Dime Community Bancshares Inc (DCOM) 2021 Q1 法說會逐字稿

Good morning, and welcome to Dime Community Bancshares' First Quarter Earnings Call. (Operator Instructions) Please note that this event is being recorded.

Now I'd like to turn the call over to Mr. Kevin O'Connor, CEO of Dime Community. Please go ahead.

Thank you, operator. Welcome to Dime Community's first quarter earnings call. We thank everyone for joining us this morning. On the call today with me are Stu Lubow, our President and Chief Operating Officer; Avi Reddy, our CFO; and John McCaffery, our Chief Risk Officer.

In my remarks, I'll make some enterprise-wide comments about our recently completed merger, provide some key accomplishments and the progress made during the first quarter on the business call. Avi will then provide some details on the quarter, some forward guidance and the targets we're managing to. I'll then summarize what I believe are the investment highlights of the new Dime and leave time at the end for questions.

First, let's start with the merger. As you may recall, we announced our merger transaction on July 1, 2020. We closed the transaction on February 1 this year, and on April 17, successfully completed our core systems integration and conversion. When we announced the merger, several investors asked, "Why now in the middle of a pandemic?" At the time my answer was given the tremendous opportunities to move our organization to the next level, we needed to strike now.

Our staff has proved me right. They worked countless hours throughout the pandemic and got the job done on schedule and flawlessly. They forged the new Dime culture, putting aside legacy issues and making the customer our #1 priority. This gives me tremendous confidence we are earning the mantle of New York's premier community bank. On behalf of our Board of Directors and management, I again want to thank our staff, many of whom are listening to this call, for their tremendous dedication, effort and a job well done.

Ultimately, our business is about growing clients and winning new relationships, and throughout the integration process, we continued to see client growth. First, on the PPP funds. We were again the leading community bank of Long Island with approximately $575 million of newly originated PPP loans. As we've outlined in the press release, this provides us approximately $24 million of deferred fees to recognize, or what I'd like to think of $0.40 per share of hidden book value. In addition to our PPP success, we've been able to grow deposits by over $800 million since the closing of our merger on February 1. Our increased market share, brand appeal and the coverage of the entire Greater Long Island marketplace positions us to be bank of choice to small and mid-sized businesses in our footprint.

As Stu and I put together our business plans for this year, one thing really resonated: the clarity of thought in our mission. We are a business-focused community bank driven to being responsive to our customers' needs. One measurement of this success is the progress we made on improving the profile of our balance sheet. When we announced our merger, pro forma DDA was 24% of deposits. In the last 9-plus months, we have grown this to 32%. And we're confident over a 3-year time frame, we'll drive that number to 40% of deposits. Additionally, when we announced this transaction, our loan-to-deposit ratio was almost 110%. And today that stands at 84%, excluding PPP.

Our reported results for the first quarter was a net loss of $23 million. Included within this loss were merger-related charges, the impact of balance sheet restructuring and the CECL-related provision on the acquired loan portfolio. Adjusting for these items, core net income would have been a positive $32 million.

While our back office was busy integrating systems, our frontline producers did not miss a beat. One of the key benefits of the merger was the minimal customer overlap between our franchises and our expanded capital base. This is allowing us to deepen relationships with our existing clients and to win new clients. In fact, our loan pipeline is approaching $1 billion.

Moving to credit quality. Our non-performing loans, excluding PCD loans, are only 26% -- 0.26%, excuse me, of total loans. Through merger due diligence, integration and closing, we have done several third party reviews of our portfolio and are comfortable with the strength of our credits and our loan loss coverage. Our deferrals are lower than our geographic peers at only 60 basis points of total loans. As importantly, within COVID-sensitive industries of hotels, restaurants and offices, we have very limited deferrals.

As you would expect, upon crossing the $10 billion asset threshold, we have spent more time stress testing our portfolios. And the results of this stress testing indicates we have meaningful excess capital on the balance sheet, even under a severely adverse COVID scenario. In that regard, I'm pleased to announce our Board of Directors has approved the resumption of our share repurchase plan where we have 800,000 shares authorized.

