# EDGAR Filing Document

**Accession Number:** 0000907471
**File Stem:** 0001308179-23-000026
**Filing Date:** 2023-1
**Character Count:** 434522
**Document Hash:** 64bb04ab1080f8e0ae6ebf9c0dcb468b
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001308179-23-000026.hdr.sgml**: 20230118

**ACCESSION NUMBER**: 0001308179-23-000026

**CONFORMED SUBMISSION TYPE**: ARS

**PUBLIC DOCUMENT COUNT**: 1

**CONFORMED PERIOD OF REPORT**: 20220930

**FILED AS OF DATE**: 20230118

**DATE AS OF CHANGE**: 20230118

**EFFECTIVENESS DATE**: 20230118

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** PATHWARD FINANCIAL, INC.
- **CENTRAL INDEX KEY:** 0000907471
- **STANDARD INDUSTRIAL CLASSIFICATION:** NATIONAL COMMERCIAL BANKS [6021]
- **IRS NUMBER:** 421406262
- **STATE OF INCORPORATION:** DE
- **FISCAL YEAR END:** 0930

**FILING VALUES:**
- **FORM TYPE:** ARS
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 000-22140
- **FILM NUMBER:** 23533046

**BUSINESS ADDRESS:**
- **STREET 1:** 5501 SOUTH BROADBAND LANE
- **STREET 2:** P O BOX 1307
- **CITY:** SIOUX FALLS
- **STATE:** SD
- **ZIP:** 57108
- **BUSINESS PHONE:** 6057821767

**MAIL ADDRESS:**
- **STREET 1:** 5501 SOUTH BROADBAND LANE
- **STREET 2:** P O BOX 1307
- **CITY:** SIOUX FALLS
- **STATE:** SD
- **ZIP:** 57108

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** META FINANCIAL GROUP INC
- **DATE OF NAME CHANGE:** 20050208

**FORMER COMPANY:**
- **FORMER CONFORMED NAME:** FIRST MIDWEST FINANCIAL INC
- **DATE OF NAME CHANGE:** 19930618

### Attached PDF Documents

**Attachment 1:** `lcash2023_ars.pdf`

# ![Pathward logo: a stylized yellow and blue 'p' shape followed by the word 'pathward' in a bold, sans-serif font.]()  
**pathward**

**2022**

# **Annual Report**

Pathward Financial, Inc.

![img-0.jpeg](img-0.jpeg)

## INVESTOR INFORMATION

### ANNUAL MEETING OF STOCKHOLDERS

The Annual Meeting of Stockholders will convene at 9:00 a.m. Central Standard Time on Tuesday, February 28, 2023. The meeting will be held virtually via the internet. Further information with regard to this meeting can be found in the proxy statement.

### FORM 10-K

Copies of the Company's Annual Report on Form 10-K for the year ended September 30, 2022 (excluding exhibits thereto) included in this document may also be obtained, without charge, from pathwardfinancial.com.

### STOCKHOLDER SERVICES

Stockholders desiring to change the name, address or ownership of stock; to report lost certificates; or to consolidate accounts should contact the corporation's transfer agent:

Computershare Investor Services
150 Royall St., Suite 101
Canton, MA 02021

### INVESTOR RELATIONS

Requests for Form 10-K, other inquiries or investor comments are welcome and should be directed to:

Pathward Corporate Services
Justin Schempp
VP, Investor Relations and Financial Reporting
5501 South Broadband Lane
Sioux Falls, SD 57108

Telephone: 877.497.7497
InvestorRelations@metabank.com
pathwardfinancial.com

### ABOUT PATHWARD FINANCIAL, INC.TM

Pathward Financial, Inc. (Nasdaq: CASH) is a U.S.-based financial holding company driven by its purpose to power financial inclusion for allTM. Through our subsidiary, PathwardTM, N.A., we strive to increase financial availability, choice, and opportunity across our Banking as a Service and Commercial Finance business lines. These strategic business lines provide end-to-end support to individuals and businesses. Learn more at www.pathwardfinancial.com.

2

PATHWARD FINANCIAL, INC. 2022 ANNUAL REPORT

![img-1.jpeg](img-1.jpeg)

## A MESSAGE FROM CHIEF EXECUTIVE OFFICER BRETT PHARR

### TO MY FELLOW SHAREHOLDERS,

For Pathward, Fiscal 2022 was a momentous year. We again generated strong earnings per share and increased net revenue, while growing relationships with partners and customers to position our Company for sustained growth. Our superior to industry financial results demonstrate that our core capabilities provide significant economic advantage. Our current core strategy to optimize earning assets continues to produce substantial returns for shareholders. We also completed a rebranding of the Company. We continue with our noble purpose of financial inclusion for all, especially in places in the economy that traditional financial institutions overlook.

### FISCAL 2022 FINANCIAL RESULTS

We reported net income of $156.4 million for fiscal year 2022, including a one-time gain on the sale of our former brand's trademarks, representing an increase of 10% compared to fiscal 2021; and generated earnings per share of $5.26, an increase of 20% compared to fiscal 2021. These results produced a return on average assets of 2.2% and a return on average tangible equity of 35.4% for the fiscal year.

![img-2.jpeg](img-2.jpeg)

Our commercial finance business achieved year-over-year loan growth of 11%, while maintaining strong credit metrics; and our Banking as a Service 'BaaS' business attracted and maintained low-cost deposits while also generating steady fee income. The benefits of rising interest rates and the continued optimization of our earning assets drove the expansion of our net interest margin to 4.84% for fiscal 2022, as compared to 3.83% the prior year.

The underlying momentum of our business and our continued confidence in our growth trajectory, combined with our commitment to maintaining the size of our balance sheet, enabled us to return the majority of earnings to shareholders through share repurchases and dividends during the fiscal year.

![img-3.jpeg](img-3.jpeg)

PATHWARD FINANCIAL, INC. 2022 ANNUAL REPORT

3

These results were achieved by continuing to execute our core strategy and related initiatives.

#### **OPTIMIZE OUR INTEREST-EARNING PORTFOLIO, TO EMPHASIZE HIGHER-RETURN ASSETS**

- • Grew commercial finance loans by 11%.
- • Improved the yield on earning assets to 4.93% from 3.94% in the prior fiscal year.
- • Completed the sale of the remaining student loans and community bank loans.

#### **OPTIMIZE OUR DEPOSIT MIX, TO MAINTAIN A STABLE, LOW-COST DEPOSIT BASE**

- • Achieved 0.08% cost of funds from all deposits and borrowings.
- • Prioritized acquisition of stable BaaS deposits, to support higher fee income generation.
- • Ended fiscal year 2022 with $1.3 billion of income-generating off-balance sheet customer deposits in custody of partner banks.

#### **SIMPLIFY AND OPTIMIZE OUR EXISTING BUSINESS PLATFORMS**

- • Established a business transformation office to drive optimization of existing business platforms and accelerate our investments in technology, targeting 2X operating leverage.
- • Executed several expense reduction initiatives, including shrinking our office space footprint and restructuring our workforce.

Due to our core capabilities and market position, our company can produce top-tier economic returns for our industry.

| Fiscal Year 2022 | GAAP | Peers (1) | Percentile |
| --- | --- | --- | --- |
| Return on average assets | 2.20% | 1.25% | 95-99 th |
| Return on average equity | 20.0% | 12.90% | 90-95 th |
| Net interest margin (TE) | 4.85% | 3.13% | 95-99 th |

(1) Peers includes insured commercial banks with assets between $3 and $10B, sourced from FFIEC reports.

Our business model will allow us to continue to provide outsize returns to shareholders through valuations, stock-buy backs, or both, as valuations adjust to reflect our earning power.

#### **CORE CAPABILITIES**

Our top-tier sustainable economic results are the product of our core capabilities that are not easily duplicated. Our BaaS division has long been known for its expertise in solutions, payments operations, third-party relationships and the all-critical Risk and Compliance. We are a market leader in the small bank market for sponsorship, providing us stable low-cost deposits. Public announcements impacting others in recent months have demonstrated the need for strong Third-Party management in the BaaS space; an area where we excel. Our unique collateral managed approach in Commercial Finance allows us to have outsized yields while maintaining low loan losses throughout cycles. Our variety of asset classes also provide good economic and duration diversification. The ability to generate non-interest income, including the annual benefits from our tax business, provides us with a revenue mix that is often elusive for banks.

#### **Well-Developed Risk Mitigation and Compliance Capabilities:**

##### **ENTERPRISE RISK MANAGEMENT**

Our Enterprise Risk Management (ERM) program applies corporate governance to risk-taking activities. The ERM program sets strategy across the enterprise and works closely with the lines of business to ensure that risks are appropriately identified and managed.

##### **THIRD-PARTY RISK MANAGEMENT**

Just as Pathward's ERM program oversees our own actions, our Third-Party Risk Management program ensures that our third-party relationships are controlled and mitigated. Our policy and strategy encourage us to protect our company from risk, monitor third-party activities, and report risk events.

##### **BUSINESS CONTINUITY MANAGEMENT**

Business Continuity Management (BCM) sets standards and testing to ensure our company remains resilient in case of disaster. Our standards comply with Federal Financial Institutions Examination Council (FFIEC) and Office of the Comptroller of the Currency (OCC) guidance.

##### **BANK SECRECY ACT / ANTI-MONEY LAUNDERING**

To protect our customers, partners and company from the risks of fraud, money laundering, terrorist financing and other illicit activity, Pathward's compliance programs are designed to keep us compliant with all federal programs and sanctions.

4 PATHWARD FINANCIAL, INC. 2022 ANNUAL REPORT

## NEW BRAND PROMISE

We also rebranded to Pathward during the year, unifying our businesses under a single name, brand and culture. I want to acknowledge our team's tremendous efforts in these and other areas: Change isn't easy, but they met the challenge, and our Board and I thank them.

In the first quarter of fiscal 2022, we announced an agreement to sell our former Meta name and trademarks to Beige Key LLC for $60 million. The sale provided significant funds to advance a new corporate name and brand that represents the Company's significant evolution and better enables us to fulfill our purpose of financial inclusion for all®.

Later in the year, we unveiled our new name and corporate brand and launched our new website. Pathward reflects our commitment to providing a path forward to people and businesses so they can reach the next stage of their financial journey. The name reflects our dedication to removing barriers that prevent millions of Americans from achieving access to the financial system and will serve as a constant reminder of our mission to create a path forward for the unbanked, underbanked, and underserved to help them achieve economic mobility.

The rebrand also provided an ideal opportunity for us to develop our current and aspirational values and to communicate them throughout our organization to drive excitement.

### Together We:

1

#### LEAD BY EXAMPLE:

Do the right thing, engage with empathy, and foster diversity and inclusion.

2

#### FIND A BETTER WAY:

Always ask why, challenge how we do things, embrace innovation, and look to simplify.

3

#### HELP OTHERS SUCCEED:

Elevate our teammates, be present and have fun, and positively impact our customers and our communities.

4

#### DARE TO BE GREAT:

Think big, have the courage to disrupt, be prepared to pivot, deliver best-in-class service, and promote an environment of excellence.

These values reflect who we are and aim to be as a company and help set the stage for our future as Pathward, a future in which we constantly strive to fulfill our purpose of financial inclusion for all® while driving shareholder value.

**We strive  
to increase  
financial  
availability,  
choice, and  
opportunity  
through  
financial  
empowerment.**

PATHWARD FINANCIAL, INC. 2022 ANNUAL REPORT

5

During fiscal 2022, American Banker named BaaS Division President Whitney Woyke as one of the Most Influential Women in Payments, 2022, and Senior Vice President, Partner Services and Delivery Nancy Schempp as one of the Most Influential Women in Payments: Next.

Executive Vice President and Chief Technology and Product Officer Charles Ingram also garnered recognition in fiscal 2022 when ArizonaCIO presented him with the Enterprise ORBIE award in April. ArizonaCIO is the preeminent peer leadership network of Arizona chief information officers.

In the final quarter, the American Bankers Association Foundation named Pathward a winner of its 2022 Community Commitment Award. The award recognizes Pathward's Community Impact Program in the Volunteerism category.

## COMMITMENT TO ENVIRONMENTAL, SOCIAL AND GOVERNANCE

In addition to driving our lines of business, our purpose of financial inclusion for all animates our environmental, social and governance "ESG" efforts. ESG is embedded in our strategy and aligns our business activities with our purpose and culture.

We published our second annual ESG report in fiscal 2022, highlighting our progress in implementing plans, programs and policies that support our ESG strategy and describing how the Company's activities help facilitate the economic mobility of communities nationwide.

## CHIEF FINANCIAL OFFICER

![img-4.jpeg](img-4.jpeg)

**Sonja Theisen**
*Incoming Chief Financial Officer*

![img-5.jpeg](img-5.jpeg)

**Glen Herrick**
*Outgoing Chief Financial Officer*

In October, our Company announced Sonja Theisen's appointment to succeed Glen Herrick as Chief Financial Officer, effective April 30, 2023. Sonja, who joined Pathward in 2013, has held leadership roles across the organization including Chief Accounting Officer, Chief of Staff, and EVP, Governance, Risk and Compliance. The Board and I are confident that Sonja will continue her successful leadership at Pathward.

On behalf of our Company and our shareholders, I want to thank Glen for his invaluable contributions as our CFO over the past decade. Glen was a key architect of many of our earnings growth and balance sheet strategies, along with overseeing five acquisitions and two divestitures that drive Pathward's unique and resilient business model, which together generates cash and enables strong capital returns to our shareholders. We wish Glen success in his future endeavors.

## WELL-POSITIONED FOR FISCAL YEAR 2023

Looking ahead, we believe Pathward's unique business model positions us well to benefit from rising interest rates. Moreover, our commercial loan portfolio, which we manage closely, has historically been resilient during periods of economic contraction. Both factors position us well to continue delivering solid financial results in the coming fiscal year.

We remain committed to fulfilling Pathward's purpose of financial inclusion for all® by leveraging our partnerships, forward-thinking solutions, and deep expertise to help provide a path to access the financial system. Under our new name and brand, we will now do it from a stronger, more unified foundation than ever before.

In closing, I would like to thank you, our owners, for your faith in us to be good stewards of your capital while making the world a better place through financial inclusion.

Sincerely,

**Brett Pharr**
Chief Executive Officer

6 PATHWARD FINANCIAL, INC. 2022 ANNUAL REPORT

# UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2022

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______.

Commission File Number: 0-22140

![img-6.jpeg](img-6.jpeg)

# PATHWARD FINANCIAL, INC.TM

(Exact name of registrant as specified in its charter)

Delaware

(State or other jurisdiction of incorporation or
organization)

42-1406262

(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108

(Address of principal executive offices and Zip Code)

(877) 497-7497

(Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:

| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| --- | --- | --- |
| Common Stock, $.01 par value | CASH | The NASDAQ Stock Market LLC |

Securities Registered Pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐

Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 and Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large Accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

As of March 31, 2022, the aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and asked prices of such stock on the NASDAQ Global Select Market as of such date, was $1.5 billion.

As of November 16, 2022, there were 28,466,833 shares of the Registrant's Common Stock outstanding.

#### **DOCUMENTS INCORPORATED BY REFERENCE**

PART III of Form 10-K - Portions of the Proxy Statement for the Annual Meeting of Stockholders expected to be held February 28, 2023 are incorporated by reference into Part III of this report.

# **PATHWARD FINANCIAL, INC.**
**FORM 10-K**

# **Table of Contents**

| Description | Page |
| --- | --- |
| PART I |  |
| Item 1. Business | 3 |
| Item 1A. Risk Factors | 38 |
| Item 1B. Unresolved Staff Comments | 53 |
| Item 2. Properties | 53 |
| Item 3. Legal Proceedings | 53 |
| Item 4. Mine Safety Disclosures | 53 |
| PART II |  |
| Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 54 |
| Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations | 56 |
| Item 7A. Quantitative and Qualitative Disclosures About Market Risk | 69 |
| Item 8. Financial Statements and Supplementary Data | 71 |
| Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | 128 |
| Item 9A. Controls and Procedures | 128 |
| Item 9B. Other Information | 130 |
| Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection | 130 |
| PART III |  |
| Item 10. Directors, Executive Officers and Corporate Governance | 133 |
| Item 11. Executive Compensation | 133 |
| Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 134 |
| Item 13. Certain Relationships and Related Transactions, and Director Independence | 134 |
| Item 14. Principal Accountant Fees and Services | 134 |
| PART IV |  |
| Item 15. Exhibits and Financial Statement Schedules | 135 |
| Item 16. Form 10-K Summary | 137 |
| SIGNATURES | 138 |

i

# FORWARD-LOOKING STATEMENTS

PATHWARD FINANCIAL, INC.TM ('Pathward Financial' or 'the Company' or 'us') and its wholly-owned subsidiary, PathwardTM, 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 Annual Report on Form 10-K, 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, National Association, 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,' 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; our ability to remediate the material weakness in our internal controls over financial reporting and otherwise maintain effective internal controls over financial reporting; customer retention; expectations regarding the Company's and the Bank's ability to meet minimum capital ratios and capital conservation buffers; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; technology; and management and other employees. 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: successfully transitioning and 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 the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the war between Russia and Ukraine; our ability to achieve brand recognition as Pathward equal to or greater than we enjoyed under our prior brand; changes in tax laws; the strength of the United States' economy, and the local economies in which the Company operates; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed funds rate; inflation, market, and monetary fluctuations; 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; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company's refund advance business; 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 and recent and potential changes in response to the ongoing COVID-19 pandemic; technological changes, including, but not limited to, the security 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 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 Annual Report on Form 10-K speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. 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 the Company's periodic filings with the SEC. The Company expressly disclaims any intent or obligation to update 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.

2

# PART I

## Item 1. Business.

### GENERAL

Pathward Financial, a registered bank holding company, was incorporated in Delaware on June 14, 1993. Pathward Financial's principal assets are all the issued and outstanding shares of the Bank, a South Dakota chartered, national bank, the accounts of which are insured up to applicable limits by the Federal Deposit Insurance Corporation ('FDIC') as administrator of the Deposit Insurance Fund ('DIF'). Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all subsidiaries of Pathward Financial, direct or indirect, on a consolidated basis.

As a nationwide provider of Banking as a Service ('BaaS') solutions and commercial finance products, the Company has offices across the country. The principal executive office is located at 5501 South Broadband Lane, Sioux Falls, South Dakota, 57108. Its telephone number at that address is (877) 497-7497. The Company is subject to comprehensive regulation and supervision. See 'Regulation and Supervision' herein.

The Company's purpose of financial inclusion for all® means everyone deserves access to high quality financial services. It is why for the past two decades Pathward Financial has been building solutions to help those who have been underserved by traditional banking providers.

The Company strives to remove barriers to financial access and promote economic mobility by working with third parties to provide responsible, secure, high quality financial products that contribute to the social and economic benefit of communities at the core of the real economy. Pathward Financial strives to increase financial availability, choice, and opportunity across two business lines: BaaS and Commercial Finance. These strategic business lines provide end-to-end support to individuals and businesses.

As a nationally chartered bank, Pathward sits at the hub of the financial ecosystem. With expert talent and access to world-class partners, Pathward moves money seamlessly across a multitude of solutions while mitigating risk by anticipating changes to a complicated, regulatory landscape.

The Bank, a wholly-owned full-service banking subsidiary of Pathward Financial, operates through three reportable segments (Consumer, Commercial, and Corporate Services/Other). See Note 17. Segment Reporting for further information on the reportable segments.

The business of the Bank is to collaborate with partners through the BaaS business line to provide solutions that attract low-cost deposits and generate fee income. The low-cost deposits are primarily invested into loan and lease products offered through the Commercial Finance business line. In addition to originating loans and leases, the Bank also occasionally contracts to sell loans, such as consumer credit product loans, refund advance loans, and government guaranteed loans to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities ('MBS') and other investments permissible under applicable regulations.

The Consumer segment includes the BaaS business line, which collaborates with partners to navigate payment and lending needs. With capabilities ranging from prepaid cards and deposit accounts to payment processing and consumer lending, the Company empowers its partners to deliver programs that provide a financial path forward for all.

The Company offers the following innovative solutions: payment, issuing, credit, and tax. Payment solutions accepts and processes payments for all customers' personal and business needs. The Bank moves funds daily through high speed banking rails, including ACH, wire transfers, and push to debit. With its Issuing solutions, Pathward is one of the leading debit and prepaid card issuers in the country and holds funds for the programs of its partners in order to provide the consumer protections of a traditional bank account. Credit solutions enables the Bank's partners' lending solutions that serve the borrowing needs of customers in a diverse credit pool. Tax solutions offer electronic refund advances and refund transfers with some of the largest tax companies, as well as thirty-thousand independent tax preparers nationwide.

3

The Commercial segment includes the Company's Commercial Finance business line, which helps businesses access funds they need to launch, operate, and grow. Pathward's innovative approach and customized financial products offer the flexibility traditional bank products cannot. This diverse range of commercial financial products is available through the following lending solutions: working capital, equipment finance, structured finance, and insurance premium finance.

Working capital provides ready cash for liquidity needs to new or growing companies or companies in cyclical or seasonal industries. Working capital financing is secured by business collateral (assets) such as accounts receivable, inventory, and equipment. Equipment finance provides financing in the form of leases and loans for equipment needs. Structured finance assists small- and mid-sized business and rural borrowers to fund growth, expansion, and restructuring. Products include alternative energy financing, conventional loans, and loans administered through partnerships with the Small Business Administration ('SBA') and United States Department of Agriculture ('USDA'). Insurance premium finance is short-term financing to facilitate the purchase of property, casualty, and liability insurance premiums.

## OTHER SUBSIDIARIES

Pathward Venture Capital, LLC ('Pathward Venture Capital'), a wholly-owned service corporation subsidiary of the Bank was formed in 2017 for the purpose of making minority equity investments. Pathward Venture Capital focuses on investing in companies in the financial services industry.

First Midwest Financial Capital Trust I, a wholly-owned subsidiary of Pathward Financial, was established in July 2001 and Crestmark Capital Trust I, acquired by the Company in August 2018, was established in June 2005. Both subsidiaries were established for the purpose of issuing trust preferred securities.

## LENDING ACTIVITIES

### General

The Company focuses its lending activities on the origination of commercial finance loans, consumer finance loans and tax services loans. The Company emphasizes credit quality and seeks to avoid undue concentrations of loans and leases to a single industry or based on a single class of collateral. The Company has established lending policies that include a number of underwriting factors that it considers in making a loan, including loan-to-value ratio, cash flow, interest rate and credit history of the borrower. At September 30, 2022, the Company's loans and leases receivable, net of allowance for credit losses, totaled $3.49 billion, or 52% of the Company's total assets, as compared to $3.54 billion, or 53%, at September 30, 2021.

Loan and lease applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan or lease as directed by the Bank's lending policies. The Company has a loan committee structure in place for oversight of its lending activities. Loans and leases in excess of certain amounts require approval by an Executive Credit Committee. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors.

At September 30, 2022, the Company's largest lending relationship to a single borrower or group of related borrowers totaled $74.9 million. The Company had 24 other lending relationships in excess of $15.0 million as of September 30, 2022.

4

## Loan and Lease Portfolio Composition

The following table shows the composition of the Company's loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.

| (Dollars in thousands) | At September 30, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amount | Percent | Amount | Percent |
| Fixed-Rate Loans and Leases |  |  |  |  |
| Commercial finance | $1,872,256 | 53.1% | $1,754,706 | 48.6% |
| Consumer finance | 169,659 | 4.8% | 154,169 | 4.3% |
| Tax services | 9,098 | 0.3% | 10,405 | 0.3% |
| Warehouse finance | 252,276 | 7.1% | 322,682 | 8.9% |
| Community banking | - | - % | 190,240 | 5.3% |
| Total fixed-rate loans and leases | 2,303,389 | 65.3% | 2,432,202 | 67.4% |
| Adjustable-Rate Loans and Leases |  |  |  |  |
| Commercial finance | 1,151,417 | 32.6% | 970,789 | 26.9% |
| Consumer finance | - | - % | 98,688 | 2.7% |
| Tax services (1) | - | - % | - | - % |
| Warehouse finance | 74,574 | 2.1% | 97,244 | 2.7% |
| Community banking | - | - % | 8,892 | 0.3% |
| Total adjustable-rate loans and leases | 1,225,991 | 34.7% | 1,175,613 | 32.6% |
| Total loans and leases | 3,529,280 | 100.0% | 3,607,815 | 100.0% |
| Deferred fees and discounts | 7,025 |  | 1,748 |  |
| Allowance for credit losses | (45,947) |  | (68,281) |  |
| Total loans and leases receivable, net | $3,490,358 |  | $3,541,282 |  |

$^{(1)}$ Certain tax services loans do not bear interest.

The following table illustrates the contractual maturities of the Company's loan and lease portfolio and the distribution by changes in interest rates for loans with a contractual maturity greater than one year at September 30, 2022.

| (Dollars in thousands) | Loan Maturities |  |  |  | Loans Maturing After One Year |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  | Due in 1 Year Or Less | Due After 1 Year Through 5 Years | After 5 Years Through 15 Years | After 15 Years | Total | Fixed Interest Rate | Floating/Variable Interest Rate |
| Commercial finance | $968,371 | $1,444,060 | $331,342 | $279,900 | $3,023,673 | $1,256,970 |  |
| Consumer finance | 37,102 | 130,530 | 2,027 | - | 169,659 | 132,557 |  |
| Tax services | 9,098 | - | - | - | 9,098 | - |  |
| Warehouse finance | 89,963 | 236,887 | - | - | 326,850 | 236,887 |  |
| Total loans and leases | $1,104,534 | $1,811,477 | $333,369 | $279,900 | $3,529,280 | $1,626,414 |  |

5

## Commercial Finance

The Company's Commercial Finance business line offers a variety of products through its working capital, equipment finance, structured finance, and insurance premium finance lending solutions. These products include term lending, asset based lending, factoring, lease financing, insurance premium finance, government guaranteed lending and other commercial finance products offered on a nationwide basis.

*Term Lending.* The Bank originates a variety of collateralized conventional term loans and notes receivable. While terms range from three years to 25 years, the weighted average life of these loans is approximately 53 months. These term loans may be secured by equipment, recurring revenue streams, or real estate. Credit risk is managed through setting loan amounts appropriate for the collateral based on information including equipment cost, appraisals, valuations, and lending history. The Bank follows standardized loan policies and established and authorized credit limits and applies attentive portfolio management, which includes monitoring past dues, financial performance, financial covenants, and industry trends. As of September 30, 2022, 14% of the term lending portfolio exposure is concentrated in solar/alternative energy, most of which are construction projects that will convert to longer term government guaranteed facilities upon completion of the construction phase. Equipment Finance agreements make up 54% of the term lending total as of September 30, 2022. The remaining 32% are a variety of investment advisory and insurance agency loans and other more traditional term equipment and general purpose commercial loans.

*Asset Based Lending.* The Bank provides asset based loans secured by short-term assets such as accounts receivable and inventory. Asset based loans may also be secured by equipment supported by third party independent appraisals. The primary sources of repayment are the collection of the receivables and/or the sale of the inventory securing the loan, as well as the operating income of the borrower. Loans are typically revolving lines of credit with terms of one year to three years, whereby the Bank withholds a contingency reserve representing the difference between the amount advanced and the fair value of the invoice amount or other collateral value. Credit risk is managed through advance rates appropriate for the collateral (generally, advance rates on accounts receivable ranges from 80% to 90% and inventory advance rates range from 40% to 60%). In certain cases, inventory advances are supported by the third party independent appraisals. Collateral is further supported and verified via field audits conducted up to three times per year. All asset based facilities have standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the debtors' cash receipts. As of September 30, 2022, approximately 65% of asset based loans were backed by accounts receivable.

*Factoring.* The Bank provides factoring lending where clients provide detailed accounts receivable reporting for lending arrangements. The factoring clients are diversified as to industry and geography. With these loans, the Commercial Finance business line withholds a contingency reserve, which is the difference between the fair value of the invoice amount or other collateral value and the amount advanced (generally, advance rates range between 80% and 95% on accounts receivable). This reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable.

*Lease Financing.* The Bank provides creative, flexible lease solutions for equipment needs of its clients. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are accounted for as sales-type or direct financing leases. The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value. Residual values are estimated at the inception of the lease. Lease maturities are generally no greater than 84 months.

*Insurance Premium Finance.* The Bank provides, on a national basis, short-term, primarily collateralized financing to facilitate the commercial customers' purchase of insurance for various forms of risk, otherwise known as insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk. Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to 10 months on average. The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest and is returned by the insurer to the Bank on a pro rata basis. Over 95% of the portfolio finances policies provided by investment grade-rated insurance company partners.

6

**SBA and USDA.** The Bank originates loans through programs partially guaranteed by the SBA or USDA. These loans are made to small businesses and professionals. Certain guaranteed portions of these loans are sold to the secondary market. See 'Originations, Sales and Servicing of Loans and Leases' below for further details. The Company is also participating in the Paycheck Protection Program (the 'PPP') which is being administered by the SBA. The Company expects that the major portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Loans funded through the PPP are fully guaranteed by the U.S. government. As of September 30, 2022, the Company had 41 loans outstanding with total loan balances of $13.5 million originated as part of the PPP.

**Other Commercial Finance.** Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor's repurchase agreement. This loan category also includes commercial real estate loans.

### **Consumer Finance**

The Company's BaaS business line offers its consumer credit products and Emerald Advance products through its credit solutions.

**Consumer Credit Products.** The Bank designs its credit program relationships with certain desired outcomes. Three high priority outcomes are liquidity, credit protection, and risk retention by the program partner. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement. See 'Originations, Sales and Servicing of Loans and Leases' below for further details.

As of September 30, 2022, the Bank has multiple consumer credit programs. The loan products offered under these programs are generally closed-end installment loans with terms between 12 months and 84 months.

**Emerald Advance.** Through the Bank's partner program, the Bank serves as the originator of a line of credit, where customers draw on a line of credit and the balance must be paid down to zero by February 15 to maintain an account with good standing. Funds are loaded onto a prepaid card and the line of credit gives customers the ability to repeatedly borrow and repay money and has an annual resting period from January 27 to February 15 during which draws cannot generally be made. As of September 30, 2022, there were no outstanding loan balances on the Company's balance sheet for this product type. The Company expects balances on the line of credit to increase with the new Emerald Advance promotional period in the first quarter of fiscal 2023.

### **Other Consumer Finance**

**Student Lending.** During the fourth quarter of fiscal 2022, the Bank sold its entire student loan portfolio consisting of seasoned, floating rate, private portfolios serviced by a third-party servicer.

### **Tax Services**

The Bank's BaaS business line also offers tax solutions, which includes short-term refund advance loans and short-term electronic return originator ('ERO') advance loans.

**Refund Advance Loans.** Refund advance loans are unsecured loans to taxpayers that are determined to be eligible based on underwriting criteria designed for this product. Due to the nature of refund advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the taxpayer. The Bank will charge off the balance of a refund advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful.

**ERO Advance Loans.** ERO advance loans are unsecured advances that are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.

7

### **Warehouse Finance**

The Bank participates in several collateral-based warehouse lines of credit whereby the Bank is in a senior, secured position as the first out participant. These facilities are primarily collateralized by consumer receivables, with the Bank holding a senior collateral position enhanced by a subordinate party structure.

### **Community Banking**

The Company completed its final sale of retained Community Bank loans in the first quarter of fiscal 2022.

### **ORIGINATIONS, SALES AND SERVICING OF LOANS AND LEASES**

The Company, from time to time, sells loans and leases, and in some cases, loan participations, generally without recourse. At September 30, 2022, there were no outstanding loans sold by the Company with recourse. When loans or leases are sold, the Company may retain the responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. As of September 30, 2022, the Company was servicing $336.6 million SBA/USDA loans.

The Company may sell the guaranteed portion of its SBA 7(a) loans and USDA program loans in the secondary market. These sales have resulted in premium income for the Company at the time of sale and created a stream of future servicing income. When the Company sells the guaranteed portion of its loans, it retains credit risk on the non-guaranteed portion of the loans, and, if a customer defaults on the loan, the Company shares any loss and recovery related to the loan pro-rata with the SBA or USDA, as applicable. If the SBA or USDA establishes that a loss on a guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by the Company, the SBA or USDA may seek recovery of the principal loss related to the deficiency from the Company, which could materially adversely affect our business, results of operations and financial condition.

The Company sold additional loans from the retained Community Bank portfolio in the amount of $192.5 million and $308.1 million for the fiscal years ended September 30, 2022 and 2021, respectively. All loans from the retained Community Bank portfolio have been sold as of December 31, 2021.

In periods of economic uncertainty, the Company's ability to originate large dollar volumes of loans and leases may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company's ability to sell loans may substantially decrease if potential buyers (principally government agencies) reduce their purchasing activities.

8

The following table shows the loan and lease originations (including draws, loan and lease renewals, and undisbursed portions of loans and leases in process), purchases, and sales and repayment activities of the Company for the periods indicated.

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Originations |  |  |
| Commercial finance | $11,554,312 | $9,678,519 |
| Consumer finance | 1,530,128 | 1,098,526 |
| Tax services | 1,898,511 | 1,841,326 |
| Community banking | - | - |
| Total loans and leases originated | 14,982,951 | 12,618,372 |
| Purchases |  |  |
| Commercial finance | 3,098 | - |
| Warehouse finance | 112,255 | 308,014 |
| Community banking | - | 3,318 |
| Total loans and leases purchased | 115,353 | 311,332 |
| Sales and Repayments |  |  |
| Sales: |  |  |
| Commercial finance | 66,397 | 89,276 |
| Consumer finance | 932,747 | 494,584 |
| Community banking | 183,457 | 321,793 |
| Total loans and leases sales | 1,182,601 | 905,793 |
| Repayments: |  |  |
| Loan and lease principal repayments | 14,029,362 | 11,857,619 |
| Total principal repayments | 14,029,362 | 11,857,619 |
| Total reductions | 15,211,963 | 12,763,412 |
| Increase (decrease) in other items, net | 27,612 | (18,970) |
| Net increase (decrease) | $(86,047) | $147,322 |

#### NONPERFORMING ASSETS, OTHER LOANS AND LEASES OF CONCERN AND CLASSIFIED ASSETS

The following table sets forth the Company's loan and lease delinquencies by type, by amount and by percentage of type at September 30, 2022.

| (Dollars in thousands) | 30-59 Days |  |  | 60-89 Days |  |  | > 89 Days Past Due |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Number of Loans | Amount | Percent of Category | Number of Loans | Amount | Percent of Category | Number of Loans | Amount | Percent of Category |
| Commercial finance | 414 | $24,881 | 88.2% | 293 | $6,208 | 70.4% | 900 | $7,868 | 40.3% |
| Consumer finance | 228 | 3,322 | 11.8% | 152 | 2,609 | 29.6% | 1,003 | 2,793 | 14.3% |
| Tax services (1) | - | - | - % | - | - | - % | - | 8,873 | 45.4% |
| Total loans and leases held for investment | 642 | $28,203 | 100.0% | 445 | $8,817 | 100.0% | 1,903 | $19,534 | 100.0% |
| Total loans and leases | 642 | $28,203 | 100.0% | 445 | $8,817 | 100.0% | 1,903 | $19,534 | 100.0% |

$^{(1)}$ The tax services loans past due represented the aggregate remaining balance of the tax services loan portfolio.

Delinquencies 90 days and over constituted 0.55% of total loans and leases and 0.29% of total assets.

9

Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table above are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful.

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

|  | At September 30, |  |
| --- | --- | --- |
| (Dollars in thousands) | 2022 | 2021 |
| Nonperforming Loans and Leases |  |  |
| Nonaccruing loans and leases: |  |  |
| Commercial finance | $13,375 | $19,330 |
| Community banking | - | 14,915 |
| Total nonaccruing loans and leases | 13,375 | 34,245 |
| Accruing loans and leases delinquent 90 days or more: |  |  |
| Loans held for sale | - | - |
| Commercial finance | 4,142 | 12,489 |
| Consumer finance | 2,793 | 1,236 |
| Tax services (1) | 8,873 | 7,962 |
| Community banking | - | - |
| Total accruing loans and leases delinquent 90 days or more | 15,808 | 21,687 |
| Total nonperforming loans and leases | 29,183 | 55,932 |
| Other Assets |  |  |
| Nonperforming operating leases | 1,736 | 3,824 |
| Foreclosed and repossessed assets: |  |  |
| Commercial finance | 1 | 2,077 |
| Community banking | - | - |
| Total foreclosed and repossessed assets | 1 | 2,077 |
| Total other assets | 1,737 | 5,901 |
| Total nonperforming assets | $30,920 | $61,833 |
| Total as a percentage of total assets | 0.46% | 0.92% |

$^{(1)}$ Certain tax services loans do not bear interest.

For the fiscal year ended September 30, 2022, gross interest income, which would have been recorded had the nonaccruing loans and leases been current in accordance with their original terms was insignificant, none of which was included in interest income.

*Nonaccruing Loans and Leases.* At September 30, 2022, the Company had $13.4 million in nonaccruing loans and leases, which constituted 0.4% of the Company's gross loan and lease portfolio. At September 30, 2021, the Company had $34.2 million in nonaccruing loans which also constituted 0.9% of its gross loan and lease portfolio.

The fiscal 2022 decrease in nonaccruing loans and leases was primarily driven by a reduction of $14.9 million in the community bank portfolio, along with a decrease in the commercial finance portfolio.

10

*Accruing Loans and Leases Delinquent 90 Days or More.* At September 30, 2022, the Company had $15.8 million in accruing loans and leases delinquent 90 days or more, compared to $21.7 million at September 30, 2021. This balance of accruing loans and leases 90 days or more past due was mainly comprised of tax services, commercial finance, and consumer finance loans and leases.

*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 Office of the Comptroller of the Currency (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.

Pathward has revised its credit administration policies and reviewed its loan portfolio to better align with OCC guidance for national banks, a process that began during the quarter ending June 30, 2021 and was completed as of September 30, 2021. These credit policy revisions had an impact on our loan and lease risk ratings, resulting in downgrades of certain credits in several categories. Our loan and collateral management practices have proven effective in managing losses during previous economic cycles; and this process resulted in setting a new baseline for portfolio metrics going forward, it does not indicate a deterioration in our portfolio's expected performance.

On the basis of management's review of its loans, leases, and other assets, at September 30, 2022, the Company had classified loans and leases of $203.7 million as substandard, $4.0 million as doubtful and none as loss. At September 30, 2021, the Company classified loans and leases of $264.2 million as substandard, $12.1 million as doubtful and none as loss. Further, at September 30, 2022, the Company owned an insignificant amount of real estate or other assets as a result of foreclosure of loans, as compared to $2.1 million at September 30, 2021.

