:
Commercial finance 3,286 3,245
Consumer finance 3 —
Tax services 7,785 2,963
Total recoveries 11,074 6,208
Net (charge-offs) recoveries (46,607) (53,690)
Provision for credit loss 42,238 57,448
Balance at end of period $ 45,336 $ 49,705
Ratio of net charge-offs during the period to average loans outstanding during the period 1.00 % 1.36 %
Ratio of net charge-offs during the period to average loans outstanding during the period (excluding tax loans and tax net charge-offs) 0.52 % 0.47 %
Ratio of net charge offs during the period to nonperforming assets at year end 108.31 % 92.61 %
Allowance to total loans and leases 1.11 % 1.14 %
Ratio of allowance to total nonaccrual loans 1.72 % 1.33 %
Ratio of total nonaccrual loans to total loans outstanding 0.55 % 0.84 %
For more information on the Provision for Credit Loss, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Annual Report on Form 10-K.
The following table presents net loan charge-offs per lending category and the percentage of net charge-offs to average loan and lease balances.
At and For the Fiscal Year Ended September 30,
2024 2023
(Dollars in thousands) Net Loan Charge-offs Average Outstanding Balance Percent of Net Charge-offs to Average Loans Net Loan Charge-offs Average Outstanding Balance Percent of Net Charge-offs to Average Loans
Term lending $ 15,850 $ 1,462,403 1.1 % $ 9,476 $ 1,184,055 0.8 %
Asset-based lending (255) 429,726 (0.1) % 2,317 369,686 0.6 %
Factoring 2,229 341,571 0.7 % 1,513 342,447 0.4 %
Lease financing 103 170,962 0.1 % 1,176 190,661 0.6 %
Insurance premium finance 870 639,825 0.1 % 1,162 558,018 0.2 %
SBA/USDA 754 566,255 0.1 % 5 409,296 — %
Other commercial finance — 159,472 — % — 166,422 — %
Commercial finance 19,551 3,770,214 0.5 % 15,649 3,220,585 0.5 %
Consumer finance 4,061 318,886 1.3 % 2,263 231,242 1.0 %
Tax services 22,995 153,713 15.0 % 35,778 141,210 25.3 %
Warehouse finance — 416,988 — % — 343,168 — %
Total $ 46,607 $ 4,659,801 1.0 % $ 53,690 $ 3,936,205 1.4 %
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The distribution of the Company’s ACL at the dates indicated is summarized as follows:
At September 30,
2024 2023
(Dollars in thousands) Amount Percent of Loans and Leases in Each Category of Total Loans and Leases Amount Percent of Loans and Leases in Each Category of Total Loans and Leases
Term lending $ 30,394 38.2 % $ 25,686 30.0 %
Asset-based lending 1,356 11.6 % 2,738 8.8 %
Factoring 5,757 8.9 % 6,566 8.2 %
Lease financing 1,189 3.7 % 3,302 4.2 %
Insurance premium finance — — % 2,637 18.4 %
SBA/USDA 3,273 14.0 % 2,962 12.0 %
Other commercial finance 607 4.6 % 3,089 3.8 %
Commercial finance 42,576 81.0 % 46,980 85.4 %
Consumer finance 2,240 6.1 % 2,346 5.8 %
Tax services 2 0.2 % 2 0.1 %
Warehouse finance 518 12.7 % 377 8.7 %
Total $ 45,336 100.0 % $ 49,705 100.0 %
Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. 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 loan and lease coverage ratio was primarily driven by decreases in the loan and lease coverage ratios for the consumer finance portfolio and the seasonal tax services portfolio, partially offset by an increase in the loan and lease coverage ratio for the commercial finance portfolio. The increase in the commercial finance loan and lease coverage ratio was primarily related to the $594.4 million of insurance premium finance loans that were held for sale as of September 30, 2024 and, as such, had no related ACL balance. That portfolio carried a lower reserve rate compared to the rest of the commercial finance portfolio. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.
Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at September 30, 2024 reflected an appropriate allowance against expected credit losses from the lending portfolio. Although the Company maintains its ACL at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan and lease losses will not be required in future periods.
Investment Activities
The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company’s need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings and to fulfill the Company’s asset/liability management policies. The Company’s portfolio is managed in accordance with a written investment policy, which is implemented by members of the Company’s Asset/Liability Committee. The Company closely monitors balances in these accounts and maintains a portfolio of highly liquid assets to fund potential deposit outflows or other liquidity needs. To date, the Company has not experienced any unexpected significant outflows related to the Partner Solutions business line deposits, though no assurance can be given that this will continue to be the case.
As of September 30, 2024, the Company had total investment securities with an amortized cost of $1.98 billion compared to $2.18 billion as of September 30, 2023. At September 30, 2024, $1.57 billion, or 79.3%, of the Company’s investment securities were pledged to secure various obligations of the Company. Many of the Company’s municipal holdings are able to be pledged at either the Federal Reserve bank ("FRB") or the Federal Home Loan Bank of Des Moines ("FHLB").
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The Company’s mortgage-backed securities ("MBS") portfolio consists of securities issued by U.S. Government agencies or by non-agencies. MBS have uncertain cash flow characteristics that present additional interest rate risk in the form of prepayment or extension risk primarily caused by changes in market interest rates. The prepayment risk associated with MBS is continually monitored, and prepayment rate assumptions are adjusted as appropriate to update the Company’s MBS accounting and asset/liability reports.
The following table sets forth the carrying value of the Company’s portfolio at the dates indicated.
At September 30,
(Dollars in thousands) 2024 2023
Securities Available for Sale ("AFS")
Corporate securities $ 19,750 $ 18,250
SBA securities 81,935 85,242
Obligations of states and political subdivisions 480 2,289
Non-bank qualified obligations of states and political subdivisions 217,990 226,723
Asset-backed securities 189,698 246,199
Mortgage-backed securities 1,231,368 1,225,525
Total debt securities AFS 1,741,221 1,804,228
Securities Held to Maturity ("HTM")
Non-bank qualified obligations of states and political subdivisions 31,060 34,415
Mortgage-backed securities 2,032 2,176
Total debt securities HTM 33,092 36,591
FRB and FHLB stock 36,014 28,210
Total securities and FRB and FHLB stock $ 1,810,327 $ 1,869,029
Other Interest-Earning Assets
Interest bearing deposits in other financial institutions and federal funds sold (1)
$ 106,672 $ 262,225
(1) From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including the FRB, the FHLB,
and other private institutions. At September 30, 2024, the Company had $104.9 million and $1.7 million in interest bearing deposits held at
the FRB and FHLB, respectively. At September 30, 2023, the Company had $260.3 million and $1.9 million in interest bearing deposits held
at the FRB and FHLB, respectively.
The fair value of debt securities available for sale ("AFS") decreased $63.0 million at September 30, 2024 when compared to September 30, 2023 while the amortized cost of debt securities held to maturity ("HTM") decreased $3.5 million over the same period. These decreases were primarily driven by reductions in SBA securities, non-bank qualified obligations of state and political subdivisions, and asset-backed securities, partially offset by an increase in MBS.
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The following table sets forth the contractual maturities of debt securities AFS and HTM at September 30, 2024. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations.
At September 30, 2024
1 Year or Less After 1 Year Through 5 Years After 5 Years Through 10 Years After 10 Years Total Securities
(Dollars in thousands) Carrying
Value Carrying
Value Carrying
Value Carrying
Value Amortized Cost Fair
Value
Debt Securities AFS
Corporate securities $ — $ — $ 19,750 $ — $ 25,000 $ 19,750
SBA securities 1,599 7,330 38,756 34,250 86,036 81,935
Obligations of states and political subdivisions — 480 — — 501 480
Non-bank qualified obligations of states and political subdivisions 198 6,402 1,529 209,861 246,233 217,990
Asset-backed securities — — 3,601 186,097 192,979 189,698
Total debt securities AFS $ 1,797 $ 14,212 $ 63,636 $ 430,208 $ 550,749 $ 509,853
Weighted average yield (1)
4.86 % 4.21 % 5.02 % 5.59 % 3.87 % 5.50 %
Debt Securities HTM
Non-bank qualified obligations of states and political subdivisions $ — $ — $ — $ 31,060 $ 31,060 $ 28,392
Total debt securities HTM $ — $ — $ — $ 31,060 $ 31,060 $ 28,392
Weighted average yield (1)
— % — % — % 2.49 % 2.49 % 4.07 %
(1) Weighted average yield for debt securities AFS and HTM are calculated on a pro rata basis for each security based on the relative amortized cost and relative market value, respectively. Yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
The following table sets forth the contractual maturities of the Company's MBS, excluding the effect of prepayments, periodic principal repayments and the adjustable rate nature of these instruments, all of which typically lower the average life of these securities.
