Q4 2023 Dime Community Bancshares Inc Earnings Call
Okay.
Yeah.
Good day, and thank you for standing by.
Welcome to the Dime community Bancshares fourth quarter earnings conference call at.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this session you will need to press star one on your telephone.
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To withdraw your question. Please press star one again.
Before we begin the company would like to remind you that discussions during this call contain forward looking statements made under the safe Harbor provisions of the U S. Private Securities Litigation Reform Act of 1995, such.
Such statements are subject to risks uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U S Securities and Exchange Commission to which we refer you.
During this call references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance.
These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for financial information prepared and presented in accordance with U S. GAAP.
Information about these non-GAAP measures and for reconciliation to GAAP. Please refer to page earnings release.
Please be advised that today's conference is being recorded.
I would now like to hand, the conference over to your speaker today stored about president and CEO. Please go ahead.
Good morning. Thank you Shannon with me today is Avi Reddy, our CFO and thank you all for joining US this morning for our fourth quarter earnings call.
2023 was an unprecedented year in many respects with the federal reserve, taking interest rates to a multi decade high and three regional banks fairly resulting in significant focus on liquidity and deposits.
Avinash Reddy: Throughout all of this uncertainty guidance business model remain resilient as demonstrates traded by year over year growth in deposits of over $275 million and loans is over $200 million importantly in 2023, we put in place several cordless cornerstone investments that will surface growth engines for the franchise in the years.
Avi Reddy: Ahead.
Avinash Reddy: First we rapidly assembled a cross functional internal team to attract productive deposit gathering bankers from signature bank in the second quarter, we were able to onboard six groups and at 12 31 their portfolio stands at approximately $350 million with approximately 50% being the CBA.
Avinash Reddy: To provide some background after I joined Diamond 2017, we put in place the building blocks for our private and commercial bank deposit gathering operation. This existing operation provided us a solid foundation that helped us attract these new groups. We are proud I'm proud of the fact that time was the only bank in Metro New York that was able to go.
Avinash Reddy: Track. These talented bankers are testament to our client first business model and our state of the art technology technology in Treasury management systems.
They are overall private and commercial bank deposit per foot portfolio stands at approximately $1 5 billion inclusive of the new folks hired in 2023.
Avinash Reddy: Over the course of the second half through the year, we made significant operational and tech technology related enhancements in this business and truly believe we now have the best in class private client platform in the Metro New York area.
Avinash Reddy: As I have said this segment will be the growth engine for diamond years. It in the years ahead as we build our portfolio via acquisition of new clients and new groups.
Avinash Reddy: Moving to the asset side of the balance sheet, we added to our business loan origination capacity by building out a brand new health care vertical in 2023.
Avinash Reddy: This follows on the heels of building out our middle market C&I lending operation in 'twenty two.
Avinash Reddy: Our health care team is actively in the market and our pipeline in this new vertical is now over $100 million and growing with an average rate of 9%.
Avinash Reddy: The health care vertical will add diversity to our balance sheet with solid margins.
Avinash Reddy: Once again, we continue to spend a significant amount of time on the recruiting front and believe we have the potential to add more groups of talented bankers in the future. We do believe there'll be more fallout from larger local institutions as well as an opportunity to bring over individual clients, who seek locally manage relationship relationship based bank.
Coupled with a strong technology and Treasury management staff.
Avinash Reddy: In summary, as we look back at 2023, it was important for diet and navigate the dynamic environment, while playing a strategic offense and take advantage of market opportunities.
Avinash Reddy: As we have just completed a year and a strategic planning process I wanted to lay out our medium long term go goals.
Avinash Reddy: We intend to create a more diversified balance sheet by focusing on growth in our business loan portfolio, which includes C&I and owner occupied CRE.
Avinash Reddy: While we have historically been very strong operators in the multifamily and Investor Cree our committed focus for the futures to remix this balance sheet such that business loans will have a greater weighting right now business loans account for approximately 21% of loans and we envision growing up growing business launched at 30%.
Avinash Reddy: And reducing multifamily to the 25, 30% range over a two to three year timeframe.
Avinash Reddy: To provide you some context about how earnest we are about the balance sheet. We transfer transformation look at our current loan pipeline indicates a property $780 million in the pipeline with 70% in business loans, a year ago business phones accounted for only 35% of the pipeline Baidu.
Avinash Reddy: The average rate on our pipeline is 8.43%.
Avinash Reddy: Building on the success, we have had on the deposit gathering front growing our private and commercial bank will be a key focus this will allow.
Avinash Reddy: Allow us to continue to grow the DDA balances as well as lower our loan to deposit ratio to a range between 90 and 95% over medium term.
Avinash Reddy: As I've said, we are in discussions with numerous teams at the current time and expect to hire additional top quality bankers in the year ahead.
Avinash Reddy: Finally, I want to provide some thoughts on our profitability goals while.
Avinash Reddy: Our asset book is limited maturities repricing and 24 in 2025 and 2026, we see increased repricing on the asset side returning to a 110 to 125 ROE as a key marker and we are highly focused on getting either as the asset side of the balance sheet turns over it this will be accomplished by significant enough.
Avinash Reddy: Proven and NIM as rates normalize in the interim we will continue to control the things that we can including staying extremely disciplined on expenses.
Avinash Reddy: As I said in our last earnings call. Our main focus is on providing our customers without customers with outstanding service that only a locally managed community banking can provide.
Growing our franchise value and delivering shareholders are shareholders strong returns.
Avinash Reddy: Being a conservative underwriter credit has always been a hallmark of dime.
Avinash Reddy: We continue have a very low level of nonperforming loans, including past dues.
Including no past dues, and a $4 billion of multi family portfolio.
Avinash Reddy: With respect to the fourth quarter results, our core EPS was approximately <unk> 45.
Avinash Reddy: We are we were pleased to see NIM contraction continuing to slow DDA balances remaining steady capital ratios continuing to grow and asset quality metric metrics remaining stable.
Avinash Reddy: Closing I would like to thank all of our outstanding employees for staying focused on our goals during these challenging times.
Avinash Reddy: Avi will now provide more details on the quarter.
Thank you Stu reported EPS was <unk> 37 per share excluding the impact of the special FDIC assessment, and assuming a normalized tax rate of 27% core EPS would've been approximately 45 the tax rate in the second half of the year was impacted by certain disallowed items related to executive search.
Avinash Reddy: As mentioned in the press release, our expectations for the tax rate for 2024 is around 27%.
Avinash Reddy: As we expected the pace of NIM compression slowed even further in the fourth quarter and the compression was only five basis points compared to 16 basis points in the prior quarter.
Avinash Reddy: At 29% of average total deposits are noninterest bearing deposit percentage remains a clear differentiator for <unk> versus other.
Avinash Reddy: Any banks in our footprint.
Avinash Reddy: We are cognizant of the challenging revenue environment and continue to manage expenses prudently.
Avinash Reddy: Our focus has been as efficient as possible expenses for the fourth quarter. Excluding the one time FDIC special assessment and intangible amortization was $52 5 million.
