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

Well, thank you. I believe it's 2:00, right, on the button according to my Apple Watch. My name is Ed Nigro. I'm the Executive Chairman of GBank Financial Holdings and GBank. And with me today are Ryan Sullivan, our President and CEO of both; and also Jeff Whicker, our CFO and Treasurer of the Holding Company. Today, I have a great pleasure in starting off our second quarter earnings call for GBFH. And some calls are more enjoyable than others. And I think this one, at least for us in this room, is going to be most enjoyable, and I hope it is for you, too. As a matter of fact, in the spirit of the Olympics, maybe you can tell us if team GBFH gets a gold or silver or a bronze. We've already rated ourselves, so I don't think we need to say it. But I get to look at the big macro picture. And today, I want to talk just a bit in the beginning about a couple of very important things I mentioned, $1 billion in total assets. Just a year ago, we were -- this amounts to about $324 million more than we were one year ago or a 47% increase in the size of our balance sheet in one year. Earnings, $4.7 million for the quarter, you know these numbers. But last year, at the same time, it was $2.4 million and we had a 103% increase, excuse me, the increase was $2.4 million or a 103%, better results. I love saying those big numbers when they happen. And the third and most important part of the quarter for that we spent a great deal of time on was the BCS acquisition of the 32.99% non-voting interest -- non-controlling interest in BCS. For all stock, we gave BCS 231,508 shares. And it was really, we think, of a very good investment for the Holding Company and a very good deal for BCS. I mean by receiving the bank's shares and with the Holding Company performing the way we are, their value has increased. And I'm going to go towards the end of the meeting and talk about our Gaming FinTech Division because it's tied closely to our BCS relationship. And to give some of the detail of those remarkable numbers that I just gave, I'm going to turn the meeting over to Ryan Sullivan.

Yes. Well, thank you, Ed. Good afternoon, everybody. As Ed mentioned, yes, this is -- it makes it fun and maybe a little easier to report numbers like these. Certainly, a very strong quarter of performance. Through the call, we'll provide some additional details on the financial and operating highlights that allowed us to generate these kind of results. We believe the quarter is really a demonstration of the strides and performance made by the company and the high level of performance that we're really seeing across all business lines currently. Certainly, the big headline, earnings, all-time record for the quarter at $4.7 million. That's up nearly $1 million from just the prior quarter or a single quarter increase of 26%. Also interesting, '24 year-to-date earnings now stand at $8.4 million, which is a 49% increase over the first 2 quarters of 2023. Now how we were able to achieve these results in no small part was because of revenue growth, also set a company record for quarterly net revenues on the top line at $15.5 million. And this really is a function of continued and demonstrated success in our revenue development strategies that we began working on many years ago. As we look at the major revenue components, net interest income of $11.3 million for the quarter, was up 5% compared to Q1 of '24 and up 30% compared to Q2 of '23. NIM was generally flat, consolidated at 4.82% for the quarter. Directionally, we're really encouraged by what we're seeing there as we see the full effect of some of the higher cost deposits that we brought in, and Q4 and Q1 really running through. And on an inter-quarter basis, we're seeing directionally some improvements there. So as we look at the second half of the year for net interest margin, we expect to be able to focus on both mix and reducing our interest cost on interest-bearing liabilities, and we'll see that margin improve in the second half of the year. Non-interest income in total was $4.2 million for the quarter. It was up in every single category. Certainly, gain on sale of loans is a driver of that as the company and bank migrate back to a majority sell position in its newly originated guaranteed loans. Gain on sale of loan income was up by $1.1 million in the quarter compared to Q1, and that was on the sale of approximately $78 million in guaranteed loan sales for the quarter. Also encouraged by what appears to be stabilization in the GAAP gain, the prices that we received on the sale of those guarantee, that appear to be stabilizing, and we're seeing that continuing into Q3 above what we saw in both Q1 and the final quarter of 2023. I am particularly excited about the demonstrated operating leverage that we were able to show during the quarter. And that, although non-interest expenses went up and Jeff will get into some of those details, revenues went up by more. So altogether, that resulted in an efficiency ratio of 59%, which puts us on the mark for our long-term 60% or better target. On the balance sheet, net of all those loan sales for the quarter, gross loans were still up by $36 million for the quarter or 5% sequentially. And also, as we cross the $1 billion threshold, we're very excited about that. As we look at the composition of the balance sheet, 1/4 of our entire balance sheet is comprised by government-guaranteed loans. Government guaranteed loans stood at $252 million as of June 30th. Asset quality levels remain stable and manageable. Total non-performing loans were $7.6 million as of June 30th or $2.2 million if we net out the guarantees, that $2.2 million equates to 22 bps on total assets. And in addition to those guarantees, all of those non-performing loans are also commercial real estate secured. Just really quick, to take a moment, and Ed mentioned, he'll talk about some of the developments, they are very important and exciting progress in our business lines. I just want to take a moment to talk about our SBA Lending Division. Through today, we have secured $384 million in 7(a) authorizations for the SBA fiscal year. SBA fiscal year started on October 1, 2023. So with Q3 left to go, this will be the first time that we exceed $400 million in the SBA fiscal year in total SBA 7(a) authorizations. To put that into context, for the entire prior fiscal year, which ended September 30, 2023, we secured $224 million in 7(a) authorizations. This is an incredible achievement and it demonstrates the kind of activity and production that we've been able to generate. And I'd like to extend my special thanks to all GBank employees. But in this context, thank you very much to the SBA Lending Division.

