Independent Bank Corp. (NASDAQ:INDB) Q3 2024 Earnings Call Transcript

Independent Bank Corp. (NASDAQ:INDB) Q3 2024 Earnings Call Transcript October 18, 2024

Operator: Good day, and welcome to the Independent Bank Corp Third Quarter 2024 Earnings Call Conference Call. All participants will be in listen only mode. [Operator Instructions]. Before proceeding, please note that during this call, we will be making forward looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussions today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings.

These SEC filings can be accessed via the Investor Relations section of our website. Finally, please also note that this event is being recorded. I would now like to turn the conference over to Jeff Tengel, CEO. Please go ahead.

Jeff Tengel: Thank you. Good morning, and thanks for joining us today. I’m accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. I’m pleased to report that our Q3 performance felt like a bit of an inflection point with margins improving and deposits showing continued growth. This performance reflects our team’s continued commitment to developing and deepening customer relationships. As we discussed last quarter, we have one large commercial real estate office loan that matures in the Q1 of 2025, which is experiencing stress. While this loan is current and continues to pay, we proactively moved it to NPA status given the uncertain outlook and lack of commitment from the sponsor. Recall, this loan came over with the East Boston Savings acquisition and has been adversely rated since close.

A sizable reserve was set up in the Q3 in anticipation of its ultimate resolution, and we are actively exploring all avenues, for resolution prior to maturity. Mark will have more on how this loan impacted our Q3 results. However, we believe it is a one-off situation and further demonstrates our long-standing position of addressing problem loans head on and not kicking the can down the road. Absent the elevated provision, our quarter was strong with all the fundamentals of our franchise intact and performing well. Pre-provision net revenue ROA was 1.54% in the quarter versus 1.47% last quarter and tangible book value is up 9% year-over-year. We remain focused on a number of key strategic priorities all centered around protecting short-term earnings while positioning the bank for earnings growth as the overall environment improves.

As we’ve mentioned on previous calls, we are actively managing our commercial real estate exposure with particular emphasis on office, while working to create a more diversified loan portfolio. We will continue to reduce this concentration through normal amortization and the exit of transactional business. By exiting transactional business, we will free up capacity to continue to support our legacy commercial real estate relationships. At the same time, we are working to reorient the balance sheet towards more C&I. Over the last 9 months, we’ve made steady progress toward generating solid C&I volume while reducing overall CRE balances. We will continue to focus on C&I through strategic hires in our core markets while evaluating select industry verticals.

Our robust pipeline, which is up 9% linked quarter, is testament to our strength in this space. We continue to add new talent to our commercial banking team in the Greater Boston market, and our value proposition in community banking model resonates. Another priority is prudently growing deposits, which has been a historical strength of ours. Mark will provide additional color in a few minutes, but in the third quarter, we grew deposits, grew the number of households we serve and expanded our net interest margin. Just as important, with the likelihood of additional rate cuts by the Fed, the value of our franchise will stand out. Our ability to proactively manage our most rate-sensitive customers is a reflection of our high-touch service model that has consistently resulted in peer-leading deposit costs.

We anticipate no difference in the upcoming loosening cycle. In addition to our strong deposit trends, our Wealth Management business continues to be a key value driver. We grew our AUA to a record $7.2 billion in the third quarter. This offering works seamlessly with our retail and commercial colleagues to deliver a differentiated experience that resonates with our clients. The breadth of these services provides a one stop shopping experience for our clients that includes not only investment management, but financial planning, estate planning, tax prep, insurance and business advisory services. This full suite of products is a differentiating factor for ING in our markets. And underscoring all of this is our historical disciplined credit underwriting and portfolio management.

Rockland Trust solid loan underwriting has consistently resulted in low loan losses through various economic cycles, and we think this environment will be no different. While we clearly have some legacy-acquired loans we are working through, the core franchise continues to perform as it has in past cycles. As we focus on these priorities, we continue to actively assess M&A opportunities. While M&A activity does seem to be picking up a bit, we will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters. It’s been a proven value driver in the past and we expect it to be one in the future. Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback.

