Q1 2022 Dime Community Bancshares Inc Earnings Call
My name is one and I will be coordinating your call today at this time all participants are in a listen only mode. If you would like to ask a question you may do so by pressing the star followed by number one on your telephone keypad.
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 U S. 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 certain statements included as set forth in the company filings in the U S 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.
We consider them in isolation or as a substitute for financial information prepared and presented in accordance with U S. GAAP for information about these non-GAAP measures and the reconciliation to GAAP. Please refer to the earnings release.
I'd now like to turn the call over to Kevin O'connor CEO of time. Please Kevin go ahead.
Thank you Juan and thank you all for joining us this morning.
With me again, a stool lebow, our president and Chief operating officer, and I'll be ready our CFO .
We had a good start to 2022 with net income of $32 7 million or <unk> 82 per share.
I'm also pleased to report we executed well on all our strategic priorities growing noninterest bearing deposits managing our cost of funds and prioritizing NIM expansion.
All while prudently managing expenses and maintaining solid asset quality.
Our noninterest bearing balances grew to 38% of deposits at quarter end.
<unk> us well for upcoming Federal reserve rate hikes.
This consistent long term level of noninterest 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.
<unk> 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 end loan balances had 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.
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 our full year loan growth guidance. We've 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 on our marketplace.
With these transactions finally closing we are excited to onboard several individuals.
<unk>, Bob, making who will be our new head of middle market lending.
Most recently, Bob was the market President and responsible for all middle market banking activities in the northeast Bank Leumi, we're extremely excited to have Bob join us.
Our asset quality remains very strong with NPA is 90 days past due declined 14% a linked quarter basis and represent only 31 basis points of total assets.
Similar to the rest of the industry, we did see the decrease.
We did see the decrease of rising rate.
Decreasingly fair value of our diverse portfolio.
This contributed to a $43 million decline in our OCI and as a result, our tangible book value drop dipped by approximately 3% or 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 500000 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 <unk> from Moody's and.
In fact in their report Moody's cited our excellent credit quality track record.
<unk> 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 on R&D noninterest 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 and an attractive banking market with significant organic growth opportunities.
At this point I am 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.
Thank you Kevin our reported net income to common for the fourth quarter was $32 $7 million with a module 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 nine basis points.
It should come as no surprise that we expect deposit costs to bottom out at these levels.
Importantly, we believe we have 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've done previously we've provided details in the press release on the impact of purchase accounting and PPP.
On an adjusted basis, the NIM was up two 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.
On a current loan loan pipeline of approximately 4% is higher than our existing portfolio rate.
We expect new additions to the pipeline to be in the fourth quarter to four and a half 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.
Noninterest income for the first quarter was approximately $7 2 million as.
As we mentioned in the earnings release, we expect a pickup in fees from our SBA division and from a back to back loan swap program in the second quarter of approximately $175 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 reduction in results on individually analysts credits on.
Our existing allowance for credit losses of approximately 86 basis points, it's 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 500000 shares at $34 44.
We believe share repurchases continue to be attractive given our trading levels organic prospects and strong balance sheet that performs favorably under stress testing.
We will continue to manage our balance sheet efficiently and our tangible equity ratio of 832 is within our comfort zone of 8% to eight 5%.
Now, let's turn over to guidance and targets we are reiterating.
Iterating, 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 the at the end of February and since then we've seen nice growth over the past two months.
As you well know by now we don't provide quarterly quantitative NIM guidance.
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 2020.
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 work 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.
Yes.
We are reiterating our full year guidance for core cash noninterest expenses, excluding intangible amortization to be between $197 million and $199 million and noninterest 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 a return on assets to the 120 to 125 area by the back half of 2024 and operate with a <unk> ratio in excess of 40%.
With that I'll turn the call back to one.
Quick question.
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And the first question comes from the line of Mark Fitzgibbon from Piper Sandler. Please Mark Your line is now open.
Hey, guys. Good morning, Thank you.
Okay.
First question I had avi.
Service charges and fee line was down about 12% sequentially I guess I was curious why was that.
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 line. So it's a bit seasonal over there some of that will correct over the course of the year.
Item was really.
The SBA A&D 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 in all of those fees went into effect in the middle of February early so we've got a.
Month's worth of income coming out of that so that should nicely picked up as we enter the second quarter and move into the latter half of the year.
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%.
Yes, so hi markets Stu.
The pipeline size of about $2 $4 billion at this point.
We have about $480 million in underwriting and about $300 million waiting to close as Kevin mentioned, we've had a.
The last few months have been very strong.
We're up as well.
Today over $130 million.
Loan balances.
<unk> to March 31.
And.
What we're seeing is prepayments are down as well so where.
We're very comfortable there.
