Dime Community Bancshares, Inc. (DCOM) Q1 2021 Earnings Report, Transcript and Summary

Good morning, and welcome the Dime Community Bancshares First Quarter Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. Now, I'd like to turn the call over to Mr. Kevin O'Connor, CEO of Dime Community. Please go ahead.

Thank you, operator. Welcome to Dime Communities' first quarter earnings call. We thank everyone for joining us this morning. On the call today with me are Stu Lubow, our President and Chief Operating Officer; Avi Reddy, our CFO; and John McCaffery, our Chief Risk Officer. In my remarks, I'll make some enterprisewide comments about our recently completed merger, provide some key accomplishments and the progress made during the first quarter on the business front. Avi will then provide some details on the quarter, some forward guidance and the target we're managing to. I'll them summarize what I believe on the investment highlights of the new Dime and leave time at the end for questions. First let's start with the merger. As you may recall, we announced the merger transaction on July 1, 2020. We closed the transaction on February 1 this year and on April 17, successfully completed our core systems, integration and conversion. When we announced the merger, several investors asked why now in the middle of a pandemic. At the time, my answer was given the tremendous opportunities to move our organization to the next level, we needed to strike now. Our staff has proved me right. They worked countless hours throughout the pandemic and got the job done on schedule and flawlessly. They forged the new Dime culture, putting aside legacy issues and making the customer our number one priority. This gives me tremendous confidence we are running the mantle of New York's premier community bank. On behalf of our Board of Directors and management, I again want to thank our staff, many of whom are listening to this call for their tremendous dedication, effort, and a job well done. Ultimately, our business is about growing clients and winning new relationships, and throughout the integration process we continue to see client growth, first on the PPP funds. We were again the leading community bank on Long Island with approximately $575 million of newly originated PPP loans. As we've outlined in the press release, this provides us approximately $24 million of deferred fees to recognize or what I'd like to think a $0.40 per share of hidden book value. In addition to our PPP success, we've been able to grow deposits by over $800 million since the closing of our merger on February 1st. Our increased market share, brand appeal, and the coverage of the entire Greater Long Island marketplace positions us to be bank of choice to small and mid-sized businesses in our footprint. As Stu and I put together our business plan for this year, one thing really resonated, the clarity of thought in our mission. We are a business focused community bank driven to being responsive to our customers' needs. One measurement of this success is the progress we made on improving the profile of our balance sheet. When we announced our merger, pro forma DBA was 24% of deposits. In the last nine plus months, we have grown this to 32% and we're confident over a three-year timeframe, we'll drive that number to 40% of deposits. Additionally, when we announced this transaction, our loan-to-deposit ratio was almost 110%, and today that stands at 84% excluding PPP. Our reported results for the first quarter was a net loss of $23 million. Included within this loss were merger-related charges, the impact of balance sheet restructuring and the CECL related provision on the acquired loan portfolio. Adjusting for these items, core net income would have been a positive $32 million. While our back office was busy integrating systems, our frontline producers did not miss a beat. One of the key benefits of the merger was the minimal customer overlap between our franchises and our expanded capital base. This is allowing us to deepen relationships with our existing clients and to win new clients. In fact, our loan pipeline is approaching $1 billion. Moving to credit quality. Our non-performing loans, excluding PCD loans, are only 26% – 0.26%, excuse me, of total loans. The merger due diligence, integration and closing, we have done several third-party reviews of our portfolio and are comfortable with the strength of our credits and our loan loss coverage. Our deferrals are lower than our geographic peers at only 60 basis points of total loans, as importantly, within COVID-sensitive industries and hotels, restaurants and offices, we have very limited deferrals. As you would expect, upon crossing the $10 billion asset threshold, we have spent more time stress testing our portfolios. And the results of this stress testing indicates we have meaningful excess capital on the balance sheet, even under a severely adverse COVID scenario. In that regard, I'm pleased to announce our Board of Directors has approved the resumption of our share repurchase plan where we have 800,000 shares authorized. At this point, I'd like to turn the conference call over to our CFO, Avi Reddy, who will provide some additional color on our first quarter results.

