Earnings Call Transcript - DCOM Q4 2023

Operator, Operator

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

Stuart Lubow, CEO

Good morning. Thank you, Shannon. With me today is Avi Reddy, our CFO, and thank you all for joining us this morning for our fourth quarter earnings call. 2023 was an unprecedented year in many respects, with the Federal Reserve taking interest rates to a multi-decade high and three regional banks failing resulting in significant focus on liquidity and deposits. Throughout all of this uncertainty, Dime's business model remained resilient as demonstrated by year-over-year growth in deposits of over $275 million and loans over $200 million. Importantly, in 2023, we put in place several cornerstone investments that will serve as growth engines for the franchise in the years ahead. First, we rapidly assembled a cross-functional internal team to attract productive deposit-gathering bankers from Signature Bank. In the second quarter, we were able to onboard six groups, and as of December 31, their portfolio stands at approximately $350 million with approximately 50% being in DDA. To provide some background, after I joined Dime in 2017, we put in place the building blocks for our private and commercial bank deposit-gathering operations. This existing operation provided us a solid foundation that helped us attract these new groups. We are proud of the fact that Dime was the only bank in Metro New York that was able to attract these talented bankers, a testament to our client-first business model and our state-of-the-art technology and treasury management systems. Today, our overall private and commercial bank deposit portfolio stands at approximately $1.5 billion, inclusive of the new groups hired in 2023. Over the course of the second half of the year, we made significant operational and technology-related enhancements in this business and truly believe we now have the best-in-class private client platform in the Metro New York area. As I have said, this segment will be the growth engine for Dime in the years ahead as we build our portfolio via acquisition of new clients and new groups. Moving to the asset side of the balance sheet. We added to our business loan origination capacity by building out a brand-new health care vertical in 2023. This follows on the heels of building out a middle market C&I lending operation in 2022. Our health care team is actively in the market, and our pipeline in this new vertical is now over $100 million and growing, with an average rate of 9%. The health care vertical will add diversity to our balance sheet with solid margins. Once again, we continue to spend a significant amount of time on our recruiting front and believe we have the potential to add more groups of talented bankers in the future. We do believe there will be more fallout from larger local institutions as well as an opportunity to bring over individual clients who seek locally managed relationship-based bank coupled with a strong technology and treasury management stack. In summary, as we look back on 2023, it was important for Dime to navigate the dynamic environment while playing strategic offense and take advantage of market opportunities. As we have just completed our year-end strategic planning process, I want to lay out our medium and long-term goals. We intend to create a more diversified balance sheet by focusing on growth in our business loan portfolio, which includes C&I and owner-occupied CRE. While we have historically been very strong operators in the multifamily and investor CRE, our committed focus for the future is to remix this balance sheet such that business loans will have a greater weighting. Right now, business loans account for approximately 21% of loans, and we envision growing that to 30% and reducing multifamily to the 25% to 30% range over a two-to-three-year time frame. To provide you some context on how earnest we are about the balance sheet transformation, a look at our current loan pipeline indicates approximately $780 million in the pipeline with 70% in business loans. By the way, the average rate on our pipeline is 8.43%. Building on the success we have had on the deposit-gathering front, growing our private and commercial bank will be a key focus. This will allow us to continue to grow the DDA balances as well as lower our loan-to-deposit ratio to a range between 90% and 95% over the medium term. As I've said, we are in discussions with numerous teams at the current time and expect to hire additional top quality bankers in the year ahead. Finally, I want to provide some thoughts on our profitability goals. While our asset book has limited maturities and re-pricings in 2024, in 2025 and 2026, we see increased re-pricing on the asset side. Returning to a 110 to 125 ROA is a key target, and we are highly focused on getting there as the asset side of the balance sheet turns over. This will be accomplished by a significant improvement in NIM as rates normalize. In the interim, we will continue to control the things that we can, including staying extremely disciplined on expenses. As I said in our last earnings call, our main focus is on providing our customers with outstanding service that only a locally managed community bank can provide, growing our financialized value, and delivering strong returns to our shareholders. Being a conservative underwriter of credit has always been a hallmark of Dime. We continue to have a very low level of nonperforming loans, including no past dues in our $4 billion multifamily portfolio. With respect to the fourth quarter results, our core EPS was approximately $0.45. We were pleased to see NIM contraction continuing to slow, DDA balances remaining steady, capital ratios continuing to grow, and asset quality metrics remaining stable. In closing, I would like to thank all our outstanding employees for staying focused on our goals during these challenging times. Avi will now provide more details on the quarter.

