PATHWARD FINANCIAL, INC. 10-Q/A

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS PATHWARD FINANCIAL, INC. ("Pathward Financial" or the "Company" or "us") and its wholly-owned subsidiary, Pathward ® , National Association ("Pathward ® , N.A" or "Pathward" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q/A, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and Pathward, N.A, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” "target," or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results including our performance expectations; progress on key strategic initiatives; expected results of our partnerships; impacts of our improved data analytics, underwriting, and monitoring processes; expected nonperforming loan resolutions and net charge-off rates; the performance of our securities portfolio; future effective tax rate; the impact of card balances related to government stimulus programs; customer retention; loan and other product demand; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; and technology. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflicts in Ukraine and the Middle East, weather-related disasters, or public health events, such as pandemics, and any governmental or societal responses thereto; our ability to successfully implement measures designed to reduce expenses and increase efficiencies; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the federal funds rate, and their related impacts on macroeconomic conditions, customer behavior, funding costs and loan and securities portfolios; changes in tax laws; the strength of the United States' economy, and the local economies in which the Company operates; adverse developments in the financial services industry generally such as bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer behavior; inflation, market, and monetary fluctuations; our liquidity and capital positions, including the sufficiency of our liquidity; the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value and acceptance of these products and services by users; Pathward's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by, our regulators, 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; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by Pathward of its status as a well-capitalized institution; changes in consumer borrowing, spending, and saving habits; losses from fraudulent or illegal activity; technological risks and developments and cyber threats, attacks, or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase. The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q/A speak only as of the date of the Original Report. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” and in other sections of the Company’s Annual Report on Form 10-K/A for the Company’s fiscal year ended September 30, 2024, and in the Company's other filings made with the SEC. The Company expressly disclaims any intent or obligation to update, revise, or clarify any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason. 40 Table of Contents RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS As discussed in the Explanatory Note and Note 17. Restatement of Previously Issued Financial Statements to the Consolidated Financial Statements included in this Quarterly Report on Form 10-Q/A, the Company has restated its unaudited historical consolidated financial statements as of December 31, 2024 and 2023 and for the three months ended December 31, 2024 and 2023, to correct for identified errors in its accounting for allowance for credit losses, interest income, provision for credit losses, and noninterest expense. In addition, the Company has corrected other unrelated immaterial errors which were previously not recorded or not recorded in the appropriate period. As a result, the previously reported financial information as of December 31, 2024 and 2023 and for the three months ended December 31, 2024 and 2023, in this Management's Discussion and Analysis of Financial Condition and Results of Operations has been amended and restated to reflect the restatement. Other than the effect of the restatement and the revisions noted above, this section has not been otherwise modified and does not reflect any information or events occurring after February 6, 2025, the filing date of the Original Report, or modify or update those disclosures affected by events that occurred at a later date or facts that subsequently became known to the Company, except to the extent they are otherwise required to be included and discussed herein. GENERAL The Company, a registered bank holding company that has elected to be a financial holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a chartered national bank, the accounts of which are insured up to applicable limits by the FDIC as administrator of the Deposit Insurance Fund. Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all direct or indirect subsidiaries of Pathward Financial on a consolidated basis. The Company’s common stock trades on the NASDAQ Global Select Market under the symbol “CASH.” The following discussion focuses on the consolidated financial condition of the Company at 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 Form 10-K/A. EXECUTIVE SUMMARY 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 $182.6 million, an increase of $10.9 million, or 6%, 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 66 basis points to 7.38% for the first quarter from 6.72% 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. 41 Table of Contents • Total gross loans and leases at December 31, 2024 increased $133.4 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 $674.1 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 December 31, 2024, the Company’s total assets increased slightly to $7.60 billion compared to $7.53 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 $48.8 million in other assets, partially offset by reductions of $619.0 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 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 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 $24.5 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 $691.7 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. See Note 5. Loans and Leases, Net to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q/A. 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. 42 Table of Contents 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 $757.6 million, a decrease of $64.6 million, from $822.2 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 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: – Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20. – Discount fundings: The Company funds cards in alignment to expected breakage values on the card. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to a small number of partners and are analyzed on an ongoing basis. – Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category. The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the Partner Solutions business line: (Dollars in thousands) December 31, 2024 September 30, 2024 Noninterest-bearing deposits $ 6,527,973 $ 5,982,992 Prefunding (184,742) (315,994) Discount funding (40,950) (38,665) DDA overdrafts (18,337) (11,236) Noninterest-bearing checking, net $ 6,283,944 $ 5,617,097 Off-Balance Sheet Custodial Deposits. The Bank utilizes a custodial deposit transference structure for certain prepaid and deposit programs whereby the Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds that are not needed to support near term settlement at one or more third-party banks insured by the FDIC (each, a “Program Bank”). Accounts opened at Program Banks are established in the Bank’s name as custodian, for the benefit of the Bank’s cardholders. The Bank remains the issuer of all cards and holder of all accounts under the applicable cardholder agreements and has sole custodial control and transaction authority over the accounts opened at Program Banks. The Bank maintains the records of each cardholder’s deposits maintained at Program Banks. Program Banks undergo robust due diligence prior to becoming a Program Bank and are also subject to continuous monitoring. As of 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. 43 Table of Contents RESULTS OF OPERATIONS The following table presents, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. The balances presented in the table below are calculated on a daily average 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 December 31, 2024 2023 (As Restated) (As Restated) (Dollars in thousands) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Average Outstanding Balance Interest Earned / Paid Yield / Rate (1) Interest-earning assets: Cash and fed funds sold $ 239,614 $ 2,258 3.74 % $ 337,975 $ 4,103 4.83 % Mortgage-backed securities 1,309,926 8,986 2.72 % 1,486,854 10,049 2.69 % Tax-exempt investment securities 120,707 845 3.52 % 136,470 930 3.43 % Asset-backed securities 188,163 2,604 5.49 % 250,172 3,565 5.67 % Other investment securities 234,087 1,815 3.07 % 284,625 2,288 3.20 % Total investments 1,852,883 14,250 3.10 % 2,158,121 16,832 3.15 % Commercial finance 3,687,369 74,612 8.03 % 3,766,612 74,670 7.89 % Consumer finance 316,402 22,341 28.01 % 362,935 20,151 22.09 % Tax services 36,785 132 1.43 % 28,050 (11) (0.16) % Warehouse finance 603,824 14,764 9.70 % 381,931 9,044 9.42 % Total loans and leases 4,644,380 111,849 9.55 % 4,539,528 103,854 9.10 % Total interest-earning assets 6,736,877 $ 128,357 7.57 % 7,035,624 $ 124,789 7.07 % Noninterest-earning assets 629,600 514,336 Total assets $ 7,366,477 $ 7,549,960 Interest-bearing liabilities: Interest-bearing checking $ 685 $ — 0.21 % $ 426 $ — 0.34 % Savings 45,469 3 0.03 % 54,783 6 0.04 % Money markets 180,104 385 0.85 % 183,255 576 1.25 % Time deposits 4,208 3 0.25 % 5,517 4 0.25 % Wholesale deposits 26,892 384 5.67 % 211,281 2,940 5.54 % Total interest-bearing deposits (a) 257,358 775 1.19 % 455,262 3,526 3.08 % Overnight fed funds purchased 131,337 1,670 5.05 % 117,153 1,656 5.62 % Subordinated debentures 19,702 355 7.14 % 19,600 357 7.24 % Other borrowings 13,661 306 8.89 % 14,178 323 9.07 % Total borrowings 164,700 2,331 5.62 % 150,931 2,336 6.16 % Total interest-bearing liabilities 422,058 3,106 2.92 % 606,193 5,862 3.85 % Noninterest-bearing deposits (b) 5,823,877 — — % 6,102,927 — — % Total deposits and interest-bearing liabilities 6,245,935 $ 3,106 0.20 % 6,709,120 $ 5,862 0.35 % Other noninterest-bearing liabilities 335,839 210,605 Total liabilities 6,581,774 6,919,725 Shareholders' equity 784,703 630,235 Total liabilities and shareholders' equity $ 7,366,477 $ 7,549,960 Net interest income and net interest rate spread including noninterest-bearing deposits $ 125,251 7.37 % $ 118,927 6.72 % Net interest margin 7.38 % 6.72 % Tax-equivalent effect 0.01 % 0.02 % Net interest margin, tax-equivalent (2) 7.39 % 6.74 % Total cost of deposits (a+b) 6,081,235 775 0.01 % 6,558,189 3,526 0.05 % (1) Tax rate used to arrive at the TEY for the three months ended December 31, 2024 and 2023 was 21%. 44 Table of Contents (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. General The Company recorded net income of $30.0 million, or $1.23 per diluted share, for the three months ended December 31, 2024, compared to net income of $34.9 million, or $1.34 per diluted share, for the three months ended December 31, 2023. Net Interest Income Net interest income for the first quarter of fiscal 2025 was $125.3 million, an increase of 5% 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 $298.7 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 $104.9 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 7.38% from 6.72% in the first fiscal quarter of 2024 . The overall reported tax-equivalent yield (“TEY”) on average interest-earning assets increased 50 basis points to 7.57% compared to the prior year quarter, driven by an improved earning asset mix. The yield on the loan and lease portfolio was 9.55% compared to 9.10% for the comparable period last year and the TEY on the securities portfolio was 3.10% compared to 3.15% over that same period. 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 losses of $18.7 million for the quarter ended December 31, 2024, compared to $7.8 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 consumer finance portfolio of $9.5 million, the commercial finance portfolio of $1.9 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 $16.3 million for the quarter ended December 31, 2024, compared to net charge-offs of $13.2 million for the quarter ended December 31, 2023. Net charge-offs attributable to the commercial finance, consumer finance, and tax services portfolios for the current quarter were $8.1 million, $7.7 million, and $0.5 million, respectively. Net charge-offs attributable to the consumer finance, commercial finance, tax services portfolios for the same quarter of the prior year were $7.8 million, $4.6 million, and $0.8 million, respectively. Noninterest 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. 45 Table of Contents 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 6% to $127.8 million for the fiscal 2025 first quarter, from $121.1 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 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 $6.0 million, representing an effective tax rate of 16.6%, for the fiscal 2025 first quarter, compared to an income tax expense of $7.7 million, representing an effective tax rate of 18.0%, for the first quarter last fiscal year. The current quarter decrease in income tax expense compared to the prior year quarter was primarily due to a decrease 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. Asset Quality Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a nonaccrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table below are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on nonaccrual status, but are instead written off when the collection of principal and interest become doubtful. 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 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 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. See the section below titled “Allowance for Credit Losses” for further information. 46 Table of Contents The table below sets forth the amounts and categories of the Company's nonperforming assets. (Dollars in thousands) December 31, 2024 September 30, 2024 Nonperforming Loans and Leases Nonaccruing loans and leases: Commercial finance $ 27,231 $ 26,412 Total nonaccruing loans and leases 27,231 26,412 Accruing loans and leases delinquent 90 days or more: Loans held for sale — 1,050 Commercial finance 5,555 2,314 Consumer finance 2,423 3,053 Tax services (1) — 8,733 Total accruing loans and leases delinquent 90 days or more 7,978 15,150 Total nonperforming loans and leases 35,209 41,562 Other Assets Nonperforming operating leases 2,310 1,471 Total other assets 2,310 1,471 Total nonperforming assets $ 37,519 $ 43,033 Total as a percentage of total assets 0.49 % 0.57 % (1) Certain tax services loans do not bear interest. 