Dime Community Bancshares - Q3 2024

Transcript

Operator (participant)

Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc., Third 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 U.S. 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 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 the U.S. 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.

To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead.

Stuart Lubow (CEO)

Good morning. Thank you, Dee Dee, and thank you all for joining us this morning for our quarterly earnings call. Joining me today is Avi Reddy, our CFO. In the third quarter, Dime continued to execute on our growth plan. The momentum in our business is extremely strong, and in the third quarter, we grew core deposits by over $500 million and the business loan portfolio by $125 million.

As a result of strong growth in core deposits and a four basis points reduction in the cost of total deposits, the net interest margin increased to 250 basis points. To put things in perspective, our margin for the first quarter of 2024 was 221 basis points, implying a 29 basis points improvement through the third quarter.

As we outlined in our press release, since the Federal Reserve reduced Fed funds rate by 50 basis points in mid-September, the spread between loans and core deposits has increased by approximately 15 basis points, and this will contribute to continued NIM expansion in the fourth quarter. Avi will provide more detail on his remarks, but suffice to say, we have a clear line of returning to a 3% plus net interest margin.

In summary, the improvement in NIM to date and our expectations for forward NIM significantly increases Dime's earnings power. Cash and non-interest expense levels increased on a linked quarter basis to $57.4 million. Our expectation is to keep expense levels relatively flat in the fourth quarter and into 2025, as we are working on a number of efficiency optimization initiatives.

Business loans were up approximately $125 million in the quarter, and we continue to see a very strong pipeline in our middle market, C&I and healthcare lending verticals. The weighted average rate on new business loans originations for the third quarter was approximately 8%. We expect to end the year with approximately $11 billion of total gross loans. Asset quality continues to remain solid, and net charge-offs remain well contained at only 15 basis points. While NPAs ticked up off a very low starting base, we expect to report in our 10-Q that criticized and classified assets are flat on a linked quarter basis, and early-stage 30-89 day delinquencies are down 28% on a linked quarter basis.

Our capital ratios continue to build, and as of September 30th, our total capital was 14.8%, and our Common Equity Tier One ratio was 10.2%. As we have mentioned before, in this environment, accreting capital is important as it speaks to Dime's strength and our ability to service our growing customer base. In that vein, in the third quarter, we built our loan loss reserve by approximately 9% or six basis points.

As I mentioned during our last earnings call, over the course of the next 9-12 months, as we evolve our business model and portfolio towards business loans, and with our strong pipeline of C&I and healthcare loans, we expect to operate with a reserve level in a 90 basis point to 1% area.

Finally, I'd like to conclude by touching on three things that are key to Dime's story going forward. The first is disruption. In our local marketplace, the disruption. As you know, Dime has been highly successful in attracting teams of deposit gatherers and lenders, and the growth in core deposits and business loans to date is a validation of our efforts.

The disruption levels in our market continue to be at all-time high, and we are actively building our recruiting pipeline for 2025. Given we are close to year-end, we don't expect to make any announcements until 2025, but suffice to say, we are spending a fair bit of time interviewing candidates that fit well with the Dime culture and business model. Second topic is declining rates.

While we have been pleased with the NIM trajectory over the course of this year, the expansion we have seen thus far has not been driven by lower interest rates. This should change starting in the fourth quarter as the full impact of the 50 basis point cut will manifest. Given the forward curve, we are more confident than ever that returning to historical profit, historical profitability levels is to be seen in the near term.

Finally, growth in DDA. Our DDA levels are now back to almost 30% of deposits, and we believe the value of this DDA base will shine through in the current rate environment. In conclusion, I'm looking forward to ending this year strong and want to thank all our dedicated employees for their efforts in positioning Dime as the best business bank in New York. With that, I will turn the call over to Avi.

Avinash Reddy (CFO)

Thank you, Stu. Reported EPS was $0.29 per share. We saw a meaningful expansion in the NIM this quarter. As you will recall, the second quarter NIM included a recovery of interest income of four basis points. In addition, the second quarter did not have the impact of the cost of the sub debt issuance. Adjusting the second quarter for these two items on a like-for-like basis, NIM expansion for the third quarter was around 17 basis points.

The NIM expansion was driven largely by strong growth in core deposits. Non-interest income for the third quarter was $7.6 million. As you'll recall, the second quarter non-interest income included a non-recurring branch sale gain. Swap fee revenue was lower in the third quarter.

Given the uncertainty with the Federal Reserve's rate-cutting decisions this year, we have found that customers are being more patient and taking more time to engage in swap transactions till they have more certainty on the rate outlook. As such, we expect the swap line item to rebound in 2025, with Q3 marking a low point for swap revenue.

Core cash operating expenses for the third quarter, excluding intangible amortization, was $57.4 million. This was in line with our guidance for the third quarter core cash expenses being in the $57 million area. For the fourth quarter, we expect core cash operating expenses to be between $57.5 million and $58 million, and as Stu mentioned, we expect to hold the Q4 run rate steady into 2025.

