GBank Financial Holdings - Q2 2024

Transcript

Ed Nigro (Executive Chairman)

Well, thank you. I believe it's 2:00 P.M. 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. 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. 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 anything.

I get to look at the big macro picture. Today I'm going to talk a bit, just a bit in the beginning, about a couple of very important things I mentioned. $1 billion in total assets. You know, just a year ago, we were, this amounts to about $324 million, more than we were one year ago. We're a 47% increase in the size of our balance sheet in one year. Earnings: $4.7 million for the quarter. You know these numbers. Last year, at the same time, it was $2.4 million. We had a 103% increase. Excuse me, the increase was $2.4 million, or 103% better results. I love seeing those big numbers when they happen.

The third and most important part of the quarter 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. This was really, we think, 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. 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. 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.

Ryan Sullivan (President and CEO)

Yes. Well, thank you, Ed. Good afternoon, everybody. As Ed mentioned, yeah, this is. It makes it fun and maybe a little easier to report numbers like these. You know, certainly a very strong quarter of performance. You know, through the call, we'll provide some additional details on the financial and operating highlights that allowed us to generate these kinds of results. We believe the quarter is really a demonstration of the strides in performance made by the company and the high-level 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, 2024 year-to-date earnings now stand at $8.4 million, which is a 49% increase over the first two 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. 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 2024 and up 30% compared to Q2 of 2023. 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 in Q4 and Q1 really running through. On an interquarter 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 gain on sale, the prices that we received on the sale of those guaranteed 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 billion-dollar threshold, we're very excited about that.

As we look at the composition of the balance sheet, a quarter 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, you know, to take a moment, and Ed mentioned he'll talk about some of the developments that 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 1st of 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 30th of 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.

Ed Nigro (Executive Chairman)

You know, I'd like to just add one thing to what Ryan just said about our SBA division because, you know, we are strong in the hotel. We have almost 30,000 hotel rooms in our portfolio right now. And, you know, 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, you know, 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%-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, you know, 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.

Ryan Sullivan (President and CEO)

No, I'm glad you brought it up. Thank you, Ed. You know, certainly, as we look at the rest of the year, you know, 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, you know, Q3 and Q4 to be more of the same. So with that, overall, really great quarter. And I'll turn it over to Jeff to get into some of the details. Jeff.

Jeff Whicker (Executive VP and Chief Strategy Officer)

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 of $4.7 million, which is $0.35 per diluted share, and is 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 billion-dollar bank, ending the quarter with just over $1 billion in total assets. 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 asset 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 one-time 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 a $9 million increase in loans sold and an increase in 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 six months of 2024, and $268,000 in one-time expenses related to the Bank Card 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 a $30.7 million decrease in investment securities due to the maturity of the $65 million U.S. Treasury securities that we had, and all other assets increased by $7.5 million, with the primary driver being the $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. 100% government-guaranteed loan balances were $252 million at quarter end, which represents 31% of the bank's total loan portfolio, and these have 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 that 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 at March 31st to $7.6 million on June 30th. The balance is comprised of three 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. 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.

Non-interest-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 remains stable at 96.7% compared to 96.3% in the prior quarter. Our securities portfolio holds several short-duration treasuries and 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 31st, 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.

Ed Nigro (Executive Chairman)

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 heard, if you're in the fintech business at all, the headlines on fintechs have been very troubling these past few months. Failures 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 accounts 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 a financial technology arena that no one else is. We have our prepaid access structure that we receive 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 because 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. Now, Trice is a company that we met, that the bank met through our investment in Jacobs Asset Management, or the JAM FinTech 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 architecture, 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 on, in, and out to gaming apps, large or small. And we think this is going to be very important because there are many, there's savings in it, there's time. So imagine as a consumer, you're sitting and you're 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 five 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 quarter, 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 MassPay is a payment processor. So MassPay is a payment processor for a lot of entities that are engaged in social games, 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 two are very important, and we actually have another four that will go live in this quarter. 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 you're going to see 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 it because we started looking at the credit card program for gamers back when we were very big Sightline, and we still are Sightline providers of their prepaid card. But in the early days of Sightline, we had issued and opened almost 1 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 at MGM, 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 with a credit card. But then both Mastercard and Visa changed their merchant code to where this activity was and became a gaming transaction instead of a financial transaction of loading a prepaid card. Without getting into too much detail, that really reduced the amount of loads that went in because the banks that issued the credit cards, many of them do not like the gaming transaction merchant code and will not approve that merchant for their card. So the transaction's 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 have 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?

