Q2 2022 Dime Community Bancshares Inc Earnings Call
With net loan growth of 4% to 6% for 2022.
In early June we revised the guidance to the top end of this range given our continued strong pipelines and the traction of our recent hires we are now comfortable increasing the loan growth guidance again to 6% to 8%.
I'm sure. It can provide more color on the current pipeline and the mix in our Q&A section.
Apart from strong loan growth, we continue to execute well on our strategic plan priorities managing our cost of funds.
Prioritizing NIM expansion prudently managing expenses and maintaining solid asset quality.
Cost of deposits was up only five basis points for the quarter and continues to compare favorably to our local competitors.
But the level of DDA and our balance sheet remains a clear differentiator versus other community banks in our footprint.
These are in fact up $283 million versus a year ago quarter.
The uplift in our loan portfolio rates more than offset the increase in our cost of deposits contributing to the linked quarter margin expansion.
Our core efficiency ratio this quarter was 46% and for the year. We've operated at 48% again within our stated goal of operating a sub 50% efficiency ratio regardless of the prevailing environment.
Our asset quality remained strong with npa's, representing only 30 basis points of total assets.
Like the growth in loans, our loan loss provision for the quarter was fairly immaterial.
The provision for growth was largely offset by improvement in the reserves on loans, which came on as part of our merger transaction.
Like everyone else, we are digitally watching for any signs of deterioration or local economies and thus far we've not seen any meaningful early warning indicators of credit concerns within our portfolio.
As you know we are primarily a secured lender with conservative underwriting standards, our credit losses have been well below the bank index over multiple cycles.
Underpinning our strong historical credit performance has been our bullet proof multifamily portfolio that has come through every cycle unscathed, including the COVID-19 induced shutdown of New York City.
The LTV on our multifamily portfolio, which represents 30% 38% of loans is approximately 55%.
This portfolio will clearly outperform in any recessionary environment.
Similarly, the LTV of our Manhattan office portfolio, which represents only $123 million of balances is only 51% again very well secured and monitored.
Turning to capital in the month of May we successfully issued $160 million of sub debt at a rate of 5%.
While it was a challenging environment for the capital markets, we were pleased to get our issuance done.
We subsequently used the proceeds to redeem two legacy debt instruments.
Similar to the rest of the banking industry, we did see the impact of rising rates on the fair value of our securities portfolio, which contributed to a $27 million decline in OCI.
Despite this tangible book value per share increased by <unk> <unk> from the prior quarter.
Importantly, our regulatory capital ratios remained strong our tier one leverage ratio increased by six basis points in the quarter and stands at a healthy 871%.
As we've said before our low risk balance sheet, which performed favorably and stress testing has provided us the opportunity to be active on the capital return front.
During the second quarter, we increased the pace of our stock buyback and repurchased $22 million worth of stock.
In the month of May our board authorized a new share repurchase plan and we continue to be an active purchase of our stock.
To conclude my prepared remarks, we had a strong quarter and our year to date core return on assets was one 4%.
<unk> good visibility into the earnings power of our company.
As mentioned in our press release, I'd really like to thank our entire employee base for their daily efforts and furthering our goal of being the Premier business bank in our footprint.
In this regard, it's especially gratifying to have our CRA rating upgraded by our regulators to an outstanding designation.
This quarter's results make me even more excited to <unk> future, we have a tremendous opportunity in front of us as a pure play community commercial bank highly focused on being responsive to our customers' needs.
At this point I'd like to turn the conference call over to Avi, who will provide some additional color on our quarterly results as well as our expectations for the rest of 2022.
Thank you Kevin I reported net income to common for the second quarter was $36 7 million.
Excluding the impact of loss on extinguishment of debt and severance expense adjusted net income to common would have been $39 3 million or one one per share.
The reported NIM and the adjusted NIM for the quarter was 329, the net accretion balance from purchase accounting currently stands at approximately $1 9 million.
While the purchase accounting accretion was fairly immaterial this quarter as mentioned previously there could be some lingering impact on income statement in the future depending on payoff activity on premium and discount loans.
We use spot period end deposits by approximately $135 million in the second quarter, while keeping our cost of deposits relatively well controlled.
