Dime Community Bancshares - Q1 2024

Transcript

Operator (participant)

Welcome to the Dime Community Bancshares First Quarter Earnings Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. 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)

Thank you, Marvin. Thank you all for joining us this morning for our first quarter earnings call. With me today is Avi Reddy, our CFO. Dime has begun 2024 on solid footing and on a positive growth trajectory. In the first quarter, we grew core deposits by 19% on an annual basis, paid down our Federal Home Loan Bank borrowings by 41%, maintained solid asset quality, increased our risk-based capital ratios, prudently managed expenses, and importantly, saw our net interest margin expand in the month of March versus year-end and January levels. We have been active on the hiring front, and since the middle of March, we have added over 30 extremely talented, revenue-producing bankers. I would like to provide some color on why these bankers joined Dime.

As you know, the first group of bankers we hired in 2023 have been very strong advocates of Dime and have gotten the word out that Dime is the premier platform for talented bankers. They have seen firsthand how nimble we are as a bank, how our staff is aligned to make the customer experience outstanding, and how flat our organizational structure is. The bankers hired in 2023 have grown their deposit portfolios to approximately $600 million. Suffice to say, we prove that our business model provides a conducive environment for talented bankers to succeed. Secondly, our technology and treasury management systems are state-of-the-art and superior to all other local banks. We know this because all the groups that we recruited in 2024 did detailed demos of our systems, and to a person, they were all significantly impressed. Our feedback from new customers has been outstanding.

Finally, Dime's brand name and reputation in our local market is second to none. We have 60 branches from Montauk to Manhattan, and our reputation has always been that of a strong community bank. Customers like working with strong community banks where they have access to decision-makers and can get things done quickly. Four of the deposit groups that we hired are based in Brooklyn. One is based in the Five Towns area of Nassau County. We are also very excited to enter Westchester County, specifically White Plains. Westchester is a market we've looked at for a long time, and we finally found the right banker to lead our efforts there. In the first quarter, we closed the first healthcare loan in our new vertical.

Our healthcare team is actively in the market at the moment, and our healthcare pipeline is robust at $150 million with a weighted average yield of 8%. We expect this vertical to contribute to our overall loan growth and aid in the diversification of our balance sheet. As I mentioned on a prior earnings call, this is an important component of our strategic plan. In summary, I am pleased that the investments that we've put into the business in 2023 are starting to pay off, and I am very optimistic about the hires we have just announced. Dime has been navigating the macro environment well while simultaneously playing strategic offense and taking advantage of the opportunities in our market. With that, I will turn it over to Avi.

Avi Reddy (CFO)

Thank you, Stu. Reported EPS was $0.41 per share. In line with our expectations, the NIM bottomed in January and expanded to 2.23 in the month of March. The exit NIM would have been even higher by around three basis points had we not carried some excess liquidity in February and March as a precaution given the disruption caused by a large regional bank in our footprint. We normalized our liquidity position towards the middle to the end of March, and as such, the second quarter should not have this liquidity-related drag going forward. We are cognizant of the overall environment and continue to manage expenses prudently. Our focus is on being as efficient as possible. Core cash operating expenses for the first quarter, excluding intangible amortization and extinguishment of debt, was $51.7 million, or down 3% versus the prior quarter.

Non-interest income for the first quarter was $10.5 million. This included a gain on the sale of a branch that we did a sale-leaseback on. We had a $5 million loan loss provision this quarter. The allowance to loans increased to 71 basis points. 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. Our Common Equity Tier 1 ratio improved to 10%, which is an optically important benchmark in our mind. Our reported total capital ratio was 13.8%. Incorporating the full impact of AOCI, it would have been 13%.

As you know, the focus these days is on capital with the AOCI impact, and in this regard, compared to banks between $10 billion and $100 billion of assets, our total capital ratio, inclusive of AOCI of 13%, would put us in the top third of our peers. Next, I'll provide some updated thoughts on our expense guide for 2024. For those who follow Dime closely, in 2023, we were able to absorb the cost of the new deposit gathering groups into our organization, along with the addition of various corporate staff to support them by rationalizing expenses across the organization. As part of our 2023 efforts, we significantly expanded our treasury management and back office staff and intentionally built the bank for future expansion. As a result, we don't expect any meaningful additional staffing in corporate support areas to support the new hires we have made in 2024.