I'd like to just add one thing to what Ryan just said about our SBA Division because we are strong in the hotel. We have almost 30,000 hotel rooms in our portfolio right now. And I consider it, it's considered CRE. But when we look at the small service hotels, I consider them consumer business. We are not renting to office space or businesses or providing corporate venues at these small service hotels. This is the consumer. When you see the PCE index, the consumer expenditure index, those are our customers. And in the -- when the interest rates went from 5% to 10%, our 29,000 rooms and how they adjusted it amounted to about a $7 per day average room rate. And RevPARs at these hotels because of inflation went up way beyond that. As a matter of fact, the entire portfolio is still averaging over a 2.2 debt coverage ratio. So it's a remarkable business we're in with our SBA Division. And I just wanted to point that out because it is so important in terms of risk analysis that we really understand the nature of the portfolio. But thanks, Ryan, I didn't mean to interrupt you.

No, I'm glad you brought it up. Thank you, Ed. Certainly, as we look at the rest of the year, we have some exciting developments; Gaming FinTech, credit card, which we'll talk about in a moment as we focus on an important part of our business, just commercial and SBA. We're optimistic that this level of production and performance will continue into the second half of the year. And actually, today, we stand just on commercial pipeline on a 90-day period, well above $150 million in our current pipeline. So we expect Q3 and Q4 to be more of the same. So with that, overall, a really great quarter. And I'll turn it over to Jeff to get into some of the details. Jeff?

