Q4 2023 Dime Community Bancshares Inc Earnings Call

Presentation

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 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. Please be advised that today's conference is being recorded.
I would now like hand the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead.

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 of 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 operation. 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've 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 our brand new healthcare vertical in 2023. This follows on the heels of building out a middle market C&I lending operation in '22. Our healthcare 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 healthcare vertical will add diversity to our balance sheet with solid margins.
Once again, we continue to spend a significant amount of time on the 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 in 2023, it was important for Dime to navigate the dynamic environment while playing strategic offense and taking advantage of market opportunities.
As we have just completed our year-end strategic planning process, I want to layout our medium- and long-term goals. We intend on creating 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 business loans to 30% and reducing multifamily to the 25%, 30% range over a two- to three-year timeframe.
To provide you some context on how earnest we are about the balance sheet transformation, 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. Our asset book has limited maturities and repricings in '24. In 2025 and 2026, we see increased repricings on the asset side. Returning to a 1.10% to 1.25% ROA is a key marker, 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 franchise value, and delivering 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 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.

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 5 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 one time 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.
Noninterest income for the third quarter was $8.5 million. We had a $3.7 million provision in the fourth quarter. The allowance to loans remained 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 ratio has 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 3s and potentially even higher.
This will require more of our assets to reprice, 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 CRE while 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.

Question and Answer Session

Operator

(Operator Instructions) Steve Moss, Raymond James.

Maybe just starting on the margins activity here, Avi. Just curious, how you -- I hear in terms of Fed cuts getting it to the low 3s on the margin. How many rate cuts do you think it will take to get to that level?

Yeah. 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 3s. I will say that if you follow the forward curve, and you assume where the five-year treasury ends up in 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 3.30% 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.

And can you just remind me how much do you have in assets repricing in 2025?

Yeah, sure. So we have on the real estate side, we have around $500 million, $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.

Okay. Then a meaningful step up in 2025 in there?

Yeah. 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 securities. Now that's contractual, right? But if the Fed cuts rates, you're going to see some of the asset repricings from 2026 pull forward a year and happen in 2025.

Okay. Appreciate that. And then, Stu, you mentioned the healthcare 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?

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, yeah, I mean, we're looking at -- there are a couple of other C&I-related and healthcare-related individuals and teams we're looking at that also have significant deposits as part of their book, and we are looking at them.

Okay. And does the expense guide contemplate additional hires for the year, or would that be additive to to expenses?

Yeah. 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 with the groups and teams that we do have. But I would just say the payback period on the groups is very, very quick from a bottomline perspective.

Yeah. I mean, last year we brought on -- in those groups, we brought on 21 individuals, and we were able to recover those costs within our expense guide. I mean, we're cognizant of managing both sides of that, both the income opportunity bringing on new teams and the expense side.

Okay, great. I appreciate that. And one last question, just on the, I assume, it's one commercial real estate nonperforming loan, just curious any color you could give there on that credit?

Yeah. 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 take a loan out of nonaccrual. So we anticipate that loan actually coming out of nonaccrual this quarter.

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

Operator

Mark Fitzgibbon, Piper Sandler.

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 audited tax rate in the first quarter?

Yeah, Mark, primarily it's related to 162(m) 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 rates have 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.

Okay, great. And then Stu, your comments on hiring additional teams. Are those presumably mostly from legacy signature or other large bags, or where do you see those teams coming from?

Yeah, 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.

So of the teams that you've hired, those six teams that have brought in $300 million and some odd million of deposits, what do you think those teams are capable of doing once their books have fully matured and migrated over?

Yeah, sure, Mark. So you go back to September 30, we were at $250 million on the teams. At December 31, we were $333 million. Today, we're $375 million. So it seems like a steady build of $70 million to $80 million per quarter at this point. I mean, the good thing is we look at it on a client-level and on an account-level basis, and it has really not slowed down yet. So we expect to see continued growth in the quarters ahead over there. Again, they're very heavily focused on DDA.
At this point, it does take time to move over clients. So I think so far they're really meeting the expectations that we set out, and they've become profitable very quick. And really, the opportunity for us is continue to grow that. But now that they've been here for a while, hiring new groups and, as Stu said, that's going to be additive as well pretty quickly overall.

Okay. The last question I had, Stu, is there has been a lot of dislocation in the banking space and your balance sheet has obviously held up well. Are you thinking about M&A at all? Is that a priority for Dime over the next several quarters?

Look, obviously M&A has -- the talk about M&A has certainly picked up. There's still issues with marks and the balance sheets that are out there. I mean, certainly for the right transaction, we're certainly interested and would explore opportunities. So I do think over time and particularly in the next several years, there's going to be much more activity in the M&A space. And once the Fed levels out and has a direction, I think there's going to be much more discussion out there. Given where we are in the marketplace and the strength of our balance sheet, I think there's certainly going to be an opportunity for us.

