Q3 2023 Dime Community Bancshares Inc Earnings Call
Participants
Stuart Lubow; President and CEO; Dime Community Bancshares, Inc.
Avi Reddy; Senior EVP and CFO; Dime Community Bancshares, Inc.
Steve Moss; Analyst; Raymond James Ltd.
Matthew Breese; Analyst; Stephens Inc.
Mark Fitzgibbon; Analyst; Piper Sandler Companies
Chris O'Connell; Analyst; Keefe, Bruyette & Woods, Inc.
Micha Ferretti; Analyst; D. A. Davidson
Presentation
Operator
Hello, everyone, and welcome to the Dime Community Bancshares third-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 provision of the US 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 US 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 US 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, Stuart Lubow, President and CEO, to begin. Stuart, please go ahead when you're ready.
Stuart Lubow
Good morning. Thank you, Carla, and thank you all for joining us this morning. I will first provide comments on key themes underlying our business. Avi will then provide additional details on the third quarter, and then we'll open it up for questions.
Dime continues to perform well in a year marked by the failure of three regional banks and unprecedented inverted yield curve and significant interest rate increases by the Fed. In the third quarter, we grew core deposits approximately $200 million. We reduced wholesale funding on our balance sheet. We increased our already strong risk-based capital, and we reduced our nonperforming assets by 16%.
As we have mentioned on our previous calls, we do not have any concentrations that got the failed banks and others in trouble. These facts, coupled with our rock-solid bullet-proof multifamily portfolio, which represents 38% of our overall loan portfolio, gives us confidence that we will outperform in any potential recessionary environment. For the record, we have no loans on our entire multifamily portfolio that are delinquent greater than 60 days. And the LTV on that portfolio is 58%.
We continue to be vigilant and diligent around monitoring all parts of our loan portfolio. Overall asset quality remains strong with NPAs and 90 days past due declining to only 17 basis points. As you would expect, we continue to closely monitor our investor office portfolio. As of September 30, we have no delinquencies greater than 60 days in the investor office portfolio. In fact, we only have one loan over 30 days at [930], which was only $1.9 million and had an LTV less than 50%.
We provide some additional disclosures on this portfolio as it relates to properties and geography in our recent investor presentation. Our Manhattan investor office portfolio is only $200 million or less than 1.5% of total assets. The LTV on our Manhattan office portfolio was 50%. We are comfortable with the exposure and the operators of our office portfolio are very strong. Notably, we do not have significant amount of repricing or maturing office loans for the remainder of '23 or 2024.
Repricing and maturing office loans for remainder of 2023 is only $20 million. And for '24, only $39 million. We are cognizant of the challenging revenue environment and continue to manage expenses prudently. Our focus is on being as efficient as possible.
Core expenses, which included a full quarter's impact of our private banking group hires were down on a linked quarter basis. There are a number of projects that we are working on that will result in expense containment for future years. For example, we recently outsourced our data center.
Importantly, on a linked quarter basis, our non-interest-bearing deposits increased. This marks (technical difficulty) first increased as the current rate tightening cycle began and portends well for our future earnings potential. Avi will provide more details on the margin in his remarks.
Dime has been very active on the hiring front in 2023. And the third quarter was no different. We were able to recruit a high-caliber banker to lead our health care vertical. We continue to do spend (technical difficulty) and potentially add more talented bankers in the future. We do believe there will be some more fallout from larger local institutions as well as an opportunity to bring over individual clients who seek a locally managed relationship base bank with access to key decision-makers at all time. That, coupled with our strong technology, makes us very attractive to new customers and new bankers.
With respect to our positioning on lending, our strategy is to ensure we continue to support our key clients through any operating environment. We will continue to prudently add franchise-enhancing full-service business relationship. The addition of the health care vertical is consistent with our strategy of growing business loans.
Our loan pipelines while down from a year ago, given the much higher rate environment, are intentionally heavily weighted toward business loans. Approximately 60% of our loan pipeline is in business loans with weighted average rate on the entire loan pipeline of 7.9%. We expect loans to remain relatively stable between now and the end of the year with growth in business loan offsetting planned declines in our investor CRE and multifamily portfolios.
Since my appointment as CEO and in my day-to-day meetings with customers, it's apparent to me that Dime's brand and reputation in marketplace has been never been stronger. Our technology platform is better and more agile than many of the larger local banks. And our customer service is second to none.
