Q3 2024 Independent Bank Corp Earnings Call
Good day and welcome to the Independent Bank Court, 3rd quarter 2024 earnings call conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the start key followed by zero.
After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch tone phone. To withdraw your question, please press star, then two.
Speaker Change: Before proceeding, please note that during this call, we'll be making forward-looking statements.
Speaker Change: Actual results may differ materially from these statements due to a number of factors, including those described in our earnings released and other SEC filings.
Speaker Change: We undertake no obligation to publicly up the any such statements.
Speaker Change: In addition, some of our discussions today may include references to certain non-gab financial measures.
Speaker Change: Information about these non-gat measures, including reconciliation that gat measures, may be found in our earnings release and other SEC filings.
Speaker Change: These SEC findings 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 Learning, Mark Ruggiero.
Jeff Tengel: I'm pleased to report that our third quarter 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.
Jeff Tengel: As we discussed last quarter, we have one large commercial real estate office loan that matures in the first quarter of 2025 which is experiencing stress.
Jeff Tengel: Well, 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.
Jeff Tengel: The sizable reserve was set up in the third quarter in anticipation of its ultimate resolution, and we are actively exploring all avenues for resolution prior to maturity.
Jeff Tengel: Mark will have more on how this loan impact at our third quarter results. However, we believe as a one-off situation and further demonstrate our long-standing position of addressing problem loans head-on and not kicking the can down the road.
Jeff Tengel: Absent the elevator provision our court was strong with all the fundamentals of our franchise intact and performing well.
Speaker Change: Pre-Provision Net Revenue R08 was 1.54% in the quarter versus 147 last quarter. And tangible book values up 9% year over year.
Speaker Change: We remain focused on a number of keys for teaching priorities, all centered around protecting short-term earnings while positioning the bank for earnings growth as the overall environment improves.
Speaker Change: 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.
Speaker Change: We will continue to reduce this concentration through normal amortization and the exit of transactional business.
Speaker Change: By exiting transactional business, we will free up capacity to continue to support our legacy commercial real estate relationships.
Speaker Change: At the same time, we're working to reorient the balance sheet towards Moore's CNI. Over the last nine months we've made steady progress towards generating solid CNI volume while reducing overall crevalences.
Speaker Change: We will continue to focus on CNI through strategic hires in our core markets while evaluating select industry verticals.
Speaker Change: Our robust pipeline, which is up 9% linked quarter, is testament to our strength in this space. We continue to add new talents to our commercial banking team in the greater Boston market and our value proposition in community banking model resonates.
Speaker Change: Another priority is prudently growing deposits, which has been in a historical strength of ours. Mark will provide additional color in a few minutes, but in a third quarter, we grew deposits. Through the number of households we serve and expanded our net interest margin.
Speaker Change: 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.
Speaker Change: We anticipate no difference in the upcoming loosening cycle.
Speaker Change: 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.
Speaker Change: This offering works seamlessly with our retail and commercial colleagues to deliver a differentiated experience that resonates with our clients.
Speaker Change: The breath of these services provides a one-stop shopping experience for our clients that include not only investment, but financial planning, estate planning, tax prep, insurance, and business advisory services.
Speaker Change: This full suite of products is a differentiating factor for IMG in our markets.
Speaker Change: and underscoring all of this is our historical discipline credit underwriting and portfolio management.
Speaker Change: 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.
Speaker Change: As we focus on these priorities, we continue to actively assess M&A opportunities.
Speaker Change: Well M&A activity does seem to be picking up a bit.
Speaker Change: We will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters.
Speaker Change: has been a proven valued driver in the past and we expect it to be one in the future.
Speaker Change: Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock by back.
Speaker Change: We will continue to focus on those actions we have control over and look to capitalize on our historical strengths There's 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 We will continue to focus on long term value creation
Speaker Change: Under scoring every measure of success is a talented team of engaged passionate and a highly talented colleagues focused on making a difference for the customers and communities we serve.
Speaker Change: 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 a four list of best-in-state banks for 2024.
Speaker Change: 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.
Speaker Change: Good expense management.
Speaker Change: Discipline Credit Underwriting, Strong Brand Recognition, Operating Scale, A Deep Consumer and Commercial Customer Base, and an Energize and Engage Workforce.
