Earnings Call Transcript
Dime Community Bancshares, Inc. /NY/ (DCOM)
Earnings Call Transcript - DCOM Q2 2024
Operator, Operator
Thank you for standing by and welcome to Dime Community Bancshares, Inc. Second Quarter Earnings Conference Call. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the Safe Harbor provisions of the US Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties, and factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the US Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the US GAAP. For information about non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to turn the conference over to Stuart Lubow, President and CEO. Please go ahead.
Stuart Lubow, President and CEO
Good morning. Thank you, Lisa, and thank you all for joining us this morning for our quarterly earnings call. With me today is Avi Reddy, our CFO. In the second quarter, Dime continued to execute on our growth plan. The momentum in our business is strong and we grew core deposits by over $300 million and business loans by over $200 million. The strong growth in core deposits has enabled us to reduce our wholesale funding position substantially since year-end. As a result, the net interest margin increased by 20 basis points in the quarter. We were pleased with the increase in the margin and believe the first quarter of 2024 was a trough for this cycle in terms of both net interest income and NIM. Our cost of deposits declined on a linked quarter basis and since the end of the second quarter, deposits have continued to remain stable to down. Going forward, we expect a slow and steady build in NIM absent any rate cuts. Rate cuts and the eventual repricing of our legacy lower coupon fixed and adjustable rate loan portfolios should accelerate NIM expansion as we get into the latter half of 2025 and 2026, and this will drive a structurally higher NIM. Over the past month, we have successfully raised $75 million in subordinated debt. At the end of the second quarter, our total capital ratio was 14.5%, and we now rank at the absolute top end of our local peer group in terms of total capital. Capital is obviously important in executing our growth strategy. Asset quality continues to remain solid with NPAs down 29% on a linked quarter basis. We plan to file our 10-Q next week and expect to report that classified assets will also be down approximately 14% on a linked quarter basis. We recently received regulatory approval for a new branch location in Westchester County. In fact, I was in White Plains just last week for a business reception we hosted with many important new and prospective clients, and I'm proud of our ability to expand the Dime franchise into this new attractive market. Subsequent to our first quarter earnings call where we announced the onboarding of six deposit-gathering teams, we've onboarded another two deposit-gathering teams in May and June. One of these teams is based in Williamsburg, a market that is very familiar to Dime and where we were founded. The second team is based in Manhattan. Additionally, we hired an exceptional banker to build out our not-for-profit lending vertical. I am proud of the company-wide effort in terms of recruiting and integrating all these bankers into the Dime umbrella. Clearly, our recruiting efforts over the past year have been successful. Our deposit-gathering groups are up over $1 billion of total deposits, and our middle market C&I group helped drive strong business loan growth this quarter. In the quarters ahead, we expect the healthcare vertical to begin to meaningfully contribute to the loan growth and the diversification of our balance sheet as they have built a substantial loan pipeline at attractive yields. In summary, I am very optimistic about the trajectory that Dime is on; our market continues to be significantly disrupted, and the strategic offense we have been playing is paying off in the numbers. With that, I will turn it over to Avi.
