Dime Community Bancshares, Inc. (DCOM) Q3 2022 Earnings Report, Transcript and Summary

Hello everyone. Welcome to the Dime Community Bancshares Incorporated Third Quarter Earnings Call. My name is Charlie and I will be your coordinator for the call today. 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 such statements including and set forth in today’s press release and the company filings with 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 be considered in isolation or as a substitute for the financial information prepared and presented in accordance with the U.S. GAAP. The information about these non-GAAP measures and for reconciliation to GAAP, please refer today’s earnings release. I will now hand over to your host Kevin O’Connor, Chief Executive Officer to begin. Kevin, please go ahead. Kevin O’Connor: Good morning. Thank you, Charlie, and thank you all for joining us this morning on our third quarter earnings call. With me again are Stu Lubow, our President and COO; and Avi Reddy, our CFO. We’re proud to report this was another strong quarter for Dime Community Bank. We generated net income of almost $38 million, or EPS at $0.98 a share an increase on both a link quarter basis and year-over-year. This success was the result of another impressive quarter of strong net loan growth, expanding margins and prudent cost control. Our results further illustrate our execution capabilities and the quality and structure of our balance sheet in a rising rate environment. I have to again give full credit to each of our 800 plus employees on delivering record loan growth and 10% year-over-year EPS growth. Capitalizing on the strong wide long pipelines we’ve discussed on prior calls we grew net loans in excess of $450 million. Loan growth this quarter was weighted towards multifamily and asset class that has performed extremely well for us over many credit cycles. The quality of origination remains strong. in the face of an uncertain economic environment. As we begin putting together our budgets for 2023 and beyond I am confident our team will continue servicing and growing our loan portfolio. Over the past year, we bolstered Dime by hires of revenue producers and support staff from banks and our footprint impacted by merger transactions. Stu, I’m sure will provide more color on this as well as our current pipeline and then mixed in the Q&A. Apart from strong long growth, we continue to execute well on each of our strategic plan priorities, managing our cost of funds and prioritizing NIM expansion, prudently managing expenses, and as always maintaining solid asset quality. Our Q3 deposit costs were only 23 basis points as we continue to outperform the industry and certainly our metro New York City competitors. Our cumulative total deposit data for cycle today tightening has been approximately 10%. Our relatively lower betas have been driven by the significant level of non interest bearing deposits on a balance sheet. This remains the clear differentiator for other community banks and our footprint. While many banks across the country witness notable declines in DDA deposits this quarter, we were able to keep balances fairly stable. The improvement in our loan yields more than offset the increase in deposit costs and contributed to link quarter margin expansion. Our core efficiency ratio this quarter was 44% and on a year-to-date basis, we’ve operated approximately 47% well within our stated goal of operating at some 50% regardless of the prevailing environment. Asset quality remains very strong with NPAs representing only 34 basis points of total assets. Avi will provide some detail on the loan loss provisioning in his comments. Suffice to say we feel very comfortable with the level of reserves and the overall health of our balance sheet. Thus far, we have not seen any meaningful early warning indicators of credit deterioration. As you know, Dime’s credit losses have been well below the bank index over multiple cycles. Underpinning our strong historical credit performance has been our bulletproof multifamily portfolio that comes through every cycle unscathed including the pandemic induced shutdown of New York City. The LTV on this portfolio representing 39% of our entire loan portfolio is less than 60%. We continue to believe this portfolio outperform in any recessionary environment. Turning to capital. We continue to repurchase shares in the third quarter while still supporting significant balance sheet growth. Similar to the rest of the banking industry, rising rates did impact the fair value of our AFS portfolio contributing to a $23 million decline at AOCI. Despite this tangible book value per share increased $0.14 this quarter. regulatory capital ratios remain strong as our tier one leverage stood at a healthy 861 for the third quarter. As we said before, our low risk balance sheet performs favorably and stress testing relative to the industry, providing us with the opportunity to grow our balance sheet and be active on the capital return front. To conclude my prepared remarks, we had a strong quarter. Our balance sheet is well positioned to produce strong returns in any economic environment as evidenced by our quarterly and year-to-date, ROAs of over 1.2% and this quarters return on tangible equity over 17%. The quarter’s results and momentum make me even more excited for Dime’s future. We are delivering on the opportunities in front of us as a true community commercial bank, highly focused on being responsive to market conditions and our customers’ needs. As you can expect, we’re well underway in our annual budgeting process and look forward to sharing our 2023 outlook with you on our next call in January. At this point, I’d like to turn the conference call over to Avi who provides some additional color on our quarterly results.

