GBank Financial Holdings - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid top line with net revenue of $17.4M, net income of $4.5M, and diluted EPS of $0.31; noninterest income rose 127% YoY to $5.5M driven by credit card interchange, while net interest margin compressed to 4.47% due to lower loan yields after the late-2024 Fed cut.
• EPS missed S&P Global consensus ($0.31 vs $0.36)*, primarily owing to ~$1.0M extraordinary SEC uplift/legal/audit and tech costs in Q1; gain-on-sale declined vs Q4 on seasonality and softer margins, partially offset by interchange doubling sequentially. Values retrieved from S&P Global.
• Strategic catalysts: SEC Form S‑1 declared effective April 16; shares uplisted and began trading on Nasdaq Capital Market on April 30, positioning the company for broader index eligibility and liquidity.
• Gaming FinTech momentum: credit card charge transactions surged to $105.6M (from $51.7M in Q4), net interchange hit $2.0M; management plans a near-term marketing pause to complete internal app/customer service builds, then larger campaigns and a secured card in Q3.
• Asset quality mixed: nonperforming assets increased to $20.4M (1.71% of assets) with $14.7M SBA guaranteed; net charge-offs were $828K, still modest vs capital and reserves, while Tier 1 leverage ratio rose to 14.2% after $15M downstream to the bank.

What Went Well and What Went Wrong

What Went Well

• Noninterest income growth and payments monetization: “Our other income… in the fourth quarter we had $5.7M… in the first quarter, $5.4M… reason, of course, is interchange. Our interchange went from $1M… to $2M in Q1” (Executive Chairman).
• Credit card scale and engagement: Net interchange reached $2.0M on $105.6M spend in Q1, vs $1.1M on ~$52M in Q4 and $20K on $1.1M in Q1 2024; >90% of spend is gaming, a high-transactor cohort.
• Capital and liquidity strength: Tier 1 leverage ratio rose to 14.2% after a $15M downstream; deposits hit ~$996M (+23.4% YoY), with ~$488M available borrowing capacity and loans-to-deposits improved to 84.7%.

What Went Wrong

• EPS miss and expense pressure: ~$800K SEC uplift and ~$200K tech added ~$1.0M one‑time costs; efficiency ratio rose to 62.8% vs 55.4% in Q4.
• Margin compression and gain‑on‑sale: NIM fell to 4.47% (from 4.53% in Q4; 4.85% in Q1 2024) due to the 50 bps Fed cut impacting variable-rate SBA loans; gain-on-sale fell 36.5% QoQ to $2.5M as margins softened and volumes normalized.
• Asset quality normalization: NPAs rose to $20.4M (1.71% of assets) including $14.7M guaranteed; net charge-offs increased to $828K, with one repurchase contributing ~$3.6M to nonperformers; management remains comfortable given guarantees and reserves.

Transcript

Ed Nigro (Executive Chairman)

Welcome, everyone, to our very first call as a NASDAQ-traded company. It started this morning, I'm sure you all know that. We've been on an adventure with the SEC and the NASDAQ application, with the whole goal to get to become trading as of the 30th of April so that we would also be eligible for the Russell 2000 reorganization. Without one day to spare, we were live this morning. As very we had board meetings yesterday, and we celebrated together because it is a very big step for us. We have a new birthday of GBank Financial Holdings of April 30th. Yeah, April 30th, 2025. I want to welcome you this morning.

We're going to change our format a bit from our prior calls, and Ryan and I are going to be doing about 15 minutes or so of presentations, and then we're going to open it up for questions and answers. We're not going to reread our report that we sent out. Jeff Whicker, our Chief Financial Officer, is also here in the room to answer questions as well. I'm going to start off because we will be talking about our company, our growth company. We're a banking and payments company, but we do and have been a growth company for some time. Our growth right now, if we focus on our report that we just submitted, we have really seen growth in other income. Our other income has always been led by our SBA gain on sales.

Ryan and I were talking about the time where our GAAP gain was well over 10% on our gain on sales. If someone told us that several years from now, the GAAP gain would be in the threes or 3.8 or 9%, we would have been very concerned. It has done that, and yet we've been able to maintain our growth. Yes, we've increased our volume in SBA, and Ryan's going to talk about that. I want to focus on our payments arena because if we look, we've looked year over year and seen that our other income has doubled, more than doubled in year over year the same quarter. Let's even look at it sequentially because if we look sequentially in the fourth quarter, we had $5.7 million, and I'm going to round my numbers around it, please.