Said differently, any expense billed in 2024 is primarily for revenue-generating staff that is expected to pay for itself relatively quickly. At the start of the year, we had guided to a range of $210 million-$212 million of core non-interest expense ex intangible amortization. We are now increasing the guide to a range of $214 million-$216 million. This represents the cost of all the new groups hired to date and is net of the benefits of additional bank-wide efficiency initiatives we have planned for 2024. On a standalone growth basis, we expect the new group hires to begin generating pre-tax income by the third quarter and be cumulatively break-even, inclusive of all the startup costs in the fourth quarter. Starting in 2025, they will contribute to growth in earnings and book value per share versus our prior standalone numbers without the 2024 new hires.

With respect to our positioning on lending, our strategy is to ensure we continue to support our key clients and we continue to seek 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 loans year-over-year to be up in the low single digits. With that, I'll turn the call back to Marvin, and we'll be happy to take your questions.

Operator (participant)

Thank you. At this time, we will conduct the question-and-answer session. As a reminder to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Steve Moss of Raymond James. Your line is now open.

Steve Moss (Managing Director of Banking)

Good morning.

Stuart Lubow (President and CEO)

Hi, Steve.

Steve Moss (Managing Director of Banking)

Hey, Stu. Maybe just starting with the new hires here from Signature, just curious if you could size up the deposit potential and any specialties with the group?

Avi Reddy (CFO)

Yeah, sure, Steve. I'll take that to start with. I mean, the groups, as we said in our press release when we put it out, most recently, they managed several billion dollars of deposits. The groups really fit with our existing business model, very plain vanilla community commercial banking. Four of the groups are based in Brooklyn, where we have an existing branch presence. One of them is based in the Five Towns area, and then the last one is in Westchester. The groups, in general, are slightly bigger than the groups we hired last year. So the teams are generally between four and six people, which is higher than what we had last year. So I think we've laid out the groups last year at around $600 million of deposits.

Our expectations for these groups are to be higher than that given their book of business as well as given the size of these groups, as well as some of the improvements that we made over the course of the year in terms of our technology, our platforms, our operations. So they're really going to start hitting the ground running here in the first quarter onwards.

Stuart Lubow (President and CEO)

Yeah. Just in terms of some context, the last year, the groups we hired had about $1.1 billion in deposits. And if you recall, I said at that time, if we got to 50%, I thought it would be a home run in terms of what they brought over, and they're currently at $600 million. So we're excited about the new hires. I will say, in the first three weeks of their coming on board, we've opened up over 1,000 accounts for the groups in total and very active. We have people working weekends opening accounts. So we're excited by the opportunity, and we're very positive that this is going to accrue greatly to our benefit.

Steve Moss (Managing Director of Banking)

Okay. Appreciate that. And so just as we think about the deposits coming on here, I hear you guys in the press release highlighting that it starts to be core funded here. Should we expect a similar type of cost of funds for the deposits coming on like last year's groups?

Avi Reddy (CFO)

Yeah. I mean, they pretty much had a very similar book in terms of a very high percentage of DDA. Obviously, the rate environment is even more competitive at this point given the Fed's posture. But our focus is really on core deposits, low-cost deposits. And as you said, Steve, the plan over the next six to 12 months is use that to continue to pay down FHLB and broker deposits and really drive NIM expansion through that going forward.

Steve Moss (Managing Director of Banking)

Okay. And then just in terms of the loan pipeline here, here you're on the healthcare vertical, but just in aggregate, just curious, what's the size of the total pipeline and kind of how you're thinking about that?

