Earnings Call Transcript - DCOM Q4 2024

Operator, Operator

Good day. Thank you for standing by. Welcome to Dime Community Bancshares Inc. Fourth Quarter Earnings Conference Call. 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 US Private Securities Litigation Reform Act of 1995. 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 US 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 the US GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please note that today's conference may be recorded. I will now hand the conference over to your speaker, Mr. Stu Lubow, President and CEO. Please go ahead, sir.

Stuart Lubow, President and CEO

Thank you, Olivia, and everyone for joining us this morning for our quarterly earnings call. With me today is Avi Reddy, our CFO. Today, I will discuss the progress we made in 2024 as we implement our business plan. Avi will then provide details on the fourth quarter and guidance for 2025. We started 2024 by hiring several deposit-gathering teams from the former Signature Bank. These teams joined Dime due to the positive results and the performance of the teams we had hired previously in 2023. Collectively, the deposit groups have raised around $1.8 billion in core deposits, with about 40% in non-interest-bearing deposits. We've also opened over 11,000 accounts and established 7,000 individual customer relationships, marking a significant achievement for Dime. The successful development of our private and commercial bank has been a collaborative effort across the company. The growth and stabilization of branch-based deposits, particularly in consumer and DDA, contributed to significant year-over-year growth in core deposits. We concluded the year with a loan-to-deposit ratio of below 95% and reduced our wholesale borrowings and brokered deposits by about $1.2 billion in the past year. On the loan front, we are continuing to pursue our plan of increasing business loans while managing our CRE ratio downwards. Business loans increased by over $70 million in the fourth quarter and by $400 million for the full year, driven by strong growth in our C&I and healthcare sectors. Our loan pipeline remains robust with over $750 million in loans at an average rate of 7.75%, leaning towards C&I and healthcare loans. We ended the year with a CRE concentration of roughly 45 and plan to continue lowering this ratio over time to the low 400s. Despite expanding our deposit and loan teams over the past two years, we have kept core operating expenses relative to assets tightly controlled within a 165 basis point range. We achieved this by leveraging technology for operational efficiencies and closely monitoring discretionary expenses. As mentioned on the last call, fourth quarter expenses were relatively consistent with the third quarter. Following the election and reflecting improved investor sentiment towards bank stocks, we raised about $136 million in net proceeds from a heavily oversubscribed common equity offering, which was beneficial to our tangible book value. We utilized a portion of the proceeds to adjust our securities and BOLI portfolios. Consequently, with the capital we raised, we ended the year with a common equity Tier 1 ratio exceeding 11% and a total capital ratio above 15.5%. Having strong capital ratios compared to our peers will position us to seize future opportunities and support our organic growth. Additionally, we increased our loan loss reserves from 67 basis points to 82 basis points during the year, approaching our medium-term target of 90 to 100 basis points. In the fourth quarter, we received our second consecutive outstanding CRA rating. In addition to the overall rating, we received outstanding scores on the three CRA component tests: lending, investment, and service. Achieving perfect scores on all three components distinguishes us from competitors and underscores Dime's commitment to community and the hard work of our dedicated employees. In summary, we are effectively executing our growth strategy, differentiating our franchise from competitors in terms of growth and ability to attract skilled bankers. We have strong momentum and are continuing to grow business loans and core deposits. Our net interest margin is on the rise, with the fourth quarter NIM increasing to 2.79%. Importantly, we see substantial opportunities to further increase our net interest margin in the years to come due to significant back-book repricing in our portfolio. Avi will share more details shortly, but we are confident in our trajectory towards achieving a net interest margin above 3%. Our DDA levels have returned to 30%, and we expect the value of this DDA base will be evident in the current rate environment. Market disruptions remain high, and we are actively hiring with strong recruiting pipelines. We will provide further updates in the next 90 days as bonus season concludes. I am optimistic about a strong 2025 and want to thank all our dedicated employees for their efforts in positioning Dime as the leading business bank in New York. Now, I will hand the call over to Avi.