We will continue to focus on those actions we have control over and look to capitalize on our historical strengths. There is no magic to our value proposition. We do community banking really well and believe our current market position represents a high level of opportunity. We remain focused on long-term value creation. Underscoring every measure of success is a talented team of engaged, passionate and highly talented colleagues focused on making a difference for the customers and communities we serve. That’s why we’re proud to be named a top place to work in Massachusetts by The Boston Globe for 15 consecutive years, a top charitable contributor by The Boston Business Journal for the last 11 years, and the number one bank in Massachusetts according to Forbes list of best in state banks for 2024.

To summarize, we have everything in place to deliver the results the market has been accustomed to over the years, including a talented and deep management team, ample capital, highly attractive markets, good expense management, disciplined credit underwriting, strong brand recognition, operating scale, a deep consumer and commercial customer base and an energized and engaged workforce. In short, I believe we are well positioned to take market share and continue to be an acquirer of choice in the Northeast. And on that note, I’ll turn it over to Mark.

Mark Ruggiero: Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8-K filing and is available on our website in today’s investor portal. Starting on Slide 3 of the deck, 2024 third quarter GAAP net income was $42.9 million and diluted EPS was $1.01 resulting in a 0.88% return on assets, a 5.75% return on average common equity, and an 8.67% return on average tangible common equity. And as just described in his comments, the quarter results were heavily impacted by the outsized provision associated with one large office loan, which I will be covering shortly. Many aspects of the bank’s strong fundamentals were on display here for the quarter, including a $1.38 increase in tangible book value per share.

We have always prioritized sustainable tangible capital growth and that is evidenced by the 9% growth in tangible book value per share over the last year despite increased provision versus our historical normal levels. Turning to Slide 4, we highlight a real franchise strength that we believe to be a key differentiator. As noted here, period end deposit balances increased slightly while average deposits grew 2.2% or almost 9% annualized for the quarter. With strong growth in non-interest-bearing business checking accounts, we are confident that the overall deposit composition has stabilized and is well positioned to reprice effectively with expected Fed rate cuts. As we often highlight, core households grew another 1% for the quarter, reflecting a consistent flow of net new account opening activity.

These accounts then get nurtured by our high service level business model to build profitable relationships over time. As anticipated in our margin guidance last quarter, this return of deposit growth has allowed for a meaningful reduction in wholesale borrowings leading to an overall increase in funding costs of only 1 basis point in the quarter. Moving to Slide 5, payoff activity in the construction book was the primary driver behind the reduction in commercial loan balances with total loans decreasing $40 million or 0.3% for the quarter. Despite the relatively flat low loan balances, there are several positives to highlight. The approved commercial pipeline is $294 million at September 30 and reflects a 9% increase over the prior quarter approved pipeline.

Year to date commercial close commitments exceed $1 billion with notable increases in C&I activity that are currently being muted by persistent low levels of line utilization. And in general, with the rate environment shifting, we are starting to see some optimism in our commercial borrowers to re-engage with various projects and we are excited for growth prospects over the near term. On the consumer side, positive home equity trends and increased line utilization have driven nice growth for quarter while mortgage closings are up with continued shifts to more salable activity. And as a reminder, though we have no clear prediction over future long-term rates, back in the 2019-2020 easing cycle, we saw our strength in both mortgage banking and swap offerings serve as a natural hedge against pressure on longer-term rate reductions.

Shifting gears to asset quality on Slide 6, Jeff addressed the most significant developments behind the data reflected here. To reiterate, the quarter included the migration of a large $54.6 million office relationship from a prior acquisition to non-performing status with higher provision levels reflecting the establishment of a $22.4 million specific reserve on that exposure. While final resolution is not very clear at the moment, the reserve reflects consideration of several different valuation data points received during the quarter. In addition, a previous $5.9 million reserve on a large C&I credit was charged off during the quarter in conjunction with the commencement of a collateral liquidation plan. We continue to closely monitor all criticized and classified loans with total adversely related loans actually declining during the quarter.

