Q3 2021 Dime Community Bancshares Inc Earnings Call
Good morning, and welcome to the Dawn community Bancshares incorporated third quarter earnings call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone keypad.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to Kevin O'connor Chief Executive.
Sir Please go ahead.
Thank you Andrew and thank you all for joining US this morning on our third quarter conference call.
With me again are still lebow, our president and Chief operating officer, and I'll be ready our CFO.
We had a strong quarter with net income of $36 5 million or 89 per share adjust.
Adjusting for one time expenses associated with the previously announced branch closures and merger related items. The net income was $41 4 million.
Or one dollar one cents per share.
Our adjusted ROA was 137% and we continue to operate the bank in a sub 50% efficiency ratio delivering on our stated merger goals.
Our employees have spent a tremendous amount of time, putting together a new organization internally in terms of system conversions of new processes.
And importantly, externally in terms of working with our customers to ensure the experience has been seamless.
I'm happy to report the merger integration is now largely in our rearview mirror and we are 100% focused on growing our core business.
The third quarter loan originations were $465 million at a weighted average rate of 356%. These.
These originations were 9% above the prior quarter's $425 million.
Despite higher pay up levels production resulted in net loan growth for the quarter, a 4% annualized.
Our loan pipeline remains strong and as each quarter goes by our lending teams are getting more and more comfortable with on all of them are new loan origination system and processes.
Our focus on growing noninterest bearing deposits has been unwavering and at the end of the third quarter DDA represents 36% of total deposits.
This high level of DDA, and our core funded balance sheet positions us well for the day the FRB raises rates, while also producing strong metrics even in this low rate.
As you're all aware there have been several large merger transactions on our marketplace, none of which have actually closed yet.
Post closing of these margins do you expect there'll be some level of fallout and we believe we are extremely well positioned to capitalize new growing our business.
Our nonperforming loans remained at low levels and our capital ratios remained strong we ended the third quarter of a tangible equity ratio of eight 5%.
Our low risk balance sheet, which performed favorably and stress testing relative to the industry has provided us the opportunity to actively return capital to shareholders.
During the third quarter, we repurchased approximately 15 million common stock and expect to continue managing our capital over time.
We definitely see significant value in our stock given our trading levels earnings trajectory and balance sheet profile.
Our budget and planning process for 2022 is in full swing and.
And we will provide more color on our expectation of 2022 at the January earnings call.
To conclude my prepared remarks, we had a strong quarter with growth in loans and noninterest bearing deposits.
Continue to believe we have a tremendous opportunity in front of US we have a clarity of mission to be a pure play community commercial bank focused on being responsive to our customers' needs.
At this point I'd like to turn the conference call over to Avi will provide some additional color on our third quarter results.
Thank you Kevin our reported net income to common for the second quarter was $36 $5 million included in this quarter's results were $7 million in aggregate onetime costs associated with our previously announced branch closures and merger related expenses.
We've provided a table in the earnings release with the three months ended September 30th pre provision net revenue, which on an adjusted basis was $54 $7 million compared to $52 7 million for the prior quarter.
Our level of pre tax pre provision income provides visibility into our ability to produce sustainable 1% plus ROE is regardless of the rate environment.
We were able to migrate our cost of deposits lowered to the tune of 13 basis points in the third quarter and the current spot rate as of today is even lower at approximately 10 basis points.
We believe we have an opportunity over the next several quarters to continue to drive down cost of deposits by a few more basis points as higher cost Cds roll off and are replaced at lower rates.
Importantly, we believe we have removed a significant amount of rate sensitivity from our deposit base as we have not retained rate sensitive Cds and money markets.
These actions coupled with a higher percentage of noninterest bearing deposits that are Metro New York peers should result in our deposit betas lagging other banks in our footprint when rates rise.
The reported net interest margin was 320 up eight basis points on a linked quarter as we did last quarter. We've provided details in the press release on the impact of purchase accounting and PPP.
Not just the kony, increasing on loan to the approximately <unk> million dollars in the third quarter we.
We expect this to moderate to approximately half a million to $1 million for the next couple of quarters by early next year, we would have most likely run through all of the remaining net accretion from purchase accounting.
Beyond that they could still be a lingering impact on the income statement, depending on payoff activity and some acquired loans, our gross premiums and summit gross discount but in terms of the net accretion it should wind down by the first quarter of next dealer.
The impact of PPP has also been outlined in our earnings release, we only have $900000 remaining unrecognized fees on these loans. So do not expect much noise for this line item going forward.
Excluding the impact of PPP in purchase accounting the adjusted NIM of 310 was above our previously telegraphed trained as we were able to hold the line on loan pricing and benefited from reductions in the cost of deposits.