Thank you, Ryan, and good afternoon, everyone. I'll see what I can do about providing a little color on the financial results. So as discussed, the company has had a very exciting quarter with several major accomplishments. First, GBank Financial Holdings reported record quarterly earnings in the second quarter, the $4.7 million, which is $0.35 per diluted share, and as compared to $3.7 million in the prior quarter or $0.28 per diluted share. This was due mainly to year-over-year asset growth, increases in non-interest income and low levels of non-performing balances. In addition to record income, the company has crossed over a major threshold to become a $1 billion bank, ending the quarter with just over $1 billion in total assets. And also, the holding company purchased a 32.99% non-voting equity interest in BankCard Services, LLC, by exchanging non-voting common stock. This transaction was valued at $3.3 million and is recorded in the other assets section of the balance sheet. The investment will be recorded at cost and adjusted to fair value on an ongoing basis. The company incurred $268,000 in onetime expenses related to this transaction during the quarter. Quarter-over-quarter net interest income increased 5% to $11.3 million compared to $10.8 million in Q1 2024 and increased 30% from $8.7 million when compared to the second quarter of 2023. Net interest income is up both quarter-over-quarter and year-over-year as the increase in interest income on loans has exceeded the increase in deposit costs by $400,000 on a linked quarter basis. The loan portfolio produced an impressive 8.33% yield as it continues to benefit from the current rate environment. The investment securities yield of 4.74%, increased 58 basis points during the quarter as we had $30 million in lower-yielding treasury securities that matured. Bank net interest margin of 4.94% has stabilized over the last few quarters and is almost 155 basis points higher than the peer average. Non-interest income totaled $4.2 million and increased $1.8 million or 73% over the prior quarter. The gain on sale of loans increased $1.1 million quarter-over-quarter due to both the $9 million increase in loans sold and an increase in GAAP gain of 133 basis points to 4.36%. Contributing to the favorable increase in non-interest income was an increase in loan servicing income of $474,000 as the first quarter reflected $400,000 of servicing asset write-offs on previously sold loans. Non-interest expense increased $758,000 during the quarter, primarily due to increased variable compensation paid related to significant volume of SBA loan originations and sales during the first 6 months of 2024 and $268,000 in onetime expenses related to the BankCard Services investment as discussed earlier. The efficiency ratio favorably decreased to 58.86% for Q2 2024 from 63.41% in the prior quarter and from 68.96% for the same quarter in 2023 as the bank has been able to take advantage of the prior period investments in technology and people to minimize costs while maximizing revenues. The consolidated ROA of 1.9% for the quarter and 1.75% year-to-date, and the bank's ROA was 2.16% for Q2 compared to the peer average of 1.07%, putting the bank in the 92nd percentile for income. Consolidated return on average equity was 17.59% for the quarter and 16.17% year-to-date. So moving over to the balance sheet. The assets increased by $45.9 million or 5% during the quarter, due mainly to a $33.4 million increase in deposits with quarter-over-quarter increases in every deposit category. Additionally, the company experienced that $30.7 million decrease in investment securities due to the maturity of the [ $5 million ] U.S. treasury securities that we had and all other assets increased by $7.5 million, with the primary driver being $3.3 million investment in BankCard Services. The bank paid down the $10 million FRB borrowing in early April 2024 and then subsequently executed a short-term borrowing of $12 million at the end of June 2024, which we paid off at the beginning of July. The bank continued to see a broad momentum in SBA and conventional lending as balances increased 5% for the quarter and 77% over the prior year. New originations for our SBA and Commercial Banking Divisions were approximately $127 million during the quarter. In addition, the bank sold SBA-guaranteed loan balances of approximately $78 million during the quarter, an increase of 118% and 14% on a year-over-year and linked-quarter basis, respectively. A 100% government-guaranteed loan balances were $252 million at quarter end, which represents 31% of the bank's total loan portfolio, and these are held steady during the quarter with minimal prepayments. So looking at the asset quality relating to the loans, a $283,000 provision for credit losses was recorded during the quarter, reflecting growth within the loan portfolio. The allowance for credit losses increased to $7.3 million. Non-performing loans remained stable with a small balance of net charge-offs related to our Credit Card Division and were within our expectations. The overall allowance for credit losses was 0.9% of gross loans and 1.31% of at-risk loans, which is net of the government-guaranteed balances. This is right in line with our peer group. Non-performing assets increased from $6.1 million on March 31st to $7.6 million on June 30th. The balance is comprised of 3 unrelated non-accrual loans totaling $6.5 million, of which $4.6 million is guaranteed and one loan 90 days past due and accruing of $1.1 million, and this loan was brought current in early July 2024. While deposit generation remains competitive, the bank has been able to utilize the diversified channels that have allowed the bank to grow deposits in all categories during the quarter. The need for wholesale funding has decreased while the bank continues to work to replace those high-cost funds with more core balances. Uninsured deposits are estimated to be 39.3% of total deposits. Noninterest-bearing deposits increased in balance from the prior quarter, but fell slightly as a percent of the total portfolio and represents 26.2% of total deposits. The loan-to-deposit ratio remained stable at 96.7% compared to 96.3% in the prior quarter. Our securities portfolio holds several short-duration treasuries at variable rate Ginnie Mae mortgage-backed securities. Overall yield on the investment portfolio of 4.7% for the quarter puts us in the top decile compared to our peers. OCI is still negligible and decreased during the quarter to $199,000 compared to $258,000 on March 31st. The total unrealized loss on the investment portfolio is $451,000 tax affected, which is down 33% from the prior quarter due to maturities and valuation adjustments related to lower future rate expectations. Equity to assets increased to 11% from 10.6% in the prior quarter, and the bank's Tier 1 leverage ratio was 12.88% compared to 13.03% in the prior quarter, due mainly to asset growth, which was offset by organically produced retained earnings. The tangible book value per share increased to $8.49 on June 30th from $8 on March 31, 2024. The change in tangible book value per share reflects growth in shareholders' equity from both increases in retained earnings fueled by net income growth and higher common stock and paid-in capital from the shares issued for the BankCard Services investment. Sensitivity at the bank continues to decrease. The bank continues to move toward a more neutral position related to interest rate risk to better position for all potential rate environments. The large increase in our fixed rate loans in recent quarters combined with the short-term funding has continued to reduce the asset sensitivity of the bank. Our most recent models reflect that a 12% reduction to net interest income would occur in a 200 basis point rate decrease. Liquidity remains very strong at the bank. During the quarter, the bank continued to enhance liquidity options to provide additional security to fund operations. The bank has on-balance sheet liquidity of $130 million and total liquidity, including borrowing capacity of $664 million. Secured borrowing capacity through the Federal Reserve and the FHLB stood at $454 million at quarter end. This puts the bank in position to immediately replace 78% of its deposit base if needed. So striving to provide customers and employees with the best banking experience ever has allowed GBank to thrive as an institution. This is evident in our quarterly results, and the bank continues to execute on its overall strategy. The company has continued to outperform expectations and as we continue to look for opportunities to support the small businesses and consumers all over this nation. With that, Ed, I'll turn it over to you.

