Earnings Call Transcript - CASH Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Pathward Financial Third Quarter Fiscal Year 2023 Investor Conference Call. During the presentation, all participants will be in a listen-only mode. Following the prepared remarks, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the conference call over to Darby Schoenfeld, Senior Vice President, Head of Investor Relations. Please go ahead.

Darby Schoenfeld, Senior Vice President, Head of Investor Relations

Thank you, operator, and welcome. With me today are Pathward Financial’s CEO, Brett Pharr, and CFO, Glen Herrick, who will discuss our operating and financial results for the third fiscal quarter of 2023, after which we will take your questions. Additional information, including the earnings release, the investor presentation that accompanies our prepared remarks, and supplemental file may be found on our website at pathwardfinancial.com. As a reminder, our comments may include forward-looking statements, including with respect to anticipated results for future periods. Those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to update any forward-looking statement. Please refer to the cautionary language in the earnings release, investor presentation, and the company's filings with the Securities and Exchange Commission, including our most recent filings for additional information covering factors that could cause actual and anticipated results to differ materially from the forward-looking statements. Additionally, today, we will be discussing certain non-GAAP financial measures on this conference call. References to non-GAAP measures are only provided to assist you in understanding the company's results and performance trends. Reconciliations for such non-GAAP measures are included in the appendix of the investor presentation. Now, let me turn the call over to Brett Pharr, our CEO.

