DCOM - NASDAQ

Good day, and thank you for standing by. Welcome to the Dime Community Bancshares, Inc. Q2 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risks, uncertainties and other factors that may cause actual results to differ materially from those contained in any such statements, including as set forth in today's press release and the company's filings with the U.S. Securities and Exchange Commission to which we refer you. During this call, references will be made to non-GAAP financial measures as supplemental measures to review and assess operating performance. These non-GAAP financial measures are not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and for a reconciliation to GAAP, please refer to today's earnings release. I would now like to hand the conference over to your first speaker today, Stuart Lubow, President and CEO. Please go ahead.

Good morning. Thank you, Stephen, and thank you all for joining us this morning for our quarterly earnings call. With me this morning is Avi Reddy, our CFO. In my prepared remarks, I will touch upon key highlights for the second quarter of 2025. Avi will then provide some details on the quarter and thoughts on the remainder of the year. Our core earnings power has increased significantly over the past year. Core pretax pre-provision income was $49 million in the second quarter of 2025 compared to $28 million a year ago. This translated into a core ROA of 85 basis points for the second quarter. Core deposits were up $1.2 billion on a year-over-year basis. The deposit teams hired since 2023 have grown their deposit portfolios to approximately $2.2 billion. This has allowed us to continue to pay down our broker deposits to a fairly minimal level. We have made significant progress in creating a core deposit funded balance sheet with ample liquidity to take advantage of lending opportunities as they arise. Our cost of total deposits was 2.09% in the second quarter. By maintaining a strong focus on cost of funds management, our NIM has now increased for the fifth consecutive quarter and is approaching the 3% mark. We continue to have several catalysts to continue to grow our NIM over the medium to long-term, including a significant back book repricing opportunity. Avi will get into that in more details in his remarks. On the loan front, we continue to execute on our stated plan of growing business loans and managing our CRE ratio lower. Business loans grew over $110 million in the second quarter and over $370 million or 15% on a year-over-year basis. We are starting to see the benefit of the new hires we have made over the past couple of years. Loan originations, including new lines of credit, increased to $450 million for the quarter. The weighted average rate on the new origination was approximately 7%. Our loan pipelines continue to be strong and currently stand at $1.2 billion compared to approximately $1.1 billion at quarter end in March and $750 million when we reported earnings in January. The weighted average rate on the pipeline is approximately 6.85%. On our recruiting efforts, disruption in the local market remains very high. And in the second quarter, we executed on our commercial lending diversification strategy. After hiring Tom Geisel in the first quarter, we identified several verticals that are complementary to our existing businesses and made a number of senior hires. Once they settle in, we expect these verticals to contribute to our growth in the fourth quarter and beyond. While hiring does cause an increase in near-term operating expenses, we expect all these verticals to meaningfully contribute to the execution of our strategic goals. In addition to the new lending verticals, we made progress on getting regulatory approvals to open our new location in Lakewood, New Jersey. Additionally, we expect to open a new branch in Manhattan in the fourth quarter. In conclusion, the momentum in our business is extremely strong, and we continue to execute on our business plan of growing business loans and core deposits. We have clearly differentiated our franchise from our local competitors as it relates to our growth trajectory and the ability to attract talented bankers. We have an outstanding deposit franchise, a strong liquidity position and a robust capital base. It is important to note that our full earnings power, which is underpinned by a 30% noninterest-bearing deposit base, is not yet shining through as the asset side of the balance sheet has not yet repriced. Ongoing NIM improvement is supported by loan repricing opportunities and coupled with organic growth across deposits and business loans. That will aid in unlocking the inherent earnings of the Dime. I'm looking forward to the remainder of 2025. I want to again thank all our dedicated employees for their efforts in positioning Dime as the best business bank in New York. With that, I will turn the call over to Avi.