Thank you, Kevin. Our reported net income to common for the third quarter was $37.7 million. Excluding the impact of gain on sale of a branch property adjusted net income to common would have been 36.7 or $0.95 per share. The reported NIM and the adjusted NIM for the quarter were 338. This represents approximately nine basis points of linked quarter margin expansion. A couple of housekeeping items. Net accredible balance from purchase accounting currently stands at approximately 1.8 million while purchase accounting equation was fairly immaterial this quarter as mentioned previously, there could be lingering impacts on the income statement in future periods depending on payoff activity on premium and discount loans. Included in the 338 margin for this quarter was three basis points or prepayment related income. Given the significant increase in market interest rates, we expect prepayment fees to dry up in the quarters ahead. We grew average deposits by over 300 million in the quarter while keeping our costs and deposits relatively well controlled. The average cost of deposits increased by only 23 basis points compared to the second quarter. The spot rate on deposits at quarter end was approximately 47 basis points. We are again pleased with our deposit beta significantly lagging the level of Fed Funds increases in the third quarter. That said given the rapid pace of rate increases, we do expect deposit betas to increase from the low level seen cycle a day. Offsetting future increases in deposit costs is the re-pricing opportunity on our loan portfolio. As you’d expect, given the current interest rate environment, we continue to proactively manage our loan pricing. The rate on our total pipeline is approximately 525 and new additions to the pipeline on the high 5% to low 6% area. This is significantly higher than our existing loan portfolio rate of 4.33%. While there will be a lingering impact of deposit costs catch up even after the Fed stops hiking. The medium to longer term opportunity for us is to re-price our loan portfolio at new origination rates, which are approximately 150 and 200 basis points above the overall portfolio rate. Moving over to expenses. Core cash operating expenses excluding intangible amortization for the third quarter came in at $47.9 million. Annualized expenses on a year-to-date basis have been below our expense guidance for the full year 2022. We remain highly focused on expense discipline while making necessary investments in our franchise and have built this into our culture on a very granular level. Non-interest income for the second quarter was approximately 9.4 million. Included in non-interest income was 1.4 million from the sale of a branch property. Of note we expect revenue from the back to back loans for our program to pick up in the fourth quarter compared to third quarter level. I would also note that this quarter was the first time the company was subjected to the Durbin amendment cap on interchange income which reduced our interchange fees by approximately $600,000 for the quarter. This is the final material headwind we face from crossing the 10 billion asset regulatory session. Moving on to credit quality. Our provision for the quarter was $6.5 million. The provision for the quarter was primarily due to a change in Moody’s economic forecast and drive our loan loss reserve models. In addition, we have strong loan growth in the quarter of over $450 million. Needless to say, we are comfortable with the level of reserves on our balance sheet. Our existing allowance for credit losses of 81 basis points is still above the historical pre-pandemic combined levels of the legacy institutions. During the third quarter, we bought back approximately 200,000 shares at $30.97. We believe share repurchases continue to be attractive given our current trading levels. With that said growing our balance sheet and supporting loan growth and our clients are the first and best use of our capital place. As a reminder, our balance sheet performed very favorably under stress testing and provides us ample flexibility to continue growing the balance sheet and returning capital to shareholders. We will continue to manage our balance sheet efficiently and our tangible equity ratio of 770 including the full impact of AOCI, and 836 excluding the impact of AOCI is within our comfort zone. To conclude, we look forward to ending the year strong and providing you our thoughts on 2023 during our earnings call in January. With that, I’ll turn the call back to Charlie for questions.

Thank you. Our first question comes from Mark Fitzgibbon of Piper Sandler. Mark, your line is open. Please proceed.

Just to clarify, I missed what you had said about the pipeline. Did you say how large the pipeline is currently?