We had $5.7 million of other income, non-interest-bearing income. In the first quarter, we had $5.4 million. The interesting anomaly there is that we had $5.4 million with our gain on sale decreasing by $1.5 million because our gain on sale in the first quarter is always lighter and always has been lighter because of the generations in the fourth quarter have usually been a bit less than our normal. Although, in this year, I think when you see that the gain on sale declined that much, yet we were still almost matched the non-interest income of the prior quarter. The reason, of course, is interchange. Our interchange went from $1 million contribution in the fourth quarter to $2 million contribution in quarter one from our transactions on our credit card. When we look at it from the standpoint of growth, there is another issue.

If you look at other expenses, we had unusual expenses, other expenses in our financials. You'll see where our other total non-interest expenses went to $10.9 million. You'll see the various breakouts, but other expenses in particular went from up to $4.1 million in the quarter. We have, and again, I'll round the numbers, $800,000 of that is unusual expenses for accounting and finance and legal for our applications to the SEC as well as NASDAQ. There was about $200,000 that was an additional billing from FIS that they said that we owed in additional funds that they didn't bill us for. We had $1 million in one-time expenses in that quarter as well.

If you add that and you look at and even equate our gain on sales, if you would, for a moment, you see the kind of growth we are really experiencing. I mean, we add these numbers in and the earnings per share jump significantly from $0.31. If we also look at the fact that we now have 14.5 million shares and last year we had 13.2 million shares. We are 1.3 million shares, excuse me, 1.3 million shares more to spread our earnings over. At the same time, these earnings we think would be going to manifest themselves, especially as we continue forward. Now, on a little bit of a forward-looking basis for the second quarter, we have seen our credit card and our interchange growing significantly.

We have deliberately kept the program at a manageable level from the standpoint of our marketing and how many consumers and the consumer participation that we have because we have a system, internal system that is, as we think, needs improvement. Because as we have done with everything else that GBank accomplishes, we do it ourselves. That way we know that it is done well. We want our GBank app and our credit card division of that app to be self-sustaining where we have our own landing page to process our own applications and approve our own credit cards. We can do it on a timely basis and we have a consumer and customer service that really performs well. To do this, we do have a remarkable IT division, and we are already well under our way to form this app.

We want to, if you will, pause our marketing until we have this app completely tested and developed. We have been working on it for some time now. We believe it is going to take about 30-60 days to do that. We may see some slowdown in our growth in our credit cards for the next quarters, but we anticipate that we are going to be able to handle a much, much higher volume of applications. We are also looking in terms of our customer service where we will have a very effective and efficient customer service that will work well for our consumers.

We want to take this little window of opportunity to do that to make sure we're ready because we are planning a major marketing effort that are going to be starting in about 60 days, 30 to 60 days, actually, depending on our app. Because we have a great deal going on and we have a very, very high interest in this card, in this credit card for gaming. Now, finally, when we're looking at growth, we cannot, and we are looking at new amortization, excuse me, new monetization of our gaming fintech division. We have to also talk a bit about our slot program.

When I talk about our slot program, I mean our primary, one of our primary customers, BoltBetz, is prepared to launch live with their slot program once the final regulatory approvals are done in the state of Nevada for their gaming operator to implement it, which should be forthcoming in this quarter. BoltBetz has developed with the Konami Casino Management System, a system that identifies all the banking requirements, the payments requirements, the gaming requirements. It uses our pool player account for all of their consumers so that BoltBetz funds are not, the consumer funds are not held by BoltBetz. They're held by the bank. We have implemented RTP and RFP for moving money instantly on and off this app.

We also have gotten, he has gotten credit card approval from Visa, and we will have an app direct for our credit card on this program as well. It is also tied to his rewards program. It is an amazing program that has tested really well, is live on his machines, but not live for use by the consumer until they get the final nod from Gaming Control, not BoltBetz, but until the gaming operator does. There are other programs that are also being groomed by us that are going to increase, I think, our activity and our deposit schedules for our gaming fintech division. Many exciting things, including the application we recently filed for a secured card, and it is an extension of our current Visa Signature Card. That is an application with Visa.

There's a great deal going on from the growth standpoint, and you're going to see it manifested in other income. I think once we look at taking out some of these anomalies, you'll see that earnings per share could have easily achieved much higher numbers, and I'll let you do the math, than are on there if we added $2 million to other income. With that, I'm going to turn it over to Ryan.