Separate from the activity already discussed, I’ll highlight some other key information on Slide 8 related to the office portfolio. Focusing on upcoming maturities, the $30 million syndicated loan that is set to mature in the fourth quarter was downgraded to classified due to recent tenant developments that will further pressure debt service with negotiations still ongoing regarding the need for multiple bank involvement consensus over extension requests. And as I just mentioned, the details surrounding the large 2025 first quarter maturity have already been addressed. In reviewing the remaining calendar year 2025 maturities, the majority are pass rated with no significant concerns currently identified. This isn’t to say that we may not see future blips in credit, but all in all, we continue to feel good about the portfolio outside of the current loss reserves.

Switching gears now to Slide 10, we highlight the net interest margin improved as expected by 4 basis points in the third quarter to 3.29% and as noted earlier was driven primarily by the stabilization of the overall funding profile. As we think about margin expectations going forward, we recognize there is a lot of uncertainty related to assumptions over future Fed reserve cuts and the overall shape of the forward curve. As such, I would highlight the following key data points to help suggest a positive margin expansion over the longer-term horizon. First, total loan exposure net of hedges that are subject to short-term Fed Reserve cuts is approximately 20% of the portfolio. Long-term deposit betas on the way down should mirror results experienced on the way up, which would suggest an approximate 30% to 35% beta.

However, the timing could be impacted to some degree by scheduled time deposit maturities. And on an annual basis, approximately 12% to 15% of the loan book is expected to generate cash flows that will be subject to repricing. Currently, those cash flows are expected to generate a positive spread over current yield of approximately 100 basis points to 150 basis points. I will provide specific Q4 margin guidance here in a couple of minutes. Moving to Slide 11, non-interest income increased again for the quarter driven by strong deposit-related fees and interchange income. And in addition, total assets under administration and our wealth segment reached another record $7.2 billion as of September 30 with overall income increasing slightly despite the elevated tax preparation fees recognized in the prior quarter.

Total expenses increased slightly versus the prior quarter as expected and included in the Q3 were a couple of outsized items worth highlighting. The first being a negative adjustment associated with the valuation of split-dollar life insurance liabilities of approximately $853,000 which was essentially offset by a one-time credit received of $1.1 million related to our debit card processing agreement. And lastly, the tax rate for the quarter was 22.4%. In closing out my comments, I’ll turn to Slide 14 to provide a brief update on our forward-looking guidance, which we want to reiterate continues to reflect the level of uncertainty over the interest rate environment in near-term credit conditions. In terms of loan and deposit growth, we anticipate low single-digit percentage increases for Q4 which would result in 2024 full-year loan growth in the low single-digit percentage range and full-year deposit growth in the low to mid-single-digit percentage range.

Regarding the net interest margin, inclusive of the 50-basis point cut announced in September, we anticipate the margin to contract slightly or 0 basis points to 5 basis points in the near term reflecting the fact that some level of deposit repricing benefit will lag in terms of being able to fully offset the decrease in loan yields. Along those lines, each Fed cut would likely create a similar short-term drag on the margin. However, as I just noted earlier, with 30% to 35% deposit beta assumptions expected to offset net 20% repricing on the loan portfolio, future Fed rate cuts that lead to a flat or positively sloped yield curve will ultimately lead to an improved margin going forward. Regarding asset quality, we anticipate charge-off activity in the short term centered around the existing specific reserves identified on Page 6 of the deck, while provision expense will be driven by any other emerging credit trends not already captured in the reserve.

Regarding non-interest income, we reaffirm a low single-digit percentage increase for full year 2024 versus 2023 with relatively flat Q4 totals versus Q3 levels. And for non-interest expense, we reaffirm low single-digit percentage increases for full year 2024 versus 2023 as well as for Q4 versus Q3. And lastly, the tax rate for the Q4 is expected to be around 22%. As is typical, we will provide full year 2025 guidance next quarter and we’re optimistic about all the positive developments that Jeff cited that bode well for the future. With that, we’ll now open it up for questions.