The average cost of deposits increased by five basis points compared to the first quarter.
The spot rate on deposits at quarter end was approximately 24 basis points.
While we are pleased that our deposit beta significantly lagged the level of fed funds increases in the second quarter given the rapid pace of rate increases, we do expect deposit betas to increase from the low levels seen in the second quarter.
Offsetting future increases in deposit costs, and the repricing opportunity on our loan portfolio.
As you would expect given the current interest rate environment, we are proactively managing our loan pricing.
On new loans that are in various stages of closing is approximately 425 and new additions to the pipeline on the 450 to $4 75.
This is significantly higher than our existing portfolio.
At June 30 of 295.
Core operating expenses, excluding loss on extinguishment of debt severance expense and intangible amortization for the second quarter came in at $48 5 million.
Expenses on a year to date basis have been in line with our expense guidance for the full year.
Noninterest income for the second quarter was approximately $12 1 million.
Included in noninterest income was $2 2 million of bully income related to mortality proceeds from indefinitely.
As we mentioned on our first quarter earnings call. After a slow start to the year, we were expecting a pickup in feeds from our SBA division and from a back to back loan swap program in the second quarter, both of which came to fruition.
Moving on to credit quality, our provision for the quarter was $44000.
Basically the provision on provisioning on the loan growth was offset by improvements in our individually analyzed PCV loans.
As we've mentioned before a meaningful portion of our result is contained within individually analysed loans as part of our merger related accounting.
The result level of these loans improved this quarter as credit quality on this top portfolio has been better than what we projected at the time of the module.
When looking at our individual core loan segments, a wonderful family portfolio is resolved at approximately 55 basis points a multifamily portfolio. As a result is approximately 20 basis points or three portfolio of approximately 50 basis points and our C&I portfolio is approximately 1%.
Assuming no change to the Moody's forecast these portfolio level results should serve as a guide for future provisioning on net loan growth.
For reference we use the Moody's June forecasts and our models and carpet both the Moody's baseline scenario as well as the Moody's downside as force benign.
Our existing allowance for credit losses of 82 basis points, it's still above the historical pre pandemic combined levels of the legacy institutions.
During the second quarter, we bought back approximately 717000 shares at $31 91.
We believe share repurchases continue to be attractive given our trading levels, our organic prospects and strong balance sheet that the funds favorably under stress testing.
We will continue to manage our balance sheet efficiently and our tangible equity ratio of 802, including the full impact of the OCI and 855, excluding the impact of <unk> is within our comfort zone as Kevin noted our tier one leverage is very strong at 871.
Now, let's turn over to guidance and targets.
We are again, increasing our loan growth guidance for calendar year, 2022 to approximately 6% to 8% including PPP.
This would equate the spot balances at year end, excluding PPP of between $9 7 billion and $9 9 billion.
We are pleased with our performance at the halfway point of the year and expect to build on the pipeline and the momentum we have created thus far.
As you know well by now we don't provide quarterly quantitative NIM guidance, we do want to provide you some directional perspective.
Just on the current market expectations for rate increases in 2022, and then some rate cuts. After we see the NIM being approximately 335 by the middle of 2024.
As Kevin mentioned NIM prioritization is a firm wide focus for us.
Given the data Com convention, we use we expect the NIM to be impacted by a few basis points in the third quarter and we also expect prepayment fees, which have been contributing approximately five basis points of the margin for the first and second quarter of 2022 to start drying up.
In the second quarter, we had a small recapture of interest income from prior non accruals and this is also not expected to continue in.
In addition, our deposit betas will pick up in the second half of them.
All that being said as the impact of rate increases work their way through the loan portfolio and we reprice into a higher rate for originations, we expect the margin to get to 335 by the middle of 2024.
We are reiterating our full year guidance for core cash noninterest expense, excluding intangible amortization to be between $197 million and $199 million.
This quarter, we had a $2 million benefit to the noninterest income line item from a bully claim.
Including the impact of this our year to date noninterest income would have been $17 million.
As we've mentioned previously the impact of the Durbin Amendment will kick in starting in the third quarter of this year we.
We expect full year noninterest income excluding the previously mentioned moly benefit to be within our 32 million to $34 million guidance.