Avinash Reddy, CFO
Thank you, Stu. Reported EPS was $0.43 per share, an increase of 5% over the linked quarter. In line with the mid-quarter update we provided in June, we saw a meaningful NIM expansion to the tune of 20 basis points. NIM expansion was driven by the strong year-to-date growth in core deposits and our business loan portfolio, as well as the proactive reduction in higher-cost wholesale funding. Non-interest income for the second quarter was $11.8 million. This included a gain on the sale of a branch that we executed a sale-leaseback on. Core cash operating expenses for the second quarter, excluding intangible amortization, were $55.4 million. We have recruited approximately 65 revenue-generating bankers over the course of the past five quarters, including 15 deposit-gathering teams, a fully built-out healthcare vertical, and most recently a not-for-profit vertical. We expect the revenue generation from these hires to far outweigh the startup expenses associated with the organic build-out of all these groups in the years ahead. We had a $5.6 million loan loss provision this quarter. The allowance to loans increased to 72 basis points. Our CET1 ratio is above 10%, and our total capital ratio of 14.5% is now best-in-class amongst our local peer group. Next, I'll provide some thoughts on the NIM, expenses and balance sheet growth. With respect to the NIM, we noted in the earnings release that there was a four basis point benefit from the payoff of a loan that was previously on non-accrual status. In addition, the sub-debt offering, which closed on the last day of the quarter, is expected to have a three basis point downward impact on the NIM going forward. As such, the base NIM to work from for modeling purposes for future quarters is closer to 234. As Stu said, we expect a slow and steady improvement in the NIM until the impact of rate cuts kicks in. We also have a significant repricing opportunity in our adjustable and fixed rate loan portfolios that's expected to kick in in the second half of 2025 and 2026. To give you a sense of the repricing opportunity, in the second half of 2025 and in 2026, we have approximately $2 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 3.9% that either reprice or mature in that timeframe. Assuming a conservative 225 basis point spread for those loans over the forward five-year treasury, we should see a substantial 35 basis point increase in the NIM as these loans reset to higher rates in 2025 and 2026. With respect to expenses, we expect core cash operating expenses for the third quarter to be approximately $57 million, and we expect to hold that quarterly run rate with very nominal growth in 2025. We are working on a few company-wide initiatives that should drop to the bottom line in 2025, and this should result in very nominal expense growth for 2025. With respect to our positioning on lending, we anticipate continued growth in our business lending portfolio. Growth in the business portfolio will offset declines in multifamily and CRE, where we are still servicing existing relationships. On an aggregate basis, we expect the loan portfolio to be up low single digits for the second half of the year. With that, I'll turn the call back to Lisa, and we'll be happy to take all your questions.
Operator, Operator
Thank you. Please stand by for the next question. Our first question today is coming from Mark Fitzgibbon of Piper Sandler. Your line is open.
Gregory Zingone, Analyst
Hey, good morning, guys. This is Greg Zingone stepping in for Mark at the moment. How are you?
Avinash Reddy, CFO
Hey, Greg. How are you doing?
Stuart Lubow, President and CEO
Hey, Greg. How are you?
Gregory Zingone, Analyst
I'm fine. Just curious, what was your spot NIM for June?
Avinash Reddy, CFO
Yeah. So what I tried to point out in the prepared remarks, Greg, was we had around four basis points from the payoff of our previous non-accrual loan. All that happened in the month of June. So the June NIM was a little inflated. But if you back that out, the spot NIM would have probably been around 2.36%, 2.37% for the month of June. We also mentioned that the sub-debt offering closed at the end of June, so that will have an impact going forward, but probably around 2.36% to 2.37% ex the sub-debt for June.
Gregory Zingone, Analyst
Okay. And then on the $5.5 million provision, is that a good run rate for us to think about for the remainder of the year?
Avinash Reddy, CFO
Well, we evaluate the provision every quarter based on economic conditions. So it's really going to be a function of what the Moody's forecasts are on a going-forward basis. I think, right now, we feel pretty adequately provisioned. We built the reserve a basis point here, so it's really going to be a function of how the Moody's estimates come out, Greg?
Stuart Lubow, President and CEO
Yeah. And as we continue to book new loans, C&I and business-related loans, obviously, those provisions are somewhat higher. So there'll be just in terms of the ongoing shift in the loan portfolio, there'll be some provisioning associated with that that will change relative to the model.
Gregory Zingone, Analyst
Okay. And then lastly, how big of a push do you plan to make in Westchester? Is adding more teams or more branches in Westchester a priority going forward?
Stuart Lubow, President and CEO
I think we've got two teams up there now. We've just gotten approval for a full-service or limited-service branch up there. We're not really looking to open up retail locations. It's really more second-story business-related growth. And so, for now, I can see us bringing on more teams over time. I don't see us opening up a lot more bricks and mortar up there in terms of branch locations.