We'll be providing more color on this during our earnings call in January 2025, as we're currently working through our year-end budgeting processes. We had $11.6 million loan loss provision this quarter, which was higher than prior quarters. During the third quarter, we made several enhancements to our CECL model, centering primarily around updating peer group loss history data as well as prepayment speeds.

These model enhancements contributed approximately $4.5 million to the provision for the quarter. Excluding the model enhancements that I just noted, the loan loss provision would have been closer to $7 million. As Stu mentioned in his prepared remarks, over the next 9 to 12 months, we expect to gradually build a reserve as our business model evolves, and we expect to operate with a reserve in the 90 basis points to 1% area in the medium term.

Next, I'll provide some thoughts on the NIM trajectory. As we outlined in the earnings release, when analyzing the weighted average rate on loans and core deposits in the 30-day period after the Fed cut rates, the spread between these two items has increased by approximately 15 basis points. Accounting for the cash on our balance sheet, which of course, has 100% beta, and the fact that the borrowing portfolio is largely termed out, we expect this core spread improvement between loans and core deposits to translate into a 10-12 basis point run rate NIM improvement for the fourth quarter.

Assuming the behavior in deposits and loans holds for each subsequent rate cut and competition remains rational, we could see a five to six basis point increase in the NIM for every subsequent 25 basis point rate cut once the full impact of each rate cut flows through the entire balance sheet.

Said differently, all else equals, starting with the 250 NIM, adding the impact of the rate cut that has already taken place, and assuming another 225 basis point rate cuts in the fourth quarter, the exit run rate NIM at the end of the fourth quarter could be in the 270 area. Given the potential for rate cuts in 2025, we see additional NIM expansion in the first half of 2025 as well.

Finally, and as mentioned on our previous earning call, we have a significant back book loan repricing opportunity in our adjustable and fixed-rate loan portfolios that is expected to kick in, in the second half of 2025 and 2026.

To give you a sense of this back book repricing opportunity in the second half of 2025 and 2026, we have $1.9 billion of adjustable and fixed-rate loans across the loan portfolio at a weighted average rate of 3.90% that either reprices or matures in that time frame. Even assuming only 150 basis points spread on those loans over the forward five-year Treasury, we should see a substantial 25 basis point increase in NIM as these loans reset to higher rates.

Assuming a 225 basis point spread on those loans over the forward five-year Treasury, we could see a 35 basis point increase in NIM from the back book repricing. In summary, as you put all these parts together, we see a pathway to a 3% NIM in 2025 and a NIM greater than 3.25% in 2026. The impact of this enhanced NIM will no doubt increase our earnings power as time progresses. With that, I'll turn the call back to Stu, and we'll be happy to take your questions.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster.

Our first question comes from Steve Moss of Raymond James.

Stephen Moss (Analyst)

Good morning, guys.

Stuart Lubow (CEO)

Hey, Steve.

Avinash Reddy (CFO)

Hey, Steve, good morning.

Stephen Moss (Analyst)

I want to start up on just on the deposit side. You know, appreciate all the color you gave on the margin expansion, but you guys showed, you know, really good growth here on the core deposits. Curious to see, you know, how you're thinking about those trends going forward, the upcoming quarter, maybe into the year, just as, you know, you continue to remix and any incremental color you could give there.

Avinash Reddy (CFO)

Yeah, yeah, sure, Steve. I'll start off, and I think Stu will chip in after. Look, we, you know, very excited with the, you know, hires we made over the last year and a half on the deposit side. They're up to around $1.5 billion of deposits, so this is in the private and commercial bank. Around 35%-37% of that is DDA. You know, we look at the, you know, account opening activity on a biweekly basis. We continue to see a lot of traction, you know, over there. You know, if you look at the teams that we brought on, they're, you know, the first set of teams from 2023 have been at the bank, you know, barely a year at this point.

The teams this year have been here, you know, less than six months. It's probably gonna take, you know, three to four years for, you know, each of those teams to reach, you know, a steady state. So we think there's significant, you know, runway for them over time. It's kind of hard to predict on a quarterly basis, you know, what's gonna happen.

But you know, they're bringing on new accounts, new deposits, you know, literally on a weekly basis. I will say what we've tried to do so far with the deposit growth that's come in is really to remix the balance sheet a little bit, where we've. You know, the first step was, you know, paying off the FHLB position.

So we had a you know $1.1 billion of overnight FHLB. We don't have any overnight FHLB anymore at this point. Everything's termed out. We had around you know 7%-8% of our balance sheet in broker deposits. We brought that down to around 5% at this point.

So far it's been a bit of a mix shift. I think as you know deposit growth you know continues you'll probably see some expansion in the balance sheet overall over time. The other thing I'd say is we don't have a large amount of time deposits on the balance sheet. There's a little bit on the broker side you know it's probably around $500 million plus or minus. That obviously has a 100% beta.

