EDGAR 10-K Filing

Company CIK: 907471
Filing Year: 2023
Filename: 907471_10-K_2023_0000907471-23-000138.json

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ITEM 1. BUSINESS
Item 1. Business.
General
Pathward Financial, a registered bank holding company ("BHC") that has elected to be a financial holding company ("FHC"), was incorporated in Delaware on June 14, 1993. Pathward Financial's principal assets are all the issued and outstanding shares of the Bank, a chartered national bank, the accounts of which are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") as administrator of the Deposit Insurance Fund (“DIF”). Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all subsidiaries of Pathward Financial, direct or indirect, on a consolidated basis.
As a nationwide provider of 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. This is why for the past two decades Pathward Financial has been building solutions to help those who have been underserved by traditional banking providers.
The Company strives to remove barriers to financial access and promote economic mobility by working with third parties to provide responsible, secure, high quality financial products that contribute to the social and economic benefit of communities at the core of the real economy. Pathward Financial aims to increase financial availability, choice, and opportunity across two business lines: 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 where traditional banking and financial technology intersect. With expert talent and access to world-class partners, Pathward moves money seamlessly across a multitude of solutions while mitigating risk 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 stable deposits and generate fee income. The deposits are primarily invested into loan and lease products offered through the Commercial Finance business line. In addition to originating loans and leases, the Bank also occasionally contracts to sell loans, such as consumer credit product loans, government guaranteed loans, and other commercial loans to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities ("MBS") and other investments permissible under applicable regulations.
The Consumer segment includes the 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 accept and process 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 enable the Bank's partners' lending solutions that serve the borrowing needs of customers in a diverse credit pool. Tax solutions offer tax-related financial products, such as electronic refund advances and refund transfers, that ease the pressure of tax season and help over 30,000 independent tax offices stay competitive in a crowded marketplace.
The Commercial segment includes the Company's Commercial Finance business line, which helps businesses access funds they need to launch, operate, and grow. Pathward's innovative approach and customized financial products offer the flexibility traditional bank products cannot. This diverse range of commercial finance products is available through the following lending solutions: working capital, equipment finance, structured finance, and insurance premium finance.
Working capital provides ready cash for liquidity needs to new or growing companies or companies in cyclical or seasonal industries. Working capital financing is secured by business collateral (assets) such as accounts receivable, inventory, and equipment. Equipment finance provides financing in the form of leases and loans for equipment needs. Structured finance assists small- and mid-sized business and rural borrowers to fund growth, expansion, and restructuring. Products include alternative energy financing, conventional loans, and loans administered through partnerships with the Small Business Administration ("SBA") and United States Department of Agriculture ("USDA"). Insurance premium finance is short-term financing to facilitate the purchase of property, casualty, and liability insurance premiums.
Other Subsidiaries
Pathward Venture Capital, LLC ("Pathward Venture Capital"), a wholly-owned service corporation subsidiary of the Bank was formed in 2017 for the purpose of making minority equity investments. Pathward Venture Capital focuses on investing in companies in the financial services industry.
First Midwest Financial Capital Trust I, a wholly-owned subsidiary of Pathward Financial, was established in July 2001 and Crestmark Capital Trust I, a wholly-owned subsidiary of Pathward Financial and acquired by the Company in August 2018, was established in June 2005. Both subsidiaries were established for the purpose of issuing trust preferred securities.
Lending Activities
General
The Company focuses its lending activities on the origination of commercial finance loans and leases, consumer finance loans and tax services loans. The Company emphasizes credit quality and seeks to avoid undue concentrations of loans and leases to a single industry or based on a single class of collateral. The Company has established lending policies that include a number of underwriting factors it considers in making a loan, including loan-to-value ratio, cash flow, interest rate and credit history of the borrower. At September 30, 2023, the Company’s loans and leases receivable, net of allowance for credit losses, totaled $4.32 billion, or 57% of the Company’s total assets, as compared to $3.49 billion, or 52%, at September 30, 2022.
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, 2023, the Company’s largest lending relationship to a single borrower or group of related borrowers totaled $112.5 million. The Company had 24 other lending relationships in excess of $19.0 million as of September 30, 2023.
Loan and Lease Portfolio Composition
The following table shows the composition of the Company’s loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.
At September 30,
2023 2022
(Dollars in thousands) Amount Percent Amount Percent
Fixed-rate loans and leases
Commercial finance $ 2,426,782 55.8 % $ 1,872,256 53.1 %
Consumer finance 254,416 5.8 % 169,659 4.8 %
Tax services 5,192 0.1 % 9,098 0.3 %
Warehouse finance 141,421 3.2 % 252,276 7.1 %
Total fixed-rate loans and leases 2,827,811 64.9 % 2,303,389 65.3 %
Adjustable-rate loans and leases
Commercial finance 1,296,376 29.7 % 1,151,417 32.6 %
Warehouse finance 235,494 5.4 % 74,574 2.1 %
Total adjustable-rate loans and leases 1,531,870 35.1 % 1,225,991 34.7 %
Total loans and leases 4,359,681 100.0 % 3,529,280 100.0 %
Deferred fees and discounts 6,435 7,025
Allowance for credit losses (49,705) (45,947)
Total loans and leases receivable, net $ 4,316,411 $ 3,490,358
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, 2023.
Loan Maturities Loans Maturing After One Year
(Dollars in thousands) Due in 1 Year Or Less Due After 1 Year Through 5 Years After 5 Years Through 15 Years After 15 Years Total Fixed Interest Rate Floating/Variable Interest Rate
Commercial finance $ 1,113,826 $ 1,637,413 $ 621,725 $ 350,194 $ 3,723,158 $ 1,441,679 $ 1,167,653
Consumer finance 34,089 218,584 1,743 - 254,416 220,327 -
Tax services 5,192 - - - 5,192 - -
Warehouse finance 105,668 271,247 - - 376,915 85,604 185,643
Total loans and leases $ 1,258,775 $ 2,127,244 $ 623,468 $ 350,194 $ 4,359,681 $ 1,747,610 $ 1,353,296
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, 2023, 11% 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 55% of the term lending total as of September 30, 2023. The remaining 34% 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. 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, 2023, approximately 60% of asset-based loans were backed by accounts receivable.
Factoring. The Bank provides factoring lending where customers provide detailed accounts receivable reporting for lending arrangements. The factoring customers are diversified as to industry and geography. With these loans, the Commercial Finance business lends a percentage of eligible accounts receivable invoices. Advance rates generally range between 80% and 95%. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the customer's cash receipts. In addition, customers generally guarantee the payment of purchased accounts receivable.
Lease Financing. The Bank provides creative, flexible lease solutions for equipment needs of its customers. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are accounted for as sales-type or direct financing leases. The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value. Residual values are estimated at the inception of the lease. Lease maturities are generally no greater than 84 months.
Insurance Premium Finance. 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.
SBA and USDA. The Bank originates loans through programs partially guaranteed by the SBA or USDA. SBA loans are made to small businesses and professionals. Generally, the Bank provides USDA loans to alternative energy project developers and the hotel industry. Certain guaranteed portions of these loans may be sold to the secondary market. See "Originations, Sales and Servicing of Loans and Leases" below for further details.
Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans.
Consumer Finance
The Bank offers a variety of installment and revolving consumer lending products through its credit solutions. The Bank designs its credit program relationships with certain desired outcomes, including liquidity, credit protection, and risk retention by the program partner. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement. See "Originations, Sales and Servicing of Loans and Leases" below for further details.
Tax Services
The Bank's BaaS business line 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. When collection of principal becomes doubtful, the Bank will charge off the balance of a refund advance loan on September 30. Any remaining balances are charged off at the end of the calendar year. The Bank may record recoveries of previously charged off loans if collected in subsequent tax years.
ERO Advance Loans. ERO advance loans are unsecured advances that are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.
Warehouse Finance
The Bank participates in several collateral-based warehouse lines of credit whereby the Bank is in a senior, secured position as the first out participant. These facilities are primarily collateralized by consumer receivables, with the Bank holding a senior collateral position enhanced by a subordinate party structure.
Originations, Sales and Servicing of Loans and Leases
The Company, from time to time, sells loans and leases, and in some cases, loan participations, generally without recourse. At September 30, 2023, 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, 2023, the Company was servicing $318.8 million of SBA/USDA loans and $13.7 million of term lending 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 gains for the Company at the time of sale and created a stream of future servicing income. When the Company sells the guaranteed portion of its loans, it retains credit risk on the non-guaranteed portion of the loans, and, if a customer defaults on the loan, the Company shares any loss and recovery related to the loan pro-rata with the SBA or USDA, as applicable. If the SBA or USDA establishes that a loss on a guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by the Company, the SBA or USDA may seek recovery of the principal loss related to the deficiency from the Company, which could materially adversely affect our business, results of operations and financial condition.
In the normal course of business, the Company enters into off-balance sheet transactions with special purpose entities ("SPEs"). See Note 1 to the "Notes of Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Date" of this Annual Report on Form 10-K, for more information on these transactions.
In periods of economic uncertainty, the Company’s ability to originate large dollar volumes of loans and leases may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company’s ability to sell loans may substantially decrease if potential buyers reduce their purchasing activities.
The following table shows the loan and lease originations (including draws, loan and lease renewals, and undisbursed portions of loans and leases in process), purchases, and sales and repayment activities of the Company for the periods indicated.
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Originations
Commercial finance $ 11,268,857 $ 11,554,312
Consumer finance 1,842,021 1,530,128
Tax services 1,493,109 1,898,511
Total loans and leases originated 14,603,987 14,982,951
Purchases
Commercial finance 480 3,098
Warehouse finance 212,706 112,255
Total loans and leases purchased 213,186 115,353
Sales and Repayments
Sales:
Commercial finance 16,610 66,397
Consumer finance 1,123,271 932,747
Community banking - 183,457
Total loans and leases sales 1,139,881 1,182,601
Repayments:
Loan and lease principal repayments 12,751,261 14,029,362
Total principal repayments 12,751,261 14,029,362
Total reductions 13,891,142 15,211,963
Increase (decrease) in other items, net (43,270) 27,612
Net increase (decrease) $ 882,761 $ (86,047)
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, 2023.
30-59 Days 60-89 Days > 89 Days Past Due
(Dollars in thousands) Number of Loans Amount Percent of Category Number of Loans Amount Percent of Category Number of Loans Amount Percent of Category
Loans held for sale 27 $ 626 2.3 % 25 $ 549 4.5 % 15 $ 306 1.1 %
Commercial finance 364 23,434 86.6 % 255 9,143 75.5 % 981 20,352 72.8 %
Consumer finance 2,140 2,992 11.1 % 731 2,425 20.0 % 696 2,210 7.9 %
Tax services (1)
- - - % - - - % - 5,082 18.2 %
Total loans and leases held for investment 2,504 $ 26,426 97.7 % 986 $ 11,568 95.5 % 1,677 $ 27,644 98.9 %
Total loans and leases 2,531 $ 27,052 100.0 % 1,011 $ 12,117 100.0 % 1,692 $ 27,950 100.0 %
(1) The tax services loans past due represented the aggregate remaining balance of the tax services loan portfolio.
Delinquencies 90 days and over constituted 0.63% of total loans and leases and 0.37% of total assets.
Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table above are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful.
The table below sets forth the amounts and categories of the Company’s nonperforming assets.
At September 30,
(Dollars in thousands) 2023 2022
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance $ 37,372 $ 13,375
Total nonaccruing loans and leases 37,372 13,375
Accruing loans and leases delinquent 90 days or more:
Loans held for sale 306 -
Commercial finance 11,242 4,142
Consumer finance 2,210 2,793
Tax services(1)
5,082 8,873
Total accruing loans and leases delinquent 90 days or more 18,840 15,808
Total nonperforming loans and leases 56,212 29,183
Other Assets
Nonperforming operating leases 1,764 1,736
Foreclosed and repossessed assets:
Commercial finance - 1
Total foreclosed and repossessed assets - 1
Total other assets 1,764 1,737
Total nonperforming assets $ 57,976 $ 30,920
Total as a percentage of total assets 0.77 % 0.46 %
(1) Certain tax services loans do not bear interest.
For the fiscal year ended September 30, 2023, 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, 2023, the Company had $37.4 million in nonaccruing loans and leases, which constituted 0.8% of the Company's gross loan and lease portfolio. At September 30, 2022, the Company had $13.4 million in nonaccruing loans which constituted 0.4% of its gross loan and lease portfolio. The fiscal 2023 increase in nonaccruing loans and leases was primarily driven by one sizable relationship within the commercial finance portfolio.
Accruing Loans and Leases Delinquent 90 Days or More. At September 30, 2023, the Company had $18.8 million in accruing loans and leases delinquent 90 days or more, compared to $15.8 million at September 30, 2022. The increase in balance of accruing loans and leases 90 days or more past due was primarily within the commercial finance portfolio, partially offset by a reduction within the seasonal tax services portfolio.
For information on classified assets, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Asset Quality” of this Annual Report on Form 10-K.
Allowance for Credit Losses. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments requires the use of a current expected credit losses ("CECL") methodology to determine the allowance for credit losses ("ACL") for loans and debt securities held to maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions. See Note 1 to the "Notes of Consolidated Financial Statements," which is included in Part II, Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, for more information of the ACL.
The following table sets forth an analysis of the Company’s ACL.
At September 30,
(Dollars in thousands) 2023 2022
Balance at beginning of period $ 45,947 $ 68,281
Charge-offs:
Commercial finance (18,894) (25,422)
Consumer finance (2,263) (4,787)
Tax services (38,741) (30,852)
Total charge-offs (59,898) (61,061)
Recoveries:
Commercial finance 3,245 6,334
Consumer finance - 345
Tax services 2,963 2,762
Community banking - 424
Total recoveries 6,208 9,865
Net (charge-offs) recoveries (53,690) (51,196)
Provision for credit losses 57,448 28,862
Balance at end of period $ 49,705 $ 45,947
Ratio of net charge-offs during the period to average loans outstanding during the period 1.36 % 1.34 %
Ratio of net charge-offs during the period to average loans outstanding during the period (excluding tax loans and tax net charge-offs) 0.47 % 0.63 %
Ratio of net charge offs during the period to nonperforming assets at year end 92.61 % 165.58 %
Allowance to total loans and leases 1.14 % 1.30 %
Ratio of allowance to total nonaccrual loans 1.33 3.44
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.
The following table presents net loan charge-offs per lending category and the percentage of net charge-offs to average loan and lease balances.
At and For the Fiscal Year Ended September 30,
2023 2022
(Dollars in thousands) Net Loan Charge-offs Average Outstanding Balance Percent of Net Charge-offs to Average Loans Net Loan Charge-offs Average Outstanding Balance Percent of Net Charge-offs to Average Loans
Term lending $ 9,476 $ 1,184,055 0.8 % $ 9,580 $ 1,040,003 0.9 %
Asset-based lending 2,317 369,686 0.6 % (416) 358,683 (0.1) %
Factoring 1,513 342,447 0.4 % 9,140 380,544 2.4 %
Lease financing 1,176 190,661 0.6 % (335) 235,475 (0.1) %
Insurance premium finance 1,162 558,018 0.2 % 541 444,184 0.1 %
SBA/USDA 5 409,296 - % 578 258,039 0.2 %
Other commercial finance - 166,422 - % - 167,657 - %
Commercial finance 15,649 3,220,585 0.5 % 19,088 2,884,585 0.7 %
Consumer finance 2,263 231,242 1.0 % 4,442 295,356 1.5 %
Tax services 35,778 141,210 25.3 % 28,090 179,611 15.6 %
Warehouse finance - 343,168 - % - 433,121 - %
Community banking - - - % (424) 34,758 (1.2) %
Total $ 53,690 $ 3,936,205 1.4 % $ 51,196 $ 3,827,431 1.3 %
The distribution of the Company’s ACL at the dates indicated is summarized as follows:
At September 30,
2023 2022
(Dollars in thousands) Amount Percent of Loans and Leases in Each Category of Total Loans and Leases Amount Percent of Loans and Leases in Each Category of Total Loans and Leases
Term lending $ 25,686 30.0 % $ 24,621 30.9 %
Asset-based lending 2,738 8.8 % 1,050 10.0 %
Factoring 6,566 8.2 % 6,556 10.5 %
Lease financing 3,302 4.2 % 5,902 6.0 %
Insurance premium finance 2,637 18.4 % 1,450 13.5 %
SBA/USDA 2,962 12.0 % 3,263 10.2 %
Other commercial finance 3,089 3.8 % 1,310 4.5 %
Commercial finance 46,980 85.4 % 44,152 85.6 %
Consumer finance 2,346 5.8 % 1,463 4.8 %
Tax services 2 0.1 % 5 0.3 %
Warehouse finance 377 8.7 % 327 9.3 %
Total $ 49,705 100.0 % $ 45,947 100.0 %
Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company's ACL as a percentage of total loans and leases decreased to 1.14% at September 30, 2023 from 1.30% at September 30, 2022. The decrease in the total loans and leases coverage ratio was primarily driven by a decrease in the coverage ratio for the commercial finance portfolio which was due to both quantitative and qualitative factors. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.
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, 2023 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, which is implemented by members of the Company’s Asset/Liability Committee. The Company closely monitors balances in these accounts and maintains a portfolio of highly liquid assets to fund potential deposit outflows or other liquidity needs. To date, the Company has not experienced any unexpected significant outflows related to the BaaS business line deposits, though no assurance can be given that this will continue to be the case.
As of September 30, 2023, investment securities and MBS with fair values of approximately $773.6 million and $996.9 million were pledged as collateral to the Federal Reserve Bank (“FRB”) and the Federal Home Loan Bank of Des Moines (“FHLB”), respectively, to secure various obligations of the Company. 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, 2023, the Company had total investment securities, excluding MBS, with an amortized cost of $682.1 million compared to $623.4 million as of September 30, 2022. At September 30, 2023, $602.5 million, or 99%, 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.
The following table sets forth the carrying value of the Company’s investment securities portfolio, excluding MBS, at the dates indicated.
At September 30,
(Dollars in thousands) 2023 2022
Investment Securities Available for Sale ("AFS")
Corporate securities $ 18,250 $ 22,187
Asset-backed securities 246,199 147,790
SBA securities 85,242 97,768
Obligations of states and political subdivisions 2,289 2,344
Non-bank qualified obligations of states and political subdivisions 226,723 263,783
Subtotal debt securities AFS 578,703 533,872
Investment Securities Held to Maturity ("HTM")
Non-bank qualified obligations of states and political subdivisions(1)
34,415 39,093
Subtotal debt securities HTM 34,415 39,093
FRB and FHLB stock 28,210 28,812
Total investment securities and FRB and FHLB stock $ 641,328 $ 601,777
Other Interest-Earning Assets
Interest bearing deposits in other financial institutions and federal funds sold(2)
$ 262,225 $ 295,752
(1) Includes no taxable obligations of states and political subdivisions.
(2) From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including the FRB, the FHLB,
and other private institutions. At September 30, 2023, the Company had $260.3 million and $1.9 million in interest bearing deposits held at
the FRB and FHLB, respectively. At September 30, 2022, the Company had $294.5 million and $1.3 million in interest bearing deposits held
at the FRB and FHLB, 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, 2023, excluding equity securities and mutual funds, FRB and 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.
At September 30, 2023
1 Year or Less After 1 Year Through 5 Years After 5 Years Through 10 Years After 10 Years Total Investment Securities
(Dollars in thousands) Carrying
Value Carrying
Value Carrying
Value Carrying
Value Amortized Cost Fair
Value
Debt Securities AFS
Corporate securities $ - $ - $ 18,250 $ - $ 25,000 $ 18,250
Asset-backed securities - - - 246,199 255,384 246,199
SBA securities 1,094 4,659 45,617 33,872 95,549 85,242
Obligations of states and political subdivisions 1,800 134 355 - 2,368 2,289
Non-bank qualified obligations of states and political subdivisions 2,077 5,499 2,206 216,941 269,396 226,723
Total debt securities AFS $ 4,971 $ 10,292 $ 66,428 $ 497,012 $ 647,697 $ 578,703
Weighted average yield(1)
4.29 % 6.73 % 6.97 % 6.45 % 4.05 % 6.48 %
Debt Securities HTM
Non-bank qualified obligations of states and political subdivisions $ - $ - $ - $ 34,415 $ 34,415 $ 29,571
Total debt securities HTM $ - $ - $ - $ 34,415 $ 34,415 $ 29,571
Weighted average yield(1)
- % - % - % 2.47 % 2.47 % 5.17 %
(1) Yields on tax-exempt obligations have not been computed on a tax-equivalent basis.
The amortized cost of AFS and HTM investment debt securities increased $58.8 million at September 30, 2023 when compared to September 30, 2022 while the fair value of AFS and HTM investment debt securities increased $38.5 million over the same period. These increases were primarily driven by an increase in asset-backed securities, partially offset by a reduction in non-bank qualified obligations of state and political subdivisions.
Mortgage-Backed Securities
The Company’s mortgage-backed and related securities portfolio as of September 30, 2023 consisted of securities issued by U.S. Government agencies or instrumentalities, including those of Farmer Mac, Freddie Mac, Fannie Mae, and Ginnie Mae along with private label institutions. The Farmer Mac, Freddie Mac, Fannie Mae, and Ginnie Mae 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, 2023, the Company had a diverse MBS portfolio with an amortized cost of $1.50 billion. The fair market value of the MBS portfolio at September 30, 2023 was $1.23 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, 2023, $1.17 billion, or 95.2%, 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,
(Dollars in thousands) 2023 2022
Available for Sale
Farmer Mac $ 70,034 $ 78,870
Freddie Mac 61,516 66,653
Freddie Mac CML 11,745 11,983
Fannie Mae 107,585 121,968
Ginnie Mae 746,858 814,971
Private Label 227,787 254,552
Total MBS AFS $ 1,225,525 $ 1,348,997
Held To Maturity
Ginnie Mae $ 2,176 $ 2,589
Total MBS HTM $ 2,176 $ 2,589
The following table sets forth the contractual maturities of the Company’s MBS, excluding the effect of prepayments, periodic principal repayments and the adjustable-rate nature of these instruments, all of which typically lower the average life of these securities.
At September 30, 2023
1 Year or Less After 1 Year Through 5 Years After 5 Years Through 10 Years After 10 Years Total Investment Securities
(Dollars in thousands) Carrying
Value Carrying
Value Carrying
Value Carrying
Value Amortized
Cost Fair
Value
Available for Sale
Farmer Mac $ - $ - $ 56,947 $ 13,087 $ 80,141 $ 70,034
Freddie Mac - - 21,286 40,230 74,521 61,516
Freddie Mac CML - - - 11,745 12,228 11,745
Fannie Mae - - 4,929 102,656 127,444 107,585
Ginnie Mae - - - 746,858 926,700 746,858
Private Label - - - 227,787 274,602 227,787
Total MBS AFS $ - $ - $ 83,162 $ 1,142,363 $ 1,495,636 $ 1,225,525
Weighted average yield - % - % 5.73 % 5.93 % 2.74 % 5.92 %
Held To Maturity
Ginnie Mae $ - $ - $ - $ 2,176 $ 2,176 $ 1,854
Total MBS HTM $ - $ - $ - $ 2,176 $ 2,176 $ 1,854
Weighted average yield - % - % - % 2.73 % 2.73 % 5.75 %
At September 30, 2023, 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.
Under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively, "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.
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 are 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 to compensate for short-term delays in deposit funding, may be used on a longer-term basis to support expanded lending activities, and may also be used to match the funding of a corresponding asset.
Deposits
The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company’s deposits primarily consist of demand deposit accounts, savings accounts, and money market savings accounts, many of which are related to the BaaS business line. In addition, the Company may periodically utilize brokered or other wholesale deposits to target strategic maturities related to its seasonal refund advance lending. The refund advance lending season typically lasts six weeks or less and it is generally more efficient to fund these short-term loans by using brokered deposits 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.
The variety of deposit accounts offered by the Company has allowed it to be competitive in obtaining funds and to respond with flexibility to changes in consumer demand. The Company endeavors to manage the pricing of its deposits in keeping with its asset/liability management and profitability objectives. Based on its experience, the Company believes that deposits related to the BaaS business line are relatively stable sources of deposits. However, the ability of the Company to attract and maintain deposits and the rates paid on these deposits has been and will continue to be significantly affected by market conditions.
During fiscal years 2020 and 2021, in partnership with the U.S. Department of the Treasury’s Bureau of the Fiscal Service (“Fiscal Service”), the Bank issued 16.5 million prepaid cards in conjunction with the three Economic Impact Payment ("EIP") stimulus programs, totaling approximately $24.15 billion. As of September 30, 2023, the Company had $897.5 million in deposits related to government stimulus funds. Of the total amount of government stimulus program deposits, $340.7 million are on activated cards while $556.8 million are on inactivated cards. During fiscal year 2024, these inactivated card balances are expected to decrease by approximately $380 million as the Company actively returns unclaimed balances to the U.S. Treasury.
