Independent Bank - Q3 2024
October 18, 2024
Transcript
Operator (participant)
Good day, and welcome to the Independent Bank Corp Third 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 star 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. 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 (CEO)
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 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. 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.
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 third quarter 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 third quarter 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 nine months, we've made steady progress towards 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 and 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 IMG in our markets, and underscoring all of this is our historically disciplined credit underwriting and portfolio management. Rockland Trust's 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'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. 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 fifteen consecutive years, a top charitable contributor by the Boston Business Journal for the last eleven 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 (CFO and Head of Consumer Lending)
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 three 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 Jeff just described in his comments, the quarter results were heavily impacted by the outsized provision associated with one large office loan, which I'll 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 four, 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 one basis point in the quarter. Moving to slide five, 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 loan balances, there are several positives to highlight.
The approved commercial pipeline is $294 million at September thirtieth and reflects a 9% increase over the prior quarter approved pipeline. Year to date, commercial closed commitments exceed $1 billion, with notable increases in C&I activity that are currently being muted by persistent low levels of line utilization. In general, with the rate environment shifting, we are starting to see some optimism in our commercial borrowers to reengage 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 the quarter, while mortgage closings are up with continued shifts to more saleable activity. 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 six, 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 rated loans actually declining during the quarter. Separate from the activity I already discussed, I'll highlight some other key information on slide eight 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 four 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%-35% beta. However, the timing could be impacted to some degree by scheduled time deposit maturities. And on an annual basis, approximately 12-15% 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 100-150 basis points. I will provide specific fourth quarter 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 in our wealth segment reached another record $7.2 billion as of September thirtieth, 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 third quarter 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 % increases for Q4, which would result in 2024 full-year loan growth in the low single-digit % range and full-year deposit growth in the low to mid single-digit % range.
Regarding the net interest margin, inclusive of the 50 basis point cut announced in September, we anticipate the margin to contract slightly, or 0-5 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%-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 % increase for full year 2024 versus 2023, with relatively flat Q4 totals versus Q3 levels. For non-interest expense, we reaffirm low single-digit % increases for full year 2024 versus 2023, as well as for Q4 versus Q3.Lastly, the tax rate for the fourth quarter 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.
Operator (participant)
We'll now begin the question-and-answer session. To ask a question, you may press Star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press Star, then two. The first question comes from Steve Moss with Raymond James. Please go ahead.
Steve Moss (Managing Director and Equity Research Analyst)
Good morning.
Jeff Tengel (CEO)
Hi, Steve.
Mark Ruggiero (CFO and Head of Consumer Lending)
Hi, Steve.
Steve Moss (Managing Director and Equity Research Analyst)
Hey, 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. Just kind of curious, like, will 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?
Jeff Tengel (CEO)
Yeah, 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 we're still, you know, it's 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, what is the, you know, 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 (Managing Director and Equity Research Analyst)
Okay. Got you. And then in terms of the $54.6 million loan here, you know, 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 (CEO)
Yeah, hard to say at this point, but I would say it doesn't appear that the sponsor has an interest in contributing, you know, any capital, which we think is, 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 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, you know, a deed in lieu, something like that.
Steve Moss (Managing Director and Equity Research Analyst)
Okay. Got you. And then in terms of, you know, just kind of the reserve for office at this point, just kind of curious if you could give us color around where that specific reserve is. If I recall correctly, before it's, you know, 2.5-3% type dedication to that portfolio. Just kind of curious where that is today.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah. 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. It you know, if you include now the two or three 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 two and a half percent range.
Steve Moss (Managing Director and Equity Research Analyst)
Okay. Appreciate that color. 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 yield, yielding securities portfolio, you know, what are your thoughts around maybe doing some sort of securities restructuring versus a buyback or things that along those lines?
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, sure. It's a valid question. You know, I've always been of the opinion that the securities restructuring, you know, in many cases, can often just be somewhat of a wash, in terms of ultimate valuation. And I think, you know, to be honest, it felt like that was pretty much on display here in the third quarter when you saw, you know, rates start to come in, and 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, and end 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 you know, 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, 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. But from a liquidity standpoint, you know, the goal was to have the securities be around 12%-13% of assets, where 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.
Steve Moss (Managing Director and Equity Research Analyst)
Okay, great. I appreciate all the color here, and I'll step back in the queue.
Mark Ruggiero (CFO and Head of Consumer Lending)
No problem.
Jeff Tengel (CEO)
Thank you.
