☐ 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.TM
(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 Dakota57108
(Address of principal executive offices and Zip Code)
(877) 497-7497
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
CASH
The NASDAQ Stock Market LLC
Securities Registered Pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant Section 13 and Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer." "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large Accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of March 31, 2022, the aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the closing bid and asked prices of such stock on the NASDAQ Global Select Market as of such date, was $1.5 billion.
As of November 16, 2022, there were 28,466,833 shares of the Registrant’s Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting of Stockholders expected to be held February 28, 2023 are incorporated by reference into Part III of this report.
PATHWARD FINANCIAL, INC.TM("Pathward Financial" or "the Company" or "us") and its wholly-owned subsidiary, PathwardTM, National Association ("Pathward, N.A." or "Pathward" or "the Bank") may from time to time make written or oral “forward-looking statements,” including statements contained in this Annual Report on Form 10-K, the Company’s other filings with the Securities and Exchange Commission (the "SEC"), the Company’s reports to stockholders, and other communications by the Company and Pathward, National Association, which are made in good faith by the Company pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.
You can identify forward-looking statements by words such as “may,” “hope,” “will,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential,” “continue,” “could,” “future,” or the negative of those terms, or other words of similar meaning or similar expressions. You should carefully read statements that contain these words because they discuss our future expectations or state other “forward-looking” information. These forward-looking statements are based on information currently available to us and assumptions about future events, and include statements with respect to the Company’s beliefs, expectations, estimates, and intentions, which are subject to significant risks and uncertainties, and are subject to change based on various factors, some of which are beyond the Company’s control. Such risks, uncertainties and other factors may cause our actual growth, results of operations, financial condition, cash flows, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Such statements address, among others, the following subjects: future operating results; our ability to remediate the material weakness in our internal controls over financial reporting and otherwise maintain effective internal controls over financial reporting; customer retention; expectations regarding the Company's and the Bank's ability to meet minimum capital ratios and capital conservation buffers; loan and other product demand; expectations concerning acquisitions and divestitures; new products and services; credit quality; the level of net charge-offs and the adequacy of the allowance for credit losses; technology; and management and other employees. The following factors, among others, could cause the Company's financial performance and results of operations to differ materially from the expectations, estimates, and intentions expressed in such forward-looking statements: successfully transitioning and maintaining our executive management team; expected growth opportunities may not be realized or may take longer to realize than expected; the potential adverse effects of the ongoing COVID-19 pandemic and any governmental or societal responses thereto, or other unusual and infrequently occurring events, including the impact on financial markets from geopolitical conflicts such as the war between Russia and Ukraine; our ability to achieve brand recognition as Pathward equal to or greater than we enjoyed under our prior brand; changes in tax laws; the strength of the United States' economy, and the local economies in which the Company operates; changes in trade, monetary, and fiscal policies and laws, including actual changes in interest rates and the Fed funds rate; inflation, market, and monetary fluctuations; the timely and efficient development of new products and services offered by the Company or its strategic partners, as well as risks (including reputational and litigation) attendant thereto, and the perceived overall value and acceptance of these products and services by users; the Bank's ability to maintain its Durbin Amendment exemption; the risks of dealing with or utilizing third parties, including, in connection with the Company’s refund advance business; the risk of reduced volume of refund advance loans as a result of reduced customer demand for or usage of Pathward’s strategic partners’ refund advance products; our relationship with, and any actions which may be initiated by our regulators; changes in financial services laws and regulations, including laws and regulations relating to the tax refund industry and the insurance premium finance industry and recent and potential changes in response to the ongoing COVID-19 pandemic; technological changes, including, but not limited to, the security of our electronic systems and information; the impact of acquisitions and divestitures; litigation risk; the growth of the Company’s business, as well as expenses related thereto; continued maintenance by Pathward of its status as a well-capitalized institution; changes in consumer spending and saving habits; losses from fraudulent or illegal activity; technological risks and developments, and cyber threats, attacks or events; and the success of the Company at maintaining its high quality asset level and managing and collecting assets of borrowers in default should problem assets increase.
The foregoing list of factors is not exclusive. We caution you not to place undue reliance on these forward-looking statements. The forward-looking statements included in this Annual Report on Form 10-K speak only as of the date hereof, and the Company does not undertake any obligation to update, revise, or clarify these forward-looking statements whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in its entirety by the cautionary statements contained or referred to in this section. Additional discussions of factors affecting the Company’s business and prospects are reflected under the caption “Risk Factors,” and in the Company’s periodic filings with the SEC. The Company expressly disclaims any intent or obligation to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Company or its subsidiaries, whether as a result of new information, changed circumstances, or future events or for any other reason.
