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Item 2. Management’s Discussion and Analysis

2025-02-06 compared with 2024-08-06 · 106 added, 162 removed, 253 unchanged (51% of the section changed)

27 unchanged sentences

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

changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios;

changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the federal funds rate, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios;

changes in tax laws;

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the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products;

our relationship with, and any actions which may be initiated by, our regulators;

changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry;

our relationship with, and any actions which may be initiated by, our regulators, and any related increases in compliance and other costs;

changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry;

technological changes, including, but not limited to, the protection of our electronic systems and information;

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The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.”

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

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

This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the fiscal year ended September 30, 2024 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2024.

EXECUTIVE SUMMARY

Company Highlights

• On April 30, 2024, Pathward Financial was recognized on Keefe, Bruyette & Woods, Inc.'s (also known as "KBW") honor roll list of the top banks producing "industry-leading and consistent earnings growth for investors."

• During the quarter, Pathward announced the expansion and transformation of its Solutions for Financial Institutions, which previously only provided prepaid cards to banks and credit unions.

With this expansion, Pathward can now also provide Commercial Finance Solutions to their business clients that do not qualify for traditional financing or when a product is not offered.

Pathward also provides financial institutions the ability to offer merchant services to business clients.

Financial Highlights for the 2024 Fiscal Third Quarter

• Total revenue for the third quarter was $176.7 million, an increase of $11.5 million, or 7%, compared to the same quarter in fiscal 2023, d riven by an increase in net interest income, partially offset by a reduction in noninterest income.

• Net interest margin ("NIM") increase d 38 basis points to 6.56% for the third quarter from 6.18% during the same period of last year, p rimarily driven by increased yields on earning assets and an improved earning asset mix from the continued optimization of the portfolio.

• Total gross loans and leases at June 30, 2024 increased $539.7 million to $4.61 billion compared to June 30, 2023 and increased $203.2 million when compared to March 31, 2 024.

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

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

• During the 2024 fiscal third quarter, the Company repurchased 286,920 shares of common stock at an average share price of $52.24.

For the nine months ended June 30, 2024, total tax services product revenue was $82.0 million, an increase of 3% compared to the same period of the prior year.

The increase in revenue was primarily driven by an increase in refund advance fee income, partially offset by decreases in net interest income and refund transfer product fees.

Provision for credit losses for the tax services portfolio decreased $9.5 million for the nine months ended June 30, 2024 when compared to the same period of the prior year, due to improvements in data analytics, underwriting and monitoring.

Total tax services product income, net of losses and direct product expenses, increased 33% to $47.1 million from $35.3 million, when comparing the first nine months of fiscal 2024 to the same period of the prior fiscal year.

Company Highlights and Business Developments

• On October 31, 2024, Pathward ® , N.A.

completed the sale of substantially all of the assets and liabilities related to the Bank's commercial insurance premium finance business.

The purchase price was $603.3 million, plus a $31.2 million premium.

The Bank recorded a $16.4 million pre-tax gain on the sale.

• On November 30, 2024, the Bank sold $160.1 million of debt securities AFS with a pre-tax loss on the sale of securities of $15.7 million.

This loss largely offsets the gain from the sale of the commercial insurance premium finance business.

Financial Highlights for the 2025 Fiscal First Quarter

• Total revenue for the first quarter was $173.5 million, an increase of $10.7 million, or 7%, compared to the same quarter in fiscal 2024, driven by an increase in both net interest income and noninterest income.

• Net interest margin ("NIM") increased 61 basis points to 6.84% for the first quarter from 6.23% during the same period of last year, primarily driven by increased yields and balances in the loan and lease portfolio and an improved earnings asset mix from the continued balance sheet optimization.

• Total gross loans and leases at December 31, 2024 increased $136.4 million to $4.56 billion compared to December 31, 2023 and increased $487.5 million when compared to September 30, 2024.

