UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

☒  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

☐  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to           .

Commission File Number:  0-22140

PATHWARD FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	42-1406262
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5501 South Broadband Lane, Sioux Falls, South Dakota 57108

(Address of principal executive offices and Zip Code)

(877) 497-7497

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class:	Outstanding at May 3, 2023:
Common Stock, $.01 par value	26,912,856	Shares
Nonvoting Common Stock, $.01 par value	0	Nonvoting shares

PATHWARD FINANCIAL, INC.

FORM 10-Q

Table of Contents

Description		Page
PART I - Financial Information
Item 1.	Financial Statements (Unaudited)	2
	Condensed Consolidated Statements of Financial Condition as of March 31, 2023 and September 30, 2022	2
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2023 and 2022	3
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2023 and 2022	4
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended March 31, 2023 and 2022	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	49
Item 4.	Controls and Procedures	51
PART II - Other Information
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 6.	Exhibits	55
SIGNATURES		56

i

PART I - FINANCIAL INFORMATION

Item 1.    Financial Statements.

PATHWARD FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Financial Condition

(Dollars in thousands, except per share data)	March 31, 2023		September 30, 2022
ASSETS	(Unaudited)		(Audited)
Cash and cash equivalents	$	432,598	$	388,038
Securities available for sale, at fair value	1,825,563		1,882,869
Securities held to maturity, at amortized cost (fair value $35,028 and $38,171, respectively)	38,713		41,682
Federal Reserve Bank and Federal Home Loan Bank Stock, at cost	29,387		28,812
Loans held for sale	24,780		21,071
Loans and leases	3,725,616		3,536,305
Allowance for credit losses	(84,304)		(45,947)
Accrued interest receivable	22,434		17,979
Premises, furniture, and equipment, net	39,735		41,710
Rental equipment, net	210,844		204,371
Goodwill and intangible assets	332,503		335,196
Other assets	270,387		295,324
Total assets	$	6,868,256	$	6,747,410
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Deposits	$	5,902,696	$	5,866,037
Short-term borrowings	43,000		—
Long-term borrowings	34,543		36,028
Accrued expenses and other liabilities	214,773		200,205
Total liabilities	6,195,012		6,102,270
STOCKHOLDERS’ EQUITY
Preferred stock, 3,000,000 shares authorized, no shares issued, none outstanding at March 31, 2023 and September 30, 2022, respectively	—		—
Common stock, $0.01 par value; 90,000,000 shares authorized, 27,205,406 and 28,878,177 shares issued, 27,055,727 and 28,788,124 shares outstanding at March 31, 2023 and September 30, 2022, respectively	271		288
Common stock, Nonvoting, $0.01 par value; 3,000,000 shares authorized, no shares issued, none outstanding at March 31, 2023 and September 30, 2022, respectively	—		—
Additional paid-in capital	623,250		617,403
Retained earnings	245,046		245,394
Accumulated other comprehensive loss	(187,829)		(213,080)
Treasury stock, at cost, 149,679 and 90,053 common shares at March 31, 2023 and September 30, 2022, respectively	(6,943)		(4,835)
Total equity attributable to parent	673,795		645,170
Noncontrolling interest	(551)		(30)
Total stockholders’ equity	673,244		645,140
Total liabilities and stockholders’ equity	$	6,868,256	$	6,747,410

See Notes to Condensed Consolidated Financial Statements.

2

PATHWARD FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations (Unaudited)

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands, except per share data)	2023		2022		2023		2022
Interest and dividend income:
Loans and leases, including fees	$	83,879	$	75,540	$	152,275	$	140,575
Mortgage-backed securities	10,326		5,446		20,738		9,310
Other investments	10,482		4,191		16,734		8,183
	104,687		85,177		189,747		158,068
Interest expense:
Deposits	2,096		165		2,238		306
FHLB advances and other borrowings	1,186		1,212		2,047		2,349
	3,282		1,377		4,285		2,655
Net interest income	101,405		83,800		185,462		155,413
Provision for credit losses	36,763		32,302		46,539		32,488
Net interest income after provision for credit losses	64,642		51,498		138,923		122,925
Noninterest income:
Refund transfer product fees	30,205		27,805		30,882		28,384
Refund advance fee income	37,995		39,299		38,612		40,532
Card and deposit fees	42,087		26,520		79,805		51,889
Rental income	12,940		11,375		25,648		22,452
Gain (loss) on sale of securities	82		260		82		397
Gain on sale of trademarks	—		—		10,000		50,000
Gain (loss) on sale of other	(748)		626		(246)		(2,839)
Other income	4,477		3,881		8,032		5,542
Total noninterest income	127,038		109,766		192,815		196,357
Noninterest expense:
Compensation and benefits	47,547		45,047		90,564		83,272
Refund transfer product expense	7,863		6,260		7,968		6,398
Refund advance expense	1,603		2,002		1,630		2,185
Card processing	26,924		7,457		49,607		14,629
Occupancy and equipment expense	8,510		8,500		16,822		16,849
Operating lease equipment depreciation	14,719		8,737		24,347		17,185
Legal and consulting	4,921		9,347		14,380		15,555
Intangible amortization	1,435		2,169		2,693		3,657
Impairment expense	500		—		524		—
Other expense	13,114		13,641		23,660		25,866
Total noninterest expense	127,136		103,160		232,195		185,596
Income before income tax expense	64,544		58,104		99,543		133,686
Income tax expense	9,176		8,002		15,753		22,278
Net income before noncontrolling interest	55,368		50,102		83,790		111,408
Net income (loss) attributable to noncontrolling interest	597		851		1,177		833
Net income attributable to parent	$	54,771	$	49,251	$	82,613	$	110,575
Earnings per common share:
Basic	$	1.99	$	1.66	$	2.95	$	3.66
Diluted	$	1.99	$	1.66	$	2.95	$	3.66

See Notes to Condensed Consolidated Financial Statements.

3

PATHWARD FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands)	2023		2022		2023		2022
Net income before noncontrolling interest	$	55,368	$	50,102	$	83,790	$	111,408
Other comprehensive income (loss):
Change in net unrealized gain (loss) on debt securities	18,530		(93,632)		33,238		(102,774)
Net loss (gain) realized on investment securities	(82)		(260)		(82)		(397)
	18,448		(93,892)		33,156		(103,171)
Unrealized gain (loss) on currency translation	60		143		447		209
Deferred income tax effect	4,647		(23,651)		8,352		(25,989)
Total other comprehensive income (loss)	13,861		(70,098)		25,251		(76,973)
Total comprehensive income (loss)	69,229		(19,996)		109,041		34,435
Total comprehensive income attributable to noncontrolling interest	597		851		1,177		833
Comprehensive income (loss) attributable to parent	$	68,632	$	(20,847)	$	107,864	$	33,602

See Notes to Condensed Consolidated Financial Statements.

4

PATHWARD FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

(Dollars in thousands, except per share data)	Pathward Financial, Inc.
Three Months Ended March 31, 2023	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Pathward Financial Stockholders’ Equity		Noncontrolling interest		Total Stockholders’ Equity
Balance, December 31, 2022	$	282	$	620,681	$	246,891	$	(201,690)	$	(6,824)	$	659,340	$	(207)	$	659,133
Cash dividends declared on common stock ($0.05 per share)	—		—		(1,386)		—		—		(1,386)		—		(1,386)
Repurchases of common stock	(11)		11		(55,230)		—		(119)		(55,349)		—		(55,349)
Stock compensation	—		2,558		—		—		—		2,558		—		2,558
Total other comprehensive income	—		—		—		13,861		—		13,861		—		13,861
Net income	—		—		54,771		—		—		54,771		597		55,368
Net investment by (distribution to) noncontrolling interests	—		—		—		—		—		—		(941)		(941)
Balance, March 31, 2023	$	271	$	623,250	$	245,046	$	(187,829)	$	(6,943)	$	673,795	$	(551)	$	673,244
Three Months Ended March 31, 2022
Balance, December 31, 2021	$	301	$	610,816	$	217,991	$	724	$	(4,318)	$	825,514	$	642	$	826,156
Cash dividends declared on common stock ($0.05 per share)	—		—		(1,482)		—		—		(1,482)		—		(1,482)
Repurchases of common stock	(7)		7		(42,000)		—		(195)		(42,195)		—		(42,195)
Stock compensation	—		2,094		—		—		—		2,094		—		2,094
Total other comprehensive (loss)	—		—		—		(70,098)		—		(70,098)		—		(70,098)
Net income	—		—		49,251		—		—		49,251		851		50,102
Net investment by (distribution to) noncontrolling interests	—		—		—		—		—		—		(1,171)		(1,171)
Balance, March 31, 2022	$	294	$	612,917	$	223,760	$	(69,374)	$	(4,513)	$	763,084	$	322	$	763,406

5

(Dollars in thousands, except per share data)	Pathward Financial, Inc.
Six Months Ended March 31, 2023	Common Stock		Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Treasury Stock		Total Pathward Financial Stockholders’ Equity		Noncontrolling interest		Total Stockholders’ Equity
Balance, September 30, 2022	$	288	$	617,403	$	245,394	$	(213,080)	$	(4,835)	$	645,170	$	(30)	$	645,140
Cash dividends declared on common stock ($0.10 per share)	—		—		(2,788)		—		—		(2,788)		—		(2,788)
Issuance of common stock due to restricted stock	1		—		—		—		—		1		—		1
Repurchases of common stock	(18)		18		(80,173)		—		(2,108)		(82,281)		—		(82,281)
Stock compensation	—		5,829		—		—		—		5,829		—		5,829
Total other comprehensive income	—		—		—		25,251		—		25,251		—		25,251
Net income	—		—		82,613		—		—		82,613		1,177		83,790
Net investment by (distribution to) noncontrolling interests	—		—		—		—		—		—		(1,698)		(1,698)
Balance, March 31, 2023	$	271	$	623,250	$	245,046	$	(187,829)	$	(6,943)	$	673,795	$	(551)	$	673,244
Six Months Ended March 31, 2022
Balance, September 30, 2021	$	317	$	604,484	$	259,189	$	7,599	$	(860)	$	870,729	$	1,155	$	871,884
Cash dividends declared on common stock ($0.10 per share)	—		—		(3,004)		—		—		(3,004)		—		(3,004)
Issuance of common stock due to ESOP	1		2,885		—		—		—		2,886		—		2,886
Repurchases of common stock	(24)		24		(143,000)		—		(3,653)		(146,653)		—		(146,653)
Stock compensation	—		5,524		—		—		—		5,524		—		5,524
Total other comprehensive (loss)	—		—		—		(76,973)		—		(76,973)		—		(76,973)
Net income	—		—		110,575		—		—		110,575		833		111,408
Net investment by (distribution to) noncontrolling interests	—		—		—		—		—		—		(1,666)		(1,666)
Balance, March 31, 2022	$	294	$	612,917	$	223,760	$	(69,374)	$	(4,513)	$	763,084	$	322	$	763,406

See Notes to Condensed Consolidated Financial Statements.

