BM Technologies, Inc. (AMEX:BMTX) Q3 2022 Earnings Call Transcript

BM Technologies, Inc. (AMEX:BMTX) Q3 2022 Earnings Call Transcript November 15, 2022

BM Technologies, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $0.31.

Operator: Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the BM Technologies Incorporated Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. I would now like to turn the conference over to Bob Ramsey, CFO. Please go ahead.

Bob Ramsey: Thank you, operator and good morning everyone. And thank you for enjoying us for BM Technologies third quarter earnings call. Our earnings release and investor presentation were filed this morning and both are posted on the Investor Relations page of the company’s website at ir.bmtxinc.com. Our investor presentation includes important details that we will be walking through on this morning’s webcast, and I encourage everyone to pull up a copy. Before we begin, we would like to remind you that some of the statements we make today may be considered forward-looking. These forward-looking statements are subject to a number of risks and uncertainties that may cause actual performance results to differ materially from what is currently anticipated.

Please note that these forward-looking statements speak only as of the date of this presentation and we undertake no obligation to update these forward-looking statements in light of new information or future events, except to the extent required by applicable securities laws. Please refer to our SEC filings, including our Form 10-K and 10-Q, for a more detailed description of the risk factors that may affect our results. Copies may be obtained from the SEC or by visiting the Investor Relations section of our website. At this time it is my pleasure to turn the call over to Luvleen Sidhu, BM Technologies Chair and CEO.

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Luvleen Sidhu: Thank you, Bob. Good morning, everyone. And thank you so much for joining BM Technologies third quarter earnings call. To begin, we are excited to report to you solid year-to-date results. We will discuss in more detail both year-to-date and third quarter results in a few minutes. This year, despite the challenging environment, we generated revenue of $67.9 million, net income of $3.4 million, and core EBITDA of $16.4 million in the first nine months of 2022. As I just stated, both Bob and I will later provide more details on financials, but for a brief moment, I want to take a step back and provide some business highlights, which we will provide more details on during the call. First, we continue to strengthen our banking-as-a-service business with our recent announced collaboration with Helix by Q2, which creates the most comprehensive banking-as-a-service solution available on the market today.

We also continue to invest in development work to provide technology and program management to a significant new banking-as-a-service partner with trends of millions of US customers, which is expected to launch in 2023. Second, we are also actively working towards a definitive agreement with a new partner bank at economics, which will be better for us in this environment with improved variable rate pricing. This new sponsor bank will eventually replace our existing relationship with customers bank. To allow sufficient time to finalize the agreement and transfer the deposits, we have also entered into a short-term extension of our deposit servicing agreement with our current partner bank. Let me remind you that bank partnerships will facilitate an off balance sheet strategy for our deposits even in the future as part of a chartered institution.

We also continue to push forward our merger with First Sound Bank and are working on resubmitting our merger application in order to respond to questions posed by regulators with a goal of now closing in 2023. Other business highlights include average service deposits totaling $1.6 billion in the third quarter, which included $1.1 billion in average banking-as-a-service service deposits. Our debit card spend was $0.7 billion in the third quarter and $2.2 billion in the nine months ended September 30th. Our revenue per 90-day active account was approximately $46 in the third quarter and approximately $150 year-to-date as of September 30th. Additionally, we are excited to share that we open approximately 175,000 new accounts in the third quarter, and approximately 390,000 in the first nine months of the year.

In our higher education business, new account signups improved 11% year-over-year. I will now deep dive into the financials on slide five. Total operating revenues for the three and nine months ended September 30th totaled $19.9 million and $67.9 million, respectively. Core EBITDA for the third quarter totaled $1.5 million and core EBITDA for the nine months ended September 30th totaled $16.4 million. Net income for the nine months ended September 30th totaled $3.4 million and core earnings for the nine months ended September 30th totaled $5 million. We are proud to report these solid results despite the difficult macro environment where we face unprecedented times with rapidly rising interest rates, inflationary pressures and market volatility.

Revenue and EBITDA were negatively impacted this quarter as we were no longer benefiting from the tailwinds of stimulus, which affected customer spend and our decision not to chase rate to keep balances. Instead, we focused on building deposit franchise value by keeping core deposits and letting highly rate sensitive deposits run off. We have now begun to balance our desire to minimize rate sensitive deposits with offering a more competitive market rate for T-Mobile Money deposits, even though it reduces our deposit servicing fees in the short-term. However, it has helped stabilize these balances. Moreover, we continue to believe we will benefit immensely in the long-term from having a bank charter, which will provide more flexibility in pricing deposits and the ability to earn more on these deposits with a high quality asset generation strategy.