Avi Reddy, CFO

Thank you, Stu. During the fourth quarter we completed a repositioning of our available-for-sale securities portfolio and our Bank Owned Life Insurance portfolio. The securities restructuring was completed towards the end of November. The BOLI transaction took place in two stages a surrender of legacy BOLI was completed in the month of December and an equivalent amount of replacement BOLI is being purchased in the month of January. Excluding the impact of these two transactions as well as severance and costs associated with pension termination and other one-time items adjusted EPS increased by 45% versus the prior quarter. We saw a meaningful expansion in the net interest margin this quarter. Reported NIM was up 29 basis points and the core NIM excluding purchase accounting accretion was up 26 basis points. NIM expansion was driven by a significant reduction in our cost of deposits. Given the timing of the Federal Reserve rate cut in December, we adjusted deposit rates towards the end of the month. The full impact of the rate cut will flow through into our Q1 net interest margin. Given that the securities repositioning was completed towards the end of November, the fourth quarter NIM reflects only 1 month of benefit from the repositioning. Core deposits were up approximately $500 million in the fourth quarter. This included approximately $150 million of seasonal tax receiver municipal deposits that typically arrive in the month of December and leave in mid-January and $200 million of title company-related deposits that were tied to a closing at year end and that left the bank in early January. Excluding the seasonal tax receiver deposits and the title company-related deposits, period-end core deposit growth for the fourth quarter was approximately $150 million. Similarly, the overall balance sheet size and cash position was elevated at quarter end by approximately $350 million due to the seasonal municipal deposits and title company deposits. Core cash operating expenses for the fourth quarter excluding intangible amortization was $57.7 million. This was consistent with our previous core cash expense guidance of between $57.5 million and $58 million. Non-core items for the fourth quarter included severance, additional FDIC special assessment related to the failure of Signature and Silicon Valley, and $1.2 million related to the previously disclosed termination of a legacy pension plan. Please note, we're in the final stage of the termination of this pension plan and expect an additional $4.5 million pre-tax termination expense in the first quarter of 2025. This additional $4.5 million is already captured in the AOCI line item at year end and as such will have no material impact on tangible book value per share as it is simply a realization of the unrealized loss that is already in our equity account. We had a $13.7 million loan loss provision this quarter. Consistent with our commentary during the third quarter earnings call, our allowance to loans increased to 82 basis points. As Stu mentioned, we're within striking distance of the 90 basis points to 100 basis points medium-term target, which we expect to reach over the next six months to nine months. Next, I'll provide some thoughts on the NIM trajectory and guidance for 2025. As I mentioned previously, given the timing of the securities repositioning, there was only a partial quarter benefit from the repositioning in the fourth quarter's NIM. In addition, the timing of the rate cuts in the fourth quarter was such that the full quarter impact of the November rate cut was not fully realized in the fourth quarter margin. As such, we thought it would be helpful to provide the core NIM for the month of December, which includes the full benefit of the Federal Reserve rate cut in November as well as the full impact of the securities repositioning. The monthly December core NIM was approximately 2.84%. This is a good base NIM to use as you build out your models for 2025. The 25 basis point Federal Reserve rate cut in December should result in a 5 basis point to 6 basis point NIM improvement for the first quarter of 2025. So starting with the 2.84% core NIM for the month of December and adding the full impact of the December rate cut should get us close to 2.90% for the first quarter. Additional core deposit growth and loan repricing could add a few more basis points of upside to the first quarter NIM. As Stu mentioned, we have a line of sight towards a 3% net interest margin. Should the Federal Reserve cut rates again this year, we expect another 5 basis points to 6 basis points in quarterly NIM improvement per 25 basis point rate cut. This assumes the behavior in deposits and loans holds for each subsequent rate cut and competition remains rational. Should the Federal Reserve not cut rates in 2025, we still have a pathway to increase NIM over time given the significant amount of back book repricing. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed rate loan portfolios, in the second half of 2025 and the full year 2026, we have $1.9 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 3.95% that either reprice or mature in that time frame. Assuming a 225 basis point spread on those loans over the forward five-year treasury, we could see a 35 basis point to 40 basis point increase in NIM from the repricing of these loans. Finally, and while we've previously only provided information on the back half of 2025 and full year 2026, as we look into the back book for 2027, we have another $1.75 billion of loans that are at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. In summary, we see a pathway to a 3% NIM in 2025 and a NIM greater than 3.25% in 2026 with continued expansion in 2027 and approaching the 3.50% area. The impact of this enhanced NIM will no doubt increase our earnings power as time progresses. With respect to non-interest income guidance for 2025, we expect between $40 million and $42 million. Individual quarters may be impacted by the level of customer-related loan swap income. With respect to balance sheet growth, we expect period-end loan balances to grow in the low single-digit area in 2025 with growth more weighted towards the back half of 2025. As we mentioned previously, we are focused on gradually reducing our CRE concentration to the low 400s. Attrition in CRE and multi-family may mask some of the growth in our business loan portfolio in 2025 as it did in 2024. However, we expect this trend to moderate by the end of 2025 and expect to return to a mid single-digit growth profile in 2026. With respect to core cash non-interest expenses, our full year 2025 guidance is between $234 million and $235 million. This guidance takes into account our existing employee base. To the extent, we add additional client-facing bankers after year-end bonuses are paid out, we could see an increase in expenses starting in the second quarter. But as we've demonstrated previously, we expect these bankers to pay for themselves and contribute to pretax income growth in a relatively short period of time. Finally, we expect the tax rate for the full year between 27% and 28%. With that, I'll turn the call back to Olivia, and we'll be happy to take your questions.

