Earnings Call Transcript - DCOM Q3 2025

Operator, Operator

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 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 turn the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead.

Stuart Lubow, CEO

Thank you, Diane, and thank you all for joining us this morning for our quarterly earnings call. With me today, as usual, is Avi Reddy, our CFO; and also Tom Geisel, who we hired earlier this year to continue growing our commercial bank. In my prepared remarks, I will touch upon key highlights for the third quarter of 2025. Avi will then provide some details on the quarter and thoughts for the remainder of 2025. Our core earnings power continues its significant upward trajectory. Core pretax pre-provision income was $54.4 million for the third quarter of 2025 compared to $49.4 million in the second quarter of '25 and $29.8 million a year ago. We had an increase in loan loss provision in the third quarter, primarily tied to charge-offs on loans in the owner-occupied and nonowner-occupied real estate segments. While NPAs were up slightly on a linked quarter basis, they are up off a very small base and represent only 50 basis points of total assets, which compares favorably to commercial bank peers. On a linked-quarter basis, we did see a decline in criticized loans in the third quarter of approximately $30 million and also saw a 33% decline in 30 to 89 days past due. Core deposits were up $1 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.6 billion. We have a core deposit funded balance sheet with ample liquidity to take advantage of lending opportunities as they arise. Our cost of total deposits was 2.09% in the third quarter, which was unchanged versus the second quarter. By maintaining a strong focus on cost of funds, our NIM has now increased for the sixth consecutive quarter and has surpassed the 3% mark. Following the Fed rate cut in September, we were able to meaningfully lower deposit costs while maintaining loan yields. As mentioned in the press release, since the Fed rate cut, the spread between loan and deposits has increased approximately 10 basis points, and this will continue to drive NIM expansion in the fourth quarter. Outside of rate cuts, we continue to have several additional catalysts to grow our NIM over the medium to long term, including a significant back book loan repricing opportunity. Avi will get into more details on the margin in his prepared remarks. On the loan front, we continue to execute our stated plan of growing business loans and managing our CRE concentration ratio, which is now 401. Business loans grew over $160 million in the third quarter compared to $110 million of business loan growth in the second. On a year-over-year basis, business loan growth was in excess of $400 million. Loan originations, including new lines of credit increased to $535 million. The weighted average rate on new originations and lines was approximately 6.95%. Our loan pipelines continue to be strong and currently stand at $1.2 billion. The weighted average rate on the pipeline is between 6.50% and 6.75%. Next, I will touch on our recruiting efforts. Disruption in our local marketplace remains very high, and we continue to execute on our goals of building out our C&I businesses. As outlined in the press release, we hired a number of talented bankers in the third quarter. Once they settle in, we expect them to meaningfully contribute to our business loan growth. In addition, we recently opened a branch location in Manhattan. The grand opening was actually yesterday, and we are on track to open our New Jersey location in Lakewood in the first quarter of 2026. Additionally, we have identified a new location in North Shore of Long Island that we expect to open in early 2026. In conclusion, the momentum in our business continues to be very strong, and we are executing our business plan of growing business loans and core deposits. We have clearly differentiated our franchise from our local competitors as it relates to our growth trajectory, our ability to attract talented bankers. We have an outstanding deposit franchise, a strong liquidity position, and a robust capital base. We expect more meaningful NIM expansion in the fourth quarter and significant opportunities in 2026 based on loan pricing opportunities, organic growth across deposits and loans. I'm looking forward to closing out the year strong. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best commercial bank in Europe. With that, I will turn the call over to Avi.