Looking at the last 45 days, we've gotten over $500 million.
New loan applications into the pipeline the average yield on that.
On that group is about four 5%. So we're seeing the impact of rate increases starting to move through the pipeline.
We will obviously raise our rates in terms of.
Multifamily.
Everything across the board so.
From from our perspective pipeline is very strong.
And the process is working well and now with the new hires as we mentioned.
We're excited to.
For the opportunity to do even grow it further.
And really focusing on the middle market C&I.
Okay.
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 in the pipeline or is it typical for you is sort of only closed maybe 'twenty three 'twenty four 'twenty, 5% of your your state of pipeline.
I think for the most part.
The pipeline.
Is just that there is some percentage of that does fall out, but January and February tend to be very slow months for us.
Just historically and I think that's going to pick up nicely throughout the rest of the year. So I think it was somewhat more timing.
Certainly towards the end of the year in January .
All of the industry the market was affected by the pandemic again with the omicron things slow down a little bit.
But things have certainly picked up at this point.
Great and then the last question I had is I guess I was curious how many lenders you have hired and how many you think its likely youll hire say over the remainder of this year.
Well, we've hired basically.
<unk> team leaders and we have several more in the in the offing.
Could see us hiring five to 10 additional lenders throughout the rest of the year.
Great. Thank you.
Thank you. Our next question comes from the line of William Wallace from Raymond James. Please <unk>. Your line is now open.
Yes, hi, thanks.
Good morning, guys.
First question is on the.
SBA and swap guide for the second quarter did you say it was one $5 million or did I mishear you.
One $175 million combined Walid for both those line items for Q2, we just had a bunch of stuff clause in the month of April on the swap side.
The SBA pipeline now for May and June .
So basically that those two items combined in Q1 was close to zero, but over the course of the we've got certain expectations in the second quarter, we're going to make up for the first quarter basically on both on both those items.
Okay. So is it.
Is it.
Safe to assume or fair or fair to assume that.
That $1 75, a lot of that is whatever timing that youre catching up for one quarter, but we wouldn't expect that would be a good kind of run rate.
Yes.
General and our SBA run rate internally is probably three and a half to $4 million is a good number for a full year for the SBA side and then on the swap side. When we ran our budget for this year in the 33 to 34 million that we came up with we only put to $1 1 million of swap fee income in that just given where we were at the start of the year I think.
We're seeing a lot more traction on the swap side going forward I mean, obviously banks don't want to extend longer than if customers do want to lock in those rates I mean, they are willing at this point to engage with us on the swap side. So in the $33 million to $34 million, we only had <unk> million of swap income and that we may end up beating that for the full year given.
What's coming in but just for the second quarter itself.
We'll probably know at least $1 million on the slot side. So we feel pretty good about that business heading into the second half of the year.
Okay, great. Thanks, Avi and then.
Your commentary around the net interest margin I know youre, not guiding and I'm not asking for guidance.
You said that you would anticipate.
That the expansion in net interest margin to that mid 2004 target would be more weighted to 2023 and 24. So can you tell me what what kind of keeps keeps a floor on the net or are kind of pushing down on NIM in 2022 as the fed starts to height.
Yeah sure Ali So I think it's just the.
The aggregate amount of the loan portfolio, that's going to be re pricing over time.
We put on more and more loans at a rate that's above the portfolio right. It's obviously going to help the NIM overtime right. We're still closing items right now in the portfolio that when they initially came to US came to three months back.
Rates when the different picture right. So it's a little bit of that we also have some floors on loans in the portfolio as.
As we have in our rate hikes that are 75 to 100 basis points, they're going to come off being in the money at that point in time.
And a little conservative in the guidance over there, we just want to wait and see what happens.
I think when we started the modeling of this.
Right.
It's going up over time last year, I think everybody thought that was going to be four or $5 25 basis point hikes. This year.
And then we are going to have maybe 200 basis points overall thinking has obviously changed to having multiple 50 basis point rate hikes upfront and getting $2 75 to 300 on fed funds. So it's a little bit of working its way through the loan portfolio being cautious on the deposit side, but over time, what I'd say, while you could go back to work.
Comments on our last earnings call, which was three months back we had said by the middle of 2024, we were guiding to a margin of around 330 basis points. So we've taken that up now to $3 35. So clearly the additional rate hikes are going to help us is just going to take a little bit of time to work through the portfolio of the yard.
Okay. Thank you very much I appreciate that color.
Ill step out for someone else. Thanks.
Thank you. The next question comes from the line of Chase Haynes from D. A Davidson. Please chase your line is now open.
Hey, guys How's it going ammonia for Manuel Nava.
Davidson Hi, guys good today.
Hi, good morning.
Great.