At September 30, 2024
1 Year or Less After 1 Year Through 5 Years After 5 Years Through 10 Years After 10 Years Total Securities
(Dollars in thousands) Carrying
Value Carrying
Value Carrying
Value Carrying
Value Amortized
Cost Fair
Value
MBS AFS
Agency MBS $ — $ 30,680 $ 53,537 $ 918,859 $ 1,138,849 $ 1,003,076
Non-agency MBS — — — 228,292 254,700 228,292
Total MBS AFS $ — $ 30,680 $ 53,537 $ 1,147,151 $ 1,393,549 $ 1,231,368
Weighted average yield — % 4.20 % 4.78 % 4.71 % 2.73 % 4.70 %
MBS HTM
Agency MBS $ — $ — $ — $ 2,032 $ 2,032 $ 1,844
Total MBS HTM $ — $ — $ — $ 2,032 $ 2,032 $ 1,844
Weighted average yield — % — % — % 2.75 % 2.75 % 4.59 %
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At September 30, 2024, the contractual maturity of approximately 93.2% of the Company’s MBS were in excess of ten years. The actual maturity of an MBS is typically less than its stated contractual maturity due to scheduled principal payments and prepayments of the underlying mortgages. Prepayments that are different than anticipated will affect the yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the MBS. In accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of MBS, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, borrower credit scores, loan to premises value, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because, to the extent that the Company’s MBS amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. During periods of rising interest rates, these prepayments tend to decelerate as the prevailing market interest rates for mortgage rates increase and prepayment incentives dissipate.
Under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively, "Topic 326") debt securities HTM are subject to an allowance for credit losses that reflects expected credit losses over the life of the financial asset, unless management concludes there is a zero risk of loss. The Company’s HTM debt security portfolio is limited to investments with implicit and explicit guarantees by government agencies. As a result, management has concluded a zero risk of loss associated with these securities and no provision for credit loss has been included in the Company’s Consolidated Statement of Operations. Under Topic 326, debt securities AFS continue to be recorded at fair value but are subject to an allowance for credit losses that reflects the portion of an unrealized loss position related to credit factors. Any such credit loss is recorded in the Company’s Provision for Credit Loss on the Company’s Consolidated Statement of Operations. Non-credit related losses are recorded in Other Comprehensive Income in the Company’s Consolidated Statement of Condition. The adoption of CECL was inconsequential to debt securities AFS.
Equity Securities. The Company holds marketable equity securities, which have readily determinable fair values, and include common equity and mutual funds. These securities are recorded at fair value with unrealized gains and losses, due to changes in fair value, reflected in earnings. Interest and dividend income from these securities is recognized in interest income. See Note 2. Securities for additional information on marketable equity securities.
The Company also holds non-marketable equity investments and accounts for them under the equity method, fair value, or the measurement alternative method depending on the level of significant influence the Company can exercise and the availability of fair value. All income or loss recognition or fair value adjustments, regardless of measurement methodology, are reflected in earnings as non-interest income. Non-marketable equity investments measured under the equity method, or the measurement alternative method are reviewed for impairment each reporting period and are reported in earnings if applicable.
Funding Activities
The Company’s sources of funds are deposits, borrowings, amortization and repayment of loan and lease principal, interest earned on or maturation of securities and funds provided from operations.
Borrowings, including FHLB advances, overnight federal funds purchased, repurchase agreements, other short-term borrowings, and funds available through the FRB Discount Window, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, may be used to compensate for short-term delays in deposit funding, may be used on a longer-term basis to support expanded lending activities, and may also be used to match the funding of a corresponding asset.
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Deposits
The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company’s deposits primarily consist of demand deposit accounts, savings accounts, and money market savings accounts, many of which are related to the Partner Solutions business line. In addition, the Company may periodically utilize brokered or other wholesale deposits to target strategic maturities related to its seasonal refund advance lending. The refund advance lending season typically lasts six weeks or less and it is generally more efficient to fund these short-term loans by using brokered deposits to match the expected repayment from refunds. Other sources of wholesale deposits may also be utilized periodically to take advantage of balance sheet funding opportunities.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition.
The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Company believes that deposits related to the Partner Solutions business line are relatively stable sources of deposits. However, the ability of the Company to attract and maintain deposits and the rates paid on these deposits has been and will continue to be significantly affected by market conditions.
During fiscal years 2020 and 2021, in partnership with the U.S. Department of the Treasury’s Bureau of the Fiscal Service (“Fiscal Service”), the Bank issued 16.5 million prepaid cards in conjunction with the three Economic Impact Payment ("EIP") stimulus programs, totaling approximately $24.15 billion. As of September 30, 2024, the Company had $433.3 million in deposits related to government stimulus funds. Of the total amount of government stimulus program deposits, $198.2 million are on activated cards while $235.1 million are on inactivated cards.
At September 30, 2024, $5.64 billion of the Company’s $5.88 billion deposit portfolio was attributable to the Consumer segment. The majority of these deposits represent funds available to spend on prepaid debit cards and other stored value products, of which $5.59 billion are included with noninterest-bearing checking accounts and $47.5 million are included with savings deposits on the Company’s Consolidated Statements of Financial Condition. The Partner Solutions business line originates debit card programs through outside sales agents and other financial institutions. As such, these deposits carry a somewhat higher degree of concentration risk than traditional consumer products. If a major customer or card program were to leave the Bank, deposit outflows could be more significant than if the Bank were to lose a more traditional customer, although it is considered unlikely that all deposits related to a program would leave the Bank without significant advance notification. As such, and as historical results indicate, the Company believes that its deposit portfolio attributable to the Consumer segment is stable. Deposits arising from the Partner Solutions business line has allowed the Bank to reduce its reliance on wholesale deposits, certificates of deposit and public funds, which typically have relatively higher costs.
For information on noninterest-bearing checking deposits, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition" of this Annual Report on Form 10-K.
Approximately 57% of the deposit portfolio during the 2024 fiscal fourth quarter was subject to variable, rate-related processing expenses that are derived from the terms of contractual agreements with certain Partner Solutions relationships. These agreements are tied to a rate index, typically the Effective Federal Funds Rate ("EFFR").
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The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Company for the periods indicated.
At September 30,
2024 2023
(Dollars in thousands) Amount Percent of Total Amount Percent of Total
Transactions and Savings Deposits:
Non-Interest bearing checking $ 5,617,097 95.6 % $ 6,332,941 96.1 %
Interest bearing checking 4,350 0.1 % 415 — %
Savings deposits 48,730 0.8 % 59,041 0.9 %
Money market deposits 174,701 3.0 % 185,307 2.8 %
Wholesale deposits 1,001 — % 5,944 0.1 %
Total transactions and savings deposits 5,845,879 99.5 % 6,583,648 99.9 %
Time Certificates of Deposit:
Total time certificates of deposit (1)
29,206 0.5 % 5,534 0.1 %
Total deposits $ 5,875,085 100.0 % $ 6,589,182 100.0 %
(1) As of September 30, 2024, total time certificates of deposit included $25.0 million of wholesale certificates of deposit.
As of September 30, 2024 and 2023, total deposits that exceed FDIC insurance limits, or are otherwise uninsured, were estimated to be $643.3 million and $550.7 million, respectively. Estimated uninsured domestic deposits reflect amounts, disclosed in U.S. regulatory reports of the Bank, with adjustments for amounts related to consolidated subsidiaries.
The following table presents contractual maturities of estimated U.S. time deposits in excess of FDIC insurance limits or are otherwise uninsured.
Maturity
(Dollars in thousands) 3 Months or Less Over 3 to 6 Months Over 6 to 12 Months Over 12 Months Total
Certificates of deposit $ 675 $ 579 $ 750 $ 602 $ 2,606
The following table shows rate and maturity information for the Company’s certificates of deposit at September 30, 2024.
