Description

GBFH operates a well managed Las Vegas-based, two branch community bank and offers an option on conversion of casinos to FDIC-insured cashless betting via patented intellectual property.  There is high insider ownership (47%) and a recently announced transaction expected to acquire key intellectual property.

GBank operates in three prominent divisions: SBA Lending, Commercial Lending, and Gaming FinTech.

Banking

First and foremost, GBank is a well-run community bank as the following data from the most recent investor deck indicate.

Despite an already impressive NIM, we expect to see credit card interest income increase in quarters to come as the bank recently launched (Q3 2023) its “CREDIT CARD DESIGNED For Gaming and Sports Fans Everywhere!”.  The target market for this credit card is clear, based on the Bank’s website: “The GBank Visa Signature® Card Approves Transactions for Gaming and Sports.  Many credit card issuing banks decline gaming and sports transactions. As long as your GBank Visa Signature® Card is in good standing with available credit, your gaming and sports transactions will be authorized.”

Interest Income Mix - past 10 years

The efficiency ratio has increased in recent quarters as the Bank increased full-time equivalent employees to 163 on September 30, 2023, compared to 138 for the same period of 2022. 

Per the most recent earnings release, staff additions were made to support the Company's future growth in both existing business lines as well as the development and launch of new business lines. Employee growth has been primarily in the following areas: 

1. SBA team staff additions to support continued loan growth  

   1. The bank is a leading SBA lender, ranked 14th in the nation by the U.S. Small Business Administration for SBA 7(a) dollar loan volume through September 30, 2022

2. Addition of commercial bankers to drive expansion within our conventional lending and deposit portfolios

3. Staff additions to support the launch of the Bank's new credit card program

4. Technology employees added to facilitate and maintain technology upgrades implemented in the preceding twelve months

Gaming - FinTech

While early in its evolution and development, we believe the patented Pooled-Player Program Account (“PPA”) technology provides a valuable option on the increased adoption of the cashless payment ecosystem and the cashless gaming market in particular.  Significantly, GBFH recently announced an agreement to acquire BankCard Services, LLC (“BCS”) in an all stock transaction (expected to close in Q2 2024), thereby bringing the key intellectual property under GBFH’s ownership.

GBFH's Gaming - FinTech Division was launched in 2016 through its contract with BankCard Services, LLC ("BCS").  BCS was founded in 2014 by the Bank’s Chair and 9% holder (of GBFH), Edward M. Nigro, to partner with Sightline Payments to facilitate transfer of individuals funds “cashlessly’’ to/from gaming company wagering accounts.  

In 2016, BCS facilitated a partnership between itself, Sightline Payments, and G-Bank, as a bank was necessary to issue the Discover General Reloadable Prepaid card, branded for each of Sightline Distributors (Casinos), to their customers.  In addition to fee income, a benefit to GBank of this relationship was the deposit balances from gamblers using Sightline’s Play+ digital payments product.  

As set forth in recent company filings, Sightline’s Play+ is losing market share, and GBFH is focusing on its PPA business line.  In the Q2 2023 quarterly report, GBFH Chair, Edwarwd M. Nigro, said the following (my emphasis):

“As the sports betting and iGaming markets in North America continue to mature, consolidate, move towards profitability, and the marginal cost of payments continues to drift towards zero, the Company's partner, Sightline Payments' Play+ Reloadable Prepaid Card continues to lose market share as a funding vehicle for online gaming apps. The Discover and MasterCard Play+ Prepaid Cards issued by GBank have seen a 38% decrease in year-to-date load volume through June 30, 2023, when compared to the same period of 2022. 

“The Company and Sightline have been anticipating this shift and, among other initiatives, GBank has now been approved as a Visa Prepaid issuer. Sightline has worked diligently towards the development of its "Omni-Channel Wallet'' which it believes shall provide players with a seamless experience as they move across an operator's enterprise, from digital to brick-and-mortar and from gaming to non-gaming. The core principles of a gaming centric Omni-Channel Wallet are: (i) safety and security of consumer funds with funds always held at the Bank, (ii) access to consumer funds anywhere and anytime, (iii) earning loyalty for all gaming and non-gaming activity both inside and outside a gaming operators' ecosystem, and (iv) low cost and ease of use. The Company's PPA/PCA business line, which creates FDIC-insured consumer accounts, continues to grow with both gaming and non gaming clients and deposits. These deposits have offset Play+ declines.” (GBFH Q2 2023 quarterly press release)

There are two notable comments in the foregoing.  First, Nigro emphasizes that GBFH’s PPA business line can ensure the “security of consumer funds” via “FDIC-insured consumer accounts.”   Second, he refers to growth with “non-gaming” clients.