At this point, I'd like to turn the conference call over to our CFO, Avi Reddy, who will provide some additional color on our first quarter results.

Thank you, Kevin. Included in this quarter's results were the following onetime items: merger expenses and transaction costs of $38 million; balance sheet restructuring charges of approximately $18 million, which included swap terminations and extinguishment of debt; and the provision for acquired non-PCD loans of approximately $20 million.

We were able to migrate our cost of deposits lower to the tune of 25 basis points in the first quarter. The current spot rate on deposits is even lower, and we have an opportunity in the CD book to continue to reprice lower. As outlined in the press release, we have approximately $550 million of CDs at a weighted average rate of 84 basis points, which are maturing in the second quarter of 2021. Repricing these CDs at lower rates provides us confidence that we can maintain relative stability in our NIM. The reported NIM for the quarter was 3.14%, while the adjusted NIM was 3.26%.

To provide clarity for investors, we have provided details on the impact of purchase accounting and PPP. The presence of PPP loans, while additive to interest income in the amount of approximately $5 million, was dilutive to our core NIM by approximately 17 basis points. Purchase accounting accretion on loans contributed approximately 5 basis points to the margin. We expect $1 million of purchase accounting accretion on loans to be a fairly reasonable run rate for the next couple of quarters.

With respect to PPP, we have $4 million of remaining unrecognized fees that are associated with 2020 originations whose balances are at $885 million currently. We expect these loans to be forgiven or pay off and the income recognized between now and the middle of next year as these were effectively 2-year maturity loans. With respect to the tranche of loans originated in 2021, which has $20 million of unrecognized fees, we expect the amortization on the income on these loans to come in over the course of the 5-year term, subject to forgiveness and payoffs over time.

We ended the first quarter with strong capital levels. Our tangible equity to tangible assets ratio, excluding PPP, was 8.8%. Given our low-risk profile and simple business model, we are very comfortable operating the bank at an 8.5% tangible equity ratio, excluding PPP.

As Kevin mentioned, we will be resuming our share repurchase plan as soon as our blackout period ends. We currently have approximately 800,000 shares remaining. We expect to be in the market as soon as possible and complete this plan as quickly as we can. We definitely see significant value in our stock, given our trading levels, earnings trajectory and balance sheet profile.

Given that our quarterly results included 1 month of standalone legacy Dime and 2 months of the combined, we have also provided a table in the earnings release with the 2 months ended March 31, combined pre-provision net revenue, which on an adjusted basis was $34 million. This should provide a glimpse into the go-forward earnings power of the company.

Next, I will turn to guidance and targets. As you well know by now, we don't provide quantitative quarterly NIM guidance. I will say though that we continue to drive our deposit costs lower and expect to reduce our cost of deposits from 25 basis points to below 20 basis points as the year progresses. This will allow us to maintain our core NIM in a range between 3.20% and 3.30% over the course of the next 12 months.

As you know, we just completed our core conversion in the second quarter with ancillary system conversions expected over the course of this year. As such, by the fourth quarter of this year, we are driving towards an annualized run rate on core cash non-interest expenses of approximately $195 million, which we expect to hold relatively flat into 2022. We expect our run rate annualized fee income will trend towards approximately $35 million to $36 million. This is inclusive of the full impact of the Durbin Amendment. Given the current shape of the swap curve, we are increasingly seeing customers gravitate away from swap products towards fixed rate loans, and as such, have incorporated that development into the fee income guidance.

Next, I would like to touch briefly upon two enterprise-wide goals. Our first goal is growing DDA to approximately 40% in a 3-year time frame. The second equally important goal is managing the bank with an efficiency ratio range of 47% to 50% over the near to medium term. All of our decisions at the enterprise level are centered around these two key goals.

