GBank Financial Holdings Inc. (GBFH) Earnings Call Transcript & Summary

Well, welcome, everyone. I'm Ed Nigro, the Executive Chairman of GBank Financial Holdings and GBank. And with me is Ryan Sullivan, the CEO and President of both. I know you got in our press release, or I believe you have because of tenants on the call, and you'll probably have many questions. So I want to center some comments, and we'll take questions after our comments about why the 32.99% deal and why now? Well, it was -- as you know, we made an application to the FDIC to acquire BankCard Services or BCS, and I need not repeat all the reasons why we wanted to buy BCS and why we felt it was important. But I believe it's also important that many of you may know as banking investment experts and may have been following the FDIC recently and many are [ here ] through the FDIC subscription. But the FDIC is coming out with a new SOP on the bank mergers, on all mergers. And this is interestingly changed the horizon a little bit for us too, maybe not just more than a little bit. But without digging too deep into it, a couple of things that this new SOP does, it makes all acquisitions subject to the Bank Merger Act, even if the bank is buying a non-bank. Or -- and a bank buying a non-bank happens to be a particular additional complication to any application because an insured depository institution buying a noninsured depository institution always draws additional attention. But also by coming under the Bank Merger Act, every acquisition, regardless of its size has to meet all the statutory requirements of the Bank Merger Act. Without getting into it a long [ flurry ] activity in the FDIC when I -- not [ flurry ] activity of them but the [ flurry ] of activity of our application, the requirements under our application dramatically increased, and we saw an extended time frame of the possibility of this occurring. Plus, there were new issues that were raised with respect to the application's permissibility of the transaction itself. So we reached out and actually -- and Rodge Cohen. He's a senior Chair of Sullivan & Cromwell, advise us on the regulatory side. And one of the things he pointed out to us very early on was that your application is -- without looking at the size, is very complex and will require a great deal of work to achieve -- in his opinion. He said, have you ever considered a minority interests? And I said, yes, we know the 4.99% rule under the FRB and he advised and said, actually -- you also have and can acquire up to 32.99% with only -- with no application to the Federal Reserve, just notification as long as it's nonvoting and noncontrolling on each side. That became a much more interesting possibility than a less than 5% acquisition. As a matter of fact, 32.99% which would be doable immediately, basically as fast as the bank and BCS as the holding company rather, BCSC could put the deal together. And the independent committee was immediately asked to review this. They approved it. We also had both boards look at doing it. We approved it. And we then put together with -- actually with Rodge Cohen, he notified the FRB already that we were going to do this acquisition. And I notified the FDIC and [ these both ] had happened Friday, last Friday, that we were going to be withdrawing our application to acquire BCS. Now as we discussed it with counsel, this is -- as we've seen, even normal bank to bank acquisitions and mergers have been taking 18 months, we really recognized that we could be sitting here a year from now without knowing whether this would be approved or not, and a year from now in the world of technology is a long, long time. And then if we had the opportunity to acquire 32.99% immediately, that doesn't mean we can't return later for the full acquisition. So we're keeping that option open. Just because we're withdrawing this application, it doesn't mean we won't do another. But we also recognize because of the extraordinary amount of work that would be required to respond to the bank merger rack and all the statutory requirements, which all [ go like lions on ] my shoulders to do. We're not a big bank with a whole division that does nothing about regulatory assessment. We do most of the heavy lifting in respect of these applications. This was done in view of the fact of what is going on with BCS, BankCard Services. Now one could argue that what is going on makes it more valuable to complete the transpo transaction, but at the same time, as Rodge Cohen had pointed out to us, he said Ed, I'm not going to say your deal is zero. It's not zero percent achievement, but he said [ Ready Knight ] is not 100 either. I thought that was very wise advice because I want to switch gears now and show you why we accelerated the decision to acquire 32.99% now because of what is happening with the world right now and with ECS. So I'm going to shift into the extraordinary activities that are going on right now. ECS has nine companies right now, not to mention about several more that we know of that are coming with one applications right away, nine new companies for our PPA and old consumer account programs. These programs, as you know, offer remarkable consumer protection. And then also the other thing they offer to these payments companies, that they are no longer handling the money. The digital transactions they are, their platforms manage, but the funding is all managed by GBank. That's the way the pooled accounts work, their bank controlled accounts, they are notational for the benefit of the individual, so they are considered an individual account owned by the consumer. And they are afforded all the protections, the aggressive protections we do at GBank for our consumers. All the regulations, the bank enforces those. Not BCS, and we don't rely on the fintech or the payments company to enforce them even though we require them to. We audit them and we have [ 4 weeks ], literally, in some cases, force them if they want to stay active in the areas of consumer protection. But you know that, you know that our full player account, and that's why there's this great interest. There's something else that has just occurred. And if you look -- and Ryan's going to address it a little more than I am, but there's some fintech failures going on right now and some bank failures that are being caused by those under the Banking as a Service. And he's going to talk about that a little more in depth. But having said that, we are seeing -- because BCS was founded by bankers on the principles consumer protection and the principle of very sound policies and procedures. We're not like other fintechs that are out there and develop great ideas, but they're not bankers and rely on banks through service provider agreements to manage their accounts, although they're