Operator, Operator

Thank you. And our first question comes from Mark Fitzgibbon with Piper Sandler. Your line is now open.

Mark Fitzgibbon, Analyst

Hey, guys. Good morning.

Avi Reddy, CFO

Hi, Mark.

Stuart Lubow, President and CEO

Good morning.

Mark Fitzgibbon, Analyst

First question I had Avi, just to follow-up on one of the guidance numbers that you gave for non-interest income. I think you had said $40 million to $42 million for the full year 2025. Is that correct?

Avi Reddy, CFO

Yes, yes Mark. So, we did the BOLI restructuring in the month of December. So, what happened there was we took the tax charge in Q4. We're purchasing around $85 million to $90 million of BOLI in the month of January. So the additional income that comes in on the BOLI side will be around $5 million to $5.5 million plus or minus. And so that's why the non-interest income is higher. We also factored that into the tax rate of 27% to 28% given the BOLI income is tax-free. So we gave a range. The range was $40 million to $42 million. And obviously, the individual quarters may be impacted by the level of loan swap income in there.

Mark Fitzgibbon, Analyst

Okay. Got you. So the big delta is the BOLI income number.

Avi Reddy, CFO

Yes, correct.

Mark Fitzgibbon, Analyst

It goes from about $2.8 million to as much as $5 million. And regarding your guidance for loan growth being in the low single digits, is that because you expect a significant portion of the pipeline to not materialize, or do you anticipate there will be considerable refinancing activity? I'm curious about that.

Stuart Lubow, President and CEO

Yes, I think we're noticing an increase in transaction volume in the marketplace. For instance, during the fourth quarter, we closed over $150 million to $175 million in new business-related loans. However, we also experienced a higher rate of payoffs and refinances, which led to less growth than we anticipated. We are observing more activity, particularly in the commercial real estate and multifamily sectors where there are more transactions. Since we are not as active as we once were, that has affected our growth.

Avi Reddy, CFO

Yes Mark, in 2024, we increased the business loan portfolio by $425 million for the year, which we are pleased with and aim to build upon. On the commercial real estate side, we experienced a decline of around $350 million in multifamily and CRE combined. Our goal is to reduce the CRE ratio to the low 400s, so some of the multifamily CRE downturn will balance out the business growth in the first half of the year. However, as we move from 2025 to 2026, maintaining that level of CRE should lead to an overall increase in loan growth by 2026.