Brett Pharr, CEO

Thanks, Darby, and thanks, everyone, for joining us. As we start today, it's not news to anyone that the banking industry as a whole has come through some turbulent times. Last quarter, we talked about how our business model differentiated us, especially in these times. This quarter, I want to share how those differentials translate into our strengths. Just a few examples: The industry has suffered from unstable deposits. We have not. Compression on the net interest margin from rising interest rates throughout the industry. But, even counting the increase in card expenses, we have a growing net interest margin, not a lower one. There are general loan-related concerns, both demand and credit. But we have a collateral-managed portfolio with diverse asset classes built for whatever may come. Importantly, we typically do not engage in commercial real estate purpose lending. During these times, our business model puts us in the envious position of allowing us to be defensive while still having increasing returns. More about some details of this in the next few minutes. But first, the third quarter: Pathward once again produced solid results consistent with our performance so far in fiscal year 2023. Our net income for the quarter was $45.1 million or $1.68 per diluted share. Both were significant increases when compared to the same quarter last year. We accomplished this through growth in both net interest income and non-interest income. Our net interest margin grew to 6.18%, an increase of six basis points from last quarter, and a significant expansion of 142 basis points from the third quarter last year. While six basis points and sequential quarter NIM growth doesn't seem as large as you might expect, remember that last quarter includes the impact of our seasonal tax business, which can temporarily boost the net interest margin. Our adjusted NIM, considering rate-related card processing fees, was 4.88%. We are very pleased with this net interest margin performance and believe the steady trend upward will continue in 2024. Now, I want to turn my attention to the loan side of the business: We have a history of delivering proven solutions to small and medium-sized businesses and helping them meet specific financial goals. We understand the challenges these businesses may face right now in securing the funding they need. How do we do that? We have a set of methods and controls that allow us to serve these clients safely, what I often refer to as collateral-managed. We recently released a video on our LinkedIn page that we think tells the story well from the customer's perspective. Some specific asset highlights this quarter: We had significant growth in our insurance premium finance loans. We had expansion in our term lending and SBA/USDA balances compared to last quarter. We also saw an increase in the number of working capital originations. That's an area we are especially optimistic about in this particular economic climate. I do want to make a comment on renewable energy loans. In recent times, we've had good demand and increased originations, but industry-wide we are experiencing a slowdown in the pipeline as projects become less attractive due to rising interest rates. We expect this to continue into 2024, which will likely lead to lower originations and, therefore, a higher tax rate next year. This is already factored into the guidance we are introducing today. That being said, our various asset classes provide us the diversity built for economic cycles. In order to deliver on our strategic initiatives of optimizing our earning asset portfolio, sometimes we may grow working capital; other times it will be equipment finance; others, and maybe insurance premium finance. It may even mean that if some of our securities mature, we may reinvest those funds in other securities since rates have increased significantly. This kind of optionality helps us meet our strategic goals in various environments. Now a few words about Banking as a Service partnerships and our deposits. If you listened to last quarter's call, you heard how we are different. The partnerships we have formed continue to manage and continue to source are integral to our financial inclusion purpose, but also provide stable deposits and coveted fee income. As the banking industry is experiencing rising deposit costs and/or deposit outflows, this model is less impacted by the environment. We've built long-term relationships with a core group of companies that contribute significantly to our deposits' stability. These partnerships are pivotal to our success, and importantly, we are very careful and diligent in who we decide to work with. This is called smart defense. For example, during the recent expansion of Fintechs, we made sure that those we partnered with had a strong understanding of regulatory requirements and could survive their cash burn phase. We added very limited partners during that time. Notably, we stayed away from concentrating in any one industry, even establishing internal industry-specific limits. This allows us to focus on our current partners, maximize those partnerships, strengthen and deepen the existing relationships, and work together to expand and enhance product offerings. We have added a few new partners recently and launched a few new programs or capabilities in conjunction with them. We launched a new line of credit for consumers with Propel Holdings. We paired with Clair to offer spending and savings accounts and earned wage advances. I'd also like to mention that we announced a new relationship with Finix. We are their banking partner supporting their launch as a payment processor. These new programs and associations may take time to deliver meaningful impact on deposit balances and revenue. This is why our model is built on long-term contracts. We are excited to strengthen our partnership network, and we continue to fulfill our purpose of increasing financial access for more Americans. Because of the partnerships Pathward has formed and nurtured, most of our deposits are held in millions of retail card accounts with an average balance of less than $1,000. We have very few institutional accounts, and those we do have are typically cash collateral tied to loans within our commercial finance group. As a result, our non-interest-bearing deposits on the balance sheet have a weighted average life of over six years based on our decay study. Just a comment on BaaS industry trends: The value of these deposits is significant, and we believe others in the industry are realizing that in the wake of recent events in banking. There are more banks entering the banking as a service space, but as recent news has reflected, they have not always invested in the regulatory framework needed. I believe there will be a bit of a regulatory cycle as these new entrants adjust to third-party demands, the cost of which will eventually be included in pricing. However, at the moment, we are seeing more competition on pricing, and we have continued to work very closely with our partners. This may lead to slightly higher card processing fees in 2024, but we believe we can continue to grow both our GAAP net interest margin and adjusted net interest margin, which includes these costs in 2024. This is also included in the guidance we introduced today. Before I turn things over to Glen, I want to comment on our CFO search. We've made a lot of progress, had some very substantive discussions, and have a strong candidate pipeline. It's our hope to announce something in the coming months. Now, I'll turn it over to Glen to take us through our financial results.