But, but absent that, you know, our core customer base is more money markets and DDA. So, you know, obviously, on the money market side, we're able to pass on rate decreases to them significantly, and we don't have to wait, you know, till those, you know, time deposits reprice because the complexion of our base is more on the money market side.

So I think, you know, all in, you know, this was a good quarter for deposits. I think, you know, we'll continue to have good years in the years ahead with what we had. And as Stu said, we're working on, you know, a pipeline of, you know, hires for next year, focused on both the deposit and loan side. So I think over time, you know, we'd like to create an environment here where we continue to grow the deposit base like we have.

Stuart Lubow (CEO)

Yeah, I mean, you know, typically, the fourth quarter is a little slower in terms of transitioning accounts and moving funds from bank to bank as customers get to year-end, but we are still seeing a lot of positive flows in terms of new accounts and new relationships coming on, but I don't think we're gonna get the entire relationship, you know, at this point. We're getting pieces of it until the first quarter, simply because of, you know, just the operating environment for a business moving all their accounts in the fourth quarter.

Avinash Reddy (CFO)

Yeah, and Steve, just one more point just to highlight on the composition of the deposit base. I mean, if we look at it on a year-to-date basis, our business deposits are up a billion and three, basically. So we started the year at around $4 billion of business deposits. We're at $5.3 billion right now. The consumer deposit side, you know, it's stayed pretty stable, you know, $3.4 billion to start the year, around $3.4 billion now. At the start of the year, we were seeing some outflows still on the consumer side, you know, especially as rates, you know, went higher. Starting to see trends in that stabilize.

And on the municipal side, you know, for example, this quarter, we used some of the, you know, core deposits that were coming in, to exit a small municipal relationship that we had that had a higher cost. And so, you know, on the margin, I think, you know, very happy with the business side of it, and, you know, that's our goal is to be the best business bank in New York, and I think that's the focus, and, that's where we're growing over time.

Stephen Moss (Analyst)

Okay, great. I really appreciate all the color there. And then just one clarification, just staying with the margin subject. Avi, you mentioned the 1.9 billion back book. That's from the second half of 2025 through 2026?

Avinash Reddy (CFO)

Yes, so that's that 18-month window, Steve.

Stephen Moss (Analyst)

Okay.

Avinash Reddy (CFO)

You know, the way we've tried to lay this out is in layers, like we did on our last call. Really, you know, between now and June of next year, you know, given the forward curve and given your rate cuts are baked in, you know, for every 25 basis points, we've tried to give a high level construct of the 5-6 basis points. Now, in addition to that, you know, we're obviously originating loans at a higher rate than the existing portfolio, so that should help a little bit too, between now and then.

But, you know, once the rate cuts, let's just say, stop, you know, middle half of next year, we just wanted to give you the guidance that there's an additional opportunity over those eighteen months, just given the fact that there's fixed rate loans that are repricing higher.

Stuart Lubow (CEO)

Yeah. And then getting back to the pipeline, we have about $1 billion, $959 million in the pipeline at a weighted average rate of 7.9%. And it's really focused on, you know, in the areas of, C&I has approximately $300 million, healthcare about approximately $260 million, and owner-occupied CRE is approximately $181 million.

All those, you know, we expect, you know, these are loans that are going through the process, some of which are gonna be closing this quarter. I mean, to date, you know, we've had a substantial origination so far in October. And, as I said, we expect to be over $11 billion by the end of the year. But those originations will accrue to our benefit with those type of weighted average rates, you know, in the 7.90 range.

Stephen Moss (Analyst)

Okay, great. That's really helpful color. And then just in terms of credit here, just curious if you could give some color around the, you know, agency loan or loans that went, were placed on non-accrual status, and I know it was a small uptick, but just on the business as well.

Avinash Reddy (CFO)

Yeah. Yeah, sure. No worries, Steve. I mean, like you said, you know, we're starting off a really low base here. And so on the C&I side, you had a legacy East End line of credit. You know, don't really expect any additional provisioning on that loan. You know, something as part of the Bridge franchise, you know, on the East End.

On the CRE side, actually, this loan was on the CRE side, was actually paying through September 30th. But there, you know, unfortunately, seems to be a dispute between the two partners, and there's a maturity on that loan in November. So given the dispute, you know, we believe it was prudent to move that loan into NPA.

You know, we believe it was secured on it, have a personal guarantee on it. It was a previously identified criticized loan. So, you know, a couple of, you know, small items here. You know, not really seeing any trends in the overall portfolio. And you know, like we pointed out in the prepared remarks, you know, criticized and classified flat overall. Net charge-offs have remained pretty stable. Not really seeing anything in the 30-90/90 bucket. It's actually down 28%. So overall, pretty steady, you know, couple of small items here. We continue to have no issues in the multifamily portfolio.