Speaker Change: In short, I believe we are well positioned to take markets here and continue to be an inquire of choice in the Northeast.
Speaker Change: and on that note, I'll turn it over to Mark. Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8K filing and is available on our website in today's investor portal.
Mark Ruggiero: Starting on fly 3 of the deck 2024-3rd quarter, Gatnet Incum was 42.9 million.
Mark Ruggiero: and diluted EPS with a dollar in one cent.
Mark Ruggiero: 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.
Mark Ruggiero: and is just described in his comments. The quarter results were heavily impacted by the outside provision associated with one large office loan which I'll be covering shortly.
Mark Ruggiero: Many aspects of the bank's strong fundamentals were on display here for the quarter, including a dollar 38 increase in tangible book value per share.
Mark Ruggiero: We have always prioritized sustainable tangible capital growth, and that is evidenced by the 9% growth and tangible book value per share over the last year, despite increased provision for a historical normal levels.
Mark Ruggiero: Turning to Slide 4, we highlight a real franchise strength that we believe to be a key differentiator. As noted here, period and deposit balances increase slightly, while average deposits grew 2.2% or almost 9% annualized for the quarter.
Mark Ruggiero: With strong growth and non-interest bearing business checking accounts, we are confident that the overall deposit composition has stabilized and is well positioned to reprise effectively with expected Fed-Raid cuts.
Mark Ruggiero: As we often highlight, core households grew in other 1% for the quarter, reflecting a consistent flow of net new account opening and activity.
Mark Ruggiero: These accounts then get nurtured by our high service level business model to build profitable relationships over time.
Mark Ruggiero: As anticipated in our margin guide in flash 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 one basis point in the quarter.
Mark Ruggiero: Moving to slide five payoff activity in the construction book was the primary driver behind the reduction in commercial loan balances.
Mark Ruggiero: with total loans decreasing 40 million or 0.3% for the quarter.
Mark Ruggiero: Despite the relatively flat low-boundes, there are several positives to highlight. The approved commercial pipeline is $294 million at September 30th and reflects a 9% increase over the prior quarter approved pipeline.
Mark Ruggiero: Yet a date commercial close commitments exceed $1 billion with notable increases in CNI activity that are currently being muted by persistent low levels of line utilization.
Mark Ruggiero: and in general with the rate and environment shifting, we are starting to see some optimism in our commercial bars to re-engage with various projects and we are excited for growth prospects over the near-term.
Mark Ruggiero: On the consumer side, positive home equity trends in increased line utilization have driven nice growth for the quarter, while mortgage closings are up with continued shifts to more sale-collectivity.
Mark Ruggiero: And as a reminder, there we have no clear prediction over future long-term rates. Back in the 2019-2020 easing cycle, we saw our strengths in both mortgage banking and swap offerings serve as a natural hedge against pressure on longer-term rate reductions.
Mark Ruggiero: Justing years to asset quality on slide 6.
Mark Ruggiero: Dress the most significant developments behind the data reflected here.
Mark Ruggiero: 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.
Mark Ruggiero: While final resolution is not very clear at the moment, the reserve reflects consideration of several different valuation data points received during the quarter.
Mark Ruggiero: In addition, a previous $5.9 million reserve on a large CNI credit was charged off during the quarter, in conjunction with the commencement of a collateral liquidation plan.
Mark Ruggiero: We continue to closely monitor all criticized and classified loans, with total adversely-related loans actually declining during the quarter.
Speaker Change: Deppert from the activity already discussed, I'll highlight some other key information on flight 8 related to the office portfolio.
Speaker Change: Focusing on upcoming maturities that 30 million dollars 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.
Speaker Change: with negotiations still ongoing regarding the need for a multiple bank involvement consensus over extension requests.
Speaker Change: and as I just mentioned the details surrounding the Logs 2025 for a quarter maturity have already been addressed.
Speaker Change: In reviewing the remaining calendar year 2025 maturedies, the majority of pass rated with no significant concerns currently identified. This isn't to say that we may not see future blipsing credit, but all in all we continue to feel good about the portfolio outside of the common loss reserves.
Speaker Change: Switching gears now to slide 10, we highlight the net interest margin improved as expected by four basis points in the third quarter to 3.29 percent. And as noted earlier, it was driven primarily by the stabilization of the overall funding profile.