Jeff Whicker (Executive VP and Chief Strategy Officer)

That's the average. Yeah.

Ed Nigro (Executive Chairman)

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, they're starting to develop, and it's a premier customer. Here's 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, the first quarter, we had $1 million in transactions on 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 he is, that means that our customers spent $7 million with our merchants in the second quarter. And the merchants that they're spending, the top four are at MGM, FanDuel, DraftKings, and Caesars. Those are our prime merchants for our credit card program. Now, and this is in its infancy.

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 part's very small, the credit part. And that's fine. We love the fact that it's generating a great revenue from the interchange fee force.

Interestingly, in 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 Game Technology, IGT, and be 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 to $42 billion to $45 billion a year in cash transactions for the casinos, for the casino cages, for their kiosks. And we just signed an agreement, a marketing agreement with them because they love this.

They really like the gaming-friendly credit card that we have, and they are trying to develop a wallet for their customers to use that are 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. And 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 three other companies that have executed marketing agreements, and these have all been happening in the first or second quarter of this year.

So our gaming fintech division, with the access to our prepaid account structure, with our 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, PPA accounts, and we're going to get our first pool 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 what kind of Olympic medal did we get, any, or did we just get a participation medal? But thank you.

Tim Spencer (Chairman and CEO)

Hey, guys, I got a question too, if you don't mind.

Ed Nigro (Executive Chairman)

Yeah. Hi, Tim.

Ryan Sullivan (President and CEO)

Hey, Tim.

Tim Spencer (Chairman and CEO)

Hey.

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?

Ryan Sullivan (President and CEO)

Yeah, I think that we'll be somewhere in between there. Although I do think that the 5% sequentially probably or closer to that is kind of what we expect for Q3 and Q4. The composition will drive that a little bit, but if you're talking about net quarter-over-quarter growth, we're probably in the 8% range.

Tim Spencer (Chairman and CEO)

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

Ryan Sullivan (President and CEO)

Competitive on the liability deposit side?

Tim Spencer (Chairman and CEO)

No, on the loan pricing.Sorry. On the loan pricing.

Ryan Sullivan (President and CEO)

Yeah. 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 three years ago, as an example, really most of our new SBA origination volume was at prime plus two. Most of the average is prime +1 today on commercial real estate secured, and more than that on anything else. But I think we've been pretty competitive there. We'll continue to, 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 the inversion of the curve, those rates are a little bit lower. But overall, we're incrementing or generating new volume per quarter all in at still a contractual rate close to nine. So that's what we expect to continue.

Tim Spencer (Chairman and CEO)

Okay. Okay. Great. 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're kind of reaching into that, maxing out on their bandwidth?

Ryan Sullivan (President and CEO)

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'd be just a small increase in FTE.

Tim Spencer (Chairman and CEO)

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?

Ed Nigro (Executive Chairman)

Yes, I believe easily.

As I said, we have about 12 others in the pipeline right now that we're working with, four 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 culling out a lot of the callers now, a lot of the companies, a lot of the startups we're not working with anymore because startups 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 vet really well. So the answer to that is yes.

Tim Spencer (Chairman and CEO)

Okay. So not only doubling, but adding a more mature customer.

Ed Nigro (Executive Chairman)

Yes. That's why we talk about people like Everi and Sightline, and we're working with Sightline to possibly open one of our pool player accounts and start bringing their clients into it.

Tim Spencer (Chairman and CEO)

Okay. All right. Great. Thanks. Those are my questions. I'll step back. I'm sure Brad's got some, but I'll definitely give you guys a go ahead.