So I just wanted to get some more color on your loan growth.
Paul.
Uptick in your multifamily and ADC line.
Curious are you guys have any concern about credit and growth as we go forward and especially in the second half of the year.
No I mean at this point the pipeline is strong we're still seeing a lot of activity credit.
I'm a credit perspective, the portfolio is very strong.
All of our delinquency numbers have improved.
So we're very very comfortable we've also.
Updated our underwriting guidelines and are stressing.
All our underwriting at the higher rates.
Got it.
And anticipating higher rates, so we're actually underwriting it.
At the forecasted increase rates, so that we're making sure that.
In the rising rate environment that these loans performed well.
How the debt service coverage to meet our meet our guidelines. So we've taken the rising rate environment into account in our underwriting, but what we're seeing is a very strong environment still for for lending.
We're very again still very comfortable with our growth in our in our credit and historically.
And Enbridge both companies at some point, we'll stop seeing both companies.
Had extraordinarily good.
Credit metrics and we expect that to.
T.
Great.
You state the color.
Just one more for me.
On the share buybacks. This quarter I was just curious what does that look like going forward I wasn't sure of your share repurchase plan that you have at the moment I'm not sure it'd be exhausted or continue to keep it going through the roof.
Rest of the year.
Yes, we have around 500000 shares left in our authorization at this point once that's complete we will look at our capital again at the board level, we're very comfortable with where we're at.
Tier one ratio was $10 75 at this point tangible equity ratios well over 8% so.
I think we were pretty active in the last year or so.
Especially as we had a lot of payoffs and the loan portfolio.
You said.
<unk> growing nicely our pipeline as big a 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 wanted to and as Kevin said.
Portfolio stress test really well so we will take all that into account once we're done with the with the current authorization.
Yes.
I appreciate it. Thank you guys for taking my questions look forward to next quarter.
Thanks, Jay Thank you.
Thank you. Our next question comes from the line of Matthew Breese from Stephens. Please Matthew Your line is now open.
Good morning.
Hey, good morning.
Hey, good morning, I appreciate the 4% to 6% loan growth guidance, but I was curious if maybe we could slightly a different way with securities with securities portfolio down a little bit this year.
And Theres really no longer any sort of PPP related headwinds I was curious.
Your thoughts on the overall size of the balance sheet.
When do you think is part of your guidance, we can break through some of the key milestones like $12 5 billion in assets and $13 billion in assets or those 'twenty, three and 'twenty four Vince in your view.
Yes, Matt we're not dealing it will provide.
Guidance on breaking through asset sizes, it's all about profitability.
We want to maintain a certain margin we want to make sure. We don't have a lot of wholesale leverage on the balance sheet. So.
I think about it and I've gotten this on last quarter's earnings call really the securities portfolio. It really shouldnt view that it'll be any growth in that particular portfolio going forward.
As we get cash flows from that portfolio, we're going to put it in into the loan book and Thats.
What banks should be doing right over time, so I would take our loans with 90, $999 1 billion plus or minus you assuming a 5% growth on that and then I would keep pretty much everything else steady on the balance sheet. So I mean that would result in a slightly lower average, earning asset growth overall, but then that obviously resulted in a <unk>.
With more capital right until we can use that on buybacks. So I don't think we will.
If you would on an asset say thats really about growing the loan portfolio, we feel very good about our loan to deposit ratio, where it is right now.
And really we're really happy that payoffs have subsided on the portfolio and we've really turned the corner like I said in my prepared remarks loan to the trough in February .
The last 12 months, we've we've done a lot with the portfolio in terms of maximizing rate and we're really looking forward to net interest income growth both from balances and margin expansion going forward.
Okay.
And then I know multifamily hasnt been as high as our focus as it as it was for legacy time. This quarter was interesting note because balances are actually up a little bit.
What's the outlook for that 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 I mean, maybe maybe just some insight on multifamily loans.
Yes.
I think.
We have a good multifamily team we've been we've been really quite.
Aggressive on the rate side, even through this the last year.
And that was one of the reasons that you saw some of the significant payoffs.
Over the last year, we werent caisson tracing loans in the sub 3% range as other institutions, where and we really.
<unk> disciplined on that.
As rates have moderated up we've.
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.
Through the rest of the year.
Pretty attractive rates, we also have a significant amount of loans that are repricing over.
Over the next.
Eight to nine months and all of those with the current rate environment.
Would be repricing at 30 to 40 basis points higher.
And what they are at today and potentially.
Poland did 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 opportunities there to to maintain that book grow at somewhat and grow at rates that are certainly more attractive to us Matt.
Just the other thing I'd point out on the multifamily side just back to the pay offs.
The month of February the payoffs on multifamily with 41% and so.