*Allowance for Credit Losses.* Effective October 1, 2020, the Company adopted ASU 2016-13, *Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*, and subsequent related ASUs (collectively 'Topic 326'), which measures credit loss for most financial assets, including trade and other receivables, debt securities held to maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a current expected credit losses ('CECL') methodology to determine the allowance for credit losses ('ACL') for loans and debt securities held to maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions.

The ACL represents management's estimate of expected credit losses 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 for credit loss, generally this means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. Management has also identified certain structured finance credits for alternative energy projects in which a substantial cash collateral accounts have been established to mitigate credit risk. Due to the nature of the transactions and significant cash collateral positions, these credits are evaluated individually. 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 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

11

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 following table sets forth an analysis of the Company's ACL.

|  | At September 30, |  |
| --- | --- | --- |
| (Dollars in thousands) | 2022 | 2021 |
| Balance at beginning of period | $68,281 | $56,188 |
| Impact of CECL Adoption: |  |  |
| Commercial finance | - | 12,713 |
| Consumer finance | - | 5,998 |
| Warehouse finance | - | (1) |
| Community banking | - | (5,937) |
| Total Impact of CECL Adoption | - | 12,773 |
| Charge-offs: |  |  |
| Commercial finance | (25,422) | (19,451) |
| Consumer finance | (4,787) | (3,324) |
| Tax services | (30,852) | (34,354) |
| Community banking | - | (144) |
| Total charge-offs | (61,061) | (57,273) |
| Recoveries: |  |  |
| Commercial finance | 6,334 | 5,256 |
| Consumer finance | 345 | 320 |
| Tax services | 2,762 | 1,078 |
| Community banking | 424 | - |
| Total recoveries | 9,865 | 6,654 |
| Net (charge-offs) recoveries | (51,196) | (50,619) |
| Provision for credit losses | 28,862 | 49,939 |
| Balance at end of period | $45,947 | $68,281 |
| Ratio of net charge-offs during the period to average loans outstanding during the period | 1.34% | 1.36% |
| Ratio of net charge-offs during the period to average loans outstanding during the period (excluding tax loans and tax net charge-offs) | 0.63% | 0.50% |
| Ratio of net charge offs during the period to nonperforming assets at year end | 165.58% | 81.86% |
| Allowance to total loans and leases | 1.30% | 1.89% |
| Ratio of allowance to total nonaccrual loans | 3.44 | 1.99 |

For more information on the Provision for Credit Losses, see 'Management's Discussion and Analysis of Financial Condition and Results of Operations,' which is included in Item 7 of this Annual Report on Form 10-K.

12

The following table presents net loan charge-offs per lending category and the percentage of net charge-offs to average loan and lease balances.

| (Dollars in thousands) | At and For the Fiscal Year Ended September 30, |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  | 2021 |  |  |
|  | Net Loan Charge-offs | Average Outstanding Balance | Percent of Net Charge-offs to Average Loans | Net Loan Charge-offs | Average Outstanding Balance | Percent of Net Charge-offs to Average Loans |
| Term lending | $9,580 | $1,040,003 | 0.9% | $12,803 | $886,678 | 1.4% |
| Asset based lending | (416) | 358,683 | (0.1)% | 777 | 241,195 | 0.3% |
| Factoring | 9,140 | 380,544 | 2.4% | (1,175) | 293,468 | (0.4)% |
| Lease financing | (335) | 235,475 | (0.1)% | 2,596 | 285,402 | 0.9% |
| Insurance premium finance | 541 | 444,184 | 0.1% | (785) | 382,382 | (0.2)% |
| SBA/USDA | 578 | 258,039 | 0.2% | (21) | 346,224 | - % |
| Other commercial finance | - | 167,657 | - % | - | 113,986 | - % |
| Commercial finance | 19,088 | 2,884,585 | 0.7% | 14,195 | 2,549,335 | 0.6% |
| Consumer credit products | - | 182,447 | - % | - | 108,060 | - % |
| Other consumer finance | 4,442 | 112,909 | 3.9% | 3,004 | 140,697 | 2.1% |
| Consumer finance | 4,442 | 295,356 | 1.5% | 3,004 | 248,757 | 1.2% |
| Tax services | 28,090 | 179,611 | 15.6% | 33,276 | 214,835 | 15.5% |
| Warehouse finance | - | 433,121 | - % | - | 330,224 | - % |
| Community banking | (424) | 34,758 | (1.2)% | 144 | 375,258 | - % |
| Total | $51,196 | $3,827,431 | 1.3% | $50,619 | $3,718,409 | 1.4% |

The distribution of the Company's ACL at the dates indicated is summarized as follows:

| (Dollars in thousands) | At September 30, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amount | Percent of Loans and Leases in Each Category of Total Loans and Leases | Amount | Percent of Loans and Leases in Each Category of Total Loans and Leases |
| Term lending | $24,621 | 30.9% | $29,351 | 26.6% |
| Asset based lending | 1,050 | 10.0% | 1,726 | 8.3% |
| Factoring | 6,556 | 10.5% | 3,997 | 10.1% |
| Lease financing | 5,902 | 6.0% | 7,629 | 7.4% |
| Insurance premium finance | 1,450 | 13.5% | 1,394 | 11.9% |
| SBA/USDA | 3,263 | 10.2% | 2,978 | 6.9% |
| Other commercial finance | 1,310 | 4.5% | 1,168 | 4.4% |
| Commercial finance | 44,152 | 85.6% | 48,243 | 75.6% |
| Consumer credit products | 1,400 | 4.1% | 1,242 | 3.6% |
| Other consumer finance | 63 | 0.7% | 6,112 | 3.4% |
| Consumer finance | 1,463 | 4.8% | 7,354 | 7.0% |
| Tax services | 5 | 0.3% | 2 | 0.3% |
| Warehouse finance | 327 | 9.3% | 420 | 11.6% |
| Community banking | - | - % | 12,262 | 5.5% |
| Total | $45,947 | 100.0% | $68,281 | 100.0% |

13

Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company's ACL as a percentage of total loans and leases decreased to 1.30% at September 30, 2022 from 1.89% at September 30, 2021. The decrease in the total loans and leases coverage ratio was primarily driven by the sale of the community bank portfolio, along with a decrease in the coverage ratio for both the commercial and consumer finance portfolios. The decrease in the consumer finance portfolio coverage ratio was attributable to the sale of the student loan portfolio. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.

Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at September 30, 2022 reflected an appropriate allowance against expected credit losses from the lending portfolio. Although the Company maintains its ACL at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan and lease losses will not be required in future periods.

## Investment Activities

### General

The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company's need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings and to fulfill the Company's asset/liability management policies. The Company's investment and MBS portfolios are managed in accordance with a written investment policy adopted by the Board of Directors, which is implemented by members of the Company's Asset/Liability Committee. The Company closely monitors balances in these accounts and maintains a portfolio of highly liquid assets to fund potential deposit outflows or other liquidity needs. To date, the Company has not experienced any significant outflows related to the BaaS business line deposits, though no assurance can be given that this will continue to be the case.

As of September 30, 2022, investment securities and MBS with fair values of approximately $924.2 million and $804.0 million were pledged as collateral for the Bank's Federal Reserve Bank ('FRB') advances and Federal Home Loan Bank of Des Moines ('FHLB') advances, respectively. For additional information regarding the Company's collateralization of borrowings, see Note 11 to the 'Notes to Consolidated Financial Statements,' which is included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

### Investments

It is the Company's general policy to purchase investment securities which are U.S. Government-related securities, U.S. Government-related agency and instrumentality securities, U.S. Government-related agency or instrumentality collateralized securities, state and local government obligations and overnight federal funds.

As of September 30, 2022, the Company had total investment securities, excluding MBS, with an amortized cost of $623.4 million compared to $891.6 million as of September 30, 2021. At September 30, 2022, $491.1 million, or 86%, of the Company's investment securities were pledged to secure various obligations of the Company. Many of the Company's municipal holdings are able to be pledged at both the FRB and the FHLB.

14

The following table sets forth the carrying value of the Company's investment securities portfolio, excluding MBS, at the dates indicated.

| (Dollars in thousands) | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Investment Securities Available for Sale ('AFS') |  |  |
| Corporate securities | $22,187 | $25,000 |
| Asset-backed securities | 147,790 | 394,859 |
| SBA securities | 97,768 | 157,209 |
| Obligations of states and political subdivisions | 2,344 | 2,507 |
| Non-bank qualified obligations of states and political subdivisions | 263,783 | 268,295 |
| Subtotal debt securities AFS | 533,872 | 847,870 |
| Common equities and mutual funds (1) | - | 12,668 |
| Investment Securities Held to Maturity ('HTM') |  |  |
| Non-bank qualified obligations of states and political subdivisions (2) | 39,093 | 52,944 |
| Subtotal debt securities HTM | 39,093 | 52,944 |
| FRB and FHLB stock | 28,812 | 28,400 |
| Total investment securities and FRB and FHLB stock | $601,777 | $929,214 |
| Other Interest-Earning Assets |  |  |
| Interest bearing deposits in other financial institutions and federal funds sold (3) | $295,752 | $184,729 |

$^{(1)}$ Equity securities at fair value are included within other assets on the consolidated statements of financial condition at September 30, 2022 and 2021.

$^{(2)}$ Includes no taxable obligations of states and political subdivisions.

$^{(3)}$ From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including the FHLB, the FRB, and other private institutions. At September 30, 2022, the Company had $9.1 million and $295.8 million in interest bearing deposits held at the FHLB and FRB, respectively. At September 30, 2021, the Company had $8.7 million and $184.7 million in interest bearing deposits held at the FHLB and FRB, respectively.

## Debt Securities

The composition and maturities of the Company's available for sale ('AFS') and held to maturity ('HTM') investment debt securities portfolios at September 30, 2022, excluding equity securities and mutual funds, FHLB stock and MBS, are indicated in the following table. The actual maturity of certain municipal housing related securities is typically less than its stated contractual maturity due to scheduled principal payments and prepayments of the underlying mortgages.

| (Dollars in thousands) | At September 30, 2022 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 1 Year or Less | After 1 Year Through 5 Years | After 5 Years Through 10 Years | After 10 Years | Total Investment Securities |  |
|  | Carrying Value | Carrying Value | Carrying Value | Carrying Value | Amortized Cost | Fair Value |
| Available for Sale |  |  |  |  |  |  |
| Corporate securities | $ - | $ - | $22,187 | $ - | $25,000 | $22,187 |
| Asset-backed securities | - | - | - | 147,790 | 160,806 | 147,790 |
| SBA securities | 8 | 3,602 | 55,380 | 38,778 | 105,238 | 97,768 |
| Obligations of states and political subdivisions | - | 1,954 | 390 | - | 2,469 | 2,344 |
| Non-bank qualified obligations of states and political subdivisions | 708 | 3,838 | 3,862 | 255,375 | 290,754 | 263,783 |
| Total debt securities AFS | $716 | $9,394 | $81,819 | $441,943 | $584,267 | $533,872 |
| Weighted average yield (1) | 3.38% | 4.78% | 4.67% | 4.75% | 3.00% | 4.74% |

15

At September 30, 2022

|  | 1 Year or Less | After 1 Year Through 5 Years | After 5 Years Through 10 Years | After 10 Years | Total Investment Securities |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Carrying Value | Carrying Value | Carrying Value | Carrying Value | Amortized Cost | Fair Value |
| (Dollars in thousands) |  |  |  |  |  |  |
| Held to Maturity |  |  |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $ - | $ - | $ - | $39,093 | $39,093 | $35,902 |
| Total debt securities HTM | $ - | $ - | $ - | $39,093 | $39,093 | $35,902 |
| Weighted average yield (1) | - % | - % | - % | 2.42% | 2.42% | 4.30% |

$^{(1)}$ Yields on tax-exempt obligations have not been computed on a tax-equivalent basis.

### Mortgage-Backed Securities

The Company's mortgage-backed and related securities portfolio as of September 30, 2022 consisted of securities issued by U.S. Government agencies or instrumentalities, including those of Ginnie Mae, Fannie Mae, Freddie Mac and Farmer Mac, along with private label institutions. The Ginnie Mae, Fannie Mae, Freddie Mac and Farmer Mac certificates are modified pass-through MBS representing undivided interests in underlying pools of fixed-rate, or certain types of adjustable-rate, predominantly single-family mortgages issued by these U.S. Government agencies or instrumentalities. At September 30, 2022, the Company had a diverse portfolio of MBS with an amortized cost of $1.58 billion. The fair market value of the MBS at September 30, 2022 was $1.35 billion.

MBS generally increase the quality of the Company's assets by virtue of the insurance or guarantees that back them, are more liquid than individual mortgage loans, and may be used to collateralize borrowings or other obligations of the Company. At September 30, 2022, $495.7 million, or 36.7%, of the Company's MBS were pledged to secure various obligations of the Company.

While MBS carry a reduced credit risk as compared to whole loans, such securities remain subject to the risk that a fluctuating interest rate environment, along with other factors such as the geographic distribution and other underwriting risks inherent in the underlying mortgage loans, may alter the prepayment rate of such mortgage loans and so affect both the prepayment speed, and value, of such securities. The prepayment risk associated with MBS is continually monitored, and prepayment rate assumptions are adjusted as appropriate to update the Company's MBS accounting and asset/liability reports.

The following table sets forth the carrying value of the Company's MBS at the dates indicated.

|  | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| (Dollars in thousands) |  |  |
| Available for Sale |  |  |
| Farmer Mac | $78,870 | $109,355 |
| Freddie Mac | 66,653 | 53,206 |
| Freddie Mac CML | 11,983 | 14,578 |
| Fannie Mae | 121,968 | 156,605 |
| Ginnie Mae | 814,971 | 683,285 |
| Private Label | 254,552 | - |
| Total MBS AFS | $1,348,997 | $1,017,029 |

|  | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| (Dollars in thousands) |  |  |
| Held To Maturity |  |  |
| Ginnie Mae | 2,589 | 3,725 |
| Total MBS HTM | $2,589 | $3,725 |

16

The following tables set forth the contractual maturities of the Company's MBS, excluding the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments, all of which typically lower the average life of these securities.

|  | At September 30, 2022 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 1 Year or Less | After 1 Year Through 5 Years | After 5 Years Through 10 Years | After 10 Years | Total Investment Securities |  |
|  | Carrying Value | Carrying Value | Carrying Value | Carrying Value | Amortized Cost | Fair Value |
| (Dollars in thousands) |  |  |  |  |  |  |
| Available for Sale |  |  |  |  |  |  |
| Farmer Mac | $ - | $ - | $65,222 | $13,648 | $90,045 | $78,870 |
| Freddie Mac | - | - | 21,746 | 44,907 | 77,812 | 66,653 |
| Freddie Mac CML | - | - | - | 11,983 | 12,450 | 11,983 |
| Fannie Mae | - | - | 5,102 | 116,866 | 137,968 | 121,968 |
| Ginnie Mae | - | - | - | 814,971 | 968,049 | 814,971 |
| Private Label | - | - | - | 254,552 | 295,128 | 254,552 |
| Total MBS AFS | $ - | $ - | $92,070 | $1,256,927 | $1,581,452 | $1,348,997 |
| Weighted average yield | - % | - % | 4.50% | 4.78% | 2.67% | 4.76% |

|  | At September 30, 2022 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 1 Year or Less | After 1 Year Through 5 Years | After 5 Years Through 10 Years | After 10 Years | Total Investment Securities |  |
|  | Carrying Value | Carrying Value | Carrying Value | Carrying Value | Amortized Cost | Fair Value |
| (Dollars in thousands) |  |  |  |  |  |  |
| Held To Maturity |  |  |  |  |  |  |
| Ginnie Mae | $ - | $ - | $ - | $2,589 | $2,589 | $2,268 |
| Total MBS HTM | $ - | $ - | $ - | $2,589 | $2,589 | $2,268 |
| Weighted average yield | - % | - % | - % | 2.70% | 2.70% | 5.87% |

At September 30, 2022, the contractual maturity of approximately 93.2% of the Company's mortgage backed securities were in excess of ten years. The actual maturity of an MBS is typically less than its stated contractual maturity due to scheduled principal payments and prepayments of the underlying mortgages. Prepayments that are different than anticipated will affect the yield to maturity. The yield is based upon the interest income and the amortization of any premium or discount related to the MBS. In accordance with U.S. Generally Accepted Accounting Principles ('GAAP'), premiums and discounts are amortized over the estimated lives of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period for premiums and discounts can significantly affect the yield of MBS, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depend on many factors, including the type of mortgages, the coupon rate, borrower credit scores, loan to premises value, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, the Company may be subject to reinvestment risk because, to the extent that the Company's MBS amortize or prepay faster than anticipated, the Company may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate. During periods of rising interest rates, these prepayments tend to decelerate as the prevailing market interest rates for mortgage rates increase and prepayment incentives dissipate.

17

Effective October 1, 2020, the Company adopted ASU 2016-13, *Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments*, and subsequent related ASUs (collectively “Topic 326”). Under Topic 326, investment debt securities held to maturity are subject to an allowance for credit loss that reflects expected credit losses over the life of the financial asset, unless management concludes there is a zero risk of loss. The Company’s held to maturity debt security portfolio is limited to investments with implicit and explicit guarantees by government agencies. As a result, management has concluded a zero risk of loss associated with these securities and no provision for credit loss has been included in the Company’s Consolidated Statement of Operations. Under Topic 326, investment debt securities available for sale continue to be recorded at fair value but are subject to an allowance for credit loss that reflects the portion of an unrealized loss position related to credit factors. Any such credit loss is recorded in the Company’s Provision for Credit Loss on the Company’s Consolidated Statement of Operations. Non-credit related losses are recorded in Other Comprehensive Income in the Company’s Consolidated Statement of Condition. The adoption of CECL was inconsequential to debt securities available for sale.

Prior to adoption of ASU 2016-13, management identified securities with potential credit impairment that were other-than-temporary. This process involved evaluation of the length of time and extent to which the fair value was less than the amortized cost basis, review of available information regarding the financial position of the issuer, monitoring the rating, watch, and outlook of the security, monitoring changes in value, cash flow projections, and the Company’s intent to sell a security or whether it is more likely than not we would be required to sell the security before the recovery of its amortized cost which, in some cases, extended to maturity. To the extent we determined that a security was deemed to be other-than-temporarily impaired, an impairment loss was recognized. In fiscal 2020, there were no other-than-temporary impairments recorded.

*Equity Securities.* The Company holds marketable equity securities, which have readily determinable fair values, and include common equity and mutual funds. These securities are recorded at fair value with unrealized gains and losses, due to changes in fair value, reflected in earnings. Interest and dividend income from these securities is recognized in interest income. See Note 3. Securities for additional information on marketable equity securities.

The Company also holds non-marketable equity investments and accounts for them under the equity method, fair value, or the measurement alternative method depending on the level of significant influence the Company can exercise and the availability of fair value. All income or loss recognition or fair value adjustments, regardless of measurement methodology, are reflected in earnings as non-interest income. Non-marketable equity investments measured under the equity method, or the measurement alternative method are reviewed for impairment each reporting period and is reported in earnings if applicable.

## Funding Activities

### General

The Company’s sources of funds are deposits, borrowings, amortization and repayment of loan and lease principal, interest earned on or maturation of investment securities and funds provided from operations.

Borrowings, including FHLB advances, overnight federal funds purchased, repurchase agreements, other short-term borrowings, and funds available through the FRB Discount Window, may be used at times to compensate for seasonal reductions in deposits or deposit inflows at less than projected levels, may be used on a longer-term basis to support expanded lending activities, and may also be used to match the funding of a corresponding asset.

### Deposits

The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company’s deposits primarily consists of demand deposit accounts, savings accounts, money market savings accounts, and certificate accounts currently ranging in terms from three months to five years, many of which are related to prepaid cards. In addition, the Company may periodically utilize brokered or other wholesale deposits to target strategic maturities related to its seasonal refund advance lending. The refund advance lending season typically lasts six weeks or less and it is generally more efficient to fund these short-term loans by using brokered deposits rather than by selling investment securities. Other sources of wholesale deposits may also be utilized periodically to take advantage of balance sheet funding opportunities.

The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, and competition.

18

The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Company believes that deposits related to prepaid cards are relatively stable sources of deposits. However, the ability of the Company to attract and maintain certificates of deposit and the rates paid on these deposits has been and will continue to be significantly affected by market conditions.

Beginning in fiscal year 2020, the Bank partnered with the U.S. Department of the Treasury's Bureau of the Fiscal Service ("Fiscal Service") to disburse Economic Impact Payment ("EIP") stimulus payments through the distribution of prepaid cards. The Company's BaaS business line, in collaboration with Fiserv and Visa, is serving in an ongoing role to provide a safe and secure mechanism for individuals, including the underbanked, to receive their stimulus payments. In 2020, the Bank disbursed approximately $6.42 billion of the first round of EIP payments under the Coronavirus Aid, Relief, and Economic Security Act through the distribution of 3.6 million Bank-issued prepaid cards, and in 2021 disbursed approximately $7.10 billion of the second round of EIP payments under the Consolidated Appropriations Act of 2021 through the distribution of 8.1 million Bank-issued prepaid cards.

On March 11, 2021, the U.S. Congress, through the American Rescue Plan Act of 2021, directed the Internal Revenue Service ("IRS"), to distribute a third round of EIP via the U.S. Treasury to persons in the U.S. eligible to receive them. Through this third round, the Bank disbursed approximately $10.64 billion of EIP payments through the distribution of 4.7 million Bank-issued prepaid cards.

Of the 16.5 million prepaid cards issued in conjunction with the three EIP stimulus programs, totaling approximately $24.15 billion, $1.08 billion were outstanding as of September 30, 2022, of which $681.4 million of deposits was on Pathward Financial's balance sheet with the remainder being held by other banks.

At September 30, 2022, $5.70 billion of the Company's $5.87 billion deposit portfolio was attributable to the Consumer segment. The majority of these deposits represent funds available to spend on prepaid debit cards and other stored value products, of which $5.63 billion are included with noninterest-bearing checking accounts, $65.9 million are included with savings deposits on the Company's Consolidated Statements of Financial Condition. The BaaS business line originates debit card programs through outside sales agents and other financial institutions. As such, these deposits carry a somewhat higher degree of concentration risk than traditional consumer products. If a major client or card program were to leave the Bank, deposit outflows could be more significant than if the Bank were to lose a more traditional customer, although it is considered unlikely that all deposits related to a program would leave the Bank without significant advance notification. As such, and as historical results indicate, the Company believes that its deposit portfolio attributable to the Consumer segment is stable. The increase in deposits arising from the BaaS business line has allowed the Bank to reduce its reliance on wholesale deposits, certificates of deposit and public funds, which typically have relatively higher costs.

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

19

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) | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Noninterest-bearing deposits | $5,916,142 | $5,492,646 |
| Prefunding | (244,462) | (436,111) |
| Discount funding | (15,991) | (26,440) |
| DDA overdrafts | (8,587) | (11,862) |
| Noninterest-bearing checking, net | $5,647,102 | $5,018,233 |

The following table sets forth the deposit flows at the Company during the periods indicated.

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Opening balance | $5,514,971 | $4,979,200 |
| Acquired | - | - |
| Deposits | 1,414,581,944 | 1,041,660,076 |
| Withdrawals | (1,414,230,916) | (1,041,124,905) |
| Sold | - | - |
| Interest credited | 38 | 601 |
| Ending balance | $5,866,037 | $5,514,971 |
| Net increase | $351,066 | $535,772 |
| Percent increase | 6.37% | 10.76% |

The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Company for the periods indicated.

| (Dollars in thousands) | At September 30, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amount | Percent of Total | Amount | Percent of Total |
| Transactions and Savings Deposits: |  |  |  |  |
| Non-Interest bearing checking | $5,647,102 | 96.3% | $5,018,233 | 91.0% |
| Interest bearing checking (1) | 423 | - % | 254,721 | 4.6% |
| Savings deposits | 67,158 | 1.2% | 86,356 | 1.6% |
| Money market deposits | 137,888 | 2.4% | 67,204 | 1.2% |
| Wholesale deposits | 5,712 | - % | 55,957 | 0.9% |
| Total transactions and savings deposits | 5,858,283 | 99.9% | 5,482,471 | 99.3% |
| Time Certificates of Deposit: |  |  |  |  |
| Variable | - | - % | - | - % |
| 0.00 - 0.99% | 7,311 | 0.1% | 25,604 | 0.5% |
| 1.00 - 1.99% | 344 | - % | 3,329 | 0.1% |
| 2.00 - 2.99% | 99 | - % | 3,567 | 0.1% |
| Total time certificates of deposit (2) | 7,754 | 0.1% | 32,500 | 0.7% |
| Total deposits | $5,866,037 | 100.0% | $5,514,971 | 100.0% |

$^{(1)}$ Of the total balance as of September 30, 2021, $254.3 million were interest-bearing deposits where interest expense was paid by a third party and not by the Company. On October 1, 2021, the Company reclassified the balances related to that program to noninterest bearing checking due to the product moving to noninterest bearing.

$^{(2)}$ As of September 30, 2022, total time certificates of deposit included $0.1 million of wholesale certificates of deposit.

20

As of September 30, 2022 and 2021, total deposits that exceed FDIC insurance limits, or are otherwise uninsured, were estimated to be $211.4 million and $135.1 million, respectively. Estimated uninsured domestic deposits reflect amounts, disclosed in U.S. regulatory reports of the Bank, with adjustments for amounts related to consolidated subsidiaries.

The following table presents contractual maturities of estimated time deposits in excess of FDIC insurance limits or are otherwise uninsured.

| (Dollars in thousands) | Maturity |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | 3 Months or Less | After 3 to 6 Months | After 6 to 12 Months | After 12 Months | Total |
| Certificates of deposit | $940 | $727 | $880 | $613 | $3,160 |

The following table shows rate and maturity information for the Company's certificates of deposit at September 30, 2022.

| (Dollars in thousands) | 0.00 - 0.99% | 1.00 - 1.99% | 2.00 - 2.99% | Total | Percent of Total |
| --- | --- | --- | --- | --- | --- |
| Certificate accounts maturing in quarter ending: |  |  |  |  |  |
| December 31, 2022 | $1,992 | $344 | $99 | $2,435 | 31.4% |
| March 31, 2023 | 1,227 | - | - | 1,227 | 15.8% |
| June 30, 2023 | 1,721 | - | - | 1,721 | 22.2% |
| September 30, 2023 | 564 | - | - | 564 | 7.3% |
| December 31, 2023 | 762 | - | - | 762 | 9.8% |
| March 31, 2024 | 1,045 | - | - | 1,045 | 13.5% |
| Total | $7,311 | $344 | $99 | $7,754 | 100.0% |
| Percent of total | 94.3% | 4.4% | 1.3% | 100.0% |  |

The following table indicates the amount of the Company's certificates of deposit and other deposits by time remaining until maturity as of September 30, 2022.

| (Dollars in thousands) | Maturity |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | 3 Months or Less | After 3 to 6 Months | After 6 to 12 Months | After 12 Months | Total |
| Certificates of deposit less than $250,000 | $745 | $ - | $406 | $445 | $1,596 |
| Certificates of deposit of $250,000 or more | 1,690 | 1,227 | 1,880 | 1,362 | 6,158 |
| Total certificates of deposit | $2,435 | $1,227 | $2,285 | $1,807 | $7,754 |

At September 30, 2022, there were no deposits from governmental or other public entities included in certificates of deposit.

*Custodial Off-Balance Sheet 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.

21

In return for record keeping services at Program Banks, the Bank receives a servicing fee (“Servicing Fee”). For the fiscal year ended September 30, 2022, the Company recognized $6.4 million in servicing fee income. In prior periods, the Servicing Fee was not significant. The Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.

### **Borrowings**

Although deposits are the Company’s primary source of funds, the Company’s practice has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company desires additional capacity to fund loan demand. Borrowings from various sources mature based on stated payment schedules.

The Company’s borrowings have historically consisted primarily of advances from the FHLB upon the security of a blanket collateral agreement of a percentage of unencumbered loans and the pledge of specific investment securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At September 30, 2022, the Bank had no overnight borrowings or term advances, but did have the ability to borrow up to an approximate additional $693.0 million from the FHLB.

On May 15, 2022, the Company retired the outstanding $75.0 million subordinated debt, which was due August 15, 2026.

On September 26, 2022, the Company announced the completion of a private placement of $20 million of its 6.625% Fixed-to-Floating Rate Subordinated Notes due 2032 to certain qualified institutional buyers and accredited investors. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes. The Notes were issued under an indenture with UMB Bank, N.A., as trustee. At September 30, 2022, $20.0 million in aggregate principal amount in subordinated debentures were outstanding.

On July 16, 2001, the Company issued all of the 10,310 authorized shares of Company Obligated Mandatorily Redeemable Preferred Securities of First Midwest Financial Capital Trust I (preferred securities of subsidiary trust) holding solely trust preferred securities. Distributions are paid semiannually. Cumulative cash distributions are calculated at a variable rate LIBOR plus 3.75%, not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions must be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has a semiannual option to shorten the maturity date. The option has not been exercised as of the date of this filing. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s common stock. The trust preferred securities have been includable in the Company’s capital since they were issued. The preferential capital treatment of the Company’s trust preferred securities was grandfathered under the Dodd-Frank Act and is consistent with federal community bank capital rules. The outstanding balance of the trust preferred securities at September 30, 2022 was $13.7 million.

Through the Crestmark Acquisition, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The subordinated debentures bear interest at LIBOR plus 3.00%, have a stated maturity of 30 years from the date of issuance and are redeemable by the Company at par, with regulatory approval. The interest rate is reset quarterly at distribution dates in February, May, August, and November. The subsidiary has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.

The Company previously offered retail repurchase agreements to its customers. These agreements typically ranged from 14 days to five years in term, and typically were offered in minimum amounts of $100,000. The proceeds of these transactions were used to meet cash flow needs of the Company. At September 30, 2022, the Company had no retail repurchase agreements outstanding.

The following table sets forth the maximum month-end balance and average balance of FHLB advances, retail and reverse repurchase agreements, trust preferred securities, subordinated debentures, and overnight fed funds purchased for the periods indicated.

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| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Maximum Balance: |  |  |
| FHLB advances | $ - | $ - |
| Repurchase agreements | - | - |
| Trust preferred securities | 13,661 | 13,661 |
| Subordinated debentures | 20,000 | 73,980 |
| Overnight fed funds purchased | 582,000 | - |
| Other borrowings | 4,994 | 10,250 |
| Average Balance: |  |  |
| FHLB advances | $ - | $ - |
| Repurchase agreements | - | - |
| Trust preferred securities | 13,661 | 13,661 |
| Subordinated debentures | 46,441 | 73,886 |
| Overnight fed funds purchased | 32,414 | 5 |
| Other borrowings | 3,829 | 7,888 |

The following table sets forth certain information as to the Company's FHLB advances, retail and reverse repurchase agreements, trust preferred securities, subordinated debentures, and overnight fed funds purchased.

| (Dollars in thousands) | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| FHLB and FRB advances | $ - | $ - |
| Repurchase agreements | - | - |
| Trust preferred securities | 13,661 | 13,661 |
| Subordinated debentures | 20,000 | 73,980 |
| Overnight fed funds purchased | - | - |
| Other borrowings | 2,367 | 5,193 |
| Total borrowings | $36,028 | $92,834 |
| Weighted average interest rate of FHLB and FRB advances | - % | - % |
| Weighted average interest rate of repurchase agreements | - % | - % |
| Weighted average interest rate of trust preferred securities | 7.68% | 3.72% |
| Weighted average interest rate of subordinated debentures | 6.63% | 5.75% |
| Weighted average interest rate of overnight fed funds purchased | - % | - % |

## Payment, Issuing, and Tax Solutions

The Company's core capabilities of payment, issuing, and tax solutions focus on innovation in the fineriv and fintech industries by providing solid banking infrastructure, proven tech resource partners, and high-energy collaboration that enables its partners to deliver banking programs that meet their customers' demands. The BaaS business line offers a complement of payments related products and services that are marketed to consumers and businesses nationwide through financial institutions and other commercial entities. Other solutions facilitate the movement of funds between an entity and the audience they serve, typically a consumer. Overall, the products and services offered by the Company are generally designed to facilitate the processing and settlement of authorized electronic transactions involving the movement of funds.

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While the Company has adopted policies and procedures to manage and monitor risks, and the executives who manage the Company's program have years of experience, no guarantee can be made that the Company will not experience losses in the BaaS business line. The Company has signed agreements with terms extending through the next few years with several of its largest sales agents/program managers, which the Company expects will help mitigate this risk.

Each core capability is discussed generally below with examples to illustrate use cases. The Company cross-utilizes personnel and resources across these capabilities.

### **Payment Solutions**

*Acquiring Sponsorship.* Payment solutions include the acceptance, processing and settlement of credit card and debit card payments by an acquiring bank on behalf of merchants. Pathward acts as an acquiring bank to sponsor acquiring activity on behalf of merchant clients by leveraging partnerships with partners who act as merchant processors, third-party service providers, ISOs, and/or payment facilitators to identify, onboard and support merchant clients.

*Money Movement Solutions.* In today's market, consumers want to move their money fast, with more visibility and control of their own financial transactions. Pathward provides the financing operations for Automated Clearing House ('ACH') transactions, disburse to debit (through Visa Direct or Mastercard Send), wire or check processing which enable the faster, almost instantaneous movement of funds from sender to receiver.

Technology has accelerated the growth and speed of transactional payments for corporate and financial organizations. Prompt movement of money creates efficiency, speed and a robust marketplace for consumers, B2B and business-to-consumer ('B2C') companies.

Pathward is a Nacha Top 50 bank for receiving and originating payments. As of September 2022, Pathward typically processes a combined $2.5 billion per day in ACH and wire services, which supports that Pathward has earned the confidence of its partners by providing safe and efficient movement of money, unprecedented service, and operational success.

*ATM Sponsorship.* The Company sponsors ATM independent sales organizations ('ISOs') into various networks and provides associated sponsorships of encryption support organizations and third-party processors in support of the financial institutions and the ATM ISO sponsorships. Sponsorship consists of the review and oversight of entities participating in debit and credit networks. In certain instances, Pathward also has certain leasehold interests in certain ATMs which require bank ownership and registration for compliance with applicable state law.

Pathward currently provides financial processing services for approximately 65% of freestanding ATMs nationwide providing consumers with access to funds at ATMs frequently found in malls, retail chains, convenience stores, events, fairs and other small business locations across the U.S.

### **Issuing Solutions**

*Prepaid Cards.* Similar to traditional debit cards, prepaid cards are embedded with a magnetic stripe, which encodes relevant card data (which may or may not include information about the user and/or purchaser of such card), or an EMV chip, which is equipped with a microprocessor chip and the technology used to authenticate chip card transactions. When the holder of such a card attempts a permitted transaction, necessary information, including the authorization for such transaction, is shared between the 'point of use' or 'point of sale' and authorization systems maintaining the account of record. Most recently, 'virtual' prepaid cards have become popular in the industry. Virtual prepaid cards are used in both the consumer space, for example as a gift card, and in the commercial arena to facilitate accounts payable and vendor payments.

The funds associated with such cards are typically held in pooled accounts at the Bank representing the aggregate value of all cards issued in connection with particular products or programs. Although the funds are held in pooled accounts, the account of record indicates the funds held by each individual card. The cards may work in a closed loop (e.g., the card will only work at one particular merchant and will not work anywhere else), a 'Restricted Access Network' (e.g., the card will only work at a specific set of merchants such as a shopping mall), or in an open loop by way of a Visa or MasterCard or Discover branded debit card that will work wherever such cards are accepted for payment. Most of the Company's prepaid cards are open loop. Pathward is one of the leading prepaid card issuers in the United States.

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The prepaid card business can generally be divided into two program categories: Consumer Use and Business or Commercial Use products. These programs are typically offered through a third-party relationship.

*Consumer Use.* Examples of consumer use prepaid card programs include payroll, general purpose reloadable ('GPR'), reward, gift and benefit/HSA cards. Payroll cards are a product whereby an employee's payroll is loaded to the card by their employer via direct deposit. GPR cards are usually distributed by retailers and can be reloaded an indefinite number of times at participating retail load networks. Other examples of reloadable cards are travel cards, which are used in place of traveler's checks and can be reloaded a predetermined number of times, as well as tax-related cards where a taxpayer's refund is placed on the card. Reloadable cards are generally open- loop cards that consumers can use to obtain cash at ATMs or purchase goods and services wherever such cards are accepted for payment.

*Business or Commercial Use.* Prepaid cards are also frequently used by businesses for travel and entertainment, accounts payable and business-to-business ('B2B') settlement products. For example, virtual prepaid cards are used to facilitate one-time payments between a company and its vendors for monthly settlement. Travel and entertainment cards, alternatively, are reloadable by the company for use by its employees to travel for business.

*Consumer Banking Solutions.* Partners looking to offer financial services in an ecosystem typically employ a demand deposit account ('DDA'), savings account or debit card, or combination thereof. Pathward facilitates their ability to establish a direct deposit relationship with consumers, complete with online acceptance and digital funds transfer, as well as options such as overdraft protection in times of income shortfalls and the overall benefit of improved money management.

### **Tax Solutions**

Under the Refund Transfer program, the Bank opens a temporary bank account for each customer who is receiving an income tax refund and elects to defer payment of his or her tax preparation fees. After the IRS and any state income tax authorities transfer the refund into the customer's account, the net funds are transferred to the customer and the temporary deposit account is closed.

## **Regulation and Supervision**

### **General**

Both the Company and the Bank are subject to extensive regulation in connection with their respective activities and operations, including those of their subsidiaries. On April 1, 2020, the Bank converted from a federal thrift charter to a national bank charter and the Company converted from a savings and loan holding company to a bank holding company ('BHC') that has elected to be a financial holding company (a 'FHC').

As a national bank, the Bank is supervised and examined by the OCC, as its primary federal regulator, and the Federal Deposit Insurance Corporation ('FDIC'), the federal agency that administers the Deposit Insurance Fund ('DIF'). As a BHC, the Company is supervised and examined by the FRB. Federal banking policy is designed to protect customers of and depositors in insured depository institutions, the DIF, and the U.S. banking system.

The framework by which both the Bank and the Company are supervised and examined is complex. This framework includes acts of Congress, regulations, policy statements and guidance, and other interpretive materials that define the obligations and requirements for entities participating in the U.S. banking system.

Moreover, regulation of banks and their holding companies is subject to continual revision, both through statutory changes and corresponding regulatory revisions as well as through evolving supervisory objectives of banking agency examiners and supervisory staff. It is not possible to predict the content or timing of changes to the laws and regulations that may impact the business of the Bank and the Company. Any changes to the regulatory framework applicable to the Company or the Bank, however, could have a material adverse impact on the condition or operations of each entity.

In addition to regulation and supervision by the FRB, the Company is a reporting company under the Securities Exchange Act of 1934, as amended (the 'Exchange Act'), and is required to file reports with the SEC and otherwise comply with federal securities laws.