For the full year cash noninterest expense, excluding FDIC special assessment intangible amortization and severance was approximately $202 million well below our annual guidance for 2023 of $260 million to $109 million, notably we were able to absorb the cost of new hires into our organization by rationalizing expenses.
Avinash Reddy: <unk> across the organization by using technology to automate manual processes, and promoting and filling open roles from a talented employee base.
Avinash Reddy: Noninterest income for the third quarter was $8 5 million, we had a $3 7 million provision in the third quarter and the fourth quarter. The allowance to loans remained steady at 67 basis points.
Avinash Reddy: We're cognizant that there has been a lot of scrutiny on CRE concentration in this regard dimes investor Cree concentration, excluding multifamily loans, which are really residential loans for five or more tenants is only 258% of total capital.
Avinash Reddy: This quarter, our concentration levels drop as we continue to focus on growing business loans and building capital.
Avinash Reddy: In light of the overall environment, our posture as it relates to the balance sheet is to build capital methodically. This will in turn support our clients when they need it this quarter, our risk based capital ratios increased by approximately 20 basis points.
Now I will turn to some guidance for 2024.
Avinash Reddy: As you know, we don't provide quarterly quantitative NIM guidance.
Avinash Reddy: All else equal we expect the NIM to remain within a few basis points of current levels until the federal reserve starts cutting rates. This is contingent on competition remaining rational and our loan originations, which help offset any deposit cost creep remaining at fourth quarter levels of approximately $200 million at 785.
Avinash Reddy: Once the fed cuts rates, we anticipate expansion in a medium to longer term goals and projections do envision the NIM getting back to historical levels in the low to mid threes and potentially even higher.
Avinash Reddy: This will require more of our assets to reprice and as mentioned earlier 2025, and 2026, a significant deal for us in terms of asset repricing.
Avinash Reddy: Of note, we have already begun to prepare for the fed rate cut by segmenting, our deposit base in the various buckets. It's important to note that our deposit base has less of a consumer waiting the national payer groups.
Avinash Reddy: As such we should see higher deposit betas on the way down.
Avinash Reddy: With respect to our positioning on lending our strategy is to ensure we continue to support our key clients through any operating environment and the stew mentioned, we continue to see growth in our business loan portfolio.
Avinash Reddy: Growth in the business portfolio will offset declines in multifamily and investor Cree, while we are still servicing existing solid relationships.
Avinash Reddy: On an aggregate basis, we expect loan growth in 2024 to be in the low single digits with a stable first half of dealer and growth in the latter half of the year.
Operator: Good day, and thank you for standing by. Welcome to the DIME Community Bank Share's 4th Quarter Earnings Conference Call. At this time, all participants are in the listening mode. During the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is free.
Avinash Reddy: With respect to core cash noninterest expenses, if we take the Q4 cash operating expenses of $52 5 million and annualize that we get to $210 million, we expect to be flat to up one 5% on that base, which equates to $210 million to $213 million as a range for 2024.
Avinash Reddy: As I mentioned earlier the expectation for the core tax rate for 2024 is around 27%.
Operator: To withdraw your question, please press star 1 1 again. Before we begin, the company would like to remind you that the discussions during this call contain forward-looking statements made under the Safe Harbor Provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risk, uncertainties, and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release in the company's filings with the U.S. Securities and Exchange Commission, to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with U.S. GAAP.
With that I'll turn the call back to the operator, and we will be happy to take your questions.
Avinash Reddy: Thank you.
Avinash Reddy: A reminder to ask a question. Please press star one wanting your telephone and wait for your name to be announced.
Avinash Reddy: <unk>. Your question. Please press star one again.
Avinash Reddy: Please stand by while we compile the Q&A roster.
Avinash Reddy: Our first question comes from the line of Steve Moss with Raymond James Your line is now open.
Avinash Reddy: Good morning.
Stephen M. Moss: Hey, Steve.
Stephen M. Moss: Sure.
Starting on the margin sensitivity here Avi.
Avinash Reddy: Just curious how you think I hear you in terms of fed cuts getting it to the low threes on the margin how many rate cuts do you think it'll take to get to that level.
Operator: For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Stuart LeBeau, President and CEO.
Avinash Reddy: Yeah look we're just following the forward curve, Steve we don't give quantitative guidance as I said, we're confident you'll get back into the low to mid threes, you know I will say that.
Good morning. Thank you, Shannon. With me today is Avi Reddy, our CFO. And thank you all for joining us this morning for our fourth quarter earnings call. 2023 was an unprecedented year in many respects, with the Federal Reserve taking interest rates to a multi-decade high and three regional banks failing, resulting in a significant focus on liquidity and deposits. Throughout all of this uncertainty, DIME's business model remained resilient, as demonstrated by year-over-year growth in deposits of over $275 million and loans of over $200 million. Importantly, in 2023, we put in place several cornerstone investments that will serve as growth engines for the franchise in the years ahead. First, we rapidly assembled a cross-functional internal team to attract productive deposit-gathering bankers from Signature Bank.
Steve: You follow the forward curve and you assume a five year in where the five year Treasury ends up in a positive sloping yield curve with the 29%, 30% DDA and growing with some of the new groups that we've hired we do see the potential to be.
Avinash Reddy: <unk>, even above what we were historically which was.
Avinash Reddy: At the peak, we were around <unk> 30 on the NIM, but FIFA.
Avinash Reddy: If you follow the forward Colby.
Avinash Reddy: In our internal model do we should we should end up.
Avinash Reddy: That.
Sue: As Sue said.
Sue: 2024, we don't have a lot of assets repricing, but it really starts picking up in 2025 and 2026, so I'll just leave it at there.
And could you just remind me how much do you have an assets repricing in 2025.
Sue: Yes, sure. So we have other on the real estate side, we have around 500 $575 million of assets in 2024, and then we probably have around $200 million to $225 million on the security side as well coming to you.
In the second quarter, we were able to onboard six groups, and at 1231, their portfolio stands at approximately $350 million, with approximately 50% being in CDA. To provide some background, after I joined DIME in 2017, we put in place the building blocks for a private and commercial bank deposit gathering operation. This existing operation provided us with a solid foundation that helped us attract these new groups. We are proud of the fact that DIME was the only bank in Metric New York that was able to attract these talented bankers, a testament to our client-first business model and our state-of-the-art technology and treasury management system.
Sue: Okay, and then a meaningful step up in 2025.
Avinash Reddy: But yes for 2025, a meaningful step up right. So in 2025 on the asset side, we have around $900 million in 2025, and then we have $250 million of securities that dealer and then if you roll forward one year to 2026, we have around 1 billion four in 2026 of assets and around $200 million of securities.
Avinash Reddy: Now now that's contractual rate, but if the fed cuts rates youre going to see some of that some of those asset re pricings from 2026 pull forward a yarn happened in 2025.
Today, our overall private and commercial bank deposit portfolio stands at approximately $1.5 billion, inclusive of the new groups hired in 2023. Over the course of the second half of the year, we've made significant operational and technology-related enhancements to this business, and truly believe we now have the best-in-class private client platform in the metro New York area. As I have said, this segment will be the growth engine for DIME in the years ahead as we build our portfolio via the acquisition of new clients and new groups. Moving to the asset side of the balance sheet, we added to our business loan origination capacity by building out a brand new healthcare vertical in 2023. This follows on the heels of building out a middle market C&I lending operation in 22.
