Dime Community Bancshares Inc
NASDAQ:DCOM
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Dime Community Bancshares Inc
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Hello. And welcome to the Dime Community Bancshares, Inc. First Quarter Earnings Call.
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 Kevin O’Connor, Chief Executive Officer to begin. Kevin, please go
Good morning. Thank you, Lauren. And thank you all for joining us this morning. With me are Stu Lubow, our President and Chief Operating Officer, and Avi Reddy, our CFO. I am pleased to report another strong quarter of returns for Dime, as well as provide positive comments on deposits and loans. This despite the Fed's unprecedented activities and the connected events of March. This further reflects the power of our plain-vanilla community bank model and the franchise we've created on Greater Long Island. It's certainly not an overstatement to say we're operating unique and challenging environment for the industry.
As those of you who follow Dime know, we do not have any of the concentrations that got the failed banks and others in trouble. We also don't have a large book of securities and don't take rate risk in that portfolio. These facts, coupled with our rock solid multifamily portfolio provide us with the confidence we will outperform in any potential recessionary environment. For the record, we have zero multifamily loans that are greater than 60 days delinquent and the LTV on that portfolio is in the mid-50. Finally, Dime's credit losses have been well below the bank index over multiple cycles and we're extremely proud of our track record. Similar to the rest of the banking industry, we took steps in the first quarter to add to our on balance sheet liquidity. Also, as you would expect, we reached out to our client base reminding them of Dime's strong track record, our simple plain-vanilla business model, and our strong relationship based mindset. These conversations had their tended impact and were pleased, despite significant market turbulence, to report our deposits, excluding brokered, were up approximately $15 million versus year end.
Additionally, to enhance our on balance sheet liquidity, we added approximately $300 million of broker deposits in the month of March. Our deposit base is diversified and granular and again remain resilient throughout the quarter. Today consumer deposits represent 33% of the total, collateralized and insured municipal deposits at 20%, with commercial deposits representing the remainder. Within this commercial book, we do not have any significant industry concentrations. Our cumulative deposit beta for this tightening cycle has been approximately 30% and compares favorably to our metro New York competitors. This relatively lower beta continues to be positively impacted by our significant level of noninterest bearing deposits. At 32% of average total deposits, this remains a clear differentiator for Dime versus other community banks in our footprint. As metro New York has been a more competitive market for deposit gathering while affording more stable asset quality performance than other parts of the country. While there has been a significant focus on balance sheet metrics, insured deposits and liquidity, we were also able to deliver a core return on assets of 114 basis points this quarter. It is important to note this marks the 8th consecutive quarter dating back to the closing of a merger transaction. We have reported a return on assets in excess of 110 basis points.
Our results were driven by prudent expense management and a good quarter for noninterest income. Our credit quality continues to be stable. In fact, our NPAs and 90 days past due actually declined to only 23 basis points of loans. In light of this overall environment, I want to give full credit to each of our 800 plus employees for again delivering strong returns. They have been tirelessly working and communicating with our customers and our communities during these challenging times. Since we want to leave adequate time for questions, I’ll turn it over to Stu now
to provide some updates on some of the recent hires we've made, initiatives we have underway, and the loan portfolio. Avi will then provide additional details on the quarter.
Thanks, Kevin. As you have no doubt seen in our press release, we have hired four experienced deposit focus groups from Signature Bank. While many banks have been playing defense over the course of the past six weeks, we have viewed the events at Signature as a moment in time opportunity for Dime to enhance our deposit franchise. In total, the core team managed a book of business at their peak of approximately $1 billion heavily weighted toward DDA, hiring these groups was a bank wide effort, and we're able to impress our new colleagues with Dime's intense focus on relationship based banking, our state-of-the-art technology, our brand and our flat organizational structure.
We believe there could be more fallout in the months, quarters and years ahead, both from the group hiring perspective as well as an opportunity to bring over individual clients who seek a locally managed, client focused relationship bank with access to key decision makers at all times, coupled with a strong technology stack. On the technology front, we expect to roll out our brand new escrow management commercial system at the end of May, and we are on track to complete our new business focused, online account opening project that takes our already strong digital capabilities to the next level. With respect to our positioning on lending, our strategy is to ensure we continue to support our key clients through any operating environment. At the same time, we continue to prudently grow loans and add franchise enhancing full service relationships. Our current expectation is to grow loans by approximately $100 million in the second quarter.
