Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q2 2023 Earnings Call Transcript
Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q2 2023 Earnings Call Transcript July 28, 2023
Dime Community Bancshares, Inc. beats earnings expectations. Reported EPS is $1.01, expectations were $0.6.
Operator: [Started Abruptly] Apologies, everyone. We are having technically difficulties with the lines.
Unidentified Company Representative: Okay. We can hear you nw.
Operator: Such statements are subject -- thank you. 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 reconciliation to GAAP, please refer to today’s earnings release. I will now hand over to your host, Kevin O'Connor, CEO, to begin. Please go ahead.
Kevin O'Connor: Good morning. Thank you, Carla, and thank you all for joining us this morning. As usual, with me are Stu Lubow and Avi Reddy. I will first comment on Dime’s second quarter earnings and then touch upon the succession announcement we outlined in our press release. I’ll begin by saying Dime has done an admirable job weathering unique macro challenges posed by the failures of three regional banks, along with an unprecedented movement in rates and an inverted yield curve. In the second quarter, we grew average deposits by $150 million and supported our customers by growing loans 6% on an annualized basis. We grew our capital ratios and our balance sheet continues to remain solid with non-performing loans declining by 12%.
As we have mentioned previously, we do not have any of the loan or deposit concentrations that got the failed banks and others in trouble. These facts, coupled with our rock-solid bulletproof multifamily portfolio, representing nearly 40% of loans provides us with confidence we will outperform in any potential recessionary environment. For the record, we have no multifamily loans greater than 60 days past due and the LTV in this portfolio is in the mid-50% area. As Stu will comment on in his prepared remarks, in the second quarter, we successfully onboarded seven talented deposit-focused groups, while at the same time, managing our overall expense base prudently. We had a strong quarter for fee income marked by robust activity in our back-to-back loan swap program for commercial customers, which also has the impact of adding floating rate loans to our balance sheet.
Finally, our NIM contracted less in the second quarter than the prior quarter and was in line with the consensus estimates. Putting all these items together, we reported core EPS of approximately $0.68 per share. In the second quarter, we increased our quarterly cash dividend to $0.25. This increase is reflected in our strong current financial position and the culmination of our financial results over the last few years. These results reflect the power of our pure-play plain-vanilla community bank model and the dominant market share we create -- we have on Greater Long Island. Part of our press release this morning, we announced the culmination of a thoughtful and well-planned CEO succession process, the Board and I began discussing in earnest earlier this year.
Taking a step back, it’s been over three years since we announced our highly successful merger transaction. We’ve delivered on all the goals established at the time of the merger and created the premier business bank on Greater Long Island. The Board and I are very proud of these accomplishments. I’ve been CEO for over 16 years and take great pride in helping build along with our team a $13 billion local champion. And with stability returning to the banking sector with Dime’s strong financial performance these past few months and our tremendous success in hiring new groups of productive bankers, the Board and I both felt now was the right time to pass sword to Stu. I’m extremely proud of the franchise we’ve built. Our employees have worked tirelessly to create a real difference in our communities, being the leading community bank for PPP on Long Island, receiving an outstanding CR rating last year, above all we’ve been a beacon of strength and stability from the 2008 financial crisis through to the recent regional banking failures and resultant panic.
We plan to work with Stu and the Board on ensuring a seamless transaction. Given our collaborative approach in shaping Dime’s culture and strategy, I have no doubt he will continue our mission and culture of service to our staff and customers. With that, I will turn the call over to Stu.
Stu Lubow: Thanks, Kevin. At the outset, I would like to thank Kevin for his leadership and support. As many of you know, we have a history dating back almost a decade when Community National Bank, a bank I founded merged with Bridge. I am looking forward to working with Kevin over the remainder of this year and we will lean -- we’ll be leaning on him for his counsel and support in managing the bank. Together, we have built a strong team of client-facing personnel and operators. The Board, Kevin and I are highly confident that we have a significant runway for organic growth, especially after the failure of two banks in our footprint. From a strategic perspective, I would like to mention that I intend to keep Dime’s focused on providing exemplary relationship-based services that only a locally managed community bank can provide.
Managing expenses prudently and being a conservative underwriter of credit have always been hallmarks of Dime and we will not stray from these two core guidelines and principles. My focus will be on providing our customers outstanding service, growing our franchise value and delivering our shareholders strong returns. I am very excited to work with and rely on every one of our outstanding employees to accomplish this goal. Recently, we had the opportunity to capitalize on the disruption in the marketplace caused by the failure of Signature Bank and First Republic Bank by adding seven deposit focus groups. Of note, none of our local community bank competitors, both bigger and smaller, have been able to add the level and depth of deposit-focused talent that we’re able to add.
Onboarding these hires provides validation of Dime’s business model from a number of fronts, including our customer-centric relationship-based model, our best-in-class technology platform and our commitment to providing a flat organizational structure. Early results from these groups has been extremely positive with over 600 customers onboarded over 1,000 accounts open in a very short period of time. We expect these groups to contribute meaningfully in deposit growth over the next several years. We continue to be approached by groups of bankers looking to move the Dime and we are in active discussion with a number of groups. We do believe there will be more fallout from both group hiring perspective, as well as the opportunity to bring over individual clients who seek locally managed relationship based bank with access to key decision-makers coupled with a strong technology stack.
On the technology front, we rolled out a number of new enhancements in the second quarter, including a brand-new escrow management system and a consumer online account opening platform. We are well on track to complete our new business-focused online account opening platform that takes our already strong digital capabilities to the next level. With respect to our positioning on the lending side, our strategy is to ensure we continue to support our key clients through any operating environment. We will continue to prudently grow loans and add franchise-enhancing full-service business relationships. Our current expectation is to grow loans by approximately $200 million in the second half of this year. We are keeping a watch out on our loan to deposit ratio and intend to manage the balance sheet at a loan-to-deposit ratio of less than 105%.
