Earnings Call Transcript - DCOM Q1 2022

Operator, Operator

Hello, everyone, and welcome to the Dime Community Bancshares, Incorporated First Quarter Earnings Call. My name is Juan, and I will be coordinating your call today. At this time, all participants are in a listen-only mode. 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 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 statements included and set forth in the company filings in the US Securities and Exchange Commission to which we'll 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 US 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.

Kevin O'Connor, CEO

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 non-interest-bearing deposits, managing our cost of funds and prioritizing NIM expansion, all while prudently managing expenses and maintaining solid asset quality. Our non-interest 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 non-interest 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 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 the 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 responsible for all middle market banking activities at 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 representing only 31 basis points of total assets. Similar to the rest of the industry, we did see 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 non-interest deposit base and deposit cost 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.

Avinash Reddy, CFO

Thank you, Kevin. Our reported net income to common for the fourth quarter was $32.7 million. With 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've 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 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. Non-interest 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 performed 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 two 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 perspective. 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 works 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 non-interest expenses excluding intangible amortization to be between $197 million and $199 million and non-interest income to be within a 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 the DDA ratio in excess of 40%. With that, I will turn the call back to Juan for questions.

Operator, Operator

Thank you. The first question comes from the line of Mark Fitzgibbon from Piper Sandler. Please, Mark, your line is now open.

Mark Fitzgibbon, Analyst

Hey guys, good morning. Thank you. The first question I had, Avi, the service charges and fee line was down about 12% sequentially. I guess I was curious why that was?

Avinash Reddy, CFO

Yeah, Mark, typically Q3 and Q4, we have various fees on the loan side that we charge, and some of that goes into the other fee lines. 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.

Mark Fitzgibbon, Analyst

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?

Stuart Lubow, President and COO

Hi, Mark. It's Stu. The pipeline size is approximately $2.4 billion at this time. We currently have around $480 million in underwriting and about $300 million pending closure. As Kevin noted, the last two months have been quite strong. We are over $130 million in loan balances compared to March 31, and we've noticed a decrease in prepayments as well. Therefore, we feel confident about this area. In the past 45 days, we've added over $500 million in new loan applications to the pipeline, with an average yield of about 4.5%. We are witnessing the effects of rate increases as they make their way through the pipeline. We have, of course, increased our rates for multifamily and across the board. From our viewpoint, the pipeline is robust, and the process is functioning well. With our new hires, we are looking forward to the chance to expand further, particularly focusing on the middle market and commercial and industrial sectors.

Mark Fitzgibbon, Analyst

Okay. Stu, in the 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 sort of only close maybe 23%, 24%, 25% of your stated pipeline?

Stuart Lubow, President and COO

I believe the pipeline is generally strong, although a portion does drop off. Historically, January and February are slower months for us, but I anticipate an improvement as the year progresses. It seems there were some timing issues, particularly at the year's end and in January when the industry was impacted by the pandemic and Omicron, leading to a slowdown. However, things have definitely picked up since then.

Mark Fitzgibbon, Analyst

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. Thank you.

Stuart Lubow, President and COO

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

Operator, Operator

Thank you. Our next question comes from the line of William Wallace from Raymond James. Please, William, your line is now open.

William Wallace, Analyst

Yeah, hi, thanks. Good morning, guys. 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?

Avinash Reddy, CFO

$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 now for May and June. So, basically those two items combined in Q1 was close to zero. 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.

William Wallace, Analyst

Okay. So is it safe to assume that a lot of the $1.75 million is due to timing, catching up from the previous quarter, but we wouldn't consider that a sustainable run rate.

Avinash Reddy, CFO

In general, our internal SBA run rate is probably around $3.5 million to $4 million for a full year on the SBA side. In terms of the swap side, for our budget this year, we projected $33 million to $34 million, including only $2.5 million of swap fee income based on our starting position. However, we are seeing increased traction on the swap side moving forward. Banks are hesitant to extend longer terms, but customers interested in locking in rates are now more willing to engage with us regarding swaps. The $33 million to $34 million figure includes just $2.5 million of swap income, but we might exceed that for the full year based on incoming business. For the second quarter specifically, we anticipate at least $1 million from the swap side, so we are optimistic about that business as we enter the second half of the year.

