Independent Bank Corp Q3 FY2024 Earnings Call

Good day, and welcome to the Independent Bank Corp Third Quarter 2024 Earnings Call. All participants will be in listen-only mode. Before we begin, I want to mention that during this call, we will be making forward-looking statements. Actual results may differ significantly from these statements due to various factors, which are described in our earnings release and other SEC filings. We have no obligation to publicly update any of these statements. Additionally, some of our discussions may include references to non-GAAP financial measures. Information on these non-GAAP measures, including their reconciliation to GAAP measures, can be found in our earnings release and other SEC filings, which are accessible through the Investor Relations section of our website. Please note that this event is being recorded. I will now turn the conference over to Jeff Tengel, CEO. Please proceed.

Thank you. Good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. I'm pleased to report that our Q3 performance felt like a bit of an inflection point with margins improving and deposits showing continued growth. This performance reflects our team's continued commitment to developing and deepening customer relationships. As we discussed last quarter, we have one large commercial real estate office loan that matures in the Q1 of 2025, which is experiencing stress. While this loan is current and continues to pay, we proactively moved it to NPA status given the uncertain outlook and lack of commitment from the sponsor. Recall, this loan came over with the East Boston Savings acquisition and has been adversely rated since the close. A sizable reserve was set up in Q3 in anticipation of its ultimate resolution, and we are actively exploring all avenues for resolution prior to maturity. Mark will have more on how this loan impacted our Q3 results. However, we believe it is a one-off situation and further demonstrates our long-standing position of addressing problem loans head-on and not kicking the can down the road. Absent the elevated provision, our quarter was strong with all the fundamentals of our franchise intact and performing well. Pre-provision net revenue ROA was 1.54% in the quarter versus 1.47% last quarter and tangible book value is up 9% year-over-year. We remain focused on a number of key strategic priorities all centered around protecting short-term earnings while positioning the bank for earnings growth as the overall environment improves. As we've mentioned on previous calls, we are actively managing our commercial real estate exposure with particular emphasis on office, while working to create a more diversified loan portfolio. We will continue to reduce this concentration through normal amortization and the exit of transactional business. By exiting transactional business, we will free up capacity to continue to support our legacy commercial real estate relationships. At the same time, we are working to reorient the balance sheet towards more C&I. Over the last nine months, we've made steady progress toward generating solid C&I volume while reducing overall CRE balances. We will continue to focus on C&I through strategic hires in our core markets while evaluating select industry verticals. Our robust pipeline, which is up 9% linked quarter, is a testament to our strength in this space. We continue to add new talent to our commercial banking team in the Greater Boston market, and our value proposition in community banking model resonates. Another priority is prudently growing deposits, which has been a historical strength of ours. Mark will provide additional color in a few minutes, but in the third quarter, we grew deposits, grew the number of households we serve and expanded our net interest margin. Just as important, with the likelihood of additional rate cuts by the Fed, the value of our franchise will stand out. Our ability to proactively manage our most rate-sensitive customers is a reflection of our high-touch service model that has consistently resulted in peer-leading deposit costs. We anticipate no difference in the upcoming loosening cycle. In addition to our strong deposit trends, our Wealth Management business continues to be a key value driver. We grew our AUA to a record $7.2 billion in the third quarter. This offering works seamlessly with our retail and commercial colleagues to deliver a differentiated experience that resonates with our clients. The breadth of these services provides a one-stop shopping experience for our clients that includes not only investment management, but financial planning, estate planning, tax prep, insurance, and business advisory services. This full suite of products is a differentiating factor for our company 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. While we clearly have some legacy-acquired loans we are working through, the core franchise continues to perform as it has in past cycles. As we focus on these priorities, we continue to actively assess M&A opportunities. While M&A activity does seem to be picking up a bit, we will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters. It's been a proven value driver in the past and we expect it to be one in the future. Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback. We will continue to focus on those actions we have control over and look to capitalize on our historical strengths. There is no magic to our value proposition. We do community banking really well and believe our current market position represents a high level of opportunity. We remain focused on long-term value creation. Underscoring every measure of success is a talented team of engaged, passionate and highly talented colleagues focused on making a difference for the customers and communities we serve. That's why we're proud to be named a top place to work in Massachusetts by The Boston Globe for 15 consecutive years, a top charitable contributor by The Boston Business Journal for the last 11 years, and the number one bank in Massachusetts according to Forbes list of best in state banks for 2024. To summarize, we have everything in place to deliver the results the market has been accustomed to over the years, including a talented and deep management team, ample capital, highly attractive markets, good expense management, disciplined credit underwriting, strong brand recognition, operating scale, a deep consumer and commercial customer base, and an energized and engaged workforce. In short, I believe we are well positioned to take market share and continue to be an acquirer of choice in the Northeast. And on that note, I'll turn it over to Mark.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8-K filing and is available on our website in today's investor portal. Starting on Slide 3 of the deck, 2024 third quarter GAAP net income was $42.9 million and diluted EPS was $1.01 resulting in a 0.88% return on assets, a 5.75% return on average common equity, and an 8.67% return on average tangible common equity. As just described in his comments, the quarter results were heavily impacted by the outsized provision associated with one large office loan, which I will be covering shortly. Many aspects of the bank's strong fundamentals were on display here for the quarter, including a $1.38 increase in tangible book value per share. We have always prioritized sustainable tangible capital growth, and that is evidenced by the 9% growth in tangible book value per share over the last year despite increased provision versus our historical normal levels. Turning to Slide 4, we highlight a real franchise strength that we believe to be a key differentiator. As noted here, period end deposit balances increased slightly while average deposits grew 2.2% or almost 9% annualized for the quarter. With strong growth in non-interest-bearing business checking accounts, we are confident that the overall deposit composition has stabilized and is well positioned to reprice effectively with expected Fed rate cuts. As we often highlight, core households grew another 1% for the quarter, reflecting a consistent flow of net new account opening activity. These accounts then get nurtured by our high service level business model to build profitable relationships over time. As anticipated in our margin guidance last quarter, this return of deposit growth has allowed for a meaningful reduction in wholesale borrowings leading to an overall increase in funding costs of only 1 basis point in the quarter. Moving to Slide 5, payoff activity in the construction book was the primary driver behind the reduction in commercial loan balances with total loans decreasing $40 million or 0.3% for the quarter. Despite the relatively flat loan balances, there are several positives to highlight. The approved commercial pipeline is $294 million at September 30 and reflects a 9% increase over the prior quarter approved pipeline. Year to date, commercial close commitments exceed $1 billion with notable increases in C&I activity that are currently being muted by persistent low levels of line utilization. In general, with the rate environment shifting, we are starting to see some optimism in our commercial borrowers to re-engage with various projects and we are excited for growth prospects over the near term. On the consumer side, positive home equity trends and increased line utilization have driven nice growth for 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, Jeff addressed the most significant developments behind the data reflected here. To reiterate, the quarter included the migration of a large $54.6 million office relationship from a prior acquisition to non-performing status with higher provision levels reflecting the establishment of a $22.4 million specific reserve on that exposure. While final resolution is not very clear at the moment, the reserve reflects consideration of several different valuation data points received during the quarter. In addition, a previous $5.9 million reserve on a large C&I credit was charged off during the quarter in conjunction with the commencement of a collateral liquidation plan. We continue to closely monitor all criticized and classified