David Antolik

Yeah, wonderful. Continue with the discussion of our balance sheet particularly as it relates to loan balance activities. We did see a reduction in balances of nearly $25 million for the quarter. This was primarily the result of reduced commercial loan balances of $76 million. And in the commercial segment production in Q3 was just slightly lower than what we saw in Q2.
It really impacted the balance reduction. We were payoffs that increased by nearly 50% in the quarter. These elevated payoff levels were driven by continued demand for multi-family loans in the permanent market, slightly lower C&I utilization rates and payouts in our C&I portfolio as we manage asset quality.
It's very important to note that we do not anticipate this high level of commercial payoff activity in the coming quarter. During the quarter, we also experienced growth in all segments of consumer loans with the exception of construction and when looking more closely at Q3, activity production was slower early in the quarter and much stronger in September.
And we expect this positive growth momentum to carry forward into Q4, looking forward and in support of a return to loan growth in Q4, our total pipeline has increased by over 50% quarter over quarter, primarily due to improved commercial both in the CRE and C&I spaces. We've also seen an increase in the consumer pipeline as customer activity shifts from purchase to home equity.
If I can now direct your attention to page 5 of the presentation in order to discuss our asset quality results for the quarter, I'm starting with the allowance for credit losses which declined by approximately $2 million. And move from 1.38% to 1.36% of total loans.
This reduction was a result of several factors including a decline in our non-performing assets of $3 million. As you can see non-performing assets remain low at $31.9 million or 41 basis points of total loans. We also saw further declines in our criticized and classified assets of almost 3% during the quarter. This represents the fourth consecutive quarter of reductions in criticized and classified loans and they have reduced by 17% year-to-date and 31% that year over year.
Just as a reminder, these criticizing classified loans require higher levels of reserves. In addition, charge us for the quarter. We're in line with expectations at $2.1 million up from the previous quarters, $400,000 net recovery. Finally, we anticipate loan growth in Q4 to be in the lowest mid-single digit range. And we are targeting mid-single digit loan growth for 2025. I'll now turn the program over to Mark.

Mark Kochvar

Oh, great Dave, thanks. Next slide, we have the third quarter and interest margin rate at 3.82%. That's down 3 basis points from the second quarter. While net interest income improved by $900,000 compared to last quarter, primarily due to an extra day, the impact of late September fed rate decrease. And the leading sofa rate changes can be seen in the reduction of quarterly loan yield improvement to about 1 basis points in the third quarter compared to 5 basis points to 6 basis points per quarter in the first half of the year.
We're also still experiencing an increase in cost of funds in the third quarter. That's driven by deposit mix changes and continued upward repricing activity throughout most of the quarter, we did implement non-maturity deposit repricing in response to the fed cut in late September with CD rates being lowered earlier in the quarter.
Strong customer deposit growth allowed for the reduction in more expensive brokered CDs of $126 million wholesale borrowings are down $25 million but this did not happen until very late in the quarter. So the third quarter should represent the peak in our cost of funds as we expect this to decline going forward as our liability is repriced.
So looking ahead, we expect an additional 10 basis points to 12 basis points of net interest margin compression from here that assumes another 50 basis points of rate cuts or 100 basis points of cuts in total in 2024.
After that first 100 basis points cuts and as we move into 2025, we do expect to find an equilibrium net interest margin rate in the low 370s and that should happen early in the year. We anticipate that level to hold even if rate cuts continue. As the market expects throughout 2025, support for that and interest margin stability. Despite those further cuts will come from favorable fixed and arm loan and securities pricing.
Our received fixed swap ladder beginning to mature a very short duration CD portfolio that will reprice and an improving ability to implement non maturity rate cuts as rates move lower.
I'm moving on to non-interest income, non-interest income declined in the third quarter by $1.4 million a quarter-over-quarter variance is related to two main things. Securities repositioning and our visa class B1 shares in the second quarter. We recognized a $3.2 million fair value adjustment in the visa stock and also repositioned about $49 million of securities taking a loss for approximately the same amount at $3.2 million. So these two actions netted to zero.
In the third quarter. However, we executed another securities repositioning also for about $48 million, $49 million. But this time taking a loss of $2.2 million but without an offset, like we had in the second quarter, our normal not just income run rate remains approximately $13 million to $14 million per quarter related non-interest expenses.
On the next slide, we saw an increase of $1.8 million in the third quarter compared to the second two main things drove that salaries and benefits are higher due to increased incentive payout expectations due to our performance and in the data processing line, that's higher due to some timing related to some technology investments. We expect run rates in expenses to be $54 million to $55 million per quarter.
And lastly on capital TCE ratio increased by 64 basis points. This quarter, a little over half of that 36 basis points was due to the AOCI improvement, our TCE and regulated capitals as Chris mentioned, position us very well for the environment and will enable us to take advantage of both organic and inorganic growth opportunities.
Thanks very much. At this time, I'd like to turn the call back over to the operator to provide instructions for asking questions.

