Earnings Call Transcript - DCOM Q4 2021

Operator, Operator

Hello, and welcome to the Dime Community Bancshares, Inc. Fourth Quarter Earnings Call. Before we begin, the company would like to remind you that the discussions during this call contain forward-looking statements under the Safe Harbor Provisions of the US 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 statement, including as set forth in the company's filings with the US Securities and Exchange Commission to which we refer you. During this call, reference 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 US GAAP. For information about these non-GAAP measures and reconciliation to GAAP, please refer to the earnings release. As a reminder, this call is being recorded. I will now pass the call over to CEO, Kevin O'Connor.

Kevin O'Connor, CEO

Good morning. And thank you, Keith. And thank you all for joining us this morning on our fourth quarter earnings conference call. With me again are Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO. As we approach the one-year anniversary of our MOE, it is especially gratifying to discuss our fourth quarter results. If you indulge me for a moment, I want to highlight the accomplishments of the new Dime team over the past 12 months. To begin, we had a strong quarter, reporting net income of $33.5 million, or $0.83 per share. After adjusting for one-time expenses associated with the merger, branch closures, and asset sales, net income would have been $33.8 million, or $0.84 per share. This translates to an adjusted ROA of 1.15% and a return on tangible common equity of 14.7%. Most importantly, we continue to operate the bank at a sub-50% efficiency ratio and have delivered on all of our stated merger goals. As we look back on 2021, our employees spent a tremendous amount of time and effort building our new organization. The success of this effort is evidenced in our organic growth metrics. We are ahead of schedule in enhancing the quality of our deposit base and have grown non-interest bearing deposits to 37.5% of total deposits, which is the highest percentage of any bank in our footprint. In the fourth quarter, we had record loan originations of over $500 million for an annual run rate of over $2 billion. The velocity of originations has increased almost 10% each quarter since we merged the banks. If you recall, second quarter originations were $425 million, third quarter was $465 million, and again in the fourth quarter, it was $505 million at a weighted average rate of 3.52%. Despite continued high payoff levels this quarter, especially in the multifamily sector, we're exceeding 35%. Our increased production resulted in core net loan growth for the quarter. Our loan pipeline remains strong. As each quarter progresses, our lending teams are becoming more familiar with each other, the processes, and the new origination system, and they are truly firing on all cylinders. As interest rates rise over the course of the year, we expect payoff rates across the loan portfolio to moderate. This reduction in payoffs, coupled with over $2 billion in origination capacity, will lead to stronger loan growth throughout 2022. While we have produced strong return metrics in a low-rate environment, our high level of DDA and core-funded balance sheet positions us well for rising rates. Relative to other metro banks, we believe the value of our deposit franchise will shine through in this expected rising rate environment. I'll leave it to Avi to dive into more detail on this and the impact of rising rates on the loan portfolio in NIM. As you're all aware, there have been several large merger transactions in our marketplace, none of which have closed yet, but we believe these transactions will provide us a chance to add talented bankers and create potential from a business perspective. We believe Dime is extremely well-positioned to capitalize on this disruption and leverage these opportunities to grow our customer-centric banking business. Our non-performing loans remained at a low level as loan deferrals have been reduced substantially. Capital ratios remain strong, and we ended the third quarter with a tangible equity ratio of 8.64%. Our low-risk balance sheet performance favorably stress tests relative to the industry has afforded us the opportunity to be very active on the capital return front. During the fourth quarter, we stepped up the pace of repurchases, buying back $29 million of common stock. As we told you last quarter, we believe there is significant value in our stock, and given our trading levels, earnings trajectory, and balance sheet profile, we doubled the level of our capital return to shareholders. We have approximately 1 million shares left in the current authorization and expect to continue managing our capital levels efficiently over time. To conclude my prepared remarks, we had a strong quarter with improved margins, record loan originations, and continued improvement in our deposit franchise. Looking back, 2021 was an outstanding year for Dime; we successfully integrated our merger transaction, and we delivered on all of our stated merger goals. We were again a leading provider of PPP loans, making over 2,000 loans totaling $600 million. Importantly, we organically grew DDA by over $950 million since the closing of our transaction. As we look forward to 2022, I and the board continue to believe that there are tremendous opportunities in front of us. We are a pure play community commercial bank highly focused on being responsive to our customer's needs and in a position to benefit from expected rising rates. At this point, I'd like to turn the conference call over to Avi, who will provide some additional color on our quarterly results, as well as our expectations for 2022.