When excluding the insurance premium finance loans of $671.0 million at December 31, 2023, total gross loans and leases at December 31, 2024 increased $807.4 million, or 22%, when compared to December 31, 2023.

• During the 2025 fiscal first quarter, the Company repurchased 701,860 shares of common stock at an average share price of $74.05.

As of December 31, 2024, there were 6,298,140 shares available for repurchase under the current common stock share repurchase program.

FINANCIAL CONDITION

At June 30, 2024, the Company’s total assets decreased slightly to $7.53 billion compared to $7.54 billion at September 30, 2023, primarily due to reductions of $78.8 million in securities AFS, $76.7 million in cash and cash equivalents, and $48.4 million in loans held for sale, partially offset by growth of $246.4 million in loans and leases.

Total cash and cash equivalents were $298.9 million at June 30, 2024, decreasing from $375.6 million at September 30, 2023.

At December 31, 2024, the Company’s total assets increased slightly to $7.62 billion compared to $7.55 billion at September 30, 2024, primarily due to growth of $487.5 million in loans and leases, $439.1 million in cash and cash equivalents, and $48.6 million in other assets, partially offset by reductions of $616.2 million in loans held for sale, $261.1 million in securities AFS, and $13.0 million in goodwill and intangible assets.

Total cash and cash equivalents were $597.4 million at December 31, 2024, increasing from $158.3 million at September 30, 2024.

The increase is primarily due to the proceeds from the sale of the commercial insurance premium finance business, net transaction costs, and the sale of debt securities AFS, partially offset by the repayment of short-term borrowings during the three months ended December 31, 2024 .

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

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

The total investment portfolio decreased $81.3 million, or 4%, to $1.76 billion at June 30, 2024, compared to $1.84 billion at September 30, 2023.

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

The Company's investment security balances at December 31, 2024 totaled $1.51 billion, as compared to $1.77 billion at September 30, 2024.

The decrease is primarily due to $160.1 million of debt securities AFS sold by the Bank during the three months ended December 31, 2024.

The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities.

During the nine months ended June 30, 2024, the Company made no purchases of investment securities.

During the three months ended December 31, 2024, the Company made $1.2 million of purchases of investment securities.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the FRB.

The FHLB requires a level of stock investment based on a pre-determined formula.

The Company’s investment in these stocks was $24.4 million at June 30, 2024 and $28.2 million at September 30, 2023, as redemptions were partially offset by purchases of FHLB membership stock during the nine months ended June 30, 2024.

Loans held for sale at June 30, 2024 totaled $29.4 million, decreasing from $77.8 million at September 30, 2023.

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

Total gross loans and leases totaled $4.61 billion at June 30, 2024, as compared to $4.37 billion at September 30, 2023 .

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

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

Commercial finance loans, which comprised 84% of the Company's loan and lease portfolio, totaled $3.86 billion at June 30, 2024 , reflecting an increase of $137.0 million from September 30, 2023.

The increase in commercial finance loans was primarily driven by a $225.6 million increase in the term lending portfolio and a $90.9 million increase in the asset-based lending portfolio, partially offset by a $183.0 million decrease in the insurance premium finance portfolio.

Total end-of-period deposits decreased 2% to $6.43 billion at June 30, 2024, compared to $6.59 billion at September 30, 2023, primarily driven by decreases in noninterest-bearing deposits of $176.3 million and money market deposits of $15.4 million, partially offset by an increase in wholesale deposits of $37.4 million.

As of June 30, 2024, the Company had $575.7 million in deposits related to government stimulus programs.

Of the total amount of government stimulus program deposits, $236.9 million are on activated cards while $338.8 million are on inactivated cards.

During the remainder of fiscal year 2024, the inactive deposit balances are expected to decline by approximately $180 million as the Company actively returns unclaimed balances to the U.S.

The Company's total borrowings decreased $13.6 million from $46.9 million at September 30, 2023 to $33.3 million at June 30, 2024, primarily driven by a decrease in short-term borrowings of $13.0 million.