not really managing the accounts in some cases, as you'll see in some of these recent failures. So the desirability of the consumer protected account managed by the bank and [ online ] bank value has increased. But something else is happening. Another application of our -- of the BCS patents that we hadn't looked at before, real-time payments, RTP. Now real-time payments are a product of the Clearing House. And many of you know the Clearing House because they handle -- really did a private company that handles the wire activity and all the ACH activity of about 50% of the transactions in the entire United States, $2 trillion a day is settled. Well, they come out with RTP. As you know, it's not new. It started about 4 or 5 years ago, and there are many banks that have real-time payments, which has to occur between a consumer account to a consumer account. The same consumer looking money, which can be done on a real-time payment rails, which is very nice. Now the Clearing House has also come out most recently, towards the end of last year with an RFP, or request for payment. Now, you as the consumer can order money [ are real ] trends, real-time payment out of your account. But with RFP, you can now order the money back into your account. However, both accounts must be your account. So think of it for a moment now. If you have a platform provider and a payments company or a wagering company in gaming, and you have an accountant, if you -- if that company has our pooled player account system, then that is an individual account and not funds on deposit in that corporate account. So if you had a PPA, your customer would be able to move in real request for payments and then do an RTP back to the consumer's account. What this basically means in [ inflated vernacular ]. I have my app. I have been wagering. I want my money in my account. I get the request for payment in regard to the approval that I have with that account and it's in 5 seconds, it's in my bank, 24/7. This is a solution that is another opportunity were our banking system that we have created between Bankcard Services and GBank, where now all of our pooled player accounts and pooled consumer accounts are eligible for RTP or in this new RFP. Now there's only about 30% of the banks around the RFP platform, but there are two remaining large banks that were originally on it got off and now are coming back on within the next 3 to 6 months. What RTP is a really game changer for moving money on and off different applications, digital applications and digital solutions because it replaces ACH. And of course, [ trust is ] very interested in ACH, which is [ 3 to 5 years ] and now earned off, it feels great. So what occurred is what's occurring now is this is an opportunity we haven't focused on. We hadn't focused on RTP, we had been focusing on the consumer protection aspect of it. Now interestingly, in consumer protection aspects of it, let's talk about a couple of other things that have happened right away. First of all, the [ Supreme Court, 7 to 2 ] reconfirmed the CFPB's methodology of operations that it's legal, what they do, how they collect their fines. And so this has, of course, invigorated the CFPB. And it should cause more people to be concerned about consumer protection. Let's talk about something else, and I'm going to have Ryan talk a little bit more since he's a little more -- he's more adept at discussing some of the detail than I am about the Synapse failure recently, and it's effect on Evolve and effect on possibly many other banks. What happens when the fintech where your payment is happiest and where all your funds are deposited, even though they say they may be deposit today, they are held and controlled by the fintech. And if the fintech fails, you go into bankruptcy, your funds are gone. And all of a sudden today, they're finding over 10 million users who they could lose -- have the potential to lose all their money on this Synapse, Evolve failure. This is just another reminder of why the PPA is important and what it can do for you, short of you opening up an individual account at a bank for every one of your applicants or every one of your users. So we thinking that to RTP and RFP, we think between the failures that we're going to see out there in the Banking as a Service product because neither the bank nor the fintech did their job right, or many of the other things the CFPB may address, that the timing for BCS and GBank is really important. In refining the GBank brand and why the GBank brand and the BCS and particularly the BCS brand is so strong right now is because BCS we can -- one could argue is a fintech company, but BCS was founded by bankers. I founded BCS with other [indiscernible] revenues, and we founded it on the sound basis of banking. And that's why is consumers, [ it brings in is payments providers that it wins in ] their consumers are really protected and those companies that are pre-vetted by ECS. ECS knows how difficult it is to become a vendor at GBank. It is difficult. You must have consumer compliance in place because -- and we're not going to rely on you to do it with [indiscernible]. Make sure you do it, but we also do it. GBank does all its own consumer protection. It will not rely on someone else to do it. We cannot. We -- we're guided by this and advised by this with the FDIC Bank in 2015 when we first started. So we're building all of these programs on a solid foundation. Now I could talk even more about another very exciting application for BCS is that we're signing our first physical game, physical equipment platform. When I talk about physical equipment platform, they are going to be the digitally load slot machines and digitally offload slot machines. And we'll have a PPA at [ GBank and ] BCS agreement. And this company will be the first slot machine company on -- not slot machine company, the first platform providing these services for slot machines that will be on the PPA. And this is going to happen within the next several months. So there's a great deal going on with BCS and GBank right now that are very exciting, as well as other projects that we have working. But we saw the timing. We didn't want to be sitting here possibly a year or 1.5 years from now without having the process of acquiring BCS completed and all of these new programs in place. We believe that the 32.99% is a very sound transaction and deal, and it provides -- and it will be completed within the next 2 weeks. There's just some housekeeping in -- up to the agreements that have to be done before they're all executed, but everyone has agreed to the transaction. I'd like Ryan to pick up another couple of aspects, and then I'll close, and then we'll open it to questions. And I think Ryan's assessment is very important to this whole process.