Hi Mark. It’s Stu. The pipeline today is $1.8 billion. Still very robust. The average yield, weighted average rate on that pipeline is about 528. And it’s really quite diversified at this point. Probably the largest portion of that is C&I 425 million, our owner occupied CRE has grown to 365 and again, getting back to the weighted average rates on the C&I portfolio, you have a weighted average rate of 610. CRE portfolio is at about 5% on the owner occupied. So we’re really moving away from multifamily and total multifamily pipeline at this point is about $300 million with only $170 million in new application and the weighted average rate and as about 520. And our rate today on multifamily is about 638. We’re really kind of cycling and rotating sectors now that we have a very strong C&I group and all our teams in place and our plan is really keep multifamily relatively flat as previous guy had done and really focused on growing the other sectors. We think the multifamily portfolio is a very strong risk adjusted asset. But we do have other opportunities to really grow the C&I book, which is a floating rate portfolio, and also provides us with more deposit balances. So still very strong and overall very pleased with how the first how the fourth quarter has started in the first month. And we expect a very strong fourth quarter.

And then secondly, Avi, could you share with us the term and rate on that 520 million in Federal Home Loan Bank advances you guys booked this quarter?

Yes. So Mark the way our FHLB portfolio structure is austere is this around 600 million and un-booked. 150 million of that is longer term with five to six year duration. The cost on that is around 80 basis points. We’d locked that in upfront. The remainder is really overnight to one month on the FHLB side. We kind of use that as a asset liability management tool in terms of making sure we get the outcomes that we want. So, at the moment it’s fairly shot down the FHLB book.

And I think you said, deposit betas thus far been around 10%. When you do your modeling, for the full cycle, what are you assuming for a deposit beta?

Yes. So Mark, the way most models work is they kind of base it on what historical experience was, and so you go back and look at, both legacy companies and do a blended beta we all know, somewhere between 28% and 30%. I think that being said, if you go back in time, and look at the first 250, 300 basis points and rate hikes in the past we’ve completely outperformed this cycle, so far with having only a 10% beta. So the simulations, you’ve seen our 10-Q are probably closer to 30%. In reality, I think we’ve said our guidance was around 45% cumulative, total deposit beta through the cycle and we’re reasonably comfortable with that at this point. Obviously, rates are up a lot more than when we started giving the guidance initially, but I think we’re still sticking with that 25% total deposit beta over the cycle at this point.

And lastly, I heard your comments about the common equity ratio, but optically, it does start to look a little light, if you’re growing fast and buying back stock. I guess, I’m curious, how long would you be willing to take that?

Yes. We don’t, we don’t really look at that Mark, in terms of internal budgeting process. So we really based on capital are done on stress testing and portfolio, honestly it’s as strong as it’s ever been. The first and best use of capital as always growing the balance sheet. So, to the extent we have double digit loan growth. We’ll do a little bit less on the buyback but earning a return on assets of 125 as Kevin said high teens return on tangible equity, there’s going to be a lot of capital to do a lot of good things with that. And we continue to believe the stock is very cheap at these levels. And given our earnings profile. So I think the other part of our capital structure is we do have preferred and our capital structure, the way we do think about it is that tangible equities 770 and even with the AOIC impact, and that’s very healthy, when you look at us compared to the industry.

And, Avi I know, you don’t like to give margin guidance, but should we assume that based upon what you all see the margin should sort of slowly rise from here with re-mixing and re-pricing?

Yes. I think we’ve been very happy so far Mark with how we’ve performed. I think we’ve always said we’re a moderately asset sensitive bank. You go back the last two or three quarters the margins are 5 basis points, 10 basis points. We got 20% to 25% of our balance sheets, floating rate loans, obviously when the Fed re-prices those are going to go up immediately. So look, I mean, we’re happy with how we’ve done so far. Again, the opportunities really re-pricing the whole loan portfolio and again, I point you to our e-disclosures in our in our 10-Q, which really takes into account the full re-pricing of the whole portfolio, just cash flows of assets and liabilities, and you go to the start of the year, or EVE disclosure was the economic value of equity was around 1.2 billion back then. In our latest 10-Q, it’s somewhere between 1.7 billion and 1.8 million. So we feel like we’ve created on $500 million of franchise value by keeping deposit costs as low as we can. So, obviously, we’re monitoring competition, but we’re very happy with where the NIM is. And again, as Kevin said, our balance sheets really set up to perform well, in any rate environment, really. Thank you. Our next question comes from Matthew Breese of Stephens. Matthew, your line is open. Please proceed.