Mark Fitzgibbon, Analyst

Okay. And then lastly, given your outstanding CRA rating it strikes me that you're really well positioned to do acquisitions. Is that something that you think is in the cards for Dime in coming quarters? And if so, where and what might you be most focused on in potential partners?

Stuart Lubow, President and CEO

Yes, we are always looking for strategic opportunities that can enhance our franchise value, particularly in the Tri-State metropolitan area. We will consider opportunities as they arise. Additionally, we anticipate significant organic growth with our new teams and the support of capital. If the right opportunities present themselves, considering valuations and our current positioning, we are definitely interested if they make sense.

Avi Reddy, CFO

Thanks Mark.

Operator, Operator

Thank you. And our next question coming from the line of Steve Moss with Raymond James. Your line is now open.

Steve Moss, Analyst

Good morning.

Avi Reddy, CFO

Hi, Steve.

Steve Moss, Analyst

I would like to follow up on the margin guidance. Avi, you mentioned the $1.9 billion fixed rate for the second half of 2025 and 2026. Could you clarify how that is divided between what will mature in the second half of 2025 and the total for 2026?

Avi Reddy, CFO

Yes sure. So the second half of 2025, it's around $600 million at a rate of 4.25% and the remaining piece is in 2026. So it looks like there's $1.3 billion plus or minus in 2026 and the rate on that is around 3.85%.

Steve Moss, Analyst

Okay, great. I appreciate that information. Regarding the current deposit competition, I'm curious about your recent decrease in deposit pricing. Where are your marginal deposits coming from these days?

Avi Reddy, CFO

Yes. It's a mix, Steve. I mean we're starting with client needs to have DDA. If you have DDA we're willing to pay a competitive rate on the money market side. As Stu said, we're tracking account activity. The difference with us is versus a lot of banks in our footprint is there's a lot of new activity coming into the bank and new customers coming in, which helps us be more aggressive on existing customer rates and looking at them one by one. I think I mentioned on our third quarter earnings call, we had a large municipal customer that we were paying a very high rate to and we rationalized the size of that deposit over time, because it didn't make sense for the bank. Same with the broker deposits. So I would say, it's coming in between 2 and 2.5 plus or minus on a blended basis in terms of deposits coming in, because the new groups are bringing in DDA at a rate of around 40%. And if you're paying a money market rate of plus or minus 4% to be competitive you're looking at somewhere between 2 and 2.5 in terms of the marginal cost coming in.

Stuart Lubow, President and CEO

Yes. The overall cost of deposits is currently in the range of 2% to 2.05%.

Steve Moss, Analyst

Right. Okay. Great. No I really appreciate that color there. And then just on credit here, just curious if you could give some color around the charge-offs that occurred this quarter that would be helpful.

Avi Reddy, CFO

Yes, sure. Just it's kind of across the board Steve, there's a mix across C&I, commercial real estate and multifamily, no large credits in there. I think a lot of other banks have said this. I mean it's important to look at charge-offs over an extended period of time. I think our charge-offs for 2024 was 17 basis points or 18 basis points. So all stuff that we've identified. Our classified assets when we report our 10-K will be down. 30 days to 90 days it's pretty flat basically. So not seeing any concerning trends at this point. And so I'll just leave it at that for now.

Steve Moss, Analyst

Okay. Great. Really appreciate the color and nice quarter. Thank you, guys.

Avi Reddy, CFO

Thanks, Steve.

Stuart Lubow, President and CEO

Thanks.

Operator, Operator

Thank you. And our next question coming from the line of Chris O'Connell with KBW. Your line is now open.

Stuart Lubow, President and CEO

Hi, Chris…

Chris O'Connell, Analyst

Good morning. I was curious about the elevated cash position you mentioned at the end of the year, but it seems like the low single-digit loan growth isn't significantly impacting things, particularly in the first half of the year. What is your plan or timeline for deploying that cash?