As you will note on our average balance sheet in the third quarter, we had $880 million of short term investments, earning 26 basis points.
We expect these average short term investment balances to be at least $250 million lower in the fourth quarter as we used excess cash to pay off broker deposits and also reinvest into securities towards the end of the quarter and into the beginning of the fourth quarter.
But are you using these average short term investment balances, which have very limited positive spread should provide support for the core margin in the fourth quarter.
As Kevin mentioned, we will be providing more updates on our 2022 expectations. During our January earnings call, but the clear opportunity for us over time is to deploy redeploy our cash and securities portfolio in the core relationship Lawrence.
At the end of the third quarter cash and unencumbered securities represented approximately 14% of total assets, we're very comfortable operating the bank closer to 9% to 10% as it relates to this ratio and hence stink, we have $500 million to $600 million of excess liquidity on the balance sheet, which when reinvested into relationship loans provides a clear.
Catalysts for medium term NIM and NII expansion.
We've demonstrated strong originations and once loan paydowns eventually moderate the excess liquidity will be absolved with both NII and NIM growth.
Of note the payoff rate across our real estate portfolios was approximately 23% in the third quarter. When this rate eventually moderate costs loan growth will accelerate given our current level of origination.
Moving on to credit quality, we had a negative provision in the quarter of approximately $5 million all else equal and assuming no major changes in macroeconomic conditions. We expect the level of reserve releases seen in the last couple of quarters to moderate and our provision levels to be driven more by trends in growth in our loan portfolio.
Our existing allowance for credit losses of 88 basis points is still above the historical combined levels off the legacy institutions pre COVID-19.
We feel comfortable with our current reserve levels based on current economic conditions.
We expect core cash operating expenses in the fourth quarter to be approximately $49 million.
As Kevin mentioned, when the middle of FY 2022, budgeting process and expect to provide more color on 2022 during our January earnings call.
Noninterest income for the third quarter included a couple of items that we don't expect to repeat.
Approximately $350000 of referrals fees on loan originations and approximately $200000 related to an insurance reimbursement, which both show up in the other noninterest income line item and approximately $350000 additional in the below the line item due to mortality proceeds from a death claim.
Backing out these items run rate noninterest income noninterest income would have been closer to $8 $8 million.
During the third quarter.
Just approximately 480000 shares at $32, an 18th we believe share repurchases continue to be very attractive given our trading levels prospects and strong balance sheet that perform favorably in stress testing.
In the month of October we are on pace to purchase an additional $9 million of stock.
With respect to the go forward tax rate, whereas we're estimating a rate of approximately 27, 5% for the fourth quarter.
Finally, I'd like to end briefly by touching upon progress against the two enterprise wide goals, we laid out at the time of the merger announcement.
First of all with growing noninterest bearing deposits to approximately 40% over a three year timeframe.
By the end of the third quarter, we've already grown this ratio to 36%, we're definitely doing better than our initial timelines for achieving our goals. The second equally important goal was managing the bank with a sub 50% efficiency ratio in this regard we've operated the pro forma bank and approximately 48% while.
While the PPP in purchase accounting accretion will dissipate in 2022, staying below that 50% Mark continues to be a fundamental focus across the organization.
With that I'll turn the call back to Andrew to open it up for questions.
Yeah.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning, and congrats on a nice quarter.
Good morning.
First Kevin you'd mentioned the size of the pipeline was with large I wondered if you could give us some some.
The actual size of it maybe the complexion and what the average rate looks like.
Hey, Mark it's Stu do Levo sure.
Right now the total pipeline is about $1 7 billion, we got about $1 2 billion in discussion.
We had $225 million in underwriting.
And we have about $200 million.
In la.
Loans approved and waiting to close I will tell you that October was a very strong month.
We've closed nearly $200 million.
New originations.
So far this month, we still have.
A number of loans to close before the end of the month.
So it is very strong the average yield on that portfolio.
And the pipeline is about $3 70.
Okay, great. Thanks, and then I guess I'm curious are you out in the market trying to hire teams.
And are there any new product plans within the lending side of the business.
I think we're pretty happy with R. R.
Our.
Products in our <unk>.
Lending plans, although I will say that we have.
Rolled out a digital product that is focusing on small businesses small business lending 250000, or less and we've been running now for about six months and we're going to be rolling that out to our website. So that customers can fly.
Right online and get an answer within 24 to 48 hours.
That is part of our plan going forward it really well.
Offline some of the work that's done by our relationship managers on the smaller credits, but also provide better services to our customers in terms of.
With mergers occurring.
The near future, we are talking to a number of.
Individuals from other institutions as they receive clarity in terms of those deals closing.
We'll have some opportunity, but we are getting close to several but at.
At this point, it's a little early given the fact that those deals or not.
Not closed yet.