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 . Federal regulations provide for the classification of certain loans, leases, and other assets such as debt and equity securities considered by the Bank's primary regulator, the OCC, to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted. General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances. On the basis of management’s review of its loans, leases, and other assets, at 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. 47 Table of Contents Allowance for Credit Losses . The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as modifications or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition. Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, credit loss is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate. The Company's ACL totaled $74.3 million at December 31, 2024, an increase compared to $71.8 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 $1.7 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 December 31, 2024 September 30, 2024 June 30, 2024 March 31, 2024 December 31, 2023 (As Restated) Commercial finance 1.18 % 1.29 % 1.17 % 1.21 % 1.30 % Consumer finance 10.84 % 11.52 % 12.85 % 13.14 % 13.81 % Tax services 1.75 % 0.02 % 66.35 % 37.31 % 1.52 % Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 % Total loans and leases 1.63 % 1.76 % 2.32 % 2.53 % 2.06 % Total loans and leases excluding tax services 1.63 % 1.77 % 1.71 % 1.85 % 2.06 % The Company's ACL as a percentage of total loans and leases decreased to 1.63% at December 31, 2024 from 1.76% 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 The Company’s financial statements are prepared in accordance with GAAP. The financial information contained within these financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. Management has identified its critical accounting policies, which are those policies that, in management's view, are most important in the portrayal of our financial condition and results of operations. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Form 10-K/A. There were no significant changes to these critical accounting policies and estimates during the first three months of fiscal 2025. 48 Table of Contents LIQUIDITY AND CAPITAL RESOURCES 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. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, to maintain liquidity, and to meet operating expenses. At 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 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"). Under the Capital Rules and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors. The Capital Rules require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). At 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; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components. The table below includes certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and corresponding reconciliation to total equity. 49 Table of Contents Company Bank Minimum to be Adequately Capitalized Under Prompt Corrective Action Provisions Minimum to be Well Capitalized Under Prompt Corrective Action Provisions (As Restated) (As Restated) At December 31, 2024 Tier 1 leverage capital ratio 8.90 % 9.16 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 12.15 12.78 4.50 6.50 Tier 1 capital ratio 12.40 12.78 6.00 8.00 Total capital ratio 14.04 14.03 8.00 10.00 At September 30, 2024 Tier 1 leverage capital ratio 9.05 % 9.22 % 4.00 % 5.00 % Common equity Tier 1 capital ratio 12.26 12.78 4.50 6.50 Tier 1 capital ratio 12.52 12.78 6.00 8.00 Total capital ratio 14.14 14.03 8.00 10.00 The following table provides a reconciliation of the amounts included in the table above for the Company. Standardized Approach (1) December 31, 2024 September 30, 2024 (Dollars in thousands) (As Restated) Total stockholders' equity $ 757,554 $ 822,189 Adjustments: LESS: Goodwill, net of associated deferred tax liabilities 286,171 296,105 LESS: Certain other intangible assets 16,951 18,018 LESS: Net deferred tax assets from operating loss and tax credit carry-forwards 15,039 15,624 LESS: Net unrealized (losses) on available for sale securities (187,833) (152,328) LESS: Noncontrolling interest (756) (277) ADD: Adoption of Accounting Standards Update 2016-13 1,788 3,576 Common Equity Tier 1 (1) 629,770 648,623 Long-term borrowings and other instruments qualifying as Tier 1 13,661 13,661 Tier 1 minority interest not included in common equity Tier 1 capital (462) (150) Total Tier 1 capital 642,969 662,134 Allowance for credit losses 64,904 66,140 Subordinated debentures, net of issuance costs 19,719 19,693 Total capital $ 727,592 $ 747,967 (1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes were fully phased in through the end of 2021. The Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively. Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. 50 Table of Contents CONTRACTUAL OBLIGATIONS See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations " in the Company’s Form 10-K/A 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, 2024 through December 31, 2024.