Finally, with respect to the tax rate for the remainder of 2022, we expect it to be approximately 28%.
With that I'll turn the call back to the operator for questions.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad. As a reminder, if you are using a speakerphone. Please remember to pick up your handset before asking your question.
The first question today comes from the line of.
Mark Fitzgibbon from Piper Sandler. Please go ahead. Your line is now open.
Hey, guys, good morning, and nice quarter.
Good morning, Mark.
No.
First question I had.
I missed what you said about the margin being impacted by a few basis points in the third quarter could you just clarify what that why that was.
Yes.
Overall comment Mark on the on the on the margin as you know, we don't provide quarterly guidance, but in general the day Count convention that dining with US we typically see the Q1 margin being higher just given the fewer number of days in that quarter.
We also just mentioned prepayment fees, which have been around five basis points on the margin.
For the first and second quarters of this deal we expect that to dry up going forward.
Given the fact that.
Payoffs are probably going to slow.
Novartis in deposit costs.
Very moderated so far that think that at some point deposit costs are going to go up.
Our spot rate was 24 basis points in deposits at June 30, I mean that being said our loan rates were 405.
No.
At the end of the quarter.
Currently asking for 10 basis points up.
So you put all that together on an individual quarter the margin maybe up maybe down but the <unk> guidance is when you exclude some of these onetime items.
We had a little bit of non accrual interest recaptured this quarter, which is a couple of basis points as well.
But stripping all that stuff out the margin is going to expand going forward in the medium term.
We don't expect it to get around $3 35 by.
In the middle of 'twenty 2020.
So company guiding to higher average interest, earning balances given the loan growth is higher so you put that altogether. The net interest income guide is definitely higher than what it was last time around.
Got you and then on the deposit front. It looked like you had kind of a big swing out of money market account balances into savings was there a promotion or something that kind of drove that or anything there.
Yes, just managing customers via rate basically savings and money market or the same product.
Some of the regulations out there on the savings that you can do in the non limited number of transactions right now so it's just managing customers into individual products.
Managing our cost of deposits as you see the cost of deposits only five basis points is not really a significant amount of promotion we've kind of stayed away from any promotional money markets at this point in time.
Just getting customer the right product.
Mark that's what really has changed into business savings accounts. So.
And we really are managing individual individual customer relationships as opposed to changing.
The base rate on the entire money market portfolio.
Okay.
What are the what's the loan.
Loan pipelines size at the end of the court.
Right now, it's about $2 7 billion.
The yield on our portfolios.
$4 six for the weighted average rate on.
What's in the pipeline today is about $4 64.
Okay.
Last question I had is.
I think that.
Sorry to risk based capital ratios, I think 534% how much higher you're comfortable letting that go.
Yes.
Generally we'd like to be.
400, low five hundreds.
We're pretty comfortable with where it is right now.
Obviously, we bought back a lot of our stock because we believe it's very cheap.
We do see significant growth in our C&I portfolio, two can talk a bit about how the pipeline is weighted towards the C&I credits, but really focused on doing owner occupied loans.
<unk> said look our company has a long history of being over 300%, we do a significant amount of stress testing.
We get approvals from the fed every time, we knew we do a buyback and were very comfortable with our concentration and it comes on the credit quality at the end of the day in our credit quality has been pretty pristine and thats, where the con cycle and prior cycles.
Thank you.
Yes.
Thank you.
The next question today comes from the line of Manuel <unk> from D. A Davidson. Please go ahead. Your line is now open.
Okay.
Adding to <unk>.
Question about deposit trends a little bit.
The mix shift away from DDA.
Anything to add there.
And still.
You're still above peer there, but just kind of any any color to add on that ship.
Yes Emmanuel.
Not much of a change I mean looking at spot balances, it's pretty hard and I'll daily points, either at a year over year increase in DDA.
There's a lot of seasonality, we do have some municipal deposits I mean, we actually grew business deposits by around $150 million on a year to date basis.
Some minor outflows and as consumer overall, but we are trying to be more competitive on rate as rates do go up so.
Really nothing to be concerned about.
We do see.