At June 30, 2024, the Company’s stockholders’ equity totaled $765.2 million, an increase of $114.6 million, from $650.6 million at September 30, 2023.

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

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

The Company’s investment in these stocks was $24.5 million at December 31, 2024 and $36.0 million at September 30, 2024, as redemptions were partially offset by purchases of FHLB membership stock during the three months ended December 31, 2024.

Loans held for sale at December 31, 2024 totaled $72.6 million, decreasing from $688.9 million at September 30, 2024.

This decrease was primarily driven by the sale of the commercial insurance premium finance loans and a reduction in SBA/USDA held for sale, partially offset by growth in consumer credit products held for sale at December 31, 2024 compared to September 30, 2024.

Total gross loans and leases totaled $4.56 billion at December 31, 2024, as compared to $4.08 billion at September 30, 2024.

The increase was due to growth across all loan portfolios.

Loans and Leases, Net to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

Commercial finance loans, which comprised 79% of the Company's loan and lease portfolio, totaled $3.62 billion at December 31, 2024 , reflecting an increase of $321.0 million, 10%, from September 30, 2024.

The increase was primarily driven by increases of $180.9 million in term lending and $136.4 million in asset-based lending.

Total end-of-period deposits increased 11% to $6.52 billion at December 31, 2024, compared to $5.88 billion at September 30, 2024, primarily driven by an increase in noninterest-bearing deposits of $666.8 million, partially offset by a decrease in wholesale deposits of $25.0 million.

As of December 31, 2024, the Company had $416.1 million in deposits related to government stimulus programs.

The Company's total borrowings decreased from $410.4 million at September 30, 2024 to $33.4 million at December 31, 2024, primarily driven by a decrease in short-term borrowings of $377.0 million as the Company used the increase in total deposits to fund loans and leases and investment balances.

The Company's short-term borrowings fluctuate on a daily basis due to the nature of a portion of its noninterest-bearing deposit base.

At December 31, 2024, the Company’s stockholders’ equity totaled $776.4 million, a decrease of $63.2 million, from $839.6 million at September 30, 2024.

The decrease was primarily attributable to an increase in accumulated other comprehensive loss and a decrease in retained earnings.

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

See “Liquidity and Capital Resources” for further information.

Noninterest-bearing Checking Deposits.

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

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

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

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The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts.

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

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

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

(Dollars in thousands) December 31, 2024 September 30, 2024

Noninterest-bearing deposits $ 6,527,973 $ 5,982,992

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

As of June 30, 2024, the Company managed $352.8 million of customer deposits at other banks in its capacity as custodian.

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

As of December 31, 2024, the Company managed $840.5 million of customer deposits at other banks in its capacity as custodian.

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

RESULTS OF OPERATIONS

The following table presents, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates.

The balances presented in the table below are calculated on a daily average balance.

The balances presented in the table below are calculated on a daily average basis.

Tax-equivalent adjustments have been made in yields on interest-bearing assets and NIM.

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

Three Months Ended June 30,

(Dollars in thousands) Average

Balance Interest

Interest-earning assets:

Cash and fed funds sold $ 224,987 $ 2,053 3.67 % $ 248,865 $ 2,441 3.93 %

Mortgage-backed securities 1,438,683 9,748 2.73 % 1,533,122 10,234 2.68 %

Tax exempt investment securities 128,117 911 3.62 % 145,474 989 3.45 %

Asset-backed securities 220,461 3,148 5.74 % 188,039 2,120 4.52 %

Other investment securities 282,966 2,211 3.14 % 292,025 2,320 3.19 %

Total investments 2,070,227 16,018 3.16 % 2,158,660 15,663 2.96 %

Commercial finance 3,756,152 78,353 8.39 % 3,268,780 68,174 8.37 %

Consumer finance 286,476 6,865 9.64 % 225,470 4,665 8.30 %

Tax services 56,836 55 0.39 % 52,477 25 0.19 %

Warehouse finance 407,210 10,598 10.47 % 372,498 8,378 9.02 %

Total loans and leases 4,506,674 95,871 8.56 % 3,919,225 81,242 8.31 %

Total interest-earning assets 6,801,888 $ 113,942 6.75 % 6,326,750 $ 99,346 6.31 %