Operator (participant)
Our next question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
Hey, guys. Happy Friday.
Jeff Tengel (CEO)
Hey, Mark.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
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 (CFO and Head of Consumer Lending)
That one does not. No. It, it-- you know, from, 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.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
Okay. And then I think you mentioned that the rest of the office portfolio, excluding the $154.7 million loan, that has a reserve at 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 (CFO and Head of Consumer Lending)
Yeah, I mean, without knowing what our competitors have in their portfolio, you know, we get comfortable with the risk rating allocation within that pool. So, you know, if I were to look at the breakout of our office book, $850 million of it is pass grade, risk-graded five or six. And then again, if you strip out the individual evaluated loans, there's a little over $100 million that's risk-graded seven or eight.
So, you know, what I've shared within the past is, you know, if you do the math on, even if you go as far as allocating, say, a 20%-25% reserve on our risk-graded eight loans and somewhere around 10% reserve on our seven-rated loans, that gets you to the 2.5% total allocation, you know, 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 (Managing Director and the Head of Financial Services Group Research)
Okay. And then, was the $54.7 million office loan your largest loan in that portfolio?
Jeff Tengel (CEO)
We have one other loan that I think is larger. That's a pass-rated credit that is. It was also a, you know, an acquired loan. But it's really, we feel very very good about it. It's a very unique property that that's doing just fine.
Mark Ruggiero (CFO and Head of Consumer Lending)
Has a very strong sponsor.
Jeff Tengel (CEO)
Yes, very strong sponsor and very good tenants.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
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, and also I'd be curious on commercial line utilization rates, what those are trending like.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, 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, you know, 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 they, for the September period, is around 28%. So that certainly has, you know, 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 balance growth. And construction's another portfolio where you're seeing utilization. I think that's down to about 55%, where historically, we've seen construction utilization, you know, north of 60%.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
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, you 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 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 outside looking in, the probability of being able to do acquisitions over the next, say, year or so?
Jeff Tengel (CEO)
I mean, it's hard to predict activity and assign a 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 you know that would kind of fit our criteria profile. So the pond, so to speak, is definitely a bit smaller. I know I've said in the past that we wouldn't rule out contiguous markets, so that would include you know Rhode Island or Southern New Hampshire. But generally speaking you know 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 outside that, all 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, you know, get the synergy that would come with the deal.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
Okay. So given that, you think the stock is undervalued and you have plenty of capital, should we presume buybacks are in the cards?
Jeff Tengel (CEO)
Yeah, I mean, I'll let Mark answer in a second, but it's something that we talk about, you know, if not every ALCO 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.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, 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, 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 it's a fair point to be sort of expecting something along those lines.
Mark Fitzgibbon (Managing Director and the Head of Financial Services Group Research)
Thank you.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yep.
Operator (participant)
Our next question comes from Laurie Hunsicker with Seaport Research Partners. Please go ahead.
Laurie Hunsicker (Senior Financial Bank Analyst)
... Yeah. Hi, thanks. Good morning, gentlemen. 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 (CEO)
I wouldn't say it's our only one, but it's our only meaningful one. We have, like, a couple other much smaller performing well, kind of, and they're relationship oriented. So this is the only meaningful Financial District office exposure in the portfolio.
Laurie Hunsicker (Senior Financial Bank Analyst)
Got it. Got it. Okay, and then from my notes I had previously, this was 85% occupied, and so I guess you guys lost a tenant. What-- Where does that take occupancy? And then did that push debt service coverage ratio down to less than one?
Jeff Tengel (CEO)
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 a 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, you know, today with the agent bank and the client about how we move forward.
Laurie Hunsicker (Senior Financial Bank Analyst)
Got it. And sorry, who was the lead bank on this one?
Jeff Tengel (CEO)
Morgan Stanley.
Mark Ruggiero (CFO and Head of Consumer Lending)
Stanley, yes.
Laurie Hunsicker (Senior Financial Bank Analyst)
Okay. Okay, great. And then just going over to your $54.6 million, and I understand that, you know, most of the $19.5 million loan loss provision in the quarter was due to this, but what, what was the exact dollar amount? I mean, you see the reserve is sitting at $22 million, but what, what was the exact dollar amount that allocated to this credit?
Mark Ruggiero (CFO and Head of Consumer Lending)
You know, 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 over the last couple of quarters without any charge-off activity. So that's all done through the qualitative factors, which is more of sort of a pooled approach, but it's heavily influenced by, you know, some of these larger credits that we knew were coming on the horizon.