At September 30, 2023, $6.38 billion of the Company’s $6.59 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 $6.32 billion are included with noninterest-bearing checking accounts and $57.8 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 customer or card program were to leave the Bank, deposit outflows could be more significant than if the Bank were to lose a more traditional customer, although it is considered unlikely that all deposits related to a program would leave the Bank without significant advance notification. As such, and as historical results indicate, the Company believes that its deposit portfolio attributable to the Consumer segment is stable. 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.
For information on noninterest-bearing checking deposits, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition" of this Annual Report on Form 10-K.
Approximately 49% of the deposit portfolio during the 2023 fiscal fourth quarter was subject to variable, rate-related processing expenses that are derived from the terms of contractual agreements with certain BaaS partners. These agreements are tied to a rate index, typically the Effective Federal Funds Rate ("EFFR").
The following table sets forth the dollar amount of deposits in the various types of deposit programs offered by the Company for the periods indicated.
At September 30,
2023 2022
(Dollars in thousands) Amount Percent of Total Amount Percent of Total
Transactions and Savings Deposits:
Non-Interest bearing checking $ 6,332,941 96.1 % $ 5,647,102 96.3 %
Interest bearing checking 415 - % 423 - %
Savings deposits 59,041 0.9 % 67,158 1.2 %
Money market deposits 185,307 2.8 % 137,888 2.4 %
Wholesale deposits 5,944 0.1 % 5,712 - %
Total transactions and savings deposits 6,583,648 99.9 % 5,858,283 99.9 %
Time Certificates of Deposit:
0.00 - 0.99% 5,534 0.1 % 7,311 0.1 %
1.00 - 1.99% - - % 344 - %
2.00 - 2.99% - - % 99 - %
Total time certificates of deposit(1)
5,534 0.1 % 7,754 0.1 %
Total deposits $ 6,589,182 100.0 % $ 5,866,037 100.0 %
(1) As of September 30, 2023, total time certificates of deposit included no wholesale certificates of deposit.
As of September 30, 2023 and 2022, total deposits that exceed FDIC insurance limits, or are otherwise uninsured, were estimated to be $550.7 million and $211.4 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.
Maturity
(Dollars in thousands) 3 Months or Less After 3 to 6 Months After 6 to 12 Months After 12 Months Total
Certificates of deposit $ 734 $ 1,126 $ 757 $ 119 $ 2,736
The following table shows rate and maturity information for the Company’s certificates of deposit at September 30, 2023.
(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, 2023 $ 2,037 $ - $ - $ 2,037 36.8 %
March 31, 2024 1,871 - - 1,871 33.8 %
June 30, 2024 1,257 - - 1,257 22.7 %
September 30, 2024 - - - - - %
September 30, 2025 369 - - 369 6.7 %
Thereafter - - - - - %
Total $ 5,534 $ - $ - $ 5,534 100.0 %
Percent of total 100.0 % - % - % 100.0 %
The following table indicates the amount of the Company’s certificates of deposit by time remaining until maturity as of September 30, 2023.
(Dollars in thousands) 3 Months or Less After 3 to 6 Months After 6 to 12 Months After 12 Months Total
Certificates of deposit less than $250,000 $ 302 $ 245 $ - $ - $ 547
Certificates of deposit of $250,000 or more 1,735 1,626 1,257 369 4,987
Total certificates of deposit $ 2,037 $ 1,871 $ 1,257 $ 369 $ 5,534
At September 30, 2023, there were no deposits from governmental or other public entities included in certificates of deposit.
For information on custodial off-balance sheet deposits, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Financial Condition” of this Annual Report on Form 10-K.
Borrowings
Although deposits are the Company’s primary source of funds, the Company’s practice has been to utilize borrowings when they are a less costly source of funds, can be invested at a positive interest rate spread, or when the Company desires additional capacity to fund loan demand. Borrowings from various sources mature based on stated payment schedules.
The Company’s borrowings have historically consisted primarily of advances from the FHLB upon the security of a blanket collateral agreement of a percentage of unencumbered loans and the pledge of specific 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, 2023, the Bank had $13.0 million overnight borrowings with the ability to borrow up to an approximate additional $785.0 million from the FHLB.
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, 2023, $19.6 million in aggregate principal amount in subordinated debentures were outstanding.
On July 16, 2001, the Company issued all of the 10,310 authorized shares of Company Obligated Mandatorily Redeemable Preferred Securities of First Midwest Financial Capital Trust I (preferred securities of subsidiary trust) holding solely trust preferred securities. Distributions are paid semiannually. Cumulative cash distributions are calculated at 6-month CME Term SOFR plus 0.42826% tenor spread adjustment plus 3.75%, not to exceed 12.5%. The Company may, at one or more times, defer interest payments on the capital securities for up to 10 consecutive semi-annual periods, but not beyond July 25, 2031. At the end of any deferral period, all accumulated and unpaid distributions must be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has a semiannual option to shorten the maturity date. The option has not been exercised as of the date of this filing. The redemption price is $1,000 per capital security plus any accrued and unpaid distributions to the date of redemption. Holders of the capital securities have no voting rights, are unsecured, and rank junior in priority of payment to all of the Company’s indebtedness and senior to the Company’s common stock. The trust preferred securities have been includable in the Company’s capital since they were issued. The preferential capital treatment of the Company’s trust preferred securities was grandfathered under the Dodd-Frank Act and is consistent with federal community bank capital rules.
Through the Crestmark Acquisition, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The subordinated debentures bear interest at 3-month CME Term SOFR plus 0.26161% tenor spread adjustment plus 3.00%, have a stated maturity of 30 years from the date of issuance and are redeemable by the Company at par, with regulatory approval. The interest rate is reset quarterly at distribution dates in February, May, August, and November. The subsidiary has the option to defer interest payments on the subordinated debentures from time to time for a period not to exceed five consecutive years.
The outstanding balance of the trust preferred securities at September 30, 2023 was $13.7 million.
The following table sets forth the maximum month-end balance and average balance of trust preferred securities, subordinated debentures, overnight fed funds purchased, and other borrowings for the periods indicated.
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Maximum Balance:
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,626 20,000
Overnight fed funds purchased 440,000 582,000
Other borrowings 2,178 4,994
Average Balance:
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,560 46,441
Overnight fed funds purchased 74,812 32,414
Other borrowings 1,447 3,829
The following table sets forth certain information as to the Company’s trust preferred securities, subordinated debentures, overnight fed funds purchased, and other borrowings.
At September 30,
(Dollars in thousands) 2023 2022
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures 19,591 20,000
Overnight fed funds purchased 13,000 -
Other borrowings 621 2,367
Total borrowings $ 46,873 $ 36,028
Weighted average interest rate of trust preferred securities 9.39 % 7.68 %
Weighted average interest rate of subordinated debentures 6.63 % 6.63 %
Weighted average interest rate of overnight fed funds purchased 5.57 % - %
Payment, Issuing, and Tax Solutions
The Company's core capabilities of payment, issuing, and tax solutions focus on innovation in the fintech industry 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 multiple payment solutions 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.
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 customers 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 customers.
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 25 bank for receiving and originating payments. As of September 2023, Pathward typically processes a combined $2.5 billion per day in ACH and wire services to provide safe and efficient movement of money.
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 60% 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), and an EMV chip, which is equipped with a microprocessor chip and the technology used to authenticate chip card transactions. When the holder of a card attempts a permitted transaction, necessary information, including the authorization for such transaction, is shared between the “point of use” or “point of sale” and authorization systems maintaining the account of record. Most recently, “virtual” prepaid cards have become popular in the industry. Virtual prepaid cards are used in both the consumer space, for example as a gift card, and in the commercial arena to facilitate accounts payable and vendor payments.
The funds associated with such cards are typically held in pooled accounts at the Bank representing the aggregate value of all cards issued in connection with particular products or programs. Although the funds are held in pooled accounts, the account of record indicates the funds held by each individual card. The cards may work in a closed loop (e.g., the card will only work at one particular merchant and will not work anywhere else), a restricted access network (e.g., the card will only work at a specific set of merchants such as a shopping mall), or in an open loop by way of a Visa, MasterCard, or Discover branded debit card that will work wherever such cards are accepted for payment. Most of the Company's prepaid cards are open loop. Pathward is one of the leading prepaid card issuers in the United States.
The prepaid card business can generally be divided into two program categories: Consumer Use and Business or Commercial Use products. These programs are typically offered through a third-party relationship.
Consumer Use. Examples of consumer use prepaid card programs include payroll, general purpose reloadable ("GPR"), reward, gift and benefit/HSA cards. Payroll cards are a product whereby an employee’s payroll is loaded to the card by their employer via direct deposit. GPR cards are usually distributed by retailers and can be reloaded an indefinite number of times at participating retail load networks. Other examples of reloadable cards are travel cards, which are used in place of traveler’s checks and can be reloaded a predetermined number of times, as well as tax-related cards where a taxpayer’s refund is placed on the card. Reloadable cards are generally open-loop cards that consumers can use to obtain cash at ATMs or purchase goods and services wherever such cards are accepted for payment.
Business or Commercial Use. Prepaid cards are also frequently used by businesses for travel and entertainment, accounts payable and business-to-business ("B2B") settlement products. For example, virtual prepaid cards are used to facilitate one-time payments between a company and its vendors for monthly settlement. Travel and entertainment cards, alternatively, are reloadable by the company for use by its employees to travel for business.
Consumer Banking Solutions. Partners looking to offer financial services in an ecosystem typically employ a 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. The temporary deposit account remains available for use for two tax years, which allows for additional payments to be received in addition to federal and state refunds, and then the account is closed.
Regulation and Supervision
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 Office of the Comptroller of the Currency ("OCC"), as its primary federal regulator, and the FDIC, the federal agency that administers the DIF. As a BHC, the Company is supervised and examined by the FRB. Federal banking policy is designed to protect customers of and depositors in insured depository institutions, the DIF, and the U.S. banking system.
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.
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.
Debit Card Transactions. On October 3, 2022, the Federal Reserve updated its rules concerning debit card transactions under Regulation II (12 C.F.R. Part 235) consistent with the Federal Reserve's statutory obligations under the Dodd-Frank Act. The final rule amends Regulation II to (i) specify that the requirement that each debit card transaction must be able to be processed on at least two unaffiliated payment card networks applies to card-not-present transactions, (ii) clarify the requirement that debit card issuers ensure that at least two unaffiliated networks have been enabled to process a debit card transaction, and (iii) standardize and clarify the use of certain terminology for debit card transactions, including for card-not-present transactions. The final rule, which became effective on July 1, 2023 does not impact or modify the Federal Reserve's rules on interchange fees.
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 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.”
Temporary Regulatory Capital Relief Related to Impact of CECL
In March 2020, 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. In May, 2023, the FDIC announced a proposed rulemaking with respect to a special assessment to recover the costs associated with protecting uninsured depositors following the closures of Silicon Valley Bank and Signature Bank. As proposed, the assessment would be calculated based only on a bank's uninsured deposits in excess of $5 billion and therefore is not expected to impact the Company or the Bank.
Regulatory authorities have been granted extensive discretion in connection with their supervisory and enforcement activities which are intended to strengthen the financial condition of the banking industry, including, but not limited to, the imposition of restrictions on the operation of an institution, the classification of assets by the institution, and the adequacy of an institution’s allowance for credit losses. Typically, these actions are undertaken due to violations of laws or regulations or conduct of operations in an unsafe or unsound manner.
The Bank derives its lending and investment powers from the National Bank Act (“NBA”) and the OCC’s implementing regulations promulgated thereunder. Under these laws and regulations, the Bank may invest in mortgage loans secured by residential and commercial real estate, commercial and consumer loans, certain types of debt securities and certain other assets. The Bank may also invest in operating subsidiaries, bank service companies (but not service corporations generally), financial subsidiaries, and may make non-controlling investments in other entities, in each case subject to the statutory provisions of the NBA and the OCC’s regulatory requirements and limitations.
In general, the Bank’s legal lending limit totals 15 percent of its capital and surplus plus an additional 10 percent of capital and surplus if the amount that exceeds the 15 percent general limit is fully secured by readily marketable collateral (together, referred to as the “combined general limit”). At September 30, 2023, the Bank was in compliance with the combined general limit.
The OCC announced on September 28, 2023 that its supervisory strategies for 2024 will focus on: (a) asset and liability management; (b) credit risk management and allowance for credit losses; (c) cybersecurity; (d) operations; (e) digital ledger technology activities; (f) change management; (g) payments; (h) Bank Secrecy Act/anti-money laundering/countering the financing of terrorism/Office of Foreign Assets Control; (i) consumer compliance and fair lending risk; (j) Community Reinvestment Act performance; and (k) climate-related financial risk management.
The OCC’s 2024 supervisory plan provides the foundation for policy initiatives and for supervisory strategies as applied to national banks as well as their third-party service providers subject to OCC examination. OCC staff members use the supervisory plan to guide their supervisory priorities, planning, and resource allocations. The OCC typically provides periodic updates about supervisory priorities through the Semiannual Risk Perspective process in the fall and spring of each year.
Insurance of Deposit Accounts and Regulation by the FDIC
The Bank is a member of the DIF, which is administered by the FDIC. Pursuant to the Dodd-Frank Act, a permanent increase in deposit insurance to $250,000 was authorized. The coverage limit is per depositor, per insured depository institution for each account ownership category. FDIC insurance is backed by the full faith and credit of the United States government.
While not the Bank's primary federal regulator, the FDIC, as insurer of the Bank's deposits, imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order poses a serious risk to the DIF. The FDIC also has authority to initiate enforcement actions against any FDIC-insured institution after giving its primary federal regulator the opportunity to take such action, and may seek to terminate the deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition. Finally, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the OCC.
The FDIC imposes an assessment against all depository institutions for deposit insurance quarterly. FDIC 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, 2023, 2022 and 2021, the Bank’s deposit insurance assessment rate was 7 basis points, 5 basis points, and 5 basis points, respectively. The Bank’s deposit insurance premium expense totaled $4.3 million for 2023, $3.1 million for 2022, and $6.2 million for 2021. A significant increase in DIF insurance premiums would have an adverse effect on the operating expenses and results of operations of the Bank.
The designated reserve ratio (“DRR”) of the DIF reached 1.36% as of September 30, 2018, exceeding the statutorily required 1.35% two years ahead of the deadline imposed by the Dodd-Frank Act. On June 30, 2019, the DRR reached 1.40% and the FDIC applied small bank credits to banks with less than $10 billion in assets, such as the Bank, beginning September 30, 2020. The FDIC will continue to apply small bank credits so long as the DRR is at least 1.35%. After applying small bank credits for four quarters, the FDIC will remit to banks the value of any remaining small bank credits in the next assessment period in which the DRR is at least 1.35%.
The Federal Deposit Insurance Act requires the FDIC to designate and publish the DRR before the beginning of each calendar year. For calendar year 2023, the FDIC set the DRR at 2.00%, which is consistent with the DRR set for each calendar year since 2011 and the FDIC's goal to maintain the DRR at or above the statutory threshold.
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, 2023, the Bank categorized $64.3 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. Specifically, the Bureau revoked provisions that: (i) provide that it is an unfair and abusive practice for a lender to make a covered short-term or longer-term balloon-payment loan, including payday and vehicle title loans, without reasonably determining that consumers have the ability to repay those loans according to their terms; (ii) prescribe mandatory underwriting requirements for making the ability-to-repay determination; (iii) exempt certain loans from the mandatory underwriting requirements; and (iv) establish related definitions, reporting, and recordkeeping requirements. However, due to continuing appellate litigation regarding the constitutionality of the Bureau's funding structure, which stems, in part, from legal challenges to the Small Dollar Rule, the effective date for nationwide compliance with the Small Dollar Rule remains uncertain at this time.
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 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 June 9, 2023, the OCC, Federal Reserve, and FDIC issued final interagency guidance on risk management of third-party relationships, including third-party lending relationships. The interagency guidance is based, in part, on the OCC’s existing third-party risk management guidance from 2013 and seeks to, among other things, promote consistency in third-party risk management and provide sound risk management guidance for third-party relationships commensurate with a bank’s risk profile and complexity as well as the criticality of the activity. The final interagency guidance replaces each agency’s existing guidance on this topic (including the OCC's 2020 Frequently Asked Questions on Third-Party Relationships) and is directed to all banking organizations supervised by the OCC, Federal Reserve, and FDIC.
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, 2023, the Bank paid assessments (standard assessments) of $734,217 to the OCC.
Regulatory Capital Requirements
The regulatory capital rules applicable to the Company and the Bank (the “Capital Rules”) identify three components of regulatory capital: (i) common equity tier 1 capital (“CET1 Capital”), (ii) additional tier 1 capital, and (iii) tier 2 capital. Tier 1 capital is the sum of CET1 Capital and additional tier 1 capital instruments meeting certain requirements. Total capital is the sum of tier 1 capital and tier 2 capital. CET1 Capital, tier 1 capital, and total capital serve as the numerators for three prescribed regulatory capital ratios. Risk-weighted assets, calculated using the standardized approach in the Capital Rules for the Company and the Bank, provide the denominator for such ratios. There is also a leverage ratio that compares tier 1 capital to average total assets.
Failure by the Company or the Bank to meet minimum capital requirements set by the Capital Rules could result in certain mandatory and/or discretionary disciplinary actions by their regulators that could have a material adverse effect on their business and their consolidated financial position. Under the capital requirements and the regulatory framework for prompt corrective action (discussed below), the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors.
The Company and the Bank are required to maintain a capital conservation buffer of 2.5% above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of CET1 Capital and applies to each of the three risk-based capital ratios (but not the leverage ratio).
The Capital Rules provide for a number of deductions from and adjustments to CET1 Capital. These include, for example, the requirement that deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks and significant investments in non-consolidated financial entities be deducted from CET1 Capital to the extent that any one such category exceeds 10% of CET1 Capital or all such items, in the aggregate, exceed 15% of CET1 Capital.
The Capital Rules prescribe a standardized approach for risk weightings for a large and risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities to 600% for certain equity exposures, and resulting in high-risk weights for a variety of asset classes. As of September 30, 2023, 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 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 $110.0 million to the Company during fiscal 2023, 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 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. On August 25, 2023, the Company's Board of Directors authorized a new stock repurchase program pursuant to which the Company may repurchase up to an additional 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028. As part of its capital planning, the Company will continue to regularly assess its needs for dividends from the Bank in order to fund future share repurchases and dividends to the Company's stockholders as needed.
Transactions with Affiliates
The Bank must comply with Sections 23A and 23B of the Federal Reserve Act relative to transactions with “affiliates,” generally defined to mean any company that controls or is under common control with the institution (as such, the Company is an affiliate of the Bank for these purposes). Transactions between an institution or its subsidiaries and its affiliates are required to be on terms as favorable to the Bank as terms prevailing at the time for transactions with non-affiliates. Certain transactions, such as loans to an affiliate, are restricted to a percentage of the institutions’ capital (e.g., the aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the institution; the aggregate amount of covered transactions with all affiliates is limited to 20% of the institution’s capital and surplus).
Community Reinvestment Act (“CRA”)
Under the CRA, the Bank is evaluated periodically by its primary federal banking regulator to determine if it is meeting its continuing and affirmative obligations consistent with its safe and sound operation, to help meet the credit needs of its assessment areas, including low- and moderate-income neighborhoods. CRA ratings can also impact an insured depository institution’s ability to engage in certain activities as CRA performance is considered in connection with certain applications by depository institutions and their holding companies, including merger applications, charter applications, and applications to acquire assets or assume liabilities. The Bank received 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 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, 2023, the Bank had in the aggregate $8.5 million in FHLB stock, which was in compliance with the FHLB of Des Moines' requirement. For the fiscal year ended September 30, 2023, dividends paid by the FHLB to the Bank totaled $0.5 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 proprietorship, unincorporated organization, or any other form of entity. A person acquires "control" of a banking organization whenever the person acquires ownership, control, or the power to vote 25 percent or more of any class of voting securities of the institution. The applicable regulations also provide for certain other "rebuttable" presumptions of control.
In April 2020, the Federal Reserve adopted a final rule to revise its regulations related to determinations of whether a company has the ability to exercise a controlling influence over another company for purposes of the BHCA. The final rule expands and codifies the presumptions for use in such determinations. By codifying the presumptions, the final rule provides greater transparency on the types of relationships that the Federal Reserve generally views as supporting a facts-and-circumstances determination that one company controls another company. The Federal Reserve’s final rule applies to questions of control under the BHCA, but does not extend to CIBCA.
Source of Strength and Capital Requirements
The Dodd-Frank Act requires all companies, including BHCs, that directly or indirectly control an insured depository institution to serve as a source of financial and managerial strength to its subsidiary depository institutions and to maintain adequate resources to support such institutions; to date, however, specific regulations implementing this requirement have not been published. As an BHC, the Company is also subject to the same regulatory capital requirements as the Bank.
Examination
In 2019, the Federal Reserve published finalized guidance with respect to inspection frequency and scope for BHCs with less than $10 billion in assets. According to the Federal Reserve, with respect to institutions with less than $10 billion in assets (such as the Company), the determination of whether a holding company is "complex" versus "noncomplex" is made at least annually on a case-by-case basis taking into account and weighing a number of considerations, such as: the size and structure of the holding company; the extent of intercompany transactions between insured depository institution subsidiaries and the holding company or uninsured subsidiaries of the holding company; the nature and scale of any non-bank activities; and the degree of leverage of the holding company, including the extent of its debt outstanding to the public.
Dividends
In 2009, the Federal Reserve released a supervisory letter entitled Applying Supervisory Guidance and Regulations on the Payment of Dividends, Stock Redemptions and Stock Repurchases at Bank Holding Companies. This letter generally sets forth principles describing when a BHC must consult, provide notice, or seek approval from the FRB prior to a capital distribution including the payment of dividends, stock redemptions, or stock repurchases. According to FRB staff, the FRBs are likely to require holding companies to eliminate, defer or reduce dividends if these payments are not fully covered by the net income available to shareholders for the past four quarters, earnings retention is not consistent with capital needs or the holding company will not meet or is in danger of not meeting minimum regulatory capital adequacy ratios.
Management
In August 2017, the Federal Reserve published proposed guidance related to supervisory expectations for boards of directors of BHCs. The proposal sought to clarify supervisory expectations of boards and distinguish the roles held by senior management to allow boards to focus on fulfilling their core responsibilities. On February 26, 2021, the Federal Reserve issued a Supervision and Regulation letter (SR 21-3/CA 21-1) containing its final supervisory guidance on the effectiveness of a banking institution's board of directors. Although the guidance only applies to bank holding companies and savings-and-loan holding companies with total consolidated assets of $100 billion or more, the Company continues to monitor the Federal Reserve's evolving supervisory and regulatory approach to board and senior management effectiveness.
Additional Regulatory Matters
The Company is subject to oversight by the SEC, NASDAQ and various state securities regulators. In the normal course of business, the Company has received requests for information from these regulators. Such requests have been considered routine and incidental to the Company’s operations.
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 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 seek to provide a diverse, inclusive, safe, and healthy workplace for all.
Demographics
The following table describes the composition of our workforce as of September 30, 2023:
Employee Type 9/30/2022 9/30/2023 Change
Full-time 1,139 1,192 4.6%
All Other Types 15 7 (53.0)%
Total Employees 1,154 1,199 3.8%
Women 56%
Minorities 20%
Diversity, Equity and Inclusion ("DEI")
We value 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 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.
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 seek to identify 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 customers 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-first 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 continue to mature and expand our talent management framework. This framework is used throughout the company to better equip Pathward to have clear line of sight on its teams’ strengths and opportunities, by identifying capabilities needed to achieve our strategy and creating action plans to close gaps. This helps ensure our internal talent supply keeps pace with demand, that we invest in our workforce with intention, have our highest performing, highest potential employees applied to our most critical work, and are preparing today’s talent for tomorrow’s needs.
Our performance management program is an interactive practice that engages our employees beginning with aligning objectives at the enterprise level to drive individual goal setting and quarterly conversations designed to review progress and accomplishments and calibrate on focus areas for the upcoming quarter, driving progress against objectives, alignment, and performance feedback throughout the year. We offer a variety of support to help team members and managers establish and meet personalized development goals, take on new roles and become better leaders.
Employee Engagement
We recognize that team members who are involved in, enthusiastic about and committed to their work and workplace contribute meaningfully to the success of the company. As a normal course of business, we complete enterprise-wide engagement surveys. The results of the survey are reviewed with the executive management team and are used to prioritize employee programs, initiatives, and communications.
Total Rewards
As part of our total rewards strategy, we aspire to offer and maintain market competitive total rewards programs for our employees that attract and retain superior talent. In addition to healthy base wages, we offer other variable pay depending on an employee's position, including an annual bonus or commission plan. We offer a 401(k) plan with a highly competitive company match. Our healthcare, insurance benefits, health savings and flexible spending accounts are equally competitive with a low-cost share for the employee. We 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.
