Earnings Call Transcript - DCOM Q1 2021

Operator, Operator

Good morning, and welcome to the Dime Community Bancshares First Quarter Earnings Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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.

Kevin O'Connor, CEO

Thank you, operator. Welcome to Dime Communities' 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 front. Avi will then provide some details on the quarter, some forward guidance and the target 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 the 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 that 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 number one priority. This gives me tremendous confidence we are running 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 continue to see client growth, first on the PPP funds. We were again the leading community bank on 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 as a $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 1st. Our increased market share, brand appeal, and the coverage of the entire Greater Long Island marketplace positions us to be the bank of choice for small and mid-sized businesses in our footprint. As Stu and I put together our business plan for this year, one thing really resonated: the clarity of thought in our mission. We are a business-focused community bank driven to be 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 nine plus months, we have grown this to 32%, and we're confident that over a three-year timeframe, 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 0.26% of total loans. The 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 and 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. The results of this stress testing indicate 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.

Avi Reddy, CFO

Thank you, Kevin. Included in this quarter's results were the following one-time items: merger expenses and transaction costs of $38 million, balance sheet restructuring charges of approximately $18 million, which included swap termination 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 I am ensuring will be repriced 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've provided details on the impact of purchase accounting and PPP. The presence of PPP loans is quite additive to interest income in the amount of approximately $5 million, which contributed 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 $885 million currently. We expect these loans to be forgiven or paid off, and the income recognized between now and the middle of next year as these were effectively two-year maturity loans. With respect to the tranche of loans originated in 2021, which has $20 million of unrecognized fees, we expect the amortization of the income on these loans to occur over the course of the five-year term, subject to forgiveness and payoff 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 quickly. We definitely see significant value in our stock, given our trading levels, earnings trajectory, and balance sheet profile. Given that our quarterly results included one month of standalone legacy Dime and two months of the combined entity, we have also provided a table in the earnings release with the two months ended March 31st 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 target. As you are well aware, we don't provide quantitative quarterly NIM guidance. However, I will say 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 320 and 330 over the next 12 months. As you know, we just completed our core conversion in the second quarter with ancillary system conversions expected over the 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 to 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 seeing customers gravitate away from swap products toward fixed-rate loans, and thus, have incorporated that development into the fee income guidance. Next, I'd like to touch briefly upon two enterprise-wide goals. Our first goal is growing DDA to approximately 40% in a three-year timeframe. The second equally important goal is managing the bank within 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 various economic and interest rate cycles should result in an ROE over a 12-month time horizon of approximately 110 basis points. Our medium-to-longterm 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. 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 the 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.

Kevin O'Connor, CEO

Thank you, Avi. Before we open the call for 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 number one 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 slow to respond and the smaller banks lack the size or capital products 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, Operator

Now, we will begin the question-and-answer session. First question is from Mark Fitzgibbon of Piper Sandler. Please go ahead.

Mark Fitzgibbon, Analyst

Hi, guys, good morning, and congrats on the deal in the first quarter.

Kevin O'Connor, CEO

Good morning, Mark.

Mark Fitzgibbon, Analyst

Avi, I 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?

Avi Reddy, CFO

No, Mark. The guidance is that by the fourth quarter of this year we should be in the $195 million run rate. Obviously, we disclosed the merger right now. There are 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 it to hold fairly steady into 2022.

Mark Fitzgibbon, Analyst

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?

Avi Reddy, CFO

Mark, so right now the provision and the result just reflects everything that we know based on the economic conditions that are at hand. 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 1st until now. With some stability in those forecasts coming in, it should really be based on loan growth and the mix shift over time. We believe the result at around 112 basis points, excluding PPP, is a very strong reserve level compared to our peers. We feel pretty good given the last content we have from stress testing that we have done. So we're very comfortable with the results, which should just be based on the growth of the portfolio going forward.

Mark Fitzgibbon, Analyst

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 is sort of the extraction of those synergies look like this year?

Avi Reddy, CFO

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 mentioned that it would be phased in during 2021. We're on track at this point. Obviously, with the conversion, some ancillary system conversions are ongoing, right-sizing our expense base, but it should all be 100% in there.

Mark Fitzgibbon, Analyst

So do you sort of see a straight line down between now and then or is that sort of...

Avi Reddy, CFO

Yes, yes. I mean, we're going to get to $195 million by the end of this year in terms of an annualized number. And then, informally, that's the number for 2022.

Mark Fitzgibbon, Analyst

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 are the opportunities being created, and where might those be coming from?

Kevin O'Connor, CEO

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 have been able to do that. We've said in a number of loan committee meetings since we've been together where common relationships have grown. It has come from our treasury management products, basically 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 coordination between both of the teams has been incredibly gratifying. I mean, 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 more. One of the things I'll share with you too is 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 situation is. In some ways, it's worked out better because the people in the building have been focused on integration and consolidation, and the people that have been out at home are separate from that and they are basically out there growing business. So, it's worked out very well.

Stu Lubow, President & COO

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

Mark Fitzgibbon, Analyst

Great. And then last question. 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? Thank you.

Kevin O'Connor, CEO

I mean, our systems are converted today. So there's really no, short of a few of the ancillary things, as Avi had mentioned. So, operationally I think we are in good shape. We believe we may take a – get some weekend off from that standpoint. I think we'll continue to look at things that fit with the profile. We're not – we're a community bank or commercial bank. So, we'll be looking for things that fit our profile.

Operator, Operator

Thank you. The next question comes from Christopher Keith of D.A. Davidson. Please go ahead.