Gregory Zingone, Analyst
Awesome. Thank you, guys.
Avinash Reddy, CFO
Thanks, Greg.
Operator, Operator
Thank you. Please hold for the next question. Our next question will be coming from Manuel Navas of D.A. Davidson. Your line is open.
Manuel Navas, Analyst
Good morning, everyone. Thank you. I think I missed the operating expense guidance for the next quarter. Could you please repeat that? Also, could you provide more detail on the initiatives you’re considering for next year, given that you mentioned nominal expense growth? Is it too early to discuss those?
Avinash Reddy, CFO
Yeah. We're just going through our budgeting process now, Manuel. So I think as we get towards the end of the year into really our January call, we'll be able to outline all of those in detail. The guidance was we probably expect to be around $57 million in Q3, kind of hold that for the rest of the year. But our goal is for next year to have very nominal growth absent any additional team hiring opportunities that could take place next year. So that's pretty much the guidance at this point. I think we'll have more details as we get into our December and January timeframe once we get through the budgeting season.
Manuel Navas, Analyst
I really appreciate that. That leads me to my next question. What's kind of the pipeline on hires? Is it kind of calmed down? Are you still seeing talent out there? That's interesting. What's kind of an update on the hiring process?
Stuart Lubow, President and CEO
We are still in discussions with potential candidates and there is still talent available on both the deposit and lending sides. We've been active in bringing in a group of C&I lenders who have already made significant contributions. Our healthcare group pipeline is quite substantial, and we expect meaningful loan volume this quarter in that sector as well. We are also looking into adding more teams for C&I business. There are opportunities present, though I anticipate a slight slowdown as we approach year-end when people think about bonuses. However, we are laying the groundwork for the upcoming year. We've demonstrated that we are the bank of choice for opportunities, successfully opening 3,000 to 4,000 new business and relationship accounts with the new teams that are just starting to engage. We are nearing $1.1 billion in new deposits, with almost half of that in DDA. Our model and thesis are proving effective, establishing us as a preferred option for opportunities. I genuinely believe there is a lot more to come in the future.
Manuel Navas, Analyst
Is healthcare going to be a big chunk of the low single-digit growth in the back half of this year? I think you've given pipelines in the past for that group. Is that something that's disclosable today?
Stuart Lubow, President and CEO
Sure. I mean our pipeline in the healthcare business is $172 million at an average rate of 7.80%. And our C&I pipeline is $130 million at an average rate of 8.5%. So, it's across the board and it's really, again, following what we've been saying for the last year in terms of diversification. So, we're quite encouraged by the build-out of both our middle market C&I business and our healthcare business. Even our residential group is up substantially in terms of pipeline. They have almost $60 million in the pipeline at a 6.5% rate, all adjustable rate mortgages. So, again, we're out there and we're doing business. And so we're very encouraged.
Manuel Navas, Analyst
If I just shift to the NIM for a moment. I really appreciate the repricing opportunity, second half of next year into 2026. More near term if we do get a rate cut in September, could the slow and steady NIM increases accelerate a bit in the fourth quarter?
Avinash Reddy, CFO
Yes, yes.
Manuel Navas, Analyst
Okay.
Stuart Lubow, President and CEO
Yeah, I mean, I think we're seeing just month over month with the new originations and repricing of what loans we do have that are repricing this year. We're seeing a slow and steady growth in terms of loan yields and deposit yields are flat or down. So just the natural progression is positive. But certainly with a rate cut in September and possibly one later in the year, we could see that accelerate quite a bit. Just month-to-date, for example, our yields on loans are up over three basis points, and we expect that to accelerate with this quarter's new originations and repricing. So, again, we're optimistic. And as I said, absent rate cuts, we're going to see a slow and steady grind up. But certainly, the rate cuts are going to help accelerate that growth.
Manuel Navas, Analyst
Okay. My last question is that repricing opportunity doesn't include any. It just includes the forward curve for the second half of 2025 into 2026. It's just the loan side. It doesn't include expectations on rate cuts in there, correct? Is that the right way to think about that analysis?