Q&A Session

Operator: [Operator Instructions]. The first question comes from Steve Moss with Raymond James. Please go ahead.

Steve Moss: Hi, good morning.

Jeff Tengel: Hi, Steve.

Mark Ruggiero: Hi, Steve.

Steve Moss: Jeff, Mark, maybe just starting on the $30 million credit that was downgraded to classified here. If I recall correctly, it has an extension, 1-year option to extend. Just kind of curious like where the recent developments here kind of make it where, like, it’s not likely to extend? Or just how do we think about that workout process?

Jeff Tengel: Yes. Steve, it’s Jeff. One of the complicating factors here is it’s a syndicated loan. And so, if they don’t qualify for an extension, which is still kind of TBD as we move through the quarter, we’re going to need to get an agreement amongst the bank group to either allow the extension or — and if we do, on what terms, what’s the quid pro quo. So, it’s kind of a fluid situation. and a bit of the curveball that caused us to downgrade. It was the loss of the tenant that we weren’t anticipating.

Steve Moss: Okay. Got you. And then in terms of the $54.6 million loan here, is the borrower cooperating with you guys at this point? Or do you think it’s more likely a loan sale or foreclosure-type evolution? Just kind of trying to get a sense there.

Jeff Tengel: Yes. Hard to say at this point, but I would say it doesn’t appear that the sponsors as an interest in contributing any capital, which we think is a sign that things aren’t going to and well here per se, which is why we’ve been exploring all of the above. Like we continue to interact with the sponsor and hopefully, they’ll see some value in the property. But we’re prepared to take whatever action we think is necessary to include a note sale or a foreclosure, a deed in lieu, something like that.

Steve Moss: Okay. Got it. And then in terms of in terms of just kind of the reserve for us at this point, just kind of curious if you could give us color around where that specific reserve is for [indiscernible] before 2.5%, 3% type dedication to that portfolio just kind of curious where that is today?

Mark Ruggiero: Yes. So certainly, as you can imagine, Steve, it gets skewed a bit now with this large of a specific reserve on that large property we were just talking about. So, if you include now the 2 loans or 3 loans that we have either taking a specific reserve or a charge-off on, I’d suggest the reserve is up to about almost 5%. But obviously, that’s inclusive of the large $22 million one on this larger facility. If you were to strip out the, I guess, the individually specific reserves, the rest of that portfolio, I’d suggest is as you indicated, somewhere around that 2.5% range.

Steve Moss: Okay. I appreciate that color. And then just curious here, obviously, that shifting definitely helps with the margin longer term. We get a positive slope. I hear you on those comments, Mark. Just kind of curious, with the capital position you guys have and a relatively low-yielding securities portfolio. What are your thoughts around maybe doing some sort of securities restructuring versus a buyback or things along those lines?

Mark Ruggiero: Yes. So, it’s a valid question. I’ve always been on the opinion that the securities restructuring in many cases, can often just be somewhat of a wash in terms of ultimate valuation. And I think, to be honest, it felt like that was pretty much on display here in the third quarter when you saw rates start to come in, in some of those securities valuations actually improving a bit. So, I’ve always suggested you’ll see tangible book value grow and have and then tangible book value per share number that is probably in the same range, regardless of whether you do the balance sheet restructure or not. And we’re primarily focused on that, which is to grow tangible book value. So, while the earnings certainly looks better if you do that securities restructure, I think ultimate valuation and growing tangible book, you kind of end up in the same place.

And so that’s sort of been the reason we haven’t been all that enamored with that. And I think further, we’ve allowed the securities book to really just run down over the last year. We put a little bit of that money back to work here in the third quarter. So, we did buy another $50 million or so. But from a liquidity standpoint, the goal was to have the securities be around 12% to 13% of assets where we’re only slightly higher than that right now. So, it feels like we’re in a much better spot just with the overall composition of the balance sheet.

Operator: Our next question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon : Just want to follow up on a couple of Steve’s questions. First, on the $30 million classified loan that matures in the fourth quarter, is there a specific reserve against that?

