Dime Community Bancshares Inc (DCOM) 2022 Q1 法說會逐字稿

Hello, everyone, and welcome to the Dime Community Bancshares Inc. First Quarter Earnings Call. My name is Juan, and I will be coordinating your call today. (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 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 included as set forth in the company filings in the U.S. Securities and Exchange Commission to which we refer you.

During this call, references will be made to non-GAAP financial measures and 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 the reconciliation to GAAP, please refer to the earnings release.

I would now like to turn the call over to Kevin O'Connor, CEO of Dime. Please, Kevin, go ahead.

Thank you, Juan, and thank you all for joining us this morning. With me again are Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO. We had a good start to 2022 with net income of $32.7 million or $0.82 per share. I'm also pleased to report we executed well on all our strategic priorities: growing noninterest-bearing deposits, managing our cost of funds and prioritizing NIM expansion, all while prudently managing expenses and maintaining solid asset quality.

Our noninterest-bearing balances grew to 38% of deposits at quarter end positioning us well for upcoming Federal Reserve rate hikes. This consistent long-term level of noninterest-bearing deposits on our balance sheet is a clear differentiator versus other community banks in our footprint. We continue to believe the value of our low-cost deposit franchise will shine through over this rising rate cycle. Avi will comment more about our interest rate risk position and NIM guidance in his remarks.

On the loan origination front, we had a slow January, which is typical for us. In addition, payoff levels remained high in the early months of the quarter and loan balances hit a trough of $9.1 billion at the end of February. March was a strong month for us with approximately $200 million of new originations. In fact, loan balances were up approximately $100 million for the month of March and closed the quarter at approximately $9.2 billion.

We continue to see nice loan growth in April with spot balances increasing another $130 million to over approximately $9.3 billion as of today. Given our strong pipeline, slowing payoff rates and the new hires we've made, we remain comfortable with the full year loan growth guidance we've previously provided. With respect to new hires, we have been mentioning for several quarters, we believe there is an opportunity to capitalize on several large merger transactions in marketplace. With these transactions finally closing, we are excited to onboard several individuals, including Bob Maichin, who will be our new Head of Middle Market lending. Most recently, Bob was the Market President and responsible for all middle market banking activities in the Northeast Bank Leumi. We are extremely excited to have Bob join us.

Our asset quality remains very strong with NPAs and 90 days past due, declining 14% on a linked quarter basis and represent only 31 basis points of total assets. Similar to the rest of the industry, we did see the decrease -- we did see the decrease of rising rate -- the decrease in the fair value of our AFS portfolio. This contributed to a $43 million decline in our AOCI. And as a result, our tangible book value dipped by approximately 3% or $0.70. More importantly, our strong returns allowed regulatory capital ratios to increase quarter-over-quarter, even adjusting for share repurchase activity.

As we said before, our low-risk balance sheet provides us with the opportunity to be active on the capital return front. During the first quarter, we bought back $17 million of common stock at a weighted average price of $34.44. We have approximately 500,000 shares left in our current authorization and expect to continue managing capital levels efficiently over time. Just a week ago, we were pleased to receive a deposit rating of A3 from Moody's. In fact, in their report, Moody's cited our excellent credit quality track record, strong operating efficiency, low-cost, locally sourced deposit base and good liquidity and clear strategy.

To conclude my prepared remarks, we had a good clean quarter. Loan originations picked up as the quarter progressed, and our noninterest deposit base and deposit costs continue to differentiate us from local peers. As we look forward to the remainder of 2022, I continue to believe we have a tremendous opportunity in front of us. We remain a pure-play community commercial bank in an attractive banking market with significant organic growth opportunities.

At this point, I'm pleased to turn the call over to Avi to provide some additional color on our quarterly results as well as our expectations for the rest of 2022.

Thank you, Kevin. Our reported net income to common for the fourth quarter was $32.7 million. With our merger integration well behind us, we had no unusual items in this quarter's results. We lowered our average cost of deposits in the first quarter by another basis point. The spot rate on deposits at quarter end was even lower at approximately 9 basis points. It should come as no surprise that we expect deposit costs to bottom out at these levels. Importantly, we believe we have removed a significant amount of rate sensitivity from our deposit base. These actions, coupled with a higher percentage of noninterest-bearing deposits than our peers should result in our deposit betas lagging other banks in our footprint. The reported NIM and the adjusted NIM for the quarter was 3.19%. As we have done previously, we have provided details in the press release on the impact of purchase accounting and PPP.

