Paul Frenkiel

Thank you, Damien. While the Federal Reserve began to reduce rates in September, the purchase of $900 million of long- term fixed rate. US government sponsored agency securities in April 2024 significantly reduced exposure to federal reserve rate decreases.
Additionally, an emphasis on fixed rate loans continues in the company's efforts to optimize its margins.
The majority of the increase in loans compared to June 30th 2024 was comprised of consumer fintech loans.
We're proceeding prudently in our fintech credit strategies and currently are generating balances with lower potential loss exposure. We believe we will be able to originate loans with higher yields and or fees in the future.
The third quarter net interest margin of 4.78% compared to 4.97% for second quarter 2024 and reflected $1.6 million or $1.2 million after tax. But prior period, interest reversals on rebel loans either transferred to nonaccrual or related to loan modifications reflecting those rebel prior year prior period, interest reversal, net interest income increased 5% in Q3 2024 compared to Q3 2023. As noted in our last press release company examined the sensitivity of its allowance for credit losses to increases or decreases in its rebel loans classified as either special mention or substandard as a result. A new seasonal factor resulted in a $2 million increase in the quarterly provision or $1.5 million after tax at September 30th, 2024 (revb) loans classified as special mention and substandard respectively amounted to $84.4 million and $155.4 million compared to $96million and $80.4 million at June 30th 2024.
Notwithstanding the increase this quarter in loans. So classified the respective weighted average as is and as stabilized loan to values of 77% and 68%. Based on appraisals performed within the past '12 months continues to provide significant protection against loss.
Each classified loan was evaluated for a potential increase in the allowance for credit losses on the basis of the aforementioned third party appraisals of apartment building collateral and again which was which was updated and performed in the past '12 months.
Average Fintech Solutions group deposits for the quarter increased 11% to $6.64 billion from $6.01 billion in third quarter, 2023.
The provision for credit losses was $3.5 million in Q3, 2024 compared to $1.8 million in Q3 2023. In addition to the afore mentioned impact of the new rebel factor, the provision for credit losses in Q3 2024 reflected the impact of $1.3 million of leasing charge off of those charge offs. $600,000 resulted from transportation and trucking for which total outstanding amount to $34 million.
While the macroeconomic environment has challenged the multifamily bridge space. The stability of the BCOS Rehabilitation Bridge loan portfolio is evidenced by the estimated value of underlying collateral.
The 2.2 billion apartment bridge lending portfolio has a weighted average origination date. LT as is LTV of 70% based on third party appraisals. Further the weighted average origination date as stabilized LTV which measures the estimated value of the apartment after the rehabilitation is complete. May provide even greater protection from losses, non interest income. For Q3, 2024 was 32.1 million which was 20% higher than Q3 2023 prepaid debit card. Ach and other payment fees. Increased 16%. Accounting for the majority of the increase, those increases reflected both higher rapid funds transfer income and higher prepaid and debit program sponsorship, income driven by both new client relationships, achieving scale year over year and the continued organic growth of long standing client relationships for the for the consumer fintech loans noted previously, the income statement reflects a new income saving line item, consumer credit fintech fees which generated $1.6 million of quarterly fees.
As previously noted, we believe we will be able to originate loans with higher yields and or fees in the future non interest expense. For Q3, 2024 was $53.3 million which was 12% higher than Q3 2023. The increase included an 11% increase in salaries and benefits. The 892,000 after tax loss mentioned earlier by Damien and increased other real estate owned expense, book value per share at quarter end increased 18% to $16.90 compared to $14.36 a year earlier that reflected the impact of retained earnings and also the impact of the unrealized gains on the securities portfolio primarily as a result of the 2024 securities purchases.
In summary, the bank's balance sheet has a risk profile enhanced by the special nature of the collateral supporting its loan niches and related underwriting those loan niches have contributed to increased earnings levels even during periods in which markets have experienced various economic stresses. Real estate bridge lending is comprised of workforce housing which we believe and consider to be working class apartments at more affordable interest rates in selected states. We believe that our underwriting requirements provide significant protection against loss as objectively supported by LTB ratios based on third party appraisals. Further S block and I block loans are respectively collateralized by marketable securities in the cash value of life insurance. While SBA loans are either SBA 7 a loans that come with significant government related guarantees or SBA 504 loans that are made at 50% to 60% LTDS.
Additional details regarding our loan portfolio are included in the related tables in our press release. As are the earnings contributions of our payments businesses which further enhances our risk profile. The risk profile inherent in the company's loan portfolios, payments, funding sources and earnings levels may present opportunities to further increase stockholder value while still prudently maintaining capital levels. Such opportunities include stock repurchases which are planned to be continued for the remainder of the year with additional repurchases in 2025. I will now turn the call back to Damien.