Thank you, Stu. Core EPS was $0.64 per share. This represents increases of 12% on a linked-quarter basis and 49% on a year-over-year basis. The reported NIM increased to 2.98%. We had around 3 basis points of prepayment fees in the second quarter NIM. Excluding prepayment fees and purchase accounting, the second quarter NIM would have been 2.95%. As a reminder, the first quarter NIM, excluding prepayment fees and purchase accounting, was 2.91%. Non-brokered deposits were up approximately $210 million at June 30 versus the prior quarter. As we continue to see strong inflows across our branch network and across the private and commercial bank, we proactively reduced the higher cost municipal relationship by approximately $125 million in the second quarter. Said differently, had we not proactively reduced this municipal relationship, we would have grown non-brokered deposits by approximately $335 million in the second quarter. Core cash operating expenses, excluding intangible amortization and severance expense, was $59.9 million. The linked quarter increase in expenses was primarily due to the hiring of production staff. Noninterest income of $11.6 million reflected increased loan swap income. We had a $9.2 million credit loss provision for the quarter and the allowance to loans increased to 86 basis points. Capital levels continue to grow, and our common equity Tier 1 ratio increased to 11.25% and our total capital ratio grew to 15.8%. Having best-in-class capital ratios versus our local peer group is a competitive advantage and will allow us to take advantage of opportunities as they arise, and speaks to our strength and ability to service our growing customer base. Next, I'll provide some thoughts on guidance for the remainder of 2025. As I mentioned previously, excluding prepayment fees, the NIM for the second quarter would have been 2.95%. We would use this as a starting point for modeling purposes going forward as we don't expect the prepayment fees to repeat in that size in the upcoming quarters. In the near term, we expect a gradual upward bias in the NIM for the third quarter with more pronounced expansion in the fourth quarter as the asset repricing story will start to unfold with more vigor towards the end of the year. To give you a sense of the significant back book repricing opportunity in our adjustable and fixed rate loan portfolios, in the second half of 2025 and the full year 2026, we have approximately $1.95 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of approximately 4.1% that either reprice or mature in that time frame. Assuming a 225 basis points spread on those loans over the forward 5-year treasury, we could see a 30 basis points increase in NIM from the repricing of these loans. As we look into the back book for 2027, we have another $1.7 billion of loans at a weighted average rate of 4.25% that will lead to continued NIM expansion in 2027. Moving to the short end of the curve, should the Federal Reserve cut rates, we expect our previous trend of approximately 5 basis points of NIM expansion for every 25 basis point rate cut to repeat, assuming the behavior in deposits and loans hold for each subsequent rate cut and competition remains rational. In summary, assuming the market consensus forward curve plays out, we have a path to a structurally higher NIM and enhanced earnings power over time. As we approach a 3% margin, the next marker in front of us is 3.25% and after that, 3.50%. It's important to note that while the destination to us is clear, the near to medium-term NIM is going to be a function of business loan growth. We believe we have the people and verticals in place to drive strong medium to long-term business loan growth. Along the journey, if there's a quarter of subdued growth and less remixing, it does not change the ending NIM destination in our mind. With respect to balance sheet growth, we expect low single-digit growth for the remainder of the year with the planned attrition in transactional CRE and multifamily masked by growth in our business loan portfolio. As we've typically done, we will only provide guidance for 2026 once we get into the new year. Next, I'll turn to expenses. As outlined in the press release, we have organically built out several new lending verticals. As a result, we are updating our core cash noninterest expense guidance, which excludes intangible amortization to approximately $61.5 million for the third quarter of 2025. This updated guidance is based on our existing employee base as of the time of the earnings release. For the third quarter, we anticipate swap fee income to be approximately $0.5 million and total noninterest income to be in the $10.5 million area. Finally, on the tax rate, we expect the effective tax rate to be between 27% and 27.5% for the third quarter. With that, I'll turn the call back to the operator, and we'll be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Thomas Reid of Raymond James.

Thomas on for Steve. So I want to start it off, we saw a pretty healthy bump in DDA balances here, based relative to the prior trend. Was there anything onetime in nature? Or can we expect a similar trajectory there going forward?

Yes. Nothing one time, Thomas.

Yes. No, we've had a nice continued strength in our retail network as well as our private banking groups. I mean, if you look at quarter-over-quarter, we're still seeing a significant amount of new accounts opened. There are about 1,500 new accounts opened in our private banking group quarter-over-quarter. And obviously, $350 million to $400 million in growth quarter-over-quarter. We're still seeing significant positive trends in both the retail group as well as our private banking group.

Okay. Good. That's good to hear. And then it looks like the weighted average rate on the loan pipeline is down about 40 basis points. Is that largely driven by rate movements? Or are you maybe seeing a little bit more competition in tightening the spreads there?

No. So the origination rate this quarter was around 7.10%. And Stu mentioned in his prepared remarks that the new pipeline was around 6.85%. So it's probably around 20 to 25 basis points. Some of it is just -- we're doing floating rate loans. We're getting a good spread over it. It's a little bit of mix shift, things like that. So nothing substantial in there, but we're still pretty much there, very high 6s to close to 7 basically.

