Q3 2022 Bm Technologies Inc Earnings Call
[music].
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 B M technologies incorporated third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a.
A question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question Press Star One again I would now like to turn the conference over to Bob Ramsey CFO . Please go ahead.
Thank you operator, and good morning, everyone and thank you for joining us for <unk> technologies third quarter earnings call. Our earnings release and Investor presentation was filed this morning, and both are posted on the Investor Relations page of the <unk>.
<unk> web site at IR Dot DMT <unk>.
C Dot 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 at.
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's my pleasure to turn the call over to love leans to do beyond technology.
<unk> chairman and CEO .
Thank you Bob.
Everyone and thank you so much for joining the <unk> technology 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 <unk>.
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 for a brief moment I wanted 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 recently announced collaboration with helix by Q2, which creates the most comprehensive banking as a service solution available on the market today.
We also continued to invest in development work to provide technology and program management to a significant new banking as a service partner, which tens of millions of U S customers, which is expected to launch in 2023.
Second we are also actively working towards a definitive agreement with a new partner bank and 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 deposit 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 partnership 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 firsthand 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 <unk> 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 opened approximately 175000, new accounts in the third quarter and approximately 390000 in the first nine months of the year.
And our higher education business, new account sign ups 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.
<unk> 4 million.
Net income through the nine months ended September 30th totaled $3 4 million in 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 faced unprecedented time 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 tailwind 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 deposit 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 rates 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 improve.
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 deposits.
Total ending deposits.
One $5 7 billion with approximately $600 million of this coming from the higher education vertical.
I'd like to highlight that the higher education vertical deposits are essentially non interest bearing deposits with a deposit beta of close to zero percent, which is extremely attractive in the current rate environment.
Moving onto debit card spend.
What card spend was $683 million in the third quarter and $2 $2 billion year to date.
Student business spend specifically it 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 and our higher education vertical.
We disbursed three $4 billion in financial aid and the third quarter.
In financial aid refunds in the third quarter and $10 $3 billion year to date.
One 2 billion of these disbursements were deposited into a bank mobile vibe checking account held at our partner Bank based on the student's choice to do so.
In addition to the students made organic deposits into these accounts.
He is our deposits over and above any refund disbursements coming into the account.
Organic deposits totaled $1 $3 billion year to date, indicating primary banking behavior.
Additionally, we saw increased account sign ups with an 11% increase in checking account sign ups year over year, and a 6% increase in saving account sign ups 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.
Thank you Leslie.
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 $200 on an annualized basis looking over the trailing 12 months and.
In the current quarter, we were slightly lower than the year ago period, which reflects the trends in spend in deposit balances and interest which loveline discuss.
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 balanced vertical the decision not to chase rate rather focus on franchise value can be seen.
And the declines from the mid year peak.
Spend per account is slightly lower on a year over year basis, which dose reflects the absence of any stimulus in the current period.
Oh.
Turning to slide eight.
You can see the 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 continued 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 bass business, which we've already discussed.
You can also see here, our total higher rate disbursements, which exceeded.
$10 billion.
Year to date period.
Yes.
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 item.
Items, our 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 a combination with a bank and establishing a new bank partner with stronger variable rate pricing.
With that I will turn it back over to love lean to discuss slide 10 and business highlights.
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 transfer the deposit we have entered a short term extension of our deposit servicing agreement with our current partner Bank.
Tension continues existing terms with the exception of the partner banks the obligation to pay us the difference between Durbin regulated in Germany 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 Michael.
Binding BMT acts as our award winning App development services Technology and program management with Helix is 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 of 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.
Spectra logic with partner in 2023 will expand <unk> 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 account. The Mastercard To-name feature a new P to P feature and expanded the T mobile money perks offerings in Metro customers just to name a few.
Lastly, we continue to invest in improvements to our banking as a service platforms to shorten time to market and decreased 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 sign ups compared to this time last year we.
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 $200.
Lastly, we added 10, new school relationships in 2022, providing about 55000 additional students access to bank mobile disbursement.
Fourth we continue to push forward our merger with first 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 closing in 2023.
We remain committed to combining with a bank in 2023 to expand our revenue opportunity.
Slide 11, and 12 I will skip through as I had 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.