Pathward Financial, a registered bank holding company, was incorporated in Delaware on June 14, 1993. Pathward Financial's principal assets are all the issued and outstanding shares of the Bank, a South Dakota chartered, national bank, the accounts of which are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") as administrator of the Deposit Insurance Fund (“DIF”). Unless the context otherwise requires, references herein to the Company include Pathward Financial and the Bank, and all subsidiaries of Pathward Financial, direct or indirect, on a consolidated basis.
As a nationwide provider of Banking as a Service ("BaaS") solutions and commercial finance products, the Company has offices across the country. The principal executive office is located at 5501 South Broadband Lane, Sioux Falls, South Dakota, 57108. Its telephone number at that address is (877) 497-7497. The Company is subject to comprehensive regulation and supervision. See "Regulation and Supervision" herein.
The Company's purpose of financial inclusion for all® means everyone deserves access to high quality financial services. It is why for the past two decades Pathward Financial has been building solutions to help those who have been underserved by traditional banking providers.
The Company strives to remove barriers to financial access and promote economic mobility by working with third parties to provide responsible, secure, high quality financial products that contribute to the social and economic benefit of communities at the core of the real economy. Pathward Financial strives to increase financial availability, choice, and opportunity across two business lines: BaaS and Commercial Finance. These strategic business lines provide end-to-end support to individuals and businesses.
As a nationally chartered bank, Pathward sits at the hub of the financial ecosystem. With expert talent and access to world-class partners, Pathward moves money seamlessly across a multitude of solutions while mitigating risk by anticipating changes to a complicated, regulatory landscape.
The Bank, a wholly-owned full-service banking subsidiary of Pathward Financial, operates through three reportable segments (Consumer, Commercial, and Corporate Services/Other). See Note 17. Segment Reporting for further information on the reportable segments.
The business of the Bank is to collaborate with partners through the BaaS business line to provide solutions that attract low-cost deposits and generate fee income. The low-cost deposits are primarily invested into loan and lease products offered through the Commercial Finance business line. In addition to originating loans and leases, the Bank also occasionally contracts to sell loans, such as consumer credit product loans, refund advance loans, and government guaranteed loans to third party buyers. The Bank also sells and purchases loan participations from time to time to and from other financial institutions, as well as mortgage-backed securities ("MBS") and other investments permissible under applicable regulations.
The Consumer segment includes the BaaS business line, which collaborates with partners to navigate payment and lending needs. With capabilities ranging from prepaid cards and deposit accounts to payment processing and consumer lending, the Company empowers its partners to deliver programs that provide a financial path forward for all.
The Company offers the following innovative solutions: payment, issuing, credit, and tax. Payment solutions accepts and processes payments for all customers' personal and business needs. The Bank moves funds daily through high speed banking rails, including ACH, wire transfers, and push to debit. With its Issuing solutions, Pathward is one of the leading debit and prepaid card issuers in the country and holds funds for the programs of its partners in order to provide the consumer protections of a traditional bank account. Credit solutions enables the Bank's partners' lending solutions that serve the borrowing needs of customers in a diverse credit pool. Tax solutions offer electronic refund advances and refund transfers with some of the largest tax companies, as well as thirty-thousand independent tax preparers nationwide.
The Commercial segment includes the Company's Commercial Finance business line, which helps businesses access funds they need to launch, operate, and grow. Pathward's innovative approach and customized financial products offer the flexibility traditional bank products cannot. This diverse range of commercial financial products is available through the following lending solutions: working capital, equipment finance, structured finance, and insurance premium finance.
Working capital provides ready cash for liquidity needs to new or growing companies or companies in cyclical or seasonal industries. Working capital financing is secured by business collateral (assets) such as accounts receivable, inventory, and equipment. Equipment finance provides financing in the form of leases and loans for equipment needs. Structured finance assists small- and mid-sized business and rural borrowers to fund growth, expansion, and restructuring. Products include alternative energy financing, conventional loans, and loans administered through partnerships with the Small Business Administration ("SBA") and United States Department of Agriculture ("USDA"). Insurance premium finance is short-term financing to facilitate the purchase of property, casualty, and liability insurance premiums.
OTHER SUBSIDIARIES
Pathward Venture Capital, LLC ("Pathward Venture Capital"), a wholly-owned service corporation subsidiary of the Bank was formed in 2017 for the purpose of making minority equity investments. Pathward Venture Capital focuses on investing in companies in the financial services industry.
First Midwest Financial Capital Trust I, a wholly-owned subsidiary of Pathward Financial, was established in July 2001 and Crestmark Capital Trust I, acquired by the Company in August 2018, was established in June 2005. Both subsidiaries were established for the purpose of issuing trust preferred securities.