William Wallace, Analyst

Thanks, Avi. Regarding the net interest margin, I understand you're not providing guidance, and I'm not seeking one. However, you mentioned that the expansion in net interest margin toward the mid-2024 target would be more focused on 2023 and 2024. Could you explain what factors might limit or push down the net interest margin in 2022 as the Fed begins to raise interest rates?

Avinash Reddy, CFO

Certainly. The key point is that the total amount of our loan portfolio will be adjusting over time. As we continue to issue new loans at rates higher than the existing portfolio rate, this will naturally improve our net interest margin over time. We are still finalizing some loans that were initiated a few months ago when interest rates were different. Additionally, we have some loans with interest rate floors, and as rates increase by 75 to 100 basis points, those loans will no longer remain favorable. We are being somewhat cautious in our guidance as we want to assess how things unfold. Last year, when we modeled rate increases, there was an expectation of four or five 25 basis point hikes this year, leading to around 200 basis points total. However, the outlook has shifted toward earlier multiple 50 basis point hikes, resulting in an increase to about 275 to 300 basis points on the Fed funds rate. We are working through the loan portfolio while being careful on the deposit side. Reflecting back on our previous earnings call, we originally projected a margin target of around 330 basis points by mid-2024, which we've now increased to 335 basis points. The upcoming rate hikes will support this, though it will take time to see their full effect in the portfolio.

William Wallace, Analyst

Okay, thank you very much, Avi. I appreciate that color. And I'll step out for someone else. Thanks.

Operator, Operator

Thank you. The next question comes from the line of Chase Haynes from D.A. Davidson. Please, Chase, your line is now open.

Chase Haynes, Analyst

Hey, guys. How's it going? I am on here for Manuel Navas at D.A. Davidson. How are you guys doing today?

Avinash Reddy, CFO

Hi, good morning.

Stuart Lubow, President and COO

How are you?

Chase Haynes, Analyst

Great. So I just wanted to get some more color on your loan growth. Looks like you guys had a nice uptick in your multi-family and ADC line. I was just curious, do you guys have any concern about credit and growth as we go forward, especially in the second half of the year?

Stuart Lubow, President and COO

At this point, the pipeline is strong, and we are observing a lot of activity. From a credit perspective, the portfolio is performing very well, and our delinquency numbers have improved. We are quite comfortable with the situation. We have also updated our underwriting guidelines to account for higher rates and are conducting our underwriting under the scenario of anticipated higher rates. This ensures that in a rising rate environment, these loans are expected to perform well and meet our debt service coverage requirements. We have factored the increasing rates into our underwriting, yet we continue to see a robust lending environment. We remain confident in our growth and credit. Historically, Dime and Enbridge have maintained excellent credit metrics, and we anticipate this trend will continue.

Chase Haynes, Analyst

Great. I really appreciate the color. Just one more from me. I will start on the share buyback 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. Not sure if you exhausted it or continue to keep it going through the rest of the year.

Avinash Reddy, CFO

Yeah. 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 are 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 number one 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 want to do 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.

Chase Haynes, Analyst

I appreciate it. Thank you guys for taking my question, I look forward to the next quarter.

Avinash Reddy, CFO

Thanks, Chase.

Operator, Operator

Thank you. Our next question comes from the line of Matthew Breese from Stephens. Please, Matthew, your line is now open.

Matthew Breese, Analyst

Good morning.

Stuart Lubow, President and COO

Good morning.

Matthew Breese, Analyst

Hi, Avi, good morning. I appreciate the 4% to 6% loan growth guidance. But I was curious maybe we could slice it in a different way. With the 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 assets and $13 billion in assets? Are those '23 and '24 events in your view?

Avinash Reddy, CFO

We typically do not provide specific guidance on asset sizes. Our focus is on profitability and maintaining a certain margin, without significant wholesale leverage on the balance sheet. Regarding the securities portfolio, I don't expect any growth in that area moving forward. Cash flows from that portfolio will be redirected into the loan book, which is the appropriate strategy for a bank over time. Currently, our loans total approximately $9.1 billion, and if we assume a 5% growth on that, everything else on the balance sheet will remain relatively steady. This may lead to slightly lower average earning asset growth, but it will contribute to a higher capital rate, allowing for share buybacks. Our priority is on growing the loan portfolio, and we're pleased with our current loan to deposit ratio. We've seen a reduction in payoffs and believe we've turned a corner. As mentioned in my earlier remarks, loans reached a low point in February, and over the last year, we've worked hard to maximize rates within the portfolio. We are optimistic about the growth of net interest income, driven by both balances and margin expansion in the future.