Stephen Moss (Analyst)

Right. And maybe just kind of on the multifamily portfolio. Just, you know, I'm assuming a good chunk of the back book reprice is multifamily, but just kind of curious if you think that pace of pay downs and runoff maybe accelerates here as we go through the next, you know, 12-24 months.

Stuart Lubow (CEO)

Yeah, I think you're gonna see that, you know, after several more rate cuts, and you'll start to see some activity in that regard. I mean, obviously, you know, with our portfolio not having any more real maturities or repricing in the near term, it's gonna be probably toward the latter part of 2025 that you really see a pickup, which will dovetail with the, you know, not only maturities and repricing, but also the rate reductions in terms of Fed funds will work together. And I think at that point, you'll see an acceleration in prepayments.

Stephen Moss (Analyst)

Okay, excellent. Well, I really appreciate all the color and the good outlook here, so I'll step back into the queue.

Avinash Reddy (CFO)

Thanks, Steve.

Stuart Lubow (CEO)

Thanks, Steve.

Operator (participant)

Thank you. Our next question comes from Manuel Navas of D.A. Davidson. Your line is open.

Manuel Navas (Analyst)

Hey, good morning. One quick clarification. Did you say loan growth by the end of the year at a certain level? I just, I think I just missed that number.

Avinash Reddy (CFO)

Yeah. Yeah. So, what Stu said, Manuel, was, you know, expect to be approximately $11 billion in total gross loans. So this quarter, I think we were $10.8885 billion or $10.875 billion. So I'd probably assume another $125 million of net loan growth in between Q3 and Q4.

Manuel Navas (Analyst)

How, how is kind of rate cuts driving the pipeline? I mean, it seems strong. Like, how's borrower sentiment and kind of borrower sentiment headed into next year? I know you're- it's too early to budget next year, but how do you feel like loan growth should be impacted by borrower sentiment at current levels?

Stuart Lubow (CEO)

Yeah, I mean, at this point, and particularly because of the type of lending, you know, we're really focusing on, which is the C&I, owner-occupied CRE, and healthcare, we're seeing quite a bit of activity and interest. So, you know, and I do think that the rate environment, you know, helps that along. So, we have a very strong pipeline and a constant flow of new deals that we're looking at. Of course, we're being, you know, somewhat conservative and picky, as we always are. But I think there's a lot more activity than there was, say, you know, six months ago.

Manuel Navas (Analyst)

I appreciate that. Shifting over to provision expense and kind of the thought process behind the pace of getting to that 90-100 basis point level of reserves. How should I think about that over the next five to six quarters? Are you gonna get halfway there by year-end or maybe get there by the end of next year? Just thoughts on that.

Avinash Reddy (CFO)

Yeah, Manuel, so I think Stu said in his prepared remarks, right, the goal over the, you know, next 9-12 months. It, it's hard to see, you know, two years down the road. So, you know, over the next 9-12 months, you know, we expect to be in the 90 basis points to 1-1% area. Look, I'm just gonna use round math here. I mean, assuming the level of charge-off stays pretty constant, I mean, this quarter, we're around $4 million bucks.

You know, again, using round numbers, if we're between $9 million-$10 million on a provision, that basically means a, you know, five to six basis point build per quarter. So, you know, we're at 78 basis points right now. So within, you know, three to four quarters, you probably end up there.

It's kind of hard to predict, but you know, I think you know, as we you know, evolve the business model, as Stu said, you know, it's a natural progression you know, for our reserves over time. You know, that's kind of the current expectation.

You know, I'd just like to reiterate you know, as I said in the prepared remarks, in this quarter, we're around $4.5 million of the provision increase was solely tied to a model update that was tied to you know, prepayment speeds in the overall market and peer group you know, loss history data. Didn't really have anything to do with Dime's credit quality, so you know, we'll see what the quarters ahead bring, but I think that's probably a reasonable expectation going forward.

Stuart Lubow (CEO)

Yeah, and we're in the midst of, you know, working on our budgets as we get into the, you know, this last quarter, and, you know, looking at our growth scenarios in terms of the loan origination side. And as I said, with the skewed, with this, you know, the origination skewed toward business loans, you know, as I said last quarter, you know, there's obviously a natural progression that's gonna occur, so in terms of the loan loss provision as well.

Manuel Navas (Analyst)

That's really helpful. Thank you. I'll step back into the queue.

Operator (participant)

Thank you. Our next question comes from Mark Fitzgibbon of Piper Sandler. Your line is open.

Mark Fitzgibbon (Analyst)

Hey, guys. Good morning.

Avinash Reddy (CFO)

Hey, Mark, good morning.

Stuart Lubow (CEO)

Hey, Mark, how are you?

Mark Fitzgibbon (Analyst)

Good. Just to clarify, on that $20 million increase in non-performers, that was a partnership dispute. There's no specific reserve or anything against it. You feel like you'll come out of that hole once the partnership situation resolves?

Avinash Reddy (CFO)

Yeah, correct. Correct, Mark.