Noninterest-earning assets 537,525 574,840

Total assets $ 7,339,413 $ 6,901,590

Interest-bearing liabilities:

Interest-bearing checking $ 684 $ — 0.14 % $ 339 $ — 0.22 %

Savings 56,565 3 0.02 % 69,310 7 0.04 %

Money markets 178,255 584 1.32 % 126,994 76 0.24 %

Time deposits 4,265 3 0.32 % 6,224 3 0.19 %

Wholesale deposits 74,167 1,099 5.96 % 5,794 78 5.38 %

Total interest-bearing deposits (a) 313,936 1,689 2.16 % 208,661 164 0.32 %

Overnight fed funds purchased 52,374 730 5.61 % 78,320 1,057 5.42 %

Subordinated debentures 19,651 355 7.26 % 19,549 355 7.28 %

Other borrowings 13,705 309 9.07 % 14,850 305 8.24 %

Total borrowings 85,730 1,394 6.54 % 112,719 1,717 6.11 %

Total interest-bearing liabilities 399,666 3,083 3.10 % 321,380 1,881 2.35 %

Noninterest-bearing deposits (b) 5,947,054 — — % 5,686,581 — — %

Total deposits and interest-bearing liabilities 6,346,720 $ 3,083 0.20 % 6,007,961 $ 1,881 0.13 %

Other noninterest-bearing liabilities 252,763 206,708

Total liabilities 6,599,483 6,214,669

Shareholders' equity 739,930 686,921

Total liabilities and shareholders' equity $ 7,339,413 $ 6,901,590

Net interest income and net interest rate spread including noninterest-bearing deposits $ 110,859 6.56 % $ 97,465 6.19 %

Net interest margin 6.56 % 6.18 %

Tax-equivalent effect 0.01 % 0.02 %

Net interest margin, tax-equivalent (2)

6.57 % 6.20 %

Total cost of deposits (a+b) 6,260,990 1,689 0.11 % 5,895,242 164 0.01 %

(1) Tax rate used to arrive at the TEY for the three months ended June 30, 2024 and 2023 was 21%.

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

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

The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.

Nine Months Ended June 30,

Three Months Ended December 31,

(Dollars in thousands) Average

40 unchanged sentences

Total cost of deposits (a+b) 6,081,235 775 0.01 % 6,558,190 3,526 0.05 %

(1) Tax rate used to arrive at the TEY for the nine months ended June 30, 2024 and 2023 was 21%.

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

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

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The Company recorded net income of $41.8 million, or $1.66 per diluted share, for the three months ended June 30, 2024, compared to net income of $45.1 million, or $1.68 per diluted share, for the three months ended June 30, 2023.

The Company recorded net income of $134.8 million, or $5.27 per diluted share, for the nine months ended June 30, 2024, compared to net income of $127.7 million, or $4.62 per diluted share, for the nine months ended June 30, 2023.

The Company recorded net income of $31.4 million, or $1.29 per diluted share, for the three months ended December 31, 2024, compared to net income of $27.7 million, or $1.06 per diluted share, for the three months ended December 31, 2023.

Net Interest Income

Net interest income for the third quarter of fiscal 2024 was $110.9 million, an increase of 14% from the same quarter in fiscal 2023.

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

For the nine months ended June 30, 2024, net interest income was $339.2 million, an increase of 20%, from $282.9 million compared to the same period in the prior fiscal year.

The Company’s average interest-earning assets for the third quarter of fiscal 2024 increased by $475.1 million to $6.80 billion compared to the same quarter in fiscal 2023, due to growth in loans and leases, partially offset by a decrease in total investment security balances and a decrease in cash balances.

The third quarter average outstanding balance of loans and leases increased $587.4 million compared to the same quarter of the prior fiscal year, due to an increase across all loan portfolios.

