Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q4 2021 Earnings Conference Call January 28, 20228:30 AM ET
Company Participants
Kevin O'Connor - President & Chief Executive Officer
Avinash Reddy - Senior Executive Vice President & Chief Financial Officer
Stuart Lubow - President & Chief Operating Officer
Conference Call Participants
Mark Fitzgibbon - Piper Sandler
Matthew Breese - Stephens Inc
Christopher O'Connell – KBW
Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.
Operator
0:04 Hello, and welcome to the Dime Community Bancshares, Inc. Fourth Quarter Earnings Call. Before we begin, company would like to remind you 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.
0:37 During this call, reference will be made to non-GAAP financial measures, and supplemental measures to review and assess of operating performance. These non-GAAP financial measures are not intended to be considered an isolation or substitute for the financial information prepared and presented in accordance with the US GAAP. For information about these non GAAP measures and – for information about the non-GAAP measures and for reconciliation to GAAP, please refer to the earnings release.
1:07 As a reminder, this call is being recorded. I will now pass the call over to CEO, Kevin O'Connor.
Kevin O'Connor
1:14 Good morning. And thank you, Keith (ph). And thank you all for joining us this morning on a fourth quarter earnings conference call. With me again our Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO.
1:26 As we approach the one-year anniversary of our MOE, it is especially gratifying to discuss our fourth quarter results. If you indulge me a bit, the accomplishments of the new Dime team over the past 12 months. To begin, we had a strong quarter, was reported net income of $33.5 million or $0.83 per share. After adjusting for one-time expenses associated with the merger, ranch 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%.
2:08 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. Success of this as evidence in organic growth metrics. We are ahead of schedule enhancing the quality of our deposit base and have grown non-interest bearing deposits to 37.5% of total deposits. This is the highest percentage of any bank in our footprints.
2:46 In the fourth quarter, we had record loan origination so over $500 million for an annual run rates of over $2 billion. The velocity of originations has increased almost 10% each quarter since we've merged the banks. If you recall, second quarter originations were $425 million, the third quarter is $465 million and again in the fourth quarter, it was $505 million at a weighted average rate of 3.52%.
3:13 Despite continued high-payoff levels this quarter, especially on the multifamily front, we're there in excess of 35%. Our increased production resulted in core net loan growth for the quarter. Our loan pipeline remains strong. As each quarter goes by, our lending teams become more familiar with each other, the process and the new origination system the advantage and 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. These lower-payoffs, coupled with a two plus billion in origination capacity, will lead to stronger loan growth over the course of 2022.
3:56 While we have produced strong return metrics in a low rate environment, our high level of DDA and core funded balance sheet positions as well for rising rates. Relative to other metro banks, near banks, we believe the value of our deposit franchise will shine through with 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.
4:21 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.
4:45 Our non-performing loans remained at 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 testing relative to the industry has afforded us the opportunity to be very active on the capital return front.
5:09 During the fourth quarter, we stepped up the pace of repurchases and bought back $29 million of common stock. As we told you last quarter, we believe there was significant value in our stock and given our trading levels in earnings trajectory and balance sheet profile, we doubled the level of our capital return to shareholders in the [Indiscernible]. We have approximately $1 million shares left in the current authorization and expect to continue managing our capital levels efficiently over time.
5:35 To conclude my prepared remarks, we had a strong quarter with improved margins, record loan originations and continued improvement in our deposit franchise. Taking a step 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 2000 loans, totaling $600 million. And importantly, we organically grew DDA by over $950 million since the closing of our transactions.
6:07 As we look forward to 2022, I and the board, continue to believe that tremendous opportunity 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 high rates.
6:23 At this point, I'd like to turn the conference call over to Avi, will provide some additional color on a quarterly results, as was our expectations for 2022.
Avinash Reddy
6:33 Thank you, Kevin. reported net income to common for the fourth quarter was $33.5 million, included in this quarter results are 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 had committed to delivering an ROA of 110 in a 12-month time horizon after closing, and in this regard, we were happy to deliver an adjusted ROA of 115 for the fourth quarter.
7:05 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 some opportunities on the CD front to lower deposit costs. In total, we have approximately $700 million of CDs at a cost of approximately 50 basis points coming due in 2022.
7:32 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.
7:50 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 equation on acquired loans and PPP income was effectively negative $86,000 for the fourth quarter. This compares to a positive $5 million contribution from these line items in the third quarter.
8:14 As we mentioned previously, as part of purchase accounting, some loans were acquired at gross premiums and some at gross discounts. And this quarter, we had more loans that were a premium that paid-off. The net accretion balance from purchase accounting currently stands at approximately $1.85 million and is actually higher than the $1.2 million we had at the end of the third quarter, due to payoff of loans that were premium. As mentioned previously, there'll be some lingering impact from purchase accounting on the income statement in 2022. Depending on payoff activity.
8:46 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 we're up approximately $300 million versus the linked quarter.
9:20 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 Telegraph's amount for expenses for the fourth quarter of $49 million. Importantly, 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.
9:59 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.
