Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q2 2024 Earnings Conference Call July 23, 2024 9:00 AM ET
Company Participants
Stuart Lubow - President and Chief Executive Officer
Avinash Reddy - Senior Executive Vice President and Chief Financial Officer
Conference Call Participants
Gregory Zingone - Piper Sandler
Manuel Navas - D.A. Davidson
Steve Moss - Raymond James
Christopher O'Connell - KBW
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. [Operator Instructions] 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
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 proud of our ability to expand Dime franchise into this new attractive new 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 an 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
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 lease back on. Core cash operating expenses for the second quarter, excluding intangible amortization was $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 called out 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 kick 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 '25 and '26.
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 time frame. 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 '25 and '26.
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 '25 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] And our first question today is coming from Mark Fitzgibbon of Piper Sandler. Your line is open.
Gregory Zingone
Hey, good morning, guys. This is Greg Zingone stepping in for Mark at the moment. How are you?
Avinash Reddy
Hey, Greg. How you're doing?
Stuart Lubow
Hey, Greg. How are you?
Gregory Zingone
I'm fine. Just curious, what was your spot NIM for June?
Avinash Reddy
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, you know, 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
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
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
Yeah. And as we continue to book new loans, C&I and business-related loans, obviously, those provisions are somewhat higher. So they'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
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
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
Awesome. Thank you, guys.
Avinash Reddy
Thanks, Greg.
Operator
Thank you. And one moment for the next question. Our next question will be coming from Manuel Navas of D.A. Davidson. Your line is open.
Manuel Navas
Hey, good morning, fellows. I appreciate. I think I just missed the OpEx guide for next quarter. Could you just reiterate that? And then any color you can add on some -- some of the things you're looking at for next year, you're saying you're going to have nominal expense growth. Just could you highlight or discuss any of those initiatives in greater detail or is it too early to say?
Avinash Reddy
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 -- you know, get into our December and January timeframe once we get through the budgeting season.
Manuel Navas
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
Yeah. We're still talking to folks. There's still talent out there both -- on both sides of the balance sheet, both on the deposit side and on the lending side. We've obviously been busy on both sides of the balance sheet. We brought in a group of C&I lenders and we -- and they've really have begun contributing in a significant way. Our healthcare group pipeline is very significant and I think there's going to -- be some meaningful loan volume this quarter in that business as well. And we are exploring other teams in terms of C&I business. So yeah, there's some opportunity. I think, as we get later in the year, as folks get closer to year-end and bonuses and whatnot, that's going to slow down a little bit. But we are planting the seeds into next year. So I do think there's some opportunity. I think we proved that we're the bank to be in terms of opportunity and bringing their customers over. We've opened 3,000 to 4,000 new business accounts and relationship accounts with the new teams that are just starting to fund. We're almost at $1.1 billion in new deposits, nearly half of that DDA. So, the model and the thesis that we have has proved out, and I think we're looked at as a place to go in terms of opportunity. So I really do think there's a lot to come in the future.
Manuel Navas
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
Sure. I mean our pipeline in the healthcare business is $172 million at an average rate of 7.80%. And but 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, 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
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
Yes, yes.
Manuel Navas
Okay.
Stuart Lubow
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 flatted 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 loan 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
Okay. My last question is that repricing opportunity doesn't include any. It just includes the forward curve for the second half of '25 into '26. 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
Yeah, just off the forward curve, Manuel. So the comment was, you know, we have $2 billion in the back half of '25 and '26 at a rate of 3.90%. Just follow the forward curve and that's -- you know, which is around 4% for the five year going forward. You should see a 35 basis point increase in the NIM overall just solely because of that. Now, on top of that, we are remixing the loan portfolio. That's obviously adding as Stu said around four basis points to five basis points every quarter to the NIM. And then you layer on top of that, the deposit growth that we have, we still have around $750 million of brokered on the balance sheet. We've obviously paid down a lot of our short-term FHLB borrowings. So that was the first step in the balance sheet evolution. The brokered still at $750 million. So as we -- as the new teams bring in deposits, you know, as our lending teams bring in deposits, that's going to help offset the cost -- the broker deposits on the balance sheet. So I think the message here is we don't need rate cuts to see an upward bias in the NIM. With rate cuts, we're going to have an even greater increase in the NIM. And then once the repricing opportunity kicks in, the NIM is really going to accelerate at that point in time back and probably higher than where we were in the last cycle based on what our models are showing.