(Dollars in thousands) 0.00 - 0.99% 1.00 - 1.99% 2.00 - 2.99% 3.00 - 3.99% 4.00 - 4.99% Total Percent of Total
Certificate accounts maturing in quarter ending:
December 31, 2024 $ 1,275 $ — $ — $ — $ — $ 1,275 4.4 %
March 31, 2025 829 — — — — 829 2.8 %
June 30, 2025 1,000 — — — — 1,000 3.4 %
September 30, 2025 — — — — — — — %
December 31, 2025 300 — — — 25,000 25,300 86.6 %
March 31, 2026 802 — — — — 802 2.8 %
Total $ 4,206 $ — $ — $ — $ 25,000 $ 29,206 100.0 %
Percent of total 14.4 % — % — % — % 85.6 % 100.0 %
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The following table indicates the amount of the Company’s certificates of deposit by time remaining until maturity as of September 30, 2024.
(Dollars in thousands) 3 Months or Less After 3 to 6 Months After 6 to 12 Months After 12 Months Total
Certificates of deposit less than $250,000 $ 100 $ — $ — $ 25,000 $ 25,100
Certificates of deposit of $250,000 or more 1,175 829 1,000 1,102 4,106
Total certificates of deposit $ 1,275 $ 829 $ 1,000 $ 26,102 $ 29,206
At September 30, 2024, there were no deposits from governmental or other public entities included in certificates of deposit.
For information on custodial off-balance sheet deposits, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Financial Condition” of this Annual Report on Form 10-K.
Borrowings
Although deposits are the Company’s primary source of funds, the Company’s practice has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company desires additional capacity to fund loan demand. Borrowings from various sources mature based on stated payment schedules.
The Company’s borrowings have historically consisted primarily of advances from the FHLB upon the security of a blanket collateral agreement of a percentage of unencumbered loans and the pledge of specific securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At September 30, 2024, the Bank had $257.0 million overnight borrowings with the ability to borrow up to an approximate additional $726.6 million from the FHLB.
As of September 30, 2024, debt securities with fair values of approximately $533.8 million and $1.04 billion were pledged as collateral to the FRB and the FHLB, respectively, to secure various obligations of the Company. For additional information regarding the Company’s collateralization of borrowings, see Note 10. 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.
On September 26, 2022, the Company announced the completion of a private placement of $20 million of its 6.625% Fixed-to-Floating Rate Subordinated Notes due 2032 to certain qualified institutional buyers and accredited investors. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes. The Notes were issued under an indenture with UMB Bank, N.A., as trustee. At September 30, 2024, $19.7 million in aggregate principal amount in subordinated debentures were outstanding.
On July 16, 2001, the Company issued all of the 10,310 authorized shares of Company Obligated Mandatorily Redeemable Preferred Securities of First Midwest Financial Capital Trust I (preferred securities of subsidiary trust) holding solely trust preferred securities. Distributions are paid semiannually. Cumulative cash distributions are calculated at 6-month CME Term SOFR plus 0.42826% tenor spread adjustment plus 3.75%, not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions must be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has a semiannual option to shorten the maturity date. The option has not been exercised as of the date of this filing. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s common stock. The trust preferred securities have been includable in the Company’s capital since they were issued. The preferential capital treatment of the Company’s trust preferred securities was grandfathered under the Dodd-Frank Act and is consistent with federal community bank capital rules.
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Through the Crestmark Acquisition, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The subordinated debentures bear interest at 3-month CME Term SOFR plus 0.26161% tenor spread adjustment plus 3.00%, have a stated maturity of 30 years from the date of issuance and are redeemable by the Company at par, with regulatory approval. The interest rate is reset quarterly at distribution dates in February, May, August, and November. The subsidiary has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.
The outstanding balance of the trust preferred securities at September 30, 2024 was $13.7 million.
The following table sets forth the maximum month-end balance and average balance of trust preferred securities, subordinated debentures, overnight fed funds purchased, and other borrowings for the periods indicated.
Fiscal Year Ended September 30,
(Dollars in thousands) 2024 2023
Maximum Balance:
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,693 19,626
Overnight fed funds purchased 377,000 440,000
Other borrowings 523 2,178
Average Balance:
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,638 19,560
Overnight fed funds purchased 99,290 74,812
Other borrowings 201 1,447
The following table sets forth certain information as to the Company’s trust preferred securities, subordinated debentures, overnight fed funds purchased, and other borrowings.
At September 30,
(Dollars in thousands) 2024 2023
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,693 19,591
Overnight fed funds purchased 377,000 13,000
Other borrowings — 621
Total borrowings $ 410,354 $ 46,873
Weighted average interest rate of trust preferred securities 8.91 % 9.39 %
Weighted average interest rate of subordinated debentures 6.63 % 6.63 %
Weighted average interest rate of overnight fed funds purchased 5.11 % 5.57 %
Partner Solutions Activities
The Company's core differentiators, including industry experience, operational excellence, committed partnership, and mature risk and compliance infrastructure are important for payment innovators in an evolving marketplace. Partner Solutions delivers a diversified portfolio of offerings including issuing, acquiring, digital payments, financial institution solutions, credit solutions, and professional tax solutions with an operating structure that streamlines banking processes and ensures reliable and sustainable programs with unparalleled commitment to enabling our partners' success. Overall, the products and services offered by the Company are generally designed to facilitate the processing and settlement of authorized electronic transactions involving the movement of funds.
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While the Company has seasoned banking expertise and time-tested risk and compliance infrastructure, no guarantee can be made that the Company will not experience losses in the Partner Solutions business line. The Company has signed agreements with terms extending through the next few years with several of its largest sales agents/program managers, which the Company expects will help mitigate this risk.
Each offering is discussed generally below with examples to illustrate use cases. The Company cross-utilizes personnel and resources across these offerings.
Issuing
DDA Sponsorship. Partners looking to offer financial services in an ecosystem typically employ a direct deposit account, savings account or debit card, or combination thereof. Pathward facilitates their ability to establish a seamless banking experience for both their consumer and business customers, complete with online acceptance and digital funds transfer, as well as options such as overdraft protection in times of income shortfalls and the overall benefit of improved money management.
Prepaid Sponsorship. Similar to traditional debit cards, prepaid cards are embedded with a magnetic stripe, which encodes relevant card data (which may or may not include information about the user and/or purchaser of such card), and an EMV chip, which is equipped with a microprocessor chip and the technology used to authenticate chip card transactions. When the holder of a card attempts a permitted transaction, necessary information, including the authorization for such transaction, is shared between the “point of use” or “point of sale” and authorization systems maintaining the account of record. Most recently, “virtual” prepaid cards have become popular in the industry. Virtual prepaid cards are used in both the consumer space, for example as a gift card, and in the commercial arena to facilitate accounts payable and vendor payments.
The funds associated with such cards are typically held in pooled accounts at the Bank representing the aggregate value of all cards issued in connection with particular products or programs. Although the funds are held in pooled accounts, the account of record indicates the funds held by each individual card. The cards may work in a closed loop (e.g., the card will only work at one particular merchant and will not work anywhere else), a restricted access network (e.g., the card will only work at a specific set of merchants such as a shopping mall), or in an open loop by way of a Visa, MasterCard, or Discover branded debit card that will work wherever such cards are accepted for payment. Most of the Company's prepaid cards are open loop. Pathward is one of the leading prepaid card issuers in the United States.
The prepaid card business can generally be divided into two program categories: Consumer Use and Business or Commercial Use products. These programs are typically offered through a third-party relationship.
Consumer Use. Examples of consumer use prepaid card programs include payroll, general purpose reloadable ("GPR"), reward, gift and benefit/HSA cards. Payroll cards are a product whereby an employee’s payroll is loaded to the card by their employer via direct deposit. GPR cards are usually distributed by retailers and can be reloaded an indefinite number of times at participating retail load networks. Other examples of reloadable cards are travel cards, which are used in place of traveler’s checks and can be reloaded a predetermined number of times, as well as tax-related cards where a taxpayer’s refund is placed on the card. Reloadable cards are generally open-loop cards that consumers can use to obtain cash at ATMs or purchase goods and services wherever such cards are accepted for payment.
Business or Commercial Use. Prepaid cards are also frequently used by businesses for travel and entertainment, accounts payable and business-to-business ("B2B") settlement products. For example, virtual prepaid cards are used to facilitate one-time payments between a company and its vendors for monthly settlement. Travel and entertainment cards, alternatively, are reloadable by the company for use by its employees to travel for business.
Acquiring
Merchant Acquiring Sponsorship. Acquiring solutions include the acceptance, processing and settlement of credit card and debit card payments by an acquiring bank on behalf of merchants. Pathward acts as an acquiring bank to sponsor acquiring activity on behalf of merchant customers by leveraging partnerships with partners who act as merchant processors, third-party service providers, independent sales organizations (“ISOs”), and/or payment facilitators to identify, onboard and support merchant customers.
