Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q4 2023 Earnings Call Transcript

Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q4 2023 Earnings Call Transcript January 26, 2024

Dime Community Bancshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and thank you for standing by. Welcome to the Dime Community Bancshares Fourth Quarter Earnings Conference Call. [Operator Instructions]. 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: 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 is 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 at 12/31, 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 ’22. 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 on creating 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 — growing business loans to 30% and reducing multi-foundry 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.

A year ago, business loans accounted for only 35% of the pipeline. 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 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 ’24, in 2025 and 2026, we see increased repricing on the asset side. Returning to a 110 to 125 ROA is a key market, 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 shareholders — our shareholders strong returns. 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 past dues — 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: 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 onetime FDIC special assessment and intangible amortization was $52.5 million. For the full year, cash noninterest expense, excluding FDIC special assessment, 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 remain 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 -. And 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. And 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. And 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 Cree 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.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James. Your line is now open.

Stephen Moss: Good morning. Hey, Steve. Starting on the margin sensitivity here, Avi, just curious, how you — I hear you in terms of Fed cuts getting into the low threes on the margin. How many rate cuts do you think it will take to get to that level?

Avinash Reddy: 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, 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 there.

Stephen Moss: And could you just remind me how much do you have an assets repricing in 2025?

Avinash Reddy: Yes, sure. So we have — on the real estate side, we have around $575 million of assets in 2024. And then we probably have around $200 million to $225 million on the security side as well coming due.

Stephen Moss: Okay. And then a meaningful step-up in 2025 to — from there?

Avinash Reddy: Yes. For 2025, a meaningful step up, right? So in 2025, on the asset side, we have around $900 million in 2025. And then we have $250 million of securities that year. And then if you roll forward one year to 2026, we have around $1.4 billion in 2026 of assets and around $200 million of securities. Now that’s contractual, right? But if the Fed cuts rates, you’re going to see some of that — some of those asset repricing from 2026 pull forward a 1.5 year in 2025.

Stephen Moss: Okay. Appreciate that. And the Stu, you mentioned the health care vertical. I’m sorry, but you cut out on just how large the pipeline was there. Wondering if you could just — if you could give that number? And also, just curious, are you looking to hire any additional teams in the upcoming year?

Stuart Lubow: So at this point, the pipeline is approximately $115 million with a weighted average rate of 9%. And so we’re very happy with the growth in the pipeline. We expect to have our first closings in the first quarter. So things are going well. In terms of additional teams, yes, I mean, we’re looking at — there are a couple of other C&I related and health care-related individuals and teams we’re looking at that also have significant deposits as part of their book, and we are looking at them.

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

Avinash Reddy: 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 very profitable very quickly. I mean right now, it’s 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: 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: Okay. Great. I appreciate that. And one last question, just on the — I assume it’s one commercial real estate nonperforming loan. Any — just curious any color you could give there on that credit?

Stuart Lubow: 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 put a loan — take a loan out of nonaccrual. So we anticipate that loan coming — actually coming out of nonaccrual this quarter.

Operator: Our next question comes from the line of Mark Fitzgibbon with Piper Sandler. Your line is now open.

Mark Fitzgibbon: 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, what they are and those will be fully out of the tax rate in the first quarter?

Avinash Reddy: 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: 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: 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.