Speaker Change: 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.
Speaker Change: As such, I would highlight the following key data points to help suggest a positive margin expansion over the longer term horizon.
Speaker Change: First, total loan exposure, net of hedges that a subject to short-term Fed Reserve cuts is approximately 20% of the portfolio.
Speaker Change: Long-term deposit betas on the way down shouldn't mirror results experienced on the way up, which would suggest an approximate 30% to 35% beta, however the timing would be impacted to some degree by scheduled time-deposit majorities.
Speaker Change: and on an annual basis, approximately 12-15% of the loan book is expected to generate cash flows that will be subject to repricing.
Speaker Change: Currently, those cashflowers are expected to generate a positive spread over a current yield of approximately 100 to 150 basis points.
Speaker Change: I will provide specific fourth quarter margin guidance here in a couple of minutes.
Speaker Change: Moving to slide 11, non-interest income increased again for the quarter driven by strong deposit-related fees and interchange income.
Speaker Change: And in addition, total assets under administration and our wealth segment reached another record 7.2 billion as of September 30th, with overall income increasing slightly despite the elevated tax preparation fees recognized in the prior quarter.
Speaker Change: Total expenses increased slightly versus the prior quarter as expected and included in the third quarter were a couple of outsized items worth highlighting. The first being a negative adjustment associated with the valuation of split all the 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.
Speaker Change: and lastly, the tax rate for the quarter was 22.4%.
Speaker Change: In closing out my comments, I'll turn to slide 14 to provide a brief update on our forward-looked guidance, which we want to reiterate continues to reflect the level of uncertainty over the interest rate environment in the term credit conditions.
Speaker Change: 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.
Speaker Change: Regarding the net interest margin, inclusive of the 50 basis point cut announced in September, we anticipate the margin to contract slightly, or 0 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.
Speaker Change: 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.
Speaker Change: Future Fed rate cuts that lead to a flat, a positively-flop deal curve, will ultimately to an improved margin going forward.
Speaker Change: 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.
Speaker Change: Regarding non-interest income, we reaffirm a low-single digit percentage increase for full year 2024 vs. 2023 with relatively flat Q4 totals vs Q3 levels.
Speaker Change: and for non-interest expense, we reaffirm low single digit percentage increases for fully year 2024, first 2023, as well as for Q4 versus Q3.
Speaker Change: and lastly, the tax rate for the fourth quarter is expected to be around 22%.
Speaker Change: As is typical, we will provide full year 2025 guidance next quarter, and we're optimistic about all the positive developments that Jeff Sighton that bowed well for the future.
Speaker Change: Now, begin the question and answer session. To answer a question, you may press star, then one on your touch zone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. But at any time your question has been addressed and you would like to withdraw your question, please press star, then two.
Speaker Change: The first question comes from Steve Moss with the Raymond James. Please go ahead.
Speaker Change: Good morning.
Speaker Change: Thank you for watching.
Steve Moss: Jeff Mark, maybe just starting on the $30 million credit that was downgraded to classified here. Yeah, if I recall correctly, it has an extension, one year option to extend. It's kind of serious, like where the recent developments here kind of, you know, make it where, like, it's not likely to extend or just how do we think about that workout process.
Speaker Change: Yeah, Steven's Jeff, one of the complicating factors here is that it's a syndicated loan. And so if they don't qualify for an extension, which we're still, you know, still kind of TBD as we move through the quarter, we're going to need to get an agreement amongst the bank group, you know, to either allow the extension or, and if we do on what terms, you know, what is the...
Speaker Change: What's the quick pro quo? So it's kind of a fluid situation and a bit of a curve ball that causes to downgrade it was the loss of the tenant that we were anticipating.
Steven Jeff: Okay, got you. And then in terms of the the 54.6 million dollar loan here, you know.
Steven Jeff: is the borrower of 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 get a sense there.
Steven Jeff: Yeah, hard to say at this point, but I would say it doesn't appear that
Steven Jeff: that the sponsor has an interest in contributing.
Steven Jeff: you know, any capital which we think is.
Steven Jeff: You know, a sign that, you know, things aren't going to end well here per se, which is why we've been exploring, you know, all of the above. Like we continue to interact with this 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, you know, a deed and lose something like that.
Speaker Change: Okay, got it. And then in terms of...