Question and Answer Session

Operator

(Operator Instructions)
Daniel Tamayo, Raymond James.

Daniel Tamayo

Thank you. Good afternoon guys. Maybe, first on credit where you know the story just continually gets better every quarter seemly for you guys. So that's certainly good news but just curious now with [MPAs] down to the level they're at and, and net charge offs seeming to slow.
If you had updated thoughts on what would be kind of a more normalized or regular type of cadence for net charge offs or provision, however, we should think about it going forward.

David Antolik

Yeah, I think what you saw in the quarter would be closer to what would I would call as normalized relative to the charge off levels? And what we're hoping to see relative to provisioning is as we return to loan growth that we would you know, need to keep provision in place to support that loan growth.
We do think there is still room for us to improve though I mentioned the criticized and classified asset. So I think about a adversely classified assets, generally there's still room for improvement there for us. So the, you know, the ACL level may move as a result of those continued improvements.

Daniel Tamayo

Okay. All right, terrific. And then I guess just a clarification for Mark on the interest margin guidance. So, you talked about a stabilization in the early 2025 and the let's see here, the 370s, low, 370s, even assuming for rate cuts. So I'm just curious, I guess if we didn't get those rate cuts, does that mean that margin would you'd expect it to stabilize higher or, I guess then, you know, get down to the low 370s and rise from there. Or like, you know, I'm just curious kind of what the embedded impact from rate cuts would be within that forecast that you're giving.

Mark Kochvar

Yeah, I mean, a lot of the finer details is going to depend on the timing and on the competition. But if the fed moves a lot slower, I would expect it to take potentially longer or longer to get to the -- that stabilization point and as you kind of alluded to it probably would be slightly higher than the 370s that we're looking at now with a much deeper cut.

Daniel Tamayo

Okay. Yeah, that makes sense to me. Okay. All right. Well, I will I'll step back. Thanks guys.

Mark Kochvar

Thank you, Dan.

Operator

Kelly Motta, KBW.

Kelly Motta

Hey, good afternoon. Thanks for the question. I know it sounds like the pipeline is really strong and you were impacted by some elevated payoffs and pay downs this quarter. I'm just wondering what gives you, you know, the confidence that, that that kind of headwind will slow and, and how should we be thinking about you know, the potential risk that going forward with customer potentially looking to refi as rates come down.

David Antolik

Yeah, well, as rates reduce, of course, customers will be, be looking at the potential to refinance. We do have rate protection in many of our, our loan products, you know, with prepayment penalties and may hold. So we're able to get ahead of those and understand when those maturities or rate changes occur, and the bankers have proactive conversations relative to those.
And if we can get ahead of them, make sure that we understand what the impact is and what really what the customer desires and what's best for them, that, you know, that that's our focus. And then in terms of adding additional volume, we've seen some pretty good activity as I mentioned at the end of Q3 that carries into the beginning of Q4 here, relative to new customer calling activities.

