Earnings Call Transcript - DCOM Q1 2025

Operator, Operator

Good day and thank you for standing by. Welcome to Dime Community Bancshares Inc. First 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 speakers' 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.

Stuart Lubow, CEO

Good morning and thank you, Shannon, and everyone for joining us for our first quarter earnings call. With me this morning is Avi Reddy, our CFO. In my remarks, I will discuss key highlights for the first quarter of 2025. Avi will then provide details on the quarter and thoughts for the remainder of the year. Core deposits increased by $1.3 billion year-over-year. The deposit teams hired since 2023 have built their deposit portfolios to $1.9 billion. This has enabled us to significantly reduce our reliance on brokered deposits and diminish our FHLB borrowing. We are making notable strides toward establishing a core deposit funded balance sheet. Our cost of deposits fell to 2.09% in the first quarter. Our net interest margin has risen for the fourth consecutive quarter, now in the 2.9% range. We have several catalysts for continued net interest margin growth in the medium to long-term, including a substantial back book loan repricing opportunity. Despite the current uncertain rate environment, we remain optimistic about our ongoing net interest margin improvement. Avi will elaborate on this in his remarks. On the lending side, we are adhering to our plan of increasing business loans while decreasing our CRE concentration. Business loans grew by over $60 million in the first quarter and more than $400 million year-over-year. Typically, the first quarter is our slowest for growth. We have rebuilt our loan pipeline since year-end, which currently stands at approximately $1.1 billion with an average yield of 7.22%. This is an increase from $750 million reported in January. Additionally, we have made several new hires who will contribute to our loan growth later in the year. Our core earnings capacity has significantly improved over the past year. Core pre-tax provision income was $46 million in the first quarter of 2025, compared to $28 million a year ago, resulting in a core ROA of 77 basis points for the quarter. Lastly, I want to address our recruiting efforts. There is considerable disruption in our local marketplace, and our recruiting pipelines are strong. As noted in our earnings release, we have added many bankers across the organization. This year's hiring has focused on enhancing both sides of the balance sheet. Many of you are likely familiar with Tom Geisel from the New York City banking area, who played a vital role in Sterling's growth and success. We expect Tom to be key to our ongoing transformation into a highly profitable commercial bank. Additionally, we have recently announced plans to expand into the Lakewood, New Jersey market. In conclusion, our business momentum is very strong as we continue executing our plan to grow business loans and core deposits. We have clearly distinguished our franchise from local competitors regarding our growth potential and ability to attract talented bankers. I look forward to the rest of 2025 and want to extend my gratitude to all our dedicated employees for their role in positioning the bank as the leading Business Bank of New York. I will now turn the call over to Avi.

