CUBI - BM Technologies: A Show Me Story

Summary

• The company announced a "profit enhancement plan" on January 30th which the market reacted to by wiping -11% off the stock price.
• In this article, I'll update my previous coverage on this name and reflect on whether or not that's justified.
• Two senior management changes were announced as well -- a reflection of the company's changing strategy.
• In all, it looks like the company is amidst a turnaround as a result of its own failed strategy.
• By reviewing the likelihood of cost savings, we generate estimates of what earnings are possible moving forward. The company may turn profitable.

BM Technologies ( BMTX ) announced a “ profit enhancement plan ” on January 30th which the market reacted to promptly with a -11% single day decline driving the stock to new 52-week lows. It seemed an interesting reaction considering the company announced intentions to reduce their workforce by 25% and expects $15 million in savings from these cost reductions this year.

In order to achieve this they expect to incur a charge of $1.5 - 3.0 million in the first quarter. Results for Q4’22 are expected sometime in March though they have not announced the date yet.

A number of management changes were also indicated in the press release above. Jamie Donahue was promoted to the company’s President from his previous role as Chief Technology Officer and Executive Vice President. This move seems to be a replacement of their Chief Operating Officer Robert Diegel who announced resignation on January 27th .

Another key role, Chief Financial Officer, changed hands as well. Robert Ramsey, who has been with the Sidhu family in this venture when BMTX was still part of Customers Bancorp ( CUBI ), transiti oned from the CFO role to a curiously worded “ new corporate development role. ” Replacing Ramsey is the current Chief Accounting Officer James Dullinger.

All of this seems related to the now abandoned acquisition of First Sound Bank. In what seems to have been a complete about-face in terms of operational direction in just one year they terminated the merger to “ create a FinTech Bank ” to focus rather as “ a FinTech with a sponsor bank ”. While the parsing of this may seem mundane, the operational reality of the two models could not be further from each other.

My guess is that we’re seeing the proverbial heads roll as one strategy was abandoned for another. New leaders are being put into place to enact new visions. Dullinger, the Chief Accounting Officer now promoted to CFO as well, has only been with the company since March 2022. The new President, Donahue has been around since 2020 and has a 25-year career in financial services.

Placing Donahue as the leader of operations suggests that their technology efforts will be front and center moving forward. This aligns with their shift away from the bank strategy.

CEO Luvleen Sidhu had this to say regarding the changes:

“These leadership changes will allow BMTX to continue driving long-term growth while maintaining continuity as it transitions its strategy from becoming a bank to re-focusing on being a lean, efficient, innovative Fintech with a strong focus on risk management. In our new model, we will partner with banks while we focus on building and delivering superior technology, market leading products, and memorable customer experiences. I am confident of the exceptional caliber and determination of our leadership team and wish them the best in their new roles.”

So there you have it. BM Technologies is amidst a self-induced turnaround after abandoning an unforced merger. And I find it somewhat comforting that management changes are happening in these areas particularly given the complete failure to have a sponsor bank agreement in place just in case the merger didn’t go through.

But for those who maybe lack context on the nuance here, let me back-up and discuss this.

Setting the Stage: BM Technologies November 2021 - December 2022

For those who are well aware, forgive me for a brief interlude to review our timeline here. The merger originally was announced in November 2021 and the extensive regulatory process had been going on since then until it was terminated in December 2022.

Despite this merger, and as noted in my previous coverage , the company still needed a sponsor bank to manage the high number of deposits they had. Management knew this and stated they were exploring options as early as August 2022. Robert Ramsey, who recall was just moved out of the CFO position, had this to say on that August call :

“We are evaluating what we are going to do at the end of this year and knowing that there will be opportunity to put some of these deposits with a partner bank were off balance sheet even if we close the acquisition of First Sound Bank or merger with First Sound Bank. And so we are exploring those options. And once we have finalized the deal, we'll be willing to share some of that information with you. I don't think it helps our competitive position to set pricing expectations in advance and having something.”

Three months later on the November 2022 quarterly call they did not have any tangible news here. In fact, what they announced is that they would have to extend their current sponsor bank arrangement at unfavorable terms simply to cover the reality that they did not have another option in place. Luvleen stated on the call that “ we are also actively working towards a definitive agreement with a new partner bank at economics which will be better for us in this environment with improved variable rate pricing. ”

She also said, “ We also continue to push forward our merger with First Sound Bank and are working on resubmitting our merger application to respond to questions posed by regulators with a goal of now closing in 2023. ”

In just over thirty days something changed. The merger was instead terminated. Here’s how Luvleen put it,

“The prolonged regulatory approval process provided us the opportunity to reflect on our broader strategy to maximize the value of BMTX-serviced deposits in the context of an evolving macro environment. Interest rates and their outlook are materially higher today than last year when the merger was announced. In this environment, we believe BMTX is better situated as a FinTech with a sponsor bank without the capital needs and credit risk that an on-balance sheet strategy would entail. We believe this is in the best long-term interest of our shareholders. We are working towards a new sponsor bank agreement with variable pricing and improved economics.”