Christopher McComish

Yeah, Kelly, I think that, you know, this is Chris, but you know, part of what we're hearing a lot from customers is many of them have been waiting on the sidelines either in the C&I space for capital expenditures, waiting to find out what's going to happen with the rate environment or some of our CRE customers and having some better clarity around the direction of rates I think is helping people be more confident to, to make decisions about future investment, which obviously leads to a bigger pipeline for us.
So it may not be while it was a little unusual to see the level of pay off some of it as Dave talked about was credit related for us continuing to focus on credit quality and returns it also you know, is, is going to help us, you know, the pipeline coming in was lower in the year just simply because of what I would define some is some uncertainty as to what people wanted to understood about the future.

Kelly Motta

Got it. That's helpful. Maybe a bit of a housekeeping question for the model. Just looking at the average balance sheet, it looks like interest bearing cash was a bit elevated. Just wondering how we should be thinking about, you know, managing liquidity levels.
And the size of the balance sheet was that, you know, because loan growth was a little slower and you're expecting, you know, to deploy that, you know, as we look to Q4, just any color on managing the liquidity there and how you guys are looking to optimize that.

Mark Kochvar

So on an average basis, we were a little bit high. I mentioned that these brokered CDS that we paid off and that happened at the very end of the quarter. So we knew that was coming and our, and it is our intent to pay those off.
So we let some of the cash levels build, you know, that was coming from our customer deposit growth and so that we could pay those off and not replace them at the end of the quarter. So on average, we did have a little bit higher cash, but I think it got to a more normal level if you looked at just the quarter end point.

Kelly Motta

Got it. Okay. That's, that's really helpful. And then as we look ahead, you know, you're just under $10 billion in assets, just wondering if you have any, you know, updated thoughts on, you know, potentially crossing next year. And how you guys are thinking about, you know, what potential lovers you have to offset that initial hit from Durban.

Christopher McComish

Yeah. And some of it obviously is timing associated with the, with, with Durban. And as we've talked about before, Kelly, it's about $6 million, $7 million of initial impact, you know, normal, loan growth as we've talked about kind of in that mid-single digit range would put us there sometime in 2025.
I have really no concerns from the standpoint of will we be able to absorb the kind of the, the additional regulatory oversight we've been building for that over the course of the past couple of years? If you look, that's where a lot of, you know, some of our expense growth has come in and enhancing all of our risk management, audit compliance [BSA, AML], all of those areas that are critical to, to growing the franchise, whether we go over $10 billion or not.
So we recognize, you know, organically, it's $6million to $7 million. That's a big, big reason why we're so focused on things like our treasury management initiatives and, and deepening some, some other forms of fee income to offset some of that as well as just expanding our customer base.
So it's not a huge hit for us and we made $33 million this quarter. So we're going to have to absorb it, but it's a, it's something that we'll be able to grow into. And then again, we believe that, you know, as you know, inorganic opportunities, we will present themselves and we're preparing for that as well.

Kelly Motta

Got it. That's helpful. I'll step back. Thank you so much.

David Antolik

Thank you.

Mark Kochvar

Thanks, Kelly.

Operator

Manuel Navas, D.A. Davidson.

Manuel Navas

Hey, I appreciate the outlook. But could you just dive a little bit deeper into some of the assumptions there you talked about some swaps. I'm interested in what you're assuming on loan and deposit data. Initially, it may be through the cycle. Just any extra color you could add there as you build that 10 basis points to 12 basis points decline, you know, into next year. It's not immediate but just any extra color there would be really helpful.