Stuart Lubow (President and CEO)

All right. So today, it's $1.1 billion with a weighted average yield of 8.14%. In C&I and owner-occupied CRE, it's over $600 million. And as I mentioned, the healthcare is approaching actually, today, is a little higher, almost $180 million. And then the important thing is and the other thing I want to mention is we have approximately $200 million, $206 million approved waiting to close that we expect to close in the next 30-90 days. So we think the next several months are going to be very busy in terms of new loan bookings. And so the pipeline is active. We are seeing some nice new activity coming in. As we announced earlier this month, we did hire two middle-market bankers from another institution who already have some deals in the pipeline as well, and they're primarily C&I lenders.

We are seeing demand pick up and activity pick up, and our pipeline is pretty robust.

Steve Moss (Managing Director of Banking)

Okay. Appreciate that. And maybe just one last one here. Just curious on the NPA. It looks like maybe just one NPA in AD&C. Just curious as to the dynamics with that property and any color you can give there.

Avi Reddy (CFO)

Yeah, Steve. Yeah, Steve, we actually did a reappraisal on that and very, very well secured from a collateral perspective. A couple of tenants that are going to be moving into that. So we don't expect any loss content at all, but just from an accounting standpoint, we conservatively moved it into NPA. We hope to get it resolved in the second quarter or third quarter, but don't see any loss content there at all.

Steve Moss (Managing Director of Banking)

Okay. So maybe just to clarify, is it just kind of like a timing issue with completion and rents, or?

Stuart Lubow (President and CEO)

Yes. The building is complete, 100% complete. It's tenanted with a significant medical facility. They're going to be doing their build-out. The rent starts this month. And we've got an updated evaluation, and we're pretty comfortable that this is going to be resolved in the second quarter.

Steve Moss (Managing Director of Banking)

Okay. Appreciate all the color. I'll step back. Thanks.

Avi Reddy (CFO)

Thanks, Steve.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Mark Fitzgibbon of Piper Sandler. Your line is now open.

Greg Zingone (Research Analyst)

Hey, guys. This is Greg Zingone stepping in for Mark at the moment. How are you?

Stuart Lubow (President and CEO)

Hey, Greg. How are you?

Greg Zingone (Research Analyst)

Thanks. The new expense guide, you said, includes the new teams hired to date, but how many more hirings can we expect this year?

Stuart Lubow (President and CEO)

So we're still talking to several teams. We probably expect an announcement of at least one more team relatively soon. And we'll continue to have conversations and take advantage of opportunities. The disruption in the marketplace has never been so great here in the New York metropolitan area, but it takes time. We've interviewed a number of teams that are available, and so I don't expect at this point to double what we have, per se, but there are still conversations happening and opportunities we believe will benefit us.

Greg Zingone (Research Analyst)

Depending on how many teams you bring on board the remainder of the year, could that $214 million-$216 million in expenses kind of trickle up a little higher?

Avi Reddy (CFO)

Yeah, but Greg, I think the way to look at it is these groups are producing revenue, right? So that was my initial comment, that on a cumulative basis, we expect the groups to be break-even in 2024. So when you're thinking about your model going forward, it's really accretive starting in 2025 with no deterioration in 2024 from an EPS perspective. As I said, also, we're not really adding any we don't really need to add any additional support staff with them because we built the company out for growth. So look, we're always judicious on expenses. We're telling you where we are right now based on who's joined the company right now. And in the future, we always look to hire productive people. So we'll keep you updated as we go along.

Greg Zingone (Research Analyst)

Okay. With all the people you're bringing on board and your expectation for accelerated balance sheet growth, do you envision needing additional capital in the near future?

Avi Reddy (CFO)

Yeah. Look, I mean, the plan right now is really to remix the balance sheet with what we have. We have around $700 million of FHLB on the balance sheet. Our broker deposits, while a lot lower than a lot of our local peers, is probably around $750 million ±. So we really have a pathway there to remix the balance sheet by paying off some of these items. Obviously, supporting our clients is the most important. We said multiple times on the investor call and multifamily side, we expect those to pay down slowly over time. So you're going to get some cash flows out of that, and we're going to grow the business portfolio. So I think with the groups that we have right now, we're confident that we can remix the balance sheet. And our capital is very strong.