Health and Safety
We believe the success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety, and wellness of our employees. Being a fully remote-first employer, we provide laptops and related hardware along with a stipend to enhance employees' at-home work experience. Employees also have access to our offices if they choose to work there instead. Our employees and their families are also supported with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health. We follow local, state and federal regulations issued by the Occupational Safety and Health Administration and are prepared to implement any applicable workplace requirements.
Available Information
The Company’s website address is www.pathwardfinancial.com. The Company makes available, through a link with the SEC’s EDGAR database (http://www.sec.gov), free of charge, its Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, and statements of ownership on Forms 3, 4, and 5. Investors are encouraged to access these reports and other information about our business on our website. The information found on the Company’s website is not incorporated by reference in this or any other report the Company files or furnishes to the SEC. The Company also will provide copies of its Annual Report on Form 10-K, free of charge, upon written request to Darby Schoenfeld, SVP of Investor Relations, 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.

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ITEM 1A. RISK FACTORS
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, certain events including geopolitical and financial market 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.”
Risk Factor Summary
These risks and uncertainties include:
Risks Related to Our Industry and Business
•Our framework for managing risk, including our underwriting practices, may not prevent future 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.
•If our actual credit losses exceed our allowance for credit losses, our net income will decrease.
•Our earnings are significantly affected by general business, political and economic conditions.
•Adverse developments or concerns affecting the financial services industry or specific financial institutions could adversely affect our financial condition and results of operations.
•Ineffective liquidity management could adversely affect our financial condition and results of operation.
•Our investments in certain tax-advantaged projects may not generate anticipated returns, causing an adverse impact on our results of operations.
•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.
•Changes in interest rates could adversely affect our results of operations and financial condition.
•We operate in an extremely competitive market, and our business will suffer if we are unable to compete effectively.
•Our business could suffer if consumer behaviors, or other factors, in connection with the use of prepaid cards change, or there are adverse developments with respect to the prepaid financial services industry in general.
•Our operations depend upon third-party relationships; our ability to maintain such relationships and such third parties' performances could adversely affect our business.
•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 are exposed to fraud losses from customer accounts.
•We are exposed to settlement and other losses from payments customers.
•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.
•Acquisitions and other strategic transactions, or the failure to consummate such transactions, could disrupt our business and harm our financial condition and may not yield the intended benefits.
•New lines of business or new products and services may subject us to additional risks.
•An impairment charge of goodwill or other intangibles could have a material adverse impact on our financial condition and results of operations.
•We may incur losses due to fraudulent and negligent acts, as well as errors, by third parties or our employees.
•Security breaches involving us, the Bank or any third parties with which we do business could expose us to liability and litigation, adversely affecting our reputation and operating revenues.
•Failure to comply satisfactorily with certain privacy and data protection laws, regulations and standards to which we are subject could adversely affect our reputation and operating revenues.
•Our reputation and financial condition may be harmed by system failures, computer viruses and other technological interruptions to our operations.
•Agency, technological, or human error could lead to tax refund processing delays, which could adversely affect our reputation and operating revenues.
•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.
•Agreements between the Bank and third parties to market and service Bank-originated consumer loans may subject the Bank to credit, 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 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 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 regularly assess our investments in technology, and changes in technology could be costly.
•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.
•Unclaimed funds represented by unused value of the cards presents compliance and other risks.
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.
•The Bureau's rulemaking and enforcement of prohibitions against unfair, deceptive or abusive practices have directly impacted, and may continue to impact, the Bank's consumer financial products and service offerings.
•Regulatory scrutiny of bank provision of BaaS solutions and related technology considerations has recently increased.
•Increased scrutiny and evolving expectations from stakeholders with respect to environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.
•We will be subject to heightened regulatory requirements if our total assets exceed $10 billion as of December 31 of any calendar year.
•We will become subject to reduced interchange income and could face related adverse business consequences if our total assets exceed $10 billion as of December 31 of any calendar year.
•Any change in the Bank's ability to gather brokered deposits may adversely impact the Bank.
•As a bank holding company, we are required to serve as a "source of strength" for the Bank.
•If we fail to maintain sufficient capital, our financial condition, liquidity, results of operations, and compliance with regulatory requirements would be adversely affected.
•Changes in federal, state and local tax laws, interpretations of existing laws, or adverse determinations by tax authorities, could increase our tax burden or otherwise have a material adverse effect on our business, financial condition and results of operations.
General Risk Factors
•The price of our common stock may be volatile, which may result in losses for investors.
•An investment in our common stock is not an insured deposit.
•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.
•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.
•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.
•Federal regulations and our organizational documents may inhibit a takeover, prevent a transaction you favor or limit our growth opportunities, causing the market price of our common stock to decline.
•We may not be able to pay dividends in the future in accordance with past practice.
•Catastrophic events could negatively impact our operations, the operations of third parties with which we do business, and the communities in which we do business.
•Legal challenges to and regulatory investigations of our, or the Bank’s operations could have a significant material adverse effect on us.
•Our reputation and business could be damaged by negative publicity.
•Existing insurance policies may not adequately protect us and our subsidiaries.
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 credit losses, which could have an adverse effect on our financial condition and results of operations. Any resulting deterioration in our loan and lease 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 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 business lines 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 business lines, 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 recent events impacting financial, real estate, and securities markets, including geopolitical turmoil, rising interest rates, inflation, adverse developments in the financial services industry, 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 credit 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 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 credit 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 credit 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. 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.
Our earnings 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.
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 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 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.
Adverse developments or concerns affecting the financial services industry or specific financial institutions could adversely affect our financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, transactional counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar events, have in the past and may in the future lead to erosion of customer confidence in the banking system, deposit volatility, liquidity issues, stock price volatility, and other adverse developments. For example, the closures of Silicon Valley Bank ("SVB") and Signature Bank in March 2023, and First Republic Bank in May 2023, led to disruption and volatility, including deposit outflows and increased need for liquidity, at certain banks. Although depositors of these banks were largely protected, it is not certain that the Federal Reserve or FDIC will treat future bank failures similarly.
Similarly, inflation and rapid increases in interest rates have led to a decline in the trading value of previously issued government securities with interest rates below current market interest rates. Any sale of investment securities that are held in an unrealized loss position by financial institutions for liquidity or other purposes will cause actual losses to be realized. There can be no assurance that there will not be additional bank failures or issues such as liquidity concerns in the broader financial services industry or in the U.S. financial system as a whole. Adverse financial market and economic conditions can exert downward pressure on stock prices, security prices, and credit availability for financial institutions without regard to their underlying financial strength. The volatility and economic disruption resulting from the failures of SVB and Signature Bank particularly impacted the price of securities issued by financial institutions, including us.
While we did not experience any abnormal changes in our total outstanding deposit balances following the bank closures in March and May 2023 and related events, we experienced changes in deposit balances resulting from typical seasonal fluctuations due to the nature of our business. While our deposit base primarily consists of millions of retail cards and other small dollar accounts with an average balance less than $1,000 and we maintain a liquidity
position with numerous funding options available totaling over $2.6 billion as of September 30, 2023, we cannot be assured that unusual deposit withdrawal activity will not affect banks generally in the future or us in particular. Continued uncertainty regarding or worsening of the severity or duration of the volatility in the banking industry could also adversely impact our estimate of our allowance for credit losses and related provision for credit losses.
Any of these impacts, or any other impacts resulting from the events described above, could have a material adverse effect on our liquidity and our current and/or projected business operations and financial condition and results of operations.
Ineffective liquidity management could adversely affect our financial condition and results of operation.
Liquidity is essential to our business. We rely on different sources in order to meet our potential liquidity demands. Our primary sources of funds are deposits, derived principally through our BaaS business line, borrowings, principal and interest payments on loans and leases and mortgage-backed securities, and maturing investment securities. We also utilize wholesale deposit sources to provide temporary funding when necessary or when favorable terms are available. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities or on terms which are acceptable to us could be impaired by factors that affect us specifically, or the financial services industry or economy generally. Any decline in available funding in amounts adequate to finance our activities or on terms which are acceptable could adversely impact our ability to originate loans, invest in securities, meet our expenses or fulfill our obligations, such as repaying our borrowings or meeting deposit withdrawal demands, any of which could, in turn, have a material adverse effect on our business, financial condition and results of operations. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources” of this Form 10-K.
Our investments in certain tax-advantaged projects may not generate anticipated returns, causing 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.
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.
Through our Commercial Finance business line, we engage in equipment leasing activities. 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.
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 interest rates we earn on loans, securities, and other interest-earning assets, and (ii) the interest rates we pay on deposits, other borrowings, and other interest-bearing liabilities. We are exposed to interest rate risk because our interest-earning assets and interest-bearing liabilities do not react uniformly or concurrently to changes in interest rates since the two have different time periods for adjustment and can be tied to different measures of rates. These rates are highly sensitive to many factors beyond our control, including general economic conditions and the policies of various governmental and regulatory authorities, including the Federal Reserve. Throughout 2022 and 2023, the Federal Reserve has raised the federal funds rate to its current targeted rate between 5.25% and 5.5% in an effort to curb inflation. As market interest rates rise, we experience competitive pressures to increase the rates we pay on deposits, which may decrease our net interest income. In addition, inflationary pressures will increase our operating costs and could have a significant negative effect on our borrowers and the values of collateral securing loans, which could negatively affect our financial performance. 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, factoring companies, card issuers, 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, may offer services that we do not or cannot provide and, due to their size and other factors, may be able to offer services at more competitive rates. 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 business lines, may increase our costs, reduce our revenues or revenue growth, result in fragmented market share and a failure to enjoy economies of scale or make it difficult for us to compete effectively in maintaining and obtaining additional customer relationships.
Our business could suffer if consumer behaviors, or other factors, in connection with the use of prepaid cards change, or there are adverse developments with respect to the prepaid financial services industry in general.
As the prepaid financial services industry evolves, consumers may either find prepaid financial services to be less attractive than other financial services or may change the way in which they utilize the service prepaid cards provide. 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 the Payments business and prospects for
growth to the extent it adversely impacts the perception of prepaid financial services. Consumer spend behaviors could increase or decrease, or become more difficult to accurately predict, thereby impacting operating revenues and/or expenses of the Company. Growth of prepaid financial services as an electronic payment mechanism may not occur or may occur more slowly than estimated. These factors could have a material adverse effect on our financial condition and results of operations.
Our operations depend upon third-party relationships; our ability to maintain such relationships and such third parties' performances 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 business lines (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 business lines 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 relationship was not replaced, we may be required to seek higher-rate funding sources as compared to the existing program manager relationship 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 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, 2023, 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, 2023. 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. Our growth strategy may divert management from our existing business and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage our growth, including to the satisfaction of our regulators, we could be materially and adversely affected. In addition, acquiring other companies may involve risks such as exposure to potential asset quality issues, disruption to our normal business activities and diversion of management’s time and attention due to integration and conversion efforts. Consequently, continued organic growth, if achieved, may place a strain on our administrative and operational infrastructure, which could have a material adverse effect on our financial condition and results of operations.
Acquisitions and other strategic transactions, or the failure to consummate such transactions, could disrupt our business and harm our financial condition and may not yield the intended benefits.
We have historically and may continue to evaluate, consider and engage in strategic transactions, combinations, acquisitions and dispositions. These transactions could be material to our financial condition and results of operations if consummated. Identifying appropriate business opportunities can be difficult, time-consuming and costly, and we may not be successful in negotiating favorable terms and/or consummating the transaction. Even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such transaction, including:
•increased regulatory and compliance requirements;
•implementation or remediation of controls, procedures and policies at the acquired company;
•diversion of management time and focus from operation of our then-existing business;
•integration and coordination of product, sales, marketing, program and systems management functions; and
•integration of the acquired company’s systems and operations generally with ours;
•integration of employees from the acquired company into our organization;
•loss or termination, including costs associated with the termination or replacement, of employees;
•liability for activities of the acquired company prior to the acquisition, including violations of law, commercial disputes and tax and other known and unknown liabilities; and
•increased litigation or other claims in connection with the acquired company, including claims brought by terminated employees, customers, former stockholders or other third parties.
Accordingly, any acquisition, disposition or other strategic transaction may not be successful, may not benefit our business strategy or may not otherwise result in the intended benefits. It also may take us longer than expected to fully realize the anticipated benefits and synergies of these transactions, and those benefits and synergies may ultimately be smaller than anticipated or may not be realized at all, which could adversely affect our business and operating results.
Additionally, any acquisition of target financial institutions or other banking assets by us may require approval by, and cooperation from, a number of governmental regulatory agencies, as well as state banking regulators. Such regulators could delay or deny our applications or regulatory approvals may not be granted on terms that are acceptable to us.
To the extent we pay the consideration for any future strategic acquisition in cash, it would reduce the amount of cash available to us for other purposes. Future strategic transactions could also result in dilutive issuances of our equity securities or the incurrence of debt, contingent liabilities, amortization expenses, or goodwill impairment charges, any of which could harm our financial condition and negatively impact our stockholders.
New lines of business or new products and services may subject us to additional risks.
From time to time, we have implemented, and in the future, 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 or when the laws and regulations regarding a new product are not mature, 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 business lines may need to price products and services on less advantageous terms than anticipated to retain or attract customers. External factors, such as regulatory reception, compliance with regulations and guidance, developing laws and regulations, 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 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 estimation of fair value involves a high degree of judgment and subjectivity in the assumptions used. 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 third parties with which we do business could expose us to liability and litigation, adversely affecting 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 are subject to security breaches, which may be due 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 customers and other third parties. Such events could also cause interruptions or malfunctions in the operations of our customers, or other third parties with which we engage in business. Such events could also damage our reputation with customers and third parties with whom we do business, which could lead to loss of customers and business opportunities and have a material adverse effect on our financial condition and results of operation.
Risks and exposures related to cybersecurity attacks have increased as a result of greater 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. Cybersecurity risk and other security matters are also a major focus of regulatory authorities. 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, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures.
Failure to comply satisfactorily with certain privacy and data protection laws, regulations, and standards to which we are subject could adversely affect our reputation and operating revenues.
We are subject to various privacy, information security and data protection laws, regulations and standards. 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 nonpublic personal information of cardholders. These laws, regulations and standards are rapidly evolving and increasing in complexity and could have a significant impact
on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and employee information, and some of current or planned business activities. Complying with these laws, regulations and standards may increase our operational costs, restrict our ability to provide certain products and services or have an effect on the profitability of one or more of our business divisions. Additionally, our failure, or perceived failure, to comply with applicable laws and regulations or other obligations to which we may be subject relating to personal information could result in regulatory sanctions, including financial penalties, regulatory investigations, claims for damages by customers and other affected individuals and damage to our reputation, any of which could have a material adverse effect on our operations, financial performance and business.
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, power loss, telecommunications failure, physical break-ins, or damage from fire, could also result in negative publicity, have a material adverse effect on our ability to obtain or retain customers, 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 between the Bank and third parties to market and service Bank-originated consumer loans may subject the Bank to credit, 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 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 national 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 and other key employees. Their experience and industry contacts significantly benefit us. Our future success also depends in part on our ability to attract, retain and motivate key management and operating personnel. The loss of any of our key personnel could have an adverse effect on our business. Most recently, we completed a Chief Financial Officer transition in November 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.
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 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 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. If we are not able to anticipate and keep pace with existing and future technology needs, our business, financial results, or reputation could be negatively impacted.
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 and could have an adverse effect on our business.
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.
Many of the laws, rules, regulations and supervisory policies governing our business are intended primarily for the protection of our depositors, our customers, the financial system and the FDIC insurance fund, not our stockholders or other creditors and are subject to regular modification and change. A considerable amount of management time and resources is devoted to oversight of, and development, implementation and execution of controls and procedures relating to, compliance with these laws, regulations and policies.
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. Failure to maintain and implement adequate policies, procedures, and systems to comply with these regulations could also have serious reputational consequences for us.
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 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. In addition, further regulations, including in response to recent highly-publicized bank failures, could increase the assessment rate we are required to pay to the FDIC, adversely affecting our earnings. It is very difficult to predict future changes in regulation or the competitive impact that any such changes would have on our business.
The Bureau's rulemaking and enforcement of prohibitions against unfair, deceptive or abusive practices 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 stakeholders with respect to environmental, social and governance ("ESG") practices may impose additional costs on us or expose us 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. To the extent that we or our customers experience increases in costs, including with respect to compliance with any additional regulatory or disclosure requirements or expectations, reductions in the value of assets, constraints on operations or similar concerns driven by changes in ESG oversight and regulation, our results of operations, financial condition, and business could be adversely affected.
We will be subject to heightened regulatory requirements if our total assets exceed $10 billion as of December 31 of any calendar year.
As of September 30, 2023, our total assets were $7.54 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 Bureau 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 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 exceed $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.
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. The Bank relies on brokered deposits to assist in funding its loan and other financing products. 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. Additionally, brokered deposits are highly sensitive to changes in interest rates and, accordingly, can be a more volatile source of funding. Use of brokered deposits involves the risk that growth supported by such deposits would be halted, or the Bank’s liquidity adversely impacted, if the rates offered by the Bank were less than those offered by other institutions seeking such deposits, or if depositors were to perceive a decline in the Bank’s safety and soundness, or both.
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.
If we fail to maintain sufficient capital, our financial condition, liquidity, results of operations, and compliance with regulatory requirements would be adversely affected.
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 $7.54 billion at September 30, 2023, 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.
Changes in federal, state, and local tax laws, interpretations of existing tax laws, or adverse determinations by tax authorities, could increase our tax burden or otherwise have a material adverse effect on our business, financial condition, and results of operations.
We are subject to taxation at the federal state and local levels. The governing tax laws and applicable tax rates vary by jurisdiction and are subject to interpretation and changes. We may be subject to examination by the tax authorities and such authorities may disagree with our tax positions, which could adversely affect our financial
condition. Additionally, the amount of tax payable in a given financial statement period may be impacted by sudden or unforeseen changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. For example, the Tax Cuts and Jobs Act (the “Tax Act”) enacted in December 2017, made broad and complex changes to the U.S. tax code.
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 financial services industry or the worldwide economy;
•operating and stock price performance of comparable companies, as deemed by investors;
•geopolitical conditions, such as acts or threats of terrorism, military conflicts, the effects (or perceived effects) of pandemics and trade relations;
•a shortfall in revenues or earnings compared to securities analysts' expectations;
•lack of an active trading market for the common stock;
•new technology used, or services offered, by competitors;
•changes in analysts' recommendations or projections; and
•announcement of new acquisitions, dispositions or other projects by the Company or our competitors.
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. Stock price volatility also may make it more difficult for our stockholders to resell their common stock when desired. General market fluctuations, industry factors, political conditions, and general economic conditions and events, such as economic slowdowns, recessions, interest rate changes or credit loss trends, could cause our common stock price to decrease regardless of operating results. Further, volatility in our stock price also impacts the value of our equity compensation, which may impact our ability to recruit and retain employees.
Moreover, in the past, securities class action lawsuits have been instituted against some companies following periods of volatility in the market price of its securities. In the future, we could be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources from our normal business.
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.
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, 2023, we were authorized to issue up to 90,000,000 shares of common stock, of which 26,183,583 shares were outstanding, and 41,980 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. Such changes could also require us to incur additional personnel and technology costs.
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.
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. As a 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 have identified control deficiencies in our internal controls over financial reporting in the past, and if our internal controls over financial reporting are not effective in the future, we may be unable to issue our financial statements in a timely manner, we may be unable to obtain the required audit or review of our financial statements by our independent registered public accounting firm in a timely manner, or we may otherwise be unable to comply with the periodic reporting requirements of the SEC. Additionally, our common stock listing on the NASDAQ Global Select Market® could be suspended or terminated and our stock price could materially suffer. In addition, we or members of our management team could be subject to investigation and sanction by the SEC or other regulatory authorities and to claims by stockholders, which could impose significant additional costs on us and divert our management's attention. See also Part II. "Item 9A. Controls and Procedures - Inherent Limitations on the Effectiveness of Controls" if this Annual Report on Form 10-K for inherent limitations in a control system.
Federal regulations and our organizational documents may inhibit a takeover, prevent a transaction you favor or limit our growth opportunities, causing the market price of our common stock to decline.
Certain provisions of our organizational 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 negatively impact our operations, the operations of third parties with which we do business, and the communities in 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. Natural disasters and severe weather conditions could harm our operations through interference with communications, including the interruption or loss of our computer systems, which could prevent or impede us from gathering deposits, originating loans, and processing and controlling the flow of business, as well as through the destruction of facilities and our operational, financial and management information systems. 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. Additionally, such catastrophic events may negatively impact economic activity, which could lead to an adverse effect on our customers and impact the communities in which we do business. Such catastrophic events could each negatively impact our employees, our business operations or the stability of our deposit base, cause significant property damage, adversely impact the values of collateral securing our loans and/or interrupt our borrowers’ abilities to conduct their business in a manner to support their debt obligations, which could result in losses and increased provision for credit losses. There is no assurance that our business continuity and disaster recovery program can adequately mitigate the risks of such business disruptions and interruptions.
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. Moreover, our involvement in such matters, even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation, result in substantial expense, and divert management attention from the operations of our business. 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 or reputational harm 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, the behavior of our employees, the customers with whom we have chosen to do business, and negative publicity for other financial institutions. 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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

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ITEM 2. PROPERTIES
Item 2. Properties.
The Company's corporate headquarters is located at 5501 South Broadband Lane in Sioux Falls, South Dakota. The Company has 10 non-branch offices from which its BaaS and Commercial Finance business lines operate. The BaaS business line operates out of the Company's corporate headquarters along with additional offices in Louisville, Kentucky and Easton, Pennsylvania. The Commercial Finance business line operates out of offices in Troy, Michigan; Newport Beach, California; Franklin, Tennessee; Addison, Texas; and Toronto, Ontario, Canada. The Company has corporate and shared services offices located in Scottsdale, Arizona and Washington, D.C.
Of the Company's 10 properties, the Company leases nine 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.

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ITEM 3. LEGAL PROCEEDINGS
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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 2023 and 2022 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 15, 2023, the Company had (i) 25,989,063 shares of common stock outstanding, which were held by approximately 206 stockholders of record, (ii) no shares of nonvoting common stock outstanding, and (iii) 111,118 shares of common stock held in treasury.
The transfer agent for the Company’s common stock is Computershare, P.O. Box 43078, Providence, RI 02940-3078.
On September 3, 2021, the Company's Board of Directors authorized a 6,000,000 share repurchase program that was publicly announced on September 7, 2021 and is scheduled to expire on September 30, 2024. The Company's Board of Directors authorized an additional 7,000,000 share repurchase program that was publicly announced on August 25, 2023 and is scheduled to expire September 30, 2028. The table below sets forth information regarding repurchases of our common stock during the fiscal 2023 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 31 311,727 $ 51.29 311,727 - 1,666,436
August 1 to 31 - - - 7,000,000 8,666,436
September 1 to 30 7,477 46.07 - - 8,666,436
Total 319,204 311,727 7,000,000
(1) Of the total number of shares acquired during the period, 7,477 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.
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, the NASDAQ ABA Community Bank Index, and the S&P 600 Financials Index (assuming the investment of $100 in each index on October 1, 2018 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 Company determined to change from using the NASDAQ ABA Community Bank Index for purposes of the graph to the S&P 600 Financials Index as of September 30, 2023 to align with an index that better reflects the strategy and model of the Bank.
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.
Fiscal Year Ended September 30,
Index 2018 2019 2020 2021 2022 2023
Pathward Financial, Inc.
$ 100.00 $ 119.36 $ 70.95 $ 194.58 $ 122.76 $ 172.38
NASDAQ Composite Index 100.00 100.52 141.70 184.58 136.12 171.65
NASDAQ ABA Community Bank Index 100.00 92.06 63.58 115.50 106.20 86.80
S&P 600 Financials Index 100.00 95.88 70.86 114.59 96.88 90.85

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ITEM 6. SELECTED FINANCIAL DATA

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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
Company Highlights
•On October 5, 2023, the Company announced Gregory A. Sigrist was appointed as Executive Vice President ("EVP"), Chief Financial Officer-Designee of the Company and the Bank, beginning November 1, 2023. Immediately after the filing of the Company’s Form 10-K for fiscal year ended September 30, 2023, Mr. Sigrist will transition to EVP, Chief Financial Officer, succeeding Glen W. Herrick, who will retire but continue his employment with the Company as EVP, Executive Advisor to the Chief Executive Officer through December 29, 2023 to transition his duties and responsibilities and assist with various projects.
•On August 25, 2023, the Company announced a new share repurchase program to repurchase up to 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028.
Financial Highlights for the 2023 Fiscal Fourth Quarter
•Total revenue for the fourth quarter was $161.0 million, an increase of $37.8 million, or 31%, compared to the same quarter in fiscal 2022, driven by an increase in both net interest income and noninterest income.
•Net interest margin ("NIM") increased 98 basis points to 6.19% for the fourth quarter from 5.21% during the same period of last year, primarily driven by increased yields and an improved earning asset mix from the continued optimization of the portfolio.
•Total gross loans and leases at September 30, 2023 increased $829.8 million, to $4.37 billion compared to September 30, 2022. The increase compared to the prior year quarter was primarily due to growth in the commercial and consumer finance portfolios.
•During the 2023 fiscal fourth quarter, the Company repurchased 311,727 shares of common stock at an average share price of $51.29.
Subsequent Events
Management has evaluated and identified subsequent events that occurred after September 30, 2023. See Note 21. Subsequent Events for details on these events.
FINANCIAL CONDITION
At September 30, 2023, the Company’s total assets increased by $788.1 million to $7.54 billion compared to September 30, 2022, primarily due to growth of $829.8 million in total loans and leases and $56.7 million in loans held for sale, partially offset by reductions of $78.6 million in securities available for sale and $20.3 million in other assets.
Total cash and cash equivalents were $375.6 million at September 30, 2023, decreasing from $388.0 million at September 30, 2022. The Company maintains its cash investments primarily in interest-bearing overnight deposits with the FHLB of Des Moines and the FRB. At September 30, 2023, the Company did not have any federal funds sold.
The total investment portfolio decreased $83.7 million to $1.84 billion at September 30, 2023, compared to $1.92 billion at September 30, 2022, as maturities and principal pay downs exceeded purchases. The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. During the fiscal year ended September 30, 2023, the Company purchased $156.9 million of investment securities.
Loans held for sale at September 30, 2023 totaled $77.8 million, increasing from $21.1 million at September 30, 2022. This increase was primarily driven by growth in consumer credit products held for sale at September 30, 2023 compared to September 30, 2022.
Total gross loans and leases totaled $4.37 billion at September 30, 2023, as compared to $3.54 billion at September 30, 2022. The increase was primarily due to increases in commercial finance, consumer finance, and warehouse finance loans, partially offset by a slight reduction in seasonal tax services loans. See Note 4 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Commercial finance loans, which comprised 85% of the Company's gross loan and lease portfolio, totaled $3.72 billion at September 30, 2023, reflecting an increase of $699.5 million, or 23%, from September 30, 2022. The increase was primarily driven by increases in the insurance premium finance, SBA/USDA, term lending, and asset-based lending portfolios, partially offset by reductions in the factoring and lease financing portfolios.
Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the FRB. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in these stocks decreased $0.6 million, or 2%, to $28.2 million at September 30, 2023 from $28.8 million at September 30, 2022, resulting from redemptions exceeding purchases of FHLB membership stock.
Total end-of-period deposits increased 12% to $6.59 billion at September 30, 2023, compared to $5.87 billion at September 30, 2022. The increase in end-of-period deposits was primarily driven by increases in noninterest-bearing deposits of $685.8 million and money market deposits of $47.4 million, partially offset by decreases in savings deposits of $8.1 million and certificate of deposits of $2.1 million.
As of September 30, 2023, the Company had $897.5 million in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $340.7 million are on activated cards while $556.8 million are on inactivated cards. During fiscal year 2024, the inactive card balances are expected to decrease by approximately $380 million as the Company actively returns unclaimed balances to the U.S. Treasury.
The Company's total borrowings increased $10.9 million, or 30%, from $36.0 million at September 30, 2022 to $46.9 million at September 30, 2023. See Note 11 to the “Notes to Consolidated Financial Statements,” which are included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
At September 30, 2023, the Company’s stockholders’ equity totaled $650.6 million, an increase of $5.5 million, from $645.1 million at September 30, 2022. The increase was primarily attributable to an increase in additional paid-in capital and retained earnings related to activity from the Company's share repurchase programs partially offset by an increase in accumulated other comprehensive loss. The Company and Bank remained above the federal regulatory minimum capital requirements at September 30, 2023, 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 are analyzed on an ongoing basis.
-Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category.
The Company meets the Right of Set off criteria in ASC 210-20, Balance Sheet - Offsetting, for all payments negative deposit balances with the exception of DDA overdrafts. The following table summarizes the Company's negative deposit balances within the BaaS business line:
(Dollars in thousands) September 30, 2023 September 30, 2022
Noninterest-bearing deposits $ 6,608,137 $ 5,916,142
Prefunding (230,749) (244,462)
Discount funding (34,351) (15,991)
DDA overdrafts (10,096) (8,587)
Noninterest-bearing checking, net $ 6,332,941 $ 5,647,102
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.
As of September 30, 2023, the Company managed $267.6 million of customer deposits at other banks in its capacity as custodian. In return for record keeping services at Program Banks, the Bank receives a servicing fee (“Servicing Fee”). The Servicing Fee has been typically reflective of the EFFR. For the fiscal year ended September 30, 2023, the Company recognized $53.4 million in servicing fee income compared to $6.4 million for the prior fiscal year. The increase when compared to the prior year was driven by several factors, including the interest rate environment, increased balances, and fiscal year 2023 being the first full year that the Company received the Servicing Fee.
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 and that card processing expense derived from contractual agreements with certain BaaS partners are tied to a rate index and servicing fees the Company recognizes for custodial off-balance sheet deposits are typically reflective of the EFFR. The provision for credit losses is the adjustment to the allowance for credit losses balance for the applicable period. The allowance for credit losses represents management’s current estimate of credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date.
The Company’s noninterest income is derived primarily from tax product fees, card and deposit fees, credit products, and ATM fees attributable to the BaaS business line and fees charged on bank loans, leases and transaction accounts. Noninterest income is also derived from rental income, net gains on the sale of securities, net gains on the sale of loans and leases, as well as the Company’s holdings of bank-owned life insurance. This income is offset by noninterest expenses, such as compensation and benefits associated with personnel, as well as card processing expenses and tax product expenses attributable to the Baas business line. Noninterest expense is also impacted by operating lease equipment depreciation expense, occupancy and equipment expense, legal and consulting expenses, and regulatory expense.
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.
Fiscal Year Ended September 30,
2023 2022 2021
(Dollars in thousands) 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)
Interest-earning assets:
Cash and fed funds sold $ 316,222 $ 12,425 3.93 % $ 496,334 $ 3,535 0.71 % $ 1,919,760 $ 3,709 0.19 %
Mortgage-backed securities 1,541,909 41,197 2.67 % 1,292,804 26,846 2.08 % 728,884 12,155 1.67 %
Tax exempt investment securities 147,863 3,924 3.36 % 183,936 3,565 2.45 % 281,573 4,004 1.80 %
Asset-backed securities 186,854 8,197 4.39 % 283,752 3,898 1.37 % 388,458 5,340 1.37 %
Other investment securities 295,439 9,390 3.18 % 268,062 6,274 2.34 % 239,283 4,566 1.91 %
Total investments 2,172,065 62,708 2.94 % 2,028,554 40,583 2.05 % 1,638,198 26,065 1.66 %
Commercial finance 3,220,585 261,195 8.11 % 2,884,585 203,004 7.04 % 2,549,335 188,855 7.41 %
Consumer finance 231,242 22,404 9.69 % 295,356 23,097 7.82 % 248,757 19,940 8.02 %
Tax services 141,210 10,490 7.43 % 179,611 12,978 7.23 % 214,835 7,321 3.41 %
Warehouse finance 343,168 29,513 8.60 % 433,121 27,474 6.34 % 330,224 21,262 6.44 %
Community banking - - - % 34,758 1,525 4.39 % 375,258 18,702 4.98 %
Total loans and leases(3)
3,936,205 323,602 8.22 % 3,827,431 268,078 7.00 % 3,718,409 256,080 6.89 %
Total interest-earning assets 6,424,492 $ 398,735 6.23 % 6,352,319 $ 312,196 4.93 % 7,276,367 $ 285,854 3.94 %
Noninterest-earning assets 585,719 751,555 849,141
Total assets $ 7,010,211 $ 7,103,874 $ 8,125,508
Interest-bearing liabilities:
Interest-bearing checking $ 355 $ 1 0.30 % $ 338 $ 1 0.32 % $ 254,236 $ - - %
Savings 65,175 25 0.04 % 78,613 24 0.03 % 81,619 16 0.02 %
Money markets 137,024 461 0.34 % 96,112 214 0.22 % 58,656 204 0.35 %
Time deposits 6,488 10 0.15 % 8,493 38 0.45 % 13,081 139 1.06 %
Wholesale deposits 81,153 3,859 4.75 % 63,529 223 0.35 % 150,213 1,234 0.82 %
Total interest-bearing deposits 290,195 4,356 1.50 % 247,085 500 0.20 % 557,805 1,593 0.29 %
Overnight fed funds purchased 74,812 3,922 5.24 % 32,414 235 0.73 % 6 - 0.25 %
Subordinated debentures 19,560 1,422 7.27 % 46,441 3,375 7.27 % 73,886 4,507 6.10 %
Other borrowings 15,108 1,174 7.77 % 17,490 762 4.36 % 21,549 763 3.54 %
Total borrowings 109,480 6,518 5.95 % 96,345 4,372 4.54 % 95,441 5,270 5.52 %
Total interest-bearing liabilities 399,675 10,874 2.72 % 343,430 4,872 1.42 % 653,246 6,863 1.05 %
Noninterest-bearing deposits 5,739,084 - - % 5,776,852 - - % 6,440,830 - - %
Total deposits and interest-bearing liabilities 6,138,759 $ 10,874 0.18 % 6,120,282 $ 4,872 0.08 % 7,094,115 $ 6,863 0.10 %
Other noninterest-bearing liabilities 200,054 202,887 189,841
Total liabilities 6,338,813 6,323,169 7,283,956
Shareholders' equity 671,398 780,705 841,552
Total liabilities and shareholders' equity $ 7,010,211 $ 7,103,874 $ 8,125,508
Net interest income and net interest rate spread including noninterest-bearing deposits $ 387,861 6.05 % $ 307,324 4.85 % $ 278,992 3.84 %
Net interest margin 6.04 % 4.84 % 3.83 %
Tax-equivalent effect 0.01 % 0.01 % 0.01 %
Net interest margin, tax equivalent (2)
6.05 % 4.85 % 3.84 %
(1) Tax rate used to arrive at the TEY for the fiscal years ended September 30, 2023, 2022, and 2021 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 $27.7 million, $33.7 million, and $35.7 million for the fiscal years ended September 30, 2023, 2022 and 2021, respectively.
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,
2023 vs. 2022
2022 vs. 2021
(Dollars in thousands) 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)
Interest-earning assets:
Cash and fed funds sold $ (1,709) $ 10,599 $ 8,890 $ (4,293) $ 4,119 $ (174)
Mortgage-backed securities 5,795 8,556 14,351 11,152 3,539 14,691
Tax-exempt investment securities (1,032) 1,391 359 (2,008) 1,569 (439)
Asset-backed securities (1,721) 6,020 4,299 (1,442) - (1,442)
Other investment securities 691 2,425 3,116 594 1,113 1,707
Total investments 3,115 19,010 22,125 7,310 7,208 14,518
Commercial finance 25,245 32,946 58,191 23,929 (9,779) 14,150
Consumer finance (5,584) 4,891 (693) 3,664 (507) 3,157
Tax services (2,837) 349 (2,488) (1,373) 7,030 5,657
Warehouse finance (6,457) 8,496 2,039 6,546 (334) 6,212
Community banking (763) (762) (1,525) (15,193) (1,984) (17,177)
Total loans and leases 7,778 47,746 55,524 7,768 4,230 11,998
Total interest-earning assets $ 9,184 $ 77,355 $ 86,539 $ 10,785 $ 15,557 $ 26,342
Interest-bearing liabilities:
Savings $ 1 $ - $ 1 $ (1) $ 9 $ 8
Money markets 247 - 247 103 (93) 10
Time deposits (28) - (28) (38) (63) (101)
Wholesale deposits 78 3,558 3,636 (507) (504) (1,011)
Total interest-bearing deposits 101 3,755 3,856 (703) (391) (1,094)
Overnight fed funds purchased 644 3,043 3,687 235 - 235
Subordinated debentures (1,952) (1) (1,953) (1,887) 755 (1,132)
Other borrowings (116) 528 412 (159) 158 (1)
Total borrowings 653 1,493 2,146 49 (947) (898)
Total interest-bearing liabilities $ 754 $ 5,248 $ 6,002 $ (654) $ (1,338) $ (1,992)
Net effect on net interest income $ 8,430 $ 72,107 $ 80,537 $ 11,439 $ 16,895 $ 28,334
Comparison of Operating Results for the Fiscal Years Ended September 30, 2023 and September 30, 2022
General
The Company reported net income of $163.6 million, or $5.99 per diluted share, for the fiscal year ended September 30, 2023, compared to $156.4 million, or $5.26 per diluted share, for the fiscal year ended September 30, 2022, an increase of $7.2 million. Total revenue for fiscal 2023 was $704.5 million, compared to $601.1 million for fiscal 2022, an increase of 17%. The increase in net income was driven by an increase in both net interest income and noninterest income.
Net Interest Income
Net interest income for fiscal 2023 was $387.9 million, an increase of 26%, from $307.3 million for the same period of the prior year. The increase was mainly attributable to increased yields, higher interest-earning asset balances and an improved earning asset mix.
The Company's average interest-earning assets for fiscal 2023 increased by $72.2 million to $6.42 billion compared with fiscal 2022, primarily due to growth in loans and leases and an increase in total investment balances, partially offset by a decrease in cash balances. The Company's average outstanding balance of loans and leases increased $108.8 million compared to the prior fiscal year, primarily due to an increase in commercial finance loans, partially offset by decreases in consumer finance loans, tax services loans, and warehouse finance loans.
The Company’s average balance of total deposits and interest-bearing liabilities increased $18.5 million to $6.14 billion during fiscal 2023 from $6.12 billion during fiscal 2022. This increase was primarily due to increases in average interest-bearing deposits of $43.1 million and total borrowings of $13.1 million, partially offset by a decrease in the average noninterest-bearing deposits of $37.8 million.
For fiscal 2023, NIM was 6.04%, an increase of 120 basis points from 4.84% in fiscal 2022. NIM, tax-equivalent for fiscal 2023 increased to 6.05% from 4.85% in fiscal 2022. See the table in section above titled "Average Balances, Interest Rates and Yields."
The Company’s cost of funds for all deposits and borrowings averaged 0.18% during fiscal 2023, as compared to 0.08% during fiscal 2022. The Company's overall cost of deposits was 0.12% in fiscal 2023, as compared to 0.01% during fiscal 2022.
Provision for Credit Losses
The Company recognized a provision for credit losses of $57.4 million for fiscal 2023 compared to $28.5 million in fiscal 2022. The increase in provision for credit losses was primarily driven by growth in the commercial finance portfolio. Also see Note 4 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Noninterest Income
Noninterest income increased 8% to $316.6 million for fiscal 2023 from $293.8 million for fiscal 2022. The increase was primarily attributable to increases in card and deposit fees, rental income, gain on sale of other, and other income, partially offset by decrease in gain on sale of trademarks.
The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $53.4 million during the fiscal year ended September 30, 2023, as compared to $6.4 million for the fiscal year ended September 30, 2022.
Noninterest Expense
Noninterest expense increased 21% to $465.0 million for fiscal 2023 from $385.3 million for fiscal 2022. The increase in noninterest expense was primarily attributable to increases in card processing expense, compensation and benefits expense, and operating lease equipment depreciation, partially offset by a decrease in legal and consulting expense.
The card processing expense increase was due to rate-related agreements with BaaS partners. The 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 49% of the deposit portfolio was subject to these higher rate-related processing expenses. For fiscal 2023, contractual, rate-related processing expenses were $77.4 million, as compared to $9.9 million for the fiscal year ended September 30, 2022.
Income Tax Expense
The Company recorded an income tax expense of $16.3 million, representing an effective tax rate of 9.0%, for fiscal 2023, compared to an income tax expense of $28.0 million, representing an effective tax rate of 15.2%, in fiscal 2022. The decrease in income tax expense was primarily due to an increase in investment tax credit recognized ratably when compared to the prior fiscal year.
For the fiscal year ended September 30, 2023, the Company originated $93.6 million in renewable energy tax credits, compared to $62.8 million for the prior fiscal year. The timing and impact of future renewable energy tax credits are expected to vary from period to period, and the Company intends to undertake only those tax credit opportunities that meet the Company's underwriting and return criteria.
Comparison of Operating Results for the Fiscal Years Ended September 30, 2022, and September 30, 2021
A comparison of the 2022 results to the 2021 results and other 2021 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 22, 2022 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, 2023 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.
The table below sets forth the amounts and categories of the Company's nonperforming assets.
(Dollars in thousands) September 30, 2023 September 30, 2022
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance $ 37,372 $ 13,375
Total nonaccruing loans and leases 37,372 13,375
Accruing loans and leases delinquent 90 days or more:
Loans held for sale 306 -
Commercial finance 11,242 4,142
Consumer finance 2,210 2,793
Tax services(1)
5,082 8,873
Total accruing loans and leases delinquent 90 days or more 18,840 15,808
Total nonperforming loans and leases 56,212 29,183
Other Assets
Nonperforming operating leases 1,764 1,736
Foreclosed and repossessed assets:
Commercial finance - 1
Total foreclosed and repossessed assets - 1
Total other assets 1,764 1,737
Total nonperforming assets $ 57,976 $ 30,920
Total as a percentage of total assets 0.77 % 0.46 %
(1) Certain tax services loans do not bear interest.
The Company's nonperforming loans and leases at September 30, 2023, were $56.2 million, representing 1.26% of total gross loans and leases, compared to $29.2 million, or 0.82% of total gross loans and leases at September 30, 2022.
The increase in nonperforming assets as a percentage of total assets at September 30, 2023 compared to September 30, 2022 was primarily due to one sizable relationship moving to nonaccrual within the commercial finance portfolio, partially offset by a decrease in nonperforming loans in the seasonal tax services portfolio and the consumer finance portfolio.
Classified Assets. 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, 2023, the Company had classified loans and leases of $208.2 million as substandard, $8.2 million as doubtful and none as loss. At September 30, 2022, the Company classified loans and leases of $203.7 million as substandard, $4.0 million as doubtful and none as loss. Further, at September 30, 2023, the Company did not own any real estate or other assets as a result of foreclosure of loans, as compared to owning an insignificant amount at September 30, 2022.
Allowance for Credit Losses. The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. 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 $49.7 million at September 30, 2023, an increase compared to $45.9 million at September 30, 2022. The $3.8 million year-over-year increase in the ACL was primarily driven by a $2.8 million increase in the allowance related to the commercial finance portfolio and a $0.9 million increase in the allowance related to the consumer finance portfolio. The year-over-year increase in the allowance related to both the commercial finance and consumer finance portfolios was primarily attributable to loan growth in each respective portfolio.
The following table presents the Company's ACL as a percentage of its total loans and leases.
As of the Period Ended
September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022
Commercial finance 1.26 % 1.35 % 1.53 % 1.62 % 1.46 %
Consumer finance 0.92 % 0.92 % 1.99 % 1.54 % 0.86 %
Tax services 0.04 % 70.20 % 53.77 % 2.01 % 0.05 %
Warehouse finance 0.10 % 0.10 % 0.10 % 0.10 % 0.10 %
Total loans and leases 1.14 % 2.01 % 2.27 % 1.50 % 1.30 %
Total loans and leases excluding tax services 1.14 % 1.21 % 1.40 % 1.50 % 1.30 %
The Company's ACL as a percentage of total loans and leases decreased to 1.14% at September 30, 2023 from 1.30% at September 30, 2022. The decrease in the total loans and leases coverage ratio was primarily driven by a decrease in the commercial finance portfolio which was due to both quantitative and qualitative factors. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.
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 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 to twenty-four 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 utilizes different methodologies when estimating expected credit losses.
Investment debt securities held to maturity include implicit and explicit guarantees by government agencies and have an expected zero risk of loss, therefore no provision for credit loss for debt securities held to maturity has been included in the Company’s Consolidated Statement of Operations. Investment debt securities available for sale are recorded at fair value and are assessed quarterly for credit loss. 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, 2023 and September 30, 2022 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.
At September 30, 2023, the Company had unfunded loan and lease commitments of $1.31 billion. Management believes that loan repayment and other sources of funds will be adequate to meet the Company’s foreseeable short- and long-term liquidity needs. The liquidity sources as of September 30, 2023 include $375 million in cash and cash equivalents and $268 million in off-balance sheet deposits. When factoring in all resources, such as the FHLB, the FRB Discount Window and other unsecured funding and wholesale options, the Company has over $2.6 billion in available liquidity.
The following table summarizes the Company’s significant contractual obligations at September 30, 2023.
(Dollars in thousands) Less Than 1 Year 1 to 3 Years 3 to 5 Years More Than 5 Years Total
Time deposits $ 5,165 $ 369 $ - $ - $ 5,534
Short-term debt 13,000 - - - 13,000
Long-term debt 621 - - 33,252 33,873
Operating leases - 7,631 6,287 18,639 32,557
Total $ 18,786 $ 8,000 $ 6,287 $ 51,891 $ 84,964
For more information on the Company’s short-term and long-term borrowings, see “Funding Activities - Borrowings” within Item 1 “Business,” which is included in Part I of this Annual Report on Form 10-K and Note 11 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.”
The Company and the Bank met regulatory requirements for classification as well-capitalized institutions at September 30, 2023. Based on current and expected continued profitability and subject to continued access to capital markets, management believes that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios. See Note 15 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
The payment of dividends and repurchase of shares have the effect of reducing stockholders’ equity. 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. See "Regulation and Supervision - Limitations on Dividends and Other Capital Distributions" within Item 1 "Business", which is included in Part I of this Annual Report on Form 10-K.
No assurance can be given that our regulators will consider our liquidity level, or our capital level, though substantially in excess of current rules pursuant to which the Company and the Bank are considered “well-capitalized,” to be sufficiently high in the future. See Note 15 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Impact of New Accounting Standards
See Note 1 to the "Notes of Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for information regarding recently issued accounting pronouncements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 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, likelihood of prepayment, and deposit behaviors.
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 portfolio of longer duration 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. However, the card processing expense derived from contractual agreements with certain BaaS partners, which are tied to a rate index, would likely lower card processing expenses.
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 applicable 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, such as certain other card fee income and expense line items tied to card processing expense derived from contractual agreements with certain BaaS partners and servicing fees the Company recognizes from custodial off-balance sheet deposits. 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 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, 2023 and 2022:
Net Sensitive Earnings at Risk
Change in Interest Income/Expense
for a given change in interest rates
Over/(Under) Base Case Parallel Shift
(Dollars in thousands) Book Value -200 -100 Base +100 +200 +300 +400
Balances as of September 30, 2023
Total interest-sensitive income 6,650,735 397,360 424,061 450,823 477,078 503,412 529,599 556,117
Total interest-sensitive expense 269,861 1,069 1,905 3,530 5,429 7,352 9,289 11,249
Net interest-sensitive income 396,291 422,156 447,293 471,649 496,060 520,310 544,868
Percentage change from base -11.4 % -5.6 % - % 5.4 % 10.9 % 16.3 % 21.8 %
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 %
The EAR analysis reported at September 30, 2023, 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, 2023 and 2022:
Economic Value Sensitivity
Standard (Parallel Shift)
Economic Value of Equity at Risk %
-200 -100 +100 +200 +300 +400
Balances as of September 30, 2023
Percentage change from base -9.9 % -4.3 % 3.4 % 6.3 % 8.7 % 11.5 %
Balances as of September 30, 2022
Percentage change from base -3.8 % 2.9 % 5.3 % 7.3 % 9.6 %
The EVE at risk reported at September 30, 2023 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
Item 8. Financial Statements and Supplementary Data.
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
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and the Board of Directors of Pathward Financial, Inc.
Sioux Falls, South Dakota
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial condition of Pathward Financial, Inc. and Subsidiaries (the "Company") as of September 30, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2023, 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, 2023, 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 21, 2023 expressed an unqualified 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
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 to twenty-four 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 judgments; 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 21, 2023
PATHWARD FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Financial Condition
(Dollars in thousands, except per share data)
ASSETS September 30, 2023 September 30, 2022
Cash and cash equivalents $ 375,580 $ 388,038
Securities available for sale, at fair value 1,804,228 1,882,869
Securities held to maturity, at amortized cost (fair value $31,425 and $38,171, respectively)
36,591 41,682
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost 28,210 28,812
Loans held for sale 77,779 21,071
Loans and leases 4,366,116 3,536,305
Allowance for credit losses (49,705) (45,947)
Accrued interest receivable 23,282 17,979
Premises, furniture, and equipment, net 39,160 41,710
Rental equipment, net 211,750 204,371
Goodwill and intangible assets 330,225 335,196
Other assets 292,327 295,324
Total assets $ 7,535,543 $ 6,747,410
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits $ 6,589,182 $ 5,866,037
Short-term borrowings 13,000 -
Long-term borrowings 33,873 36,028
Accrued expenses and other liabilities 248,863 200,205
Total liabilities 6,884,918 6,102,270
STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued, none outstanding at September 30, 2023 and 2022, respectively
- -
Common stock, $0.01 par value; 90,000,000 shares authorized, 26,225,563 and 28,878,177 shares issued, 26,183,583 and 28,788,124 shares outstanding at September 30, 2023 and 2022, respectively
262 288
Common stock, Nonvoting, $0.01 par value; 3,000,000 shares authorized, no shares issued, none outstanding at September 30, 2023 and 2022, respectively
- -
Additional paid-in capital 628,500 617,403
Retained earnings 278,655 245,394
Accumulated other comprehensive loss (255,443) (213,080)
Treasury stock, at cost, 41,980 and 90,053 common shares at September 30, 2023 and 2022, respectively
(344) (4,835)
Total equity attributable to parent 651,630 645,170
Noncontrolling interest (1,005) (30)
Total stockholders’ equity 650,625 645,140
Total liabilities and stockholders’ equity $ 7,535,543 $ 6,747,410
See Notes to Consolidated Financial Statements.