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As described broadly below, the banking industry is subject to significant regulation. The following discussion is not intended to be a complete list of all the activities regulated by the U.S. banking laws or of the impact of such laws and regulations on the Company or the Bank. Rather, it is intended to briefly summarize the legal and regulatory framework in which the Bank and the Company operate and describe legal requirements that impact their businesses and operations. The information set forth below is subject to change and is qualified in its entirety by the actual laws and regulations referenced.

#### **Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the 'Dodd-Frank Act')**

Enacted in 2010, the Dodd-Frank Act significantly changed the financial regulatory regime in the United States. Since the enactment of the Dodd-Frank Act, U.S. banks and financial services firms, such as the Company and the Bank, have been subject to enhanced regulation and oversight. As of the date of the filing of this Annual Report on Form 10-K, several provisions of the Dodd-Frank Act remain subject to further rulemaking and interpretation by the federal banking agencies; moreover, certain provisions of the act that were implemented by federal agencies have been revised or rescinded pursuant to legislative changes adopted by the U.S. Congress.

Certain provisions of the Dodd-Frank Act that directly impact the operation of the Company or the Bank are highlighted below:

*Consumer Financial Protection Bureau.* Pursuant to the Dodd-Frank Act, the Bank is subject to regulations promulgated by the Consumer Financial Protection Bureau (the 'Bureau'). The Bureau has consolidated authority related to federal laws and regulations impacting the provision of consumer financial products and services. The Bureau also has substantial power to define the rights of consumers and responsibilities of lending institutions, such as the Bank. The Bureau does not, however, examine or supervise the Bank for compliance with such laws and regulations; rather, based on the Bank's size (less than $10 billion in assets), enforcement authority remains with the OCC, although the Bank may be required to submit reports or other materials to the Bureau upon request. The Dodd-Frank Act also provides state attorneys general with the right to enforce federal consumer protection laws. The Bureau is also authorized to prescribe rules applicable to any covered person or service provider identifying and prohibiting acts or practices that are unfair, deceptive or abusive in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service ('UDAAP authority'). To date, the Bureau has engaged in rulemaking and taken enforcement actions that directly impact the business operations of financial institutions offering consumer financial products or services including the Bank and its divisions.

*Interchange Fees.* The Dodd-Frank Act includes provisions that restrict interchange fees to those which are 'reasonable and proportionate' for certain debit card issuers and limits the ability of networks and issuers to restrict debit card transaction routing (known as the 'Durbin Amendment'). The Federal Reserve issued final rules implementing the Durbin Amendment on June 29, 2011. Although, as of the date of the filing of this Annual Report on Form 10-K, the interchange fee restrictions in the Durbin Amendment do not apply to the Bank because debit card issuers with total worldwide assets of less than $10 billion are exempt, such restrictions may negatively impact the pricing all debit card processors in the market, including the Bank, may charge.

*Incentive Compensation.* The Dodd-Frank Act requires that the federal banking agencies, including the Federal Reserve and the OCC, issue a rule related to incentive-based compensation. No final rule implementing this provision of the Dodd-Frank Act has, as of the date of the filing of this Annual Report on Form 10-K, been adopted, but a proposed rule was published in 2016 that expanded upon a prior proposed rule published in 2011. The proposed rule is intended to (i) prohibit incentive-based payment arrangements that the banking agencies determine could encourage certain financial institutions to take inappropriate risks by providing excessive compensation or that could lead to material financial loss, (ii) require the board of directors of those financial institutions to take certain oversight actions related to incentive-based compensation, and (iii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator. Although a final rule has not been issued, the Company and the Bank have undertaken efforts to ensure that their incentive compensation plans do not encourage inappropriate risks, consistent with the principles identified above.

#### **The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 ('Regulatory Relief Act')**

Enacted in 2018, the Regulatory Relief Act includes several provisions that positively affect smaller banking institutions (e.g., those with less than $10 billion in assets) like the Bank. Specific provisions of the Regulatory Relief Act that benefit smaller banks include modifications to the 'qualified mortgage' criteria under the 'ability to repay' rules for certain mortgages that are held and maintained on the Bank's retained portfolio as well as relief

26

from certain capital requirements required by an international banking capital framework with the creation of a “community bank leverage ratio.” See “Recent Developments Related to Capital Rules” and “Brokered Deposits.”

### **The Coronavirus Aid, Relief, and Economic Security Act**

In response to the COVID-19 pandemic, the CARES Act was signed into law on March 27, 2020 to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as the Company and the Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over the Company and the Bank. Furthermore, as the on-going COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

*Paycheck Protection Program.* The CARES Act amended the SBA’s loan program, in which the Bank participates, to create a guaranteed, unsecured loan program, the PPP, to fund operational costs of eligible businesses, organizations and self-employed persons during COVID-19. In June 2020, the Paycheck Protection Program Flexibility Act was enacted, which among other things, gave borrowers additional time and flexibility to use PPP loan proceeds. After previously being extended by Congress, the application deadline for PPP loans expired on May 31, 2021. As a participating lender in the PPP, the Bank continues to monitor legislative, regulatory, and supervisory developments related thereto, including updates to guidance on loan forgiveness.

*Troubled Debt Restructuring and Loan Modifications for Affected Borrowers.* The CARES Act (as amended by the Consolidated Appropriations Act of 2021) permits banks to suspend requirements under GAAP for loan modifications to borrowers affected by COVID-19 that would otherwise be characterized as TDRs and suspend any determination related thereto if (i) the loan modification is made between March 1, 2020 and the earlier of January 1, 2022 or 60 days after the end of the national COVID-19 emergency declaration and (ii) the applicable loan was not more than 30 days past due as of December 31, 2019. The federal banking agencies also issued guidance to encourage banks to make loan modifications for borrowers affected by COVID-19 and to assure banks that they will not be criticized by examiners for doing so. The Company has applied this guidance to qualifying loan modifications. See Note 4 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for further information about the COVID-19-related loan modifications completed by the company.

### **Temporary Regulatory Capital Relief Related to Impact of CECL**

Concurrently with enactment of the CARES Act, federal banking agencies issued an interim final rule that delayed the estimated impact on regulatory capital resulting from the adoption of CECL. The interim final rule provided banking organizations that implemented CECL before the end of 2020 the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of capital benefit provided during the initial two-year delay. Thereafter, the federal banking agencies issued a final rule that made certain technical changes to the interim final rule. The changes in the final rule apply only to those banking organizations that elected the CECL transition relief provided under the interim rule. The Company has elected this option.

### **Bank Regulation and Supervision**

The Bank is a national bank that is subject to broad federal regulation and oversight extending to all of its operations by its primary federal regulator, the OCC, and by its deposit insurer, the FDIC. Such regulation covers all aspects of the banking business, including lending practices, safeguarding deposits, capital structure, transactions with affiliates, and conduct and qualifications of personnel. The Bank pays assessment fees both to the OCC and the FDIC, and the level of such assessments reflects the condition of the Bank. If the condition of the Bank were to deteriorate, the level of such assessments could increase significantly, having a material adverse effect on the Company’s financial condition and results of operations.

Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including, but not limited to, the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and

27

the adequacy of an institution's allowance for credit losses. Typically, these actions are undertaken due to violations of laws or regulations or conduct of operations in an unsafe or unsound manner.

The Bank derives its lending and investment powers from the National Bank Act ('NBA') and the OCC's implementing regulations promulgated thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC's regulatory requirements and limitations.

In general, the Bank's legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the 'combined general limit'). At September 30, 2022, the Bank was in compliance with the combined general limit.

The OCC announced on October 6, 2022 that its supervisory strategies for 2023 will focus on: (a) strategic and operational planning; (b) credit risk management and allowance for credit losses; (c) operational resilience; (d) oversight of third parties and related concentrations; (e) Bank Secrecy Act/anti-money laundering and Office of Foreign Assets Control/sanctions programs compliance management; (f) interest rate risk and liquidity risk management; (g) consumer compliance and fair lending risk; (h) Community Reinvestment Act performance; (i) new products and services, including those related to payments and fintech/digital assets; and (j) climate-related financial risk management.

The OCC's 2023 supervisory plan provides the foundation for policy initiatives and for supervisory strategies as applied to national banks as well as their technology service providers. OCC staff members use the supervisory plan to guide their supervisory priorities, planning, and resource allocations. The OCC typically provides periodic updates about supervisory priorities through the Semiannual Risk Perspective process in the fall and spring of each year.

#### **Insurance of Deposit Accounts and Regulation by the FDIC**

The Bank is a member of the DIF, which is administered by the FDIC. Pursuant to the Dodd-Frank Act, a permanent increase in deposit insurance to $250,000 was authorized. The coverage limit is per depositor, per insured depository institution for each account ownership category. FDIC insurance is backed by the full faith and credit of the United States government.

While not the Bank's primary federal regulator, the FDIC, as insurer of the Bank's deposits, imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order poses a serious risk to the DIF. The FDIC also has authority to initiate enforcement actions against any FDIC-insured institution after giving its primary federal regulator the opportunity to take such action, and may seek to terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Finally, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the OCC.

The FDIC imposes an assessment against all depository institutions for deposit insurance quarterly. FDIC assessment rates range from 3 to 30 basis points annually and take into account an institution's composite CAMELS rating and other factors. Notably, the FDIC has the authority to increase an institution's deposit insurance premium if it determines that an insured depository institution significantly relies upon brokered deposits. As of September 30, 2022, 2021 and 2020, the Bank's deposit insurance assessment rate was 5 basis points, 5 basis points, and 14 basis points, respectively. The Bank's deposit insurance premium expense totaled $3.1 million for 2022, $6.2 million for 2021, and $8.4 million for 2020. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank.

The designated reserve ratio ('DRR') of the DIF reached 1.36% as of September 30, 2018, exceeding the statutorily required 1.35% two years ahead of the deadline imposed by the Dodd-Frank Act. On June 30, 2019, the DRR reached 1.40% and the FDIC applied small bank credits to banks with less than $10 billion in assets, such as the Bank, beginning September 30, 2020. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. After applying small bank credits for four quarters, the FDIC will remit to banks the value of any remaining small bank credits in the next assessment period in which the DRR is at least 1.35%.

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## Brokered Deposits

The FDIC limits the ability to accept brokered deposits to those insured depository institutions that are well capitalized. Institutions that are less than well capitalized cannot accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver by the FDIC. The FDIC has defined the “national rate” for all interest-bearing deposits held by less-than-well-capitalized institutions as “a simple average of rates paid by all insured depository institutions and branches for which data are available” and has stated that its presumption is that this national rate is the prevailing rate in any market. As such, institutions that are less than well capitalized that are permitted to accept, renew or rollover brokered deposits via FDIC waiver generally may not pay an interest rate in excess of the national rate plus 75 basis points on such brokered deposits. As of September 30, 2022, the Bank categorized $83.8 million, or 1% of its deposit liabilities, as brokered deposits.

On December 15, 2020, the FDIC issued a final rule establishing a new framework for analyzing whether bank deposits obtained through third-party arrangements are brokered deposits pursuant to Section 29 of the Federal Deposit Insurance Act. Generally, a person is a “deposit broker” if it is “engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties.” The final rule clarifies what it means to be in the business of placing deposits and facilitating the placement of deposits for purpose of the deposit broker definition.

Section 29 provides, in particular, that a person with an exclusive deposit placement arrangement with one insured depository institution will not be considered a deposit broker because it is not in the business of placing deposits or facilitating the placement of deposits.

The final rule also clarifies application of the “primary purpose exception” to Section 29 by identifying a number of common business relationships described as “designated exceptions” as meeting the primary purpose exception. Many of these designated exceptions are arrangements previously addressed in advisory opinions and include: certain investment-related deposits; property management service deposits; deposits for cross-border clearing services; deposits related to real estate and mortgage servicing activities; retirement and 529 deposits; deposits related to employee benefits programs; deposits held to secure credit card loans; and deposits placed by agencies to disburse government benefits. The final rule became effective April 1, 2021, with full compliance extended to January 1, 2022. As a result of this final rule, the Company’s deposits that were classified as brokered deposits reduced significantly beginning with the June 30, 2021 reporting period.

## Branching by National Banks

Subject to certain limitations, federal statutes and OCC regulations permit national banks to establish branches in any state of the United States. With OCC approval, a national bank may open an interstate *de novo* branch in any state that permits the establishment of a branch by a bank chartered by such state, subject to applicable state law limitations. On February 29, 2020, the Company sold the Bank’s Community Bank division to Central Bank, a state-chartered bank headquartered in Storm Lake, Iowa. The sale included, among other things, all of the Community Bank division’s branch locations. Consequently, the Bank’s only banking office open to the public is its home office in Sioux Falls, South Dakota, where it accepts deposits.

## Prepaid Accounts under the Electronic Fund Transfer Act (“Regulation E”) and the Truth In Lending Act (“Regulation Z”)

The Bureau’s “Prepaid Accounts Rule,” adopted in October 2016, enhanced the regulations applicable to prepaid products and brought them fully within Regulation E, which implements the federal Electronic Funds Transfer Act. In addition, prepaid products that have a credit component, like some of those offered in connection with an existing program manager agreement, are now regulated by Regulation Z, which implements the federal Truth in Lending Act. The rule also extended Regulation Z’s credit card rules and disclosure requirements to prepaid accounts that provide overdraft services and other credit features. These rules became effective on April 1, 2019.

## Short-Term, Small-Dollar Installment Lending

In October 2017, the OCC rescinded its guidance on deposit advance products in light of the Bureau’s pending small dollar loan rule related to payday, vehicle title and certain high cost installment loans that was issued in November 2017 (“Small Dollar Rule”). The Small Dollar Rule, however, has been the subject of further regulatory review and a court order staying compliance in connection with a legal challenge.

The Bureau issued its final Small Dollar Rule on July 22, 2020, which became fully effective on October 20, 2020. Specifically, the Bureau revoked provisions that: (i) provide that it is an unfair and abusive practice for a lender to

29

make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from the mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements. However, no lenders are required to comply until either November 19, 2020 or until the court in litigation challenging the Small Dollar Rule lifts its stay of the compliance date.

Separately, in May 2018, the OCC published guidance that encourages national banks and federal savings associations to offer responsible short-term, small-dollar installment loans with terms between two and twelve months and equal amortizing payments. Pursuant to the OCC's guidance on this issue, banks are encouraged to offer these products in a manner that is consistent with sound risk management principles and clear, documented underwriting guidelines. Further, the federal banking agencies issued interagency guidance on May 20, 2020 to encourage banks, savings associations, and credit unions to offer responsible small-dollar loans to customers for consumer and small business purposes. As of the date of the filing of this Annual Report on Form 10-K, the Bank has not determined to offer such products, although this position may change as the Bank further refines its business plan in the future.

### **Interest Rate Risk Management**

The OCC requires national banks, like the Bank, to have an effective and sound interest rate risk management program, including appropriate measurement and reporting, robust and meaningful stress testing, assumption development reflecting the institution's experience, and comprehensive model valuations. According to OCC guidance, interest rate risk exposure is supposed to be managed using processes and systems commensurate with their earnings and capital levels; complexity; business model; risk profile; and scope of operations.

### **Standards for Safety and Soundness**

The federal banking agencies have adopted the *Interagency Guidelines Establishing Standards for Safety and Soundness*. The guidelines establish certain safety and soundness standards for all depository institutions. The operational and managerial standards in the guidelines generally relate to the following: (1) internal controls and information systems; (2) internal audit systems; (3) loan documentation; (4) credit underwriting; (5) interest rate exposure; (6) asset growth; (7) compensation, fees and benefits; (8) asset quality; and (9) earnings. Failure to meet the standards in the guidelines could result in a request by the OCC to the Bank to provide a written compliance plan to demonstrate its efforts to come into compliance with such guidelines.

### **Anti-Money Laundering ('AML') Laws and Regulations**

AML and financial transparency laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act of 2001, impose strict standards for gathering and verifying customer information in order to ensure funds or other assets are not being placed in U.S. financial institutions to facilitate terrorist financing and laundering of funds. Applicable laws require financial institutions to have AML programs in place and require the federal banking agencies to consider a holding company's effectiveness in combating money laundering when ruling on certain merger or acquisition applications. In addition, failure to comply with these requirements could lead to significant fines and penalties or the imposition of corrective orders.

### **Customer Identification Programs for Holders of Prepaid Cards**

The federal banking agencies, including the OCC and the FRB, issued guidance in 2016 that extends the requirements of the Customer Identification Program required by Section 326 of the USA PATRIOT Act to prepaid accounts where the cardholder has either the (i) ability to reload funds, or (ii) access to credit or overdraft features. If either of these features is present, the issuer must verify the identity of the named account holder.

### **Privacy and Cybersecurity**

The Bank is required by federal statutes and regulations to disclose its privacy policies to its customers. The Bank is also required to appropriately safeguard its customers' personal information.

On November 18, 2021, the federal banking agencies issued a final rule to improve the sharing of information about cyber incidents. The final rule requires a banking organization to notify its primary federal regulator of any significant computer-security incident as soon as possible and no later than 36 hours after the banking organization determines that a cyber incident has occurred. Notification is required for incidents that have materially affected-or are reasonably likely to materially affect-the viability of a banking organization's operations, its ability to deliver banking products and services, or the stability of the financial sector. The final rule also requires a bank service provider to notify affected banking organization customers as soon as possible when the provider determines that it has

30

experienced a computer-security incident that has materially affected or is reasonably likely to materially affect banking organization customers for four or more hours. This rule became effective May 1, 2022.

In addition, certain state laws could potentially impact the Bank's operations, including those related to applicable notification requirements when computer-security incident or unauthorized access to customers' nonpublic personal information has occurred.

### **Examination Guidance for Third-Party Lending**

On July 29, 2016, the FDIC issued revised examination guidance related to third-party lending relationships (e.g., lending arrangements that rely on a third party to perform a significant aspect of the lending process). Similar to guidance published by the OCC in 2013, this guidance generally requires that financial institutions, including the Bank, ensure that risks related to such third-party lending relationships are evaluated, including the type of lending activity, the complexity of the lending program, the projected and realized volume created by the relationship, and the number of third-party lending relationships the institution has in place.

On July 19, 2021, the OCC, Federal Reserve, and FDIC issued an interagency notice seeking comment on proposed risk management guidance of third-party relationships, including third party lending relationships. The proposed interagency guidance is based on the OCC's existing third-party risk management guidance from 2013 and seeks to, among other things, promote consistency in third-party risk management and provide sound risk management guidance for third-party relationships commensurate with a bank's risk profile and complexity as well as the criticality of the activity. The public comment period ended on October 18, 2021. When finalized, the proposed interagency guidance will replace each agency's existing guidance on this topic and will be directed to all banking organizations supervised by the OCC, Federal Reserve, and FDIC. The Company continues to monitor developments related to the proposed guidance to determinate what affect, if any, it will have on the Bank and its third-party relationships.

### **Unclaimed Property Laws**

Unclaimed property (escheatment) laws vary by state but generally require holders of customer property (including money) to turn over such property to the applicable state after holding the property for the statutorily prescribed period of time. These laws are not uniform and impose varying requirements on entities, like the Bank, which may hold funds that are required to be escheated to the applicable states.

### **Assessments**

The Dodd-Frank Act provides that, in establishing the amount of an assessment, the Comptroller of the Currency may consider the nature and scope of the activities of the entity, the amount and type of assets it holds, the financial and managerial condition of the entity and any other factor that is appropriate. The assessments are paid to the OCC on a semi-annual basis. During the fiscal year ended September 30, 2022, the Bank paid assessments (standard assessments) of $944,848 to the OCC.

### **Regulatory Capital Requirements**

The regulatory capital rules applicable to the Company and the Bank (the 'Capital Rules') identify three components of regulatory capital: (i) common equity tier 1 capital ('CET1 Capital'), (ii) additional tier 1 capital, and (iii) tier 2 capital. Tier 1 capital is the sum of CET1 Capital and additional tier 1 capital instruments meeting certain requirements. Total capital is the sum of tier 1 capital and tier 2 capital. CET1 Capital, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Capital Rules for the Company and the Bank, provide the denominator for such ratios. There is also a leverage ratio that compares tier 1 capital to average total assets.

Failure by the Company or the Bank to meet minimum capital requirements set by the Capital Rules could result in certain mandatory and/or discretionary disciplinary actions by their regulators that could have a material adverse effect on their business and their consolidated financial position. Under the capital requirements and the regulatory framework for prompt corrective action (discussed below), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.

The Company and the Bank are required to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and

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discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of CET1 Capital and applies to each of the three risk-based capital ratios (but not the leverage ratio).

The Capital Rules provide for a number of deductions from and adjustments to CET1 Capital. These include, for example, the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 Capital to the extent that any one such category exceeds 10% of CET1 Capital or all such items, in the aggregate, exceed 15% of CET1 Capital.

The Capital Rules prescribe a standardized approach for risk weightings for a large and risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, and resulting in high-risk weights for a variety of asset classes. As of September 30, 2022, the Bank exceeded all of its regulatory capital requirements and was designated as “well capitalized” under federal guidelines.

### Recent Developments Related to Capital Rules

There have been several developments which are intended to reduce the regulatory capital burden on smaller, less complex banking organizations like the Company and the Bank. The effect that these developments will have on the Company and the Bank is currently uncertain.

In July 2019, the federal banking agencies finalized a rule intended to simplify and clarify a number of the more complex aspects of existing regulatory capital rules. Specifically, the rule simplifies the capital treatment for mortgage servicing assets, certain deferred tax assets, investments in the capital instruments of unconsolidated financial institutions, and minority interest. The final rule also allows bank holding companies to redeem common stock without prior approval unless otherwise required. The final rule became effective April 1, 2020 for the amendments to simplify capital rules, and October 1, 2019 for revisions to the pre-approval requirements for the redemption of common stock and other technical amendments. The Bank did not elect to implement the relief provided under the simplification rule.

On November 21, 2018, the FDIC, the OCC, and the FRB jointly issued a proposed rule required by the Regulatory Relief Act that would permit qualifying banks that have less than $10 billion in consolidated assets to elect to be subject to a 9% leverage ratio that would be applied using less complex leverage calculations (referred to as the “community bank leverage ratio” or “CBLR”). Under the proposed rule, banks that opt into the CBLR framework and maintain a CBLR of greater than 9% would not be subject to other risk-based and leverage capital requirements and would be deemed to have met the well capitalized ratio requirements. The rule was adopted in September 2019. The Bank continues to assess the potential impact of opting in to this election as part of its ongoing capital management and planning processes.

### Prompt Corrective Action (“PCA”)

Federal banking agencies are authorized and, under certain circumstances, required to take certain actions against banks that fail to meet their minimum capital requirements expressed in terms of a total risk-based capital ratio, a Tier 1 risk-based capital ratio, a CET1 ratio, and a leverage ratio (as identified in the tables above).

Well capitalized banks may not make a capital distribution or pay management fees if the bank would be undercapitalized after making such distributions or paying such fees. Adequately capitalized banks, in general, cannot pay dividends or make any capital contributions that would leave them undercapitalized; they cannot pay a management fee to a controlling person if, after paying the fee, they would be undercapitalized; and they cannot accept, renew or roll over any brokered deposit unless they have applied for and been granted a waiver by the FDIC.

The activities of an “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized” bank are further restricted. Any such bank must submit a capital restoration plan that is guaranteed by each company that controls the Bank, and such company must provide appropriate assurances of performance. Until such plan is approved, the bank may not increase its assets, acquire another institution, establish a branch or engage in any new activities, and generally may not make capital distributions. The federal banking agencies are authorized to impose additional restrictions, discussed below, that are applicable to significantly undercapitalized institutions.

The imposition of any action taken by the OCC against the Bank in connection with the agency’s PCA authority would likely have a substantial adverse effect on it and on the Company’s operations and profitability. This is especially true if the Bank were to no longer be deemed to be well capitalized and, therefore, subject to limitations on its ability

32

to accept, renew or roll over brokered deposits absent a waiver from the FDIC. The Company's stockholders are not entitled to preemptive rights and, therefore, if the Company is directed by its regulators to issue additional shares of common stock, such issuance may result in dilution to the Company's existing stockholders.

#### **Institutions in Troubled Condition**

Certain events, including entering into a formal written agreement with a bank's regulator that requires action to improve the bank's financial condition, or being informed by the regulator that the bank is in troubled condition, will automatically result in limitations on so-called 'golden parachute' agreements pursuant to Section 18(K) of the FDIA. In addition, organizations that are not in compliance with minimum capital requirements, or are otherwise in a troubled condition, must give 90 days' written notice to the OCC before appointing a Director or Senior Executive Officer, pursuant to the OCC's regulations.

#### **Civil Money Penalties**

The OCC has the authority to assess civil money penalties ('CMPs') against any national bank, federal savings bank or any of their institution-affiliated parties ('IAPs'). In addition, the OCC has the authority to assess CMPs against bank service companies and service providers. CMPs may encourage an affected party to correct violations, unsafe or unsound practices or breaches of fiduciary duty. CMPs are also intended to serve as a deterrent to future violations of law, regulations, orders and other conditions.

#### **Limitations on Dividends and Other Capital Distributions**

The NBA and related federal regulations govern the permissibility of dividends and capital distributions by a national bank. As a national bank, the Bank's board of directors may not declare, and the Bank may not pay, any dividend in an amount greater than the sum of current period net income and retained earnings. A distribution in excess of that amount is a reduction in permanent capital, and the Bank would need to follow the applicable procedures set forth in OCC regulations and guidance. Further, the Bank's board of directors may not declare a dividend if paying the dividend would result in the Bank being undercapitalized under the OCC's PCA rule.

The Bank also must obtain prior approval from the OCC to pay a cash dividend if the dividend would exceed the sum of current period net income and retained earnings from the past two years, after deducting the following transactions during that period: (i) any dividends previously declared, (ii) extraordinary transfers required by the OCC, and (iii) payments made for the retirement of preferred stock. This calculation is performed on a rolling basis as described in the OCC's earnings limitation regulations.

The Bank paid cash dividends in the amount of $229.2 million to the Company during fiscal 2022, to be used to fund share repurchases under the common stock share repurchase programs that were authorized by the Company's Board of Directors. The program authorized the Company to repurchase up to 7,500,000 shares of the Company's outstanding common stock through December 31, 2022. On September 3, 2021, the Company's Board of Directors authorized a new stock repurchase program pursuant to which the Company may repurchase up to an additional 6,000,000 shares of the Company's outstanding common stock on or before September 30, 2024. As part of its capital planning, the Company will continue to regularly assess its needs for dividends from the Bank in order to fund future share repurchases and dividends to the Company's stockholders as needed.

#### **Transactions with Affiliates**

The Bank must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with 'affiliates,' generally defined to mean any company that controls or is under common control with the institution (as such, The Company is an affiliate of the Bank for these purposes). Transactions between an institution or its subsidiaries and its affiliates are required to be on terms as favorable to the Bank as terms prevailing at the time for transactions with non-affiliates. Certain transactions, such as loans to an affiliate, are restricted to a percentage of the institutions' capital (e.g., the aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the institution; the aggregate amount of covered transactions with all affiliates is limited to 20% of the institution's capital and surplus).

#### **Community Reinvestment Act ('CRA')**

Under the CRA, the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting its continuing and affirmative obligations consistent with its safe and sound operation, to help meet the credit needs of its assessment areas, including low- and moderate-income neighborhoods. CRA ratings can also impact an insured depository institution's ability to engage in certain activities as CRA performance is considered in connection with certain applications by depository institutions and their holding companies, including merger

33

applications, charter applications, and applications to acquire assets or assume liabilities. The Bank received an “Outstanding” rating during its most recent Performance Evaluation dated February 3, 2020.

### **Federal Home Loan Bank System**

The Bank is a member of the Federal Home Loan Bank (“FHLB”) system through the FHLB of Des Moines, one of 11 regional FHLBs that administer the home financing credit function that is subject to regulation and supervision by the Federal Housing Finance Agency. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances must be used for residential home financing.

As a member of the FHLB system, the Bank is required to purchase and maintain activity-based capital stock in the FHLB in the amount specified by the applicable FHLB’s capital plan. At September 30, 2022, the Bank had in the aggregate $9.1 million in FHLB stock, which was in compliance with the FHLB of Des Moines’ requirement. For the fiscal year ended September 30, 2022, dividends paid by the FHLB to the Bank totaled $0.3 million.

### **Other Regulation**

The Bank is also subject to a variety of other regulations with respect to its business operations including, but not limited to, the Truth in Lending Act, the Truth in Savings Act, the Consumer Leasing Act, the Equal Credit Opportunity Act, the Electronic Funds Transfer Act, the Military Lending Act, the Servicemembers’ Civil Relief Act, the Fair Housing Act, the Fair Debt Collection Practices Act, the Telephone Consumer Protection Act, the Controlling the Assault of Non-Solicited Pornography and Marketing Act, and the Fair Credit Reporting Act.

It is possible that additional rulemaking could require significant revisions to the regulations under which the Bank operates and is supervised. Any change in such laws and regulations or interpretations thereof negatively impacting the Bank’s or the Company’s current operations, whether by the OCC, the FDIC, the Bureau, the FRB or through legislation, could have a material adverse impact on the Bank and its operations and on the Company and its stockholders.

### **Holding Company Regulation and Supervision**

The Company is subject to examination, supervision, and certain reporting requirements by the Federal Reserve, which has responsibility for the primary regulation and supervision of all BHCs, including the Company, under the Bank Holding Company Act (“BHCA”). The Federal Reserve also has supervisory authority over any nonbank subsidiary of a BHC that is not functionally regulated by another federal or state regulator, such as a leasing subsidiary. Through the supervisory process, the Federal Reserve ensures that BHCs, like the Company, comply with law and regulation and are operated in a manner that is consistent with safe and sound banking practices. The Federal Reserve supervises BHCs pursuant to Regulation Y (12 C.F.R. Part 225) and a supervisory program that seeks to ensure that BHCs comply with rules and regulations and that they operate in a safe and sound manner.

As a BHC that has elected to become a FHC, the Company may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the Federal Reserve in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity, and that does not pose a substantial risk to the safety and soundness of depository institutions or the financial system (as solely determined by the Federal Reserve). Activities that are financial in nature include securities underwriting and dealing, insurance underwriting, and making merchant banking investments.

### **Acquisitions**

Federal law prohibits a BHC, including the Company, directly or indirectly, from: (a) acquiring control (as defined under Regulation Y) of another bank (or a holding company parent) without prior Federal Reserve approval; or (b) through merger, consolidation or purchase of assets, acquiring another bank or a holding company thereof, or acquiring all or substantially all of the assets of such institution (or a holding company), without prior Federal Reserve approval. In evaluating applications by BHCs to acquire other holding companies and banks, the Federal Reserve must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the DIF, the convenience and needs of the community and competitive factors.

### **Change in Bank Control**

Federal law and regulation set forth the types of transactions that require prior notice under the Change in Bank Control Act (“CIBCA”). Pursuant to CIBCA and Regulation Y, any person (acting directly or indirectly) that seeks to acquire control of a bank or its holding company must provide prior notice to the Federal Reserve. A “person” includes an individual, bank, corporation, partnership, trust, association, joint venture, pool, syndicate, sole

34

proprietorship, unincorporated organization, or any other form of entity. A person acquires 'control' of a banking organization whenever the person acquires ownership, control, or the power to vote 25 percent or more of any class of voting securities of the institution. The applicable regulations also provide for certain other 'rebuttable' presumptions of control.

In April 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHCA. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve's final rule applies to questions of control under the BHCA, but does not extend to CIBCA.

### **Source of Strength and Capital Requirements**

The Dodd-Frank Act requires all companies, including BHCs, that directly or indirectly control an insured depository institution to serve as a source of financial and managerial strength to its subsidiary depository institutions and to maintain adequate resources to support such institutions; to date, however, specific regulations implementing this requirement have not been published. As an BHC, the Company is also subject to the same regulatory capital requirements as the Bank.

### **Examination**

In 2019, the Federal Reserve published finalized guidance with respect to inspection frequency and scope for BHCs with less than $10 billion in assets. According to the Federal Reserve, with respect to institutions with less than $10 billion in assets (such as the Company), the determination of whether a holding company is 'complex' versus 'noncomplex' is made at least annually on a case-by-case basis taking into account and weighing a number of considerations, such as: the size and structure of the holding company; the extent of intercompany transactions between insured depository institution subsidiaries and the holding company or uninsured subsidiaries of the holding company; the nature and scale of any non-bank activities; and the degree of leverage of the holding company, including the extent of its debt outstanding to the public.

In addition, on June 23, 2020, the federal banking agencies released guidance to promote consistency in the supervision and examination of financial institutions affected by the COVID-19 pandemic. The Federal Reserve and OCC will continue to assess institutions in accordance with existing policies and procedures. However, in conducting their supervisory assessment, federal banking examiners will consider whether institution management has managed risk appropriately, including taking appropriate actions in response to stress caused by COVID-19-related impacts. The interagency guidance instructs examiners to consider the unique, evolving, and potential long-term nature of the issues confronting institutions and to exercise appropriate flexibility in their supervisory response.

### **Dividends**

In 2009, the Federal Reserve released a supervisory letter entitled *Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions and Stock Repurchases at Bank Holding Companies*. This letter generally sets forth principles describing when a BHC must consult, provide notice, or seek approval from the FRB prior to a capital distribution including the payment of dividends, stock redemptions, or stock repurchases. According to FRB staff, the FRBs are likely to require holding companies to eliminate, defer or reduce dividends if these payments are not fully covered by the net income available to shareholders for the past four quarters, earnings retention is not consistent with capital needs or the holding company will not meet or is in danger of not meeting minimum regulatory capital adequacy ratios.

### **Management**

In August 2017, the Federal Reserve published proposed guidance related to supervisory expectations for boards of directors of BHCs. The proposal sought to clarify supervisory expectations of boards and distinguish the roles held by senior management to allow boards to focus on fulfilling their core responsibilities. On February 26, 2021, the Federal Reserve issued a Supervision and Regulation letter (SR 21-3/CA 21-1) containing its final supervisory guidance on the effectiveness of a banking institution's board of directors. Although the guidance only applies to bank holding companies and savings-and-loan holding companies with total consolidated assets of $100 billion or more, the Company continues to monitor the Federal Reserve's evolving supervisory and regulatory approach to board and senior management effectiveness.

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### Additional Regulatory Matters

The Company is subject to oversight by the SEC, NASDAQ and various state securities regulators. In the normal course of business, the Company has received requests for information from these regulators. Such requests have been considered routine and incidental to the Company's operations.

### Federal and State Taxation

Pathward Financial and its subsidiaries file a consolidated federal income tax return and various consolidated state income tax returns. Additionally, Pathward Financial or its subsidiaries file separate company income tax returns in states where required. All returns are filed on a fiscal year basis using the accrual method of accounting. The Company monitors relevant tax authorities and changes its estimate of accrued income tax due to changes in income or franchise tax laws and their interpretation by the courts and regulatory authorities.

### Competition

The Company operates in competitive markets for each of the different financial sectors in which it engages in business: payments, commercial finance, tax services and consumer lending. Competitors include a wide range of regional and national banks and financial services companies located both in the Company's market areas and across the nation.

The Company's BaaS business line serves customers nationally and also faces strong competition from large commercial banks and specialty providers of electronic payments processing and servicing, including prepaid, debit and credit card issuers, ACH processors and ATM network sponsors. Many of these national players are aggressive competitors, leveraging relationships and economies of scale.

As part of its national lending operations, the Company also faces strong competition from non-bank commercial finance companies, leasing companies, factoring companies, insurance premium finance companies, consumer finance and others on a nationwide basis. In addition, the Company's tax return processing services division competes nationwide with financial institutions that offer similar processing technologies and capabilities.

### Human Capital Resources

Our mission of Financial Inclusion for All® is foundational to our ability to attract and retain top talent who desire to have impact working with innovators to enable financial availability, choice, and opportunity for consumers and businesses in underserved niche markets. Our people are our number one asset and the source of our ability to deliver on our mission. We empower them by providing opportunities to grow and develop in their careers, supported by strong compensation, benefits, and health and well-being programs. We live our mission and provide a diverse, inclusive, safe, and healthy workplace for all.

### Demographics

The following table describes the composition of our workforce as of September 30, 2022:

| Employee Type | 9/30/2021 | 9/30/2022 | Change |
| --- | --- | --- | --- |
| Full-time | 1,121 | 1,139 | 1.6% |
| All Other Types | 13 | 15 | 15.4% |
| Total Employees | 1,134 | 1,154 | 1.8% |
| Women | 56% |  |  |
| Minorities | 19% |  |  |

### Diversity, Equity and Inclusion ('DEI')

We place immense value on the diversity of our employees, and we are proud of our commitment to treating our employees with dignity and respect through an inclusive work environment. We believe that diversity of backgrounds, thoughts and experiences in our organization leads to more innovative solutions for our customers and partners as we seek to understand the unique needs in the niche markets that we serve. All employees are expected to contribute to a culture of mutual respect and inclusion, and we promote a workplace culture that is free from discrimination, harassment, or any other form of abuse.

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We approach the components of DEI as follows:

- DIVERSITY: We prioritize cultivating a culture that promotes, supports, and respects diversity among our employees, customers, partners, and community, honoring their unique perspectives that enrich their experience with us.
- EQUITY: We prioritize designing a workplace experience that meets people's individual needs by facilitating equitable access and advancement aligned with their professional goals. For our customers and partners, we commit to identifying ways we can work with people to increase their economic mobility.
- INCLUSION: We prioritize creating a culture where our employees, customers and partners have a sense of belonging and feel valued in the ways that most resonate with them.

We oversee our DEI efforts through our Environmental, Social and Governance (ESG) structure, which includes Board and executive management oversight, as well as a DEI Steering Committee that supports the implementation of our DEI strategy which is both internally and externally focused. Our people are dedicated to a spirit of stewardship and service to the clients and communities that we serve. By growing and promoting a diversity of perspectives within our employee base that reflects our diverse customer base, we can better understand their challenges and deliver on the solutions that they need.

### Talent Acquisition

A core tenet of our talent system is to both develop talent from within and enrich our talent pool with external hires to support a continuous improvement mindset. We have evolved our "Talent Anywhere" recruitment strategy to source candidates in anchor geographic hubs with flexibility to hire "anywhere" domestically. This allows us to expand our talent pool to acquire the best talent available while encouraging the ability for interactivity in our hub locations to build connections and community. This reimagined recruiting strategy allows us to expand our reach beyond local candidates as a remote-enabled employer of choice. As part of our DEI strategy, we train our internal recruiters on how to mitigate unconscious bias in the hiring process and how to assemble diverse candidate slates for open positions.