Mark Ruggiero: That one does not. No. From the appraisal that we have earlier in the process, we felt good about the value there. So, there’s no specific reserve on it at this point.

Mark Fitzgibbon : Okay. And then I think you mentioned that the rest of the office portfolio, excluding the one, $54.7 million loan that has a reserve of about 2.5%-ish. Some of your competitors in the market like Webster has a 6% office reserve and Citizens has a 12% office reserve in the portfolio. Do you feel like maybe this is a good time to build that, or do you feel like your portfolio is that different from your competitors that it warrants a much lower reserve level?

Mark Ruggiero: Yes. I mean without knowing what our competitors have in their portfolio, what we get comfortable with the risk rating allocation within that pool. So if I were to look at the breakout of our office book, $850 million of it is pass grade, risk-rated 5 or 6. And then again, if you strip out the individual evaluated loans, there’s a little over $100 million, that’s risk-rated 7 or 8. So what I’ve shared with in the past is if you do the math on — even if you go as far as allocating, say, a 20% to 25% reserve on our risk-rated loans and somewhere around 10% reserve on our 7 rated loans. That gets you to the 2.5% total allocation that we’re highlighting. So, it’s really just a function, Mark, of the vast majority still being pass rating and performing well without any major concerns. And it does reflect higher allocations where we see credit concern.

Mark Fitzgibbon : Okay. And then was the $54.7 million office loan, your largest loan in that portfolio?

Jeff Tengel: We have one other loan that I think is larger. That’s a pass-rated credit that is it was also an acquired loan. But it’s really — we feel very, very good about it. It’s a very unique property that’s doing just fine.

Mark Ruggiero: Has a very strong sponsor.

Jeff Tengel: Yes, very strong sponsor and very good tenants.

Mark Fitzgibbon : Okay. And then I think in the release, you referenced that home equity line utilization rates have been rising. I wondered if you could share with us what those are. And also, I’d be curious on commercial line utilization rates, what those are trending like.

Mark Ruggiero: Yes. So, home equity utilization, not big changes, Mark, but it went from about 34.5% to a little over 35%, which is still below where we saw sort of pre-COVID levels. But has been a little bit of an uptick driving some of that outstanding balance growth you saw. General C&I utilization rates are actually under 30% right now. I believe for the September period is around 28%. And so that certainly has — like we said, muted, what we’ve seen is pretty good closing volume on C&I activity. We’re just not getting the utilization to drive balanced growth. And construction is another portfolio where you’re seeing utilization, I think that’s down to about 55%, where historically, we’ve seen construction utilization north of 60%.

Mark Fitzgibbon : Okay. And then lastly, I guess I’m curious how you’d handicap the probability of being able to get acquisitions done, say, in 2025? I know the rate marks look a little better and there’s probably some management teams that are tired and eager to do something. But you’re in a market where there’s not a lot of logical targets how would you sort of handicap it from the outside looking in the probability of being able to do acquisitions over the next, say, year or so?

Jeff Tengel: Well, I mean it’s hard to predict activity and a sign-up probability to it because, as you know, banks are sold, they’re not bought. And you’re also right that there’s just not as many banks in Eastern or even Central Massachusetts that would kind of fit our target profile. So, the kind of the pond, so to speak, is definitely a bit smaller. I know I’ve said in the past that we wouldn’t rule out continuous market, so that would include Rhode Island or Southern New Hampshire. But generally speaking, I think the probability or, I would say, the possibility of us doing something — I feel like we’re well positioned to do something other than we think our stock price could be a little bit higher and give us a bit more juice in our currency.

But out in that, the other aspects of our bank are performing really well, as we just talked about. And so, I wouldn’t rule it out if we found the right candidate, but it’s all about finding the right candidate. We don’t feel pressured to do anything if the numbers don’t work, and we can’t get the synergy that would come with the deal.

Mark Fitzgibbon : Okay. So, given that, you think the stock is undervalued and you have plenty of capital, should we presume buybacks during the quarter?