Avi Reddy, CFO

Yes. Look, I think what we said Chris and we communicated this when we did the equity offering, we've pretty much paid off most of our wholesale funding at this point. The FHLB position is around $500 million to $600 million plus or minus. Of that $500 million is medium to longer-term, which we don't expect to pay off at this point. The broker deposits are probably around $300 million to $400 million plus or minus. So there's not a lot of room to continue to pay off wholesale deposits and borrowings over the course of the year. Q4 was a bit of an anomaly. As I said, we had some municipal deposits come in every year at the end of the year. In addition, we had a couple of large title companies put in deposits then. So the normalized cash position is probably $350 million to $400 million lower than that. Look, I think we're being judicious on securities purchases. We did do a repositioning in the fourth quarter obviously on securities, where we restructured on $400 million. I think look having a little bit more cash is not a bad thing. It helps position the bank to the extent that the Fed doesn't cut rates or the Fed goes in another direction. So I think we're trying to manage our asset sensitivity with the cash position. And over time, we'll put it to work on the loan side. We're not rushing in to do anything all at once. So it does have a little bit of drag on the margin, obviously but, I think we're willing to live with that just given the additional flexibility it provides the bank overtime.

Chris O'Connell, Analyst

Great. It sounds like that might stick around for a little bit. And then, on the loans, just curious, it seems like there's a bigger headwind for the multifamily and CRE repricing and maturities in the second half of 2025, but you guys are indicating that their growth might be more impacted in the first half, just curious on, kind of the dynamics there.

Avi Reddy, CFO

Yes, Chris, this involves managing our balance sheet. We aim to lower the CRE ratio to the low-400s. Currently, we're not at a market rate to retain some of these credits. However, as the year advances and we approach the 400s, we can choose to keep some solid credits in the low-to-mid-sixes on our balance sheet. Once we reach a comfortable CRE level, we’ll have more flexibility to retain certain credits. The volume is higher, but we have the option to hold onto some of these credits. The headwind will mainly affect the first half of this year, but later on, we will be able to retain items and manage the balance sheet accordingly.

Chris O'Connell, Analyst

Okay. Got it. And then just as you guys are moving into the March, April I guess, bonus season for competitor bankers. I know that things are still in flux, but is there any way to quantify perhaps on either a percentage of what you guys have either already added from the prior teams or the size just how big that opportunity is?

Avi Reddy, CFO

I believe it's still a bit early to provide specifics. We have several teams that are very close to committing, with some already on board and others in the final stages of discussion. As we approach March and April, it will become clearer. Some banks have their bonus season ending in January, which could lead to announcements in February. It's going to be a mix, but I expect things will fall into place. This year, the opportunities will be more balanced across both sides of the balance sheet, not just focused on deposits. In previous years, we dedicated 80% to 90% of our effort to deposits, but this time we will likely be more evenly focused on both areas.

Stuart Lubow, President and CEO

I would expect that in the next 30 days to 45 days you'll see a couple of announcements. And then as we get into the end of March, there'll be additional.

Operator, Operator

Thank you. And our next question coming from the line of Manuel Navas with D.A. Davidson. Your line is now open.

Manuel Navas, Analyst

I just wanted…

Avi Reddy, CFO

Hi Manuel.

Manuel Navas, Analyst

Good morning. I wanted to follow up on the discussion regarding customer reactions to the recent Fed rate cuts. Has there been an industry-wide difference in how deposit costs have adjusted for the December cut compared to the November cuts? Have you noticed any significant changes, or is everything mostly as expected at this point?

Avi Reddy, CFO

I think the situation is quite similar, Manuel. From my own experience and our involvement in daily deposit rate changes, customers have certain psychological thresholds. If the rate is at 5%, they expect 5%. If it's at 4%, they want 4%. At a rate of 4.35%, they might accept 4.15%. It's largely about customer psychology depending on their position. We manage our base in a very segmented way, focusing on their balances and the weighted average rate. The ideal scenario for banks is to see gradual cuts of 25 basis points every 90 days. We experienced swings of 100 basis points quite rapidly, which affected customers significantly, but they also benefited during the increases. I believe the best scenario for everyone would be for the Fed to pause and then, perhaps in May or June, cut rates by 25 basis points, allowing us to adjust our rates accordingly. If there are continuous large cuts, some customers may react more strongly. However, as a relationship bank, we've compensated customers during rate increases and have managed to reduce costs during the declines.