Operating at these efficiency ratios and producing stable risk-adjusted margins across the economic and interest rate cycles should result in an ROE over a 12-month time horizon of approximately 110 basis points. Our medium to longer term goal is to drive the ROE to 125, which is the next profitability milestone in front of us. Having just crossed the $10 billion asset threshold, we believe we have the infrastructure in place for a larger organization, and as such, any marginal growth in the coming years, both on an organic and inorganic basis, will be accretive to our ROE.

In terms of overall balance sheet growth, we expect to grow core loans, excluding PPP, by approximately 6% on an annualized basis. This is inclusive of having multifamily loan balances trend down over time as we focus on only the most profitable risk-adjusted relationships. Finally, with respect to the effective tax rate for the remainder of 2021, we expect it to be approximately 27%.

With that, I'll turn the call back to Kevin.

Thank you, Avi. Before I open the call to questions, and since we haven't been on the road with investors, given the merger and conversion, I thought I'd take a moment to remind you of what we believe makes our story unique and compelling. We believe we've created a bank with the #1 market share among community banks. We have strong brand appeal and a highly desirable footprint in a market with significant wealth and business density.

We have significant scarcity value. Our merger has created a bank that hasn't existed on Long Island since North Fork was acquired. We're a locally managed $13 billion bank with in excess of $1 billion of capital. This provides the scale and opportunity to win credits where larger banks are to slow respond, and the smaller banks under the size capital product to deliver. We have a unique and best-in-class deposit franchise with 32% DDA to grow to 40%. We have a highly responsive, simple, customer-focused business model as we demonstrated by our performance in PPP. Finally, with the successful execution of the merger of equal transactions, we have validated our ability to get the job done and our credibility with the regulators.

A last point to note, there have been two significant M&A transactions announced where the acquirers are not headquartered in our immediate footprint. Stu and I both believe over time this presents opportunities for the new Dime. We are open for business and ready to leverage these opportunities.

With that, we can turn the call over for questions.

(Operator Instructions) First question, Mark Fitzgibbon at Piper Sandler.

Congrats on the deal and first quarter. Avi, just wanted to clarify a couple of points you made. Did you say that for expenses, you expect sort of run rate expenses to be around $195 million for this year, excluding obviously charges?

So Mark, the guidance there is by the fourth quarter of this year, we should be at $195 million run rate. Obviously we just closed the merger right now. There's a few merger charges that may come through in the second quarter as well. But the guidance was we're driving towards a $195 million annual run rate by the fourth quarter and expect to hold that pretty steady into 2022.

Okay. Great. And then secondly, and I know this is hard to answer because it depends upon loan growth and credit and such. But how do you think about sort of a normalized level of provisioning maybe in 2Q or 3Q?

Sure. So right now the provision mark -- and the result just reflects everything that we know based on the economic conditions that are at hand. And so really, it's going to be a function of how the economic forecast changes going forward. Obviously, there was a big change in some of the Moody's unemployment rates from Jan 1 until now. Obviously with some stability in those forecasts coming in, it should really be based on loan growth and the mix shift over time. So we believe the result at around 112 basis points, excluding PPP, very strong result levels compared to our peers, we feel pretty good, given the last contact we have and stress testing that we've done. So, very comfortable, and the results should just be based on your growth in the portfolio going forward.

Okay. And then can you kind of update us on the timing of the recognition of the cost synergies? I know you just completed the systems conversion recently. But what does sort of the extraction of those synergies look like this year?

Yes. So the $195 million mark, that's with the full synergies by the fourth quarter of this year. If you remember when we announced the transaction, we had mentioned that it'd be phased in in 2021. We're on track at this point. Obviously with the conversion and some ancillary system conversions going on, we're rightsizing our expense base, but for everything to be 100% in there.

So do you sort of see a straight line down between now and then? Or is that sort of --

Yes. Yes. We're going to get to $195 million by the end of this year in terms of an annualized number, and then --. But importantly, that's the number for 2022.

Okay. And then Kevin, I'm curious. Could you talk a little bit about the synergies that you're finding on the revenue side, where the opportunities are being created, where those might be coming from?