6

PATHWARD FINANCIAL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended March 31,
(Dollars in thousands)	2023		2022
Cash flows from operating activities:
Net income before noncontrolling interest	$	83,790	$	111,408
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion, net	34,390		30,753
Provision for credit losses	46,539		32,488
Provision for deferred taxes	2,545		14,091
Originations of loans held for sale	(608,628)		(555,397)
Proceeds from sales of loans held for sale	604,363		723,942
Net change in loans held for sale	652		8,834
Net realized (gain) loss on loans held for sale	(110)		4,065
Net realized loss on premise, furniture, and equipment	—		43
Net realized (gain) on lease receivables and equipment	354		(1,063)
Net realized (gain) on trademarks	(10,000)		(50,000)
Net realized (gain) loss on other assets	(82)		(397)
Impairment on rental equipment	24		—
Net change in accrued interest receivable	(4,455)		(2,862)
Net change in other assets	14,050		(21,680)
Net change in accrued expenses and other liabilities	14,568		(8,400)
Stock compensation	5,829		5,524
Net cash provided by operating activities	183,829		291,349
Cash flows from investing activities:
Purchases of securities available for sale	—		(470,067)
Proceeds from maturities of and principal collected on securities available for sale	89,162		184,107
Proceeds from maturities of and principal collected on securities held to maturity	2,822		8,937
Purchases of Federal Reserve Bank and Federal Home Loan Bank stock	(120,160)		(103,573)
Redemption of Federal Reserve Bank and Federal Home Loan Bank stock	119,586		103,160
Purchases of loans and leases	(187,834)		(88,913)
Proceeds from sales of loans and leases	—		45,784
Net change in loans and leases	191,195		(69,966)
Purchases of premises, furniture, and equipment	(3,428)		(3,718)
Proceeds from sales of premises, furniture, and equipment	—		35
Purchases of rental equipment	(238,999)		(196,043)
Proceeds from sales of rental equipment	6,736		6,811
Net change in rental equipment	(153)		(1,567)
Proceeds from sales of foreclosed real estate and repossessed assets	1		1,715
Proceeds from sale of trademarks	10,000		50,000
Proceeds from sale of other assets	—		460
Net cash provided by (used in) investing activities	(131,072)		(532,838)
Cash flows from financing activities:
Net change in deposits	36,659		314,915
Net change in short-term borrowings	43,000		—
Principal payments on capital lease obligations	—		(74)
Principal payments on other liabilities	—		(1,463)
Proceeds from other liabilities	(1,026)		—
Payment of debt issuance costs	(511)		—
Dividends paid on common stock	(2,788)		(3,004)
Issuance of common stock due to restricted stock	1		—
Issuance of common stock due to ESOP	—		2,886
Repurchases of common stock	(82,281)		(146,653)
Distributions to noncontrolling interest	(1,698)		(1,666)
Net cash provided by (used in) financing activities	(8,644)		164,941
Effect of exchange rate changes on cash	447		209
Net change in cash and cash equivalents	44,560		(76,339)
Cash and cash equivalents at beginning of fiscal year	388,038		314,019
Cash and cash equivalents at end of fiscal period	$	432,598	$	237,680

7

	Six Months Ended March 31,
(Dollars in thousands)	2023		2022
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	4,273	$	2,663
Income taxes	7,842		9,381
Franchise taxes	100		100
Other taxes	372		432
Supplemental schedule of non-cash investing activities:
Transfers
Held for sale to loans and leases	—		14,731
Loans and leases to held for sale	—		169,045
Loans and leases to rental equipment	1,449		2,634
Rental equipment to loan and leases	202,330		177,193

See Notes to Condensed Consolidated Financial Statements.

8

NOTE 1. BASIS OF PRESENTATION

The interim unaudited Condensed Consolidated Financial Statements contained herein should be read in conjunction with the audited consolidated financial statements and accompanying notes to the consolidated financial statements for the fiscal year ended September 30, 2022 included in Pathward Financial, Inc.’s (“Pathward” or the “Company”) Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on November 22, 2022. Accordingly, footnote disclosures which would substantially duplicate the disclosures contained in the audited consolidated financial statements have been omitted.

The financial information of the Company included herein has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial reporting and has been prepared pursuant to the rules and regulations for reporting on Form 10-Q and Rule 10-01 of Regulation S-X. Such information reflects all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position and results of operations for the periods presented. The results of the three and six months ended March 31, 2023 are not necessarily indicative of the results expected for the fiscal year ending September 30, 2023.

Certain prior fiscal 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.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENTLY ADOPTED ACCOUNTING STANDARDS UPDATES ("ASU")

Significant accounting policies in effect and disclosed within the Company’s most recent audited consolidated financial statements as of September 30, 2022 remain substantially unchanged. The following ASU became effective for the Company on October 1, 2022, and did not have a material impact on the Company’s significant accounting policies or Condensed Consolidated Financial Statements:

–ASU 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments.

NOTE 3. SIGNIFICANT EVENTS

Rebranding

On December 7, 2021, the Company executed a Purchase Agreement (the “Agreement”) with Beige Key, LLC (the “Assignee”) for the sale of all of the Company’s worldwide right, title and interest in and to company names and tradenames including Meta and other "Meta" formative names including MetaBank and Meta Financial Group, and the domain names, social media accounts and goodwill associated with the foregoing (collectively, the “Meta” tradenames) in exchange for $60.0 million in cash. Subject to the terms and conditions set forth in the Agreement, the Company had one year from the Agreement execution date to phase out and cease all use of the Meta tradenames. The Company received $50.0 million upon execution and delivery of the Agreement and was reflected in noninterest income for the fiscal year ended September 30, 2022. The remaining $10.0 million was received by the Company upon completion of phase out activities during the quarter ended December 31, 2022. There have been no additional rebrand activities since completion of these activities.

9

NOTE 4. SECURITIES

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

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized (Losses)		Fair Value
Debt Securities AFS
At March 31, 2023
Corporate securities	$	25,000	$	—	$	(6,250)	$	18,750
SBA securities	99,670		—		(5,422)		94,248
Obligations of states and political subdivisions	2,436		—		(79)		2,357
Non-bank qualified obligations of states and political subdivisions	277,767		37		(28,311)		249,493
Asset-backed securities	136,028		—		(9,324)		126,704
Mortgage-backed securities	1,534,356		—		(200,345)		1,334,011
Total debt securities AFS	$	2,075,257	$	37	$	(249,731)	$	1,825,563
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 March 31, 2023
Non-bank qualified obligations of states and political subdivisions	$	36,407	$	—	$	(3,474)	$	32,933
Mortgage-backed securities	2,306		—		(211)		2,095
Total debt securities HTM	$	38,713	$	—	$	(3,685)	$	35,028
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

10

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 March 31, 2023
Corporate securities	$	—	$	—	$	18,750	$	(6,250)	$	18,750	$	(6,250)
SBA securities	41,231		(1,166)		53,016		(4,256)		94,247		(5,422)
Obligations of state and political subdivisions	—		—		2,357		(79)		2,357		(79)
Non-bank qualified obligations of states and political subdivisions	65,300		(4,118)		183,201		(24,193)		248,501		(28,311)
Asset-backed securities	—		—		126,704		(9,324)		126,704		(9,324)
Mortgage-backed securities	296,523		(14,199)		1,037,488		(186,146)		1,334,011		(200,345)
Total debt securities AFS	$	403,054	$	(19,483)	$	1,421,516	$	(230,248)	$	1,824,570	$	(249,731)
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 March 31, 2023
Non-bank qualified obligations of states and political subdivisions	$	—	$	—	$	32,934	$	(3,474)	$	32,934	$	(3,474)
Mortgage-backed securities	—		—		2,096		(211)		2,096		(211)
Total debt securities HTM	$	—	$	—	$	35,030	$	(3,685)	$	35,030	$	(3,685)
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	$	(2890)	$	38,171	$	(3,511)

At March 31, 2023, there were 192 securities AFS in an unrealized loss position. All of the mortgage-backed securities ("MBS") in an unrealized loss position at March 31, 2023 were government guaranteed. Management assessed each investment security with unrealized losses for credit loss and determined substantially all unrealized losses on these securities were due to credit spreads and interest rates versus credit loss. As part of that assessment, management evaluated and concluded that it is more-likely-than-not that the Company will not be required and does not intend to sell any of the securities prior to recovery of the amortized cost. At March 31, 2023, there was no allowance for credit losses ("ACL") for debt securities AFS.

11

The amortized cost and fair value of debt securities by contractual maturity are shown below. Certain securities have call features that 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 Small Business Administration ("SBA") securities may differ from contractual maturities because the borrowers may have the right to prepay the obligation. However, certain prepayment penalties may apply.

(Dollars in thousands)	At March 31, 2023				At September 30, 2022
Securities AFS at Fair Value	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	3,785	$	3,728	$	718	$	715
Due after one year through five years	5,830		5,468		9,921		9,395
Due after five years through ten years	86,540		76,745		89,921		81,819
Due after ten years	444,746		405,611		483,707		441,943
	540,901		491,552		584,267		533,872
Mortgage-backed securities	1,534,356		1,334,011		1,581,452		1,348,997
Total securities AFS, at fair value	$	2,075,257	$	1,825,563	$	2,165,719	$	1,882,869
Securities HTM at Fair Value
Due after ten years	$	36,407	$	32,933	$	39,093	$	35,903
	36,407		32,933		39,093		35,903
Mortgage-backed securities	2,306		2,095		2,589		2,268
Total securities HTM, at cost	$	38,713	$	35,028	$	41,682	$	38,171

Equity Securities

The Company held $3.5 million at March 31, 2023 and $2.9 million at September 30, 2022 in marketable equity securities. The Company recognized none and $3.8 million in unrealized losses on marketable equity securities during the six months ended March 31, 2023 and 2022, respectively, which is attributable to an investee becoming publicly traded during fiscal year 2021. All other marketable equity securities and related activity were insignificant for the six months ended March 31, 2023 and 2022. No such securities were sold during the six months ended March 31, 2023.

Non-marketable equity securities with a readily determinable fair value totaled $7.7 million at March 31, 2023 and $7.2 million at September 30, 2022. The Company recognized $0.1 million in unrealized losses and $0.3 million in unrealized gains during the six months ended March 31, 2023 and 2022, respectively. No such securities were sold during the six months ended March 31, 2023.

Non-marketable equity securities without readily determinable fair value totaled $17.7 million at March 31, 2023 and $18.2 million at September 30, 2022. No such securities were sold during the six months ended March 31, 2023.

Federal Reserve Bank ("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 March 31, 2023 and September 30, 2022. These equity securities are 'restricted' in that they can only be owned by member banks.

12

Federal Home Loan Bank ("FHLB") Stock

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

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

The FHLB stock is carried at cost since it is generally redeemable at par value. The carrying value of the stock held at the FHLB was $9.7 million and $9.1 million at March 31, 2023 and at September 30, 2022, respectively.

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

Equity Security Impairment

The Company evaluates impairment for investments held at cost on at least an annual basis based on the ultimate recoverability of the par value. All other equity investments, including those under the equity method, are reviewed for other-than-temporary impairment on at least a quarterly basis. The Company recognized $0.5 million and no impairment for such investments for the six months ended March 31, 2023 and 2022, respectively.

NOTE 5. LOANS AND LEASES, NET

Loans and leases consist of the following:

(Dollars in thousands)	March 31, 2023		September 30, 2022
Term lending	$	1,235,453	$	1,090,289
Asset based lending	377,965		351,696
Factoring	338,884		372,595
Lease financing	170,645		210,692
Insurance premium finance	437,700		479,754
SBA/USDA	405,612		359,238
Other commercial finance	166,402		159,409
Commercial finance	3,132,661		3,023,673
Consumer credit products	120,739		144,353
Other consumer finance	27,909		25,306
Consumer finance	148,648		169,659
Tax services	61,553		9,098
Warehouse finance	377,036		326,850
Total loans and leases	3,719,898		3,529,280
Net deferred loan origination costs	5,718		7,025
Total gross loans and leases	3,725,616		3,536,305
Allowance for credit losses	(84,304)		(45,947)
Total loans and leases, net	$	3,641,312	$	3,490,358

During the six months ended March 31, 2023 and 2022, the Company originated $608.6 million and $555.4 million of consumer finance and SBA/USDA as held for sale, respectively.

The Company sold held for sale loans resulting in proceeds of $604.4 million and gain on sale of $0.1 million during the six months ended March 31, 2023. The Company sold held for sale loans resulting in proceeds of $723.9 million and loss on sale of $4.1 million during the six months ended March 31, 2022.

13

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

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands)	2023		2022		2023		2022
Loans Purchased
Loans held for investment:
Commercial finance	$	—	$	1,378	$	—	$	3,098
Warehouse finance	120,185		29,822		187,834		85,815
Total purchases	$	120,185	$	31,200	$	187,834	$	88,913
Loans Sold
Loans held for sale:
Commercial finance	$	294	$	14,090	$	1,149	$	47,113
Consumer finance	201,199		147,163		603,214		523,607
Community banking	—		—		—		153,222
Loans held for investment:
Commercial finance	—		15,549		—		15,549
Community banking	—		—		—		30,235
Total sales	$	201,493	$	176,802	$	604,363	$	769,726

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

(Dollars in thousands)	March 31, 2023		September 30, 2022
Carrying amount	$	173,621	$	216,880
Unguaranteed residual assets	11,849		13,037
Unamortized initial direct costs	202		295
Unearned income	(14,825)		(19,225)
Total net investment in direct financing and sales-type leases	$	170,847	$	210,987

Undiscounted future minimum lease payments receivable for direct financing and sales-type leases, and a reconciliation to the carrying amount recorded at March 31, 2023 were as follows:

(Dollars in thousands)
Remaining in 2023	$	43,358
2024	67,521
2025	37,603
2026	15,265
2027	7,418
Thereafter	2,456
Total undiscounted future minimum lease payments receivable for direct financing and sales-type leases	173,621
Third-party residual value guarantees	—
Total carrying amount of direct financing and sales-type leases	$	173,621

The Company did not record any contingent rental income from direct financing and sales-type leases in the six months ended March 31, 2023.