Our common equity tier one ratio is 10%. Like I said, our total capital ratio is 13.8. Even with the impact of AOCI, it's 13. So we feel pretty good about the remixing story and supporting our clients with our existing capital base.

Greg Zingone (Research Analyst)

All right. Thank you guys so much.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Manuel Navas of D.A. Davidson & Co. Your line is now open.

Manuel Navas (SVP and Equity Research Analyst)

Hey, good morning. Could you guys speak a little bit on your comfort around the reserve level, around 71 basis points? Should we kind of expect a methodical build from here?

Avi Reddy (CFO)

Manuel, we're comfortable. Otherwise, we won't be reporting earnings where we are. So we're comfortable.

Manuel Navas (SVP and Equity Research Analyst)

Okay. How have repricings gone year to date across either multifamily or any other CRE loan?

Avi Reddy (CFO)

Yeah, we've had no issues. Loans have repriced. I will say our criticized and classified is actually down 9% on a year-to-date basis. We're probably down around $5 million-$10 million on the CRE and multifamily side and probably down around $30 million-$35 million on the owner-occupied side. So I'd say overall, it's business as usual. As we've always said in the past, we don't have a lot of maturities and repricings in 2024 and 2025, and we're not really seeing anything unusual at this point.

Manuel Navas (SVP and Equity Research Analyst)

Great. As you think about the balance sheet remixing, kind of shifting over to the NIM, it seems to be inflecting on a monthly basis. Can that kind of improved pace continue near-term in general?

Avi Reddy (CFO)

Yeah. I think the way to think about the NIM a little bit is the month of February and March was probably the first months in the last 15-16 months that the deposit cost actually declined. So the spot deposit cost at the end of March was 2.68. The cost of deposit for the full quarter was 2.70. So we did see some competition in December and January, and the January NIM was really a bottom in our mind. So on a going-forward basis, especially with these new groups coming on, you should see stability in the cost of deposits. So then it's just going to be a function of how quickly originations come on board. And if you go back to the month of September, the weighted average rate on the loan portfolio was around 5.20. In December, that went up to 5.29.

That was based on around $200 million of originations for Q4. Q1 was a little bit slower in terms of originations, and that's just seasonal where you close a lot of loans at the end of the year. But because we did half the originations, the weighted average rate on the loans only increased by five basis points. So you go back to Stu's point about the pipeline, if you're going to assume around $200 million of originations every quarter, that should lead to an increase in the weighted average rate by around eight to 10 basis points on the loan side. So on an average basis, you're probably going to get a four to five basis point benefit on the margin there. So I think overall, we're thinking about the NIM with an upward bias going forward.

Obviously, the cost of deposits is the biggest piece of that, and we do believe that that stabilized to a large extent.

Manuel Navas (SVP and Equity Research Analyst)

That's great. I really appreciate the color. Thank you, guys.

Operator (participant)

Thank you. One moment for our next question. Again, as a reminder to ask the question, you will need to press star 11 on your telephone. Our next question comes from the line of Chris O'Connell of KBW. Your line is now open.

Chris O'Connell (Director of Equity Research)

Hey, good morning.

Stuart Lubow (President and CEO)

Chris.

Avi Reddy (CFO)

Hey, Chris.

Chris O'Connell (Director of Equity Research)

Just on the new deposit team adds and kind of that break-even point that you're targeting to hit in Q4, what's the deposit level for them to hit break-even?

Avi Reddy (CFO)

Yeah. So on an average basis, Chris, they probably should get to around, call it, around $400 million of deposits ±. So maybe between $350 million and $400 million by that point for Q4, basically. So when you look at that run rate, then it starts becoming break-even to positive at that point.

Chris O'Connell (Director of Equity Research)

Got it. And as far as the balance sheet movements in the quarter, on the end-of-period basis, the borrowings were a lot lower than on the average basis. I mean, were those paid off pretty late in the quarter, and do you have any sense of how that's going to impact the margin going into 2Q? I mean, was it included in the March 2023 margin, or is there further benefit of that coming into the second quarter?