Mark Kochvar

Okay. So, I mean, overall, I mean, when I talk about the, the full '24 and '25 we're looking at, you know, aggregate a 200 basis points drop is kind of what we're modeling, that seems to be somewhat of a consensus from the market and the FED.
So you're going from, you know, the 550 to the 3.5. So that's kind of a baseline, FED piece. So, the declines that we have in the core and the core rates, a lot of those are coming from how we're addressing the exception pricing book that we have. And so, our goal there is to as we go deeper into the tranches to make deeper and deeper cuts on those lower levels of deposits.
So for example, in this initial cut, with the 50 basis points, we came close to the 50 basis points in the highest tranches. But there were some tranches lower that we were, we didn't. So the deeper that we go into the rate stack over time as rates get slower, the more we'll be able to balances will be able to impact and then eventually we should be able to also change some of the rates that we have on our non-exception book.
So, is that sort of improving over the course of the year? And the other piece that the swap book that you mentioned, we have about a $500 million received a fixed swap ladder that we built as rates began to rise. That starts to mature at the pace of about $50 million per quarter, starting in the first quarter. So we're underwater on those anywhere from 200 basis points to 300 basis points.
So as those mature, if we let those fully go, that will also provide some margin support that will show up really in the loan in the loan line versus in, in a deposit space. Then we also have the, the, the CD book that we've intentionally over the course of this past year, have priced very short, like many others. And so we do expect we've already priced that lower, starting early, early September, late August. Most of those are going into to the kind of the six month area.
So over the course of the year, we expect to get, you know, a couple of price decline at attempt out of those and then on the securities, both securities and the fixed loans, you know, based on where those are repricing, there's still a better rates, with those being put on it at newer rate or at the current rate levels versus what they're maturing at.
So I don't, I can tell you exact, because the betas are going to change over the course of that year, they're going to be a little bit higher or a little bit different going into the cycle and then improve as we are able to implement more of those deposit rate changes later in '25.

Manuel Navas

That's really helpful color. How should I think about like end of period deposit costs this quarter? And you're kind of already, you're saying this is the peak, So you, you're already expecting with the exception pricing moves, you've made deposit costs to decline next quarter,

Mark Kochvar

Right? Yeah, I mean, you know, with the, the fed moving so late in September, we, we moved within a few days after that, but really didn't see much of an impact, you know, the bulk of the momentum going for the quarter happened in July, August, the first part of September, we still continue to see the changes and continued exception pricing.
So, we're definitely going to, and we, when we look at spot rates, you know, our spot rates as of September 30, we're down already from that month end average. So we know we're going to have a better cost of funds cost of deposits in the fourth quarter for sure.

Manuel Navas

Is your deposit strength, potentially a wild card here that could even help them more. Can you just kind of talk about your success in deposit flows and where that could go going forward?

Mark Kochvar

Yeah, I think so. I mean, there's, you know, where there's a lot of emphasis being placed on that both on the, on the business side, commercial side and also on the consumer side. And we still have about $375 million of wholesale borrowings that are, are also very short and, and relatively high price that we can pick up some advantage if we're able to replace those with a decent mix of customer deposits.

Christopher McComish

Manuel, it's, Chris and you know, this is more anecdotal than anything, but, you know, the good news is with, you know, rights are in the, you know, above the fold from a standpoint of, you know, what's being talked about in the marketplace as a whole.
And so that, that leads to more customer conversations both with existing customers as well as prospective customers. So we feel very good about, you know, the, obviously the progress that we've made and kind of the infrastructure that we built in order to continue this. And I think, you know, changing rights lead to customer conversations and that's a good thing.

Manuel Navas

That's good color. Can I switch over to fees for a moment if you have 200 basis points and cuts? What could that do on the fee side for you?

Mark Kochvar

This year, I mean, I think we're really looking and repositioning our, our mortgage business. We've really been portfolio most of that activity, but we're getting ready to make a concerted effort to, to sell more of that production and, going in the next year.
So that's probably our biggest, you know, kind of interest rate related, ability or, or potential on the fee side is right now, you know, the only mortgage activity we're seeing right now is just you know, the fees from the servicing side.
But there's an opportunity as we shift some of that production to the sales that, that we would pick up, possibly a couple million dollars next year of fee income.