14

The COVID-19 pandemic began impacting the U.S. and global economies in the first calendar quarter of 2020, with significant deterioration of macroeconomic conditions and markets into 2021. Although macroeconomic conditions and markets have improved since the beginning of 2021, other factors have been affecting the economic environment in 2022 and 2023 including geopolitical conflict, supply chain disruptions, inflation, rising interest rates, and recent bank failures brought on by, among other things, rising interest rates, deposit outflows and liquidity crises. While the ultimate impact of the pandemic and these other factors on the Company's loan and lease portfolio remains difficult to predict, management continues to evaluate the loan and lease portfolio in order to assess the impact on repayment sources and underlying collateral that could result in additional losses and the impact to our customers and businesses as a result of COVID-19 and other factors impacting the economy and will refine its estimate as developments occur and more information becomes available.

15

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

	Three Months Ended March 31, 2023
(Dollars in thousands)	Beginning Balance		Provision (Reversal)		Charge-offs		Recoveries		Ending Balance
Allowance for credit losses:
Term lending	$	26,752	$	3,974	$	(2,705)	$	394	$	28,415
Asset based lending	3,903		51		(2,873)		—		1,081
Factoring	5,674		(40)		(62)		16		5,588
Lease financing	5,238		(183)		(607)		101		4,549
Insurance premium finance	1,261		155		(224)		71		1,263
SBA/USDA	2,632		2		—		6		2,640
Other commercial finance	3,356		976		—		—		4,332
Commercial finance	48,816		4,935		(6,471)		588		47,868
Consumer credit products	1,263		(44)		—		—		1,219
Other consumer finance	1,624		276		(154)		—		1,746
Consumer finance	2,887		232		(154)		—		2,965
Tax services	609		31,422		—		1,063		33,094
Warehouse finance	280		97		—		—		377
Total loans and leases	52,592		36,686		(6,625)		1,651		84,304
Unfunded commitments(1)	279		77		—		—		356
Total	$	52,871	$	36,763	$	(6,625)	$	1,651	$	84,660
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.

	Three Months Ended March 31, 2022
(Dollars in thousands)	Beginning Balance		Provision (Reversal)(2)		Charge-offs		Recoveries		Ending Balance
Allowance for credit losses:
Term lending	$	26,722	$	1,954	$	(1,822)	$	714	$	27,568
Asset based lending	2,758		(175)		—		—		2,583
Factoring	15,242		823		(9,590)		51		6,526
Lease financing	6,857		(395)		(95)		104		6,471
Insurance premium finance	1,044		59		(106)		60		1,057
SBA/USDA	2,996		(53)		—		—		2,943
Other commercial finance	1,349		(152)		—		—		1,197
Commercial finance	56,968		2,061		(11,613)		929		48,345
Consumer credit products	1,627		(6)		—		—		1,621
Other consumer finance	6,960		1,157		(802)		73		7,388
Consumer finance	8,587		1,151		(802)		73		9,009
Tax services	1,601		28,972		—		184		30,757
Warehouse finance	467		(26)		—		—		441
Community banking	—		(2)		—		2		—
Total loans and leases	67,623		32,156		(12,415)		1,188		88,552
Unfunded commitments(1)	405		146		—		—		551
Total	$	68,028	$	32,302	$	(12,415)	$	1,188	$	89,103
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.
(2) As a result of the adoption of CECL, effective October 1, 2020, the provision for credit losses includes the provision for unfunded commitments that was previously included within other noninterest expense.

16

	Six Months Ended March 31, 2023
(Dollars in thousands)	Beginning Balance		Provision (Reversal)		Charge-offs		Recoveries		Ending Balance
Allowance for credit losses:
Term lending	$	24,621	$	7,645	$	(4,522)	$	671	$	28,415
Asset based lending	1,050		2,904		(2,873)		—		1,081
Factoring	6,556		(804)		(183)		19		5,588
Lease financing	5,902		(621)		(1,013)		281		4,549
Insurance premium finance	1,450		108		(409)		114		1,263
SBA/USDA	3,263		(649)		—		26		2,640
Other commercial finance	1,310		3,022		—		—		4,332
Commercial finance	44,152		11,605		(9,000)		1,111		47,868
Consumer credit products	1,400		(181)		—		—		1,219
Other consumer finance	63		2,016		(333)		—		1,746
Consumer finance	1,463		1,835		(333)		—		2,965
Tax services	5		33,059		(1,731)		1,761		33,094
Warehouse finance	327		50		—		—		377
Total loans and leases	45,947		46,549		(11,064)		2,872		84,304
Unfunded commitments(1)	366		(10)		—		—		356
Total	$	46,313	$	46,539	$	(11,064)	$	2,872	$	84,660
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.

	Six Months Ended March 31, 2022
(Dollars in thousands)	Beginning Balance		Provision (Reversal)		Charge-offs		Recoveries		Ending Balance
Allowance for credit losses:
Term lending	$	29,351	$	1,095	$	(3,906)	$	1,028	$	27,568
Asset based lending	1,726		736		(16)		137		2,583
Factoring	3,997		13,324		(10,864)		69		6,526
Lease financing	7,629		(1,217)		(112)		171		6,471
Insurance premium finance	1,394		(211)		(283)		157		1,057
SBA/USDA	2,978		180		(217)		2		2,943
Other commercial finance	1,168		29		—		—		1,197
Commercial finance	48,243		13,936		(15,398)		1,564		48,345
Consumer credit products	1,242		379		—		—		1,621
Other consumer finance	6,112		2,718		(1,622)		180		7,388
Consumer finance	7,354		3,097		(1,622)		180		9,009
Tax services	2		28,259		(254)		2,750		30,757
Warehouse finance	420		21		—		—		441
Community banking	12,262		(12,686)		—		424		—
Total loans and leases	68,281		32,627		(17,274)		4,918		88,552
Unfunded commitments(1)	690		(139)		—		—		551
Total	$	68,971	$	32,488	$	(17,274)	$	4,918	$	89,103
(1) Reserve for unfunded commitments is recognized within other liabilities on the Condensed Consolidated Statements of Financial Condition.

17

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 March 31, 2023		At September 30, 2022
Term lending	$	2,809	$	2,885
Factoring	—		550
Lease financing	2,284		2,787
SBA/USDA	1,113		1,199
Commercial finance(1)	6,206		7,421
Total	$	6,206	$	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 $70.8 million and $120.7 million at March 31, 2023 and at September 30, 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 Office of the Comptroller of the Currency (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.

18

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 electronic return originator ("ERO") loans if such loans have not been collected by the end of June and refund advance loans if such loans have not been collected by the end of the calendar year. Nonaccrual loans and troubled debt restructurings are generally individually evaluated for expected credit losses.

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

The Company has various portfolios of consumer finance and tax services loans that present unique risks that are statistically managed. Due to the unique risks associated with these portfolios, the Company monitors other credit quality indicators in their evaluation of the appropriateness of the allowance for credit losses on these portfolios, and as such, these loans are not included in the asset classification table below. The outstanding balances of consumer finance loans and tax services loans were $148.6 million and $61.6 million at March 31, 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 March 31, 2023	2023		2022		2021		2020		2019		Prior
Term lending
Pass	$	327,992	$	255,383	$	139,016	$	94,309	$	23,151	$	104,467	$	—	$	944,318
Watch	32,477		45,370		53,429		13,430		7,324		9,780		—		161,810
Special mention	1,226		6,498		20,181		212		1,263		1,120		—		30,500
Substandard	5,986		31,094		21,996		25,660		5,632		4,576		—		94,944
Doubtful	—		1,553		1,130		804		307		87		—		3,881
Total	367,681		339,898		235,752		134,415		37,677		120,030		—		1,235,453
Asset based lending
Pass	—		—		—		—		—		—		178,436		178,436
Watch	—		—		—		—		—		—		153,311		153,311
Special mention	—		—		—		—		—		—		20,731		20,731
Substandard	—		—		—		—		—		—		24,828		24,828
Doubtful	—		—		—		—		—		—		659		659
Total	—		—		—		—		—		—		377,965		377,965
Factoring
Pass	—		—		—		—		—		—		246,196		246,196
Watch	—		—		—		—		—		—		66,221		66,221
Special mention	—		—		—		—		—		—		10,973		10,973
Substandard	—		—		—		—		—		—		15,494		15,494
Total	—		—		—		—		—		—		338,884		338,884
Lease financing
Pass	6,352		21,369		23,704		38,157		2,776		4,761		—		97,119
Watch	2,625		11,398		8,506		5,906		5,425		5,509		—		39,369
Special mention	—		—		805		556		366		53		—		1,780
Substandard	—		8,142		5,122		4,400		4,875		8,932		—		31,471
Doubtful	—		—		521		206		43		136		—		906
Total	8,977		40,909		38,658		49,225		13,485		19,391		—		170,645
Insurance premium finance
Pass	363,501		72,407		79		6		—		—		—		435,993
Watch	221		578		—		—		—		—		—		799
Special mention	13		353		—		—		—		—		—		366
Substandard	83		213		—		—		—		—		—		296

19

Doubtful	—		246		—		—		—		—		—		246
Total	363,818		73,797		79		6		—		—		—		437,700
SBA/USDA
Pass	70,249		199,198		31,679		45,386		9,041		17,908		—		373,461
Watch	—		—		—		55		400		2,843		—		3,298
Special mention	—		—		—		—		210		—		—		210
Substandard	252		1,540		78		7,037		8,489		11,247		—		28,643
Total	70,501		200,738		31,757		52,478		18,140		31,998		—		405,612
Other commercial finance
Pass	—		18,900		30,637		1,003		10,176		69,598		—		130,314
Watch	1,735		—		—		—		—		—		—		1,735
Substandard	5,214		478		28,400		—		—		261		—		34,353
Total	6,949		19,378		59,037		1,003		10,176		69,859		—		166,402
Warehouse finance
Pass	—		—		—		—		—		—		377,036		377,036
Total	—		—		—		—		—		—		377,036		377,036
Total loans and leases
Pass	768,094		567,257		225,115		178,861		45,144		196,734		801,668		2,782,873
Watch	37,058		57,346		61,935		19,391		13,149		18,132		219,532		426,543
Special mention	1,239		6,851		20,986		768		1,839		1,173		31,704		64,560
Substandard	11,535		41,467		55,596		37,097		18,996		25,016		40,322		230,029
Doubtful	—		1,799		1,651		1,010		350		223		659		5,692
Total	$	817,926	$	674,720	$	365,283	$	237,127	$	79,478	$	241,278	$	1,093,885	$	3,509,697

	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

20

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:

(Dollars in thousands)	Accruing and Nonaccruing Loans and Leases												Nonperforming Loans and Leases
At March 31, 2023	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	$	—	$	—	$	—	$	—	$	24,780	$	24,780	$	—	$	—	$	—
Term lending	26,127		1,170		6,530		33,827		1,201,626		1,235,453		1,952		10,891		12,843
Asset based lending	—		—		—		—		377,965		377,965		—		3,493		3,493
Factoring	—		—		—		—		338,884		338,884		—		512		512
Lease financing	3,154		—		2,378		5,532		165,113		170,645		1,807		3,323		5,130
Insurance premium finance	2,741		698		1,871		5,310		432,390		437,700		1,871		—		1,871
SBA/USDA	2,043		2,291		252		4,586		401,026		405,612		—		1,366		1,366
Other commercial finance	—		—		94		94		166,308		166,402		94		—		94
Commercial finance	34,065		4,159		11,125		49,349		3,083,312		3,132,661		5,724		19,585		25,309
Consumer credit products	2,653		2,248		2,140		7,041		113,698		120,739		2,140		—		2,140
Other consumer finance	608		1,609		1,077		3,294		24,615		27,909		1,077		—		1,077
Consumer finance	3,261		3,857		3,217		10,335		138,313		148,648		3,217		—		3,217
Tax services	639		—		—		639		60,914		61,553		—		—		—
Warehouse finance	—		—		—		—		377,036		377,036		—		—		—
Total loans and leases held for investment	37,965		8,016		14,342		60,323		3,659,575		3,719,898		8,941		19,585		28,526
Total loans and leases	$	37,965	$	8,016	$	14,342	$	60,323	$	3,684,355	$	3,744,678	$	8,941	$	19,585	$	28,526