So, you know, I would, I'm comfortable suggesting, even though, you know, on paper it looks like $21 million of the provision is associated to this, to the loan. You know, there was some level of indirect build within the qualitative factors that were heavily influenced by this loan. You know, you could probably suggest that somewhere in that $19 million-$21 million range was sort of the needed provision for the quarter, specific to that.
Laurie Hunsicker (Senior Financial Bank Analyst)
Yeah.
Mark Ruggiero (CFO and Head of Consumer Lending)
Does that make sense?
Laurie Hunsicker (Senior Financial Bank Analyst)
Yep, that makes sense. That makes sense.
Okay. Okay. And then really appreciate all the details obviously you give. Previously, I had your office maturities in full year 2025 was $219 million, and I didn't see that on page eight this time. You just have a quarterly breakdown. It looks like that ends partway through 2025. Do you have a new figure on what your maturities look like for 2025?
Jeff Tengel (CEO)
Yeah, you should. 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%.
Laurie Hunsicker (Senior Financial Bank Analyst)
Oh.
Mark Ruggiero (CFO and Head of Consumer Lending)
book, which I don't have the exact number-
Laurie Hunsicker (Senior Financial Bank Analyst)
I see it.
Mark Ruggiero (CFO and Head of Consumer Lending)
-but I'm doing it right now. Yeah, about $200 million.
Laurie Hunsicker (Senior Financial Bank Analyst)
Yep. Nope. Okay, I missed it. It was right there. My apologies.
Jeff Tengel (CEO)
Oh, no problem.
Laurie Hunsicker (Senior Financial Bank Analyst)
And then-
Jeff Tengel (CEO)
Of that $200 million, Laurie, is the $55 million loan, too, so keep that in mind.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah.
Laurie Hunsicker (Senior Financial Bank Analyst)
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 2025, but there were more LOIs coming in on that. Do you have an update on that credit?
Mark Ruggiero (CFO and Head of Consumer Lending)
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 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 (Senior Financial Bank Analyst)
Okay. Yeah, because that one started the year with, like, almost 100% vacant. Is that right?
Mark Ruggiero (CFO and Head of Consumer Lending)
That's right. It was essentially a spec lab facility.
Jeff Tengel (CEO)
Yeah, and so it's extended out to-
Mark Ruggiero (CFO and Head of Consumer Lending)
It's extended.
Jeff Tengel (CEO)
Yeah, year-end 2026.
Mark Ruggiero (CFO and Head of Consumer Lending)
Right.
Jeff Tengel (CEO)
It's got positive velocity.
Laurie Hunsicker (Senior Financial Bank Analyst)
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 punted. 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, we have to be thinking about this.
Mark Ruggiero (CFO and Head of Consumer Lending)
I mean, there's always somewhat off. So, you know, in full transparency, there, 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. $15 million. Still sort of early innings in terms of understanding sort of the ultimate resolution, but this was 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 suggests, you know, it's still under, you know, 90% LTV and is, you know, close to 65% as a stabilized unit. 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 of the book, as Jeff indicated, is pass rating.
We're not seeing anything that gives 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.
Laurie Hunsicker (Senior Financial Bank Analyst)
Okay. Then just one more question. Your CRE exposure, that's included in the $1.042 billion-
Mark Ruggiero (CFO and Head of Consumer Lending)
It is.
Laurie Hunsicker (Senior Financial Bank Analyst)
Or that's separate?
Mark Ruggiero (CFO and Head of Consumer Lending)
It is.
Laurie Hunsicker (Senior Financial Bank Analyst)
It is.
Mark Ruggiero (CFO and Head of Consumer Lending)
Okay.
Laurie Hunsicker (Senior Financial Bank Analyst)
How total, total loan exposure of your $1 billion?
Mark Ruggiero (CFO and Head of Consumer Lending)
Well, we have, you know, what we call medical as, as about $88 million.
Laurie Hunsicker (Senior Financial Bank Analyst)
Right.
Mark Ruggiero (CFO and Head of Consumer Lending)
I'd have to 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 lab.
Jeff Tengel (CEO)
Yeah. My gut feel is it might be a little bit north of that, but it's not a lot north of it.
Laurie Hunsicker (Senior Financial Bank Analyst)
Okay. Okay. Great, that's really helpful. And then just, circling back to margin, do you have a spot margin for September?
Mark Ruggiero (CFO and Head of Consumer Lending)
I do. It was 3.30% for September.