PATHWARD FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Year Ended September 30,
(Dollars in thousands, except per share data) 2023 2022 2021
Interest and dividend income:
Loans and leases, including fees $ 323,602 $ 268,078 $ 256,080
Mortgage-backed securities 41,197 26,846 12,155
Other investments 33,936 17,272 17,619
398,735 312,196 285,854
Interest expense:
Deposits 4,356 500 1,593
FHLB advances and other borrowings 6,518 4,372 5,270
10,874 4,872 6,863
Net interest income 387,861 307,324 278,991
Provision for credit losses 57,354 28,538 49,766
Net interest income after provision for credit losses 330,507 278,786 229,225
Noninterest income:
Refund transfer product fees 39,452 39,809 37,967
Refund advance fee income 37,433 40,557 47,639
Card and deposit fees 150,746 105,733 108,121
Rental income 54,190 46,558 39,416
Gain (loss) on sale of securities 91 (1,287) 6
Gain on sale of trademarks 10,000 50,000 -
Gain (loss) on sale of other 2,572 (4,920) 11,515
Other income 22,115 17,357 26,240
Total noninterest income 316,599 293,807 270,904
Noninterest expense:
Compensation and benefits 184,318 171,126 151,090
Refund transfer product expense 9,723 8,908 11,861
Refund advance expense 1,863 2,157 2,564
Card processing 105,498 38,785 27,201
Occupancy and equipment expense 34,691 34,909 29,269
Operating lease equipment depreciation 45,710 35,636 30,987
Legal and consulting 27,102 40,634 31,341
Intangible amortization 4,971 6,585 8,545
Impairment expense 3,273 670 2,818
Other expense 47,826 45,865 48,007
Total noninterest expense 464,975 385,275 343,683
Income before income tax expense 182,131 187,318 156,446
Income tax expense 16,324 27,964 10,701
Net income before noncontrolling interest 165,807 159,354 145,745
Net income attributable to noncontrolling interest 2,192 2,968 4,037
Net income attributable to parent $ 163,615 $ 156,386 $ 141,708
Earnings per common share:
Basic $ 6.01 $ 5.26 $ 4.38
Diluted $ 5.99 $ 5.26 $ 4.38
See Notes to Consolidated Financial Statements.
PATHWARD FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Net income before noncontrolling interest $ 165,807 $ 159,354 $ 145,745
Other comprehensive income (loss):
Change in net unrealized (loss) on debt securities (56,164) (293,952) (13,896)
Net (gain) loss realized on investment securities (91) 1,287 (6)
(56,255) (292,665) (13,902)
Unrealized gain (loss) on currency translation 331 (1,736) 476
Deferred income tax effect (13,561) (73,722) (3,483)
Total other comprehensive (loss) (42,363) (220,679) (9,943)
Total comprehensive income (loss) 123,444 (61,325) 135,802
Total comprehensive income attributable to noncontrolling interest 2,192 2,968 4,037
Comprehensive income (loss) attributable to parent $ 121,252 $ (64,293) $ 131,765
See Notes to Consolidated Financial Statements.
PATHWARD FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands, except per share data) Common
Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Treasury
Stock Total Pathward Financial, Inc.
Stockholders’
Equity Noncontrolling interest Total
Stockholders’
Equity
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 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 loss - - - (220,679) - (220,679) - (220,679)
Net income - - 156,386 - - 156,386 2,968 159,354
Net 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
Balance, September 30, 2022 $ 288 $ 617,403 $ 245,394 $ (213,080) $ (4,835) $ 645,170 $ (30) $ 645,140
Cash dividends declared on common stock ($0.20 per share)
- - (5,426) - - (5,426) - (5,426)
Issuance of common stock due to restricted stock 1 - - - - 1 - 1
Repurchases of common stock (27) 27 (117,985) - (2,452) (120,437) - (120,437)
Retirement of treasury stock - - (6,943) - 6,943 - - -
Stock compensation - 11,070 - - - 11,070 - 11,070
Total other comprehensive loss - - - (42,363) - (42,363) - (42,363)
Net income - - 163,615 - - 163,615 2,192 165,807
Net distribution to noncontrolling interests - - - - - - (3,167) (3,167)
Balance, September 30, 2023 $ 262 $ 628,500 $ 278,655 $ (255,443) $ (344) $ 651,630 $ (1,005) $ 650,625
See Notes to Consolidated Financial Statements.
PATHWARD FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Cash flows from operating activities:
Net income before noncontrolling interest $ 165,807 $ 159,354 $ 145,745
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net 64,955 61,601 59,047
Provision for credit losses 57,354 28,538 49,766
Provision for deferred taxes (175) 17,587 (1,639)
Originations of loans held for sale (1,208,684) (985,330) (601,481)
Proceeds from sales of loans held for sale 1,139,881 1,059,361 890,340
Net change in loans held for sale 25,922 12,819 588
Fair value adjustment of foreclosed real estate - 301 591
Net realized (gain) on securities available for sale - (154) (6)
Net realized (gain) loss on loans held for sale (268) 3,694 (8,610)
Net realized loss on premise, furniture, and equipment 65 55 -
Net realized (gain) on lease receivables and equipment (1,741) (3,397) (2,257)
Net realized (gain) on foreclosed real estate and repossessed assets - - (4)
Net realized (gain) on trademarks (10,000) (50,000) -
Net realized (gain) on other assets (91) 1,441 28
Change in bank-owned life insurance value (1,497) (2,434) (2,434)
Impairment on rental equipment 24 - -
Impairment of intangibles - 670 -
Net change in accrued interest receivable (5,303) (1,725) 374
Net change in other assets 17,134 (32,936) 825
Net change in accrued expenses and other liabilities 48,658 (10,640) 43,920
Stock compensation 11,070 10,004 6,852
Net cash provided by operating activities 303,111 268,809 581,645
Cash flows from investing activities:
Purchases of securities available for sale (156,885) (907,361) (1,041,768)
Proceeds from sales of securities available for sale - 265,951 50,468
Proceeds from maturities of and principal collected on securities available for sale 177,296 324,234 371,898
Proceeds from maturities of and principal collected on securities held to maturity 4,835 14,281 34,268
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock (330,144) (173,653) (1,296)
Redemption of Federal Reserve Bank and Federal Home Loan Bank stock 330,746 173,240 34
Purchases of loans and leases (215,266) (115,353) (311,332)
Proceeds from sales of loans and leases - 123,241 13,850
Net change in loans and leases (307,473) 358,635 (196,356)
Purchases of premises, furniture, and equipment (8,623) (8,177) (12,961)
Proceeds from sales of premises, furniture, and equipment - 35 86
Purchases of rental equipment (441,047) (424,919) (50,437)
Proceeds from sales of rental equipment 14,998 9,372 16,822
Net change in rental equipment (236) (5,772) (630)
Proceeds from sales of foreclosed real estate and repossessed assets 1 1,824 8,952
Proceeds from death benefit of bank-owned life insurance 1,040 - -
Proceeds from sale of trademarks 10,000 50,000 -
Proceeds from sale of other assets - 3,550 -
Net cash (used in) investing activities (920,758) (310,872) (1,118,402)
Cash flows from financing activities:
Net change in deposits 723,145 351,066 535,771
Net change in short-term borrowings 13,000 - -
Redemption of long-term borrowings - (75,000) -
Proceeds from long-term borrowings - 20,000 -
Principal payments on capital lease obligations - (75) (32)
Principal payments on other liabilities (1,747) (2,751) (5,611)
Proceeds from other liabilities - - 80
Payment of debt issuance costs (511) - -
Dividends paid on common stock (5,426) (5,921) (6,400)
Issuance of common stock due to restricted stock 1 1 -
Issuance of common stock due to ESOP - 2,886 3,036
Repurchases of common stock (120,437) (168,235) (99,878)
Distributions to noncontrolling interest (3,167) (4,153) (4,033)
Net cash provided by financing activities 604,858 117,818 422,933
Effect of exchange rate changes on cash 331 (1,736) 476
Net change in cash and cash equivalents (12,458) 74,019 (113,348)
Cash and cash equivalents at beginning of fiscal year 388,038 314,019 427,367
Cash and cash equivalents at end of fiscal period $ 375,580 $ 388,038 $ 314,019
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 10,819 $ 5,259 $ 8,207
Income taxes 14,056 13,940 8,038
Franchise taxes 250 250 250
Other taxes 1,109 541 722
Supplemental schedule of non-cash investing activities:
Transfers
Held for sale to loans and leases $ 158 $ 115,934 $ 36,919
Loans and leases to held for sale 13,421 169,045 188,638
Loans and leases to rental equipment 3,122 3,893 28,604
Loans and leases to foreclosed real estate and repossessed assets - 49 9
Rental equipment to loan and leases 377,250 400,148 24,324
Rental equipment to foreclosed real estate and repossessed assets - - 1,650
Recognition of operating lease ROU assets, net of measurements - 117 12,954
Retirement of treasury stock 6,943 - -
See Notes to Consolidated Financial Statements.
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 Pathward®, 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 is a variable interest holder in certain entities in which the equity holders do not have the characteristics of a controlling financial interest or where the entity does not have enough equity at risk to finance its activities without additional subordinated financial support (referred to as variable interest entities or "VIEs"). The Company's variable interest arises from contractual ownership or other monetary 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. If the determination is made that the Company is the primary beneficiary, then that entity is included in the Consolidated Financial Statements.
Noncontrolling interests represent the portion of net income and equity attributable to third-party owners of consolidated subsidiaries that are not wholly-owned by Pathward Financial. All of the Company's noncontrolling interests relate to the Company's Commercial Finance business line.
Variable Interest Entities
As a result of the Crestmark Acquisition, the Company acquired existing membership interests of certain joint venture limited liability companies (the "LLCs"). The Company holds 80% of the membership interests in each of the 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 LLCs as it has the managing power under the terms of each of the LLC operating agreements. Results of the LLCs are reflected in the Company's September 30, 2023 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, 2023
Cash and cash equivalents $ 174
Loans and leases 63,628
Allowance for credit losses (3,290)
Accrued interest receivable 183
Foreclosed real estate and repossessed assets, net -
Other assets 1,368
Total assets 62,063
Accrued expenses and other liabilities 533
Noncontrolling interest (1,005)
Net assets less noncontrolling assets $ 62,535
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 customers 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 TFS, LLC - CM TFS engages in the business of acquiring equipment financing term loans and leases.
In the normal course of business, the Company enters into off-balance sheet transactions with special purpose entities ("SPEs"), which can be structured as corporations, trusts, limited liability companies, or partnerships and are established for a limited purpose. Currently, the Company utilizes a SPE facility for certain term lending products within the Company's Commercial Finance business line. The Company participated in the structuring of the SPE, has a minority ownership interest in the SPE, and acts as servicer for the SPE in exchange for a servicing fee. Pathward is not the primary beneficiary of the SPE as our risk of loss or right to benefits from the SPE are not significant. As of September 30, 2023, there are $13.7 million commercial term loans held at the SPE, and the Company’s equity investment in the SPE is $1.2 million. The Company’s maximum exposure to loss from the SPE is limited to its equity investment. As of September 30, 2023, there are no commercial term loans classified as held for sale related to this SPE.
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 FHLB advances with terms less than 90 days. The FRB requires all depository institutions to maintain reserves at specified levels against their transaction accounts, primarily checking accounts. In response to the COVID-19 pandemic, the FRB reduced reserve requirement ratios to zero percent effective on March 26, 2020, to support lending to households and businesses. At September 30, 2023, the Bank was not required to maintain any reserve balances. 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, 2023, the Company had $1.9 million interest-bearing deposits held at the FHLB and $260.3 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.
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, 2023 or 2022.
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, 2023 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, 2023 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.
The Company held the following non-marketable equity investments:
•Equity Method - The Company held equity method investments of $4.1 million within other assets as of September 30, 2023 and $2.9 million at September 30, 2022. The Company’s ownership of such investments typically ranges from 5% - 25% of the investee. The Company recognized nominal net earnings from these investments within noninterest income for the fiscal year ended September 30, 2023. 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 $8.4 million at September 30, 2023 and $7.2 million at September 30, 2022 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 $12.1 million as of September 30, 2023 and $15.3 million at September 30, 2022 within other assets on the Company’s Consolidated Financial Statements. Equity investments measured using the measurement alternative are subject to fair value adjustments when observable price changes in orderly transactions for the identical or similar investment of the same issuer occur. The Company did not recognize any fair value adjustments in the fiscal year ended September 30, 2023, and recognized a decrease in fair value of $1.0 million in the fiscal year ended September 30, 2022. Additionally, the Company recognized impairment loss of $3.3 million and zero of such investments during the fiscal years ended September 30, 2023 and 2022, respectively.
LOANS HELD FOR SALE ("LHFS")
Loans are designated as LHFS based on management's intent to sell loans, or portions of loans, in established secondary markets or to participating third-party financial institutions. 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, 2023 and 2022, 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. The Company occasionally transfers loans between held for sale and held for investment classifications based on its intent and ability to hold or sell loans. Management's intent to sell may be impacted by secondary market conditions, loan credit quality, or other factors.
The following table summarizes the activity pertaining to loans held for sale:
Fiscal Year Ended September 30,
2023 2022
(Dollars in thousands) Consumer Commercial Consumer Commercial
Beginning of year balance $ 21,071 $ - $ 23,111 $ 33,083
Originations 1,206,201 2,483 856,819 128,511
Proceeds from sales (1,123,271) (16,610) (855,291) (50,848)
Gain (loss) on sales - 268 - 5,813
Principal collections, net of deferred fees and costs (26,222) 280 (4,062) (625)
Non-cash transfers, net - 13,579 494 (115,934)
End of year balance $ 77,779 $ - $ 21,071 $ -
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 classified as held for investment and are generally 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 (amortized cost).
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 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.
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. A nominal impairment expense from rental equipment was recognized for the fiscal year ended September 30, 2023, and no impairment expense was recognized for fiscal years ended September 30, 2022 and 2021.
Loan Servicing and Transfers of Financial Assets
The Company sells loan participations, generally without recourse, in both the commercial and consumer segments. 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. If the fee is determined commensurate and customary with market terms, no servicing asset or liability is recorded. Any fee that is above or below market terms results in a servicing asset or liability and is included within Other Assets on the Consolidated Statements of Financial Condition. At September 30, 2023 and 2022, the Bank was servicing loans for others with aggregate unpaid principal balances of $332.5 million and $336.6 million, respectively. The service fees and ancillary income related to these loans were immaterial.
Transfers of loans, portions of loans meeting the definition of a participating interest, and other financial assets are accounted for as sales on the transaction settlement date when control 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 such right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through a repurchase agreement or other means. Upon sale, the loans or other financial assets are derecognized from the Company’s Consolidated Statements of Financial Condition. If the transfer does not satisfy the aforementioned control criteria, the transaction is recorded as a secured borrowing with the loans or other financial assets remaining on the Company’s Consolidated Statements of Financial Condition and proceeds recognized as a liability.
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 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 to twenty-four 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. The determination of the allowance is governed by structured tiers that dictate how cash collections are applied to losses to assess if there are sufficient available funds to cover expected credit losses.
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 a variety of installment and revolving consumer lending products through its credit solutions. The Bank designs its credit program relationships with certain desired outcomes, including liquidity, credit protection, and risk retention by the program partner. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement.
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. When collection of principal becomes doubtful, the Bank will charge off the balance of a refund advance loan on September 30. Any remaining balances are charged off at the end of the calendar year. The Bank may record recoveries of previously charged off loans if collected in subsequent tax years.
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 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.
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 and amortization 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, 2023, 2022 or 2021. 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.
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 fair value of non-vested (restricted) shares and performance share 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.
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.
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.
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 upon vesting of restricted stock grants and after the allocation of earnings to the participating securities. See Note 5. Earnings per Common Share for further information.
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, 2023 and 2022, the Company had no loans or deposits 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 (loss).
RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES ("ASU")
The following ASUs were adopted by the Company during the fiscal year ended September 30, 2023, none of which had a material impact on the Company's Consolidated Financial Statements. All became effective for the Company on October 1, 2022.
ASU 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments.
The following ASUs have been issued and are considered applicable to the Company, but have not yet been adopted as of September 30, 2023.
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. The ASU also requires current-period gross charge-offs by year of origination to be disclosed for loans and leases within scope of Topic 326. The adoption of this ASU will be reflected using the prospective approach beginning October 1, 2023 in the Company's Quarterly Report on Form 10-Q for the quarter ending December 31, 2023. The Company does not expect a material impact on the Consolidated Financial Statements.
NOTE 2. SIGNIFICANT EVENTS
In December 2022, the Company completed its rebranding efforts to Pathward Financial, Inc., including its bank subsidiary to Pathward, N.A. In December 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. The Company received and recognized $50.0 million as noninterest income upon execution and delivery of the Agreement, at which time the Meta tradenames were assigned to the Assignee. The Company received and recognized the remaining $10.0 million as noninterest income upon completion of required phase-out activities, which occurred in December 2022. The Company incurred $3.7 million and $13.1 million of noninterest expense in the fiscal years ending September 30, 2023 and 2022, respectively, as a result of rebranding activities.
NOTE 3. SECURITIES
The amortized cost, gross unrealized gains and losses and estimated fair values of AFS and HTM debt securities are presented below.
(Dollars in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized (Losses) Fair
Value
Debt Securities AFS
At September 30, 2023
Corporate securities $ 25,000 $ - $ (6,750) $ 18,250
SBA securities 95,549 - (10,307) 85,242
Obligations of states and political subdivisions 2,368 - (79) 2,289
Non-bank qualified obligations of states and political subdivisions 269,396 - (42,673) 226,723
Asset-backed securities 255,384 234 (9,419) 246,199
Mortgage-backed securities 1,495,636 - (270,111) 1,225,525
Total debt securities AFS $ 2,143,333 $ 234 $ (339,339) $ 1,804,228
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
Debt Securities HTM
At September 30, 2023
Non-bank qualified obligations of states and political subdivisions $ 34,415 $ - $ (4,844) $ 29,571
Mortgage-backed securities 2,176 - (322) 1,854
Total debt securities HTM $ 36,591 $ - $ (5,166) $ 31,425
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
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:
LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL
(Dollars in thousands) Fair
Value Gross Unrealized (Losses) Fair
Value Gross Unrealized (Losses) Fair
Value Gross Unrealized (Losses)
Debt Securities AFS
At September 30, 2023
Corporate securities $ - $ - $ 18,250 $ (6,750) $ 18,250 $ (6,750)
SBA securities 22,327 (1,919) 62,915 (8,388) 85,242 (10,307)
Obligations of state and political subdivisions - - 2,289 (79) 2,289 (79)
Non-bank qualified obligations of states and political subdivisions 5,010 (83) 221,714 (42,590) 226,723 (42,673)
Asset-backed securities 46,528 (224) 115,608 (9,195) 162,136 (9,419)
Mortgage-backed securities 18,311 (944) 1,207,214 (269,167) 1,225,525 (270,111)
Total debt securities AFS $ 92,176 $ (3,170) $ 1,627,990 $ (336,169) $ 1,720,165 $ (339,339)
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)
Debt Securities HTM
At September 30, 2023
Non-bank qualified obligations of states and political subdivisions $ - $ - $ 29,571 $ (4,844) $ 29,571 $ (4,844)
Mortgage-backed securities - - 1,854 (322) 1,854 (322)
Total debt securities HTM $ - $ - $ 31,425 $ (5,166) $ 31,425 $ (5,166)
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)
The decline in the fair value of investment securities balances when comparing September 30, 2023 to the prior year was primarily driven by increases in unrealized losses due to the rise in interest rates throughout the fiscal year. At September 30, 2023, there were 206 securities AFS in an unrealized loss position. All of the mortgage-backed securities ("MBS") in an unrealized loss position at September 30, 2023 were government guaranteed. Management assessed each investment security with unrealized losses for credit loss and determined all unrealized losses on these securities were due to change in 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, 2023, 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.
At September 30,
(Dollars in thousands) 2023 2022
Securities AFS at Fair Value Amortized Cost Fair
Value Amortized Cost Fair
Value
Due in one year or less $ 5,023 $ 4,971 $ 718 $ 715
Due after one year through five years 11,175 10,292 9,921 9,395
Due after five years through ten years 79,139 66,428 89,921 81,819
Due after ten years 552,360 497,012 483,707 441,943
647,697 578,703 584,267 533,872
Mortgage-backed securities 1,495,636 1,225,525 1,581,452 1,348,997
Total securities AFS, at fair value $ 2,143,333 $ 1,804,228 $ 2,165,719 $ 1,882,869
Securities HTM at Fair Value
Due after ten years $ 34,415 $ 29,571 $ 39,093 $ 35,903
34,415 29,571 39,093 35,903
Mortgage-backed securities 2,176 1,854 2,589 2,268
Total securities HTM, at cost $ 36,591 $ 31,425 $ 41,682 $ 38,171
Activity related to the sale of securities is summarized below.
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Securities AFS
Proceeds from sales $ - $ 265,951 $ 50,468
Gross gains on sales - 1,742 179
Gross losses on sales - 1,588 173
Net gain (loss) on securities AFS $ - $ 154 $ 6
There was no activity related to the sale of securities held to maturity during the fiscal years ended September 30, 2023, 2022, and 2021.
No securities were pledged as collateral for public funds on deposit at September 30, 2023 and 2022. No securities were pledged as collateral for individual, trust and estate deposits at September 30, 2023 and 2022.
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, 2023 and 2022. These equity securities are 'restricted' in that they can only be owned by member banks. At fiscal year-end 2023 and 2022, the Company pledged securities with fair values of $773.6 million and $924.2 million against FRB advances, respectively.
Included in interest and dividend income from other investments is $1.2 million, $1.2 million, and $1.5 million related to dividend income on FRB stock for the fiscal years ended September 30, 2023, 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 $8.5 million and $9.1 million at September 30, 2023 and 2022, respectively. At fiscal year-end 2023 and 2022, the Company pledged securities with fair values of approximately $996.9 million and $804.0 million, respectively, as collateral against FHLB advances. There was no combination of qualifying residential and other real estate loans pledged as collateral at September 30, 2023 and 2022.
Included in interest and dividend income from other investments is $0.5 million, $0.3 million and $0.2 million related to dividend income on FHLB stock for the fiscal years ended September 30, 2023, 2022 and 2021, 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 Securities. The Company held $3.4 million and $2.9 million in marketable equity securities at September 30, 2023 and 2022, respectively. The unrealized gains and losses associated with these securities were insignificant for the fiscal years ended September 30, 2023 and 2022. No securities were sold during the fiscal year.
Non-marketable equity securities with a readily determinable fair value totaled $8.4 million and $7.2 million at September 30, 2023 and 2022, respectively. The Company recognized $0.2 million in unrealized losses and $1.1 million in unrealized gains during the fiscal years ended September 30, 2023 and 2022, respectively. No securities were sold during the fiscal year.
Non-marketable equity securities without readily determinable fair value totaled $16.2 million and $18.2 million at September 30, 2023 and 2022, respectively. There were two securities sold during the fiscal year for a $0.1 million gain.
Equity Securities 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 $3.3 million, zero, and $2.6 million in impairment for such investments for the fiscal years ended September 30, 2023, 2022, and 2021, respectively.
NOTE 4. LOANS AND LEASES, NET
Loans and leases consist of the following:
At September 30,
(Dollars in thousands) 2023 2022
Term lending $ 1,308,133 $ 1,090,289
Asset-based lending 382,371 351,696
Factoring 358,344 372,595
Lease financing 183,392 210,692
Insurance premium finance 800,077 479,754
SBA/USDA 524,750 359,238
Other commercial finance 166,091 159,409
Commercial finance 3,723,158 3,023,673
Consumer finance 254,416 169,659
Tax services 5,192 9,098
Warehouse finance 376,915 326,850
Total loans and leases 4,359,681 3,529,280
Net deferred loan origination costs 6,435 7,025
Total gross loans and leases 4,366,116 3,536,305
Allowance for credit losses (49,705) (45,947)
Total loans and leases, net $ 4,316,411 $ 3,490,358
During the fiscal years ended September 30, 2023 and 2022, the Company originated $1.21 billion and $985.3 million of other consumer finance and SBA/USDA loans as held for sale, respectively.