Jeff Tengel: I mean I’ll let Mark answer in a second, but it’s something that we talk about, if not every ALCO meeting, maybe every other. So, we’re — we talk about it quite a bit, and it’s just a matter of when we think it’s prudent and when we think it’s not.

Mark Ruggiero: Yes. Not too much more to add to that. I think as you know, we were active earlier in the year. We did hit the pause button on a bit there. You’ve seen a lot of sort of volatility in our stock price, which again, kept us on the sideline a bit. But I think having something in place to be opportunistic makes sense given our absolute levels of capital. So, I think it’s a fair point to be sort of expecting something along those lines.

Operator: Our next question comes from Laurie Hunsicker with Seaport Research. Please go ahead.

Laurie Hunsicker: Wanted to go back to office here. So, the $30 million Class A, that is your only financial district exposure, is that correct?

Jeff Tengel: I wouldn’t say it’s our only one, but it’s our only meaningful one. We have like a couple of other much smaller performing well kind of in the relationship oriented. So, this is the only meaningful financial district office exposure in the portfolio.

Laurie Hunsicker: Got it. Okay. And then from my notes, I had previously, this was 85% occupied. And so, I guess you guys lost a tenant, where does that take occupancy? And then did that push debt service coverage ratio down to less than one?

Jeff Tengel: I don’t know if it’s less than one. So, I don’t have that handy, but it took the occupancy down to 77% from 85%. And they’ve also — some of their more recent new tenants in this building are burning off of free rent period, which has also put some near-term pressure on the debt service coverage. And so, I think the mix of those two things is what’s creating a lot of the conversation we’re having today with the agent bank and the client about how we move forward.

Laurie Hunsicker: Got it. And sorry, who was the lead bank on this one?

Jeff Tengel: Morgan Stanley.

Mark Ruggiero: Morgan Stanley, yes.

Laurie Hunsicker: Okay. Okay, great. And then just going over to your $54.6 million, and I understand that most of the $19.5 million loan loss provision in the quarter, was due to this, but what was the exact dollar amount? I mean, we — you see the reserve is sitting at 22%. But what was the exact dollar amount that allocated to this credit?

Mark Ruggiero: So, technically, where we did not have a specific reserve on the loan last quarter, it had a general allocation that was relatively small, call it, $1 million or so. But as you know, Laurie, we had been increasing the reserve both the last couple of quarters without any charge-off activity. So that’s all done through the qualitative factors, which is sort of a pooled approach, but it’s heavily influenced by some of these larger credits that we knew were coming on the horizon. So, I would — I’m comfortable suggesting even though on paper, it looks like $21 million of the provision is associated to the loan, there was some level of indirect build within the qualitative factors that were heavily influenced by this loan. So, you could probably suggest that somewhere in that $19 million to $21 million range was sort of the needed provision for the quarter, specific to that. Does that make sense?

Laurie Hunsicker: Yes. That makes sense. That makes sense. Okay. Really appreciate all the details, obviously, you give. Previously, I had your office maturities and full year ’25 was $219 million, and I didn’t see that on Page 8 this time. You just have a quarterly breakdown, it looks like that ends partway through ’25. Do you have a new figure on what your maturities look like for ’25?

Mark Ruggiero: Yes, there should be a chart about — right above that or that has the calendar year breakdown of maturities. But it’s — so it’s 19% book, which I don’t have the exact number, but I’m doing it right now. Yes, about $200 million?

Laurie Hunsicker: Yes. No. Okay. And it was right here. My apologies.

Jeff Tengel: Of that $200 million, Laurie, is the $55 million loan, too. So, keep that in mind.

Mark Ruggiero: Yes.

Laurie Hunsicker: Right. And then — yes, and to that point, I had remembered you guys had another adversely rated loan that was $20 million maturing in ’25, but there were more LOIs coming in on that. Do you have an update on that credit?

Mark Ruggiero: Yes. That’s actually a positive development. In fact, we’ve executed an extension out to 2026 now. So, it’s technically not in the 2025 maturities for this quarter. But that sponsor has been able to sign either existing leases or LOIs now for 50% of that space, and there’s other LOI interest ongoing as well. So that’s actually improved from a credit profile versus the last quarter, and we feel good about that one.

