Dime Community Bancshares - Q4 2023
January 26, 2024
Transcript
Operator (participant)
Good day and thank you for standing by. Welcome to the Dime Community Bancshares fourth quarter earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a Q&A 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. 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 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. 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 Lubow, President and CEO. Please go ahead.
Stuart Lubow (President and CEO)
Good morning. Thank you, Shannon. With me today is Avi Reddy, our CFO. 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 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.
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 in DDA. To provide some background, after I joined Dime in 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, proud of the fact that Dime was the only bank in Metro 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 systems. 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 made significant operational and 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. As I have said, this segment will be the growth engine for Dime in the years ahead as we build our portfolio via 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 2022. Our healthcare 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%.
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 a 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, relationship-based bank, coupled with a strong technology and treasury management stack. 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 and long-term goal, goals.
We intend on creating more diversified balance sheet by focusing on growth in our business loan portfolio, which includes C&I and owner-occupied CRE. While we have historically been very strong operators in the multifamily and investor CRE, 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% of loans, and we envision growing business loans to 30% and reducing multifamily to the 25%-30% range over a two-three-year timeframe. 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.
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 bank will be a key focus. This will 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 a 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 repricing in 2024, in 2025 and 2026, we see increased repricing on the asset side.
Returning to a 1.10-1.25 ROA is a key marker, and we are highly focused on getting there as the asset side of the balance sheet turns over. This will be accomplished by a significant improvement in NIM as rates normalize. 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 our shareholders strong returns. Being a conservative underwriter of credit has always been a hallmark of Dime. 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 $0.45. We were 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.
Avi Reddy (CFO)
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. 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 basis points, compared to 16 basis points in the prior quarter. At 29% of average total deposits, our 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, was $52.5 million. For the full year, cash non-interest expense, excluding FDIC special assessment, intangible amortization, and severance, was approximately $202 million, well below our annual guide for 2023 of $206 million-$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 promoting and filling open roles from our talented employee base. Non-interest income for the third quarter was $8.5 million. We had a $3.7 million provision in the fourth quarter. The allowance to loans remained steady at 67 basis points.
We're cognizant that there has been a lot of scrutiny on CRE concentration. In this regard, Dime's investor CRE concentration, excluding multifamily 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. 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 7.85%. Once the Fed cuts rates, we anticipate expansion, and our medium- to longer-term goals and projections do envision the NIM getting back to historical levels in the low- to mid-3s% and potentially even higher. This will require more of our assets to reprice, and as mentioned earlier, 2025 and 2026 are significant years 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 less of a 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 we continue to support our key clients through any operating environment, 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 CRE, while 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.
We expect to be flat to up 1.5% on that base, which equates to $210 million-$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.
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 the line of Steve Moss with Raymond James. Your line is now open.
Steve Moss (Managing Director)
Good morning.
Stuart Lubow (President and CEO)
Hey, Steve.
Steve Moss (Managing Director)
Maybe just 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?
Avi Reddy (CFO)
Yeah, look, we're just following the forward curve, Steve. We don't give quantitative guidance. You know, as, as I said, you know, we're, we're confident, you know, to get back into the low to mid 3s. 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%-30% DDA and, 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, you know, at the peak, we were around 3.30 on the NIM.
But, you know, if you follow the forward curve, we, you know, in our, 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 there.
Steve Moss (Managing Director)
Could you just remind me how much do you have in assets repricing in 2025?
Avi Reddy (CFO)
Yeah, sure. So we have on the real estate side, we have around $500, $575 million of assets in 2024, and then we probably have around $200 million-$225 million on the securities side, as well coming due.
Steve Moss (Managing Director)
Okay, and then a meaningful step up in 2025 from there?
Avi Reddy (CFO)
But yeah, for 2025, a meaningful step up, right. So, 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 in securities. Now, now that's contractual, right? But, but if the Fed cuts rates, you're gonna see some of that, some of the asset repricing from 2026 pull forward a year and happen in, in 2025.
Steve Moss (Managing Director)
Okay. Appreciate that. 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'm wondering if you could just, if you could give that number. And also just curious, are you looking to hire any additional teams in the upcoming year?
Stuart Lubow (President and CEO)
So at this point, the pipeline is approximately $115 million with a weighted average rate of 9%. And so we're, you know, we're very happy with the, you know, with the growth in the pipeline. We expected to have our first closings in the first quarter. So, you know, things are going well. In terms of additional teams, yeah, I mean, we're looking at... There are a couple other C&I related and healthcare-related individuals and teams we're looking at that also have significant deposits as part of their book, and we are looking at them.