On an adjusted basis, the NIM was up 2 basis points versus the linked quarter. The net accretion balance from purchase accounting currently stands at approximately $1.8 million. As mentioned previously, there will be some lingering impact from purchase accounting on the income statement in 2022 depending on payoff activity on premium and discount loans.

Given the current interest rate environment, we continue to proactively manage our loan pricing. The rate on our current loan pipeline of approximately 4% is higher than our existing portfolio rate. We expect new additions to the pipeline to be in the 4.25% to 4.5% area once new loans work their way through underwriting and closing. Core operating expenses, excluding intangible amortization for the first quarter came in at $49.3 million. This is in line with our expense guidance for the full year.

Noninterest income for the first quarter was approximately $7.2 million. As we mentioned in the earnings release, we expect a pickup in fees from our SBA division and from our back-to-back loan swap program in the second quarter of approximately $1.75 million on a combined basis. Moving on to credit quality. We had a negative provision in the quarter of $1.7 million. The negative provision was driven by a reduction in reserves on individually analyzed credits. Our existing allowance for credit losses of approximately 86 basis points is still above the historical combined levels of the legacy institutions. We feel comfortable with our current reserve levels based on current economic conditions.

During the quarter, we bought back approximately 500,000 shares at $34.44. We believe share repurchases continue to be attractive given our trading levels, our organic prospects and strong balance sheet that performs favorably under stress testing. We will continue to manage our balance sheet efficiently, and our tangible equity ratio of 8.32% is within our comfort zone of 8% to 8.5%.

Now let's turn over to guidance and targets. We are reiterating our loan growth guidance for calendar year 2022 of approximately 4% to 6%, excluding PPP. As Kevin mentioned, we hit a trough on loans at the end of February. And since then, we have seen nice growth over the past 2 months. As you well know by now, we don't provide quarterly quantitative NIM guidance. That said, we do want to provide you some directional perspectives.

We see NIM gradually improving over the next couple of years and reaching a level of approximately 335 basis points by the middle of 2024. As Kevin mentioned, NIM prioritization is a firm-wide focus for us. Given the day count convention, we expect the NIM to be impacted by a few basis points in the second quarter but as the impact of rate increases work their way through the loan portfolio and we reprice into a higher rate for originations, we expect expansion to be more pronounced in 2023 and 2024. We are reiterating our full year guidance for core cash noninterest expenses, excluding intangible amortization, to be between $197 million and $199 million and noninterest income to be within the range of $33 million to $34 million.

Finally, with respect to the tax rate for the remainder of 2022, we expect it to be approximately 28.5%. With respect to our medium-term goals, it is our intention to drive our return on assets to the 120 to 125 area by the back half of 2024 and operate with a DDA ratio in excess of 40%.

With that, I'll turn the call back to Juan for questions.

(Operator Instructions) And the first question comes from the line of Mark Fitzgibbon from Piper Sandler.

First question I had Avi, the service charges and fee line was down about 12% sequentially. I guess I was curious why was that?

Yes. Mark, typically, in Q3 and Q4, we have various fees on the loan side that we charge and some of that goes into the other fee line. So it's a bit seasonal over there. Some of that will correct over the course of the year. The bigger item was really the SBA and the swap fee income, which is more transactional in nature. The other item just to mention is we now have a full suite of treasury management products that we instituted in the first quarter. All those fees went into effect in the middle of February, really. So we got a month's worth of income coming out of that. So that should nicely pick up as we enter the second quarter and move into the latter half of the year.

Okay. And then secondly, I didn't hear, did you give the size of the pipeline? I know you said the average rate was around 4%, but ...

So Mark, it's Stu. Yes, the pipeline size is about $2.4 billion at this point. We have about $480 million in underwriting and about $300 million waiting to close. As Kevin mentioned, we've had -- in the last few months, been very strong. We're up as of today, over $130 million in loan balances compared to March 31st. And what we're seeing is prepayments are down as well. So we're very comfortable there. In looking at the last 45 days, we've gotten over $500 million in new loan applications into the pipeline. The average yield on that grouping is about 4.5%.

So we're seeing the impact of rate increases starting to move through the pipeline. We obviously raised our rates in terms of multi-family and everything across the board. So from our perspective, pipeline is very strong. And the process is working well. And now with the new hires, as we mentioned, we're excited to put the opportunity to even grow it further and really focusing on the middle market and C&I.

