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spk01: 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. 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 1 again. I would now like to turn the conference over to Bob Ramsey, CFO. Please go ahead.
spk06: Thank you, Operator, and good morning, everyone. And thank you for joining us for BM Technology's 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.emtxinc.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's my pleasure to turn the call over to Lavleen Sadu, BM Technologies Chair and CEO.
spk04: 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. 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 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 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 customer's 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. We are excited to share that we opened 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 rates 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 deposits 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 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 on to 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 disbursed $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 Bank Mobile 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 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 7.
spk06: Thank you, Loveline. 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 lower than the year-ago period, which reflects the trends in spend and deposit balances and interest, which Lavleen 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 BAS 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 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 BAS business, which we've already discussed. You can also see here our 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 breakouts 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 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 Loveleen to discuss slide 10 and business highlights.
spk04: 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 prices. 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. The extension continues existing terms with the exception of the partner bank's obligation to pay us the difference between Durban regulated and Durban exempt interchange income. The new partner bank will be Durban 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 Holding to provide embedded banking solutions for consumer brands by combining BMTX's 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 pipelines, 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's 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 bank mobile 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 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 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 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 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.
spk01: At this time, I'd like to remind everyone to ask a question. Simply press star 1 on your telephone keypad. Our first question will come from the line of Mike Grundle with Northland Securities. Please go ahead.
spk05: Hey, guys. Thanks. 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 um new partner you're you're in negotiations with and into the the short-term extension that you got from um customers bank what will that rate be in january and then maybe third related to deposits it seems like you're you're you know letting some of the higher cost deposits roll off, do you guys see deposit balances overall growing over the next few quarters?
spk06: So maybe I'll take a first stab at that, and, Loveline, feel free to chime in. And you asked 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.
spk05: Got it. And then you can't say anything what, on a net basis, what the rate is with Covey in that short term. I know you guys have said that Durbin is
spk06: reg rate versus urban exemption i guess i guess can you just apply numbers to those yeah so i think we have said in the past that the customers servicing fee arrangement was fixed rate with a base rate of approximately three percent 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 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. The other thing that I always like to point out and just want to highlight, you know, is that this is really a feature or a pressure point in the way that the BAS product has been structured in 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 in that core deposit base. We actually, the last rate adjustment we had in that product was in early 2021, and we moved rates down, not up, 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 a variable rate servicing agreement. And in 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.
spk05: Got it. Got it. And then, hey, just lastly, do you expect deposit balances overall to grow the next couple quarters?
spk06: Yeah. So, you know, Mike, I think we're not going to provide guidance there. A lot of that is going to have to do with what happens with market rate increases. And as Lovleen said, we really have taken the approach of trying to balance as we look forward. know maintaining balances with not chasing rate we do want to have low-cost core deposits and that's what we do want to grow and whether we find rates move up rapidly in the market and we decide not to chase that and there could be some runoff it's possible but overall i think that uh you know in the student business we we are looking to continue to grow that business and we haven't seen the rate driven pressures on the bath space it's really going to depend on market conditions
spk09: Fair enough. Thank you.
spk03: Your next question will come from the line of Brian Dobson with LeChardon Capital Markets.
spk01: Please go ahead.
spk10: Good morning, Brian. Hi. Good morning. So, could you speak a little bit about your decision process for not changing rates – I'm sorry, not chasing rates in the quarter and how that would – I guess specifically how that would have impacted the P&L? and how your new banking partner relationship might alleviate pressure there moving forward?
spk06: Yeah, so I'll speak to that. And then, Loveline, again, feel free to chime in. But, you know, we've looked at this product. It was structured originally in a different rate environment with a rate that was, we'll call it reasonably competitive. And as market interest rates moved, What we found is that there were a lot of other competitors out there that were paying more, in some cases materially more, and we started to see some of our depositors that wore more rate-sensitive move balances. Now, we believe that value is created in banking with a low-cost core deposit franchise. So whether we are a bank, whether we have a partner bank, whether we're brokering those deposits out to banks, that's where they are going to be most valuable is 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. In 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, decide at some point, hey, we don't want to be too far away from the market and where we need to be. We do want to balance rate 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 BAS product, not in the higher ed space, but on the BAS product. And we initially moved the rate 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 is part of the servicing fee calculation. So that reduces what we earn on those deposits. And then obviously the lower balances means you're earning on a lower base. So you sort of have both a volume and a rate impact from the movements and rates and balances. And then I think he did ask you, hey, longer term, how do we get to pass that through or how do we benefit? Again, if we had today a variable rate servicing agreement where the yield that we were earning on deposits was moving up with Fed funds, then if we are able to move deposit pricing up at the same time, there would be no impact. If we're able to lag deposit pricing increases, which is what I think you find is 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, you know, earn more on deposits to offset that increase in rate. And that is ultimately the goal. And, you know, longer term, I know we've talked about this, you know, 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 and 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 there probably are two steps to this. One is sort of getting away from the squeeze and 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.
spk09: Yeah, excellent. Thanks for that, Collin. And so your new banking as a service,
spk10: partner that's a very exciting prospect to be announced 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 a back half event?