Manuel Navas
Right. That's great. I really appreciate the commentary. Thank you very much.
Operator
Thank you. And our next question will be coming from Steve Moss of Raymond James. Your line is open.
Steve Moss
Good morning.
Stuart Lubow
Hey, Steve.
Avinash Reddy
Hey, Steve.
Steve Moss
All right. Just following up on deposits here. Stu, I think you said balances on deposits were stable to down at the beginning of the call. Just kind of curious here, you know, you had a healthy step up in the deposit growth with all the teams you've added here. Is it possible that we could see that pace continue this quarter? And then the second part to that -- go ahead.
Stuart Lubow
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
Okay. And so perhaps at a similar pace to what we saw this past quarter?
Avinash Reddy
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
Okay. Could you share with us how many accounts were open this quarter?
Avinash Reddy
This quarter, we probably had, I'd say, close to around 700 to 800 accounts that were open.
Steve Moss
And then in terms of -- just curious what the blended cost of funds you're seeing on the deposits coming over these days.
Avinash Reddy
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
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
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 basically flat. But all the detail will be in our Q next week, Steve.
Steve Moss
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
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 too seriously so -- but I think on a deposit side, it's probably more geared toward early 2025.
Steve Moss
Okay, great. Really appreciate all the color. Nice quarter.
Stuart Lubow
Thank you.
Operator
Thank you. [Operator Instructions] Our next question will be coming from Christopher O'Connell of KBW. Your line is open.
Christopher O'Connell
Hey, good morning.
Avinash Reddy
Hey, Chris. Good morning.
Stuart Lubow
Hey, Chris.
Christopher O'Connell
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
Yeah. No, so, Chris, in my prepared remarks, what I said was the base NIM to use is 2.34%. So the 2.34% excludes the four basis points from the non-accrual interest recovery and then the three basis points from the sub-debt. So I'd start with the 2.34% and use the slow and steady and upward bias off of that base. As we said, the loan yields are going up probably four basis points to five basis points of every quarter on an average basis. So that's going to help. And obviously, if you see stabilization in the cost of deposits, you're going to see natural upward progression in the NIM. So I think that's the case. Still, there's rate cuts. Once there's rate cuts, we obviously have more deposits than assets that we can reprice. So that's going to help us. I'd say starting in Q4 into Q1 and Q2 of next year and then layer on top of that, the substantial repricing opportunity that really starts in the second half of '25. So it's going to be a layered approach in terms of the NIM. And then I think you also have to factor into all of that, the new deposit teams that are coming, that are bringing in deposits. As I said, rate of between 2.50% and 2.75% versus the brokered cost right now, which is 5.35%. So I think all -- if you put all of that together, we're pretty confident that as we get into the back half of '25 and '26, then the NIM structurally will be a lot higher than where it is right now.
Christopher O'Connell
Great. That's helpful. And then, as you guys are, it sounds like 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
Yes. I'll start off with the -- what's coming to you and then Stu will add some qualitative comments. I mean, in Q3, we probably have around $10 million on the rent-regulated side and in Q4, we have, I think, $15 million to $20 million. So it's very modest this year in terms of what's remaining. In the second quarter, for example, we probably had around $45 million of rent-regulated loans that were supposed to reprice around $20 million of that satisfied, around $25 million of that repriced. And we've had no issues associated with them. So probably like a one-third, two-third split as of the last quarter in terms of satisfactions and repricings. Stu, probably give you some color qualitatively on that.
Stuart Lubow
Yeah, I mean, we haven't had a lot of conversations with customers. We haven't had -- the phones are not ringing off the hook in terms of issues or problems. Obviously, our NPLs and delinquencies are stable to down. So it's, you know, we're monitoring everything. We haven't seen a significant change in debt service coverages. Actually, overall, probably a lot of it has actually gone to the positive in terms of growth in debt service coverage. I'd say, 75% to 80% of the portfolio year-over-year has debt service coverage. So, at this point, we continue to monitor and certainly stay in contact with customers where necessary, but we're not seeing any significant issues at this point.
Christopher O'Connell
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 increase, et cetera, in '25, where you guys think that you have opportunities to kind of save and kind of limit the overall expense growth from here into '25?
Avinash Reddy
Yeah, yeah. So, I think all of that's fair, Chris. So I think for the second half of this year, around $57 million plus or minus is probably a good range. Obviously, the merit increase is going to impact really on April 1st. So the first quarter of next year is going to be pretty consistent with where the second half of this year is going to be. I mean, look, we've always managed expenses efficiently. Like you said, we're going to see an uptick in salary and comp expense, especially as the new groups are performing, you know, very well. So there's accruals and the such to think about on a going-forward basis. But we're working, like I said when I answered Manuel's question, we're working on a few company-wide initiatives. We'll probably have more to disclose when we get into early next year. I think the guidance for next year is very nominal growth. I wouldn't say flat because we know, obviously investing in our businesses throughout the year, but we're going to be very judicious, as we always are. And as you see the NIM trajectory improve over time, I think, that's going to give us a little bit of room to invest in the business as well. Look, we're very happy with the early performance of the groups. The groups are basically better than breakeven at this point in time. And there's no additional fixed costs that are coming in beyond what the $57 million run rate that we have right now. So, look, we'll have more to say then and I think just down the road, they will come up time when we're able to grow the balance sheet a little bit more. And at that point in time, I think we'd -- our expense to asset ratio will also naturally start coming down. We've historically managed the company between 1.50% and 1.55%. We're probably closer to 1.60% to 1.65% right now. But we do see that coming down in the years ahead, as if and when balance sheet growth picks up.
Christopher O'Connell
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
Yeah, yeah. We just had some rollover fees last quarter on some loans, basically, that were repricing. So as I said earlier, we had more multifamily loans this quarter that actually satisfied versus repriced. And so that's where that fits in. Last quarter, we had more loans -- in the first quarter, more loans that took the rollover option, and that's where that goes in there. So I would say, look, there's a couple of seasonal items here and there that come in and out, but nothing material.
Christopher O'Connell
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
Yeah, I think, it's going to be -- obviously, the first rate cut and the second rate cut, it's going to -- part of it's going to depend on the competition in terms of what they're doing. That said, I will say, our deposit base is more skewed towards commercial customers and we have more money markets than time deposits in our base. So which should lend itself to more in terms of being having more benefit from rate cuts than a lot of our peers, right? If you look at the balance sheet right now, around 31% to 32% is variable rate in terms of the loan portfolio. Obviously, 30% of the balance sheet is DDA on the deposit side of the balance sheet. And we probably have some deposits that cost less than 1%. And so, it's going to be harder to change the rates on those. But I would say, by and large, our goal is really to get the margin back to that 3% plus area, which is going to drive higher returns overall for the company. And our internal model show us getting there latter part of '25 into '26. And so how it happens between here and that could be choppy up and down in an individual quarter, but there's definitely going to be a level of benefit from rate cuts.
Stuart Lubow
Yeah. And we do have, as Avi said before, we do have $700 million of broker that will be able to move those down very quickly in terms of rate cut. Plus, we have about $1.8 billion of municipals that are also easily moved in terms of a rate cut. So, look, we're looking to -- we're prepared, we've already segregated the portfolio in terms of when a rate cut happens, which buckets are going to move and how much. So, I mean, we're pretty optimistic, but we're a little cautious at this point because obviously competition is going to play a bit of a role there as well.
Christopher O'Connell
Got it. And last one for me, just what's a good tax rate going forward?
Avinash Reddy
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
Great. Thank you.
Avinash Reddy
Thank you.
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
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
Thank you for joining today's conference call. You may all disconnect.