Steve Moss (Managing Director)
Okay. And does the expense guide contemplate additional hires for the year, or would that be added into expenses?
Avi Reddy (CFO)
Yes. I think, Steve, if you, if you go back to last year, right, we gave guidance of 206-209, 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, you know, they've, they're very profitable very quickly. I mean, right now it's with the, you know, groups and teams, you know, that, that we do have. But, you know, I would just say that the payback period on the groups is, is very, very quick from a bottom-line perspective.
Stuart Lubow (President and CEO)
Yeah. I mean, last year we brought on, in those groups, we brought on 21 individuals, and we were able to cover those costs within our expense guide. I mean, we're very cognizant of managing both sides of that, both the income opportunity, bringing on new teams and the expense side.
Steve Moss (Managing Director)
Okay, great. I appreciate that. And one last question, just on the, I assume it's one commercial real estate non-performing loan. Just curious, any color you'd give there on, the that credit and-
Stuart Lubow (President and CEO)
Yeah, it's a fully tenanted building that houses two schools. 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. So we anticipate that loan coming, actually coming out of nonaccrual this quarter.
Steve Moss (Managing Director)
Okay, great. Appreciate all that color. I'll step back.
Avi Reddy (CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is now open.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Hey, guys. Good morning.
Stuart Lubow (President and CEO)
Hey, Mark.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Hey, just to clarify, Avi, on the tax rate was elevated in both the third and fourth quarters. Could you just explain what the discrete items were, what they are, and those will be fully out of the tax rate in the first quarter?
Avi Reddy (CFO)
Yeah, Mark, primarily it's related to 162(m) 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 rate's been in the, you know, 27%-28% area. Obviously, depends upon the level of, you know, income at the bank. So, you know, next year, you know, 27% is a reasonable rate to use for next year.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Okay, great. And then, Stu, your comments on hiring additional teams, are those presumably mostly from Legacy Signature or other large banks, or where, where do you see those teams coming from?
Stuart Lubow (President and CEO)
Yeah, I would say all of the above. So there's some serious opportunities of both within existing teams at Signature and other institutions that we're in conversation with.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Of the teams that you've hired, those six teams that have brought in $300 and some odd million of deposits, what do you think those teams are capable of doing once they've, you know, their books have kind of fully matured and migrated over?
Avi Reddy (CFO)
Yeah, sure, Mark. So you go back, you know, to September 30th, we were at $250 million on, on the teams. You know, at December 31st, we were $333 million. Today, we're $375 million. So it, it seems like a steady build of, you know, $70 million-$80 million, you know, per, per quarter at this point. I mean, the, the, the good thing is we, 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, we expect to see continued growth in the quarters ahead over there. Again, they're very heavily focused on, on DDA. 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.
You know, they've become profitable very quick. Really, the opportunity for us is continue to grow that. But now that they've been here for a while, you know, you know, hiring new groups, and as Stu said, you know, that's going to be additive as well, pretty, pretty quickly overall.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Okay. 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?
Stuart Lubow (President and CEO)
Look, you know, obviously, the talk about M&A has certainly picked up. You know, there's still issues with marks and, you know, 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, you know, in the next several years, there's going to be much more activity in the M&A space. 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. Certainly, you know, 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 us.
Mark Fitzgibbon (Head of Financial Services Group Research and Senior Managing Director)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Manuel Navas with D.A. Davidson and Company. Your line is now open.
Manuel Navas (Senior Vice President and Equity Research Analyst)
Hey, good morning. 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 would we see kind of an inflection for the rest? And what's driving the trends that caused some of the deposit outflows recently? Just kind of comment on deposit growth next year.
Avi Reddy (CFO)
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 on around $330 million, right? So on a net-net basis, we were flat in the rest of the bank. 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, 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.
You know, I think, you know, the opportunity here to grow deposits is really building our private and commercial bank, as Stu said. We have $1.5 billion of deposits in that business. The branch business is, you know, important as well. And so I think, you know, as rates, you know, 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 rate, 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. You know, the important part is also looking at the loan-to-deposit ratio, right?
I mean, we, we're at 102, you know, at the end of the year. We're actually close at 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 2024.
Stuart Lubow (President and CEO)
Yeah, and, you know, most importantly, you see quarter-over-quarter DDA is stable. So, you know, I think, you know, 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 base.