LENDING ACTIVITIES
General
The Company focuses its lending activities on the origination of commercial finance loans, consumer finance loans and tax services loans. The Company emphasizes credit quality and seeks to avoid undue concentrations of loans and leases to a single industry or based on a single class of collateral. The Company has established lending policies that include a number of underwriting factors that it considers in making a loan, including loan-to-value ratio, cash flow, interest rate and credit history of the borrower. At September 30, 2022, the Company’s loans and leases receivable, net of allowance for credit losses, totaled $3.49 billion, or 52% of the Company’s total assets, as compared to $3.54 billion, or 53%, at September 30, 2021.
Loan and lease applications are initially considered and approved at various levels of authority, depending on the type and amount of the loan or lease as directed by the Bank's lending policies. The Company has a loan committee structure in place for oversight of its lending activities. Loans and leases in excess of certain amounts require approval by an Executive Credit Committee. The Company may discontinue, adjust, or create new lending programs to respond to competitive factors.
At September 30, 2022, the Company’s largest lending relationship to a single borrower or group of related borrowers totaled $74.9 million. The Company had 24 other lending relationships in excess of $15.0 million as of September 30, 2022.
The following table shows the composition of the Company’s loan and lease portfolio by fixed- and adjustable-rate at the dates indicated.
At September 30,
2022
2021
(Dollars in thousands)
Amount
Percent
Amount
Percent
Fixed-Rate Loans and Leases
Commercial finance
$
1,872,256
53.1
%
$
1,754,706
48.6
%
Consumer finance
169,659
4.8
%
154,169
4.3
%
Tax services
9,098
0.3
%
10,405
0.3
%
Warehouse finance
252,276
7.1
%
322,682
8.9
%
Community banking
—
—
%
190,240
5.3
%
Total fixed-rate loans and leases
2,303,389
65.3
%
2,432,202
67.4
%
Adjustable-Rate Loans and Leases
Commercial finance
1,151,417
32.6
%
970,789
26.9
%
Consumer finance
—
—
%
98,688
2.7
%
Tax services (1)
—
—
%
—
—
%
Warehouse finance
74,574
2.1
%
97,244
2.7
%
Community banking
—
—
%
8,892
0.3
%
Total adjustable-rate loans and leases
1,225,991
34.7
%
1,175,613
32.6
%
Total loans and leases
3,529,280
100.0
%
3,607,815
100.0
%
Deferred fees and discounts
7,025
1,748
Allowance for credit losses
(45,947)
(68,281)
Total loans and leases receivable, net
$
3,490,358
$
3,541,282
(1)Certain tax services loans do not bear interest.
The following table illustrates the contractual maturities of the Company’s loan and lease portfolio and the distribution by changes in interest rates for loans with a contractual maturity greater than one year at September 30, 2022.
The Company's Commercial Finance business line offers a variety of products through its working capital, equipment finance, structured finance, and insurance premium finance lending solutions. These products include term lending, asset based lending, factoring, lease financing, insurance premium finance, government guaranteed lending and other commercial finance products offered on a nationwide basis.
Term Lending. The Bank originates a variety of collateralized conventional term loans and notes receivable. While terms range from three years to 25 years, the weighted average life of these loans is approximately 53 months. These term loans may be secured by equipment, recurring revenue streams, or real estate. Credit risk is managed through setting loan amounts appropriate for the collateral based on information including equipment cost, appraisals, valuations, and lending history. The Bank follows standardized loan policies and established and authorized credit limits and applies attentive portfolio management, which includes monitoring past dues, financial performance, financial covenants, and industry trends. As of September 30, 2022, 14% of the term lending portfolio exposure is concentrated in solar/alternative energy, most of which are construction projects that will convert to longer term government guaranteed facilities upon completion of the construction phase. Equipment Finance agreements make up 54% of the term lending total as of September 30, 2022. The remaining 32% are a variety of investment advisory and insurance agency loans and other more traditional term equipment and general purpose commercial loans.
Asset Based Lending. The Bank provides asset based loans secured by short-term assets such as accounts receivable and inventory. Asset based loans may also be secured by equipment supported by third party independent appraisals. The primary sources of repayment are the collection of the receivables and/or the sale of the inventory securing the loan, as well as the operating income of the borrower. Loans are typically revolving lines of credit with terms of one year to three years, whereby the Bank withholds a contingency reserve representing the difference between the amount advanced and the fair value of the invoice amount or other collateral value. Credit risk is managed through advance rates appropriate for the collateral (generally, advance rates on accounts receivable ranges from 80% to 90% and inventory advance rates range from 40% to 60%). In certain cases, inventory advances are supported by the third party independent appraisals. Collateral is further supported and verified via field audits conducted up to three times per year. All asset based facilities have standardized loan policies, established and authorized credit limits, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the debtors' cash receipts. As of September 30, 2022, approximately 65% of asset based loans were backed by accounts receivable.
