Dime Community Bancshares Inc
NASDAQ:DCOM
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Dime Community Bancshares Inc
Earnings Call Analysis
Q2-2024 Analysis
Dime Community Bancshares Inc
Dime Community Bancshares, Inc. demonstrated robust operational performance in the second quarter, with significant growth in core deposits surpassing $300 million and an increase in business loans exceeding $200 million. This surge in deposits allowed the bank to reduce its reliance on wholesale funding, resulting in an impressive 20 basis points enhancement in net interest margin (NIM). The management views the first quarter of 2024 as the low point for NIM in the current cycle, indicating a positive outlook for future financial performance.
Management anticipates a gradual and consistent improvement in NIM, assuming there are no rate cuts in the near term. Should rate cuts occur, coupled with the repricing of a substantial portfolio of fixed and adjustable rate loans maturing beginning in late 2025, Dime expects to experience a structural increase in NIM. Specifically, the bank projects about $2 billion of loans at a current weighted average rate of 3.9% will reprice during this period, which could contribute an estimated 35 basis points to the NIM, propelling it higher than its previous cycle peaks.
Dime's strategic hiring initiatives have been fruitful, bringing in approximately 65 revenue-generating bankers across various verticals, including 15 new deposit-gathering teams and a robust health care lending division. This expansion has already translated into a significant increase in deposits exceeding $1 billion. With a strengthened middle market commercial and industrial (C&I) lending focus, the bank anticipates further loan growth, particularly from the health care sector, which is expected to augment the diversification of its balance sheet considerably.
The bank’s asset quality continues to remain strong. Non-performing assets (NPAs) decreased by 29% quarter-over-quarter, reflecting effective risk management strategies. Management also noted an expected 14% drop in classified assets, indicating a proactive approach to maintaining the integrity of the loan portfolio.
Core cash operating expenses for the second quarter stood at $55.4 million, with management anticipating a slight increase to around $57 million for the third quarter. Despite this uptick, they project nominal expense growth for 2025 due to focusing on efficiency while investing wisely in new initiatives to bolster bottom-line performance. With an emphasis on careful financial stewardship, the company aims to reduce its expense-to-asset ratio, which has increased slightly and is currently at 1.60% to 1.65%.
For the remainder of the year, Dime expects aggregate loan portfolio growth in low-single digits. In terms of revenue, noninterest income for the second quarter was recorded at $11.8 million, benefitting from a branch sale-leaseback arrangement. The projected tax rate moving forward is around 27%, which aligns with historical performance and expectations.
The bank has received regulatory approval for a new branch in Westchester County, marking its strategic entry into a promising new market. This aligns with Dime’s goals of controlled expansion without excessive reliance on physical branch networks, demonstrating a commitment to leveraging strategic partnerships and local expertise to bolster growth.
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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 U.S. 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 U.S. Securities and Exchange Commissions 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 non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release.
[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.
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 that 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 6 deposit gathering teams, we've onboarded another 2 deposit gathering teams in May and June. One of these teams is based in Williamsburg, a market that is very familiar to time 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 health care 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've been playing is paying off in the numbers. With that, I will turn it over to Avi.
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 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. Noninterest 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 5 quarters, including 15 deposit gathering teams, a fully built out health care vertical and most recently, a not-for-profit vertical.
We expect the revenue generation from these hires to far outweigh the start-up 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 4 basis point benefit from the payoff of a loan that was previously on nonaccrual status. In addition, the sub debt offering, which closed on the last day of the quarter is expected to have a 3 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 2.34%.
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 5-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.
[Operator Instructions] Our first question today is coming from Mark Fitzgibbon of Piper Sandler.
This is Greg Zingone stepping in for Mark at the moment. Just curious, what was your spot NIM for June?
Yes. So what I tried to point out in the prepared remarks, Greg, was we had around 4 basis points from the payoff of our previous nonaccrual 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 will 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.
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?
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 forecast 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.
Yes. 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 will be some provisioning associated with that, that will change relative to the model.
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 are priority going forward?
I think we've got 2 teams up there now. We've just got an approval for a full service or a 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.
Our next question will be coming from Manuel Navas of D.A. Davidson.
I appreciate -- I think I'd just bist the OpEx guide for next quarter? Could you just reiterate that? And then any color you can add on some of what -- 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?
Yes. 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 time frame once we get through the budgeting season.
I really appreciate that. That leads me to my next question. What's kind of the pipeline I hire? Is it kind of calmed down? Are you still seeing talent out there that's interesting? What's kind of an update on hiring process?