Thank you, Kevin. Included in this quarter's results were the following one-time items: merger expenses and transaction costs of $38 million, balance sheet restructuring charges of approximately $18 million, which included swap termination and extinguishment of debt and the provision for acquired non-PCD loans of approximately $20 million. We were able to migrate our cost of deposits lower to the tune of 25 basis points in the first quarter. The current spot rate on deposits is even lower and we have an opportunity in the CD book to continue to reprice lower. As outlined in the press release, we have approximately $550 million of CDs at a weighted average rate of 84 basis points, which I am ensuring in the second quarter of 2021. Repricing these CDs at lower rates provides us confidence that we can maintain relative stability in our NIM. The reported NIM for the quarter was 3.14%, while the adjusted NIM was 3.26%. To provide clarity for investors, we've provided details on the impact of purchase accounting and PPP. The presence of PPP loans is quite additive to interest income in the amount of approximately $5 million was delivered to our core NIM by approximately 17 basis points. Purchase accounting accretion on loans contributed approximately 5 basis points to the margin. We expect $1 million of purchase accounting accretion on loans to be a fairly reasonable run rate for the next couple of quarters. With respect to PPP, we have $4 million of remaining unrecognized fees that are associated with 2020 originations, who's balances are $885 million currently. We expect these loans to be forgiven or payoff and the income recognized between now and the middle of next year as these were effectively two-year maturity loans. With respect to the tranche of loans originated in 2021, which has $20 million of unrecognized fees, we expect the amortization on the income on these loans to come in over the course of the five-year term subject to forgiveness and payoff over time. We ended the first quarter with strong capital levels. Our tangible equity to tangible assets ratio, excluding PPP, was 8.8%. Given our low risk profile and simple business model, we are very comfortable operating the bank at an 8.5% tangible equity ratio, excluding PPP. As Kevin mentioned, we will be resuming our share repurchase plan as soon as our blackout periods ends. We currently have approximately 800,000 shares remaining. We expect to be in the market as soon as possible and complete this plan as quickly as we can. We definitely see significant value on our stock, given our trading levels, earnings trajectory and balance sheet profile. Given that our quarterly results included one-month of standalone legacy Dime and two months of the combined, we have also provided a table in the earnings release with the two months ended March 31st combined pre-provision net revenue, which on an adjusted basis was $34 million. This should provide a glimpse into the go-forward earnings power of the company. Next I will turn to guidance and target. As you well know by now, we don't provide quantitative quarterly NIM guidance. I will say though that we continue to drive our deposit costs lower and expect to reduce our cost of deposits from 25 basis points to below 20 basis points as the year progresses. This will allow us to maintain our core NIM in a range between 320 and 330 over the course of the next 12 months. As you know, we just completed our core conversion in the second quarter with ancillary system conversions expected over the course of this year. As such, by the fourth quarter of this year, we are driving towards an annualized run rate on core cash non-interest expenses of approximately $195 million, which we expect to hold relatively flat into 2022. We expect our run rate annualized fee income will trend towards approximately $35 million to $36 million. This is inclusive of the full impact of the Durbin Amendment. Given the current shape of the swap curve, we are increasingly seeing customers gravitate away from swap products toward fixed-rate loans, and as such, have incorporated that development into the fee income guidance. Next, I'd like to touch briefly upon two enterprise-wide goals. Our first goal is growing DDA to approximately 40% in a three-year timeframe. The second equally important goal is managing the bank within an efficiency ratio range of 47% to 50% over the near-to-medium term. All of our decisions at the enterprise level are centered around these two key goals. Operating at these efficiency ratios and producing stable risk-adjusted margin across various economic and interest rate cycles should result in an ROE over a 12-month time horizon of approximately 110 basis points. Our medium-to-longer-term goal is to drive the ROE to 125, which is the next profitability milestone in front of us. Having just crossed the $10 billion asset threshold, we believe we have the infrastructure in place for a larger organization. And as such, any marginal growth in the coming years, both on an organic and inorganic basis will be accretive to our ROE. In terms of overall balance sheet growth, we expect to grow core loans excluding PPP by approximately 6% on an annualized basis. This is inclusive of having the multifamily loan balances trend down over time as we focus on only the most profitable risk-adjusted relationships. Finally, with respect to the effective tax rate for the remainder of 2021, we expect it to be approximately 27%. With that, I'll turn the call back to Kevin.

Thank you, Avi. Before we open the call for questions and since we haven't been on the road with investors given the merger and conversion, I thought I'd take a moment to remind what we believe makes our story unique and compelling. We believe we've created a bank with the number one market share among community banks. We have strong brand appeal and a highly desirable footprint in a market with significant wealth and business density. We have significant scarcity value. Our merger has created a bank that hasn't existed on Long Island since North Fork was acquired. We're a locally managed $13 billion bank with in excess of $1 billion of capital. This provides the scale and opportunity to win credits where larger banks are slow to respond and the smaller banks on the size capital products to deliver. We have unique and best-in-class deposit franchise with 32% DDA to grow to 40%. We have a highly responsive simple customer-focused business model as we demonstrated by our performance in PPP. Finally, with the successful execution of the merger of equal transactions, we have validated our ability to get the job done and our credibility with the regulators. A last point to note, there have been two significant M&A transactions announced where the acquirers are not headquartered in our immediate footprint. Stu and I both believe over time this presents opportunities for the new Dime. We are open for business and ready to leverage these opportunities. With that, we can turn the call over for questions.