Our focus continues to be on growing solid business relationships while keeping our multifamily portfolio relatively flat. Obviously, we are keeping a watch on our loan to deposit ratio, should rates decline in future years, 2024 and beyond, we do expect prepayments in the multifamily portfolio to pick up. This will lead to a natural normalizing of the loan to deposit ratio over time.
In addition, as teams hired from Signature start to build their book of business, we expect additional momentum from our deposit gathering efforts. With respect to specific CRE exposures, as we have mentioned before, our Manhattan portfolio is only $225 million or less than 0.7% of total assets. The LTV on the Manhattan office portfolio is 52%. We are comfortable with the exposure and the operators of our office portfolio are very strong individuals. Given that Dime undertook an effort in 2018 and 2019 time frame to remix the loan portfolio. And since the product generally resets after five years, we do not have a significant amount of repricing loans for the remainder of 2023. In fact, only $205 million of investor CRE loans at a rate of 4.67 are set to reprice for the remaining nine months.
Thus far, we have not seen any meaningful early warning indicators of credit deterioration. While we continue to be diligent around monitoring all parts of our loan portfolio, as mentioned, our overall asset quality remains strong and NPAs and 90 day past dues are down to 0.23%.
With that, I will turn it over to Avi to provide some details on the results of this quarter.
Thank you, Stu. Our reported net income to common for the first quarter was $35.5 million. Despite the unprecedented and inverted interest rate environment, earnings per share was up 12% on a year-over-year basis. The NIM adjusted for purchase accounting was 2.76% for the first quarter, compared to 3.14% for the prior quarter. As we don't provide quarterly quantitative NIM guidance. We're operating in a significantly inverted yield curve environment with intense competition on the deposit side, we do expect the NIM to have another couple of quarters of declines. For reference, the NIM for the month of March was approximately 2.61%. We continue to position the balance sheet for a scenario where forward rates drop in 2024. We have approximately $1.1 billion of FHLB borrowings that all mature by June of 2024. As mentioned previously, while we had the ability in 2022 to borrow longer at a lower cost, we intentionally did not extend the duration of borrowings, similar to how many companies kept excess cash during the pandemic and benefited from rising rates. We're following a similar strategy on the liability side, where we're intentionally not going too long and hope to benefit from a full repricing if and when rates do gap down.
Core cash operating expenses for the first quarter of 2023 was approximately $47 million. Our core efficiency ratio this quarter was 48.9% and the core expense to assets ratio was 1.40%. Given the overall operating environment, we remain highly focused on expense discipline, pro pharma for the Signature teams we have hired, we expect to still be within our previous full year guidance for core cash operating expenses of approximately $206 million to $209 million. That said, we remain focused on controlling the things we can, and we will do everything in our power to beat the guide for the year and we continue to evaluate opportunities for expense reductions while funding productive deposit teams. Core noninterest income for the first quarter was approximately $10.4 million. The increase in noninterest income was driven by strong swap related revenue. We expect swap related revenue to be approximately $1 million to $1.5 million in the second quarter given our current pipeline.
We had a $3.6 million provision released this quarter. As mentioned in the press release, the release was tied to a reduction in acquired pooled PCD loans. This speaks to the improvement in credit quality and the conservative reserve we had set up for PCD loans as part of our merger of equals transaction. Importantly, the reserve for our Non-PCD, non-individually analyzed loans remained steady versus the linked quarter and accounted for approximately $51 million of the overall total reserve. Needless to say, we are very comfortable with the level of reserves on our balance sheet. During the first quarter, our risk based regulatory capital ratios increased by approximately 15 basis points. We do expect some improvement in the RWA in the second and third quarters as multifamily loans originated in 2022, reach their one year seasoning period and will qualify for 50% RWA treatment.
With that I'll turn the call back to Lauren for question.
[Operator Instructions]
Our first question comes from Mark Fitzgibbon from Piper Sandler.
Hey guys, how are you? It's Greg on filling in for Mark. How are you guys doing? Good. So I know you guys mentioned that there's a few more quarters of decline in the NIM, but assuming the Fed follows the forward curve, when would you expect the NIM to bottom?