Manuel Navas (Senior Vice President and Equity Research Analyst)
Okay. I appreciate that. Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Chris O'Connell with KBW. Your line is now open.
Chris O'Connell (VP and Equity Research Analyst)
Hey, good morning.
Stuart Lubow (President and CEO)
Hey, Chris.
Chris O'Connell (VP and Equity Research Analyst)
So I think in your opening comments, you know, the ROA getting up to, you know, 1.10-1.25 over time. Is that assuming that to get there, you know, that's the low 3s NIM that you're talking about as well over longer term?
Avi Reddy (CFO)
Yes, Chris, correct. Yep.
Chris O'Connell (VP and Equity Research Analyst)
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 and, you know, if it's in, you know, a methodical or kind of, you know, gradual way, you know, does that accelerate over time? Are you guys getting the 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. Just as I know you won't give, you know, the quantitative guide, but, you know, just thinking about, you know, the pace and the magnitude, you know, as the Fed's cutting would be helpful.
Avi Reddy (CFO)
Yeah, I think, look, we plan to be very aggressive on the deposit side in terms of cutting rates. As I said, you know, our book is weighted more to, you know, 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 repricing in 2024, and then that really starts to pick up in 2025 and 2026. So some of it will depend on the pace of which, you know, payoffs pick up, you know, on the asset side of the balance sheet.
But I would say on the deposit side, if you split the two, the question up into, you know, how are you gonna see deposit costs and what are you gonna 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, you know, the structure and nature of, of our assets. I think throughout all of this, Chris, it's just really important to keep in mind, you know, 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.
The other piece that I just wanted to add is, you know, we have around $1 billion of borrowings that are at, you know, around $900 million-$950 million of borrowings that we've kept really short term. That's really gonna reprice immediately as well. We've intentionally kept that short. We've been messaging that all across and really to position the balance sheet from rates drop. We do have the benefit of that as well.
Stuart Lubow (President and CEO)
Yeah, and just, you know, anecdotally, if you look month-over-month, you know, November and December, we saw, like, two basis point increase in deposit rates each month. And in December, we saw an eight basis point increase in loan rates. So, you know, you know, hence, you know, we, we do feel, you know, that, you know, as Avi said, we're, we're expecting, you know, relatively flat NIM within a few basis points, until the, you know, the Fed cuts.
Chris O'Connell (VP and Equity Research Analyst)
Great. That's helpful. And kind of along the same lines, I know it, you know, really hasn't been much of the margin for, you know, the past, I don't know, two years or so. But, I mean, when the Fed is cutting, I mean, what do you, what do you think that a normalized kind of prepayment impact would have on the margin?
Avi Reddy (CFO)
Yeah, look, it's gonna 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, you know, Legacy Dime, we used to have, you know, between 10 and 15 basis points, you know, on prepayment fees. Now, obviously, that's multifamily is gonna 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, you know, it's probably not a bad assumption. But, you know, I don't think that's gonna happen in 2024 necessarily, just given-
Stuart Lubow (President and CEO)
Yeah, most likely, if, if it does, it's gonna be toward late 2024.
Avi Reddy (CFO)
Yep. So-
Stuart Lubow (President and CEO)
Assuming that, you know, the Fed rate cuts.
Avi Reddy (CFO)
Yep.
Chris O'Connell (VP and Equity Research Analyst)
Great. Could you just provide a little bit of color on, you know, what the drivers of the net charge-offs were for this quarter?
Avi Reddy (CFO)
Yeah, 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. It 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.
Chris O'Connell (VP and Equity Research Analyst)
Got it. 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, we're reserving for, you know, a couple of other loans being individually analyzed. Just, you know, any comments around those?
Avi Reddy (CFO)
Sure. So there was one net new addition to the C&I portfolio. It's a $2 million loan. We fully reserved against it. However, they, too, have started paying at this point in time, and so, you know, there's a potential for that coming out.
Stuart Lubow (President and CEO)
Yeah, that was a C&I loan, 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, they have agreed on basic terms of a renewal, brought their loan current, and we'll probably close that in the first quarter and put that back on accrual status.
Chris O'Connell (VP and Equity Research Analyst)
Great. Really helpful. Thanks, Stu and Avi.
Operator (participant)
Thank you. Our next question comes from the line of Matthew Breese with Stephens. Your line is now open.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Hey, good morning.
