BM Technologies, Inc.

Good afternoon, everyone, and welcome to the BM Technologies second quarter 2023 earnings call. Please note that this event is being recorded. Following management's prepared remarks, we will hold a question and answer session. For those joining on the webcast, you can submit your questions online where the management team can see them. At this time, I'd like to turn the conference call over to Brian Preneveau, Investor Relations for BM Technologies. Please go ahead.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us for BM Technologies' second quarter earnings call. 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 law. Please refer to our SEC filings, including our Form 10-K and 10-Qs, 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 Lavleen Sidhu, VM Technology CEO. Lavleen?

Thanks, Brian, and good afternoon, everyone. Joining me on the call today is Raj Singh, our co-CEO, and Jim Dellinger, our CFO. On today's call, we will discuss our second quarter and first half of 2023 results. We will also provide updates on various initiatives, including our partner bank, profit enhancement plan, and growth initiatives. As I mentioned on our first quarter call, this past year has been challenging, especially for FinTechs. We have had to adapt to unprecedented interest rate increases, changes in the regulatory landscape, pressure on FinTech valuations, a banking crisis, and the end of unprecedented stimulus into the system, just to name a few. With these changes came the need to look closely at our company and adapt to the shifting realities of today. In response, we pivoted from becoming a bank to focusing on becoming a lean, innovative, and risk-oriented fintech. In doing so, we made several significant decisions and took decisive actions since the beginning of the year to strengthen our foundation and position us for growth in 2024 and beyond. Some of these actions included, one, our large reduction in force, including changes at the executive leadership level. Two, entering into a definitive agreement with Durban exempt First Carolina Bank for our higher education portfolio. Three, renewing our relationship with our largest BAS client for another two years. Four, amending our deposit agreement with Customers Bank to reflect variable rate pricing to increase our margin. And five, recruiting and bringing on a seasoned executive like Raj Singh to serve as my partner and co-CEO. These changes continue to position us well for our future. We haven't stopped here. We continue to build upon the momentum in the first quarter of the year to where we sit today. We will talk more about some of these initiatives throughout our call. Before getting into that, I would like to briefly mention some financial highlights from the quarter and first half of the year. Operating revenues for the three and six months ended June 30, 2023, totaled $13 million and $26.5 million, respectively. Had a Durban-exempt bank partnership been in place during the second quarter, our interchange revenue for our higher education vertical would have been at least 50% higher on a gross basis. This would have resulted in positive core EBITDA for the second quarter. With regards to this, I would also like to mention that we have a significant update as it relates to our partner, First Carolina Bank. We have recently entered into an amendment of our existing deposit agreement that will allow us to accelerate the transfer of our higher education deposits independent of the ongoing regulatory review process We plan to transition these deposits as soon as possible, but no later than December 31st of this year. We view transitioning of these deposits as a very high priority to ensure positive cash flow and to position our company for growth over the long term. We're also on track to realize the benefits of our profit enhancement plan with a goal of cutting costs by 15 million. At the end of the second quarter, We had already realized over 60% of those estimated savings, and we anticipate that we'll complete those initiatives throughout 2023 and into 2024. Lastly, the addition of Raj Singh as co-CEO has been valuable, as he has focused his efforts on enhancing our systems, processes, and product offerings to further drive cost efficiencies and identify new revenue opportunities for the company. We believe these initiatives will continue to enhance our value. Raj will speak about some of these initiatives shortly. Additionally, we are actively exploring how to effectively use AI to improve our operations, risk management, fraud capabilities, and customer engagement. As I stated earlier, we view 2023 as a year of strengthening our foundation so we are well positioned for growth in 2024 and beyond. and we believe we are on a solid path to achieve this. I will now turn the call over to our CFO, Jim Dollinger, to review financials. Jim?