Well, obviously, we've had a lot of customers that we didn't have the branch network to service. As the branch networks expanded, we've been able to do that. We've sat in a number of loan committee meetings since we've been together where common relationships we've been able to grow. It has come from our treasury management products basically have been sort of rolled out in some places that I think have created opportunities. The SBA business that we were strong at, Dime was strong at. I think we've been able to continue to leverage that with customers. And just the overall, the coordination between both of the teams has been incredibly gratifying. I've been on -- we were actually back out seeing customers and have been on joint calls with some people from the legacy Dime SBA group with some of our lenders. So this is really working, Mark. One of the things I'll just share with you, too, it's interesting. We've got a lot of people still working from home, some of the frontline people as we try to figure out what the back to work thing is. In some ways it's worked out better because the people in the building have been focused on sort of the integration and consolidation. And the people that have been out at home, they're separate from that and they are basically out there growing business. So it's worked out very well.

And Mark, as of [LB 1], on February 1, we really made a concerted effort to make sure that the businesses, the customer-facing businesses were really out and servicing their customers. And in fact, before we even closed and converted, we had switched to a single loan origination system. And we have restructured our lending teams in our retail organization, our private banking. So everyone really hit the ground running as far as that's concerned. The other thing, as Kevin mentioned, we have over $1 billion in the pipeline. But what we've also seen, and as we talked about at the announcement was that we thought there'd be quite a bit of opportunity to do more business with customers that we both already had, but we were unable to continue to grow that relationship because of our capital size. And what has happened in just the short 2, 3 months that were together is we're seeing significant opportunity to enhance those relationships.

Great. And then last question, and it may be hard to kind of think about. But when do you think you could potentially do another acquisition, and what are the characteristics that you'd be looking for in future partners?

Our systems are converted today. So there's no really, short of a few of the ancillary things, as Avi had mentioned. So I think operationally, I think we are in good shape. People may take a little -- get a couple weekends off, but from that standpoint. And I think we'll continue to look at things that fit with the profile. We're not -- we're a community bank. We're a commercial bank. So we'll be looking for things that fit that profile.

The next question comes from Christopher Keith at D.A. Davidson.

Congratulations again on the first quarter consolidated results. So my first question is related to the paydown of FHLB borrowings. Avi, can you just give us an update on where your progress is and how much room you might have left?

So we're all done, Chris. Everything was done in the months of February and January. We're trying to present a clean balance sheet, clean income statement going forward. So everything is done. Right now, the whole FHLB portfolio is pretty short. We only view it as funding PPP loans. The press release we mentioned that the spot rate on the FHLB borrowings is around 30 to 35 basis points at the end of March. So everything is done.

Got it. And then can you just remind us where we should expect the loan mix for Dime to be specifically related to C&I? Will we see that 9% contribution in C&I climb through the next several quarters, or do you have maybe a longer term target?

Yes. I think longer term, Chris, we obviously have multifamily loans at 35% of the portfolio right now. We expect that over a 2 to 3-year time frame to trend down in the 20% to 25% area. C&I, obviously, the line utilization is fairly low for us and across the industry. So as the utilization picks up, C&I growth will pick up. We'll be active in that market. We'd like to grow that portfolio. Same on the owner-occupied side on the commercial real estate team. And now we have a residential business that we can spread across all of our branches. So it's going to be a mix between C&I and owner-occupied commercial real estate with multifamily trending down over time.

Okay. And then the deal seems to have created a more favorable liquidity position compared to the rest of the industry right now. So I guess with that said, do you feel the need to increase the contribution of the securities portfolio as a percent of earning assets?

No. We'd like to be between an 85% to 95% loan-to-deposit bank. As Stuart and Kevin said, we have a tremendous pipeline of loans. And over time, the earnings power of this franchise is going to be as PPP loans runoff, we're going to replace them with relationship-based loans and grow our margins. So we're not out here to make money with a wholesale leverage book over a 2 to 3-year time frame. We prefer not to have any borrowings on the book, as Kevin always says, and just have a core funded balance sheet. And we're going to get there over the course of 2 to 3 years.