Avinash Reddy, CFO

Thank you, Kevin. The reported net income for the fourth quarter was $33.5 million, which included approximately $0.5 million in aggregate one-time items associated with merger-related expenses, branch closures, and gain on sale of assets. If you recall, when we announced our merger transaction, we committed to delivering an ROA of 110 in a 12-month time horizon after closing, and we were happy to deliver an adjusted ROA of 115 for the fourth quarter. We lowered our cost of deposits in the fourth quarter by another 2 basis points to 11 basis points. The spot rate on deposits at year-end was even lower at approximately 9 basis points. As outlined in the press release, we still have opportunities on the CD front to lower deposit costs, and in total, we have approximately $700 million of CDs at a cost of approximately 50 basis points coming due in 2022. Importantly, we believe we have removed a significant amount of rate sensitivity from our deposit base, as we have not retained rate-sensitive accounts. These actions, coupled with a higher percentage of non-interest bearing deposits than our Metro New York peers, should result in our deposit betas lagging other banks in our footprint. The reported net interest margin was 3.14. As we've done previously, we provided details in the press release on the impact of purchase accounting and PPP. The sum of purchase accounting on acquired loans and PPP income was effectively negative $86,000 for the fourth quarter, which compares to a positive $5 million contribution from these line items in the third quarter. As mentioned previously, as part of purchase accounting, some loans were acquired at gross premiums and some at gross discounts. This quarter, we had more loans that were at a premium that paid off. The net accretion balance from purchase accounting currently stands at approximately $1.85 million, which is actually higher than the $1.2 million we had at the end of the third quarter due to the payoff of loans that were at a premium. There will be some lingering impact from purchase accounting on the income statement in 2022, depending on payoff activity. Excluding the impact of PPP and purchase accounting, the adjusted NIM of 317 was 7 basis points above the third quarter adjusted NIM of 310. We were pleased with the seven basis points expansion as we continue to hold the line on loan pricing. We benefited from reductions in the cost of deposits, and we also reduced our average cash position in the quarter coinciding with not retaining CD balances. Importantly, our average non-interest bearing deposits for the fourth quarter surpassed the $4 billion mark and were up approximately $300 million compared to the linked quarter. Core cash operating expenses, excluding margin-related items, branch restructuring, and intangible amortization for the fourth quarter came in at $48.7 million, which was slightly below the previously telegraphed amount for expenses for the fourth quarter of $49 million. We've operated the company consistently at a sub-50% efficiency ratio. Non-interest income for the fourth quarter included approximately $900,000 of gain on sale of assets, primarily related to the sale of an owned branch property. Backing out this item, run rate non-interest income would have been closer to $9 million. Moving on to credit quality, we had a negative provision in the quarter of $132,000. All else equal, and assuming no major changes in macroeconomic conditions, we expect provisioning levels in the future to be driven by trends and growth in our loan portfolio. Our existing allowance for credit losses of 91 basis points is still above the historical combined levels of the legacy institutions. We feel very comfortable with our current reserve levels based on current economic conditions. During the fourth quarter, we ramped up our share repurchase activity and bought back over 850,000 shares at $34.44. We believe share repurchases continue to be attractive given our trading levels, our organic growth prospects, and our strong balance sheets that perform favorably in stress testing. We will continue to manage our balance sheet efficiently, and with a tangible equity ratio of 8.64, which is above our comfort zone of 8% to 8.5%, we will continue to be active on the share repurchase front in 2022. Our tax rate of 30.9% for the fourth quarter was higher than normal due to non-deductible expenses. Now, let's turn to guidance and targets for 2022. We expect loan growth for 2022, excluding PPP, of approximately 4% to 6%. We've clearly demonstrated strong loan originations with sequential growth every quarter. We look forward to building upon our existing $2 billion annualized run rate of loan originations in 2022 and believe that once loan paydowns moderate, loan growth will pick up in the back half of 2022. As you know, we don't provide quarterly quantitative NIM guidance, but we wanted to provide you some directional perspectives. Our internal forecasts assume four rate hikes in 2022 and three more in 2023, with curve flattening, wherein the spread between the six-month and five-year compresses to approximately 15 basis points by the middle of next year. In this scenario, we see NIM gradually improving and reaching a level of approximately 330 by the middle of 2024. Expansion will be more pronounced in 2023 and 2024 as the impact of rate increases filters through the loan portfolio, repriced into a higher rate environment for originations. Underlying these assumptions are cumulative total deposit betas of between 20% to 25% for the entire tightening cycle, with a total deposit beta for the first 100 basis points of rate hikes being less than 20%. As a reminder, approximately 25% of our $9 billion loan portfolio is floating rates, of which approximately $1.2 billion will reprice immediately with a single rate hike and an additional $900 million, which has flows that are currently in the money, will reprice with 100 basis points of rate hikes. We expect core cash non-interest expenses, excluding intangible amortization, to be between $197 million and $199 million for 2022. This expense guidance takes into account wage inflation that you've all no doubt seen. We remain committed to operating the company with a sub-50% efficiency ratio. We expect non-interest income to be within a range of $33 million to $34 million. This guidance takes into account adjustments we have made to NSF and overdraft fees, as well as the impact of the Durbin amendment, which will kick in for us in the middle of 2022. We expect to manage our capital ratios efficiently and are very comfortable operating the company at an 8.5% tangible equity ratio, which translates to a 7.5% TCE ratio. As such, we expect to be active on the share buyback front throughout 2022, keeping these capital ratios in mind. Finally, with respect to the tax rate for 2022, we expect it to be between 28.5% and 29%. Regarding medium-term goals, it's our intention to drive our return on assets to the 120 to 125 area by the back half of 2024 and operate with the DDA ratio in excess of 40%. Having just crossed the $10 billion asset threshold, we believe we have the infrastructure in place for a larger organization, and as such, growth in the coming years will be accretive to our ROA. With that, I'll turn the call back to the operator for questions.