Speaker Change: You know, in terms of just kind of the reserve for us, that this point just kind of curious and gives color around where that specific reserve is. Our call crack would be four, you know, two and a half three percent type of dedication to that portfolio. Just kind of.
Speaker Change: Yes, so certainly as you can imagine, Steve, it gets skewed a bit now with this large of a specific reserve on that that large property we were just talking about. So, you know, if you include...
Speaker Change: Now the two with relones that we have either taking a specific reserve or a charge off on.
Speaker Change: I'd suggest a reserve is up to about...
Speaker Change: Almost 5%
Steve Moss: But obviously, that's inclusive of the log's 22 million dollar one on this log's facility. If you were to strip out the, I guess the individually specific reserves, the rest of that portfolio, I'd suggest is, as as you indicated somewhere around that, that two and a half percent range.
Steve Moss: Okay
Speaker Change: Thank you for that color.
Speaker Change: And then just curious here, you know, obviously the fed shifting definitely helps with the margin longer term. We get a positive slope. You know, I hear you on those comments, Mark. Just kind of, you know, curious with the capital position you guys have. And, you know, a relatively low security, you'll, you'll be curious portfolio. You know, what are your thoughts around maybe doing some sort of security restructuring versus a buybacker that thinks that along those lines.
Mark Ruggiero: Yeah, so it's a valid question, you know, I've always been of the opinion that the security is restructuring.
Mark Ruggiero: In many cases can often just be somewhat of a wash.
Mark Ruggiero: 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.
Mark Ruggiero: Start to come in in some of those securities valuations actually improving a bit. So, you know, I've always suggested you'll see tangible book value grow and have, you know, an, an, an, an, an tangible book value per share number that is.
Mark Ruggiero: Probably in the same range regardless of whether you do the balance sheet restructure or not and you know, we're we're primarily focused on that Which is to grow tangible book value. So while the earnings certainly looks better if you if you do that securities restructure I think ultimate valuation and growing tangible book you kind of end up in the same place and
Mark Ruggiero: So that's sort of been the reason we haven't been all that enamored with that and I think further.
Mark Ruggiero: You know, 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.
Mark Ruggiero: But from a liquidity standpoint, you know, the goal was to have the securities be around 12 to 13% of assets where...
Mark Ruggiero: We're only slightly higher than that right now, so, you know, it feels like we're in a much better spot, just with the overall composition of the balance sheet.
Speaker Change: Okay, great. I appreciate all the color here and I'll step back in the queue.
Speaker Change: from TechCube.
Speaker Change: For next question comes from Mark Fitzgivin with Piper Samler. Please go ahead. Hey guys, happy Friday. Hey Mark.
Mark Fitzgivin: 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?
Speaker Change: Now one does not know it, you know, from the appraisal that we have earlier in the process, you know, we felt good about the value there. So there's no specific reserve on it at this point.
Speaker Change: Okay. And then I think you mentioned that the rest of the office portfolio excluding the 154.7 million all along that has a reserve about 2.5% ish.
Speaker Change: 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? It warrants a much lower reserve level.
Speaker Change: Yeah, I mean without knowing what our competitors have and their portfolio, we get comfortable with the risk rating allocation within that pool.
Speaker Change: So, you know, if I would have looked at the breakout of our office book, 850 million of it is past grade, Rescrated 5 or 6.
Speaker Change: and then, again, if you strip out the individual evaluated loans, there's a little over a hundred million that's risk graded seven or eight.
Speaker Change: So, you know, what I've shared with in the past is, you know, if you do the math on, even if you go as far as allocating, say a 20 to 25% reserve on our risk-rated eight loans.
Speaker Change: and somewhere around 10% reserve on our seven rated loans.
Speaker Change: That gets you to the two and a half percent 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.
Speaker Change: Okay, and then was the $54.7 million office loan, your largest loan in that portfolio.
Speaker Change: We have one other loan that I think is larger, that's the pass rate of credit that
Speaker Change: 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 as a very strong sponsor. Yes, very strong sponsor and very good tenants.
Speaker Change: Okay, and then I think in the release you referenced that home equity line utilization rates have been rising I wanted if you could share with us what those are and and also be curious on commercial line utilization rates what those are trending like
Speaker Change: Yeah, so home equity utilization, not big changes Mark, but it went from about 34 and a half to a little over 35%.