### Talent Assessment and Development

Assessing talent and leadership development are also critical areas to our talent pipeline strategy. We have continued to mature our enterprise talent management framework. This framework is used throughout the company to better equip Pathward to have clear line of sight on their teams' strengths and opportunities, by identifying capabilities needed to achieve our strategy and creating action plans to close gaps. This ensures our internal talent supply keeps pace with demand, that we invest in our workforce with intention, have our highest performing, highest potential employees applied to our most critical work, and are preparing today's talent for tomorrow's needs.

Our performance management program is an interactive practice that engages our employees beginning with aligning objectives at the enterprise level to drive individual goal setting and quarterly conversations designed to review progress and accomplishments and calibrate on focus areas for the upcoming quarter, driving progress against objectives, alignment, and performance feedback throughout the year. We offer a variety of support to help team members and managers establish and meet personalized development goals, take on new roles and become better leaders.

### Employee Engagement

We recognize that team members who are involved in, enthusiastic about and committed to their work and workplace contribute meaningfully to the success of the company. As a normal course of business, we complete enterprise-wide engagement surveys. The results of the survey are reviewed with the executive management team and are used to prioritize employee programs, initiatives, and communications.

### Total Rewards

As part of our total rewards strategy, we aspire to offer and maintain market competitive total rewards programs for our employees and that attracts and retain superior talent. In addition to healthy base wages, we offer other variable pay including an annual bonus or commission plan. We offer a 401(k) plan with a highly competitive company match. Our healthcare, insurance benefits, health savings and flexible spending accounts are equally competitive with a low-cost share for the employee. We understand how important it is that our employees have time away from work. To allow employees time to recharge, we offer paid time off, family leave, family care resources, flexible work schedules, adoption assistance, employee assistance programs, and other rest and family related benefits. We want our employees to be healthy and be able to bring their whole selves to the workplace.

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## Health and Safety

The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. In 2021, we became a fully remote-enabled employer and instituted a work-from-home program allowing hybrid access to our offices while imposing safety protocols. We purchased laptops and related hardware for home-based employees who previously worked on desktop computers; we also provided employees with a stipend to enhance their at-home work experience. Our employees and their families were also supported with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health. We follow local, state and federal regulations issued by the Occupational Safety and Health Administration and are prepared to implement any applicable workplace requirements.

## Available Information

The Company's website address is www.pathwardfinancial.com. The Company makes available, through a link with the SEC's EDGAR database, free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and statements of ownership on Forms 3, 4, and 5. Investors are encouraged to access these reports and other information about our business on our website. The information found on the Company's website is not incorporated by reference in this or any other report the Company files or furnishes to the SEC. The Company also will provide copies of its Annual Report on Form 10-K, free of charge, upon written request to Justin Schempp, VP of Investor Relations and Financial Reporting, at the Company's address. Also posted on the Company's website, among other things, are the Environmental, Social and Governance Report, the charters of committees of the Board of Directors, as well as the Company's Code of Business Conduct.

### Item 1A. Risk Factors.

We are subject to various risks, including those described below that, individually or in the aggregate, could cause our actual results to differ materially from expected or historical results. Our business could be harmed, perhaps materially, by any of these risks, as well as other risks that we have not identified, whether due to such risks not presently being known to us, because we do not currently believe such risks to be material, or otherwise. The trading price of our common stock could decline due to any of these risks, and you may lose all or part of your investment. Moreover, the impact of the COVID-19 pandemic and recent geopolitical turmoil may also have the effect of heightening many of the risks and uncertainties described in the risks discussed below. The risks discussed below also include forward-looking statements, and actual results and events may differ substantially from those discussed or highlighted in these forward-looking statements. In assessing these risks, you should also refer to the other information contained in this Annual Report on Form 10-K, including the Company's financial statements and related notes. Before making an investment decision with respect to any of our securities, you should carefully consider the following risks and uncertainties described below and elsewhere in this Annual Report on Form 10-K. See 'Forward-Looking Statements.'

## Risks Related to Our Industry and Business

### Our framework for managing risk, including our underwriting practices, may not prevent future losses.

We have established processes and procedures intended to identify, measure, monitor, report, and analyze the types of risk to which we are subject, including liquidity risk, credit risk, market risk, interest rate risk, operational risk, legal and compliance risk, and reputational risk, among others. However, as with any risk management framework, there are inherent limitations to our risk management strategies, as there may exist, or develop in the future, risks that we have not appropriately anticipated or identified. For example, if our underwriting practices or criteria fail to adequately identify, price, and mitigate credit risks, such as risks related to continued economic disruption and the risk in our refund advance loan portfolio that the IRS or the relevant state revenue department does not pay our customer's tax refund in full or the risk that any of our EROs will facilitate or engage in malfeasance or offer the Bank's products and services in a manner that does not comply with applicable law or contractual representations, warranties and covenants, it is possible that losses in our loan portfolio will exceed the amounts the Bank has set aside for loss reserves and result in reduced interest income and increased provision for loan losses, which could have an adverse effect on our financial condition and results of operations. Any resulting deterioration in our loan portfolio could also cause a decrease in our capital, which would make it more difficult to maintain regulatory capital compliance. Further, risk mitigation techniques and the judgments that accompany their application cannot

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anticipate every economic and financial outcome or the specific circumstances and timing of such outcomes, which may result in the Bank or any of its divisions incurring unexpected losses.

**We are subject to credit risk in connection with our lending and leasing activities, and our financial condition and results of operations may be negatively impacted by factors that adversely affect our borrowers.**

We, through the Bank and its divisions, originate various types of loans and leases, and our financial condition and results of operations are affected by the ability of borrowers to repay their loans or leases in a timely manner. Borrowers may be unable to repay their loans due to various factors, some of which are outside of their control. Similarly, borrowers under our commercial loans and related financing products (typically, small- to medium-sized businesses) may be more susceptible to even mild or moderate economic declines than larger commercial borrowers, which may subject the Bank and, ultimately, us, to a higher risk of loan loss. Many borrowers have been negatively impacted by the COVID-19 pandemic, its economic consequences, and other recent events that have caused market and economic volatility, and may continue to be similarly or more severely affected in the future. The risk of non-payment by borrowers is assessed through our underwriting processes and other risk management practices, which may not be able to fully identify, price and mitigate such risk. See *'Our framework for managing risk, including our underwriting practices, may not prevent future losses.'* Despite those efforts, we do and will experience loan and lease losses, and our financial condition and results of operations will be adversely affected by those loan and lease losses.

**If our actual loan and lease losses exceed our allowance for credit losses, our net income will decrease.**

We make various assumptions and subjective judgments about the collectability of our loan and lease portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of our loans and leases, which are subject to change. Despite our underwriting and monitoring practices, our loan and lease customers may not repay their loans and leases according to their terms, and the collateral securing the payment of these loans and leases may be insufficient to pay any remaining loan and lease balance. We may experience significant loan and lease losses due to nonpayment by our borrowers, which could have a material adverse effect on our overall financial condition and results of operation, as well as the value of our common stock. Because we must use assumptions to establish our allowance for credit losses, the current allowance for credit losses may not be sufficient to cover actual loan and lease losses, and increases in the allowance, which may be significant, may be necessary. In addition, federal and state regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or recognize loan charge-offs. Our allowance for credit losses has been negatively impacted by the economic consequences of the COVID-19 pandemic and other recent events that have affected the economy, and a worsening or prolonged continuation of such unfavorable economic conditions could further impact our allowance. Material additions to our allowance would materially decrease our net income. We cannot provide any assurance that our monitoring procedures and policies will reduce certain lending risks or that our allowance for credit losses will be adequate to cover actual losses.

**The earnings of financial services companies, like us, are significantly affected by general business, political and economic conditions.**

Our operations and profitability, including the value of the portfolio of investment securities we hold and the value of collateral securing certain of our loans, are impacted by general business, political and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, commodity pricing, money supply and monetary policy, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, the strength of the United States economy, and uncertainty in financial markets globally, all of which are beyond our control. A deterioration in business, political or economic conditions, including those arising from pandemics such as COVID-19, geopolitical turmoil and war, government shutdowns or defaults, or increases in unemployment, could result in an increase in loan delinquencies and nonperforming assets, decreases in loan collateral values, and a decrease in demand for our products and services, among other things, any of which could have a material adverse impact on our financial condition and results of operations. See also *'The ongoing COVID-19 pandemic and resulting adverse economic conditions have adversely impacted, and could continue to adversely impact, our business and results.'*

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions, and determinations as to whether economic conditions might impair the ability of our borrowers to repay their loans and leases. The level of uncertainty concerning economic

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conditions may adversely affect the accuracy of our estimates which may, in turn, impact the reliability of our underwriting processes. See also "If our actual loan and lease losses exceed our allowance for credit losses, our net income will decrease."

The electronic payments industry, including the prepaid financial services segment within that industry in which the BaaS business line operates, depends heavily upon the overall level of consumer spending, which may decrease if economic or political conditions in the United States further deteriorate and result in a reduction of the number of our prepaid accounts that are purchased or reloaded, the number of transactions involving our cards and the use of our reloadable card products and related services. A sustained reduction in the use of our products and related services, either as a result of a general reduction in consumer spending or as a result of a disproportionate reduction in the use of card-based payment systems, would materially harm our business, results of operations and financial condition.

**The ongoing COVID-19 pandemic and resulting adverse economic conditions have adversely impacted, and could continue to adversely impact, our business and results.**

Our business is dependent on the willingness and ability of our customers to conduct banking and other financial transactions. The ongoing COVID-19 global and national health emergency caused significant disruption in the United States and international economies and financial markets and continues to cause illness, quarantines, reduced attendance at events and reduced travel, reduced commercial and financial activity, and overall economic and financial market instability.

While the level of disruption caused by, and the economic impact of, COVID-19 has lessened in 2022, there is no assurance that the pandemic will not worsen again, included as a result of the emergence of new strains of the virus. Any worsening of the pandemic and its effects on the economy could further impact our business, our provision and allowance for credit losses, and the value of certain assets that we carry on our balance sheet such as goodwill. Our customers, business partners, and third-party providers, including those who perform critical services for our business, may also be adversely affected.

**Our investments in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our results of operations.**

We invest in certain tax-advantaged investments that support renewable energy resources. Our investments in these projects are designed to generate a return in part through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by taxing authorities based on compliance features required to be met at the project level, may fail to meet certain government compliance requirements and may not be able to be realized.

The risk of not being able to realize, or of subsequently incurring a recapture of, the tax credits and other tax benefits depends on various factors, some of which are outside of our control, including changes in the applicable tax code, as well as the continued economic viability of the project and project operator. Further, while we engage in due diligence review both prior to the initial investment and on an ongoing basis, our due diligence review may not identify relevant issues or risks that may adversely impact our ability to realize these tax credits or other tax benefits. The possible inability to realize these tax credits and other tax benefits would have a negative impact on our financial results.

**Through our Commercial Finance business line, we engage in equipment leasing activities; the residual value of leased equipment at the time of its disposition may be less than forecasted at the time we entered into the lease.**

The market value of any given piece of leased equipment could be less than its depreciated value at the time it is sold due to various factors, including factors beyond our control. The market value of used leased equipment depends on several factors, including:

- the market price for new equipment that is similar;
- the age and condition of the leased equipment at the time it is sold;
- the supply of and demand for similar used equipment on the market;
- technological advances relating to the leased equipment or similar equipment; and
- economic conditions in the specific business or industry in which the equipment is used, as well as broader regional or national economic conditions.

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We include in income from operations the difference between the sales price and the depreciated value of an item of leased equipment sold. Changes in our assumptions regarding depreciation could change our depreciation expense, as well as the gain or loss realized upon disposal of leased equipment. If we sell our used leased equipment at prices significantly below our projections or in lesser quantities than we anticipated at the time we entered into the lease, our results of operations and cash flows may be negatively impacted.

# **Changes in interest rates could adversely affect our results of operations and financial condition.**

Our earnings depend substantially on our interest rate spread, which is the difference between (i) the rates we earn on loans, securities, and other earning assets, and (ii) the interest rates we pay on deposits and other borrowings. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities. As market interest rates rise, we experience competitive pressures to increase the rates we pay on deposits, which may decrease our net interest income. Conversely, if interest rates fall, yields on loans and investments may fall. In addition, certain of our noninterest income and noninterest expenses are subject to adverse effect in a rising interest rate environment. The Bank monitors its interest rate risk exposure; however, the Bank can provide no assurance that its efforts will appropriately protect the Bank in the future from interest rate risk exposure. For additional information, see Part II, Item 7A, 'Quantitative and Qualitative Disclosures About Market Risk.'

# **We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.**

We encounter significant competition in all of our market areas and national business lines from other commercial banks, savings and loan associations, credit unions, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market mutual funds and other financial intermediaries, including but not limited to fintech or neobank financial intermediaries. Some of our and the Bank's competitors have substantially greater resources and lending limits, may be subject to less regulation than we are, and may offer services that we do not or cannot provide. Our profitability depends upon both our ability to compete successfully in our market areas and the Bank's and the divisions' ability to compete in their various business markets.

For example, the Commercial Finance business line competes for loans, leases, and other financial services with numerous national and regional banks, thrifts, credit unions, and other financial institutions, as well as other entities that provide financial services, including specialty lenders, securities firms, and mutual funds. Certain larger commercial financing companies do not currently focus their marketing efforts on smaller commercial companies; however, any shift in focus by such larger financing companies may further fragment existing market share in this commercial finance industry. Moreover, some of the financial institutions and financial service organizations with which the Commercial Finance business line competes are not subject to the same degree of regulation as the Commercial Finance business line and the Bank. Many of the Commercial Finance business line's competitors have been in business for many years, have established customer bases, are larger and may offer other services that neither the Commercial Finance business line nor the Bank do.

Several banking institutions have adopted business strategies similar to ours, particularly with respect to the Banking-as-a-Service business. This competition, and competition in any of the Bank's other divisions, may increase our costs, reduce our revenues or revenue growth, or make it difficult for us to compete effectively in obtaining additional customer relationships.

# **Our business could suffer if there is a decline in the use of prepaid cards or there are adverse developments with respect to the prepaid financial services industry in general.**

As the prepaid financial services industry evolves, consumers may find prepaid financial services to be less attractive than other financial services. Consumers might not use prepaid financial services for any number of reasons. For example, negative publicity surrounding us or other prepaid financial service providers could impact Payments' business and prospects for growth to the extent it adversely impacts the perception of prepaid financial services. If consumers do not continue or increase their usage of prepaid cards, Payments' operating revenues may remain at current levels or decline. Growth of prepaid financial services as an electronic payment mechanism may not occur or may occur more slowly than estimated. If there is a shift in the mix of payment forms used by consumers (i.e., cash, credit cards, traditional debit cards and prepaid cards) away from products and services offered by Payments, such a shift could have a material adverse effect on our financial condition and results of operations.

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**We are dependent upon relationships with various third parties with respect to our operations, and our ability to maintain such relationships and the ability of such third parties to perform in accordance with the applicable agreements, could adversely affect our business.**

The Bank has entered into numerous arrangements with third parties with respect to the operations of its business, as described in Part I, Item 1 'Business.' Upon the expiration of the then-current term, any such agreements may not be renewed by the third party or may be renewed on terms less favorable to the Bank. In some cases, such agreements may permit the third party to unilaterally prescribe certain business practices and procedures with respect to the Bank and its divisions (as is the case under agreements between Payments and Discover, MasterCard, Visa and other card networks) or terminate the agreement early under certain circumstances (as is the case under our program management agreement with EFS with respect to certain H&R Block financial services if the Bank should lose its exemption from the 'Durbin Amendment'). To the extent any agreement with a service provider is terminated, we may not be able to secure alternate service providers, and, even if we do, the terms with alternate providers may not be as favorable as those currently in place. In addition, were we to lose any of our significant third-party providers, including in our refund advance related business in which we have a limited number of partners, it could cause a material disruption in our ability to service our customers, which also could have an adverse material impact on the Bank, its divisions and, ultimately, us. Moreover, significant disruptions in our ability to provide services could negatively affect the perception of our business, which could result in a loss of confidence and other adverse effects on our business.

In addition, if any of our counterparties is unable to or otherwise does not fulfill (or does not timely fulfill) its obligations to us for any reason (including, but not limited to, bankruptcy, computer or other technological interruptions or failures, personnel loss, negative regulatory actions, or acts of God) or engages in fraud or other misconduct during the course of such relationship, we may need to seek alternative third-party service providers, or discontinue certain products or programs in their entirety. We have experienced, and expect to continue to experience, situations where we have been held directly or indirectly responsible, or were otherwise subject to liability, for the inability of our third party service providers to perform services for our customers on a timely basis or at all or for actions of third parties undertaken on behalf of the Bank or otherwise in connection with the Bank's arrangement with such third parties. Any such responsibility or liability in the future may have a material adverse effect on our business, including the operations of the Bank and its divisions, and financial results.

In any event, our agreements with third parties could come under scrutiny by our regulators, and our regulators could raise an issue with, or object to, any term or provision in such an agreement or any action taken by such third party vis-à-vis the Bank's operations or customers, resulting in a material adverse effect to us including, but not limited to, the imposition of fines and/or penalties and the material restructuring or termination of such agreement. Moreover, if our regulators examine our third-party service providers and find questionable or illegal acts or practices, our regulators could require us to restructure or terminate our agreements with such providers.

Additionally, although our network of tax preparation partners is expansive, it is possible that our EROs may choose to offer tax-related products of other companies that provide products and services similar to the Bank's if such other companies offer superior pricing or for other competitive reasons.

**We derive a significant percentage of our deposits, total assets and income from deposit accounts that we generate through Payments' customer relationships, of which a limited number of program manager relationships are particularly significant to our operations.**

We derive a significant percentage of our deposits, total assets and income from deposit accounts we generate through program manager relationships between third parties and Payments. If one of these significant program manager relationships were to be terminated or there is a significant decrease in revenues or deposits associated with any of these business relationships, it could materially reduce our deposits, assets and income. Similarly, if a significant program manager was not replaced, we may be required to seek higher-rate funding sources as compared to the existing program manager or see a significant reduction in fee income.

**We are exposed to fraud losses from customer accounts.**

Fraudulent activity involving our products may lead to customer disputed transactions, for which we may be liable under banking regulations and payment network rules. Our fraud detection and risk control mechanisms may not

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prevent all fraudulent or illegal activity. To the extent we incur losses from disputed transactions, our business, results of operations and financial condition could be materially and adversely affected.

#### **We are exposed to settlement and other losses from payments customers.**

Our cardholders can incur charges in excess of the funds available in their accounts, and we may become liable for these overdrafts. While we decline authorization attempts for amounts that exceed the available balance in a cardholder's account, the application of card association rules, the timing of the settlement of transactions and the assessment of the card's monthly maintenance fee, among other things, can result in overdrawn accounts.

In addition, we face settlement risks from our distributors and banking partners, which may increase during an economic downturn. Depending on contract terms, we may prefund partner accounts. If a partner becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to remit proceeds to our card issuing bank from the sales of our products and services, we are liable for any amounts owed to our customers. At September 30, 2022, we had assets subject to settlement risk of $269.0 million.

For one of our programs, the Company pays servicing fees which are primarily offset by estimated card breakage. For cards issued prior to January of 2020, if consumers spend more than projected over the life of the card programs, the Company could experience a material adverse effect on our business, results of operations and financial condition. See 'Funding Activities - Deposits' for further breakdown of balances as of September 30, 2022. We are not insured against these settlement or partner risks.

#### **Our business strategy includes plans for organic growth, and our financial condition and results of operation could be adversely affected if we fail to grow or fail to manage our growth effectively.**

As part of our general growth strategy, we expect to continue to pursue organic growth, while also continuing to evaluate potential acquisitions and expansion opportunities that we believe provide a strategic or geographic fit with our business. Although we have experienced significant growth in our assets and revenues, we may not be able to sustain our historical growth rate or be able to grow at all. We believe that our future organic growth will depend on competitive factors and on the ability of our senior management to continue to maintain a robust system of internal controls and procedures and manage a growing number of customer relationships. See *'We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.'* We may not be able to implement changes or improvements to these internal controls and procedures in an efficient or timely manner and may discover deficiencies in existing systems and controls. Consequently, continued organic growth, if achieved, may place a strain on our operational infrastructure, which could have a material adverse effect on our financial condition and results of operations.

#### **New lines of business or new products and services may subject us to additional risks.**

From time to time, we may implement new lines of business or offer new financial products or services within existing lines of business. Substantial risks and uncertainties are associated with developing and marketing new lines of business or new products or services, particularly in instances where markets are not fully developed, and we may be required to invest significant time and management and capital resources in connection with such new lines of business or new products or services. Initial timetables for the introduction and development of new lines of business or new products or services may not be achieved. In addition, price and profitability targets for new lines of business or new products or services may not prove feasible, as we, the Bank or any of the Bank's divisions may need to price products and services on less advantageous terms than anticipated to retain or attract clients. External factors, such as regulatory reception, compliance with regulations and guidance, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business or new product or service may be expensive to implement and could also have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could reduce our revenues and potentially generate losses.

#### **An impairment charge of goodwill or other intangibles could have a material adverse impact on our financial condition and results of operations.**

From previous acquisitions, the Company has goodwill and intangible assets included in its consolidated assets. Under GAAP we are required to test the carrying value of goodwill and intangible assets at least annually or sooner if

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events occur that indicate impairment could exist. These events or circumstances could include a significant change in the business climate, legal and regulatory factors, competition, a decrease in our stock price and market capitalization over a sustained period of time, a sustained decline in a reporting unit's fair value or other operating performance indicators. GAAP requires us to assign and then test goodwill at the reporting unit level. If the fair value of our reporting unit is less than its net book value, the shortfall is recognized as impairment and is recognized in current earnings. In addition, if the revenue and cash flows generated from any of our other acquired intangible assets is not sufficient to support its net book value, we may be required to record an impairment charge. The amount of any impairment charge could be significant and could have a material adverse impact on our financial condition and results of operations for the period in which the charge is taken.

# **We may incur losses due to fraudulent and negligent acts, as well as errors, by third parties or our employees.**

We may incur losses due to fraudulent or negligent acts, misconduct or errors on the part of third parties with which we do business, our employees and individuals and entities unaffiliated with us, including unauthorized wire and automated clearinghouse transactions, the theft of customer data, customer fraud concerning the value of any relevant collateral, identity theft, errors in a customer's tax return, tax return fraud, the counterfeiting of cards and 'skimming' (whereby a skimmer reads a debit card's encoded mag stripe and a camera records the PIN that is entered by a customer), malicious social engineering schemes (where people are asked to provide a prepaid card or reload product in order to obtain a loan or purchase goods or services) and collusion between participants in the card system to act illegally. Additionally, our employees could hide unauthorized activities from us, engage in improper or unauthorized activities on behalf of our customers, or improperly use confidential information. There can be no assurances that the Bank's program to monitor fraud and other activities will be able to detect all instances of such conduct or that, even if such conduct is detected, we, the Bank, our customers or the third parties with which we do business, including the ATM networks and card payment industry in which the Bank participates, will not be the victims of such activities. Even a single significant instance of fraud, misconduct or other error could result in reputational damage to us, which could reduce the use and acceptance of our cards and other products and services, cause retail distributors or their customers to cease doing business with us or them, or could lead to greater regulation that would increase our compliance costs. Such activities could also result in the imposition of regulatory sanctions, including significant monetary fines, and civil claims which could adversely affect our business, operating results and financial condition.

# **Security breaches involving us, the Bank or any of the third parties with which we do business could expose us to liability and protracted and costly litigation, and could adversely affect our reputation and operating revenues.**

In connection with our business, we collect and retain significant volumes of sensitive business and personally identifiable information, including social security numbers of our customers and other personally identifiable information of our customers and employees, on our data systems. We and the third parties with which we conduct business may experience security breaches, due in part to the failure of our data encryption technologies or otherwise, involving the receipt, transmission, and storage of confidential customer and other personally identifiable information, including account takeovers, unavailability of service, computer viruses, or other malicious code, cyberattacks, or other events, any of which may arise from human error, fraud or malice on the part of employees or third parties or from accidental technological failure. If one or more of these events occurs, it could result in the disclosure of confidential customer information, impairment of our ability to provide products and services to our customers, damage to our reputation with our customers and the market, additional costs (such as costs for repairing systems or adding new personnel or protection technologies), regulatory penalties, and financial losses for us, our clients and other third parties. Such events could also cause interruptions or malfunctions in the operations of our clients, customers, or other third parties with which we engage in business. Risks and exposures related to cybersecurity attacks have increased as a result of the COVID-19 pandemic and the related increased reliance on remote working, and are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, the proliferation of malicious actors internationally, and the expanding use of technology-based products and services by us and our customers. We can provide no assurances that the safeguards we have in place or may implement in the future will prevent all unauthorized infiltrations or breaches and that we will not suffer losses related to a security breach in the future, which losses may be material.

In addition, if the Bank or its divisions fail to comply with data security regulations, the Bank could be subject to various regulatory sanctions, including financial penalties. For example, the largest credit card associations in the world created the Payment Card Industry Data Security Standards (the 'PCI DSS'), a multifaceted standard that includes data security management, policies and procedures as well as other protective measures to protect the

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nonpublic personal information of cardholders. Compliance with the PCI DSS is costly and changes to the standards could have an equal, or greater, effect on the profitability of one or more of our business divisions.

# **Our reputation and financial condition may be harmed by system failures, computer viruses and other technological interruptions to our operations.**

We rely heavily upon information systems and other operating technologies to efficiently operate and manage our business, including to process transactions through the Internet, including, in particular, in our BaaS business line. Were there to be a failure or a significant impairment in the operation of any of such systems, we may need to develop alternative processes, including to comply with customer safeguard protocols, during which time revenues and profitability may be lower, and there can be no assurance that we could develop or find such an alternative on terms acceptable to us or at all. Any such disruption in the information systems and other operating technologies utilized by the Bank or its divisions, including due to infiltration by hackers or other intruders, could also result in negative publicity and have a material adverse effect on our financial condition and results of operations.

# **Agency, technological, or human error could lead to tax refund processing delays, which could adversely affect our reputation and operating revenues.**

We and our tax preparation partners rely on the IRS, technology, and employees when processing and preparing tax refunds and tax-related products and services. Any delays during the processing or preparation period could result in reputational damage to us or to our tax preparation partners, which could reduce the use and acceptance of our cards and tax-related products and services, either of which could have a significant adverse impact on our operating revenues and future growth prospects.

# **The Commercial Finance business line generates government-backed loans funded by the Bank, any of which could be negatively impacted by a variety of factors.**

The Commercial Finance business line originates loans backed by numerous state and federal government agencies. Risks inherent in the Bank's participation in such programs, through its Commercial Finance business line, include: (i) some of these programs guarantee only a portion of the commercial loan made by the Bank; as such, if the borrower defaults and losses exceed those guaranteed by the government agency, the Bank could realize significant losses; (ii) certain programs, including some guaranteed by the United States Department of Agriculture, limit the geographic scope of such loans; as such, if the Commercial Finance business line is not able to market these loans to potential borrowers, the Bank's share in this market may be negatively impacted; (iii) the intended beneficiaries of such loan programs may experience a contraction in their credit quality due to local, national, or global economic events or because of factors specific to their business, including, for example, businesses dependent upon the farming and agriculture industry; as such, any negative impact to certain commercial business lines designed to benefit from such government-sponsored loan programs could constrict the Bank's business in these areas; and (iv) nearly all of these guaranteed loan programs are subject to an appropriations process, either at the legislative or regulatory level; this means that funds that may be currently available to guarantee loans or portions of loans could be limited or eliminated in their entirety with little or no advance warning.

# **Agreements that the Bank has entered into with third parties to market and service consumer loans originated by the Bank may subject the Bank to credit risk, fraud and other risks, as well as claims from regulatory agencies and third parties that, if successful, could negatively impact the Bank's current and future business.**

The Bank has entered into various agreements with unaffiliated third parties ('Marketers'), whereby the Marketers will market and service unsecured consumer loans underwritten and originated by the Bank. These agreements present potential increased credit, operational, and reputational risks. Because the loans originated under such programs are unsecured, in the event a borrower does not repay the loan in accordance with its terms or otherwise defaults on the loan, the Bank may not be able to recover from the borrower an amount sufficient to pay any remaining balance on the loan. See *'If our actual loan and lease losses exceed our allowance for credit losses, our net income will decrease.'* We may also become subject to claims by regulatory agencies, customers, or other third parties due to the conduct of the third parties with which the Bank operates such lending programs if such conduct is deemed to not comply with applicable laws in connection with the marketing and servicing of loans originated pursuant to these programs.

Certain types of these arrangements have been challenged both in the courts and in regulatory actions. In these actions, plaintiffs have generally argued that the 'true lender' is the marketer and that the intent of such lending

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program is to evade state usury and loan licensing laws. Other cases have also included other claims, including racketeering and other state law claims, in their challenge of such programs.

In 2020, the OCC issued final rules designed to clarify when a national bank such as the Bank will be considered the “true lender” in such relationships (the “True Lender Rule”). In June 2021, the True Lender Rule was repealed and the OCC prohibited from issuing any replacement of the True Lender Rule absent Congressional authorization. In the wake of the repeal of the True Lender Rule, several states have announced their intention to broaden oversight of non-bank fintech lenders, while certain parties have initiated litigation in order to obtain court guidance on how particular jurisdictions may weigh loan program facts and rule on “true lender” challenges. In addition, the Consumer Financial Protection Bureau and the Federal Trade Commission have each announced their intention to explore their authority to supervise nonbank lending partnerships in markets for consumer financial products and services.

Consequently, state and federal regulatory authorities may proceed on different paths to promulgate “true lender” restrictions, and - absent binding court rulings or direct legislative action - impacted parties may have little to no advance notice of new restrictions and compliance obligations. In the absence of applicable laws or regulations addressing these matters, true lender disputes will be determined on a case-by-case basis, informed by differing state laws and the facts in each instance. There can be no assurance that lawsuits or regulatory actions in connection with any such lending programs the Bank has entered, or will enter, into will not be brought in the future. If a regulatory agency, consumer advocate group, or other third party were to bring successful action against the Bank or any of the third parties with which the Bank operates such lending programs, there could be a material adverse effect on our financial condition and results of operations.

**The OCC’s grant of bank charters to fintech companies and special purpose fintech charter could present a market risk to us generally and the BaaS business line specifically.**

The OCC announced on July 31, 2018 that it would begin to accept and evaluate charters for entities that wanted to conduct certain components of a banking business pursuant to a federal charter, known as a “special purpose national bank” (“SPNB”) charter. Intended to promote economic opportunity and spur financial innovation, SPNBs may engage in paying checks, lending money and taking deposits. While the OCC has not granted any SPNB charters as of the date of this filing, it has granted bank charters to companies that were previously non-bank fintech companies.

If, in the future, the OCC determines to grant any SPNB applications or continues to grant bank charters to fintech applicants, recipients of such charters may enter the U.S. payments market BaaS solutions market, and other business lines in which the Bank operates, which could increase the competition we face and have a material adverse effect on the Bank and the BaaS business line.

**The loss or transition of key members of our senior management team or key employees in the Bank’s divisions, or our inability to attract and retain qualified personnel, could adversely affect our business.**

We believe that our success depends largely on the efforts and abilities of our senior executive management team. Their experience and industry contacts significantly benefit us. Our future success also depends in large part on our ability to attract, retain and motivate key management and operating personnel. We completed a Chief Executive Officer and Chief Operating Officer transition in October 2021 and announced a Chief Financial Officer transition in October 2022 that will be effective April 30, 2023. Management transitions may create uncertainty and involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows.

Additionally, as we continue to develop and expand our operations, we may require personnel with different skills and experiences, with a sound understanding of our business and the industries in which we operate. The competition for qualified personnel in the financial services industry is intense, and the loss of any of our key personnel or an inability to continue to attract, retain, and motivate key personnel could adversely affect our business.

**We and our divisions regularly assess our investments in technology, and changes in technology could be costly.**

The fintech industry is undergoing technological innovation at a fast pace. To keep up with our competition, we regularly evaluate technology to determine whether it may help us compete on a cost-effective basis. This is especially true with respect to our BaaS business line, which requires significant expenditures to exploit technology and to develop new products and services to meet customers’ needs. The cost of investing in, implementing and

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maintaining such technology is high, and there can be no assurance, given the fast pace of change and innovation, that our technology, either purchased or developed internally, will meet our needs, in a timely, cost-effective manner or at all. During the course of implementing new technology into our or the Bank's operations, we may experience system interruptions and failures. In addition, there can be no assurances that we will recognize, in a timely manner or at all, the benefits that we may expect as a result of our implementing new technology into our operations. In connection with our implementation of new lines of business, offering of new financial products or acquisitions, we may experience significant, one-time or recurring technology-related costs.

**Our ability to receive dividends from the Bank could affect our liquidity and ability to pay dividends on our common stock and interest on our trust preferred securities.**

We are a legal entity separate and distinct from the Bank. Our primary source of cash, other than securities offerings, is dividends from the Bank. These dividends are a principal source of funds to pay dividends on our common stock, interest on our trust preferred securities and interest and principal on our debt. Various laws and regulations limit the amount of dividends that the Bank may pay us, as further described in Part I, Item 1 'Business - Regulation and Supervision - Bank Regulation and Supervision - Limitations on Dividends and Other Capital Distributions' of this Annual Report on Form 10-K. Such limitations could have a material adverse effect on our liquidity and on our ability to pay dividends on common stock. Additionally, if the Bank's earnings are not sufficient to make dividend payments to us while maintaining adequate capital levels, we may not be able to make dividend payments to our common shareholders or make payments on our trust preferred securities.

**Unclaimed funds represented by unused value on the cards presents compliance and other risks.**

The concept of escheatment involves the reporting and delivery of property to states that is abandoned when its rightful owner cannot be readily located and/or identified. In the context of prepaid cards, the customer funds represented by such cards can sometimes be 'abandoned' or unused for the relevant period of time set forth in each applicable state's abandoned property laws. The BaaS business line utilizes automated programs designed to comply with applicable escheatment laws and regulations. There appears, however, to be a movement among some state regulators to more broadly interpret definitions in escheatment statutes and regulations than in the past. State regulators may choose to initiate collection or other litigation action against prepaid card issuers, like Payments, for unreported abandoned property, and such actions may seek to assess fines and penalties.

## **Risks Related to Regulation of the Company and the Bank**

**We operate in a highly regulated environment, and our failure to comply with laws and regulations, or changes in laws and regulations to which we are subject, may adversely affect our business, prospects, results of operations and financial condition.**

We and the Bank operate in a highly regulated environment, and we are subject to extensive regulation (including, among others, the Dodd-Frank Act, the Basel III Capital Rules, the Bank Secrecy Act and other AML rules), supervision, and examination, including by the OCC and the Federal Reserve, our primary banking regulators. In addition, the Bank is subject to regulation by the FDIC and, to a lesser degree, the Bureau. Prepaid card issuers like the Bank are also subject to heightened regulatory scrutiny based on AML and Bank Secrecy Act concerns, which scrutiny could result in higher compliance costs. See Part I, Item 1 'Business - Regulation and Supervision' herein. Banking regulatory authorities have broad discretion in connection with their supervisory and enforcement activities, including, but not limited, to the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the adequacy of an institution's allowance for credit losses. If any of our banking regulators takes informal or formal supervisory action or pursues an enforcement action, any required corrective steps could result in us being subject to additional regulatory requirements, operational restrictions, a consent order, enhanced supervision and/or civil money penalties. Any new requirements or rules, changes in such requirements or rules, changes to or new interpretations of existing requirements or rules, failure to follow requirements or rules, or future lawsuits or rulings could increase our compliance and other costs of doing business, require significant systems redevelopment, render our products or services less profitable or obsolete or otherwise have a material adverse effect on our business, prospects, results of operations, and financial condition. For example, any changes in the U.S. tax laws as a result of pending tax legislation in the U.S. Congress or otherwise may adversely impact our

47

tax refund processing and settlement business, which could reduce customer demand for our strategic partner's refund advance products, thereby reducing the volume of refund advance loans that we may offer.

**The Bureau has reshaped certain consumer financial laws through rulemaking and enforcement of prohibitions against unfair, deceptive or abusive practices, and such actions have directly impacted, and may continue to impact, the Bank's consumer financial products and service offerings.**

The Bureau has broad rulemaking authority to administer and carry out the purposes and objectives of 'federal consumer financial laws, and to prevent evasions thereof' with respect to all financial institutions that offer financial products and services to consumers. We cannot predict the impact the Bureau's future actions, including any exercise of its UDAAP authority, will have on the banking industry broadly or us and the Bank specifically. Notwithstanding that insured depository institutions with assets of $10 billion or less (such as the Bank) will continue to be supervised and examined by their primary federal regulators, the full reach and impact of the Bureau's broad rulemaking powers and UDAAP authority on the operations of financial institutions offering consumer financial products or services are currently unknown. The Bureau has initiated enforcement actions against a variety of bank and non-bank market participants with respect to a number of consumer financial products and services that has resulted in those participants expending significant time, money and resources to adjust to the initiatives being pursued by the Bureau. Such enforcement actions may serve as precedent for how the Bureau interprets and enforces consumer protection laws, which may result in the imposition of higher standards of compliance with such laws and, as a result, limit or restrict the Bank with respect to its consumer product offerings. See 'Business - Regulation and Supervision - Bank Regulation and Supervision' in Part I, Item 1 of this Annual Report on Form 10-K.

**Regulatory scrutiny of bank provision of BaaS solutions and related technology considerations has recently increased.**

We provide products and services to third parties through various payments, issuing, credit and tax solutions. The third parties that use these BaaS solutions, and with which we often partner in marketing efforts, are typically considered fintech companies but may also include other financial intermediaries. Recently, federal bank regulators have increasingly focused on the risks related to bank and fintech company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. This focus is demonstrated by recent regulatory enforcement actions against other banks that have allegedly not adequately addressed these concerns while growing their BaaS offerings. While we believe we are a leader in managing, monitoring and overseeing BaaS relationships with third parties and corresponding technologies, we could be subject to additional regulatory scrutiny with respect to that portion of our business.

**Increased scrutiny and evolving expectations from customers, regulators, investors, and other stakeholders with respect to environmental, social and governance (ESG) practices may impose additional costs on the Company or expose it to new or additional risks.**

As a regulated financial institution and a publicly traded company, we are facing increasing scrutiny from customers, regulators, investors, and other stakeholders related to ESG practices and disclosure. Investor advocacy groups, investment funds, and influential investors are increasingly focused on these practices, especially as they relate to climate risk, hiring practices, the diversity of the work force, and racial and social justice issues. Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact the Company's reputation, ability to do business with certain partners, and stock price. New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure. ESG-related costs, including with respect to compliance with any additional regulatory or disclosure requirements or expectations, could adversely impact our results of operations.