In June 2023, the Consumer Finance Protection Bureau (CFPB) published an Issue Spotlight entitled, “Analysis of Deposit Insurance Coverage on Funds Stored Through Payment Apps.”  In the report, the CFPB notes that “funds stored in a payment app [PayPal, Venmo, Cash App, etc.] may be at significantly higher risk of loss for a consumer than if it is deposited in an [FDIC] insured bank or credit union account.”  

The report concludes with the following comment (my emphasis):

“Consumers should be aware of these risks if they choose to leave a balance on these nonbank payment apps. To minimize these risks, consumers may choose to transfer their nonbank payment app balances back to their federally insured deposit accounts, where they have a direct relationship with an FDIC-insured bank or NCUA-insured credit union. The CFPB, in coordination with other state and federal regulators, will continue to monitor the evolution of this segment of the payments ecosystem and consider whether further steps should be taken to protect consumers.”

Subsequent to this report, the CFPB proposed Federal oversight of digital wallet and payment app providers.  CFPB Director Rohit Chopra laid out the CFPB’s vision in this 10/6/23 speech to the Brookings Institution.

GBFH’s technology addresses one of the CFPB’s concerns by connecting cashless payment activities to an FDIC insured bank.  For the moment, that bank is GBank, but it seems reasonable to assume that GBFH could also license its technology (once the acquisition of BCS has closed) to other FDIC-insured institutions, and/or to payment apps to link with FDIC-insured entities to address this CFPB’s concern.

The reference to “non-gaming” clients indicates, at a minimum, that GBFH sees its technology as having application outside of cashless gaming, despite its origins.

The initial PPA deployment, the Oregon Lottery partnership, wound down when DraftKings merged with SBTech, but GBank and BCS have been signing up new customers for its PPA technology in recent years.

While there is the prospect of licensing fee revenue from the PPA technology once the BCS acquisition has been completed, the historical appeal of facilitating cashless gaming has been deposit generation for GBank, and we expect that will continue.  As the company commented in the Q3 2023 earnings press release:

“The Company consistently prioritizes deposit generation as a key strategic focus within its Gaming FinTech Division. In alignment with this objective, GBank and BCS mutually agreed to an amendment of their Sponsorship and Program Management Agreement in the third quarter of 2023. This revision introduces program deposit monthly average minimums, accompanied by a provision for shared fees payable to GBank, should these monthly average balances fall below $30 million in aggregate.”

Patented Technology

BCS currently has two patents and one application in process

• Patent 11,376,775; filed 5/7/21

• Patent 11,587,010; filed 7/3/22 

• US Patent Application US 2023/0162117 A1; Pub date 5/25/23

In sum, the technology helps facilitate cashless gaming by providing individual ledger account management for gaming operators.

Ed Nigro, CEO of BCS (And Chair of GBFH) said, "This notice of Allowance is a vital step for BCS's proprietary account management system that provides Gaming Operators customers individual Cashless Wagering Accounts with FDIC account protection - a Pooled Player Account “Powered by PIMS [Player Information Management System]''.

Hanan Sabri, President/COO BCS said "an Individual Pooled Player Account, Powered by PIMS, was first created to provide the banking solution for the Oregon State Lottery Sports Wagering program at Bank of George in Las Vegas in 2019. This unique solution, created by BCS, placed each individual player’s funds at Bank of George (now called GBank) in a pooled-player trust account, where all fund settlement actions occurred and from which player fund withdrawals could be made. All wagering occurred inOregon via digital accounts.”

Management and Board

GBFH has an experienced management team and board, including the current CEO of MGM Resorts International, William Hornbuckle IV.

Management owns 47% of the company. (Link to the most recent proxy statement.)

Valuation

At today’s prices ($15), you are paying roughly 2x tangible book value ($7.29) for a well run bank and a valuable (in our view) intellectual property option on the future of FDIC-insured cashless payments in both gaming and the broader economy.   Regardless of the ultimate success of the PPA technology, assuming GBFH continues to manage GBank as they have to date, the downside is quantifiable. 

Risks

• Acquisition of BCS fails

• Adoption of PPA technology does not materialize

• Credit problems in GBank lending book

• Challenges to Intellectual property

Catalyst

• Closing BCS acquisition
• Market recognition of IP
• Continued solid bank performance