Laurie Hunsicker: Okay. Yes, because that one started the year was like almost 100% baked in, is that right?

Mark Ruggiero: That’s right. It was essentially a spec lab facility.

Jeff Tengel: Yes. And so, it’s extended out to year-end 2026.

Mark Ruggiero: Right.

Jeff Tengel: And it’s kind of a positive velocity.

Laurie Hunsicker: Perfect. And so, I guess as we look on the horizon, really, it’s just these three credits. The one you just reserve, obviously, the one that’s upcoming in the fourth quarter and $20 million seems to be counted. There’s nothing else that — and obviously, I appreciate that you’re going to have bits and spurts and you guys give so much good detail. But there’s nothing else out there that is large that you look at and say, “Wow, we have to be thinking about this.”

Mark Ruggiero: I mean there’s always some one-offs. So, in full transparency, there’s a new criticized office loan, if you were to look at total criticized and classified specific to office versus the prior quarter. And that is also a 2025 maturity. This is — it’s about a $15 million loan, I believe. Yes, $15 million, still sort of early innings in terms of understanding sort of the ultimate resolution. But this is at one point, looking to be converted to lab space, but then in terms of dealing with the market and understanding demand actually for some new office space, they sort of repurposed some of the facility back into office space. So, it’s a little bit of a unique one where the appraisal contemplated all office and suggest it’s still under 90% LTV and is close to 65% as a stabilized unit.

But given some of the fluidity of that and uncertainty around true occupancy and tenant levels, we just felt it was appropriate to downgrade that to a $7 million. So that’s a fourth quarter 2025 maturity that we obviously have our eyes on, but the rest of the book, as Jeff indicated, is past rating, we’re not seeing anything that gives us major concern. So, any loan, let’s call it, over $10 million that has a little bit of uncertainty. I think we’ve probably provided as much detail as we can at this point on all those.

Laurie Hunsicker: Okay. And then just one more question. Your lab exposure, that’s included in the $1.042 billion, or that’s separate?

Mark Ruggiero: It is. It’s included.

Laurie Hunsicker: [indiscernible] total lab exposure of your $1 billion?

Mark Ruggiero: Well, we have what we call medical is about $88 million. Double check if that’s all, if there’s other lab, that’s not in there or not. So, I don’t have a specific…

Jeff Tengel: Yes. My gut feel is it might be a little bit north of that, but it’s not a lot north of it.

Laurie Hunsicker: Okay. Great. That’s really helpful. And then just circling back to margin, do you have a spot margin for September?

Mark Ruggiero: I do. It was 3.30% for September.

Operator: [Operator Instructions]. Our next question comes from Chris O’Connell with KBW. Please go ahead.

Christopher O’Connell : Hi, good morning. So just one quick question just to clarify and put the office discussion. So, for second half of ’25, 3Q and 4Q ’25, what’s the total dollar amount of criticize and classified?

Mark Ruggiero: I believe it would just be the one new criticized, we just talked about, the $15 million. There might be one other small $3 million actually, I don’t know what quarter that’s maturing in. So, call it $15 million to $18 million, something like that.

Christopher O’Connell : Great. And then so as you think about the margin longer term and kind of like a normalized or positively sloping yield curve environment like where do you think roughly that range is?

Mark Ruggiero: Yes. I’m hesitant to give a number, Chris, just because there’s so many variables around the slope of the curve that. And depending on the time line of what you want to assume for just repricing benefit. So, I think the guidance that I would sort of just suggest is the best way to think about it is if the Fed cuts, as I mentioned, you could take 20% of whatever that Fed cut is and assume you’ll you lose that on the loan side. But long term — longer term, you get 30% to 35% benefit on the deposit side. So, we positioned the balance sheet to be more liability sensitive on the short end of the curve, which gives you anywhere between, I’d say, 5% to 10% margin expansion immediately on the short end of the curve. And that — the caveat to that is it needs to be reflective of CDs repricing in a little bit more of a longer term.