Operator

Manuel Navas, D.A. Davidson & Company.

Just thinking about the overall deposit base, it's great that you're having success with the new hires, and those teams are adding a lot. When will we see an inflection for the rest, and what's driving the trends that caused some of the deposit outflows recently? Just comment on deposit growth next year.

Yeah. Look, I mean, Manuel, we grew deposits by $275 million in a year that was very challenging, I think, for the industry overall. If you look at the overall groups that we brought on, they they brought on around $330 million, right. So on a net-net basis, we were flat in the rest of the bank. So I think if you look at that holistically, that's pretty reasonable in this environment. We've seen DDA really stabilize across the entire bank, and so I think when you start 2024, you're not -- whatever's left behind is really core DDA at the bank operational DDA. So that gives us a lot of comfort going forward with that.
I think the opportunity here to grow deposits is really building our private and commercial bank, as Stu said. We have $1.5 billion of deposits in that business. The branch business is important as well. And so I think as rates stabilize and normalize, we should be doing well over there. Obviously overtime, we've looked at our deposit base and conceptually where there are higher rate, chunkier deposits, we've tried to normalize our deposit base over there like everybody else. All that's behind us in 2023.
The important part is also looking at the loan-to-deposit ratio, right? I mean, we're at 102% at the end of the year, We're actually close at 100% right now. So we feel pretty comfortable from that perspective that we have the deposit growth to fund the loan growth that we're projecting for 2024.

Yeah, and most importantly, you see quarter-over-quarter DDA is stable. So I think there are not a lot of banks that could say that their DDA balances have remained stable over the last two quarters, and we see opportunity to continue to grow that base.

Okay. I appreciate that.

Operator

Chris O'Connell, KBW.

So I think in your opening comments, you've talked about the ROA getting up to 1.10% to 1.25% over time. Is that assuming that to get there, that's the low 3s NIM that you're talking about as well longer term?

Yes, Chris, correct. Yup.

Got it. And how are you guys thinking about, not quantitative guidance, but the pace of NIM expansion once the Fed starts cutting? If it's in a methodical or gradual way, does that accelerate overtime? Are you guys getting the full benefit in the first quarter of Fed cuts? You talked a little bit about preparing your deposit book for this process. I know you won't give the quantitative guide, but just thinking about the pace and the magnitude as Feds cutting would be helpful.

Yeah, I think we plan to be very aggressive on the deposit side in terms of cutting rates. As I said, our book is weighted more to business and municipal customers, so that will allow us to be more aggressive on that front. That's on the liability side of the balance sheet, right? On the asset side of the balance sheet, as we mentioned, there's less repricing's in 2024, and then that really starts to pick up in '25 and '26. So some of it will depend on the pace of which pay offs pick up on the asset side of the balance sheet.
But I would say on the deposit side, if you split the question up into how are we gonna see deposit cost and what are you gonna see on the asset side, I'd say on the deposit side, that's something we can control, and we expect to be very aggressive around that. On the asset side, it will just take a little bit of time given the structure and nature of our assets. I think throughout all of this, Chris, it's just really important to keep in mind operating a bank with 30% DDA, right? It's just a matter of time before we get back to those margins over time given the repricing opportunity that we have.
The other piece that I just wanted to add is, we have around $1 billion dollars of borrowings that are at -- around $900 million to $950 million of borrowings that we've kept really short term. That's really going to reprice immediately as well. And we've intentionally kept that short. We've been messaging that all across and really to position the balance sheet from rates drops. So we do have the benefit of that as well.

And just, anecdotally, if you look month over month, November and December, we saw like a 2-basis-point increase in deposit rates each month, and in December, we saw an 8-basis-point increase in loan rates. Hence, we do feel -- as Avi said, we're expecting relatively flat NIM within a few basis points until the Fed cuts.

Great. That's helpful. And along the same lines, I know it really hasn't been much of the margin for the past, I don't know, two years or so. But I mean, when the Fed is cutting, I mean, what do you think that a normalized prepayment impact would have on the margin?

Yeah. Look, it's going to be -- it has to be a whole lot better than what it is right now because right now the prepayment fees on the margin is like 1 basis point or 2 basis points. I think if you go back to legacy Dime, we used to have between 10 and 15 basis points on prepayment fees. Now obviously multifamily is going to be a smaller piece of the overall portfolio, so I would say anywhere between 5 and 10 basis points when speed really pick up. And it's probably not a bad assumption, but I don't think that's going to happen in 2024 necessarily just given (inaudible)

Yeah. Most likely, if it does, it's going to be toward late 2024.

Yeah, so --

Assuming the Fed rate cuts.

Yeah.

Great. And could you just provide a little bit of color on what the drivers of the net charge offs were for this quarter?