Fiscal 2024 third quarter NIM increased to 6.56% from 6.18% in the third fiscal quarter of last year.

The overall reported tax-equivalent yield (“TEY”) on average earning asset yields increase d 44 basis points to 6.75% compared to the prior year quarter, driven by an improved earning asset mix.

Net interest income for the first quarter of fiscal 2025 was $116.1 million, an increase of 6% from the same quarter in fiscal 2024.

The increase was mainly attributable to increased yields and balances in the loan and lease portfolio and an improved earning asset mix.

The Company’s average interest-earning assets for the first quarter of fiscal 2025 decreased by $296.0 million to $6.74 billion compared to the same quarter in fiscal 2024, due to decreases in average outstanding balances of total investments and interest earning cash balances, partially offset by an increase in total loan and lease balances.

The first quarter average outstanding balance of loans and leases increased $107.6 million compared to the same quarter of the prior fiscal year, primarily due to increases in warehouse finance and tax services loans, partially offset by decreases in commercial finance and consumer finance loans.

The decrease in the average outstanding balance of commercial finance loans and leases was primarily driven by the sale of the insurance premium finance loans, partially offset by an increase in term lending, asset-based lending, and SBA/USDA loans.

Fiscal 2025 first quarter NIM increased to 6.84% from 6.23% in the first fiscal quarter of 2024 .

The overall reported tax-equivalent yield (“TEY”) on average interest-earning assets increased 47 basis points to 7.04% compared to the prior year quarter, driven by an improved earning asset mix.

The yield on the loan and lease portfolio was 8.78% compared to 8.33% for the comparable period last year and the TEY on the securities portfolio was 3.10% compared to 3.15% over that same period.

For the nine months ended June 30, 2024, NIM was 6.33%, an increase of 35 basis points from 5.98% compared to the same period in the prior fiscal year.

The Company's cost of funds for all deposits and borrowings averaged 0.20% during the fiscal 2024 third quarter, as compared to 0.13% during the prior year quarter.

The Company's overall cost of deposits was 0.11% in the fiscal third quarter of 2024, as compared to 0.01% during the prior year quarter.

The Company's cost of funds for all deposits and borrowings averaged 0.20% during the fiscal 2025 first quarter, as compared to 0.35% during the prior year quarter.

The Company's overall cost of deposits was 0.05% in the fiscal first quarter of 2025, as compared to 0.21% during the prior year quarter.

Provision for Credit Loss

The Company recognized a provision for credit loss of $5.9 million for the three months ended June 30, 2024, compared to $1.8 million for the comparable period in the prior fiscal year.

The period-over-period increase in provision for credit losses was primarily due to an increase in provision for credit losses in the commercial finance portfolio of $6.5 million , partially offset by a decrease of $3.1 million in the tax services portfolio .

The Company recognized n et charge-offs of $6.6 million for the quarter ended June 30, 2024, compared to net charge-offs of $4.2 million for the quarter ended June 30, 2023.

Net charge-offs attributable to the commercial finance portfolio for the current quarter were $7.0 million, while net recoveries of $0.4 million were recognized in the tax services portfolio.

Net charge-offs attributable to the consumer finance portfolio for the current quarter were insignificant.

Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same quarter of the prior year were $2.6 million and $1.9 million, respectively, while a net recovery of $0.3 million was recognized in the tax services portfolio.

The Company recognized a provision for credit loss of $41.8 million for the nine months ended June 30, 2024, compared to $48.3 million for the comparable period in the prior fiscal year.

The period-over-period decrease in provision for credit losses was primarily due to a decrease in provision for credit losses in the tax services portfolio of $9.5 million, partially offset by increases in the commercial finance portfolio of $1.4 million, the consumer finance portfolio of $0.8 million and unfunded commitment reserves of $0.8 million.

The Company recognized net charge-offs of $11.0 million for the nine months ended June 30, 2024, compared to net charge-offs of $12.4 million for the same period of the prior year.