**We will be subject to heightened regulatory requirements if our total assets grow in excess of $10 billion as of December 31 of any calendar year.**

As of September 30, 2022, our total assets were $6.75 billion. While we intend to remain under the $10 billion asset level, our total assets could exceed $10 billion at the end of this or a future calendar year. In addition to our current regulatory requirements, banks with $10 billion or more in total assets are, among other things: examined directly by the CFPB with respect to various federal consumer financial laws; subject to reduced dividends on the Bank's holdings of Federal Reserve Bank of Minneapolis common stock; subject to limits on interchange fees pursuant to the Durbin Amendment to the Dodd-Frank Act; subject to certain enhanced prudential standards; no longer treated as a 'small institution' for FDIC deposit insurance assessment purposes; and no longer eligible to elect to be subject to the Community Bank Leverage ratio. Compliance with these additional ongoing requirements

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may necessitate additional personnel, the design and implementation of additional internal controls, or the incurrence of other significant expenses, any of which could have a significant adverse effect on our business, financial condition or results of operations. Our regulators may also consider our preparation for compliance with these regulatory requirements in the course of examining our operations generally or when considering any request from us or the Bank.

**We will become subject to reduced interchange income and could face related adverse business consequences if our total assets grow in excess of $10 billion as of December 31 of any calendar year.**

Debit card interchange fee restrictions set forth in Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which is known as the Durbin Amendment, as implemented by regulations of the Federal Reserve, cap the maximum debit interchange fee that a debit card issuer may receive per transaction. Debit card issuers with total consolidated assets of less than $10 billion are exempt from these interchange fee restrictions. The exemption for small issuers ceases to apply as of July 1 of the year following the calendar year in which the debit card issuer has total consolidated assets of $10 billion or more at calendar year-end. While we intend to remain under the $10 billion asset level, and have implemented an off-balance sheet strategy for deposits, growth in deposits and associated loan growth could result in such an increase on our balance sheet. Any reduction in interchange income as a result of the loss of the exemption for small issuers under the Durbin Amendment could have a significant adverse effect on our business, financial condition and results of operations. Moreover, our loss of eligibility under the exemption for small issuers could adversely affect or reduce our ability to maintain certain of our fee-sharing prepaid card partnerships, which have the right to terminate our agreement with respect to certain financial services under such circumstances.

**The Bank relies on brokered deposits to assist in funding its loan and other financing products; accordingly, any change in the Bank's ability to gather brokered deposits may adversely impact the Bank.**

Failure to maintain the Bank's status as a 'well capitalized' institution could have an adverse effect on us, and our ability to fund our operations. Should the Bank ever fail to be well capitalized in the future as a result of not meeting the well capitalized requirements or the imposition of an individual minimum capital requirement or similar formal requirement, then, the Bank would be prohibited, absent waiver from the FDIC, from utilizing brokered deposits (i.e., no insured depository institution that is deemed to be less than 'well capitalized' may accept, renew or rollover brokered deposits absent a waiver from the FDIC). In such event, such a result could produce material adverse consequences for the Bank with respect to liquidity and could also have material adverse effects on our financial condition and results of operations. Further, depending on the Bank's condition in the future and its reliance on these deposits as a source of funding, the FDIC could increase the surcharge on our brokered deposits. If we are ever required to pay higher surcharge assessments with respect to these deposits, such payments could be material and therefore could have a material adverse effect on our financial condition and results of operations. In addition, changes to FDIC regulations regarding brokered deposits or interpretations of such regulations by federal banking agencies could have an adverse impact on the Bank's ability to accept brokered deposits.

**As a bank holding company, we are required to serve as a 'source of strength' for the Bank.**

Federal banking law codifies a requirement that a bank holding company (like us) act as a financial 'source of strength' for its FDIC-insured depository institution subsidiaries (like the Bank) and permits the OCC, as the Bank's primary federal regulator, to request reports from us to assess our ability to serve as a source of strength for the Bank and to enforce compliance with these statutory requirements. See Part I, Item 1 'Business - Regulation and Supervision - Holding Company Regulation and Supervision.' Given the power provided to the federal banking agencies, we, as a source of strength for the Bank, may be required to contribute capital to the Bank when we might not otherwise voluntarily choose to do so. Specifically, the imposition of such financial requirements might require us to raise additional capital to support the Bank at a time when it is not otherwise prudent for us to do so, including on terms that are not typical or favorable to us. Further, any capital provided by us to the Bank would be subordinate to others with an interest in the Bank, including the Bank's depositors. In addition, in the event of our bankruptcy at a time when we had a commitment to one of the Bank's regulators to maintain the capital of the Bank, the regulators' claims against us may be entitled to priority status over other obligations.

**We are required to maintain capital to meet regulatory requirements, and, if we fail to maintain sufficient capital, whether due to growth opportunities, losses or an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our compliance with regulatory requirements, would be adversely affected.**

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Both we and the Bank are required to meet regulatory capital requirements and otherwise need to maintain sufficient liquidity to support recent and future growth. We have continued to experience considerable growth recently, having increased our assets from $2.53 billion at September 30, 2015 to $6.75 billion at September 30, 2022, primarily due to strategic transactions, such as the Crestmark Acquisition, through participation in government stimulus programs such as the EIP, and through organic growth. Asset growth, diversification of our lending business, expansion of our financial product offerings and other changes in our asset mix continue to require higher levels of capital, which management believes may not be met through earnings retention alone. Our ability to raise additional capital, when and if needed in the future, to meet such regulatory capital requirements and liquidity needs will depend on conditions in the capital markets, general economic conditions, the performance and prospects of our business and a number of other factors, many of which are outside of our control. We cannot assure you that we will be able to raise additional capital if needed or raise additional capital on terms acceptable to us. If we fail to meet these capital and other regulatory requirements, our financial condition, liquidity and results of operations could be materially and adversely affected.

Although we comply with all current applicable capital requirements, we may be subject to more stringent regulatory capital requirements in the future, and we may need additional capital in order to meet those requirements. If we or the Bank fail to meet applicable minimum capital requirements or cease to be well capitalized, such failure would cause us and the Bank to be subject to regulatory restrictions and could adversely affect customer confidence, our ability to grow, our costs of funds and FDIC insurance costs, our ability to pay dividends on common stock and/or repurchase shares, our ability to make distributions on our trust preferred securities, our ability to make acquisitions, and our business, results of operations and financial condition, generally.

## General Risk Factors

**The price of our common stock may be volatile, which may result in losses for investors.**

The market price for shares of our common stock has been volatile in the past, and several factors, including factors outside of our control and unrelated to our performance, could cause the price to fluctuate substantially in the future. These factors include:

- announcements of developments related to our business;
- the initiation, pendency or outcome of litigation, regulatory reviews, inquiries and investigations, and any related adverse publicity;
- fluctuations in our results of operations;
- sales of substantial amounts of our securities into the marketplace;
- general conditions in the banking industry or the worldwide economy;
- a shortfall in revenues or earnings compared to securities analysts' expectations;
- lack of an active trading market for the common stock;
- changes in analysts' recommendations or projections; and
- announcement of new acquisitions, dispositions or other projects.

General market price declines or market volatility in the future could adversely affect the price of our common stock, and the current market price may not be indicative of future market prices.

Additionally, the COVID-19 pandemic, or other economic factors, has also resulted in severe volatility in the financial markets and may result in a lower stock price for companies, including our common stock.

**An investment in our common stock is not an insured deposit.**

Our common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund, or by any other public or private entity. Investment in our common stock is inherently subject to risks, including those described in this "Risk Factors" section, and is subject to forces that affect the financial markets in general. As a result, if you hold or acquire our common stock, it is possible that you may lose all or a portion of your investment.

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**Future sales or additional issuances of our capital stock may depress prices of shares of our common stock or otherwise dilute the book value of shares then outstanding.**

Sales of a substantial amount of our capital stock in the public market or the issuance of a significant number of shares could adversely affect the market price for shares of our common stock. As of September 30, 2022, we were authorized to issue up to 90,000,000 shares of common stock, of which 28,788,124 shares were outstanding, and 90,053 shares were held as treasury stock. We were also authorized to issue up to 3,000,000 shares of preferred stock and 3,000,000 shares of non-voting common stock, none of which were outstanding or reserved for issuance. Future sales or additional issuances of stock may affect the market price for shares of our common stock.

**Changes in accounting policies or accounting standards, or changes in how accounting standards are interpreted or applied, could materially affect how we report our financial results and condition.**

Our accounting policies are fundamental to determining and understanding our financial results and condition. From time to time, the Financial Accounting Standards Board (the 'FASB') and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. In addition, those that set accounting standards and those that interpret the accounting standards (such as the FASB, the SEC, banking regulators, and our outside auditors) may change or even reverse their previous interpretations or positions on how these standards should be applied. Changes in financial accounting and reporting standards and changes in current interpretations may be beyond our control, can be difficult to predict, and could materially affect how we report our financial results and condition. We may be required to apply a new or revised standard retroactively or apply an existing standard differently and retroactively, which may result in us being required to restate prior period financial statements, which restatements may reflect material changes.

**We incur significant costs and demands upon management and accounting and finance resources as a result of complying with the laws and regulations affecting public companies; if we fail to maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and our reputation.**

As an SEC reporting company, we are required to, among other things, maintain a system of effective internal control over financial reporting, which requires annual management and independent registered public accounting firm assessments of the effectiveness of our internal controls. Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly and time-consuming effort that needs to be re-evaluated frequently. We have historically dedicated a significant amount of time and resources to implement our internal financial and accounting controls and procedures. Substantial work may continue to be required to further implement, document, assess, test, and, if necessary, remediate our system of internal controls. We may also need to retain additional finance and accounting personnel in the future.

Control failures, including failures in our controls over financial reporting, could result from human error, fraud, breakdowns in information and computer systems, lapses in operating processes, or natural or man-made disasters. If a significant control failure or business interruption were to occur, it could materially damage our financial condition and results of operations. We may not be able to foresee, prevent, mitigate, reverse, or repair the negative effects of such failures or interruptions.

We identified control deficiencies in our internal controls over financial reporting related to certain loan systems control environment over the segregation of duties associated with the disbursement process, which, as described in Part II, Item 9A 'Controls and Procedures' of this Annual Report on Form 10-K, we determined, represent a material weakness in internal controls over financial reporting. Other control deficiencies of this or a similar nature may be identified in the future. These and any future control deficiencies could result in us being unable to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner. Any such control deficiencies could also result in a misstatement of our financial statement accounts and disclosures that, in turn, could result in a material misstatement of our annual or interim final statements that may not be prevented or detected.

If we are unable to correct the material weakness or deficiencies in internal controls over financial reporting in a timely manner or if future instances of an ineffective control environment exist, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC could be adversely affected, and we may be unable to comply with the periodic reporting requirements of the

51

SEC. This failure, which could cause our investors to lose confidence in our reported financial information, could subject us to investigation and sanction by the SEC or other regulatory authorities and to claims by stockholders, which could impose significant additional costs on us, divert our management's attention and materially and adversely impact our business and financial condition. Additionally, our common stock listing on the NASDAQ Global Select Market could be suspended or terminated, and our stock price could materially suffer. See also Part II, Item 9A 'Controls and Procedures' of this Annual Report on Form 10-K.

**Federal regulations and our organizational documents may inhibit a takeover or prevent a transaction you may favor or limit our growth opportunities, which could cause the market price of our common stock to decline.**

Certain provisions of our charter documents and federal regulations could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, control of us. In addition, we may need to obtain approval from regulatory authorities before we can acquire control of any other company. Such approvals could involve significant expenses related to diligence, legal compliance, and the submission of required applications and could be conditioned on acts or practices that limit or otherwise constrain our operations.

**We may not be able to pay dividends in the future in accordance with past practice.**

We have historically paid a quarterly dividend to stockholders. The payment of dividends is subject to legal and regulatory restrictions. Any payment of dividends in the future will depend, in large part, on our earnings, capital requirements, financial condition, regulatory review, and other factors considered relevant by our Board of Directors.

**Catastrophic events could occur and impact our operations or the operations third parties with which we do business.**

Catastrophic events (including natural disasters, severe weather conditions, pandemics, terrorism and other geopolitical events), which are beyond our control, could have an adverse impact on the Bank's ability and the ability of our vendors and other third parties with which we do business, to provide necessary services to support the operation of the Bank and provide products and services to the Bank's customers. Although insurance coverage may provide some protection in light of such events, there can be no assurance that any insurance proceeds would adequately compensate the Bank for the losses it incurred as a result of such events. See also *'Existing insurance policies may not adequately protect us and our subsidiaries.'* Moreover, the damage caused by such events may not be directly compensable from insurance proceeds or otherwise, such as damage to our reputation as a result of such events.

**Legal challenges to and regulatory investigations of our, or the Bank's, operations could have a significant material adverse effect on us.**

From time to time, we, the Bank or our other subsidiaries are subject to regulatory supervision and investigation, legal proceedings and claims in the ordinary course of business. An adverse resolution in litigation or a regulatory action, including litigation or other actions brought by our shareholders, customers or another third party, such as a state attorney general or one of our regulators, could result in substantial damages or otherwise negatively impact our business, reputation and financial condition. See Part I, Item 1 'Business - Regulation and Supervision' and Item 3, 'Legal Proceedings.'

**Our reputation and business could be damaged by negative publicity.**

Reputational risk, including as a result of negative publicity, is inherent in our business. Negative publicity can result from actual or alleged conduct in a number of areas, including legal and regulatory compliance, lending practices, corporate governance, litigation, inadequate protection of customer data, illegal or unauthorized acts taken by third parties that supply products or services to us or the Bank, and behavior of our employees. Damage to our reputation could adversely impact our ability to attract new, and maintain existing, loan and deposit customers, employees and business relationships, and, particularly with respect to our BaaS business line, could result in the imposition of new regulatory requirements, operational restrictions, enhanced supervision and/or civil money penalties. Such damage could also adversely affect our ability to raise additional capital, and otherwise have a material adverse effect on our financial condition and results of operations.

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# **Existing insurance policies may not adequately protect us and our subsidiaries.**

Fidelity, business interruption, cybersecurity, and property insurance policies are in place with respect to our operations. Should any event triggering such policies occur, however, it is possible that our policies would not fully reimburse us for the losses we could sustain due to deductible limits, policy limits, coverage limits, or other factors. We generally renew our insurance policies on an annual basis. If the cost of coverage becomes too high, we may need to reduce our policy limits, increase the deductibles or agree to certain exclusions from our coverage in order to reduce the premiums to an acceptable amount.

# **Item 1B. Unresolved Staff Comments.**

None.

# **Item 2. Properties.**

The Company's home office is located at 5501 South Broadband Lane in Sioux Falls, South Dakota. The Company has eight non-branch offices from which its BaaS and Commercial Finance business lines operate. The BaaS business line operates out of the Company's home office along with additional offices in Louisville, Kentucky and Easton, Pennsylvania. The Commercial Finance business line operates out of offices in Troy, Michigan; Franklin, Tennessee; and Toronto, Ontario, Canada. The Company has corporate and shared services offices located in Scottsdale, AZ and Washington, D.C.

Of the Company's eight properties, the Company leases seven of them, all on market terms. See Note 6 to the 'Notes to Consolidated Financial Statements' which is included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

Management believes current facilities are adequate to meet its present needs, though it is continuing to assess those property needs as Pathward Financial is a Talent Anywhere remote working environment.

# **Item 3. Legal Proceedings.**

There are no material pending legal proceedings to which we are a party or to which any of our properties are subject. There are no material proceedings known to us to be contemplated by any governmental authority. From time to time, we are involved in a variety of litigation matters in the ordinary course of our business and anticipate that we will become involved in new litigation matters in the future.

# **Item 4. Mine Safety Disclosures.**

Not applicable.

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## PART II

### Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

The Company's common stock trades on the NASDAQ Global Select Market* under the symbol 'CASH.' Quarterly dividends for all quarters of fiscal years 2022 and 2021 were $0.05 per share.

Dividend payment decisions are made with consideration of a variety of factors including earnings, financial condition, market considerations and regulatory restrictions.

As of November 16, 2022, the Company had (i) 28,466,833 shares of common stock outstanding, which were held by approximately 214 stockholders of record, (ii) no shares of nonvoting common stock outstanding, and (iii) 147,344 shares of common stock held in treasury.

The transfer agent for the Company's common stock is Computershare Investor Services, P.O. Box 43006, Providence, RI 02940-3006.

The Company's Board of Directors authorized a 7,500,000 share repurchase program on November 20, 2019 that was publicly announced on November 20, 2019 and is scheduled to expire on December 31, 2022. All remaining shares available for repurchase under this program were repurchased during the fiscal 2022 first quarter. On September 3, 2021, the Company's Board of Directors authorized an additional 6,000,000 share repurchase program that was publicly announced on September 7, 2021 and is scheduled to expire on September 30, 2024. The table below sets forth information regarding repurchases of our common stock during the fiscal 2022 fourth quarter.

| Period | Total Number of Shares Repurchased (1) | Average Price Paid per Share (1)(2) | Total Number Of Shares Purchased As Part of Publicly Announced Plans or Programs | Additional Shares Authorized As Part of Publicly Announced Plans or Programs | Maximum Number Of Shares that may yet be Purchased Under the Plans or Programs |
| --- | --- | --- | --- | --- | --- |
| July 1 to 31 | 306,129 | $40.55 | 305,700 | - | 4,562,477 |
| August 1 to 31 | - | - | - | - | 4,562,477 |
| September 1 to 30 | 273,435 | 32.76 | 267,500 | - | 4,294,977 |
| Total | 579,564 |  | 573,200 | - |  |

$^{(1)}$ Of the total number of shares acquired during the period, 6,364 shares were acquired in satisfaction of the tax withholding obligations of holders of restricted stock unit awards, which vested during the quarter.

$^{(2)}$ The average price paid per share is calculated on a trade date basis for all open market transactions and excludes commissions and other transaction expenses.

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## Total Stock Return Performance Graph

The following graph compares the cumulative total stockholder return on Pathward Financial common stock over the last five fiscal years with the cumulative total return of the NASDAQ Composite Index and the NASDAQ ABA Community Bank Index (assuming the investment of $100 in each index on October 1, 2017 and reinvestment of all dividends). The stock price performance reflected below is based on historical results and is not necessarily indicative of future stock price performance.

*The information contained in this section, including the following line graph, shall not be deemed to be 'soliciting material' or 'filed' or incorporated by reference in future filings of Pathward Financial with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent the Company specifically incorporates it by reference into a document filed under the Securities Act of 1933, as amended, or the Exchange Act.*

![img-0.jpeg](img-0.jpeg)

| Index | Fiscal Year Ended September 30, |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
| Pathward Financial, Inc. | $100.00 | $106.00 | $126.51 | $75.20 | $206.25 | $130.12 |
| NASDAQ Composite Index | 100.00 | 125.17 | 125.82 | 177.36 | 231.03 | 170.37 |
| NASDAQ ABA Community Bank Index | 100.00 | 103.35 | 95.14 | 65.70 | 119.36 | 109.76 |

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# Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

This section should be read in conjunction with the following parts of this Form 10-K: Part I, Item 1 "Business," Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," and Part II, Item 8 "Financial Statements and Supplementary Data."

# GENERAL

The Company, a registered bank holding company, is a Delaware corporation, the principal assets of which are all the issued and outstanding shares of the Bank, a national bank. Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all direct or indirect subsidiaries of Pathward Financial on a consolidated basis.

# EXECUTIVE SUMMARY

# Business Highlights

- On October 27, 2022, the Company announced that Sonja Theisen, currently Executive Vice President of Governance, Risk and Compliance, has been appointed to succeed Glen Herrick as the Chief Financial Officer effective April 30, 2023. Ms.Theisen, who joined Pathward in 2013, has held leaderships roles across the organization including Chief Accounting Officer, Chief of Staff, and EVP of Governance, Risk and Compliance. Additional details can be found in the related press release available at www.pathwardfinancial.com.
- On October 4, 2022, the Company announced the unveiling of its new corporate brand, marked by the transition to its new name, PathwardTM, N.A. ("Pathward" or the "Bank"), and the launch of the Company's new website, Pathward.com. As part of the corporate rebrand, the Company recognized $6.9 million of pre-tax expenses related to rebranding efforts during the fourth quarter of fiscal 2022. The Company continues to estimate total rebranding expenses will range between $15 million to $20 million.
- As part of its strategy to continue to optimize interest-earning assets, the Company sold the entirety of its student loan portfolio during the fourth quarter of fiscal 2022. The sale generated an unfavorable pre-tax impact of approximately $0.5 million after netting the $4.3 million reversal of provision from the portfolio's allowance and the loss on sale of $4.8 million. The balance of the portfolio at time of sale was $81.5 million.
- On September 26, 2022, the Company announced the completion of a private placement of $20 million of its 6.625% Fixed-to-Floating Rate Subordinated Notes due 2032 to certain qualified institutional buyers and accredited investors. The Notes are intended to qualify as Tier 2 capital for regulatory capital purposes.
- The Company announced on October 10, 2022 that the American Bankers Association ("ABA") Foundation awarded it the 2022 Community Commitment Award during the ABA's Annual Convention on October 4. Pathward's Community Impact Program partners with organizations that provide resources for the unbanked and underbanked and aid to historically marginalized populations. The Community Impact Program delivers on Pathward's purpose of powering financial inclusion for allTM by lifting up the communities it serves.

# Financial Highlights for the 2022 Fiscal Fourth Quarter

- Total revenue for the fourth quarter was $123.2 million, an increase of $3.0 million, or 3%, compared to the same quarter in fiscal 2021, primarily driven by an increase in interest income, partially offset by a decrease in noninterest income.
- Net interest margin ("NIM") increased to 5.21% for the fourth quarter from 4.35% during the same period of last year. The prior year period was impacted by excess cash associated with the Company's participation in the U.S. Treasury Department's Economic Impact Program.
- Total gross loans and leases at September 30, 2022 decreased $78.5 million, to $3.53 billion, or 2%, compared to September 30, 2021 and decreased $154.2 million, or 4%, when compared to June 30, 2022. The decrease compared to the prior year quarter was primarily due to the sale of all remaining community banking loans during the fiscal 2022 first quarter, the sale of the student loan portfolio during the fiscal 2022 fourth quarter, and a reduction in warehouse finance loans, partially offset by growth in the commercial finance portfolio. The primary driver for the decrease on a linked quarter basis was the sale of the student loan portfolio, a reduction in warehouse finance loans, and the seasonal decline in tax services loans.

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- The Company resumed share repurchases on July 1, 2022, and during the fiscal 2022 fourth quarter repurchased 573,200 shares of common stock at an average share price of $37.05.

## Subsequent Events

Management has evaluated and identified subsequent events that occurred after September 30, 2022. See Note 21. Subsequent Events for details on these events.

## FINANCIAL CONDITION

At September 30, 2022, the Company's total assets increased by $56.8 million to $6.75 billion compared to September 30, 2021.

Total cash and cash equivalents was $388.0 million at September 30, 2022, increasing from $314.0 million at September 30, 2021. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the FRB. At September 30, 2022, the Company did not have any federal funds sold.

The total investment portfolio increased $3.0 million to $1.92 billion at September 30, 2022, compared to $1.92 billion at September 30, 2021, as purchases exceeded maturities and principal pay downs. 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. Of the total $1.35 billion MBS held by the Company at September 30, 2022, $1.10 billion were issued by a U.S. Government agency or instrumentality. During the fiscal year ended September 30, 2022, the Company purchased $907.4 million of investment securities.

Loans held for sale at September 30, 2022 totaled $21.1 million, decreasing from $56.2 million at September 30, 2021. This decrease was primarily driven by a reduction in SBA/USDA loans held for sale at September 30, 2022 compared to September 30, 2021.

The Company's total loans and leases decreased $78.5 million, or 2%, to $3.53 billion at September 30, 2022, from $3.61 billion at September 30, 2021. The decrease was primarily driven due the sale of all remaining community banking loans during the fiscal 2022 first quarter, the sale of the student loan portfolio during the fiscal 2022 fourth quarter, and a reduction in warehouse finance loans, partially offset by growth in our commercial finance portfolio. See Note 4 to the 'Notes to Consolidated Financial Statements,' which is included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

Commercial finance loans, which comprised 86% of the Company's gross loan and lease portfolio, totaled $3.02 billion at September 30, 2022, reflecting growth of $298.2 million, or 11%, from September 30, 2021.

When excluding PPP loans, the community bank portfolio and the student loan portfolio, total loans and leases grew 9% at September 30, 2022 when compared to the same period of the prior year.

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 Federal Reserve Bank. The FHLB requires a level of stock investment based on a pre-determined formula. The Company's investment in these stocks increased $0.4 million, or 1%, to $28.8 million at September 30, 2022 from $28.4 million at September 30, 2021, resulting from the purchase of FHLB membership stock.

Total end-of-period deposits increased 6% to $5.87 billion at September 30, 2022, compared to $5.51 billion at September 30, 2021. The increase in end-of-period deposits was primarily driven by an increase in noninterest-bearing deposits of $628.9 million, partially offset by decreases in interest-bearing checking of $254.3 million and in wholesale deposits of $73.6 million.

The Company's total borrowings decreased $56.8 million, or 61%, from $92.8 million at September 30, 2021 to $36.0 million at September 30, 2022. See Note 11 to the 'Notes to Consolidated Financial Statements,' which are included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

57

At September 30, 2022, the Company's stockholders' equity totaled $645.1 million, a decrease of $226.7 million, from $871.9 million at September 30, 2021. The decrease was primarily attributable to a reduction in accumulated other comprehensive income and a reduction in retained earnings related to activity from the Company's share repurchase programs. The Company and Bank remained above the federal regulatory minimum capital requirements at September 30, 2022, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See Note 15 to the "Notes to Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

Noninterest-bearing Checking Deposits. The Company may hold negative balances associated with cardholder programs in the BaaS business line that are included within noninterest-bearing deposits on the Company's Consolidated Statements of Financial Condition. 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 analyzed on an ongoing basis.
- Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category.

The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the BaaS business line:

| (Dollars in thousands) | September 30, 2022 | September 30, 2021 |
| --- | --- | --- |
| Noninterest-bearing deposits | $5,916,142 | $5,492,646 |
| Prefunding | (244,462) | (436,111) |
| Discount funding | (15,991) | (26,440) |
| DDA overdrafts | (8,587) | (11,862) |
| Noninterest-bearing checking, net | $5,647,102 | $5,018,233 |

Custodial Off-Balance Sheet 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.

In return for record keeping services at Program Banks, the Bank receives a servicing fee ("Servicing Fee"). For the fiscal year ended September 30, 2022, the Company recognized $6.4 million in servicing fee income. In prior periods, the Servicing Fee was not significant. The Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.

As of September 30, 2022, the Company managed $1.31 billion of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn record keeping service fee income, typically reflective of the EFFR.

Approximately 37% of the deposit balances at September 30, 2022 are subject to variable card processing expenses that are derived from the terms of contractual agreements with certain BaaS partners. These agreements are tied to a portion of a rate index, typically the EFFR.

58

## RESULTS OF OPERATIONS

The Company's results of operations are dependent on net interest income, provision for credit losses, noninterest income, noninterest expense and income tax expense. Net interest income is the difference, or spread, between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread is affected by regulatory, economic and competitive factors that influence interest rates, loan and lease demand and deposit flows. Notwithstanding that a significant amount of the Company's deposits, primarily those attributable to the BaaS business line, pay relatively low rates of interest or none at all, the Company, like other financial institutions, is subject to interest rate risk to the extent that its interest-earning assets mature or reprice at different times, or on a different basis, than its interest-bearing liabilities. The provision for credit losses is the adjustment to the allowance for credit losses balance for the applicable period. The allowance for credit losses represents management's current estimate of credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date.

The Company's noninterest income is derived primarily from tax product fees, prepaid cards, credit products, deposit and ATM fees attributable to the BaaS business line and fees charged on bank loans, leases and transaction accounts. Noninterest income is also derived from rental income, net gains on the sale of securities, net gains on the sale of loans and leases, as well as the Company's holdings of bank-owned life insurance. This income is offset by noninterest expenses, such as compensation and occupancy expenses associated with additional personnel and office locations, as well as card processing expenses and tax product expenses attributable to the BaaS business line. Noninterest expense is also impacted by acquisition-related expenses, operating lease equipment depreciation expense, occupancy and equipment expenses, regulatory expenses, and legal and consulting expenses.

### Average Balances, Interest Rates and Yields

The following table presents, for the periods indicated, the 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.

59

|  | Fiscal Year Ended September 30, |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | 2022 |  |  | 2021 |  |  | 2020 |  |  |
|  | Average Outstanding Balance | Interest Earned / Paid | Yield / Rate (1) | Average Outstanding Balance | Interest Earned / Paid | Yield / Rate (1) | Average Outstanding Balance | Interest Earned / Paid | Yield / Rate (1) |
| (Dollars in thousands) |  |  |  |  |  |  |  |  |  |
| Interest-earning assets: |  |  |  |  |  |  |  |  |  |
| Cash and fed funds sold | $496,334 | $3,535 | 0.71% | $1,919,760 | $3,709 | 0.19% | $1,236,027 | $2,824 | 0.23% |
| Mortgage-backed securities | 1,292,804 | 26,846 | 2.08% | 728,884 | 12,155 | 1.67% | 367,869 | 9,028 | 2.45% |
| Tax exempt investment securities | 183,936 | 3,565 | 2.45% | 281,573 | 4,004 | 1.80% | 434,262 | 7,477 | 2.18% |
| Asset-backed securities | 283,752 | 3,898 | 1.37% | 388,458 | 5,340 | 1.37% | 319,258 | 7,636 | 2.39% |
| Other investment securities | 268,062 | 6,274 | 2.34% | 239,283 | 4,566 | 1.91% | 198,924 | 4,748 | 2.39% |
| Total investments | 2,028,554 | 40,583 | 2.05% | 1,638,198 | 26,065 | 1.66% | 1,320,313 | 28,889 | 2.34% |
| Commercial finance | 2,884,585 | 203,004 | 7.04% | 2,549,335 | 188,855 | 7.41% | 2,100,464 | 169,189 | 8.05% |
| Consumer finance | 295,356 | 23,097 | 7.82% | 248,757 | 19,940 | 8.02% | 254,293 | 19,808 | 7.79% |
| Tax services | 179,611 | 12,978 | 7.23% | 214,835 | 7,321 | 3.41% | 148,650 | 6,390 | 4.30% |
| Warehouse finance | 433,121 | 27,474 | 6.34% | 330,224 | 21,262 | 6.44% | 292,952 | 17,919 | 6.12% |
| Community banking | 34,758 | 1,525 | 4.39% | 375,258 | 18,702 | 4.98% | 975,618 | 47,822 | 4.90% |
| Total loans and leases (3) | 3,827,431 | 268,078 | 7.00% | 3,718,409 | 256,080 | 6.89% | 3,771,977 | 261,128 | 6.92% |
| Total interest-earning assets | 6,352,319 | $312,196 | 4.93% | 7,276,367 | $285,854 | 3.94% | 6,328,317 | $292,841 | 4.66% |
| Noninterest-earning assets | 751,555 |  |  | 849,141 |  |  | 881,314 |  |  |
| Total assets | $7,103,874 |  |  | $8,125,508 |  |  | $7,209,631 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |
| Interest-bearing checking | $338 | $1 | 0.32% | $254,236 | $ - | - % | $189,704 | $259 | 0.14% |
| Savings | 78,613 | 24 | 0.03% | 81,619 | 16 | 0.02% | 50,888 | 18 | 0.03% |
| Money markets | 96,112 | 214 | 0.22% | 58,656 | 204 | 0.35% | 57,573 | 422 | 0.73% |
| Time deposits | 8,493 | 38 | 0.45% | 13,081 | 139 | 1.06% | 61,837 | 1,226 | 1.98% |
| Wholesale deposits | 63,529 | 223 | 0.35% | 150,213 | 1,234 | 0.82% | 1,081,935 | 20,691 | 1.91% |
| Total interest-bearing deposits | 247,085 | 500 | 0.20% | 557,805 | 1,593 | 0.29% | 1,441,937 | 22,616 | 1.57% |
| Overnight fed funds purchased | 32,414 | 235 | 0.73% | 6 | - | 0.25% | 183,438 | 2,804 | 1.53% |
| FHLB Advances | - | - | - % | - | - | - % | 106,093 | 2,638 | 2.49% |
| Subordinated debentures | 46,441 | 3,375 | 7.27% | 73,886 | 4,507 | 6.10% | 73,718 | 4,618 | 6.26% |
| Other borrowings | 17,490 | 762 | 4.36% | 21,549 | 763 | 3.54% | 28,696 | 1,127 | 3.93% |
| Total borrowings | 96,345 | 4,372 | 4.54% | 95,441 | 5,270 | 5.52% | 391,945 | 11,187 | 2.85% |
| Total interest-bearing liabilities | 343,430 | 4,872 | 1.42% | 653,246 | 6,863 | 1.05% | 1,833,882 | 33,803 | 1.84% |
| Noninterest-bearing deposits | 5,776,852 | - | - % | 6,440,830 | - | - % | 4,396,132 | - | - % |
| Total deposits and interest-bearing liabilities | 6,120,282 | $4,872 | 0.08% | 7,094,115 | $6,863 | 0.10% | 6,230,014 | $33,803 | 0.54% |
| Other noninterest-bearing liabilities | 202,887 |  |  | 189,841 |  |  | 143,772 |  |  |
| Total liabilities | 6,323,169 |  |  | 7,283,956 |  |  | 6,373,786 |  |  |
| Shareholders' equity | 780,705 |  |  | 841,552 |  |  | 835,845 |  |  |
| Total liabilities and shareholders' equity | $7,103,874 |  |  | $8,125,508 |  |  | $7,209,631 |  |  |
| Net interest income and net interest rate spread including noninterest-bearing deposits |  | $307,324 | 4.85% |  | $278,992 | 3.84% |  | $259,038 | 4.12% |
| Net interest margin |  |  | 4.84% |  |  | 3.83% |  |  | 4.09% |
| Tax-equivalent effect |  |  | 0.01% |  |  | 0.01% |  |  | 0.03% |
| Net interest margin, tax equivalent (2) |  |  | 4.85% |  |  | 3.84% |  |  | 4.12% |

| (1) Tax rate used to arrive at the TEY for the fiscal years ended September 30, 2022, 2021, and 2020 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. Management of 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 believe the presentation of this non-GAAP financial measure may be useful for peer comparison purposes. |  |  |  |  |  |  |  |  |  |
| (3) Included in the yield computation are net loan fees of $33.7 million, $35.7 million, and $24.0 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. |  |  |  |  |  |  |  |  |  |

60

## Rate / Volume Analysis

The following table presents, for the periods presented, the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between the change related to higher outstanding balances and the change due to the levels and volatility of interest rates. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (i.e., changes in volume multiplied by old rate); and (ii) changes in rate (i.e., changes in rate multiplied by old volume). Due to the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.

|  | Fiscal Year Ended September 30, |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | 2022 vs. 2021 |  |  | 2021 vs. 2020 |  |  |
|  | Increase / (Decrease) Due to Volume | Increase / (Decrease) Due to Rate | Total Increase / (Decrease) | Increase / (Decrease) Due to Volume | Increase / (Decrease) Due to Rate | Total Increase / (Decrease) |
| (Dollars in thousands) |  |  |  |  |  |  |
| Interest-earning assets: |  |  |  |  |  |  |
| Cash and fed funds sold | $(4,293) | $4,119 | $(174) | $1,408 | $(523) | $885 |
| Mortgage-backed securities | 11,152 | 3,539 | 14,691 | 6,711 | (3,584) | 3,127 |
| Tax-exempt investment securities | (2,008) | 1,569 | (439) | (2,323) | (1,150) | (3,473) |
| Asset-backed securities | (1,442) | - | (1,442) | 1,423 | (3,720) | (2,297) |
| Other investment securities | 594 | 1,113 | 1,707 | 865 | (1,045) | (180) |
| Total investments | 7,310 | 7,208 | 14,518 | 6,845 | (9,668) | (2,823) |
| Commercial finance | 23,929 | (9,779) | 14,150 | 34,013 | (14,347) | 19,666 |
| Consumer finance | 3,664 | (507) | 3,157 | (441) | 573 | 132 |
| Tax services | (1,373) | 7,030 | 5,657 | 2,440 | (1,509) | 931 |
| Warehouse finance | 6,546 | (334) | 6,212 | 2,362 | 981 | 3,343 |
| Community banking | (15,193) | (1,984) | (17,177) | (29,872) | 752 | (29,120) |
| Total loans and leases | 7,768 | 4,230 | 11,998 | (3,784) | (1,264) | (5,048) |
| Total interest-earning assets | $10,785 | $15,557 | $26,342 | $4,469 | $(11,455) | $(6,986) |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing checking | $ - | $ - | $ - | $66 | $(324) | $(258) |
| Savings | (1) | 9 | 8 | 8 | (9) | (1) |
| Money markets | 103 | (93) | 10 | 8 | (226) | (218) |
| Time deposits | (38) | (63) | (101) | (684) | (404) | (1,088) |
| Wholesale deposits | (507) | (504) | (1,011) | (11,698) | (7,759) | (19,457) |
| Total interest-bearing deposits | (703) | (391) | (1,094) | (9,025) | (11,997) | (21,022) |
| Overnight fed funds purchased | 235 | - | 235 | (1,527) | (1,278) | (2,805) |
| FHLB Advances | - | - | - | (1,319) | (1,319) | (2,638) |
| Subordinated debentures | (1,887) | 755 | (1,132) | 10 | (122) | (112) |
| Other borrowings | (159) | 158 | (1) | (261) | (103) | (364) |
| Total borrowings | 49 | (947) | (898) | (12,000) | 6,082 | (5,918) |
| Total interest-bearing liabilities | $(654) | $(1,338) | $(1,992) | $(21,025) | $(5,915) | $(26,940) |
| Net effect on net interest income | $11,439 | $16,895 | $28,334 | $25,494 | $(5,540) | $19,954 |

## Comparison of Operating Results for the Fiscal Years Ended September 30, 2022 and September 30, 2021

### General

The Company recorded net income of $156.4 million, or $5.26 per diluted share, for the fiscal year ended September 30, 2022, compared to $141.7 million, or $4.38 per diluted share, for the fiscal year ended September 30, 2021, an increase of $14.7 million. Total revenue for fiscal 2022 was $601.1 million, compared to $549.9 million for fiscal 2021, an increase of 9%. The increases in net income was primarily due to an increase in noninterest income and a decrease in provision for credit losses, partially offset by an increase in non-interest expense.

61

### **Net Interest Income**

Net interest income for fiscal 2022 increased by $28.3 million, or 10%, to $307.3 million from $279.0 million for the same period of the prior year. The increase in net interest income was mainly attributable to increased yields and an improved earning asset mix.

NIM was 4.84% for fiscal 2022, an increase of 101 basis points from 3.83% in fiscal 2021. The increase in NIM in fiscal 2022, compared to the same period of the prior year was primarily attributable to the decrease in noninterest-bearing deposit balances related to government stimulus-related dollars.