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

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

Good morning, Mark.

Avi, just wanted to clarify a couple of points you made. Did you say that for expenses you expect sort of run rate expenses to be around $195 million for this year, excluding, obviously charges.

No, Mark, the guidance there is by the fourth quarter of this year we should be in $195 million run rate. Obviously, we disclosed the merger right now. There is a few merger charges that may come through in the second quarter as well, but the guidance was we're driving towards $195 million annual run rate by the fourth quarter and expectable that pretty steady into 2022.

Okay, great. And then secondly – and I know this is hard to answer because it depends upon loan growth and credit and such. But how do you think about sort of a normalized level of provisioning, maybe in 2Q or 3Q?

Mark, so right now the provision, Mark, and the result just reflects everything that we know based on the economic conditions that are at hand. And so really it's going to be a function of how the economic forecast changes going forward. Obviously, there was a big change in some of the Moody's unemployment rates from Jan 1st until now. Obviously with some stability in those forecast coming in, it should really be based on loan growth and the mix shift over time. So we believe the result at around 112 basis points, I think, excluding PPP, very strong reserve level compared to our peers. We feel pretty good given the last content we have is stress testing that we have done. So very comfortable on the results should just be based on the growth of the portfolio going forward.

Okay. And then can you kind of update us on the timing of the recognition of the cost synergies. I know you just completed the systems conversion recently, but what is sort of the extraction of those synergies look like this year?

Yes. So the $195 million Mark, that's with the full synergies by the fourth quarter of this year. If you remember when we announced the transaction, we had mentioned that it'd be phased in, in 2021. We're on track at this point. Obviously, with the conversion, some ancillary system conversion is going on the dealers, right-sizing our expense base, but, - for everything to be 100% in there.

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

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

Okay. And then Kevin, I'm curious, could you talk a little bit about the synergies that you're finding on the revenue side where the opportunities are being created, where those might be coming from?

Well, obviously, we've had a lot of customers that we didn't have the branch network to service. As the branch networks expanded, we have been able to do that. We've said in a number of loan committee meetings since we've been together where common relationships we've been able to grow. It has come from our treasury management products, basically had been sort of rolled out in some places that I think it created opportunities. The SBA business that we were strong at, Dime was strong at; I think we've been able to continue to leverage that with customers. And just the overall, the coordination between both of the teams has been incredibly gratifying. I mean, I've been on – we were actually back out seeing customers and have been on joint calls with some people from the Legacy Dime SBA Group with some of our lenders. So this is really working more. One of the things I'll just share with you too is interesting. We've got a lot of people still working from home, some of the frontline people as we try to figure out what the back-to-work thing is. In some ways it's worked out better because the people in the building has been focused on sort of the integration and consolidation and the people that have been out at home, they're separate from that and they are basically out there growing business. So it's worked out very well.

Got it. And Mark, as of LB1, on February 1st, we really made a concerted effort to make sure that the businesses – the customer-facing businesses we're really out and servicing their customers. And in fact, before we even closed and converted, we had switched to a single loan origination system and we're restructuring our lending teams and our retail organization, our private banking. So everyone really hit the ground running as far as that's concerned. The other thing that Kevin mentioned, we have over $1 billion in the pipeline. But what we've also seen and as we talked about at the announcement it was that we thought there'd be quite a bit of opportunity to do more business with customers that we both already have, but we were unable to continue to grow that range because of our capital size. And what is happening in just a short two, three months that were together is we're seeing significant opportunity to enhance those relationships.

Great. And then last question. It may be hard to kind of think about, but when do you think you could potentially do another acquisition? And what are the characteristics that you'd be looking for in future partners? Thank you.

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

Thank you.

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

Hey, good morning, guys, and congratulations again on the first quarter consolidated results.

Hey, Chris. Good morning.

Good morning. All right. So my first question is related to the paydown of FHLB borrowings. Avi, can you just give us an update on where your progress is and how much room you might have left?

Well, we're all done, Chris. Everything was done in the month of February and January. We try to present it clean balance sheet, clean income statement going forward. So everything is done. Right now, the whole FHLB portfolio is pretty short. We really view it as funding PPP loans. In the press release we mentioned that the spot rate on the FHLB borrowings is around 30 basis point to 35 basis points at the end of March. So everything is done.