Avinash Reddy: Okay.
Avinash Reddy: I appreciate that.
Avinash Reddy: And then.
Avinash Reddy: Excuse me.
Avinash Reddy: Steve You mentioned the health care vertical.
Steve: I'm sorry, you cut out on just how large the pipeline was there I'm wondering if you could just.
Steve: If you could give that number and also just curious are you looking to hire any additional teams in the upcoming year.
Steve: So at this point.
Steve: Sure.
Steve: The pipeline is.
Steve: Approximately $115 million with a weighted average rate of 9%.
Steve: And so.
Steve: We're very happy with the with the growth in our pipeline.
Steve: We expect to have our.
Steve: First closings in the first quarter, so things are going well in terms of additional teams. Yes. I mean, we're looking at there is there are a couple of other C&I related in health care related.
Our healthcare team is actively in the market, and our pipeline for this new vertical is now over $100 million and growing at an average rate of 9%. The Healthcare Vertical will add diversity to our balance sheet with solid margins. Once again, we continue to spend a significant amount of time on the recruiting front and believe we have the potential to add more groups of talented bankers in the future. We do believe there will be more fallout from larger local institutions as well as an opportunity to bring over individual clients who seek locally managed, relationship-based banks coupled with a strong technology and treasury management stack.
Steve: Individuals and teams we're looking at that also have significant deposits.
Steve: As part of their book and we are looking at that.
Steve: Okay.
Okay and does the expense guide contemplate additional hires for the year or would that be additive to expenses.
Steve: Yes, I think Steve if you will if you go back to last year right. We gave guidance of two six to two <unk> and we hired six groups and we beat the expense guidance by $6 million. So I think.
In summary, as we look back on 2023, it was important for DIME to navigate the dynamic environment while playing strategic offense and taking advantage of market opportunities. As we have just completed our year-end strategic planning process, I want to lay out our medium-long-term goals. We intend on creating a more diversified balance sheet by focusing on growth in our business loan portfolio, which includes C&I and owner-occupied CREs. While we have historically been very strong operators in the multifamily and investor sectors, our committed focus for the future is to remix this balance sheet such that business loans will have a greater weighting. Right now, business loans account for approximately 21 percent of loans, and we anticipate growing business loans to 30 percent and reducing multifamily to the 25-30% range over a two- to three-year time frame. To provide you some context on how earnest we are about the balance sheet transformation, a look at our current loan pipeline indicates approximately $780 million in the pipeline, with 70% in business loans. A year ago, business loans accounted for only 35% of the pipeline.
Steve: We're very cognizant of expenses, we will we will hire groups and they're very profitable very quickly.
Right now its with the groups and teams that we do have.
Steve: But I would just say that the payback period on the groups is very very quick from a bottomline perspective, yes, I mean last year, we brought on.
Avinash Reddy: It's groups, where we brought on 21 individuals and we are able to cover those cost within our expense guide.
Avinash Reddy: We're very cognizant of.
Avinash Reddy: Managing both sides of that.
Avinash Reddy: The income opportunity, bringing on new teams and the expense side.
Avinash Reddy: Okay, Great I appreciate that and one last question just on the.
Avinash Reddy: As soon as one commercial real estate non performing loan.
Avinash Reddy: Any color you could give there on.
Avinash Reddy: That credit.
Avinash Reddy: Yes.
Avinash Reddy: It's a fully tenanted.
Avinash Reddy: Building Thats.
Avinash Reddy: That's houses too.
Two schools, both both tenants were paying the borrower had some issues and did not remit payments to us since that time <unk> payments have been made the loan is current and.
Avinash Reddy: And our policy is that we need six six payments in order to put up a loan take alone out of non accrual. So we anticipate that loan coming actually coming out of non accrual this quarter.
By the way, the average rate on our pipeline is 8.43%. Building on the success we have had on the deposit-gathering front, growing our private and commercial banks will be a key focus. This will allow us to continue to grow DDA balances, as well as lower our loan-to-deposit ratio to a range between 90% and 95% over the medium term. As I've said, we are in discussions with numerous teams at the current time and expect to hire additional top-quality bankers in the year ahead. Finally, I want to provide some thoughts on our profitability goals. While our asset book has limited maturities and repricings in 2024, in 2025 and 2026, we see increased repricings on the asset side. Returning to a 110 to 125 ROA is a key marker, and we are highly focused on getting you there as the asset side of the balance sheet turns over. This will be accomplished by a significant improvement in NIM as rates normalize.
Avinash Reddy: Okay.
Avinash Reddy: Great I appreciate all that color I'll step back.
Avinash Reddy: Thank you.
Avinash Reddy: Our next question comes from the line of Mark Fitzgibbon with Piper Sandler Your line is now open.
Avinash Reddy: Hey, guys good morning.
Mark Thomas Fitzgibbon: Hey, Mark.
Mark Thomas Fitzgibbon: Hey, just to clarify our view on the tax rate was elevated in both the third and fourth quarters could you just explain what the discrete items.
Mark Thomas Fitzgibbon: What they are in.
Mark Thomas Fitzgibbon: And those will be fully out of the tax rate in the first quarter.
Mark Thomas Fitzgibbon: Yes, Mark primarily it's related to 162 msos.
The CEO succession that we had it's obviously a cumulative number so it picks up and then there were some other than a true up items in a return to provision type items.
Mark Thomas Fitzgibbon: If you look back historically, our tax rate has been in the 27% to 28% area, obviously depends upon the level of income at the bank. So next year, 27% is a reasonable rate to use for next year.
In the interim, we will continue to control the things that we can, including staying extremely disciplined on expenses. As I said in our last earnings call, our main focus is on providing our customers with outstanding service that only a locally managed community bank can provide, growing our franchise value, and delivering strong returns to our shareholders. Being a conservative underwriter of credit has always been a hallmark of DIME.
Mark Thomas Fitzgibbon: Okay, Great and then your comments on hiring additional teams or those presumably mostly from legacy signature or other large banks or where do you see those teams coming from.
Avinash Reddy: Yes, I will.
Avinash Reddy: I'd say all of the above so theres some serious opportunities both within the existing teams at signature and other institutions that were.
We continue to have a very low level of non-performing loans, including past dues, including no past dues in our $4 billion multifamily portfolio. With respect to the fourth quarter results, our core EPS was approximately 45 cents. We are pleased to see NIM contraction continuing to slow, DDA balances remaining steady, capital ratios continuing to grow, and asset quality metrics remaining stable. In closing, I would like to thank all our outstanding employees for staying focused on our goals during these challenging times. Avi will now provide more details on the quarter. Thank you, Stu. Reported EPS was $0.37 per share. Excluding the impact of the special FDIC assessment and assuming a normalized tax rate of 27%, core EPS would have been approximately $0.45. The tax rate in the second half of the year was impacted by certain disallowed items related to executive severance.
Avinash Reddy: We're in conversation with.
