Earnings Call Transcript - DCOM Q2 2025

Operator, Operator

Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc. Q2 Earnings Call. Please be advised that today's conference is being recorded. 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 a reconciliation to GAAP, please refer to today's earnings release. I would now like to hand the conference over to your first speaker today, Stuart Lubow, President and CEO. Please go ahead.

Stuart Lubow, President and CEO

Good morning. Thank you, Stephen, and thank you all for joining us this morning for our quarterly earnings call. With me this morning is Avi Reddy, our CFO. In my prepared remarks, I will touch upon key highlights for the second quarter of 2025. Avi will then provide some details on the quarter and thoughts on the remainder of the year. Our core earnings power has increased significantly over the past year. Core pretax pre-provision income was $49 million in the second quarter of 2025 compared to $28 million a year ago. This translated into a core ROA of 85 basis points for the second quarter. Core deposits were up $1.2 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.2 billion. This has allowed us to continue to pay down our broker deposits to a fairly minimal level. We have made significant progress in creating 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 second quarter. By maintaining a strong focus on cost of funds management, our NIM has now increased for the fifth consecutive quarter and is approaching the 3% mark. We continue to have several catalysts to continue to grow our NIM over the medium to long-term, including a significant back book repricing opportunity. Avi will get into that in more detail in his remarks. On the loan front, we continue to execute our stated plan of growing business loans and managing our CRE ratio lower. Business loans grew over $110 million in the second quarter and over $370 million or 15% on a year-over-year basis. We are starting to see the benefit of the new hires we have made over the past couple of years. Loan originations, including new lines of credit, increased to $450 million for the quarter. The weighted average rate on the new origination was approximately 7%. Our loan pipelines continue to be strong and currently stand at $1.2 billion compared to approximately $1.1 billion at quarter end in March and $750 million when we reported earnings in January. The weighted average rate on the pipeline is approximately 6.85%. On our recruiting efforts, disruption in the local market remains very high. And in the second quarter, we executed our commercial lending diversification strategy. After hiring Tom Geisel in the first quarter, we identified several verticals that are complementary to our existing businesses and made a number of senior hires. Once they settle in, we expect these verticals to contribute to our growth in the fourth quarter and beyond. While hiring does cause an increase in near-term operating expenses, we expect all these verticals to meaningfully contribute to the execution of our strategic goals. In addition to the new lending verticals, we made progress on getting regulatory approvals to open our new location in Lakewood, New Jersey. Additionally, we expect to open a new branch in Manhattan in the fourth quarter. In conclusion, the momentum in our business is extremely strong, and we continue to execute 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 and the ability to attract talented bankers. We have an outstanding deposit franchise, a strong liquidity position, and a robust capital base. It is important to note that our full earnings power, which is underpinned by a 30% noninterest-bearing deposit base, is not yet shining through as the asset side of the balance sheet has not yet repriced. Ongoing NIM improvement is supported by loan repricing opportunities and coupled with organic growth across deposits and business loans. That will aid in unlocking the inherent earnings of Dime. I'm looking forward to the remainder of 2025. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best business bank in New York. With that, I will turn the call over to Avi.