Well, thank you, Jeff. I want to go for a minute to our Gaming FinTech Division. And it is a very important part of our activities here at GBank. You may have heard, and I know you've heard if you're in the FinTech business at all, the headlines on FinTechs have been very troubling these past few months. Daily use of several of these or at least one in particular, banking-as-a-service FinTech, where they aggregated almost 100 other FinTechs and opened banking-as-a-service accounts at several banks. Not counts like we do, but very nice apps that provided very nice service to some of these customers that use those applications for their banking requirements. Now we don't do that. We are not banking as a service in our FinTech, and we're keeping the name FinTech because we are indeed in the financial technology arena that no one else is. We have our prepaid access structure that we received through agreements with BCS, but our FinTechs are very carefully vetted by our bank. We have amazing personnel that do incredible vendor management on every client a processor may bring to us. They are clients of the bank, and we know everything about them. And we know and are certain that they have the kind of internal controls that we try to assure that they do. And the ones that they don't, we have anyway as the buck always stops with us. We learned that very early in the game. So you've seen some press releases today that have just come out, and forgive the timing on them, but these agreements have been in the works for some time, but we released the Trice press release. Trice is a company that we met -- that the bank met through our investment in Jacobs Asset Management or the JAM FINTOP fund that they have. And that fund provides us access to technology companies in their early stages that are providing some interesting solutions for banking. And Trice was one of those solutions that has developed a format, an API for real-time payments. In real-time payments and also a platform for RFP, and RFP is request for payments. So real-time payments going out and real-time payments coming in back and forth between your own personal accounts. Now RTP, we through this process of our pool player accounts, where if you're a bank -- if you're a gaming company that has an agreement with us for our pool player accounts, then your app and the consumers on your app have a personal account. And with a personal account and they have a personal account at whatever bank that as long as they're a member of RTP, you can instantly and I mean instantly move money on and off your gaming app, utilizing Trice platform and utilizing our account architecture at GBank. What does this mean? This means that we think we are going to be one of the first or possibly the first in the marketplace for RTP, real-time payments, in and out to gaming apps, large or small. And we think this is going to be very important because there are savings in it, there's time. So imagine as a consumer, you're sitting and you are using a sports app that has an agreement with GBank for our pool player account, you can instantly on a Sunday morning offload your money to your bank account, takes about 5 seconds. We think this is going to be revolutionary. We think it's very important for many gaming clients, and we executed our agreement, and we hope to go live with some of our first clients in the third and fourth quarter for sure. Real-time payments, on gaming apps, we think we'll be one of the first. We also just released MassPay, which is another company and the MassPay is a payment processor. So MassPay is a payment processor for a lot of entities that are engaged in social game, games of skill. And they really like and are going to be a PPA customer too because they really like these consumers having the protection of a pool player account at GBank. And they have quite a few operators in the social gaming arena that they want to provide this kind of security to. What this FinTech attention is doing is pushing a lot of people to understand that they want to protect the consumer. And we have, we believe, the ultimate solution for protecting the consumer because of the architecture of our prepaid access accounts at GBank. So those 2 are very important. And we actually have another 4 that will go live in this quarter, and we have another 12 FinTechs in the pipeline that we hope to get as many as we can active by the fourth quarter. It takes time both for them to develop their platform, but once they've developed their platform, and many of them are existing very large platforms already, but they have to endure the rather rugged vendor management programs that we have preliminarily at BCS and then they get the heavy hitter at GBank. Those are very exciting programs. And I think that with this pipeline, you're going to see a lot of releases start to come out over the next several months of new clients and new customers for GBank. I also want to point to one other thing, one other important element of our gaming business, and that's our gaming-specific credit card that we launched. You've heard us talk about it before. To say this has been a long process would be understating because we started looking at the credit card program for gamers back when we were a very big Sightline and we still are Sightline providers of their prepaid card. But in their pay day of Sightline, we had issued and opened almost one million accounts for Sightline. We had about 700,000 active prepaid cards that we were processing at GBank. So we have really understood and know and the biggest clients that these cards were being used with were BetMGM, FanDuel, DraftKings, Caesars, and about 50 other small clients. But a change happened in the world of loading these prepaid cards and the preferred way to load them was for the credit card. But then both MasterCard and Visa changed their merchant code to where this activity was and became a gaming transaction instead of the financial transaction of loading a prepaid card. And without getting into too much detail, that really reduced the amount of loads that went in because the banks that issued the prepaid -- that issued the credit cards, many of them do not like the gaming transaction merchant coded, will not approve that merchant for their card so that this transaction is denied. But these were many of our prime customers, we recognize this. So we started the process some time ago in developing and then we believed that the best card to issue was Visa. And we went and become a Visa issuer and not just a Visa issuer, we're issuing a Visa Signature card, which has instant credit, if you qualify, for $11,000, $12,000, about $11,000, I believe, right, Ryan?