The overall reported tax equivalent yield ('TEY') on average interest-earning assets increased by 99 basis points to 4.93% when comparing fiscal 2022 to fiscal 2021. The growth was driven primarily by an increase in loan and lease and investment securities yields, along with a decrease in lower-yielding cash balances. The overall yield on the loan and lease portfolio increased primarily related to increased yields in the tax services portfolio. The increase in tax services yields for fiscal 2022 compared to fiscal 2021 was due to a change in mix between interest and fee income. The fiscal 2022 TEY on the securities portfolio increased by 39 basis points to 2.05% as compared to the same period of the prior year.

The Company's average interest-earning assets for fiscal 2022 decreased $924.0 million, or 13%, to $6.35 billion, from $7.28 billion during fiscal 2021. The decrease was primarily attributable to a decrease in average cash balances of $1.42 billion, partially offset by increases in total average investment securities of $390.4 million, and in average loan and lease balances of $109.0 million. The increase in the Company's average loan and lease balances was driven by growth of $335.3 million and $102.9 million in commercial finance and warehouse finance loans, respectively, partially offset by the sale of the remaining community bank portfolio of $340.5 million.

The Company's average balance of total deposits and interest-bearing liabilities decreased $973.8 million, or 14%, to $6.12 billion during fiscal 2022, from $7.09 billion during fiscal 2021. This decrease was primarily due to decreases in average interest-bearing deposits of $310.7 million and noninterest-bearing deposits of $664.0 million, partially offset by an increase in the average balance of total borrowings of $0.9 million.

Overall, the Company's cost of funds for all deposits and borrowings averaged 0.08% during fiscal 2022, compared to 0.10% during fiscal 2021. The cost of deposits was 0.01% during fiscal 2022, the same as during fiscal 2021. The Company believes that its growing, lower-cost deposit base gives it a distinct and significant competitive advantage, and even more so if interest rates rise, because the Company anticipates that its cost of funds will likely remain relatively low, increasing less than at many other banks.

### **Provision for Credit Losses**

During fiscal 2022, the Company recorded $28.5 million in provision for credit losses, compared to $49.8 million in fiscal 2021. The decrease in provision was primarily driven by a reversal of provision for credit losses related to the community bank and student loan portfolio sales, along with a decrease in commercial finance provision expense. Also see Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

### **Noninterest Income**

Noninterest income increased by $22.9 million, or 8%, to $293.8 million for fiscal 2022 from $270.9 million for fiscal 2021. The increase in noninterest income was primarily driven by gain on sale of trademarks, partially offset by loss on sale of other and a reduction in other income.

Within payment card and deposit fee income, the Company recognized $6.4 million from servicing fee income on off-balance sheet deposits during the fiscal year ended September 30, 2022. The amount of servicing fee income recognized during the prior period was not significant.

### **Noninterest Expense**

Noninterest expense increased by $41.6 million, or 12%, to $385.3 million for fiscal 2022 from $343.7 million for fiscal 2021. This increase in noninterest expense was primarily driven by an increase in compensation expense of $20.0 million, in card processing expense of $11.6 million, and in legal and consulting expense of $9.3 million.

62

The card processing expense increase was due to structured agreements with banking as a service ('BaaS') partners. The amount of expense paid under those agreements is based on an agreed upon rate index that varies depending on the deposit levels, floor rates, market conditions, and other performance conditions. Generally this rate index averages between 50% to 85% of the EFFR and reprices immediately upon a change in the EFFR. Approximately 37% of the deposit portfolio was subject to these higher card processing expenses. For the fiscal year ended September 30, 2022, card processing expenses related to these structured agreements were $9.9 million, as compared to $0.4 million for the fiscal year ended September 30, 2021.

#### **Income Tax Expense**

The Company recorded an income tax expense of $28.0 million for fiscal 2022, resulting in an effective tax rate of 15.2%, compared to an income tax expense of $10.7 million and an effective tax rate of 7.0%, in fiscal 2021. The increase in recorded income tax expense during the period was primarily due to a decrease in the investment tax credit. For the fiscal year ended September 30, 2022, the Company originated $62.8 million in solar leases, compared to $101.1 million for the comparable prior year period. The timing and impact of future solar tax credits are expected to vary from period to period, and the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.

#### **Comparison of Operating Results for the Fiscal Years Ended September 30, 2021, and September 30, 2020**

A comparison of the 2021 results to the 2020 results and other 2020 information not included herein can be found in the Company's Annual Report on Form 10-K: Part II, Item 7, 'Management's Discussion and Analysis of Financial Condition and Results of Operations' filed November 23, 2021 and is incorporated by reference herein.

#### **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 charged-off when collection of principal becomes doubtful. Generally, this is associated with a delay or shortfall in payments of greater than 210 days for insurance premium finance, 180 days for tax and other specialty lending loans, 120 days for consumer credit products and 90 days for other loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year. Nonaccrual loans and troubled debt restructurings are generally considered impaired.

The Company believes that the level of allowance for credit losses at September 30, 2022 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.

63

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

| (Dollars in thousands) | September 30, 2022 | September 30, 2021 |
| --- | --- | --- |
| Nonperforming Loans and Leases |  |  |
| Nonaccruing loans and leases: |  |  |
| Commercial finance | $13,375 | $19,330 |
| Community banking | - | 14,915 |
| Total nonaccruing loans and leases | 13,375 | 34,245 |
| Accruing loans and leases delinquent 90 days or more: |  |  |
| Commercial finance | 4,142 | 12,489 |
| Consumer finance | 2,793 | 1,236 |
| Tax services (1) | 8,873 | 7,962 |
| Total accruing loans and leases delinquent 90 days or more | 15,808 | 21,687 |
| Total nonperforming loans and leases | 29,183 | 55,932 |
| Other Assets |  |  |
| Nonperforming operating leases | 1,736 | 3,824 |
| Foreclosed and repossessed assets: |  |  |
| Commercial finance | 1 | 2,077 |
| Total foreclosed and repossessed assets | 1 | 2,077 |
| Total other assets | 1,737 | 5,901 |
| Total nonperforming assets | $30,920 | $61,833 |
| Total as a percentage of total assets | 0.46% | 0.92% |

$^{(1)}$ Certain tax services loans do not bear interest.

At September 30, 2022, nonperforming loans and leases totaled $29.2 million, representing 0.82% of total loans and leases, compared to $55.9 million, or 1.52% of total loans and leases at September 30, 2021.

**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 September 30, 2022, the Company had classified loans and leases of $203.7 million as substandard, $4.0 million as doubtful and none as loss. At September 30, 2021, the Company classified loans and leases of $264.2 million as substandard, $12.1 million as doubtful and none as loss.

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**Allowance for Credit Losses.** The ACL represents management's estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the 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 $45.9 million at September 30, 2022, a decrease compared to $68.3 million at September 30, 2021. The $22.3 million year-over-year decrease in the ACL was primarily driven by a $12.3 million decrease attributable to the disposition of the community banking portfolio, along with a $5.9 million decrease in the consumer finance portfolio and a $4.1 million decrease in the commercial finance portfolio.

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

|  | As of the Period Ended |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | September 30, 2022 | June 30, 2022 | March 31, 2022 | December 31, 2021 | September 30, 2021 |
| Commercial finance | 1.46% | 1.56% | 1.66% | 2.04% | 1.77% |
| Consumer finance | 0.86% | 2.44% | 3.18% | 2.70% | 2.91% |
| Tax services | 0.05% | 54.29% | 35.76% | 1.60% | 0.02% |
| Warehouse finance | 0.10% | 0.10% | 0.10% | 0.10% | 0.10% |
| Community banking | - % | - % | - % | - % | 6.16% |
| Total loans and leases | 1.30% | 2.04% | 2.38% | 1.84% | 1.89% |
| Total loans and leases excluding tax services | 1.30% | 1.44% | 1.59% | 1.84% | 1.89% |

The Company's ACL as a percentage of total loans and leases decreased to 1.30% at September 30, 2022 from 2.04% at June 30, 2022. The decrease in the total loans and leases coverage ratio was primarily driven by the seasonal tax services loan portfolio, along with a decrease in the coverage ratio for both the commercial and consumer finance portfolios. The decrease in the consumer finance portfolio coverage ratio was attributable to the sale of the student loan portfolio. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.

## 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 described below as Critical Accounting Estimates 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.

### Allowance for Credit Losses

The Company's allowance for credit losses methodology estimates expected credit losses over the life of each financial asset as of the balance sheet date.

For the loan and lease portfolio, the Company measures credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs if collateral dependent or based on the present value of expected future cash flows discounted at the loan or lease initial effective interest rate if not collateral dependent. The majority of the Company's loans and leases subject to individual evaluation are considered collateral dependent. Only loans and leases that are on nonaccrual status or are designated as a TDR are subject to individual evaluation. Management has also identified certain structured finance credits for alternative energy projects in which a substantial cash collateral account has been established to mitigate credit risk. Due to the nature of the

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transactions and significant cash collateral positions, these credits are evaluated individually. All other loans and leases are evaluated collectively for credit loss by pooling loans and leases based on similar risk characteristics. The collective evaluation of expected losses in all commercial finance portfolios is based on a cohort loss rate and adjustments for forward-looking information, including industry and macroeconomic forecasts. The cohort loss rate is a life of loan loss rate that immediately reverts to historical loss information for the remaining maturity of the financial asset. Management has elected to use a twelve-month reasonable and supportable forecast for forward-looking information. Factors utilized in the determination of the allowance include historical loss experience, current and forecasted economic conditions, and measurement date credit characteristics such as product type, delinquency, and industry. The unfunded credit commitments depend on these same factors, as well as estimates of lines of credit usage. The collective evaluation of expected credit losses for certain consumer lending portfolios utilize different methodologies when estimating expected credit losses. The Company's student loan portfolio utilizes a roll-rate historical loss rate and adjustments for forward-looking information, including macroeconomic conditions. Management has elected to use a twelve-month reasonable and supportable forecast with an immediate reversion to historical loss rates. Factors utilized in the determination of the allowance include historical loss experience, current and forecasted economic conditions, and measurement date credit characteristics including delinquency.

Investment debt securities held to maturity include implicit and explicit guarantees by government agencies and have an expected zero risk of loss, therefore no provision for credit loss for debt securities held to maturity has been included in the Company's Consolidated Statement of Operations. Investment debt securities available for sale are recorded at fair value and are assessed quarterly for credit loss. Any such credit loss is recorded in the Company's Provision for Credit Loss on the Company's Consolidated Statement of Operations. Non-credit related losses are recorded in Other Comprehensive Income in the Company's Consolidated Statement of Condition.

Although management believes the levels of the allowance for credit losses at September 30, 2022 and September 30, 2021 are adequate to absorb expected credit losses in the financial assets evaluated, a decline in local economic conditions or other factors could result in increasing losses.

#### **Goodwill and Intangible Assets**

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, *Business Combinations*. Under the acquisition method, the Company records assets acquired, including identifiable intangible assets, liabilities assumed, and any non-controlling interest in the acquired business at their fair values as of the acquisition date. Any acquisition-related transaction costs are expensed in the period incurred. Results of operations of the acquired entity are included in the Consolidated Statements of Operations from the date of acquisition. Any measurement-period adjustments are recorded in the period the adjustment is identified.

The excess of consideration paid over the fair value of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired, including identifiable intangible assets, liabilities assumed, and any noncontrolling interest often requires the use of significant estimates and assumptions. This may involve estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques such as estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. In addition, the determination of the useful lives over which an intangible asset will be amortized is subjective. See Note 8. Goodwill and Intangibles to the Consolidated Financial Statements for further information.

#### **LIQUIDITY AND CAPITAL RESOURCES**

The Company's primary sources of funds are deposits, derived principally through its BaaS business line, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities. In addition, the Company utilizes wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and early loan repayments are influenced by the level of interest rates, general economic conditions and competition. The Company uses its capital resources principally to meet ongoing commitments to fund maturing certificates of deposit and loan commitments, to maintain liquidity, and to meet operating expenses.

The Bank is required by regulation to maintain sufficient liquidity to assure its safe and sound operation. In the opinion of management, the Bank is in compliance with this requirement.

Liquidity management is both a daily and long-term function of the Company's management strategy. The Company adjusts its investments in liquid assets based upon management's assessment of (i) expected loan demand, (ii) the

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projected availability of purchased loan products, (iii) expected deposit flows, (iv) yields available on interest-bearing deposits and (v) the objectives of its asset/liability management program. Excess liquidity is generally invested in interest-earning overnight deposits and other short-term government agency or instrumentality obligations. If the Company requires funds beyond its ability to generate them internally, it has additional borrowing capacity with the FHLB and other wholesale funding sources. The Company is not aware of any facts that would be reasonably likely to have a material adverse impact on the Company's liquidity or its ability to borrow additional funds.

The primary investing activities of the Company are the origination of loans and leases and the purchase of securities. During the fiscal years ended September 30, 2022, 2021 and 2020, the Company originated loans and leases totaling $14.98 billion, $12.62 billion and $9.79 billion, respectively. Purchases of loans and leases totaled $115.4 million, $311.3 million, and $151.4 million during the fiscal years ended September 30, 2022, 2021 and 2020. During the fiscal years ended September 30, 2022, 2021 and 2020, the Company purchased MBS and other securities in the amount of $907.4 million, $1.04 billion and $229.3 million, respectively. Of these purchases, there were no securities designated as held to maturity in fiscal 2022, 2021 and 2020.

At September 30, 2022, the Company had unfunded loan and lease commitments of $1.27 billion. Certificates of deposit scheduled to mature in one year or less at September 30, 2022 totaled $5.9 million, of which $0.1 million were wholesale time deposits and $5.8 million were non-wholesale time deposits. Management believes that loan repayment and other sources of funds will be adequate to meet the Company's foreseeable short- and long-term liquidity needs.

The following table summarizes the Company's significant contractual obligations at September 30, 2022.

| (Dollars in thousands) | Total | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | More Than 5 Years |
| --- | --- | --- | --- | --- | --- |
| Time deposits | $7,655 | $5,848 | $1,807 | $ - | $ - |
| Wholesale time deposits | 99 | 99 | - | - | - |
| Long-term debt | 36,028 | 603 | 1,764 | - | 33,661 |
| Operating leases | 36,503 | 3,946 | 7,631 | 6,287 | 18,639 |
| Total | $80,285 | $10,496 | $11,202 | $6,287 | $52,300 |

During July 2001, the Company's unconsolidated trust subsidiary, First Midwest Financial Capital Trust I, sold $10.3 million in floating-rate cumulative preferred securities. Proceeds from the sale were used to purchase trust preferred securities of the Company, which mature in 2031, and are redeemable at any time after five years. The capital securities are required to be redeemed on July 25, 2031; however, the Company has the option to redeem them earlier.

On May 15, 2022, the Company retired the outstanding $75.0 million of its 5.75% fixed-to-floating rate subordinated debentures due August 15, 2026. On September 23, 2022, the Company completed a private placement of $20.0 million of its 6.625% fixed-to-floating rate subordinated debentures due 2032 to certain qualified institutional buyers and accredited investors. These notes will mature on September 30, 2032, unless earlier redeemed. Beginning on September 30, 2027, the notes may be redeemed, in whole or in part, at the Company's option subject to regulatory approval, on any scheduled interest payment date. Prior to September 30, 2027, the notes may be redeemed, in whole but not in part, at any time upon certain other specified events. The Company has used and intends to continue to use the net proceeds of the offering for general corporate purposes and repurchases of the Company's common stock.

Through the Crestmark Acquisition, consummated in the fourth quarter of fiscal 2018, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the company. The subordinated debentures bear interest at LIBOR plus 3.00%, have a stated maturity of 30 years and are redeemable by the Company at par, with regulatory approval. See Note 8 to the 'Notes to Consolidated Financial Statements,' which is included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

The Company and the Bank met regulatory requirements for classification as well-capitalized institutions at September 30, 2022. Based on current and expected continued profitability and subject to continued access to capital markets, management believes that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. See Note 15 to the 'Notes to Consolidated Financial Statements,' which is included in Part II, Item 8 'Financial Statements and Supplementary Data' of this Annual Report on Form 10-K.

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The payment of dividends and repurchase of shares have the effect of reducing stockholders' equity. Prior to authorizing such transactions, the Board of Directors considers the effect the dividend or repurchase of shares would have on liquidity and regulatory capital ratios. On August 16, 2022, the Inflation Reduction Act of 2022 ('IRA') was signed into law. The IRA imposes a 1% excise tax on net repurchases of stock by certain publicly traded corporations, including the Company. The excise tax is imposed on the value of net stock repurchased or treated as repurchased and will apply to stock repurchases occurring after December 31, 2022.

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

#### **Impact of New Accounting Standards**

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

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## Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

The Company derives a portion of its income from the excess of interest collected over interest paid. The rates of interest the Company earns on assets and pays on liabilities generally are established contractually for a period of time. Market interest rates change over time. Accordingly, the Company's results of operations, like those of most financial institutions, are impacted by changes in interest rates and the interest rate sensitivity of its assets and liabilities. The risk associated with changes in interest rates and the Company's ability to adapt to these changes is known as interest rate risk and is the Company's only significant 'market' risk.

The Company monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and risk policies established by the Board of Directors, and in order to preserve stockholder value. In monitoring interest rate risk, the Company analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency, maturity date and likelihood of prepayment.

The Company's primary objective for its investment portfolio is to provide a source of liquidity for the Company. In addition, the investment portfolio may be used in the management of the Company's interest rate risk profile. The investment policy generally calls for funds to be invested among various categories of security types and maturities based upon the Company's need for liquidity, desire to achieve a proper balance between minimizing risk while maximizing yield, the need to provide collateral for borrowings, and the need to fulfill the Company's asset/liability management goals.

The Company believes that its growing portfolio of longer duration, low-cost deposits generated from its BaaS business line provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest rate environment than it would otherwise have without this portfolio. This risk is due to the fact that, while asset yields may decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with these deposits, which thereby compress the Company's net interest margin.

A portion of the Company's deposit balances are subject to variable card processing expenses, derived from contractual agreements with certain BaaS partners tied to a rate index, typically the EFFR. These costs reprice immediately upon a change in the application rate index.

The Bank, acting as custodian of cardholder funds, places a portion of such cardholder funds at one or more third-party banks insured by the FDIC (each, a 'Program Bank'). These custodial deposits earn recordkeeping service fee income, typically reflective of the EFFR.

The Board of Directors and relevant government regulations establish limits on the level of acceptable interest rate risk at the Company, to which management adheres. There can be no assurance, however, that, in the event of an adverse change in interest rates, the Company's efforts to limit interest rate risk will be successful.

### Interest Rate Risk ('IRR')

*Overview.* The Company actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The Company's interest rate risk analysis is designed to compare income and economic valuation simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as well as the slope of the yield curve. This analysis may not represent all impacts driven by changes in the interest rate environment. The Company does not currently engage in trading activities to control interest rate risk although it may do so in the future, if deemed necessary, to help manage interest rate risk.

*Earnings at risk and economic value analysis.* As a continuing part of its financial strategy, the Bank considers methods of managing an asset/liability mismatch consistent with maintaining acceptable levels of net interest income. In order to monitor interest rate risk, the Company has created an Asset/Liability Committee whose principal responsibilities are to assess the Bank's asset/liability mix and implement strategies that will enhance income while managing the Bank's vulnerability to changes in interest rates.

The Company uses two approaches to model interest rate risk: Earnings at Risk ('EAR analysis') and Economic Value of Equity ('EVE analysis'). Under EAR analysis, net interest income is calculated for each interest rate scenario and compared to the net interest income forecast in the base case. EAR analysis measures the sensitivity of interest-sensitive earnings over a one-year minimum time horizon. The results are affected by projected rates, prepayments, caps and floors. Management exercises its best judgment in making assumptions regarding events that management can influence, such as non-contractual deposit re-pricing, as well as events outside of management's control, such as customer behavior on loan and deposit activity and the effect that competition has

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on both lending and deposit pricing. These assumptions are subjective and, as a result, net interest income simulation results will differ from actual results due to the timing, magnitude, and frequency of interest rate changes, changes in market conditions, customer behavior and management strategies, among other factors. The Company performs various sensitivity analyses on assumptions of deposit attrition, loan prepayments, and asset re-pricing, as well as market-implied forward rates and various likely and extreme interest rate scenarios, including rapid and gradual interest rate ramps, rate shocks and yield curve twists.

The EAR analysis used in the following table reflects the required analysis used no less than quarterly by management. It models basis point parallel shifts in market interest rates over the next one-year period. The following table shows the results of the scenarios as of September 30, 2022 and 2021:

#### Net Sensitive Earnings at Risk

| (Dollars in thousands) | Book Value | Change in Interest Income/Expense for a given change in interest rates |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- |
|  |  | Over / (Under) Base Case Parallel Shift |  |  |  |  |  |
|  |  | -100 | Base | +100 | +200 | +300 | +400 |
| Balances as of September 30, 2022 |  |  |  |  |  |  |  |
| Total interest-sensitive income | 5,866,763 | 314,229 | 337,945 | 361,442 | 384,921 | 408,263 | 431,850 |
| Total interest-sensitive expense | 221,302 | 323 | 752 | 1,821 | 2,904 | 4,017 | 5,149 |
| Net interest-sensitive income |  | 313,906 | 337,193 | 359,621 | 382,017 | 404,246 | 426,701 |
| Percentage change from base |  | -6.9% | -% | 6.7% | 13.3% | 19.9% | 26.5% |
| Balances as of September 30, 2021 |  |  |  |  |  |  |  |
| Total interest-sensitive income | 5,880,667 | 263,269 | 277,479 | 302,440 | 327,277 | 352,428 | 377,750 |
| Total interest-sensitive expense | 501,932 | 603 | 770 | 1,958 | 3,178 | 4,426 | 5,698 |
| Net interest-sensitive income |  | 262,666 | 276,709 | 300,482 | 324,099 | 348,002 | 372,052 |
| Percentage change from base |  | -5.1% | -% | 8.6% | 17.1% | 25.8% | 34.5% |

The EAR analysis reported at September 30, 2022, shows that total interest-sensitive income will change more rapidly than total interest-sensitive expense over the next year. IRR is a snapshot in time. The Company's business and deposits are predictably cyclical on a weekly, monthly and yearly basis. The Company's static IRR results could vary depending on which day of the week the month ends, primarily related to payroll processing and timing of when certain programs are prefunded and when the funds are received.

Under EVE analysis, the economic value of financial assets, liabilities and off-balance sheet instruments is derived under each rate scenario. The economic value of equity is calculated as the difference between the estimated market value of assets and liabilities, net of the impact of off-balance sheet instruments.

The EVE analysis used in the following table reflects the required analysis used no less than quarterly by management. It models immediate basis point parallel shifts in market interest rates. The following table shows the results of the scenario as of September 30, 2022 and 2021:

#### Economic Value Sensitivity

|  | Standard (Parallel Shift) |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Economic Value of Equity at Risk % |  |  |  |  |
|  | -100 | +100 | +200 | +300 | +400 |
| Balances as of September 30, 2022 |  |  |  |  |  |
| Percentage change from base | -3.8% | 2.9% | 5.3% | 7.3% | 9.6% |
| Balances as of September 30, 2021 |  |  |  |  |  |
| Percentage change from base | -12.9% | 8.4% | 14.5% | 19.5% | 24.6% |

The EVE at risk reported at September 30, 2022 shows that the economic value of equity position is expected to benefit from rising interest rates due to the large amount of noninterest-bearing funding.

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**Item 8. Financial Statements and Supplementary Data.**

**Table of Contents**

Report of Independent Registered Public Accounting Firm

**Consolidated Financial Statements**

- Statements of Financial Condition
- Statements of Operations
- Statements of Comprehensive Income
- Statements of Changes in Stockholders' Equity
- Statements of Cash Flows
- Notes to Consolidated Financial Statements

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# REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Stockholders and the Board of Directors of Pathward Financial, Inc.

## Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial condition of Pathward Financial, Inc. (formerly known as Meta Financial Group, Inc.) and Subsidiaries (the 'Company') as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the years in the three-year period ended September 30, 2022, and the related notes (collectively referred to as the 'financial statements'). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ('PCAOB'), the Company's internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated November 22, 2022 expressed an adverse opinion.

## Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses effective October 1, 2020 due to the adoption of Financial Accounting Standards Board's Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below.

## Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

## Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses (ACL) - Qualitative Adjustments

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As described in Notes 1 and 4 to the financial statements, the Company adopted ASC 326 as of October 1, 2020, which, among other things, required the Company to recognize expected credit losses over the contractual lives of financial assets carried at amortized cost, including loans receivable, utilizing the Current Expected Credit Losses (“CECL”) methodology. Estimates of expected credit losses are based on relevant information about current conditions, past events, and reasonable and supportable forward-looking forecasts regarding collectability of the reported amounts. For most of its loan segments, the Company utilized a cohort model which computes the historical life-of-loan loss rate for each identified loan segment (also referred to as the “quantitative loss rates”). The quantitative loss rates are then adjusted, as deemed necessary, based on current economic forecasts over a twelve-month reasonable and supportable forecast period as well as for measurement date credit characteristics including problem loan and delinquency trends, portfolio growth and other factors (also referred to as the “qualitative adjustments”).

We have identified auditing the qualitative adjustments as a critical audit matter as management’s determination of the qualitative adjustments used in the ACL is subjective and involves significant management judgements; and our audit procedures related to the qualitative adjustments involved a high degree of auditor judgment and required significant audit effort, including the need to involve more experienced audit personnel.

The primary procedures we performed to address this critical audit matter included:

- • Testing the effectiveness of controls over the qualitative adjustments used in the ACL calculation including controls addressing:
  - • Testing the design and operating effectiveness of controls pertaining to the key assumptions and judgments applied in the development of the qualitative adjustments.
  - • Testing the design and operating effectiveness of the controls around the mathematical accuracy of the qualitative adjustments applied to the loan segments in the ACL calculation.
- • Substantively testing management’s determination of the qualitative adjustments used in the ACL estimate, including evaluating their judgements and assumptions, including:
  - • Testing management’s process for developing the qualitative adjustments and assessing the reasonableness, relevance and reliability of data used to develop the adjustments, including evaluating their judgments and assumptions for reasonableness. Among other procedures, our evaluation considered evidence from internal and external sources, loan portfolio performance and whether such assumptions were applied consistently from period to period.
  - • Analytically evaluating the qualitative adjustments for directional consistency.
  - • Testing the qualitative adjustments for reasonableness, including evaluating significant changes.
  - • Testing the mathematical accuracy of the qualitative adjustments applied to the loan segments in the ACL calculation.

/s/ Crowe LLP

We have served as the Company’s auditor since 2018.

South Bend, Indiana November 22, 2022

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# **PATHWARD FINANCIAL, INC. AND SUBSIDIARIES**  
 **Consolidated Statements of Financial Condition**

(Dollars in thousands, except per share data)

| ASSETS | September 30, 2022 | September 30, 2021 |
| --- | --- | --- |
| Cash and cash equivalents | $388,038 | $314,019 |
| Securities available for sale, at fair value | 1,882,869 | 1,864,899 |
| Securities held to maturity, at amortized cost (fair value $38,171 and $56,391, respectively) | 41,682 | 56,669 |
| Federal Reserve Bank and Federal Home Loan Bank Stock, at cost | 28,812 | 28,400 |
| Loans held for sale | 21,071 | 56,194 |
| Loans and leases | 3,536,305 | 3,609,563 |
| Allowance for credit losses | (45,947) | (68,281) |
| Accrued interest receivable | 17,979 | 16,254 |
| Premises, furniture, and equipment, net | 41,710 | 44,888 |
| Rental equipment, net | 204,371 | 213,116 |
| Goodwill and intangible assets | 335,196 | 342,653 |
| Other assets | 295,324 | 212,276 |
| Total assets | $6,747,410 | $6,690,650 |

# **LIABILITIES AND STOCKHOLDERS' EQUITY**

| LIABILITIES |  |  |
| --- | --- | --- |
| Deposits | $5,866,037 | $5,514,971 |
| Long-term borrowings | 36,028 | 92,834 |
| Accrued expenses and other liabilities | 200,205 | 210,961 |
| Total liabilities | 6,102,270 | 5,818,766 |

# **STOCKHOLDERS' EQUITY**

| Preferred stock, 3,000,000 shares authorized, no shares issued, none outstanding at September 30, 2022 and 2021, respectively | - | - |
| --- | --- | --- |
| Common stock, $0.01 par value; 90,000,000 shares authorized, 28,878,177 and 31,686,483 shares issued, 28,788,124 and 31,669,952 shares outstanding at September 30, 2022 and 2021, respectively | 288 | 317 |
| Common stock, Nonvoting, $0.01 par value; 3,000,000 shares authorized, no shares issued, none outstanding at September 30, 2022 and 2021, respectively | - | - |
| Additional paid-in capital | 617,403 | 604,484 |
| Retained earnings | 245,394 | 259,189 |
| Accumulated other comprehensive income (loss) | (213,080) | 7,599 |
| Treasury stock, at cost, 90,053 and 16,531 common shares at September 30, 2022 and 2021, respectively | (4,835) | (860) |
| Total equity attributable to parent | 645,170 | 870,729 |
| Noncontrolling interest | (30) | 1,155 |
| Total stockholders' equity | 645,140 | 871,884 |
| Total liabilities and stockholders' equity | $6,747,410 | $6,690,650 |

See Notes to Consolidated Financial Statements.

74

# **PATHWARD FINANCIAL, INC. AND SUBSIDIARIES**  
 **Consolidated Statements of Operations**

| (Dollars in thousands, except per share data) | Fiscal Year Ended September 30, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Interest and dividend income: |  |  |  |
| Loans and leases, including fees | $268,078 | $256,080 | $261,128 |
| Mortgage-backed securities | 26,846 | 12,155 | 9,028 |
| Other investments | 17,272 | 17,619 | 22,685 |
|  | 312,196 | 285,854 | 292,841 |
| Interest expense: |  |  |  |
| Deposits | 500 | 1,593 | 22,616 |
| FHLB advances and other borrowings | 4,372 | 5,270 | 11,187 |
|  | 4,872 | 6,863 | 33,803 |
| Net interest income | 307,324 | 278,991 | 259,038 |
| Provision for credit losses | 28,538 | 49,766 | 64,776 |
| Net interest income after provision for credit losses | 278,786 | 229,225 | 194,262 |
| Noninterest income: |  |  |  |
| Refund transfer product fees | 39,809 | 37,967 | 36,061 |
| Refund advance fee income | 40,557 | 47,639 | 31,826 |
| Payments card and deposit fees | 104,684 | 107,182 | 87,379 |
| Other bank and deposit fees | 1,049 | 939 | 1,310 |
| Rental income | 46,558 | 39,416 | 44,826 |
| Gain (loss) on sale of securities | (1,287) | 6 | 51 |
| Gain on divestitures | - | - | 19,275 |
| Gain on sale of trademarks | 50,000 | - | - |
| Gain (loss) on sale of other | (4,920) | 11,515 | 4,425 |
| Other income | 17,357 | 26,240 | 14,641 |
| Total noninterest income | 293,807 | 270,904 | 239,794 |
| Noninterest expense: |  |  |  |
| Compensation and benefits | 171,126 | 151,090 | 136,247 |
| Refund transfer product expense | 8,908 | 11,861 | 7,644 |
| Refund advance expense | 2,157 | 2,564 | 2,723 |
| Card processing | 38,785 | 27,201 | 25,956 |
| Occupancy and equipment expense | 34,909 | 29,269 | 26,995 |
| Operating lease equipment depreciation | 35,636 | 30,987 | 32,831 |
| Legal and consulting | 40,634 | 31,341 | 20,858 |
| Intangible amortization | 6,585 | 8,545 | 10,997 |
| Impairment expense | 670 | 2,818 | 1,982 |
| Other expense | 45,865 | 48,007 | 52,818 |
| Total noninterest expense | 385,275 | 343,683 | 319,051 |
| Income before income tax expense | 187,318 | 156,446 | 115,005 |
| Income tax expense | 27,964 | 10,701 | 5,661 |
| Net income before noncontrolling interest | 159,354 | 145,745 | 109,344 |
| Net income attributable to noncontrolling interest | 2,968 | 4,037 | 4,624 |
| Net income attributable to parent | $156,386 | $141,708 | $104,720 |
| Earnings per common share: |  |  |  |
| Basic | $5.26 | $4.38 | $2.94 |
| Diluted | $5.26 | $4.38 | $2.94 |

See Notes to Consolidated Financial Statements.

75

# **PATHWARD FINANCIAL, INC. AND SUBSIDIARIES**  
 **Consolidated Statements of Comprehensive Income (Loss)**

|  | Fiscal Year Ended September 30, |  |  |
| --- | --- | --- | --- |
| (Dollars in thousands) | 2022 | 2021 | 2020 |
| Net income before noncontrolling interest | $159,354 | $145,745 | $109,344 |
| Other comprehensive income (loss): |  |  |  |
| Change in net unrealized gain (loss) on debt securities | (293,952) | (13,896) | 15,164 |
| Net loss (gain) realized on investment securities | 1,287 | (6) | (51) |
|  | (292,665) | (13,902) | 15,113 |
| Unrealized gain (loss) on currency translation | (1,736) | 476 | (101) |
| Deferred income tax effect | (73,722) | (3,483) | 3,809 |
| Total other comprehensive income (loss) | (220,679) | (9,943) | 11,203 |
| Total comprehensive income (loss) | (61,325) | 135,802 | 120,547 |
| Total comprehensive income attributable to noncontrolling interest | 2,968 | 4,037 | 4,624 |
| Comprehensive income (loss) attributable to parent | $(64,293) | $131,765 | $115,923 |

See Notes to Consolidated Financial Statements.

76

# **PATHWARD FINANCIAL, INC. AND SUBSIDIARIES**
**Consolidated Statements of Changes in Stockholders' Equity**

| (Dollars in thousands, except per share data) | Pathward Financial, Inc. |  |  |  |  |  | Noncontrolling interest | Total Stockholders' Equity |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total Pathward Financial Stockholders' Equity |  |  |
| Balance, September 30, 2019 | $378 | $580,826 | $252,813 | $6,339 | $(445) | $839,911 | $4,047 | $843,958 |
| Cash dividends declared on common stock ($0.20 per share) | - | - | (7,100) | - | - | (7,100) | - | (7,100) |
| Issuance of common stock due to exercise of stock options | 1 | 265 | - | - | - | 266 | - | 266 |
| Issuance of common stock due to restricted stock | 2 | - | - | - | - | 2 | - | 2 |
| Issuance of common stock due to ESOP | 1 | 3,219 | - | - | - | 3,220 | - | 3,220 |
| Repurchases of common stock | (38) | 38 | (115,506) | - | (3,232) | (118,738) | - | (118,738) |
| Stock compensation | - | 10,221 | - | - | - | 10,221 | - | 10,221 |
| Total other comprehensive income | - | - | - | 11,203 | - | 11,203 | - | 11,203 |
| Net income | - | - | 104,720 | - | - | 104,720 | 4,624 | 109,344 |
| Net investment by (distribution to) noncontrolling interests | - | - | - | - | - | - | (5,068) | (5,068) |
| Balance, September 30, 2020 | $344 | $594,569 | $234,927 | $17,542 | $(3,677) | $843,705 | $3,603 | $847,308 |
| Balance, September 30, 2020 | $344 | $594,569 | $234,927 | $17,542 | $(3,677) | $843,705 | $3,603 | $847,308 |
| Adoption of Accounting Standards Update 2016-13, net of income taxes | - | - | (8,351) | - | - | (8,351) | (2,452) | (10,803) |
| Cash dividends declared on common stock ($0.20 per share) | - | - | (6,400) | - | - | (6,400) | - | (6,400) |
| Issuance of common stock due to ESOP | 2 | 3,034 | - | - | - | 3,036 | - | 3,036 |
| Repurchases of common stock | (29) | 29 | (96,999) | - | (2,879) | (99,878) | - | (99,878) |
| Retirement of treasury stock | - | - | (5,696) | - | 5,696 | - | - | - |
| Stock compensation | - | 6,852 | - | - | - | 6,852 | - | 6,852 |
| Total other comprehensive loss | - | - | - | (9,943) | - | (9,943) | - | (9,943) |
| Net income | - | - | 141,708 | - | - | 141,708 | 4,037 | 145,745 |
| Net investment by (distribution to) noncontrolling interests | - | - | - | - | - | - | (4,033) | (4,033) |
| Balance, September 30, 2021 | $317 | $604,484 | $259,189 | $7,599 | $(860) | $870,729 | $1,155 | $871,884 |
| Balance, September 30, 2021 | $317 | $604,484 | $259,189 | $7,599 | $(860) | $870,729 | $1,155 | $871,884 |
| Cash dividends declared on common stock ($0.20 per share) | - | - | (5,921) | - | - | (5,921) | - | (5,921) |
| Issuance of common stock due to ESOP | 1 | 2,885 | - | - | - | 2,886 | - | 2,886 |
| Repurchases of common stock | (30) | 30 | (164,260) | - | (3,975) | (168,235) | - | (168,235) |
| Stock compensation | - | 10,004 | - | - | - | 10,004 | - | 10,004 |
| Total other comprehensive income (loss) | - | - | - | (220,679) | - | (220,679) | - | (220,679) |
| Net income | - | - | 156,386 | - | - | 156,386 | 2,968 | 159,354 |
| Net investment by (distribution to) noncontrolling interests | - | - | - | - | - | - | (4,153) | (4,153) |
| Balance, September 30, 2022 | $288 | $617,403 | $245,394 | $(213,080) | $(4,835) | $645,170 | $(30) | $645,140 |

See Notes to Consolidated Financial Statements.