Avinash Reddy, CFO
We have $2 billion in the second half of 2025 and 2026 at a rate of 3.90%, following the forward curve which is around 4% for the next five years. This should lead to a 35 basis point increase in the net interest margin overall solely due to that. Additionally, we are remixing the loan portfolio, which is contributing approximately four to five basis points every quarter to the net interest margin. Furthermore, with the deposit growth we have, we still hold around $750 million of brokered deposits on the balance sheet and have significantly reduced our short-term FHLB borrowings. This is the initial step in evolving our balance sheet. As our new teams bring in deposits, it will help offset the costs associated with the brokered deposits. The key takeaway is that we don't require rate cuts for an upward trend in the net interest margin. In fact, with rate cuts, we expect an even more substantial increase. Once we have the opportunity to reprice, the net interest margin will accelerate, potentially exceeding the levels we reached in the last cycle based on our models.
Manuel Navas, Analyst
Right. That's great. I really appreciate the commentary. Thank you very much.
Operator, Operator
Thank you. Please hold for the next question. Our next question will be coming from Steve Moss of Raymond James. Your line is open.
Steve Moss, Analyst
Good morning.
Stuart Lubow, President and CEO
Hey, Steve.
Avinash Reddy, CFO
Hey, Steve.
Steve Moss, Analyst
Alright. I want to follow up on deposits. Stu, I believe you mentioned that the balances on deposits were stable to down at the beginning of the call. I'm curious about this because you've seen a solid increase in deposit growth with the new teams you've added. Could we expect this trend to continue in the upcoming quarter? Additionally, please go ahead with your thoughts.
Stuart Lubow, President and CEO
What I said was yields on deposits were stable to down. But we're seeing steady growth on the deposit side, so we expect continued growth on the deposit side.
Steve Moss, Analyst
Okay. And so perhaps at a similar pace to what we saw this past quarter?
Avinash Reddy, CFO
Yeah, I don't think, we don't think about it on a quarterly basis, Steve. Obviously, you know, in the first and second quarters, there was significant disruption with one of our competitors. So sometimes it ebbs and flows. But, I mean, the way we look at it is the groups that have come on, right. The average tenure of the groups on a weighted average basis is only seven months to eight months at the bank. So they have a substantial runway in front of them to do that. So we're measuring it in terms of years as opposed to quarters. So I think a year from now, we're going to be substantially higher than where we are right now. Every individual quarter, you have seasonality deposits coming in, deposits coming out. The other way we track it as Stu said is accounts. So we're continuing to see accounts open every day, every week and very bullish about them bringing over more and more deposits over time.
Steve Moss, Analyst
Okay. Could you share with us how many accounts were open this quarter?
Avinash Reddy, CFO
This quarter, we probably had, I'd say, close to around 700 to 800 accounts that were open.
Steve Moss, Analyst
I'm interested in knowing the current blended cost of funds for the deposits you're receiving.
Avinash Reddy, CFO
Yeah, probably say around between 2.50% and 2.70% plus or minus from the new groups, because, as Stu said, substantial portion of it is in DDA. Probably 40% to 45% DDA of the stuff that's coming in. So it's between 2.50% and 2.75%.
Steve Moss, Analyst
Okay, appreciate that. And then in terms of the drivers here on the lowered classified, down 14% quarter-over-quarter. Just curious to get some incremental color around those drivers.
Avinash Reddy, CFO
Yeah, we should have all the detail in the 10-Q we just provide an expectation. Right now, I think multifamily is down around $15 million, $20 million. I think C&I and owner-occupied are down, the rest basically, investor CRE is flat. But all the detail will be in our Q next week, Steve.
Steve Moss, Analyst
Appreciate that. Okay. So I guess just last one for me here in terms of, you know, it sounds like you guys remain active on the hiring front or at least interested. Do you expect like a steady pace of ads in the second half of the year for additional teams or is it more maybe a 2025?