Yeah, sure. So we just fully charged off a loan that we had previously fully reserved for. So last quarter, we took a $4 million charge to mention that credit last quarter was still in the legal process on that loan. But we thought it was prudent to charge that fully off with something that we had put in nonaccrual status a couple of years back, so nothing really new over there.

Got it. And then I assume given the reserve ratio in some of the comments in the release that you guys did like we're reserving for a couple of other loans being individually analyzed, just any comments around those?

Sure. So there was one net new addition to the C&I portfolio. It's a couple of $1 million loan. We fully reserved against it. However, they too have started paying at this point in time, and so there's a potential for that coming out (inaudible)

Yeah, that was a C&I loan, contractor loan that had matured, and we couldn't come to terms on a renewal. And so we were very conservative in our approach. We made it, so we fully reserved for that. Since then, we have agreed on basic terms over renewal, brought it along current, and we'll probably close that in the first quarter and put that back on accrual status.

Great. Really helpful.

Operator

Matthew Breese, Stephens.

Just a couple of quick ones for me. Stu, just in light of your multifamily guidance getting to 25% to 30% of loans over the next two, three years, it feels like the pace of runoff needs to accelerate to get there. And so I was curious if this quarter is 2% quarterly reduction in multifamily is a good run rate or a better representation of what we should be modeling in order to achieve those goals?

Yeah, Matt, I think for the near term, yes. Like we said, we have a limited amount of repricings and maturities in 2024, which is specifically why our guide is over the course of two to three years. We're going to get there. So if you go back a couple of years, our payoff speed on the multifamily portfolio was 37%. Right now, it's 6%, right? So I think the Q4 and Q3 numbers are reasonable estimates for the next six months or so. But then, as the Fed starts cutting rates, you're going to start seeing a pickup in that. And then eventually the loans do come up for maturity or repricing which is again why this is a two- to three-year goal for us.

Yeah. I mean, we're we're looking at sats and projected sats each month. I mean, for this month, we're probably going to have $40 million to $45 million in satisfactions, and we're getting requests already for next month. So I mean, there is some activity out there, some transactions happening, but it's very chunky. So it's hard to say exactly when you're going to see significant runoff, but suffice to say, we are seeing some amount of satisfactions each month.

Avi, can we just go back to one of the points you made there. I think you said, historically the payoff activity was 30% to 35% for multifamily making it effectively a three-year duration type product, and now it's in the --

No. Yeah, no. No, Matt, the comment there was two years back at the peak. The payoff rate was 37%. If you look at it over a multi-decade horizon, probably between 15% and 20% is the true payoff rate on the multifamily side. Right now, it's 5% to 6%. But as rates come down, they generally catch up. It's more of a timing issue, Matt.
And again, we're pretty clear. We're trying to give two to three years' worth of a forward look in terms of where we want and see the balance sheet ending up. The thing that we can control is what we feed in into the bucket. And so right now, we really have no multifamily loans in the pipeline.

Yeah. For the first time, I think, ever, we don't have any pipeline in multifamily.

Got it. Okay. Just one more question on this topic. As the typical multifamily borrower reaches the end of their standard five-year fixed, are they willfully rolling into the floating and and waiting for lower rates, or are you seeing them refi to higher rates or go elsewhere? What is the common behavior?

Sure. So Matt, we went back and looked at our 2018 vintage rate. So that basically mature or repriced in 2023, so around 30% to 35% of that is satisfying at this point in time and is around 65% that's taking the repricing option. So it's basically one-thirds, two-thirds in terms of the mix. Now, we will say that there are competitors in the market right now that are in the low 6s to high 5s. And as you know, rates come down, you're going to see more of those loans not take the reprice. They're probably just going to satisfy away from us given where the market is trending towards.

Yeah. I mean, many of those view it as a short term -- even though they're taking the rollover, they viewed as a short-term rollover because they figure why go through the expense of refinancing at these rates. But once rates do come down, they're going to -- they'll pull the trigger and prepay.

Got it. I appreciate all that color. The last one for me is just, conceptually, as the focus continues on business banking and moves away from traditional multifamily, should we start to see the reserve reflect that and start to increase a little bit? 67 bps on today's balance sheet make sense, but if multifamily is 25% of loans, does it make sense for the reserve to be higher?

Matt, yes, absolutely.

Yeah. I mean, our reserve methodology calls for at least 1% on C&I loans today. So as we put C&I loans on, we are significantly higher than what we're reserving for multifamily, so that transition will occur just naturally as part of our origination process.

Got it. Okay. That's all I had. I'll leave it there.

Operator

(Operator Instructions) And I'm currently shown no further questions at this time. I'd like to hand the call back over to Stuart Lubow for closing remarks.

Well, once again, I'd like to thank our dedicated employees who worked diligently through these challenges throughout the year and thank our shareholders for their continuing support. And we look forward to seeing you next quarter.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.