Avinash Reddy: So of the teams that you've hired those six teams that are brought in 300 and some odd million of deposits. What do you think those teams are capable of doing once Dave.
Avinash Reddy: Your books of kind of fully matured and migrated over.
Avinash Reddy: Yes sure Mark So you go back in our September 30th we were at $250 million on the teams.
Mark: At December 31, two with $333 million today with $375 million. So it seems like a steady build of $70 million to $80 million per quarter. At this point I mean, the good thing is we look at it on a client level at an account level basis, and its really not slowed down yet so.
Mark: So we expect to see continued growth in the quarters ahead over there again, they're very heavily focused on on DDA.
Avinash Reddy: At this point it does take time to move all of our clients. So I think so far they're really meeting the expectations that we set out and they've become profitable very quick and really the opportunity for us is continuing to grow that but now that they've been here for a while.
Avinash Reddy: As mentioned in the press release, our expectation for the tax rate for 2024 is around 27%. As we expected, the pace of NIM compression slowed even further in the fourth quarter, and the compression was only five bases, compared to 16 basis points in the prior quarter. At 29% of average total deposits, a non-interest-bearing deposit percentage remains a clear differentiator for DIME versus other community banks in our footprint. We are cognizant of the challenging revenue environment and continue to manage expenses prudently. Our focus is being as efficient as possible. Expenses for the fourth quarter, excluding the one-time FDIC special assessment and intangible amortization, were $52.5 million.
Avinash Reddy: Hiring new groups and as stew said, that's going to be additive as well pretty pretty quickly overall.
Avinash Reddy: Okay. The last question I had is.
Avinash Reddy: There's been a lot of dislocation in the banking space and your balance sheet is obviously held up well.
Are you thinking about M&A at all is that is that sort of a priority I think for dime over the next several quarters.
Avinash Reddy: Okay.
Avinash Reddy: M&A has has.
Avinash Reddy: As the talk about M&A has certainly picked up.
Avinash Reddy: There are still.
Avinash Reddy: Issues with marks in.
Avinash Reddy: For the full year, cash non-interest expense, excluding the FDIC special assessment, intangible amortization, and severance, was approximately $202 million, well below our annual guide for 2023 of $206 to $209 million. Notably, we were able to absorb the cost of new hires into our organization by rationalizing expenses across the organization, by using technology to automate manual processes, and by promoting and filling open roles from a Non-interest income for the third quarter was $8.5 million.
Avinash Reddy: In the.
Avinash Reddy: The balance sheets that are out there I mean, certainly for the right transaction, we're certainly interested.
Avinash Reddy: And.
Would explore opportunities so I do think over time and particularly in the next <unk>.
Several years theres going to be much more activity in the M&A space and once the fed kind of.
Avinash Reddy: Levels out.
Avinash Reddy: And has the direction I think theres going to be much more discussion out there certainly.
Avinash Reddy: Given our given where we are in the marketplace and the strength of our balance sheet. I think they are certainly going to be an opportunity for us.
Avinash Reddy: We had a $3.7 million provision in the fourth quarter. The allowance to loans remained steady at 67 basis points, and we were cognizant that there has been a lot of scrutiny on CRE concentration. In this regard, DIME's Investor Cree concentration, excluding multi-family loans, which are really residential loans for five or more tenants, is only 258% of total capital. This quarter, our concentration levels dropped as we continue to focus on growing business loans and building capital. In light of the overall environment, our posture as it relates to the balance sheet is to build capital methodically. This will, in turn, support our clients when they need it. This quarter, our risk-based capital ratios increased by approximately 20 basis points. Now, I will turn to some guidance for 2024. As you know, we don't provide quarterly quantitative NIM guidance.
Avinash Reddy: Thank you.
Avinash Reddy: Thank you.
Speaker Change: Our next question comes from the line of Manuel Novice with D. A Davidson <unk> company. Your line is now open.
Hey, good morning.
Speaker Change: Just thinking about the overall deposit base.
Speaker Change: It's great that you're having success with the <unk>.
Manuel Novice: With the new hires and those teams are adding a lot when would we see kind of an inflection.
Manuel Novice: For the rest of what's driving that.
Manuel Novice: <unk> that caused some of the deposit outflows recently, just kind of comment on deposit growth next year.
Yes look I mean manual we grew deposits by $275 million in a year that was very challenging I think for the industry. Overall, if you look at the overall groups that we brought on days they brought out around $330 million right. So on a net net basis, we were flat and the rest of the bank.
Avinash Reddy: All else equal, we expect NIM to remain within a few basis points of current levels until the Federal Reserve starts cutting rates. This is contingent on competition remaining rational and our loan originations, which help offset any deposit cost creep remaining at fourth-quarter levels of approximately $200 million at 785. Once the Fed cuts rates, we anticipate expansion, and our medium-to-longer-term goals and projections do envision NIM getting back to historical levels in the low-to-mid threes and potentially even higher. This will require more of our assets to reprice, and as mentioned earlier, 2025 and 2026 are significant deals for us in terms of asset repricing. Of note, we have already begun to prepare for the Fed rate cuts by segmenting our deposit base into various buckets. It's important to note that our deposit base has a lower consumer weighting than national peer groups, and as such, we should see higher deposit betas on the way down. With respect to our positioning on lending, our strategy is to ensure that we continue to support our key clients through any operating environment.
Manuel Novice: So I think if you if you look at that Holistically, that's that's pretty reasonable in this environment, we've seen DDA really stabilize across the entire bank and so I think when you start 2024, youre not whatevers left behind as Julian core DDA at the bank operational DDA, so that gives us.
Manuel Novice: Sort of comfort going going forward with that.
Manuel Novice: I think the opportunity here to grow deposits is really building on building, our private and commercial bankers to set we have a 1 billion and a half of deposits in that business.
The branch businesses important important as well.
Avinash Reddy: And so I think as rates stabilize anomalies, we should be doing well over there obviously over time, we've looked at our deposit base and conceptually where there are higher rate chunkier deposits, we've kind of.
Avinash Reddy: Try to normalize our deposit base over there like everybody else all of that is behind us in two.
Avinash Reddy: 2023.
Avinash Reddy: And, as Stu mentioned, we continue to seek growth in our business loan portfolio. Growth in the business portfolio will offset declines in multifamily and investor loans where we are still servicing existing solid relationships. On an aggregate basis, we expect loan growth in 2024 to be in the low single digits with a stable first half of the year and growth in the latter half of the year. With respect to core cash non-interest expenses, if we take the Q4 cash operating expenses of $52.5 million and annualize that, we get to $210 million.
Avinash Reddy: One part is also looking at the loan to deposit ratio right I mean, we were.
Avinash Reddy: We're at one or two at the end of the hour actually close at a 100% right now.
Avinash Reddy: So we feel pretty comfortable from that perspective that we have the deposit growth to fund the loan growth that we're projecting for 2024.
Avinash Reddy: Yes.
Avinash Reddy: Most importantly, you see quarter over quarter DDA is stable so.
Avinash Reddy: I think.
Avinash Reddy: There are not a lot of banks that can say that their DDA balances have remained stable over the last two quarters.