loans with total adversely related loans actually declining during the quarter. Separate from the activity already discussed, I'll highlight some other key information on Slide 8 related to the office portfolio. Focusing on upcoming maturities, the $30 million syndicated loan that is set to mature in the fourth quarter was downgraded to classified due to recent tenant developments that will further pressure debt service with negotiations still ongoing regarding the need for multiple bank involvement consensus over extension requests. As I just mentioned, the details surrounding the large 2025 first quarter maturity have already been addressed. In reviewing the remaining calendar year 2025 maturities, the majority are pass rated with no significant concerns currently identified. This isn't to say that we may not see future blips in credit, but all in all, we continue to feel good about the portfolio outside of the current loss reserves. Switching gears now to Slide 10, we highlight the net interest margin improved as expected by 4 basis points in the third quarter to 3.29%, and as noted earlier was driven primarily by the stabilization of the overall funding profile. As we think about margin expectations going forward, we recognize there is a lot of uncertainty related to assumptions over future Fed reserve cuts and the overall shape of the forward curve. As such, I would highlight the following key data points to help suggest a positive margin expansion over the longer-term horizon. First, total loan exposure net of hedges that are subject to short-term Fed Reserve cuts is approximately 20% of the portfolio. Long-term deposit betas on the way down should mirror results experienced on the way up, which would suggest an approximate 30% to 35% beta. However, the timing could be impacted to some degree by scheduled time deposit maturities. And on an annual basis, approximately 12% to 15% of the loan book is expected to generate cash flows that will be subject to repricing. Currently, those cash flows are expected to generate a positive spread over current yield of approximately 100 basis points to 150 basis points. I will provide specific Q4 margin guidance here in a couple of minutes. Moving to Slide 11, non-interest income increased again for the quarter driven by strong deposit-related fees and interchange income. In addition, total assets under administration and our wealth segment reached another record $7.2 billion as of September 30 with overall income increasing slightly despite the elevated tax preparation fees recognized in the prior quarter. Total expenses increased slightly versus the prior quarter as expected and included in Q3 were a couple of outsized items worth highlighting. The first being a negative adjustment associated with the valuation of split-dollar life insurance liabilities of approximately $853,000 which was essentially offset by a one-time credit received of $1.1 million related to our debit card processing agreement. And lastly, the tax rate for the quarter was 22.4%. In closing out my comments, I'll turn to Slide 14 to provide a brief update on our forward-looking guidance, which we want to reiterate continues to reflect the level of uncertainty over the interest rate environment in near-term credit conditions. In terms of loan and deposit growth, we anticipate low single-digit percentage increases for Q4 which would result in 2024 full-year loan growth in the low single-digit percentage range and full-year deposit growth in the low to mid-single-digit percentage range. Regarding the net interest margin, inclusive of the 50-basis point cut announced in September, we anticipate the margin to contract slightly or 0 basis points to 5 basis points in the near term reflecting the fact that some level of deposit repricing benefit will lag in terms of being able to fully offset the decrease in loan yields. Along those lines, each Fed cut would likely create a similar short-term drag on the margin. However, as I just noted earlier, with 30% to 35% deposit beta assumptions expected to offset net 20% repricing on the loan portfolio, future Fed rate cuts that lead to a flat or positively sloped yield curve will ultimately lead to an improved margin going forward. Regarding asset quality, we anticipate charge-off activity in the short term centered around the existing specific reserves identified on Page 6 of the deck, while provision expense will be driven by any other emerging credit trends not already captured in the reserve. Regarding non-interest income, we reaffirm a low single-digit percentage increase for full year 2024 versus 2023 with relatively flat Q4 totals versus Q3 levels. And for non-interest expense, we reaffirm low single-digit percentage increases for full year 2024 versus 2023 as well as for Q4 versus Q3. And lastly, the tax rate for the Q4 is expected to be around 22%. As is typical, we will provide full year 2025 guidance next quarter, and we're optimistic about all the positive developments that Jeff cited that bode well for the future. With that, we'll now open it up for questions.