Okay. Stu, last quarter, you guys had a pipeline of like $2.1 billion but your originations were only $480 million. I guess I'm curious, was there a lot of fallout on the pipeline or is it typical for you to sort of only close maybe 23%, 24%, 25% of your stated pipeline?

I think for the most part, the pipeline is just that. There's some percentage that does fall out. But January and February tend to be a very slow month for us just historically. And I think that's going to pick up nicely throughout the rest of the year. So I think it was somewhat more timing. I mean, certainly, towards the end of the year in January, we -- or the industry, the market was affected by the pandemic again with Omicron things slowed down a little bit, but things have certainly picked up at this point.

Great. And then the last question I had is, I guess, I was curious how many lenders you've hired and how many you think it's likely you'll hire, say, over the remainder of this year?

Well, we've hired basically 2 team leaders, and we have several more in the offing. I could see us hiring 5 to 10 additional lenders throughout the rest of the year.

Our next question comes from the line of William Wallace from Raymond James.

My first question is on the SBA and swap guide for the second quarter. Avi, did you say it was $1.5 million or did I mishear you?

$1.75 million combined Wally for both those line items for Q2. We just had a bunch of stuff closed in the month of April on the swap side and the SBA pipeline for May and June. So basically, those 2 items combined in Q1 was close to 0. But over the course of the year, we've got certain expectations and in the second quarter, we're going to make up for the first quarter basically on both those items.

Okay. So is it safe to assume or fair to assume that $1.75 million, a lot of that is whatever timing and that you're catching up for 1 quarter, but we wouldn't expect that would be a good kind of run rate?

Yes. I mean, in general, our SBA run rate internally is probably $3.5 million to $4 million is a good number for a full year for the SBA side. And then on the swap side, when we ran our budget for this year, in the $33 million to $34 million that we came up with, we only put $2.5 million of swap fee income in there, just given where we were at the start of the year. I think we're seeing a lot more traction on the swap side going forward? I mean, obviously, banks are not -- don't want to extend longer. And if customers do want to lock in those rates, I mean, they are willing at this point to engage with us on the swap side.

So in the $33 million to $34 million, we only had $2.5 million of swap income in there. We may end up beating that for the full year given on what's coming in. But just for the second quarter itself, we're probably at least $1 million on the swap side. So we feel pretty good about that business heading into the second half of the year.

Okay. Great. And then your commentary around the net interest margin. I know you're not guiding, and I'm not asking for a guide, but you said that you would anticipate that the expansion in net interest margin to that mid-24% target would be more weighted to 2023 and '24. So can you tell me what kind of keeps the floor on the net -- or kind of pushing down on NIM in 2022 as the Fed starts to hike?

Yes. Sure, Wally. So I think it's just the aggregate amount of the loan portfolio that's going to be repricing over time. I mean as we put on more and more loans at a rate that's above the portfolio rate, it's obviously going to help the NIM over time, right? We're still closing items right now in the portfolio that when they initially came to us, came to us 3 months back when rates were in a different picture, right? So it's a little bit of that. We also have some floors on loans in the portfolio. As we have rate hikes that are 75 to 100 basis points, they're going to come off being in the money at that point in time. I mean, we're also a little conservative in the guidance over there. We just want to wait and see what happens. I think when we started the modeling of this rates going up over time last year, I think everybody thought there was going to be 4 or 5, 25 basis point hikes this year. And then we're going to have maybe 200 basis points overall.

I mean thinking has obviously change to having multiple 50 basis point rate hikes upfront and getting to $275 to $300 million on Fed funds. So it's a little bit of working its way through the loan portfolio, being cautious on the deposit side. But over time, what I'd say, Wally, if you go back to our comments on our last earnings call, which was 3 months back, we had said by the middle of 2024, we were guiding to a margin of around 330 basis points. We've taken that up now to 335. So clearly, the additional rate hikes are going to help us. It's just going to take a little bit of time to work through the portfolio over here.

The next question comes from the line of Chase Haynes from D.A. Davidson.

Aman here for Manuel Navas, D.A. Davidson. So I just wanted to get some more color on your loan growth. It looks like you guys saw a nice uptick in your multifamily and your ADC line. I was just curious, are you guys having any concern about credit and growth as we go forward and especially in the second half of the year?

No. I mean, at this point, the pipeline is strong. We're still seeing a lot of activity credit. From a credit perspective, the portfolio is very strong. You noticed our -- all our delinquency numbers have improved. So we're very, very comfortable. We've also updated our underwriting guidelines and are stressing all our underwriting at the higher rates at -- and anticipating higher rates. So we're actually underwriting at the forecasted increase rates so that we're making sure that in the rising rate environment that these loans perform well and are have the debt service coverage to meet our guidelines.