Glen Herrick, CFO

Thank you, Brett. For the quarter ended June 30th, net income totaled $45.1 million or $1.68 per share and increased from $22.4 million or $0.76 per share in the prior year's quarter. Net interest income was $97.5 million for the third quarter of fiscal year 2023, an increase of 35% from the prior year's quarter. This was driven by an expansion in the net interest margin to 6.18% from 4.76%. NIM expansion was driven by a 162 basis point expansion in loan and lease portfolio yields and an 82 basis point expansion in the yield on the securities portfolio. Remember, the bulk of our deposit costs are recorded as card processing expenses. If you include those expenses in our net interest margin calculation, our adjusted NIM would have been 4.88% compared to 4.89% last quarter and 4.62% in the third quarter of last year. Also, keep in mind that the revenue we are earning on our off-balance sheet deposits is not shown in the NIM but in fee income. We expect our net interest margin to continue to expand as we deliver on our strategic initiative of optimizing the interest-earning portfolio and repricing our assets in the current rate environment targeting appropriate yields. Provision expense was $1.8 million in the third quarter. During the prior year's quarter, the business recorded a credit of $1.3 million to provision primarily due to releases in the commercial finance portfolio. As of June 30th, the company had an ACL coverage rate of 2.01% compared to 2.04% at the same time last year. ACL coverage in our commercial finance group was 1.35% compared to 1.56% in the third quarter last year and 1.53% last quarter. The sequential decrease was driven by a mixed shift towards insurance premium finance and SBA loans, which have a lower allowance rate. Non-interest income increased 25% from the prior year quarter to $67.7 million in the third quarter. This increase was primarily driven by $14.6 million of deposit servicing fee income associated with off-balance sheet deposits. Turning to expenses, total non-interest expenses grew 19% or $18 million from the prior year quarter. The increase was primarily driven by $20.5 million of contractual card processing expenses related to the higher rate environment. Total deposits, including on and off-balance sheet, increased $158 million or 2% from the prior year quarter to $7.1 billion. Total deposits decreased from the linked quarter primarily due to a seasonal decrease in tax return-related deposits. During the third quarter, we maintained an average of $1.2 billion of deposits off-balance sheet, earning fee income roughly equal to the effective Fed funds rates. At June 30th, period end, there were $781 million of deposits off-balance sheet. As mentioned last quarter, we serviced deposits related to government stimulus programs that will decline over the fourth quarter and throughout fiscal year 2024. At June 30th, roughly $970 million of these deposits remained. These deposits continue to be slowly spent down while unclaimed balances are being returned to the U.S. Treasury. Between July 2023 and the end of fiscal year 2024, we expect to return close to $450 million of unclaimed deposits. This reduction in our total deposit levels will lower the amount of funds we hold off-balance sheet and service for partner banks. Total loans and leases ended at $4.1 billion as of June 30th, growing 9% from the last quarter and 10% from the prior year. The year-over-year increase was primarily driven by insurance premium finance, term lending, and SBA and USDA loans. Credit quality across the portfolio remains strong. Non-performing loans of 93 basis points were up slightly from 76 basis points in the previous quarter, and our net charge-off rates remain stable. We remain confident in our collateral management and the quality of our loan portfolio. From a liquidity perspective, Pathward continues to be in a good position. Our balance sheet is strong, and the company holds $781 million in deposits off-balance sheet. In addition, we have cash and cash equivalents of $515 million, unpledged investment securities of $124 million, FHLB borrowing capacity of $744 million, and funds available through the Fed discount window of $234 million. When factoring in unsecured funding and other wholesale funding options, this gives us over $3 billion in available liquidity. Our strong balance sheet and return levels allow us to continue to return value to shareholders. During the fiscal 2023 third quarter, we repurchased approximately 490,000 shares at an average price of $43.83. In addition, 249,000 shares of common stock at an average price of $50.23 were purchased in July through July 21, 2023. We are increasing our guidance for fiscal year 2023 to a range of $5.60 and $6 in GAAP earnings per diluted share. We also expect the effective tax rate to be in the range of 10% to 14%. We are also introducing fiscal year 2024 guidance of $6.10 to $6.60 per diluted share. This guidance includes the impacts from declining EIP deposit balances. Additionally, as Brett mentioned, the market is seeing slowing demand for renewable energy fundings, which will impact tax credits, and we expect them to be lower in 2024. Therefore, we expect our annual effective tax rate in fiscal year 2024 will be in the 16% to 20% range. That concludes our prepared remarks. Operator, please open the line for questions.

Operator, Operator

Our first question comes from Frank Schiraldi with Piper Sandler.