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ATM Sponsorship. The Company sponsors ATM ISOs into various networks and provides associated sponsorships of encryption support organizations and third-party processors in support of the financial institutions and the ATM ISO sponsorships. Sponsorship consists of the review and oversight of entities participating in debit and credit networks.
Pathward currently provides financial processing services for approximately 300,000 freestanding ATMs nationwide providing consumers with access to funds at ATMs frequently found in malls, retail chains, convenience stores, events, fairs and other small business locations across the U.S.
Digital Payments
Money Movement Solutions. In today’s market, consumers want to move their money fast, with more visibility and control of their own financial transactions. Pathward provides the financing operations for Automated Clearing House ("ACH") transactions, disburse to debit (through Visa Direct or Mastercard Send), wire or check processing which enable the faster, almost instantaneous movement of funds from sender to receiver.
Technology has accelerated the growth and speed of transactional payments for corporate and financial organizations. Prompt movement of money creates efficiency, speed and a robust marketplace for consumers, B2B and business-to-consumer ("B2C") companies.
Pathward is a Nacha Top 30 bank for receiving and originating payments. As of September 2024, Pathward typically processes a combined $2.5 billion per day in ACH and wire services to provide safe and efficient movement of money.
Financial Institution Solutions
With this suite of offerings, Pathward provides community banks and credit unions a path to fulfill the unique needs of their customers without using in-house resources.
Prepaid Solutions. Pathward has delivered myriad co-branded prepaid card programs that promote the brands of our financial institution clients.
Commercial Financing Options. Today’s businesses require unique, flexible financial products to target areas ranging from acquiring new equipment and business expansion to maximizing cash flow and working capital. When business clients do not qualify for traditional financing or when a product is not available, Pathward provides a variety of options including asset-based lending and SBA lending.
Merchant Services. Pathward’s merchant services program empowers community banks and credit unions to offer merchant processing services to their business clients, eliminating the challenges and liabilities associated with managing an independent program.
Professional Tax Solutions
Under the Refund Transfer program, the Bank opens a temporary bank account for each customer who is receiving an income tax refund and elects to defer payment of his or her tax preparation fees. After, the IRS and any state income tax authorities transfer the refund into the customer’s account, the net funds are transferred to the customer. The temporary deposit account remains available for use for two tax years, which allows for additional payments to be received in addition to federal and state refunds, and then the account is closed.
Regulation and Supervision
Both the Company and the Bank are subject to extensive regulation in connection with their respective activities and operations, including those of their subsidiaries. On April 1, 2020, the Bank converted from a federal thrift charter to a national bank charter and the Company converted from a savings and loan holding company to a BHC that has elected to be a FHC.
As a national bank, the Bank is supervised and examined by the Office of the Comptroller of the Currency ("OCC"), as its primary federal regulator, and the FDIC, the federal agency that administers the DIF. As a BHC, the Company is supervised and examined by the FRB. Federal banking policy is designed to protect customers of and depositors in insured depository institutions, the DIF, and the U.S. banking system.
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The framework by which both the Company and the Bank are supervised and examined is complex. This framework includes acts of Congress, regulations, policy statements and guidance, and other interpretive materials that define the obligations and requirements for entities participating in the U.S. banking system.
Moreover, regulation of banks and their holding companies is subject to continual revision, both through statutory changes and corresponding regulatory revisions as well as through evolving supervisory objectives of banking agency examiners and supervisory staff. It is not possible to predict the content or timing of changes to the laws and regulations that may impact the business of the Bank and the Company. Any changes to the regulatory framework applicable to the Company or the Bank, however, could have a material adverse impact on the condition or operations of each entity.
In addition to regulation and supervision by the FRB, the Company is a reporting company under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is required to file reports with the SEC and otherwise comply with federal securities laws.
As described broadly below, the banking industry is subject to significant regulation. The following discussion is not intended to be a complete list of all the activities regulated by the U.S. banking laws or of the impact of such laws and regulations on the Company or the Bank. Rather, it is intended to briefly summarize the legal and regulatory framework in which the Company and the Bank operate and describe legal requirements that impact their businesses and operations. The information set forth below is subject to change and is qualified in its entirety by the actual laws and regulations referenced.
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act”)
Enacted in 2010, the Dodd-Frank Act significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-Frank Act, U.S. banks and financial services firms, such as the Company and the Bank, have been subject to enhanced regulation and oversight. As of the date of the filing of this Annual Report on Form 10-K, several provisions of the Dodd-Frank Act remain subject to further rulemaking and interpretation by the federal banking agencies; moreover, certain provisions of the act that were implemented by federal agencies have been revised or rescinded pursuant to legislative changes adopted by the U.S. Congress.
Certain provisions of the Dodd-Frank Act that directly impact the operation of the Company or the Bank are highlighted below:
Consumer Financial Protection Bureau. Pursuant to the Dodd-Frank Act, the Bank is subject to regulations promulgated by the Consumer Financial Protection Bureau (the “Bureau”). The Bureau has consolidated authority related to federal laws and regulations impacting the provision of consumer financial products and services. The Bureau also has substantial power to define the rights of consumers and responsibilities of lending institutions, such as the Bank. The Bureau does not, however, examine or supervise the Bank for compliance with such laws and regulations; rather, based on the Bank’s size (less than $10 billion in assets), enforcement authority remains with the OCC, although the Bank may be required to submit reports or other materials to the Bureau upon request. The Dodd-Frank Act also provides state attorneys general with the right to enforce federal consumer protection laws. The Bureau is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service ("UDAAP authority"). To date, the Bureau has engaged in rulemaking and taken enforcement actions that directly impact the business operations of financial institutions offering consumer financial products or services including the Bank and its divisions.
Interchange Fees. The Dodd-Frank Act includes provisions that restrict interchange fees to those which are “reasonable and proportionate” for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing (known as the “Durbin Amendment”). In October 2023, the Federal Reserve issued proposed rules that would reduce the maximum permissible interchange fee cap and would adopt an approach for future adjustments to the interchange fee cap. Although, as of the date of the filing of this Annual Report on Form 10-K, the interchange fee restrictions in the Durbin Amendment do not apply to the Bank because debit card issuers with total worldwide assets of less than $10 billion are exempt, such restrictions may negatively impact the pricing all debit card processors in the market, including the Bank, may charge.
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Incentive Compensation. The Dodd-Frank Act requires that the federal banking agencies, including the Federal Reserve and the OCC, issue a rule related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule was published in May 2024. The proposed rule is intended to (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss, (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation, and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, the Company and the Bank have undertaken efforts to ensure that their incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (“Regulatory Relief Act”)
Enacted in 2018, the Regulatory Relief Act includes several provisions that positively affect smaller banking institutions (e.g., those with less than $10 billion in assets) like the Bank. Specific provisions of the Regulatory Relief Act that benefit smaller banks include modifications to the “qualified mortgage” criteria under the “ability to repay” rules for certain mortgages that are held and maintained on the Bank’s retained portfolio as well as relief from certain capital requirements required by an international banking capital framework with the creation of a “community bank leverage ratio.” See “Regulatory Capital Requirements” and “Brokered Deposits.”
Temporary Regulatory Capital Relief Related to Impact of CECL
On August 26, 2020, the federal banking agencies adopted a final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. The Company elected to phase in the regulatory capital impact as permitted under this final rule. The CECL transition amount is being phased out of regulatory capital over a three-year period that began October 1, 2022 and ends on September 30, 2025.
Bank Regulation and Supervision
The Bank is a national bank that is subject to broad federal regulation and oversight extending to all of its operations by its primary federal regulator, the OCC, and by its deposit insurer, the FDIC. Such regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates, and conduct and qualifications of personnel. The Bank pays assessment fees both to the OCC and the FDIC, and the level of such assessments reflects the condition of the Bank. If the condition of the Bank were to deteriorate, the level of such assessments could increase significantly, having a material adverse effect on the Company’s financial condition and results of operations.
Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including, but not limited to, the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the adequacy of an institution’s allowance for credit losses. Typically, these actions are undertaken due to violations of laws or regulations or conduct of operations in an unsafe or unsound manner.
The Bank derives its lending and investment powers from the National Bank Act (“NBA”) and the OCC’s implementing regulations promulgated thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC’s regulatory requirements and limitations.
