Scott Goodman: Yes. Hi, Andrew, it’s Scott. I can take that one. I mean, I think generally, the credit that impacted this quarter represented historically weaker operating companies that had been in the system, in our process for a while. And I think the amount of movement you saw this quarter kind of reflects the intentionally proactive workout strategy that we’re trying to take, get to the table early when there’s cash to get a pay down, liquidity to get guarantor payments, to get additional collateral, which also pushes them through our process faster. I’m happy to provide more color because I think really, the movement, at least in non-performers, is just related to three credits this quarter. There was a $19 million commercial real estate developer leasing company in SoCal, a 19-year – or a 13-year client of that legacy bank.
$16 million of our exposure is actually secured – adequately secured by margin multifamily collateral. There’s really just this smaller unsecured piece which is driving most of the rating, and we’re in the process of securing. There’s an $8 million Kansas City-based truck dealership. They deal in specially modified commercial box and delivery trucks. And I think we’re in the process of exiting that through either a refi or a liquidation, which does include hard assets, owner-occupied commercial real estate. And then $5.5 million Ag credit, which is a hog producer, and they’re actually under contract to sell prior to year-end and pay us off. So I think by just pushing those fairly quickly and getting to the table, we’ve got decent strategies.
I think the other question is what do we see? As we try to read the tea leaves, I think the major comment is we’re not seeing signs that this is part of a bigger wave at this point. Total criticized loans, if you take classifieds plus the next level of special mention, we’re actually down $60 million this quarter versus last quarter. So we’ve exited some of those credits. We’ve upgraded others. Other trends that we look at, past dues are actually down versus the prior quarter. And we’re not seeing abnormally high activity on things like covenant breaks or additional downgrades. So you just look at classifieds and non-performers at the levels they’re at today, it’s really similar to what we saw pre-pandemic 2019 and prior. So hopefully, that provides a little bit of color.
Andrew Liesch: Yes, absolutely. And obviously, we saw the increase, but I mean, still at a very low level here. And actually looking at – you touched on pretty much all my other questions. So I’m in good shape. I’ll step back here.
Scott Goodman: Thanks, Andrew.
Operator: Your next question is from Damon DelMonte of KBW. Please go ahead. Your line is open.
Damon DelMonte: Hey, good morning guys. Hope everybody is doing well today. Just wanted to start off with a question on the outlook for fee income regarding the tax credit line item. Can you break down how much of the $2.7 million loss was rate related versus realized gains during the quarter?
James Lally: Yes. I would say that, Damon, based on the net, the rate-related loss was like 300% of what was posted. So there was good activity in the quarter, as I noted, but with what’s carried at fair value, and how much SOFR move, we just weren’t able to really withstand that. I think we expect some rebound here in the fourth quarter as sort of noted by my total guide. And then, look, if rates are – don’t continue to tick up sort of as hard as they have the last couple of years. The passage of time as well as the business activity will drive better opportunity for next year and maybe that tax credit line item will be able to get to, call it, seven or eight figures again for 2024 with just some stability returning.
Damon DelMonte: Got it. So that seven or eight figure number for 2024, the cadence of that, is it kind of more realizations in the first and fourth quarters and the second and third, or usually seasonally weak. Is that right?
James Lally: Yes. I mean, some of it is probably going to be a little bit dependent on what happens with rate. I would still expect it to be driven largely in the fourth quarter just by nature of how the business occurs, with some of the turbulence and some of the business climate issues. I mean, we’ve been trying to circulate some of those credits and bulk sale them, and that may somewhat affect timing, but I would still expect it to be maybe a little bit here in the first quarter if rates don’t mess with us and then back-end loaded for the fourth quarter of 2024.
Damon DelMonte: Okay. That’s helpful. Thank you. And then with regards to the margin outlook, and I think you commented that you expect somewhat continued drift here from this quarter’s level. Can you kind of put some bookends around that? I mean, do you think maybe like five to 10 basis points of drift over the next couple of quarters is reasonable before bottoming?
James Lally: Yes. And I would just say I don’t – I think – we think that we can get to largely level net interest income in the quarter here. I mean, I think there was some inefficiency and there probably will still be some inefficiency in the balance sheet composition because we use brokered CDs to really fund a lot of the growth in the first and second quarter. So my comments are sort of notwithstanding balance sheet composition, just similar level at 930, but yes. I mean, I think we’ve got, call it, three or five basis points of drifts. And as I say that – it sounds ridiculous that in this environment, I’m guiding three to five basis points, but – in each of the next couple of quarters is what we’re thinking. And then we start to have day count in our favor going from 1Q to 2Q and maybe there’s a chance that we can start to grow net interest income again.
But we are definitely seeing some stabilization and the last couple of months have been much more stable than they were. And in fact, September was a little bit higher than August, but one month isn’t a trend, and there’s a lot of pieces that drive that. But we’re definitely feeling better about it, and we’re seeing slowing in cumulative betas even though we expect some continued degradation in the next couple of quarters at the minimum.