Operator: We expect to be flat to up 1.5% on that base, which equates to $210 to $213 million as a range for 2024. As I mentioned earlier, the expectation for the core tax rate for 2024 is around 27%. With that, I'll turn the call back to the operator, and we will be happy to take your questions. Thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steve Moss with Raymond James. Your line is now open. Good morning, and H.G.
Avinash Reddy: We see opportunity to continue to grow that.
Avinash Reddy: This.
Avinash Reddy: Okay I appreciate that thank.
Thank you.
Avinash Reddy: Thank you.
Our next question comes from the line of Chris O'connell with <unk>. Your line is now open.
Avinash Reddy: Hey, good morning.
Chris O'connell: Hey, Chris.
Chris O'connell: So I think in your opening comments you talked about.
Chris O'connell: <unk> getting up to 110 to 125 over time.
Is that assuming.
Chris O'connell: Sure.
Chris O'connell: Debt to get there.
That is still low.
Chris O'connell: Threes, NIM that you're talking about as well longer term.
Chris O'connell: Yes, Chris correct Yep.
Avinash Reddy: Starting on the margin sensitivity here, Avi, just curious, you know, how you think, I hear you in terms of Fed cuts, getting it to the low threes on the margin, you know, how many rate cuts do you think it'll take to get to that level? Yeah, look, we're just following the forward curve, Steve. We don't give quantitative guidance, you know, as I said, you know, we're confident, you know, to get back into the lower to mid threes. You know, I will say that, you know, if you follow the forward curve and you, you know, you assume where, you know, five-year, where the five-year treasury ends up in a positive sloping yield curve, you know, with the, you know, 29 to 30% DDA and growing with some of the, you know, new groups that we've hired, you know, we do see the potential, you know, to be, you know, even above what we were historically, which was, you know, at the peak, we were on 330 on the NIM, but, you know, if you follow the forward curve, we, you know, in our internal models, we should, we should end up, you know, above that, you know, as Stu said, you know, 2024, we don't have a lot of assets repricing, but that really starts picking up in 2025 and 2026, so I'll just leave it at that. And can you just remind me how much do you have in assets repricing in 2025? Yes, sure.
Chris O'connell: Got it.
Chris O'connell: How are you guys thinking about.
Chris O'connell: And there are no quantitative guidance, but.
Chris O'connell: The pace of NIM expansion.
Chris O'connell: Once the fed starts cutting.
Chris O'connell: If it's in.
Chris O'connell: A methodical or kind of a gradual way.
Chris O'connell: Does that accelerate over time are you guys getting a full benefit.
Chris O'connell: The first quarter of fed cuts you talked a little bit about kind of preparing your deposit book.
Chris O'connell: For this process.
Just I know you won't give quantitative guide, but just thinking about the pace and magnitude.
Chris O'connell: The fed's cutting would be helpful.
Chris O'connell: Yes, I think look we plan to be very aggressive on the deposit side in terms of cutting rates as I said, our book is weighted more to business and municipal customers. So that will allow us to be more aggressive on that front. That's on the liability side of the balance sheet right on the asset side of the balance sheet as we mentioned, there's less re pricings in 2012.
Four and then that really starts to pick up in 'twenty five 'twenty six or some of it will depend on the pace of which payoffs pick up.
Avinash Reddy: So on the real estate side, we have around $575 million in assets in 2024. And then we probably have around $200 to $225 million on the security side as well coming due. Okay, and then a meaningful step up in 2025 from there. Yeah.
Chris O'connell: On the asset side of the balance sheet, but I would say on the deposit side. We split the question up into how youre going to see deposit costs and what are you going to see on the asset side I'd say on the deposit side, that's something we can control and we expect to be very aggressive around that on the asset side. They will just take a little bit of time, given the structure and nature of our assets I think throughout all.
Chris O'connell: Of this Chris is just really important to keep in mind operating a bank with 30% DDA right. It's just a matter of time before we get back to those margins over time, given the repricing opportunity that we have.
Avinash Reddy: For 2025, a meaningful step-up. Right? So in 2025, on the asset side, we have around $900 million in 2025, and then we have $250 million of securities that year. And then if you roll forward one year to 2026, we have around $1.4 billion in 2026 of assets and around $200 million of securities. Now that's contractual, right? But if the Fed cuts rates, you're going to see some of that, some of those asset repricings from 2026 pull forward a year and happen in 2025. O'Hare, I appreciate that.
Chris O'connell: The other piece that I just wanted to add is we have around $1 billion of borrowings that are at.
Chris O'connell: Around $900 million to $950 million of borrowings that we've kept really short term, that's really going to reprice immediately as well and we've intentionally kept that chart. We've been messaging that all across in daily to position the balance sheet when rates dropped. So we do have the benefit of that as well.
Chris O'connell: Anecdotally if you look at month over month November and December we saw a two basis point increase in deposit rates.
Chris O'connell: <unk>.
Chris O'connell: Each month.
Chris O'connell: And in December we saw an eight basis point increase in loan rates.
Chris O'connell: So.
Hence.
And then, excuse me, Stu, you mentioned the healthcare vertical. I'm sorry, but you cut out on just how large the pipeline was there. I was wondering if you could just give that number and also just curious, are you looking to hire any additional teams in the upcoming year? So at this point, the pipeline is approximately $115 million with a weighted average rate of 9%. And so we're very happy with the growth in the pipeline. We expected to have our first, first closings in the first quarter. So things are going well.
Chris O'connell: We do feel.
Speaker Change: As Avi said, we're we're expecting.
Speaker Change: Relatively flat.
Speaker Change: NIM within a few basis points until the fed cuts.
Speaker Change: Great that's helpful.
Speaker Change: And kind of along the same lines.
Speaker Change: I know it really hasnt been.
Speaker Change: Much of the margin for the past two years or so.
Speaker Change: When the fed is cutting I mean, what do you think that a normalized kind of prepayment.
In terms of additional teams, yeah, I mean, we're looking at, there are a couple other CNI-related and health care-related individuals and teams we're looking at that also have significant deposits as part of their books. And we are looking at that. Okay, and does the expense guide contemplate additional hires for the year, or would that be added to expenses?
Speaker Change: Impact could have on the margin.
Speaker Change: Yes look it is going to be it has to be a whole lot better than what it is right now because right now the prepayment fees on the margin is like one basis point or two basis points I think if you go back to <unk>.
Speaker Change: Our legacy Dime, we used to have between 10 and 15 basis points.
Avinash Reddy: Yes, I think, Steve, if you go back to last year, right, we gave guidance of 206 to 209, and we hired, you know, six groups, and we beat the expense guidance by $6 million. So, you know, I think, you know, we're very cognizant of expenses. We will, you know, we will hire groups, and they're very profitable very quickly. I mean, right now, it's with the groups and teams that we do have.
Speaker Change: On prepayment fees now, obviously thats multifamily is going to be a smaller piece of the overall portfolio I would say.
Speaker Change: Anywhere between five and 10 basis points when speeds really pick up.
Speaker Change: It's probably not a bad assumption.