Anecdotally, we are winning back some clients who left were biggest banks during the March Madness as they realize service and personal culture are important. A big client win for our firm in the third quarter was New York Jets. Dime is now the official private bank of the Jets. The partnership is providing us tremendous visibility and has been well received by our clients and employees across the board and demonstrates that Dime can bank big brand-name institutions.
As I said on our last earnings call, my focus is on providing customers outstanding service that only locally managed community banks can provide, growing our franchise value and delivering our shareholders strong returns. Managing expenses prudently and being a conservative underwriter of credit have always been hallmarks of Dime. I will not stray from these two core guiding principles.
I would like to thank all our outstanding employees for staying focused on these goals. With that, I will turn the call over to Avi to provide us more detail on the quarter.
Avi Reddy
Thank you, Stu. Core EPS for the third quarter was $0.56 per share. Our results were marked by prudent noninterest expense management and stable asset quality. We grew core deposits by approximately $200 million on a spot basis. And importantly, non-interest-bearing deposits increased in the third quarter. At 29% of average total deposits, our non-interest-bearing deposit percentage remains a clear differentiator for Dime versus other community banks in our footprint.
In a higher for longer environment, the value of these non-interest-bearing deposits will be paramount. The NIM was 2.34% for the third quarter compared to 2.50% for the prior quarter. As expected, the pace of NIM compression continued to slow in the third quarter. As you know, we don't provide quarterly quantitative NIM guidance. All else equal, we do expect the NIM to stabilize at the end of this year and see expansion in 2024.
We're currently in our budgeting process for 2024, and we'll have more to add on our January earnings call. Given the growth in core deposits, we reduced our wholesale funding position and our loan to deposit ratio ticked down to 102%. Core cash operating expenses for the third quarter was approximately $51 million, and we are on track to beat our full-year guidance for core cash operating expenses, even after absorbing the hires we made in the second and third quarters.
We have been able to absorb the cost of these hires 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 rules from our talented employee base.
Non-interest income for the third quarter was $7.9 million. The decline on a linked quarter basis was due to an expected decline in swap revenue. And additionally, we had a [bully] that claim in the second quarter. We expect fourth-quarter results for swap fees to generally be in line with the third quarter and then to pick up in 2024 as we have more back-to-back swap loans in the pipeline expected to close in the new year.
We had a $1.8 million loan loss provision this quarter. The allowance to NPLs increased to over 300% in the third quarter. I will point out that excluding multifamily, which we view as a risk-free asset class, our reserve to loans would be approximately 1%. We are cognizant of the fact that there's 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 260% of total capital.
As we continue to focus our growth on business loans and building capital, we expect the CRE concentration to decline over time. In light of the overall environment, our posture as it relates to the balance sheet is to build the capital methodically. This will in turn support our clients when they need it.
This quarter, our risk-based capital ratios increased by approximately 25 basis points. As a reminder, we have a very short duration AFS portfolio and the AOCI marks this quarter were fairly modest despite the increase in long rates.
With that, I'll turn the call back to callers for questions.
Question and Answer Session
Operator
(Operator Instructions) Steve Moss, Raymond James.
Steve Moss
Good morning, Stu. Maybe just start on the deposit growth you guys showed this quarter here, particularly noninterest-bearing, I realize that's from the Signature hires. Just curious to give any expectations or updated thoughts looking forward here into in the fourth quarter.
Avi Reddy
Yeah, I'll start, Steve. Part of the reason for the decline in non-interest-bearing deposits earlier in the year was really migration out of some consumer DDA. And the first half of the year, we were probably losing around $50 million to $100 million of consumer DDA. In the third quarter, we were down to only around $30 million. So that's stabilizing to some extent.
And obviously, the new private banking groups that we have have added significant deposits. I think overall at the bank, business DDA is up, municipal DDA is fairly stable. So when we're doing our projections, it's pretty much stable to up from here on out. Obviously, any particular quarter can go up or down. But I think we've seen the bulk of declines in DDA at this point. And as I mentioned, and as Stu mentioned, having that 29% in north of that in terms of DDA is really going to be a key driver of NIM expansion in the future.
Steve Moss
Okay. And then on the expense front here, good expense controls -- Avi previously provide guidance, I think, the number is $206 million to $209 million. Looks like you're running below that trend, if we kind of hold flat in the fourth quarter. Just any updated thoughts on expenses?