Net charge-offs attributable to the commercial finance portfolio and consumer finance portfolio for the nine months ended June 30, 2024, were $16.2 million and $0.1 million, respectively, while net recoveries of $5.4 million were recognized in the tax services portfolio.

Net charge-offs attributable to the commercial finance and consumer finance portfolios for the same period of the prior year were $10.5 million and $2.2 million, respectively, while net recoveries of $0.3 million was recognized in the tax services portfolio.

The Company recognized a provision for credit losses of $12.0 million for the quarter ended December 31, 2024, compared to $9.9 million for the comparable period in the prior fiscal year.

The period-over-p eriod increase in provision for credit losses was primarily due to increases in provision for credit losses in the commercial finance portfolio of $1.9 million, the consumer finance portfolio of $0.7 million, and the warehouse finance portfolio of $0.1 million, partially offset by a decrease of $0.1 million in provision for credit losses tax services portfolio .

The Company recognized net charge-offs of $8.6 million for the quarter ended December 31, 2024, compared to net charge-offs of $5.5 million for the quarter ended December 31, 2023.

Net charge-offs attributable to the commercial finance and seasonal tax services portfolios for the current quarter were $8.1 million and $0.5 million, respectively.

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

Noninterest Income

Fiscal 2024 third quarter noninterest income decreased 3% to $65.9 million, compared to $67.7 million for the same period of the prior year.

The decrease was primarily driven by a decrease in card and deposit fees.

The period-over-period decrease was partially offset by an increase in gain on sale of other and tax services product fees.

The period-over-period decrease in card and deposit fee income was primarily related to lower servicing fee income due to a reduction in custodial deposits.

Servicing fee income totale d $8.6 million during the 2024 fiscal third quarter, compared to $14.6 million for the same period of the prior year.

Noninterest income for the nine months ended June 30, 2024 decreased to $247.6 million from $260.5 million for the same period of the prior year.

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

Fiscal 2025 first quarter noninterest income increased 9% to $57.4 million, compared to $52.8 million for the same period of the prior year.

During the first fiscal quarter of 2025, the Company recognized a gain on divestiture of $16.4 million from the sale of its commercial insurance premium finance business.

This gain on divestiture was largely offset by a loss on sale of securities of $15.7 million also recognized during the current quarter.

The increase in noninterest income when comparing the current period to the same period of the prior year was primarily driven by an increase in gain on sale of loans and leases, other income, tax services product fees, and rental income.

The period-over-period increase was partially offset by a decrease in card and deposit fees and a reduction in gain on sale of other.

The increase in gain on sale of loans was primarily driven by SBA/USDA loan sales.

The period-over-period decrease in card and deposit fee income was primarily related to lower servicing fee income due to a reduction in rates following reductions in the EFFR.

Servicing fee income on custodial deposits totaled $4.5 million during the 2025 fiscal first quarter, compared to $5.1 million for the same period of the prior year.

For the fiscal quarter ended September 30, 2024, servicing fee income on custodial deposits totaled $3.2 million.

Noninterest Expense

Noninterest expense increased 8% to $123.7 million for the fiscal 2024 third quarter, from $114.6 million for the same quarter last year.

The increase was primarily attributable to increases in card processing expense, other expense and compensation and benefits.

The period-over-period increase was partially offset by a decrease in impairment expense.

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

Noninterest expense increased 4% to $123.6 million for the fiscal 2025 first quarter, from $119.3 million for the same quarter last year.

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

The period-over-period increase was partially offset by decreases in card processing expense.

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

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

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

Approximately 57% of the deposit portfolio was subject to these rate-related processing expenses during the 2024 fiscal third quarter.

For the fiscal quarter ended June 30, 2024, contractual, rate-related processing expenses were $27.6 million, as compared to $30.1 million for the fiscal quarter ended March 31, 2024 and $20.5 million for the fiscal quarter ended June 30, 2023.