21

(Dollars in thousands)	Accruing and Nonaccruing Loans and Leases												Nonperforming Loans and Leases
At September 30, 2022	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 credit products	3,209		2,558		2,669		8,436		135,917		144,353		2,669		—		2,669
Other consumer finance	113		51		124		288		25,018		25,306		124		—		124
Consumer finance	3,322		2,609		2,793		8,724		160,935		169,659		2,793		—		2,793
Tax services	—		—		8,873		8,873		225		9,098		8,873		—		8,873
Warehouse finance	—		—		—		—		326,850		326,850		—		—		—
Total loans and leases held for investment	28,203		8,817		19,534		56,554		3,472,726		3,529,280		15,808		13,375		29,183
Total loans and leases	$	28,203	$	8,817	$	19,534	$	56,554	$	3,493,797	$	3,550,351	$	15,808	$	13,375	$	29,183

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 March 31, 2023	2023		2022		2021		2020		2019		Prior
Term lending	$	103	$	5,123	$	2,507	$	2,351	$	739	$	68	$	—	$	10,891	$	2,370
Asset based lending	—		—		—		—		—		—		3,493		3,493		—
Factoring	—		—		—		—		—		—		512		512		—
Lease financing	—		—		609		891		1,681		142		—		3,323		645
SBA/USDA	—		1,114		—		—		—		252		—		1,366		1,114
Commercial finance	103		6,237		3,116		3,242		2,420		462		4,005		19,585		4,129
Total nonaccrual loans and leases	$	103	$	6,237	$	3,116	$	3,242	$	2,420	$	462	$	4,005	$	19,585	$	4,129

	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

22

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 March 31, 2023	2023		2022		2021		2020		2019		Prior
Term lending	$	1,346	$	35	$	132	$	211	$	40	$	188	$	—	$	1,952
Lease financing	90		468		953		198		30		68		—		1,807
Insurance premium finance	—		1,849		10		8		4		—		—		1,871
Other commercial finance	—		—		—		—		—		94		—		94
Commercial finance	1,436		2,352		1,095		417		74		350		—		5,724
Consumer credit products	174		1,437		404		92		30		3		—		2,140
Other consumer finance	1,032		—		—		—		—		—		45		1,077
Consumer finance	1,206		1,437		404		92		30		3		45		3,217
Total 90 days or more delinquent and accruing	$	2,642	$	3,789	$	1,499	$	509	$	104	$	353	$	45	$	8,941

	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 credit products	2,123		481		42		23		—		—		—		2,669
Other consumer finance	—		124		—		—		—		—		—		124
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 nonaccrual until later delinquency, usually 120 days past due.

The following table provides the average recorded investment in nonaccrual loans and leases:

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands)	2023		2022		2022		2021
Term lending	$	9,758	$	10,688	$	9,277	$	12,305
Asset based lending	5,292		5,993		4,782		5,002
Factoring	523		9,791		615		11,019
Lease financing	3,627		3,020		3,625		3,027
SBA/USDA	1,379		1,464		1,400		840
Commercial finance	20,579		30,956		19,699		32,193
Total loans and leases	$	20,579	$	30,956	$	19,699	$	32,193

The recognized interest income on the Company's nonaccrual loans and leases for the three and six months ended March 31, 2023 and 2022 was not significant.

23

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. No loans were modified in a TDR during the three months ended March 31, 2023. There were $0.2 million of commercial finance loans and $0.2 million of consumer finance loans that were modified in a TDR during the three months ended March 31, 2022, all of which were modified to extend the term of the loan.

During the six months ended March 31, 2023, there were no loans that were modified in a TDR. There were $10.3 million of commercial finance loans and $0.2 million of consumer finance loans that were modified in a TDR during the six months ended March 31, 2022, all of which were modified to extend the term of the loan.

During the three months ended March 31, 2023, there was an immaterial amount 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 three months ended March 31, 2022, the Company had $0.3 million of commercial finance loans and $0.3 million of consumer finance loans that were modified in a TDR with the previous 12 months and for which there was a payment default.

During the six months ended March 31, 2023, the Company had $0.1 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 six months ended March 31, 2022, the Company had $2.6 million of commercial finance loans and $0.8 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 six months ended March 31, 2023 and March 31, 2022.

NOTE 6. 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.

24

A reconciliation of net income and common stock share amounts used in the computation of basic and diluted earnings per share is presented below.

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands, except per share data)	2023		2022		2023		2022
Basic income per common share:
Net income attributable to Pathward Financial, Inc.	$	54,771	$	49,251	$	82,613	$	110,575
Dividends and undistributed earnings allocated to participating securities	(841)		(815)		(1,231)		(1,773)
Basic net earnings available to common stockholders	53,930		48,436		81,382		108,802
Undistributed earnings allocated to nonvested restricted stockholders	820		791		1,190		1,724
Reallocation of undistributed earnings to nonvested restricted stockholders	(818)		(791)		(1,187)		(1,723)
Diluted net earnings available to common stockholders	$	53,932	$	48,436	$	81,385	$	108,803
Total weighted-average basic common shares outstanding	27,078,048		29,212,301		27,555,197		29,731,797
Effect of dilutive securities(1)
Performance share units	91,521		12,061		77,540		17,035
Total effect of dilutive securities	91,521		12,061		77,540		17,035
Total weighted-average diluted common shares outstanding	27,169,569		29,224,362		27,632,737		29,748,832
Net earnings per common share:
Basic earnings per common share	$	1.99	$	1.66	$	2.95	$	3.66
Diluted earnings per common share(2)	$	1.99	$	1.66	$	2.95	$	3.66

(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 three months ended March 31, 2023 and 2022, respectively, were 422,461 and 491,621 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive. Excluded from the computation of diluted earnings per share for the six months ended March 31, 2023 and 2022, respectively, were 417,012 and 484,457 weighted average shares of nonvested restricted stock because their inclusion would be anti-dilutive.

NOTE 7. RENTAL EQUIPMENT, NET

Rental equipment consists of the following:

(Dollars in thousands)	March 31, 2023		September 30, 2022
Computers and IT networking equipment	$	20,589	$	21,669
Motor vehicles and other	121,014		107,648
Other furniture and equipment	35,604		34,254
Solar panels and equipment	137,548		133,765
Total	314,755		297,336
Accumulated depreciation	(105,073)		(94,355)
Unamortized initial direct costs	1,162		1,390
Net book value	$	210,844	$	204,371

During the quarter, certain solar panels and equipment assets had a change in depreciable life that resulted in additional depreciation expense of $4.8 million occurring during the three-month period ended March 31, 2023. The assets impacted are now carried at their residual value and will not be subject to depreciation going forward.

25

Future minimum lease payments expected to be received for operating leases at March 31, 2023 were as follows:

(Dollars in thousands)
Remaining in 2023	$	20,951
2024	35,326
2025	27,772
2026	19,091
2027	12,569
Thereafter	12,758
Total	$	128,467

NOTE 8. GOODWILL AND INTANGIBLE ASSETS

The Company held a total of $309.5 million of goodwill at March 31, 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 six months ended March 31, 2023.

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
Intangible Assets
At September 30, 2022	$	8,605	$	—	$	12,395	$	4,691	$	25,691
Amortization during the period	(609)		—		(1,819)		(265)		(2,693)
At March 31, 2023	$	7,996	$	—	$	10,576	$	4,426	$	22,998
Gross carrying amount	$	14,624	$	2,481	$	82,088	$	9,940	$	109,133
Accumulated amortization	(6,628)		(2,481)		(60,594)		(5,296)		(74,999)
Accumulated impairment			—		(10,918)		(218)		(11,136)
At March 31, 2023	$	7,996	$	—	$	10,576	$	4,426	$	22,998
At September 30, 2021	$	9,823	$	40	$	17,868	$	5,417	$	33,148
Acquisitions during the period	—		—		—		1		1
Amortization during the period	(526)		(40)		(2,829)		(262)		(3,657)
Write-offs during the period	—		—		—		(202)		(202)
At March 31, 2022	$	9,297	$	—	$	15,039	$	4,954	$	29,290
Gross carrying amount	$	14,624	$	2,481	$	82,088	$	9,940	$	109,133
Accumulated amortization	(5,327)		(2,481)		(56,801)		(4,768)		(69,377)
Accumulated impairment	—		—		(10,248)		(218)		(10,466)
At March 31, 2022	$	9,297	$	—	$	15,039	$	4,954	$	29,290

(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.

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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 remaining six months of fiscal 2023 and subsequent fiscal years at March 31, 2023 was as follows:

(Dollars in thousands)
Remaining in 2023	$	2,250
2024	4,128
2025	3,566
2026	3,220
2027	2,574
Thereafter	7,260
Total anticipated intangible amortization	$	22,998

There were no impairments to intangible assets during the six months ended March 31, 2023 and 2022. Intangible impairment expense is recorded within the impairment expense line of the Condensed Consolidated Statements of Operations.

NOTE 9. OPERATING LEASE RIGHT-OF-USE ASSETS AND LIABILITIES

Operating lease ROU assets, included in other assets, were $28.5 million and $31.8 million at March 31, 2023 and 2022, respectively.

Operating lease liabilities, included in accrued expenses and other liabilities, were $30.4 million and $33.6 million at March 31, 2023 and 2022, respectively.

Undiscounted future minimum operating lease payments and a reconciliation to the amount recorded as operating lease liabilities at March 31, 2023 were as follows:

(Dollars in thousands)
Remaining in 2023	$	2,045
2024	3,913
2025	3,718
2026	3,195
2027	3,092
Thereafter	18,639
Total undiscounted future minimum lease payments	34,602
Discount	(4,169)
Total operating lease liabilities	$	30,433

The weighted-average discount rate and remaining lease term for operating leases at March 31, 2023 were as follows:

Weighted-average discount rate	2.36	%
Weighted-average remaining lease term (years)	9.98

The components of total lease costs for operating leases were as follows:

	Three Months Ended March 31,				Six Months Ended March 31,
(Dollars in thousands)	2023		2022		2023		2022
Lease expense	$	982	$	1,119	$	1,996	$	2,256
Short-term and variable lease cost	42		40		84		75
Sublease income	(339)		(355)		(672)		(531)
Total lease cost for operating leases	$	685	$	804	$	1,408	$	1,800

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NOTE 10. 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. During the six months ended March 31, 2023, and 2022, the Company repurchased 1,826,694 and 2,447,699 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 March 31, 2023, 2,468,283 shares of common stock remained available for repurchase.

For the six months ended March 31, 2023, and 2022, the Company also repurchased 59,626 and 64,536 shares, or $2.1 million and $3.7 million of common stock, respectively, in settlement of employee tax withholding obligations due upon the vesting of restricted stock.

Retirement 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 zero shares of common stock held in treasury during the six months ended March 31, 2023 and 2022, respectively.

NOTE 11. STOCK COMPENSATION

The Company maintains the Pathward Financial, Inc. 2002 Omnibus Incentive Plan, as amended and restated (the "2002 Omnibus Incentive Plan"), which, among other things, provides for the awarding of stock options, nonvested (restricted) shares, and performance share units ("PSUs") to certain officers and directors of the Company. Awards are granted by the Compensation Committee of the Board of Directors based on the performance of the award recipients or other relevant factors.

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 options or fair value of nonvested (restricted) shares and performance share units granted under the Company’s 2002 Omnibus Incentive Plan is equal to the fair market value of the underlying stock at the grant date, adjusted for dividends where applicable. The Company has elected, with the adoption of ASU 2016-09, to record forfeitures as they occur.