Stuart Lubow, President and CEO

We have been very careful during the decline, evaluating individual customers and making rate adjustments, including for municipal clients where we communicated that they should expect full beta during both rising and falling rates. Most banks have acted rationally during this recent cycle, allowing us to maintain our strategy. As Avi mentioned earlier, the fact that we are consistently opening hundreds of new accounts and attracting new customers provides us with greater flexibility. This means we are not compelled to outbid every offer customers receive from other banks. Generally, customers have chosen to stay with us, and we have not experienced significant disintermediation in our deposits regarding rates.

Manuel Navas, Analyst

I appreciate that commentary and it's obviously a relationship business. I don't think I heard and it's probably harder to pin down is how much more deposit growth can you get from the current teams you've had? Is there a thought process on what we should expect on the deposit side across this year? Just, kind of, thoughts on where that deposit growth could go.

Avi Reddy, CFO

Yes. So I think what we've said previously on this is it probably will take every team three to four years to get to some type of steady state and they're continuously opening accounts. Look every quarter we've grown accounts and we've grown deposits. And when we look at the forward pipeline, we think there's additional room. I think it's hard to predict Manuel exactly where they're going to end up. But what we're trying to do is look at accounts and account opening activity and they continue to make progress. Obviously they've built a substantial book. It's $1.8 billion right now. I think over time as our name gets out and our technology platform and some of the things we do for customers gets out they may bring in additional new customers as well not part of their existing book. So I think we're in a good spot. As Stu said our branch-based deposits have stabilized. Our consumer deposits have stabilized and we're looking at other teams as well. So I think we have a long runway on the deposit side in terms of growing that over time.

Stuart Lubow, President and CEO

Well, just to give you an idea if I look at our reports even today we've opened up over 300 accounts and 200 relationships just since December 31st. So that gives you an idea. They're still very active in moving relationships over and developing new relationships. So I still think there's a fairly long runway. But again that's going to happen over time. There are a lot of accounts get open. It takes them several months to fully fund. So there's still upside in terms of the pipeline.

Manuel Navas, Analyst

I love the sense of activity there. If deposit growth comes in better than expected, could that drive stronger loan growth? Like how should we think of those together? And I know that you have a build in the back half of the year and you have a lot of repricing. But just how do those work together in your thought process?

Stuart Lubow, President and CEO

I believe that credit remains credit, and we are always seeking solid loans; however, I don't see deposits significantly influencing the credit side. Our focus is on establishing profitable relationships with reliable credits, particularly in business loans. To some extent, one won't affect the other. Nevertheless, as we continue to expand our commercial and industrial lending and healthcare sectors, along with some forthcoming announcements regarding new teams dedicated to loans, we anticipate that this will effectively utilize the excess liquidity we have.

Avi Reddy, CFO

Yes. So regarding our CRE concentration, we're focused on gradually reducing it to the low 400s, not an aggressive pace but strategic. Also, considering our strong lending practices, we'll continue to prioritize profitable loans regardless of deposit levels.

Manuel Navas, Analyst

That makes a lot of sense. I appreciate that. One last question on the asset side is with the repricing that you're having over the next 3 years, are you still kind of thinking that the loan portfolio ends with multifamily in the 30% range or could there be a wider range of outcomes there? You spoke a little bit about flexibility that you might keep some of those more than you maybe thought if the pricing is right. Just kind of talk through that a bit and where it ends.

Avi Reddy, CFO

Yes. I believe our range is between 25% and 30%. We want to avoid being fixed to a single number. I think that's essentially aimed at the lower 400s. On the investor CRE side, we have established strong relationships and solid deposits in that area. Therefore, I feel that 25% to 30% is likely a reasonable medium to long-term estimate that leads us into the 400s.

