Independent Bank Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2024

There are 7 speakers on the call.

Operator

Good day, and welcome to the Independent Bancorp Third Quarter 20 24 Earnings Call Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Operator

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.

Operator

I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead.

Speaker 1

Thank you. Good morning and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. I'm pleased to report that our Q3 performance felt like a bit of an inflection point with margins improving and deposits showing continued growth. This performance reflects our team's continued commitment to developing and deepening customer relationships.

Speaker 1

As we discussed last quarter, we have 1 large commercial real estate office loan that matures in the Q1 of 2025, which is experiencing stress. While this loan is current and continues to pay, we proactively moved it to NPA status given the uncertain outlook and lack of commitment from the sponsor. Recall, this loan came over with the East Boston Savings acquisition and has been adversely rated since close. A sizable reserve was set up in the Q3 in anticipation of its ultimate resolution, and we are actively exploring all avenues for resolution prior to maturity. Mark will have more on how this loan impacted our Q3 results.

Speaker 1

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.

Speaker 1

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 and I. Over the last 9 months, we've made steady progress towards generating solid C and I volume, while reducing overall CRE balances. We will continue to focus on C and I through strategic hires in our core markets, while evaluating select industry verticals.

Speaker 1

Our robust pipeline, which is up 9% linked quarter, is testament to our strength in this space. We continue to add new talent to our commercial banking team in the Greater Boston market, and our value proposition in community banking model resonates. Another priority is prudently growing deposits, which has been a historical strength of ours. Mark will provide additional color in a few minutes. But in the Q3, we grew deposits, grew the number of households we serve and expanded our net interest margin.

Speaker 1

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 $7,200,000,000 in the 3rd quarter.

Speaker 1

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 historical 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.

Speaker 1

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 and A opportunities. While M and 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 1 in the future. Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback.

Speaker 1

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.

Speaker 1

That's why we're proud to be named a top place to work in Massachusetts by the Boston Globe for 15 consecutive years, a top charitable contributor by the Boston Business Journal for the last 11 years and the number one bank in Massachusetts according to Forbes list of best in state banks for 2024. To summarize, we have everything in place to deliver the results the market has been accustomed to over the years, including a talented and deep management team, ample capital, highly attractive markets, good expense management, disciplined credit underwriting, strong brand recognition, operating scale, a deep consumer and commercial customer base and an energized and engaged workforce. In short, I believe we are well positioned to take market share and continue to be an acquirer of choice in the Northeast. And on that note, I'll turn it over to Mark.

Speaker 2

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8 ks filing and is available on our website in today's investor portal. Starting on Slide 3 of the deck, 2024 Q3 GAAP net income was $42,900,000 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 Jess just described in his comments, the quarter results were heavily impacted by the outsized provision associated with 1 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.

Speaker 2

We have always prioritized sustainable tangible capital growth and that is evidenced by the 9% growth in tangible book value per share over the last year despite increased provision versus our historical normal levels. Turning to Slide 4, we highlight a real franchise strength that we believe to be 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.

Speaker 2

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 5, payoff activity in the construction book was the primary driver behind the reduction in commercial loan balances, with total loans decreasing $40,000,000 or 0.3 percent for the quarter. Despite the relatively flat low loan balances, there are several positives to highlight. The approved commercial pipeline is $294,000,000 at September 30 and reflects a 9% increase over the prior quarter approved pipeline.

Speaker 2

Year to date, commercial close commitments exceed $1,000,000,000 with notable increases in C and I activity that are currently being muted by persistent low levels of line utilization. And in general, with the rate environment shifting, we are starting to see some optimism in our commercial borrowers to 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. And as a reminder, though we have no clear prediction over future long term rates, back in the 2019 2020 easing cycle, we saw our strength in both mortgage banking and swap offerings serve as a natural hedge against pressure on longer term rate reductions. Shifting gears to asset quality on Slide 6.

Speaker 2

Jeff addressed the most significant developments behind the data reflected here. To reiterate, the quarter included the migration of a large $54,600,000 office relationship from a prior acquisition to non performing status, with higher provision levels reflecting the establishment of $22,400,000 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 $5,900,000 reserve on a large C and I credit was charged off during the quarter in conjunction with the commencement of a collateral liquidation plan. We continue to closely monitor all criticized and classified loans with total adversely related loans actually declining during the quarter.

