Q2 2023 Dime Community Bancshares Inc Earnings Call
Participants
Avinash Reddy; Senior EVP, CFO & Principal Accounting Officer; Dime Community Bancshares, Inc.
Kevin M. O'Connor; CEO & Director; Dime Community Bancshares, Inc.
Stuart H. Lubow; COO & President; Dime Community Bancshares, Inc.
Manuel Antonio Navas; VP & Research Analyst; D.A. Davidson & Co., Research Division
Mark Thomas Fitzgibbon; MD & Head of FSG Research; Piper Sandler & Co., Research Division
Stephen M. Moss; Research Analyst; Raymond James & Associates, Inc., Research Division
Presentation
Operator
Good morning, and thank you for joining the Dime Community Bancshares Second Quarter Earnings 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 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. So 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.
Kevin M. O'Connor
Good morning. Thank you, Carla, and thank you all for joining us this morning. As usual, with me are Stuart Lubow and Avinash 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 3 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 nonperforming 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 Stuart will comment on in his prepared remarks, in the second quarter, we successfully on-boarded 7 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 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 3 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 with the right time to pass torch to Stuart. 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 among 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. I plan to work with Stuart 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 Stuart.
Stuart H. 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'll be leaning on him for his counsel and support and 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 2 banks in our footprint. From a strategic perspective, I would like to mention that I intend to keep Dime's focus 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 2 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 of First Republic Bank by adding 7 deposit-focused group. 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 were 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 on-boarded 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 to Dime, and we are in active discussion with a number of groups. We do believe there will be more fallout from both group high rate perspective as well as the opportunity to bring over individual clients who seek locally managed relationship base 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 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, '24 and beyond, we do accept 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 15, it stood at $1 billion with a weighted average rate of 7.5%. And 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 here there's been a lot of scrutiny on CRE concentration. In this regard, I want to mention that Dime's investor CRE concentration, excluding multi-families, which are really residential loans for 5 or more tenants is only 265% of total capital. 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 the portfolio and only have 4 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 ‘23 or ‘24. Repricing maturing office loans for the remainder of '23 are only $30 million and for ‘24 only $37 million. As we have mentioned before, our Manhattan investor portfolio, our investor office portfolio was only $200 million, less than 1.5% of total assets. The LTV on the Manhattan office portfolio is 50% and 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 Avinash to provide some detail on the results of this quarter.
Avinash Reddy
Thank you, Stuart. Core EPS for the second quarter was $0.68 per share. Our results were driven by prudent noninterest expense management and another good quarter for noninterest 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 noninterest-bearing deposits on our balance sheet. At 29% of average deposits, our noninterest-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 noninterest-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 750 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. A. 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 7 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.
Noninterest income for the second quarter was $11.2 million. We had a BOLI death 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.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from Mark Fitzgibbon from Piper Sandler.
Mark Thomas Fitzgibbon
Stuart, a quick question for you. You and I go back a long way and obviously, you've had a very successful career running a number of community banking institutions and have gone in and fixed and cleaned up and grown and ultimately sold a number of those institutions. Should we think of the Dime strategy as changing under your leadership? Should we assume that Dime will be eventually marching in that same kind of a direction?
Stuart H. Lubow
I think at this point, and as I mentioned in my remarks, from our perspective, from my perspective, it stated of course, Kevin and I work collaboratively on putting our strategic plan together. We've built a great team. We think there's a tremendous opportunity for organic growth and a chance to really improve franchise value by bringing down to the next level in terms of becoming a pre evident community commercial bank within Greater Long Island. So we're going to stay the course. We think the opportunity to bring on additional teams and potentially additional lenders out of the disruption of the 2 recent failures and some of the significant amount of cost cutting that other banks are going through will provide us some opportunities as well. So for now, it's stay the course. But the fact is that I've always viewed myself as someone who is significantly interested in providing strong returns to our shareholders, and that will never change.
Mark Thomas Fitzgibbon
Okay. And then I guess I was curious if you could share with us how much in the way of deposits the 7 new teams brought in so far. I know it's early days.