Our next question comes from the line of Mark Fitzgibbon of Piper Sandler.

First question, Avi, just to clarify, you did say $61.5 million for operating expenses for the third quarter. Is that correct?

Yes. So -- but excluding the intangible amortization, Mark, so $61.5 million plus the $200,000, $250,000 odd for the intangible amortization. So all in, it's probably $61.8 million.

Okay. Great. And then secondly, I wonder if you could remind us, what the impact of a 25 basis point rate cut means to NII or the margin. Any color on that?

Yes. Yes, sure. It's historically been around 5 basis points, Mark. So we'd expect that to continue. I mean, obviously, if we get a bunch of gradual 25 basis point rate cuts with some time lag in between them, that's the most favorable environment for us to realize the full 5 basis points. So I would use around 5 basis points.

Okay. Great. And then sort of at a high level, I guess I'm curious how you all are thinking about sort of the hiring. You've done a lot of hiring, had some really good success on the deposit front in growing business. Are we getting to the point, do you think, where expense growth and hiring start to flatten out a little bit here? Or is there still a steep trajectory there?

Yes. So I'd say, Mark, we put the verticals in place on the lending side. The second quarter was a big hiring quarter for us in terms of who we put in place and the infrastructure behind it. I would say as we get closer to the end of the year, it's harder to move people basically. I mean there could be some singles and doubles where we add some people on. But I think any substantial hiring as you get into August and September, you then start getting into next year at that point. So I think using the Q3 run rate-ish plus or minus for the fourth quarter is not unreasonable. I mean, it may be up a little bit. But then once we get into next year, we're going to have to reevaluate. I mean we're still in touch with some substantial deposit teams and some substantial people on the lending side, but it takes time to move some of these. And we're also trying to stage these where we keep OpEx in check, and we can show that we're driving the efficiency ratio down every quarter.

Yes. I'd say that generally, we're where we want to be. We had concentrated on bringing deposit teams on for the last 18 months. And then we really focused on building up the remainder of these verticals in the first part of this year. And I think we're pretty comfortable where we are today in meeting our goals and strategic goals in terms of the verticals we're looking at. And the pipelines are starting to really build in those verticals. So we're very pleased. And I think those new hires are going to be at breakeven or profitable very quickly based on the pipeline we're seeing.

Okay. And then, Stu, I'm curious at a high level, it feels like M&A is starting to pick back up. Do you see that as an opportunity for Dime or are you still more internally focused right now? Any comments around M&A?

Look, if there are opportunities out there, we're certainly interested. And as you know, the market is not a target-rich environment. So we are looking at options and are certainly interested. But just as important or more importantly, we've been able to significantly grow the balance sheet and think we can continue to do that organically. But if opportunities present themselves, we will certainly take a look.

Okay. And then lastly, I guess I'm curious your thoughts on how a Mamdani narrow win might impact your New York City multifamily rent-regulated book. And obviously I know you're deemphasizing that business, but any thoughts on sort of how you might handle that?

Well, look, there's no guarantee he's going to win. Obviously, the Rent Guidelines Board has just announced new rent increases that go into effect in October. So there's not a lot of near-term concern, but obviously if he were to be elected and were to affect the Rent Guidelines Board in such a way that rent freezes were put in place, we're taking a look at that. Look, we've been through this before. We've had several years of rent freezes in New York City before. Our portfolio remains very strong. As you can see and as we've reported, we still have no nonperforming multifamilies. The other thing is our rent-regulated portfolio is very granular. The average loan size is about $2.8 million. And also important, all those the pre-2019 portfolio that were subject to the changes in the law regarding passing on capital expenses and increasing rents, all those loans, what remains with them, which is in the $400 million range are all -- have all repriced at this point and are current. So we're monitoring it. We've looked at what it might mean to the portfolio, but we think we have a pretty strong portfolio, good debt service coverage and good borrowers, a very granular portfolio with generational owners. So we're going to continue to monitor it. We'll see what happens in the election, and we'll manage through it as the market has managed through it in the past.

Our next question comes from the line of Matthew Breese of Stephens Inc.

I was hoping you could touch a little bit on cost of deposits. It was -- obviously demand deposit growth this quarter was really solid and you continue to make gains there. But the overall cost of deposits was flat. Can you just talk about in the absence of rate cuts, is there room to reduce costs? Or are we about done?