Ed Nigro (Executive Chairman)

Oh, Brad.

Ryan Sullivan (President and CEO)

Thank you, Tim.

Ed Nigro (Executive Chairman)

Thank you, Tim.

Brad, are you out there? You're not on mute.

Speaker 5

Hello. I guess I have to ask a question since I got tee'd up.

Ed Nigro (Executive Chairman)

There he is. Yeah.

Ryan Sullivan (President and CEO)

Is Brad okay?

Speaker 5

No. So should I think of this as with down 200 basis points, your interest income being down 12%, could that be offset with the change of deposit composition that's expected over the course of the next year plus?

So really, top-line loan growth of, if it's 20%, that should actually be a 20% increase in interest income, even if we have rates down 200 basis points. So that's pretty much going to be mitigated by the change in deposit mix.

Ryan Sullivan (President and CEO)

I believe that's a fair assessment and accurate. I think when Jeff comes to speak to this. But one of the things our models don't necessarily contemplate are significant changes in mix, which could happen, particularly with some of the growth expectations we have in gaming fintech deposit generation there, which are largely a non-interest-bearing. So long answer to the short version, which is yes.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Yeah. I echo that. The change in mix is probably going to be more important, and that is not factored into the models as we model. So this would be if we just stick with the same mix.

But like we said before, being able to move out of those more risky or more high-cost deposits into more core, I think could actually benefit us even more than that in the long run.

Speaker 5

Okay. Great. And if my math is correct, most of the originations on the loan side for this year have been in the SBA category. So your kind of local business, Las Vegas loans, is pretty insignificant. Is that correct, or is that an area of focus going forward?

Jeff Whicker (Executive VP and Chief Strategy Officer)

No, the biggest portion, certainly in the current volume, you're right, is SBA, and I wouldn't ever question your math, Brad. I think we're being very selective on what we choose. There is a market that is very dynamic, and there's a lot of upside, we believe, in the Nevada market in terms of asset generation.

Some of this ties into balance sheet management, but we're seeing there are opportunities for, as an example, conventional commercial real estate that tends to be originated closer to 7% or below. So in terms of maximizing revenue, we're certainly hyper-focused on government guaranteed at the moment.

Speaker 5

Okay. Got it. And lastly.

Ryan Sullivan (President and CEO)

I will add that, I mean, we are seeing, and obviously, we're growing into gaming as well as an industry. Trust services is something that we've talked about in prior calls. So we're seeing some even related credits in some of those specialty lines that are coming on too.

Speaker 5

Okay. Great. Lastly here, on the credit card portfolio, I was thinking it was running at maybe a cash burn of $400,000 per quarter, something like that. It sounds like you have tremendous momentum with all of these marketing partnerships.

Is there a revised maybe break-even in this credit card division?

Jeff Whicker (Executive VP and Chief Strategy Officer)

Yeah. What we're finding, Brad, with some of these metrics is our original projections were way off, and it's actually performing better than some of our expectations. Ed highlighted some of the numbers on credit card. Gross interchange for Q2 was $220,000. Now, there's expenses there that net out, including rewards and revenue shares on marketing contracts and things like that. But that $400,000 as of Q2 was actually closer to $300,000 in terms of burn as you think about it going forward. If we have just a moderate increase in some of the levels that we see in balances and accounts, we could break even by the end of the year pretty easily.

Ed Nigro (Executive Chairman)

Yeah. As I said, forward-looking, of course, but July is seeing the expected growth continue.

Speaker 5

Great. Thanks, guys.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Thanks, Brad.

Ed Nigro (Executive Chairman)

We're coming up on NFL. We look for some interesting things in September, October, November, and December too.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Apply for your GBank Visa Signature.

Ed Nigro (Executive Chairman)

Yes. Everybody wants to play NFL and get a GBFH. GBank, rather. Signature credit card.

Brad Wingster (Analyst)

Ed, hey. It's Brad Wingster from Downrange Capital. How are you guys?

Ed Nigro (Executive Chairman)

Hi, Brad.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Hey.