Avinash Reddy, CFO

Thank you, Stu. Core EPS for the third quarter was $0.61 per share. This represents a 110% year-over-year increase. Core pretax pre-provision net revenue of $54 million represents approximately 1.5% of average assets. The reported third quarter NIM increased to 3.01%. We had around 2 basis points of prepayment fees in the third quarter NIM. Excluding prepayment fees and purchase accounting, the third quarter NIM would have been 2.98%. As a reminder, the second quarter NIM, excluding prepayment fees and purchase accounting, was 2.95%. Total deposits were up approximately $320 million at September 30 versus the prior quarter. We continue to see strong inflows across our branch network and across the Private and Commercial Bank. Core cash operating expenses, excluding intangible amortization, were $61.9 million, which was marginally above our prior guidance for the third quarter of $61.5 million. The variance versus the prior guidance was due to the additional hires we made in the third quarter. Noninterest income of $12.2 million was inclusive of a $1.5 million positive benefit tied to a fraud recovery that dates back to Legacy Bridge. We had a $13.3 million credit loss provision for the quarter, and the allowance to loans increased to 88 basis points. As Stu mentioned, criticized loans were down approximately $30 million linked quarter, and loans 30 to 89 days past due were down approximately 33% on a linked-quarter basis. We continue to grow, and our common equity Tier 1 ratio grew to over 11.5%, and our total capital ratio grew to over 16%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise and speaks to our strength and ability to service our growing customer base. Next, I'll provide some thoughts on the fourth quarter. As I mentioned previously, excluding prepayment fees and purchase accounting, the NIM for the third quarter would have been 2.98%. We would use this as a starting point for modeling purposes going forward. As Stu mentioned, we expect more substantial NIM expansion in the fourth quarter as we have been successful in reducing deposit costs and maintaining our loan yield, which has been helped by the pace of new originations. The spread between loans and deposits is approximately 10 basis points higher currently than what it was at September 15. While we have a larger cash position than we did in prior quarters, that will eat into some of the NIM benefit from the spread differential between loans and deposits, we do expect more pronounced NIM expansion in the fourth quarter compared to the second and third quarters. In addition, we expect the asset repricing story that we've been talking about for a while to unfold with more vigor in 2026 and 2027. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed-rate loan portfolios, in the full year 2026, we have approximately $1.35 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 250 basis point spread on those loans over the forward 5-year treasury, we could see a 20 basis point increase in NIM by the end of 2026 from the repricing of these loans alone. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. In summary, assuming the market consensus forward curve plays out, we continue to have a path to a structurally higher NIM and enhanced earnings power over time. Now that we've crossed 3% on the margin, the next marker in front of us is 3.25%, and after that, 3.50%. With respect to the balance sheet, we expect a relatively flat balance sheet for the remainder of this year as planned attrition in transactional CRE and multifamily masks the growth in our business loan portfolio. As we've typically done, we will only provide guidance for 2026 once we get into the new year. Next, I'll turn to expenses. As you are aware, we've added a significant amount of talented individuals to the organization, and we continue to have opportunities to selectively add more. We expect fourth quarter core cash operating expenses to be around $63 million. We don't expect any more wholesale additions of production staff until bonuses are paid in the first quarter, so we can treat the new fourth quarter expense run rate of $63 million as a good placeholder for now. Turning to noninterest income. For the fourth quarter, we do not expect a repeat of the fraud recovery item that we saw this quarter, meaning the run rate for noninterest income would be around $10 million to $10.5 million. Factors that will determine the eventual outcome will be swap fee income, which can be hard to predict, as well as SBA fees, which are being impacted by the government shutdown. As has been our typical practice, we won't be providing guidance on 2026 until we report earnings in January. Suffice to say, we are very positive on the NIM trajectory as we exit 2025. Our efficiency ratio continues to improve, and we expect to continue driving that down with NIM improvement. With that, I'll turn the call back to Diane, and we'll be happy to take your questions.

Operator, Operator

And our first question comes from Steve Moss of Raymond James.

Stephen Moss, Analyst

Maybe just starting off on credit here. Just curious with regard to the NPA formations and the charge-offs. Were the charge-offs related to this quarter's new nonperforming loans? And then was it weighted more towards owner-occupied CRE or nonowner-occupied CRE? And maybe if any of it was multifamily related?

Avinash Reddy, CFO

Yes. So none of it was multifamily related, Steve. It was owner-occupied and nonowner-occupied. The split was around 20% owner-occupied, and around 80% nonowner-occupied over there. Like Stu said, criticized were down around $30 million linked quarter. The 30- to 89-day bucket improved, and we're pretty confident that we should see some resolution of legacy NPAs in the fourth quarter, probably amounting to around $15 million to $17 million that we have a good line of sight into. So I wouldn't characterize the formation as anything out of the ordinary course of business. We're operating at 50 basis points of NPAs. We probably could be range-bound around that between now and the end of the year. And we're seeing a very strong credit overall on the multifamily side.

Stephen Moss, Analyst

Okay. Appreciate that. And then maybe on the multifamily payoffs this quarter, those accelerated here. It kind of sounds like you're going to expect that similar pace into the fourth quarter. Is that kind of maybe how you guys are thinking about 2026 as you guys just have greater repricing, and we're going to see just a continued step-up in the multifamily paydowns?

Stuart Lubow, CEO

I think that I can see continued paydowns in the multifamily. I think this quarter was a bit outsized, and we knew that we had some big prepayments or payoffs coming in. But I wouldn't expect it to be at this level of prepayment going forward, more normalized. But we are seeing maturities. When we do have maturities, there is a relatively high percentage that is refinancing out.

Operator, Operator

Our next question comes from Matthew Breese of Stephens Inc.