In 2023, we are committed to combining with a bank and improving our revenues. Let’s move to slide six where we deep dive in deposit and spend metrics. Average service deposits totaled $1.6 billion in Q3, 2022, which included $1.1 billion in average banking-as-a-service service deposit. Total ending deposits totaled $1.57 billion with approximately $600 million of this coming from the higher education vertical. I would like to highlight that the higher education vertical deposits are essentially non-interest bearing deposits with a deposit beta close to 0%, which is extremely attractive in the current rate environment. Moving onto debit card spend. Debit card spend was $683 million in the third quarter and $2.2 billion year-to-date. Student business spend specifically was $524 million in the third quarter and $1.7 billion year-to-date, and banking-as-a-service business spend was $158 million in the third quarter and $469 million year-to-date.

I would now like to share some of our compelling metrics in our higher education vertical. We disperse $3.4 billion in financial aid in the third quarter — in financial aid refunds in the third quarter and $10.3 billion year-to-date. $1.2 billion of these disbursements were deposited into a BankMobile Vibe checking account held at our partner bank based on the student’s choice to do so. In addition to this, students made organic deposits into these accounts. These are deposits over and above any refund disbursement coming into the account. Organic deposits totaled $1.3 billion year-to-date indicating primary banking behavior. Additionally, we saw increased account signups with an 11% increase in checking account signups year-over-year, and a 6% increase in saving account signups year-over-year.

As you can see, we celebrate many business wins despite the challenging times. I would now like to pass it on to Bob Ramsey to walk through our per account metrics on slide seven.

Bob Ramsey: Thank you, Luvleen. Turning to slide seven. Our revenue per account in the third quarter was approximately $46. Year-to-date, our revenue per account is $149 and totals up $200 on an annualized basis looking over the trailing 12 months. In the current quarter, we were slightly than the year ago period, which reflects the trends and spend and deposits balances and interest, which Luvleen discussed. This slide also demonstrates our deposits per account and spend per account metrics. Overall, we have seen some growth in deposit balances per account on a year-over-year basis. Although, in our BaaS vertical, the decision not to chase rate, but rather focus on franchise value can be seen in the declines from the mid-year peak.

Spend per account is slightly lower on a year-over-year basis, which does reflect the absence of any stimulus in the current period. Turning to slide eight. You can see that debit spend in the first nine months of 2022 was lower than the first nine months of 2021. As a reminder, there was a significant amount of stimulus in early 2021 with a tailwind as the stimulus dollars continue to be spent through the remainder of the year. Our average deposits, again, are very slightly lower year-over-year with more pronounced declines from the BaaS business, which we’ve already discussed. You can also see here are total higher ed disbursements, which exceeded $10 billion in the year-to-date period. Moving to slide nine. I won’t talk you through the details on this slide, but it does show a five-quarter view of our EBITDA and revenue breakout by financial statement line item.

Our largest revenue items are deposit servicing fees and card revenue. Looking forward, we’re excited about our ability to grow these revenues, particularly the deposit servicing fees by increasing how we monetize deposits through both the combination with a bank and establishing a new bank partner with stronger variable rate pricing. With that, I will turn it back over to Luvleen to discuss slide 10 and business highlights.

Luvleen Sidhu: Thank you, Bob. On slide 10, I would now like to provide you with a few key accomplishments and highlights for the third quarter in greater detail. First, as I mentioned before, we are working towards a definitive agreement with a new partner bank with better economics given the rising rate environment and new variable rate pricing. To allow sufficient time to finalize the agreement and transferred the deposits, we have entered a short-term extension of our deposit servicing agreement with our current partner bank. The extension continues existing terms with the exception of the partner bank’s obligation to pay us the difference between Durbin regulated and Durbin exempt interchange income. The new partner bank will be Durbin Exempt.

Second, we continue to strengthen our positioning as a top tier banking-as-a-service provider. We recently announced a collaboration with Helix by Q2 Holdings to provide embedded banking solutions for consumer brands by combining BMTX award-winning app development services, technology and program management with Helix’s embedded finance platform, network of partner banks and strong banking-as-a-service pipeline given its large global sales team. Together, we provide the most comprehensive banking-as-a-service solution available on the market today, increasing our pipeline and new business opportunities, and most importantly, serving our partners even better. We also continue development work to provide technology and program management to our new banking-as-a-service partner announced last quarter.

The expected launch of this partner in 2023 will expand BMTX has reach to millions of new customers. Our T-Mobile relationship also continues to expand. This year, we have expanded the product roadmap to include savings accounts, the MasterCard true name feature, a new P2P feature and expanded the T-Mobile Money Perks offering to metro customers just to name a few. Lastly, we continue to invest in improvements to our banking-as-a-service platform to shorten time to market and decrease development expense as we scale the business. Third, we are making good progress in our higher education business. As I mentioned before, this is a very attractive portfolio of about $600 million in nearly non-interest bearing deposits, which is highly valuable in this rate environment.