Factoring. The Bank provides factoring lending where clients provide detailed accounts receivable reporting for lending arrangements. The factoring clients are diversified as to industry and geography. With these loans, the Commercial Finance business line withholds a contingency reserve, which is the difference between the fair value of the invoice amount or other collateral value and the amount advanced (generally, advance rates range between 80% and 95% on accounts receivable). This reserve is withheld for nonpayment of factored receivables, service fees and other adjustments. Credit risk is managed through standardized advance policies, established and authorized credit limits, verification of receivables, attentive portfolio management and the use of lock box agreements and similar arrangements which result in the Company receiving and controlling the client's cash receipts. In addition, clients generally guarantee the payment of purchased accounts receivable.
Lease Financing. The Bank provides creative, flexible lease solutions for equipment needs of its clients. Leases that transfer substantially all of the benefits and risks of ownership to the lessee are accounted for as sales-type or direct financing leases. The lease may contain provisions that transfer ownership to the lessee at the end of the initial term, contain a bargain purchase option or allow for purchase of the equipment at fair market value. Residual values are estimated at the inception of the lease. Lease maturities are generally no greater than 84 months.
Insurance Premium Finance. The Bank provides, on a national basis, short-term, primarily collateralized financing to facilitate the commercial customers’ purchase of insurance for various forms of risk, otherwise known as insurance premium financing. This includes, but is not limited to, policies for commercial property, casualty and liability risk. Premiums are advanced either directly to the insurance carrier or through an intermediary/broker and repaid by the policyholder with interest during the policy term. The policyholder generally makes a 20% to 25% down payment to the insurance broker and finances the remainder over nine to 10 months on average. The down payment is set such that if the policy is canceled, the unearned premium is typically sufficient to cover the loan balance and accrued interest and is returned by the insurer to the Bank on a pro rata basis. Over 95% of the portfolio finances policies provided by investment grade-rated insurance company partners.
SBA and USDA. The Bank originates loans through programs partially guaranteed by the SBA or USDA. These loans are made to small businesses and professionals. Certain guaranteed portions of these loans are sold to the secondary market. See "Originations, Sales and Servicing of Loans and Leases" below for further details. The Company is also participating in the Paycheck Protection Program (the "PPP") which is being administered by the SBA. The Company expects that the major portion of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. Loans funded through the PPP are fully guaranteed by the U.S. government. As of September 30, 2022, the Company had 41 loans outstanding with total loan balances of $13.5 million originated as part of the PPP.
Other Commercial Finance. Included in this category of loans are the Company's healthcare receivables loan portfolio primarily comprised of loans to individuals for medical services received. The majority of these loans are guaranteed by the hospital providing the service to the debtor and this guarantee serves to reduce credit risk as the guarantors agree to repurchase severely delinquent loans. Credit risk is minimized on these loans based on the guarantor’s repurchase agreement. This loan category also includes commercial real estate loans.
Consumer Finance
The Company's BaaS business line offers its consumer credit products and Emerald Advance products through its credit solutions.
Consumer Credit Products. The Bank designs its credit program relationships with certain desired outcomes. Three high priority outcomes are liquidity, credit protection, and risk retention by the program partner. The Bank believes the benefits of these outcomes not only support its goals but the goals of the credit program partner as well. The Bank designs its program credit protections in a manner so that the Bank earns a reasonable risk adjusted return, but is protected by certain layers of credit support, similar to what you would find in structured finance. Certain loans are sold to third parties based on terms and conditions within the Program Agreement. See "Originations, Sales and Servicing of Loans and Leases" below for further details.
As of September 30, 2022, the Bank has multiple consumer credit programs. The loan products offered under these programs are generally closed-end installment loans with terms between 12 months and 84 months.
Emerald Advance. Through the Bank’s partner program, the Bank serves as the originator of a line of credit, where customers draw on a line of credit and the balance must be paid down to zero by February 15 to maintain an account with good standing. Funds are loaded onto a prepaid card and the line of credit gives customers the ability to repeatedly borrow and repay money and has an annual resting period from January 27 to February 15 during which draws cannot generally be made. As of September 30, 2022, there were no outstanding loan balances on the Company's balance sheet for this product type. The Company expects balances on the line of credit to increase with the new Emerald Advance promotional period in the first quarter of fiscal 2023.