Avi Reddy
Typically, we don't re-guide on expenses. I think my comment was we're just going to be the full-year number. We're working on -- we're really focused on keeping expenses as low as possible, and we're going to use that as a base into next year. I think Stu said that there's a lot of opportunity to make new hires and revenue-generating deposit and people on the loan side. So I think we'll look at both over time, but we're pretty comfortable in terms of beating that $206 million number, and we're trying to beat it as much as possible in the fourth quarter.
Steve Moss
Okay. And just one last one for me. Just curious on (inaudible) is loan pricing these days for you guys and it sounds like that business -- C&I business side remain strong for the pipeline, while obviously some further decline in CRE?
Stuart Lubow
Yeah, so basically our pipeline is about $985 million. The weighted average rate on the entire portfolio is $790 million. But on the C&I side, the pipeline is about $321 million, and that, the yield or the weighted average rate on those loans is actually 8.97%. So we have quite a bit in that pipeline. And then there's about $300 million in owner-occupied CRE, which is in the 7%s. And interestingly, we only have $22 million in multifamily in the pipeline. So obviously our focus is on C&I and owner-occupied CRE.
Steve Moss
All right. Great. Thank you very much.
Operator
Matthew Breese, Stephens Inc.
Matthew Breese
Hey, good morning. My question on the updates on the on the deposit side and certainly the inflection point this quarter was a welcomed one. What I'm curious about is on the opposite side of the balance sheet. Movement in loan yields hasn't been as robust, and a lot of it's tied to the longer duration nature of CRE, resi, multifamily. I was curious when do you expect to see a bigger pickup in loan yields. Provide some expectations around loan data through the end of the year, early 2024, please?
Avi Reddy
Yeah, sure. So Matt, we mentioned in the past -- we have a slide in our investor presentation too about the next couple of years in terms of repricings and maturities of the real estate book. We obviously were not big originators back in 2017 and 2018. And typically, those come due five years afterwards, right? So it's going to be a steady progression up. I think what's going to make the difference is the originations now are really focused on the owner occupied and C&I side.
This quarter we had a large construction loan payoff, which was a good thing. The rate on that was pretty high. So I think if you're replacing loans that are coming off at 5%, 5.5%, at 8.5% to 9%, you're going to see that uptick over time. And our portfolio is also gearing more towards floating rate loans going forward.
So I think is going to be a steady build. We have outlined in our investor presentation too that there's a big slug of multi-family loans that are coming due in 2026 and 2027. Obviously, with current rates where they are, those are probably not going to prepay at this point in time. However, if you follow the forward curve and rates do drop at some point in 2024 and 2025, you could see some of that come in. And we've outlined that's around 30 basis points of the margin once all those reprice.
So if it's in the near term, we're following the cash flows and it's going to be based on yields. In the medium to longer term, it's going to be based on the multi-family coming due.
Stuart Lubow
Yeah, and I do think we will see a pickup in the C&I business. I'm looking -- right now, I expect, between $100 million and $150 million of C&I business to close in the quarter. We've got our first two healthcare deals that we'll either close late in the year or early 2024, and the yields on those are about 9%, 9.05%, and that's about $50 million. So we're starting to see real traction on the C&I side at this point.
Matthew Breese
Got it. Okay. And then, Avi, I know you don't provide quarterly NIM guidance, but historically, you have kind of discussed for this institution what the appropriate NIM should migrate to over time and I'm curious in this kind of yield curve environment, what that migration point, that point of gravity is?
Avi Reddy
Yes. So for example, in terms of the near term NIM at -- I probably didn't mention in my prepared remarks. The spot NIM in the month of September was around 2.35%. So it kind of stabilized in September. We want to wait and have a couple more months of stability before officially calling the bottom for sure. So that was a near-term thought process around that.
Look, when we do our medium- to longer-term projections, obviously, with the long end being up, that's a good thing for us, right? Because you're going to be repricing into a higher rate environment as your deposit costs have stabilized.
So I think getting back to that 3%, 3.25% area is the right medium- to longer-term opportunity for us. And if the curve stays as -- if it's less inverted as it is now and if the five year continues to stay where it is with 30% DDA, I mean there's the probability that we can get higher than 3.25% in the long run. In the short term, it's obviously going to be methodical, every quarter, expansion in 2024.
Matthew Breese
Got it. Okay. Last couple of questions. Understanding historically, multifamily, particularly rent-regulated multifamily has been a risk-free asset. But does the combination of the 2019 rent law change with the still very tenant friendly rent guidelines board, higher expenses, higher loan yields, and then the more recent Supreme Court decision, did that change the risk-free nature, particularly, of the rent-regulated portfolio?