Mark Fitzgibbon (Analyst)

Okay, great. And then secondly, the CRE to risk-based capital ratio is kind of. It's come down nicely. I think you're at 487 now. You know, do you have a target in mind for that? And how long does it take you to get there?

Avinash Reddy (CFO)

Yeah, Mark, so I think, you know, we'd, you know, what's happening right now is the payoffs on the multifamily increase side have not picked up yet, right? So we're running with a, you know, 6%-7%, you know, payoff speed. But, you know, as Stu said, you know, as rates change, you know, and a few more rate cuts, you could see that start picking up. I mean, what we've consistently said is, you know, we'd like to be in the low 400s, you know, plus or minus. It's just natural evolution of the portfolio, you know, especially as we put on, you know, more business loans.

I'd say, you know, over the course of the next, you know, 12 months, you know, operating in the low 400s is a, you know, target ahead of us. We're gonna get there gradually. You know, we have a plan. We obviously did the sub debt issuance in June, which, you know, helped us get below that optically, you know, bond number of 500%. So I'd say over 12 months, low 400s is probably a good marker for us.

Mark Fitzgibbon (Analyst)

Okay, great. And then I heard your comments about, you know, hiring in teams and some of the expensing issues, but, you know, it sounds like you're still looking, you know, you're interviewing people, and I guess I wonder how realistic is it that you're gonna be able to hold costs flat for the next couple quarters if you continue to hire people? You know, what are some of the areas where there's opportunity to offset that?

Avinash Reddy (CFO)

Yeah. So the next couple of quarters, Mark, nobody's really moving in Q4, as you said, because we're pretty close to bonus time. So really, you know, to bring on somebody, it's more like an April first thing at this point, because people get paid in February and March. So I guess directly to answer the next couple of quarters, and we tried to put this in the press release, like, everything is fully loaded, you know, in here in the run rate.

I mean, obviously, with the teams we brought on this year, you know, we added people to our treasury management side, our operations side. So all that's fully there in the numbers right now. I'd say if there's an opportunity next year, you know, to add a substantial amount of teams, we'll do it, and the teams will pay for themselves, very quick.

So, you know, the guidance for, you know, keeping it flat next year is assuming the team right now stays, you know, consistent with what we have. I think, look, we've always been, you know, very efficient, but we continue to look at, you know, areas for savings across the bank. I think, you know, when, as Stu said, we're finishing our budget process right now, so when we get into next year, we'll probably have more details on the exact initiatives. But I think for modeling purposes, what I would assume is, assuming the current team over here, you know, our goal is to keep expenses, you know, relatively flat within that $57 million-$58 million area for Q4, keep that flat into 2025.

Obviously, if we hire more teams, you know, and add to the expense base off that, we need to look at additional savings over that, but then that's gonna come with, you know, additional NIM expansion. And the teams we've hired so far, they've basically paid for themselves within six months. So I think, you know, that that'll be a cherry on the top as we get to that point next year.

Mark Fitzgibbon (Analyst)

Okay. And then I guess I was curious, Stu, on your, you know, how are you thinking about potentially doing acquisitions? And if you are interested in doing acquisitions, you know, what kinds of things would you be looking for in potential partners?

Stuart Lubow (CEO)

Look, I mean, you know, to some degree, we did an acquisition, you know, last year without really doing an acquisition, right? Growing $1.5 billion in new deposits and new relationships is significant. I would venture to say there are not a lot of institutions that could say that, you know, they had that kind of growth, particularly in core deposits. Look, you know, we've always been very conservative and looked at opportunities that make sense, you know, for the institution, for the franchise, and for the franchise value on our shareholders. Look, you know, there are not a lot of potential candidates within our footprint.

And certainly, we're open to looking, but, you know, really, we're focusing more on organic growth, particularly after last year's success or this year's success, in terms of the new teams we brought on board. We think there's still quite a bit of runway still to be had there.

Mark Fitzgibbon (Analyst)

So acquisitions are not sort of a priority one?

Avinash Reddy (CFO)

No, I mean, I think, Mark, you know, if you look at our footprint, there's a very limited amount of banks out there that make sense. Obviously, what Dime is known for is having a, you know, great deposit base. You know, obviously, that's front and center of everybody's point of view. There's very few candidates that probably meet that, and, you know, all the stars need to align.

So I think we're spending our time on interviewing people from the bigger banks that have been disrupted. As you know, there's, you know, another merger in the market, you know, a couple months back. So the talent acquisition opportunity is significant at this point, and the full bank, you know, opportunity, I mean, that just, you know, a lot of things have to go right for that to happen. So I'd say, you know, our focus is really on the former.

Stuart Lubow (CEO)

Yeah. I mean, suffice to say, Mark, and you guys have known us for a long time, I mean, we're always looking to maximize shareholder value. So if there's an opportunity out there, you know, we're certainly gonna explore it, but it's got to be the right deal for us.