Thank you, Levine. During the second quarter of 2023, the company earned $13 million of operating revenue, as compared to $23 million in the prior year. For the first half of 2023, the company earned $26.5 million of operating revenue, as compared to $48 million in the prior year. Servicing fees for the second quarter of 2023 totaled $7.7 million as compared to $13.3 million in the prior year. For the first half of 2023, servicing fees totaled $14.3 million as compared to $27.5 million in the prior year. For the first quarter of 2023, servicing fee revenues were negatively impacted by the fixed rate servicing agreements that were in place. Beginning in the second quarter of 2023, and under the amended deposit servicing agreements with Customers Bank, servicing fee margins improved by approximately 175 basis points at the current Fed funds rate due to the impact of the new variable rate agreements. Interchange and card revenue totaled $1.8 million for the second quarter of 2023 as compared to $5.3 million in the prior year. For the first half of 2023, interchange and card revenue totaled $4.9 million as compared to 12 million in the prior year. For the first half of 2023, interchange and card revenues were negatively impacted by the temporary loss of Durban-exempt interchange fees. The move to FCB is expected to significantly improve interchange rates for our higher education vertical. Had a Durban-exempt bank partnership been in place for the first half of 2023, total interchange and card revenues would have been at least 50% higher than the 4.9 million reported. Average service deposits totaled 0.9 billion for the second quarter of 2023, down from the 1.2 billion for the first quarter of 2023, and from the 2 billion for the second quarter of 2022. Substantially, all of this balance reduction occurred within our BAS vertical. As discussed in our prior calls, we strategically allowed our highly interest rate sensitive deposit accounts to runoff in late 2022 and year-to-date 2023 versus repricing at potentially unprofitable levels. We anticipate this runoff to moderate as interest rates begin to peak with deposit growth resuming in late 2023 and beyond. Deposits per 90-day active account at June 30th averaged $1,623 within our higher education vertical at $4,443 within our BAS vertical, both comparing favorably to market averages. Spend totaled $658 million for the second quarter of 2023, down from $787 million for the first quarter of 2023 and from $682 million for the second quarter of 2022. Spend per 90-day active account for the second quarter of 2023 averaged $1,855 within our higher education vertical, and $1,508 within our BAS vertical, both up significantly when compared to the second quarter of 2022. Overall, we continue to see spend in our higher education vertical normalizing in 2023 to pre-COVID levels. Annualized debit card spend for highly active BAS users, those with both direct deposits and a minimum of five customer-driven transactions per month, was approximately $18,000 $740 during the second quarter of 2023. This very attractive cohort makes up approximately 22% of active accounts at June 30, 2023, as compared to 19% in the year-ago period. Account fees and university fees totaled $3.3 million for the second quarter of 2023, as compared to $3.7 million in the prior year. For the first half of 2023, Account fees and university fees totaled $6.9 million as compared to $7.8 million in the prior year. During the second quarter of 2023, the company retained over 98% of its higher education institutional customers, and with our continued strategic focus in 2023, we anticipate growth in both the number of active accounts and account activity. There were 108,000 new account signups in the second quarter of 2023, and 213,000 new account signups in the first six months of 2023. In our higher education vertical, new checking account signups improved 11% year over year. We processed over $1.8 billion of student financial aid refund disbursements during the second quarter of 2023 as compared to $2 billion during the second quarter of 2022. Core operating expenses totaled $13.9 million for the second quarter of 2023, comparing favorably to the 15.4 million incurred for the first quarter of 2023 and the 17.3 million incurred for the second quarter of 2022, with sequential quarterly reductions since the third quarter of 2022. For the first half of 2023, core operating expenses totaled 29.3 million, comparing favorably to the 33.1 million in the prior year. The company continues to actively execute upon its PEP with initiatives completed during the first half of 2023 that are expected to lead to the realization of over 60% of the targeted 15 million of cost savings for the full year 2023. We are confident that we will achieve our full PEP target with potential continuation into the first half of 2024 as some of our cost reduction efforts are partially offset by investments in technology, operational processes, and data initiatives. Core loss before interest, taxes, depreciation, and amortization totaled negative 0.9 million for the second quarter of 2023, comparing favorably to the negative 1.9 million for the first quarter of 2023, and unfavorably to the 5.7 million core EBITDA earned for the second quarter of 2022. Substantially, all of the year-over-year decrease in core EBITDA is driven by the 44% reduction in operating revenue, offset in part by the 20% reduction in core operating expense. Importantly, the improvement in core EBITDA from the first quarter is expected to continue for the remainder of 2023. Liquidity remains strong at June 30, 2023, with $11.5 million of cash, $9.5 million of working capital, and no debt. In addition, the company anticipates monetizing approximately $4.5 million in tax receivables by the end of 2023. For the second half of 2023, the company expects to generate positive core EBITDA and operating cash flow, inclusive of the effect of the delayed transfer of our higher education customer deposits and the continuing challenging economic and interest rate environment. With that update, I'd like to turn the call to Raj Singh, BMTX's co-CEO. Raj?