Stuart Lubow, President and CEO

Yes, you have to remember I mean the multifamily book has been a very solid book from a credit perspective, but it's the lowest yielding loan asset that we have on the books. It's even at 4.49% which is the average yield on our multifamily book, it's even lower than our adjustable rate mortgage portfolio 1 to 4 family portfolio. So, I mean, so there's a good risk-adjusted asset there, but we also are looking at maximizing returns. So, we think that 25% to 30% is the right place to be. Although in this marketplace obviously, rates have gone up quite a bit on the multifamily side and it's a much more profitable asset than it was several years ago when it was commoditized pricing.

Manuel Navas, Analyst

Thank you, both. Thank you for the commentary.

Avi Reddy, CFO

Thanks, Manuel.

Operator, Operator

Our next question is from Matthew Breese with Stephens Inc. Your line is now open.

Matthew Breese, Analyst

Good morning. Just a few follow-ups for me. I was hoping first you could discuss new loan yields and spreads across C&I and kind of your focus relationship commercial real estate. And then secondly, just discuss payoff activity on the back book and whether or not the slowest pace of payoff activity if anything has changed there?

Stuart Lubow, President and CEO

Sure. Currently, the average rate on the pipeline is 7.75%. The commercial and industrial portfolio has a weighted average rate of about 7.60%, the owner-occupied commercial real estate is around 7.20%, and the health care sector is approximately 7.50%. In our entire pipeline, we only have $9 million in multifamily properties and about $60 million in investor commercial real estate. Therefore, the 7.50% pipeline is primarily influenced by the commercial and industrial owner-occupied commercial real estate and health care sectors.

Avi Reddy, CFO

And then Matt, just on the payoff speeds, look, we track this every single quarter. The multifamily payoff speeds in Q4 were a little higher actually. It was around 10%. The prior quarters we're probably averaging closer to 6% to 7% plus or minus. On the investor CRE, it's probably around 6% to 7%, so the payoff speeds at this point pretty consistent with what the prior quarters were. We did see some elevated payoffs in our business loans at year-end just customers selling businesses just normal activity. That was actually 20% in Q4. That's a bit higher than what we traditionally see, because in that business portfolio, it's probably closer to 8% to 10% because those are just customers that we're retaining over time. So, if we didn't have that 20% payoff in that portfolio in Q4, loans would have ended up closer to $11 billion at the end.

Stuart Lubow, President and CEO

Yes. We had a couple of large customers who sold their companies to private equity firms or whatnot and we did have some payoffs there which were unanticipated.

Matthew Breese, Analyst

One thing from a industry perspective is, a lot of banks are pulling out of commercial real estate similar to you trying to lower CRE concentrations. I was hoping you could talk about what you're seeing on the nonbank side and whether or not they are taking market share and keeping spreads lower than you would normally see.

Stuart Lubow, President and CEO

Yes, we are observing increased activity in the nonbank sector regarding financing commercial real estate and other multifamily opportunities. I believe that, over time and given the current yield curve and interest rates, banks will eventually re-enter the commercial real estate market as they reach their desired levels for CRE ratios. There are profits to be made in this business, and it represents a solid risk-adjusted asset.

Matthew Breese, Analyst

All right. I have two more questions. First, I'm looking for some insight on the rent-regulated multifamily portfolio and the office portfolio, which seem to be the two areas of most concern for everyone. Can you talk about the health of those portfolios? Have there been any changes in the underlying characteristics? Additionally, could you share some thoughts on charge-off activity for next year, if you have any insights?

Avi Reddy, CFO

Sure. Yeah, nothing significant, Matt, on both. Look, we track our classifieds very closely. Like I said in the prepared remarks, classifieds are down. We don't have a lot of maturities in the first half of this year. I think maturities pick up in a stairstep approach starting in the second half of the year. But really not seeing anything. Nobody is really coming in and asking for new deferrals or modifications at this point. Those levels are pretty steady at this point. I think we know what we have. I would just say for the charge-off item, look, it's hard to predict charge-offs over time. I think we've done a good job identifying what loans are substandard. So we know where we have issues over time. In an individual quarter, it may be up or down. It could also be, look, you may reach a decision point on certain credits saying, look, it's better for us to exit these credits at this point, especially as you have third-party investors and non-banks stepping up in those markets. So I'd say we're probably entering the point in the cycle that charge-offs are not going to be 0 basically. I mean, for the full year, our charge-offs were, I think, 17 basis points last year. So a range between 20 and 30 basis points is a reasonable range for a commercial bank, and that's probably where we expect to be for next year. So hopefully, that helps in terms of color, but not really seeing anything out of the ordinary at this point.