Stuart Lubow (President and CEO)
Hey, Matt.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Just a couple of quick ones for me. Stu, just, just in light of your multifamily guidance, you know, getting to 25%-30% of loans over the next, you know, two-three years, it feels like the pace of runoff needs to, needs to accelerate to get there. And so I was curious if this quarter's kind of 2% quarterly reduction in multifamily is, is a good run rate or a better representation of what we should be modeling in order to kind of achieve those goals?
Avi Reddy (CFO)
Yeah, Matt, I think for the near term, yes. So, you know, like we said, we have a limited amount of repricing and maturities in 2024, which is specifically why our guide is over the course of two-three years, we're gonna 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 what the Q4 and Q3 numbers are, you know, reasonable estimates for the next six months or so, but then as the Fed starts cutting rates, you're gonna start seeing a pickup in that. And then eventually, the loans, you know, do come up, you know, for maturity or repricing, which is again, why this is a two-three-year goal for us.
Stuart Lubow (President and CEO)
Yeah, I mean, you know, we're, we're looking at, you know, sats and, and projected sats each month. I mean, for this month, we're, we're probably gonna have $40 million-$45 million in satisfactions. And, you know, we're looking. We're getting requests already for next month. So, I mean, there is some activity out there, some transactions happening, and, you know, so it... But, you know, it's very chunky, so it's, it's hard to say it's exactly when, when you're gonna see a significant runoff. But, you know, suffice to say, we are seeing, you know, some, some amount of satisfactions each month.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
I mean, can we just go back to one of the points you made there? I think you said historically, the payoff activity was, you know, 30%-35% for multifamily, making it effectively a three-year duration type product.
Avi Reddy (CFO)
No.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Now it's in the-
Avi Reddy (CFO)
Yeah. 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%-
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Right
Avi Reddy (CFO)
-is the true payoff rate on the multifamily side. Right now, it's, you know, 5%-6%. So, but as rates come down, they generally catch up. It's more of a timing issue, Matt. And again, we're pretty clear, we're trying to give, you know, two-three years worth of a forward look in terms of where we want and see the balance sheet, you know, ending 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 so-
Stuart Lubow (President and CEO)
Yeah, for the first time, I think ever, we don't have any pipeline in multifamily.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Got it. Okay. Just one more question on this topic. You know, as the, you know, typical kind of multifamily borrower reaches the end of their kind of standard five-year fix, are they, you know, willfully rolling into the floating and waiting for lower rates, or are you seeing them refi to higher rates or go elsewhere? What is kind of the common behavior?
Avi Reddy (CFO)
Sure. So Matt, we went, yeah, we went back and looked at our 2018 vintage rate, so that, you know, basically, you know, matured or repriced in 2023. So around 30%-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, two-thirds in terms of the mix. Now, we will say that, you know, there are competitors in the market right now that are on the low sixes to high fives. And as you know, rates come down, you're gonna see more of those loans not take the reprice. They're probably just gonna satisfy away from us, you know, given where the market is trending towards.
Stuart Lubow (President and CEO)
Yeah. I mean, many of those, you know, viewed it as a short term. Even though they're taking a rollover, they viewed it as a short-term, you know, rollover because, you know, they figure why go through the expense of refinancing at these rates? But once rates do come down, they're gonna. They'll pull the trigger and prepay.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Got it. I appreciate all that color. The last one for me is just, you know, conceptually, as the focus continues on business banking and moves away from traditional multifamily, should we start to see the reserve reflect that and start to increase a little bit? 67 bps on today's balance sheet makes sense, but if multifamily is 25% of loans, does it make sense for the reserve to be higher?
Avi Reddy (CFO)
Matt, yes, absolutely.
Stuart Lubow (President and CEO)
Yeah, I mean-
Avi Reddy (CFO)
We agree.
Stuart Lubow (President and CEO)
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 and that. So that transition will occur just naturally as part of our origination process.
Matthew Breese (Managing Director and Senior Equity Research Analyst)
Got it. Okay. That's all I had. I'll leave it there. Thank you for taking my questions.
Operator (participant)
Thank you.
Avi Reddy (CFO)
Thanks, Matt.
Operator (participant)
As a reminder, to ask a question at this time, please press star one one on your touch-tone telephone. I'm currently showing no further questions at this time. I'd like to hand the call back over to Stuart Lubow for closing remarks.
Stuart Lubow (President and CEO)
Well, once again, I'd like to thank our dedicated employees who worked diligently through these challenges throughout the year, and thank our shareholders for their continued support, and we look forward to seeing you next quarter.