Matthew Breese, Analyst

Okay. 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 were 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? Maybe just some insight on multifamily loans.

Stuart Lubow, President and COO

Yeah, I think we have a good multifamily team. We've been really quite aggressive on the rate side even throughout the last year, and that was one of the reasons that you saw some of the significant pay-offs over the last year. We weren't pricing 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 eight to nine months. And all 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.

Avinash Reddy, CFO

Matthew, just the other thing I'd point out on the multifamily side, just back to the payoffs. In 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 are comfortable with given how well these loans perform over time.

Stuart Lubow, President and COO

Avi and I are continually reviewing payoff requests. As of April, this trend has moderated further. Therefore, we anticipate some promising opportunities in rate sets that the multifamily market hasn't experienced in many years. We will remain involved to a certain degree.

Matthew Breese, Analyst

Got it, okay. The last question is just around credit. So, NPAs charge-off is very solid this quarter. But if you look at like the 10-K, there is a pickup in substandard special mention, some of the criticized classified categories. I was hoping for, one, maybe an updated balance on criticized classified loans and then two, maybe 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.

Avinash Reddy, CFO

Yeah, Matthew, a disclosure will be in our queue, which is a couple of weeks out substandard reasons down around 7% on a linked quarter basis. I mean, the primary reason was the approach that we took where multifamily loans that had deferrals, we basically put them in the substandard back in the pandemic. Obviously, as we're getting updated rentals, all these loans are performing really well. Of the portfolio, the majority of it was multifamily, but if you look at our 60 days past due, we have zero multifamily loans that are past due at this point. So all these loans are paying. All these loans are off the bands. 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 to 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. Our NPAs are obviously down, and charge-offs are down, and we're pretty comfortable.

Matthew Breese, Analyst

Got it. All right. I appreciate taking my questions. Thank you.

Operator, Operator

Thank you. The next question comes from the line of Chris O'Connell from KBW. Please, Chris, your line is now open.

Chris O'Connell, Analyst

Good morning. I was hoping just to 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?

Stuart Lubow, President and COO

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

Chris O'Connell, Analyst

Okay, great. And then it looks like you still have a decent chunk of higher-cost CDs coming off this next quarter here, 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 kinds of roll off balance sheet?

Avinash Reddy, CFO

Yeah, Chris, we are 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've still not changed rates on that. Obviously, legacy Dime had a much bigger CD book. We think having a more weighting towards non-time deposits gives us more flexibility on the balance sheet going forward. I think over the last year, we have seen even larger deposit growth if we didn't have attrition in this book. So at some point, that'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 CDs run off, but we're still seeing reasonable retention on it.

Chris O'Connell, Analyst

Okay, great. And then, I appreciate the updates in the NIM and the ROE guidance 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 ROE goal or the NIM goal in 2024 to kind of accelerate and be achieved earlier.

Avinash Reddy, CFO

I think the current guidance is based on the existing forward curve, which we view as relatively flat over the next six months compared to the five-year outlook. If the spread widens, we will certainly benefit from it, as our lending is based off the five-year rates while our borrowing and deposit costs are shorter term. A more pronounced curve would be advantageous, especially with rising rates. If we encounter several 50 basis point rate hikes, we will have to adjust our deposit pricing accordingly, but in the long term, it will positively impact loan pricing. An upward-sloping rate environment indeed benefits us. We typically do not take large positions regarding interest rates. We have performed well in low-rate conditions and expect to do similarly as rates increase. Ultimately, our focus remains on growing our DDA. We increased our DDA from 37% to 38%, and our goal is to elevate it to 40%. If we achieve that and maintain it, we can thrive in any rate environment.

Chris O'Connell, Analyst

Great, thanks for taking my question.

Operator, Operator

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

Kevin O'Connor, CEO

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

Operator, Operator

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