Mark Fitzgibbon (Analyst)

Thank you.

Operator (participant)

Thank you.

Avinash Reddy (CFO)

Thanks.

Operator (participant)

Our next question comes from Matthew Breese of Stephens Inc. Your line is open.

Matthew Breese (Analyst)

Good morning, everybody.

Stuart Lubow (CEO)

Hey, Matt.

Avinash Reddy (CFO)

Hey, Matt.

Matthew Breese (Analyst)

Avi and Stu, I appreciate very much the NIM outlook. I was hoping you could talk a little bit about behind the NIM outlook, just expectations around deposit betas and loan betas, call it, over the next year. And then could you remind us of what percentage of loans are kind of fit into pure floating rate, you know, priced off on SOFR or prime?

Avinash Reddy (CFO)

Okay, sure. So Matt, I'll start off, and Stu will chip in. So I mean, we'll start with the deposit side of the balance sheet. Now, I'll give you some weighted average rates, Matt, so you can kind of extrapolate from that. So it's so June 30th, our spot cost of total deposits was 2.69%. At September 30th, the spot cost of total deposits was 2.39%.

And so this quarter was a little weird because, you know, the Fed cut happened on, you know, September 17th. So the cost of deposits for this quarter was 2.65%, so it's only four basis points below, you know, the June 30th number. But the way we looked at it is, like, let's look at it one day before the Fed cut to, you know, 30 days afterwards.

So on the deposit side, that's basically been, you know, a significant decline from, you know, probably around, you know, 30 basis points, plus or minus, on the deposit side. So if we sit here today, the cost of deposits is closer to 2.35. So I think if you think about, think about it, you know, we started at, you know, 2.65. We're basically at, you know, 2.35 at this point.

That's 30 basis points for a 50 basis point rate cut. You're talking about a 55%-60% total deposit beta. The interest-bearing piece of that is obviously higher because we have a higher proportion of non-interest-bearing deposits, right? Now, obviously, you know, we've tried to, you know, get passed through the whole 50 basis points to everybody.

You know, you're gonna have some customers come back and, you know, you know, make us change a rate here and there. So I think we've got to have a little bit more time to, you know, comment on, you know, where we think we're gonna be way down the road. But it seems like at least the first 30 days of experience has been, you know, around 55% total deposit beta. On the, on the loan side, you know, the loan rates have come down around 10-11 basis points, plus or minus. So I, I think it's, it's closer to the 20-25% area on the loan side. And that's assuming a static, you know, loan balance sheet.

The difference on the loan side is, as Stu said, as we're putting on more loans, you should get around, you know, three to four basis points per quarter. Assuming we have $200 million of originations every quarter, you should see three to four basis points of benefit from that, which is gonna offset any, you know, pure reprice. But I'd say 20%-25% on the loan side and probably around 55% on the deposit side at this point is what we're seeing.

Matthew Breese (Analyst)

I appreciate all that. And then just what is the percentage of pure floating rate loans that are priced off SOFR prime?

Avinash Reddy (CFO)

Yeah, sure. I believe that number is around 35%, plus or minus, but that includes a portfolio layer hedge that we have, was around $500 million. So excluding the portfolio layer hedge, it's probably closer to 27%-28%. And then with the portfolio layer hedge, it's probably at 35%. So 35% all in is probably a reasonable number.

Matthew Breese (Analyst)

Got it. Okay.

Avinash Reddy (CFO)

SOFR, right. Yep, yep.

Matthew Breese (Analyst)

Yep. And then within deposits, you know, could you just comment on the areas where you've had the most success, kind of achieving that, call it 55%-60% deposit betas? I would assume it's on some of the higher priced savings and money market, maybe perhaps some of the new business customers. But, you know, you tell me.

Stuart Lubow (CEO)

Yeah. I mean, we really spent a good deal of time in anticipation of the rate cut and, you know, really put everything into buckets and went through all our high rate customers and worked our way down. I would say with a very few exceptions, we really were able to go to the full level of the cut on, you know, the vast majority, and we, you know, we haven't gotten a huge pushback at this point either, but we were really able to move the money market, high rate savings customers, and certainly the business and municipal customers very quickly. That's obviously accrues to our benefit, and you see that in the numbers.

Avinash Reddy (CFO)

Yeah. So two things I'd point out, Matt, that's I don't use the word unique to our customer base, but maybe slightly different than, you know, some other banks. One, we don't have a lot of time deposits on the balance sheet, and some of the time deposits that we do have are brokered, and obviously, the brokered stuff's gonna reprice 100%. The other piece is, you know, we have a $2 billion municipal portfolio, which was 100% beta on the way up. So on the way down, we've kind of conditioned them to the fact that it's gonna be 100% beta on the way down.

I think the other benefit that we have, and I think this is circling back to, I think, Steve's question earlier on deposit growth is, look, we have a source of growing deposits with the new groups that we've hired. You know, there are some cases where, you know, we're not paying the highest rate and, you know, you know, it's really, you know, DDA focused, and it's money market focused.