Speaker 2

Separate from the activity already discussed, I'll highlight some other key information on Slide 8 related to the office portfolio. Focusing on upcoming maturities, the $30,000,000 syndicated loan that is set to mature in the Q4 was downgraded to classified due to recent tenant developments that will further pressure debt service with negotiations still ongoing regarding the need for a 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.

Speaker 2

Switching gears now to Slide 10, we highlight the net interest margin to 3.29 percent 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. 1st, total loan exposure net of hedges that are subject to short term Fed Reserve cuts is approximately 20% of the portfolio. Long term deposit betas on the way down should mirror results experienced on the way up, which would suggest an approximate 30% to 35% beta.

Speaker 2

However, the timing could be impacted to some degree by scheduled time deposit maturities. And on an annual basis, approximately 12% to And on an annual basis, approximately 12% to 15% of the loan book is expected to generate cash flows that will be subject to repricing. Currently, those cash flows are expected to generate a positive spread over current yield of approximately 100 basis points to 150 basis points. I will provide specific 4th 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.

Speaker 2

And in addition, total assets under administration in our wealth segment reached another record $7,200,000,000 as of September 30, with overall income increasing slightly despite the elevated tax preparation fees recognized in the prior quarter. Total expenses increased slightly versus the prior quarter as expected And included in the Q3 were a couple of outsized items worth highlighting. The first being a negative adjustment associated with the valuation of split dollar life insurance liabilities of approximately 853,000 dollars which was essentially offset by a one time credit received of $1,100,000 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.

Speaker 2

In terms of loan and deposit growth, we anticipate low single digit percentage increases for Q4, which would result in 2024 full year loan growth in the low single digit percentage range and full year deposit growth in the low to mid single digit percentage range. Regarding the net interest margin, inclusive of the 50 basis point cut announced in September, we anticipate the margin to contract slightly or 0 to 5 basis points in the near term, reflecting the fact that some level of deposit repricing benefit will lag in terms of being able to fully offset the decrease in loan yields. Along those lines, each Fed cut would likely create a similar short term drag on the margin. However, as I just noted earlier, with 30% to 35% deposit beta assumptions expected to offset net 20% repricing on the loan portfolio, future fed rate cuts that lead to a flat or positively sloped yield curve will ultimately lead to an improved margin going forward. Regarding asset quality, we anticipate charge off activity in the short term centered around the existing specific reserves identified on Page 6 of the deck, while provision expense will be driven by any other emerging credit trends not already captured in the reserve.

Speaker 2

Regarding non interest income, we reaffirm a low single digit percentage increase for full year 2024 versus 2023 with relatively flat Q4 totals versus Q3 levels. And for non interest expense, we reaffirm low single digit percentage increases for full year 2024 versus 2023 as well as for Q4 versus Q3. And lastly, the tax rate for the 4th 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

We'll now begin the question and answer session. The first question comes from Steve Moss with Raymond James. Please go ahead.

Speaker 2

Hi, good morning.

Speaker 1

Hi, Steve. Good morning, Steve.

Speaker 3

Hey, Jeff, Mark. Maybe just starting on the $30,000,000 credit that was downgraded to classified here. If I recall correctly, it has an extension, 1 year option to extend. Just kind of curious, like, were the recent developments here kind of make it where, like, it's not likely to extend? Or just how do we think about that workout process?

Speaker 1

Yes, Steve, it'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 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 to either allow the extension or and if we do on what terms, what is the 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.

Speaker 3

Okay, got you. And then in terms of the $54,600,000 loan here, is the borrower cooperating with you guys at this point? Or do you think it's more likely a loan sale or foreclosure type evolution? Just kind of trying to get a sense there.

Speaker 1

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

Speaker 3

Okay, got you. And then in terms of just kind of the reserve for us at this point, just kind of curious if you could give us color around where that specific reserve is, if I recall correctly before, 2.5%, 3% type dedication to that portfolio, just kind of curious where that is today?

Speaker 2

Yes. So certainly, as you can imagine, Steve, it gets skewed a bit now with this large of a specific reserve on that large property we were just talking about. So if you include now the 2 or 3 loans that we have either taking a specific reserve or a charge off on, I'd suggest the reserve is up to about almost 5%. But obviously that's inclusive of the large $22,000,000 one 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 in that 2.5% range.