Operator, Operator

At this time, we will begin the question-and-answer session. The first question comes from Mark Fitzgibbon with Piper Sandler.

Mark Fitzgibbon, Analyst

Hey, guys, good morning.

Kevin O'Connor, CEO

Good morning.

Mark Fitzgibbon, Analyst

Clarification points of view on your guidance, which was very helpful. Did you say the effective tax rate would move back to sort of your previous expectations around 27.5%?

Avinash Reddy, CFO

No, Mark, the guidance for 2022 is between 28.5% to 29% on the tax rate. We had some lingering benefits this year from our tax strategy associated with our REITs, and that's going to go away, something that went away here in Q4. So for next year, the guide is between 28.5% and 29%.

Mark Fitzgibbon, Analyst

Okay, great. And then you said the margin, you think can get to around 330 by the middle of '24. Is that right?

Avinash Reddy, CFO

Yep, that's right. I mean, again, our assumptions are based on seven rate hikes and curve flattening. Obviously, if we have a steeper curve, we'll do better. But based on our base scenario, that's kind of where we expect to be, roughly 24 months out.

Mark Fitzgibbon, Analyst

Okay. And then Kevin, you referenced the pipeline being strong. I wondered if you could quantify that. And also, maybe give us some sense of the mix?

Kevin O'Connor, CEO

Sure. So, Stuart Lubow, currently, the pipeline is about $2.1 billion, which is the highest it's ever been. It continues to grow each quarter. The average yield on the portfolio or on the pipeline is in the high threes at this point. The mix is basically CRE at about 50%, multifamily at about 20%, and the remaining in the C&I bucket at this point.

Mark Fitzgibbon, Analyst

Okay, great. And then I know you referenced those CDs that you guys have maturing later this year at higher rates. Do you think it's likely we’ll see more runoff of that CD book, and maybe the balance sheet contracts a little bit more in the early part of 2022?