Speaker Change: But I don't think thats going to happen in 2024 necessarily just given yes, most likely if it does it's going to be toward late 2024.
Avinash Reddy: But you know, I would just say that the payback period on the groups is very, very quick from a bottom-line perspective. Yeah, I mean, last year we brought on 21 individuals in those groups, and we were able to cover those costs within our expense guide. I mean, we're very cognizant of managing both sides of that, the income opportunity, bringing on new teams, and the expenses. Okay, great. I appreciate that.
Speaker Change: Assuming the fed rate cuts.
Speaker Change: Great.
Speaker Change: And could you just provide a little bit of color on what.
Speaker Change: Drivers of the net charge offs were for this quarter.
Speaker Change: Yes, sure. So we just fully charged off a loan that we had previously fully resolved for so last quarter, we took a $4 million.
Charge, Stu mentioned that credit last quarter was still.
And one last question, just on the, I assume it's one commercial real estate non-performing loan. Any, just curious, any comments you'd give on that credit? Yeah, it's a fully tenanted building that houses two schools.
And the legal process on that loan, but we thought it was prudent to charge that fully off but something that we had put on non accrual status. A couple of years back so nothing really new over there.
Both tenants were paying. The borrower had some issues and did not remit payments to us. Since that time, five payments have been made. The loan is current, and our policy is that we need six payments in order to take a loan out of nonaccrual.
Speaker Change: Got it and then.
Speaker Change: Assumed given.
Speaker Change: The reserve ratio.
Speaker Change: And some of the comments in the release.
Speaker Change: Then you guys did were reserving for a couple of other loans being individually analyzed.
So we anticipate that loan actually coming out of nonaccrual this quarter. Okay. Great. Appreciate all that, Carl.
Speaker Change: Comments around those.
Speaker Change: Sure. So there was a one net new addition to the C&I portfolio a couple of million dollars loan we fully reserved against it. However, they too have started paying at this point in time and so there is a potential for that coming out.
Operator: I'll step back. Thank you. Thank you. Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is now open. Hey, guys. Good morning.
Speaker Change: That was a C&I C&I loan.
Avinash Reddy: Hey Mark. Hey, just to clarify, Avi, the tax rate was elevated in both the third and fourth quarters. Could you just explain what the discrete items were, what they were, and those will be fully out of the tax rate in the first quarter? Yeah, Mark, primarily it's related to 162M issues, you know, with the CEO succession that we had. It's obviously a cumulative number, so it picks up. And then there were some other, you know, true-up items, you know, return-to-provision type items. I mean, if you look back historically, our tax rates have been in the, you know, 27 to 28 percent area.
Speaker Change: Contract alone.
Speaker Change: Was.
Speaker Change: Had matured.
Speaker Change: We couldnt come to terms on a renewal.
So we were very conservative in our approach.
Speaker Change: We made it.
Speaker Change: So we fully reserve for that since then we have they have agreed.
Speaker Change: On basic turns over renewal brought along Kern and and we will probably close that in.
Speaker Change: In the first quarter.
And put that back on accrual status.
Avinash Reddy: Obviously, it depends upon the level of, you know, income at the bank. So, you know, next year, 27 percent is a reasonable rate to use for next year. Okay, great. And then, Stu, your comments on hiring additional teams, are those presumably mostly from Legacy Signature or other large banks, or where do you see those teams coming from? Yeah, I would say all of the above.
Great really helpful.
Speaker Change: Thanks to all of them.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Matthew Breese with Stephens. Your line is now open.
Speaker Change: Hey, good morning.
Matt: Hey, Matt.
Matthew M. Breese: Just a couple of quick ones from me.
Matthew M. Breese: Steve just just in light of your multifamily guidance getting to 25% to 30% of loans over the next two to three years.
So there are some serious opportunities, both within existing teams at Signature and other institutions that we're in conversation with. So of the teams that you've hired, those six teams that have brought in 300 and some-odd million in deposits, what do you think those teams are capable of doing once their books have kind of fully matured and migrated over? Yeah, sure, Mark.
Steve: It feels like the pace of run off needs to need to sell.
Steve: Accelerate to get there and so I was curious if this quarter is kind of 2% quarterly reduction in multifamily is a good run rate or a better representation of what we should be modeling in order to kind of achieve those goals.
Steve: Yes, Matt I think for the near term, yes. So like we said we have a limited amount of re pricings and maturities in.
Matt: 2024, which is specifically why our guidance over the course of two to three years, we're going to get there. So it's if you go back a couple of years.
Avinash Reddy: So you go back, you know, to September 30th, we were at $250 million on the teams. You know, on December 31st, we were $333 million. Today, we're $375 million.
Payoffs speed on the multifamily portfolio was 37% right now its 6% rate. So I think what the Q4 and Q3 numbers are reasonable estimates for the next six months or so, but then as the fed starts cutting rates youre going to start seeing a pickup in that and then eventually the loans do come up for maturity or repricing, which is <unk>.
Avinash Reddy: So it seems like a steady build of, you know, $70 to $80 million per quarter at this point. I mean, the good thing is we look at it on a client level and an account level basis, and it's really not slowed down yet. So, you know, we expect to see continued growth in the quarters ahead over there. Again, they're very heavily focused on DDA.
Matt: Why this is a two to three year goal for us.
Matt: We're looking at SaaS.
Matt: SaaS and projected SaaS.
Matt: Each month for this month, we're probably going to have $40 million to $45 million.
Matt: In satisfactions.
Avinash Reddy: You know, at this point, it does take time to move over clients, so I think so far, they're really meeting the expectations that we set out. And, you know, they've become profitable very quickly.
Matt: And.
Matt: We're looking at we're getting requests already for next month. So I mean, there is some activity out there some transactions happening in.
Matt: No.
Matt: It's very chunky.
And really, the opportunity for us is to continue to grow that. But now that they've been here for a while, you know, hiring new groups, and as Stu said, that's going to be additive as well pretty quickly overall. Okay.
Matt: It's hard to say exactly when that youre going to see significant run off but suffice to say we are seeing.
Matt: Yes.
Matt: So some amount of satisfactions each month pipeline.
The last question I had, Stu, is... You know, there's been a lot of dislocation in the banking space, and your balance sheet has obviously held up well. Are you thinking about M&A at all? Is that sort of a priority, you think, for DIME over the next, you know, several quarters? Look, obviously, M&A has, The talk about M&A has certainly picked up, but there's still... issues with Mark's and the balance sheets that are out there. I mean, certainly, for the right transaction, we're certainly interested and, you know, would explore opportunities. So, you know, I do think, over time, and, particularly, in the next several years, there's going to be much more activity in the M&A space.
Matt: I mean can we just go back to one of the points you made there I think you said historically the payoff activity was 30% to 35% for multifamily, making it secondly, a three year duration type product, but not now.
Matt: No.
Matt: No Matt the comment that was two years back at the peak the payoff rate was 37% if you look at it over a.
Matt: Our multi decade horizon, you'll probably between 15 and 20% is a true pay off rate on the multifamily side right now, it's 5% to 6%, so but as rates come down they generally.