Manuel Navas

It is -- do you feel like you have the right capacity or is that part of the adjustments you're going to make? You might have to make some hires? Like, what, how do you compare your capacity versus where you were three years ago? For example,

Mark Kochvar

I think from a capacity standpoint, it's similar in terms of origination. We haven't been selling a lot, so some of the back office functions need to be reset to make that process smoother.

Christopher McComish

But it's not a dramatic lift. I mean, the fact, you know, the only thing that could, and if you're talking specifically about mortgage is if, you know, mortgage rates decline rapidly and there becomes a big refi boom that could create capacity issues, not only for us but everybody in the industry because we, you know, we're at a much lower run rate than we were three years ago when you know, the refi activity was really high

Manuel Navas

And then I appreciate that color -- we could be getting going in that direction. Going back to the comment about inorganic growth. What are some places that you're interested in growing that? And where, where are opportunities that you would be excited to geographically?

Christopher McComish

Yeah. So, and we've talked about this before, but I'll continue to reiterate it. We look at our, you know, our core geographic franchise today is kind of the, the southern half of Pennsylvania, east to west, and into Northeast Ohio and central Ohio. Those are all really, really attractive markets for us.
We're also have lots of interest in, you know, throughout the state of Ohio, into that area of the Midwest. And then, you know, further south into Maryland, northern Virginia DC, those areas geographically. If you think about it, we, you know, from Pittsburgh to Washington DC is not, it is not that far as far as it is to get all the way to Philadelphia, for example.
So we think about markets, the makeup of markets relative to our culture and, and what we're trying to build. And there, there's, you know, there's interesting opportunities both East and West as well as here in, in, in western Pennsylvania.
So, you know, we continue to build relationships and the best way that we can build relationships from an inorganic standpoint is to deliver a performance and have the currency necessary to have these conversations and that's where we're focused.

Manuel Navas

Thank you very much. I'll step back into the queue.

Operator

Matthew Breese, Stevens.

Matthew Breese

Hey, good afternoon. Just a couple of questions. Most of them have been answered. First just -- any, are you contemplating any additional securities restructurings? If so maybe sense for how much? And is that included in any way, shape or form your 2025 in outlook?

Mark Kochvar

I mean, we're still looking at it. We're not anticipating anything significant. So we've done to both of them just under $50 million. I mean, it would certainly be less than that. The opportunities that are with the shape of the curve changing a little bit and just what we've sold already is kind of being the best candidates.
The -- you kind of that, that the, the cost benefit of the activity is less than it was. So, if we were to do anything more, it wouldn't be any larger than the ones we've already done and, and there's a fair chance we wouldn't do more.

Matthew Breese

And remind us again what the yield pickup was on both of those restructurings.

Mark Kochvar

And so the, first one was about 370 basis points. The second one was maybe 270 basis points.

Matthew Breese

Okay. And the other topic I just wanted to touch on and it's been brought up a handful of times on the call is just payoff activity, commercial real estate, multifamily related, how much of that was by design, meaning, you know, these were non-strategic or non, you know, full relationship type customers and then how much of it was rate driven.
You know, one thing we've been hearing a lot of this, this quarter is that there's been some, you know, stiffer competition on the commercial real estate front from insurance companies, some of the agencies, some of the bigger banks even.
And so I wanted to get a sense for how much of that was going on and how different the types of rate offerings were between yourselves and some of the other players.

David Antolik

Yeah, sure. To your point, there is still a significant amount of competition relative to these permanent mortgages for, for multifamily that we had two relatively large, you know $20 million range deals that, that paid off during Q3 that are both with existing customers, they're not transactional deals. Just normal course of business where we do a construction loan that construction loan converts to a permanent loan on a bridge basis, typically to get to permanent financing.
So, in both of these cases, it is the normal course that they would take these to a permanent facility. And, and normally the reason that that's done is to take advantage of a longer term fixed rate, typically a 10 year rate and remove recourse.
The second being the most important, right? So these, these large builders and developers want to preserve equity in their deal, have it owned in a single asset entity and not have recourse back to the sponsorship.
So, you know, and those are things that would fall outside of our credit risk appetite. So we, you know, view that as again, sort of normal course of business for these types of transactions,

Matthew Breese

Got it, was there any meaningful delta between yourselves and other sources, other competition or other competitors?