The Company sold held for sale loans resulting in proceeds of $1.14 billion and gain on sale of $0.3 million during the fiscal year ended September 30, 2023. The Company sold held for sale loans resulting in proceeds of $1.06 billion and gain on sale of $3.7 million during the fiscal year ended September 30, 2022.
Loans purchased and sold by portfolio segment, including participation interests, were as follows:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Loans Purchased
Loans held for investment:
Commercial finance $ 480 $ 3,098
Warehouse finance 214,786 112,255
Total purchases $ 215,266 $ 115,353
Loans Sold
Loans held for sale:
Commercial finance $ 16,610 $ 50,848
Consumer finance 1,123,271 855,291
Community banking - 153,222
Loans held for investment:
Commercial finance - 15,549
Consumer finance - 77,456
Community banking - 30,235
Total sales $ 1,139,881 $ 1,182,601
Leasing Portfolio. The net investment in direct financing and sales-type leases was comprised of the following:
At September 30,
(Dollars in thousands) 2023 2022
Minimum lease payments receivable $ 191,807 $ 216,880
Unguaranteed residual assets 12,709 13,037
Unamortized initial direct costs 141 295
Unearned income (21,124) (19,225)
Total net investment in direct financing and sales-type leases $ 183,533 $ 210,987
The components of total lease income were as follows:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Interest income - loans and leases
Interest income on net investments in direct financing and sales-type leases $ 13,536 $ 17,081
Leasing and equipment finance noninterest income
Lease income from operating lease payments 53,551 46,017
Other(1)
3,964 5,982
Total leasing and equipment finance noninterest income 57,515 51,999
Total lease income $ 71,051 $ 69,080
(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.
Undiscounted future minimum lease payments receivable for direct financing and sales-type leases, and a reconciliation to the carrying amount recorded at September 30, 2023 were as follows:
(Dollars in thousands)
2024 $ 76,899
2025 47,205
2026 25,478
2027 16,300
2028 13,378
Thereafter 12,547
Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases 191,807
Third-party residual value guarantees -
Total carrying amount of direct financing and sales-type leases $ 191,807
The Company did not record any contingent rental income from direct financing and sales-type leases in the fiscal year ended September 30, 2023.
Although macroeconomic conditions and markets have improved since the COVID-19 pandemic, other factors have been affecting the economic environment in 2023 including geopolitical conflict, supply chain disruptions, inflation, rising interest rates, and bank failures brought on by, among other things, rising interest rates, deposit outflows and liquidity crises. While the ultimate impact of these 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 these 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:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Beginning balance $ 45,947 $ 68,281
Provision for credit losses 57,448 28,862
Charge-offs (59,898) (61,061)
Recoveries 6,208 9,865
Ending balance $ 49,705 $ 45,947
Activity in the allowance for credit losses and balances of loans and leases by portfolio segment was as follows:
At September 30, 2023
(Dollars in thousands) Beginning Balance Provision (Reversal) Charge-offs Recoveries Ending Balance
Allowance for credit losses:
Term lending $ 24,621 $ 10,541 $ (11,295) $ 1,819 $ 25,686
Asset-based lending 1,050 4,005 (2,873) 556 2,738
Factoring 6,556 1,523 (1,545) 32 6,566
Lease financing 5,902 (1,424) (1,479) 303 3,302
Insurance premium finance 1,450 2,349 (1,659) 497 2,637
SBA/USDA 3,263 (296) (43) 38 2,962
Other commercial finance 1,310 1,779 - - 3,089
Commercial finance 44,152 18,477 (18,894) 3,245 46,980
Consumer finance 1,463 3,146 (2,263) - 2,346
Tax services 5 35,775 (38,741) 2,963 2
Warehouse finance 327 50 - - 377
Total loans and leases 45,947 57,448 (59,898) 6,208 49,705
Unfunded commitments(1)
366 (94) - - 272
Total $ 46,313 $ 57,354 $ (59,898) $ 6,208 $ 49,977
(1) Reserve for unfunded commitments is recognized within other liabilities on the Consolidated Statements of Financial Condition.
At September 30, 2022
(Dollars in thousands) 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 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.
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, 2023 At September 30, 2022
Term lending $ 3,516 $ 2,885
Asset-based lending 19,226 -
Factoring 1,133 550
Lease financing 630 2,787
SBA/USDA 750 1,199
Commercial finance(1)
25,255 7,421
Total $ 25,255 $ 7,421
(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. The balance of these pass rated cash collateral loans totaled $117.0 million and $120.7 million at September 30, 2023 and 2022, respectively.
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.
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, 120 days or more for consumer credit products and leases, and 90 days or more for commercial finance loans. Action is taken to charge off ERO loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year. Nonaccrual loans and troubled debt restructurings are generally 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 its evaluation of the appropriateness of the ACL 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 $254.4 million and $5.2 million at September 30, 2023, respectively, and $169.7 million and $9.1 million at September 30, 2022, respectively. The amortized cost basis of loans and leases by asset classification and year of origination was as follows:
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total
At September 30, 2023 2023 2022 2021 2020 2019 Prior
Term lending
Pass $ 301,778 $ 149,190 $ 99,677 $ 73,132 $ 14,368 $ 323,482 $ - $ 961,627
Watch 35,277 51,036 58,041 12,230 4,483 18,931 - 179,998
Special mention 15,314 13,853 20,463 723 2,932 11,300 - 64,585
Substandard 4,604 30,451 14,729 24,613 3,872 16,597 - 94,866
Doubtful 200 2,655 1,691 1,121 165 1,225 - 7,057
Total 357,173 247,185 194,601 111,819 25,820 371,535 - 1,308,133
Asset-based lending
Pass - - - - - - 161,744 161,744
Watch - - - - - - 174,243 174,243
Special mention - - - - - - 26,382 26,382
Substandard - - - - - - 19,501 19,501
Doubtful - - - - - - 501 501
Total - - - - - - 382,371 382,371
Factoring
Pass - - - - - - 270,754 270,754
Watch - - - - - - 70,833 70,833
Special mention - - - - - - 8,892 8,892
Substandard - - - - - - 7,865 7,865
Total - - - - - - 358,344 358,344
Lease financing
Pass 7,716 15,941 15,167 27,489 4,036 50,688 - 121,037
Watch 626 10,436 12,566 4,494 1,579 222 - 29,923
Special mention - - 847 415 195 - - 1,457
Substandard - 1,983 7,082 3,660 3,062 14,923 - 30,710
Doubtful - - 71 61 - 133 - 265
Total 8,342 28,360 35,733 36,119 8,872 65,966 - 183,392
Insurance premium finance
Pass 797,267 1,210 - - - - - 798,477
Watch 858 34 - - - - - 892
Special mention 250 15 - - - - - 265
Substandard 91 20 - - - - - 111
Doubtful 180 152 - - - - - 332
Total 798,646 1,431 - - - - - 800,077
SBA/USDA
Pass 158,675 148,525 26,244 36,274 8,798 18,252 - 396,768
Watch 49,010 48,833 658 51 357 2,572 - 101,481
Special mention - - 530 - - - - 530
Substandard 252 2,356 1,718 5,418 8,509 7,718 - 25,971
Total 207,937 199,714 29,150 41,743 17,664 28,542 - 524,750
Other commercial finance
Pass 2,330 18,927 32,737 1,137 10,122 69,927 - 135,180
Watch 1,742 - - - - - - 1,742
Substandard 2,753 450 25,708 - - 258 - 29,169
Total 6,825 19,377 58,445 1,137 10,122 70,185 - 166,091
Warehouse finance
Pass - - - - - - 376,915 376,915
Total - - - - - - 376,915 376,915
Total loans and leases
Pass 1,267,766 333,793 173,825 138,032 37,324 462,349 809,413 3,222,502
Watch 87,513 110,339 71,265 16,775 6,419 21,725 245,076 559,112
Special mention 15,564 13,868 21,840 1,138 3,127 11,300 35,274 102,111
Substandard 7,700 35,260 49,237 33,691 15,443 39,496 27,366 208,193
Doubtful 380 2,807 1,762 1,182 165 1,358 501 8,155
Total $ 1,378,923 $ 496,067 $ 317,929 $ 190,818 $ 62,478 $ 536,228 $ 1,117,630 $ 4,100,073
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total
At September 30, 2022 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
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
Past due loans and leases were as follows:
At September 30, 2023
Accruing and Nonaccruing Loans and Leases Nonperforming Loans and Leases
(Dollars in thousands) 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
Loans held for sale $ 626 $ 549 $ 306 $ 1,481 $ 76,298 $ 77,779 $ 306 $ - $ 306
Term lending 13,898 7,723 11,136 32,757 1,275,376 1,308,133 3,737 15,324 19,061
Asset-based lending - - 123 123 382,248 382,371 - 18,082 18,082
Factoring - - - - 358,344 358,344 - 1,298 1,298
Lease financing 6,865 158 4,828 11,851 171,541 183,392 4,242 1,666 5,908
Insurance premium finance 2,159 1,262 2,339 5,760 794,317 800,077 2,339 - 2,339
SBA/USDA 512 - 1,835 2,347 522,403 524,750 833 1,002 1,835
Other commercial finance - - 91 91 166,000 166,091 91 - 91
Commercial finance 23,434 9,143 20,352 52,929 3,670,229 3,723,158 11,242 37,372 48,614
Consumer finance 2,992 2,425 2,210 7,627 246,789 254,416 2,210 - 2,210
Tax services - - 5,082 5,082 110 5,192 5,082 - 5,082
Warehouse finance - - - - 376,915 376,915 - - -
Total loans and leases held for investment 26,426 11,568 27,644 65,638 4,294,043 4,359,681 18,534 37,372 55,906
Total loans and leases $ 27,052 $ 12,117 $ 27,950 $ 67,119 $ 4,370,341 $ 4,437,460 $ 18,840 $ 37,372 $ 56,212
At September 30, 2022
Accruing and Nonaccruing Loans and Leases Nonperforming Loans and Leases
(Dollars in thousands) 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
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 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
Nonaccrual loans and leases by year of origination were as follows:
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total Nonaccrual with No ACL
At September 30, 2023 2023 2022 2021 2020 2019 Prior
Term lending $ 748 $ 4,942 $ 2,933 $ 2,165 $ 3,134 $ 1,402 $ - $ 15,324 $ -
Asset-based lending - - - - - - 18,082 18,082 -
Factoring - - - - - - 1,298 1,298 -
Lease financing - - 446 660 - 560 - 1,666 1
SBA/USDA - 750 - - - 252 - 1,002 -
Commercial finance 748 5,692 3,379 2,825 3,134 2,214 19,380 37,372 1
Total nonaccrual loans and leases $ 748 $ 5,692 $ 3,379 $ 2,825 $ 3,134 $ 2,214 $ 19,380 $ 37,372 $ 1
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total Nonaccrual with No ACL
At September 30, 2022 2022 2021 2020 2019 2018 Prior
Term lending $ 251 $ 1,110 $ 1,964 $ 989 $ 3,096 $ 166 $ - $ 7,576 $ 2,885
Asset-based lending - - - - - - 29 29 -
Factoring - - - - - - 569 569 550
Lease financing 977 310 2,442 13 8 - - 3,750 -
SBA/USDA - - 1,199 - - 252 - 1,451 1,199
Commercial finance 1,228 1,420 5,605 1,002 3,104 418 598 13,375 4,634
Total nonaccrual loans and leases $ 1,228 $ 1,420 $ 5,605 $ 1,002 $ 3,104 $ 418 $ 598 $ 13,375 $ 4,634
Loans and leases that are 90 days or more delinquent and accruing by year of origination were as follows:
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total
At September 30, 2023 2023 2022 2021 2020 2019 Prior
Loans held for sale $ 306 $ - $ - $ - $ - $ - $ - $ 306
Term lending 1,290 1,371 500 233 29 314 - 3,737
Lease financing - 490 979 784 1,794 195 - 4,242
Insurance premium finance - 414 114 - 334 1,477 - 2,339
SBA/USDA - - - 833 - - - 833
Other commercial finance - - - - - 91 - 91
Commercial finance 1,290 2,275 1,593 1,850 2,157 2,077 - 11,242
Consumer finance 891 1,045 246 - - - 28 2,210
Tax services 5,082 - - - - - - 5,082
Total loans and leases held for investment 7,263 3,320 1,839 1,850 2,157 2,077 28 18,534
Total 90 days or more delinquent and accruing $ 7,569 $ 3,320 $ 1,839 $ 1,850 $ 2,157 $ 2,077 $ 28 $ 18,840
Amortized Cost Basis
(Dollars in thousands) Term Loans and Leases by Origination Year Revolving Loans and Leases Total
At September 30, 2022 2022 2021 2020 2019 2018 Prior
Term lending $ 207 $ 720 $ 716 $ 130 $ 70 $ 192 $ - $ 2,035
Asset-based lending - - - - - - 39 39
Lease financing 8 158 98 131 45 - - 440
Insurance premium finance 1,513 110 5 - - - - 1,628
Commercial finance 1,728 988 819 261 115 192 39 4,142
Consumer finance 2,123 605 42 23 - - - 2,793
Tax services 8,873 - - - - - - 8,873
Total 90 days or more delinquent and accruing $ 12,724 $ 1,593 $ 861 $ 284 $ 115 $ 192 $ 39 $ 15,808
Certain loans and leases 90 days or more past due as to interest or principal continue to accrue because they are (1) well-secured and in the process of collection or (2) consumer loans exempt under regulatory rules from being classified as non-accrual until later delinquency, usually 120 days past due.
The following table provides the average recorded investment in nonaccrual loans and leases:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Term lending $ 11,494 $ 11,320
Asset-based lending 10,295 3,754
Factoring 578 6,344
Lease financing 2,852 3,278
SBA/USDA 1,244 1,244
Commercial finance 26,463 25,940
Total loans and leases $ 26,463 $ 25,940
The recognized interest income on the Company's nonaccrual loans and leases for the fiscal years ended September 30, 2023 and 2022 was not significant.
The Company’s troubled debt restructurings ("TDRs") typically involve forgiving a portion of interest or principal on existing loans, making loans at a rate materially less than current market rates, or extending the term of the loan. There were $1.1 million loans that were modified in a TDR during the fiscal year ended September 30, 2023. There were $10.5 million of commercial finance loans and $0.9 million of consumer finance loans that were modified in a TDR during the fiscal year ended September 30, 2022, all of which were modified to extend the term of the loan.
During the fiscal year ended September 30, 2023, the Company had $0.9 million of commercial finance loans that were modified in a TDR within the previous 12 months and for which there was a payment default. During the fiscal year ended September 30, 2022, the Company had $5.2 million of commercial finance loans and $1.1 million of consumer finance loans that were modified in a TDR within the previous 12 months and for which there was a payment default. TDR net charge-offs and the impact of TDRs on the Company's allowance for credit losses were insignificant during the fiscal years ended September 30, 2023 and September 30, 2022.
NOTE 5. EARNINGS PER COMMON SHARE ("EPS")
The Company has granted restricted share awards with dividend rights that are considered to be participating securities. Accordingly, a portion of the Company’s earnings is allocated to those participating securities in the earnings per share calculation under the two-class method. Basic EPS is computed using the two-class method 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 EPS is calculated using the more dilutive of the treasury stock method or the two-class method. Diluted EPS 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, performance share units, and nonvested restricted stock, where applicable. Diluted EPS under the two-class method also considers the allocation of earnings to the participating securities. Antidilutive securities are disregarded in earnings per share calculations. Diluted EPS shown below reflects the two-class method, as diluted EPS under the two-class method was more dilutive than under the treasury stock method.
A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share is presented below.
Fiscal Year Ended September 30,
(Dollars in thousands, except per share data) 2023 2022 2021
Basic income per common share:
Net income attributable to Pathward Financial, Inc. $ 163,615 $ 156,386 $ 141,708
Dividends and undistributed earnings allocated to participating securities (2,453) (2,565) (2,698)
Basic net earnings available to common stockholders 161,162 153,821 139,010
Undistributed earnings allocated to nonvested restricted stockholders 2,372 2,468 2,575
Reallocation of undistributed earnings to nonvested restricted stockholders (2,364) (2,468) (2,573)
Diluted net earnings available to common stockholders $ 161,170 $ 153,821 $ 139,012
Total weighted-average basic common shares outstanding 26,833,079 29,227,071 31,729,596
Effect of dilutive securities(1)
Performance share units 92,527 5,176 21,926
Total effect of dilutive securities 92,527 5,176 21,926
Total weighted-average diluted common shares outstanding 26,925,606 29,232,247 31,751,522
Net earnings per common share:
Basic earnings per common share $ 6.01 $ 5.26 $ 4.38
Diluted earnings per common share(2)
$ 5.99 $ 5.26 $ 4.38
(1) Represents the effect of the assumed exercise of stock options and vesting of performance share units and restricted stock, as applicable, utilizing the treasury stock method.
(2) Excluded from the computation of diluted earnings per share for the fiscal years ended September 30, 2023, 2022, and 2021, respectively, were 408,477, 487,476, and 615,811 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive.
NOTE 6. PREMISES, FURNITURE, AND EQUIPMENT, NET
Premises, furniture, and equipment consists of the following:
At September 30,
(Dollars in thousands) 2023 2022
Land $ 1,354 $ 1,354
Buildings 21,331 21,300
Furniture, fixtures, and equipment 62,312 56,631
84,997 79,285
Less: accumulated depreciation and amortization (45,837) (37,575)
Net book value $ 39,160 $ 41,710
Depreciation expense of premises, furniture and equipment included in occupancy and equipment expense was approximately $11.1 million, $11.3 million and $9.6 million for the fiscal years ended September 30, 2023, 2022 and 2021, respectively.
NOTE 7. RENTAL EQUIPMENT, NET
Rental equipment consists of the following:
At September 30,
(Dollars in thousands) 2023 2022
Computers and IT networking equipment $ 25,094 $ 21,669
Motor vehicles and other 122,845 107,648
Other furniture and equipment 37,637 34,254
Solar panels and equipment 142,355 133,765
Total 327,931 297,336
Accumulated depreciation (117,418) (94,355)
Unamortized initial direct costs 1,237 1,390
Net book value $ 211,750 $ 204,371
Future minimum lease payments expected to be received for operating leases at September 30, 2023 were as follows:
(Dollars in thousands)
2024 $ 45,612
2025 37,424
2026 27,542
2027 19,791
2028 11,495
Thereafter 13,891
Total $ 155,755
NOTE 8. GOODWILL AND INTANGIBLE ASSETS
The Company held a total of $309.5 million of goodwill at September 30, 2023. The recorded goodwill is a result of multiple business combinations that occurred from 2015 to 2018. There have been no changes to the carrying amount of goodwill during the fiscal years ended September 30, 2023 and 2022.
The changes in the carrying amount of the Company's intangible assets were as follows:
(Dollars in thousands) Trademark(1)
Non-Compete Customer Relationships(2)
All Others(3)
Total
At September 30, 2022 $ 8,605 $ - $ 12,395 $ 4,691 $ 25,691
Amortization during the period (1,128) - (3,285) (558) (4,971)
At September 30, 2023 $ 7,477 $ - $ 9,110 $ 4,133 $ 20,720
Gross carrying amount $ 14,314 $ 301 $ 77,578 $ 7,796 $ 99,989
Accumulated amortization (6,837) (301) (57,550) (3,445) (68,133)
Accumulated impairment - - (10,918) (218) (11,136)
At September 30, 2023 $ 7,477 $ - $ 9,110 $ 4,133 $ 20,720
At September 30, 2021 $ 9,823 $ 40 $ 17,868 $ 5,417 $ 33,148
Acquisitions during the period - - - 1 1
Amortization during the period (1,218) (40) (4,803) (524) (6,585)
Write-offs and disposals during the period - - (670) (203) (873)
At September 30, 2022 $ 8,605 $ - $ 12,395 $ 4,691 $ 25,691
Gross carrying amount $ 14,624 $ 2,481 $ 82,088 $ 9,940 $ 109,133
Accumulated amortization (6,019) (2,481) (58,775) (5,031) (72,306)
Accumulated impairment - - (10,918) (218) (11,136)
At September 30, 2022 $ 8,605 $ - $ 12,395 $ 4,691 $ 25,691
(1) Book amortization period of 5-15 years. Amortized using the straight line and accelerated methods.
(2) Book amortization period of 10-30 years. Amortized using the accelerated method.
(3) Book amortization period of 3-20 years. Amortized using the straight line method.
The estimated amortization expense of intangible assets assumes no activities, such as acquisitions, which would result in additional amortizable intangible assets. Estimated amortization expense of intangible assets in the subsequent fiscal years at September 30, 2023 was as follows:
(Dollars in thousands)
2024 $ 4,116
2025 3,554
2026 3,208
2027 2,562
2028 2,251
Thereafter 5,029
Total anticipated intangible amortization $ 20,720
There was a no impairment to intangible assets for the fiscal year ended September 30, 2023 and $0.7 million impairment for the fiscal year ended September 30, 2022. Intangible impairment expense is recorded within the impairment expense line of the Consolidated Statements of Operations.
NOTE 9. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES
Operating lease right-of-use ("ROU") assets, included in other assets, were $26.9 million and $30.1 million at September 30, 2023 and 2022, respectively.
Operating lease liabilities, included in accrued expenses and other liabilities, were $28.8 million and $32.1 million at September 30, 2023 and 2022, respectively.
Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities at September 30, 2023 were as follows:
(Dollars in thousands)
2024 $ 3,913
2025 3,718
2026 3,195
2027 3,092
2028 3,803
Thereafter 14,836
Total undiscounted future minimum lease payments 32,557
Discount (3,724)
Total operating lease liabilities $ 28,833
The weighted-average discount rate and remaining lease term for operating leases at September 30, 2023 were as follows:
Weighted-average discount rate 2.38 %
Weighted-average remaining lease term (years) 9.66
The components of total lease costs for operating leases were as follows:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022
Lease expense $ 3,951 $ 4,431
Short-term and variable lease cost 142 194
ROU asset impairment - 670
Sublease income (1,409) (1,267)
Total lease cost for operating leases $ 2,684 $ 4,028
NOTE 10. TIME CERTIFICATES OF DEPOSIT
Time certificates of deposit in denominations of $250,000 or more were approximately $5.0 million and $6.2 million at September 30, 2023, and 2022, respectively.
Scheduled maturities of time certificates of deposit at September 30, 2023 were as follows for the fiscal years ending:
(Dollars in thousands)
2024 $ 5,165
2025 369
2026 -
2027 -
2028 -
Thereafter -
Total(1)
$ 5,534
(1) As of September 30, 2023, the Company had no certificates of deposit recorded in wholesale deposits on the Consolidated Statements of Financial Condition.
Under the Dodd-Frank Act, IRA and non-IRA deposit accounts are insured up to $250,000 by the DIF under management of the FDIC.
NOTE 11. SHORT-TERM AND LONG-TERM BORROWINGS
Short-Term Borrowings
At September 30,
(Dollars in thousands) 2023 2022
Overnight fed funds purchased $ 13,000 $ -
Total $ 13,000 $ -
The Bank has executed blanket pledge agreements whereby the Bank assigns, transfers, and pledges to the FHLB and grants to the FHLB a security interest in real estate and securities collateral. The Bank has the right to use, commingle, and dispose of the collateral it has assigned to the FHLB. Under the agreement, the Bank must maintain “eligible collateral” that has a “lending value” at least equal to the “required collateral amount,” all as defined by the agreement.
At September 30, 2023 and 2022, the Bank pledged securities with fair values of approximately $996.9 million and $804.0 million, respectively, to be used against FHLB advances as needed. In addition, qualifying real estate loans of approximately $21.3 million were pledged as collateral at September 30, 2023 compared to none at September 30, 2022.
The Company had no securities sold under agreements to repurchase at September 30, 2023 and 2022.
Long-Term Borrowings
At September 30,
(Dollars in thousands) 2023 2022
Trust preferred securities $ 13,661 $ 13,661
Subordinated debentures, net of issuance costs 19,591 20,000
Other long-term borrowings(1)
621 2,367
Total $ 33,873 $ 36,028
(1) Includes $0.6 million and $2.4 million of discounted leases at September 30, 2023 and 2022, respectively.
Scheduled maturities of the Company's long-term borrowings at September 30, 2023 were as follows for the fiscal years ending:
(Dollars in thousands) Trust preferred securities Subordinated debentures Other long-term borrowings Total
2024 $ - $ - $ - $ -
2025 - - 621 621
2026 - - - -
2027 - - - -
2028 - - - -
Thereafter 13,661 19,591 - 33,252
Total long-term borrowings $ 13,661 $ 19,591 $ 621 $ 33,873
Certain trust preferred securities are due to First Midwest Financial Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The securities were issued in 2001 in conjunction with the Trust’s issuance of 10,000 shares of Trust Preferred Securities. The securities bear the same interest rate and terms as the trust preferred securities. The securities are included on the Consolidated Statements of Financial Condition as liabilities.