Avinash Reddy, CFO

Thank you, Stu. Reported EPS was $0.37 per share. Excluding the impact of the special FDIC assessment and assuming a normalized tax rate of 27%, core EPS would have been approximately $0.45. The tax rate in the second half of the year was impacted by certain disallowed items related to executive severance. As mentioned in the press release, our expectation for the tax rate for 2024 is around 27%. As we expected, the pace of NIM compression slowed even further in the fourth quarter, and the compression was only five basis points compared to 16 basis points in the prior quarter. At 29% of average total deposits, our noninterest-bearing deposit percentage remains a clear differentiator for Dime versus other community banks in our footprint. We are cognizant of the challenging revenue environment and continue to manage expenses prudently. Our focus is being as efficient as possible. Expenses for the fourth quarter, excluding the one-time FDIC special assessment and intangible amortization, was $52.5 million. For the full year, cash noninterest expense, excluding FDIC special assessments, intangible amortization, and severance was approximately $202 million, well below our annual guide for 2023 of $206 million to $209 million. Notably, we were able to absorb the cost of new hires into our organization by rationalizing expenses across the organization by using technology to automate manual processes and promoting and filling open roles from our talented employee base. Non-interest income for the third quarter was $8.5 million. We had a $3.7 million provision in the fourth quarter. The allowance to loans remains steady at 67 basis points. We're cognizant that there has been a lot of scrutiny on CRE concentration. In this regard, Dime's Investor CRE concentration, excluding multifamily loans, which are really residential loans for five or more tenants, is only 258% of total capital. This quarter, our concentration levels dropped as we continue to focus on growing business loans and building capital. In light of the overall environment, our posture as it relates to the balance sheet is to build capital methodically. This will, in turn, support our clients when they need it. This quarter, our risk-based capital ratios increased by approximately 20 basis points. Now I will turn to some guidance for 2024. As you know, we don't provide quarterly quantitative NIM guidance. All else equal, we expect the NIM to remain within a few basis points of current levels until the Federal Reserve starts cutting rates. This is contingent on competition remaining rational and our loan originations, which help offset any deposit cost creep remaining at fourth quarter levels of approximately $200 million at 7.85%. Once the Fed cuts rates, we anticipate expansion, and our medium to longer-term goals and projections do envision the NIM getting back to historical levels in the low to mid-threes and potentially even higher. This will require more of our assets to reprice. As mentioned earlier, 2025 and 2026 are significant years for us in terms of asset repricing. Of note, we have already begun to prepare for the Fed rate cuts by segmenting our deposit base into various buckets. It's important to note that our deposit base has less of a consumer weighting than national peer groups. As such, we should see higher deposit betas on the way down. With respect to our positioning on lending, our strategy is to ensure we continue to support our key clients through any operating environment. As Stu mentioned, we continue to see growth in our business loan portfolio. Growth in the business portfolio will offset declines in Multifamily and Investor CRE, where we are still servicing existing solid relationships. On an aggregate basis, we expect loan growth in 2024 to be in the low single digits with a stable first half of the year and growth in the latter half of the year. With respect to core cash noninterest expenses, if we take the Q4 cash operating expenses of $52.5 million and annualize that, we get to $210 million. We expect to be flat to up 1.5% on that base, which equates to $210 million to $213 million as a range for 2024. As I mentioned earlier, the expectation for the core tax rate for 2024 is around 27%. With that, I'll turn the call back to the operator, and we will be happy to take your questions.