Avi Reddy, CFO

Thank you, Stu. Excluding the impact of the previously mentioned legacy Bridgehampton National Bank pension plan termination, adjusted EPS was $0.57 per share. This represents a 36% linked-quarter increase and a 50% year-over-year increase. The reported NIM increased by 16 basis points and the NIM, excluding purchase accounting accretion, increased by 19 basis points to 2.94%. NIM expansion was driven by a significant reduction in our cost of deposits. We did have around three to four basis points of prepayment fees in the first quarter NIM. Excluding prepayment fees and purchase accounting, the NIM would have been around 2.90% for the first quarter. Non-brokered deposits were up approximately $65 million at March 31st versus year-end levels. As I mentioned on our fourth quarter earnings call, year-end 2024 deposits were inflated by approximately $200 million of title company-related deposits that were tied to a closing that left the bank in early January. Said differently, we grew non-brokered deposits by approximately $250 million this quarter versus year-end levels if you exclude the title company deposits from year-end totals. We continue to manage expenses prudently. Core cash operating expenses for the first quarter, excluding intangible amortization was $57.9 million. Non-core items for the first quarter included $7 million related to the previously disclosed termination of a legacy pension plan, which is now effectively complete. Non-interest income of $9.6 million for the first quarter reflected the full quarter impact of the BOLI repositioning transaction. We had a $9.6 million credit loss provision for the quarter. Net charge-offs to average loans decreased to 26 basis points and the allowance to loans increased to 83 basis points. Capital levels continue to grow and our common equity Tier 1 ratio increased to 11.1% and our total capital ratio grew to 15.7%. Having best-in-class capital ratios versus our local peer group allows us to take advantage of opportunities as they arise, and it speaks to Dime's strength and our ability to service our growing customer base. Next, I'll provide some thoughts on guidance for the remainder of 2025. As I mentioned previously, we had approximately three to four basis points of prepayment fee income in the first quarter NIM. Excluding this and purchase accounting accretion, the base NIM for the first quarter was closer to 2.90%. We would use this as a starting point for modeling going forward as we don't expect the prepayment fees to repeat in that size in the coming quarter. We expect the second quarter NIM to remain range bound within a plus or minus 3 basis point range of the 290 base NIM. While we don't have a lot of low-yielding repricing assets in the second quarter, starting in the second half of 2025, we have a meaningful increase in repricing assets and expect margin expansion to resume in the second half of the year. 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 $1.95 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 4% 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 increase in NIM from the repricing of these loans. As we look into the back book for 2027, we have another $1.75 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. Moving on to the short end of the curve. When the Federal Reserve cut short-term rates in 2024, our NIM benefited by approximately 5 basis points for each 25 basis point rate cut. Should the Federal Reserve cut rates in the second half of 2025, we expect this trend to repeat, assuming the behavior in deposits and loans holds for each subsequent rate cut and competition remains rational. In summary, assuming the market consensus forward curve plays out, we have a path to a structurally higher NIM and enhanced earnings power over time. With respect to balance sheet growth, we expect net loans to remain relatively flat in the second quarter and growth to pick up in the back half of 2025. In the first quarter, attrition in CRE and multifamily masked the growth in our business loan portfolio. We expect this trend to moderate towards the end of 2025. In addition, as Stu mentioned, we have several new hires who once they find their feet will contribute to loan growth towards the end of the year. With respect to core cash non-interest expenses, our previous full year 2025 guidance was between $234 million to $235 million. The prior guidance was based on our existing employee base at the end of 2024. Given the hires we have outlined in the press release, we are increasing our full year core cash non-interest expense guidance to $236.5 million to $237.5 million. With that, I'll turn the call back to Shannon, and we'll be happy to take your questions.

Operator, Operator

Thank you. Our first question comes from the line of Steve Moss with Raymond James. Your line is now open.

Steve Moss, Analyst

Good morning.

Stuart Lubow, CEO

Hi, Steve.

Steve Moss, Analyst

Hi, Stu. Maybe just starting on the loan pipeline, as you mentioned, nice pickup here relative to where it was at year-end. Just curious the underlying mix within the loan pipeline?

Avi Reddy, CFO

The underlying mix of the loan.

Stuart Lubow, CEO

Yes. So I mean, again, it really continues the theme of C&I, owner-occupied CRE and healthcare. So at this point, we have about $350 million in C&I, approximately $185 million in owner-occupied CRE and another $250 million in healthcare. That's making up the bulk of the pipeline. We actually have about $200 million in loans approved waiting to close at a yield of about 7.25%.

Steve Moss, Analyst

Okay. Great. Appreciate that. And then you guys made a number of hires this quarter and obviously, a year ago with the Signature hires. Just curious in terms of how you're thinking about the pace of deposit growth and any updates around the cost of new deposits you guys are bringing on these days?

Avi Reddy, CFO

Yes, Steve. Regarding the teams, as mentioned by Stu, they currently have $1.9 billion in deposits. The total cost of these deposits, including DDA, is approximately $210 million. They are bringing in deposits with costs in the low 2% range, with a healthy mix of DDA making up about 35% to 40%. As I noted in the last earnings call, it typically takes teams about three to four years to reach a steady state, and most of our teams have been with us for around a year or two. In the previous call, Stu reported about 11,000 accounts and 7,000 customers, which has now increased to approximately 12,500 accounts and 7,800 customers. We are seeing steady growth in account openings. If we exclude the title company deposits that were withdrawn at the beginning of the year, our core deposits would have increased by around $250 million this quarter. Essentially, excluding brokered deposits, we increased deposits by $250 million. Typically, Q1 is slow for us, while Q2 begins with tax payments and starts to pick up around May to July. We are optimistic that we have the right channels in place to support our loan growth.