Laurie Hunsicker (Senior Financial Bank Analyst)
Great. Thank you guys so much for taking my question.
Mark Ruggiero (CFO and Head of Consumer Lending)
No problem.
Jeff Tengel (CEO)
Of course.
Operator (participant)
Again, if you have a question, please press Star, then One. Our next question comes from Chris O'Connell with KBW. Please go ahead.
Chris O'Connell (Director in the Equity Research)
Hey, good morning.
Jeff Tengel (CEO)
Good morning.
Chris O'Connell (Director in the Equity Research)
So just, you know, one quick question just to clarify and put to bed, you know, the office discussion. So for second half of 2025, 3Q and 4Q 2025, what's the total dollar amount of criticized and classified?
Mark Ruggiero (CFO and Head of Consumer Lending)
I believe it would just be the one new criticized. We just talked about the $15 million. There might be one other-
Chris O'Connell (Director in the Equity Research)
Okay.
Mark Ruggiero (CFO and Head of Consumer Lending)
Small $3 million. Actually, I don't know what quarter that's maturing in. So call it $15-$18 million, something like that.
Chris O'Connell (Director in the Equity Research)
Great, thank you. And then so as you think about, you know, the margin, you know, longer term and kind of like a normalized or positively sloping, you know, yield curve environment, like, where do you think roughly, you know, that range is?
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, I, I'm hesitant to give a number, Chris, just because, you know, there's so many variables around the slope of the curve that. And depending on the timeline of, you know, what you want to assume for just repricing benefit. So, you know, I think the guidance that I would sort of just suggest is the best way to think about it is, you know, if the Fed cuts, as I mentioned, you know, you could take 20% of whatever that Fed cut is and assume you'll lose that on the loan side. But long term, longer term, you get 30%-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%-10% margin expansion immediately on the short end of the curve. And that, you know, 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 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, you know, what time period do you want to suggest? You know, we continue to see longer-term asset repricing. 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 100-150 basis points of improvement on spread. So 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.
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 are maturing, that does give us a nice two to three basis point lift each quarter. So I think that's the math that, again, you could sort of apply assumptions to the yield, you know, to the slope of the curve and sort of extrapolate where the margin could go.
Chris O'Connell (Director in the Equity Research)
Got it. And I guess, like, said another way, is, like, is there anything, like, structurally different? You know, if we had, you know, a positively sloping 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 NIM back in, like, you know, the 3.85%-4% range, like in 2018, 2019?
Mark Ruggiero (CFO and Head of Consumer Lending)
No, I think that's a fair potential. But you know, I think if you take sort of that deposit beta conversation and then 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 and land in a, call it, 1%-1.25% 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-sixes, 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 expand to the levels you're talking about. So I think the fundamentals and the balance sheet composition are certainly there, to your point.
Chris O'Connell (Director in the Equity Research)
Great. And just to, you know, kind of confirm, you know, the timing or 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. You know, and I know you said it depends on the timing of, you know, the CDs, but, I mean, the CD schedule looks to be that, you know, 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, you know, in the upward trajectory? Would that be in-
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah
Steve Moss (Managing Director and Equity Research Analyst)
... 1Q 2025 or 2Q?
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, 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 two-quarter lag as we sit 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. 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, you know, CD demand is going to go for 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, 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?
Chris O'Connell (Director in the Equity Research)
Yeah, no, that makes sense.
Mark Ruggiero (CFO and Head of Consumer Lending)
But I think there's always-
Chris O'Connell (Director in the Equity Research)
I'm just trying to figure out if we're getting consistent cuts. I guess I'm just trying to figure out if you're saying that the NIM's not gonna start to turn, you know, positive after, you know, a cut or two, even if we're getting, you know, consistent one cuts a quarter.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah. No, like, yeah, I'm - I see what you're saying, and 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 reference point, you know, inflection point of turning positive. And then, you know, there's just gonna 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, you know, 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.
Chris O'Connell (Director in the Equity Research)
Okay, so basically, you know, after these first couple quarters of CD-
Mark Ruggiero (CFO and Head of Consumer Lending)
Yeah, I think getting this larger CD repricing behind us feels like the inflection point in my mind.
Chris O'Connell (Director in the Equity Research)
Great. Appreciate the time. Thanks for taking my questions.
Mark Ruggiero (CFO and Head of Consumer Lending)
Yep, you're welcome.
Operator (participant)
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 (CEO)
Thanks. We appreciate your continued interest and support. Have a great weekend, everyone.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.