10:27 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 strong balance sheets that performs favorably in the stress testing. We will continue to manage our balance sheet efficiently and with a tangible equity ratio of 864, 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.
11:04 Now let's turn over the 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 pay downs moderate, loan growth will pick up in the back half of 2022.
11:34 As you know, we don't provide quarterly quantitative NIM guidance, we did want 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 months and five-year compresses to approximately 15 basis points by the middle of next year.
11:55 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 work their way through a loan portfolio, to be 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 cycles, with a total deposit beta for the first 100 basis points of rate hikes being less than 20%.
12:27 As a reminder, approximately 25% of our $9 billion loan portfolio is floating rates, off-which approximately $1.2 billion will replace 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.
12:46 We expect core cash non-interest expenses, excluding intangible amortization to be between $197 million and $119 million for 2022. The 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.
13:06 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 7.5% on the TCE ratio. As such, we expect to be active on the share buyback front throughout 2022 keeping these capital ratios in mind.
13:41 Finally, with respect to the tax rate for 2022, we expect it to be between 28.5% and 29%. With respect to 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 assets threshold, we believe we have the infrastructure in place for larger organization, and as such growth in the coming years will be accretive to our ROA.
14:12 With that I'll turn the call back to the operator for questions.
Question-and-Answer Session
Operator
14:16 Yes, thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Mark Fitzgibbon with Piper Sandler.
Mark Fitzgibbon
14:41 Hey, guys, good morning.
Kevin O'Connor
14:43 Good morning.
Mark Fitzgibbon
14:47 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
15:00 No, Mark, the guidance for 2022 was 28.5% to 29% on the tax rate. We had some benefits – lingering benefits this year from our tax strategy associated with our REITs and that's going to go away, something went away here in Q4. So for next year, the guide is between 28.5% and 29%.
Mark Fitzgibbon
15:19 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
15:27 Yep. Yep, that's right. I mean, again, we've, our assumptions are based on seven rate hikes and curve flattening, obviously, if – we have a steeper curve, we'll do – we'll do better. But, based on our base scenario, that's kind of where we expect to be, kind of 24 months old.
Mark Fitzgibbon
15:44 Okay. And then Kevin, you reference the pipeline being strong. I wondered if you could do quantify that. And also, maybe give us some sense of the mix?
Kevin O'Connor
15:53 Sure. So [Indiscernible] Stuart Lubow. Currently, the pipeline is about $2.1 billion is the highest, it's ever been continues to grow each quarter, the average yield on the portfolio is 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 at, in the C&I bucket at this point.
Mark Fitzgibbon
16:36 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 run off of that CD book, and maybe the balance sheet contracts a little bit more in the early part of 2022?
Avinash Reddy
16:55 Yeah, Mark, so far, we, retention rate and 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 get into our, rising rate environment, sure, there'll be, a little more attrition, there on the CDs. But the key goal here is really growing DDA, right. And, 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 migrating 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 half of this era (ph) transition away from the legacy basis is pretty much done, and you're not going to have that headwind in terms of you know, growing deposits, overtime.
Mark Fitzgibbon
17:50 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
18:02 As I said, I think we've done all the things we needed to integrate this company. And so, I think, we stand ready at this moment, if there was an opportunity, but that has balance, so…
Kevin O'Connor
18:13 Yes, I think at this point, we're really focused on growing the bank organically, building our franchise creating more value for our shareholders. We think are deposit base and our high level of DDA creates a lot of franchise value as rates rise and so certainly, we have the ability, we're fully integrated, but our real focus is not running, what we feel is a very strong company that has a lot of future value.
Avinash Reddy
18:44 And Mark, I'd be remiss that not pointing 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 organic growth. So we're going to stick with that.
Mark Fitzgibbon
18:58 Great, thanks, guys.
Operator
19:01 Thank you. And the next question comes from Matthew Breese with Stephens Inc.
Matthew Breese
19:06 Good morning. A couple of quick ones, maybe just give us a sense for the outlook on liquidity. I mean, it's not as elevated as it once was, but you still have some excess cash and along the same lines, what the outlook is for securities growth?
Avinash Reddy
19:22 So, on the securities growth, we really don't expect to grow that portfolio map, we'd like to see, the cash flows from that being reinvested in the loan growth, we probably have around, somewhere between $150 million and $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, things like that. You are right, we have on our balance sheet, when we look at it, this 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 the excess liquidity into in loans, it's going to be attractive to the 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
20:31 Got it? Okay. And then going back to the loan growth guide, I was curious about the components and where you check to see it come from, and I guess I'm particularly interested in where and how we see kind of multifamily trends, it's now down to about 36% of total loans. I'm just curious where you see that bottoming or where you want it to be as a percentage of total loans?
Avinash Reddy
20:54 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, a good, risk adjusted asset. We did do quite a bit of origination in the fourth quarter, we did about $209 million of multifamily. But we had over $330 million in satisfaction. So prepayments were in the 35%, 37% range. So, our average yield on that portfolio and new originations was in the mid-threes 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. And we still see that as kind of our niche in terms of growing the bank and very important in terms of building relationships. And those owner occupied usually come with C&I credits as well. So, I think, that's really we're focusing, both the family will continue to be part of our business, but we didn't, as you know, we also very rate sensitive assets, and we didn't chase the assets over the last six months as we enter into a rising rate environment with, the really aggressive players being sub 3%. We were not in that market.