We also saw an 11% increase in account signups compared to this time last year. We have had $1.2 billion in refund disbursements flow into our accounts year-to-date, and an additional $1.3 billion in organic deposits indicating primary banking behavior. We also saw an 11% year-over-year increase in average deposits per account, which is now over $1,800. Lastly, we added 10 new school relationships in 2022, providing about 55,000 additional students access to BankMobile disbursements. Fourth, we continue to push forward our merger with First Sound Bank, and we are working, as we mentioned before, on resubmitting our merger application in order to respond to questions posed by regulators as part of this process, with a goal of a closing in 2023.

We remain committed to combining with a bank in 2023 to expand our revenue opportunities. Slide 11 and 12, I will skip through as I have talked through these before. These slides highlight our tremendous growth opportunities and our vision to continue expanding our digital banking platform to include a full suite of digital banking products and services in the future. Moving to slide 13. I would like to end by summarizing our key investment highlights. We continue to be committed to becoming a true FinTech bank and combining with a charter in 2023, which will increase our revenue opportunities among other benefits. Second, we continue to demonstrate scale and profitability with $1.6 billion in deposits with approximately a third of these deposits nearly non-interest bearing.

Additionally, we have a portfolio with year-to-date spend of $2.2 billion, and overall our business is EBITDA and net income positive. Third, we have a strong banking-as-a-service business demonstrated by our new collaboration with Helix, our continued expansion with T-Mobile and our new banking-as-a-service partner. Fourth, we continue to demonstrate growth in new account signups with approximately 475,000 new accounts open in the trailing 12 months. Fifth, we have strong existing relationships, including partnerships with over 750 university campuses across the country, touching approximately one in every three college students. Sixth, we demonstrate deep customer engagement with a stable revenue per account — per active account, despite the economic environment.

Annual trailing 12 months revenue per account is $200. And lastly, we have developed proprietary robust technology that is API driven and is ready to rollout quickly and integrate with partners easily. We are building BM Technologies for the longer term and are excited about our future as we continue to expand our existing business and work on building new business opportunities with the bank charter. With that, I would like to close my prepared remarks. I want to thank our investors and shareholders for their continued support as well as our BMTX team members whose hard work and passion continue to propel us forward. Operator, we would now like to open the line for questions. Thank you.

Q&A Session

Operator: Our first question will come from the line of Mike Grondhahl with Northland Securities. Please go ahead.

Mike Grondhahl: Hey, guys. Thanks.

Bob Ramsey: Good morning, Mike.

Mike Grondhahl: I’m just trying to understand the deposits a little bit better. Can you give us any insight, one, into the deposit rate with this new partner you’re in negotiations with, and two, the short-term extension that you got from customers bank? What will that rate be in January? And then maybe third related to deposits. It seems like you’re letting some of the higher cost deposits roll off. Do you guys see deposit balances overall growing over the next few quarters?

Bob Ramsey: So, maybe I’ll take a first stab at that and Luvleen feel free to chime in and yes, a bunch of questions, Mike, I’ll try and roll through it and if I miss anything let me know. Yes. As indicated, we are working towards a definitive agreement with a new partner bank that would include better variable rate pricing for us as compared to the current fixed rate servicing fee agreement that we have, that the current agreement was due to expire at the end of this year. But in order to facilitate the transition to the new bank partner, we did agree to a short-term extension with the current partner bank, really with the majority of terms unchanged. So, the existing fixed rate nature is being rolled forward. This is a short-term extension and our goal here is to get longer term to the better pricing that we are negotiating with this partner.

We can’t give too much detail until we execute a definitive agreement, because it wouldn’t be appropriate before finalized to talk pricing. And we may still be limited from a competitive basis and based on the partner’s needs on how much we can say. But what I would tell you is that the deposit pricing that we are negotiating right now is variable floating rate pricing. It is indexed to Fed funds and would be materially higher than the current fixed rate arrangement that we have.

Mike Grondhahl: Got it. And then, you can’t say anything what — on a net basis, what the rate is with cubby in that short-term? I know you guys have said the Durbin reg rate versus Durbin exemption. I guess, can you just apply numbers to those?

Bob Ramsey: Yeah. So, I think we have said in the past that the customers servicing to your arrangement was fixed rate with a base rate of approximately 3%. And then, we do have to pay interest out of that. So, as our interest rate has increased on customer deposits, that does reduce the servicing fee. I think you can look at our servicing fee divided by average deposits, and you’ve got a good sense of, hey, what that net amount is and what the trajectory there is. But that’s the right way to think about the servicing fee arrangement that we have with customers bank, which is why when we are paying a little bit more on deposits, we do see that fee narrow because there is, we are paying more, but we’re not earning more. And that is why once we are able to transition to a variable rate servicing agreement, we’re able to pass through those market rate increases as we — I guess, maybe pass through isn’t the right word, but we’re able to earn more to offset the rising costs of interest as interest rates rise.