Speaker Change: which is still.
Speaker Change: The law 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 and I utilization rates are actually under 30% right now. I believe they for the September period is around 28%.
Speaker Change: So that certainly has, like we said, muted what we've seen is pretty good closing volume on seeing eye activity we're just not getting.
Speaker Change: the Utilization to drive balance 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, you know, up to 60.
Speaker Change: Okay, and then lastly, I guess I'm curious, you know, 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.
Speaker Change: You know, you're in a market where there's not a lot of logical targets, you know, how would you sort of handicap it from the health side looking in the probability of being able to do acquisitions over the next say year or so?
Speaker Change: Well, it's hard to predict activity and assign a probability to it because
Speaker Change: As you know, banked are sold, they're not bought, and you're also right that there's not as many banks and in Eastern or even Central Massachusetts that.
Speaker Change: You know, they would kind of fit our target profile so that...
Speaker Change: is definitely a bit smaller.
Speaker Change: I know I've said in the past that
Speaker Change: We wouldn't roll out continuous markets so that would include Rhode Islander.
Speaker Change: Southern New Hampshire, but generally speaking...
Speaker Change: I think that the probability or I would say the possibility of us doing something I feel like we're well positioned to do something other than
Speaker Change: We think our stock price could be a little bit higher and give us a bit more juice in our currency, but out of the doubt, all the other aspects of our banker are performing really well as we just talked about. And so I wouldn't...
Speaker Change: I wouldn't rule it out if we found the right, 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 a deal.
Speaker Change: Okay, so given that you think the stock is undervalued and you have plenty of capital, should we presume buybacks are in the cart?
Speaker Change: I mean, I'll let Mark answer in a second, but it's something that we talk about, you know, if not every alcohol meeting maybe every other, so we're, you know, we talk about it quite a bit and it's just a matter of, you know, when we think it's prudent and when we think it's not. Yeah, not too much more to add to that. I think is, 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, you know, again, kept us on the sideline a bit. But, you know, I think having something in place to be opportunistic makes sense given our absolute levels of capital. So I think.
Speaker Change: I think it's a fair point to be sort of expecting something along those lines.
Speaker Change: We have our next question comes from Larry Hunsiger with C-Port Research. Please go ahead.
Speaker Change: Yeah, hi, thanks. Good morning, gentlemen. One is, one is you go back to office here, so the 30 million dollar FAA, that is your only financial district.
Speaker Change: Exposure is that correct.
Speaker Change: I wouldn't say it's our only one, but it's our only meaningful one. We have like a couple other much smaller...
Speaker Change: Performing well kind of...
Speaker Change: and their relationship oriented. So this is the only meaningful financial district office exposure in the portfolio.
Speaker Change: Okay, and then from I know as I had previously this was 85% occupied, and so I guess you guys lost the tenant. What, where does that take occupancy and then did that push that service coverage ratio down to less than one?
Speaker Change: 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%.
Speaker Change: and they've also some of their more recent new tenants in the building are burning off a free rent period which is 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.
Speaker Change: How did, and sorry, he was the lead bank on this one.
Speaker Change: Morgan Stanley, failure.
Speaker Change: Okay, okay, great. And then just going over to your 54.6 million, and I understand that, you know, most of the 19 and half million months provision in the quarter.
Speaker Change: was due to this, but what was the exact dollar amount? I mean, you see the reserve is sitting at 22, but what was the exact dollar amount that allocated to this credit?
Speaker Change: So technically, where we did not have a specific reserve on the loan last quarter, it had a general allocation that was relatively small, called a million dollars or so.
Speaker Change: What, as you know, Larry, we had been increasing the reserve of the last couple of quarters without any charge-off activity. So that's all done through the qualitative factors, which is sort of a pool of the approach, but it's heavily influenced by...
Speaker Change: You know, some of these larger credits that we knew were coming on the horizon, so...
Speaker Change: You know, I would, I'm comfortable suggesting even though, you know, on paper it looks like 21 million dollars of the provision is associated to the, to the loan, you know, there was some level of, of indirect build within the qualitative factors that were heavily influenced by this loan. So, you know, you could, you could probably suggest it somewhere in that.
Speaker Change: 19 to 21 million dollar range was sort of the needed provision for the quarter, specific to that. That makes sense.