Matt: Catch up it's more of a timing issue, Matt and again, we're pretty clear we're trying to give.
Matt: Two to three years worth of a forward look in terms of where we want to see the balance sheet ending up the thing that we can control is what we feed in the bucket and so right now we really have no multifamily loans in the pipeline. So for the first time I think ever we don't have any.
And once the Fed kind of levels out and, you know, and has a direction, I think there's going to be much more discussion out there. Given where we are in the marketplace and, you know, the strength of our balance sheet, I think there's certainly going to be an opportunity for growth. Thank you. Our next question comes from the line of Manuel Navis with D.A. Davidson and Company. Your line is now open. Hey, good morning.
Matt: Pipeline in multifamily.
Matt: Got it okay.
Matt: One more question on this topic.
Matt: As the typical kind of multifamily.
Matt: Borrower reaches the end of their kind of stand your standard five year fixed.
Are they.
Matt: Willfully rolling into the floating and waiting for lower rates are you seeing them refis of higher rates or go elsewhere, what is kind of the common behavior.
Avinash Reddy: Just thinking about the overall deposit base. It's great that you're having success with the new hires, and those teams are adding a lot. When will we see kind of an inflection for the rest? And what's driving the trends that have caused some of the deposit outflows recently? Just kind of comment on deposit growth next year. Yeah, look, I mean, Manuel, we grew deposits by $275 million in a year that, you know, was very challenging. I think for the industry overall, if you look at the overall groups that we brought on, they brought in around $330 million, right? So on a net-net basis, we were flat in the rest of the bank.
Matt: Sure. So Matt we went we went back and looked at our 2018 vintage right. So that basically in a mature are replaced in 2023, so around 30% to 35% of that is satisfying at this point in time and is around 65%. That's taken the repricing options. So it's basically one thirds two thirds in terms of the mix.
Matt: Now we will say that there are competitors in the market right now that are in the low sixes to high fives and as as rates come down youre going to see more of those loans not take the reprice that probably just going to satisfy away from us given given where the market is trending towards.
Avinash Reddy: So I think if you look at that holistically, that's pretty reasonable in this environment. We've seen DDA really stabilize across the entire bank. And so I think when you start 2024, you're not, whatever's left behind is really, you know, core DDA at the bank, operational DDA. So that gives us, you know, a lot of comfort going forward with that.
Matt: Many of those.
Matt: Viewed it as a short term, even though they were taken a rollover.
Matt: Viewed as a short term.
Matt: Rollover because.
Matt: They trigger.
Matt: Why go through the expense of refinancing at these rates, but once rates do come down they're going to they will pull the trigger and prepay.
Avinash Reddy: You know, I think the opportunity here to grow deposits is really building our private and commercial bank, as Stu said. We have a billion and a half of deposits in that business. The branch business is, you know, important as well.
Matt: Got it I appreciate all that color.
The last one from me is just.
Conceptually is the focus.
Matt: Continues on business banking and moves away from traditional multifamily.
Avinash Reddy: And so I think, you know, as rates stabilize and normalize, you know, we should be doing well over there. Obviously, over time, we've looked at our deposit base and, you know, conceptually, where there are, you know, higher rates, chunkier deposits, we've kind of, you know, tried to, you know, normalize our deposit base over there like everybody else. All that's behind us in 2023.
Matt: Should we start to see the reserve reflect that.
Matt: And start to increase a little bit 67 bps on today's balance sheet makes sense, but if multifamily is 25% allowance as it makes sense for the reserve to be higher.
Matt: Yes, absolutely.
Matt: Yes.
Matt: Our reserve R. R.
Matt: Our reserve methodology calls for.
Matt: At least 1% on C&I loans today, so as as we put C&I loans on.
Avinash Reddy: You know, the important part is also looking at the loan to deposit ratio, right? I mean, we're at one or two, you know, at the end of the year. We're actually close to 100% right now. So we feel pretty comfortable from that perspective that we have the deposit growth to fund the loan growth that we're projecting for 2023. Yeah, and, you know, most importantly, you can see that quarter over quarter, DDA is stable. So, you know, I think, there are not a lot of banks that can say that their DDA, you know, balances have remained stable over the last two quarters. And, you know, we see opportunity to continue to grow that, at base. Okay, I appreciate that. Thank you. Our next question comes from the line of Chris O'Connell with KBW. Your line is now open. Hey, good morning.
Matt: We are significantly higher than that.
Speaker Change: <unk> reserved for multifamily.
Speaker Change: That transition will occur.
Naturally as part of our <unk>.
Speaker Change: Origination process.
Speaker Change: Got it okay. That's all I had I'll leave it there. Thank you for taking my questions.
Thank you thanks Pat.
Speaker Change: As a reminder to ask a question at this time, Please press star one one oriented tone telephones.
Speaker Change: And I'm currently showing no further questions at this time I would like to hand, the call back over to Stuart Bell for closing remarks.
Speaker Change: Well once again I'd like to think.
Speaker Change: Our dedicated employees, who work diligently through these challenges throughout the year and thank our shareholders for their continued support and we look forward to see you next quarter.
Stuart Bell: This concludes today's conference call. Thank you for your participation you may now disconnect.
Stuart Bell: Yes.
Operator: Thank you, Chris. So, in your opening comments, you talked about, you know, the ROA getting up to, you know, 110 to 125 over time. Is that assuming that to get there, you know, that's the low uh, you know, threes min that you're talking about as well as the longer term? Yes, Chris, correct. Got it. And how are you guys thinking about, you know, I know no quantitative guidance, but, you know, the pace of NIM expansion, you know, once the Fed starts cutting it, you know, if it's in a methodical or kind of, you know, gradual way, you know, does that accelerate over time? Are you guys getting a full benefit on, you know, in the first quarter of Fed cuts? You talked a little bit about kind of preparing your deposit book, you know, for this process. I know you won't get the quantitative guide, but, you know, just thinking about the pace and the magnitude of, you know, the Feds' cuts would be helpful.
Stuart Bell: Okay.
Stuart Bell: [music].
Okay.
Stuart Bell: Yes.
Stuart Bell: [music].
Stuart Bell: Okay.
Stuart Bell: Thanks.
Stuart Bell: Okay.
Stuart Bell: [music].
Avinash Reddy: Yeah, I think we plan to be very aggressive on the deposit side in terms of cutting rates. As I said, our book is weighted more to business and municipal customers, so that will allow us to be more aggressive on that front. That's on the liability side of the balance sheet, right?
Avinash Reddy: On the asset side of the balance sheet, as we mentioned, there is less repricing in 2024, and then that really starts to pick up in 2025 and 2026, so some of that will depend on the pace of which payoffs pick up on the asset side of the balance sheet. But I would say on the deposit side, if you split the question up into how are you going to see deposit costs and what are you going to see on the asset side, I'd say on the deposit side, that's something we can control, and we expect to be very aggressive around that. On the asset side, it'll just take a little bit of time given the structure and nature of our assets. I think throughout all of this, Chris, it's just really important to keep in mind operating a bank with 30% DDA, right?