Operator, Operator

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

Stephen Moss, Analyst

Good morning. Hi, Steve. Regarding the margin sensitivity, Avi, I'm curious about your thoughts on the Fed cuts impacting margins. How many rate cuts do you think it will take to reach the low threes on the margin?

Avinash Reddy, CFO

Yes. Look, we're just following the forward curve, Steve, we don't give quantitative guidance. As I said, we're confident to get back into the low to mid-threes. I will say that if you follow the forward curve and you assume where the five-year treasury ends up and a positive sloping yield curve, with the 29% to 30% DDA and growing with some of the new groups that we've hired, we do see the potential to be even above what we were historically, which was at the peak, we were around 330 on the NIM. But if you follow the forward curve in our internal model, we should end up above that. As Stu said, in 2024, we don't have a lot of assets repricing, but that really starts picking up in 2025 and 2026. So I'll just leave it at that.

Stephen Moss, Analyst

And could you just remind me how much do you have in assets repricing in 2025?

Avinash Reddy, CFO

Yes, sure. On the real estate side, we have around $575 million of assets in 2024. Additionally, we likely have around $200 million to $225 million on the security side coming due.

Stephen Moss, Analyst

Okay. And then there will be a significant increase in 2025 from there?

Avinash Reddy, CFO

In 2025, we expect a significant increase. We will have approximately $900 million in assets and $250 million in securities that year. Looking ahead to 2026, we project around $1.4 billion in assets and about $200 million in securities. This is based on contractual agreements. However, if the Federal Reserve lowers interest rates, we may see some of the asset repricing from 2026 happen earlier, moving into 2025.

Stephen Moss, Analyst

Okay, I appreciate that. Stu, you mentioned the health care vertical, but I missed how large the pipeline was there. Could you provide that number? Also, are you planning to hire any additional teams in the upcoming year?

Stuart Lubow, CEO

The pipeline currently stands at approximately $115 million with a weighted average rate of 9%. We are pleased with the growth in the pipeline and anticipate our first closings in the first quarter. We are exploring additional teams, specifically a few individuals and teams in the commercial and industrial sector and health care sector that also have significant deposits in their portfolios.

Stephen Moss, Analyst

Okay. And does the expense guide contemplate additional hires for the year? Or would that be additive to expenses?

Avinash Reddy, CFO

Yes. So I think, Steve, if you go back to last year, right, we gave guidance of $206 million to $209 million, and we hired six groups, and we beat the expense guidance by $6 million. So I think we're very cognizant of expenses. We will hire groups, and they're profitable very quickly. I mean right now, with the groups and teams that we do have. But I would just say that the payback period on the group is very, very quick from a bottom-line perspective.

Stuart Lubow, CEO

Yes. I mean last year, we brought on in ads groups we brought on 21 individuals, and we are able to cover those costs within our expense guide. I mean we're very cognizant of managing both sides of that, both the income opportunity, bringing on new teams on the expense side.

Stephen Moss, Analyst

I appreciate that. I have one last question regarding a commercial real estate nonperforming loan. Could you provide any details about that credit?

Stuart Lubow, CEO

Yes. It's a fully tenanted building that houses two schools. Both tenants were paying. The borrower had some issues and did not remit payments to us. Since that time, five payments have been made, the loan is current, and our policy is that we need six payments in order to take a loan out of non-accrual. So we anticipate that loan coming out of non-accrual this quarter.

Operator, Operator

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. Just to clarify, Avi, on the tax rate was elevated in both the third and fourth quarters. Could you just explain what the discrete items were and if those will be fully out of the tax rate in the first quarter?

Avinash Reddy, CFO

Yes. Mark, primarily, it's related to 162M issues with the CEO succession that we had. It's obviously a cumulative number, so it picks up. And then there were some other true-up items, return to provision type items. I mean if you look back historically, our tax rate has been in the 27% to 28% area obviously depends upon the level of income at the bank. So next year, 27% is a reasonable rate to use for next year.