Avi Reddy (CFO)

Yeah, a little bit further benefit, Chris. So if you look at I mean, the easiest way to look at it is if you look at the short-term investments that we had, it was around $300 million more this quarter than we had last quarter. So for the full quarter, the impact was more. But in my prepared remarks, what I tried to say was in the month of March, we paid down the borrowings starting on March 1st, but we were probably done by around March 20th. So there was probably around a three basis point drag even for the month of March. So that $2.23 margin for March was probably more like $2.25-$2.26 as an exit run rate going forward into the second quarter.

That doesn't include the benefits of any further paydowns that we'll have of borrowings or broker deposits going forward once the deposits start coming in.

Chris O'Connell (Director of Equity Research)

Great. I know you guys don't give short-term margin guidance, but based on that commentary, is it kind of safe to assume that you trend back up close to the levels that you were at into Q4 of 2023 and kind of migrate consistently upward from there as kind of overall balance sheet repricing occurs going forward?

Avi Reddy (CFO)

Yeah. I think overall, the way we describe it is an upward bias. I think last quarter, our guidance was the margin will be within a few basis points. And I think without this liquidity build, it would have been within a few basis points and obviously is a little bit down. But I think it's fair to say upward bias, the individual factors are stabilization in the deposit cost, which helps, not having a liquidity drag, which helps. And then to Stu's point, more originations on the loan side, which also help. And then as you see, more paydowns. And in the third quarter, we have some treasuries maturing. We probably have around $70-$75 million, I believe, in the third quarter. Right now, the yield on those treasuries are like 1%. So that's going to help as well.

So you're going to see a little bit of that into Q3 and into Q4. So I think I'll leave it at upward bias, and it'll be a function of closings on the loan side.

Chris O'Connell (Director of Equity Research)

Great. And there were some changes announced impacting the overall New York multifamily space with the budgeting being passed in the past week or so. Any thoughts or color as to how you guys think that will impact the market and if it will be significant at all? And just any general, I guess, thoughts on the state of the New York multifamily market and how you expect to manage your exposure going forward?

Stuart Lubow (President and CEO)

Yeah. So I mean, it's still a little early to ascertain what the ultimate impact is going to be. They still have to work out the details. And it's certainly better than what the advocates wanted. It's not necessarily where all the landlords wanted to be. So I mean, I still think that has to work through. I think on the margin, it could have been worse, and it's probably a net positive overall, but it's still got to work through the process, and we have to see how it actually affects the market.

Chris O'Connell (Director of Equity Research)

Got it. In any sense to Stu, were there any rent-regulated multifamily maturities in the first quarter? And if there was, where the new debt service coverage ratios were that repriced?

Avi Reddy (CFO)

Yeah. I don't have that off the top of my head, Chris, here, but we had a very small amount in the first quarter, probably, I don't know, $30 million± of multifamilies, and most of them took the option basically to reprice. And we can follow up after the call with.

Stuart Lubow (President and CEO)

Yeah. I mean, they're all paying. They're current. And it was a relatively small handful of loans that repriced during their period. And they just repriced. And the way it works in our world is if you take the repricing, you have to pay a fee. So they paid the fee, and they're repricing, and they're current.

Chris O'Connell (Director of Equity Research)

Great. In the near-term outlook, I know there's zero multifamilies on NPAs and zero any loans on 90 days past due. As you guys look through the maturities scheduled, which are fairly light over the next couple of quarters, is there anything that concerns you in terms of credit quality and coverage after repricing on the rent-regulated book?

Avi Reddy (CFO)

No, not especially. Like I said, we monitor the criticized and classified very closely. The multifamily criticized classified was, I think, down $4million-$5 million. So at this point, nothing stands out.

Chris O'Connell (Director of Equity Research)

Great. Thanks for taking my questions.

Operator (participant)

Thank you. I'm 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, Marvin. Once again, I'd like to thank all of our team members for their support during our significant growth initiatives. Our philosophy of a single point of contact and customer-centric approach to our customers remains first and foremost. Both new and old customers are the mainstay of our organization, and our continued success will accrue not only to the benefit of our customers but to the franchise value as well. We look forward to speaking with you all after the second quarter. Thank you.

Operator (participant)

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