Continue to be committed to becoming a true fintech bank and combining with the charter in 2023, which will increase our revenue opportunities among other benefits.
We continued to demonstrate scale and profitability with one 6 billion in deposits with approximately a third of these deposits nearly noninterest bearing. Additionally, we have a portfolio with year to date spend of $2 $2 billion and overall, our business 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 continued to demonstrate growth in new account sign ups with approximately 475000, new accounts opened in the trailing 12 months.
We had 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 our 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 roll out quickly and integrate with partners easily.
We're building beyond 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 a bank charter would 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 <unk> 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.
At this time I would like to remind everyone to ask a question simply press star one on your telephone keypad. Our first question will come from the line of Mike Grondahl with Northland Securities. Please go ahead.
Hey, guys. Thanks, I, just want to understand the deposits a little bit better.
Can you give us any insight into.
The deposit rate with this new partner you youre in negotiations with them in two.
The short term extension.
That you got from.
Customers Bank, what was that rate be in January .
And then maybe third related to deposits.
Okay.
It seems like you're you're.
Letting some of the higher cost deposits roll off.
See deposit balances overall growing over the next few quarters.
So maybe I'll take a first stab at that and lovely and feel free to chime in and yes. Some bumps questions, Mike I'll try and roll through it and if I Miss anything let me know.
Yes, as <unk> 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 the current agreement was due to expire at the end of this year.
But in order to facilitate the transition to the new Bank partners we.
We did agree to a short term extension.
With our 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 executed it.
Many of the agreement because it wouldn't be appropriate before finalize the tau pricing and we may still be limited.
On a competitive basis based on the partners needs on how much we can say, but what I would tell you because of the deposit pricing that we are negotiating right. Now is variable floating re pricing is indexed to fed funds and would be materially higher than the current fixed rate arrangement that we have.
Okay.
Got it got it and then you can't say anything what.
On a net basis, what the rate is with <unk>.
In the short term.
I know you guys have said the durbin.
Greg Great versus Durbin exemption I get I guess can you just applied numbers to those.
Yeah.
Yes, So I think we have said in the past with the customers servicing fee 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 thats 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.
There is we are paying more but we're not earning more and that is why once we were 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 it isn't the right word, but we're able to earn more to offset the rising cost of interest as interest rates rise. The other thing that I always like to point.
And I just want to highlight.
This is really a feature or a.
Pressure point in a way that the bass product has been structured into the higher Ed business that $600 million. We have in deposits are almost no cost we have not had to have any increases in pricing and that core deposit base. We actually the last rate adjustment we had in that product was in early <unk>.
'twenty, one we moved rates down not off without any sort of negative impact on balances. So the higher Ed space. It's a very high quality low cost core deposit base, which we think is very valuable and no pressure there and all the benefit of rising rates would flow through to us there once we have.
Variable rate servicing agreement.
And then the balanced product, we would expect to sort of offset the increases in costs with increases in revenue once we have a new bank partner.
Got it got it and then just lastly, do you expect deposit balances overall to grow the next couple of quarters.
Yeah.
Yeah. So.
Mike I think we're not going to provide guidance on a lot of that is going to have to do with what happens with market rate increases and as lovely and said, we really have taken the approach of trying to balance as we look forward to maintain.
Maintaining balances with not chasing rate, we do want to have low cost core deposits and thats, what we do want to grow.
And whether we find rates move up rapidly in the market and we decided not to chase that and there could be some runoff it's possible, but overall I think.
The student business.
We are looking to continue to grow that business and we haven't seen the rate driven pressures on the bounce space, it's really going to depend on market conditions.
Fair enough. Thank you.
Your next question will come from the line of Brian Dobson with Chardan capital markets. Please go ahead.
Good morning, Brian .
Hi, good morning.
So could you just speak a little bit about your decision process for not changing rates I'm, sorry, not chasing rates in the quarter.
And and how that would affect I guess, specifically how that would have impacted the P&L and how your new banking partner relationship might alleviate pressure there moving forward.
Yes, so I'll speak to that so and then locally and again feel free to chime in but we've looked at this product. It was structured originally in a different rate environment with a rate that was well call it reasonably competitive and as market interest rates moved.
We found is that there were a lot of other competitors out there that we're paying more in some cases materially more and we've started to see some of our depositors that were more rate sensitive move balances now.