So we've taken the rising rate environment into account in our underwriting. But what we're seeing is a very strong environment still for lending. And we're very -- again, still very comfortable with our growth and our credit. And historically, Dime and Bridge, both companies, at some point, will stop saying both companies had extraordinary good credit metrics, and we expect that to continue.

Great. I appreciate the color. Just 1 more for me. Nice job on the share buybacks this quarter. I'm just curious what does that look like going forward? I wasn't sure of your share repurchase plan, you have at the moment, I'm not sure if you exhausted it or continue to keep it going through the rest of the year?

Yes. We have around 500,000 shares left in our authorization at this point. Once that's complete, we'll look at our capital again at the Board level, we're very comfortable with where we're at. Our Tier 1 ratio is 10.75 at this point. Our tangible equity ratio is well over 8%. So I think we were pretty active in the last year or so. especially as we had a lot of payoffs in the loan portfolio. As Stu said, loans are growing nicely. Our pipeline is big. Our #1 use of capital is always organic growth on the loan portfolio side.

But it's something we evaluate constantly, we have the capital to do it if we wanted to, and as Kevin said, our portfolio stress tests really well. So we'll take all that into account once we're done with the current authorization.

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

Avi, I appreciate the 4% to 6% loan growth guidance but I was curious maybe we could slice it in a different way. With securities -- was securities portfolio down a little bit this year. And there's really no longer any sort of PPP-related headwinds. I was curious your thoughts on the overall size of the balance sheet? And when do you think -- as part of your guidance, we can break through some of the key milestones like $12.5 billion in assets and $13 billion in assets. Are those '23 and '24 events in your view?

Yes, Matt, we're not -- we really never provide guidance on breaking through asset sizes. It's all about profitability here. So we want to maintain a certain margin. We want to make sure we don't have a lot of wholesale leverage on the balance sheet. So the way I think about it, and I've gotten to this on last quarter's earnings call, really, the securities portfolio really shouldn't view there to be any growth in that particular portfolio going forward. As we get cash flows from that portfolio, we're going to put it into the loan book, and that's what banks should be doing, right, over time. So I would take our loans with $9.1 billion plus or minus. You assume 5% growth on that, and then I would keep pretty much everything else steady on the balance sheet.

So I mean that would result in slightly lower average earning asset growth overall. But then that obviously results in a little bit more capital, right? And so we can use that on buyback. So I don't think we really view it on an asset side. It's really about growing the loan portfolio here. We feel very good about our loan-to-deposit ratio where it is right now. And really, we're really happy that payoffs have subsided on the portfolio, and we've really turned the corner. Like I said in my prepared remarks, loans at a trough in February, the last 12 months. We've done a lot with the portfolio in terms of maximizing rate, and we're really looking forward to net interest income growth, both from balances and margin expansion going forward.

And then I know multifamily hasn't been as high as a focus as it was for legacy Dime. This quarter was interesting though because balances are actually up a little bit. What's the outlook for that segment? Have things become more attractive there? Can we actually start to see some multifamily growth? Or should we expect balances there to be flat? I mean maybe just some insight on multifamily loans?

Yes. I think we have a good multifamily team. We've been really quite aggressive on the rate side even through this -- the last year. And that was 1 of the reasons that you saw some of the significant payoffs over the last year. We weren't tracing loans in the sub-3% range as other institutions were. And we really held our discipline on that. As rates have moderated up, we've also moved our rates and we do see a fairly good pipeline. So at this point, I would say, flat to up through the period and through the rest of the year at pretty attractive rates. We also have a significant amount of loans that are repricing over the next 8 to 9 months.

And all of those with the current rate environment, would be repricing at 30 to 40 basis points higher than what they are at today. And potentially, if they hold and do not refinance, we're going to see a bump there. If they do refinance, we're going to be refinancing those at even higher rates. So I think the opportunity is there to maintain that book, grow it somewhat and grow it at rates that are certainly more attractive to us.

Matt, just the other thing I'd point out on the multifamily side, just back to the payoffs. The month of February, the payoffs on multifamily were 41%. And so that's obviously been a headwind in that portfolio over time. But in the month of March, it was down to around 25%. So as rates go up, you're going to see significantly less payoffs over there, and we're going to keep a little bit more on the balance sheet, which we're comfortable with, given how well these loans perform over time.

Yes. Avi and I are looking at payoff requests on an ongoing basis. In April, at this point is -- has moderated even further. So we're seeing -- we're going to see some opportunity there at some -- at rates that the multifamily market hasn't seen in many years. So we'll be active to an extent.

Got it. Okay. The last question was just around credit. So NPAs charge-offs very solid this quarter. But as you look at like the 10-K, there was a pickup in substandard special mention some of the criticized classified categories. I was hoping for one, maybe an updated balances on criticized and classified loans. And then 2, just some insight as to whether or not the movement in those buckets were tied to more deferrals and some lingering pandemic-related issues or any sort of underlying credit concerns?

Yes, Matt. So our disclosure will be in our Q, which is a couple of weeks -- substandard which is around 7% on a linked-quarter basis. I mean the primary reason was the approach that we took where multifamily loans that had a deferral, we basically put them into substandard, back in the pandemic. Obviously, as we're getting updated rentals, all these loans are performing really well. We -- off the portfolio, majority of it was multifamily. But if you look at our 60 days past due, we have 0 multifamily loans that are past due at this point. So all these loans are paying, all these ones are off the balance as we're getting rentals from our borrowers, upgrading them over time.

So you should see a significant decline in those over time. In addition, we had some PCD loans that we put into substandard as part of the acquisition. We're fully resolved for that. So I mean, we always think about credit, but we have a rock-solid portfolio, and we were looking back over the last 15, 20 years and our loss history on multifamily on an annual basis is less than 4 basis points. So we're really not concerned about what's in there. NPA is obviously down and charge-offs are down and we're pretty comfortable.

(Operator Instructions) The next question comes from the line of Chris O'Connell from KBW.

I was hoping to just touch up, you mentioned the multifamily origination rates a couple of times. But I may have missed it, what are those origination yields coming on at now?

Yes. So we raised our floor rate to 4.25% on our multifamily at this point on 5-year deals, we're really not interested in doing the 7 to 10-year deals. So we're really in the 4.25% to 4.5% range on the 5.

Okay. Great. And then it looks like you still have a decent chunk of higher cost kind of CDs coming off this next quarter here and a bit more in the back half of the year. How are you guys thinking about kind of CD retention going forward? Are you still going to let a big chunk of those kind of roll off the balance sheet?

Yes. Chris, we're seeing around 70% to 80% retention on the CDs at this point in time. Our rates on the CDs, we only have a rate of around 5 basis points on the CDs right now. So I think you will see some attrition on that. We still not change rates on that. Obviously, legacy Dime had a much bigger CD book, we think having more weighting towards non-time deposits just gives us more flexibility on the balance sheet going forward. I think over the last year, we'd have seen even larger deposit growth, we didn't have attrition in this book. So at some point, it's going to stop, but it's all about just managing the balance sheet with the lowest absolute cost on the balance sheet. And right now, we think the best way to do that is let some see these run off. But we're still seeing reasonable retention on it.

Okay. Great. And then I appreciate the updates on the NIM and the ROA guide and the kind of longer-term goals here. I was hoping to just get your opinion on what's the ideal operating environment or rate environment for you guys for the ROA goal or the NIM goal in 2024 to kind of accelerate and be achieved earlier?

Yes. I think the -- I mean the current guidance is based on the current forward curve. So we're assuming a pretty flat curve, the 6-months so far versus the 5-year, we're basically assuming it's flat. To the extent that widens out and we get more spread, we're obviously going to make more. I mean essentially, at the end of the day, we lend off to 5-year and borrowing costs and deposit costs are on the short end. So I think a little more steepness in the curve will help us. Obviously, with rates going up, if we have multiple 50 basis point rate hikes, we'll have to adjust deposit pricing a little bit. But in the long run, it's going to help loan pricing even more. So I think looks an upwardly sloping rate environment does help us. We try not to take a lot of positions on interest rates. As you know, we've done really well when rates are low. We're going to do well when rates go up. But at the end of the day, it comes back to growing DDA. So I mean we grew DDA from 37% to 38%. We want to get that number up to 40% and really if we get to that level and maintain that, we're going to do well in any rate environment.

We currently have no further questions. So I will hand over back to Kevin O'Connor for any final remarks.

Well, I just want to thank everybody who participated, and we look forward to chatting with you next quarter. Thank you.

This concludes today's call. Thank you so much for joining. You may now disconnect.