Stuart Lubow
Yeah. Matt, not really. I mean, we took that into account in terms of our underwriting as we originated from 2019 on. At Dime -- legacy Dime, we changed our underwriting guidance to take that into account. You have to remember, we really never did any repositioning multi-family. We underwrite very stringently. We raised our underwriting criteria. And we always had a very low LTV.
And so what we're seeing now is that we haven't had any pressure in terms of the credit quality on the multifamily at all. And in fact, we have a significant amount reprice this year where we haven't been asked for modifications. They just moved into a higher rate, which is obviously a positive and so we're not seeing the pressure that others have. But when you have a 58% average LTV, there's a lot of equity in those buildings. And these are generational owners that we're not looking for quick hits and repositioning of loans.
So I think from our perspective, we still feel very comfortable. And obviously, our delinquency and nonperforming numbers bear that out.
Avi Reddy
Yeah, Matt, the only other thing I'd add is we really want in the multifamily market in 2017 and 2018. If you remember, that's when Stu got to Dime, and we pivoted our balance sheet. So for example, we only have $100 million of multifamily loans that were made in 2018. So a lot of our production is post 2019 and taking this into account already.
Matthew Breese
Got it. Okay. I mean, just industry sources are starting to point to new transaction values down -- showing valuations down 30% to 45% in the asset class. And it gets you close to your average LTV of 58%. I guess that's my bottom-line point.
And then I guess I'd be curious, obviously multifamily can bucket both the market rate and the rent regulate. How much rental regulated multi-family exposure do you have today?
Avi Reddy
Yes, it's around third modified portfolio. Free market is around two-thirds, rent-regulated around the third basically. Look, I mean, at the end of the day, we can only tell you what we're seeing in our portfolio. We're really not seeing any signs at this point in time. So we'll leave it at that.
Steve Moss
Totally understood. Okay. Thank you for taking my questions. I'll leave it there. Appreciate it.
Operator
Mark Fitzgibbon, Piper Sandler.
Mark Fitzgibbon
Hey, guys. Good morning. I guess I was curious, first, what does the pipeline in new private client teams look like today and the private client teams you've hired recently? Can you give us a sense for how much they've already brought in in terms of deposits and loans?
Stuart Lubow
They've opened up about 2,000 accounts at this point and about 1,000 separate customers. Not all of that has funded yet. I'd say there's probably 5,000 to 6,000 accounts that haven't funded yet. I mean, at this point they brought in about $250 million and about 50% of that is DDA.
Mark Fitzgibbon
Okay. In the pipeline and the team, Stu, would you say it's still quite a few out there?
Stuart Lubow
Yeah. I mean, it's growing really steadily every week. We get reports twice a week, and basically, we're seeing steady growth every week.
Mark Fitzgibbon
Okay. And then, Avi, obviously I am wondering if you could share with us your thoughts on maybe restructuring some of the available for sale securities book given as you said that it's relatively short in duration and rates may be stuck up here for a little bit. Is that something you're contemplating?
Avi Reddy
Yes, I think at this point, probably not in honest, Mark, I think just having a little more stability in the banking industry in general is important. I think we're focused on building capital, optically. We're doing that in a 10 to 20 basis points every quarter. So it's pretty short that's going to run off pretty quickly. So I'd say in the near to medium term, probably not, but something we evaluate and update our analysis constantly.
Mark Fitzgibbon
Okay. And then lastly, what are your thoughts around share buybacks given the depressed level of the stock price? You know, are capital levels an impediment to doing buybacks here? not really mark.
Avi Reddy
Not really, Mark. I think from a corporate finance perspective, it's screaming out to do buybacks. I think that said, in the current operating environment, I think clients value banks with capital and strong liquidity, and you don't know how long the Fed is going to stay at these levels, don't know what's going to happen if they raise rates more. So I think at this point, we're still keeping the capital to support our clients. They'll come a time and place for buybacks. And as we've been very active on that front since the merger and when the time's right, we'll do it. But like a lot of our peers, I think right now we're waiting and watching to see what happens over the course of the next three months or so.
Mark Fitzgibbon
Thank you.
Operator
Chris O'Connell, KBW.
Chris O'Connell
Hey, good morning. Yeah, just start off on the credit for this quarter, I noticed the reserve, it came down a little bit and net charge-off is a bit higher, but NPAs came down. Just any commentary around the movement this quarter and whether there's something charge-off that was maybe fully reserved for?