The Company issued all of the 10,310 authorized shares of trust preferred securities of First Midwest Financial Capital Trust I holding solely securities. Distributions are paid semi-annually. Cumulative cash distributions are calculated at 6-Month CME Term SOFR plus 0.42826% tenor spread adjustment plus 3.75% (9.65% at September 30, 2023 and 7.98% at September 30, 2022), 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 are required to be paid. The capital securities are required to be redeemed on July 25, 2031; however, the Company has a semi-annual option to shorten the maturity date. 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.
Although the securities issued by the Trust are not included as a component of stockholders’ equity, the securities are treated as capital for regulatory purposes, subject to certain limitations.
Through the Crestmark Acquisition, the Company acquired $3.4 million in floating rate capital securities due to Crestmark Capital Trust I, a 100%-owned nonconsolidated subsidiary of the Company. The subordinated debentures bear interest at 3-Month CME Term SOFR plus 0.26161% tenor spread adjustment plus 3.00%, have a stated maturity of 30 years 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 interest rate as of September 30, 2023 was 8.66%. The Company 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 redeemed its $75.0 million of 5.75% fixed-to-floating rate subordinated debentures on May 15, 2022 with payment of $75.0 million principal and approximately $1.0 million interest. 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. At September 30, 2023, the Company had $20.0 million in aggregate principal amount in subordinated debentures remains outstanding.
NOTE 12. STOCKHOLDERS' EQUITY
Repurchase of Common Stock. The Company's Board of Directors authorized the September 3, 2021 share repurchase program to repurchase up to 6,000,000 shares of the Company's outstanding common stock. This authorization is effective from September 3, 2021 through September 30, 2024. On August 25, 2023, the Company's Board of Directors announced a share repurchase program to repurchase up to an additional 7,000,000 shares of the Company's outstanding common stock on or before September 30, 2028. During the fiscal years ended September 30, 2023 and 2022, the Company repurchased 2,628,541 and 3,020,899 shares, respectively, as part of the share repurchase programs.
Under the repurchase programs, repurchased shares were retired and designated as authorized but unissued shares. The Company accounts for repurchased shares using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings. As of September 30, 2023, 8,666,436 shares of common stock remained available for repurchase.
For the fiscal years ended September 30, 2023, and 2022, the Company also repurchased 67,103 and 73,522 shares, or $2.5 million and $4.0 million, of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.
Repurchase of Treasury Stock. The Company accounts for the retirement of repurchased shares, including treasury stock, using the par value method under which the repurchase price is charged to paid-in capital up to the amount of the original proceeds of those shares. When the repurchase price is greater than the original issue proceeds, the excess is charged to retained earnings. The Company retired 149,679 and zero shares of common stock held in treasury during the fiscal years ended September 30, 2023 and 2022, respectively.
NOTE 13. STOCK COMPENSATION
The Company previously maintained the Pathward Financial, Inc. 2002 Omnibus Incentive Plan, as amended and restated (the "Prior Omnibus Incentive Plan"). On September 27, 2023, the Board adopted the Pathward Financial, Inc. 2023 Omnibus Incentive Plan (the "New Omnibus Incentive Plan") contingent on stockholder approval at the Annual Meeting of Stockholders expected to be held on February 27, 2024. The Prior Omnibus Incentive Plan provided for the awarding of stock options, nonvested (restricted) shares, and performance share units ("PSUs") to certain officers and directors of the Company. Awards were granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors. No awards have been granted under the Prior Omnibus Incentive Plan following November 25, 2022, the date that the Prior Omnibus Incentive Plan expired by its terms.
Shares have previously been granted each year to executives and senior leadership members under the applicable Company incentive plan. These shares vest at various times ranging from immediately to three years based on circumstances at time of grant. The fair value is determined based on the fair market value of the Company’s stock on the grant date. Director shares are issued to the Company’s directors, and these shares have historically vested one year from the grant date.
The Company also grants selected executives and other key employees PSU awards. The vesting of these awards is contingent on meeting company-wide performance goals, including but not limited to return on equity, earnings per share, and total shareholder return. PSUs are generally granted at the market value of the underlying share on the date of grant, adjusted for dividends, as performance share units do not participate in dividends. The awards contingently vest over a period of three years and have payout levels ranging from a threshold of 50% to a maximum of 200%. Upon vesting, each performance share unit earned is converted into one share of common stock.
The fair value of the PSUs is determined by the dividend-adjusted fair value on the grant date for those awards subject to a performance condition. For those PSUs subject to a market condition, a simulation valuation is performed.
In addition, during the first and second quarters of fiscal year 2017, shares were granted to certain executive officers of the Company in connection with their signing of employment agreements with the Company. These stock awards vest in equal installments over eight years.
The following tables show the activity of share awards (including shares of restricted stock subject to vesting, fully-vested restricted stock, and PSUs) granted, exercised or forfeited under all of the Company’s incentive plans during the fiscal years ended September 30, 2023 and 2022.
(Dollars in thousands, except per share data) Number of Shares Weighted Average Fair Value at Grant
Nonvested shares outstanding, September 30, 2022 474,348 $ 36.52
Granted 135,417 36.68
Vested (229,803) 37.46
Forfeited or expired (9,811) 41.14
Nonvested shares outstanding, September 30, 2023 370,151 $ 35.87
Nonvested shares outstanding, September 30, 2021 547,063 $ 30.22
Granted 178,631 55.56
Vested (230,323) 35.70
Forfeited or expired (21,023) 43.45
Nonvested shares outstanding, September 30, 2022 474,348 $ 36.52
(Dollars in thousands, except per share data) Number of Units Weighted Average Fair Value at Grant
Performance share units outstanding, September 30, 2022 96,689 $ 42.59
Granted(1)
59,115 38.94
Vested - -
Forfeited or expired - -
Performance share units outstanding, September 30, 2023 155,804 $ 41.20
(1) The number of PSUs granted reflects the target number of PSUs able to be earned under a given award.
Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of the grant. The exercise price of fair value of nonvested (restricted) shares and PSUs 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.
The following table shows the effect to income, net of tax benefits, of share-based compensation expense recorded:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Total employee stock-based compensation expense recognized in income, net of tax effects of $1,838, $2,181, and $1,562, respectively
$ 8,465 $ 7,824 $ 5,290
As of September 30, 2023, stock-based compensation expense not yet recognized in income totaled $6.1 million, which is expected to be recognized over a weighted-average remaining period of 1.45 years.
NOTE 14. INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return on a fiscal year basis. The provision for income taxes were as follows:
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Federal:
Current $ 8,682 $ 5,657 $ 6,402
Deferred (1,168) 12,900 (3,909)
7,514 18,557 2,493
State:
Current 7,817 4,720 5,938
Deferred 993 4,687 2,270
8,810 9,407 8,208
Income tax expense $ 16,324 $ 27,964 $ 10,701
The tax effects of the Company's temporary differences that give rise to significant portions of its deferred tax assets and liabilities were:
At September 30,
(Dollars in thousands) 2023 2022
Deferred tax assets:
Bad debts $ 11,606 $ 10,636
Deferred compensation 3,739 2,652
Stock based compensation 3,916 3,521
Valuation adjustments 393 3,047
General business credits(1)
59,783 52,684
Accrued expenses 2,558 1,948
Lease liability 7,210 8,074
Net unrealized loss on securities available for sale 84,908 71,336
Other assets 4,193 2,662
178,306 156,560
Deferred tax liabilities:
Premises and equipment (2,016) (3,148)
Intangibles (5,862) (4,099)
Leased assets (66,877) (58,592)
Right-of-use assets (6,877) (7,758)
Other liabilities (1,349) (1,170)
(82,981) (74,767)
Net deferred tax assets $ 95,325 $ 81,793
(1) The general business credits are investment tax credits generated from qualified solar energy property placed in service during the fiscal years ended September 30, 2023 and 2022. These credits will begin to expire on September 30, 2041.
As of September 30, 2023, the Company had a gross deferred tax asset of $2.7 million for separate company state cumulative net operating loss carryforwards, for which $2.7 million was reserved. At September 30, 2022, the Company had a gross deferred tax asset of $2.9 million for separate company state cumulative net operating loss carryforwards, for which $2.9 million was reserved. These state operating loss carryforwards will expire in various subsequent periods.
In general, management believes that the realization of its deferred tax assets is more likely than not based on the expectations as to future taxable income; therefore, there was no deferred tax valuation allowance at September 30, 2023, or 2022 with the exception of the state cumulative net operating loss carryforwards discussed above.
The table below reconciles the statutory federal income tax expense and rate to the effective income tax expense and rate for the fiscal years presented. The Company's effective tax rate is calculated by dividing income tax expense by income before income tax expense.
Fiscal Year Ended September 30,
2023 2022 2021
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
Statutory federal income tax expense and rate $ 38,248 21.0 % $ 38,714 21.0 % $ 32,854 21.0 %
Change in tax rate resulting from:
State income taxes net of federal benefits 7,047 3.9 % 7,413 4.0 % 6,452 4.1 %
162(m) disallowance 919 0.5 % 1,125 0.4 % 686 0.4 %
Tax exempt income (783) (0.4) % (743) (0.4) % (835) (0.5) %
General business credits (28,633) (15.7) % (17,589) (9.5) % (26,945) (17.2) %
Other, net (474) (0.3) % (956) (0.3) % (1,511) (1.0) %
Income tax expense $ 16,324 9.0 % $ 27,964 15.2 % $ 10,701 6.8 %
The Company uses the flow through method of accounting for investment tax credits under which the credits are recognized as a reduction to income tax expense in the period in which the credit arises. During the fiscal years ended September 30, 2023, 2022, and 2021, $27.4 million, $16.8 million, and $26.5 million in investment tax credits were recognized as a reduction to income tax expense, respectively.
The Company’s tax reserves reflect management’s judgment as to the resolution of the issues involved if subject to judicial review. While the Company believes that its reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed its related reserve. With respect to these reserves, the Company’s income tax expense would include (i) any changes in tax reserves arising from material changes during the period in the facts and circumstances surrounding a tax issue, and (ii) any difference from the Company’s tax position as recorded in the Consolidated Financial Statements and the final resolution of a tax issue during the period.
The tax years ended September 30, 2020 and later remain subject to examination by the Internal Revenue Service. For state purposes, the tax years ended September 30, 2020 and later remain open for examination, with few exceptions.
A reconciliation of the beginning and ending balances for liabilities associated with unrecognized tax benefits follows:
At September 30,
(Dollars in thousands) 2023 2022
Balance at beginning of fiscal year $ 645 $ 777
Additions (reductions) for tax positions related to prior years (124) (132)
Balance at end of fiscal year $ 521 $ 645
The total amount of unrecognized tax benefits that, if recognized, would impact the effective rate was $164,000 as of September 30, 2023. The Company recognizes interest related to unrecognized tax benefits as a component of income tax expense. The amount of accrued interest related to unrecognized tax benefits was $80,000 as of September 30, 2023. The Company does not anticipate any significant change in the total amount of unrecognized tax benefits within the next 12 months.
NOTE 15. CAPITAL REQUIREMENTS AND RESTRICTIONS ON RETAINED EARNINGS
The Company and the Bank are required to comply with the regulatory capital rules administered by federal banking agencies (the "Capital Rules"). Under the Capital Rules and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings, and other factors.
The Capital Rules require the Company and the Bank to maintain minimum ratios (set forth in the table below) of total risk-based capital and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and a leverage ratio consisting of Tier 1 capital (as defined) to average assets (as defined). At September 30, 2023, the Company and the Bank exceeded federal regulatory minimum capital requirements to be classified as well-capitalized under the prompt corrective action requirements. The Company and the Bank took the AOCI opt-out election; under the rule, non-advanced approach banking organizations were given a one-time option to exclude certain AOCI components.
The tables below include certain non-GAAP financial measures that are used by investors, analysts and bank regulatory agencies to assess the capital position of financial services companies. Management reviews these measures along with other measures of capital as part of its financial analyses and has included this non-GAAP financial information, and the corresponding reconciliation to total equity.
Company Bank Minimum
to be Adequately Capitalized Under Prompt Corrective Action Provisions Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
At September 30, 2023
Tier 1 leverage capital ratio 8.11 % 8.32 % 4.00 % 5.00 %
Common equity Tier 1 capital ratio 11.25 11.81 4.50 6.50
Tier 1 capital ratio 11.50 11.81 6.00 8.00
Total capital ratio 12.84 12.76 8.00 10.00
At September 30, 2022
Tier 1 leverage capital ratio 8.10 % 8.19 % 4.00 % 5.00 %
Common equity Tier 1 capital ratio 12.07 12.55 4.50 6.50
Tier 1 capital ratio 12.39 12.55 6.00 8.00
Total capital ratio 13.88 13.57 8.00 10.00
The following table provides a reconciliation of the amounts included in the table above for the Company.
(Dollars in thousands) Standardized Approach(1)
September 30, 2023
Total stockholders' equity $ 650,625
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities 297,679
LESS: Certain other intangible assets 21,228
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards 19,679
LESS: Net unrealized (losses) on available for sale securities (254,294)
LESS: Noncontrolling interest (1,005)
ADD: Adoption of Accounting Standards Update 2016-13 2,017
Common Equity Tier 1(1)
569,355
Long-term borrowings and other instruments qualifying as Tier 1 13,661
Tier 1 minority interest not included in common equity Tier 1 capital (826)
Total Tier 1 capital 582,190
Allowance for credit losses 47,960
Subordinated debentures, net of issuance costs 19,591
Total capital $ 649,741
(1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio.
The following table provides a reconciliation of tangible common equity and tangible common equity excluding AOCI, each of which is used in calculating tangible book value data, to total stockholders' equity. Each of tangible common equity and tangible common equity excluding AOCI is a non-GAAP financial measure that is commonly used within the banking industry.
(Dollars in thousands) At September 30, 2023
Total stockholders' equity $ 650,625
LESS: Goodwill 309,505
LESS: Intangible assets 20,720
Tangible common equity 320,400
LESS: AOCI (255,443)
Tangible common equity excluding AOCI $ 575,843
Since January 1, 2016, the Company and the Bank have been required to maintain a capital conservation buffer above the minimum risk-based capital requirements in order to avoid certain limitations on capital distributions, stock repurchases and discretionary bonus payments to executive officers. The capital conservation buffer is exclusively composed of Common Equity Tier 1 capital, and it applies to each of the three risk-based capital ratios but not the leverage ratio. The required Common Equity Tier 1 risk-based, Tier 1 risk-based and total risk-based capital ratios with the buffer are currently 7.0%, 8.5% and 10.5%, respectively.
Based on current and expected continued profitability and subject to continued access to capital markets, we believe that the Company and the Bank will continue to meet the capital conservation buffer of 2.5% in addition to required minimum capital ratios.
NOTE 16. REVENUE FROM CONTRACTS WITH CUSTOMERS
Topic 606 applies to all contracts with customers unless such revenue is specifically addressed under existing guidance. The table below presents the Company’s revenue by operating segment. For additional descriptions of the Company’s operating segments, including additional financial information and the underlying management accounting process, see Note 17. Segment Reporting to the Consolidated Financial Statements.
(Dollars in thousands) Consumer Commercial Corporate Services/Other Consolidated Company
Fiscal Year Ended September 30, 2023 2022 2023 2022 2023 2022 2023 2022
Net interest income(1)
$ 154,316 $ 98,366 $ 195,239 $ 187,209 $ 38,306 $ 21,749 $ 387,861 $ 307,324
Noninterest income:
Refund transfer product fees 39,452 39,809 - - - - 39,452 39,809
Refund advance fee income(1)
37,433 40,557 - - - - 37,433 40,557
Card and deposit fees 149,703 104,684 1,018 1,020 25 29 150,746 105,733
Rental income(1)
- - 53,346 46,023 844 535 54,190 46,558
Gain (loss) on sale of securities(1)
- - - - 91 (1,287) 91 (1,287)
Gain on trademarks(1)
- - - - 10,000 50,000 10,000 50,000
Gain (loss) on sale of other(1)
- - 2,005 8,782 567 (13,702) 2,572 (4,920)
Other income(1)
6,956 4,202 9,682 12,587 5,477 568 22,115 17,357
Total noninterest income 233,544 189,252 66,051 68,412 17,004 36,143 316,599 293,807
Revenue $ 387,860 $ 287,618 $ 261,290 $ 255,621 $ 55,310 $ 57,892 $ 704,460 $ 601,131
(1) These revenues are not within the scope of Topic 606. Additional details are included in other footnotes to the accompanying financial statements. The scope of Topic 606 explicitly excludes net interest income as well as many other revenues for financial assets and liabilities, including loans, leases, and securities.
Following is a discussion of key revenues within the scope of Topic 606. The Company provides services to customers that have related performance obligations that must be completed to recognize revenue. Revenues are generally recognized immediately upon the completion of the service or over time as services are performed. Any services performed over time generally require that the Company renders services each period; therefore, the Company measures progress in completing these services based upon the passage of time. Revenue from contracts with customers did not generate significant contract assets and liabilities for the fiscal year ended September 30, 2023.
Refund Transfer Product Fees. Refund transfer fees are specific to the BaaS business line and reflect product fees offered by the Company through third-party tax preparers and tax preparation software providers where the Company acts as the partnering financial institution. A refund transfer allows a taxpayer to pay tax preparation and filing fees directly from their federal or state government tax refund, with the remainder of the refund being disbursed in accordance with the terms and conditions of the taxpayer agreement, which may include satisfaction of other disbursement obligations before going directly to the taxpayer via check, direct deposit, or prepaid card. Refund transfer fees are recognized by the Company immediately after the taxpayer's refund has been disbursed in accordance with the contract and are based on standalone pricing included within the terms and conditions. Certain expenses to tax preparation software providers are netted with refund transfer fee income as the Company is considered the agent in these contractual relationships. All refund transfer fees are recorded within the Consumer reporting segment.
Card and Deposit Fees. Card fees relate to the BaaS business line and consists of income from prepaid cards and merchant services, including interchange fees from prepaid cards processed through card association networks, merchant services and other card related services. Interchange rates are generally set by card association networks based on transaction volume and other factors. Since interchange fees are generated by cardholder activity, the Company recognizes the income as transactions occur. Fee income for merchant services and other card related services reflect account management and transaction fees charged to merchants for processing card association network transactions. The associated income is recognized as transactions occur or as services are performed. For the Company's internally managed prepaid card programs, fees are based on standalone pricing within the terms and conditions of the cardholder agreement. The Company is considered the principal of these relationships resulting in all fee income being presented on a gross basis within the Consolidated Statement of Operations. For the Company's sponsorship prepaid card programs where a third-party is considered the Program Manager, the fees are based on standalone pricing within the terms and conditions of the Program Agreement. For these relationships, the Company is considered the agent and certain expenses with the Program Manager, networks and associations are netted with card fee revenue. All card fee income is included in the Consumer reporting segment.
Deposit fees relate to the BaaS and Commercial Finance business lines and consist of income from banking and deposit-related services, including account services, overdraft protection, and wire transfers. Fee income for account services is recognized over the course of the month as the performance obligation is satisfied. Fee income for overdraft protection and wire transfers is recognized at the point in time when such event occurs. For BaaS, the fees for account services and overdraft protection are based on standalone pricing within the terms and conditions of the Program Agreement with the sponsorship partner. For these relationships, the Company is considered the agent and certain expenses with the partner are netted with deposit fee revenue. For Commercial Finance, fees for wire transfers are based on standalone pricing within the terms and conditions of the customer deposit agreement. Bank and deposit fees for the BaaS and Commercial Finance business lines are included in the Consumer and Commercial reporting segments, respectively. Also included within Card and Deposit Fees for the Consumer reporting segment are servicing fees the Company recognizes for custodial off-balance sheet deposits. This fee income is for services the Bank performs to maintain records of cardholder funds placed at one or more third-party banks insured by the FDIC. The servicing fee is typically reflective of the EFFR.
NOTE 17. SEGMENT REPORTING
An operating segment is generally defined as a component of a business for which discrete financial information is available and whose results are reviewed by the chief operating decision-maker. Operating segments are aggregated into reportable segments if certain criteria are met.
The Company reports its results of operations through the following three business segments: Consumer, Commercial, and Corporate Services/Other. The BaaS business line is reported in the Consumer segment. The Commercial Finance business line is reported in the Commercial segment. The Corporate Services/Other segment includes certain shared services as well as treasury related functions such as the investment portfolio, warehouse finance, wholesale deposits, and borrowings.
The following tables present segment data for the Company:
Fiscal Year Ended September 30, 2023
(Dollars in thousands) Consumer Commercial Corporate Services/Other Total
Net interest income $ 154,316 $ 195,239 $ 38,306 $ 387,861
Provision for (reversal of) credit losses 38,920 18,384 50 57,354
Noninterest income 233,544 66,051 17,004 316,599
Noninterest expense 165,782 141,627 157,566 464,975
Income (loss) before income tax expense 183,158 101,279 (102,306) 182,131
Total assets 492,964 4,179,914 2,862,665 7,535,543
Total goodwill 87,145 222,360 - 309,505
Total deposits 6,376,467 5,958 206,757 6,589,182
Fiscal Year Ended September 30, 2022
(Dollars in thousands) Consumer Commercial Corporate Services/Other Total
Net interest income $ 98,366 $ 187,209 $ 21,749 $ 307,324
Provision for (reversal of) credit losses 30,680 14,674 (16,816) 28,538
Noninterest income 189,252 68,412 36,143 293,807
Noninterest expense 99,589 128,904 156,782 385,275
Income (loss) before income tax expense 157,349 112,043 (82,074) 187,318
Total assets 356,994 3,487,461 2,902,955 6,747,410
Total goodwill 87,145 222,360 - 309,505
Total deposits 5,695,776 8,965 161,296 5,866,037
Fiscal Year Ended September 30, 2021
(Dollars in thousands) Consumer Commercial Corporate Services/Other Total
Net interest income $ 91,489 $ 173,969 $ 13,533 $ 278,991
Provision for (reversal of) credit losses 35,765 19,791 (5,790) 49,766
Noninterest income 195,708 61,813 13,383 270,904
Noninterest expense 90,792 114,925 137,966 343,683
Income (loss) before income tax expense 160,640 101,066 (105,260) 156,446
Total assets 354,441 3,208,889 3,127,320 6,690,650
Total goodwill 87,145 222,360 - 309,505
Total deposits 5,342,192 6,625 166,154 5,514,971
NOTE 18. PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company, Pathward Financial.
Condensed Statements of Financial Condition
(Dollars in thousands) September 30, 2023 September 30, 2022
ASSETS
Cash and cash equivalents $ 1,399 $ 13,117
Investment securities held to maturity, at cost 9,220 8,003
Investment in subsidiaries 678,572 665,172
Other assets 1,312 928
Total assets $ 690,503 $ 687,220
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Subordinated debentures $ 33,252 $ 33,661
Other liabilities 6,626 8,419
Total liabilities 39,878 42,080
STOCKHOLDERS' EQUITY
Common stock 262 288
Additional paid-in capital 628,500 617,403
Retained earnings 278,655 245,394
Accumulated other comprehensive income (loss) (255,443) (213,080)
Treasury stock, at cost (344) (4,835)
Total equity attributable to parent 651,630 645,170
Non-controlling interest (1,005) (30)
Total stockholders' equity 650,625 645,140
Total liabilities and stockholders' equity $ 690,503 $ 687,220
Condensed Statements of Operations
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Interest expense $ 2,538 $ 3,982 $ 4,915
Other expense 1,409 1,062 1,287
Total expense 3,947 5,044 6,202
Loss before income taxes and equity in undistributed net income of subsidiaries (3,947) (5,044) (6,202)
Income tax (benefit) expense (967) (1,029) 395
Loss before equity in undistributed net income of subsidiaries (2,980) (4,015) (6,597)
Equity in undistributed net income of subsidiaries 166,738 159,652 147,895
Other income (143) 749 410
Total income 166,595 160,401 148,305
Net income attributable to parent $ 163,615 $ 156,386 $ 141,708
Condensed Statements of Cash Flows
Fiscal Year Ended September 30,
(Dollars in thousands) 2023 2022 2021
Cash flows from operating activities:
Net income attributable to parent $ 163,615 $ 156,386 $ 141,708
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net 102 1,020 173
Equity in undistributed net income of subsidiaries (166,738) (159,652) (147,895)
Net change in accrued interest receivable (30) (15) -
Net change in other assets (354) (636) 3,030
Net change in accrued expenses and other liabilities (1,793) 3,163 (2,698)
Cash dividend received 110,000 229,200 104,000
Stock compensation 11,070 10,004 6,852
Net cash provided by operating activities 115,872 239,470 105,170
Cash flows from investing activities:
Alternative investments (1,217) (3,380) (3,415)
Net cash (used in) investing activities (1,217) (3,380) (3,415)
Cash flows from financing activities:
Redemption of long-term borrowings - (75,000) -
Payment of debt issuance costs (511) - -
Proceeds from long-term borrowings - 20,000 -
Dividends paid on common stock (5,426) (5,921) (6,400)
Issuance of common stock due to restricted stock 1 1 -
Issuance of common stock due to ESOP - 2,886 3,036
Repurchases of common stock (120,437) (168,235) (99,878)
Net cash (used in) financing activities (126,373) (226,269) (103,242)
Net change in cash and cash equivalents (11,718) 9,821 (1,487)
Cash and cash equivalents at beginning of fiscal year 13,117 3,296 4,783
Cash and cash equivalents at end of fiscal year $ 1,399 $ 13,117 $ 3,296
The extent to which the Company may pay cash dividends to stockholders will depend on the cash currently available at the Company, as well as the ability of the Bank to pay dividends to the Company. For further discussion, see Note 15 herein.