Avinash Reddy, CFO

Yeah, Mark, so far, our retention rate on CDs has actually been a lot higher than we thought; we've got a really low rate, and we're still retaining 60% to 70% of that. But as we enter a rising rate environment, sure, there will be a little more attrition there on the CDs. But the key goal here is really growing DDA, right? And so we've grown that ratio up to 37.5%. We grew average DDA by $300 million in the fourth quarter. So I think we will have deposit growth next year. We're transitioning the bank away from higher rate sensitive consumer CDs. We've already got that on the money market side; there’s really not much rate sensitivity left in that. So I think by the middle of this year, the transition away from the legacy basis will be mostly complete, and you're not going to have that headwind in terms of growing deposits over time.

Mark Fitzgibbon, Analyst

Okay. And then last question, I guess, I'd be curious when you all think you'd be in a position to want to do another acquisition? Thank you.

Stuart Lubow, President and COO

As I said, I think we've done all the things we needed to integrate this company. I think we stand ready at this moment if there was an opportunity, but that has balance, so…

Kevin O'Connor, CEO

Yes, I think at this point, we're really focused on growing the bank organically, building our franchise, and creating more value for our shareholders. We think our deposit base and our high level of DDA creates a lot of franchise value as rates rise, and while certainly, we have the ability, we're fully integrated, our real focus is on running what we feel is a very strong company that has a lot of future value.

Avinash Reddy, CFO

And Mark, I'd be remiss if I didn't point out, we bought back $30 million of our shares in Q4. I mean, the best investment we can make right now is really putting it back in the company and investing in organic growth. So we're going to stick with that.

Mark Fitzgibbon, Analyst

Great, thanks, guys.

Operator, Operator

Thank you. And the next question comes from Matthew Breese with Stephens Inc.

Matthew Breese, Analyst

Good morning. A couple of quick ones, maybe just give us a sense of the outlook on liquidity. I mean, it's not as elevated as it once was, but you still have some excess cash. Along the same lines, what is the outlook for securities growth?

Avinash Reddy, CFO

So, on securities growth, we really don't expect to grow that portfolio much. We'd like to see the cash flows from that being reinvested in loan growth. We probably have around $150 million to $200 million of cash flows from that portfolio; it's a pretty short-duration portfolio. We're not really looking to add that apart from just standard needs, like buying securities for CRE purposes and things like that. You are right, we have on our balance sheet, when we look at it, probably 300 to 400 basis points of excess liquidity; we're very comfortable managing the bank at 8.5% to 9% cash and unencumbered securities to total assets ratio. We're higher than that right now; we probably have 12% to 13%. So over time, over a three-year forecast, we believe we're going to take that down, and obviously, as we put that excess liquidity into loans, it will be attractive to NIM going forward. We're not rushing to deploy that cash right now. We're just waiting and obviously we'd like to see it come through loan growth versus buying securities.

Matthew Breese, Analyst

Got it? Okay. And then going back to the loan growth guide, I was curious about the components and where you expect to see it come from, particularly interested in where and how we see kind of multifamily trends, which is now down to about 36% of total loans. I'm curious where you see that bottoming, or where you want it to be as a percentage of total loans?

Avinash Reddy, CFO

Matt, we've always said we want to be in that business, but not to the level that we are today. We do think it's a good, risk-adjusted asset. We did quite a bit of origination in the fourth quarter; we did about $209 million of multifamily loans. But we had over $330 million in satisfaction, so prepayments were in the 35%, 37% range. Our average yield on that portfolio and new originations was in the mid-threes at about $340. So, we're still in the business. But we do see, over time, that becoming a lower percentage of our total book. We booked about $250 million of CRE in total, but about $91 million of that was owner-occupied. We still see that as our niche in terms of growing the bank, and it's very important in terms of building relationships. Those owner-occupied loans usually come with C&I credits as well. So, I think that's where we're focusing—multifamily will continue to be part of our business, but we didn't, as you know, chase those assets over the last six months as we enter into a rising rate environment with the really aggressive players being below 3%. We were not in that market.

Matthew Breese, Analyst

Got it. Okay. And then Avi, I appreciate the financial outlook for '22. I'm curious if there's anything on the strategic front that you would mention as well, any new business lines or geographies you'd like to explore?

Avinash Reddy, CFO

At this point, we're really focusing on getting our treasury management operating efficiently. We've really come a long way, and that's been really what has helped us grow our commercial DDA balances. We're seeing significant growth in that business rising dramatically over the next couple of years. Certainly, we're looking at all the new technologies that are out there, but there's nothing specifically in terms of new ventures at this point.