Stuart Lubow, President and CEO
Yeah. I think it's more 2025. As we're getting toward the end of the year, folks tend to have the view of, well, I'm going to stay where I am for now. I got bonuses coming up and so it's probably more towards, you know, the end of the first quarter of 2025, although there probably might be some opportunity on the lending side with some teams that I think may be available. And we are talking seriously, but I think on the deposit side, it's probably more geared toward early 2025.
Steve Moss, Analyst
Okay, great. Really appreciate all the color. Nice quarter.
Stuart Lubow, President and CEO
Thank you.
Operator, Operator
Thank you. Please hold for the next question. Our next question will be coming from Christopher O'Connell of KBW. Your line is open.
Christopher O'Connell, Analyst
Hey, good morning.
Avinash Reddy, CFO
Hey, Chris. Good morning.
Stuart Lubow, President and CEO
Hey, Chris.
Christopher O'Connell, Analyst
So, yeah, just want to start off on the NIM and apologize if I missed anything. But from what I understand, slow and steady progress until there's rate cuts from here in the back half of the year and that's inclusive of the sub-debt offering, correct? And kind of minus the non-accrual recovery, are you guys thinking the NIM will progress and be up from the 2.37%, June NIM range ex the non-accrual recovery?
Avinash Reddy, CFO
In my prepared remarks, I mentioned that the base net interest margin to consider is 2.34%. This figure excludes four basis points from the non-accrual interest recovery and three basis points from the subordinated debt. I would begin with the 2.34% and expect a slow and steady upward trend from that point. As we have indicated, loan yields are likely to increase by approximately four to five basis points each quarter on average, which will contribute positively. Additionally, if we observe stabilization in deposit costs, we can expect a natural upward movement in the net interest margin. It’s important to note that once rate cuts occur, we will have more deposits than assets that can be repriced, which will also be beneficial. I anticipate this starting in the fourth quarter and continuing into the first and second quarters of next year, with a significant repricing opportunity emerging in the second half of 2025. Therefore, the approach to the net interest margin will be layered. Furthermore, we need to consider the new deposit teams that are bringing in deposits, with rates ranging from 2.50% to 2.75%, compared to the current brokered cost of 5.35%. Overall, if you take all of this into account, we are quite confident that by the latter half of 2025 and into 2026, the net interest margin will be significantly higher than it is at present.
Christopher O'Connell, Analyst
Great. That's helpful. And then, as you guys are, it sounds like, having a very good quarter multifamily on the criticized classifieds, no NPLs. Can you just remind us of how much you guys have maturing in the rent-regulated portfolio in the second half of the year? And just anything that you've been seeing from your customers in terms of just any qualitative data as to what you've been seeing in terms of either debt service coverage ratios or just conversations with the customers for what's matured year-to-date?
Avinash Reddy, CFO
Yes. I'll start off with what's coming up, and then Stu will provide some qualitative insights. In the third quarter, we anticipate around $10 million from the rent-regulated side, and in the fourth quarter, we expect between $15 million and $20 million. This is quite modest for the year in terms of what remains. For example, in the second quarter, we had approximately $45 million in rent-regulated loans that were set to reprice, with around $20 million satisfied and about $25 million repriced, and there have been no issues with these loans. The split is likely about one-third satisfied and two-thirds repriced as of the last quarter. Stu will give you more qualitative details on that.
Stuart Lubow, President and CEO
We haven't had many discussions with customers, and we aren't experiencing a high volume of calls regarding issues or problems. Our non-performing loans and delinquencies are stable or declining. We're keeping an eye on everything and have not noticed significant changes in debt service coverages. In fact, much of it has shown positive growth in terms of debt service coverage. Approximately 75% to 80% of the portfolio year-over-year has debt service coverage. At this time, we continue to monitor the situation and maintain contact with customers as needed, but we're not encountering any significant issues at the moment.