That's the average, yes.

And the important part of this is that these are quality customers. And the unfortunate part of it is that it takes a pretty high credit rating to get instantly approved for $11,000 of credit. So the process of finding approved players has been a long one, but at the same time, you're starting to develop, and it's a premier customer. Here are some interesting numbers. We really launched the program in the fourth quarter, where we started some serious marketing. But today, our marketing program is increasing, and I'll tell you a little bit about that. But right now, in the first quarter, we had $1 million in transactions in our credit card program. In the second quarter, we had $7 million in transactions in our credit card program. So we increased $6 million, and we're seeing the growth rate continue at pretty much the same rate through the month of July. What this is, is the number of transactions that they do with various merchants if we look at the gaming operator as a merchant, which is. That means that our customers spend $7 million with our merchants in the second quarter. And the merchants that they're spending, the top 4 are at BetMGM, FanDuel, DraftKings and Caesars. Those are our prime merchants for our credit card program. And this is in its infancy. And of course, there's the interchange fee and we pay rewards programs, but we believe that this -- and the $7 million I mentioned to you, 90% of it is our gaming transactions. And they're instantly paying off their credit card each month. So the behavioral pattern is exactly what we were hoping for. The volume exceeds our expectations. And we believe this is going to become a very significant program, and you're going to start to see our Gaming FinTech Division being monetized not only by increased deposits, but also by the fees we earn from the credit card program. And we haven't even gotten into the credit part yet, but the credit card is very small, the credit part. And that's fine. We love the fact that it's generating a great revenue from the interchange fee for us. Interestingly, and how we're marketing it now. We've just signed an agreement with Everi. Now some of you will know Everi, some of you will not. Everi is currently in an agreement to merge with International Gaming Technology, IGT, NV based in Las Vegas. IGT is moving their headquarters back to Las Vegas. They were actually bought by an Italian firm. But Everi is one of the largest casino cash management companies in the United States with over 700 casinos, most of the strip. And they manage about $40 billion, $42 billion to $45 billion a year in cash transactions with the casinos for the casino cages, their kiosk. And we just signed a marketing agreement with them because they really like the gaming-friendly credit card that we have, and they are trying to develop the wallet for their customers to use, their customers of Everi. So this has, we think, some amazing potential for us as well. We just executed that agreement. We haven't even begun our marketing yet, but it's going to start. The other important one is Sightline Payments. Now we haven't been talking about Sightline in quite some time, but we still have a very viable business with Sightline prepaid cards and Sightline has just executed a marketing agreement for our credit card as well. Plus, there are 3 other companies that have executed marketing agreements, and these have all been happening in the second quarter of this year. So our Gaming FinTech Division with the access to our prepaid account structure, with their access to our credit card. And with our access to, I think, the gaming industry as a whole and the recognition of what we do, full circle in payments, prepaid cards, credit cards, UPI accounts, and we're going to get our first Pooled Consumer Account customer, we believe, in the third quarter as well. So we think the outlook is very strong for our Gaming FinTech Division. We believe we're going to start to see the monetization of it. We believe we're going to start to see the deposits pick up because Ryan sure uses them quickly, as you can see by our balance sheet growth. So we think we have an amazing complex of businesses with our SBA Division, our Commercial Division, our Payments Division, our Gaming Division, our Credit Card Division, and we are really growing. In closing, I wanted to make one statement, which has been a subject matter of discussion and I'm making the statement with very explicit instructions of how I say it. But preliminarily, we are exploring becoming an SEC reporting company, and the possibility of public offering of our shares. So with that, I would like to conclude our prepared remarks for our earnings call and open it up to questions and also wonder whether what kind of Olympic medals if we've got any or did we just get a participation medal. Thank you.