Speaker Change: Yeah, that makes sense. That makes sense. Okay. Um, oh man.
Speaker Change: I really appreciate all the details, obviously, you give. Frequently, I had your office maturities and fill your 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 part way through 25. Do you have a new figure on what your maturities look like for 25?
Speaker Change: Yeah, you should be a charred about right above that, or that has the calendar year breakdown of maturitys, but it's the, so it's 19% of the book, which...
Speaker Change: I don't have these documents, but I'm doing it right now. Yeah, about 200 million. Yeah, no. Okay. I know this. It was right there. My apologies. Of that 200 million, where he is the $55 million loan, too. So keep that in mind. Yeah. Right. Right. And then, yeah. 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 LOI's coming in on that. Do you have an update on that credit? Yeah.
Speaker Change: Yeah, 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 majorities 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.
Speaker Change: Okay, because that one started the year with like almost 100% fake in, is that right? It was essentially a spec lab facility. Yeah, so it's extended out to, it's extended out near end, 2026 right?
Speaker Change: and FKP, the lawfully.
Speaker Change: Perfect. And so I guess as we look on the horizon, really, it's just these three credits. The one you just reserved, obviously the one that's upcoming in the fourth quarter, and 20 million seems to be funded. There's nothing else that, and obviously I appreciate that you're going to have bits and spurs, 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
Speaker Change: There's always someone off, so in full transparency, there's a new criticized office loan if you would look at total criticizing classified specific to office, first the prior quarter. And that is also a 2025 maturity. This is it's about a
Speaker Change: 15 million dollar loan, I believe, yeah, 15 million dollars. Still sort of.
Speaker Change: Early innings in terms of understanding sort of the ultimate resolution, but this is at one point.
Speaker Change: I'm looking to be converted to lab space, but then in terms of dealing with the market and understanding demand actually for.
Speaker Change: Some new office space, they sort of repurposed some of the facility back into office space.
Speaker Change: So, it's a little bit of a unique one where the appraisal.
Speaker Change: Contemplated all office and suggests, you know, it's still under, you know, 90% LTV and is, you know, close to 65% as a stabilized unit.
Speaker Change: But, you know, given some of the fluidity of that and, you know, uncertainty around true occupancy and tenant levels, we just felt it was appropriate to downgrade that to a seven. So that's a fourth quarter, 2025 maturity that, you know, we obviously have our eyes on, but the rest.
Speaker Change: of the book is Jeff indicated is past rating when not seeing anything that gets us major concern. So, you know, any loan, let's call it over $10 million that, you know, has a little bit of uncertainty. I think we've probably provided as much detail as we can at this point on all those.
Speaker Change: Okay, and then just one more question, your lab exposure that's included in the 1.042 billion, or that's separate. It's okay. How does total total lab exposure of your billion dollars?
Speaker Change: Well, we have, you know, what we call medical is about 88 million double check if that's all, if this other lab that's not in there or not, so I don't have a specific. Yeah, my gut feel is it might be a little bit north of that, but it's not a lot north of it.
Speaker Change: Okay, okay. Great, that's really helpful. And then just circling back to margin. Do you have a spot margin for September?
Speaker Change: I do, it was 330 for September.
Speaker Change: Again, if you have a question, please press star, then one.
Speaker Change: Our next question comes from Chris O'Connell with KBW, please go ahead.
Chris O'connell: Hey, good morning.
Chris O'connell: So, just one quick question, just to clarify and put that, you know, the all-is-discussion. So, for...
Chris O'connell: 2nd half of 25, 3 Q and 4 Q 25, what's the total dollar amount of critter sizing class if I'm.
Speaker Change: I believe it would just be the one new criticize we just talked about the 15 million.
Speaker Change: It might be one other small $3 million actually. I don't know what quarter that's matureing in. So call it, call it 15 to 18 million something like that.
Speaker Change: i
Speaker Change: Great, thank you.
Speaker Change: And then, so as you think about, you know, the margin, you know, longer term and kind of like a normalize your positive, these sloping, you know, yield curve environment. Like, where do you think roughly, you know, that ranges?
Speaker Change: Yeah, yeah.
Speaker Change: I'm hesitant to give a number.
Chris: Chris, just because you know, there's so many variables around the slope of the curve that...