77

# **PATHWARD FINANCIAL, INC. AND SUBSIDIARIES**  
 **Consolidated Statements of Cash Flows**

|  | Fiscal Year Ended September 30, |  |  |
| --- | --- | --- | --- |
| (Dollars in thousands) | 2022 | 2021 | 2020 |
| Cash flows from operating activities: |  |  |  |
| Net income before noncontrolling interest | $159,354 | $145,745 | $109,344 |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |
| Depreciation, amortization and accretion, net | 61,601 | 59,047 | 60,745 |
| Provision for credit losses | 28,538 | 49,766 | 64,776 |
| Provision (reversal of) for deferred taxes | 17,587 | (1,639) | (2,347) |
| Originations of loans held for sale | (985,330) | (601,481) | (98,798) |
| Proceeds from sales of loans held for sale | 1,059,361 | 890,340 | 319,123 |
| Net change in loans held for sale | 12,819 | 588 | 22,855 |
| Fair value adjustment of foreclosed real estate | 301 | 591 | 568 |
| Net realized (gain) on securities available for sale, net | (154) | (6) | (51) |
| Net realized (gain) loss on loans held for sale | 3,694 | (8,610) | (5,389) |
| Net realized loss on premise, furniture, and equipment | 55 | - | - |
| Net realized (gain) on lease receivables and equipment | (3,397) | (2,257) | (4,335) |
| Net realized (gain) on foreclosed real estate and repossessed assets | - | (4) | 4,960 |
| Net realized (gain) on divestitures | - | - | (19,275) |
| Net realized (gain) on trademarks | (50,000) | - | - |
| Net realized (gain) loss on other assets | 1,441 | 28 | 361 |
| Change in bank-owned life insurance value | (2,434) | (2,434) | (2,488) |
| Impairment on rental equipment | - | - | 447 |
| Impairment of intangibles | 670 | - | - |
| Impairment on assets held for sale | - | - | 242 |
| Net change in accrued interest receivable | (1,725) | 374 | 2,050 |
| Net change in other assets | (32,936) | 825 | 1,524 |
| Net change in deposits held for sale | - | - | 1,535 |
| Net change in accrued expenses and other liabilities | (10,640) | 43,920 | 1,152 |
| Stock compensation | 10,004 | 6,852 | 10,221 |
| Net cash provided by operating activities | 268,809 | 581,645 | 467,220 |
| Cash flows from investing activities: |  |  |  |
| Purchases of securities available for sale | (907,361) | (1,041,768) | (229,326) |
| Proceeds from sales of securities available for sale | 265,951 | 50,468 | 4,904 |
| Proceeds from maturities of and principal collected on securities available for sale | 324,234 | 371,898 | 237,254 |
| Proceeds from maturities of and principal collected on securities held to maturity | 14,281 | 34,268 | 40,017 |
| Purchases of Federal Reserve Bank and Federal Home Loan Bank stock | (173,653) | (1,296) | (472,000) |
| Redemption of Federal Reserve Bank and Federal Home Loan Bank stock | 173,240 | 34 | 475,778 |
| Purchases of loans and leases | (115,353) | (311,332) | (151,435) |
| Proceeds from sales of loans and leases | 123,241 | 13,850 | 9,991 |
| Net change in loans and leases | 358,635 | (196,356) | (100,508) |
| Purchases of premises, furniture, and equipment | (8,177) | (12,961) | (12,266) |
| Proceeds from sales of premises, furniture, and equipment | 35 | 86 | 107 |
| Purchases of rental equipment | (424,919) | (50,437) | (53,637) |
| Proceeds from sales of rental equipment | 9,372 | 16,822 | 14,692 |
| Net change in rental equipment | (5,772) | (630) | 2,623 |
| Proceeds from sales of foreclosed real estate and repossessed assets | 1,824 | 8,952 | 23,992 |
| Proceeds from divestitures | - | - | 3,498 |
| Proceeds from sale of trademarks | 50,000 | - | - |
| Proceeds from sale of other assets | 3,550 | - | - |
| Net cash (used in) investing activities | (310,872) | (1,118,402) | (206,316) |
| Cash flows from financing activities: |  |  |  |
| Net change in deposits | 351,066 | 535,771 | 931,128 |
| Net change in short-term borrowings | - | - | (756,019) |

78

| Redemption of long-term borrowings | (75,000) | - | - |
| --- | --- | --- | --- |
| Proceeds from long-term borrowings | 20,000 | - | - |
| Principal payments on capital lease obligations | (75) | (32) | (1,737) |
| Principal payments on other liabilities | (2,751) | (5,611) | (7,568) |
| Proceeds from other liabilities | - | 80 | 1,633 |
| Dividends paid on common stock | (5,921) | (6,400) | (7,100) |
| Issuance of common stock due to exercise of stock options | - | - | 266 |
| Issuance of common stock due to restricted stock | 1 | - | 2 |
| Issuance of common stock due to ESOP | 2,886 | 3,036 | 3,220 |
| Repurchases of common stock | (168,235) | (99,878) | (118,738) |
| Distributions to noncontrolling interest | (4,153) | (4,033) | (5,068) |
| Net cash provided by financing activities | 117,818 | 422,933 | 40,019 |
| Effect of exchange rate changes on cash | (1,736) | 476 | (101) |
| Net change in cash and cash equivalents | 74,019 | (113,348) | 300,822 |
| Cash and cash equivalents at beginning of fiscal year | 314,019 | 427,367 | 126,545 |
| Cash and cash equivalents at end of fiscal period | $388,038 | $314,019 | $427,367 |

|  | Fiscal Year Ended September 30, |  |  |
| --- | --- | --- | --- |
| (Dollars in thousands) | 2022 | 2021 | 2020 |
| Supplemental disclosure of cash flow information: |  |  |  |
| Cash paid during the period for: |  |  |  |
| Interest | $5,259 | $8,207 | $41,294 |
| Income taxes | 13,940 | 8,038 | 6,223 |
| Franchise taxes | 250 | 250 | 281 |
| Other taxes | 541 | 722 | 535 |
| Supplemental schedule of non-cash investing activities: |  |  |  |
| Transfers |  |  |  |
| Held for sale to loans and leases | 115,934 | 36,919 | - |
| Loans and leases to held for sale | 169,045 | 188,638 | 542,101 |
| Loans and leases to rental equipment | 3,893 | 28,604 | 2,134 |
| Loans and leases to foreclosed real estate and repossessed assets | $49 | $9 | $9,983 |
| Rental equipment to loan and leases | 400,148 | 24,324 | 8,924 |
| Rental equipment to foreclosed real estate and repossessed assets | - | 1,650 | - |
| Other assets to held for sale | - | - | 7,858 |
| Deposits to held for sale | - | - | 288,975 |
| Recognition of operating lease ROU assets, net of measurements | 117 | 12,954 | 28,666 |

See Notes to Consolidated Financial Statements.

79

## NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

### NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

#### PRINCIPLES OF CONSOLIDATION

The Consolidated Financial Statements include the accounts of Pathward Financial, Inc. ('Pathward Financial' or the 'Company' or 'us'), a registered bank holding company located in Sioux Falls, South Dakota, and its wholly-owned subsidiaries. The Company's subsidiaries include PathwardTM, National Association ('Pathward, N.A.' or 'Pathward' or 'the 'Bank'), a national bank whose primary federal regulator is the Office of the Comptroller of the Currency (the 'OCC'), and Pathward Venture Capital, LLC, a wholly-owned service corporation subsidiary of Pathward, N.A. which invests in companies in the financial services industry. All significant intercompany balances and transactions have been eliminated. The Company also owns 100% of First Midwest Financial Capital Trust I (the 'Trust'), which was formed in July 2001 for the purpose of issuing trust preferred securities, and Crestmark Capital Trust I, which was acquired from the Crestmark Acquisition in August 2018. The Trust and Crestmark Capital Trust I are not included in the Consolidated Financial Statements of the Company. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities ('VIEs') and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is included in the Consolidated Financial Statements.

#### Variable Interest Entities

VIEs are defined by contractual ownership or other interests that change with fluctuations in the VIE's net asset value. The primary beneficiary is the entity which has both: (1) the power to direct the activities of the VIE that most significantly impacts the VIE's economic performance, and (2) the obligation to absorb losses or receive benefits of the entity that could potentially be significant to the VIE. To determine whether or not a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of the Company's involvement with the VIE. Further, the Company assesses whether or not the Company is the primary beneficiary of a VIE on an ongoing basis.

Crestmark Capital Trust I qualifies as a VIE for which the Company is not the primary beneficiary. Consequently, the accounts of that entity are not consolidated in the Company's Financial Statements.

As a result of the Crestmark Acquisition, the Company acquired existing membership interests of five joint venture limited liability companies (the 'LLCs'). The Company holds 80% of the membership interests in each of the five LLC entities, which offer commercial lending and other financing arrangements. In connection with these LLCs, the Company exclusively provides funding for each entity's activities. The Company determined it is the primary beneficiary of all five LLCs as it has the managing power under the terms of each of the LLC operating agreements. Results of the five LLCs are reflected in the Company's September 30, 2022 Consolidated Financial Statements and are summarized below. The assets recognized as a result of consolidating the LLCs are the property of the LLCs and are not available for any other purpose.

| (Dollars in thousands) | At September 30, 2022 |
| --- | --- |
| Cash and cash equivalents | $604 |
| Loans and leases | 81,881 |
| Allowance for credit losses | (3,720) |
| Accrued interest receivable | 345 |
| Foreclosed real estate and repossessed assets, net | 1 |
| Other assets | 1,727 |
| Total assets | 80,838 |
| Accrued expenses and other liabilities | 1,280 |
| Noncontrolling interest | (30) |
| Net assets less noncontrolling assets | $79,588 |

80

Amounts for noncontrolling interests reflect the proportionate share of membership interest (equity) and net income attributable to the holders of minority membership interest in the following entities:

- Capital Equipment Solutions, LLC ("CES") - CES engages in the business of providing equipment financing term loans.
- CM Help, LLC - CM Help provides flexible patient loan programs to hospitals and patient clients of hospitals as a financing alternative for the self-pay and co-pay portions of patients' hospital expenses.
- CM Southgate II, LLC - CM Southgate II engages in the business of acquiring fleet leases and semi-trailer/ tractor loans and leases.
- CM Sterling, LLC - CM Sterling engages in asset based lending and factoring.
- CM TFS, LLC - CM TFS engages in the business of acquiring equipment financing term loans and leases.

# NATURE OF BUSINESS AND INDUSTRY SEGMENT INFORMATION

One of the Company's primary sources of revenue relates to payment processing services for prepaid debit cards, ATM sponsorship, tax refund transfer and other money transfer systems and services. Additionally, a significant source of revenue for the Company is interest from the purchase or origination of commercial finance loans, consumer finance loans, and warehouse finance loans. The Company accepts deposits from customers in the normal course of business on a national basis through its Payments and tax services divisions, and through wholesale funding. The Company operates in the banking industry, which accounts for the majority of its revenues and assets. The Company uses the "management approach" for reporting information about segments in annual and interim financial statements. The management approach is based on the way the chief operating decision-maker organizes segments within a company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure and any other manner in which management disaggregates a company. Based on the management approach model, the Company has determined that its business is comprised of three reporting segments. See Note 17. Segment Reporting for additional information on the Company's segment reporting.

# USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS

The preparation of Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Certain significant estimates include the valuation of residual values within lease receivables, allowance for credit losses, the valuation of goodwill and intangible assets and the fair values of securities and other financial instruments. These estimates are reviewed by management regularly; however, they are particularly susceptible to significant changes in the future.

# CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents is defined to include the Company's cash on hand and due from financial institutions and short-term interest-bearing deposits in other financial institutions. The Company reports cash flows net for customer loan transactions, securities purchased under agreement to resell, federal funds purchased, deposit transactions, securities sold under agreements to repurchase, and Federal Home Loan Bank ("FHLB") advances with terms less than 90 days. The Bank is required to maintain reserve balances in cash or on deposit with the FRB, based on a percentage of deposits. The total of those reserve balances was zero at September 30, 2022, and zero at September 30, 2021. The Company at times maintains balances in excess of insured limits at various financial institutions including the FHLB, the FRB and other private institutions. At September 30, 2022, the Company had $1.3 million interest-bearing deposits held at the FHLB and $294.4 million in interest-bearing deposits held at the FRB. The Company does not believe these instruments carry a significant risk of loss, but cannot provide assurances that no losses could occur if these institutions were to become insolvent.

81

## SECURITIES

GAAP requires that, at acquisition, an enterprise classify debt securities into one of three categories: Available for Sale ('AFS'), Held to Maturity ('HTM') or trading. AFS debt securities are carried at fair value on the Consolidated Statements of Financial Condition. Unrealized holding gains and losses due to risk of credit loss are recognized in earnings while unrealized holding gains and losses due to market conditions and other non-credit risk factors are excluded from earnings and recognized as a separate component of equity in accumulated other comprehensive income (loss) ('AOCI'). See Note 20. Fair Values of Financial Instruments for additional information on fair value of AFS debt securities. HTM debt securities are measured at amortized cost. The Company classifies the majority of its debt securities as AFS, which are those the Company may decide to sell if needed for liquidity, asset/liability management, or other reasons. Both AFS and HTM are subject to an allowance for credit loss. Pathward Financial did not hold trading securities at September 30, 2022 or 2021.

Gains and losses on the sale of securities are determined using the specific identification method based on amortized cost and are reflected in results of operations at the time of sale. Interest and dividend income, adjusted by amortization of purchase premium or discount using the level yield method, is included in income as earned. For callable debt securities, any purchase premium is amortized to the first call date while any discount is accreted over the contractual life of the security.

### Debt Securities Credit Losses

The Company evaluates HTM debt securities for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Consolidated Statements of Operations. The Company has concluded that its portfolio as of September 30, 2022 has a zero risk of credit loss due to the U.S. Government financial guarantees underlying the securities within the HTM portfolio and as a result has not recorded an allowance for credit loss.

The Company evaluates AFS debt securities for credit losses on a quarterly basis and records any such losses as a component of provision for credit losses in the Consolidated Statements of Operations. The Company has concluded that any unrealized holding losses in its portfolio as of September 30, 2022 are not related to credit loss and as a result has not recorded an allowance for credit loss. See Note 3. Securities for further information.

### Equity Investments

The Company holds marketable equity securities, which have readily determinable fair value, and include common equity and mutual funds. These securities are recorded at fair value with unrealized gains and losses, due to changes in fair value, reflected in earnings. Interest and dividend income from these securities is recognized in interest income. See Note 3. Securities for additional information on marketable equity securities.

The Company also holds non-marketable equity investments that are included in Other Assets in the Company's Consolidated Financial Statements. The Company generally accounts for these investments under the equity method or the provisions of Accounting Standards Codification ('ASC') 321. Equity Securities. Investments where the Company has significant influence, but not control, over the investee are accounted for under the equity method. Investments where the Company cannot exercise significant influence over the investee are measured at fair value, with changes in fair value recognized in earnings, unless those investments have no readily determinable fair value. Investments without readily determinable fair value are measured under the measurement alternative, which reflects cost less impairment, with adjustments in value resulting from observable price changes arising from orderly transactions of the same or a similar security from the same issuer ('measurement alternative investments').

The Company reviews for impairment for equity method and measurement alternative investments and includes an analysis of the facts and circumstances for each investment, expectations of cash flows, capital needs, and viability of its business model. For equity method, the asset carrying value is reduced when the decline in fair value is considered to be other than temporary. For measurement alternative investments, the asset carrying value is reduced when the fair value is less than the carrying value, without the consideration of recovery.

82

The Company held the following non-marketable equity investments:

- Equity Method - The Company held equity method investments of $2.9 million within other assets as of September 30, 2022 and $3.1 million at September 30, 2021. The Company's ownership of such investments typically ranges from 5% - 25% of the investee. The Company recognized net earnings from these investments in the amount of $12,863 within noninterest income for the fiscal year ended September 30, 2022. The Company elected to classify distributions received from equity method investments using the cumulative earnings approach on the Consolidated Statements of Cash Flows.
- Fair Value Method - The Company held equity investments measured at net asset value (NAV) per share (or its equivalent) of $7.2 million at September 30, 2022 and $4.6 million at September 30, 2021 where NAV is considered the fair value practical expedient. These investments are recorded within other assets on the Company's Consolidated Financial Statements. Fluctuations in fair value are recognized in earnings within noninterest income.
- Measurement Alternative - The Company held equity investments measured using the measurement alternative of $15.3 million as of September 30, 2022 and $12.9 million at September 30, 2021 within other assets on the Company's Consolidated Financial Statements. The Company recognized a fair value decrease of $1.0 million and an increase of $8.0 million during the fiscal years ended September 30, 2022 and 2021, respectively. The Company recognized impairment losses of zero and $2.6 million on such investments during the fiscal years ended September 30, 2022 and 2021, respectively.

#### **LOANS HELD FOR SALE ("LHFS")**

LHFS include commercial loans originated under the guidelines of the SBA or USDA and consumer loans. LHFS are held at the lower of cost or fair value. Any amount by which the cost exceeds fair value is initially recorded as a valuation allowance and subsequently reflected in the gain or loss on sale when sold. At September 30, 2022 and 2021, there was no valuation allowance recorded for LHFS. Gains and losses on LHFS are recorded in noninterest income on the Consolidated Statements of Operations. Loan costs and fees are deferred at origination and are recognized in income at the time of sale. Interest income is calculated based on the note rate of the loan and is recorded as interest income. For loans transferred to LHFS due to change in intent of holding the loans to maturity or for the foreseeable future, such loans are transferred at lower of cost or fair value.

#### **LOANS AND LEASES**

##### **Loans Receivable**

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balances net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans, and unamortized premiums or discounts on purchased loans.

Interest income on loans is accrued over the term of the loans based upon the amount of principal outstanding except when serious doubt exists as to the collectability of a loan, in which case the accrual of interest is discontinued. Unearned income, deferred loan fees and costs, and discounts and premiums are amortized to interest income over the contractual life of the loan using the interest method. The Company's business lines follow a nonaccrual policy with certain commercial finance, consumer finance and tax service loans not generally being placed on non-accrual status, but instead are charged off when the collection of principal and interest become doubtful. When placed on nonaccrual status, the accrued unpaid interest receivable is reversed against interest income and any remaining amortizing of net deferred fees is suspended. Cash collected on these loans is applied to first reduce the carrying value of the loan with any remainder being recognized as interest income. Generally, a loan can return to accrual status when all delinquent interest and principal become current under the terms of the loan agreement and collectability of the remaining principal and interest is no longer doubtful. Loans are considered past due when contractually required principal or interest payments have not been made on the due dates.

For commercial loans, the Company generally fully charges off or charges down to net realizable value (fair value of collateral, less estimated costs to sell) for loans secured by collateral when: management judges the loans to be uncollectible; repayment is deemed to be protracted beyond reasonable time frames; the loan has been classified as a loss by either the Company's internal loan review process or its banking regulatory agencies; the customer has filed bankruptcy and the loss becomes evident owing to lack of assets; or the loan meets a defined number of days

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past due unless the loan is both well-secured and in the process of collection. For consumer loans, the Company fully charges off or charges down to net realizable value when deemed uncollectible due to bankruptcy or other factors, or meets a defined number of days past due.

As part of the Company's ongoing risk management practices, management generally attempts to work with borrowers when necessary to extend or modify loan terms to better align with their current ability to repay. Extensions and modifications to loans are made in accordance with internal policies and guidelines which conform to regulatory guidance. Modified loan terms may include interest rate reductions, principal forgiveness, term extensions, payment forbearance or other actions intended to minimize the Company's economic loss and to avoid foreclosure or repossession of the collateral. Each occurrence is unique to the borrower and is evaluated separately. In a situation where an economic concession has been granted to a borrower that is experiencing financial difficulty, the Company identifies and reports that loan as a troubled debt restructuring ('TDR'). Management considers regulatory guidelines when restructuring loans to ensure that prudent lending practices are followed. As such, qualification criteria and payment terms consider the borrower's current and prospective ability to comply with the modified terms of the loan. Additionally, the Company structures loan modifications with the intent of strengthening repayment prospects. Loans that are reported as TDRs apply the identical criteria in the determination of whether the loan should be accruing or not accruing. The event of classifying the loan as a TDR due to a modification of terms may be independent from the determination of accruing interest on a loan.

### **Leases Receivable**

The Company provides various types of commercial lease financing that are classified for accounting purposes as direct financing, sales-type or operating leases. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are classified as direct financing or sales-type leases and are included in loans and leases receivable on the Consolidated Statements of Financial Condition. Direct financing and sales-type leases are carried at the combined present value of future minimum lease payments and lease residual values. The determination of lease classification requires various judgments and estimates by management, including the fair value of equipment at lease inception, useful life of the equipment under lease, lease residual value, and collectability of minimum lease payments.

Sales-type leases generate dealer profit, which is recognized at lease inception by recording lease revenue net of lease cost. Lease revenue consists of the present value of the future minimum lease payments. Lease cost consists of the lease equipment's book value, less the present value of its residual. Interest income on direct financing and sales-type leases is recognized using methods that approximate a level yield over the fixed, non-cancelable term of the lease. Recognition of interest income is generally discontinued at the time the lease becomes 90 days delinquent, unless the lease is well-secured and in process of collection. Delinquency and past due status is based on the contractual terms of the lease. The Company receives pro rata rent payments for the interim period until the lease contract commences and the fixed, non-cancelable lease term begins. Interim payments are recognized in the month they are earned and are recorded in interest income. Management has policies and procedures in place for the determination of lease classification and review of the related judgments and estimates for all lease financings.

The Company generally fully charges off or charges down to net realizable value (fair value of collateral, less estimated costs to sell) for leases when management judges the lease to be uncollectible; repayment is deemed to be protracted beyond reasonable time frames; the lease has been classified as a loss by either the Company's internal review process or its banking regulatory agencies; the customer has filed bankruptcy and the loss becomes evident owing to lack of assets; or the lease meets a defined number of days past due unless the lease is both well-secured and in the process of collection.

Some lease financings include a residual value component, which represents the estimated fair value of the leased equipment at the expiration of the initial term of the transaction. The estimation of the residual value involves judgments regarding product and technology changes, customer behavior, shifts in supply and demand, and other economic assumptions. The Company may purchase and sell minimum lease payments, primarily as a credit risk reduction tool, to third-party financial institutions at fixed rates on a non-recourse basis with its underlying equipment as collateral. For those transactions that achieve sale treatment, the related lease cash flow stream and the non-recourse financing are derecognized. For those transactions that do not achieve sale treatment, the underlying lease remains on the Company's Consolidated Statements of Financial Condition and non-recourse debt is recorded in the amount of the proceeds received. The Company retains servicing of these leases and bills, collects, and remits funds to the third-party financial institution. Upon default by the lessee, the third-party financial institutions may take control of the underlying collateral which the Company would otherwise retain as residual value.

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Leases that do not transfer substantially all benefits and risks of ownership to the lessee are classified as operating leases. Such leased equipment are included in rental equipment on the Consolidated Statements of Financial Condition and are depreciated on a straight-line basis over the term of the lease to its estimated residual value. Depreciation expense is recorded as operating lease equipment depreciation expense within noninterest expense. Operating lease rental income is recognized when it becomes due and is reflected as a component of noninterest income. The Company evaluates the carrying value of rental equipment for impairment whenever events or circumstances have occurred that would indicate the carrying amount may not be fully recoverable. If the carrying amount is not fully recoverable, an impairment loss is recognized to reduce the carrying amount to fair value, where fair value is based on the condition of the rental equipment and the projected net cash flows from rental and sale adjusted for current market conditions. No impairment expense was recognized for fiscal years ended September 30, 2022, 2021, and 2020.

#### **LOAN SERVICING AND TRANSFERS OF FINANCIAL ASSETS**

The Company, from time to time, sells loan participations, generally without recourse. The Company also sells commercial SBA and USDA loans to third parties, generally without recourse. Sold loans are not included in the Consolidated Financial Statements. The Bank generally retains the right to service the sold loans for a fee and records a servicing asset, which is included within other assets on the Consolidated Statements of Financial Condition. At September 30, 2022 and 2021, the Bank was servicing loans for others with aggregate unpaid principal balances of $336.6 million and $307.3 million, respectively. The service fees and ancillary income related to these loans were immaterial.

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been legally isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

#### **ALLOWANCE FOR CREDIT LOSSES**

The ACL represents management's estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the 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. Management has also identified certain structured finance credits for alternative energy projects in which a substantial cash collateral account has been established to mitigate credit risk. Due to the nature of the transactions and significant cash collateral positions, these credits are evaluated individually.

Credit loss for all other loans and leases is evaluated collectively by various characteristics. The collective evaluation of expected losses in all commercial finance portfolios is based on a cohort loss rate and adjustments for forward-looking information, including industry and macroeconomic forecasts. The cohort loss rate is a life of loan loss rate that immediately reverts to historical loss information for the remaining maturity of the financial asset. Management has elected to use a twelve-month reasonable and supportable forecast for forward-looking information. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts and measurement date credit characteristics such as product type, delinquency, and industry. The unfunded credit commitments depend on these same factors, as well as estimates of lines of credit usage. The various quantitative and qualitative factors used in the methodologies are reviewed quarterly.

The collective evaluation of expected credit losses for certain consumer lending portfolios utilize different methodologies when estimating expected credit losses. Factors utilized in the determination of the allowance include historical loss experience, current economic forecasts, and measurement date credit characteristics including delinquency.

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The amount of ACL depends significantly on management's estimates or key factors and assumptions affecting valuation, appraisals of collateral, evaluations of performance and status, the amounts and timing of future cash flows expected to be received, forecasts of future economic conditions and reversion periods. Such estimates, appraisals, evaluations, cash flows and forecasts may be subject to frequent adjustments due to changing economic prospects of borrowers, lessees, properties or economic conditions. These estimates are reviewed quarterly and adjustments, if necessary, are recorded in the provision for credit losses in the periods in which they become known. Accrued interest receivable is presented separately on the Consolidated Statements of Financial Condition, and an ACL is not recorded for these balances. Generally, when a loan or lease is placed on nonaccrual status, typically when the collection of interest or principal is 90 days or more past due, uncollected interest accrued in prior years is charged off against the ACL and interest accrued in the current year is reversed against interest income.

Management maintains a framework of controls over the estimation process for the ACL, including review of collective reserve methodologies for compliance with GAAP. Management has a quarterly process to review the appropriateness of historical observation periods and loss assumptions and risk ratings assigned to loans and leases, if applicable. Management reviews its qualitative framework and the effect on the collective reserve compared with relevant credit risk factors and consistency with credit trends. Management also maintains controls over information systems, models and spreadsheets used in the quantitative components of the reserve estimate. This includes the quality and accuracy of historical data used to derive loss rates, the inputs to industry and macroeconomic forecasts and the reversion periods utilized. The results of this process are summarized and presented to management quarterly for their approval of the recorded allowance. See Note 4. Loans and Leases, Net for further information.

The following are risk characteristics of the Company's loan and lease portfolio:

#### **Commercial Finance**

The Company's Commercial Finance business line offers a variety of products through its working capital, equipment finance, structured finance, and insurance premium finance lending solutions. These products include term lending, asset based lending, factoring, lease financing, insurance premium finance, government guaranteed lending and other commercial finance products offered on a nationwide basis that are subject to adverse market conditions which may impact the borrower's ability to make repayment on the loan or lease or could cause a decline in the value of the collateral that secures the loan or lease. The loans or leases are primarily made based on the operating cash flows of the borrower and on the underlying collateral provided by the borrower. The cash flows of borrowers may be volatile and the value of the collateral securing these loans and leases may be difficult to measure. Most commercial finance loans and leases are secured by the assets being financed or other business assets such as accounts receivable or inventory. Although the loans and leases are often collateralized by equipment, inventory, accounts receivable, insurance premiums or other business assets, the liquidation of collateral in the event of a borrower default may be an insufficient source of repayment, because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use. The Company attempts to mitigate these risks by adhering to its underwriting policies in evaluating the management of the business and the credit-worthiness of borrowers and guarantors.

#### **Consumer Finance**

The Company's BaaS business line offers its consumer credit products and Emerald Advance products through its credit solution. The Bank designs its credit program relationships with certain desired outcomes. Three high priority outcomes are liquidity, credit protection, and risk retention. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement.

#### **Tax Services**

The Bank's BaaS business line also offers tax solutions, which includes short-term refund advance loans. Through this product, taxpayers are underwritten to determine eligibility for these unsecured loans. Due to the nature of refund advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the tax consumer. The Bank will charge off the balance of a refund advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful.

The Bank offers short-term electronic return originator ('ERO') advance loans on a nationwide basis. These loans are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the

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upcoming tax season. EROs go through an underwriting process to determine eligibility for the unsecured advances. ERO loans are not collateralized. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.

#### **Warehouse Finance**

The Bank participates in several collateral-based warehouse lines of credit whereby the Bank is in a senior, secured position as the first out participant. These facilities are primarily collateralized by consumer receivables, with the Bank holding a senior collateral position enhanced by a subordinate party structure.

#### **EARNINGS PER COMMON SHARE ('EPS')**

Basic earnings per share is computed by dividing income available to common stockholders after the allocation of dividends and undistributed earnings to the participating securities by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, and is computed after giving consideration to the weighted average dilutive effect of the Company's stock options and after the allocation of earnings to the participating securities. See Note 5. Earnings per Common Share for further information.

#### **PREMISES, FURNITURE, AND EQUIPMENT**

Land is carried at cost. Buildings, furniture, fixtures, leasehold improvements, internal-use software and equipment are carried at cost, less accumulated depreciation and amortization. The Company primarily uses the straight-line method of depreciation over the estimated useful lives of the assets, which is 39 years for buildings, three years for internal-use software, and range from two years to 15 years for leasehold improvements, and for furniture, fixtures and equipment. Assets are reviewed for impairment when events indicate the carrying amount may not be recoverable. See Note 6. Premises, Furniture and Equipment, Net for further information.

#### **GOODWILL**

Goodwill represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in transactions accounted for as business acquisitions. Goodwill is evaluated annually for impairment at a reporting unit level. The Company has determined that its reporting units are one level below the operating segments and distinguish these reporting units based on how the segments and reporting units are managed, taking into consideration the economic characteristics, nature of the products, and customers of the segments and reporting units. The Company performs its impairment evaluation as of September 30 of each fiscal year unless a triggering event occurs that would require an interim impairment evaluation. The Company generally utilizes a qualitative approach during this annual assessment to determine whether it is more likely than not (i.e. a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying value. If we determine it is more likely than not that goodwill is impaired, then a quantitative assessment is performed to determine fair value of the reporting unit. If the carrying amount of the reporting unit with goodwill exceeds its fair value, goodwill is considered impaired and is written down by the excess carrying value of the reporting unit. Subsequent increases in goodwill are not recognized in the Consolidated Financial Statements. No goodwill impairment was recognized during the fiscal years ended September 30, 2022, 2021 or 2020. See Note 8. Goodwill and Intangible Assets for further information.

#### **INTANGIBLE ASSETS**

Intangible assets other than goodwill are amortized over their respective estimated lives. All intangible assets are subject to an impairment test at least annually or more often if conditions indicate a possible impairment. See Note 8. Goodwill and Intangible Assets for further information.

#### **EMPLOYEE PROFIT SHARING PLAN**

The Company has a profit sharing plan covering substantially all full-time employees. Profit sharing expense included in compensation and benefits, for the fiscal years ended September 30, 2022, 2021 and 2020 was $0.1 million, $3.1 million and $3.1 million, respectively. As of October 1, 2021, the Company modified its profit sharing plan to incorporate a Qualified Automatic Contribution Arrangement safe harbor provision, whereby employee contributions are matched at 100% of the first 6% of eligible compensation contributed.

#### **STOCK COMPENSATION**

Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The exercise price of options or fair value of non-vested (restricted) shares and performance share

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units granted under the Company's incentive plans is equal to the fair market value of the underlying stock at the grant date, adjusted for dividends where applicable. The Company has elected to record forfeitures as they occur. See Note 13. Stock Compensation for further information.

## **INCOME TAXES**

The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.

In accordance with ASC 740, *Income Taxes*, the Company recognizes a tax position as a benefit only if it is more likely than not that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized upon examination. For tax positions not meeting the more likely than not test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in noninterest income or noninterest expense. The effect on deferred tax assets and liabilities from a change in tax rates is recorded in income tax expense in the Consolidated Statements of Operations in the period in which the enactment date occurs. If current period income tax rates change, the impact on the annual effective income tax rate is applied year to date in the period of enactment. See Note 14. Income Taxes for further information.

## **FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK**

The Company, in the normal course of business, makes commitments to originate loans which are not reflected in the Consolidated Financial Statements. The reserve for these unfunded commitments is included within Other Liabilities on the Consolidated Statements of Financial Condition.

## **REVENUE RECOGNITION**

Interest revenue from loans, leases, and investments is recognized on the accrual basis of accounting as the interest is earned according to the terms of the particular loan, lease, or investment. Income from service and other customer charges is recognized as earned. Revenue within the Consumer segment is recognized as services are performed and service charges are earned in accordance with the terms of the various programs. Refer to Note 16. Revenue from Contracts with Customers for additional information.

## **COMPREHENSIVE INCOME (LOSS)**

Comprehensive income (loss) consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes the change in net unrealized holding gains and losses due to market conditions and other non-credit risk factors on AFS debt securities, net of reclassification adjustments and tax effects. Accumulated other comprehensive income (loss) is recognized as a separate component of stockholders' equity.

## **RELATED PARTY TRANSACTIONS**

The Company has disclosed information on its equity investments and relationships with variable interest entities in Note 1. Summary of Significant Accounting Policies.

At September 30, 2022 and 2021, the Company had no loans outstanding with individuals deemed under Regulation O to be directors, executive officers and/or employees of the Company.

## **RECLASSIFICATION AND REVISION OF PRIOR PERIOD BALANCES**

Certain prior year amounts have been reclassified to conform to the current year financial statement presentation. These changes and reclassifications did not impact previously reported net income or comprehensive income.

## **RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES ('ASU')**

The following ASUs were adopted by the Company during the fiscal year ended September 30, 2022, none of which had a material impact on the Company's Consolidated Financial Statements. All became effective for the Company on October 1, 2021.

**ASU 2019-12, *Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes*.** This ASU simplifies accounting for income taxes by removing specific technical exceptions in ASC 740 related to the incremental approach for intra-

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period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition for deferred tax liabilities for outside basis differences. All changes within ASU 2019-12 were applied on a prospective basis and did not have a material impact on the Company's Consolidated Financial Statements.

**ASU 2020-08, Codification Improvements to Subtopic 310-20: Receivables - Nonrefundable Fees and Other Costs.** This ASU clarifies that an entity should amortize any premium, if applicable, to the next call date, which is the first date when a call option at a specified price becomes exercisable. The Company had previously amortized fees through the next call date and will continue to do so; accordingly, there is no impact on the Company's Consolidated Financial Statements as a result of adopting this ASU.

**ASU 2020-10, Codification Improvements.** This ASU made minor improvements to various Topics that did not have a significant impact on the Company's accounting policies and practices. There were no material impacts to the Consolidated Financial Statements as a result of adopting this ASU.

**ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services - Depository and Lending (Topic 942), and Financial Services - Investment Companies (Topic 946) - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Business, and No. 33-10835, Updated of Statistical Disclosures for Bank and Savings and Loan Registrants.** This ASU adds new quarterly disclosures and expands certain annual disclosures to quarterly reporting. The additional disclosure requirements have been included within the Management Discussion & Analysis section.

The following ASUs have been issued and are considered applicable to the Company, but have not yet been adopted as of September 30, 2022.

**ASU 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments.** The amendments in this ASU require lessors to classify and account for leases with variable lease payments that do not depend on a reference index or rate as an operating lease if certain criteria are met. This ASU is effective for public companies for fiscal years beginning after December 15, 2021. The Company's Equipment Finance division does not generally originate leases with variable lease payments that do not depend on a reference rate or index, so the impact of this ASU is not expected to be material to the consolidated financial statements.

**ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.** The amendments in this ASU eliminate accounting guidance for troubled-debt restructurings (TDRs) by creditors in Subtopic ASC 310-40, Receivables - Troubled Debt Restructurings by Creditors, and enhance disclosure requirements for certain loan refinancings and restructurings when a borrower is experiencing financial difficulty. This ASU is effective for public companies for fiscal years beginning after December 15, 2022. Management is currently evaluating the impact of this guidance on the consolidated financial statements.

## NOTE 2. SIGNIFICANT EVENTS

### Rebranding

On December 7, 2021, the Company executed a Purchase Agreement (the 'Agreement') with Beige Key, LLC (the 'Assignee') for the sale of all of the Company's worldwide right, title and interest in and to company names and tradenames including Meta and other 'Meta' formative names including MetaBank and Meta Financial Group, and the domain names, social media accounts and goodwill associated with the foregoing (collectively, the 'Meta' tradenames) in exchange for $60.0 million in cash. Subject to the terms and conditions set forth in the Agreement, the Company has one year from the Agreement execution date to phase out and cease all use of the Meta tradenames. From the date of the Agreement until the date such phase out is completed (the 'Phase Out Period'), Assignee has granted the Company a non-exclusive royalty free license in the United States and Canada to use the Meta tradenames in the manner in which they were used by the Company prior to the Agreement.

The Company received $50.0 million upon execution and delivery of the Agreement, at which time the Meta tradenames were assigned to the Assignee. The Company has recognized the $50.0 million as noninterest income in the fiscal year ended September 30, 2022. The remaining $10.0 million was paid by the Assignee and is being held in an escrow account by a third-party agent until the agreed upon activities within the Phase Out Period have been completed, at which time the funds will be released to the Company. The Company's receipt of the $10.0 million payment is contingent upon phase out activities that have not yet been completed and has not been recognized in the Company's consolidated financial statements for the fiscal year ended September 30, 2022.

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On July 13, 2022, the Company announced it changed its name to Pathward Financial, Inc.TM, and its bank subsidiary MetaBank®, N.A. changed to PathwardTM, N.A. ("Pathward" or the "Bank"). The full transition to Pathward, including a new brand identity and website, is expected to be completed by the end of this calendar year.
The Company recognized $13.1 million of noninterest expense related to rebranding efforts in the fiscal year ended September 30, 2022.