Avinash Reddy
So Mark, the teams really started May 1, some of them. The others still started June 7. But really quickly, they brought on around 600 customers. There's around 1,000 accounts opened. That's actually as of July 15, I believe. The month of July to date, they've actually funded around $75 million in the month of July already. We've mentioned when we did bring in the teams at that peak, they manage around $2 billion plus of deposits. So we view this as a significant opportunity in the quarters and years ahead, just in terms of the timing of when they started, there was not a lot at June 30. But what we're seeing in the month of July is why we feel very positive in terms of the net interest margin going forward.
Kevin M. O'Connor
Yes and just to expand on that, of that $75 million, approximately 75% of that is DDA. The weighted average cost or rate on those deposits is less than 1%.
Mark Thomas Fitzgibbon
And then, I guess, I know you had mentioned you were talking to some other teams. How many groups do you think you could sort of handle and would sort of want to take on maybe over the next year or so?
Avinash Reddy
So Mark, it's really about fitting our business mix. We've been very focused on adding groups in industries that Dime already banks, for example, lawyers, real estate companies, things like that. So really, the fit needs to be there. We have a corporate staff over here that's able to handle more volume at this point. We're growing our treasury management team. So I think it really depends on the group and whether it fits what we need. Obviously, we're getting to the second half of this year at this point in time. But I think given the experience that the current groups are having and our experience with them, too, I think we'd be very open-minded and there's really no limit in terms of what we can add on.
Mark Thomas Fitzgibbon
And then last question, Avinash, and I apologize if I missed this. If you could help us think about the trajectory of expenses. I know you've certainly done a good job of offsetting the incremental costs from the teams, but how are you thinking about things going forward?
Avinash Reddy
Yes. So I mean, really, the way we look at the company mark is really OpEx to assets, right? So first quarter, we were around 140 plus or minus OpEx to assets, we're around 150 right now. I mean we need to operate the company at that level, right? So this quarter, there's a bit of a tick up because in the month of April, obviously, you're going to have the annual merit increases going to impact. We have some of the group hires come in over there. But I would say managing that at around the 150 level is kind of what we're focused on and really figuring out a way and looking across the organization, which we do continuously. We never really had a cost savings plan out there because it's just built into our DNA in terms of how we manage the expense base.
Operator
Our next question comes from Steve Moss from Raymond James. Your line is now open, please go ahead.
Stephen M. Moss
My first question, just following up on the margin here in terms of maybe just thinking about funding costs and the trajectory there. You did see a slowdown in the pace of interest-bearing deposit costs. And Avinash, I do hear you in terms of Steelman advanced maturing over the next 12 months. Just kind of curious just how you're thinking about where your interest-bearing deposit costs could peak out?
Avinash Reddy
Yes. I think our cycle-to-date beta, Steve, on a cumulative basis around 38% I think our current models probably say mid-40s is kind of where we peak out at this point in time. We're obviously going to have a little bit more pressure here in Q3. But the tailwind that we have obviously, is these new deposits as Stuart said, right? You add $75 million of deposits at a 1% cost. Our marginal cost of deposits coming in is a lot lower than a lot of our peers. So I would say at this point, mid-40s is kind of what we're thinking in terms of deposit betas.
Stephen M. Moss
Okay. And then in terms of just on the asset side with securities, just if you could remind us what's the average life or duration of the portfolio?
Avinash Reddy
Sure. So it's around 3 years effective duration on the securities portfolio on the AFS side.
Stephen M. Moss
Okay. And then in terms of loan pricing, I hear you guys in terms of, I think it was mid-7s. Just curious here, as the mix has definitely improved, and you look at the margin cost of funds, do you think we had towards like an 8 handle or is the competitive environment closer to the 7s range?