Speaker 3

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

Speaker 2

Yes. So it's a valid question. I've always been of the opinion that the securities restructuring in many cases can often just be somewhat of a wash in terms of ultimate valuation. And I think to be honest, it felt like that was pretty much on display here in the Q3 when you saw rates start to come in and some of those securities valuations actually improving a bit. So I've always suggested you'll see tangible book value grow and have and tangible book value per share number that is probably in the same range regardless of whether you do the balance sheet restructure or not.

Speaker 2

And we're primarily focused on that, which is to grow tangible book value. So while the earnings certainly looks better if you do that securities restructure, I think ultimate valuation and growing tangible book, you kind of end up in the same place. And so that's sort of been the reason we haven't been all that enamored with that. And I think further, we've allowed the securities book to really just run down over the last year. We put a little bit of that money back to work here in the Q3.

Speaker 2

So we did buy another $50,000,000 or so. But from a liquidity standpoint, the goal was to have the securities be around 12% to 13% of assets where we're only slightly higher than that right now. So it feels like we're in a much better spot just with the overall composition of the balance sheet.

Speaker 3

Okay, great. I appreciate all the color here and I'll step back in the queue.

Speaker 2

No problem. Thank you.

Operator

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

Speaker 4

Hey, guys. Happy Friday.

Speaker 1

Hey, Mark.

Speaker 4

Just want to follow-up on a couple of Steve's questions. First, on the 30,000,000 dollars classified loan that matures in the Q4, is there a specific reserve against that?

Speaker 2

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

Speaker 4

Okay. And then I think you mentioned that the rest of the office portfolio excluding the $154,700,000 loan that has a reserve of about 2.5 percent -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?

Speaker 2

Yes. I mean, without knowing what our competitors have in their portfolio, what we get comfortable with the risk rating allocation within that pool. So if I were to look at the breakout of our office book, $850,000,000 of it is pass grade, risk rated 5 or 6. And then again, if you strip out the individual evaluated loans, there's a little over $100,000,000 that's risk rated 7 or 8. So what I've shared with in the past is if you do the math on even if you go as far as allocating say a 20% to 25% reserve on our risk rated 8 loans and somewhere around 10% reserve on our 7 rated loans that gets you to the 2.5% total allocation that we're highlighting.

Speaker 2

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 4

Okay. And then was the $54,700,000 office loan your largest loan in that portfolio?

Speaker 1

We have one other loan that I think is larger that's a pass rated credit that is it was also an acquired loan, but it's really we feel very, very good about it. It's a very unique property that Zooming just finds.

Speaker 2

As a very strong sponsor.

Speaker 1

Yes, very strong sponsor and very good tenants.

Speaker 4

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

Speaker 2

Yes. So home equity utilization, not big changes, Mark, but it went from about 34.5% to a little over 35%, which is still below where we saw sort of pre COVID levels, but has been a little bit of an uptick driving some of that outstanding balance growth you saw. General C and I utilization rates are actually under 30% right now. I believe they for the September period is around 28%. So that certainly has, like we said, muted what we've seen is pretty good closing volume on C and I activity.

Speaker 2

We're just not getting the utilization to drive balance growth. And construction is another portfolio where you're seeing utilization down. I think that's down to about 55%, where historically we've seen construction utilization north of 60%.

Speaker 4

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

Speaker 1

Well, 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 would kind of fit our target profile. So the kind of the pond, so to speak, is definitely a bit smaller. I know I've said in the past that we wouldn't roll out contiguous markets, so that would include Rhode Island or Southern New Hampshire. But generally speaking, I think the probability or I would say the possibility of us doing something, I feel like we're well positioned to do something other than we think our stock price could be a little bit higher and give us a bit more juice in our currency.

Speaker 1

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

Speaker 4

So given that you think the stock is undervalued and you have plenty of capital, should we presume buybacks are in the cards?

Speaker 1

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

Speaker 2

Yes. Not too much more to add to that. I think as you know, we were active earlier in the year. We did hit the pause button on a bit there. You've seen a lot of sort of volatility in our stock price, which again kept us on the sideline a bit.

Speaker 2

But I think having something in place to be opportunistic makes sense given our absolute levels of capital. So I think it's a fair point to be sort of expecting something along those lines.

Speaker 3

Thank you.