A few questions. Maybe first could you just talk a little bit about I don’t know if I saw it, the prepayment penalty income for the quarter? And then how, in this rate environment, how the duration on multifamily commercial real estate has changed? Just curious what the assumed duration on that book is now? Kevin O’Connor: Yes, so I mean, at this point, Matt, the prepayment fees are really dropped to historical lows level. I mean, I think in the last month, we were down to about 4% on an annualized basis. I mean, June or July, we’re in 20%, excuse me in July and August we were 20%. So I mean, as expected with as rates have gone up, and the market has really moved. In terms of multifamily book prepayments re-financings have dried up purchase transactions are on the wane. So and we expected that. So our view going forward is we’re not expecting over the next 12 months, a lot of prepayment fee incomes. The duration, what we are seeing is a lot of our book is re-pricing at the contractual amount. Most of our deals were five plus five and they re-price it 250 to 275 over the corresponding treasury. And a lot of those are re-pricing. The cash out market is really dried up to some degree. The good news is our average LTV on our portfolios about 59% and it’s a very strong and seasoned portfolio. So that’s we’re really where we are on prepayments and what our expectations for the next 12 months are a very limited in terms of prepayment fees.

Got it. And then just thinking about on the reset and as loans kind of go from rates we saw in 2017, 2018 into the 5% or 6% range now, particularly for rent regulated multifamily, which hasn’t been able to see the rent increases of the market rate apartments. Have you seen any stress? Or can you give us some color on debt service coverage ratios on those loan resets? Kevin O’Connor: Yes. So our average debt service coverage ratios are about 1.5% on our multifamily book, which is as I said about 58%, 59% LTV. So from that perspective, we have not seen any stress or delinquencies or probably at all time lows in our portfolio. So we really have not seen any stress here. In terms of underwriting even going back several years when the whole rent control issue became materialized in terms of New York City rent control increases, we had, at Dime had increased our debt service coverage ratio requirements going back because we expected that landlords were going to have a hard time raising rent, subsequent to that and in the recent past, obviously rents have the rent stabilization board have allowed landlords to increase rates. So that has actually helped. But at this point we have not seen any stress in our portfolio. And going back in time as I said, we have taken steps to really be a little more rigorous in terms of requiring higher levels of debt service coverage in terms of new originations going back 2, 3, 4 years ago, and that’s proving to be the right decision now.

Matt, the other thing I’d say, obviously, you can look at asset quality. I mean, so far there’s really nothing in the multifamily book that’s over 60 days past due. The other thing that I would add is back in 2018 so those are the loans that are resetting in 2023 but that’s the time legacy Dime moved away a bit from the multifamily market to remake the whole balance sheet. So we only have around $350 million to $400 million of those loans that are re-pricing next year. So it’s a smaller piece of our overall portfolio. We’ve done a lot of originations in the last year, obviously, and those loans are not going to reset for another five years. And those are very strong DSCR ratios going into this and we had the hindsight of the pandemic. So we have a lot of reserves and things like that associated with individual loans when we make them six months of coverage, things like that. So we feel very comfortable overall.

I appreciate all the color there. Maybe going back to loan growth. I don’t have it at my fingertips, but the $1.8 billion pipeline does that support the kind of growth that we’ve seen over the last couple quarters call it double digits, to say the least? And then within that just thinking about some of the components two areas have been surprised by in terms of strength has been revenue growth which has been higher than we’ve seen over the last year or two, and then multifamily as well. I am just curious, overall loan growth and then those two portfolios in particular? Kevin O’Connor: Yes. I think overall loan growth in the near term will sustain. Look if you go back to midsummer, I think our pipeline was about $2.9 billion. Now not all of those deals come to fruition and make it through to a closing, but so the overall total pipeline is down as expected given the current rate environment. But I think in the near term we expect to sustain that growth. Over the longer term, as I said earlier, we don’t expect to see the growth in multifamily. We’re really kind of rotating sectors and looking more towards the C&I book where we have really increased our population, our teams in terms of relationship managers, and our opportunities. And as far as the residential portfolio, we were basically doing 10 million a month. It’s really solid a paper residential arms. The average yield or weighted average rate on that is in the fives right now. So it’s a good asset. We have no delinquencies a paper and we expect that to continue. And that’s really all purchase paper obviously, the refinance market is really dried up. And it’s for the most part, non-conforming, because the Fannie Mae fixed rate market, we sell our Fannie and Freddie fixed rate product into the secondary market, but that’s really slow down. So it’s rotated into portfolio arms. And we expect that to remain constant over the coming year.