Other Consumer Finance
Student Lending. During the fourth quarter of fiscal 2022, the Bank sold its entire student loan portfolio consisting of seasoned, floating rate, private portfolios serviced by a third-party servicer.
Tax Services
The Bank's BaaS business line also offers tax solutions, which includes short-term refund advance loans and short-term electronic return originator ("ERO") advance loans.
Refund Advance Loans. Refund advance loans are unsecured loans to taxpayers that are determined to be eligible based on underwriting criteria designed for this product. Due to the nature of refund advance loans, it typically takes no more than three e-file cycles (the period of time between scheduled IRS payments) from when the return is accepted by the IRS to collect from the borrower. In the event of default, the Bank has no recourse against the taxpayer. The Bank will charge off the balance of a refund advance loan if there is a balance at the end of the calendar year, or when collection of principal becomes doubtful.
ERO Advance Loans. ERO advance loans are unsecured advances that are typically utilized by tax preparers to purchase tax preparation software and to prepare tax office operations for the upcoming tax season. EROs go through an underwriting process to determine eligibility. Collection on ERO advances begins once the ERO begins to process refund transfers. Generally, the Bank will charge off the balance of an ERO advance loan if there is a balance at the end of June, or when collection of principal becomes doubtful.
The Bank participates in several collateral-based warehouse lines of credit whereby the Bank is in a senior, secured position as the first out participant. These facilities are primarily collateralized by consumer receivables, with the Bank holding a senior collateral position enhanced by a subordinate party structure.
Community Banking
The Company completed its final sale of retained Community Bank loans in the first quarter of fiscal 2022.
ORIGINATIONS, SALES AND SERVICING OF LOANS AND LEASES
The Company, from time to time, sells loans and leases, and in some cases, loan participations, generally without recourse. At September 30, 2022, there were no outstanding loans sold by the Company with recourse. When loans or leases are sold, the Company may retainthe responsibility for collecting and remitting loan payments, making certain that real estate tax payments are made on behalf of borrowers, and otherwise servicing the loans. The servicing fee is recognized as income over the life of the loans. As of September 30, 2022, the Company was servicing $336.6 million SBA/USDA loans.
The Company may sell the guaranteed portion of its SBA 7(a) loans and USDA program loans in the secondary market. These sales have resulted in premium income for the Company at the time of sale and created a stream of future servicing income. When the Company sells the guaranteed portion of its loans, it retains credit risk on the non-guaranteed portion of the loans, and, if a customer defaults on the loan, the Company shares any loss and recovery related to the loan pro-rata with the SBA or USDA, as applicable. If the SBA or USDA establishes that a loss on a guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by the Company, the SBA or USDA may seek recovery of the principal loss related to the deficiency from the Company, which could materially adversely affect our business, results of operations and financial condition.
The Company sold additional loans from the retained Community Bank portfolio in the amount of $192.5 million and $308.1 million for the fiscal years ended September 30, 2022 and 2021, respectively. All loans from the retained Community Bank portfolio have been sold as of December 31, 2021.
In periods of economic uncertainty, the Company’s ability to originate large dollar volumes of loans and leases may be substantially reduced or restricted, with a resultant decrease in related loan origination fees, other fee income and operating earnings. In addition, the Company’s ability to sell loans may substantially decrease if potential buyers (principally government agencies) reduce their purchasing activities.
The following table shows the loan and lease originations (including draws, loan and lease renewals, and undisbursed portions of loans and leases in process), purchases, and sales and repayment activities of the Company for the periods indicated.
Fiscal Year Ended September 30,
(Dollars in thousands)
2022
2021
Originations
Commercial finance
$
11,554,312
$
9,678,519
Consumer finance
1,530,128
1,098,526
Tax services
1,898,511
1,841,326
Total loans and leases originated
14,982,951
12,618,372
Purchases
Commercial finance
3,098
—
Warehouse finance
112,255
308,014
Community banking
—
3,318
Total loans and leases purchased
115,353
311,332
Sales and Repayments
Sales:
Commercial finance
66,397
89,276
Consumer finance
932,747
494,584
Community banking
183,457
321,793
Total loans and leases sales
1,182,601
905,793
Repayments:
Loan and lease principal repayments
14,029,362
11,857,619
Total principal repayments
14,029,362
11,857,619
Total reductions
15,211,963
12,763,412
Increase (decrease) in other items, net
27,612
(18,970)
Net increase (decrease)
$
(86,047)
$
147,322
NONPERFORMING ASSETS, OTHER LOANS AND LEASES OF CONCERN AND CLASSIFIED ASSETS
The following table sets forth the Company’s loan and lease delinquencies by type, by amount and by percentage of type at September 30, 2022.