Chris: and, depending on the timeline of...
Chris: You know what, what you want to assume for our just...
Chris: Replacing Benefit, so...
Chris: I think the guidance that I would sort of just suggest is the best way to think about it is.
Chris: You know, if the Fed cuts, as I mentioned, you could take 20% of whatever that Fed cut is in the sumule.
Chris: You'll lose that on the lone side.
Chris: but long-term, longer-term, you get 30 to 35% benefit on the deposit side. So, you know, we position 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's, you know, the caveat to that is it needs to be reflected above 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 to three quarters after where you get full deposit repricing and you get left on the short end of the curve.
Chris: and then I think the variable that is tough to predict is, you know, what time period you want to suggest.
Chris: Yeah, we continue to see longer term asset reprising. 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 to 150 basis points of improvement on spread. If you were to run the math on that, I'd say that equates to about two or three basis points lift on a quarterly basis to the margin.
Chris: So that's existing yield curve, it's like I said, it's not, you know, it's not assuming you'll see much lift in the longer end, but even where it is today versus the yields that I'm retiring, that does give us a nice 2 to 3 basis point lift each quarter.
Unknown Attendee: So I think that's the math that, again, you could sort of apply assumptions to the hope, you know, to the slope of the curve and sort of extrapolate with a margin could go. Got it.
Chris: So I think that's the math that...
Chris: Again, you could sort of apply assumptions to the slope of the curve and extrapolate where the margin could go.
Unknown Attendee: And I guess, like said, another way is like, is there anything like structurally different, you know, if we had, you know, a possibly sloping yield curve and, you know, the dynamics played out, you know, over, you know, along in a time horizon where everything kind of, you know, repriced and set, you know, where you guys, you know, couldn't have, you know, and then back in like, you know, the 385 to like 4% range, like in 2018, 2019.
Speaker Change: Got it. And I guess like said, another way is like, is there anything like structurally different, you know, if we had, you know, it's positively still been yield curve and, you know, the dynamics played out, you know, over, you know, a long enough time horizon where everything kind of, you know, reprice and set, you know, where you guys, you know, couldn't have, you know, a name back in like, you know, the 385 to like 4% range like in 2018, 2019. Thank you.
Mark Thomas Fitzgibbon: I think that's a fair potential, you know. I think if you take sort of that deposit beta conversation and apply that to sort of, you know, future expectations, say Fed funds gets down to 3%, I believe we have a deposit base that could differentiate in land in a, call it one to one and a quarter cost of deposits. And if you have, you know, the longer end of the curve, you know, moving up and you can get loan pricing back or consistent in the mid six to seven percent, you know, that creates a nice spread loan to deposit that drives the vast majority of our margin.
Speaker Change: I think that the fair potential, you know, I think if you take sort of that deposit data conversation and apply that to sort of, you know, future expectations, say Fed funds gets down to 3% I believe we have a deposit base that could differentiate in land in a wallet 1 to 1 and a quarter cost of deposits.
Speaker Change: and if you have, you know, the longer end of the curve, you know, moving up and you can get loan pricing back or consistent in the mid-six is 7%, you know, that creates a nice spread loan to deposit that drives the vast majority of our margin. And I think that is, you know, that's a real formula there, where I think you see the margin expands or the levels you're talking about. So I think the fundamentals and the balance composition is certainly there to your point. [inaudible]
Mark Fitzgibbon: And I think that is, you know, that's a real formula there where I think you see the margin expands with the levels you're talking about. So I think the fundamentals and the balance you composition is certainly there to your point.
Unknown Attendee: Great, and just to, you know, kind of confirm, you know, the timing of the trajectory, you know, a little bit of pressure in the fourth quarter and then, you know, say we're getting, you know, 25 basis points a quarter of Fed cuts kind of consistently.
Speaker Change: Great, and just to kind of confirm the timing of the trajectory, you know.
Speaker Change: A little bit of pressure in the fourth quarter and then, you know, say we're getting...
Speaker Change: 25 basis points of quarter of bad cuts kind of.
Mark Thomas Fitzgibbon: You know, in our news that it depends on the timing of, you know, the CDs, but I mean, the CD CD schedule it looks to be that, you know, the vast majority of them are really pricing here in Q4 and Q1.