The following tables show the activity of nonvested (restricted) shares and PSUs granted, vested, or forfeited under the 2002 Omnibus Incentive Plan for the six months ended March 31, 2023. There were no options granted, exercised, or forfeited under this plan during the six months ended March 31, 2023.

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(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	160,881	38.95
Vested	(209,440)	36.59
Forfeited or expired	(6,958)	42.55
Nonvested shares outstanding, March 31, 2023	418,831	$	37.31
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, March 31, 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.

At March 31, 2023, stock-based compensation expense not yet recognized in income totaled $10.2 million, which is expected to be recognized over a weighted average remaining period of 1.53 years.

NOTE 12. INCOME TAXES

The Company recorded an income tax expense of $15.8 million for the six months ended March 31, 2023, resulting in an effective tax rate of 15.83%, compared to an income tax expense of $22.3 million, or an effective tax rate of 16.66%, for the six months ended March 31, 2022. The Company’s effective tax rate was lower than the U.S. statutory rate of 21% primarily because of the anticipated effect of investment tax credits during fiscal year 2023. The Company's effective tax rate in the future will depend in part on actual investment tax credits generated from qualified renewable energy property.

The table below compares the income tax expense components for the periods presented.

	Six Months Ended March 31,
(Dollars in thousands)	2023			2022
Provision at statutory rate	$	20,657		$	27,899
Tax-exempt income	(398)			(362)
State income taxes	4,285			5,543
Interim period effective rate adjustment	(483)			(3,870)
Tax credit investments, net - federal	(7,916)			(5,978)
Research tax credit	(805)			(355)
IRC 162(m) nondeductible compensation	576			505
Other, net	(163)			(1,104)
Income tax expense	$	15,753		$	22,278
Effective tax rate	15.83		%	16.66		%

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NOTE 13. 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 14. Segment Reporting to the Condensed Consolidated Financial Statements.

(Dollars in thousands)	Consumer				Commercial				Corporate Services/Other				Consolidated Company
Three Months Ended March 31,	2023		2022		2023		2022		2023		2022		2023		2022
Net interest income(1)	$	41,418	$	30,156	$	46,758	$	44,879	$	13,229	$	8,765	$	101,405	$	83,800
Noninterest income:
Refund transfer product fees	30,205		27,805		—		—		—		—		30,205		27,805
Refund advance fee income(1)	37,995		39,299		—		—		—		—		37,995		39,299
Card and deposit fees	41,828		26,270		252		244		7		6		42,087		26,520
Rental income(1)	—		—		12,737		11,225		203		150		12,940		11,375
Gain (loss) on sale of securities(1)	—		—		—		—		82		260		82		260
Gain (loss) on sale of other(1)	—		—		(748)		1,229		—		(603)		(748)		626
Other income(1)	1,748		1,387		1,935		2,839		794		(345)		4,477		3,881
Total noninterest income	111,776		94,761		14,176		15,537		1,086		(532)		127,038		109,766
Revenue	$	153,194	$	124,917	$	60,934	$	60,416	$	14,315	$	8,233	$	228,443	$	193,566
Six Months Ended March 31,
Net interest income(1)	$	75,690	$	56,427	$	89,082	$	89,805	$	20,690	$	9,181	$	185,462	$	155,413
Noninterest income:
Refund transfer product fees	30,882		28,384		—		—		—		—		30,882		28,384
Refund advance fee income(1)	38,612		40,532		—		—		—		—		38,612		40,532
Card and deposit fees	79,280		51,402		513		475		12		12		79,805		51,889
Rental income(1)	—		—		25,252		22,302		396		150		25,648		22,452
Gain (loss) on sale of securities(1)	—		—		—		—		82		397		82		397
Gain on sale of trademarks	—		—		—		—		10,000		50,000		10,000		50,000
Gain (loss) on sale of other(1)	—		—		(246)		6,093		—		(8,932)		(246)		(2,839)
Other income(1)	2,541		2,152		3,019		5,624		2,472		(2,234)		8,032		5,542
Total noninterest income	151,315		122,470		28,538		34,494		12,962		39,393		192,815		196,357
Revenue	$	227,005	$	178,897	$	117,620	$	124,299	$	33,652	$	48,574	$	378,277	$	351,770
(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.

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Refund Transfer Product Fees. Refund transfer fees are specific to the Banking as a Service ("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 is 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 Condensed 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 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 effective federal funds rate ("EFFR").

NOTE 14. 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.

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The following tables present segment data for the Company:

(Dollars in thousands)	Consumer				Commercial				Corporate Services/Other				Total
Three Months Ended March 31,	2023		2022		2023		2022		2023		2022		2023		2022
Net interest income	$	41,418	$	30,156	$	46,758	$	44,879	$	13,229	$	8,765	$	101,405	$	83,800
Provision for credit losses	31,654		29,685		5,012		2,205		97		412		36,763		32,302
Noninterest income (loss)	111,776		94,761		14,176		15,537		1,086		(532)		127,038		109,766
Noninterest expense	49,910		29,892		38,846		31,457		38,380		41,811		127,136		103,160
Income (loss) before income tax expense	71,630		65,340		17,076		26,754		(24,162)		(33,990)		64,544		58,104
Total assets	361,528		456,335		3,581,677		3,355,196		2,925,051		3,075,708		6,868,256		6,887,239
Total goodwill	87,145		87,145		222,360		222,360		—		—		309,505		309,505
Total deposits	5,744,278		5,693,063		9,313		6,882		149,105		129,941		5,902,696		5,829,886
Six Months Ended March 31,
Net interest income	$	75,690	$	56,427	$	89,082	$	89,805	$	20,690	$	9,181	$	185,462	$	155,413
Provision (reversal of) for credit losses	34,894		30,946		11,595		13,797		50		(12,255)		46,539		32,488
Noninterest income	151,315		122,470		28,538		34,494		12,962		39,393		192,815		196,357
Noninterest expense	84,404		49,553		71,595		64,504		76,196		71,539		232,195		185,596
Income (loss) before income tax expense	107,707		98,398		34,430		45,998		(42,594)		(10,710)		99,543		133,686
Total assets	361,528		456,335		3,581,677		3,355,196		2,925,051		3,075,708		6,868,256		6,887,239
Total goodwill	87,145		87,145		222,360		222,360		—		—		309,505		309,505
Total deposits	5,744,278		5,693,063		9,313		6,882		149,105		129,941		5,902,696		5,829,886

NOTE 15. 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.

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.

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The fair value 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.

	At March 31, 2023
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Debt securities AFS
Corporate securities	$	18,750	$	—	$	18,750	$	—
SBA securities	94,248		—		94,248		—
Obligations of states and political subdivisions	2,357		—		2,357		—
Non-bank qualified obligations of states and political subdivisions	249,493		—		249,493		—
Asset-backed securities	126,704		—		126,704		—
Mortgage-backed securities	1,334,011		—		1,334,011		—
Total debt securities AFS	$	1,825,563	$	—	$	1,825,563	$	—
Common equities and mutual funds(1)	$	3,545	$	3,545	$	—	$	—
Non-marketable equity securities(2)	$	7,749	$	—	$	—	$	—

(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 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.

	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 Statements 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 4%% to 62%.

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The following table summarizes the assets of the Company that are measured at fair value in the Condensed Consolidated Statements of Financial Condition on a non-recurring basis:

	At March 31, 2023
(Dollars in thousands)	Total		Level 1		Level 2		Level 3
Loans and leases, net individually evaluated for credit loss
Commercial finance	$	625	$	—	$	—	$	625
Total loans and leases, net individually evaluated for credit loss	625		—		—		625
Total	$	625	$	—	$	—	$	625

	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 March 31, 2023		Fair Value at September 30, 2022		Valuation Technique	Unobservable Input	Range of Inputs
Loans and leases, net individually evaluated for credit loss	$	625	$	1,575	Market approach	Appraised values(1)	4% - 62%

(1) The Company generally relies on external appraisers to develop this information. Management reduced the appraised value by estimating selling costs and other inputs in a range of 4% to 62%.

Management discloses the estimated fair value of financial instruments, including assets and liabilities on and off the Condensed Consolidated Statements of Financial Condition, for which it is practicable to estimate fair value. These fair value estimates were made at March 31, 2023 and September 30, 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.

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The following tables present the carrying amount and estimated fair value of the financial instruments held by the Company:

	At March 31, 2023
(Dollars in thousands)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets
Cash and cash equivalents	$	432,598	$	432,598	$	432,598	$	—	$	—
Debt securities available for sale	1,825,563		1,825,563		—		1,825,563		—
Debt securities held to maturity	38,713		35,028		—		35,028		—
Common equities and mutual funds(1)	3,545		3,545		3,545		—		—
Non-marketable equity securities(1)(2)	22,563		22,563		—		14,814		—
Loans held for sale	24,780		24,780		—		24,780		—
Loans and leases	3,719,898		3,710,718		—		—		3,710,718
Federal Reserve Bank and Federal Home Loan Bank stocks	29,387		29,387		—		29,387		—
Accrued interest receivable	22,434		22,434		22,434		—		—
Financial liabilities
Deposits	5,902,696		5,902,526		5,896,367		6,159		—
Overnight federal funds purchased	43,000		43,000		43,000		—		—
Other short- and long-term borrowings	34,543		32,961		—		32,961		—
Accrued interest payable	204		204		204		—		—

(1) Equity securities at fair value are included within other assets on the Condensed Consolidated Statements of Financial Condition at March 31, 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 Statements 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.

NOTE 16. SUBSEQUENT EVENTS

Management has evaluated subsequent events that occurred after March 31, 2023. During this period, up to the filing date of this Quarterly Report on Form 10-Q, management did not identify any material subsequent events that would require recognition or disclosure in our Condensed Consolidated Financial Statements as of or for the quarter ended March 31, 2023.

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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

PATHWARD FINANCIAL, INC.®

AND SUBSIDIARIES

FORWARD-LOOKING STATEMENTS

PATHWARD FINANCIAL, INC. ("Pathward Financial" or the "Company" or "us") and its wholly-owned subsidiary, Pathward®, National Association ("Pathward®, N.A" or "Pathward" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Quarterly Report on Form 10-Q, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and Pathward, N.A, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results including our performance expectations; the impact of measures expected to increase efficiencies or reduce expenses; customer retention; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; technology; and the Company's employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the military conflict between Russia and Ukraine; our ability to achieve brand recognition for Pathward equal to or greater than we enjoyed for MetaBank; our ability to successfully implement measures designed to reduce expenses and increase efficiencies; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed Funds rate; changes in tax laws; the strength of the United States' economy, and the local economies in which the Company operates; adverse developments in the financial services industry generally such as the recent bank failures, inflation, market, and monetary fluctuations; the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value of these products and services by users; Pathward's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s prepaid card and tax refund advance businesses, the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by, our regulators; changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry; technological changes, including, but not limited to, the protection of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by Pathward of its status as a well-capitalized institution; changes in consumer borrowing, spending, and saving habits; losses from fraudulent or illegal activity; technological risks and developments and cyber threats, attacks, or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.

The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors” of the Company’s Annual Report on Form 10-K for the Company’s fiscal year ended September 30, 2022, and in the Company's other filings made with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.

36

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.

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

The following discussion focuses on the consolidated financial condition of the Company at March 31, 2023, compared to September 30, 2022, and the consolidated results of operations for the three and six months ended March 31, 2023 and 2022. This discussion should be read in conjunction with the Company’s consolidated financial statements, and notes thereto, for the fiscal year ended September 30, 2022 and the related management's discussion and analysis of financial condition and results of operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

EXECUTIVE SUMMARY

Company Highlights

•On April 5, 2023, Pathward®, N.A. announced it became Certified™ by Great Place to Work® for the first time. Great Place to Work holds itself out as the global authority on workplace culture, employee experience, and the leadership behaviors proven to deliver market-leading revenue, employee retention and increased innovation.

•On February 28, 2023, the Board of Directors (the "Board") of Pathward Financial appointed Christopher Perretta as a member of the Board.

Financial Highlights for the 2023 Fiscal Second Quarter

•Total revenue for the second quarter was $228.4 million, an increase of $34.9 million, or 18%, compared to the same quarter in fiscal 2022, primarily driven by an increase in both noninterest income and net interest income.