Avinash Reddy, CFO

Thank you, Stu. Core EPS was $0.64 per share. This represents increases of 12% on a linked-quarter basis and 49% on a year-over-year basis. The reported NIM increased to 2.98%. We had around 3 basis points of prepayment fees in the second quarter NIM. Excluding prepayment fees and purchase accounting, the second quarter NIM would have been 2.95%. As a reminder, the first quarter NIM, excluding prepayment fees and purchase accounting, was 2.91%. Non-brokered deposits were up approximately $210 million at June 30 versus the prior quarter. As we continue to see strong inflows across our branch network and across the private and commercial bank, we proactively reduced the higher-cost municipal relationship by approximately $125 million in the second quarter. Said differently, had we not proactively reduced this municipal relationship, we would have grown non-brokered deposits by approximately $335 million in the second quarter. Core cash operating expenses, excluding intangible amortization and severance expense, was $59.9 million. The linked quarter increase in expenses was primarily due to the hiring of production staff. Noninterest income of $11.6 million reflected increased loan swap income. We had a $9.2 million credit loss provision for the quarter and the allowance to loans increased to 86 basis points. Capital levels continue to grow, and our common equity Tier 1 ratio increased to 11.25% and our total capital ratio grew to 15.8%. 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 guidance for the remainder of 2025. As I mentioned previously, excluding prepayment fees, the NIM for the second quarter would have been 2.95%. We would use this as a starting point for modeling purposes going forward as we don't expect the prepayment fees to repeat in that size in the upcoming quarters. In the near term, we expect a gradual upward bias in the NIM for the third quarter with more pronounced expansion in the fourth quarter as the asset repricing story will start to unfold with more vigor towards the end 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 approximately $1.95 billion of adjustable and fixed-rate loans across the loan portfolio at a weighted average rate of approximately 4.1% that either reprice or mature in that timeframe. Assuming a 225 basis points spread on those loans over the forward 5-year treasury, we could see a 30 basis points increase in NIM from the repricing of these loans. 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. Moving to the short end of the curve, should the Federal Reserve cut rates, we expect our previous trend of approximately 5 basis points of NIM expansion for every 25 basis point rate cut to repeat, assuming the behavior in deposits and loans hold 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. As we approach a 3% margin, the next marker in front of us is 3.25% and after that, 3.50%. It's important to note that while the destination to us is clear, the near to medium-term NIM is going to be a function of business loan growth. We believe we have the people and verticals in place to drive strong medium to long-term business loan growth. Along the journey, if there's a quarter of subdued growth and less remixing, it does not change the ending NIM destination in our mind. With respect to balance sheet growth, we expect low single-digit growth for the remainder of the year with the planned attrition in transactional CRE and multifamily masked by 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 outlined in the press release, we have organically built out several new lending verticals. As a result, we are updating our core cash noninterest expense guidance, which excludes intangible amortization to approximately $61.5 million for the third quarter of 2025. This updated guidance is based on our existing employee base as of the time of the earnings release. For the third quarter, we anticipate swap fee income to be approximately $0.5 million and total noninterest income to be in the $10.5 million area. Finally, on the tax rate, we expect the effective tax rate to be between 27% and 27.5% for the third quarter. With that, I'll turn the call back to the operator, and we'll be happy to take your questions.

Operator, Operator

Our first question comes from the line of Thomas Reid of Raymond James.

Thomas Reid, Analyst

Thomas on for Steve. So I want to start it off, we saw a pretty healthy bump in DDA balances here, based relative to the prior trend. Was there anything onetime in nature? Or can we expect a similar trajectory there going forward?

Avinash Reddy, CFO

Yes. Nothing one time, Thomas.

Stuart Lubow, President and CEO

Yes. No, we've had a nice continued strength in our retail network as well as our private banking groups. I mean, if you look at quarter-over-quarter, we're still seeing a significant amount of new accounts opened. There are about 1,500 new accounts opened in our private banking group quarter-over-quarter. And obviously, $350 million to $400 million in growth quarter-over-quarter. We're still seeing significant positive trends in both the retail group as well as our private banking group.

Thomas Reid, Analyst

Okay. Good. That's good to hear. And then it looks like the weighted average rate on the loan pipeline is down about 40 basis points. Is that largely driven by rate movements? Or are you maybe seeing a little bit more competition in tightening the spreads there?

Avinash Reddy, CFO

No. The origination rate this quarter was approximately 7.10%. Stu mentioned in his prepared remarks that the new pipeline was around 6.85%. So it's likely around 20 to 25 basis points. Some of it is due to us doing floating-rate loans, where we're achieving a good spread. There's also a bit of a mix shift and similar factors. Overall, nothing significant has changed, and we're still maintaining a rate in the high 6s to close to 7.

Operator, Operator

Our next question comes from the line of Mark Fitzgibbon of Piper Sandler.

Mark Fitzgibbon, Analyst

First question, Avi, just to clarify, you did say $61.5 million for operating expenses for the third quarter. Is that correct?

Avinash Reddy, CFO

Yes. Excluding intangible amortization, the total is likely around $61.8 million, which includes $61.5 million plus an additional $200,000 to $250,000 for intangible amortization.

Mark Fitzgibbon, Analyst

Okay. Great. And then secondly, I wonder if you could remind us, what the impact of a 25 basis point rate cut means to NII or the margin. Any color on that?