Matthew Breese
22:43 Got it. Okay. And then Avi, I appreciate the kind of financial outlook for ’22. I'm curious if there's anything on the strategic front that you all would mention as well, any new business lines or geographies you'd like to attack?
Avinash Reddy
22:58 At this point, we're, we're really focusing on getting our treasury management, you know, really functioning on all cylinders, we really come a long way and that's been really what has helped us really grow our commercial DDA balances. We're seeing [Indiscernible] coming in that business, rising dramatically over the next couple of years.
23:24 Certainly we're looking at all new tech – all the new technology that's out there, but there's nothing real specific in terms of new ventures at this point.
Matthew Breese
23:34 Okay. And the last one for me, credit quality feels very much for yourselves and for the industry, is a backburner type issue? The only real area I still get questions on, is particularly, New York City office and I'm just curious, I don't think it's a huge concern for you. But just curious what your thoughts are on the health of that particular asset class and whether or not there's any differences between kind of what you see in the suburbs or Long Island versus, the more metropolitan areas of the boroughs?
Avinash Reddy
24:06 Well, certainly Long Island office space and the suburbs have picked up, there's been quite a bit of activity out here in Nassau and Suffolk County, terms of new leasing activity. But the fourth quarter, New York City had a very good quarter in terms of new leasing activity. So it hasn't, it's starting to level out and stabilize and we think, will not get any worse from – from where it is today. Our total Manhattan Office exposure is $180 million. I mean, it's not a big part of what we've been doing. And I will tell you that the new originations are very minimal, off the top of my head, I can't think of any office space that we've, 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 to the industry, but it's not something we're – that we're concerned about.
Matthew Breese
25:10 Great. That's all I had, I appreciate taking my questions. Thank you.
Kevin O'Connor
25:12 Thanks, Matt.
Operator
25:14 Thank you. And the next question comes from Christopher O'Connell with KBW.
Christopher O'Connell
25:20 Good morning, gentlemen. We just where to start off on the fee guide. The run rate from this quarter seemed to come in a little bit higher than the guide for next year, and I had to Durbin impacted about, $2 million annual, so million dollars in the back half of the year. You guys mentioned the NSF. These are just wondering, maybe what else was going into that guidance?
Avinash Reddy
25:53 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. And we've taken a really hard look at all the items at the bank. I mean, the biggest one is really NSF and overdraft. So, a guide for that $33, $34, you've seen across the industry, people changing their practices so heavily. So that's the biggest delta between the $9 million annualized, gets you to $36, down to $33 to $34.
26:27 The residential business we had $0.5 million to $0.7 million of fee income this year, we're probably assuming that's down, close to $1 million dollars. So, you put all of that together, it's going to come down, we believe that some upside in that number based on our SBA team, we don't have a lot of low level swap income in there. If we see some traction there, that's going to be an upside, but we just wanted to provide a conservative number at the start of the year, given some of the headwinds, especially on NSF and overdraft fees.
Christopher O'Connell
26:58 Understood, appreciate the color there, and we're gonna circle back to the NIM guide. I know, it's fairly long-term there to get to that, the 330 number and the curves flattening in the guide, seeing more short-term, how are you guys thinking about the progression here, over the course of 2022, in that scenario?
Avinash Reddy
27:32 Yeah, Chris, we're gonna stay away from quarterly guidance. I was pretty clear on that upfront. I mean the base number we're starting with is 317, we've given guidance, we're going to get into the 330s, in mid-2024. We've given in terms of where we are, we've given some guidance on the deposit betas, we also have $1.2 billion of loans that are going to reprice with the first 25 basis point rate hikes. Right now, the new origination rate that we had for Q4 was around three, between 350 and 355. Our payoff rate on the loan portfolio was around 375 at this point. So you have a few higher yielding loans paying off, obviously, entering a rising rate environment, as those origination yields go up. You're not going to see any NIM compression associated with loans coming in and out of the portfolio. So, I think we've – we're comfortable with where we are, I think sometimes people get hung up a lot in terms of ramps – and in ramp scenarios and shock scenarios, I think I pointed to our EVE disclosures and our 10 Q, you look at us, and you compare this to any other bank in the Metro New York area, REB with positive rates, we're up in the double digits in terms of what that is and ultimately, we believe we're growing the company for the medium-to-longer term and you look at the, the full rephrasing of the balance sheet, cash flows and assets and liabilities. We feel, we're gonna do really well and that 37% DDA is really going to help us with that.
Christopher O'Connell
29:07 Got it. Appreciate the color there. And that's all I had for now. Thank you.
Avinash Reddy
29:17 Okay.
Operator
29:21 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
29:28 I just want to thank everybody for participated today with great questions. I'd like to thank you to Dime team for the dedication and commitment to achieving our success this year and I look forward to chatting with you as well all through 2020.
Operator
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