•Net interest margin ("NIM") increased 132 basis points to 6.12% for the second quarter from 4.80% during the same period of last year primarily driven by an increase in loan and lease and investment securities yields.

•Total gross loans and leases at March 31, 2023 decreased $4.6 million to $3.73 billion compared to March 31, 2022 and increased $215.9 million, or 6%, when compared to December 31, 2022. The decrease compared to the prior year quarter was primarily due to a reduction in consumer finance loans driven by the sale of the $81.5 million student loan portfolio during the fiscal 2022 fourth quarter and a reduction in warehouse finance loans, partially offset by growth in the commercial finance portfolio. The primary drivers for the increase on a linked quarter basis was growth in commercial finance and warehouse finance loans.

•During the 2023 fiscal second quarter, the Company recognized a total of $6.8 million in pre-tax adverse financial impacts attributable to the disposal or change in depreciable life of several mobile solar generators related to a single relationship. In fiscal year 2019, the business incurred a large impairment expense associated with one company with which it had legacy transactions that turned out to be fraudulent. At that time, the assets were written down to their market value and redeployed under an equipment lease agreement to new participants. Upon the return of the leased assets, the Company performed a due diligence assessment, which led to the determination to dispose certain generators based on their condition and adjust the depreciable life for the remaining generators to better reflect the service period based on market conditions and advancements in technology. This was an isolated event limited to this equipment type and is not indicative of the remaining Rental Equipment portfolio. The remaining value of the generators on the balance sheet is $1.3 million.

•During the 2023 fiscal second quarter, the Company repurchased 1,172,700 shares of common stock at an average share price of $46.60.

37

Tax Season

For the six months ended March 31, 2023, total tax services product revenue was $72.4 million, an increase of 2% compared to the same period of the prior year. Total tax services product fee income, total tax services product expense, and net interest income on tax services loans all increased slightly compared to the prior year period. Provision for tax services products was $33.1 million, an increase of 17% when compared to the same period of the prior year, primarily due to an expected shift in mix in refund advances from national franchise channels to independent tax providers.

Total tax services product income, net of losses and direct product expenses, decreased 14% to $29.7 million from $34.4 million, when comparing the first six months of fiscal 2023 to the same period of the prior fiscal year.

For the 2023 tax season, Pathward originated $1.46 billion in refund advance loans compared to $1.83 billion during the 2022 tax season. When excluding the two partners the Company did not renew after the 2022 tax season, loan originations increased $116.2 million this tax season compared to the previous year.

FINANCIAL CONDITION

At March 31, 2023, the Company’s total assets increased by $120.8 million to $6.87 billion compared to September 30, 2022, primarily due to growth of $189.3 million in total loans and leases, partially offset by a reduction of $57.3 million in securities available for sale.

Total cash and cash equivalents was $432.6 million at March 31, 2023, increasing 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 March 31, 2023, the Company did not have any federal funds sold.

The Company's investment security balances decreased $60.3 million, or 3%, to $1.86 billion at March 31, 2023, compared to $1.92 billion at September 30, 2022, due to maturities and principal pay downs. The Company’s portfolio of securities customarily consists primarily of MBS, which have expected lives much shorter than the stated final maturity, non-bank qualified obligations of states and political subdivisions, which mature in approximately 15 years or less, and other tax exempt municipal mortgage related pass through securities which have average lives much shorter than their stated final maturities. During the six months ended March 31, 2023, the Company made no purchases of investment securities.

Loans held for sale at March 31, 2023 totaled $24.8 million, increasing from $21.1 million at September 30, 2022. This increase was driven by growth in consumer credit products held for sale at March 31, 2023 compared to September 30, 2022.

Total gross loans and leases totaled $3.73 billion at March 31, 2023, as compared to $3.54 billion at September 30, 2022. The primary driver for the increase was due to growth in commercial finance, warehouse finance, and the seasonal tax services portfolio, partially offset by a decrease in the consumer finance portfolio. See Note 5 to the “Notes to Condensed Consolidated Financial Statements” of this Quarterly Report on Form 10-Q.

Commercial finance loans, which comprised 84% of the Company's gross loan and lease portfolio, totaled $3.13 billion at March 31, 2023, reflecting an increase of $109.0 million, or 4%, from September 30, 2022.

Through the Bank, the Company owns stock in the FHLB due to the Bank’s membership and participation in this banking system as well as stock in the Federal Reserve Bank. The FHLB requires a level of stock investment based on a pre-determined formula. The Company’s investment in these stocks was $29.4 million at March 31, 2023 and $28.8 million at September 30, 2022, as purchases were partially offset by redemptions of FHLB membership stock during the six months ended March 31, 2023.

Total end-of-period deposits increased 1% to $5.90 billion at March 31, 2023, compared to $5.87 billion at September 30, 2022, primarily driven by an increase in noninterest-bearing deposits of $35.5 million.

As of March 31, 2023, the Company had $1.0 billion in deposits related to government stimulus programs. Of the total amount of government stimulus program deposits, $359.2 million are on activated cards while $645.1 million are on inactivated cards. These card balances are expected to run down by approximately $500 million over the next 18 months as recipients continue to spend them and the Company begins to return unclaimed balances to the U.S. Treasury.

38

The Company's total borrowings increased $41.5 million from $36.0 million at September 30, 2022 to $77.5 million at March 31, 2023, primarily driven by an increase in short-term borrowings of $43.0 million partially offset by payments on long-term borrowings.

At March 31, 2023, the Company’s stockholders’ equity totaled $673.2 million, an increase of $28.1 million, from $645.1 million at September 30, 2022. The increase was primarily attributable to a change in accumulated other comprehensive income ("AOCI"). The Company and Bank remained above the federal regulatory minimum capital requirements at March 31, 2023, and continued to be classified as well-capitalized, and in good standing with the regulatory agencies. See “Liquidity and Capital Resources” for further information.

Noninterest-bearing Checking Deposits. The Company may hold negative balances associated with cardholder programs in the BaaS business line that are included within noninterest-bearing deposits on the Company's Condensed Consolidated Statements of Financial Condition. Negative balances can relate to any of the following payments functions:

–Prefundings: The Company deploys funds to cards prior to receiving cash (typically 2-3 days) where the prefunding balance is netted at a pooled partner level utilizing ASC 210-20.

–Discount fundings: The Company funds cards in alignment to expected breakage values on the card. Consumers may spend more than is estimated. These discounts are netted at a pooled partner level using ASC 210-20. The majority of these discount fundings relate to a small number of partners, and analyzed on an ongoing basis.

–Demand Deposit Account ("DDA") overdrafts: Certain programs offered allow cardholders traditional DDA overdraft protection services whereby cardholders can spend a limited amount in excess of their available card balance. When overdrawn, these accounts are re-classed as loans on the balance sheet within the Consumer Finance category.

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

(Dollars in thousands)	March 31, 2023		September 30, 2022
Noninterest-bearing deposits	$	6,014,327	$	5,916,142
Prefunding	(294,631)		(244,462)
Discount funding	(28,687)		(15,991)
DDA overdrafts	(8,378)		(8,587)
Noninterest-bearing checking, net	$	5,682,631	$	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.

In return for record keeping services at Program Banks, the Bank receives a servicing fee (“Servicing Fee”). For the three and six months ended March 31, 2023, the Company recognized $18.2 million and $31.1 million, respectively, in servicing fee income as compared to an insignificant amount for the three and six months ended March 31, 2022. The Servicing Fee has been typically reflective of the EFFR upon a renegotiation of the contracts with Program Banks.

As of March 31, 2023, the Company managed $1.96 billion of customer deposits at other banks in its capacity as custodian. These deposits provide the Company with excess deposits that can earn record keeping service fee income, typically reflective of the EFFR.

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Approximately 47% of the deposit portfolio as of March 31, 2023 are subject to variable card processing expenses that are derived from the terms of contractual agreements with certain BaaS partners. These agreements are tied to a rate index, typically the EFFR.

RESULTS OF OPERATIONS

General

The Company recorded net income of $54.8 million, or $1.99 per diluted share, for the three months ended March 31, 2023, compared to net income of $49.3 million, or $1.66 per diluted share, for the three months ended March 31, 2022. Total revenue for the fiscal 2023 second quarter was $228.4 million, an increase of $34.9 million, or 18%, compared to the same quarter in fiscal 2022, primarily driven by an increase in both noninterest income and net interest income, partially offset by an increase in noninterest expense.

The Company recorded net income of $82.6 million, or $2.95 per diluted share, for the six months ended March 31, 2023, compared to net income of $110.6 million, or $3.66 per diluted share, for the six months ended March 31, 2022. Total revenue for the six months ended March 31, 2023 was $378.3 million, an increase of $26.5 million, or 18%, compared to the same period of the prior fiscal year. The increase is primarily driven by increases in interest income and card and deposit fees along with the $10.0 million gain on sale of trademarks recognized during the six months ended March 31, 2023, partially offset by the $50.0 million gain on sale of trademarks recognized during the prior fiscal year period.

Net Interest Income

Net interest income for the second quarter of fiscal 2023 was $101.4 million, an increase of 21% from the same quarter in fiscal 2022. The increase was mainly attributable to increased yields and an improved earning asset mix. For the six months ended March 31, 2023, the net interest income was $185.5 million, an increase of 19%, from $155.4 million compared to the same period in the prior fiscal year.

The Company’s average interest-earning assets for the second fiscal quarter decreased by $364.5 million to $6.72 billion compared with the same quarter in fiscal 2022, primarily due to a reduction in cash balances as a result of elevated cash levels during the prior fiscal year period related to the Company's participation in government stimulus programs along with a decrease in loans and leases, partially offset by an increase in total investment balances. The second quarter average outstanding balance of loans and leases decreased $230.5 million compared to the same quarter of the prior fiscal year, primarily due to a reduction in tax services loans, warehouse finance loans, and consumer finance loans, partially offset by an increase in the commercial finance loans.

Fiscal 2023 second quarter NIM increased to 6.12% from 4.80% in the second fiscal quarter of last year. The overall reported tax equivalent yield (“TEY”) on average earning assets increased 145 basis points to 6.34% compared to the prior fiscal year quarter, primarily driven by an increase in loan and lease and investment securities yields, along with a decrease in cash balances. The yield on the loan and lease portfolio was 8.47% compared to 7.22% for the comparable period last year and the TEY on the securities portfolio was 2.89% compared to 1.83% over that same period.

For the six months ended March 31, 2023, NIM was 5.88%, an increase of 118 basis points from 4.70% compared to the same period in the prior fiscal year. NIM, tax-equivalent for the six months ended March 31, 2023 increased to 5.90% from 4.72% in the same period of the prior fiscal year.

The Company's cost of funds for all deposits and borrowings averaged 0.21% during the fiscal 2023 second quarter, as compared to 0.08% during the prior fiscal year quarter. The Company's overall cost of deposits was 0.13% in the fiscal second quarter of 2023, as compared to 0.01% during the prior year quarter.

The following tables present, for the periods indicated, the Company’s total dollar amount of interest income from average interest-earning assets and the resulting yields, as well as the interest expense on average interest-bearing liabilities, expressed both in dollars and rates. The balances presented in the table below are calculated on a daily average balance. Tax-equivalent adjustments have been made in yield on interest-bearing assets and net interest margin. Nonaccruing loans and leases have been included in the table as loans carrying a zero yield.