Matthew Breese, Analyst

Avi, Stu, I wanted to follow up on the credit question just for a moment. On charge-offs specifically, Avi, I think in the past, you've discussed kind of, hey, look, we're building out a business bank. There's going to be some more normalized, call it, charge-offs than historical Dime, especially in the higher rate environment. Could you just reframe for us what you define as normalized? And I'm trying to kind of triangulate the comments. Is there a path back to normalized over the next couple of quarters?

Avinash Reddy, CFO

Yes. No problem, Matt. I appreciate the question. So I think at the start of the year, our guidance for charge-offs was around 20 to 30 basis points. That's what we said before we started building out the specialty verticals, really. That was my comments back in January, right? So you look at on a year-to-date basis right now, we're basically at 31 basis points. So we're in the range of what we have. The new businesses that we're building out, fund finance, for example, we expect 0 losses in those new businesses, right? So I don't think the new businesses per se are going to add to the level of future charge-offs because we're making good loans, and we're being very conservative in what we do. What it may change, though, is the reserving methodology because for C&I loans, we are reserving somewhere between 125 and 150. So if you think about the model going forward, we do expect the reserve to build, and us to be in that 90% to 1% area, and that could gradually build over time. It will be a function of what we're putting on. But in terms of charge-offs, I mean, we're in probably the late cycles of a high-rate environment. And it's our goal with increased earnings power to exit some criticized assets here and there. So that's probably a couple more quarters of that probably that we see. But I would expect as we get into '26 to get to more of a historical Dime level, if that's what you're asking on the charge-off level. But I think on the provision level, it's going to be a function of the new business, right? And we're reserving at a higher level for the new business.

Matthew Breese, Analyst

Great. Regarding the multifamily reduction, I'm curious if there was any selection bias. For the assets being removed, was there a greater focus on market rate multifamily compared to rent-regulated properties? I'd also like to know the market appetite for those products that have been refined. Is the approach indiscriminate, affecting both types equally, or are we seeing a trend of more market rate properties being refined compared to rent-regulated ones?

Avinash Reddy, CFO

Yes. So I think we're setting our new rates slightly above market, Matt. I think at a reprice, some of the customers are staying with us. But at maturities, we're not seeing any delineation between free market and historical rent-regulated items just because the LTVs are so low, and we've been pretty conservative in the underwriting. So I think there's a difference at the reprice. If something is repricing and still has 5 years left, you probably would see more of the rent-regulated stuff staying on with the books. But at maturity, we're seeing the same 80% to 90% of the loans are basically going away at this point. And there's really no delineation between that at this point in time, at least.

Matthew Breese, Analyst

Okay. There are a couple of additional points I want to address. First, it seems we could be approaching several rate cuts, possibly two by the end of the year and maybe one earlier next year, which would total three or four cuts of 25 basis points each. Can you provide some insights on expectations for deposit betas given the changes we've seen compared to previous cycles?

Avinash Reddy, CFO

Yes. I'll start with this cut, Matt. So I think you asked the question last quarter, I mean, rate cuts obviously help us, and gradual rate cuts help us more than probably big rate cuts because that's sometimes it's hard to cut depositors by the full amount. So we kept the deposit cost at 2.09% this quarter, consistent with the last quarter, but we continue to grow deposits, right? So we're bringing on new deposits in the low 2s. Right now, our cost of deposits is in the low 190s. Prior to this rate cut, it was 2.09%. And so we were pretty much able to pass the full 100% on. I mean we do have 30% DDA. So that is what it is. So I'd say for this 25 basis points, we're very happy with where we ended up. So we started at 2.09%. We're at 1.90% right now. So we were able to cut and that's on total deposits. We're able to cut by 19 basis points. So I think for anything going forward for the next 2, we'd expect something similar, but it's going to depend on the competition. And look, the luxury that we have is we have a lot of new deposits coming in from our branch network, from our municipal deposit bankers, from our private banking teams, and from some of the commercial lending teams that we've built on. So we can be more aggressive with the existing deposit base that we have. And I don't think that's a luxury that a lot of other peers in our geography have. So while I think the models would say 50%, 60% beta, I mean, we're trying to pass everything on going forward on the way down. And if you remember, when rates were at 0, our cost of deposits was 7 basis points back then. We're not getting back there, but we did pay up on the way up, and there was industry events with Signature and some of the other stuff that happened where there was a bit of retention going on. But I think on the way down, our goal is to benefit from that. And again, the NIM guidance that we gave going forward, that's absent any rate cuts, right? So for every rate cut, we should have 5 basis points plus or minus over there, and that's kind of primarily from cutting the deposit side of the business.