Last year was remarkable in terms of rates seeing an overall increase of 4.25%. The world was quite different when BMTX made the strategic decision to purchase a bank charter. As rates changed the world, so it seems they changed Luvleen’s opinion.

And the people surrounding her.

What compounds the twists of this story are the accounting and filing issues that also underlie the company’s history. Their last four quarterly filings (three 10-Qs and one 10-K) were filed late in part due to an accounting error related to stock-based compensation which forced adjustments for all quarters from December 2020-September 2021. This mistake also resulted in someone getting fired and then replaced: the auditors.

Last quarter was the first filing that was actually on time. While I don’t think these issues are lingering, they do reflect operational challenges that have persisted for years. It also reflects why investors may be so skeptical of the story here.

Back to the Profit Enhancement Plan

It seems the market reacted more to the continued changing narrative at BMTX than it did the numbers involved. Reducing the workforce by 25% is bound to reduce costs tangibly. And if we take their $15 million estimate we can compare it to their performance. Here’s some data.

Annualizing that average results in an estimated $85.88 million in expenses. If they achieve their goal of reducing expenses by $15 million that’s a -17% reduction in expenses to $71 million annualized.

If we annualize the quarterly revenue average we get an estimate of $83.4 million. What this implies is that the expense reductions should make the company consistently profitable. But we should be asking ourselves if this is realistic or not. And we can take their 25% cut to labor as a guidepost here. Some more data:

We can see that labor and related expenses have been a significant and growing part of total expenses. Reducing these expenses by 25% would imply savings of $9.51 million based on 2021 costs. Just looking at the first three quarters, the implied 25% reduction would save $7.68 million.

What this suggests to me is that the $15 million that they are targeting is definitely possible. But let’s assume that they are able to unlock a more conservative $10 million in savings in the next year. Using our averages from above that would result in operating income of $7.52 million next year. Assuming their 25.1% effective tax rate from last year we come to an estimate of $5.63 million for net income.

The stock currently trades at $4.51 and a $55.3 million market capitalization. Though that market cap is a bit deceiving as the company has around ~22 million warrants as well. Fully diluted market cap is around $157 million.

If we use our income estimate then the current P/E ratio is ~28x. That’s quite high. Yet before the announcement was made annualized earnings using my estimates would be at a loss of nearly $2.5 million.

Has the company somehow shed -11% in value by announcing actions which might make them profitable? I think not. If anything these moves should strengthen their finances and hopefully their strategic vision. Though that makes this a show-me story. I think the vision is at least plausible when we consider how much a 25% reduction in labor represents. But time will tell.

And none of this takes into consideration growth from their new BaaS partner nor the new sponsor bank. Both seem pretty guaranteed to increase revenue, it’s a question of degree.

Stock and Warrant Repurchase Program

When the bank merger was terminated management also announced a $10 million repurchase program. The merger was originally for $23 million in aggregate to be paid in cash – so nearly half of this was diverted back to repurchases. The next quarterly update should be revealing as to how active they’ve been with this, if at all, since they announced in December.

It does place the company in a good position to take advantage of downward swings in the stock price. Though it remains to be seen as the company evolves from this turnaround how best that money might be used.

Where Does That Leave Things?

First off it means I have a mea culpa to issue. In my previous coverage I was sanguine on the possibility of the merger failing. At first , I believed simply that BMTX was capable of making it through the regulatory hurdles and therefore the merger would go through. That may well be the case, but the length of the regulatory process itself was enough of a hurdle – something I did not consider.

Despite three more months to consider my position here, I published another bullish article in November about the Warrants ( BMTXW ) with similarly no concern regarding the merger not going through. In truth, part of my lack of concern is that the mechanics of a sponsor bank should be lucrative regardless. Yet I did not do any analysis based on the possibility of those mechanics supporting the business I owned.

It wasn’t until fellow contributor Josh Klein published his article in December that I really started to reflect on this possibility. By then it didn’t bear much reflection in theory as it became reality. Clearly I missed the target on that.

As for the company, the market and investors seem to be in a wait-and-see mode. With upcoming quarterly results I would expect to see a lot of price volatility until the dust is cleared by data.

Despite my bullishness in the past on the name, for those interested in the stock I might suggest waiting to make a decision here. With so much uncertainty and change at the company, both in management and in strategy, it is prudent to be cautious here. While the company has generated a lot of cash flow, that has not consistently translated into earnings.

I do think the recent changes and announcements are encouraging. But they are encouraging simply because they reflect a departure from what seems to have been a series of stumbling management decisions thus far.

For further details see: