Dime Commercial Bancshares, Inc. (DCOM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Dime Commercial Bancshares, Inc. Third Quarter Earnings Conference 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 financial information prepared and presented in accordance with the U.S. GAAP. For information about these non-GAAP measures and for reconciliation to GAAP, please refer to today's earnings release. I would now like to hand the conference over to your speaker today, Stuart Lubow, President and CEO. Please go ahead.

Good morning. Thank you, Shannon, and thank you all for joining us this morning for our third quarter earnings call. With me today are Avi Reddy, our Chief Operating Officer and CFO; and Tom Geisel, our Chief Commercial Officer. In my prepared remarks, I will touch upon the progress we made in the third quarter. In addition, I will provide a summary of our acquisition of Empire State Bank. Avi will then provide financial details for the third quarter and the financial impact of the Empire transaction. Suffice to say, Dime's organic growth trajectory is very strong, and we have clearly differentiated our franchise from our local competitors as it relates to our ability to grow low-cost and best-in-class deposits, diversify our loan portfolio away from its historical CRE focus, attract talented bankers and at the same time, improve NIM and grow net interest income and overall profitability. Revenues for the third quarter were $135 million, which once again was a record for Dime. EPS was up 53% versus prior year. The NIM was up 7 basis points versus the linked quarter as we were able to maintain our cost of deposits while improving our yield on loans. On the loan front, we are executing well and our growth plans are in place. Year-over-year growth in business loans was approximately $929 million, which represents 30% year-over-year increase. Our loan pipeline continues to be very strong and is approximately $1.4 billion with a weighted average rate of approximately 6.5%. We are pleased to report a return on assets of 1.10% for the third quarter and a core efficiency ratio of below 48%. As you know, we have been very active on the hiring front over the past 3 years, and it's gratifying to see these investments contributing to the improved profitability. We continue to believe that the hires we have made over the last few years have a long runway in front of them as we execute our clearly articulated growth plan. The disruption in our local marketplace remains very high and the environment for our organic growth strategy as it relates to acquiring clients and bankers continues to be very attractive. In this regard, we are pleased to announce our entry into the affordable housing space with the launch of a dedicated group that will be led by Mike Camoia. Finally, as it relates to profitability, our significant loan repricing opportunity over the next 5 quarters will continue to serve as a catalyst for continued revenue growth in the quarters ahead. During the quarter, we reduced our CRE ratio to 338% while repurchasing approximately 1% of our shares outstanding. We continue to see significant long-term value in our shares, underpinned by continued NIM expansion and net interest income growth. Avi will provide some color on capital in his prepared remarks. This morning, we announced that we signed a definitive agreement to acquire Empire State Bank. We are very pleased to welcome CEO, Phil Guarnieri and his team to Dime. By way of background, Empire is a $600 million asset size commercial bank with a very granular low-cost deposit base that is headquartered in Staten Island. Dime has had our eye on having a greater ground-level branch presence in Staten Island for a long time, and we believe Empire is a very low-risk transaction for our shareholders, given their granular deposit base and low-risk LTV loan portfolio. The transaction expands Dime's presence to all 5 boroughs in New York City, and we believe Empire's granular deposit base will have real value in a higher rate environment. Empire represented a unique opportunity for Dime and the transaction economics and strategic rationale makes sense for both sets of shareholders. With that said, I will end by saying our focus remains on strong organic growth as seen by our $1.1 billion year-over-year growth in core deposits. Our significant cash position, which stood at over $2 billion at quarter end, positions us very favorably for organic growth and we expect to benefit from meaningful loan repricing over the next 5 quarters. I want to end by thanking all our dedicated employees for their efforts and in positioning Dime as the best commercial bank in Metro New York. With that, I will turn the call over to Avi.

Thank you, Stu. Core EPS for the third quarter was $0.91 per share. Core pretax pre-provision net revenue of $70 million represented 186 basis points of average assets. By maintaining a strong focus on cost of funds management and the growth of our business loan portfolio, our NIM has now increased for 10 consecutive quarters. The reported third quarter NIM increased to 3.35%. Excluding the benefits from purchase accounting and prepayment fees, the run rate NIM for the third quarter would have been closer to 3.32% compared to a 3.22% run rate for the prior quarter. Average earning assets for the third quarter was approximately $14.36 billion. Core cash operating expenses of approximately $64.3 million was in line with our expectations. The loan loss provision was in line with the prior quarter at $13.8 million, and the allowance to loans increased to 99 basis points. The loan loss provision in the quarter was primarily to cover specific reserves on C&I loans, growth in the business loan portfolio and charge-offs on multifamily loans. While NPAs were up, substandard loans were down 7% on a linked quarter basis. And in addition, 30 to 89 days past due loans also declined on a linked-quarter basis. As Stu mentioned, we reduced our CRE concentration ratio to 338%, while at the same time repurchasing approximately 1% of our shares outstanding. We believe that robust growth in our C&I businesses and operating with a clear ratio that is lower than 350% will set us apart from the other local banks, which are operating between 375 to 450 and Dime will be rewarded in the medium to longer term with a higher valuation. Our strong capital position allowed us to structure the Empire transaction with a $30 million cash component, which represents a little more than 50% of the consideration mix for the transaction. The transaction's return metrics for Dime are very strong with an internal rate of return well in excess of 20%, which is above our cost of capital. The transaction is expected to be approximately 3.5% accretive to earnings on a run rate basis once all synergies have been realized. We expect the impact on our capital ratios from the Empire deal to be approximately 35 basis points, factoring in the full impact of onetime deal costs and the interest rate marks in an elevated rate scenario. Finally, our pro forma capital levels provide us room for both organic growth as well as continued buybacks. Turning next to forward guidance. As usual, while we will not provide any specific guidance on 2027 until our January earnings call, I will provide some thoughts on the remainder of 2026. As I mentioned previously, excluding purchase accounting and prepayment fees, the run rate NIM for the third quarter would have been closer to 3.32%. We would use the 3.32% NIM as a starting point for modeling purposes going forward. We expect continued NIM expansion in the fourth quarter, driven primarily by loan repricing and secondarily from the recent Federal Reserve rate increase. With respect to rate hikes, we expect the September rate hike to benefit NIM by a couple of basis points. And any future rate hikes will likely be neutral to NIM as there will be a lagging effect on deposit costs. We have repeatedly said our large cash position is a competitive advantage that will allow us to take advantage of lending opportunities as they arise and it will help us create a sustainable NIM that's not subject to cyclical moves based on the trajectory of short-term rates. While it's hard to predict the NIM in individual quarters and the path may not be a straight line on equal increments, we are focused on the ultimate destination by the fourth quarter of 2027. On our prior earnings call, we discussed a run rate quarterly NIM of over 3.50% by the end of 2027. Based on our strong performance this quarter and our current pipelines, we believe there's a clearer line of sight to a NIM on our existing balance sheet of over 3.60% by the end of 2027. Next, I'll turn to expenses. We expect core cash operating expenses, excluding intangible amortization, for the final quarter of the year to be around $66 million. Finally, we expect the tax rate for the final quarter of 2026 to be 28.5%. With that, I'll turn the call back to Shannon, and we'll be happy to take your questions.

[Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James.

Maybe just starting here on the margin, Avi, with that 3.60% margin by the end of 2027, just kind of curious, I mean, obviously, rates are higher here. We've seen some spread compression across the industry. Just maybe just a little updated thoughts in terms of dynamics here around your assumptions to that 3.60% margin.

Yes. So I just want to be clear, we are actually increasing the NIM guidance here. So I take your comment well, across the industry, there has been some spread compression. We're not seeing that here. We've been able to maintain our cost of deposits very close to that 1.68% area. As we are 3 weeks into the quarter here. There's been a couple of basis points drift up in deposit costs, but it's actually lower than what we thought. And then on the loan side, in our press release, the weighted average rate on loans was around 5.50%. We've seen that expand to 5.58% right now sitting here today. So I think we're even more confident sitting here today than we were 3 months back, which is why we increased the guidance, both from a NIM perspective as well as from an NII perspective. And I think that's just a testament to the quality of the deposit base that we have at the bank, the new deposits that are coming into the bank as well as all of the new business lines that Tom has put in place over the last 1.5 years, which are now coming to fruition.

You got to remember, our core DDA now, noninterest-bearing DDA is now up over 32%, and it's continuing to grow. The private bankers continuing to bring in new customers, new clients, new relationships. So we're very excited about where we are in terms of our core funding abilities. And then on the loan side, with all the teams in place now and the verticals in place, the pipeline is very strong, and they're also bringing a nice chunk of the deposits in as well. So we're very comfortable that the we're going to continue to see NIM expansion at these levels.

Right. And just to tie up the margin a little further in terms of -- if I recall correctly, it's about $2.5 billion of fixed rate loans at around 4.25% that will reprice next year. Are you guys going to think of that like up 200 bps at this point?

Yes. So the $2.5 billion was the number last quarter, Steve. So you got to roll that forward. So we've had 1 quarter of -- 1 of those 6 quarters has gone away. So we're closer to $2 billion right now and the rate on those remaining loans around 4.40% at this point. So yes, there's still around 200 basis points off of that in terms of an improvement. As Stu said early on, our pipeline rate right now has actually gone up to 6.50%. So there should be probably a 210 to 225 basis point increase on that $2 billion. Now all of that's not going to stay with us. Some of that's going to refi out of the bank, some of it's going to stay with us. But I think we showed this quarter that we're able to grow overall loans, keeping in mind the reduction in the multifamily portfolio as well. So you should see the repricing benefit as well as continued growth in the overall loan portfolio at a low to mid-single-digit growth rate that we talked about last time around.

Yes. I mean, in the previous quarters, you've been seeing about $150 million to $175 million of commercial real estate move out. So you got -- you have to assume that, that will continue most likely. And it's been about $150 million a quarter of multifamily has been prepaying or paying off and refinancing out. So we're still seeing the same -- those same metrics, although in a higher rate environment, it might slow down a little bit.

Okay. That's helpful. That was my next question. And then maybe just on the core deposit growth here. It was really strong this quarter. Just kind of curious how you're thinking about the cadence here on growth and just any color you can give there?

Yes. I mean, typically, the third and fourth quarters of the year are our best quarters, just given seasonality, East end, some of our private bankers in some of the type of business mix that they have. So I would say there's nothing in the numbers in Q3 that we expect to go away in Q4. So it's a good starting point. And then we've started the quarter reasonably here. So I would say it's kind of hard to predict in individual quarters where we go. Q1, generally, we do see some outflows, but I think Q4 should steadily build off of Q3.

Our next question comes from the line of Manuel Navas with Piper Sandler.

I hear you on the low single digits, mid-single-digits growth pace. It was really strong this quarter. Can you talk a little bit about the mix this quarter, how it accelerated a bit? And I guess the pace should maybe slow a little bit in the fourth quarter, but can you just talk about the growth trajectory and what businesses drove it most?

Yes, sure. So a couple of things. So if you go back and take a look at the year, right, on the business loan side, Q1 net loan growth was about $125 million. Q2 was $275 million and in Q3 was $350 million. So nice chronology of growth across the year and across the quarters. The fourth quarter, I think, is probably going to be flat to where we were in this quarter. Q1 tends to be lower just by the nature of the business. Q2 and Q3 tends to be stronger, as you know, in banking and Q4, it just depends on the overall economic environment and the momentum. So we feel pretty good about where we think we'll end the year. To Stu's point about the $925 million or so growth year-over-year, what we're really happy about is the diversification of that growth -- our C&I business, our traditional C&I business led the way at about 25%. And then when you start to add in some of the new specialty finance businesses we put in place like lender finance, fund finance, sponsor finance and health care, they all came in at about 20%. So we're really happy. We didn't have one business that pretty much outshined the others. And when you look about the quarter, the quarter had about 1/3 growth from C&I, followed by fund finance and then the balance of the other specialty groups that fell behind. So real diverse business growth across the year and across the quarter.

Manuel, I'd just add to a couple of things, right? I think our guidance still -- when you go back to last quarter, think about the balance sheet in 3 different pieces. So on the business loan front, really somewhere between $200 million and $250 million every quarter. This quarter, we were at $350 million, so probably a little bit higher in terms of the run rate. The multifamily piece, we still expect around $500 million of runoff on that piece. And then what changed this quarter, which is why overall loans grew is we're back in the commercial real estate market doing relationship. CRE balances were down only $10 million or $15 million this quarter. We probably originated $100 million this quarter, nice spreads, nice LTVs, nice debt service. So that should continue going forward. So where the variables are going to be going forward is business loans, some quarters, it may be closer to $200 million, some quarters, maybe closer to $250 million, some it may be closer to $300 million over there. But when you put all of that together, you come back to that low to mid-single digits for the next probably 6 to 9 months.

Great. And that $500 million multifamily decline, that gets you towards that 25% longer-term target. No shift there in essence on the mix projected going forward?

Yes. I mean it's probably a little bit less than 25%. I mean, right now, we're at 27%. So I would use $500 million off the current numbers basically.

I appreciate that. And is there any other color you could add on kind of the deposit growth, which was so strong, kind of what areas that came from most? I know you talked a little bit about the private banker business mix and you talked a little bit about the trajectory over the course of the year. But just what businesses led it most and where there might be some competition?

Yes. I mean where we're really growing deposits is on -- is just business deposits, right? So if you look at our base, right now, it's probably 70% to 75% of the base is business deposits and consumer deposits are 25%. The consumer piece this time last year was 30%. This time 2 years back was probably 35%. So we're actually seeing small declines on the consumer side because we're not the highest rate payers out there for consumer deposits, which really means business deposits are growing at an even faster pace, right? So we did hire 3 teams earlier this year in April. They're doing really well in line with our projections. So they've -- it takes a little bit of time for teams to get going, but they were a good contributor to third quarter growth. Our municipal business did really well in the third quarter. Our branches did well. So I would say, look, we think we've got the best footprint in our area. We've got the best bankers. We've got the best branch network. We've hired the best private bankers. So it's really the people that we have. And Stu said, we're able to do this with growing DDA, right? So we will bring in core operating accounts I mean we've opened -- over the course of this year, we've opened over 6,000 accounts basically. So a lot of what's coming in now is the work that was done over the last 3 to 6 months, and we continue to see that account opening process not stop. So I think this quarter was especially strong in the third quarter, but fourth quarter, we'll have to see where we end up at. I will say we have been able to manage the cost of funds really well, and we're not really seeing a creep up in that yet.

Yes. That does bode well. And my last question is you've added now Staten Island with the transaction today. You've grew in the affordable business vertical. What is remaining for where you'd like to add density, perhaps another team by next April. What is it you're looking at next as like to have in terms of a new lending vertical or a new geographic area you'd like to invest in?

Look, I think we've kind of accomplished what we were set out to do in terms of verticals and business lines. We've been opportunistic when the opportunity arises and talented people become available. We've taken the opportunity to bring them on board, and we've been successful at it. The same thing with private banking teams. There are probably still a few out there that we'd be interested in. But I think overall, Strategically, I think it's really now -- we need to operate on all cylinders and get things cranking. And I think we're really about there. A lot of these teams have been on for quite a while and their pipelines are growing. And that's why you're seeing the results in terms of loan originations and closings. So strategically, I think we're really in a spot where we really got to execute and grow the business. And I think we have the horses and the manpower to do that now. So I mean, I don't I don't see any significant moves away from that. We will be opportunistic if an opportunity arises in terms of teams or verticals.