Great. Thank you, Ed, and good afternoon, everyone. As you have now read and as we're discussing today, we're excited about the announcement of Board approval of the noncontrolling equity investments between GBFH and BCS. As Ed alluded to, this will be a very quick transaction already approved and still we'll maintain our existing time line, which you may remember was Q2 of this year. So we expect to close this quarter. We believe this transaction achieves really all the key objectives and then also is sensitive to, as Ed highlighted, some of the important developments that we're seeing within our space and our clients on the PPA and gaming fintech side. And really, I think it puts us in a position at the company and the bank to continue to direct our efforts on creating value for you, our shareholders. And that really comes down to executing on our growth strategy, continuing our continued strong financial performance. And in the nature of this conversation here today, that means really working on growing our gaming fintech business and on a related Visa Signature credit card. We're very excited with some of the early metrics we're seeing on that. And specifically working very closely between GBank and BCS on building and closing on what Ed alluded to as is an expanding pipeline. Now if I might, I'm going to back up and give a little bit of background because I think it really helps to provide some context with some of the news Ed alluded to that we've seen over these last weeks and months, that hopefully give you a better insight in terms of what we are and what we do via gaming fintech, PPA and PCA and perhaps importantly, what we don't do. Specifically, I think it's important to understand the difference between a BPA, PCA account structure and our partnership with fintechs and how that varies and differs, in contrast to how most of these payment and fintech consumer funds and accounts are held today, and that is through what was called an FBO account structure. FBO stands for, for the benefit of. And FBO account structure is not new. FBO accounts have existed in some form throughout my entire career, and they actually predate that. What has changed over the last several years is the utilization of FBO accounts in the fintech environment and currently -- and we've seen some attention drawn to this issue over the last year, especially there are some questions and some very fair questions that are being asked of the growth of this industry, the growth of consumer accounts, the growth of consumer funds that are held in the FBO account structure, both from an industry standpoint and a regulatory standpoint as it pertains to the FDIC. So the FBO account structure is the majority of how these funds are actually being held by fintechs today. And in many ways, it kind of drives the backbone of the Banking as a Service industry as it has developed over these last few years. Neither GBank nor BCS is involved in Banking as a Service. So Ed touched on the important distinction between our onboarding of PPA and PCA clients and the value of the structure that we bring to all of our fintech clients. As we think back to some of the questions and challenges that we experienced as an industry in March and April of last year, there was a couple of very important questions that were being asked at that time. Around that time, a couple of key questions with some high-profile failures were how safe is your bank? And are the consumers protected through FDIC insurance in the relation of some based fintech and other related relationships? Obviously, very important questions. Without touching on the first one, how safe is your bank. I'm not going to get into that. The answer to the second question, we believe creates a problem within the industry and also presents an opportunity for the PPA and PCA. Because the answer to the question, are consumers protected through FDIC insurance through FBO arrangements, the answer is it depends. And that's generally an unsatisfying answer when you're talking about billions of dollars and hundreds of thousands of accounts. Most recently, we saw the news last week. There was actually some build up prior to last week, but fairly high profile Synapse and some related banks that were associated with the current freezing of approximately 200,000 consumer accounts. Now what those questions that were being asked in March and April failed to continue onto the next steps, and these are also important questions. In terms of how safe is your fintech and then the follow-up question, what happens to your consumer accounts if the fintech goes away through a chapter bankruptcy or, et cetera. So as you are all aware, following the PPA and PCA story, you also know that there is a significant vetting with all of the fintech partners that we bring on to that program, including due diligence that is vital before we process our first transaction with that particular fintech. What PPA and PCA does, we think it's a solution that now is starting to come up in and of its own as the industry is understanding the potential risk that exists within the system, as it perfects FDI insurance at the consumer level. Because the PPA and PCA structure is not on owned, controlled or monitored by the fintech. It is owned, controlled and monitored by the bank because these are individual consumer deposit accounts. So it clears up the FDIC insurance issue, but it also affords a number of other consumer protections that are part of what we expect as being an account holder on a U.S. depository account. Protection against unauthorized transactions under Regulation E, protection of the consumer under unfair and deceptive acts and practices. Protection against stringent monitoring at the bank level, covering fraud and protecting the consumer and the overall ecosystem as a result. And then also, we're seeing this come up more and more with our PPA and PCA consumers because the bank owns, controls, monitors the data and the account structure. Cybersecurity is now more important than it ever has been before. So as we think about the scalability and the growth potential of PPA and PCA, in light of our announcement today, it really puts our efforts back into meeting the needs of the PPA and PCA clients and most importantly, their concerns.