Frank Schiraldi, Analyst

Hi, everyone. I wondered if you could talk about, in terms of the 2024 guide, the initial guide here, can you share with us any sort of macro backdrop that assumes including interest rate outlook? If you just sort of follow the forward curve in terms of outlook here, and does it also include the potential for continued capital return through the buyback?

Glen Herrick, CFO

Hi, Frank. This is Glen. I could start. Yes. It does include generally the forward curve. We were anticipating today's action by the Fed as part of that. That obviously factored into our guidance. We talked about we're being a little cautious on investment tax credits and renewable energy lending for next year. So we wanted to call off that component in our guide, as well as the other business conditions and macro events that Brett touched on in his section.

Brett Pharr, CEO

It's about capital and buybacks.

Glen Herrick, CFO

Yes. And our plan, you could assume we continue to try to maintain, or plan to maintain a consistent balance sheet. So with the return levels that we have, we would like to continue buybacks at these price levels.

Frank Schiraldi, Analyst

Okay. And that's factored into guidance, whatever your plans are there on the buyback.

Glen Herrick, CFO

Yes, that's correct.

Frank Schiraldi, Analyst

Okay. And then just touching on a couple of those things, the fewer renewable energy projects in 2024. I guess I understand the higher interest rates and what that does for demand, but I thought that there was this backlog maybe given that there wasn't anything getting done for a while that might sort of offset or overcome that. Is there just more color on just your thoughts, what's driving you guys to decrease your expectations or give these expectations for decreased energy projects and tax credits next year?

Brett Pharr, CEO

Yes, and Frank this is Brett. I mean, what we're seeing is a lot of these deals were funded with a mix of equity and debt, the tax equity components of it. And what's happening is because there are higher rates in the marketplace, they'd have to have a whole lot more tax equity in it. And investor capital is just not coming into it, at least of the size transactions that we generally operate with. So that's why the pipeline has slowed down. And these things, as you can imagine, they have a fairly long pipeline before they actually turn into a project. So we're just looking at our pipeline and having sort of realistic expectations about how much of that is going to happen next year.

Frank Schiraldi, Analyst

Okay. All right, fair enough. And then on the interest rate outlook and the margin, just wondering if you can talk about what sort of things you're doing to protect the margin here from a potential down rate environment. Or, are you at the point now with where the variable loan book is and where the floors are that you can get some additional NIM expansion even in some downward movement in rates if it comes to that next year? Just any color on directionally, if we do get the forward curve and if we do get rates sort of lining up with where the forward curve is now, what are your thoughts on margin?

Brett Pharr, CEO

Yes, so Frank, it’s Brett. One of the things that we like about our business models is we have different asset classes, and those different asset classes have different duration elements to them. You'll note that we've been a little lean on the longer duration assets like equipment leasing, and what I would expect to happen as we go into the year, we'll start trying to figure out how to do more of those because they have a longer life to do it. Keep in mind, only about 25% of our assets repriced in a given year or less. So you've got quite a bit of opportunity to bring on longer-term assets that have a longer duration to help. We were pretty clear we were slow on the way up in getting the margin, and we should be slow on the way down on losing the margin.

Glen Herrick, CFO

No, and then the other thing is, recall Frank, as if and when rates do come down, our card processing expenses that are rate related, those fall off immediately. So there's no lag to those. They reset real time, which certainly gives us a little tailwind as well.

Frank Schiraldi, Analyst

Okay, great. And then just last, if I could, I was just trying to get a handle on loan growth here. I think the linked quarter growth in the commercial finance side was mostly insurance premium finance, which I assume that sort of growth rate isn't sustainable in that piece of the business. And we all hear about the manufacturing slowdown on the macro side. So how is that impacting the commercial finance business? Your expectations are for growth here, particularly in that business going forward.