That’s not what you’re going to see the quarter after a Fed cut announcement, but it’s not that long after, right? It’s probably two quarters or three quarters after where you get full deposit repricing and you get lift on the short end of the curve. And then I think the variable that is tough to predict is what time period you want to suggest we continue to see longer-term asset repricing. So that’s sort of why I gave the guide around how much of the book is subject to sort of a cash flow churn where we’re getting 100 basis points to 150 basis points of improvement on spread. If you were to run the math on that, I’d say that equates to about 2 basis points or 3 basis points lift on a quarterly basis to the margin. So that’s existing yield curve.

It’s — like I said, it’s not assuming you’ll see much lift in the longer end. But even where it is today versus the yields that are maturing, that does give us a nice 2 basis points to 3 basis point lift each quarter. So, I think that’s the math that, again, you could sort of apply assumptions to the slope of the curve and sort of extrapolate where the margin could go.

Christopher O’Connell : Got it. And I guess, like said another way, like is there anything like structurally different if we had a positively sloping yield curve and the dynamics played out over a long enough time horizon where everything kind of reprice and set where you guys couldn’t have a NIM back in like the 3.85% to like 4% range like in 2018, 2019?

Mark Ruggiero: I think that’s a fair potential. I think if you take sort of that deposit beta conversation and apply that to sort of future expectations, say, Fed funds gets down to 3%, I believe we have a deposit base that could differentiate and land in a, call it, 1% to 1.25% cost of deposits. And if you have the longer end of the curve moving up and you can get loan pricing back or consistent in the mid-6s, and that creates a nice spread loan to deposit that drives the vast majority of our margin. And I think that is — that’s a real formula there where I think you see the margin expand to the levels you’re talking about. So, I think the fundamentals and the balance sheet composition is certainly there, to your point.

Christopher O’Connell : Great. And just to kind of confirm the timing of the trajectory. A little bit of pressure in the fourth quarter. And then say, we’re getting 25 basis points a quarter of Fed cuts kind of consistently. And I know you said it depends on the timing of the CDs. But I mean the CD schedule, it looks to be that the vast majority of them are repricing here in Q4 and Q1. So, I mean when do you think that the NIM would start to make that turn in the upward trajectory? Would that be in 1Q ’25 or 2Q?

Mark Ruggiero: Yes, I think to your point, it’s — as it sits here today, I guess, if there was no other cuts, the vast majority of our CD reprices in the next couple of quarters. So, I think it’s only a one or a 2-quarter lag as we sit here today to have the CD benefit sort of fully offset the loan. A little of that will be dependent on what term our customers will be renewing into. Again, we’re keeping promotional money on the short end of our ladder from a CD maturity perspective for that exact reason. So, I don’t want to truly predict where CD demand is going to go for a term. But if they continue to look for rate, if that’s the primary driver, and we’re able to keep the majority of our CD book under 6 months. I think it becomes a one-quarter lag, give or take, after a Fed cut where you start to see the benefit outweigh. Does that make sense?

Christopher O’Connell : Yes. No, that makes sense. If we’re getting consistent cuts, I guess I’m just trying to figure out if you’re saying that the NIM is not going to start to turn positive after a cut or two even if we’re getting consistent one cuts a quarter.

Mark Ruggiero: Yes. No, yes, I see what you’re saying in that. That’s not what I meant to suggest. So, I think compared to where we are today, I would suggest mid-2025 would be a fair inflection point of turning positive. And then there’s just going to be sort of a little bit of noise just depending on how severe some of the cuts are and the timing of the cuts as to quarter-over-quarter, whether you’ll see expansion or not. But in general, I think mid-2025 is where you’ll see more of a positive lift.

Christopher O’Connell : Okay. So basically, after these first couple of quarters, you’re seeing…

Mark Ruggiero: Yes, I think getting this larger CD repricing behind us, feels like the inflection point in my mind.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Tengel for any closing remarks.

Jeff Tengel: Thanks. We appreciate your continued interest and support. Have a great weekend, everyone.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.