Avi Reddy
Yeah, that's exactly right, Chris. So we had a loan that's fully resolved. We took a charge on that, but I mean, again at 18 basis points, it's pretty minimal overall. Our pool of reserves, it stayed pretty constant. So within our $70 million-odd of reserves, there's around $53 million for the general pool. And that really didn't change much. So the overall pool stayed better (technical difficulty)
Chris O'Connell
Got it. And any color you could provide on the type of credit? Any details around the when those charge-off?
Stuart Lubow
Yeah, it was a line of credit to individual who was heavily involved in the hotel industry and never really recovered from the COVID pandemic. And we've been working with them for a while. We did get a significant paydown, but we thought at this point, we do have a judgment and we expect recovery. But at this point, we thought it is prudent to take the charge and any funds we get in return we take as a recovery.
Chris O'Connell
Great. And just regarding your commentary about the expenses going forward, the potential to drive some efficiencies and things that you're looking at on a go-forward basis. Just any color around where you guys are looking at to drive those efficiencies and what the potential magnitude of those efficiencies could be as we get into 2024?
Stuart Lubow
Yeah. I mean, look, we've been pretty active in looking at efficiency throughout the year. We had a reduction of force in June. It's a constant state of affairs in terms of trying to look at opportunities across the board. Obviously, I mentioned we just outsource our data center. That's going to save personnel costs and equipment costs and whatnot. And that's going to register in the fourth quarter.
And we're looking -- we're in our budget process now, so we're looking across the board in terms of opportunities to become more efficient. On the other hand, we want to take advantage of opportunities, and we've done that so far in terms of hiring the Signature teams and our recent hire in terms of a healthcare vertical. And I think it's important that we don't want to just play defense. We want to play offense and take advantage of the opportunities that are out there. And I think we've been able to do that.
We're one of the few banks that we're able to hire a significant amount of teams from Signature. And obviously, it's paid dividends to us already. And we've been able to do that while keeping our expenses below our guidance. So we're going to continue to explore a number of opportunities. We are looking at certain areas that I think there's more expense savings available. But again, we've been doing that on a fairly regular basis. And I don't think we're going to do any significant major initiatives. I think it's going to be very granular in terms of how we manage our expenses.
Chris O'Connell
Got it. And just on the loan growth, I'll appreciate all the color around the pipeline and the rates there. As you look into the fourth quarter here in the amount of CRE and multi-family, that might pay down or runoff, how are you thinking about net overall loan growth for next quarter?
Avi Reddy
Yeah, I think, Chris, in our prepared remarks, we said the balance sheet should be pretty stable runoff in multifamily and CRE offset by [CNA] and on our occupancy.
Operator
[Micha Ferretti], D.A. Davidson.
Micha Ferretti
Hey, good morning. On for Manuel here. Most of my questions have been asked, but could you talk about your loan to deposit ratio and how it's going to settle in by the end of the year? Just some color on that would be great.
Avi Reddy
Yeah, we're obviously down this quarter to 102. Obviously, you know, if we keep loans flat and we grow deposits, it's going to continue to go further down. I think at the start of the year, we had said -- we had set a hard line and said we don't want to go above 107.5. And that was when there was a banking crisis and deposits were in flux. I mean, at this point in time, we'd like to get to 100% as quickly as possible. And then continue to move that ratio down as deposits keep coming in.
Micha Ferretti
Great. Just have one more. In terms of the technology rollouts that you did last quarter, could you just provide some color on what the progress there is in terms of the new business focused accounts and -- sorry if I missed that, but some color on that would be great.
Stuart Lubow
Yeah. So we rolled out our online banking -- digital online account opening process for retail. We're rolling out the digital online for commercial as we speak. And we're very happy with that. It completes the package in terms of our digital capabilities. And our new bankers -- our new private bankers and whatnot are using that. We're certainly going to continue to enhance that. Our online or our new [Esko] management system has been very successful and very happy with that. And so we're pleased with all the all the changes we made and that it just adds to the suite of products for our customers.
Micha Ferretti
Fantastic. Thanks for taking my questions.
Operator
(Operator Instructions) We have no further questions registered today. So with that, I will hand back to your host, Stuart Lubow, for final remarks.
Stuart Lubow
Thank you, Carla. Again, I would like to thank all of our employees for their diligence and hard work as well as our shareholders for all their support. And we look forward to speaking to you all again at the end of January.
Operator
This concludes today's call. Thank you for your participation. You may now disconnect your lines. Have a great day
Stuart Lubow
At the end of January.