As you know growing DDA over time in all of our internal plans are still based on growing DDA and obviously as rates keep going up you have some customers that and you've heard this from a lot of our peer banks looking to take idle cash and putting and putting it into treasuries and to some extent, but beyond that in our portfolio is pretty granular.
And we feel pretty good with where we are.
And then.
And looking at the.
Loan pipelines, we have about $500 million in C&I business in the pipeline and about two thirds of that is new business. So we would expect that deposits would be garnered.
Once those loans are closed and we opened in the operating accounts so.
We feel pretty comfortable that we can continue to.
Enhance and grow our business DDA going forward.
That's helpful.
One other classification.
<unk> payout our escrow deposits at the at the end of the.
First half of the year at the end of the Sony optically located at the end of Q1 versus Q2, it's always going to be lower just due to the payout of escrow deposits.
Yes.
At the end of <unk>.
200, <unk>, we pay people to real estate to actually get paid in the second quarter. So that comes out of the escrow balances.
Sure.
Perfect.
A little clarification on the fee guidance.
Did I hear you right that you are you, including the $2 2 million OLED death benefit in the <unk>.
Guidance for the year.
No.
Excluding youll get your excluding perfect and then it was nice to see that.
SBA fees and swaps bounce back up.
Any change to budget there for the year.
Yes.
No I think the way when you look at those two businesses are you got to look at it over over a multi quarter time horizon. So our annual run rate. If you take the first half we feel the FDA business was light in Q1, our team was very busy with PPP and forgiveness and so we feel it's the SBA, that's a pretty good run rate.
And following those $715 million to $1 million, plus or minus obviously premiums have come down a bit in that business, but our team.
And we feel very comfortable with that and then on the swap product.
The minimum amount of swap fee revenue, we'd later generate every quarter, we like the floating rate assets that it provides.
So we're constantly adjusting pricing on that product to get off fee income and a <unk> profile of where we need.
In the long run that should be $4 million to $5 million annual run rate business for US obviously Q1 couple of transactions slipped over into Q2, but overall, we're pretty happy with our performance.
Performance across town.
Thank you.
Thank you.
The next question today comes from the line of Matthew Breese from Stephens. Please go ahead. Your line is now open.
Good morning, everybody.
I wanted to touch on.
<unk>.
Multifamily.
Growth this quarter was stronger than we've seen in quite some time.
Curious just just what happened there was it a slowdown of prepay and continued originations or.
Did you find the right characteristics of that product better this quarter, just just some color there and maybe some specific outlook on how that can proceed from here.
Thank you you answered the question.
But just to give you a little bit.
So.
First of all the multifamily is a bit gross up because we had about $70 million of construction multifamily.
<unk>.
Go permanent so those are loans that are already in the book.
The construction is completed they were fully lease up and they converted to permanent multifamily loans. The other is you write prepays were down a bit.
We did have a hangover from the first two quarters. The first part of that part of the year in terms of the pipeline today.
Total applications in the multifamily portfolio is about $55 million and our rate is about $4 75, So we're really not focusing on that.
Priced at up.
We are basically now looking at multifamily.
In terms of servicing our existing relationships in that business, but really not.
Because our pipeline is the pipeline is so strong really not out there in the market change.
Chasing product.
Although rates have.
Improved dramatically.
Right and the market is probably in the four and three quarters to 5% range, but but we have a significant pipeline in the other categories.
Particularly C&I and owner occupied so it's really a kind of a hangover from the existing pipeline.
Prepayment slowdown.
Some gross up because we are a transfer of 70 million odd too from from our construction portfolio into the Permian portfolio.
Yeah, Hey, Brian So as I did point sale.
And Matt just one other point if you go back to the timing of the balance sheet came together.
Go back to March of 2021 multifamily book was $3 6 billion. Then it's basically $3 6 million now so that had a lot of pay offs, all the time and with its back and at the same dollar balances at the time of the module.
Got it Okay I was trying to translate what happened this quarter.
Maybe get a good read on the increased loan growth guidance was it.
Was it due to increased ability to generate multifamily it sounds like it's more.
C&I commercial real estate and more activity there.
Is that an accurate read.