Got it. And then just last question. The $4 million in PPP income, does that include interest and fee income? And can you break out just the total PPP fees recognized in the quarter?

Yes. So the total interest income on PPP was around $5 million, and around $2.5 million of that was from acceleration in forgiveness. If you remember, the legacy BNB's PPP fees was recognized as part of purchase accounting. So that's not in the interest income. That was part of the goodwill calculation. So around half and half in terms of income and forgiveness on the $5 million of income.

Got it.

The next question is from Matthew Breese, Stephens Inc.

I wanted to go back to expenses because I'm having a tough time here. So if I look at legacy Dime running at about $25 million in quarterly expenses, and Bridge was in and around the same or similar level, and then take out the cost saves that were outlined at the time of deal announcement, I feel like I get to like a $175 million, kind of $180 million run rate versus the $195 million we're outlining by the end of the year today. Could you just help me understand whether there was less than expected cost saves or more than expected investment? Or just help me kind of bridge the gap here a little bit.

Yes. So Matt, you've got to look at the core run rates that both companies had. So legacy Dime in 2020, we were $99 million of core expenses. So that's excluding all the onetime items and some of the larger charges and the other stuff that was in there. Legacy Bridge was $104 million for 2020. So you add those two up, the number is $203 million. We were both growing our expense bases as -- legacy Dime was transforming it, hiring people. Same with legacy Bridge. So you take that $203 million, you run it at a 5% growth rate, given all the teams and the other people we are hiring, you get to $225 million. And then we had announced that there was going to be $30 million of cost savings. So that's exactly the $195 million. So we put in, in the $195 million, we put in teams that we're going to hire, building out our risk management practices. It's a fully baked number. We're on top of it, and we're going to get there at the end of this year.

Okay. I appreciate that explanation. Next one for me just on pipelines and loan growth. Could you just talk a little bit about the different areas you're seeing strengths in the pipeline -- C&I, commercial real estate? And perhaps, what does it tell you about kind of the local economy and where we are in the recovery process?

Yes. Matt, it's Stu. What we're seeing is a significant opportunity in commercial real estate, some residential and multifamily construction outside of the boroughs in Long Island, in northern New Jersey. C&I is active, but not as active as some of the other sectors. I think, obviously, you see there's quite a bit of liquidity out there. Our customers have quite a bit of cash. Those that have had PPP have kind of put that on the side and use that as liquidity to pay down their lines. So we're seeing about a 12% reduction in line usage. But even with that, we're looking at a 6% year-over-year growth with PPP forgiveness. So there's a lot of activity. We're seeing particularly east of Manhattan, significant economic growth and opportunity. The residential market is very strong. We're not only on new purchases and refinances, but we're seeing opportunities to get involved in small subdivision, construction and [term] financing. So it's just generally a stronger and getting stronger economy.

I appreciate that. The other one I had was just now that the balance sheet is put together, how do you look in terms of an interest rate shift scenario plus 100 basis points plus 200 basis points? Could you give us a sense for the interest rate, asset sensitive, balance sheet neutral or liability sensitive and to what extent?

Very slightly modestly asset sensitive at this point, Matt. The legacy BNB balance sheet, so at December 31, where a 100 basis point shift in rates was probably -- interest rates was probably up 7% to 8%. The legacy Dime balance sheet was roughly 4% to 5% prior to the restructuring of the borrowings that we had. And so net-net, to be fairly neutral in the first year with -- in the second year it would be positive. So again, that's one of the reasons we did this transaction to manage the two institutions together. I think even more importantly, though, it's just about DDA, right? So we went from 24% to 32% with plans to get from 32% to 40%. With having DDA on the balance sheet, it's going to help you in any rate environment. So that's the key number that we're focusing on.

Okay. Then the last one for me, just bigger picture. There's been now a ton of disruption in the Long Island markets. Two big deals, big players in the midst of partnerships. How does that change the landscape for you? Does it change the time frame in terms of where you were willing to put resources to recruitment, hiring, now that you have two players that are tied up in deals? And what do you think you can make out of it?