Noninterest expense for the nine months ended June 30, 2024 increased to $383.4 million from $346.8 million for the same period of the prior year.

The period-over-period increase was primarily driven by an increase in card processing expense and compensation and benefits expense.

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

Approximately 60% of the deposit portfolio was subject to these rate-related processing expenses during the fiscal 2025 first quarter.

For the fiscal quarter ended December 31, 2024, contractual, rate-related processing expenses were $25.6 million, as compared to $26.3 million for the fiscal quarter ended September 30, 2024 and $26.8 million for the fiscal quarter ended December 31, 2023.

Income Tax Expense

The Company recorded income tax expense of $5.1 million, representing an effective tax rate of 10.9%, for the fiscal 2024 third quarter, compared to $3.2 million, representing an effective tax rate of 6.6%, for the third quarter last fiscal year.

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

The Company originated $4.3 million in renewable energy leases during the fiscal 2024 third quarter, resulting in $1.2 million in total net investment tax credits.

During the third quarter of fiscal 2023, the Company originated $21.4 million in renewable energy leases resulting in $5.8 million in total net investment tax credits.

For the nine months ended June 30, 2024, the Company originated $42.4 million in renewable energy leases, compared to $50.9 million for the comparable prior year period.

The Company recorded income tax expense of $6.3 million, representing an effective tax rate of 16.6%, for the fiscal 2025 first quarter, compared to an income tax expense of $5.7 million, representing an effective tax rate of 17.0%, for the first quarter last fiscal year.

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

The Company originated $9.3 million in renewable energy leases during the fiscal 2025 first quarter, resulting in $3.2 million in total net investment tax credits.

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

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

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

Typically, this is associated with a delay or shortfall in payments of 210 days or more for insurance premium finance, 120 days or more for consumer credit products and leases, and 90 days or more for commercial finance loans.

Typically, this is associated with a delay or shortfall in payments of 120 days or more for consumer credit products and leases and 90 days or more for commercial finance loans.

Action is taken to charge off ERO loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year.

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

The Company believes that the level of allowance for credit losses at June 30, 2024 was appropriate and reflected probable losses related to these loans and leases;

The Company believes that the level of allowance for credit losses at December 31, 2024 was appropriate and reflected probable losses related to these loans and leases;

however, there can be no assurance that all loans and leases will be fully collectible or that the present level of the allowance will be adequate in the future.

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The table below sets forth the amounts and categories of the Company's nonperforming assets.

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

(Dollars in thousands) December 31, 2024 September 30, 2024

Nonperforming Loans and Leases

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

The Company's nonperforming assets at June 30, 2024 were $46.3 million, representing 0.61% of total assets, compared to $58.0 million, or 0.77% of total assets at September 30, 2023.

The decrease in the nonperforming assets as a percentage of total assets at June 30, 2024 compared to September 30, 2023, was primarily driven by a decrease in nonperforming loans in the tax services portfolio and commercial finance portfolio, partially offset by an increase in the consumer finance portfolio.

The Company's nonperforming loans and leases at June 30, 2024 were $44.6 million, representing 0.96% of total gross loans and leases, compared to $56.2 million, or 1.26% of total gross loans and leases at September 30, 2023.

The Company's nonperforming assets at December 31, 2024 were $37.5 million, representing 0.49% of total assets, compared to $43.0 million, or 0.57% of total assets at September 30, 2024.

The decrease in the nonperforming assets as a percentage of total assets at December 31, 2024 compared to September 30, 2024, was primarily driven by a decrease in nonperforming loans in the seasonal tax services and consumer finance portfolios, partially offset by an increase in nonperforming loans in the commercial finance portfolio.

The Company's nonperforming loans and leases at December 31, 2024 were $35.2 million, representing 0.76% of total gross loans and leases, compared to $41.6 million, or 0.87% of total gross loans and leases at September 30, 2024.

Classified Assets .

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The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.

On the basis of management’s review of its loans, leases, and other assets, at June 30, 2024, the Company had classified loans and leases of $192.5 million as substandard, $8.2 million as doubtful and none as loss.