Thank you, Ryan. I want to quickly close, but there were two things that I missed in just talking to you. Two other contracts in addition to those nine, which we're about to sign. One very important one just to show you the reach now that we have is with the government platform provider that we are in the process of -- in the final draft of that agreement between BCS and this company that is going to provide the digital solutions to a lottery service for a state. And I don't want to mention which state, but we will be issuing a Visa prepaid and debit card, which the state wants to put all of their payments over $600 instead of any -- dealing with any cash anymore, they're going promote -- use digital payments to a prepaid card, and that will be a Visa card issued by GBank. That is another program that we expect to go live in the very near future. Another one with RTP, we are moving really fast on RTP and RFP, and you won't hear many banks working with RFP. We are in the process of finalizing the tri-party agreement between BCS, GBank and the RFP -- the RTP platform provider who we have an NDA with and we're going to sign the final agreement. We're well down the road, and we hope to be -- the very first goal is launching RTP for [ Gator ]. And we believe we will be the first, but we'll see. So when I say there is a great deal going on, I think you can get the sum of that from the momentum we're talking about. And these already go through the existing contract in BCS and GBank. And GBank is the only bank BCS is working with and only bank we shall be working with because the beauty of this is that GBank is the only bank that knows how to manage PPA and PCA. And we are being recognized as being very good at what we do, very good in our compliance. Remember, we're not a Banking as a Service, PCA has no access to the banking at GBank, nor do we ever run it that way. So with that, I think we've covered so much, but we will certainly open it up to questions. And that's why we believe that 32.99% now -- what's the old saying, a bird in the hand is worth two in the bush. Well, that's almost the right math. So thank you, and we'll open the questions.

This is Brad. May I ask a quick question.

Of course.

Can you hear me?

Yes.

Perfect. Can you just let us know what kind of the revenue run rate and expense run rate of BankCard Services is right now?

Well, the run rate of BCS...

In the sense...

In earnings, I mean. Not expense. Do you want to take that one?