Avinash Reddy, CFO

Yes. Yes, sure. It's historically been around 5 basis points, Mark. So we'd expect that to continue. I mean, obviously, if we get a bunch of gradual 25 basis point rate cuts with some time lag in between them, that's the most favorable environment for us to realize the full 5 basis points. So I would use around 5 basis points.

Mark Fitzgibbon, Analyst

Okay. Great. And then sort of at a high level, I guess I'm curious how you all are thinking about sort of the hiring. You've done a lot of hiring, had some really good success on the deposit front in growing business. Are we getting to the point, do you think, where expense growth and hiring start to flatten out a little bit here? Or is there still a steep trajectory there?

Avinash Reddy, CFO

Yes. So I'd say, Mark, we put the verticals in place on the lending side. The second quarter was a big hiring quarter for us in terms of who we put in place and the infrastructure behind it. I would say as we get closer to the end of the year, it's harder to move people basically. I mean there could be some singles and doubles where we add some people on. But I think any substantial hiring as you get into August and September, you then start getting into next year at that point. So I think using the Q3 run rate-ish plus or minus for the fourth quarter is not unreasonable. I mean, it may be up a little bit. But then once we get into next year, we're going to have to reevaluate. I mean we're still in touch with some substantial deposit teams and some substantial people on the lending side, but it takes time to move some of these. And we're also trying to stage these where we keep OpEx in check, and we can show that we're driving the efficiency ratio down every quarter.

Stuart Lubow, President and CEO

Yes. I'd say that generally, we're where we want to be. We had concentrated on bringing deposit teams on for the last 18 months. And then we really focused on building up the remainder of these verticals in the first part of this year. And I think we're pretty comfortable where we are today in meeting our goals and strategic goals in terms of the verticals we're looking at. And the pipelines are starting to really build in those verticals. So we're very pleased. And I think those new hires are going to be at breakeven or profitable very quickly based on the pipeline we're seeing.

Mark Fitzgibbon, Analyst

Okay. And then, Stu, I'm curious at a high level, it feels like M&A is starting to pick back up. Do you see that as an opportunity for Dime or are you still more internally focused right now? Any comments around M&A?

Stuart Lubow, President and CEO

Look, if there are opportunities out there, we're certainly interested. And as you know, the market is not a target-rich environment. So we are looking at options and are certainly interested. But just as important or more importantly, we've been able to significantly grow the balance sheet and think we can continue to do that organically. But if opportunities present themselves, we will certainly take a look.

Mark Fitzgibbon, Analyst

Okay. And then lastly, I guess I'm curious your thoughts on how a Mamdani narrow win might impact your New York City multifamily rent-regulated book. And obviously I know you're deemphasizing that business, but any thoughts on sort of how you might handle that?

Stuart Lubow, President and CEO

There's no guarantee he'll win. The Rent Guidelines Board has just announced new rent increases effective in October, so there's not immediate concern. However, if he were elected and influenced the Board to implement rent freezes, we're considering that. We've experienced rent freezes in New York City before. Our portfolio is strong; we currently have no nonperforming multifamily loans. Additionally, our rent-regulated portfolio is diverse, with an average loan size of about $2.8 million. All loans affected by pre-2019 legal changes regarding capital expenses and rent increases have now repriced and are current. We're monitoring the situation, assessing its impact on our portfolio, but we believe we have a robust portfolio with good debt service coverage and reliable borrowers. We will keep an eye on the election and manage the situation as the market has done in the past.

Operator, Operator

Our next question comes from the line of Matthew Breese of Stephens Inc.

Matthew Breese, Analyst

I was hoping you could discuss the cost of deposits. Demand deposit growth this quarter was really solid and you are continuing to make gains there. However, the overall cost of deposits remained flat. Can you talk about whether there is potential to reduce costs in the absence of rate cuts, or are we nearing the end of that possibility?

Avinash Reddy, CFO

Yes, we're bringing in new deposits likely in the low to mid 2% range. We don't have a very large certificate of deposit base at the bank, with about $300 million to $350 million maturing in the third quarter at a rate of around 3.65% to 3.70%. We're expecting to retain about 90% of that at 3%. This CD book could contribute a couple of basis points, which we might be able to reduce slightly, but that will likely be balanced out by new deposits coming in. Growing deposits is essential for us, and in the absence of rate cuts, this seems like a reasonable level for our deposit costs. Moving forward, much of our net interest margin expansion will depend on asset repricing.