30-59 Days
60-89 Days
> 89 Days Past Due
(Dollars in thousands)
Number of Loans
Amount
Percent of Category
Number of Loans
Amount
Percent of Category
Number of Loans
Amount
Percent of Category
Commercial finance
414
$
24,881
88.2
%
293
$
6,208
70.4
%
900
$
7,868
40.3
%
Consumer finance
228
3,322
11.8
%
152
2,609
29.6
%
1,003
2,793
14.3
%
Tax services (1)
—
—
—
%
—
—
—
%
—
8,873
45.4
%
Total loans and leases held for investment
642
$
28,203
100.0
%
445
$
8,817
100.0
%
1,903
$
19,534
100.0
%
Total loans and leases
642
$
28,203
100.0
%
445
$
8,817
100.0
%
1,903
$
19,534
100.0
%
(1) The tax services loans past due represented the aggregate remaining balance of the tax services loan portfolio.
Delinquencies 90 days and over constituted 0.55% of total loans and leases and 0.29% of total assets.
Generally, when a loan or lease becomes delinquent 90 days or more or when the collection of principal or interest becomes doubtful, the Company will place the loan or lease on a non-accrual status and, as a result, previously accrued interest income on the loan or lease is reversed against current income. The loan or lease will generally remain on a non-accrual status until six months of good payment history has been established or management believes the financial status of the borrower has been significantly restored. Certain relationships in the table above are over 90 days past due and still accruing. The Company considers these relationships as being in the process of collection. Insurance premium finance loans, consumer finance and tax services loans are generally not placed on non-accrual status, but are instead written off when the collection of principal and interest become doubtful.
The table below sets forth the amounts and categories of the Company’s nonperforming assets.
At September 30,
(Dollars in thousands)
2022
2021
Nonperforming Loans and Leases
Nonaccruing loans and leases:
Commercial finance
$
13,375
$
19,330
Community banking
—
14,915
Total nonaccruing loans and leases
13,375
34,245
Accruing loans and leases delinquent 90 days or more:
Loans held for sale
—
—
Commercial finance
4,142
12,489
Consumer finance
2,793
1,236
Tax services(1)
8,873
7,962
Total accruing loans and leases delinquent 90 days or more
15,808
21,687
Total nonperforming loans and leases
29,183
55,932
Other Assets
Nonperforming operating leases
1,736
3,824
Foreclosed and repossessed assets:
Commercial finance
1
2,077
Total foreclosed and repossessed assets
1
2,077
Total other assets
1,737
5,901
Total nonperforming assets
$
30,920
$
61,833
Total as a percentage of total assets
0.46
%
0.92
%
(1) Certain tax services loans do not bear interest.
For the fiscal year ended September 30, 2022, gross interest income, which would have been recorded had the nonaccruing loans and leases been current in accordance with their original terms was insignificant, none of which was included in interest income.
Nonaccruing Loansand Leases. At September 30, 2022, the Company had $13.4 million in nonaccruing loans and leases, which constituted 0.4% of the Company's gross loan and lease portfolio. At September 30, 2021, the Company had $34.2 million in nonaccruing loans which also constituted 0.9% of its gross loan and lease portfolio.
The fiscal 2022 decrease in nonaccruing loans and leases was primarily driven by a reduction of $14.9 million in the community bank portfolio, along with a decrease in the commercial finance portfolio.
Accruing Loans and Leases Delinquent 90 Days or More. At September 30, 2022, the Company had $15.8 million in accruing loans and leases delinquent 90 days or more, compared to $21.7 million at September 30, 2021. This balance of accruing loans and leases 90 days or more past due was mainly comprised of tax services, commercial finance, and consumer finance loans and leases.
Classified Assets. Federal regulations provide for the classification of certain loans, leases, and other assets such as debt and equity securities considered by the Bank's primary regulator, the Office of the Comptroller of the Currency (the "OCC"), to be of lesser quality as “substandard,” “doubtful” or “loss,” with each such classification dependent on the facts and circumstances surrounding the assets in question. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the Bank will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such minimal value that their continuance as assets without the establishment of a specific loss reserve is not warranted.
General allowances represent loss allowances which have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When assets are classified as “loss,” the Bank is required either to establish a specific allowance for losses equal to 100% of that portion of the asset so classified or to charge off such amount. The Bank’s determinations as to the classification of its assets and the amount of its valuation allowances are subject to review by its regulatory authorities, which may order the establishment of additional general or specific loss allowances.
Pathward has revised its credit administration policies and reviewed its loan portfolio to better align with OCC guidance for national banks, a process that began during the quarter ending June 30, 2021 and was completed as of September 30, 2021. These credit policy revisions had an impact on our loan and lease risk ratings, resulting in downgrades of certain credits in several categories. Our loan and collateral management practices have proven effective in managing losses during previous economic cycles; and this process resulted in setting a new baseline for portfolio metrics going forward, it does not indicate a deterioration in our portfolio's expected performance.