That's obviously been a headwind in that portfolio over time, but in the month of March it was down at around 25%. So.
As rates go up youre going to see significantly less payoffs over there and we're going to keep a little bit more on the balance sheet, which we're comfortable with given how well these loans perform overtime.
We are looking at pay off.
Request on an ongoing basis in April .
At this point.
As has moderated even further so.
We're seeing we're going to see some opportunity there at some at rates that.
The multifamily market Hasnt seen in many years so we're.
We'll be active to to an extent.
Yes.
Got it okay.
The last question was just around credit so npa's charge offs very solid this quarter.
But if you look at like the 10-K, there was a pickup in substandard and special mention some of the criticized classified categories. I was hoping for one maybe an updated updated balances on criticized and classified loans and then two maybe just some insight as to whether or not the movement in those buckets were tied to more deferrals in some way.
During the pandemic related issues or any any sort of underlying credit concerns.
Yes.
Closure will be in our Q, which is a couple of weeks out.
Sub standard with yields down around 7% on a linked quarter basis.
I mean, the primary reason was the approach that we took were multifamily loans that had a deferral, we basically put them in the substandard back in the pandemic. Obviously is were getting updated rentals all.
All of these loans are performing really well.
Off of the portfolio majority of it was multifamily, but if you look at our 60 days paucity, we have zero multifamily loans that are past due at this point. So all of these loans are paying all of these loans are after events as we're getting rentals from from.
Our borrowers and upgrading them over time, so you should see a significant decline in those.
Overtime. In addition, we had some <unk> loans that we put into substandard as part of the acquisition will fully resolve for that so.
We always think about credit, but we have a rock solid portfolio and we were looking back over the last 15 20 years.
Losses pre on multifamily on an annual basis is less than four basis points. So we're really not concerned about what's in their NPS.
NPA is obviously down and charge offs are down and we're pretty comfortable.
Got it alright I appreciate you taking my questions. Thank you.
Yes.
Thank you as a reminder to ask any further questions. Please press the star followed by number one on your telephone keypad now.
The next question comes from the line of Chris O'connell from K B W. Please Chris Your line is now open.
Good morning.
I was hoping to just catch up you mentioned in multifamily.
<unk> a couple of times.
But I may have missed what are those origination.
Our origination yields coming on at.
No.
Yes, so we've raised our floor rate two four in the quarter on our multifamily.
Good point on five year deals, we're really not interested in 77 year deal so were really to note.
Four 5% range on that on the fiber box.
Okay great.
And then it looks like you're still a decent chunk of.
Higher cost Cds coming off.
In this next quarter here.
Back half of the year.
How are you guys thinking about kind of CD retention going forward or youre still going to let it.
A big chunk of those kind of roll off balance sheet.
Yes of course, we're seeing around.
70% to 80% retention on the Cds at this point in time in our rates on the Cds, we only have a rate of around five basis points.
On the Cds right now so I think you will see some attrition on that we've still not change rates on that.
Obviously legacy dime had a much bigger CD book, we think having a.
More weighting towards non time deposits just gives us more flexibility on the balance sheet.
Going forward.
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 has led some Cds run off but we're still seeing reasonable retention on it.
Okay great.
And then I appreciate the updates on the NIM and ROA guide and kind of longer term goals here.
Yes.
Hoping to just get your opinion on.
What's the ideal operating environment or rate environment for you guys.
For the ROA goal.
In 2024 to kind of accelerate.
Can be achieved earlier.
Yes, I think the I mean, the current data is based on the current forward curve. So we're assuming a pretty flat curve six months, so far versus a five year, we're basically assuming it's flat to the extent that widens out and we get more.
More spread we're obviously going to make more essentially at the end of the day.
We learned after five years and.
<unk>.
Our borrowing costs and deposit costs.
On the short end, so I think a little more steepness in the curve will help us obviously with rates going up.
If we have multiple 50 basis point rate hikes will have to adjust deposit pricing a little bit but in the long run it's going to help loan pricing even more so.
And I think looked at and up and up.
Upwardly sloping rate environment does help us.
We try not to take a lot of positions on interest rates as you know we've done really well when rates were low.
To do well when rates go up but at the end of the day. It comes back to growing DDA. So I mean, we grew DDA from 37%, 38%, we want to get that number up to 40% in Italy.
If we get to that level and maintain that we're going to do well in any any rate environment.
Great. Thanks for taking my question.
Thank you. Thank you. We currently have no further questions. So I'll hand back to Kevin O'connor for any final remarks.
Well I just wanted to thank everybody, who participated and we look forward to chatting with you next quarter. Thank you.
This concludes today's call. Thank you so much for joining you may now disconnect your lines.
Okay.
Okay.