In general, the Bank’s legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the “combined general limit”). At September 30, 2024, the Bank was in compliance with the combined general limit.
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The OCC announced on October 1, 2024 that its supervisory strategies for 2025 will focus on: (a) credit; (b) allowance for credit losses; (c) asset and liability management; (d) capital; (e) climate-related financial risks for banks with over $100 billion in total consolidated assets; (f) cybersecurity; (g) enterprise change management; (h) operations; (i) third-party risks; (j) payments; (k) Bank Secrecy Act/anti--money laundering/countering the financing of terrorism and Office of Foreign Assets Control; (l) consumer compliance; (m) Community Reinvestment Act; and (n) fair lending.
The OCC’s 2025 supervisory plan provides the foundation for policy initiatives and for supervisory strategies as applied to national banks as well as their third-party service providers subject to OCC examination. OCC staff members use the supervisory plan to guide their supervisory priorities, planning, and resource allocations. The OCC typically provides periodic updates about supervisory priorities through the Semiannual Risk Perspective process in the fall and spring of each year.
Insurance of Deposit Accounts and Regulation by the FDIC
The Bank is a member of the DIF, which is administered by the FDIC. Pursuant to the Dodd-Frank Act, a permanent increase in deposit insurance to $250,000 was authorized. The coverage limit is per depositor, per insured depository institution for each account ownership category. FDIC insurance is backed by the full faith and credit of the United States government.
While not the Bank's primary federal regulator, the FDIC, as insurer of the Bank's deposits, imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order poses a serious risk to the DIF. The FDIC also has authority to initiate enforcement actions against any FDIC-insured institution after giving its primary federal regulator the opportunity to take such action, and may seek to terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Finally, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the OCC.
The FDIC imposes an assessment against all depository institutions for deposit insurance quarterly. FDIC total base assessment rates for institutions that have been insured for at least five years range from 2.5 to 42 basis points annually and take into account an institution’s composite CAMELS rating and other factors. Notably, the FDIC has the authority to increase an institution’s deposit insurance premium if it determines that an insured depository institution significantly relies upon brokered deposits. As of September 30, 2024, 2023 and 2022, the Bank’s deposit insurance assessment rate was 7 basis points, 7 basis points, and 5 basis points, respectively. The Bank’s deposit insurance premium expense totaled $5.3 million for 2024, $4.3 million for 2023, and $3.1 million for 2022. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank.
The designated reserve ratio (“DRR”) of the DIF reached 1.36% as of September 30, 2018, exceeding the statutorily required 1.35% two years ahead of the deadline imposed by the Dodd-Frank Act. On June 30, 2019, the DRR reached 1.40% and the FDIC applied small bank credits to banks with less than $10 billion in assets, such as the Bank, beginning September 30, 2020. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. After applying small bank credits for four quarters, the FDIC will remit to banks the value of any remaining small bank credits in the next assessment period in which the DRR is at least 1.35%.
The Federal Deposit Insurance Act requires the FDIC to designate and publish the DRR before the beginning of each calendar year. For calendar year 2024, the FDIC set the DRR at 2.00%, which is consistent with the DRR set for each calendar year since 2011 and the FDIC's goal to maintain the DRR at or above the statutory threshold.
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Brokered Deposits
The FDIC limits the ability to accept brokered deposits to those insured depository institutions that are well capitalized. Institutions that are less than well capitalized cannot accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver by the FDIC. The FDIC has defined the “national rate” for all interest-bearing deposits held by less-than-well-capitalized institutions as “a simple average of rates paid by all insured depository institutions and branches for which data are available” and has stated that its presumption is that this national rate is the prevailing rate in any market. As such, institutions that are less than well capitalized that are permitted to accept, renew or rollover brokered deposits via FDIC waiver generally may not pay an interest rate in excess of the national rate plus 75 basis points on such brokered deposits. As of September 30, 2024, the Bank categorized $82.0 million, or 1% of its deposit liabilities, as brokered deposits.
On December 15, 2020, the FDIC issued a final rule establishing a new framework for analyzing whether bank deposits obtained through third-party arrangements are brokered deposits pursuant to Section 29 of the Federal Deposit Insurance Act. Generally, a person is a "deposit broker" if it is "engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties." The final rule clarifies what it means to be in the business of placing deposits and facilitating the placement of deposits for purpose of the deposit broker definition.
Section 29 provides, in particular, that a person with an exclusive deposit placement arrangement with one insured depository institution will not be considered a deposit broker because it is not in the business of placing deposits or facilitating the placement of deposits.
The final rule also clarifies application of the “primary purpose exception” to Section 29 by identifying a number of common business relationships described as “designated exceptions” as meeting the primary purpose exception. Many of these designated exceptions are arrangements previously addressed in advisory opinions and include: certain investment-related deposits; property management service deposits; deposits for cross-border clearing services; deposits related to real estate and mortgage servicing activities; retirement and 529 deposits; deposits related to employee benefits programs; deposits held to secure credit card loans; and deposits placed by agencies to disburse government benefits. As a result of this final rule, the Company's deposits that were classified as brokered deposits reduced significantly beginning with the June 30, 2021 reporting period.
On July 30, 2024, the FDIC proposed a rule that would amend the current rules governing brokered deposits. The proposed rule as drafted would, among other things, (1) amend the definition of “deposit broker”; (2) eliminate the exclusive deposit placement arrangement exception; (3) eliminate the enabling transactions designated business exception; (4) revise the “25 percent test” designated business exception for a primary purpose exception to be available only to broker-dealers and investment advisers and only if less than 10 percent of the total assets that the broker-dealer or investment adviser has under management for its customers is placed at one or more insured depository institutions; (5) revise the interpretation of the primary purpose exception to consider the third party’s intent in placing customer funds at a particular insured depository institution; (6) allow only insured depository institutions to file notices and applications for primary purpose exceptions; and (7) clarify how an insured depository institution that loses its “agent institution” status regains that status. The Company is currently evaluating the effect of the proposed rule on the Company were it to be adopted as a final rule and monitoring the status of this rulemaking.
Branching by National Banks
Subject to certain limitations, federal statutes and OCC regulations permit national banks to establish branches in any state of the United States. With OCC approval, a national bank may open an interstate de novo branch in any state that permits the establishment of a branch by a bank chartered by such state, subject to applicable state law limitations. The Bank's only banking office open to the public is its home office in Sioux Falls, South Dakota, where it accepts deposits.
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Prepaid Accounts under the Electronic Fund Transfer Act ("Regulation E") and the Truth In Lending Act ("Regulation Z")
The Bureau’s “Prepaid Accounts Rule,” adopted in October 2016, enhanced the regulations applicable to prepaid products and brought them fully within Regulation E, which implements the federal Electronic Funds Transfer Act. In addition, prepaid products that have a credit component, like some of those offered in connection with an existing program manager agreement, are now regulated by Regulation Z, which implements the federal Truth in Lending Act. The rule also extended Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft services and other credit features. These rules became effective on April 1, 2019.
Short-Term, Small-Dollar Installment Lending
In October 2017, the OCC rescinded its guidance on deposit advance products in light of the Bureau’s pending small dollar loan rule related to payday, vehicle title and certain high cost installment loans that was issued in November 2017 (“Small Dollar Rule”).
The Bureau issued its final Small Dollar Rule on July 22, 2020, which rescinded certain provisions of the rule that was issued in 2017 relating to mandatory underwriting. Specifically, the Bureau revoked provisions that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from the mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements. The payment provisions of the Small Dollar Rule were not rescinded and restrict lenders from attempting to withdraw payment from a borrower’s account after two consecutive failed attempts unless the borrower provides new authorization for the third attempt. In order to begin re-attempting payments, the lender must follow certain guidelines and obtain new authorizations where applicable. The Small Dollar Rule has been the subject of litigation, but the Bureau indicated that it expects the Small Dollar Rule to become effective on March 30, 2025.
Separately, in May 2018, the OCC published guidance that encourages national banks and federal savings associations to offer responsible short-term, small-dollar installment loans with terms between two and twelve months and equal amortizing payments. Pursuant to the OCC’s guidance on this issue, banks are encouraged to offer these products in a manner that is consistent with sound risk management principles and clear, documented underwriting guidelines. Further, the federal banking agencies issued interagency guidance on May 20, 2020 to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. As of the date of the filing of this Annual Report on Form 10-K, the Bank has not determined to offer such products, although this position may change as the Bank further refines its business plan in the future.