### NOTE 3. SECURITIES

The amortized cost, gross unrealized gains and losses and estimated fair values of available for sale ("AFS") and held to maturity ("HTM") debt securities are presented below.

| (Dollars in thousands) | Debt Securities AFS |  |  |  |
| --- | --- | --- | --- | --- |
|  | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value |
| At September 30, 2022 |  |  |  |  |
| Corporate securities | $25,000 | $ - | $(2,813) | $22,187 |
| SBA securities | 105,238 | - | (7,470) | 97,768 |
| Obligations of states and political subdivisions | 2,469 | - | (125) | 2,344 |
| Non-bank qualified obligations of states and political subdivisions | 290,754 | - | (26,971) | 263,783 |
| Asset-backed securities | 160,806 | - | (13,016) | 147,790 |
| Mortgage-backed securities | 1,581,452 | - | (232,455) | 1,348,997 |
| Total debt securities AFS | $2,165,719 | $ - | $(282,850) | $1,882,869 |
| At September 30, 2021 |  |  |  |  |
| Corporate securities | $25,000 | $ - | $ - | $25,000 |
| SBA securities | 151,958 | 5,251 | - | 157,209 |
| Obligations of states and political subdivisions | 2,497 | 10 | - | 2,507 |
| Non-bank qualified obligations of states and political subdivisions | 266,048 | 3,347 | (1,100) | 268,295 |
| Asset-backed securities | 393,103 | 3,003 | (1,247) | 394,859 |
| Mortgage-backed securities | 1,016,478 | 9,728 | (9,177) | 1,017,029 |
| Total debt securities AFS | $1,855,084 | $21,339 | $(11,524) | $1,864,899 |

| (Dollars in thousands) | Debt Securities HTM |  |  |  |
| --- | --- | --- | --- | --- |
|  | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value |
| At September 30, 2022 |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $39,093 | $ - | $(3,190) | $35,903 |
| Mortgage-backed securities | 2,589 | - | (321) | 2,268 |
| Total debt securities HTM | $41,682 | $ - | $(3,511) | $38,171 |
| At September 30, 2021 |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $52,944 | $103 | $(471) | $52,576 |
| Mortgage-backed securities | 3,725 | 90 | - | 3,815 |
| Total debt securities HTM | $56,669 | $193 | $(471) | $56,391 |

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Gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous loss position, were as follows:

| (Dollars in thousands) | LESS THAN 12 MONTHS |  | OVER 12 MONTHS |  | TOTAL |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Fair Value | Gross Unrealized (Losses) | Fair Value | Gross Unrealized (Losses) | Fair Value | Gross Unrealized (Losses) |
| Debt Securities AFS |  |  |  |  |  |  |
| At September 30, 2022 |  |  |  |  |  |  |
| Corporate securities | $ - | $ - | $22,187 | $(2,813) | $22,187 | $(2,813) |
| SBA securities | 97,767 | (7,470) | - | - | 97,767 | (7,470) |
| Obligations of state and political subdivisions | 2,345 | (125) | - | - | 2,345 | (125) |
| Non-bank qualified obligations of states and political subdivisions | 195,816 | (19,743) | 67,967 | (7,228) | 263,783 | (26,971) |
| Asset-backed securities | 64,886 | (1,838) | 82,904 | (11,178) | 147,790 | (13,016) |
| Mortgage-backed securities | 816,657 | (106,583) | 532,340 | (125,872) | 1,348,997 | (232,455) |
| Total debt securities AFS | $1,177,471 | $(135,759) | $705,398 | $(147,091) | $1,882,869 | $(282,850) |
| At September 30, 2021 |  |  |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $101,046 | $(1,100) | $ - | $ - | $101,046 | $(1,100) |
| Asset-backed securities | 127,110 | (283) | 91,553 | (964) | 218,663 | (1,247) |
| Mortgage-backed securities | 759,035 | (7,418) | 60,792 | (1,759) | 819,827 | (9,177) |
| Total debt securities AFS | $987,191 | $(8,801) | $152,345 | $(2,723) | $1,139,536 | $(11,524) |
| Debt Securities HTM |  |  |  |  |  |  |
| At September 30, 2022 |  |  |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $3,984 | $(300) | $31,919 | $(2,890) | $35,903 | $(3,190) |
| Mortgage-backed securities | 2,268 | (321) | - | - | 2,268 | (321) |
| Total debt securities HTM | $6,252 | $(621) | $31,919 | $(2,890) | $38,171 | $(3,511) |
| At September 30, 2021 |  |  |  |  |  |  |
| Non-bank qualified obligations of states and political subdivisions | $26,096 | $(471) | $ - | $ - | $26,096 | $(471) |
| Total debt securities HTM | $26,096 | $(471) | $ - | $ - | $26,096 | $(471) |

At September 30, 2022, there were 195 securities AFS in an unrealized loss position. All of the mortgage-backed securities ('MBS') in an unrealized loss position at September 30, 2022 were government guaranteed. Management assessed each investment security with unrealized losses for credit loss and determined substantially all unrealized losses on these securities were due to credit spreads and interest rates versus credit loss. As part of that assessment, management evaluated and concluded that it is more-likely-than-not that the Company will not be required and does not intend to sell any of the securities prior to recovery of the amortized cost. At September 30, 2022, there was no ACL for debt securities AFS.

The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features which allow the issuer to call the security prior to maturity. Expected maturities may differ from contractual maturities in MBS because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Therefore, MBS are not included in the maturity categories in the following maturity summary. The expected maturities of certain SBA securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.

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| (Dollars in thousands) | At September 30, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Securities AFS at Fair Value |  |  |  |  |
| Due in one year or less | $718 | $715 | $810 | $822 |
| Due after one year through five years | 9,921 | 9,395 | 13,026 | 13,378 |
| Due after five years through ten years | 89,921 | 81,819 | 50,785 | 52,357 |
| Due after ten years | 483,707 | 441,943 | 773,985 | 781,313 |
|  | 584,267 | 533,872 | 838,606 | 847,870 |
| Mortgage-backed securities | 1,581,452 | 1,348,997 | 1,016,478 | 1,017,029 |
| Total securities AFS, at fair value | $2,165,719 | $1,882,869 | $1,855,084 | $1,864,899 |

| (Dollars in thousands) | At September 30, |  |  |  |
| --- | --- | --- | --- | --- |
|  | 2022 |  | 2021 |  |
|  | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
| Securities HTM at Fair Value |  |  |  |  |
| Due after ten years | $39,093 | $35,903 | $52,944 | $52,576 |
|  | 39,093 | 35,903 | 52,944 | 52,576 |
| Mortgage-backed securities | 2,589 | 2,268 | 3,725 | 3,815 |
| Total securities HTM, at cost | $41,682 | $38,171 | $56,669 | $56,391 |

Activity related to the sale of securities available for sale is summarized below.

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |  |
| --- | --- | --- | --- |
|  | 2022 | 2021 | 2020 |
| Available For Sale |  |  |  |
| Proceeds from sales | $265,951 | $50,468 | $4,904 |
| Gross gains on sales | 1,742 | 179 | 51 |
| Gross losses on sales | 1,588 | 173 | - |
| Net gain (loss) on securities AFS | $154 | $6 | $51 |

There was no activity related to the sale of securities held to maturity during the fiscal years ended September 30, 2022, 2021, and 2020.

No securities were pledged as collateral for public funds on deposit at September 30, 2022 and 2021. No securities were pledged as collateral for individual, trust and estate deposits at September 30, 2022 and 2021.

#### *Equity Securities*

The Company held $2.9 million and $12.7 million in marketable equity securities at September 30, 2022 and 2021, respectively. The Company recognized $3.8 million and $3.4 million in unrealized loss on marketable equity securities during the fiscal years ended September 30, 2022 and 2021, respectively, which is attributable to an investee becoming publicly traded during fiscal year 2021. All other marketable equity securities and related activity were insignificant for the fiscal years ended September 30, 2022 and 2021. There was one marketable equity security sold during fiscal year 2022 for a $0.3 million gain.

Non-marketable equity securities with a readily determinable fair value totaled $7.2 million and $4.6 million at September 30, 2022 and 2021, respectively. The Company recognized $1.1 million and $0.6 million in unrealized gains during the fiscal years ended September 30, 2022 and 2021, respectively. No such securities were sold during fiscal year 2022.

Non-marketable equity securities without readily determinable fair value totaled $18.2 million and $16.0 million at September 30, 2022 and 2021, respectively. There were four securities sold during the fiscal year ended September 30, 2022 for a $1.7 million loss.

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#### *FRB Stock*

The Bank is required by federal law to subscribe to capital stock (divided into shares of $100 each) as a member of the FRB of Minneapolis with an amount equal to six per centum of the paid-up capital stock and surplus. One-half of the subscription is paid at time of application, and one-half is subject to call of the Board of Governors of the Federal Reserve System. FRB of Minneapolis stock held by the Bank totaled $19.7 million at September 30, 2022 and 2021. These equity securities are 'restricted' in that they can only be owned by member banks. At fiscal year-end 2022 and 2021, the Company pledged securities with fair values of approximately $924.2 million and $236.1 million against FRB advances, respectively.

Included in interest and dividend income from other investments is $1.2 million and $1.5 million related to dividend income on FRB stock for the fiscal years ended September 30, 2022 and 2021, respectively.

#### *FHLB Stock*

The Company's borrowings from the FHLB are secured by specific investment securities. Such advances can be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities.

The investments in the FHLB stock are required investments related to the Company's membership in and current borrowings from the FHLB of Des Moines. The investments in the FHLB of Des Moines could be adversely impacted by the financial operations of the FHLB and actions of their regulator, the Federal Housing Finance Agency.

The FHLB stock is carried at cost since it is generally redeemable at par value. The carrying value of the stock held at the FHLB was $9.1 million and $8.7 million at September 30, 2022 and 2021, respectively. At fiscal year-end 2022 and 2021, the Company pledged securities with fair values of approximately $804.0 million and $644.7 million, respectively, to be used against FHLB advances. In addition, a combination of qualifying residential and other real estate loans of zero and zero were pledged as collateral at September 30, 2022 and 2021, respectively.

Included in interest and dividend income from other investments is $0.3 million, $0.2 million and $0.8 million related to dividend income on FHLB stock for the fiscal years ended September 30, 2022, 2021 and 2020, respectively.

These equity securities are 'restricted' in that they can only be sold back to the respective institution from which they were acquired or another member institution at par. Therefore, FRB and FHLB stocks are less liquid than other marketable equity securities, and the fair value approximates cost.

#### *Equity Security Impairment*

The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value. All other equity investments, including those under the equity method, are reviewed for other-than-temporary impairment on at least a quarterly basis. The Company recognized zero, $2.6 million, and $1.3 million in impairment for such investments for the fiscal years ended September 30, 2022, 2021, and 2020, respectively.

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#### NOTE 4. LOANS AND LEASES, NET

Loans and leases consist of the following:

| (Dollars in thousands) | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Term lending | $1,090,289 | $961,019 |
| Asset based lending | 351,696 | 300,225 |
| Factoring | 372,595 | 363,670 |
| Lease financing | 210,692 | 266,050 |
| Insurance premium finance | 479,754 | 428,867 |
| SBA/USDA | 359,238 | 247,756 |
| Other commercial finance | 159,409 | 157,908 |
| Commercial finance | 3,023,673 | 2,725,495 |
| Consumer credit products | 144,353 | 129,251 |
| Other consumer finance | 25,306 | 123,606 |
| Consumer finance | 169,659 | 252,857 |
| Tax services | 9,098 | 10,405 |
| Warehouse finance | 326,850 | 419,926 |
| Community banking | - | 199,132 |
| Total loans and leases | 3,529,280 | 3,607,815 |
| Net deferred loan origination costs | 7,025 | 1,748 |
| Total gross loans and leases | 3,536,305 | 3,609,563 |
| Allowance for credit losses | (45,947) | (68,281) |
| Total loans and leases, net | $3,490,358 | $3,541,282 |

During the fiscal years ended September 30, 2022 and 2021, the Company transferred $169.0 million and $188.6 million, respectively, of Community Banking loans to held for sale.

During the fiscal years ended September 30, 2022, the Company originated $985.3 million of other consumer finance and SBA/USDA loans held for sale. During the fiscal year ended September 30, 2021, the Company originated $601.5 million of other consumer finance, SBA/USDA, and consumer credit product loans as held for sale.

The Company sold held for sale loans resulting in proceeds of $1.06 billion and gains on sale of $3.7 million during the fiscal year ended September 30, 2022. The Company sold held for sale loans resulting in proceeds of $890.3 million and gains on sale of $8.6 million during the fiscal year ended September 30, 2021.

In connection with the Company's sale of the Bank's Community Bank division to Central Bank, the Company entered into a servicing agreement with Central Bank for the retained Community Bank loan portfolio that became effective on February 29, 2020 (the 'Closing Date'). The Company recognized $0.2 million and $3.3 million for the fiscal years ended September 30, 2022 and 2021, respectively.

Since the Closing Date, the Company has entered into subsequent loan portfolio sale agreements with Central Bank and other third parties. The Company sold additional loans from the retained Community Bank portfolio in the amount of $192.5 million and $308.1 million for the fiscal years ended September 30, 2022 and 2021, respectively. All loans from the retained Community Bank portfolio have been sold as of December 31, 2021.

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Loans purchased and sold by portfolio segment, including participation interests, were as follows:

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Loans Purchased |  |  |
| Commercial finance | $3,098 | $ - |
| Warehouse finance | 112,255 | 308,014 |
| Community banking | - | 3,318 |
| Total purchases | $115,353 | $311,332 |
| Loans Sold |  |  |
| Loans held for sale: |  |  |
| Commercial finance | $50,848 | $89,276 |
| Consumer finance | 855,291 | 494,585 |
| Community banking | 153,222 | 308,082 |
| Loans held for investment: |  |  |
| Commercial finance | 15,549 | - |
| Consumer finance | 77,456 | - |
| Community banking | 30,235 | 13,850 |
| Total sales | $1,182,601 | $905,793 |

*Leasing Portfolio.* The net investment in direct financing and sales-type leases was comprised of the following:

| (Dollars in thousands) | At September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Carrying amount | $216,880 | $278,341 |
| Unguaranteed residual assets | 13,037 | 14,393 |
| Unamortized initial direct costs | 295 | 490 |
| Unearned income | (19,225) | (26,684) |
| Total net investment in direct financing and sales-type leases | $210,987 | $266,540 |

The components of total lease income were as follows:

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Interest income - loans and leases |  |  |
| Interest income on net investments in direct financing and sales-type leases | $17,081 | $22,876 |
| Leasing and equipment finance noninterest income |  |  |
| Lease income from operating lease payments | 46,017 | 39,553 |
| Profit recorded on commencement date on sales-type leases | - | 337 |
| Other (1) | 5,982 | 4,986 |
| Total leasing and equipment finance noninterest income | 51,999 | 44,876 |
| Total lease income | $69,080 | $67,752 |

$^{(1)}$ Other leasing and equipment finance noninterest income consists of gains (losses) on sales of leased equipment, fees and service charges on leases and gains (losses) on sales of leases.

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Undiscounted future minimum lease payments receivable for direct financing and sales-type leases, and a reconciliation to the carrying amount recorded at September 30, 2022 were as follows:

| (Dollars in thousands) |  |
| --- | --- |
| 2023 | $95,608 |
| 2024 | 66,344 |
| 2025 | 34,657 |
| 2026 | 12,714 |
| 2027 | 5,495 |
| Thereafter | 2,062 |
| Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases | 216,880 |
| Third-party residual value guarantees | - |
| Total carrying amount of direct financing and sales-type leases | $216,880 |

The Company did not record any contingent rental income from direct financing and sales-type leases in the fiscal year ended September 30, 2022.

The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020, with significant deterioration of macroeconomic conditions and markets into 2021. Although macroeconomic conditions and markets have improved since the beginning of 2021, other factors have been affecting the economic environment in 2022 including geopolitical conflict, supply chain disruptions, inflation, and rising interest rates. While the ultimate impact of the pandemic and these other factors on the Company's loan and lease portfolio remains difficult to predict, management continues to evaluate the loan and lease portfolio in order to assess the impact on repayment sources and underlying collateral that could result in additional losses and the impact to our customers and businesses as a result of COVID-19 and other factors impacting the economy and will refine its estimate as developments occur and more information becomes available.

Activity in the allowance for credit losses was as follows:

| (Dollars in thousands) | Fiscal Year Ended September 30, |  |
| --- | --- | --- |
|  | 2022 | 2021 |
| Beginning balance | $68,281 | $56,188 |
| Impact of CECL adoption | - | 12,773 |
| Provision for credit losses | 28,862 | 49,939 |
| Charge-offs | (61,061) | (57,273) |
| Recoveries | 9,865 | 6,654 |
| Ending balance | $45,947 | $68,281 |

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Activity in the allowance for credit losses and balances of loans and leases by portfolio segment was as follows:

| (Dollars in thousands) | At September 30, 2022 |  |  |  |  |
| --- | --- | --- | --- | --- | --- |
|  | Beginning Balance | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for credit losses: |  |  |  |  |  |
| Term lending | $29,351 | $4,850 | $(12,629) | $3,049 | $24,621 |
| Asset based lending | 1,726 | (1,092) | (16) | 432 | 1,050 |
| Factoring | 3,997 | 11,699 | (11,057) | 1,917 | 6,556 |
| Lease financing | 7,629 | (2,062) | (301) | 636 | 5,902 |
| Insurance premium finance | 1,394 | 597 | (767) | 226 | 1,450 |
| SBA/USDA | 2,978 | 863 | (652) | 74 | 3,263 |
| Other commercial finance | 1,168 | 142 | - | - | 1,310 |
| Commercial finance | 48,243 | 14,997 | (25,422) | 6,334 | 44,152 |
| Consumer credit products | 1,242 | 158 | - | - | 1,400 |
| Other consumer finance | 6,112 | (1,607) | (4,787) | 345 | 63 |
| Consumer finance | 7,354 | (1,449) | (4,787) | 345 | 1,463 |
| Tax services | 2 | 28,093 | (30,852) | 2,762 | 5 |
| Warehouse finance | 420 | (93) | - | - | 327 |
| Community banking | 12,262 | (12,686) | - | 424 | - |
| Total loans and leases | 68,281 | 28,862 | (61,061) | 9,865 | 45,947 |
| Unfunded commitments (1) | 690 | (324) | - | - | 366 |
| Total | $68,971 | $28,538 | $(61,061) | $9,865 | $46,313 |

$^{(1)}$ Reserve for unfunded commitments is recognized within other liabilities on the Consolidated Statements of Financial Condition.

| (Dollars in thousands) | At September 30, 2021 |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- |
|  | Beginning Balance | Impact of CECL Adoption | Provision (Reversal) | Charge-offs | Recoveries | Ending Balance |
| Allowance for loan and lease losses: |  |  |  |  |  |  |
| Term lending | $15,211 | $9,999 | $16,944 | $(14,090) | $1,287 | $29,351 |
| Asset based lending | 1,406 | 164 | 933 | (1,200) | 423 | 1,726 |
| Factoring | 3,027 | 987 | (1,192) | - | 1,175 | 3,997 |
| Lease financing | 7,023 | (556) | 3,758 | (2,969) | 373 | 7,629 |
| Insurance premium finance | 2,129 | (965) | (555) | (1,192) | 1,977 | 1,394 |
| SBA/USDA | 940 | 2,720 | (703) | - | 21 | 2,978 |
| Other commercial finance | 182 | 364 | 622 | - | - | 1,168 |
| Commercial finance | 29,918 | 12,713 | 19,807 | (19,451) | 5,256 | 48,243 |
| Consumer credit products | 845 | - | 397 | - | - | 1,242 |
| Other consumer finance | 2,821 | 5,998 | 297 | (3,324) | 320 | 6,112 |
| Consumer finance | 3,666 | 5,998 | 694 | (3,324) | 320 | 7,354 |
| Tax services | 2 | - | 33,276 | (34,354) | 1,078 | 2 |
| Warehouse finance | 294 | (1) | 127 | - | - | 420 |
| Community banking | 22,308 | (5,937) | (3,965) | (144) | - | 12,262 |
| Total loans and leases | 56,188 | 12,773 | 49,939 | (57,273) | 6,654 | 68,281 |
| Unfunded commitments (1) | 32 | 831 | (173) | - | - | 690 |
| Total | $56,220 | $13,604 | $49,766 | $(57,273) | $6,654 | $68,971 |

$^{(1)}$ Reserve for unfunded commitments is recognized within other liabilities on the Consolidated Statements of Financial Condition.

97

Information on loans and leases that are deemed to be collateral dependent and are evaluated individually for the ACL was as follows:

| (Dollars in thousands) | At September 30, 2022 | At September 30, 2021 |
| --- | --- | --- |
| Term lending | $2,885 | $20,965 |
| Factoring | 550 | 1,268 |
| Lease financing | 2,787 | 3,882 |
| SBA/USDA | 1,199 | - |
| Commercial finance (1) | 7,421 | 26,115 |
| Community banking | - | 14,915 |
| Total | $7,421 | $41,030 |

$^{(1)}$ For commercial finance, collateral dependent financial assets have collateral in the form of cash, equipment, or other business assets.

Management has identified certain structured finance credits for alternative energy projects in which a substantial cash collateral account has been established to mitigate credit risk. Due to the nature of the transactions and significant cash collateral positions, these credits are evaluated individually. At September 30, 2022, the balance of these pass rated cash collateral loans totaled $120.7 million.

In response to the ongoing COVID-19 pandemic, the Company allowed modifications, such as payment deferrals and temporary forbearance, to credit-worthy borrowers who are experiencing temporary hardship due to the effects of COVID-19. Up to January 1, 2022, when this relief ended, if all payments were less than 30 days past due prior to the onset of the pandemic effects, the loan or lease was not be reported as past due during the deferral or forbearance period. As of September 30, 2022, the Company had no loans and leases that were in active deferment. These modifications consisted solely of payment deferrals ranging from 30 days to six months. These modifications are in line with applicable regulatory guidelines and, therefore, they are not reported as troubled debt restructurings.

Federal regulations provide for the classification of loans 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.' The loan classification and risk rating definitions are as follows:

**Pass** - A pass asset is of sufficient quality in terms of repayment, collateral and management to preclude a special mention or an adverse rating.

**Watch** - A watch asset is generally a credit performing well under current terms and conditions but with identifiable weakness meriting additional scrutiny and corrective measures. Watch is not a regulatory classification but can be used to designate assets that are exhibiting one or more weaknesses that deserve management's attention. These assets are of better quality than special mention assets.

**Special Mention** - A special mention asset is a credit with potential weaknesses deserving management's close attention and, if left uncorrected, may result in deterioration of the repayment prospects for the asset. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention is a temporary status with aggressive credit management required to garner adequate progress and move to watch or higher.

The adverse classifications are as follows:

**Substandard** - A substandard asset is inadequately protected by the net worth and/or repayment ability or by a weak collateral position. Assets so classified will have well-defined weaknesses creating a distinct possibility the Bank will sustain some loss if the weaknesses are not corrected. Loss potential does not have to exist for an asset to be classified as substandard.

**Doubtful** - A doubtful asset has weaknesses similar to those classified substandard, with the degree of weakness causing the likely loss of some principal in any reasonable collection effort. Due to pending factors, the asset's classification as loss is not yet appropriate.

98

Loss - A loss asset is considered uncollectible and of such little value that the asset's continuance on the Bank's balance sheet is no longer warranted. This classification does not necessarily mean an asset has no recovery or salvage value leaving room for future collection efforts.

Loans and leases, or portions thereof, are generally charged off when collection of principal becomes doubtful. Typically, this is associated with a delay or shortfall in payments of 210 days or more for commercial insurance premium finance, 180 days or more for the purchased student loan portfolios, 120 days or more for consumer credit products and leases, and 90 days or more for community banking loans and commercial finance loans. Action is taken to charge off electronic return originator ('ERO') loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year. Nonaccrual loans and troubled debt restructurings are generally individually evaluated for expected credit losses.

The Company recognizes that concentrations of credit may naturally occur and may take the form of a large volume of related loans and leases to an individual, a specific industry, or a geographic location. Credit concentration is a direct, indirect, or contingent obligation that has a common bond where the aggregate exposure equals or exceeds a certain percentage of the Company's Tier 1 Capital plus the allowable Allowance for Credit Losses.

The Company has various portfolios of consumer finance and tax services loans that present unique risks that are statistically managed. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The outstanding balances of consumer finance loans and tax services loans were $169.7 million and $9.1 million at September 30, 2022, respectively, and $252.9 million and $10.4 million at September 30, 2021, respectively. The amortized cost basis of loans and leases by asset classification and year of origination was as follows:

| (Dollars in thousands) At September 30, 2022 | Amortized Cost Basis |  |  |  |  |  | Revolving Loans and Leases | Total |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Term Loans and Leases by Origination Year |  |  |  |  |  |  |  |
|  | 2022 | 2021 | 2020 | 2019 | 2018 | Prior |  |  |
| Term lending |  |  |  |  |  |  |  |  |
| Pass | $246,627 | $240,018 | $105,170 | $60,417 | $89,072 | $61,229 | $ - | $802,533 |
| Watch | 45,539 | 24,318 | 45,052 | 11,698 | 21,077 | 9,799 | - | 157,483 |
| Special Mention | 9,500 | 24,885 | 14,300 | 2,861 | 619 | 242 | - | 52,407 |
| Substandard | 10,627 | 16,694 | 12,248 | 23,266 | 10,457 | 2,255 | - | 75,547 |
| Doubtful | 175 | 407 | 469 | 872 | 204 | 192 | - | 2,319 |
| Total | 312,468 | 306,322 | 177,239 | 99,114 | 121,429 | 73,717 | - | 1,090,289 |
| Asset based lending |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 154,494 | 154,494 |
| Watch | - | - | - | - | - | - | 162,990 | 162,990 |
| Special Mention | - | - | - | - | - | - | 13,770 | 13,770 |
| Substandard | - | - | - | - | - | - | 20,442 | 20,442 |
| Total | - | - | - | - | - | - | 351,696 | 351,696 |
| Factoring |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 254,883 | 254,883 |
| Watch | - | - | - | - | - | - | 86,219 | 86,219 |
| Special Mention | - | - | - | - | - | - | 9,174 | 9,174 |
| Substandard | - | - | - | - | - | - | 22,319 | 22,319 |
| Total | - | - | - | - | - | - | 372,595 | 372,595 |
| Lease financing |  |  |  |  |  |  |  |  |
| Pass | 7,407 | 38,818 | 31,408 | 26,552 | 12,361 | 823 | - | 117,369 |
| Watch | 8,799 | 17,098 | 10,284 | 6,655 | 2,899 | 151 | - | 45,886 |
| Special Mention | 151 | 6,151 | 2,644 | 481 | 2,876 | 2,811 | - | 15,114 |
| Substandard | 825 | 9,486 | 11,819 | 7,273 | 1,245 | - | - | 30,648 |
| Doubtful | 144 | 163 | 1,280 | 88 | - | - | - | 1,675 |
| Total | 17,326 | 71,716 | 57,435 | 41,049 | 19,381 | 3,785 | - | 210,692 |

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| Insurance premium finance |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Pass | 478,504 | 307 | 8 | - | - | - | - | 478,819 |
| Watch | 539 | 7 | - | - | - | - | - | 546 |
| Special Mention | 169 | 40 | - | - | - | - | - | 209 |
| Substandard | 106 | 46 | - | - | - | - | - | 152 |
| Doubtful | 14 | 14 | - | - | - | - | - | 28 |
| Total | 479,332 | 414 | 8 | - | - | - | - | 479,754 |
| SBA/USDA |  |  |  |  |  |  |  |  |
| Pass | 54,512 | 111,907 | 40,474 | 56,538 | 28,874 | 24,305 | - | 316,610 |
| Watch | - | 13,836 | 1,266 | 702 | - | 710 | - | 16,514 |
| Special Mention | - | 211 | - | 869 | - | - | - | 1,080 |
| Substandard | 4,149 | 10,968 | 4,278 | - | 1,094 | 4,545 | - | 25,034 |
| Total | 58,661 | 136,922 | 46,018 | 58,109 | 29,968 | 29,560 | - | 359,238 |
| Other commercial finance |  |  |  |  |  |  |  |  |
| Pass | 5,886 | 13,607 | 26,040 | 20,458 | 23,098 | 40,782 | - | 129,871 |
| Substandard | - | 9,538 | - | - | - | 20,000 | - | 29,538 |
| Total | 5,886 | 23,145 | 26,040 | 20,458 | 23,098 | 60,782 | - | 159,409 |
| Warehouse finance |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 294,350 | 294,350 |
| Special Mention | - | - | - | - | - | - | 32,500 | 32,500 |
| Total | - | - | - | - | - | - | 326,850 | 326,850 |
| Total loans and leases |  |  |  |  |  |  |  |  |
| Pass | 792,936 | 404,657 | 203,100 | 163,965 | 153,405 | 127,139 | 703,727 | 2,548,929 |
| Watch | 54,877 | 55,259 | 56,602 | 19,055 | 23,976 | 10,660 | 249,209 | 469,638 |
| Special Mention | 9,820 | 31,287 | 16,944 | 4,211 | 3,495 | 3,053 | 55,444 | 124,254 |
| Substandard | 15,707 | 46,732 | 28,345 | 30,539 | 12,796 | 26,800 | 42,761 | 203,680 |
| Doubtful | 333 | 584 | 1,749 | 960 | 204 | 192 | - | 4,022 |
| Total | $873,673 | $538,519 | $306,740 | $218,730 | $193,876 | $167,844 | $1,051,141 | $3,350,523 |

| Amortized Cost Basis |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| (Dollars in thousands) | Term Loans and Leases by Origination Year |  |  |  |  |  | Revolving Loans and Leases | Total |
| At September 30, 2021 | 2021 | 2020 | 2019 | 2018 | 2017 | Prior |  |  |
| Term lending |  |  |  |  |  |  |  |  |
| Pass | $362,443 | $192,305 | $63,708 | $34,381 | $3,195 | $1,236 | $ - | $657,268 |
| Watch | 63,046 | 71,701 | 32,941 | 21,419 | 76 | 3,628 | - | 192,811 |
| Special Mention | 6,422 | 26,673 | 4,821 | 932 | 70 | 633 | - | 39,551 |
| Substandard | 18,569 | 16,810 | 26,920 | 3,529 | 928 | 641 | - | 67,397 |
| Doubtful | 252 | 1,673 | 1,756 | 311 | - | - | - | 3,992 |
| Total | 450,732 | 309,162 | 130,146 | 60,572 | 4,269 | 6,138 | - | 961,019 |
| Asset based lending |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 185,432 | 185,432 |
| Watch | - | - | - | - | - | - | 52,072 | 52,072 |
| Special Mention | - | - | - | - | - | - | 43,135 | 43,135 |
| Substandard | - | - | - | - | - | - | 19,586 | 19,586 |
| Total | - | - | - | - | - | - | 300,225 | 300,225 |
| Factoring |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 294,124 | 294,124 |

100

| Watch | - | - | - | - | - | - | 17,984 | 17,984 |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Special Mention | - | - | - | - | - | - | 33,035 | 33,035 |
| Substandard | - | - | - | - | - | - | 18,527 | 18,527 |
| Total | - | - | - | - | - | - | 363,670 | 363,670 |
| Lease financing |  |  |  |  |  |  |  |  |
| Pass | 54,434 | 73,629 | 17,153 | 7,511 | 1,857 | 203 | - | 154,787 |
| Watch | 22,061 | 20,455 | 9,274 | 2,739 | 1,454 | - | - | 55,983 |
| Special Mention | 15,402 | 20,595 | 4,148 | 1,546 | 61 | - | - | 41,752 |
| Substandard | 479 | 4,765 | 4,981 | 831 | 25 | - | - | 11,081 |
| Doubtful | - | 6 | 2,402 | 38 | 1 | - | - | 2,447 |
| Total | 92,376 | 119,450 | 37,958 | 12,665 | 3,398 | 203 | - | 266,050 |
| Insurance premium finance |  |  |  |  |  |  |  |  |
| Pass | 428,131 | 144 | 9 | - | - | - | - | 428,284 |
| Watch | 262 | 5 | - | - | - | - | - | 267 |
| Special Mention | 58 | 5 | - | - | - | - | - | 63 |
| Substandard | 68 | 107 | - | - | - | - | - | 175 |
| Doubtful | 58 | 20 | - | - | - | - | - | 78 |
| Total | 428,577 | 281 | 9 | - | - | - | - | 428,867 |
| SBA/USDA |  |  |  |  |  |  |  |  |
| Pass | 110,122 | 37,006 | 14,461 | 12,760 | 6,525 | 3,779 | - | 184,653 |
| Watch | - | 20,431 | 1,996 | 1,670 | 1,394 | 298 | - | 25,789 |
| Special Mention | - | 8,333 | 214 | 3,348 | 177 | 919 | - | 12,991 |
| Substandard | - | 3,812 | 9,550 | 8,079 | 2,169 | 713 | - | 24,323 |
| Total | 110,122 | 69,582 | 26,221 | 25,857 | 10,265 | 5,709 | - | 247,756 |
| Other commercial finance |  |  |  |  |  |  |  |  |
| Pass | 56,957 | 642 | 5,786 | 6,075 | 3,345 | 60,965 | - | 133,770 |
| Watch | - | 17,404 | 3,409 | 451 | - | - | - | 21,264 |
| Substandard | 466 | - | - | 273 | 837 | 1,299 | - | 2,875 |
| Total | 57,423 | 18,046 | 9,195 | 6,799 | 4,182 | 62,264 | - | 157,909 |
| Warehouse finance |  |  |  |  |  |  |  |  |
| Pass | - | - | - | - | - | - | 419,926 | 419,926 |
| Total | - | - | - | - | - | - | 419,926 | 419,926 |
| Community banking |  |  |  |  |  |  |  |  |
| Pass | - | - | 4,159 | - | 5,683 | 472 | - | 10,314 |
| Watch | - | 10,134 | - | 10,854 | 6,133 | - | - | 27,121 |
| Special Mention | - | - | 35,916 | - | - | - | - | 35,916 |
| Substandard | - | 119 | 49,449 | 50,626 | 13,933 | 6,110 | - | 120,237 |
| Doubtful | - | 122 | - | 5,422 | - | - | - | 5,544 |
| Total | - | 10,375 | 89,524 | 66,902 | 25,749 | 6,582 | - | 199,132 |
| Total loans and leases |  |  |  |  |  |  |  |  |
| Pass | 1,012,088 | 303,727 | 105,274 | 60,727 | 20,605 | 66,655 | 899,481 | 2,468,557 |
| Watch | 85,369 | 140,131 | 47,620 | 37,132 | 9,057 | 3,926 | 70,056 | 393,291 |
| Special Mention | 21,882 | 55,606 | 45,099 | 5,826 | 307 | 1,552 | 76,171 | 206,443 |
| Substandard | 19,584 | 25,613 | 90,900 | 63,338 | 17,891 | 8,762 | 38,113 | 264,201 |
| Doubtful | 310 | 1,822 | 4,158 | 5,770 | 1 | - | - | 12,061 |
| Total | $1,139,233 | $526,899 | $293,051 | $172,793 | $47,861 | $80,895 | $1,083,821 | $3,344,553 |

101

Past due loans and leases were as follows:

|  | At September 30, 2022 |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Accruing and Nonaccruing Loans and Leases |  |  |  |  |  | Nonperforming Loans and Leases |  |  |
|  | 30-59 Days Past Due | 60-89 Days Past Due | > 89 Days Past Due | Total Past Due | Current | Total Loans and Leases Receivable | > 89 Days Past Due and Accruing | Nonaccrual Balance | Total |
| (Dollars in thousands) |  |  |  |  |  |  |  |  |  |
| Loans held for sale | $ - | $ - | $ - | $ - | $21,071 | $21,071 | $ - | $ - | $ - |
| Term lending | 14,066 | 2,576 | 4,458 | 21,100 | 1,069,189 | 1,090,289 | 2,035 | 7,576 | 9,611 |
| Asset based lending | - | - | 68 | 68 | 351,628 | 351,696 | 39 | 29 | 68 |
| Factoring | - | - | - | - | 372,595 | 372,595 | - | 569 | 569 |
| Lease financing | 8,265 | 2,253 | 1,714 | 12,232 | 198,460 | 210,692 | 440 | 3,750 | 4,190 |
| Insurance premium finance | 2,550 | 1,379 | 1,628 | 5,557 | 474,197 | 479,754 | 1,628 | - | 1,628 |
| SBA/USDA | - | - | - | - | 359,238 | 359,238 | - | 1,451 | 1,451 |
| Other commercial finance | - | - | - | - | 159,409 | 159,409 | - | - | - |
| Commercial finance | 24,881 | 6,208 | 7,868 | 38,957 | 2,984,716 | 3,023,673 | 4,142 | 13,375 | 17,517 |
| Consumer credit products | 3,209 | 2,558 | 2,669 | 8,436 | 135,917 | 144,353 | 2,669 | - | 2,669 |
| Other consumer finance | 113 | 51 | 124 | 288 | 25,018 | 25,306 | 124 | - | 124 |
| Consumer finance | 3,322 | 2,609 | 2,793 | 8,724 | 160,935 | 169,659 | 2,793 | - | 2,793 |
| Tax services | - | - | 8,873 | 8,873 | 225 | 9,098 | 8,873 | - | 8,873 |
| Warehouse finance | - | - | - | - | 326,850 | 326,850 | - | - | - |
| Total loans and leases held for investment | 28,203 | 8,817 | 19,534 | 56,554 | 3,472,726 | 3,529,280 | 15,808 | 13,375 | 29,183 |
| Total loans and leases | $28,203 | $8,817 | $19,534 | $56,554 | $3,493,797 | $3,550,351 | $15,808 | $13,375 | $29,183 |

|  | At September 30, 2021 |  |  |  |  |  |  |  |  |
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
|  | Accruing and Nonaccruing Loans and Leases |  |  |  |  |  | Nonperforming Loans and Leases |  |  |
|  | 30-59 Days Past Due | 60-89 Days Past Due | > 89 Days Past Due | Total Past Due | Current | Total Loans and Leases Receivable | > 89 Days Past Due and Accruing | Nonaccrual Balance | Total |
| (Dollars in thousands) |  |  |  |  |  |  |  |  |  |
| Loans held for sale | $ - | $ - | $ - | $ - | $56,194 | $56,194 | $ - | $ - | $ - |
| Term lending | 11,879 | 2,703 | 5,452 | 20,034 | 940,985 | 961,019 | 2,558 | 14,904 | 17,462 |
| Asset based lending | - | - | - | - | 300,225 | 300,225 | - | - | - |
| Factoring | - | - | - | - | 363,670 | 363,670 | - | 1,268 | 1,268 |
| Lease financing | 4,909 | 3,336 | 8,401 | 16,646 | 249,404 | 266,050 | 8,345 | 3,158 | 11,503 |
| Insurance premium finance | 1,415 | 375 | 599 | 2,389 | 426,478 | 428,867 | 599 | - | 599 |
| SBA/USDA | 66 | 974 | 987 | 2,027 | 245,729 | 247,756 | 987 | - | 987 |
| Other commercial finance | - | - | - | - | 157,908 | 157,908 | - | - | - |
| Commercial finance | 18,269 | 7,388 | 15,439 | 41,096 | 2,684,399 | 2,725,495 | 12,489 | 19,330 | 31,819 |
| Consumer credit products | 713 | 527 | 511 | 1,751 | 127,500 | 129,251 | 511 | - | 511 |
| Other consumer finance | 963 | 285 | 725 | 1,973 | 121,633 | 123,606 | 725 | - | 725 |
| Consumer finance | 1,676 | 812 | 1,236 | 3,724 | 249,133 | 252,857 | 1,236 | - | 1,236 |
| Tax services | - | - | 7,962 | 7,962 | 2,443 | 10,405 | 7,962 | - | 7,962 |
| Warehouse finance | - | - | - | - | 419,926 | 419,926 | - | - | - |
| Community banking | - | - | - | - | 199,132 | 199,132 | - | 14,915 | 14,915 |
| Total loans and leases held for investment | 19,945 | 8,200 | 24,637 | 52,782 | 3,555,033 | 3,607,815 | 21,687 | 34,245 | 55,932 |
| Total loans and leases | $19,945 | $8,200 | $24,637 | $52,782 | $3,611,227 | $3,664,009 | $21,687 | $34,245 | $55,932 |

Nonaccrual loans and leases by year of origination at September 30, 2022 were as follows:

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