Got you, Okay, and then you mentioned a couple of times that your expectations and not unreasonable.
Is that deposit betas will pick up here at some point.
Youre beta cycle to date has been excellent I'm curious when you talk about deposit beta is accelerating what does it mean.
For you just given the level of noninterest bearing it could be better than peers.
It to be just curious how you think about it.
Yes, I think so.
So the spot rate Matt.
At quarter end was 24 basis points.
The rate on deposits today is 27% so.
Even assuming no change in between now and the end at the end of the quarter, we're going to see a double digit increase in deposit costs for next one all else equal holding it flat I mean that said the fed raise rates more I think the one thing we all need to wait and see us.
And you probably heard this from some other banks at some point deposit costs are going to get into the system. We've lagged so far and we continue to lag, but based on models and based on we've seen historically, we're trying to be conservative there I think the other pieces.
Our loan growth guidance right. So we've gone from 4% to 6% to 6% to 6% to 8%. So we see a lot of demand there and if youre going to grow the balance sheet more on the margin you're going to have to pay up for some deposits over time, So I think keeping that all in mind.
When we initially came out we said we thought deposit betas would be about 20% to 25% of the cycle. As you also know, it's probably 25 defense probably our best guests in terms of where we end up so I think we're going to do better than our local peers for sure.
That said, we're in a competitive market and we're going to see where we need to be on deposit costs.
Got it Okay, and then Kevin I think in the past you've talked about longer term maybe by that.
2024.
Area, you can get to that one in the quarter type ROA.
Looking at this quarters results, maybe you get there faster than you initially thought.
Maybe some thoughts around.
Your ability to achieve that sustainably in the near term or exceed that.
Profitability target just some general thoughts there.
Well I mean I think.
So it builds up the margin so the discussion about the margin at that.
How that impacts it but we still feel comfortable that one in a quarter is really where we can sustainably run the organization.
Yes.
Got it Okay, and then any update on M&A activity discussions willingness to participate in this kind of market.
As you can see what we've accomplished this quarter the focus really is growing what we have.
I think that would be a distraction that would take us away.
People sitting around this table and the employees we have listening on the phone are excited about what we're doing every day and how this company is coming together. So I think that's going to be the focus those are the opportunities in front of us.
Keep bringing on some new people to increase the loan portfolio.
Systems are getting better the process, we're getting better I am excited about what we can do organically.
Great I appreciate you taking my questions. That's all I had thank you.
Thank you.
Thank you.
As a reminder, if you would like to ask a question. Please press star followed by one on your telephone keypad.
The next question today comes from Chris O'connell from <unk>. Please go ahead. Your line is now open.
Hey, good morning.
So just wanted to circle back on the.
Deposit commentary.
One is I mean do you guys have.
Where do you think.
I guess in your modeling.
Where deposit betas are going to be over the course of this tightening cycle.
Yes, Chris I think.
From the start of the cycle, probably 25% is probably our best guess at this point and I think that being said in a model the model, it's only with the assumptions and then I think.
The pace of increases this quarter has been faster than what anybody thought.
On the flip side, though it's really about having the managing that growing that and then replacing our loan portfolio. So it's not a one sided equation. So I think if deposit betas are going to be higher we're going to see higher loan data overtime. So we feel pretty comfortable with.
The overall NIM getting the 335 on a couple of years in managing around that as it relates to deposits and loan growth and loan mix.
Okay got it.
Further NIM on the $3 35.
<unk>.
How does that change.
Even if you don't do and members Directionally.
If theres no cutting in the back half of 'twenty three.
It doesn't change much because.
<unk>, South, Florida Middle of 2024, and by the time you cut rates. It takes a while for it to go through the system. So not not much of a change at that point in time.
Okay.
And then just going into.
I think you may probably a pretty good luck.
Next quarter or so, but as we move into 2023.
How are you guys thinking about deposit growth and core customer growth.
Underlying growth it sounds like you feel good about.
Right now I mean, it was there.
Sure.
Is there another shift to kind of lock in rates and utilize CBD is a little bit more.
Sure.
How are you thinking about kind of long term deposit growth.
Given the tightening conditions.