Ryan Sullivan (President and CEO)

Thank you, everybody. Thank you, Ed. Just to start off, also celebrating the developments of the company and SEC registration and our first day on the NASDAQ capital markets. Specifically, I'd like to take a moment just to acknowledge the incredible efforts required to achieve this outcome, especially on the timeframe that we did. I just can't say thank you enough to all of our employees, our advisors, our stakeholders, our customers. Without you, it just would not have been possible. Thank you so much. As stated, we're pleased to report an income of $4.5 million or $0.31 per diluted share in a quarter that included altogether nearly $1 million in extraordinary expenses, the $800,000 approximately related to the SEC uplift and the other $200,000 in technology projects on work that was done in prior periods.

Net revenue continues to be strong for the quarter, $17.4 million. It was down about approximately $196,000 on a link quarter basis. However, year over year, it was actually up by $4.2 million or an annual increase of more than 31%. As we think about the different components of our top line, specifically net interest income was up $105,000 compared to Q4, mainly due to our growing balance sheet. Year over year, net interest income is up approximately $1.1 million or more than 10%, again, on a much larger balance sheet. NIM was down somewhat quarter over quarter to 4.47%, and there's a good breakdown of that in the release. Specifically, lower loan yields as the 50 basis point and rate reductions that occurred in Q4 went into effect for our variable rate SBA loans as of January 1.

That was offset by lower funding costs and also higher investment yields. Investment yield and investment portfolio is performing nicely with a quarterly yield of 4.94%. Overall, we're quite pleased with the NIM and how it's held up. On a bank peer comparison, we expect to remain in the top decile for net interest margin. As Ed mentioned, a big component of our top line is non-interest income, which totaled $5.5 million for the quarter. That was down approximately $300,000 compared to Q4, but year over year was actually up by $3.1 million or a year over year increase of 127%. The two largest components of that, as mentioned, gain on sale of SBA loans was down approximately $1.5 million compared to Q4 due to both Q4 sales being strong and Q1 being historically a little weaker due to seasonality and the year-end holidays.

Year over year, gain on sale of loans was actually up by $454,000 or an increase of 22%. Net interchange on credit cards was right at $2 million, and that's on spend volume of over $105 million for the quarter. That compares to revenue of $1.1 million on spend of approximately $52 million in Q4 and $20,000 in revenue on volume of only $1.1 million in Q1 of last year when we were still really ramping up the program. Shifting to non-interest expenses, first on a link quarter basis, non-interest expenses were up by approximately $1.2 million compared to Q4. This was due to, again, the SEC uplift expenses as well as increased compensation on higher loan origination volume during the quarter compared to Q4.

We also had an increase in employee count and continued growth in technology development costs, as that alluded to a significant portion of these costs are being driven towards improvements, enhancements, and growth within credit card. Next, on a year-over-year basis, non-interest expenses were up by approximately $2.5 million, again driven by increases in compensation and other operating expenses, which were up year-over-year by $1.1 million and nearly $1.5 million respectively. Compensation specifically, you can see that FTEs increased year-over-year from 150 at March 31, 2024, to the most recent quarter of 175. That comprised approximately $850,000 of that year-over-year increase. Also year-over-year, our stock-based compensation increased Q1 compared to Q1 by nearly $250,000. It's been great to see the stock price goes up. As that happens, we get to recast those non-cash expenses.

From other operating standpoint, again, the SEC expenses on the accounting and legal really fall into this line primarily. In addition to that, there was over $500,000 in year-over-year increases in data processing on increased credit card volumes and technology improvements and projects. Moving on to the balance sheet, total assets were at $1.19 billion. That's up 24% over the prior year. Total loans were at $843 million, which is up 15% year-over-year. The loan loss reserve stayed right around the $9 million mark, and that equates to 1.41% of at-risk loans or loans excluding the guarantees. Deposits were at $996 million, so just shy of a $1 billion mark. That's up 6.5% sequentially. Total equity now stands at $147 million for the company. That is up 43% compared to a year ago. The book value per share also broke the $10 mark and is now at $10.27.

That's up by more than 28% compared to March 31, 2024. I'll also note that we did complete the downstream of $15 million from the parent to the bank. That actually happened during the quarter. That relates to the private offering that was completed in October of last year. We did do that downstream of $15 million in Q1. That translated to an increase in the bank's tier one leverage ratio, which at the end of the quarter was 14.23%, which will place us, again, well in the upper decile for our bank peer group in total asset size. Speaking a little bit about asset quality, we recorded a provision for the quarter of $710,000 or $721,000 if you include the off-balance sheet portion. Net charge-offs for the quarter were approximately $828,000.