Interest Rate Risk Management
The OCC requires national banks, like the Bank, to have an effective and sound interest rate risk management program, including appropriate measurement and reporting, robust and meaningful stress testing, assumption development reflecting the institution’s experience, and comprehensive model valuations. According to OCC guidance, interest rate risk exposure is supposed to be managed using processes and systems commensurate with their earnings and capital levels; complexity; business model; risk profile; and scope of operations.
Standards for Safety and Soundness
The federal banking agencies have adopted the Interagency Guidelines Establishing Standards for Safety and Soundness . The guidelines establish certain safety and soundness standards for all depository institutions. The operational and managerial standards in the guidelines generally relate to the following: (1) internal controls and information systems; (2) internal audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate exposure; (6) asset growth; (7) compensation, fees and benefits; (8) asset quality; and (9) earnings. Failure to meet the standards in the guidelines could result in a request by the OCC to the Bank to provide a written compliance plan to demonstrate its efforts to come into compliance with such guidelines.
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Anti-Money Laundering (“AML”) Laws and Regulations
AML and financial transparency laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act of 2001, impose strict standards for gathering and verifying customer information in order to ensure funds or other assets are not being placed in U.S. financial institutions to facilitate terrorist financing and laundering of funds. Applicable laws require financial institutions to have AML programs in place and require the federal banking agencies to consider a holding company’s effectiveness in combating money laundering when ruling on certain merger or acquisition applications. In addition, failure to comply with these requirements could lead to significant fines and penalties or the imposition of corrective orders. In July 2024, the federal banking agencies, including the FRB and OCC, proposed amendments to update the requirements for supervised institutions to establish, implement and maintain effective, risk-based and reasonably designed AML and countering the financing of terrorism (“CFT”) programs. The proposed amendments would require supervised institutions to identify, evaluate and document the regulated institution’s money laundering, terrorist financing and other illicit finance activity risks, as well as consider, as appropriate, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network’s (“FinCEN”) published national AML/CFT priorities.
Customer Identification Programs for Holders of Prepaid Cards
The federal banking agencies, including the OCC and the FRB, issued guidance in 2016 that extends the requirements of the Customer Identification Program required by Section 326 of the USA PATRIOT Act to prepaid accounts where the cardholder has either the (i) ability to reload funds, or (ii) access to credit or overdraft features. If either of these features is present, the issuer must verify the identity of the named account holder.
Privacy and Cybersecurity
The Bank is required by federal statutes and regulations to disclose its privacy policies to its customers. The Bank is also required to appropriately safeguard its customers’ personal information.
On November 18, 2021, the federal banking agencies issued a final rule to improve the sharing of information about cyber incidents. The final rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. Notification is required for incidents that have materially affected—or are reasonably likely to materially affect—the viability of a banking organization's operations, its ability to deliver banking products and services, or the stability of the financial sector. The final rule also requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. This rule became effective May 1, 2022.
In addition, certain state laws could potentially impact the Bank’s operations, including those related to applicable notification requirements when computer-security incident or unauthorized access to customers’ nonpublic personal information has occurred.
Guidance for Third-Party Relationships
On June 9, 2023, the OCC, Federal Reserve, and FDIC issued final interagency guidance on risk management of third-party relationships, including third-party lending relationships. The interagency guidance is based, in part, on the OCC’s previously existing third-party risk management guidance from 2013 and seeks to, among other things, promote consistency in third-party risk management and provide sound risk management guidance for third-party relationships commensurate with a bank’s risk profile and complexity as well as the criticality of the activity. The final interagency guidance replaces each agency’s existing guidance on this topic (including the OCC's 2020 Frequently Asked Questions on Third-Party Relationships) and is directed to all banking organizations supervised by the OCC, Federal Reserve, and FDIC. Additionally, third party relationship risk management and banking as a service arrangements (including with respect to deposit products and services) have been topics of focus for federal bank regulators in 2024 and further rulemaking activity or guidance may be forthcoming.
Unclaimed Property Laws
Unclaimed property (escheatment) laws vary by state but generally require holders of customer property (including money) to turn over such property to the applicable state after holding the property for the statutorily prescribed period of time. These laws are not uniform and impose varying requirements on entities, like the Bank, which may hold funds that are required to be escheated to the applicable states.
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Assessments
The Dodd-Frank Act provides that, in establishing the amount of an assessment, the Comptroller of the Currency may consider the nature and scope of the activities of the entity, the amount and type of assets it holds, the financial and managerial condition of the entity and any other factor that is appropriate. The assessments are paid to the OCC on a semi-annual basis. During the fiscal year ended September 30, 2024, the Bank paid assessments (standard assessments) of $789,608 to the OCC.
Regulatory Capital Requirements
The regulatory capital rules applicable to the Company and the Bank (the “Capital Rules”) identify three components of regulatory capital: (i) common equity tier 1 capital (“CET1 Capital”), (ii) additional tier 1 capital, and (iii) tier 2 capital. Tier 1 capital is the sum of CET1 Capital and additional tier 1 capital instruments meeting certain requirements. Total capital is the sum of tier 1 capital and tier 2 capital. CET1 Capital, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Capital Rules for the Company and the Bank, provide the denominator for such ratios. There is also a leverage ratio that compares tier 1 capital to average total assets.
Failure by the Company or the Bank to meet minimum capital requirements set by the Capital Rules could result in certain mandatory and/or discretionary disciplinary actions by their regulators that could have a material adverse effect on their business and their consolidated financial position. Under the capital requirements and the regulatory framework for prompt corrective action (discussed below), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.
The Company and the Bank are required to maintain a capital conservation buffer of 2.5% 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 CET1 Capital and applies to each of the three risk-based capital ratios (but not the leverage ratio).
The Capital Rules provide for a number of deductions from and adjustments to CET1 Capital. These include, for example, the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 Capital to the extent that any one such category exceeds 10% of CET1 Capital or all such items, in the aggregate, exceed 15% of CET1 Capital.
The Capital Rules prescribe a standardized approach for risk weightings for a large and risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, and resulting in high-risk weights for a variety of asset classes. As of September 30, 2024, the Bank exceeded all of its regulatory capital requirements and was designated as “well capitalized” under federal guidelines.
There have been several developments which are intended to reduce the regulatory capital burden on smaller or less complex banking organizations like the Company and the Bank. The effect that these developments will have on the Company and the Bank is currently uncertain.
In July 2019, the federal banking agencies finalized a rule intended to simplify and clarify a number of the more complex aspects of existing regulatory capital rules. Specifically, the rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest. The final rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. The final rule became effective April 1, 2020 for the amendments to simplify capital rules, and October 1, 2019 for revisions to the pre-approval requirements for the redemption of common stock and other technical amendments. The Bank did not elect to implement the relief provided under the simplification rule.
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On November 21, 2018, the FDIC, the OCC, and the FRB jointly issued a proposed rule required by the Regulatory Relief Act that would permit qualifying banks that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (referred to as the “community bank leverage ratio” or “CBLR”). Under the proposed rule, banks that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements and would be deemed to have met the well capitalized ratio requirements. The rule was adopted in September 2019. The Bank continues to assess the potential impact of opting in to this election as part of its ongoing capital management and planning processes.
Prompt Corrective Action ("PCA")
Federal banking agencies are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their minimum capital requirements expressed in terms of a total risk-based capital ratio, a Tier 1 risk-based capital ratio, a CET1 ratio, and a leverage ratio (as identified in the tables above).
Well capitalized banks may not make a capital distribution or pay management fees if the bank would be undercapitalized after making such distributions or paying such fees. Adequately capitalized banks, in general, cannot pay dividends or make any capital contributions that would leave them undercapitalized; they cannot pay a management fee to a controlling person if, after paying the fee, they would be undercapitalized; and they cannot accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver by the FDIC.
The activities of an “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” bank are further restricted. Any such bank must submit a capital restoration plan that is guaranteed by each company that controls the Bank, and such company must provide appropriate assurances of performance. Until such plan is approved, the bank may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The federal banking agencies are authorized to impose additional restrictions, discussed below, that are applicable to significantly undercapitalized institutions.
The imposition of any action taken by the OCC against the Bank in connection with the agency’s PCA authority would likely have a substantial adverse effect on it and on the Company’s operations and profitability. This is especially true if the Bank were to no longer be deemed to be well capitalized and, therefore, subject to limitations on its ability to accept, renew or roll over brokered deposits absent a waiver from the FDIC. The Company's stockholders are not entitled to preemptive rights and, therefore, if the Company is directed by its regulators to issue additional shares of common stock, such issuance may result in dilution to the Company's existing stockholders.