We are 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 they've really have begun contributing in a significant way our health care 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 yes, 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 our 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'll look at as a place to go in terms of opportunity. So I really do think there's a lot to come in the future.
Is health care going to be a big chunk of the low single-digit growth in the back half of this year? I think you've given pipeline in the past for that group. Is that something that's disclosable today?
Sure. I mean our pipeline in the health care business is $172 million at an average rate of 7.80%. But our C&I pipeline is $430 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 health care business. Even our residential group is up substantially in terms of pipeline. They have over $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.
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?
Yes, yes.
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 to 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 3 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.
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?
Yes. Just off the forward curve Manuel. So the comment was 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 -- which is around 4% for the 5-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 we said, around 4 to 5 basis points every quarter to the NIM. And then they are on top of that, the deposit growth that we have. We still have around $750 million of broker 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 broker is still at $750 million. So as we -- as the new teams bring in deposits as our lending teams bring in deposits, that's going to help offset 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.
And our next question will be coming from Steve Moss of Raymond James.
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 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...
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 deposits side.
Okay. And so perhaps at a similar pace to what we saw this past quarter?
Yes, we don't think about it on a quarterly basis, Steve. Obviously, 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 8 -- 7 to 8 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, as Stu said, is account. 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.
Okay. Could you share with us how many accounts were open this quarter?
This quarter, we probably had, I would say, close to around 700 to 800 accounts that were open.
And then in terms of -- just curious what the blended cost of funds you're seeing on the deposits coming over these days.
Yes, probably stay around between 2.50% and 2.70%, plus or minus from the new groups. Because as Stu said, a substantial portion of it is in DDA, probably 40% to 45% of the stuff that's coming in. So it's between 2.50% and 2.75%.
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.
Yes. We should have all the detail in the 10-Q. We just provided 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 be in our Q next week, Steve.
Appreciate that. Okay. So I guess just last one for me here. In terms of -- 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.
Yes, I think it's more 2025. As we're getting toward the end of the year, folks tend to have the view of, [indiscernible] stay wearing out for now, I got bonuses coming up. And so it's probably more towards 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 to seriously. So -- but I think on the deposit side, it's probably more geared toward early 2025.
[Operator Instructions] Our next question will be coming from Christopher O'Connell of KBW.
So yes, I just wanted to start off on the NIM, and I 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 nonaccrual recovery. Are you guys thinking the NIM will progress and be up from the 2.37% June NIM range, ex the nonaccrual recovery?
Yes. So Chris, in my prepared remarks, what I said was the base NIM to use is 2.34%. So the 2.34% excludes the 4 basis points from the nonaccrual interest recovery and then the 3 basis points from the sub debt. So it starts with the 2.34% and use the slow and steady and upward bias off of that base. As we've said, the loan yields are going up probably 4 to 5 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 a 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, a rate of between 2.50% and 2.75% versus the brokered cost right now, which is 5.35%. So I think 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.
Great. That's helpful. And then as you guys are, it sounds like 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?
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 our own $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 1/3, 2/3 split as of the last quarter in terms of satisfaction and repricings. Stu probably give you some color qualitatively on the...
Yes. 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 -- we're monitoring everything. We haven't seen a significant change in and 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 debt service coverages. 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.
And then just on the expense discussion, 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.
Yes. Yes. 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, it's probably a good range. Obviously, the merit increase is going to impact really on April 1. 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 very well. So there's accruals and such to think about on a going-forward basis.
But we're working, like I said, when I answered Manuel's question, working on a few company-wide initiatives will 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're 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 -- 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.
Great. And then any small, but any color on the drop in customer service fees this quarter? Because last quarter kind of an unusually strong quarter? Or should we take it as like a blend of the 2?
Yes. Yes. We just had some rollover fees last quarter on some loans basically that we're 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 goes in there. So I would say, look, there's a couple of seasonal items here on that, that come in and out, but nothing material.
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 into '26, but what the impact of each '25 basis point cut would be on the margin?
Yes. 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 [indiscernible], 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 are 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 their latter part of '25 into '26. And so how it happens between Q1 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.
Yes. And we do have, as Avi said before, we do have $700 million of a broker that we'll be able to move those down very quickly in terms of a 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 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.
Got it. And last one for me, just what's the tax rate going forward?
Yes. I think around 27%, Chris, we had a couple of discrete items this quarter. So I'd use 27% going forward.
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 Stu Lubow for closing remarks. Please go ahead.
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.
Thank you for joining today's conference call. You may all disconnect.