Matthew Breese, Analyst

Great. Can you provide some insights into the new verticals mentioned in the press release, specifically corporate/specialty finance, lender finance, and fund finance? I'm interested in understanding how loans are priced in these areas, including the spreads over SOFR, and a sense of historical loss content.

Avinash Reddy, CFO

Yes.

Stuart Lubow, President and CEO

Go ahead.

Avinash Reddy, CFO

Yes, I believe these are mainly floating rate assets for us, which will improve our asset liability management profile. Starting with health care, although you didn't inquire about it, we've been involved in that sector. It's likely priced around SOFR plus 300 basis points. Other sectors are generally between 250 to 300 basis points over SOFR. Historically, fund finance has not encountered significant asset quality issues; we primarily focus on subscription lines, which are the safest aspect of that business. In other sectors, we also haven't observed much historical loss content, and we plan to proceed with caution and diligence, similar to how we developed our health care business over time. Therefore, we do not anticipate loss content. We are seeing new transactions coming in and have established various businesses, providing us with the flexibility to manage loan growth at a steady pace.

Stuart Lubow, President and CEO

Yes. So I'd say generally, the spreads are 225 to 300 in all the verticals. And we're seeing, as I said, some pretty strong pipeline activity. So we're excited about that. All of it is basically floating rate.

Matthew Breese, Analyst

And then in terms of balances, if everything goes according to plan or if you want to reference the folks you've hired at prior books, 12 or 24 months from now, to what extent do you think this might impact loan growth? What could be the potential kind of loan balances here?

Avinash Reddy, CFO

Yes. So I think we'd use health care as a template, Matt, for this. So we started that business probably 2, 2.5 years back. At this point, we're probably at around $300 million to $350 million of balances on the health care side. So I think that's a good template for a 24-month-ish period. I think over the slightly longer term of that, if you think about 36 to 48 months, we'd like each of these businesses to be a $0.5 billion vertical for us basically. That's how we think about it.

Matthew Breese, Analyst

Appreciate that. Last one is just, Avi, could you update us on kind of reserve plans? I think the loan loss reserve was up to 86 basis points. I think there's a push to get it higher. Could you just kind of update us on where you want to be by year-end?

Avinash Reddy, CFO

Yes, we began discussing this around a year ago or maybe nine months ago. Our objective in the medium to long term is to reach a range of 90 basis points to 1%. It can be challenging to predict each quarter, as it depends on the CECL model and various factors. As we shift our balance sheet and focus more on C&I, the ratio is likely to increase. We don't have a specific target we need to hit, but as we analyze our models internally and expand in certain areas, I believe we will reach the 90 basis points to 1% range. Currently, we are at 86 basis points, which shows a positive trend. We are aligning more closely with our local and national peer groups given the risk profile of our assets. While it's hard to determine if it will continue to rise every quarter, we would like to see it fall within the 90 to 1% range.

Operator, Operator

Our next question comes from the line of Manuel Navas of D.A. Davidson & Company.

Manuel Navas, Analyst

I appreciate the color on the loan repricing outlook. Do you have the balances just in the second half of the year?

Avinash Reddy, CFO

In the third quarter, we have approximately $400 million at a rate of around 4%. In the fourth quarter, there’s about $200 million at a rate of around 4.30%. It's important to note that much of the $400 million is towards the end of the quarter. This is why we expect to see more significant net interest margin expansion in the fourth quarter, as loans need to reprice for us to realize the benefits. Overall, the total amount is about $600 million, split between $400 million and $200 million in the third and fourth quarters respectively.

Manuel Navas, Analyst

That's great. That's really helpful. Could you provide an update on the current balances in the private banking group, which Stu mentioned has around 1,500 accounts?

Avinash Reddy, CFO

$2.2 billion.

Manuel Navas, Analyst

And our pipeline is as strong as ever? I mean, with those new accounts, just kind of you're going to be doing some remix of the balance sheet that keeps the balance sheet in the low single-digits growth, but this deposit group still has plenty of runway to go forward, correct?

Avinash Reddy, CFO

Yes, we think so. I mean, look, same thing we've said historically that we think each of these groups is going to take 3 to 4 years for them to reach a steadier state. And Stu said in his remarks, account openings are very strong, similar to the pace of prior quarters basically. And so in an individual quarter here or there, it may be up or down. But we really track it from an account opening and customer opening perspective, and that's not slowed down yet.