NOTE 19. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter Ended
(Dollars in thousands, except per share data) December 31 March 31 June 30 September 30
Fiscal Year 2023
Interest and dividend income $ 85,060 $ 104,687 $ 99,346 $ 109,642
Interest expense 1,003 3,282 1,881 4,708
Net interest income 84,057 101,405 97,465 104,934
Provision for credit losses 9,776 36,763 1,773 9,042
Noninterest income 65,777 127,038 67,733 56,051
Net income attributable to parent 27,842 54,771 45,096 35,906
Earnings per common share
Basic $ 0.98 $ 1.99 $ 1.69 $ 1.37
Diluted 0.98 1.99 1.68 1.36
Dividend declared per share 0.05 0.05 0.05 0.05
Fiscal Year 2022
Interest and dividend income $ 72,891 $ 85,177 $ 73,906 $ 80,222
Interest expense 1,278 1,377 1,755 462
Net interest income 71,613 83,800 72,151 79,760
Provision for (reversal of) loan and lease losses 186 32,302 (1,302) (2,648)
Noninterest income 86,591 109,766 53,994 43,456
Net income attributable to parent 61,324 49,251 22,391 23,420
Earnings per common share
Basic $ 2.00 $ 1.66 $ 0.76 $ 0.81
Diluted 2.00 1.66 0.76 0.81
Dividend declared per share 0.05 0.05 0.05 0.05
Fiscal Year 2021
Interest and dividend income $ 68,146 $ 75,669 $ 69,983 $ 72,056
Interest expense 2,147 1,819 1,508 1,389
Net interest income 65,999 73,850 68,475 70,667
Provision for loan and lease losses 6,089 30,290 4,612 8,775
Noninterest income 45,455 113,453 62,453 49,542
Net income attributable to parent 28,037 59,066 38,701 15,903
Earnings per common share
Basic $ 0.84 $ 1.84 $ 1.21 $ 0.50
Diluted 0.84 1.84 1.21 0.50
Dividend declared per share 0.05 0.05 0.05 0.05
NOTE 20. FAIR VALUES OF FINANCIAL INSTRUMENTS
ASC 820, Fair Value Measurements defines fair value, establishes a framework for measuring the fair value of assets and liabilities using a hierarchy system and requires disclosures about fair value measurement. It clarifies that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts.
The fair value hierarchy is as follows:
Level 1 Inputs - Valuation is based upon quoted prices for identical instruments traded in active markets that the Company has the ability to access at measurement date.
Level 2 Inputs - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which significant assumptions are observable in the market.
Level 3 Inputs - Valuation is generated from model-based techniques that use significant assumptions not observable in the market and are used only to the extent that observable inputs are not available. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability.
There were no transfers between levels of the fair value hierarchy for the fiscal years ended September 30, 2023 or 2022.
Debt Securities Available for Sale and Held to Maturity. Debt securities available for sale are recorded at fair value on a recurring basis and debt securities held to maturity are carried at amortized cost.
The fair values of debt securities available for sale, categorized primarily as Level 2, is recorded using prices obtained from independent asset pricing services that are based on observable transactions, but not quoted markets. Management reviews the prices obtained from independent asset pricing services for unusual fluctuations and compares to current market trading activity.
Equity Securities. Marketable equity securities and certain non-marketable equity securities are recorded at fair value on a recurring basis. The fair values of marketable equity securities are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs).
The following tables summarize the fair values of debt securities available for sale and equity securities as they are measured at fair value on a recurring basis.
Fair Value At September 30, 2023
(Dollars in thousands) Total Level 1 Level 2 Level 3
Debt securities AFS
Corporate securities $ 18,250 $ - $ 18,250 -
SBA securities 85,242 - 85,242 -
Obligations of states and political subdivisions 2,289 - 2,289 -
Non-bank qualified obligations of states and political subdivisions 226,723 - 226,723 -
Asset-backed securities 246,199 - 246,199 -
Mortgage-backed securities 1,225,525 - 1,225,525 -
Total debt securities AFS $ 1,804,228 $ - $ 1,804,228 $ -
Common equities and mutual funds(1)
$ 3,378 $ 3,378 $ - $ -
Non-marketable equity securities(2)
$ 8,389 $ - $ - $ -
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at September 30, 2023.
(2) Consists of certain non-marketable equity securities that are measured at fair value using net asset value ("NAV") per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
Fair Value At September 30, 2022
(Dollars in thousands) Total Level 1 Level 2 Level 3
Debt securities AFS
Corporate securities $ 22,187 $ - $ 22,187 $ -
SBA securities 97,768 - 97,768 -
Obligations of states and political subdivisions 2,344 - 2,344 -
Non-bank qualified obligations of states and political subdivisions 263,783 - 263,783 -
Asset-backed securities 147,790 - 147,790 -
Mortgage-backed securities 1,348,997 - 1,348,997 -
Total debt securities AFS $ 1,882,869 $ - $ 1,882,869 $ -
Common equities and mutual funds(1)
$ 2,874 $ 2,874 $ - $ -
Non-marketable equity securities(2)
$ 7,212 $ - $ - $ -
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at September 30, 2022.
(2) Consists of certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
Loans and Leases. The Company does not record loans and leases at fair value on a recurring basis. However, if a loan or lease is individually evaluated for risk of credit loss and repayment is expected to be solely provided by the values of the underlying collateral, the Company measures fair value on a nonrecurring basis. Fair value is determined by the fair value of the underlying collateral less estimated costs to sell. The fair value of the collateral is determined based on the internal estimates and/or assessment provided by third-party appraisers and the valuation relies on discount rates ranging from 3% to 25%.
The following table summarizes the assets of the Company that are measured at fair value in the Consolidated Statements of Financial Condition on a non-recurring basis:
Fair Value At September 30, 2023
(Dollars in thousands) Total Level 1 Level 2 Level 3
Loans and leases, net individually evaluated for credit loss
Commercial finance $ 21,829 $ - $ - $ 21,829
Total loans and leases, net individually evaluated
for credit loss 21,829 - - 21,829
Total $ 21,829 $ - $ - $ 21,829
Fair Value At September 30, 2022
(Dollars in thousands) Total Level 1 Level 2 Level 3
Loans and leases, net individually evaluated for credit loss
Commercial finance $ 1,575 $ - $ - $ 1,575
Total loans and leases, net individually evaluated
for credit loss 1,575 - - 1,575
Foreclosed assets, net 1 - - 1
Total $ 1,576 $ - $ - $ 1,576
Quantitative Information About Level 3 Fair Value Measurements
(Dollars in thousands) Fair Value at September 30, 2023 Fair Value at September 30, 2022 Valuation
Technique Unobservable Input Range of Inputs
Loans and leases, net individually evaluated for credit loss $ 21,829 1,575 Market approach Appraised values(1)
3% - 25%
Foreclosed assets, net $ - 1 Market approach Appraised values(1)
9% - 20%
(1) The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimated selling costs and other inputs in a range of 3% to 25%.
Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair values estimates were made at September 30, 2023 and 2022 based on relevant market information and information about financial instruments. Fair value estimates are intended to represent the price at which an asset could be sold or a liability could be settled. However, since there is no active market for certain financial instruments of the Company, the estimates of fair value are subjective in nature, involve uncertainties, and include matters of significant judgment. Changes in assumptions as well as tax considerations could significantly affect the estimated values. Accordingly, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.
The following tables present the carrying amount and estimated fair value of the financial instruments held by the Company:
At September 30, 2023
(Dollars in thousands) Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3
Financial assets
Cash and cash equivalents $ 375,580 $ 375,580 $ 375,580 $ - $ -
Debt securities available for sale 1,804,228 1,804,228 - 1,804,228 -
Debt securities held to maturity 36,591 31,425 - 31,425 -
Common equities and mutual funds(1)
3,378 3,378 3,378 - -
Non-marketable equity securities(1)(2)
20,453 20,453 - 12,064 -
Loans held for sale 77,779 77,779 - 77,779 -
Loans and leases 4,359,681 4,223,010 - - 4,223,010
Federal Reserve Bank and Federal Home Loan Bank stocks 28,210 28,210 - 28,210 -
Accrued interest receivable 23,282 23,282 23,282 - -
Financial liabilities
Deposits 6,589,182 6,589,065 6,583,648 5,417 -
Other short- and long-term borrowings 33,873 31,187 - 31,187 -
Accrued interest payable 247 247 247 - -
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at September 30, 2023.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
At September 30, 2022
(Dollars in thousands) Carrying
Amount Estimated
Fair Value Level 1 Level 2 Level 3
Financial assets
Cash and cash equivalents $ 388,038 $ 388,038 $ 388,038 $ - $ -
Debt securities available for sale 1,882,869 1,882,869 - 1,882,869 -
Debt securities held to maturity 41,682 38,171 - 38,171 -
Common equities and mutual funds(1)
2,874 2,874 2,874 - -
Non-marketable equity securities(1)(2)
22,526 22,526 - 15,314 -
Loans held for sale 21,071 21,071 - 21,071 -
Loans and leases 3,529,280 3,525,803 - - 3,525,803
Federal Reserve Bank and Federal Home Loan Bank stocks 28,812 28,812 - 28,812 -
Accrued interest receivable 17,979 17,979 17,979 - -
Financial liabilities
Deposits 5,866,037 5,865,854 5,858,283 7,571 -
Other short- and long-term borrowings 36,028 35,986 - 35,986 -
Accrued interest payable 192 192 192 - -
(1) Equity securities at fair value are included within other assets on the consolidated statement of financial condition at September 30, 2022.
(2) Includes certain non-marketable equity securities that are measured at fair value using NAV per share (or its equivalent) as a practical expedient and are excluded from the fair value hierarchy.
The following sets forth the methods and assumptions used in determining the fair value estimates for the Company’s financial instruments at September 30, 2023 and 2022.
CASH AND CASH EQUIVALENTS
The carrying amount of cash and short-term investments is assumed to approximate the fair value.
DEBT SECURITIES AVAILABLE FOR SALE AND EQUITY SECURITIES
Fair values for debt securities available for sale are based on quoted prices of similar securities on nationally recognized securities exchanges, or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. Fair values for marketable equity securities are based on unadjusted quoted prices from active markets in which the security is traded. Non-marketable equity securities are measured at fair value using NAV per share (or its equivalent) as a practical expedient.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of amortized cost or fair value, where fair value reflects the amount a willing market participant would pay for the loan. The Company classifies SBA/USDA loans held for sale as Level 2 in the fair value hierarchy as there is an active secondary market in which these loans are exchanged. Consumer loans held for sale are classified as Level 3 in the fair value hierarchy as the price at which these loans are sold are dictated by terms of the Program Agreements with consumer lending partners.
LOANS AND LEASES
The fair values of loans and leases were estimated using an exit price methodology. The exit price estimation of fair value is based on the present value of expected cash flows, which are based on the contractual terms of the loans, adjusted for prepayments and a discount rate based on the relative risk of the cash flows. Other considerations include the loan type, remaining life of the loan and credit risk.
FEDERAL RESERVE BANK AND FEDERAL HOME LOAN BANK STOCKS
The fair value of FRB and FHLB stock is assumed to approximate book value since the Company is only able to redeem this stock at par value.
ACCRUED INTEREST RECEIVABLE
The carrying amount of accrued interest receivable is assumed to approximate the fair value.
DEPOSITS
With the exception of time certificate deposits and wholesale deposits, the carrying values of deposits are assumed to approximate fair value since deposits are immediately withdrawable without penalty. The fair value of time certificate deposits and wholesale certificate of deposits are estimated using a discounted cash flows calculation that applies the FHLB Des Moines curve to aggregated expected maturities of time deposits.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of such advances was estimated by discounting the expected future cash flows using current interest rates for advances with similar terms and remaining maturities.
SUBORDINATED DEBENTURES AND OTHER BORROWINGS
The fair value of these instruments was estimated by discounting the expected future cash flows using derived interest rates approximating market over the contractual maturity of such borrowings.
ACCRUED INTEREST PAYABLE
The carrying amount of accrued interest payable is assumed to approximate the fair value.
LIMITATIONS
Fair value estimates are made at a specific point in time and are based on relevant market information about the financial instrument. Additionally, fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, customer relationships and the value of assets and liabilities that are not considered financial instruments. These estimates do not reflect any premium or discount that could result from offering the Company’s entire holdings of a particular financial instrument for sale at one time. Furthermore, since no market exists for certain of the Company’s financial instruments, fair value estimates may be based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with a high level of precision. Changes in assumptions as well as tax considerations could significantly affect the estimates. Accordingly, based on the limitations described above, the aggregate fair value estimates are not intended to represent the underlying value of the Company, on either a going concern or a liquidation basis.
NOTE 21. SUBSEQUENT EVENTS
Management has evaluated subsequent events that occurred after September 30, 2023. During this period, up to the filing date of this Annual Report on Form 10-K, management identified the following subsequent events:
•On October 5, 2023 the Company announced that Gregory A. Sigrist was appointed as Executive Vice President, Chief Financial Officer effective immediately after the filing of the Company's Annual Form 10-K for the fiscal year ended September 30, 2023.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Management, under the direction of its Chief Executive Officer and Chief Financial Officer, is responsible for maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “1934 Act”)) that are designed to ensure that information required to be disclosed in reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this Annual Report on Form 10-K, management evaluated the Company’s disclosure controls and procedures. The evaluation was performed under the direction of the Company’s Chief Executive Officer and Chief Financial Officer to determine the effectiveness, as of September 30, 2023, of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the Company’s disclosure controls and procedures were designed effectively to ensure timely alerting of material information relating to the Company required to be included in the Company’s periodic SEC filings.
INHERENT LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS
Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Management conducted an evaluation of the Company’s internal control over financial reporting to determine whether any changes occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting. Based on this evaluation, management concluded that, as of the end of the period covered by this report, there were no changes in the Company’s internal controls over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the fiscal fourth quarter to which this report relates that could have materially affected the Company’s internal controls over financial reporting.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2023, based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in “Internal Control Integrated Framework (2013).” Based on this assessment, our management concluded that our internal control over financial reporting was effective as of September 30, 2023.
The effectiveness of the Company’s internal control over financial reporting as of September 30, 2023, has been audited by Crowe LLP, the independent registered public accounting firm that also has audited the Company’s Consolidated Financial Statements included in this Annual Report on Form 10-K. Crowe LLP’s attestation report on the Company’s internal controls over financial reporting appears below.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
Adoption or Termination of Trading Arrangements by Directors and Executive Officers
During the fiscal quarter ended September 30, 2023, none of our directors or officers (as defined in Rule 16a-1(f) of the 1934 Act) informed us of the adoption or termination of any "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Item 408 of Regulation S-K.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance.
Directors
Information concerning directors of the Company required by this item will be included under the captions “Election of Directors,” “Communicating with Our Directors,” "Committees of the Board" and “Stockholder Proposals For The Fiscal Year 2025 Annual Meeting” in the Company’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on February 27, 2024, a copy of which will be filed no later than 120 days after September 30, 2023 (the “2024 Proxy Statement”), and is incorporated herein by reference.
Executive Officers
Information concerning the executive officers of the Company required by this item will be included under the captions “Executive Officers” and “Election of Directors” in the 2024 Proxy Statement and is incorporated herein by reference.
Compliance with Section 16(a)
Information, if applicable, required by this item regarding compliance with Section 16(a) of the Exchange Act will be included under the caption “Delinquent Section 16(a) Reports” in the Company’s 2024 Proxy Statement and is incorporated herein by reference.
Audit Committee and Audit Committee Financial Expert
Information regarding the audit committee of the Company’s Board of Directors will be included under the captions “Committees of the Board” and “Election of Directors” in the Company’s 2024 Proxy Statement and is incorporated herein by reference.
Code of Business Conduct
Information regarding the Company’s Code of Business Conduct will be included under the caption “Corporate Governance” in the Company’s 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation.
Information concerning executive and director compensation will be included under the captions “Compensation of Directors”, “Executive Compensation” and "Compensation Committee Report" in the Company’s 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(a) Security Ownership of Certain Beneficial Owners and Management
The information required by this item will be included under the caption “Stock Ownership” in the Company’s 2024 Proxy Statement and is incorporated herein by reference.
(b) Changes in Control
Management of the Company knows of no arrangements, including any pledge by any persons of securities of the Company, the operation of which may, at a subsequent date, result in a change in control of the Registrant.
(c) Equity Compensation Plan Information
The table below presents information on the Company's equity compensation plans as of September 30, 2023, as required by SEC rules.
Plan Category (a)
Number of shares
to be issued under
outstanding options,
warrants and rights(1)
(#)
(b)
Weighted-average
exercise price of
outstanding options,
warrants and rights(2)
($)
(c)
Number of shares
remaining for future issuance under equity
compensation plans
(excluding securities
reflected in column (a))(3)
(#)
Equity compensation plans approved by stockholders 241,287 N/A N/A
Equity compensation plans not approved by stockholders - - -
Total 241,287 N/A N/A
(1) Consists of outstanding performance share units awarded under the Prior Omnibus Incentive Plan, reflected based on the assumption that
target performance is probable.
(2) Performance share units do not have an exercise price and are delivered without any payment or consideration.
(3) There was no equity compensation plan in effect as of September 30, 2023.
(4) In accordance with SEC rules, this table does not include information regarding the New Omnibus Incentive Plan. For more information on the
New Omnibus Incentive Plan, see Proposal 4 “Approval of the 2023 Omnibus Incentive Plan” of the Company’s 2024 Proxy Statement.
For more information on the Company’s equity compensation plans, see Note 13 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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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item will be included under the captions “Election of Directors,” “Committees of the Board”, “Related Person Transactions” and "Corporate Governance" in the Company’s 2024 Proxy Statement and is incorporated herein by reference.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services.
The information required by this item will be included under the caption “Ratification of Appointment of Independent Registered Public Accounting Firm” in the Company’s 2024 Proxy Statement and is incorporated herein by reference.
The Independent Registered Public Accounting Firm is Crowe LLP (Public Company Accounting Oversight Board Firm ID No. 173) located in South Bend, Indiana.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibit and Financial Statement Schedules.
The following is a list of documents filed as Part of this report:
(a) Financial Statements:
The following financial statements are included under Part II, Item 8 of this Annual Report on Form 10-K:
1.Report of Independent Registered Public Accounting Firm.
2.Consolidated Statements of Financial Condition as of September 30, 2023 and 2022.
3.Consolidated Statements of Operations for the Fiscal Years Ended September 30, 2023, 2022 and 2021.
4.Consolidated Statements of Comprehensive Income (Loss) for the Fiscal Years ended September 30, 2023, 2022, and 2021.
5.Consolidated Statements of Changes in Stockholders’ Equity for the Fiscal Years Ended September 30, 2023, 2022, and 2021.
6.Consolidated Statements of Cash Flows for the Fiscal Years Ended September 30, 2023, 2022, and 2021.
7.Notes to Consolidated Financial Statements.
(b) Exhibits:
Exhibit
Number
Description
3.1
Registrant’s Amended and Restated Certificate of Incorporation, filed on July 13, 2022 as an exhibit to the Registrant's Current Report on Form 8-K, is incorporated herein by reference.
3.2
Registrant’s Fourth Amended and Restated By-laws, filed on December 12, 2022 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
4.1
Description of the Securities of the Registrant filed on November 30, 2020 as an exhibit to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2022, is incorporated herein by reference.
4.2
Registrant’s Specimen Stock Certificate, filed on June 27, 2016 as an exhibit to the Registrant’s registration statement on Form S-3 (Commission File No. 333-212269), is incorporated herein by reference.
4.3
Indenture, dated as of September 23, 2022, by and between the Registrant and UMB Bank, N.A. as Trustee, filed on September 26, 2022 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
4.4
Forms of 6.625% Fixed-to-Floating Subordinated Note due 2032 (included as Exhibit A-1 and Exhibit A-2 to the Indenture, dated as of September 23, 2022, by and between the Registrant and UMB Bank, N.A. as Trustee), filed on September 26, 2022 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.1
Performance-Based Restricted Stock Agreement between Meta and Glen W. Herrick, dated as of December 2, 2016, filed on December 6, 2016 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.2
Registrant’s Supplemental Employees’ Investment Plan, originally filed as an exhibit to the Registrant’s Annual Report on Form 10-KSB for the fiscal year ended September 30, 1994. First amendment to such agreement, filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008, is incorporated herein by reference.
*10.3
Registrant’s Amended and Restated 2002 Omnibus Incentive Plan, as amended, filed on January 24, 2018 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
10.4
Investor Rights Agreement by and among Meta Financial Group, Inc., BEP IV LLC and BEP Investors, LLC, dated as of December 17, 2015, filed on December 17, 2015 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.5
Form of Performance Share Unit Award Agreement, filed on November 23, 2021 as an exhibit to the Registrant's Annual Report on Form 10-K, is incorporated herein by reference.
*10.6
Form of Performance-Based Restricted Stock Award Agreement, filed on November 23, 2021 as an exhibit to the Registrant's Annual Report on Form 10-K, is incorporated herein by reference.
*10.7
Executive Nonqualified Deferred Compensation Plan Adoption Agreement by MetaBank, National Association, effective as of July 1, 2021, filed on May 20, 2021 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.8
Executive Nonqualified Deferred Compensation Plan, effective as of July 1, 2021, filed on May 20, 2021 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.9
First Amendment to the MetaBank, National Association Amended and Restated Supplemental Employees’ Investment Plan for Salaried Employees, effective as of June 30, 2021, filed on May 20, 2021 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.10
Executive Severance Pay Policy, effective as of November 1, 2021, filed on November 2, 2021 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.11
Termination Agreement by and among Meta Financial Group, Inc., MetaBank, National Associate and Glen W. Herrick, effective as of November 1, 2021, filed on November 2, 2021 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
†10.12
Purchase Agreement, dated December 7, 2021, between the Registrant and Beige Key LLC, filed on February 8, 2022 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, is incorporated herein by reference.
*10.13
Form of 2002 Omnibus Incentive Plan Restricted Stock Agreement (Non-Employee Directors Annual Equity Award), filed on May 9, 2022 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, is incorporated herein by reference.
*10.14
Form of 2002 Omnibus Incentive Plan Restricted Stock Agreement (Non-Employee Directors Award in Lieu of Cash Retainer), filed on May 9, 2022 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, is incorporated herein by reference.
*10.15
Amendment No. 3 to the Registrant’s Amended and Restated 2002 Omnibus Incentive Plan, as amended, filed on May 9, 2022 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q, is incorporated herein by reference.
10.16
Form of Subordinated Note Purchase Agreement, dated as of September 23, 2022, by and among the Registrant and the Purchasers (as defined therein), filed on September 26, 2022 as an exhibit to the Registrant’s Current Report on Form 8-K, in incorporated by reference herein.
10.17
Form of Registration Rights Agreement, dated as of September 23, 2022, by and among the Registrant and the Purchasers (as defined therein), filed on September 26, 2022 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
*10.18
Offer Letter between the Company and Gregory Sigrist, dated as of October 2, 2023, filed on October 5, 2023 as an exhibit to the Registrant’s Current Report on Form 8-K, is incorporated herein by reference.
Subsidiaries of the Registrant is filed herewith.
23.1
Consent of Independent Registered Public Accounting Firm of Crowe LLP is filed herewith.
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is filed herewith.
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 is filed herewith.
32.1
Certification of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.
32.2
Certification of the CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 is filed herewith.
97.1
Pathward Financial, Inc. and Pathward, N.A. Dodd-Frank Clawback Policy is filed herewith.
101 Interactive data files formatted in Inline eXtensible Business Reporting Language - pursuant to Rule 405 of Regulation S-T: (i) Consolidated Statements of Financial Condition as of September 30, 2023 and September 30, 2022, (ii) the Consolidated Statements of Operations for the fiscal years ended September 30, 2023, 2022, and 2021, (iii) the Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended September 30, 2023, 2022, and 2021, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the fiscal years ended September 30, 2023, 2022, and 2021, (v) the Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2023, 2022, and 2021 and (vi) the Notes to the Consolidated Financial Statements for the fiscal years ended September 30, 2023, 2022, and 2021.
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Management Contract or Compensatory Plan or Agreement.
† Certain schedules or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the Securities and Exchange Commission upon request; provided, however that the Registrant may request confidential treatment for any schedule or exhibit so furnished.
(c) Financial Statement Schedules:
All financial statement schedules have been omitted as the information is not required under the related
instructions or is inapplicable.