Yes. Matt. I think both those asset classes or web payoffs have slowed more than the relationship based portfolio. I mean, just on regular multifamily and residential. So it is natural that you’re going to see some additional growth there when payoff slow down.

And then, Avi, just think about the other asset components here. Securities were down a little bit this quarter, a little less than last quarter, but I just wanted to get a sense for how much you’re thinking about using securities, cash flows to go into loans, and we should expect kind of a similar pace of decrease in the securities portfolio going forward.

Yes, I mean, I look, I mean, we did purchase some securities in Q3. I think we’re always opportunistic around the security portfolio meaning we’re like managing the balance sheet with having around 8% to 10% in liquid assets that are not encumbered. So 2023, we probably have $125 million of cash flows from the securities portfolio. But really 2024 and 2025 are the big yields for us because we did when we sold out PPP loans last year, we put that into three and four year treasuries, and that’s all coming due. So looking at in the near term we feel like yields are attractive on the securities portfolio. We may look to purchase some towards the end of the year in the next year, because at some point rates go back down everybody’s then going to be buying at a much lower yield. So I think we feel very comfortable from the liquidity side. At the end of the day, we want to support long growth and we want to manage our deposit costs. So it’s kind of a dynamic moving target over time.

Our next question comes from Chris O’Connell of KBW. Chris, your line is open. Please proceed. Chris O’Connell: I want to start off circling back to the multifamily discussion. I hear you on a long term growth becoming more flat. But in the near term, I mean, that’s continued to be a pretty strong driver. I mean, so far this year, it’s the strongest category and it sounds like a decent pipeline and prepays fall into near zero. I hear that it could continue to be a good driver for the next couple of quarters.

We really control that. Multifamily is really a commodity price product. And so we’ve determined, given our pipeline, the size of the pipeline, and the ability to diversify and focus a little bit more on higher yielding relationship type businesses, particularly in the C&I world, that our pipeline can certainly support growth the kind of growth we’ve had over the last several quarters and just be in a maintenance road on the multifamily side. Certainly it’s elastic. It’s price dependent. And if we determined that we want to move in that direction, we certainly have the ability to move pricing slightly and move origination growth significantly. So for us we really are focusing on a relationship based businesses like C&I, like owner occupied CRE that come with balances and total relationships. And multifamily tends to be more of a transaction. Good business, good risk adjusted business, good credit. But we think this is the right time to kind of slow that part of business down and move towards the other relationship based businesses because we have the ability to do significant amounts not and those other sectors. Chris O’Connell: And with the multifamily that’s on the portfolio that will be coming off call it over the next 12 months or so even balance is flat what’s the spread in terms of what’s falling off, into what it’s re-pricing into? Kevin O’Connor: So what’s coming off is that in the 375 range, and what’s coming on, is in the mid five range. So there is a net pickup in terms of margin in that business. Chris O’Connell: And switching gears to deposit side. Great flows this quarter in terms of product mix as you are moving forward here rising rate cycle. Are you starting to do a little bit more in terms of the CDs and money market? Are you running any, like specials there? Or kind of strictly focused on the quarter deposit growth?