Should rates decline in future years, 2024 and beyond, we do expect prepayments in the multifamily portfolio to pick up, which will lead to a natural normalization of the loan-to-deposit ratio over time. A quick update on our loan pipeline as of July 15th, it stood at $1 billion with a weighted average rate of 7.5%. The mix of the pipeline is now heavily weighted to our business loans, which accounts for approximately 60% of the total. Of the $1 billion, about 70% is in floating rate loans. Dime’s credit losses have been well below bank index over multiple cycles and we are extremely proud of our track record. We are cognizant of the fact there’s been a lot of scrutiny on CRE concentration. In this regard, I want to mention that, Dime’s investor CRE concentration, excluding multifamilies, which are really residential loans for five or more tenants is only 265% of total capital.
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Thus far, we have not seen any meaningful early warning indication of credit deterioration, while we continue to be diligent and vigilant around monitoring our loan portfolio. Overall asset quality remains strong with NPAs and 90 days past due down 20 basis points. As you would expect, we continue to closely monitor our office portfolio. At the current time, no past dues in our portfolio and have and have -- and only have four office loans totaling approximately $30 million that are rated substandard. Notably, we do not have significant amount of repricing or maturity in our office loans for the remainder of 203 or 2024. Repricing maturity maturing office loans for the remainder of 2023 are only $30 million and for 2024 million only $37 million.
As we have mentioned before, our Manhattan investor portfolio, our investor office portfolio is only $200 million, less than 1.5% of total assets. The LTV on the Manhattan office portfolio is 50%, we are comfortable with our exposure and the operators of our office portfolio are very strong individuals. With that, I will turn it over to Avi to provide some detail on the results of this quarter.
Avi Reddy: Thank you, Stu. Core EPS for the second quarter was $0.68 per share. Our results were driven by prudent non-interest expense management and another good quarter for non-interest income. Our asset quality continues to be stable. In fact, our NPAs and 90 days past due declined only 20 basis points. Our cumulative total deposit beta for cycle-to-date tightening has been approximately 38%. Our performance on this front compares favorably to our Metro New York competitors. Our relatively lower betas have been driven by the level of non-interest-bearing deposits on our balance sheet. At 29% of average deposits, our non-interest-bearing deposit percentage remains a clear differentiator for Dime versus other community banks in our footprint.
The NIM was 2.50% for the second quarter, compared to $2.74 for the prior quarter. We believe the pace of NIM compression will continue to slow and we see a number of green shoots on the horizon. While we did see business non-interest-bearing deposits declined by approximately $200 million collectively in March and April, primarily driven by our desire to retain customers in an uncertain environment where customer retention was paramount, we started to see a stabilization in business DDA in the month of May and actually grew business DDA in the months of June and July. In addition, we saw a significant increase in the number of checking accounts opened in the second quarter of 2023 compared to both the linked-quarter and prior year. As you know, we don’t provide quarterly quantitative NIM guidance, given my comments above on the stabilization in business DDA and given that the loan pipeline weighted average rate of 7.50% [ph] is approximately 250 basis points above our existing portfolio rate, we see positive trends emerging for the NIM.
We expect the NIM to have an even smaller decline in the third quarter compared to the second quarter with stability and growth in the quarters ahead after that. We continue to position the balance sheet for a scenario where forward rates drop in 2024. For example, we have $1.25 billion of FHLB borrowings that all mature by June of 2024. Similar to how many companies kept excess cash during the pandemic and benefited from rising rates, we’re following a similar strategy on the liability side where we are intentionally not going long and intentionally not adding derivatives to the balance sheet at this point in the cycle when the majority of the Fed tightening is done for market consensus and we expect to benefit from a full repricing down if and when rates do gap down.
Cash operating expenses for the second quarter was approximately $51 million. On a year-to-date basis, this brings us to $98 million of core cash operating expenses. If you recall, at the start of the year, we had guided to core cash operating expenses of approximately $206 million to $209 million. Even incorporating the impact of the recent private banking groups that we hired from Signature and First Republic, we are very focused on being at the lower end or beating the expense guide for the full year. We have basically been able to absorb the cost of these seven groups into our organization, along with the additions of various corporate staff to support them by rationalizing expenses across the organization, using technology to automate manual processes and promoting and filling open roles from our talented employee base.
Non-interest income for the second quarter was $11.2 million. We had a BOLI debt claim, which added around $700,000 of income and it was offset by a loss on a CRA-related equity security of around $800,000. We did have another strong quarter for swap fee income, approximately $2.5 million compared to our initial guide of $1 million to $1.5 million. Given that many swap deals for our customers closed right before quarter end, we expect the revenue from this business to be lower in the third quarter and then pick up in the quarters ahead again as we rebuild the pipeline. We had a $1 million loan loss provision this quarter. This was driven by growth in the portfolio and the change in the Moody’s CRE Index, offset by continued improvement in the reserve on PCD loans.
Needless to say, we’re comfortable with the level of reserve on our balance sheet. I will point out that excluding multifamily, which we view as a risk-free asset class, our reserves to loans would be around 1%. During the quarter, our risk-based regulatory capital ratios increased by approximately 10 basis points. While we continue to see a tremendous amount of value in our shares, we bought back only a modest amount of shares in the quarter as we do believe that accreting capital is the right strategy until the overall environment stabilizes a bit more. I will point out that a number of our Board members did repurchase shares in the second quarter. With that, I’ll turn the call back to Carla for questions.
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