Damian Kozlowski

Thank you, Paul Operator. Could you please open the lines for questions?

Question and Answer Session

Operator

Yes. At this time, the floor is open for your questions. (Operator Instructions)
Our first question will come from Frank Schiraldi - Piper Sandler & Co. Please go ahead.

Frank Schiraldi

Good morning.

Damian Kozlowski

Good morning, Frank.

Frank Schiraldi

Just, just wanted to start with Damien. Just I believe I heard you mentioned a new partnership. On the fintech side, you did not name the partner. I don't know if that's by design or this is just previous previously announced. But can you just give a little more color and if it is a new partner, any guardrails around potential you know, bottom line impact.

Damian Kozlowski

So our pipeline is extremely strong right now even more than i have said in the past and we're seeing it. And there is been a lot of implementations over the last year, which is continuing to show momentum in our GDV, even in in this month in October. So nothing to announce. However, we're continue to expand our long term relationships with new product sets, including credit sponsorship, there's a lot going on there. And we're in discussions with new partners that want to move to our platform. So it's extremely robust at this time, but nothing to announce.

Frank Schiraldi

Yeah, and then just thinking about the 2025 guide and you know, we used to talk about perhaps 15% GDV growth being a store sort of growth level and, and maybe being able to exceed that. And then the pickup onfees would be something a little less than that. This quarter you put up, you know, 15% GDV growth and, 20% plus, fee growth. So, just kind of, if you could just, you know, your updated thoughts there around, just given how strong the pipeline is, are we still thinking, you know, 15% plus GDV growth and, any color on what that translates to in terms of fees,

Damian Kozlowski

So I can give you a couple of insights. Our you know, these programs take a long time to implement and sometimes they kind of pay off all at once. So, if you're looking at our GDV, and we were saying we're going to be of above trend this year. Now, this is very, this is an estimate and this moves around a lot, but we're experiencing above 20% now GDB growth in the month of October. And we think that you, you just do not know how that's going to play out. But our, our transactions tend to be based, transactions like payments of that are that happened continually for the customers of the applications, you know, the program managers. So, it seems once we have a bump up in that volume, it doesn't, it doesn't go back down again. So, we are experiencing that. Now, I, would think that 15% number plus is also a good number for next year, and could be a bit higher, more towards the 20% range, but we'll have to see it can be very volatile.

Frank Schiraldi

Okay. And then just on the, on the rebel book, given that, you know, just, just in the quarter, obviously, rates fell, they fell significantly in, in the middle part of the curve kind of bounced back a bit. But, but I'm just curious given where rates were, where what sort of trends you saw in the quarter in terms of balances, moving to permanent financing, moving off the balance sheet, off your balance sheet and any, any did that accelerate any numbers you can put behind that?

Damian Kozlowski

I don't, we really haven't. It's not been enough yet, I think it's clearly that there's building liquidity in this niche with the forward look on rates. So the market was a bit stalled for a while with new deals and that's starting now to unclog a bit. So, there's forming pools of capital. So when we're looking to, you know, whether it was the Aubrey or with a certain loan modifications we've done on the Rebel, but there's just more capital available, they can market conditions have been, have definitely improved as well as you know, new investors coming in. Or existing investors who look to add to their portfolio. So that the environment that we had in 2021 and 2022 is kind of on the that is something that's been repaired a lot in the marketplace. People have a much better perspective on rent growth and cap rates all the things that you want in a good market and that's unclogged the market a bit.

Frank Schiraldi

Okay? And then just lastly, on that front, you, you talked in the in the release about the expectation, I think the wording was nearing peak in terms of criticized balances and just trying to think through, you know, timing there. I mean, if it's late 2021 early 2022 vintage, these things come up, you know, 3 year initial term would seem to me that maybe early 2025 would be a point you could expect maybe a peak and criticize or is it that or is it that the rates coming down here in the near term? Have you feeling about better about maybe peak earlier than that? Just trying to think through that? Thanks.