The first question comes from Steve Moss with Raymond James. Please go ahead.

Hi, good morning.

Hi, Steve.

Hi, Steve.

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

Yes, Steve, it's Jeff. One of the complicating factors is that it's a syndicated loan. If they do not qualify for an extension, which is still uncertain as we progress through the quarter, we will need to reach an agreement among the bank group to either permit the extension or discuss the terms and conditions involved. This situation is somewhat fluid and contributes to the challenges we faced, particularly the unexpected loss of the tenant that led to our downgrade.

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

Yes. Hard to say at this point, but I would say it doesn't appear that the sponsors have 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.

Okay. Got it. 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 for 2.5%, 3% type dedication to that portfolio just kind of curious where that is today?

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

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

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 third quarter when you saw rates start to come in; some of those securities valuations actually improving a bit. So, I've always suggested that you'll see tangible book value grow and have tangible book value per share number that is probably in the same range, regardless of whether you do the balance sheet restructure or not. And we're primarily focused on that, which is to grow tangible book value. So, while the earnings certainly look better if you do that securities restructure, I think ultimate valuation and growing tangible book, you kind of end up in the same place. And so that's sort of been the reason we haven't been all that enamored with that. And I think further, we've allowed the securities book to really just run down over the last year. We put a little bit of that money back to work here in the third quarter. So, we did buy another $50 million or so. But from a liquidity standpoint, the goal was to have the securities be around 12% to 13% of assets where we're only slightly higher than that right now. So, it feels like we're in a much better spot just with the overall composition of the balance sheet.

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

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?

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.

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

Yes. Without knowing the specifics of our competitors' portfolios, we are comfortable with the risk rating allocation within our own. In our office book, $850 million is rated as pass-grade, with a risk rating of 5 or 6. Additionally, if we exclude individual evaluated loans, there is just over $100 million rated as risk-rated 7 or 8. As I've mentioned before, if we allocate around 20% to 25% reserve on our risk-rated loans and approximately 10% on our 7-rated loans, this would lead to a total allocation of 2.5% that we are highlighting. Essentially, the majority of our loans are still pass-rated and performing well with no significant concerns, and we do have higher allocations where we identify credit issues.

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

We have another loan that I think is larger. It's a pass-rated credit that was also acquired, and we feel very good about it. It's a very unique property that's performing well.

Has a very strong sponsor.

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

Home equity utilization hasn’t changed significantly, moving from approximately 34.5% to just over 35%, which remains below pre-COVID levels. However, this slight increase has contributed to some growth in outstanding balances. General commercial and industrial utilization rates are currently below 30%, around 28% for the September period. This low utilization has dampened the strong closing volume in C&I activity, preventing us from driving balanced growth. In the construction portfolio, utilization has decreased to about 55%, while historically it has been above 60%.

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?

It's difficult to predict activity and assign a probability to it because banks are typically sold rather than bought. Additionally, there aren't many banks in Eastern or Central Massachusetts that fit our target profile, which makes the pool smaller. I've mentioned before that we wouldn't rule out ongoing market opportunities, including Rhode Island or Southern New Hampshire. Overall, I believe the likelihood of us pursuing an acquisition is there, especially if our stock price improves, which would enhance our potential. However, the other aspects of our bank are performing well, so we're not in a rush to make any moves unless we find the right candidate. We're not feeling pressured to act if the numbers don't align or if we cannot achieve the necessary synergies from a deal.

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

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 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.

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

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

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

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

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

I don't know if it's less than one. I don't have that information readily available, but the occupancy fell to 77% from 85%. Additionally, some of the newer tenants in this building are currently using their free rent periods, which has also added some short-term pressure on the debt service coverage. I believe these two factors are driving much of the discussion we're having today with the agent bank and the client about our next steps.

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

Morgan Stanley.

Morgan Stanley, yes.

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

In the previous quarter, we did not have a specific reserve set aside for the loan; instead, we had a general allocation of around $1 million. As you know, we have been increasing the reserve for the last few quarters without any charge-off activity. This has been based on qualitative factors, which adopt a pooled approach, but they have been significantly affected by some larger credits that we anticipated. Therefore, while it appears that $21 million of the provision is linked to the loan, there was also some indirect build within the qualitative factors influenced by this loan. You could say that the provision needed for the quarter related to this was likely in the range of $19 million to $21 million. Does that make sense?

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

Yes, there should be a chart right above that, showing the calendar year breakdown of maturities. It's around 19% of the book, and while I don't have the exact number, I believe it's about $200 million.