spk06: Yes. So the expectation is that it will be in the first half. So that's what we are working towards. But we will let you know as soon as we've got something more definitive to say.
spk09: Excellent. Thank you very much.
spk01: The next question will come from the line of Chris Sakai with Singular Research. Please go ahead.
spk07: Good morning, Chris. Good morning. To go along the last question, so can you provide any color as far as, you know, what sort of revenue opportunities this new, large banking as a service client will bring in the first half of 2023? Yeah.
spk06: So again, we haven't made public sort of the full economics. And I think once we've got the product in market, we can talk still not at a very detailed level. We can talk more about it, but you know, this is a bass partner that we expect to monetize the relationship, both through, you know, tech and api related technology fees for the technology services and development that we provide and also be able to look at some level of monetization off of the account so it's uh you know that's probably at a very high level way the way to think about this okay thanks and then um the recently announced uh collaboration with tvix
spk07: Can you provide any color there as far as, you know, what will that bring BM Technologies as far as revenue growth?
spk04: Yeah, I'll take that one.
spk07: Yeah, go ahead.
spk04: Yeah. And we're really excited about this partnership. You know, we obviously view ourselves as a top tier banking as a service provider. And we often come head to head with Helix by Q2 as, you know, a really solid partner in these processes. And so just firstly, consolidating and partnering with your, you could say biggest competition, I think is a really refreshing way and 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 of our own sort of motivations and business models, but also to serve our partners and banking as a service clients better. And why is that is because, you know, we are very good at technology, providing a front-end user interface, like a white-label app. We have banking experience, so we have all the operations or the program management, so banking operations, fraud-managed services, compliance, BSA, AML, customer service, et cetera. And Helix has really great technology on the back end of really enabling banking products to function on the back end in 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, billions of dollars of valuation, they're 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 Salesforce helps 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. Hope that's helpful. yeah that that's helpful can you mention any color on you know what type of pipeline that will bring yeah um no no specific um for us this is a very you know a process that we like to keep you know um sort of behind closed doors but we've been very open about the industries that we find very very attractive from e-commerce to consumer brands to grocers gig economy types of companies to money transmitters, et cetera. So industry-wide, you know, we're very open to kind of discussing the types of companies where this sort of embedded finance play makes a lot of sense. But providing more color on specific names at this time is difficult to do.
spk07: Okay. Thanks for the answers.
spk01: Thank you. Again, to ask a question, press star 1 on your telephone keypad. Your next question will come from the line of Bill DeZellum with Titan Capital. Please go ahead.
spk02: Thank you. First of all, the student account signups being up 11%, particularly given that it's not a high interest rate account, would you talk to us about what led to that success and what, if anything, you did different to create that?
spk04: Yeah, sure. So good morning. Thank you for joining. So our student business, you know, I think we've been very forthcoming that, you know, we've been sort of, it's such a beautiful business and chugs along so well that 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 solid, solid business on its own, but it can really generate growth going forward as well. And so some of the things, it's a slow and steady process that we've done that have helped with sort of that conversion on top of the funnel. It's really simple things, to be honest, Bill. It's, you know, optimizing the email journey up front when we're first introduced to, you know, a potential student, helping them understand what we're really there to serve them for, how we can help them, you know, and making sure that the subject lies and that, you know, really basic things. And that's why we're really excited that these sorts of very small sort of tweaks are leading to, you know, strong feedback. But we also, you know, make sure that we're making the process as frictionless as possible. So working on when a student comes in, finds out that they actually have money waiting, there's 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 our product and tech teams and marketing teams on 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 there's a lot more opportunity here in this portfolio.
spk02: It's been lovely taking that one step further. You mentioned that that is something that you have begun in terms of that optimizing. Is there an implication that there's a lot more to go and therefore potentially a meaningful opportunity meaningful increases still ahead in student signups?
spk04: 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 we can continue to grow this business.
spk02: 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 the refiling will address that.
spk04: Yeah. You know, Bob, feel free to chime in. I think we have to, as you know, Bill, be very conscious of sharing sort of regulatory sort of feedback and process, but at a very high level. This is obviously a $150 million asset bank that over time we're creating a $2 billion plus institution. And so the regulators' questions and focus, quite frankly, rightly so, are just a deeper dive on understanding the infrastructure that includes risk management, teams, policies, processes, et cetera, that would support that growth. And just taking a deeper dive to make sure that the safety and soundness of growing an institution in that regard is well set up. 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, you know, we're really heads down focusing on, you know, 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.
spk06: And, Bill, I'm sure as 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.
spk08: Thank you both.
spk03: With that, I will turn the conference back over to management for any closing remarks.
spk04: Well, thank you, everyone, for joining this morning. We really appreciate your continued support. And I hope you can tell from our voices and our presentation that we are extremely excited about our future and look forward to seeing you next quarter. Thank you.
spk06: Thank you, everyone. If there were any follow-up questions or people on the webcast, feel free to reach out to me.
spk09: I'll be happy to take any follow-ups.
spk01: Ladies and gentlemen, that will conclude today's call. Thank you all for joining. You may now disconnect.
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