David Antolik

You know, from a structure perspective, you know, LTVs are generally similar rates may be slightly more aggressive depending on if it's an insurance company or CMBS. You know, insurance companies are looking for assets tend to be a little more aggressive. But the big difference in in structure is the recourse, right? We, we, we require recourse even if it's limited after some point of stabilization. You know, these facilities in the permanent market tend to be completely non-recourse.

Christopher McComish

And if you're talking about you know, bank competitive pressures from a rated standpoint, I would say that any of that is more an anecdotal one off driven specific transaction than it is anything that we're seeing in the marketplace we have seen in some areas of our geography, which is, it makes you scratch your head. We've seen some deals that were, you know, maybe as you described, not necessarily long term relationship deals that were actually taken out by large credit unions.
That is, you know, that's an unusual place for C&I or a commercial real estate customer of ours. But there are some pockets of the geography, particularly the eastern part of the, of the state of Pennsylvania where we're seeing some of that activity.

David Antolik

Yeah, I think Matt, it bottom line for us relative to asset quality. I think it speaks well for that segment in our geographies, those multifamily projects continue to perform very well. You know, they can take advantage of the permanent market and we can continue to play a role as the depository institution for those borrowers and look at their ongoing construction needs.

Matthew Breese

Yeah, absolutely good for asset quality, but headwind to growth.

David Antolik

You got it.

Christopher McComish

That's why we have four drivers.

Matthew Breese

I appreciate all that very much. I'll step back. Thank you.

Mark Kochvar

Yeah. Thanks man.

Operator

Daniel Cardenas, Janny Montgomery Scott.

Danial Cardenas

Hey, good afternoon guys. I have just a couple of questions here for you'll. In terms of deposit, your deposit growth outlook for 2025 on a percentage basis. Do you think that can mirror what you're looking for on the on the lending side or could it be a little bit better? Just kind of given where the loan to deposit ratio is right now?

Christopher McComish

Yeah, Dan, you know what we, we feel good about the momentum that we have in the focus on our deposit franchise and deposit business, we've invested in it and people and product and improving processes, we're going to continue that focus.
As I said, I think the, you know, the rate environment it leads to opportunities both with existing customers as well as new customers as you know, we talk about the kind of declining rate environment that Mark speaking to that's going to put as I would define it as a lot of money in motion. And so that's, you know our targets are to continue to look for growth in the range that we're seeing it.

Danial Cardenas

And then given where capital levels are right now. What are your thoughts in terms of stock repurchase activities going forward?

Mark Kochvar

Yeah, I mean, that's going to be our, our least favourite, event, especially given the, the run up in price, you know, just makes it a little more difficult for that to make economic sense. So, our first priorities are going to be on the growth side and to use the capital that way.

Danial Cardenas

The kind of growth dividends and then maybe buybacks if it makes sense mathematically.

Mark Kochvar

Right.

Danial Cardenas

Okay. And then, just a housekeeping question. What was your AOCI number for the quarter?

Mark Kochvar

End of the quarter was $77 million.

Danial Cardenas

Okay, great. All my other questions have been asked and answered. Thanks guys.

Christopher McComish

Okay, Dan, thank you.

Operator

There are no further questions at this time. I would like to turn the call over to Chief Executive Officer, Chris McComish for closing remarks.

Christopher McComish

Okay. Well, thanks everybody for the great questions and the dialogue. We really appreciate your engagement and your interest in our company. We look forward to being with you, you know, over the coming weeks and months and let's have a great rest of the earnings season. Thank you, bye-bye.

Operator

This does conclude today's call. You may now disconnect.