Yes. No. Okay. And it was right here. My apologies.

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

Yes.

Right. I remember you mentioned another adversely rated loan that was $20 million maturing in 2025, and there were more letters of intent coming in on that. Do you have an update on that credit?

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.

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

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

Yes. And so, it's extended out to year-end 2026. And it's kind of a positive velocity.

As we look ahead, it really comes down to these three credits. The one you just mentioned, the upcoming one in the fourth quarter, and it appears that $20 million is already accounted for. There isn't anything else significant that stands out as something we need to be concerned about.

There are always occasional one-offs. To be completely transparent, there's a new criticized office loan when comparing total criticized and classified loans specific to office since the previous quarter. This particular loan is set to mature in 2025 and is approximately $15 million. We are still in the early stages of determining its ultimate resolution. Initially, there were plans to convert it into lab space, but due to market conditions and demand for new office space, part of the facility has been repurposed back into office use. This situation is somewhat unique, as the appraisal took into account the full office use and indicated it's still under 90% loan-to-value, with nearly 65% as a stabilized unit. However, due to the fluidity and uncertainty regarding actual occupancy and tenant levels, we decided it was appropriate to downgrade the valuation to $7 million. This loan is due in the fourth quarter of 2025, and we are monitoring it closely. As Jeff mentioned, the rest of the portfolio is in good standing, and we are not seeing anything that raises major concerns. For any loan over $10 million that carries a bit of uncertainty, we've shared as much detail as possible at this time.

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

It is. It's included.

What is that total lab exposure of your $1 billion?

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

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

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

I do. It was 3.30% for September.

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

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

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

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

I'm reluctant to provide a specific number due to the many variables affecting the slope of the curve. Depending on the timeline you want to consider for the repricing benefit, my guidance would suggest thinking about it this way: if the Fed cuts rates, you could take 20% of that cut and assume you'll experience a loss on the loan side. However, in the longer term, you could see a 30% to 35% benefit on the deposit side. We have positioned the balance sheet to be more sensitive to liabilities on the short end of the curve, which could result in a margin expansion of around 5% to 10% immediately on that end. It’s important to note that this assumes a longer-term repricing of CDs. The full effect won’t be observed in the quarter following a Fed cut announcement, but rather after two or three quarters when you achieve full deposit repricing and benefit from the short end of the curve. Additionally, it's challenging to predict the duration for continued long-term asset repricing. This is why I mentioned how much of the book is subject to cash flow churn, where we might gain 100 to 150 basis points of improvement on the spread. If you calculate that, it translates to about 2 to 3 basis points increase in margin on a quarterly basis. This assessment is based on the current yield curve and does not expect significant movement at the longer end. Yet even at today's rates compared to maturing yields, we still expect a nice quarterly lift of 2 to 3 basis points. That’s the framework you could use to apply assumptions to the curve's slope and estimate where the margin might head.

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

I believe that's a reasonable possibility. If we consider the discussion around deposit beta and project future expectations, such as the Federal funds rate dropping to 3%, I think our deposit base could stand out and settle at a cost of deposits between 1% and 1.25%. If the longer end of the curve rises and loan pricing stabilizes in the mid-6s, that would create a solid spread between loans and deposits, which drives most of our margin. I really see this as a valid approach that could lead to the margin reaching the levels you're mentioning. The fundamentals and the composition of our balance sheet certainly support this perspective.

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

Yes, I think you're right. As it stands today, assuming there are no additional cuts, most of our CDs will reprice over the next few quarters. Therefore, it appears that there's only a one or two-quarter delay before the benefits from the CDs fully offset the loans. Some of this will depend on the terms our customers choose to renew. We plan to keep promotional rates on the shorter end of our maturity ladder for that reason. I don’t want to make specific predictions about CD demand for a particular term. However, if customers continue to seek higher rates as their main concern, and if we can maintain most of our CD book under six months, I believe it will be about a one-quarter lag, give or take, after a Fed cut before we start to see the benefits exceed the costs. Does that make sense?

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

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

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

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

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