Mark Fitzgibbon, Analyst

Okay. Great. And then, Stu, your comments on hiring additional teams, are those presumably mostly from legacy Signature or other large banks? Or where do you see those teams coming from?

Stuart Lubow, CEO

Yes. I would say all of the above. So there's some serious opportunities both within existing teams at Signature and other institutions that we're in conversation with.

Mark Fitzgibbon, Analyst

So of the teams that you've hired, those six teams that have brought in $300-and-some-odd million of deposits. What do you think those teams are capable of doing once their books have fully matured and migrated over?

Avinash Reddy, CFO

Yes, sure, Mark. So you go back to September 30, we were at $250 million on the teams at December 31, we were $333 million. Today, we're $375 million. So it seems like a steady build of $70 million to $80 million per quarter at this point. I mean the good thing is we look at it on a client level and an account level basis, and it's really not slowed down yet. So we expect to see continued growth in the quarters ahead over there. Again, they're very heavily focused on DDA. At this point, it does take time to move over clients. So I think so far, they're really meeting the expectations that we set out, and they become profitable very quickly. And really, the opportunity for us is to continue to grow that. But now that they've been here for a while, hiring new groups. And as Stu said, that's going to be additive as well pretty quickly overall.

Mark Fitzgibbon, Analyst

Okay. The last question I had, Stu, is there's been a lot of dislocation in the banking space and your balance sheet has obviously held up well. Are you thinking about M&A at all? Is that sort of a priority, you think, for Dime over the next several quarters?

Stuart Lubow, CEO

There has certainly been an increase in discussions about mergers and acquisitions. However, there are still issues regarding valuations and balance sheets. We are definitely interested in exploring the right opportunities if the right transaction comes along. I believe that over time, particularly in the coming years, we will see much more activity in the M&A sector. Once the Federal Reserve stabilizes its approach, I expect there to be more conversations around this. Given our current position in the market and the strength of our balance sheet, we believe there will be significant opportunities for us.

Operator, Operator

Our next question comes from the line of Manuel Navas with D.A. Davidson & Company. Your line is now open.

Manuel Navas, Analyst

Hey, good morning. Just thinking about the overall deposit base. It's great that you're having success with the new hires and those teams are adding a lot. When would we see kind of an inflection for the rest? And what's driving the trends that caused some of the deposit outflows recently? Just kind of comment on deposit growth next year.

Avinash Reddy, CFO

We increased our deposits by $275 million in a challenging year. For the overall industry, the total deposits added were around $330 million, so we were flat in the rest of the bank. When looking at it as a whole, that’s a reasonable outcome in this environment. Our demand deposit accounts have stabilized across the entire bank, so as we enter 2024, what's left is mainly core operational DDA, which makes us confident moving forward. We see a significant opportunity to grow deposits through our private and commercial banking segments; we currently have $1.5 billion in deposits in that area. The branch business also plays a crucial role. As interest rates stabilize, we expect to perform well there. Over time, we've assessed our deposit base and have aimed to normalize the chunkier, higher-rate deposits like others in the industry. That has all been addressed in 2023. It’s also important to look at the loan-to-deposit ratio, which was at 102 at the year's end, and we are now close to 100%. This gives us confidence that we have sufficient deposit growth to support the loan growth we anticipate for 2024.

Stuart Lubow, CEO

Yes. And most importantly, you see quarter-over-quarter DDA is stable. So I think there are not a lot of banks that can say that their DDA balances have remained stable over the last two quarters. And we see opportunities to continue to grow that base.

Operator, Operator

Our next question comes from the line of Chris O'Connell with KBW.

Christopher O'Connell, Analyst

So I think in your opening comments, you talked about the ROA getting up to 110 to 125 over time. Is that assuming that to get there, that's below 3s NIM that you're talking about as well longer term?

Avinash Reddy, CFO

Yes, Chris, correct. Yes.