These were all partial charge-offs on loans that were previously identified as non-accrual and actually had specific reserves recorded last year in 2024. Total non-performing loans were up by $6.2 million to $20.4 million, of which $14.7 million of that was guaranteed by the SBA. A majority of the quarterly increase in total non-performing translated to one repurchase of an SBA loan of previously sold guarantee balances, which was identified as non-accrual at the end of the year, but the repurchase actually took place in Q1, and that translated to approximately $3.6 million of that quarterly increase. With net at-risk non-performing loans of $5.7 million, that represents only 3.7% of the company's capital plus reserves. We are very comfortable and pleased with the continued performance of the loan portfolio, and we are encouraged by the fact that specifically our SBA loan performance continues to outperform our SBA peers.

As we think about the future, we're certainly happy to be in the position that we're in with nearly 25% of our loan portfolio being guaranteed by the SBA and USDA. Specifically, as we look ahead in SBA and commercial, we still see some positive sentiment really remaining within that group and our customers. Specifically, the SBA and commercial pipeline remains quite strong at an expanded pipeline of more than $300 million. Altogether, a really strong quarter. We have a lot of great things that are happening. With that, Ed, did you have any other comments?

Ed Nigro (Executive Chairman)

No. We'll open it up for questions now.

Ryan Sullivan (President and CEO)

Okay.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Hey, guys. It's Tim Coffey from Janney. How are you doing?

Ed Nigro (Executive Chairman)

Hey, Tim.

Ryan Sullivan (President and CEO)

Hi, Tim. Good morning.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Yeah. Hey, congratulations on a very active quarter.

Ryan Sullivan (President and CEO)

Thank you.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Speaking of which, Ryan, a couple of times in the press release, you discussed that SEC uplift costs were, I think, $1.1 million to date. Are you expecting more in the second quarter?

Ryan Sullivan (President and CEO)

Yes. There will be some. I think that, just to break that down, it was, like I said, about $800,000 in Q1. It was approximately $300,000 in Q4. I believe we have, what do we have slated for Q2?

Ed Nigro (Executive Chairman)

We've got $1 million in the budget for Q2, but I don't know that we'll get quite that high.

Ryan Sullivan (President and CEO)

Yeah. We've got a million in our forecast, but right now, we're looking at maybe being a little bit less than that.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. That's helpful. Ed, a lot of stuff to talk about on the credit card this next quarter. How should I be thinking about the daily transaction volume in that card for the second quarter?

Ed Nigro (Executive Chairman)

I think that we're going to, when I mentioned a pause, I think that our transaction volume is going to stay while we're in this process since we're not going to be growing our card other than through our incidental growth, word of mouth, other things. I think we can look at our transactions. Remember that the part about the second quarter, we've been doing this for a long time. As you knew, we had a million accounts with PlayPlus on prepaid cards. The second quarter always sees a decline in sports betting and activity that we've seen every year in terms of our load factors. Given all that, we think it's going to stay probably flat for a quarter until we start picking up our momentum again in the third quarter.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. In terms of kind of the expansion of the product overall, obviously, you went into detail on the marketing side. Are you planning any enhanced offerings associated with the card? Bigger credit lines, things like that?

Ed Nigro (Executive Chairman)

Yeah. The credit line, I think, depends greatly on the customer and the customer's application because we do have credit lines, I think, that go as high as $50,000.

Ryan Sullivan (President and CEO)

50, currently.

Ed Nigro (Executive Chairman)

Now, we approve that at the board level as our max credit line level. I did mention the potential for a secured card, which we've applied the bid for the bins for, where the applicant, in lieu of his credit rating, provides the capital upfront for his credit card operation. That is an interesting program that would open up to gig workers and other part-time workers that just don't certainly have the wherewithal and would qualify for our other card but cannot because of the way they have their work status.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. Okay.

Ed Nigro (Executive Chairman)

I hope I answered that question for you.

Tim Coffey (Managing Director and Associate Director of Depository Research)

It did. Yeah. Now, are these things that obviously, the credit line's already in place. The other parts of it, is that something you plan on having in place later this year?

Ryan Sullivan (President and CEO)

Yes. Yeah. We are working on all of that right now. That is part of what we talk about in terms of Q2 leading into the second half of the year. Our expectation is the application flow enhancements, the customer service enhancements, and the secured card should be in the market going into Q3.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. Are these investments that you'll be making already in the expense run rate?