Damian Kozlowski

Yes. So we, we really believe we're at or near peak and that's why we had a third party come in to validate and look at all the loans and ensure that we weren't being too aggressive in downgrades and that it was right where it should be at the standard of the market. We have a plan in place. We believe that we can reduce it in the next two quarters. So, we have identified properties working with the sponsors. We have modified certain loans, and we look to, we're looking to offload or have those loans financed. So we are hoping to make, first of all, we think we're at the peak near the peak. We think there will not be a lot more and we think we can reduce that, that balance number on the substandard, criticizing classified assets over the next two quarters. If you look to the full resolution of that group of loans, that will take a little bit longer. But that'll be throughout 2025 and by the end of 2025 we should have all or most of those loans refinanced.

Frank Schiraldi

Great. Okay. All right. Thanks for the call.

Operator

Thank you. Our next question will come from David Feaster with Raymond James. Please go ahead.

David Feaste

Hi, good morning, everybody. I wanted to get a sense. Let's touch on the credit sponsorship, right? I mean, that is clearly gained some traction. I'm curious how that rollout's gone and you know, your sense, your initial sense is you're starting to ramp that up of, of the infrastructure that you've built and then just what's the pipeline like, the growth outlook you're thinking? And could you remind us on of the yields on that production as well.

Damian Kozlowski

Okay. So, right now we are working with multiple partners to implement new, new programs.
I would say there are three that are well known providers that are looking to implement their programs at the BCO.
The ramp up is primarily with chime now and four product areas. And it'll probably be $400 million is. we are thinking by the end of the year in footings now, the velocity of those loans is very high. So we've had about a $1.6 billion actually lent through, even though the balances are not very high. It's the repayment and recycling of those loans. That's very quick. And that's why those fees grew so quickly. So the end of next year, with, depending on the time of implementation, we expect the balances to be around $902 billion by the end of next year. And it does look like the growth after that could be substantial. We're not putting a number on it, but we're, we're talking about a doubling of those balances. We think at, at the minimum by the end of 2025. So that obviously would generate a lot of spread and fee revenue because of the velocity of the loans. So, it's, it's like that's a, it's a good example to show that, you know, our guidance, if you look at our guidance for this year, right? There's a lot of momentum in that business that will, that we think will be able to meet our full year guidance with our fourth quarter even though our run rate right now. Even though you take out those one time items we mentioned is more like 111. So we do, we definitely have a $1million to $2 million opportunity just in that bucket in the credit sponsorship in the fourth quarter. Our we haven't, we just finished our full implementation of something we mentioned before, which is the rapid funds transfer balances RFT balances for block that we mentioned in the past, that is, is a $1million to $2 million opportunity. And our GDB as I mentioned below before, it is significantly above trend. So this all this is volatile. So these are just estimates and that is a $1million to $2 million opportunity. So you, you have a situation where if you look at that 111, that's about (7¢). So you're ready at 118 for the fourth quarter. But then because our deposit balances are much higher than expected, we're, we're able to fund our bond purchases without any borrowings right now. So that's, that's, that's another $1million to $2 million opportunity. That's how we, so, this area, the fintech space is showing rapid above trend growth with new fee sources. And it's very encouraging.

David Feaste

Okay, that's helpful and, and maybe to to some of the points you just made. I mean, you've been active managing rate sensitivity ahead of potential cuts. Obviously, there's prospects more on the horizon. I'm curious how do you think about the margin trajectory, looking forward, assuming the forward curve comes to fruition, you know, contemplating better yields from credit sponsorship and just what rate outlooks embedded into your 2025 guide.

Damian Kozlowski

So, our asset sensitivity has continued to decline. We moved it from 8 to under 2 with the bond purchases and putting on fixed rate exposure. So our, our nim for 2025 should be very stable. So you have to add back some of the reversals we had in the third quarter. So the NIM should be in the high force probably in the 490 to 5 range for 2025.
And depending on we don't, we don't think it's the golden forecast of 3 to 325. We still think the fed will be around the 4% range on fed funds if that's if that happens and we continue to grow our deposit sources. And the other fee income, it's, it's it's fairly easy to get to that 525 number we put on the table for 2025.