We believe that the value is created in banking with a low cost core deposit franchise. So whether we are a bank whether we are a partner bank, whether we're brokering those deposits out to banks.
That's where they are going to be most valuable as if we have low cost deposits and so initially our view was hey, we have some more rate sensitive balances, they're moving away and we're willing to stomach that we don't think that really changes our franchise value.
Fact, having a higher percentage of core deposits is probably a good thing and so we'll let that happen.
We did though as we continue to see deposit balances run down decided at some point Hey, we don't want to be too far away from from the market and where we need to be we do want to balance.
Right with balances and sort of find some sort of balance in there and so we did make the determination to increase the rate on that bounce products not in the higher Ed space, but on the <unk> product and we initially moved to the right.
By 50 basis points in July and we did move the rate again by another 75 basis points in October . So we have had those rate increases that does affect our revenues because as I say the cost of interest as part of the servicing fee calculation. So that reduces what we earn on those deposits and then obviously.
We're balances means you're earning on a lower base. So you sort of have both a volume and a rate impact from the movements in rates and balances.
And then I think you did ask a longer term how do we get to pass that through or how do we benefit again, if we had today at a variable rate servicing agreement, where the yield that we were earning on deposits was moving up with fed funds than if we are able to move deposit pricing up at the <unk>.
Same time, there would be no impact if we're able to lag deposit pricing increases, which is what I think you find as typical in the industry you actually could see some temporary widening of the spread.
Although over time, it would probably catch back up but you would be able to pass through.
The.
More on deposits to offset that increase in rate and that is ultimately the goal and.
Longer term I know, we've talked about this quite a bit but the goal is hey variable rate pricing agreement is going to help us in the near term offset these rising deposit costs. So we will give us an immediate benefit longer term as part of a bank. We see further upside because then we're able to earn more on the asset side.
The loan side of the balance sheet as well. So I think they are probably our two steps to this one is sort of getting away from the squeeze in sort of normalizing some spread just on the deposits and then longer term by layering in loans you should see some additional pickup in earnings.
Excellent thanks for the color and so your new banking as a service.
Partner.
It's a very exciting prospect to be announced yet next year do you have.
Any more color on maybe when we could expect that is that going to be a first half event or in back half.
Okay.
Yes, so the expectation is that it will be in the first half.
So that's what we're working towards but we will let you know as soon as we've got something more definitive to say.
Excellent. Thank you very much.
Yes.
Your next question will come from the line of Chris Sakai with singular research. Please go ahead.
Good morning, Chris.
Good morning.
To go along.
The last question.
So can you provide any color as far as.
What sort of revenue opportunity.
Large banking as a service client will bring in the first half of 2023.
Yes.
Yeah, So again, we haven't.
Made public sorry, the full economics and I think once we've got the product in market. We can talk it's still not at a very detailed level, we could talk more about it but this is a bass partner that we expect to monetize the relationship both through.
Tech and <unk>.
<unk> related technology fees for the technologies services and development that we provide and also be able to look at some level of monetization off of the account. So it's.
That's probably at a very high level way the way to think about this.
Okay. Thanks.
And then.
The recently announced.
Collaboration with helix.
Can you can you provide any color there as far as.
What will that bring.
<unk> technologies as far as revenue growth.
Yeah, I'll start on that one and if I'm willing to get good.
Yes, yes.
Really excited about this partnership.
We obviously view ourselves as a top tier banking as a service provider and we often come head to head with helix by Q2 is as.
Really solid partner in these processes and so just firstly consolidating and partnering with with with you or you can say biggest competition.
Is it really refreshing way an approach that we've taken because we truly believe which is your question that we are stronger together than we are apart.
And that is not just in service, if our own sort of motivations and business model, but also to serve our partners and banking as a service clients better and why is that is because.
We are very good at technology, providing upfront and user interface like a white label App, we have banking experience. So we have all of the operations or the program management banking operations fraud managed services compliance BSA AML customer service et cetera.
And helix has really great technology on the backend.
It really enables.
<unk>.
<unk> product, it's a function on the backend and a very modern way.
Probably one of the most modern platforms.
That are available in the market today and they also being a very large corporation with thousands of employees.