Stuart Lubow, President and CEO

In our rent-regulated portfolio, we are distinguishing between assets before and after 2019. The pre-2019 segment is gradually winding down, and all have been repriced. We have no non-performing loans and are actively monitoring the situation through our annual reviews. We have a solid understanding of the debt service coverage and are observing a positive trend in the coverage ratios during these reviews. The impact of inflation seems to have lessened, and rents are gradually rising. Most of our loans in this area are relatively small, averaging around $2.8 million, which allows landlords to manage their properties efficiently and remain profitable.

Matthew Breese, Analyst

Great. And then last one for me. Avi, I was hoping you could discuss deposit growth for 2025 a little bit. Sorry if I missed that. The composition is also important. And so I was hoping you could just touch on how you think non-interest-bearing deposit growth will look next year?

Avi Reddy, CFO

We've noticed a stabilization in consumer deposits at the bank, with about 30% to 35% of our book being consumer-related. In 2022, 2023, and the first half of 2024, we experienced outflows in this area as consumers sought higher rates. This situation has been obscuring some of the business growth we've been seeing. In 2024, business deposits grew by approximately $1.7 billion as our teams began to ramp up efforts. We are seeing new accounts and deposits coming in, and we expect to continue growing our deposit base this year. We have returned to 30% regarding the percentage of demand deposit accounts, and we aim to maintain and potentially increase this level over time. Although it remains challenging to grow demand deposits due to the high interest rate environment, we hope to see a gradual increase in this percentage in the future. The demand deposits coming in have a strong component, so we anticipate stability or growth in this area. Overall, we expect decent deposit growth in 2025, based on the accounts we've opened and the pipelines we are working with.

Matthew Breese, Analyst

Sorry, just last one is, thoughts on deposit betas in 2025.

Avi Reddy, CFO

We have reduced rates on our interest-bearing accounts by about 80 basis points in response to the 100 basis point rate cut. This means we are experiencing an 80% beta on interest-bearing deposits. Considering we have a 30% demand deposit (DDA) ratio, the overall deposit beta is approximately 55%. I believe this will remain consistent if there are further rate cuts. Currently, our average rate on deposits is around 2.05%, reflecting the December rate cut. We have implemented all necessary adjustments for December. Therefore, if we see an additional 25 basis point cut, the response should be similar to our previous adjustments. We do not anticipate any significant changes. However, if the Federal Reserve decides against further cuts, it will become more challenging for banks to lower rates moving forward.

Matthew Breese, Analyst

I appreciate you taking all my questions. Thank you.

Avi Reddy, CFO

Thanks, Matt.

Operator, Operator

Thank you. And I see, we have a follow-up question from Manuel Navas. Your line is open.

Stuart Lubow, President and CEO

Hi, Manuel.

Manuel Navas, Analyst

Hey, did I hear correctly that the total deposit cost at the end of the period is 2.05% in December?

Stuart Lubow, President and CEO

That's current.

Avi Reddy, CFO

That's the current weighted average rate as of January 22.

Manuel Navas, Analyst

That's very helpful. I appreciate that. That's excellent pushout of deposit cost cuts.

Avi Reddy, CFO

Yes.

Operator, Operator

Thank you. And there are no further questions in the queue at this time. I will now turn the call back over to Mr. Stu Lubow for any closing remarks.

Stuart Lubow, President and CEO

Thank you, Olivia, and thank you all for joining us today and thank you to our dedicated employees and our shareholders for their continued support. We look forward to speaking with you all after the first quarter.

Operator, Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and you may now disconnect.