David Feaste

Okay.
And then last one, I just, you know, saw, that loss from the transaction processing delay. I was just hoping you could touch on what drove that and you know, just curious what there was,

Damian Kozlowski

Yeah, there was an application glitch where in those situations, we have to rename files and do it manually. And because of a naming convention and a whole bunch of Serendib, serendipitous things that we've all put in multiple controls to prevent. We had a loss on returns like non sufficient fund files, four of them. And so they got delayed and to avoid confusion. Working with our partner, we decided to share the cost and not submit the files late, which might have caused consumer confusion. So this is we believe a one time event very, a whole list of, of serendipitous events happened and we've closed those gaps. And we, we've even changed the naming convention to, to ensure that can't happen again if there's another application failure. So this is this hasn't happened before. I've been here 8 years. We've significantly improved. The platform is one of those. It's one of those things and we don't, it's not systemic.

David Feaste

Okay. That is it Thank you.

Operator

Thank you. Our next question will come from Tim Switzer - Keefe, Bruyette & Woods, Inc. Please go ahead.

Tim Switzer

Hey, good morning guys. Thank you for taking my questions.
I, I had a quick follow up on the NIM trajectory with, with the fed rate cuts, you know, your deposits kind of repriced immediately almost with the contractual data basically, that's near 60%. So, should we see maybe margin expansion initially? Before then the margin kind of, I guess moderates it comes back down a little bit as we start to see pressure from the loan repricing.
How should we think about that over the course of the year or is it just stable every quarter?

Damian Kozlowski

Well, it's, hard to know because for example, in the s where we had fixed rate exposure that we put on during the pandemic, for example, in, in our activities like SBA but leases that were done, you know, at the beginning of the low interest rate or at the end of the low interest environment. So that's burning off. So you're, you are getting higher rates in some of our businesses and then it's say in some new rebel loans that would actually be lower rates. So it's hard to tell. I think they'll, be basically a wash. The real game changer is non interest bearing deposits. So as I said, the thing that we can't predict is our deposit levels, even though they're very, they're well above where our estimates were at the beginning of the year. So that's helping things like the funding of the bond purchases. And then also obviously, the amount of areas where we don't pay that share are growing. So I think it'll be basically a wash. I don't think it'll, I think you're going to stay in that 490 to 5 range. I don't think there's going to be wild swings unless we have a one time event or like, we've had a reversal, in the previous and in the last quarter.
So it'll be, I think it'll be fairly stable. It's hard to predict. It might move around a lot, but it's, there's just, there's ins and outs basically so you can't really give a good estimate. So we've, estimated that it's going to be fairly flat.

Tim Switzer

Okay.
Yeah, that's helpful. And then I was looking at your regulatory ratios, you know, your, your TCE went up over 50 basis points, but your regulatory ratios went down a little bit. Was there a change in like the risk weighting of your assets and was that related to some of the credit migration or can you guys walk us through that?

Damian Kozlowski

I'll give that to Paul. Paul. Would you like to opine?

Paul Frenkiel

Yeah, sure. So we do have 100% like for instance, the consumer, the $280 million of consumer loans. They, they go those go in 100%. So there was some movement as you suggested, but really the, the, the changes, the quarterly changes were really kind of minimal. We, monitor the capital and we do those projections quarter to quarter and they won't, they're not going to change meaningfully. And because we're generating so much earnings like we have that scheduled out so that we'll maintain those ratios and, and that's can taken into consideration when we estimate the guidance so it won't have any impact.

Tim Switzer

Okay. And I'm curious, this is a question I've been getting from a few other investors, but no, why did you guys decide? Like now is the time to add to the Rebel Reserve? If we're nearing kind of, you know, peak classified loans, what was the thinking then, you know, maybe a little bit more explanation on what drove that?