Brett Pharr, CEO

Yes, I think there's a few things. One is banks are pulling back. We think of that as being an opportunity. So we are seeing a little bit of that. So hopefully, that's why I mentioned, for example, equipment leasing at the right time, we might be able to get into that a little more. I've been saying for some time, the working capital class should pick up as this slowdown goes on. We are not seeing it in the pure numbers yet, but we're starting to see it in opportunities for origination. Because of the diligence involved in them, it can take 90 to 120 days to start showing up as actual assets. I think there's opportunity. The insurance premium finance group did very well this time, and I'm very impressed with what they've done. Although, that kind of growth is not sustainable. We want to, particularly with the yield we're getting, to stay at that level for what is such a low-risk asset class. I think it's more of a steady as it goes approach; we'll be picking the asset classes where we can get the yield and get the business, while certainly thinking about that duration opportunity before rates start going down.

Frank Schiraldi, Analyst

Okay, so it sounds like you still expect growth in the commercial finance business going forward. Is that fair? Probably next year.

Brett Pharr, CEO

I think that's right. I just don't know which asset classes to focus on.

Michael Perito, Analyst

Hey, guys. Good afternoon. Thanks for taking my questions. I had a couple of things I wanted to touch on with you guys. Number one, I appreciate some of this color on some of these new partnerships you guys are launching. I was wondering if you could maybe, and I realize this might be a little hard since there aren't a lot of them yet. But just on the line of credit for consumers with Propel, and just generally on credit agreements or contracts that you guys maybe are starting to consider a bit more than you have historically. Can you give us a sense of how you're trying to structure the credit risk within these? Is there a lot of indemnification built in? Should we expect kind of, as these things ramp up over time, that there'll be some noise in the income statement in terms of maybe like higher yields on the NII but then some indemnification on losses to like expense or fees? Just trying to get a better sense of how you're structuring these and how we should think about them as they ramp, realizing there's some time but just trying to get ahead of it.

Brett Pharr, CEO

Yes, Mike, I appreciate the question. We've been very consistent that we do not want to be exposed to naked consumer credit risk. So, these agreements and any agreements like that that we're going to enter into are going to have appropriate credit enhancements. Those might be of a different variety. Some might be just short-term on a balance sheet and then they get securitized away. Some might be waterfall structures. Some might actually have credit enhancement guarantees that we can rely on. We do this because these consumer credit products are needed by our partners in the marketplace, and they want to have a way to offer it. We don't want to get disintermediated with our other products because we don't have one. That's one of the main reasons we're in it. Now we're very optimistic about, for example, the Propel Holdings partnership and what it's going to do. We do make some economics on it. But as you fully understand, when you give up the credit risk, you also give up the bulk of the economics. It will be an income stream for us, but it won't be huge.

Michael Perito, Analyst

Got it. And then I was also interested to see, you guys mentioned the earned wage advanced space with Clair. It's an interesting space. I've been spending some more time there over the last nine months or so. It seems like there's not a lot of bank market share. I know there's daily pay. There are a couple of guys, non-banks, that have some share. I know Green Dot talked about doing stuff. But can you maybe give us a sense of, is that a sizable opportunity for you guys? Do you think there's room for a bank to kind of take some share and make some money in the EWA space? And I would love some high-level thoughts as we think about you guys growing maybe with other partnerships in that area and that type of magnitude of that opportunity.

Brett Pharr, CEO

This is a new business. I think there are a lot yet to be learned in the industry. How big is it going to be? How well it's going to be received? I think there are certain regulatory questions that are going to be around it. I think employers are going to have some perspective on it. We like Clair as a partner. They're one of the few fintech startups that we engage with, and right now we'll just ride this out with them and understand how well they can grow. Obviously, it turns into a huge industry and huge business. We might take those learnings and apply them with others, but right now these are the things we do. We watch things, we plant seeds, we let them grow for a long time. We’re thinking in five to seven years, not necessarily next year for a lot of these programs and what they're going to produce.