40

	Three Months Ended March 31,
	2023						2022
(Dollars in thousands)	Average Outstanding Balance		Interest Earned / Paid		Yield / Rate(1)		Average Outstanding Balance		Interest Earned / Paid		Yield / Rate(1)
Interest-earning assets:
Cash and fed funds sold	$	564,656	$	5,843	4.20	%	$	810,857	$	721	0.36	%
Mortgage-backed securities	1,549,240		10,326		2.70	%	1,184,377		5,446		1.86	%
Tax exempt investment securities	149,912		990		3.39	%	189,213		903		2.45	%
Asset-backed securities	141,968		1,273		3.64	%	370,671		1,142		1.25	%
Other investment securities	298,030		2,376		3.23	%	282,655		1,425		2.05	%
Total investments	2,139,150		14,965		2.89	%	2,026,916		8,916		1.83	%
Commercial finance	3,056,293		60,765		8.06	%	2,852,147		48,872		6.95	%
Consumer finance	187,826		6,301		13.60	%	331,033		7,892		9.67	%
Tax services	448,659		10,555		9.54	%	594,166		11,599		7.92	%
Warehouse finance	321,334		6,258		7.90	%	467,298		7,177		6.23	%
Total loans and leases	4,014,112		83,879		8.47	%	4,244,644		75,540		7.22	%
Total interest-earning assets	6,717,918		$	104,687	6.34	%	7,082,417		$	85,177	4.89	%
Noninterest-earning assets	612,020						814,151
Total assets	$	7,329,938					$	7,896,568
Interest-bearing liabilities:
Interest-bearing checking	$	267	$	—	0.33	%	$	289	$	—	0.32	%
Savings	70,024		6		0.03	%	82,902		6		0.03	%
Money markets	125,193		71		0.23	%	102,473		53		0.21	%
Time deposits	6,948		2		0.11	%	8,682		10		0.49	%
Wholesale deposits	186,421		2,017		4.39	%	173,493		96		0.22	%
Total interest-bearing deposits	388,853		2,096		2.19	%	367,839		165		0.18	%
Overnight fed funds purchased	46,735		543		4.71	%	95,700		62		0.26	%
Subordinated debentures	19,523		354		7.34	%	74,040		1,002		5.49	%
Other borrowings	15,283		289		7.68	%	17,874		148		3.35	%
Total borrowings	81,541		1,186		5.90	%	187,614		1,212		2.62	%
Total interest-bearing liabilities	470,394		3,282		2.83	%	555,453		1,377		1.01	%
Noninterest-bearing deposits	5,997,739		—		—	%	6,311,583		—		—	%
Total deposits and interest-bearing liabilities	6,468,133		$	3,282	0.21	%	6,867,036		$	1,377	0.08	%
Other noninterest-bearing liabilities	191,360						213,982
Total liabilities	6,659,493						7,081,018
Shareholders' equity	670,445						815,550
Total liabilities and shareholders' equity	$	7,329,938					$	7,896,568
Net interest income and net interest rate spread including noninterest-bearing deposits			$	101,405	6.13	%			$	83,800	4.81	%
Net interest margin					6.12	%					4.80	%
Tax-equivalent effect					0.02	%					0.01	%
Net interest margin, tax-equivalent(2)					6.14	%					4.81	%
(1) Tax rate used to arrive at the TEY for the three months ended March 31, 2023 and 2022 was 21%.
(2) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.

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	Six Months Ended March 31,
	2023						2022
(Dollars in thousands)	Average Outstanding Balance		Interest Earned / Paid		Yield / Rate(1)		Average Outstanding Balance		Interest Earned / Paid		Yield / Rate(1)
Interest-earning assets:
Cash and fed funds sold	$	393,469	$	7,559	3.85	%	$	701,548	$	1,280	0.37	%
Mortgage-backed securities	1,560,251		20,738		2.67	%	1,094,729		9,310		1.71	%
Tax exempt investment securities	152,359		1,970		3.28	%	198,518		1,723		2.20	%
Asset-backed securities	149,055		2,422		3.26	%	379,212		2,295		1.21	%
Other investment securities	299,905		4,783		3.20	%	281,232		2,885		2.06	%
Total investments	2,161,570		29,913		2.82	%	1,953,691		16,213		1.71	%
Commercial finance	3,033,331		118,865		7.86	%	2,813,348		97,894		6.98	%
Consumer finance	193,157		10,614		11.02	%	323,724		14,006		8.68	%
Tax services	234,619		10,612		9.07	%	310,805		13,073		8.44	%
Warehouse finance	305,724		12,184		7.99	%	455,271		14,077		6.20	%
Community banking	—		—		—	%	69,707		1,525		4.39	%
Total loans and leases	3,766,831		152,275		8.11	%	3,972,855		140,575		7.10	%
Total interest-earning assets	6,321,870		$	189,747	6.04	%	6,628,094		$	158,068	4.80	%
Noninterest-earning assets	600,676						827,143
Total assets	$	6,922,546					$	7,455,237
Interest-bearing liabilities:
Interest-bearing checking	$	358	$	1	0.33	%	$	339	$	1	0.32	%
Savings	66,275		12		0.04	%	81,822		11		0.03	%
Money markets	132,108		148		0.23	%	88,921		105		0.24	%
Time deposits	7,075		4		0.11	%	8,651		25		0.58	%
Wholesale deposits	95,074		2,073		4.37	%	119,855		164		0.28	%
Total interest-bearing deposits	300,890		2,238		1.49	%	299,588		306		0.21	%
Overnight fed funds purchased	35,638		787		4.43	%	47,490		63		0.26	%
Subordinated debentures	19,558		711		7.28	%	74,017		1,987		5.38	%
Other borrowings	15,553		549		7.09	%	18,259		299		3.28	%
Total borrowings	70,749		2,047		5.80	%	139,766		2,349		3.37	%
Total interest-bearing liabilities	371,639		4,285		2.31	%	439,354		2,655		1.21	%
Noninterest-bearing deposits	5,706,615		—		—	%	5,996,650		—		—	%
Total deposits and interest-bearing liabilities	6,078,254		$	4,285	0.14	%	6,436,004		$	2,655	0.08	%
Other noninterest-bearing liabilities	185,005						198,278
Total liabilities	6,263,259						6,634,282
Shareholders' equity	659,287						820,955
Total liabilities and shareholders' equity	$	6,922,546					$	7,455,237
Net interest income and net interest rate spread including noninterest-bearing deposits			$	185,462	5.89	%			$	155,413	4.72	%
Net interest margin					5.88	%					4.70	%
Tax-equivalent effect					0.02	%					0.02	%
Net interest margin, tax-equivalent(2)					5.90	%					4.72	%

(1) Tax rate used to arrive at the TEY for the six months ended March 31, 2023 and 2022 was 21%.

(2) Net interest margin expressed on a fully-taxable-equivalent basis ("net interest margin, tax-equivalent") is a non-GAAP financial measure. The tax-equivalent adjustment to net interest income recognizes the estimated income tax savings when comparing taxable and tax-exempt assets and adjusting for federal and state exemption of interest income. The Company believes that it is a standard practice in the banking industry to present net interest margin expressed on a fully taxable equivalent basis and, accordingly, believes the presentation of this non-GAAP financial measure may be useful for peer comparison purposes.

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Provision for Credit Losses

The Company recognized a provision for credit losses of $36.8 million and $46.5 million for the three and six months ended March 31, 2023, compared to $32.3 million and $32.5 million for the comparable period in the prior fiscal year. The increase in provision for credit losses during the current quarter compared to the prior fiscal year period was primarily driven by increases in the commercial finance portfolio and the seasonal tax services portfolio. Net charge-offs were $5.0 million for the quarter ended March 31, 2023, compared to $11.2 million for the quarter ended March 31, 2022. Net charge-offs attributable to the commercial finance and consumer finance portfolios for the current quarter were $5.9 million and $0.2 million, respectively, while a recovery of $1.1 million was recognized in the tax services portfolio.

Noninterest Income

Fiscal 2023 second quarter noninterest income increased to $127.0 million, compared to $109.8 million for the same period of the prior fiscal year. The increase was primarily attributable to increases in card and deposit fees, rental income, tax product fee income, and other income. The period-over-period increase was partially offset by reductions in gain (loss) on sale of other and gain on sale of investments.

Included in gain (loss) on sale of other during the quarter, was a $2.0 million loss on the disposal of mobile solar generators in connection with legacy solar transactions.

The increase in card and deposit fee income was primarily from servicing fee income on off-balance sheet deposits, which totaled $18.2 million during the 2023 fiscal second quarter, as compared to $12.9 million for the fiscal quarter ended December 31, 2022 and an insignificant amount for the fiscal quarter ended March 31, 2022.

Noninterest income for the six months ended March 31, 2023 decreased to $192.8 million from $196.4 million for the same period of the prior fiscal year.

Noninterest Expense

Noninterest expense increased 23% to $127.1 million for the fiscal 2023 second quarter, from $103.2 million for the same quarter last year. The increase was primarily attributable to increases in card processing expense, operating lease equipment depreciation, compensation expense, total tax services expense, and impairment expense. The period-over-period increase was partially offset by decreases in legal and consulting expense, amortization expense, and other expense. The increase in operating lease equipment depreciation was due to $4.8 million of accelerated depreciation on mobile solar generators in connection with the aforementioned legacy solar transactions. During the second quarter of fiscal year 2023, the Company recognized $0.5 million of impairment expense related to its Pathward Venture Capital business.

The card processing expense increase was due to structured 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 47% of the deposit portfolio was subject to these higher card processing expenses. For the fiscal quarter ended March 31, 2023, card processing expenses related to these structured agreements were $20.4 million, as compared to $14.0 million for the fiscal quarter ended December 31, 2022 and $0.2 million for the fiscal quarter ended March 31, 2022.

Noninterest expense for the six months ended March 31, 2023 increased to $232.2 million from $185.6 million for the same period of the prior fiscal year.

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Income Tax Expense

The Company recorded an income tax expense of $9.2 million, representing an effective tax rate of 14.2%, for the fiscal 2023 second quarter, compared to income tax expense of $8.0 million, representing an effective tax rate of 13.8%, for the second quarter last year. The current quarter increase in income tax expense was primarily due to increased earnings.

The Company originated $18.1 million in renewable energy leases during the fiscal 2023 second quarter, resulting in $4.9 million in total net investment tax credits. During the second quarter of fiscal 2022, the Company originated $1.3 million in renewable energy leases resulting in $0.3 million in total net investment tax credits. Investment tax credits related to renewable energy leases are recognized ratably based on income throughout each fiscal year. For the six months ended March 31, 2023, the Company originated $29.5 million in renewable energy leases, compared to $22.5 million for the comparable prior year period. 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.

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 March 31, 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.

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

(Dollars in thousands)	March 31, 2023			September 30, 2022
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance	$	19,585		$	13,375
Total nonaccruing loans and leases	19,585			13,375
Accruing loans and leases delinquent 90 days or more:
Commercial finance	5,724			4,142
Consumer finance	3,217			2,793
Tax services(1)	—			8,873
Total accruing loans and leases delinquent 90 days or more	8,941			15,808
Total nonperforming loans and leases	28,526			29,183
Other Assets
Nonperforming operating leases	1,549			1,736
Foreclosed and repossessed assets:
Commercial finance	—			1
Total foreclosed and repossessed assets	—			1
Total other assets	1,549			1,737
Total nonperforming assets	$	30,075		$	30,920
Total as a percentage of total assets	0.44		%	0.46		%
(1) Certain tax services loans do not bear interest.

The Company's nonperforming loans and leases at March 31, 2023 were $28.5 million, representing 0.76% 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 decrease in the nonperforming assets as a percentage of total assets at March 31, 2023 compared to September 30, 2022, was driven by a decrease in the tax services portfolio partially offset by an increase in the commercial 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 March 31, 2023, the Company had classified loans and leases of $230.0 million as substandard, $5.7 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.

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Allowance for Credit Losses. The ACL represents management’s estimate of current credit losses expected to be incurred by the loan and lease portfolio over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets, which generally means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Condensed Consolidated Statements of Financial Condition.

Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, credit loss is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.

The Company's ACL totaled $84.3 million at March 31, 2023, an increase compared to $45.9 million at September 30, 2022. The increase in the ACL at March 31, 2023, when compared to September 30, 2022, was primarily due to a $33.1 million increase in the seasonal tax services loan portfolio, a $3.7 million increase in the commercial finance portfolio, and a $1.5 million increase in the consumer finance portfolio.