Good afternoon. Thank you, everyone, for joining. As Lavleen mentioned earlier, 2023 is a year of foundational change for the company. Markets continue to evolve, and we're working to set up the company for sustained growth with multiple revenue channels over the long term. One of our highest priority of our president and chief technology officer, Jamie Donahue, is the modernizing and simplification of our technology platforms throughout the company. As an example, currently, the higher education business and BAS business run on separate platforms, we are working to unify those platforms, which will create operational efficiency, cost savings, enhanced user experience, and operational flexibility that will allow us to quickly adopt and deploy several new features and products with our accounts. Separately, we're fully migrating all platforms to Microsoft Azure. We believe these actions, combined with increasing our data analytics resources, will be key to better accessing and understanding our data. Data will drive our customer acquisition marketing initiatives, identify key consumer behaviors, and much faster decision-making throughout our business. Additionally, we have now successfully entered into new partnerships to unlock value-added features and products that can enhance the banking experience for our customers and university partnerships. Some examples include, first, our recently announced acquisition of software technology from Envilt. Envil is one of the first digital banking platforms to use light AI to automate elements of people's financial lives. The platform helps customers manage their finances from simple budgeting to investments, avoid unnecessary debt, and create real savings and wealth. We want to utilize that software and layer it into our existing platform over time. Second, partnering with Card as an enhanced account feature to deliver cashback reward programs to customers and connect them with the brands that they love. Our survey results conclude that this is the most sought after feature that our customers desire. We will leverage our 1 million plus accounts to capture revenue share with this new feature in 2024. Third, launching a new student identity verification service, BMTX Identity Verification, we refer to it as IDV, where universities can control fraud vulnerabilities during student enrolled processes and choose risk level preferences. Our strong market share and longstanding relationships with approximately 750 campuses will drive a significant opportunity to deepen our ties to our university partners. We expect to launch the service in late 2023 and expect revenue in 2024. These are just some of the initiatives and partnerships that are working on to bring a better, more modern, and more user-friendly banking experience to our customers and university partners. Through our increased corporate development efforts, We look forward to bringing additional features, products, and partnerships to the forefront in coming quarters. Making investments in our technology and products while concurrently focusing on operational and cost efficiencies is key to setting us up for long-term growth and value creation. We are consistent with our message across all areas of our business to leverage automation and utilize additional processes and systems that result in faster and better data that will drive our decisions. These significant moves will take time to reap the benefits, but we do expect to begin realizing these benefits beginning in 2024. We appreciate all of your support and you taking the time to join this call. I look forward to seeing the fruits of our labor translating to better operations, satisfied customers and clients, and stronger partnerships. I'll turn the call back to Lavleen for some final comments.

Thank you, Raj. We continue to believe we have significant, untapped opportunities ahead of us given our scale, existing partnerships, and the rapid technology advancements we are seeing in areas such as AI. We are excited about our future and believe the foundation setting efforts we are making in 2023 will help propel our growth in 2024 and beyond. Most importantly, I want to thank our passionate and dedicated employees. It is with your hard work and talents that we sit in this exciting position today. I also want to thank our investors for your support and for your time today. I will now turn the call over to the operator so we can open the line for questions. Thank you.