Michael Perito, Analyst

Yes. So it sounds like between some of the current stuff you're doing in the EWA, at this point it's more about protecting your share with critical customers that you have. You're certainly keeping a pulse on how the products perform and how the market evolves. You would be willing to push forward in a larger way with some of those things if you felt the opportunity was worthwhile.

Brett Pharr, CEO

Yes, I think that's right. We're also placing a bet on what we think is a really good partner that has the potential to grow significantly. But it's yet to be seen if that happens.

Michael Perito, Analyst

Yes. Cool. Thanks, Brett. That's good color. And then just on the, maybe a question for Glen, since we only get to test you with these questions for so much longer here. Just on the OpEx side. You've got one more quarter in fiscal '23 here. Obviously, you guys are giving the guide. My guess is you're looking to reasonably hold the efficiency ratio fairly stable, maybe improve it a little bit. But just what's kind of the order of magnitude of things on the list to invest in for next year? Like, what are some key areas where you are allocating dollars? And just generally, how are you thinking about expense growth? As an industry, obviously, there's been a pretty tight lid on it. But as Brett pointed out, you guys are insulated from a lot of these pressures. So there's definitely room to invest. I'm just curious what you might be investing in as we think about next year and what that rate of growth could look like.

Glen Herrick, CFO

So, as you recall, Mike, we really think about operating leverage here and at least over time, we aim to grow our revenues at least two times that of expenses. Now, for certain periods and in some of the spaces we plan, yes, we have to make investments in those. However, I think in this environment, at least as it stands today, you could expect us to maintain expenses fairly tight to where we are now. They will slowly grow as our revenues grow, but not get too far ahead. Many of our expenses are variable in nature. Those will grow consistently with revenue. And then for the rest of our expenses and investments, you can think of technology and risk management, primarily compliance. Just going to add on: staying on top of both of those, a lot of the technology investments are made in the compliance space as more and more attention is focused on banking-as-a-service providers and consumer protection and small business protection. Making sure you have up-to-date compliance systems, we believe, is going to continue to be a competitive advantage and incredibly important.

Michael Perito, Analyst

Yes, I mean, certainly seems that way when you just look at the headlines. So that makes sense. And then just lastly for me, one kind of financial follow-up to Frank's line of questioning, and I apologize if I missed this, but just are you able to give us kind of like a broad indication of the type of provisioning you assume in that 2024 guide? Is it reasonable to assume it's similar year-on-year, plus or minus to 2023 based on kind of the macro and the forward curve? Is that a reasonable assumption without getting too specific round numbers, or is there something that could alter that? Go ahead.

Glen Herrick, CFO

Now, we feel really good about, yes, no thanks, Mike. We feel really good about our credit positioning today. We're looking hard to see if there's something we're missing, but we feel comfortable. I think Brett did a good job explaining we're not taking credit risk in the consumer space. We feel confident in the way we manage our collateral in the commercial finance space. So, yes, roughly similar levels of provisioning as some of that will depend on loan growth with CECL. It'll take a lot of that up front. So, where that lands will depend on how new originations are a little bit year-over-year. But yes, similar provisioning is a good assumption.

David Feaster, Analyst

Hey, good afternoon, everybody. Maybe just kind of following up on that last line of questioning. Obviously, looking at the 2024 guidance, I'm curious from your perspective, your crystal ball is as clear as mine is right now. I appreciate the commentary about assuming the forward curve and some of the thoughts on provisioning and expenses, but I'm just curious what you think is really the key driver of the differences between the achievability of the top end versus the low end of the range. Is it growth? Is it this credit cycle? I'm just curious, what do you see as the biggest drivers between the top end and the low end of that range?