Institutions in Troubled Condition
Certain events, including entering into a formal written agreement with a bank’s regulator that requires action to improve the bank’s financial condition, or being informed by the regulator that the bank is in troubled condition, will automatically result in limitations on so-called “golden parachute” agreements pursuant to Section 18(K) of the FDIA. In addition, organizations that are not in compliance with minimum capital requirements, or are otherwise in a troubled condition, must give 90 days’ written notice to the OCC before appointing a Director or Senior Executive Officer, pursuant to the OCC’s regulations.
Civil Money Penalties
The OCC has the authority to assess civil money penalties (“CMPs”) against any national bank, federal savings bank or any of their institution-affiliated parties (“IAPs”). In addition, the OCC has the authority to assess CMPs against bank service companies and service providers. CMPs may encourage an affected party to correct violations, unsafe or unsound practices or breaches of fiduciary duty. CMPs are also intended to serve as a deterrent to future violations of law, regulations, orders and other conditions.
Limitations on Dividends and Other Capital Distributions
The NBA and related federal regulations govern the permissibility of dividends and capital distributions by a national bank. As a national bank, the Bank’s board of directors may not declare, and the Bank may not pay, any dividend in an amount greater than the sum of current period net income and retained earnings. A distribution in excess of that amount is a reduction in permanent capital, and the Bank would need to follow the applicable procedures set forth in OCC regulations and guidance. Further, the Bank’s board of directors may not declare a dividend if paying the dividend would result in the Bank being undercapitalized under the OCC’s PCA rule.
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The Bank also must obtain prior approval from the OCC to pay a cash dividend if the dividend would exceed the sum of current period net income and retained earnings from the past two years, after deducting the following transactions during that period: (i) any dividends previously declared, (ii) extraordinary transfers required by the OCC, and (iii) payments made for the retirement of preferred stock. This calculation is performed on a rolling basis as described in the OCC’s earnings limitation regulations.
The Bank paid cash dividends in the amount of $87.0 million to the Company during fiscal 2024, to be used to fund share repurchases under the common stock share repurchase programs that were authorized by the Company's Board of Directors. On September 3, 2021, the Company's Board of Directors authorized a stock repurchase program pursuant to which the Company may repurchase up to 6,000,000 shares of the Company's outstanding common stock on or before September 30, 2024. On August 25, 2023, the Company's Board of Directors authorized a new stock repurchase program pursuant to which the Company may repurchase up to an additional 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028. As part of its capital planning, the Company will continue to regularly assess its needs for dividends from the Bank in order to fund future share repurchases and dividends to the Company's stockholders as needed.
Transactions with Affiliates
The Bank must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with “affiliates,” generally defined to mean any company that controls or is under common control with the institution (as such, the Company is an affiliate of the Bank for these purposes). Transactions between an institution or its subsidiaries and its affiliates are required to be on terms as favorable to the Bank as terms prevailing at the time for transactions with non-affiliates. Certain transactions, such as loans to an affiliate, are restricted to a percentage of the institutions’ capital (e.g., the aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the institution; the aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus).
Community Reinvestment Act (“CRA”)
Under the CRA, the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting its continuing and affirmative obligations consistent with its safe and sound operation, to help meet the credit needs of its assessment areas, including low- and moderate-income neighborhoods. CRA ratings can also impact an insured depository institution’s ability to engage in certain activities as CRA performance is considered in connection with certain applications by depository institutions and their holding companies, including merger applications, charter applications, and applications to acquire assets or assume liabilities. The Bank received a “Satisfactory” rating during its most recent Performance Evaluation dated January 29, 2024.
On October 24, 2023, the federal banking agencies jointly issued a final rule to modernize CRA regulations consistent with the following key goals: (i) to encourage banks to expand access to credit, investment, and banking services in low to moderate income communities; (ii) to adapt to changes in the banking industry, including internet and mobile banking and the growth of non-branch delivery systems; (iii) to provide greater clarity and consistency in the application of the CRA regulations, including adoption of a new metrics-based approach to evaluating bank retail lending and community development financing; and (iv) to tailor CRA evaluations and data collection to bank size and type, recognizing that differences in bank size and business models may impact CRA evaluations and qualifying activities. Most of the final CRA rule’s requirements will be applicable beginning January 1, 2026, with certain requirements, including the data reporting requirements, applicable as of January 1, 2027. The Bank is evaluating the expected impact of the modified CRA regulations.
Federal Home Loan Bank System
The Bank is a member of the FHLB system through the FHLB of Des Moines, one of 11 regional FHLBs that administer the home financing credit function that is subject to regulation and supervision by the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances must be used for residential home financing.
As a member of the FHLB system, the Bank is required to purchase and maintain activity-based capital stock in the FHLB in the amount specified by the applicable FHLB's capital plan. At September 30, 2024, the Bank had in the aggregate $16.3 million in FHLB stock, which was in compliance with the FHLB of Des Moines' requirement. For the fiscal year ended September 30, 2024, dividends paid by the FHLB to the Bank totaled $0.7 million.
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Other Regulation
The Bank is also subject to a variety of other regulations with respect to its business operations including, but not limited to, the Truth in Lending Act, the Truth in Savings Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Military Lending Act, the Servicemembers’ Civil Relief Act, the Fair Housing Act, the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act, and the Fair Credit Reporting Act.
It is possible that additional rulemaking could require significant revisions to the regulations under which the Bank operates and is supervised. Any change in such laws and regulations or interpretations thereof negatively impacting the Bank's or the Company's current operations, whether by the OCC, the FDIC, the Bureau, the FRB or through legislation, could have a material adverse impact on the Bank and its operations and on the Company and its stockholders.
Holding Company Regulation and Supervision
The Company is subject to examination, supervision, and certain reporting requirements by the Federal Reserve, which has responsibility for the primary regulation and supervision of all BHCs, including the Company, under the Bank Holding Company Act (“BHCA”). The Federal Reserve also has supervisory authority over any nonbank subsidiary of a BHC that is not functionally regulated by another federal or state regulator, such as a leasing subsidiary. Through the supervisory process, the Federal Reserve ensures that BHCs, like the Company, comply with law and regulation and are operated in a manner that is consistent with safe and sound banking practices. The Federal Reserve supervises BHCs pursuant to Regulation Y (12 C.F.R. Part 225) and a supervisory program that seeks to ensure that BHCs comply with rules and regulations and that they operate in a safe and sound manner.
As a BHC that has elected to become a FHC, the Company may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the Federal Reserve). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.
Acquisitions
Federal law prohibits a BHC, including the Company, directly or indirectly, from: (a) acquiring control (as defined under Regulation Y) of another bank (or a holding company parent) without prior Federal Reserve approval; or (b) through merger, consolidation or purchase of assets, acquiring another bank or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior Federal Reserve approval. In evaluating applications by BHCs to acquire other holding companies and banks, the Federal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.
On September 17, 2024, the OCC issued a final rule related to its regulations for business combinations involving national banks and a policy statement that summarizes the principles the OCC uses when it reviews proposed bank merger transactions under the Bank Merger Act (“BMA”). The final rule removes provisions related to expedited review and the use of the streamlined business combination application. The policy statement discusses the OCC’s review of applications submitted under the BMA, including general principles for the OCC’s review and the OCC’s consideration of the financial stability, managerial and financial resources and future prospects and the convenience and statutory needs factors under the BMA. On September 17, 2024, the FDIC also approved a final Statement of Policy on Bank Merger Transactions addressing the scope of transactions subject to FDIC approval, the FDIC’s process for evaluating merger applications, and the principles that guide the FDIC’s consideration of the applicable statutory factors as set forth in the BMA.
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Change in Bank Control
Federal law and regulation set forth the types of transactions that require prior notice under the Change in Bank Control Act (“CIBCA”). Pursuant to CIBCA and Regulation Y, any person (acting directly or indirectly) that seeks to acquire control of a bank or its holding company must provide prior notice to the Federal Reserve. A “person” includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization, or any other form of entity. A person acquires "control" of a banking organization whenever the person acquires ownership, control, or the power to vote 25 percent or more of any class of voting securities of the institution. The applicable regulations also provide for certain other "rebuttable" presumptions of control.