Speaker Change: You know, and I knew it, it depends on the timing of, you know, the CDs, but I mean, the CD CD schedule it looks to be that, you know, the vast majority of them are repricing here in Q4 and Q1. So, I mean, what, what do you think that the Nim would start to make that turn, you know, in the upwards trajectory, would that be in one Q25 or two Q?
Mark Fitzgibbon: So I mean, what do you think that the Nim would start to make that turn, you know, in the upwards trajectory with that being at 1 Q 25 or 2 Q. Yeah, I think to your point, it's, as it sits here today, I guess, if there were no other cuts, the majority of our, the vast majority of our CD reprices in the next couple of quarters. So I think it's only a one or two quarter lag, as we said here today, to have the CD benefit sort of fully offset the loan. You know, a little of that will be dependent on, you know, what term our customers will be renewing into.
Speaker Change: Yeah, I think to your point, it's...
Speaker Change: As it sits here today, I guess if there was no other cuts.
Speaker Change: The majority of our, the vast majority of our CD reprises in the next couple of quarters, so I think it's, it's only a one or two quarter lag.
Speaker Change: As we sit here today to have the CD benefit sort of fully offset the loan.
Speaker Change: um
Speaker Change: You know, a little of that will be dependent on
Mark Fitzgibbon: Again, we're keeping promotional money on the short end of our, of our ladder from a CD maturity perspective for that exact reason. So I don't want to truly predict where, you know, CD demand is going to go for term, but if the continue to look for rate, if that's the primary driver. And we're able to keep the majority of our CD book, you know, under six months. I think it becomes a one quarter lag, give or take, you know, after a Fed cut where you start to see the benefit outweigh.
Speaker Change: Y'all what term our customers will be renewing into.
Speaker Change: Again, we're keeping promotional money on the short end.
Speaker Change: of our ladder from a CD maturity perspective for that exact reason.
Speaker Change: So, I don't want to...
Speaker Change: Truly, predict where you'll see the man is going to go for term.
Speaker Change: But if...
Speaker Change: The continued to look for rate if that's the primary driver, and we're able to keep the majority of our CD book, you know, under six months. I think it becomes a one-quarter lag, give or take, you know, after a Fed cut, where you start to see the benefit outweigh. Does that make sense?
Unknown Attendee: If we're getting consistent cuts, I guess I'm just trying to figure out if you're saying that the NIMS not going to start to turn positive after a cut or two, even if we're getting consistent one cuts a quarter. Yeah, no. Yeah, I see what you're saying in that thought. What I meant to suggest.
Speaker Change: You know that makes sense. I'm just trying to figure out if we're getting, if we're getting consistent cuts, I guess I'm just trying to figure out.
Speaker Change: If you're saying that the NIMS not going to start to turn positive after a cutter to, even if we're getting consistent one cut to quarter. Yeah, no, 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 turn and positive and then...
Mark Fitzgibbon: So I think compared to where we are today, I would suggest mid-2025 would be a fair reflection point of turn and 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 in 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.
Speaker Change: You know this is going to be sort of a little bit of noise just depending on
Speaker Change: How severe some of the cuts are in the timing of the cuts as to, you know, quarter or quarter, whether you'll see expansion or not.
Speaker Change: But in general I think mid 2025 is where you'll see more of a positive lift.
Unknown Attendee: Okay, so basically, you know, after these first couple of quarters of CD.
Speaker Change: Okay, so basically, you know, after these first couple quarters of CD, you know, I think getting this, this larger CD, repricing behind us.
Mark Fitzgibbon: Yeah, I think getting this larger CD repricing behind us feels like the inflection point in my mind.
Unknown Attendee: Great.
Speaker Change: The inflection point in my mind.
Unknown Attendee: Appreciate the time. I have to take my questions.
Speaker Change: Great.
Unknown Attendee: This concludes our question and answer session.
Jeffrey Tengel: I would like to turn the conference back over to Jeff Tangle for any closing remarks. Thanks. We appreciate your continued interest and support.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Jeff Tengel for any closing remarks.
Unknown Attendee: Have a great weekend, everyone.
Unknown Attendee: The conference is now concluded. Thank you for attending today's presentation.
Unknown Attendee: You may now disconnect. Thank you.
Speaker Change: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker Change: oh fouryour so
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Speaker Change: Music Music