Brad Wingster (Analyst)

Not bad. A couple of things. On the potential IPO, obviously, that would be a NASDAQ listing. Is that correct?

Ed Nigro (Executive Chairman)

We can't, but we're in the only thing we can say right now, I have said, we're in the preliminary discussions, and we can't comment any more than that, Brad, at this time.

Brad Wingster (Analyst)

Okay.

Ed Nigro (Executive Chairman)

But more to come soon.

Brad Wingster (Analyst)

Then on the fintech game, and obviously, we started talking about monetizing it. Ed, how should we view it kind of on a modeling basis?

When you talk about monetizing, is there any type of roadmap you can give us in terms of earnings or potential earnings or total available market, anything like that?

Ed Nigro (Executive Chairman)

As Ryan said, every projection we've made has been wrong in one way or another. But here's what we look at. When we do our pipelines, we do a pipeline report for our board, and just like we do with our SBA or our loan pipelines, and we estimate the closing percentage, and we estimate the amount of deposits we think could come in the short term and then the longer term from each one. BCS works off of a model of about 20 basis points per transaction to the accounts, the structured accounts of the bank.

But the real monetization of it for the bank, obviously, is in the credit card side and the use of the deposits and the value of the deposits. So when we look and try to say, going forward, what does this mean to us, it's hard because I don't have a really solid monetization model to give you that says, "Here's what we did last quarter with 14 clients, and here's what they produced," because the clients we're working with are building their platforms as we speak. You hear the term a wallet, or you hear the term a gaming app. Well, you know right now the gaming app process to do an app that does all the things we say, like works with slot machines right now. There are a couple, but they're pretty clunky. And moving money on and off them are pretty clunky.

We're working on one with a client that we hope will be our first real-time payment client and will be our first PPA client for slot machines. And that's a program that could launch in the third or fourth quarter. So these are some of the big markets we're in. There's some big opportunities. We think that the deposit growth is one measurement that we look at when we do our projections for the bank. And then when we do our projections for BCS, as an example, we do it based on what we figure the transaction activity is going to be. And when we do it for the credit card, of course, we're looking at interchange. And the interesting thing on the credit card is we haven't gotten any real credit issues. By that, I mean you're not using it for credit, which actually we like.

So to answer it, I know I haven't given you an answer to the question. I've probably given you all a lot of things that go into the answer, but we have a model. Our model is we look at BCS projections and what they give us to what they believe they're going to be doing in the next 12 months. We look at how we're going to utilize those deposits. And now, though, projecting the credit card, we've got to do new projections because growing 700% in a quarter is not something we projected. Now, if we continue to grow, are we going to continue to grow at $6 million a quarter, or is that $6 million going to go to $12 million a quarter?

We'll be able to tell you probably at our next quarterly report what the third quarter looked like, and we'll be able to project a little better. I know I haven't answered your question, Brad, but it's because it's a well, we just signed a $40 billion cash company to a credit card transaction. Now, how many of their how good is their wallet going to work? They don't have the wallet yet. They're working on it. They've been working on their wallet for some time. But how many credit cards will they get in the hands of their customers who are all gamers? The $40 billion in cash they handle a year is all in gaming. It's in 700 casinos across the country. Everi handles most of the cash on the strip in Las Vegas. So these are pretty heavy, and they're merging with IGT, International Game Technology.

Now, they're developing a wallet as well. And we've had relationships with IGT and BCS before. We presented together to gaming companies, BCS and IGT. So as these things happen, it's sort of like the credit card thing. There'll be pops here and pops there, but it's hard for us to say how successful each operator is in implementing their specific business plan to get their customers that shall become account holders at GBank. Sorry, I couldn't give you a better answer.

Brad Wingster (Analyst)

Thanks, Ed.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Any other questions?

Ed Nigro (Executive Chairman)

Well, thank you. You all have been such great supporters of ours, and we appreciate the interest, and we think some exciting things are yet to come. So thank you.

Jeff Whicker (Executive VP and Chief Strategy Officer)

Thank you, everybody. Great afternoon.

Ed Nigro (Executive Chairman)

Bye.