Operator

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

Speaker 5

Yes. Hi, thanks. Good morning, gentlemen. Hi Laurie. I wanted to go back to office here.

Speaker 5

So the $30,000,000 Class A, that is your only financial district exposure, is that correct?

Speaker 1

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.

Speaker 5

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.

Speaker 5

Where does that take occupancy? And then did that push debt service coverage ratio down to less than 1?

Speaker 1

I don't know if it's less than 1. 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 today with the agent bank and the client about how we move forward.

Speaker 5

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

Speaker 1

Morgan Stanley. Morgan Stanley, yes.

Speaker 5

Okay. Okay, great. And then just going over to your $54,600,000 and I understand that most of the $19,500,000 loan loss provision in the quarter was due to this. But what was the exact dollar amount? I mean, we see the reserve is sitting at $22,000,000 but what was the exact dollar amount that allocated to this credit?

Speaker 2

So technically where we did not have a specific reserve on the loan last quarter, it had a general allocation that was relatively small, call it $1,000,000 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 some of these larger credits that we knew were coming on the horizon. So I would I'm comfortable suggesting even though on paper it looks like $21,000,000 of the provision is associated to this to the loan, there was some level of indirect build within the qualitative factors that were heavily influenced by this loan. So you could probably suggest that somewhere in that $19,000,000 to $21,000,000 range was sort of the needed provision for the quarter specific to that.

Speaker 2

Does that make sense?

Speaker 5

Yes. That makes sense. That makes sense. Okay. And then really appreciate all the details obviously you give.

Speaker 5

Previously, I had your office maturities and full year 2025 was $219,000,000 and I didn't see that on Page 8 this time. You just have a quarterly breakdown, it looks like that ends partway through 'twenty five. Do you have a new figure on what your maturities look like for 'twenty five?

Speaker 2

Yes, you should there should be a chart about right above that, Laurie, that has the calendar year breakdown of maturities, but it's so it's 19% of the book, which I don't have the

Speaker 5

exact number, but

Speaker 2

I'm doing it right now, about $200,000,000

Speaker 5

Yes. No, okay. I missed it. It was right there. My apologies.

Speaker 1

No problem. And then Of that $200,000,000 Laurie is the $55,000,000 loan too. So keep that in mind.

Speaker 5

Yes. Right. And then, yes, and to that point, I had remembered you guys had another adversely rated loan. It was $20,000,000 maturing in 2025, but there were more LOIs coming in on that. Do you have an update on that credit?

Speaker 2

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

Speaker 5

Okay. Yes, because that one started the year was like almost 100% vacant, is that right?

Speaker 2

That's right. It was essentially a spec lab facility.

Speaker 1

Yes. And so it's extended out to year end 2026. Right. And it's got positive

Speaker 5

velocity. 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 4th quarter and $20,000,000 seems to be punted. There's nothing else that as and obviously I appreciate that you're going to have bits and spurts and you guys give so much good detail, but there's nothing else out there that is large that you look at and say, wow, we have to be thinking about this?

Speaker 2

I mean, there's always somewhat off. So in full transparency, there's a new criticized office loan, if you were to look at total criticized and classified specific to office versus the prior quarter, and that is also a 2025 maturity. This is it's about a $15,000,000 loan, I believe. Yes, dollars 15,000,000 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.

Speaker 2

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 it's still under 90% LTV and is close to 65% as a stabilized unit. But given some of the fluidity of that and uncertainty around true occupancy and tenant levels, we just felt it was appropriate to downgrade that to a 7. So that's a Q4 2025 maturity that we obviously have our eyes on. But the rest of the book, as Jeff indicated, is pass rating.

Speaker 2

We're not seeing anything that gives us major concern. So any loan, let's call it over $10,000,000 that has a little bit of uncertainty, I think we've probably provided as much detail as we can at this point on all those.

Speaker 5

Okay. And then just one more question. Your lab exposure, that's included in the $1,040,000,000 or that's separate?

Speaker 1

It is.

Speaker 5

Total lab exposure of your $1,000,000,000

Speaker 2

Well, we have what we call medical is about $88,000,000 I 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.

Speaker 1

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

Speaker 5

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

Speaker 2

I do. It was 3.30 for September.

Speaker 5

Great. Thank you guys so much for taking my question.

Speaker 2

No problem. Of course.