In April 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHCA. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve’s final rule applies to questions of control under the BHCA, but does not extend to CIBCA.
Source of Strength and Capital Requirements
The Dodd-Frank Act requires all companies, including BHCs, that directly or indirectly control an insured depository institution to serve as a source of financial and managerial strength to its subsidiary depository institutions and to maintain adequate resources to support such institutions; to date, however, specific regulations implementing this requirement have not been published. As an BHC, the Company is also subject to the same regulatory capital requirements as the Bank.
Examination
In 2019, the Federal Reserve published finalized guidance with respect to inspection frequency and scope for BHCs with less than $10 billion in assets. According to the Federal Reserve, with respect to institutions with less than $10 billion in assets (such as the Company), the determination of whether a holding company is "complex" versus "noncomplex" is made at least annually on a case-by-case basis taking into account and weighing a number of considerations, such as: the size and structure of the holding company; the extent of intercompany transactions between insured depository institution subsidiaries and the holding company or uninsured subsidiaries of the holding company; the nature and scale of any non-bank activities; and the degree of leverage of the holding company, including the extent of its debt outstanding to the public.
Dividends
In 2009, the Federal Reserve released a supervisory letter entitled Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions and Stock Repurchases at Bank Holding Companies . This letter generally sets forth principles describing when a BHC must consult, provide notice, or seek approval from the FRB prior to a capital distribution including the payment of dividends, stock redemptions, or stock repurchases. According to FRB staff, the FRBs are likely to require holding companies to eliminate, defer or reduce dividends if these payments are not fully covered by the net income available to shareholders for the past four quarters, earnings retention is not consistent with capital needs or the holding company will not meet or is in danger of not meeting minimum regulatory capital adequacy ratios.
Management
In August 2017, the Federal Reserve published proposed guidance related to supervisory expectations for boards of directors of BHCs. The proposal sought to clarify supervisory expectations of boards and distinguish the roles held by senior management to allow boards to focus on fulfilling their core responsibilities. On February 26, 2021, the Federal Reserve issued a Supervision and Regulation letter (SR 21-3/CA 21-1) containing its final supervisory guidance on the effectiveness of a banking institution's board of directors. Although the guidance only applies to bank holding companies and savings-and-loan holding companies with total consolidated assets of $100 billion or more, the Company continues to monitor the Federal Reserve's evolving supervisory and regulatory approach to board and senior management effectiveness.
Additional Regulatory Matters
The Company is subject to oversight by the SEC, NASDAQ and various state securities regulators. In the normal course of business, the Company has received requests for information from these regulators. Such requests have been considered routine and incidental to the Company’s operations.
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Federal and State Taxation
Pathward Financial and its subsidiaries file a consolidated federal income tax return and various consolidated state income tax returns. Additionally, Pathward Financial or its subsidiaries file separate company income tax returns in states where required. All returns are filed on a fiscal year basis using the accrual method of accounting. The Company monitors relevant tax authorities and changes its estimate of accrued income tax due to changes in income or franchise tax laws and their interpretation by the courts and regulatory authorities.
Competition
The Company operates in competitive markets for each of the different financial sectors in which it engages in business: payments, commercial finance, tax services and consumer lending. Competitors include a wide range of regional and national banks and financial services companies located both in the Company's market areas and across the nation.
The Company’s Partner Solutions business line serves customers nationally and also faces strong competition from large commercial banks and specialty providers of electronic payments processing and servicing, including prepaid, debit and credit card issuers, ACH processors and ATM network sponsors. Many of these national players are aggressive competitors, leveraging relationships and economies of scale.
As part of its national lending operations, the Company also faces strong competition from non-bank commercial finance companies, leasing companies, factoring companies, consumer finance and others on a nationwide basis. In addition, the Company’s tax return processing services division competes nationwide with financial institutions that offer similar processing technologies and capabilities.
Human Capital Resources
The Company's purpose of powering financial inclusion is foundational to our ability to attract and retain top talent who desire to work with innovators to enable financial availability, choice, and opportunity for consumers and businesses in underserved markets. We empower our employees by providing opportunities to grow and develop in their careers, supported by strong compensation, benefits, and health and well-being programs. We seek to provide a diverse, inclusive, safe, and healthy workplace, recognizing our employees enable us to deliver on our purpose.
Demographics
The following table describes the composition of our workforce as of September 30, 2024:
Employee Type 9/30/2023 9/30/2024 Change
Full-time 1,192 1,239 3.94%
All Other Types 7 5 (28.57)%
Total Employees 1,199 1,244 3.75%
Women 53%
Racial/Ethnic Minorities 22%
Diversity, Equity, Inclusion and Belonging ("DEIB")
At Pathward, we are committed to advancing DEIB to meet the dynamic needs of our workforce and business. We aim to cultivate an environment where every employee is embraced and recognized for their unique contributions in serving our clients, partners and communities.
Pathward works to promote diversity throughout our organization and provide an equal opportunity for employment and success regardless of background and identity, as reflected in our Code of Business Conduct and Employee Handbook.
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Talent Acquisition
A core tenet of our talent system is to both develop talent from within and enrich our talent pool with external hires to support a continuous improvement mindset. Our “Talent Anywhere” recruitment strategy enables us to source candidates needed to fill essential capabilities and roles while positioning us as a remote-enabled employer of choice. Our remote-enabled workplace has created valuable benefits for both employees and our business by reducing necessary commutes, allowing us to hire diverse talent from anywhere in the United States, and realizing a reduction in our physical footprint. As part of our DEIB strategy, we train our internal recruiters on how to mitigate unconscious bias in the hiring process and how to assemble diverse candidate slates for open positions.
Talent Assessment and Development
Assessing talent and leadership development are also critical to our talent growth and retention strategy. We continue to mature and expand our talent management framework. This framework is used throughout the company to better equip Pathward to have clear line of sight into teams’ strengths and opportunities in terms of skills, diversity, and leadership potential. This helps ensure our internal talent supply keeps pace with demand, that we invest in our workforce with intention, have our highest performing, highest potential employees applied to our most critical work, and are preparing today’s talent for tomorrow’s needs.
Our performance management program is an interactive practice that engages our employees beginning with aligning objectives at the enterprise level to drive individual goal setting and quarterly conversations designed to review progress and accomplishments and calibrate on focus areas for the upcoming quarter, driving progress against objectives, alignment, and performance feedback throughout the year. We offer a variety of support to help team members and managers establish and meet personalized development goals, take on new roles and become better leaders.
Employee Engagement
We recognize that team members who are involved in, enthusiastic about and committed to their work and workplace contribute meaningfully to the success of the company. As a normal course of business, we complete enterprise-wide engagement surveys. The results of the survey are reviewed with the executive management team and are used to prioritize employee programs, initiatives, and communications.
Total Rewards
As part of our total rewards strategy, we aspire to offer and maintain market competitive total rewards programs for our employees that attract and retain superior talent. In addition to competitive base wages, we offer other variable pay depending on an employee's position, including an annual bonus or commission plan. We offer a 401(k) plan with a highly competitive company match. Our healthcare, insurance benefits, health savings and flexible spending accounts are equally competitive with a low-cost share for the employee. We also provide employer paid short- and long-term disability and life insurance benefits. We understand how important it is that our employees have time away from work. To allow employees time to recharge, we offer paid time off, family leave, family care resources, flexible work schedules, adoption assistance, employee assistance programs, and other related benefits. We want our employees to be healthy and be able to bring their whole selves to the workplace.
Health and Safety
We believe the success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. Being a fully remote-enabled employer, we provide laptops and related hardware along with a stipend to enhance employees' at-home work experience. Employees also have access to our offices if they choose to work there instead. Our employees and their families are also supported with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health. We follow local, state and federal regulations issued by the Occupational Safety and Health Administration and are prepared to implement any applicable workplace requirements.
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Available Information
The Company’s website address is www.pathwardfinancial.com. The Company makes available, through a link with the SEC’s EDGAR database (http://www.sec.gov), free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and statements of ownership on Forms 3, 4, and 5. Investors are encouraged to access these reports and other information about our business on our website. The information found on the Company’s website is not incorporated by reference in this or any other report the Company files or furnishes to the SEC. The Company also will provide copies of its Annual Report on Form 10-K, free of charge, upon written request to Darby Schoenfeld, SVP Chief of Staff and Investor Relations, at the Company’s address. Also posted on the Company's website, among other things, are the Sustainability Report, the charters of committees of the Board of Directors, as well as the Company's Code of Business Conduct.