Yes. Well, when you're talking about the run rate, let me explain a couple of things. When BCS says a PPA, BCS charges the PPA a minimum amount per month based on what we think the size of the program is. And they start paying a minimum fee which ranges anywhere from around $10,000 a month, depending on their size because BCS gets basis points, from anywhere from 40 to 50 basis points for programs that it boards. So when we talk about the run rate of BCS, BCS has -- three of us did operate BCS. I do, as you know, as the manager of the management company and Hanan Sabri is our President and Chief Operations Officer; and we have a Chief Compliance Officer. And James Russell, who is a certified compliance officer, [ day ] compliance officer. He's very good at what he does, too. So the BCS run rate has very little overhead. We don't have office rent. We operate strictly on the -- digitally, so to speak. We have -- we flow through probably when the buying gets large, 70% to 80% of our revenue hits the bottom line. So the run rate right now with these new projections, we're -- our new projections are -- coming out soon, we just updated some projections, but it's happening so fast as soon as we give them our projections, it seems they change. So let me give you an example. RTP -- because there's zero RTP in gaming because you can't move money on the instantly or real-time payments from a company account to a personal account, can't do that. So all of these companies that are gaming hold the money in their corporate accounts. We know that. But RTP from -- the Clearing House has $2 trillion a day in transactions. They literally -- 50% of all the transactions and settlements for wire and ACH in the United States. And on that $2 trillion, only $500 million a day is RTP. And they say RTP is growing at 15% per quarter. And they just set new records in the first quarter of this year of RTP. And RFP is just launching. We will be one of the first, and we could be the first in gaming. So we talked about the run rate. As these clients come on board and these fees continue -- and BCS will get a percentage, will get a loan fee [ that will vary, from 40 or 50 basis points down to 20 or 10 in other ], very big high volume people will get a much lower rate. I'm not sure we will go to 10, but certainly, it will stay in the 30% to 50% range. So the revenue potential for BCS is really strong. And for the bank, the deposits, of course, are what we're really looking to generate. Many of you know, we admire [ Stride ] and we've study [ Stride ] because they are the bank for [ China ]. And 91% of their deposits are noninterest bearing. And that's a good goal. So when we talk the run rate of BCS, we think that the profitability from the programs, but the beauty is, I think, is that -- if you remember before we were talking about licensing agreements, we're way less focused on licensing agreements right now versus generating the activity for GBank. GBank is capable of handling millions of accounts. We've already proven that. We've already handled over 1 million accounts when we were in our Sightline [ heyday ], with over with about 700,000 prepaid cards issued with Sightline. That's down about 250,000 cards right now. But with the advent of these -- we had the Oregon state lottery program with BCS. In the Oregon state lottery program funding with the PPA, which was our first one in 2019. So we are the -- one most experts in managing player funds with the state of Oregon, so their -- SBTech was where they're at, who won their RFP that they needed them to hold the money and SBTech said they couldn't. We were the ones who did that. Now we see another state lottery saying, "Hey, we like this approach. We like this system, and we have people who like will pay an ITC saying, you've got to talk to BCS and GBank. So the run rate of BCS can be substantially profited.

I'll give you -- I'll follow up with that, if I might. In terms of -- Brad, I know you're probably looking for a number. The anticipated run rate on an earnings standpoint for BCS as we've gone through this process in year 1, a bottom line after expenses was above $0.5 million. So it was hugely significant. Now one of the things I will point out with the equity investment that we're announcing today, it will vary in terms of what that transaction would have looked like because with an acquisition of all BCS, essentially all the revenues and expenses would run through the consolidated company. This is a noncontrolling, non-majority equity investment. So we won't have consolidated P&Ls. But that will give you an idea of kind of what the modeling looked like as we were exploring our options. And then also, as I pointed out, I would say that those assumptions didn't include how the pipeline has developed over the last 30 days.

These nine companies, they didn't include any of the contracts I'm talking about our projections, they didn't include anything which I'm discussing today. And I think that there was one point when we were talking that I thought was really relevant, and it will come back to my mind in a second, Brad. But -- so I think our numbers are that we had before and the projections are irrelevant. The other point is why I was saying that we're focusing less on licensing because you see, here at GBank, we have developed all of our processes internally, all the consumer protection, all the management of these FBO accounts, all the management of millions of accounts that we've managed already, we've already processed $2 billion in payments through GBank. We know we can handle a very large volume of business of managing these FBO accounts.

PPAs.

Yes, well, the FBO accounts that hold the PPAs, which are bank controlled FBO accounts. And we know how -- if you read the Synapse failure, which you should all read, it's very important because it talks about how these ledgers come down on these company-owned accounts and how, quite frankly, many of the Banking as a Service providers just rely in [ the vender ] that their ledger is direct. There's -- we don't do that. We get a ledger for these accounts, but we have to settle them ourselves everyday that we [ hit ] a ledger. So we have the ability to manage -- the only time we may need another bank is if the deposits get so great. Remember, we have a recipient bank broker ready-to-launch. That's why I mentioned [ Stride ]. They have a great recipient bank program to push out deposits [ in China ]. But -- so we think that we're going to be able to develop this new pipeline [ strictly ] achievement.