Operator

Our next question comes from Chris O'Connell with KBW. Please go ahead.

Speaker 6

Hey, good morning.

Speaker 1

Good morning, Craig.

Speaker 6

So just one quick question just to clarify and put to bed the office discussion. So for second half of twenty twenty five, 3Q and 4Q twenty twenty five, what's the total dollar amount of criticizing classified?

Speaker 2

I believe it would just be the one new criticized we just talked about the 15,000,000 dollars There might be one other small $3,000,000 actually. I don't know what quarter that's maturing in. So call it $15,000,000 to $18,000,000 something like that.

Speaker 6

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

Speaker 2

Yes. I'm hesitant to give a number, Chris, just because there's so many variables around the slope of the curve that and depending on the timeline of what you want to assume for just repricing benefit. So I think the guidance that I would sort of just suggest is the best way to think about it is if the Fed cuts, as I mentioned, you could take 20% of whatever that Fed cut is and assume you lose that on the loan side. But long term longer term, you get 30% to 35% benefit on the deposit side. So 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.

Speaker 2

And that the caveat to that is that 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 2 or 3 quarters after where you get full deposit repricing and you get lift on the short end of the curve. And then I think the variable that is tough to predict is what time period do you want to suggest we continue to see longer term asset repricing. So that's sort of why I gave the guide around how much of the book is subject to sort of a cash flow churn where we're getting 100 basis points to 150 basis points of improvement on spread.

Speaker 2

If you were to run the math on that, I'd say that equates to about 2 or 3 basis points lift on a quarterly basis to the margin. So that's existing yield curve. It's like I said, it's not assuming you'll see much lift in the longer end, but even where it is today versus the yields that are maturing, that does give us a nice 2 to 3 basis point lift each quarter. So I think that's the math that, again, you could sort of apply assumptions to the slope of the curve and sort of extrapolate where the margin could go.

Speaker 6

Got it. And I guess like said another way, like is there anything like structurally different if we had positively sloping yield curve and the dynamics played out over a long enough time horizon where everything kind of reprice and set, where you guys couldn't have a NIM back in like the 385% to like 4% range like in 2018, 2019?

Speaker 2

I think that's a fair potential. I think if you take sort of that deposit beta conversation and apply that to sort of future expectations, say Fed funds gets down to 3%, I believe we have a deposit base that could differentiate in land in a, call it, 1 to 1.25 cost of deposits. And if you have the longer end of the curve moving up and you can get loan pricing back or consistent in the mid-6s, 7%, that creates a nice spread loan to deposit that drives the vast majority of our margin. And I think that is that's a real formula there where I think you see the margin expand to the levels you're talking about. So I think the fundamentals and the balance sheet composition are certainly there to your point.

Speaker 6

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

Speaker 6

Would that be in 1Q 'twenty five or 2Q?

Speaker 2

Yes, I think to your point, it's as it sits here today, I guess if there was no other cuts, the majority of our the vast majority of our CD re prices in the next couple of quarters. So I think it's only a 1 or a 2 quarter lag as we sit here today to have the CD benefit sort of fully offset the loan. A little of that will be dependent on what term our customers will be renewing into. Again, we're keeping promotional money on the short end of our ladder from a CD maturity perspective for that exact reason. So I don't want to truly predict where CD demand is going to go for term.

Speaker 2

But if they continue to look for rate, if that's the primary driver and we're able to keep the majority of our CD book under 6 months, I think it becomes a 1 quarter lag give or take after a Fed cut where you start to see the benefit outweigh. Does that make sense?

Speaker 6

Yes. No, that makes sense. 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 is not going to start to turn positive after a cut or 2, even if we're getting consistent one cuts a quarter?

Speaker 2

Yes. No, that yes, 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-twenty 25 would be a fair inflection point of turning positive. And then there's just going to be sort of a little bit of noise just depending on how severe some of the cuts are and the timing of the cuts as to quarter over quarter whether you'll see expansion or But in general, I think mid-twenty 25 is where you'll see more of a positive lift.

Speaker 6

Okay. So basically after these first couple of quarters of CD?

Speaker 2

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

Speaker 6

Great. Appreciate the time. Thanks for taking my questions.

Speaker 2

You're welcome.

Operator

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

Speaker 1

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

Operator

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

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Earnings Conference Call
Independent Bank Q3 2024
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