Okay. Thanks to and then Avi I guess I'm curious how asset sensitive do you think the balance sheet is today and how you are tweaking that and then also if you could kind of help us think about the core margin.
Or are they reported margin I should say when we know it'll be down from lower PPP fees, but should it slowly start to begin to build off of base and say <unk>.
Yeah, Mark I think I'll start with the margin so.
Start with the core margin our core margin was $3 10. This quarter like we said there's $880 million of short term investments at 26 basis points, you can probably assume that's $250 million lower the next quarter. So that in and of itself should result in a upward sloping margin going forward and it's really all about taking those cash balances in <unk>.
Putting them into securities, if we need to but to steves point really putting them into loans over time, So I would say.
What sloping here in Q4, and then continued moderate expansion into 2022 I think.
But as it relates to the asset sensitivity I would really point you to our 10.
<unk> 10-Q disclosure is obviously 10 Qs coming up on a couple of weeks, but if you look back to our June 10-Q, and look at our EV sensitivity in the 10-Q, and a plus 100 basis points or Evs up 16 percentage points and you look at that versus any other bank in our peer group nobody is even close to that number so I.
A lot of times people get hung up in a plus 100 scenario as you know.
Gradual ramp things like that.
The whole portfolio is going to reprice over time, and the fact that we have 36% DDA. When you look at the entirety of the portfolio, it's important to focus on EV. So.
Take us Standalone novel, Standalone book value and look at those EEV disclosures versus the peer group I think youre going to get a good sense of how much more asset sensitive. We are then then everybody in the northeast.
Right and then just lastly, Kevin I'm curious when you feel like the bank would be in a position to consider more M&A and geographically where you'd be.
Considering things.
I think we talked about this last quarter I think having put all of the integration behind us.
We've actually gone through a safety and soundness exam in the middle of doing everything else as part of this process. The regulators came in and did a safety and soundness and I think we've passed well. So I think were there today.
And I think we've always talked about.
Contiguous markets makes sense for us so nothing's changed on that point.
Thank you.
The next question comes from William Wallace with Raymond James. Please go ahead.
Thanks, Good morning, guys put dwell.
Avi, maybe just real quick circling back to the to the NIM commentary you just gave on the core NIM and you were in that.
Below $3 <unk> in the first half of the year before the PPP sale, where you had the excess liquidity.
Do you think we could get back there by.
<unk> ended the first half of next year sort of like in the second quarter or is there too much on the pricing pressures that will offset that.
Yeah, well I mean, we don't give quantitative guidance going out six to 12 months I mean look I mean, there's a clear upward sloping NIM here over time, it's going to be the pace at which we reinvest the cash into securities but may.
I mean, our targets for loan growth. If you think about that 6% annualized loan growth target that is 500 million to 600 million every year. So I think the assumption should be.
Our deposit costs aren't going to go up until rates increase and if you assume rates increase in Q3 and Q4 of next year, you're still going to see some modest compression in our cost of deposits, whereas as we put these cash and securities to work. It is going to grow up go up.
Every quarter it may be slightly different depending on what we do with the loan portfolio, but clearly I mean, the goal is to build it back to those levels and again, having the DDA and having the excess liquidity helps us going forward.
Okay and then.
Steve I appreciate your commentary on loan production in the portfolio yield, but just given all the moving parts any do we think in the fourth quarter based on the pipeline today and the activity that youre seeing in your markets that we could be on on track for that annualized target.
Excluding <unk>.
Yeah, while he is going to be very strong for the quarter. We do expect a couple of.
Packages large multifamily packaged to pay off.
That are going to refinance elsewhere that we've really decided we don't want to stay in those deals. So it's gonna be moderated a little bit by managing our our portfolio managing risk within our portfolio.
So it's a little hard to say at this point I think on the origination side in a normalized environment I would I would.
And all other things being equal would have said, yes, but knowing that there are a couple of multifamily packages that are going to pay off.
I think that will have some effect on overall growth, but we're still very very confident.
The long term in terms of our growth prospects, while the I'd just add in the prepared remarks I had mentioned the payoff rates are around 23, 24% on the portfolio. So.
In a normalized environment, and especially as rates start going up if you just assume that's 17, 18% versus 23% you get to a much higher growth rate for us.
If it's you know call it Q1, I mean I.
Thanks to his commentary was around Q4, specifically around a couple of packages. We also mentioned in the press release looked I mean with repurchasing our $9 million of shares in the first month of the quarter.
Hoping to continue that for the next couple of months here, so well manage the capital ratios appropriately and to the extent, we have some large payoffs come in but on.
In the medium term would definitely reiterating that 6% annual loan growth number.
Okay.
And then <unk>.
E U.