Yes, Chris. So we did a small special in the second quarter just to test out our capabilities. It’s very successful. We raised around 200 million, pretty quickly then. I think the one point that maybe gets lost in our deposit numbers, because we don’t have the breakouts in our press release. But we have grown business deposits by $200 million on a year-to-date basis. And we’ve grown municipal, probably by 100 to 150. We’ve seen some outflows on the consumer side, a lot of it managed where we’ve allowed higher cost CDs or higher cost money markets to leave the bank. So, look, we may go back into the market at some point to replace some of those lost consumer deposits, but I think underlying everything here is growing business deposits, and the consumer book is going to reach a stability point, regardless, at some point it’s probably down to 30% of our overall base. When we put the two companies together, we’re probably closer to 40% to 45%. So, I think in the near term, sure, you could see some additional CDs on the balance sheet. I think in the medium to longer term, it’s to said growing, seeing a growing owner occupied, it’s really about growing business deposits and keeping our overall beta is pretty low. Chris O’Connell: And on the credit side, just hoping you can give a little color around the drivers of net charge offs this quarter. Just any update in terms of any pockets of concern that you’re seeing in the market, you mentioned pipeline pretty well diversified. And I guess anything that you’re seeing kind of in the local economy that you’re trying to stay away from?

Yes. Nothing is concerned, Chris. I mean, the charges are 15 basis points or so pretty low. There was a couple of operational items with the people with one or two PPP loans that we had. So it wasn’t really part of the core portfolio. We just did a cleanup this quarter and moved on the balances on our PPP portfolios is down to less than $10 million. So really a bit of cleanup, but nothing that we’re seeing overall. Our classified assets. And you’ll see this in our 10-Q disclosure that’s coming out next month. We started the year with a relatively higher level of classified assets than a lot of peers because we believe we did the right thing in terms of classifying some of the assets during the pandemic, because they were not cash flowing when a lot of peers just put them into watch. We’ve actually seen around a $300 million decline in our classified assets year-to-date. And so we’re really not seeing any specific areas at this point. And your credit is pretty good. Our stress testing is probably producing better results now than they were three and six months back. So not really seeing anything on this point. Chris O’Connell: And then on the opening comments, I think I’m going to miss it. But did you say, did you change the expense guide for the year? Because I think you’re running under touch below?

No, I think we just said, we’re happy with where we are and we’re running below the guidance for the year. We generally provide annual guidance and look this year, I think we’re going to beat the guidance, and we’re happy with that. So we’ll just see what Q4 ends up.

Thank you, Chris. Our next question comes from Manuel Navas of D.A. Davidson. Manuel, your line is open. Please proceed.

Just wanted to follow up on thinking about the NIM trajectory. With kind of the longer term re-pricing opportunity, would you see the NIM kind of flat stabilized when the Fed stops raising rates or kind of still be able to keep going? If we assume the Fed raises rates and stops could you still have some further NIM expansion?

Yes. Manuel, we don’t really give trajectory guidance in the longer term. I think what we’d say is, look, we’re moderately asset sensitive bank. We are happy with the performance so far. I think like everybody else when the Fed stops there’s always a catch up in deposits cost, but that happens every cycle for every bank that’s out there. But that being said we’ve set the balance sheet up to and great environment. And I think we guided to getting to a 1.5 ROA. We’re pretty much there at this point slightly below. But it’s really growing the balance sheets, servicing our customers and producing the right returns. I think we’re all comfortable. We’re going to work on making sure our deposit costs continue to lag the peer group. And I think that that’s the focus for all of us over here.

I appreciate that. Just, I might have missed this on the end of period basis for deposits, what kind of drove the slight decline? I know, you were up on an average basis on the end of period to fully fund long growth with deposits. Just a follow up.

Yes, I mean, the only tough customers at the end of the quarter, sometimes they come in pull balances. And then at the end of the day, as you know, average balances are what drives the income statement. So we’re more focused on that. Look I think in terms of a loan to deposit ratio, we’re running at 96%, 97% right now. We’re comfortable, where we’re at. It’s all about supporting our customers, and we’d ideally like to fund it 100%, with core departments. So that’s always the plan.

Thank you. At this time, we currently have no further questions. So I will hand back over to Kevin O’Connor and the team for any closing remarks. Kevin O’Connor: Thank you, everybody. I appreciate your interest in Dime. I think hopefully, from the presentations we’ve made in the way we have answered the questions we’re pretty optimistic about the future for us and I look forward to and if there’s anything specific that has not been answered please give Avi a call. So have a great day. Thank you.

Ladies and gentlemen this concludes today’s call. thank you for joining. You may now disconnect your lines.