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

	As of the Period Ended
	March 31, 2023		December 31, 2022		September 30, 2022		June 30, 2022		March 31, 2022
Commercial finance	1.53	%	1.62	%	1.46	%	1.56	%	1.66	%
Consumer finance	1.99	%	1.54	%	0.86	%	2.44	%	3.18	%
Tax services	53.77	%	2.01	%	0.05	%	54.29	%	35.76	%
Warehouse finance	0.10	%	0.10	%	0.10	%	0.10	%	0.10	%
Total loans and leases	2.27	%	1.50	%	1.30	%	2.04	%	2.38	%
Total loans and leases excluding tax services	1.40	%	1.50	%	1.30	%	1.44	%	1.59	%

The Company's ACL as a percentage of total loans and leases increased to 2.27% at March 31, 2023 from 1.50% at December 31, 2022 and from 1.30% at September 30, 2022. The increase in the total loans and leases coverage ratio was primarily driven by the seasonal tax services portfolio, and to a lesser extent the consumer finance portfolio. The increase in the consumer finance coverage ratio was related to seasonal activity. 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 that, in management's view, are most important in the portrayal of our financial condition and results of operations. These policies involve complex and subjective decisions and assessments. Some of these estimates may be uncertain at the time they are made, could change from period to period, and could have a material impact on the financial statements. A discussion of the Company’s critical accounting policies and estimates can be found in the Company's Annual Report on Form 10-K for the year ended September 30, 2022. There were no significant changes to these critical accounting policies and estimates during the first six months of fiscal 2023.

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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 March 31, 2023, the Company had unfunded loan and lease commitments of $1.61 billion. Management believes that loan repayment and other sources of funds will be adequate to meet its foreseeable short- and long-term liquidity needs. The liquidity sources as of March 31, 2023 include nearly $2 billion in off-balance sheet deposits and $433 million in cash and cash equivalents. When factoring in additional resources, such as the Federal Home Loan Bank, the Fed Discount Window and other unsecured funding and wholesale options, the Company has over $4 billion in total available liquidity options as of March 31, 2023.

As U.S. banking organizations, the Company and the Bank are required to comply with the regulatory capital rules adopted by the Federal Reserve and the OCC (the "Capital Rules") that became effective on January 1, 2015, subject to phase-in periods for certain requirements and other provisions of 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 March 31, 2023, both 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 corresponding reconciliation to total equity. The decrease in Tier 1 leverage capital ratio for the period is the result of higher quarterly average assets related to its seasonal tax business. Regulatory Capital is not affected by the unrealized loss on AOCI. The securities portfolio is primarily comprised of amortizing securities that should provide consistent cash flow. The Company does not intend to sell these securities, or recognize the unrealized losses on its income statement, to fund future loan growth.

At March 31, 2023	Company		Bank		Minimum to be Adequately Capitalized Under Prompt Corrective Action Provisions		Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
Tier 1 leverage capital ratio	7.53	%	7.79	%	4.00	%	5.00	%
Common equity Tier 1 capital ratio	12.05		12.77		4.50		6.50
Tier 1 capital ratio	12.35		12.77		6.00		8.00
Total capital ratio	14.06		14.03		8.00		10.00

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The following table provides a reconciliation of the amounts included in the table above for the Company.

(Dollars in thousands)	Standardized Approach(1) March 31, 2023
Total stockholders' equity	$	673,244
Adjustments:
LESS: Goodwill, net of associated deferred tax liabilities	298,390
LESS: Certain other intangible assets	23,553
LESS: Net deferred tax assets from operating loss and tax credit carry-forwards	13,219
LESS: Net unrealized gains (losses) on available for sale securities	(186,796)
LESS: Noncontrolling interest	(551)
ADD: Adoption of Accounting Standards Update 2016-13	2,017
Common Equity Tier 1(1)	527,446
Long-term borrowings and other instruments qualifying as Tier 1	13,661
Tier 1 minority interest not included in common equity Tier 1 capital	(404)
Total Tier 1 capital	540,703
Allowance for credit losses	55,058
Subordinated debentures, net of issuance costs	19,540
Total capital	$	615,301
(1) Capital ratios were determined using the Basel III capital rules that became effective on January 1, 2015. Basel III revised the definition of capital, increased minimum capital ratios, and introduced a minimum common equity tier 1 capital ratio; those changes were fully phased in through the end of 2021.

The 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 March 31, 2023
Total stockholders' equity	$	673,244
LESS: Goodwill	309,505
LESS: Intangible assets	22,998
Tangible common equity	340,741
LESS: AOCI	(187,829)
Tangible common equity excluding AOCI	$	528,570

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.

CONTRACTUAL OBLIGATIONS

See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Contractual Obligations" in the Company’s Annual Report on Form 10-K for its fiscal year ended September 30, 2022 for a summary of our contractual obligations as of September 30, 2022. There were no material changes outside the ordinary course of our business in contractual obligations from September 30, 2022 through March 31, 2023.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk.

MARKET RISK

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

The Company monitors and measures its exposure to changes in interest rates in order to comply with applicable government regulations and risk policies established by the Board of Directors, and in order to preserve stockholder value. In monitoring interest rate risk, the Company analyzes assets and liabilities based on characteristics including size, coupon rate, repricing frequency, maturity date, 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 growing portfolio of longer duration, low-cost deposits generated from its BaaS business line provides a stable and profitable funding vehicle, but also subjects the Company to greater risk in a falling interest rate environment than it would otherwise have without this portfolio. This risk is due to the fact that, while asset yields may decrease in a falling interest rate environment, the Company cannot significantly reduce interest costs associated with these deposits, which thereby compress the Company’s net interest margin.

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

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

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

Interest Rate Risk (“IRR”)

Overview. The Company actively manages interest rate risk, as changes in market interest rates can have a significant impact on reported earnings. The Company's interest rate risk analysis is designed to compare income and economic valuation simulations in market scenarios designed to alter the direction, magnitude and speed of interest rate changes, as well as the slope of the yield curve. This analysis may not represent all impacts driven by changes in the interest rate environment, such as certain other card fee income and expense line items. 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.

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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 March 31, 2023:

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
Total interest-sensitive income	6,044,564	350,786		374,488		397,965		420,882		443,793		466,689		489,685
Total interest-sensitive expense	264,407	4,397		6,010		7,993		10,523		13,050		15,677		18,233
Net interest-sensitive income		346,389		368,478		389,972		410,359		430,743		451,012		471,452
Percentage change from base		-11.2	%	-5.5	%	—	%	5.2	%	10.5	%	15.7	%	20.9	%

The EAR analysis reported at March 31, 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 scenarios as March 31, 2023:

Economic Value Sensitivity
	Standard (Parallel Shift)
	Economic Value of Equity at Risk %
	-200		-100		+100		+200		+300		+400
Percentage change from base	-9.0	%	-3.5	%	2.5	%	4.4	%	6.1	%	8.0	%

The EVE at risk reported at March 31, 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 4.    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 Quarterly Report on Form 10-Q, 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 March 31, 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, at March 31, 2023, the Company’s disclosure controls and procedures were not designed effectively to ensure timely alerting of material information relating to the Company required to be included in the Company's periodic SEC filings.

In the fiscal fourth quarter of 2021 and the fiscal third quarter of 2022, the Company identified control deficiencies related to access permissions in two loan systems which resulted in a lack of segregation of duties over disbursements in which select individuals had the ability to both initiate and approve disbursements indicating that the user access provisioning and user entitlement review monitoring controls did not function to a precise level to ensure segregation of duties was maintained. Management determined that the combination of user access provisioning and user entitlement review deficiencies represent a material weakness in internal controls over financial reporting on the basis that the deficiencies could result in a misstatement potentially impacting the Company's financial statement accounts and disclosures that would not be prevented or detected on a timely basis.

REMEDIATION PLAN FOR REPORTED MATERIAL WEAKNESS

Annual entitlement review for the loan system identified in the fourth quarter of 2021 was performed in March 2022 and no inappropriate access was identified.

For the loan system identified with inappropriate system access in fiscal third quarter of 2022, management removed access for the individuals that had inappropriate access and performed testing of disbursements during the impacted period and did not identify any instances where the segregation of the disbursement over initiation and approval was not maintained. In May 2022, management also implemented an IT application control to identify instances where the initiator and approver are the same to prevent disbursement from occurring.

The Company is in the midst of undergoing a broader risk assessment and other remediation actions and ongoing monitoring activities, across all material applications, and is on track with the stated project plan. These remediation steps will strengthen the control environment surrounding user access controls.

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.

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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 March 31, 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 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) that were reported in the prior fiscal year that are still under remediation and continue during the fiscal third quarter to which this report relates that could have materially affected the Company’s internal controls over financial reporting, as described above.

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PATHWARD FINANCIAL, INC.

PART II - OTHER INFORMATION

FORM 10-Q

Item 1. 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. We are involved in a variety of litigation matters in the ordinary course of our business and anticipate that we will become involved in new litigation matters in the future.

Item 1A. Risk Factors.

A description of our risk factors can be found in "Item 1A. Risk Factors" included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022. There were no material changes to those risk factors during the six months ended March 31, 2023, except that the following risk factors are hereby updated or added:

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.

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. We completed a Chief Executive Officer and Chief Operating Officer transition in October 2021 and announced a Chief Financial Officer transition in October 2022 that would have been effective April 30, 2023. This transition has been extended as the Company commenced a search for a successor on March 27, 2023, after announcing the Deputy Chief Financial Officer will no longer be succeeding the Chief Financial Officer. Management transitions may create uncertainty and involve a diversion of resources and management attention, be disruptive to our daily operations or impact public or market perception, any of which could negatively impact our ability to operate effectively or execute our strategies and result in a material adverse impact on our business, financial condition, results of operations or cash flows.

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

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Adverse developments or concerns affecting the financial services industry in general or specific financial institutions, such as the recent bank closures and other developments in the United States banking industry 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 recent closures of Silicon Valley Bank ("SVB") and Signature Bank has led to disruption and volatility, including deposit outflows and increased need for liquidity, at certain banks. Although a statement by the Department of the Treasury, the Federal Reserve and the FDIC indicated that all depositors of SVB would have access to all of their money after only one business day of closure, including funds held in uninsured deposit accounts, it is not certain that the Federal Reserve or FDIC will treat future bank failures similarly. On May 1, 2023, First Republic Bank was also closed by its primary state regulator, which appointed the FDIC as receiver, and the FDIC announced that JP Morgan Chase Bank, National Association agreed to assume all of First Republic Bank's deposits and substantially all of its assets with an estimated cost to the Deposit Insurance Fund of approximately $13 billion.

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 have 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 recent bank closures 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 $4.0 billion as of March 31, 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. In connection with the recent bank closures, the United States federal bank regulators announced that losses to support uninsured deposits of the closed banks would be recovered via a special assessment on banks, which along with related costs to the Deposit Insurance Fund could led to an increase in our deposit insurance assessments.

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.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(a) None.

(b) None.

(c) Issuer Purchases of Equity Securities.

The Company's Board of Directors authorized a 6,000,000 share repurchase program on September 3, 2021 that was publicly announced on September 7, 2021 and is scheduled to expire on September 30, 2024. The table below sets forth information regarding repurchases of our common stock during the fiscal 2023 second 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	Maximum Number Of Shares that may yet be Purchased Under the Plans or Programs
January 1 to 31	637,800	$	46.23	637,800	3,003,183
February 1 to 28	205,435	50.91		203,100	2,800,083
March 1 to 31	331,800	47.34		331,800	2,468,283
Total	1,175,035			1,172,700

(1) All shares not purchased as part of the Company's publicly announced repurchase program 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.

Item 6. Exhibits.

Exhibit Number	Description
31.1	Section 302 certification of Chief Executive Officer.
31.2	Section 302 certification of Chief Financial Officer.
32.1	Section 906 certification of Chief Executive Officer.
32.2	Section 906 certification of Chief Financial Officer.
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL) includes: (i) Cover Page, (ii) Condensed Consolidated Statements of Financial Condition, (iii) Condensed Consolidated Statements of Operations, (iv) Condensed Consolidated Statements of Comprehensive Income, (v) Condensed Consolidated Statements of Changes in Stockholders' Equity, (vi) Condensed Consolidated Statements of Cash Flows, and (vii) Notes to Condensed Consolidated Financial Statements, tagged in summary and in detail.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

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PATHWARD FINANCIAL, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PATHWARD FINANCIAL, INC.
Date: May 9, 2023	By:	/s/ Brett L. Pharr
		Brett L. Pharr,
		Chief Executive Officer and Director
Date: May 9, 2023	By:	/s/ Glen W. Herrick
		Glen W. Herrick,
		Executive Vice President and Chief Financial Officer

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