Believe suggested it expand some operating core operating expense run rate of $49 million in your prepared remarks, we've been hearing.
A lot of commentary.
Loss the industry about wage pressures that are real.
And other pricing pressures due to supply chain issues as.
As we as you kind of look at your expense base with the potential for I don't know if theres any additional cost saves or anything to come on but I'm wondering if you could just talk about what that pace of expansion what what pressures there are to it and what relief valves you may have to offset those pressures.
Into next year.
Yeah, well I mean the.
When we're going through our budgeting process I mean, we feel the same pressure as everybody else. We've hired a lot of new people at the bank and so it's and it's an ongoing process and decisions we need to make here internally I think the one thing we've done a good job that in the past as we promised operating the bank at a sub 50% efficiency ratio and we're going to figure.
The way to be able to do that next year as well so.
If it means growing the balance sheet slightly faster, we're going to figure out a way to do it but.
But there is obviously some wage inflation and we're feeling like it like everybody else I think we limited the guidance to Q4, <unk> because we have really good visibility into Q4.
But we're really committed to doing that and again at the top of the house, there's only two metrics that matter growing DDA in managing the bank at a sub 50% efficiency ratio. So we're going to figure it out for next year.
Thanks, I appreciate the time Jim.
Again, if you have a question. Please press Star then one.
The next question comes from Matthew Breese with Stephens, Inc. Please go ahead.
Hi, good morning.
Hey, Matt Avi I just wanted to follow up on this on the topic of Paydowns. So.
I know you noted, 23% this quarter and normalized pace is more like 17 or 18% are you seeing any signs so far into the fourth quarter that youre heading towards that more normalized pace. Stuart I think you'd mentioned there is a couple of lumpy payoffs that youre, not particularly youre not going to be competitive on the refi just curious if theres anything else.
Getting in the right direction there.
Matt I don't think I don't think for Q4. It will be nominated I think this is just based on our history over different rate cycles that.
It just feels like as rates start going up a little bit you do have some customers coming in right now to refinance before rates actually go up rates. So.
Could it continue into Q1 sure but over time.
Once rates do start going up this is going to nominate so it's more based on our history of what we've seen over time I don't think we're going to see it be much lower in Q4 that Matt I think theres, a little bit of pent up demand as you know during COVID-19. There is not a lot of activity, particularly in the multifamily market because there is a lot of uncertainty there.
As COVID-19 issues have moderated and multifamily is has basically come back.
I think that pent up demand surfacing.
In this quarter and we're seeing the.
The last aspects of that into the fourth quarter.
But.
I think that's the reasoning.
Our multifamily was really driving those numbers.
Got it Okay, and then maybe could you discuss where you are seeing origination activity is it is it mostly on the on the east side of the island are you getting a fair bit of activity in New York City is it Brooklyn versus Manhattan, maybe some color on where the.
Bruce in long Island.
I mean I would say.
<unk> is steady.
As always.
Our activity is more west.
Both activities more west from.
From Nassau through into the boroughs into Northern New Jersey.
Okay.
Okay and then two other quick ones from me. So the first one is just that.
SBA gain on sales fell this quarter quite a bit just curious what happened there and if we can get back to you.
More normalized pace of something closer.
So what we saw last quarter.
Yes.
We have a number of <unk>.
SBA loans that are going to be.
We're going to see gains on sales.
This quarter I mean, I think that number will be.
Back to a normalized level.
In the in.
In the fourth quarter, we do have a.
A significant pipeline in SBA as well.
So at this point, we have or.
Or over $80 million in terms of loans that we're discussing and there is about $32 million of SBA loans waiting to close.
Some of those SBA loans are or construction or lease hold improvement loans that we don't sell until all of the funds are dispersed so theres some timing lag there but.
We're fairly confident that SBA gains will return to normalized levels not only in the fourth quarter, but going forward, Matt in the first month of the quarter. We've already had more games in the last quarter already so just to add close to a point.
Got it okay.
Last one for me.
In.
Total non accruals there was a pick up in C&I loans.
Close to $910 million could you just discuss what happened there was one credit or a few credit and if it was one just give us a sense for what happened.
Yes, it's one credit.
And individual walls and real estate investing.
The loan is actually still current isn't individuals this has.
Significant COVID-19 related businesses hotels, and whatnot and while the loan remains current.
We are working with the borrower.
<unk>.
To secure that loan.
But in the meantime, we took a very conservative view of of alone, but I will say at this point it's so.
Still painesville car.
Great. Okay. That's all I had thanks for taking my questions.
This concludes our question and answer session I would like to turn the conference back over to Kevin O'connor for any closing remarks.
I just want to thank everybody for participating actually I want to thank our employees are on the call for helping us achieve these great results.
And look forward to speaking jolson. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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Sure.
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