Got it. Thank you. And then can you just remind us where we should expect the loan mix for Dime to be, specifically related to C&I? Will we see that 9% contribution in C&I climb through the next several quarters? Or do you have maybe a longer-term target?

Yes. I think longer-term, Chris, we obviously have multifamily loans that are 35% of the portfolio right now. We expect that over a two to three years timeframe, trend down to the 20% to 25% CAGR. C&I rates are obviously the line utilization is very valuable for us and across the industry. So as the utilization picks up, C&I growth will pick up. Once the active in that market we would like to grow that portfolio. Same on the owner-occupied side on the commercial real estate team. And now we have a residential business that we can spread across all of our branches. So it's going to be a mix between C&I and owner-occupied commercial real estate with multifamily trending down over time.

Okay. And then the deal seems to have created a more favorable liquidity position compared to the rest of the industry right now. So I guess with that said, do you feel the need to increase the contribution of the securities portfolio as a percent of earning assets?

No. We would like to be between 85% to 95% loan to deposit bank and as Stu and Kevin said we have a tremendous pipeline of loans. And over time, the earnings power of this franchise is going to be as PPP loans runoff, we're going to replace them with relationship-based loans and grow our margins. So we're not out here to make money with wholesale leverage book. Over a two to three-year timeframe, we prefer not to have any borrowings on the book, as Kevin already said and just have a core funded balance sheet, and we're going to get there over the course of two to three years.

Got it. And then just last question. The $4 million in PPP income does that include interest and fee income. And can you break out just the total PPP fees recognized in the quarter?

Yes. So the total interest income on PPP was around $5 million and around $2.5 million of that was from acceleration and forgiveness. If you remember, the legacy BNP PPP fees were recognized as part of course, the accounting. So that's not in the interest income that will be the part of the goodwill calculation. So around half and half in terms of income and forgiveness on the $5 million of income.

Got it. All right, thank you so much.

Thank you. And next question comes from Matthew Breese of Stephens, Inc. Please go ahead.

Hey, good morning. I wanted to go back to expenses, I'm having a tough time here. So if I look at Legacy Dime running at about $25 million in quarterly expenses and Bridge was in and around the same or similar level, and then take out the cost sales that were outlined at the time of deal announcement. I feel like I get to like a 175, kind of 180 run rate versus the 195 we're outlining by the end of the year today. Could you just help me understand whether there was less than expected cost saves or more than expected investment or just – help me kind of bridge the gap here a little bit?

Yes. So Matt, when I look at the quarter away that both companies have, so Legacy Dime in 2020, we were $99 million of core expenses, so that excluding all the one-time items and some of the larger charges and the other stuff that was in there. Legacy Bridge was $104 million for 2020. So, that goes to up, the number is $203 million. We were both growing our expense bases like the Dime was transforming its hiring people, some as Legacy Bridge. So you take that $203 million, you got it at 5% growth rate either all the teams and the other people we are hiring; you get to $225 million. And then we had announced that there was going to be $30 million of cost savings. So that's exactly the $195 million. So we put in the $195 million. We've put in – teams that we're going to hire, building out on risk management practices. It's a fully baked number. We're on target and we're going to get that at the end of this year.

Okay. I appreciate the explanation. Next one from me just on pipelines and loan growth; could you just talk a little bit about the different areas you're seeing strength in the pipeline, C&I, commercial real estate? And perhaps what does it tell you about kind of the local economy and where we are in the recovery process?

Yes, Matt, Stu. What we're seeing is significant opportunity in commercial real estate, some residential and multifamily construction outside of the boroughs in Long Island, in Northern New Jersey. C&I is active but not as active as some of the other sectors. I think, obviously you see is quite a bit of liquidity out there. Our customers have quite a bit of cash. Those that have had PPP have kind of put that on the side and use that as liquidity pay down the lines. So we're seeing about 12% reduction in line usage. But even with that, we're looking at 6% year-over-year growth with PPP forgiveness. So, there is a lot of activity we're seeing particularly Eastern and significant economic growth and opportunity. The residential market is very strong. We are not only on new purchases and refinances, but we're seeing opportunities to get involved with small subdivision, construction and permanent financing. So it's just generally a stronger and getting stronger economy.

I appreciate that. The other one I had was just now that the balance sheet is put together, how do you look in terms of a interest rate shift scenario, plus 100 basis points, plus 200 basis point? Could you give us a sense for the interest rate asset sensitive balance sheet neutral or liability sensitive and to what extent?