On the basis of management’s review of its loans, leases, and other assets, at September 30, 2022, the Company had classified loans and leases of $203.7 million as substandard, $4.0 million as doubtful and none as loss. At September 30, 2021, the Company classified loans and leases of $264.2 million as substandard, $12.1 million as doubtful and none as loss. Further, at September 30, 2022, the Company owned an insignificant amount of real estate or other assets as a result of foreclosure of loans, as compared to $2.1 million at September 30, 2021.
Allowance for Credit Losses. Effective October 1, 2020, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent related ASUs (collectively “Topic 326”), which measures credit loss for most financial assets, including trade and other receivables, debt securities held to maturity, loans, net investments in leases, purchased financial assets with credit deterioration, and off-balance sheet credit exposures. ASU 2016-13 requires the use of a current expected credit losses ("CECL") methodology to determine the allowance for credit losses ("ACL") for loans and debt securities held to maturity. CECL requires loss estimates for the remaining estimated life of the assets to be measured using historical loss data, adjustments for current conditions, and adjustments for reasonable and supportable forecasts of future economic conditions.
The ACL represents management's estimate of expected credit losses over the life of each financial asset as of the balance sheet date. The Company individually evaluates loans and leases that do not share similar risk characteristics with other financial assets for credit loss, generally this means loans and leases identified as troubled debt restructurings or loans and leases on nonaccrual status. Management has also identified certain structured finance credits for alternative energy projects in which a substantial cash collateral accounts have been established to mitigate credit risk. Due to the nature of the transactions and significant cash collateral positions, these credits are evaluated individually. All other loans and leases are evaluated collectively for credit loss. A reserve for unfunded credit commitments such as letters of credit and binding unfunded loan commitments is recorded in other liabilities on the Consolidated Statements of Financial Condition.
Individually evaluated loans and leases are a key component of the ACL. Generally, the Company measures credit loss on individually evaluated loans based on the fair value of the collateral less estimated selling costs, as the Company considers these financial assets to be collateral dependent. If an individually evaluated loan or lease is not collateral dependent, credit loss is measured at the present value of expected future cash flows discounted at the loan or lease initial effective interest rate.
The following table sets forth an analysis of the Company’s ACL.
At September 30,
(Dollars in thousands)
2022
2021
Balance at beginning of period
$
68,281
$
56,188
Impact of CECL Adoption:
Commercial finance
—
12,713
Consumer finance
—
5,998
Warehouse finance
—
(1)
Community banking
—
(5,937)
Total Impact of CECL Adoption
—
12,773
Charge-offs:
Commercial finance
(25,422)
(19,451)
Consumer finance
(4,787)
(3,324)
Tax services
(30,852)
(34,354)
Community banking
—
(144)
Total charge-offs
(61,061)
(57,273)
Recoveries:
Commercial finance
6,334
5,256
Consumer finance
345
320
Tax services
2,762
1,078
Community banking
424
—
Total recoveries
9,865
6,654
Net (charge-offs) recoveries
(51,196)
(50,619)
Provision for credit losses
28,862
49,939
Balance at end of period
$
45,947
$
68,281
Ratio of net charge-offs during the period to average loans outstanding during the period
1.34
%
1.36
%
Ratio of net charge-offs during the period to average loans outstanding during the period (excluding tax loans and tax net charge-offs)
0.63
%
0.50
%
Ratio of net charge offs during the period to nonperforming assets at year end
165.58
%
81.86
%
Allowance to total loans and leases
1.30
%
1.89
%
Ratio of allowance to total nonaccrual loans
3.44
1.99
For more information on the Provision for Credit Losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in Item 7 of this Annual Report on Form 10-K.
Management closely monitors economic developments and considers these factors when assessing the appropriateness of its ACL. The Company's ACL as a percentage of total loans and leases decreased to 1.30% at September 30, 2022 from 1.89% at September 30, 2021. The decrease in the total loans and leases coverage ratio was primarily driven by the sale of the community bank portfolio, along with a decrease in the coverage ratio for both the commercial and consumer finance portfolios. The decrease in the consumer finance portfolio coverage ratio was attributable to the sale of the student loan portfolio. The Company expects to continue to diligently monitor the ACL and adjust as necessary in future periods to maintain an appropriate and supportable level.