Stuart Lubow, CEO

Yes. We review our deposit and loan pipelines, and our deposit pipelines are very strong. So we're very encouraged.

Steve Moss, Analyst

Okay. Great. And then just one on the credit front here. Reserve build was maybe a little bit less than I was thinking this quarter. Just kind of curious, any updated thoughts and guidance around that?

Avi Reddy, CFO

Yes. We have kept the CECL model largely consistent with year-end levels, using Moody's March forecast. This quarter, total loans remained relatively flat or decreased slightly. As Moody's updates their forecast and we finalize more C&I and business loans, we expect a gradual increase in the provision over time. Our medium- to long-term target remains in the range of 90 basis points to 1%. However, predicting the provision for each individual quarter is challenging. As mentioned, we are on an upward trajectory over time.

Steve Moss, Analyst

Okay. Great. Nice quarter. Appreciate all the color here. Thanks.

Operator, Operator

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

Mark Fitzgibbon, Analyst

Hey, guys. Good morning.

Stuart Lubow, CEO

Hi, Mark.

Mark Fitzgibbon, Analyst

Avi, it strikes me that you guys are carrying a relatively large cash balance at a little over $1 billion. Is that an opportunity for the margin as well? Do you think you could bring that cash level down over time? Is that the plan?

Avi Reddy, CFO

Yes. I think that's fair, Mark. However, I think like a lot of banks that had our profile two to three years back when rates went up 500 basis points. I think we're trying to run the balance sheet for the medium to longer term and have the right mix of floating rate assets and cash versus fixed rate assets. I know we're all gearing towards the Fed cutting rates. But we also just want to keep our ALM profile in check a little bit. And I think as we start putting on loans, some of that cash will get used up and also some of the loans that we're putting on are floating rate. But in the interim, we don't want to rush out to buy securities and help the net interest income in the near-term and hinder opportunities to grow loans in the longer-term. But you're exactly right. Historically, we used to run the balance sheet with $200 million to $300 million of cash. We're running it with a multiple of that at this point.

Mark Fitzgibbon, Analyst

Okay. Regarding the deposit situation, I understand there was a deliberate reduction of $137 million in brokered deposits this quarter. Given the limited loan growth in the early part of the year, was there a intentional strategy to slow down deposit growth, or is this just typical seasonal behavior?

Avi Reddy, CFO

Yes. A bit seasonal. First quarter is usually fairly weak. We have some seasonal tax receiver money as well go out. And then April is also a little weak just because of tax payments. But what we've tried to do, Mark, is really make sure that we have a keen discipline on the cost of deposits itself, right? So if there are new customers coming in at a rate in the mid-4s, we're really not taking that at this point. We're really trying to keep it sub-4s on money market and making sure the overall cost is $225 to $250 over time, we're comfortable operating with a loan-to-deposit ratio between 90% and 95%, plus or minus. So you are right. As the loan growth picks up, we can put the pedal to the metal a little bit more on the deposit side.

Stuart Lubow, CEO

We can manage our municipal portfolio more effectively now. We had a large municipal relationship with over $400 million in deposits, which carried relatively high costs because of the Fed funds rate. We asked them to move between $100 million and $150 million in those deposits to replace them with lower-cost business deposits that we had acquired. We have various options to manage our cost of funds and deposit flows. If we needed those funds back, we could certainly obtain them, and this is a long-standing relationship. These are the types of options we have now that we didn't always possess.

Mark Fitzgibbon, Analyst

Okay. Lastly, Stu, could you provide any details on the $8.7 million increase in non-owner-occupied commercial real estate this quarter? Was it due to one credit or a few credits? Was there anything noteworthy about it?

Avi Reddy, CFO

Yeah. Just one credit, Mark. So we actually had an exit of one credit that we previously identified the legacy bridge loan that we exited this quarter. So we took that out. And then we had one previously identified classified loan that we have. We have a purchase and sale agreement on that and we expect to exit that in the second quarter. So nothing systemic. It was one item, but we do expect that credit to be gone by the end of the second quarter.

Mark Fitzgibbon, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Christopher O'Connell with KBW. Your line is now open.