Paul Frenkiel

Well, that, that's exactly why because it's really theoretical the, current c still stands for current expected credit, credit losses. So we don't really expect any and that's based primarily on the LTVs the of the as is LTVs and the a stabilized LTVs.
And so we don't really expect any losses on the portfolio and that, that kind of is difficult to, to reserve against when you don't really have any objective means of doing so, but to the extent you do have an objective means, which is the, which is the level of classified assets, then theory would suggest you would add some, some level of reserve. So we're being disciplined, we're staying with the theory.
But on the basis of the strength of the LTV, it's a modest increase which by the way, as as the level of substandard loans and, and specimen loans goes down, that actually gets, you have to consider that that should get reversed.
But it really is a theoretical accounting requirement and we're staying disciplined to it.

Tim Switzer

Okay. And we, we appreciate all the updated credit methods you provided in the release. Is there any kind of like update you can provide on the loans that have modifications? And if you expect that to be peaking as well? And it sounds like you expect a lot of them to be resolved over the course of 2025.

Paul Frenkiel

Yeah, we do expect, yeah, we do expect that the modifications are peaking. We have multiple levels of review. We have the, the department itself based on its detailed knowledge of each loan has to send a quarterly certification to us, the executive management and a whole host of control parties that identifies all the problem loans. On top of that, we have a layer of, of credit review loan review and as Damien mentioned earlier this quarter because we do have an elevated amount of substandard loans we called in a third yet a third party to review all the to view a very significant amount of the loans just to make sure that they had all been identified. So that really is the basis of why we think that the loans with issues have been identified and we think they're peaking.

Tim Switzer

Okay. And if I could ask one more, please can, can you guys explain what's all captured in that 1.6 million of consumer credit fintech feeds that like interchange? And then have you guys started selling any for gain on sale revenue at all or you know, is that in your plan?

Damian Kozlowski

It is, it's we haven't sold any gain on sale. So this is all on balance sheet and it's just, and in, in this case, it's mostly fees for getting the money early. So believe it or not, we, while we get, a spread on the loan, our business partner is giving free advances of which the source of income is actually if somebody wants it, even though they can get it in two days or three days at the most, they want it immediately. And so they, you know, it could be a $50 they want it and they pay a fee based on getting that money early. And because it's, you know, once again, this is a kind of a rapid loan. And they, they need the money at that point. And so they're willing to pay a small fee in order to get that money. And that's the majority of those fees is that 1.6 million is the early, basically getting the money a little bit early. And the, the client, the customer is willing to pay a small fee to get that.

Paul Frenkiel

Secured. Yeah, we also have secured credit cards and while you don't see fees, the income for that, that, that benefit to the bank is, is significantly reflected in greater deposits and a lower cost of funds.

Tim Switzer

Okay. And how do you guys see the composition of that revenue changing over oer time?

Damian Kozlowski

Well, it will change because the partners that were, will there be an expansion of these type of, we have kind of four product types now, kind of variations of credit like products with one of our partners chime but our new partners that we're implementing will need to or have the business model, distribute the loans, you know, we will hold assets for 3 to 30 days and then they will be distributed to investors. Now, there will be also certain assets that we like or depending on the program we will hold and you know, 5% or 10% of those assets longer term. And those are very high spread loans obviously, compared to our traditional lending.
So there'll be three types, right? Secured on balance sheet, heavy fees, they'll be fully distributed 3 to 30 day underwriting risk. But once again, there'll be small spread, but a lot of fees, a lot of velocity and then there'll be a small portion of multiple different programs that will be on balance sheets will be very diversified. Our future. Look if we've said to the market, you know, in five years, but we think it's going to be sooner now because the balances, we think there's, there's just such a large pipeline and the programs that we've already implemented are going so well that we want, you know, 1520 programs, it'll look similar to our banking as a service on the on the debit deposit side. It'll be diversified with the three business models that have already detailed. But in this case, you also get all the payments activity too. So this activity is high velocity high fees and when we hold it higher rates off the back of our banking as a service debit infrastructure. So it's extremely profitable business.

Tim Switzer

That's great. Appreciate all the details. Thanks for taking on the questions.

Operator

Thank you at this time. There are no further questions in queue. I will turn the call back to Damien Kasowski for any additional or closing remarks.

Damian Kozlowski

Thank you everyone for joining us today. Have a great day and operator. Could you please disconnect the call?

Operator

Yes, this does conclude the Bancorp Inc third quarter, 2024 earnings conference call. Please disconnect your line at this time and have a wonderful day.