Yes, very slightly modestly asset sensitive at this point, Matt. The Legacy DMB balance sheet at December 31st were 100 basis point shift in rates was probably – interest rates was probably up 7% to 8%. The Legacy Dime balance sheet was probably 4% to 5% prior to the restructuring of the borrowings that we have. So net-net, to be fairly neutral in the first year with – in the second year it would be positive. So again, that's one of the reasons we visit transaction to manage the two institutions together. I think even more importantly, though, it's a system of being able DDA right, so we went from 24 to 32 with a plan to get some 32 to 40. I mean, with that on the balance sheet, is going to help you in any rate environment. So that's the key number that we're focusing on.

Okay. Then the last one for me just bigger picture, there's been now a ton of disruption in the Long Island markets, two big deals, big players in the midst of partnerships. How does that change the landscape for you? Does it change the timeframe in terms of where you were willing to put resources, to recruitment, hiring, now that you have two players that are tied up in deals and what do you think you can make out of it?

Of course, I think it's – both of our institution, certainly Bridge has been built – was built on the disruption in the market and I think the transformation of Dime took advantage of it also. This will create lots of opportunities to talk to good bankers, talk to customers that are a little afraid of on what's going to happen in the future. So that's why it's all – it's very important for us to be on the ground. Probably Stu and I spending more time talking with prospective bankers and sometimes customers. This is the thing that we look for. We look for the opportunities where customers are concerned. We sometimes as bankers, we think and we don't understand what it needs when their bank is acquired. They stay concerned and that's an opportunity for us to have the dialog, to follow-up on dialog that we might have had. So yes, this is the chance and so we are, that's why we wanted to make sure that we were done with the things that we needed to so that we can be looking extra.

I appreciate it. Very good. That's all I had. Thank you.

[Operator Instructions] Next question comes from William Wallace of Raymond James. Please go ahead.

Thanks, good morning guys. Quick question. Just point of clarification, I think I heard two different things. That loan growth target of 6%, that's – does that exclude PPP?

Yes, it excludes PPP, Wally.

Yes. If you guys had combined at 1231 [ph], would that core portfolio have grown this quarter?

Yes. So, year-to-date, the combined company has originated about $400 million to $450 million in new commercial loan originations. So you started the quarter – the year off pretty well in the quarter. As Kevin said, we have a $1 billion in pipeline, probably $250 million in underwriting and probably another $250 million just waiting to close. So we're excited about the opportunity. And now we're really to have a role together – systems together we're really start operating on those cylinders.

Okay, great, thanks. And then it sounds like there is some anticipation that the multifamily portfolio will, I'm assuming continue to decline. So I guess if I'm making that assumption and with the FHLB prepay, the commentary about the opportunity on repricing of some CDs and then with the loan balance or the loan mix shifting away from multifamily. I guess I was surprised that the net interest margin guide was it may be to have more bias for expansion. It seems like the guide is really anticipating kind of flattish margin, give or take. Is there really meaningful pricing pressure on the loan side that would give you less optimism that that margin couldn't expand from here?

So, Wally, in terms of the overall portfolio, the weighted average rate is around 318 on the overall portfolio. Right now, we're looking at loans – 3.5 to 3.58-ish. But then you also going to have run-off on the higher yielding piece of the portfolio. So even though multifamily comes down, you're going to have the higher yielding multifamily first pay off over time, right? And so I think as a result of that, we're being conservative, we're providing range. But again, my range is more in medium-term range of where we want to be as a company. In a particular quarter we may be up or down, but really think we should be able to operate this company at this range regardless of the interest rate environment, most importantly. I think you see a lot of banks in our footprint that you know are able to lower cost deposits when they come down, but with a swap. I think we're going to be the ones with a stable margins going forward.

Okay, and then Avi I noticed you took the prepayment penalty disclosure out of the release. Is that something that you don't think will have swings as much from quarter-to-quarter now with a bigger balance sheet?

Exactly. Wally, it was with a full exposure of the 4 basis points this quarter, it was pretty small. It's probably $800,000 to $900,000 of prepayment fees that came in. And obviously the legacy Dime income statement was a little volatile as a result of that. On an $11 million balance sheet in terms of growing the assets, it's not a bit number.

And then last question. This is just kind of maybe – maybe a stupid question, but there is a line item on the expense base for curtailment that you backed out of the operating base. What is that it makes it non-operating?

Yes that's just related to pension plan, Wallace. It's just the way pension accounting works and related to the transaction there was a termination of certain pension plan, so that won't continue going forward.

Okay, very helpful. Thank you very much. Appreciate the time.

This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Kevin O'Connor for any closing remarks.

Again, I appreciate everybody's patience and interest in our company. As we have said, I think multiple times today, we're excited about the prospects and we're really beginning to run this as one company, and look forward to a number of good conference calls as the year progresses. So have a great day.

Thank you.

Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.