But, where I'm going with that is because we have new deposits coming in, we have the opportunity to say, you know, no to some existing customers that want the highest rates. An example is, you know, we had a municipal relationship, that you know had a sizable amount of deposits with us.

It was a high rate deposit, and we went back to them in the third quarter and said, "Look, we can't pay you this rate." And so they reduced the size of their overall portfolio with us, but what that meant is NIM expansion there. So I think, you know, that should give you a sense that there's enough in the portfolio to reprice down, but there's also stuff coming in at a lower rate that's helping us be very aggressive, on the way down.

Matthew Breese (Analyst)

Very much appreciated. Thank you, and then my next one, if just looking at the C&I portfolio, how much, if any, of the growth is coming from, you know, Shared National Credits or syndicated credits? And could you provide how much, within C&I, you know, fits into, call it, a Shared National Credit or syndicated type bucket?

Stuart Lubow (CEO)

At this point, we don't have any SNCs.

Matthew Breese (Analyst)

So, you know, we really have not been in that marketplace.

Avinash Reddy (CFO)

Yeah, Matt, everything, you know, we-

Stuart Lubow (CEO)

Actually, I'll take that back, Matt. We have one. It's $15 million, and it's for a sports arena.

Avinash Reddy (CFO)

Yeah, and so, I mean, typically, the way we originate stuff, Matt, is, you know, there's a relationship. You know, a lot of times there's club deals with us and, you know, you know, other banks on the C&I side, especially in the middle market space. You know, we try to manage our exposures and keep them within a reasonable level. So, you know, sometimes there are, you know, multiple banks involved you know, on the C&I middle market side. But, you know, we're not buying participations from anybody on the C&I side.

Matthew Breese (Analyst)

Great. I will leave it there. Thank you so much for taking my questions.

Avinash Reddy (CFO)

Thanks.

Operator (participant)

Thank you. Our next question comes from Christopher O'Connell, CFA of Keefe, Bruyette & Woods. Your line is open.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Hey, good morning.

Stuart Lubow (CEO)

Hey, Chris.

Avinash Reddy (CFO)

Hey, Chris. Good morning.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

So I was hoping just to, you know, circle back to the, you know, reserve commentary and just, you know, logistically between, you know, now and the next 9-12 months, you know, moving up to the 90-100 basis point level, you know, what are the actual kind of like internal drivers, you know, in the model, you know, that will kind of drive that increase?

Avinash Reddy (CFO)

Chris, I mean, the CECL model is a fairly complicated model. It's, there's no one or two drivers within the model. I'm just being candid, right? So, so this particular quarter, for example, you know, we updated our prepayment speeds, you know, we updated peer group loss history data as the data was coming in.

I think, you know, something that's gonna drive it going forward is the shift in, you know, loans, right? And so as we have more C&I loans, as we have more healthcare loans, as that becomes, you know, a greater percentage of our overall loan portfolio, it's something we're gonna look at, right? And the reserving level on the C&I side is higher than the reserving level on the rest of the portfolio, right? So it's a combination of items.

You know, it's hard to pinpoint, you know, one specific item in the model. What I tried to do upfront is, you know, if assuming all else is equal, and we have $4 million of charge-off levels, which has been what we've had the last couple of quarters, and the reserving level is between 9 and 10, you're gonna see 5-6 basis points out of that, right? You know, given, you know, tweaks we can make to the model and given the shift in the portfolio mix. It's a fairly complicated model. I mean, there's quantitative factors, qualitative factors involved, but I think, you know, in general, we're just trying to give you a good sense of, you know, what's going on down the road.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Thanks, Avi. I guess cutting out a different way, what are the, like, the business loan as a whole, I guess, on a average basis, you know, under you know, this new model, you know, kind of, you know, being reserved at? Is it, is it at a level that's, you know, a bit above that or at the high end of that 90-100 basis points, or is it above that?

Avinash Reddy (CFO)

Yeah. I mean, in general, you know, we're probably reserving on, you know, on C&I loans of around, you know, somewhere between 130 and 150, plus or minus. So, it is above the overall reserve. So you're right, yes. The short answer is, it's above the overall reserve level. Yes.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Great. And then just, you know, on the margin dynamics, going forward, you know, what's the, you know, any, any color on either the, the duration or the, you know, current maturity schedule, for the CD portfolio?

Avinash Reddy (CFO)

Yeah. So on the CD portfolio, the way I think about it, Chris, is really two distinct buckets, right? The first bucket is really, you know, the brokered CD bucket. And the brokered CD bucket, that's pretty short term. That's basically every three months, you know, the CDs reprice over there. So that's kind of 100% beta short term.

Now, you know, that spread improvement of the 15 basis points that I talked about, that does not include the benefit of the brokered, because the broker is generally over three months. So we're gonna have that benefit probably by December 31st, if we did broker, you know, around September, right?