Management believes that, based on a detailed review of the loan and lease portfolio, historic loan and lease losses, current economic conditions, the size of the loan and lease portfolio and other factors, the level of the ACL at September 30, 2022 reflected an appropriate allowance against expected credit losses from the lending portfolio. Although the Company maintains its ACL at a level it considers to be appropriate, investors and others are cautioned that there can be no assurance that future losses will not exceed estimated amounts, or that additional provisions for loan and lease losses will not be required in future periods.
Investment Activities
General
The investment policy of the Company generally is to invest funds among various categories of investments and maturities based upon the Company’s need for liquidity, to achieve the proper balance between its desire to minimize risk and maximize yield, to provide collateral for borrowings and to fulfill the Company’s asset/liability management policies. The Company’s investment and MBS portfolios are managed in accordance with a written investment policy adopted by the Board of Directors, which is implemented by members of the Company’s Asset/Liability Committee. The Company closely monitors balances in these accounts and maintains a portfolio of highly liquid assets to fund potential deposit outflows or other liquidity needs. To date, the Company has not experienced any significant outflows related to the BaaS business line deposits, though no assurance can be given that this will continue to be the case.
As of September 30, 2022, investment securities and MBS with fair values of approximately $924.2 million and $804.0 million were pledged as collateral for the Bank’s Federal Reserve Bank (“FRB”) advances and Federal Home Loan Bank of Des Moines (“FHLB”) advances, respectively. For additional information regarding the Company’s collateralization of borrowings, see Note 11 to the “Notes to Consolidated Financial Statements,” which is included in Part II, Item 8 “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Investments
It is the Company’s general policy to purchase investment securities which are U.S. Government-related securities, U.S. Government-related agency and instrumentality securities, U.S. Government-related agency or instrumentality collateralized securities, state and local government obligations and overnight federal funds.
As of September 30, 2022, the Company had total investment securities, excluding MBS, with an amortized cost of $623.4 million compared to $891.6 million as of September 30, 2021. At September 30, 2022, $491.1 million, or 86%, of the Company’s investment securities were pledged to secure various obligations of the Company. Many of the Company’s municipal holdings are able to be pledged at both the FRB and the FHLB.
The following table sets forth the carrying value of the Company’s investment securities portfolio, excluding MBS, at the dates indicated.
At September 30,
(Dollars in thousands)
2022
2021
Investment Securities Available for Sale ("AFS")
Corporate securities
$
22,187
$
25,000
Asset-backed securities
147,790
394,859
SBA securities
97,768
157,209
Obligations of states and political subdivisions
2,344
2,507
Non-bank qualified obligations of states and political subdivisions
263,783
268,295
Subtotal debt securities AFS
533,872
847,870
Common equities and mutual funds(1)
—
12,668
Investment Securities Held to Maturity ("HTM")
Non-bank qualified obligations of states and political subdivisions(2)
39,093
52,944
Subtotal debt securities HTM
39,093
52,944
FRB and FHLB stock
28,812
28,400
Total investment securities and FRB and FHLB stock
$
601,777
$
929,214
Other Interest-Earning Assets
Interest bearing deposits in other financial institutions and federal funds sold(3)
$
295,752
$
184,729
(1) Equity securities at fair value are included within other assets on the consolidated statements of financial condition at September 30, 2022 and 2021.
(2) Includes no taxable obligations of states and political subdivisions.
(3) From time to time, the Company maintains balances in excess of insured limits at various financial institutions, including the FHLB, the FRB, and other private institutions. At September 30, 2022, the Company had $9.1 million and $295.8 million in interest bearing deposits held at the FHLB and FRB, respectively. At September 30, 2021, the Company had $8.7 million and $184.7 million in interest bearing deposits held at the FHLB and FRB, respectively.
Debt Securities
The composition and maturities of the Company’s available for sale ("AFS") and held to maturity ("HTM") investment debt securities portfolios at September 30, 2022, excluding equity securities and mutual funds, FHLB stock and MBS, are indicated in the following table. The actual maturity of certain municipal housing related securities is typically less than its stated contractual maturity due to scheduled principal payments and prepayments of the underlying mortgages.
At September 30, 2022
1 Year or Less
After 1 Year Through 5 Years
After 5 Years Through 10 Years
After 10 Years
Total Investment Securities
(Dollars in thousands)
Carrying Value
Carrying Value
Carrying Value
Carrying Value
Amortized Cost
Fair Value
Available for Sale
Corporate securities
$
—
$
—
$
22,187
$
—
$
25,000
$
22,187
Asset-backed securities
—
—
—
147,790
160,806
147,790
SBA securities
8
3,602
55,380
38,778
105,238
97,768
Obligations of states and political subdivisions
—
1,954
390
—
2,469
2,344
Non-bank qualified obligations of states and political subdivisions
Download