Ryan Sullivan (President and CEO)

Largely, yes. Yes. Although there will be some technology expenses, particularly in Q2 and Q3 for some of those enhancements, but they won't be significant.

Ed Nigro (Executive Chairman)

Ryan already mentioned sort of a $200,000 technology expense in the second quarter and the first quarter, which was above our normal activity.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. That's what that was. Okay. Great. And then, Ed, on the slot program, do you have visibility onto when you might start to see deposits from that product?

Ed Nigro (Executive Chairman)

We believe the program's going to launch in this quarter, the second quarter. Like all launches, it will walk before it runs. I think you'll start to see the deposits increase in the third quarter. Of course, this will be the first launch with the Distill as a gaming operator. It's going to be very controlled, but we have some very active players that are good at participating. The beauty of that app is that it's going to use all of our bank platforms. By that, I mean the pool player accounts, our RTP.

It also, very importantly, is going to, we think, be a very important resource for the credit card because the credit card really fits the pattern of behavior for a slot player where they can load the app with the credit card, participate in their gaming activity. Most of the time in today's world, the slot players go to ATM machines to get their cash, or they go to these cash advance machines to get their cash. They are paying a lot of money in order to play. With our credit card, they will not be. It is going to be very interesting, I think, on all fronts. This program is being watched very carefully by other of our clients. It is going to be, we think, a very, very important launch. We have been talking about it for some time.

I know, Tim, we chatted with you about it. There was one part in Nevada that was very important, which is that the gaming operator, whenever they utilize a software process, even in the payments app side where they're not handling any wagers, they're just moving money. In reality, they're not even moving the money. The bank is moving the money. Gaming control gets involved to make sure the application is not interrupting any of the licensed gaming apps like Konami's system. That process of review, we believe, shall be completed very shortly. It's not on BoltBetz. As I said, that's on the gaming operator. That was another little time-consuming process. At the same time, everybody in the state of Nevada has to go through it. That's not the case for gaming operators in other states.

We do not have the same rules everywhere, and particularly for tribal casinos that are very important, very, very important customers in this arena.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. Great. Thanks. That's great detail. Then, Ryan, on the SBA business, did I catch that at the interview of Prepared Comments that the pipeline was $300 million?

Ryan Sullivan (President and CEO)

Yeah. Right now, our expanded pipeline is slightly above $300 million. That's both SBA and commercial. If I was to break SBA out, Tim, it's running around. It's a majority of it. It's nearly $250 million.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Okay. How is that product behaving right now? Or the demand for loans in that product right now, given the uncertainty?

Ryan Sullivan (President and CEO)

Yeah. It's behaving pretty well, I would say. I mean, overall, we've obviously had some migrations. Very happy to have our collateral backstop on our SBA loans. That's very helpful in addition to the guarantee. We're working through that on an orderly basis. In terms of demand, demand still seems pretty strong. On an anecdotal basis, we're getting feedback from our referral sources. They think that, barring some notable contraction, the next two quarters are going to continue to have strong demand.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Great. Great. Is it too soon to ask you what you think premiums might look like this year?

Ryan Sullivan (President and CEO)

That's a $10 million question. I can tell you that we were hoping that they'd start to strengthen. That hasn't happened so far. They kind of remain at where they've been in terms of soft levels. For us, we had forecasted some improvements in the second half of the year. For that to happen, I think there's going to be a little bit more certainty, need to be a little bit more certainty on rates and prepayments, which we're not seeing yet. To be clear, we don't expect gap gain to return to 10% anytime soon, as tying into Ed's comment on our prior conversation. We do think that over time, that the gap gain for hospitality in particular will get back to a long-term average, which we think is probably close to high fours and 5%. That might take a little bit of time.

Tim Coffey (Managing Director and Associate Director of Depository Research)

Yeah. No, makes sense. All right. I'll stop there and step back. I appreciate the time. Thank you.

Ryan Sullivan (President and CEO)

Thank you, Tim. Any other questions?

Ed Nigro (Executive Chairman)

I think that if there are none, we'll be closing this call down, our first official call as a NASDAQ company on the NASDAQ Exchange, which we're obviously very excited to be. We look forward to working with all of you and continuing the journey. Thank you.

Ryan Sullivan (President and CEO)

Great. Thank you, everyone.

Operator (participant)

The recording has stopped.