Avinash Reddy
It's a mix, Steve, right? So on the C&I side, we're in the 8s at this point in time. If you do a swap, it's SOFR-plus 250, we're already getting over 8% at this point in time. So yes, I mean, right now, it's around 750. As Stuart said, it's a mix. But obviously, with the recent Fed hike, if it's going to go up a little bit more. Again, we're really pricing our products to really grow business loans, and we're not really seeing any slowdown in that. We're obviously a little bit above the market on the multifamily side and being selective on the investor creasing.
Kevin M. O'Connor
Yes. So just a little more color on that. So of the $600 million of business related loans in the pipeline, about $350 million of that is C&I at a weighted average rate of 8.5%. And then our owner-occupied CRE makes up the remainder about $250 million. And then we only have about $50 million in the pipeline on the multifamily side, which is basically existing customers refinancing and/or swaps that we're working with customers. So on the multifamily side, we're really not competitive in terms of the traditional fixed rate product, but we are still doing swaps in that business for selected customers.
Operator
(Operator Instructions) Next question comes from Manuel Navas from D.A. Davidson. Your line is now open, please go ahead.
Manuel Antonio Navas
As we think about the margin, can you kind of add to comments of when it could possibly trough? Is it just kind of, I know there's a lot of moving pieces there, but could that be first quarter next year? What's kind of the initial path there?
Avinash Reddy
Manuel, in my prepared remarks, I did mention that we do expect a little bit of pressure in Q3, but that's going to be less than what we saw in Q2 and then after that stability and growth. So we don't want to get into the exact quarters over there. But I would say very positive in terms of 2 items, which is our business DDA is growing again right now. We're seeing a lot of traction from these new groups that we've hired. And the 250 basis point differential between loans that the new are coming on versus the pipeline rate give us a lot of confidence going forward.
Stephen M. Moss
The expectation that loan-to-deposit ratio will exceed 105%. And we have had very little CD growth. Is that kind of all tied together in the comment about staying short-term funded?
Avinash Reddy
No, I think it's in the context of we feel pretty confident about deposit growth. So as Stuart said, we probably expect around $200 million of loan growth in the second half of this year. But we do expect deposits to pick up, and they have picked up. So we're actually up around $75 million to $100 million for the month of July at this point in time. And as the new groups bring on deposits, we feel pretty comfortable there. We've not really migrated our base to as much CDs as a lot of our competitors have at this point. We're retaining existing CDs out there. But really, our focus is on growing business DDA, business money markets, and that's the kind of bank we want to be.
Stephen M. Moss
Okay. What type of activity, like just kind of lending demand are you seeing in the marketplace? You're making some adjustments to pricing to bring in the type of lending you want. If you had more or easier funding could you bring in a lot more? What's kind of the demand out in the marketplace right now?
Kevin M. O'Connor
I mean demand has certainly moderated over the last 6 months. Certainly, with the current rate environment, it becomes fairly expensive, and it really takes away the opportunity to do cash outs on commercial real estate, debt service coverage ratios get a little tighter. So I think demand is certainly down. We are seeing opportunity on the C&I side. And those rates are fairly attractive to us. And that's really generated by a lot of our new hires in terms of our middle market lenders and C&I lenders that we brought in over the last year, and they've been able to cultivate relationships that they've had and are beginning to bring them over to us as well. But certainly, the rate environment has certainly moderated demand in terms of commercial real estate, small business lending, SBA lending, et cetera.
Operator
We have no further questions registered at this time. So with that, I will hand back to Kevin O'Connor for final remarks.
Kevin M. O'Connor
Thank you. I'd just like to conclude by taking a moment to thank our shareholders and the Board who supported me in this past 17 years. I look forward to as a board member and a shareholder to continue watching the success of Dime under this new leadership team. Indulge me also, I can't thank enough the current Dime team and our legacy team of BNB Bank is both current and former for their support, energy and dedication to the mission of Canadian Banking. You helped to create from this humble beginnings in 1910 in the East and a Long Island to the powerhouse it is today, all while staying true to our core mission and values. I want to thank you again for the opportunity to be part of this story. And thank you again for participating this morning.
Operator
This concludes today's call. You may now disconnect your lines. Thank you for joining.