Christopher O'Connell, Analyst
Great. And then just on the expense discussion, so you know it jumps up to $57 million next quarter. I'm assuming a lot of that's in compensation from the new hires. And then it sounds like you think that level can hold relatively flat into 2025. Just what are some of the puts and takes? I'm assuming there's merit increases, et cetera, in '25, where you guys think that you have opportunities to kind of save and limit the overall expense growth from here into '25?
Avinash Reddy, CFO
I believe that's a reasonable assessment, Chris. For the second half of this year, we expect around $57 million, give or take, to be a good estimate. The merit increase will take effect on April 1st, so the first quarter of next year will likely align with the second half of this year. We have consistently managed our expenses efficiently, although we will see an increase in salary and compensation costs as the new teams are performing well. There are accruals and other factors to consider moving forward. As I mentioned in response to Manuel's question, we are working on a few company-wide initiatives and will likely share more details early next year. Our guidance for next year indicates modest growth, but I wouldn't characterize it as flat since we plan to invest in our businesses throughout the year. We will be cautious in our approach, and as we observe improvements in net interest margin over time, it will provide some flexibility to invest back into the business. We are pleased with the initial performance of the new teams, which are currently operating above breakeven. There won't be any additional fixed costs beyond the current $57 million run rate. In the future, we anticipate a time when we can grow the balance sheet further, at which point our expense-to-asset ratio should naturally decrease. Historically, we have maintained this ratio between 1.50% and 1.55%, but it's currently around 1.60% to 1.65%. We do expect it to decrease in the coming years as balance sheet growth resumes.
Christopher O'Connell, Analyst
Great. And then any small but any color on the drop in customer service fees this quarter versus last quarter kind of an unusually strong quarter, or should we take it as like a blend of the two?
Avinash Reddy, CFO
We had some rollover fees last quarter related to certain loans that were repricing. This quarter, we had more multifamily loans that satisfied instead of repriced. Last quarter, in the first quarter, there were more loans that opted for the rollover option. So, there are a few seasonal items that fluctuate, but nothing significant.
Christopher O'Connell, Analyst
Got it. And I know you guys are usually cautious on this, but any sense of just outside of the amount of fixed maturities and everything happening in the second half of '25 and '26, but what the impact of each 25 basis point cut would be on the margin?
Avinash Reddy, CFO
I believe the timing of the first and second rate cuts will largely depend on the competition and their actions. Our deposit base leans more towards commercial customers, and we have a higher proportion of money market accounts compared to time deposits. This positions us to potentially benefit more from rate cuts than many of our competitors. Currently, approximately 31% to 32% of our loan portfolio is at a variable rate, and around 30% of our deposits are demand deposits. Some of our deposits cost less than 1%, making it harder to adjust those rates. However, our primary goal is to bring the margin back to over 3%, which would enhance our overall returns. Our projections suggest we could achieve this by late '25 into '26. The journey to get there might be inconsistent quarter to quarter, but we expect to see some advantages from the rate cuts.
Stuart Lubow, President and CEO
We have $700 million of broker assets that can be adjusted quickly in response to rate cuts, along with approximately $1.8 billion in municipals that can also be easily adjusted. We are prepared and have already organized the portfolio to identify which segments will move and by how much when the rate cut occurs. While we are optimistic about the situation, we remain somewhat cautious given the competitive landscape.
Christopher O'Connell, Analyst
Got it. And last one for me, just what's a good tax rate going forward?
Avinash Reddy, CFO
Yeah, I think around 27%, Chris. We had a couple of discrete items this quarter, so I'd use 27% going forward.
Christopher O'Connell, Analyst
Great. Thank you.
Avinash Reddy, CFO
Thank you.
Operator, Operator
Thank you. There are no more questions in the queue. This does conclude today's Q&A session and I would now like to turn the call back over to Stuart Lubow for closing remarks. Please go ahead.
Stuart Lubow, President and CEO
Thank you, Lisa. Thank you all for joining us today. I'd like to thank our dedicated employees and our shareholders for their continued support. And I look forward to speaking with you after the third quarter.
Operator, Operator
Thank you for joining today's conference call. You may all disconnect.