In terms of non-brokered deposits, we have around $275 million in Q4 here at a rate of around 4%. Then next year, we have around $400 million at a rate of 3.70%. So in total, if you add up, you know, over the course of the next, you know, several quarters, you know, it's really $275 million for this quarter, and then for next year, it's around $450 million. So it's probably $125 million per quarter for next year. Now, obviously, with the CDs, there's a lag. CD needs to mature. You know, sometimes you're not passing on the full, you know, downward beta to the CD.

You know, you probably, you know, rates around 50 basis points, probably gonna drop CD rates around 35 basis points, and then there's some attrition there, and then you need to raise new deposits. So I think more of the NIM benefit is gonna come from, and is coming from the money markets and savings side. The CDs are probably a longer-term play. That being said, the brokered CDs are gonna be, you know, pretty much an immediate thing with a three-month lag.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Great. And then, you know, I mean, it sounds like, you know, the pipelines are, you know, just as good as they've been kind of going into the end of the year here, and appreciate, you know, the update on loan growth into Q4. You know, as you guys are getting, you know, into next year, you know, loosely, is that kind of how you think that will be, you know, the start to the year on net loan growth?

And then, you know, as the multifamily, you know, maturities, you know, start to ramp up in the second half of the year, how are you thinking about kind of, you know, net loan growth, you know, I guess, you know, as that ramps up in the second half of 2025?

Avinash Reddy (CFO)

Yeah, look, I think we're putting most of our budgeting pieces in place. I know you're trying to get to 2025 guidance, which, you know, I hate to say, we typically always give that in the January earnings call because we're going through stuff. But I think just holistically, some of it's gonna depend on the payoff rate on the multifamily increase side and what we decide to do with that, right? So, you know, for example, if loans are at 4%, we may choose to retain some of them at 5.50% or 6%, or we may, you know, choose to let them go, right? So I think it starts with that.

I think what we've tried to say is that, you know, on the multifamily side, you know, we'd like that percentage over time to come down to, you know, between 25% and 30%. Right now, we're at 37%, right? So in terms of constructing the optimal balance sheet, we'd like that to be between 25% and 30%. I think on the business side, what you've seen so far is, you know, call it between $125 million-$200 million of loan growth, you know, every quarter, at least for the last couple of quarters. It seems like that's kind of the run rate that we're headed down.

So I think if we choose to retain more of the multifamily in the CRE side, then you would see, you know, a higher growth in the balance sheet next year. If those loans do go away, Chris, then maybe it's a bit more of a portfolio remix at that point in time. I think the second half of this year, we had guided to low double-digit growth.

I think that's as reasonable an assumption for the overall balance sheet for next year at this point in time. That being said, you know, I think we have an opportunity to hire teams on both the deposit and loan side, and so that could change the guidance as we get into next year, right? Because, you know, as new teams come on, you know, there could be a significant pipeline there.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Great. And then last one for me, just, you know, as, as far as the new teams that have, you know, been coming on and, and, you know, generating the deposits, has the mix of those deposits in terms of, you know, DDA interest-bearing deposits been, you know, as good, you know, either, you know, better or worse than you guys, kind of originally expected?

Avinash Reddy (CFO)

Yeah, I think overall, exactly in line. Like I said, we're probably between 35% and 40% DDA right now. It's a mix. I think when we initially did the modeling, when we hired all the teams, our goal was to be profitable within a year, you know, for all the teams. Keep a relatively short, you know, payback period.

So we had various assumptions on that, and we focused on the groups that had a higher percentage of DDA to start with, and it's obviously hard moving DDA over. Now, I think we've been positively surprised by the mix as well as the total deposits that have come in so far. And as I said, you know, within six months, you know, we're basically profitable in all the teams.

I think, you know, you know, over the medium and longer term, you know, 35%-40% is a reasonable, you know, estimate for the type of production we should see from them going forward. Because we're not chasing customers just for money markets. Like, there has to be a DDA component to it and a significant DDA component on top of that.

Stuart Lubow (CEO)

Yeah, and you know, you've got to remember, we've done this in a relatively high-rate environment, where people have, you know, looked at other opportunities to, you know, to put excess funds. I think as the rate environment changes, that's also gonna be a positive to increasing DDA. And you know, I think we're in a good place for that as well.

Christopher O'Connell (Principal and Senior Equity Research Analyst)

Great. Appreciate the time, Stuart and Avi. Thank you.

Avinash Reddy (CFO)

Thanks, Chris.

Operator (participant)

This concludes the question and answer session. At this time, I'd like to turn it back to Stuart Lubow for closing remarks.

Stuart Lubow (CEO)

Thank you, Dee Dee, and thank you all for joining us today, and thank you to our dedicated employees and our shareholders for your continued support, and we look forward to speaking to you in January.

Operator (participant)

This concludes today's conference call. Thank you for participating, and you may now disconnect.