Yes, Matt, same answer as last quarter. We're bringing in new deposits probably in the low to mid 2% area. We don't have a very large CD base at the bank. There's probably around $300 million to $350 million of CDs that are maturing in the third quarter. The rate on that is probably 3.65% to 3.70%. We're probably retaining 90% of that at 3%. So the CD book probably gives us a basis point or 2. There's probably a basis point or 2 that we can shave off and -- but that will probably be offset by new deposits coming in. So I think growing deposits is important for us. I think absent rate cuts, I think this is a reasonable level for us on deposit costs. And more of the NIM expansion story for us is on the asset repricing side going forward.

Great. And then on the new verticals, I think in the press release and just quickly, it was corporate/specialty finance, lender finance, fund finance. Could you just give us some flavor for how those -- how loans are priced on those verticals, spreads over SOFR and some sense for historical loss content?

Yes.

Go ahead.

Yes. No, I think these are primarily floating rate assets, Matt, for us. So it's going to help with the asset liability management profile. I would say on the -- I'll start with health care, which you didn't ask about, but which we've been in the business. I mean that's probably a SOFR plus 300-ish business on the health care side. I think some of these other verticals are anywhere between 250 to 300 over SOFR basically. I'd say fund finance historically has really not had any asset quality issues over time. We're really just doing subscription lines basically, which is the safest part of that business. And I think in some of the other verticals as well, we're not really seeing a lot of historical loss content, and we're going to do it carefully and appropriately like we did with the build-out of health care over time. So we don't expect loss content. We're getting to see new transactions coming in. And we've built a number of different businesses, right. So that's going to give us flexibility over time to pace loan growth over time.

Yes. So I'd say generally, the spreads are 225 to 300 in all the verticals. And we're seeing, as I said, some pretty strong pipeline activity. So we're excited about that. All of it is basically floating rate.

And then in terms of balances, if everything goes according to plan or if you want to reference the folks you've hired at prior books, 12 or 24 months from now, to what extent do you think this might impact loan growth? What could be the potential kind of loan balances here?

Yes. So I think we'd use health care as a template, Matt, for this. So we started that business probably 2, 2.5 years back. At this point, we're probably at around $300 million to $350 million of balances on the health care side. So I think that's a good template for a 24-month-ish period. I think over the slightly longer term of that, if you think about 36 to 48 months, we'd like each of these businesses to be a $0.5 billion vertical for us basically. That's how we think about it.

Appreciate that. Last one is just, Avi, could you update us on kind of reserve plans? I think the loan loss reserve was up to 86 basis points. I think there's a push to get it higher. Could you just kind of update us on where you want to be by year-end?

Yes. So when we -- I think we started talking about this probably a year back this time, Matt, or maybe 9 months back. And I think the goal was over the medium to longer term, getting to 90 basis points to 1% plus or minus. It's hard to -- every quarter know what the next quarter is going to do because it depends on the CECL model, depends on stuff coming in and out. I think going forward, as we transition the balance sheet and do more C&I, naturally the ratio is going to go up. We don't -- it's not a hard and fast number we need to get to by any circumstances. But just as we run our models internally and look at doing more in some of these verticals over time, I think you're going to get to that 90 basis points to 1% area. We're at 86 basis points right now. So we're happy it's trended up. We're getting more in line with a local peer group, national peer group type given the risk profile of our assets. So I would say hard to predict every quarter if it's going to go up from here on out, but it's definitely directionally we'd like it to be in the 90 to 1% area.

Our next question comes from the line of Manuel Navas of D.A. Davidson & Company.

I appreciate the color on the loan repricing outlook. Do you have the balances just in the second half of the year?

Yes, yes. So we have in the third quarter, Manuel, it's probably around $400 million at a rate of around 4%. And then in the fourth quarter, there's around $200 million at a rate of around 4.30%. But it's important, even that $400 million, right, a lot of them are towards the end of the quarter, which is why when we gave our NIM guidance, it was -- look, we're probably going to see more pronounced NIM expansion in the fourth quarter because loans have to actually reprice for you to get the benefit of it. So the total quantum is around $600 million and split $400 million and $200 million third and fourth quarter.

That's great. That's really helpful. And where do -- Stu discussed that the private banking group has like 1,500 accounts. Where do balances stand right now there?

$2.2 billion.

And our pipeline is as strong as ever? I mean, with those new accounts, just kind of you're going to be doing some remix of the balance sheet that keeps the balance sheet in the low single-digits growth, but this deposit group still has plenty of runway to go forward, correct?

Yes, we think so. I mean, look, same thing we've said historically that we think each of these groups is going to take 3 to 4 years for them to reach a steadier state. And Stu said in his remarks, account openings are very strong, similar to the pace of prior quarters basically. And so in an individual quarter here or there, it may be up or down. But we really track it from an account opening and customer opening perspective, and that's not slowed down yet.

And on top of that, the verticals that we brought on and the pipeline that's out there, we're seeing significant deposit balance opportunity as well. So it's just not one side of the balance sheet on these new verticals. So we're pretty bullish on continued growth there.

Yes. Just one other thing I would add is our branch network has had a really, really solid first 6 months of the year. We've made up a lot of balances, especially from stuff that was lost in 2023. So we're really seeing 3 different avenues for deposit growth of the private banking groups we hired, the new lending verticals as well as the branch network.

That's great. As you're getting more and more funding and more opportunities, where could loan growth get to, especially with all the verticals like in '26 and '27, you do have some of the repricing come at the same time, but like where could loan growth get longer term?

Yes. We -- if this is an indirect way of asking us for guidance for '26, we're going to stay away from that. Look, I think Matt asked the question, where do we think these verticals could be over time, right? And each of these, in the medium to long run, we'd want them to be $300 million to $500 million verticals. We're going to see some attrition on the transactional CRE side. But there's no reason we should not be a mid to high single-digits growth bank once the CRE ratio gets to a level that we want it to be at. The near term, as we said earlier, we're managing the CRE ratio to get down to around 400% by year-end, and we're pretty much there at this point, right? So it's really a tale of 2 balance sheets with the CRE that we're reducing. But then medium to longer term, I think mid to high single-digits is a good number for the bank.

Our next question comes from the line of David Konrad of KBW.

Thanks for all the detailed guidance. Just want to talk a little bit about capital, really strong here, north of 11% CET1. You got an improving profitability coming next year. But I guess it still sounds like the #1 priority is the organic growth of the business rather than anything near term in terms of capital deployment or return to shareholders?

Yes, David, that's fair. On our last earnings call, we got a similar question and response is pretty similar right now. I mean just -- I mean obviously still a little bit of uncertainty with tariffs. We've hired a lot of productive teams right now. What we said is when we get to the end of the year, early 2026, we're going to reevaluate the buyback, things like that. I mean from a pure corporate finance perspective, we feel our stock is very undervalued at this point. But at the same time, we do think having capital ratios higher than pretty much everybody in our local peer group is a big competitive advantage as we go after new verticals. So I'd say in the near term, we're happy to be accreting capital. I think in the medium to longer term, as we've shown in the past, we've distributed capital to shareholders when we can.

All right. I'm showing no further questions at this time. Actually, we do have one more in the queue here. All right. We have Matthew Breese returning from Stephens Inc.

Just one more. Avi, could you help me out with cash, cash equivalents, liquidity deployment strategy? You're sitting on just a lot of cash here. I'm curious where you feel comfortable bringing it down to and some sense for timing?

Yes. I think in the near term, we were not focused on buying securities, Matt. If we did decide to do so, there certainly would be a boost to NIM and a boost to net interest income. But we're trying to run the balance sheet for the more medium to longer term. I think over the medium to longer term, a lot of the cash would probably be redeployed into some of the new lending verticals that we're in. Our loan-to-deposit ratio is 91% to 92%. We're very comfortable between that 90% to 95%. So I'd say in the medium to longer term, we'd like a lot of that to go into some of the C&I items that we're focused on, which are floating rate assets. But I'd say in the near term, we're not out there buying securities and changing the ALM profile to something different than what we want to do. So we are giving up some earnings in the near term. But I think we're creating a balance sheet that will have a structurally higher NIM over time and set us up for different rate environments by keeping the cash position where it is.

Yes. And what we're seeing in the pipeline with the existing verticals and the teams we brought on plus with the new verticals, we think that we can quickly deploy over the next 6 to 9 months excess liquidity, so at meaningful NIM improvement. So that's our view as to our current cash position.

Thank you. I am showing no further questions at this time. I would now like to turn it back to Stuart Lubow for closing remarks.

Thank you, Stephen, and thank you all to our dedicated employees, our shareholders for their continued support, and we look forward to speaking with you after our third quarter.