Thank you. If you would like to ask a question over the phone, please press star followed by the number one on your telephone keypad. If you would like to submit a question via the webcast, please select the Q&A button located on the bottom right of the webcast page. We will begin with questions from the phone. Your first question comes from the line of Mike Grundle with Northland Securities. Your line is open.

Hey guys, thanks a lot. Two questions on deposits. What's your outlook for higher ed deposits and new business deposits? And then specifically on the new business deposits, can you remind us what you're paying, the interest rate the end customer is getting, and what you're getting from customers bank? I'm just trying to figure out sort of what your carrier spread is there currently.

So I think that, hey Mike, good to see you or hear from you. It's been a while. So Mike, let me try to answer the deposits first. So I think that you know, what we had sort of guided to before was that we were hoping that we'd peaked out in interest rates. As we've seen, the interest rate environment continues to change and continues to be increasing. And so, you know, unfortunately, that does have an impact on, you know, our deposits, and we continue to see a runoff. So I'd say that, you know, we can't predict the future. There is a chance, obviously, that interest rates continue to increase to the end of the year, which would continue to create a little bit of a runoff on our deposits but what we're working really hard and Raj spoke about in his comments is that we're working on many different initiatives to help with account growth deposit growth and overall increased engagement that we believe can have an offsetting effect and so you know I just wanted to say that given where things stand there's a possibility that we could see a continued drag on deposits but hopefully you know a stabilization by the end of the year

Got it. And then just the spread on the new business deposits?

We haven't talked about this because of competitive reasons. Remember, we had shared that it's really important for us. But the most important thing to make clear is that it's a variable rate pricing and an increasing rate environment that's helpful to us. And we did say that without specificity, that we have seen about 175 basis point increase in margin with our new variable rate pricing agreements in place.

Got it. Maybe then just turning to the back half of the year, how should we think about the quarterly operating expense level that $18 million in 2Q, Jim? It feels like it's got to fade or drop a little bit from there, but how should we think about that as we're kind of modeling out the back half?

Yeah, good question, Mike. I mean, I guess a couple of thoughts is I think your statement that you'll see in the second half continued decreasing in core operating expenses is spot on, right? That's consistent with our PEP initiative and what we expect to see from that. I think overall for the second half, as we stated earlier, is we expect to generate positive core EBITDA and operating cash flow. And that's inclusive of what we're seeing not only with the delayed transfer of our higher ed deposits, but also what we see from a standpoint of the economic and interest rate environment. But for core OpEx, we would definitely expect to see the continued benefit of our PEP in those numbers.

Got it. And maybe lastly for Raj, I think you talked about the card cashback rewards, K-A-R-D, and also that student ID. Is there any economics you can share, whether that's sort of like per customer, per transaction? Can you frame up that revenue in 2024?

Well, let me try to go broad and narrow. At the moment, we're heavily investing in our overall corporate development infrastructure, and we're rapidly pursuing a variety of higher ed-focused products and services and different partnerships. So while these are the ones we highlighted, we're looking at this as an overall strategy to increase various revenue sources that are not purely linked to deposits and transaction fees. That said, with respect to these two in particular, we do plan on providing updates in terms of projections. But at this stage, we're not in a position to disclose what we anticipate those to be. In the card feature, that is something linked to actual accounts. So those will be transactional related. And in the IDV product service, those are linked to our university partners, and so those will be probably both subscription-based and processing-oriented.

Got it. Okay, thank you.

Your next question comes from the line of Greg Pendy with Chardin. Your line is open.

Hi, thanks for taking my questions. I think you said in the press release an uptick in community colleges. Can you kind of give us a framework for how much that represents in the higher education business and how we might want to think about that?

Yeah, I think that, you know, we just wanted to be able to comment on sort of the macro environment. I wouldn't give too much sort of emphasis on it in the sense that this is a rebound. meaning the last two years with COVID, we actually saw enrollment decline. So if anything, we're just going back to normalized levels. This is not, you know, a greater macro trend that we can consider to be ongoing. So we just wanted to say it's a rebound and that that's a positive momentum to help us to be able to capture more applications and potentially more customers.