Of course. I think it's -- both of our institutions, as certainly Bridge has been built -- well, was built on a disruption in the market. And I think the transformation of Dime took advantage of it also. This will create lots of opportunities to talk to good bankers, talk to -- customers are a little afraid about what's going to happen in the future. So that's why it's all, it's very important for us to be on the ground. Probably Stu and I are spending more time talking to prospective bankers and sometimes customers sometimes. But this is the thing that we live on. We live for the opportunities where customers are concerned. We sometimes as bankers, we think and we don't understand what it means to a customer when their bank gets acquired. They get concerned. And that's an opportunity for us to have the dialogue, to follow up on dialogue that we might have had. So yes, this is the chance, and so we are -- that's why we wanted to make sure that we were done with the things that we needed to do internally so that we can be looking externally.

I appreciate it.

(Operator Instructions) Next question comes from William Wallace of Raymond James.

Quick question, just point of clarification. I think I heard two different things. That loan growth target, the 6%, does that exclude PPP?

Yes, it excludes PPP, Wally.

Okay. Sorry. Thanks.

6% is growth from the, in the non-PPP portfolio.

Yes. If you guys had combined at 12/31, would that core portfolio have grown this quarter?

Say that again, Wally.

I'm sorry?

Yes. So year-to-date, the combined company has originated about $400 million to $450 million in new commercial loan originations. So we started the quarter -- the year out pretty well. We had a pretty good quarter. As Kevin said, we have $1 billion in the pipeline, probably $250 million in underwriting and probably another $250 million just waiting to close. So we're excited about the opportunity. And now we're really -- now that we're all together, the systems are together, we're really ready to start operating on all cylinders.

Okay. Great. And then it sounds like there's some anticipation that the multifamily portfolio will, I'm assuming, continue to decline. So I guess, if I'm making that assumption and with the FHLB prepay, the commentary about the opportunity on repricings of some CDs, and then with the loan balance or the loan mix shifting away from multifamily, I guess I was surprised that the net interest margin guide wasn't maybe to have more bias for expansion. It seems like the guide is really anticipating kind of flattish margin, give or take. Is there really meaningful pricing pressure on the loan side that would give you less optimism that that margin couldn't expand from here?

So, Wally, in terms of the overall portfolio, the weighted average rate is around 3.80% on the overall portfolio. Right now, we're looking at loans 3.5% to 3.58%-ish. But then you're also going to have the runoff on the higher yielding piece of the portfolio. So even though multifamily comes down, you're going to have the higher yielding multifamily first pay off over time. And so I think as a result of that, we're being conservative here, we're providing a range. But again, my range is more in medium-term range of where we want to be as a company. In a particular quarter we may be up or down, but we really think we should be able to operate this company at this range, regardless of the interest rate environment, most importantly. I think you see a lot of banks in our footprint that are able to lower cost of deposits when rates come down, but when rates go up, I think we're going to be the ones with a stable margin going forward.

Okay. And then, Avi, I noticed you took the prepayment penalty disclosure out of the release. Is that something that you just don't think will have swings as much from quarter to quarter now with the bigger balance sheet?

Exactly, Wally. It was -- for full disclosure, it was around 4 basis points this quarter. It was pretty small. It's probably $800,000, $900,000 of prepayment fees that came in. And obviously the legacy Dime income statement was a little volatile as a result of that. On an $11 billion balance sheet, in terms of [loaning] assets, it's not a big number.

And then last question. This is just kind of maybe a stupid question, but you -- there's a line item on the expense base for curtailment that you had backed out of the operating base. What is that that makes it non-operating?

Yes, that's just related to pension plans, Wally. It's just the way pension accounting works. And related to the transaction, there was a termination of certain pension plans. So that won't continue going forward.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kevin O'Connor for any closing remarks.

Again, I appreciate everybody's patience and interest in our company. As we have said I think multiple times today, we're excited about the prospects of really beginning to run this as one company, and look forward to a number of good conference calls as the year progresses. So, have a great day. Thank you.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.