I got a question, if you don't mind. So Ryan, how should we think about loan growth in the second half of this year, right? I mean, first quarter was I think 14% sequentially. Second quarter was 5%. Is it somewhere in between those ranges? Or is it reasonable to think that it might be better?

Yes, I think that we'll be somewhere in between there, although I do think that the 5% sequentially probably are closer to that. It is kind of what we expect for Q3 and Q4. The composition will drive that a little bit. But talking about net quarter-over-quarter growth, we are probably in the 8% range.

And then with the prospect of lower funding costs coming down the pipeline, figures crossed later this year. Does that encourage you to get a little more competitive on pricing in advance of that?

Competitive on the liability deposit side?

No, on the loan pricing. Sorry.

On the loan pricing. Yes. And I think a lot of that has already happened. That's certainly what has helped support the volumes that we've seen on the commercial and SBA side. Comparison to 3 years ago as an example, really most of our new SBA origination volume was at prime plus 2. Most of the average is prime plus 1 today on commercial real estate secured and more than that on anything else. But I think we've been pretty competitive there. As Jeff mentioned, we'll continue to work on arriving at neutral. So we are seeing some opportunities for fixed rate lending as well because of the inversion of the curve, those rates are a little bit lower. But overall, we're generating new volume per quarter all in, it's still a contractual rate close to 9%. So that's what we expect to continue.

And then in terms of expenses, do you feel like you have the people necessary to continue to grow? Or do you feel like you kind of reaching them to max out on their bandwidth?

Well, I think we definitely have more bandwidth. I think we will see that FTE count go up slightly, probably certainly as we look over the course of the next few years. But by and large, we feel good about where we're at, and it would be just a small increase in FTE.

Okay. And then if I can turn to BCS, Ed. If I read this right, it looks like you could double the number of clients by year-end. Is that what you're kind of indicating?

Yes, I believe easily. We have -- as I said, we have about 12 others in the pipeline right now that we're working with, 4 others that are going to go active in the third quarter. And how many of these 12 will make it to the fourth quarter, we don't know yet, but that number keeps increasing. What's happening right now, Tim, is we're calling out a lot of the callers now, a lot of the companies, a lot of the start-ups, we're not working with anymore because start-ups are -- we want a more mature processor. We want to see customer base, and we want to be able to see those that have a customer base we can bet really well. So the interest of that is yes.

So not only doubling, but adding a more mature customer?

Yes. That's why we are talking about people like Everi and Sightline, and we're working with Sightline to possibly open one of our Pooled Player Accounts and start bringing their clients into it.

Those are my questions. I'll step back. I'm sure Brad's got some, but I definitely give you guys a gold.

Thank you, Tim.