Avinash Reddy: It's just a matter of time before we get back to those margins over time, given the repricing opportunities that we have. The other piece that I just wanted to add is that we have around $1 billion of borrowings that are at around $900 to $950 million of borrowings that we've kept really short-term. That's really going to reprice immediately as well, and we've intentionally kept that short.
Avinash Reddy: We've been messaging that all across and really positioning the balance sheet from rates dropping, so we do have the benefit of that as well. Yeah, and just anecdotally, if you look month over month, November and December, we saw like a two basis point increase in deposit rates each. And in December, we saw an eight basis point increase in loan rates. You know, hence, we do feel, you know, that, as Avi said, we're expecting, you know, relatively flat, nimb, within a few basis points until the Fed cuts. Great, that's very helpful.
Avinash Reddy: And kind of along the same lines, I know it really hasn't been much of a margin for, you know, the past, I don't know, two years or so. But I mean, when the Fed is cutting, what do you think that a normalized kind of prepayment impact would have on the margins? Yeah, look, it's going to be, it has to be a whole lot better than what it is right now, because right now, the prepayment fees on the margin are like one basis point or two basis points. I think if you go back to, you know, legacy time, we used to have, you know, between 10 and 15 basis points on prepayment fees.
Avinash Reddy: Now, obviously, that multifamily is going to be a smaller piece of the overall portfolio. So I would say, you know, anywhere between five and 10 basis points when speeds really pick up, it's probably not a bad assumption. But you know, I don't think that's going to happen in 2024, necessarily, just given Yeah, most likely, if it does, it's going to be toward late 2024.
Avinash Reddy: Yep. So assuming that, you know, the Fed rate cuts. I agree. And could you just provide a little bit of color on, you know, what the drivers of the net charge loss were for this?
Avinash Reddy: Yes, sure. So we just fully charged off a loan that we had previously fully reserved for. So last quarter we took a $4 million charge. Stu mentioned that credit last quarter was still, you know, in the legal process on that loan, but we thought it was prudent to charge that fully off. It's something that we had put in non-accrual status a couple of years back, so nothing really new over there. Got it.
Avinash Reddy: And then I, you know, assume given, you know, the reserve ratio in some of the comments in the release that you guys did like were reserving for a couple of other loans being individually analyzed, just, you know, any comments around. So there was one net new addition to the C&I portfolio, a couple million dollar loan. We fully resolved against it.
Avinash Reddy: However, they, too, have started paying at this point in time, and so there's a potential for that to come out. Yeah, that was a C&I loan, a contractor loan that had matured, and, you know, we couldn't come to terms on a renewal, and so we were very conservative in our approach. We made it, you know, so we fully reserved for that. Since then, we have agreed on the basic terms of a renewal, brought their loan current, and we'll probably close that in the first quarter and put that back on a bad status. Great. Really helpful.
Operator: Thanks, Stu, and Salvi. Thank you. Our next question comes from the line of Matthew Breese with Stevens. Your line is now open. Hey, good morning.
Operator: Just a couple of quick ones for me. Steve, just in light of your multifamily guidance, getting to 25 to 30% of loans over the next two, three years, it feels like the pace of runoff needs to accelerate to get there. And so I was curious if this quarter's kind of 2% quarterly reduction in multifamily is a good run rate or a better representation of what we should be modeling in order to kind of achieve those goals. Yeah, Matt.
Avinash Reddy: I think for the near term, yes. So, you know, like we said, we have a limited amount of repricings and maturities in 2024, which is specifically why our guide is that over the course of two to three years, we're going to get there. So it's, you know, if you go back a couple of years, you know, our payoff speed on the multifamily portfolio was 37%. Right now, it's 6%, right? So I think the Q4 and Q3 numbers are reasonable estimates for the next six months or so. But then, as the Fed starts cutting rates, you're going to start seeing a pickup in that. And then eventually, the loans do come up, you know, for maturity or repricing, which is again why this is a two to three year goal for us.
Avinash Reddy: Yeah, I mean, we're looking at, you know, stats and projected stats each month. For this month, we're probably going to have 40 to 45 million, you name it. It's hard to say when you're going to see significant runoff, but suffice to say we are seeing significant runoff, you know, some amount of satisfaction. Avinash, can we just go back to one of the points you made there?
Avinash Reddy: I think you said historically, the payoff activity was, you know, 30 to 35% for multifamily, making it effectively a three-year duration type product, but now it's in the same— No, yeah, no, Matt, the comment there was two years back. At the peak, the payoff rate was 37%. If you look at it over, you know, a multi-decade, you know, horizon, you're probably between 15% and 20% is the true payoff rate on the multifamily side. Right now, it's, you know, 5% to 6%, but as rates come down, they generally catch up.
Avinash Reddy: It's more of a timing issue, Matt, and again, we're pretty clear, we're trying to give, you know, two to three years' worth of a forward look in terms of where we want the balance sheet to end up. The thing that we can control is what we feed into the bucket, and so right now, we really have no multifamily loans in the pipeline. Yeah, for the first time, I think, ever, we don't have any pipeline for multifamily.
Got it. Okay. Just one more question on this topic. As a typical multifamily borrower reaches the end of their standard five-year pitch, Au revoir! you know, willfully rolling into the floating and waiting for lower rates, or are you seeing them refi into higher rates or go elsewhere? What is the common behavior?
Avinash Reddy: Sure. So Matt, we went back and looked at our 2018 vintage rates. So that, you know, basically matured or repriced in 2023. So around 30 to 35% of that is satisfying at this point in time. And there's around 65% that's taking the repricing option. So it's basically one third to two thirds in terms of the mix.
Avinash Reddy: Now, we will say that, you know, there are competitors in the market right now that are in the, you know, low sixes to, you know, high fives. And as, as you know, rates come down, you're going to see more of those loans not take the reprice, they're probably just going to satisfy away from us, given where the market is trending towards. Yeah, I mean, many of those viewed it as a short-term fix, even though they were taking a rollover, they viewed it as a short-term fix because, you know, they figure not to go through the expense of refinancing at these rates, but once rates do come down, they're going to, they'll pull the trigger and prepay.
I appreciate all that. The last one for me is, conceptually, as the focus continues on business banking and moves away from traditional multi-family. Should we start to see the reserve reflect that and start to increase a little bit? 67 BIFs on today's balance should make sense, but if multifamily is 25% alone, does it make sense for the reserve to be higher? Matt, absolutely. Yeah, I mean, our reserve, you know, our... Our reserve methodology calls for at least 1% on C&I loans today. So as we put C&I loans on, we are significantly higher than what we're reserving for multifamily.
Avinash Reddy: So that transition will occur just naturally as part of our origination process. Got it. Okay, that's all I had. I'll leave it there. Thank you for taking my question. Thank you. As a reminder, to ask a question at this time, please press star 1-1 or your touchtone telephone. And I'm currently showing no further questions at this time.
I'd like to hand the call back over to Stuart Lebeau for closing remarks. Well, once again, I'd like to thank our dedicated employees who work diligently through these challenges throughout the year and thank our shareholders for their continued support, and we look forward to seeing you next quarter. This concludes today's conference call. Thank you for your participation. You may now disconnect.