Brett Pharr, CEO

David, there are so many factors, which is the reason we have a wide range. I would say the first thing is yield and margin. Throughout this particular cycle, I think we've been surprised by how thin we had to price loans compared to the way rates had risen. It took a while for yield to really show up. If in fact banks are slowing down in their lending and we're able to do the kind of lending I want to do, which I would say is working capital, we will get the margin and we will be at the higher end of that range. That’s one big thing. I am not worried about credit; if there is ever a time that we are strength for credit it’s in our collateral. We manage everything with secured debt, and I don’t have any particular concerns about that. I did mention the banking as a service partner, which is putting pressure on us. We have long-term contracts, but it’s a function of them bringing new business. Do we have to make some concessions for them to get new business in here that might impact margins as well? Those are my main drivers. Glen, anything you'd add?

Glen Herrick, CFO

Yes, I think you are right. The macro is if we start seeing more normalized loan beta yields, then that will certainly drive us to the top end as well as just where demand for loan volume is and when that picks up. We have certainly been somewhat cautious about how much loan demand there will be in this environment. And so those would be your typical drivers, David. I just want to point out, the income tax credit obviously, we are pretty cautious there, and that's a pretty good chunk of earnings year-over-year. So, to the extent that renewable energy projects pick up the pace again, that could be an opportunity as well.

David Feaster, Analyst

That makes sense. And then I'm just curious, have you seen any impact on your partners from the bank failures at all and just the impact on the venture capital side? And maybe just more broadly, how does the pipeline of partnerships look at this point, and how are negotiations for contracts going today? It sounds like, listening to you, Brett, that maybe the partners are getting a bit more aggressive in terms of pricing power. Is that a fair characterization?

Brett Pharr, CEO

Yes, I think what I was alluding to is there are many more competitors that have jumped into the banking as a service business and they've done some thin pricing. In a lot of cases, they did it with fintech startups and fairly small things. We’ll see what happens there, but some of the bigger partners are seeing some of the thin pricing that's out there, and two, the fact that rates have moved up gives them a greater interest in the deposits we have. All of a sudden, they care about that a lot. I believe those are the things that are putting pressure on it. I mentioned and I believe this; part of this will be a regulatory cycle. You can read all the newspaper articles about what's going on and some of the things that have happened that are even very public. There will likely be a reversion back to the mean in 12 to 18 months, but in the short term, there certainly is some pressure here. We have partners in the pipeline. We have them all the time. We have some running to us because of regulatory issues at other institutions. We try to take advantage of that. One problem for them when they come to us is they get a bit of sticker shock because we don't do it as cheaply as people that did before because they don't have the risk and compliance framework. So there are negotiations that occur. It’s not all doom and gloom; we just want to be sure people understand there is some margin pressure going on in the short term.

David Feaster, Analyst

That makes sense. And then I'm just curious, you've got a unique and interesting perspective. You play in a very broad set of segments across the country. I'm just curious, as you step back and look at some of the trends in consumer behaviors within your fintech partnerships, the demand that you're seeing for credit from the SBA and the commercial finance portfolio, is there anything interesting that you're seeing just in terms of the health of the consumer or the economy more broadly? I'm just curious, as you look at teal leaves, how do you think the health of the economy is and anything interesting you're seeing?

Brett Pharr, CEO

On the consumer side, I would say remember that the bulk of our business is at the lower end of the economy. As one of my consumer credit people once told me, they are always in a recession. There’s no real difference in the transactions; they’re still buying their groceries and going to the drugstore, buying gas, etc. Therefore, we are not really seeing anything particularly concerning around that. The deposits that are coming down are more because of EIP and the runoff of tax deposits than anything else. Conversely, on the commercial finance side, there are industries we serve where they are not borrowing as much because they don't have as much activity going on. Our transportation factoring business is off a bit, and it's not because there’s not available credit to borrow; there is simply less business and a lesser need for it. We're witnessing some of that in specific areas where we see some slowdown. However, I wouldn't categorize it as dramatic or akin to what we saw when COVID first hit. It’s fairly mild.

Operator, Operator

Thank you. That concludes the Pathward Financial Third Quarter Fiscal Year 2023 Investor Conference Call. Thank you.