Christopher O'Connell, Analyst

Got it. And how are you guys thinking about, I know no quantitative guidance, but the pace of NIM expansion once the Fed starts cutting and if it's in a methodical or kind of gradual way, does that accelerate over time? Are you guys getting a full benefit in the first quarter of Fed cuts? You talked a little bit about kind of preparing your deposit book for this process. I know you won't give the quantitative guide, but just thinking about the pace of a magnitude as the Feds cutting would be helpful.

Avinash Reddy, CFO

Yes. I think we plan to be very aggressive on the deposit side in terms of cutting rates. As I said, our book is weighted more to business and municipal customers. So that will allow us to be more aggressive on that front. That's on the liability side of the balance sheet, right? On the asset side of the balance sheet, as we mentioned, there's less re-pricings in 2024, and then that really starts to pick up in 2025 and 2026. So some of it will depend on the pace at which payoffs pick up on the asset side of the balance sheet. But I would say on the deposit side, if you split the two questions up into how are you going to see deposit costs and what are you going to see on the asset side. I'd say on the deposit side, that's something we can control, and we expect to be very aggressive around that. On the asset side, it will just take a little bit of time given the structure and nature of our assets. I think throughout all of this, Chris, it's just really important to keep in mind, operating a bank with 30% DDA, right? It's just a matter of time before we get back to those margins over time, given the re-pricing opportunity that we have. The other piece that I just wanted to add is we have around $1 billion of borrowings that are at around $900 million to $950 million of borrowings that we've kept really short term, that's really going to reprice immediately as well. And we've intentionally kept that short. We've been messaging that all across and really to position the balance sheet when rates drop. So we do have the benefit of that as well.

Stuart Lubow, CEO

Yes. And just anecdotally, if you look month over month, in November and December, we saw like a two basis point increase in deposit rates each month. And in December, we saw an eight basis point increase in loan rates. So hence, we do feel that as Avi said, we're expecting relatively flat NIM within a few basis points until the Fed cuts.

Christopher O'Connell, Analyst

That's helpful. Along the same lines, I know margins haven't changed much over the past couple of years. What do you think a normalized prepayment impact would have on margins when the Fed adjusts its rates?

Avinash Reddy, CFO

Yes. It must improve significantly because currently, the prepayment fees on the margin are only around one or two basis points. In the past, with legacy Dime, we typically had prepayment fees between 10 and 15 basis points. While multifamily will constitute a smaller part of the overall portfolio now, I think anticipating prepayment fees between five and 10 basis points when speeds increase is reasonable. However, I don't expect that to occur in 2024.

Stuart Lubow, CEO

Yes, most likely, if it does, it's going to be towards late 2024.

Avinash Reddy, CFO

Yes.

Christopher O'Connell, Analyst

Great. And could you just provide a little bit of color on what the drivers of the net charge-offs were for this quarter?

Avinash Reddy, CFO

Yes, sure. So we just fully charged off a loan that we had previously fully reserved for. So last quarter, we took a $4 million charge. Stu mentioned that credit last quarter was still in the legal process on that loan, but we thought it was prudent to charge that fully off. It's something that we had put in non-accrual status a couple of years back so nothing really new over there.

Christopher O'Connell, Analyst

Got it. And then I assume given the reserve ratio in some of the comments in the release that you guys did like we're reserving for a couple of other loans being individually analyzed. Just any comments around those?

Avinash Reddy, CFO

Sure. So there was one net new addition to the C&I portfolio. It's a couple of million dollar loan, we fully reserved against it. However, they too have started paying at this point in time, and so there's a potential for that coming out.

Stuart Lubow, CEO

Yes. There was a commercial and industrial loan that had matured, and we could not agree on a renewal. We took a very conservative approach and fully reserved for it. Since then, they have agreed on basic terms for a renewal and have brought their payments current, so we will probably close that in the first quarter and put it back on accrual status.

Operator, Operator

I'm currently showing no further questions at this time. I'd like to hand the call back over to Stuart Lubow for closing remarks.

Stuart Lubow, CEO

Well, once again, I'd like to thank our dedicated employees who worked diligently through these challenges throughout the year and thank our shareholders for their continued support, and we look forward to seeing you next quarter.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.