Yes, I think I think for now we're pretty comfortable with our liquidity position. We're also comfortable taking the loan to deposits between 95 and 100% historically.
That's been a fine number for us to run our liquidity and multifamily you know, it's a pretty fast cash flowing assets.
More stains and so.
We feel comfortable growing loans a bit quicker than deposits in the in the near to medium term.
I think at the end of the day, it's about just managing the balance sheet at the lowest cost for the medium term and not damaging the franchise in the near term.
The rate setting so I think it's going to be a function of how quickly we grow loans and as stew said with more C&I business coming online, there's more deposits coming online with that.
We have our own munitions here at the bank, we're very focused on that we have in our multiple.
Different deposit gatherer.
<unk> focus on deposits. So look I think at the end of the day, it's keeping its not repricing the base and leading as long as we can.
And hopefully we don't have to do that they're going to be some customers who have we have a lot of lot of loan and deposit balances that we need to pay up for it over time, but I think I think overtime, we feel pretty good about our liquidity position, we have ample room to borrow.
We needed to we have not tapped that like a few other banks in our footprint. So I'd say overall, it's still about growing DDA and my earlier comment was we've grown business deposits by 150 million year to date, and we need to still keep doing that.
The consumer book at our bank.
To be 40%, 45% of the overall portfolio when we combined both legacy institution, that's down to probably 33% right now at some point, that's going to level off and I think once that levels off.
Youre going to see some additional growth in the deposit book as business becomes a bigger and bigger part of the overall pie.
Great.
Israel.
And last one for me is.
Just in terms of credit quality and opportunities that you guys are seeing in the market on the loan side.
Where are you seeing the most attractive.
Opportunities today, and what categories are you being the most cautious on.
Hello.
We obviously, we've seen a lot of business from some of our new teams and.
Also our existing teams and the C&I World, obviously, taking business from larger institutions and those that have been through mergers and have experienced disruptions. We're seeing a lot of opportunity there are owner occupied portfolio.
Todd into the C&I business as well as it has a nice pipeline.
In place today, and the CRE investment as well, while we are not really involved with us retail and office space, We don't have a big portfolio in that.
Today, and we're really staying away from that.
So from a credit standpoint.
We're very careful our average LTV on the entire CRE portfolio is 57%.
What we're seeing today is not much different from that we are in the 60% to 65% on new new deals.
Back in.
Back in the first quarter of February timeframe, we.
We upped our stress testing on our.
On our underwriting we basically increased qualifying rates by 1% over current rates and we're still doing that and then stress tested from there. So we feel pretty comfortable from a credit perspective.
The areas that were.
Many people might be concerned about maybe office building Manhattan office retail.
We've stayed away from historically and we continue to do so.
Great. Thanks for taking my questions.
Thank you.
The next question today is a follow up question from Manuel <unk> from da Davidson. Please go ahead. Your line is now open.
Hey, just.
Following up on that.
The competition commentary are you seeing.
Any specific offers in market on deposit rates or is this just anticipated.
Deposit rate increases.
And also on the loan side are you seeing.
Pushback on pricing, so kind of speak to both sides on the competition a little bit.
Yes, I'll speak on the deposit side, I mean in general and our competitors have been pretty rational.
One of the larger modules that have it.
You can place daily through rational competitors.
Entering our market not really seen a lot.
On the deposit side, obviously, there are some customers just looking at.
At the Treasury market, if they can get enough to announce 3% on <unk>.
That's a different type of discussion, but from the banks in general pretty rational.
And on the loan side, we're really not.
<unk> not seen a lot of pushback.
We're winning deals with the rates that.
Our rack rates.
We're looking at that daily if not weekly.
And.
And so the pushback has not been their activity has been robust. So I think everything is pretty rational.
And.
If pricing gets Ottawa.
We're not following.
The market down so.
We are very disciplined on pricing.
I appreciate the color. Thank you.
Thank you.
There are no further questions registered at this time, so I'd like to pass the call back over to Kevin O'connor for closing remarks.
Well I just want to thank everybody for your interest in the company, taking the time to participate today.
The question and answer in the dialogue back and forth and everybody have a great weekend.
This concludes today's conference call. Thank you for your participation you may now disconnect your lines.
Okay.