$1 billion valuation they are very large they have a very large sales force and so being able to leverage and benefit from their relationships that are garnered through their sales force helped build a healthy pipeline for us to both partner on and win together. So overall we're.
Stronger together than we are apart because of the combination of our technology program management.
And then also being able to benefit from the strong pipeline and increasing business development opportunities.
Helpful.
Yes, let's hope.
Can you mention any color on what type of pipeline that will bring.
Yeah, No no specific for US this is a very.
A process that we like to keep.
Sort of behind closed doors, but we've been very open about the industry that we find very very attractive.
From E Commerce.
To consumer brands to grocers.
So a gig economy types of company to money transmitter et cetera, so industry wide.
We're very open to discussing the types of companies, where this sort of embedded finance play it makes a lot of sense, but providing more color on specific names at this time it is difficult to do.
Okay. Thanks for the answers.
Thank you.
Again to ask a question press star one on your telephone keypad. Your next question will come from the line of Bill <unk> with Titan Capital. Please go ahead.
Thank you first of all the student account sign ups being up 11%.
Particularly given there is not a high not a high interest rate account would you talk to us about.
What led to that success.
And what if anything you did different too.
To create that.
Yes sure. Good morning, Thank you for joining.
So our student business you know I think we've been very forthcoming that we've been sort of such a beautiful business and chugged along so well.
We've been sort of slower to kind of make the investment in marketing strategy product development.
And really the most modernized technology stack behind that and this year, we really made a concerted effort to begin.
Really combining and focusing on marketing product and technology to begin the evolution, where this isn't just a <unk>.
Solid solid business on its own but it can really generate growth going forward as well and so some of the things its a slow and steady process that we've done that have helped it sorted that conversion on top of the funnel.
It's really simple things to be on itself.
Optimizing the email journey upfront when we were first introduced to our potential students, helping them understand what we're really there to serve them for how we can help them.
And making sure that the that the subject line than that.
Really basic things and that's why we're really excited that these sorts of very small.
Sort of tweaks are leading to.
Strong.
Outcome, but we also.
Make sure.
That we're making the process as frictionless as possible. So working on when a student comes in and finds out that they actually have money waiting there is a process that they have to go through a flow.
To understand what their choices are to make a choice and we've really been working are product and tech teams and marketing teams at optimizing that experience taking out as much friction as possible.
To help with conversion there. So again small tactics that are making positive benefits, which makes us very hopeful that theres a lot more opportunity here in this portfolio.
It's been lovely taking that one step further you mentioned that you that is something that you have begun.
In terms of that optimizing is there an implication that there is a lot more to go and therefore.
Potentially a meaningful meaningful increases still ahead in student sign ups.
Yes that is what we're aiming for that is our hope so we have that target in place and we're working every day to make sure that that we can continue to grow this business.
Great. Thank you and then relative to.
The first sound.
Refiling talk to us about what the regulators are.
Kind of the issues that they are focused on and how is it re filing will will address that.
Yeah.
You know Bob feel free to chime in I think we have to.
<unk> been very conscious of sharing sort of regulatory sort of.
Feedback and process.
But at a very high level right. This is obviously a $150 million asset bank debt over time, we're creating a 2 billion plus institution and so the regulators questions and focus.
Quite frankly rightly so alright, good deeply deeper dive on understanding the infrastructure.
That includes risk management team policies processes et cetera that would support that growth.
And just taking a deeper dive to make sure that the safety and soundness at growing institution in that regard.
Well setup and so we view this as really part of the normal process.
And we're being very thoughtful about how we want to respond.
And make sure.
That debt.
Where we're really heads down focusing on.
Creating a bank that the regulators feel and know.
Can support that type of growth over time, and we're hopeful that we can get to the finish line in 2023.
And Bill and I'm sure you understand the whole regulatory process is highly confidential and I really don't think it would be appropriate to say any more than that at this point.
Thank you both.
With that I will turn the conference back over to management for any closing remarks.
Well. Thank you everyone for joining this morning, we really appreciate your continued support and I Hope you can tell from our voices in our presentation that we are extremely excited about our future and look forward to seeing you next quarter. Thank you.
Thank you everyone. If there were any follow up questions or people on the webcast feel free to reach out to me and I'll be happy to take any follow ups.
Ladies and gentlemen that will conclude today's call. Thank you all for joining you may now disconnect.
[music].