Matthew Breese, Analyst

Great. I appreciate all that. And then just my last one. There's been some larger banks that have identified Long Island as a market folks want to be in. And I know in prior calls, we've asked you about M&A as a buyer. And I'm curious your thoughts there. But I'm also curious to what extent you've thought about all strategic alternatives, including a potential sale if bids were to come in and some of these larger banks were to make a more pronounced effort in Long Island. That's all I had.

Stuart Lubow, CEO

Thank you, Matt. We are concentrating on organic growth. We have recently added talented bankers and teams in the loan division, having already established that on the deposit side. We believe we are in a strong position to utilize our excess liquidity over the next six months to a year with these new teams. Our pipeline is robust and offers good yields. I’m optimistic that we will start to see net interest margins in the mid- to high threes over the mid- to long term, which will positively impact our bottom line and enhance shareholder value. Our primary focus remains on organic growth. As for the other points, I have been in this industry for a long time and am always committed to maximizing shareholder value, but right now, we are really concentrating on organic growth.

Operator, Operator

And our next question comes from Mark Fitzgibbon of Piper Sandler.

Mark Fitzgibbon, Analyst

I was wondering, with the capital ratios building nicely, and it sounds like no balance sheet growth in the fourth quarter. What are your thoughts on stock repurchases?

Avinash Reddy, CFO

Yes, Mark, so we've started having those conversations in earnest at this point. I think in the last couple of quarters, we said early 2026, we will revisit it. I mean the common equity Tier 1 is over 11.5%. Total capital is over 16%. I mean the one thing we were trying to do is to get the CRE concentration ratio down to the low 400s, and we are there, right, at this point in time. I will say when you look at the peer groups, Mark, and more nationally because we've really broken out of the local peer group here. Our business model is completely different from a lot of the other banks here. And you look at TCE ratios or you look at common equity Tier 1 ratios, they've gone up industry-wide. I don't think we're an outlier when you compare us to the rest of the industry. We obviously have a lot more capital than historical Dime used to run the balance sheet. So I think the first and best use of capital, obviously, is putting it to work on all of the existing lending teams that we have, a lot of the new teams that Tom has hired, and putting that to work. I mean you've seen in the press release a number of new verticals that we've brought on board. And each one of them should be a $0.5 billion business for us over 2 to 3 years, right? So we'd like to deploy that. At the same time, the CRE runoff and the multifamily runoff is going to stop at some point relatively soon, and we'll be back in that market in a bigger way. So I think we're trying to balance a lot of those items, Mark. From a corporate finance perspective, obviously, we see the stock as very undervalued, especially as you start projecting out NIMs in '26 and '27. So from that perspective, we do want to be back in the market for that. If you remember, after the merger, we returned around $100 million of capital to shareholders. So we have been aggressive in that. But I think the limiting factor was the CRE ratio more from an optics perspective. I think as we get below $400 million, that will go away, and it will probably help us be back in the market. So hopefully, that provides you a bit of perspective on the different dynamics there.

Mark Fitzgibbon, Analyst

It does. I was also curious, Avi, you mentioned there was a fraud recovery in the quarter. How much was that, and was it included in the other income line?

Avinash Reddy, CFO

Yes, yes. So that was in other income, Mark. If you remember, this probably dating back to 2018 or 2019, Legacy Bridge had a fraud with a bus company. It was around an $8 million noninterest expense hit that they had more of an operational item. So we've been going through the legal process, and we were able to recover $1.5 million this quarter, and that's in the other noninterest income line.

Mark Fitzgibbon, Analyst

Okay. Great. From a broader perspective, not necessarily tied specifically to Dime but looking at the industry as a whole, I'm interested in your thoughts on where we currently stand in the credit cycle. What inning do you think we're in? How do you see this cycle evolving? Will it deteriorate significantly, or will it continue to progress slowly? Have we already witnessed the worst of the situation? I'm looking for some high-level insights, not just related to Dime.

Stuart Lubow, CEO

Yes, I believe we are in the later stages of this cycle. Moving forward, I think we will continue to navigate through some challenges. The issues we've encountered in 2023 and in the following years have intensified some circumstances due to the higher interest rates. Overall, the industry has performed well, and now we are entering a period with lower rates. Generally, the local economy appears to be stable. The industry has effectively addressed its credit challenges. As financial performance improves, we may adopt a more proactive approach to tackling ongoing issues. However, I anticipate that the industry has managed well, and I do not foresee us facing significant credit stress.

Operator, Operator

I'm showing no further questions at this time. I'd like to turn it back to Stuart Lubow for closing remarks.

Stuart Lubow, CEO

Thank you, operator, and Diane. I also want to express my gratitude to all our dedicated employees and shareholders for their continued support. We look forward to speaking with you in early 2026 after our fourth quarter.

Operator, Operator

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