Stuart Lubow, President and CEO

And on top of that, the verticals that we brought on and the pipeline that's out there, we're seeing significant deposit balance opportunity as well. So it's just not one side of the balance sheet on these new verticals. So we're pretty bullish on continued growth there.

Avinash Reddy, CFO

Yes. Just one other thing I would add is our branch network has had a really, really solid first 6 months of the year. We've made up a lot of balances, especially from stuff that was lost in 2023. So we're really seeing 3 different avenues for deposit growth of the private banking groups we hired, the new lending verticals as well as the branch network.

Manuel Navas, Analyst

That's great. As you're getting more and more funding and more opportunities, where could loan growth get to, especially with all the verticals like in '26 and '27, you do have some of the repricing come at the same time, but like where could loan growth get longer term?

Avinash Reddy, CFO

Yes. If this is an indirect way of asking us for guidance for '26, we're going to stay away from that. Look, I think Matt asked the question, where do we think these verticals could be over time, right? And each of these, in the medium to long run, we'd want them to be $300 million to $500 million verticals. We're going to see some attrition on the transactional CRE side. But there's no reason we should not be a mid to high single-digit growth bank once the CRE ratio gets to a level that we want it to be at. The near term, as we said earlier, we're managing the CRE ratio to get down to around 400% by year-end, and we're pretty much there at this point, right? So it's really a tale of 2 balance sheets with the CRE that we're reducing. But then medium to longer term, I think mid to high single-digit is a good number for the bank.

Operator, Operator

Our next question comes from the line of David Konrad of KBW.

David Konrad, Analyst

Thanks for all the detailed guidance. Just want to talk a little bit about capital, really strong here, north of 11% CET1. You got an improving profitability coming next year. But I guess it still sounds like the #1 priority is the organic growth of the business rather than anything near term in terms of capital deployment or return to shareholders?

Avinash Reddy, CFO

Yes, David, that's a fair point. We received a similar inquiry during our last earnings call, and our response is quite similar now. There is still some uncertainty regarding tariffs, but we've built strong productive teams. We mentioned that by the end of this year or early 2026, we will reevaluate the buyback and related matters. From a corporate finance standpoint, we believe our stock is significantly undervalued at this time. However, we also think that maintaining capital ratios higher than most of our local competitors provides us with a competitive edge as we pursue new growth areas. So, for the near term, we are focused on accumulating capital. In the medium to long term, as we have demonstrated in the past, we will return capital to shareholders whenever possible.

Operator, Operator

All right. I'm showing no further questions at this time. Actually, we do have one more in the queue here. All right. We have Matthew Breese returning from Stephens Inc.

Matthew Breese, Analyst

Just one more. Avi, could you help me out with cash, cash equivalents, liquidity deployment strategy? You're sitting on just a lot of cash here. I'm curious where you feel comfortable bringing it down to and some sense for timing?

Avinash Reddy, CFO

Yes. I think in the near term, we were not focused on buying securities, Matt. If we did decide to do so, there certainly would be a boost to NIM and a boost to net interest income. But we're trying to run the balance sheet for the more medium to longer term. I think over the medium to longer term, a lot of the cash would probably be redeployed into some of the new lending verticals that we're in. Our loan-to-deposit ratio is 91% to 92%. We're very comfortable between that 90% to 95%. So I'd say in the medium to longer term, we'd like a lot of that to go into some of the C&I items that we're focused on, which are floating rate assets. But I'd say in the near term, we're not out there buying securities and changing the ALM profile to something different than what we want to do. So we are giving up some earnings in the near term. But I think we're creating a balance sheet that will have a structurally higher NIM over time and set us up for different rate environments by keeping the cash position where it is.

Stuart Lubow, President and CEO

Yes. And what we're seeing in the pipeline with the existing verticals and the teams we brought on plus with the new verticals, we think that we can quickly deploy over the next 6 to 9 months excess liquidity, so at meaningful NIM improvement. So that's our view as to our current cash position.

Operator, Operator

Thank you. I am showing no further questions at this time. I would now like to turn it back to Stuart Lubow for closing remarks.

Stuart Lubow, President and CEO

Thank you, Stephen, and thank you all to our dedicated employees, our shareholders for their continued support, and we look forward to speaking with you after our third quarter.

Operator, Operator

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.