On the basis of management’s review of its loans, leases, and other assets, at December 31, 2024, the Company had classified loans and leases of $197.7 million as substandard, $4.8 million as doubtful and none as loss.

At September 30, 2024, the Company classified loans and leases of $180.9 million as substandard, $10.3 million as doubtful and none as loss.

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

The Company's ACL totaled $79.8 million at June 30, 2024, an increase compared to $49.7 million at September 30, 2023.

The increase in the ACL at June 30, 2024, when compared to September 30, 2023, wa s primarily due to a $28.7 million increase in the allowance related to the seasonal tax services portfolio.

The Company's ACL totaled $49.0 million at December 31, 2024, an increase compared to $45.3 million at September 30, 2024.

The increase in the ACL at December 31, 2024, when compared to September 30, 2024, was primarily due to a $2.8 million increase in the allowance related to the consumer finance portfolio due to seasonal activity and a $0.8 million increase in the allowance related to the seasonal tax services portfolio.

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

As of the Period Ended

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

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

Commercial finance 1.18 % 1.29 % 1.17 % 1.21 % 1.30 %

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Total loans and leases excluding tax services 1.07 % 1.12 % 1.12 % 1.14 % 1.21 %

The Company's ACL as a percentage of total loans and leases increased to 1.73% at June 30, 2024 from 1.14% at September 30, 2023.

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

The decrease in the commercial finance loan and lease coverage ratio was due to a mix shift within the portfolio with higher balances in term lending and SBA/USDA loans, which typically carry lower reserve rates.

The Company's ACL as a percentage of total loans and leases decreased to 1.07% at December 31, 2024 from 1.11% at September 30, 2024.

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

The increase in the tax services and consumer finance portfolios loan coverage ratios was due to seasonal activity.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended September 30, 2024.

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

There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2025.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s primary sources of funds are deposits, derived principally through its BaaS business line, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities.

The Company’s primary sources of funds are deposits, derived principally through its Partner Solutions business line, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities.

In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available.

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The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, to maintain liquidity, and to meet operating expenses.

At June 30, 2024, the Company had unfunded loan and lease commitments of $1.39 billion.

At December 31, 2024, the Company had unfunded loan and lease commitments of $1.31 billion.

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

The liquidity sources as of June 30, 2024 include $298.9 million in cash and cash equivalents and $352.8 million in off-balance sheet custodial deposits.

When factoring in additional resources, such as the Federal Home Loan Bank, the Federal Reserve Discount Window and other unsecured funding and wholesale options, the Company has over $2.5 billion in total available liquidity as of June 30, 2024.

The liquidity sources as of December 31, 2024 include $597.4 million in cash and cash equivalents and $840.5 million in off-balance sheet custodial deposits.

When factoring in additional resources, such as the Federal Home Loan Bank, the Federal Reserve Discount Window and other unsecured funding and wholesale options, the Company has over $4.03 billion in total available liquidity as of December 31, 2024.

Due to the characteristics of the Company's deposit portfolio, uninsured deposits remained less than 15% of total deposits during the fiscal 2025 first quarter and below the Company's available liquidity.

The Company and the Bank are required to comply with the regulatory capital rules administered by federal banking agencies (the "Capital Rules").

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The Capital Rules require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined).

At June 30, 2024, the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

At December 31, 2024, the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements.

The Company and the Bank took the AOCI opt-out election;

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

At June 30, 2024

At December 31, 2024

Tier 1 leverage capital ratio 9.15 % 9.42 % 4.00 % 5.00 %

9 unchanged sentences

Standardized Approach (1)

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

(Dollars in thousands) December 31, 2024 September 30, 2024

Total stockholders' equity $ 776,430 $ 839,605

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Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations " in the Company’s Annual Report on Form 10-K for its fiscal year ended September 30, 2024 for a summary of our contractual obligations as of September 30, 2024.

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

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

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis