Dime Community Bancshares, Inc.

Good day, and thank you for standing by. Welcome to the DIME Community Bank Shares, Inc. Third Quarter Earnings Conference Call. Before we begin, the company would like to remind you that discussions during this call contain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are subject to risk 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 reconciliation to GAAP, please refer to today's earnings release. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press Star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 1-1 again. Please be advised that today's conference is being recorded. I would now like to turn the conference over to your speaker today, Stuart LeBeau, President and CEO. Please go ahead.

Good morning. Thank you, Didi, and thank you all for joining us this morning for our quarterly earnings call. Joining me today is Avi Reddy, our CFO. In the third quarter, Dime continued to execute on our growth plan. The momentum in our business is extremely strong, and in the third quarter, we grouped core deposits by over $500 million and the business loan portfolio by $125 million. As a result of strong growth in core deposits, and a four basis point reduction in the cost of total deposits, the net interest margin increased to 250 basis points. To put things in perspective, our margin for the first quarter of 2024 was 221 basis points, implying a 29 basis point improvement through the third quarter. As we outlined in our press release, since the Federal Reserve reduced Fed funds rate by 50 basis points in mid-September, the spread between loans and core deposits has increased by approximately 15 basis points, and this will contribute to continued NIM expansion in the fourth quarter. Avi will provide more detail in his remarks, but suffice to say we have a clear line of returning to a 3% plus net interest margin. In summary, the improvement in NIM to date and our expectations for forward NIM significantly increases DIME's earnings power. Cash and non-interest expense levels increased on a link quarter basis to $57.4 million. Our expectation is to keep expense levels relatively flat in the fourth quarter and into 2025 as we are working on a number of efficiency optimization initiatives. Business loans were up approximately $125 million in the quarter, and we continue to see a very strong pipeline in our middle market, C&I, and healthcare lending verticals. The weighted average rate on new business loans originations for the third quarter was approximately 8%. We expect to end the year with approximately $11 billion of total gross loans. Asset quality continues to remain solid, and net charge-offs remain well-contained at only 15 basis points. While MPAs ticked up off a very low starting base, we expect to report in our 10Q that criticized and classified assets are flat on a linked quarter basis, and early stage 30 to 89 day delinquencies are down 28% on a linked quarter basis. Our capital ratios continue to build, and at September 30th, our total capital was 14.8%, and our common equity tier one ratio was 10.2%. As we have mentioned before, in this environment, accreting capital is important as it speaks to dime strength and our ability to service our growing customer base. In that vein, in the third quarter, we built our loan loss reserve by approximately 9% or 6 basis points. As I mentioned during our last earnings call, over the course of the next 9 to 12 months, as we evolve our business model and portfolio towards business loans, And with our strong pipeline of CNI and healthcare loans, we expect to operate with a reserve level in the 90 basis point to 1% area. Finally, I'd like to conclude by touching on three things that are key to DIME's story going forward. The first is disruption. The disruption in our local marketplace. As you know, DIME has been highly successful in attracting teams of deposit gatherers and lenders. and the growth in core deposits and business loans to date is a validation of our efforts. The disruption in levels in our market continue to be at all-time high, and we are actively building our recruiting pipeline for 2025. Given we are close to year-end, we don't expect to make any announcements until 2025, but suffice to say we are spending a fair bit of time interviewing candidates that fit well with the dime culture and business model. Second topic is declining rates. While we have been pleased with the NIM trajectory over the course of this year, the expansion we have seen thus far has not been driven by lower interest rates. This should change starting in the fourth quarter as the full impact of the 50 basis point cut will manifest. Given the forward curve, we are more confident than ever that returning to historical profitability levels is is to be seen in the near term. Finally, growth in DDA, our DDA levels are now back to almost 30% of deposits, and we believe the value of this DDA base will shine through in the current rate environment. In conclusion, I'm looking forward to ending this year strong. I want to 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. Reported EPS was 29 cents per share. We saw a meaningful expansion in the NIM this quarter. As you will recall, the second quarter NIM included a recovery of interest income of four basis points. In addition, the second quarter did not have the impact of the cost of the sub-debt issuance. Adjusting the second quarter for these two items on a like-for-like basis, NIM expansion for the third quarter was around 17 basis points. The NIM expansion was driven largely by strong growth in core deposits. Non-interest income for the third quarter was $7.6 million. As you'll recall, the second quarter non-interest income included a non-recurring branch sale gain. Swap fee revenue was lower in the third quarter. Given the uncertainty with the Federal Reserve's rate-cutting decisions this year, we have found that customers are being more patient and taking more time to engage in swap transactions till they have more certainty on the rate outlook. As such, we expect the swap line item to rebound in 2025 with Q3 marking a low point for swap revenue. Core cash operating expenses for the third quarter excluding intangible amortization was $57.4 million. This was in line with our guidance for the third quarter core cash expenses being in the $57 million area. For the fourth quarter, we expect core cash operating expenses to be between $57.5 and $58 million And as Stu mentioned, we expect to hold the Q4 run rate steady into 2025. We'll be providing more color on this during our earnings call in January 2025, as we're currently working through our year-end budgeting processes. We had $11.6 million loan loss provision this quarter, which was higher than prior quarters. During the third quarter, we made several enhancements to our CECL model, centering primarily around updating peer group loss history data, as well as prepayment speeds. These model enhancements contributed approximately $4.5 million to the provision for the quarter. Excluding the model enhancements that I just noted, the loan loss provision would have been closer to $7 million. As Stu mentioned in his prepared remarks, over the next 9 to 12 months, we expect to gradually build a reserve as our business model evolves, and we expect to operate with the reserve in the 90 basis points to 1% area in the medium term. Next, I'll provide some thoughts on the NIMH trajectory. As we outlined in the earnings release, when analyzing the weighted average rate on loans and core deposits in the 30-day period after the Fed cut rates, the spread between these two items has increased by approximately 15 basis points. Accounting for the cash on our balance sheet, which of course has 100% beta, and the fact that the borrowing portfolio is largely termed out, we expect this core spread improvement between loans and core deposits to translate into a 10 to 12 basis point run rate NIM improvement for the fourth quarter. Assuming the behavior in deposits and loans holds for each subsequent rate cut and competition remains rational, we could see a five to six basis point increase in the NIM for every subsequent 25 basis point rate cut once the full impact of each rate cut flows through the entire balance sheet. Said differently, all else equals starting with a 250 NIM, adding the impact of the rate cut that has already taken place, and assuming another two 25 basis point rate cuts in the fourth quarter, the exit run rate NIM at the end of the fourth quarter could be in the 270 area. Given the potential for rate cuts in 2025, we see additional NIM expansion in the first half of 2025 as well. Finally, and as mentioned on our previous earning call, we have a significant back book loan repricing opportunity in our adjustable and fixed rate loan portfolios that is expected to kick in in the second half of 2025 and 2026. To give you a sense of this back book repricing opportunity in the second half of 25 and 26, we have 1.9 billion of adjustable and fixed rate loans across the loan portfolio at a weighted average rate of 390 that either reprices or matures in that timeframe. Even assuming only 150 basis point spread on those loans over the forward five-year treasury, we should see a substantial 25 basis point increase in NIM as these loans reset to higher rates. Assuming a 225 basis point spread on those loans over the forward five-year treasury, we could see a 35 basis point increase in NIM from the back book repricing. In summary, as you put all these parts together, we see a pathway to a 3% NIM in 2025 and a NIM greater than 325 in 2026. The impact of this enhanced NIM will no doubt increase our earnings power as time progresses. With that, I'll turn the call back to Didi, and we'll be happy to take your questions.