Okay. And then just one follow-up. Can you just, you know, the stabilization you're seeing in BASC, deposits, you know, any opportunity to kind of regrow that or a timeframe or runway? Or do you think it's just going to stay stable for a while? Is that kind of the outlook?

At this stage, you know, as interest rates, you know, may or may not have peaked, we do believe that they're still at risk for some level of decline. That said, there's other characteristics that we're observing in terms of new account signups and volume of account activities, which are showing some promise. We do actively work with our BAS partnership to identify ways of increasing customer adoption and customer utilization. So that is a very active process that's underway. So our hope and desire and effort is exactly what you're suggesting, which is to work to grow that business and hopefully offset some of the decline that are linked more directly to interest rates.

Okay, helpful. Thanks a lot.

Thanks, Greg. Your next question comes from the line of Bill DeZellum with Titan Capital. Your line is open.

Thank you. I actually do want to pick up further on the deposit commentary. Have you been seeing a slowing in the deposit runoff after June 30th, or what have you been seeing since June 30th?

Yeah, Bill, good to hear from you. We definitely see some moderation. I think when we had our last call, we spoke to stabilizing and stabilized. That trend line has taken a bit longer than we anticipated in the prior call, but we are starting to see encouraging signs that the rate of decline is certainly decreasing. And I think as Raj had mentioned, we are optimistic that with the efforts by the company, we will be in the stabilized position and hopefully return to our growth position in 2024.

And so since June 30th, you have seen a moderation in that decline.

What we've seen is exactly as you just articulated. The rate of decline is moderating from what we experienced in the first half of the year. That's correct.

Great. Thank you, Jim. And then let's talk about First Carolina, please, and the amendment. What effectively does that do since you don't have regulatory improvement? yet, or approval yet. Walk us through what it really effectively does, please.

Yeah, so we recently entered into an amendment of our deposit agreement with First Carolina Bank, really to be able to ensure that we can push forward on our mutual commitment to transition these deposits as soon as possible onto First Carolina Bank's balance sheet. You know, I don't really want to comment on a process that's really geared towards our bank partner and it's their process. Again, these are very much about, you know, a characteristic of balance sheet, deposits on the balance sheet. And that is something that our bank partner is comfortable sort of moving forward with in either direction. And so that has been a huge asset and a great victory for us mutually that we don't have that obstacle and we're ready and able to move forward.

Thanks, Lovelane. And so to add some clarity to make sure I'm following you, that First Carolina has decided that however these deposits are characterized, they're okay with that. So they're ready to start bringing them on now onto their balance sheet. And ultimately, what the regulators determine in terms of how those deposits are characterized that's really now what you'd be waiting for. Or I guess not you, it's what First Carolina would be waiting for essentially to get the accounting dialed in.

That's right, Bill.

Great, thank you. And lastly, once agreements are in place and assets moved, etc., etc., Can you be more competitive for some of these rate-sensitive deposits? And I'll tell you the spirit of the question is you're competing in many cases against institutions with a branch network and therefore a cost structure associated with that. So in theory, your cost structure should be really quite competitive once you get all of your agreements in place. How are you thinking about that longer term with those? competing with and for those more rate-sensitive customers.

Hey, this is Raj. Obviously, that is a consideration, and that is something that we do discuss with our BAS partnerships. And at this stage, we don't have a current plan in place, but it is something we're in consideration of.

And if you were to... have a partner that wanted to be more competitive that way. Is that essentially where some combination of the bank, the BAS partner, and BMT would each take a haircut of some level in their margin, which ultimately ends up in the consumer's pocket to make you more competitive? Is that some form of that?

Yes, absolutely. That's one of the models that we're contemplating and reviewing.

Great. Thank you all for the assistance.

Thank you. Thank you. There are no further phone questions. I turn the call back to Brian for web-based questions.

Thank you, operator. I am not currently seeing any questions in the queue, so I will turn the call back to Loveleen for some closing remarks.

Thank you, Brian. Thank you everyone for joining us today. We'll see you next quarter. Thank you. This concludes today's conference call. You may now disconnect.