Matthew Breese, Analyst

Okay. And the last one from me, credit quality feels very stable for yourselves and for the industry. Is the New York City office market still a concern? I'm just curious because I don't think it's a huge concern for you, but I want to hear your perspective on the health of that particular asset class, especially regarding the differences between the suburbs versus the metropolitan areas?

Avinash Reddy, CFO

Well, certainly, Long Island office space and the suburbs have picked up; there's been considerable activity here in Nassau and Suffolk County in terms of new leasing activity. But in the fourth quarter, New York City had a very good quarter in terms of new leasing activity. It’s starting to level out and stabilize, and we think it will not worsen from where it is today. Our total Manhattan office exposure is $180 million; it's not a big part of what we've been doing. I will tell you that new originations are very minimal—off the top of my head, I can't think of any office space that we've done in Manhattan in the last 12 months. So it's really not a big exposure for us. It's certainly a concern for the industry, but it's not something we're overly concerned about.

Matthew Breese, Analyst

Great. That's all I had; I appreciate you taking my questions. Thank you.

Kevin O'Connor, CEO

Thanks, Matt.

Operator, Operator

Thank you. And the next question comes from Christopher O'Connell with KBW.

Christopher O'Connell, Analyst

Good morning, gentlemen. I would like to start off with the fee guide. The run rate from this quarter seemed to come in a little higher than the guidance for next year, and I had to note that the Durbin amendment impacted about $2 million annually, so $1 million in the back half of the year. You guys mentioned the NSF fees. I was just wondering what else was going into that guidance?

Avinash Reddy, CFO

Yes, Chris. I mean, we seasonally have higher fees in Q3 and Q4. There's a host of fees in terms of rental fees, rollover fees, inspection fees that typically go in Q3 and Q4. We've taken a really hard look at all the items at the bank. The biggest one is really NSF and overdraft fees, and that’s where there is significant delta between the $9 million annualized—which gets you to $36 million—down to $33 million to $34 million. In our residential business, we had $0.5 million to $0.7 million of fee income this year; we’re probably assuming that's down to close to $1 million. So, when you put all that together, it's going to come down, but we believe there is some upside in that number based on our SBA team; we don't have a lot of low-level swap income in there, but if we see traction there, that could be an upside. But we just wanted to provide a conservative number at the start of the year, given some headwinds, especially on NSF and overdraft fees.

Christopher O'Connell, Analyst

Understood. I appreciate the color there, and we're going to circle back to the NIM guide. I know it's fairly long-term to get to that 330 number and the curve flattening in the guidance. What are you guys thinking about for the progression here over the course of 2022 in that scenario?

Avinash Reddy, CFO

Yeah, Chris, we're going to stay away from quarterly guidance. I was pretty clear on that upfront. The base number we're starting with is 317, and we've guided that we're going to get into the 330s by mid-2024. In terms of where we are, we've given guidance on the deposit betas, and we also have $1.2 billion of loans that will reprice with the first 25 basis point rate hikes. Right now, the new origination rate we had for Q4 was around 350 to 355. Our payoff rate on the loan portfolio was around 375 at this point. So you have a few higher yielding loans paying off, and as we enter a rising rate environment, the origination yields will go up. I think we’re comfortable with where we are. Sometimes people focus too much on ramp scenarios and shock scenarios, but as I pointed to in our EVE disclosures and our 10-Q, we are up in the double digits compared to any other bank in the Metro New York area. Ultimately, we believe we're growing the company for the medium-to-long term, and the high level of DDA is really going to help us with that.

Christopher O'Connell, Analyst

Got it. I appreciate the color there, and that's all I had for now. Thank you.

Avinash Reddy, CFO

Okay.

Operator, Operator

Thank you. And this concludes our question-and-answer session. I would like to turn the floor to Kevin O'Connor for any closing comments.

Kevin O'Connor, CEO

I just want to thank everybody for participating today with great questions. I'd like to extend my gratitude to the Dime team for their dedication and commitment to achieving our success this year, and I look forward to chatting with you all throughout 2022.

Operator, Operator

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.