Yes, I think the comment there was a couple of more quarters of declines. I think you can imply from that that it plateaus after that and starts increasing after that. It's obviously going to be a function of how quickly they do cut rates. I mean, obviously we have this $1.1 billion, $1.2 billion of FHLB, which is all pretty short term. We have around $750 million to $800 million of broker on the balance sheet, which again is pretty short term. All the CDs we've been putting on the balance sheet are again fairly short term, 11 to 12 months. So I would say next couple of quarters pressure on the NIM, maybe a quarter of stabilization after that and then following the forward curve improvements in 2024 for sure.
Okay. Do you have a sense of how long until liquidity returns to a normal level?
I think it's going to be a function of the overall environment. We're basically three weeks removed from a mini banking crisis, so I think somewhat elevated in the near term. Our deposits were up linked quarters, so not really required to be holding more liquidity to meet outflows because we've not really had any. But I think it's prudent for everybody to maintain a level of liquidity. At this point in time, we're also going to be following what the industry does overall and keeping a watch on that.
Okay. And lastly, if you could share with us your current loan pipeline and the rate attached to it.
Sure, today our loan pipeline is approximately $1.1 billion and the average weighted average rate on that is 7.17%.
Our next question comes from Steve Moss from Raymond James.
Hey, everybody, this is Tom on for Steve. Good morning. I guess to start off what drove the timing of the release on the acquired PCD loans?
So we put the company together two years back. There's been two years seasoning on this loan portfolio, Tom, and the risk ratings in that particular portfolio have remained stable or increased. So the way the accounting works for that is at some point in time you got to take into account risk ratings and enough time had passed that these loans were moved to the general pool. So as I said in my prepared remarks, we put the two companies together in the middle of COVID times were pretty uncertain then. Economic projections were all over the place. We took our best estimate at that point and were conservative and we've obviously marked them appropriately and just seen good credit quality over time. And given the passage of a couple of years, this was the time to move those loans out of the pool PCD into the general pool.
Okay, that's helpful. And can you provide any additional color on the new hires that are going to be working on the deposit initiatives and some of the associated I know you said that OpEx growth isn't going to increase related to guidance from last quarter, but any other associated expenses that may be tied to that.
No, we’ve taken that into account in terms of looking at the teams, they're all relatively small teams two and three and four person teams, good granular deposit bases. We looked at their insured versus uninsured, and we looked at their total cost of funds, and we looked at their operational needs, and we certainly could fit that within our current environment and our capacity. So we have taken other efforts within the bank in terms of cost savings measures. We've got a hiring freeze. We've done other things that we're pretty comfortable that will enhance our cost effectiveness and keep our costs aligned even as we hire these additional teams.
Okay. Thank you for that color. My other questions were hit on, so that's going to cover it for me. Nice job in a difficult environment, guys. Thanks.
Our next question comes from Manuel Navas from D.A. Davidson.
Hey, good morning. What is driving the expectation for $100 million in loan growth? Did I hear that right for next quarter? Just kind of what are some of the puts and takes with that expectation?
Yes. So we have a pipeline, as I mentioned just earlier, of about a $1 billion, which is spread out across all product lines. The average yield is 7.17%. The largest pipeline is our C& I pipeline, and that actually has a yield of 8.62%. So we do expect there are loans that are approved. We do expect these to migrate to close. They do particularly on the C&I side. Our philosophy is to service our existing customers first. Secondly, really focus on relationship banking and making loans to customers who are bringing significant deposits along with that loan. And we do have some very attractive deposit opportunities as part of the loan pipeline that we have in place. So we're pretty comfortable that we're going to be at least $100 million growth just based on what we have in the pipeline.
Okay, I'm sorry. So that was kind of like a minimum for the quarter?
No, that is our current baseline for the quarter, not a minimum.
Okay, and then the new teams can you just clarify? You said a $1 billion was their prior book of business. Was that per team or for the four teams combined?
Combined.
Okay. Any color why you guys are having such success in adding, there hasn't been that many announcements of folks moving over and I think you called out that you're offering more management engagement just any color on your success with attracting these teams and the opportunity to set there?
Well, I think, yes, I think part of it is we already have the team concept in place. We have our loan teams. We have a group concept and incentive based that are not dissimilar from what the Signature model was and this has been a bank wide effort. We've all been engaged. All senior management, I've met with every team had discussions, multiple discussions with all the teams, even the ones we've hired and the ones we're still talking to. And I think there's a level of comfort in terms of the granular nature of how we operate and attention to detail. We spent some time going through our technology staff and going through our online and the treasury management systems and they found roundly indicated from the teams that we've spoken to that we matched up very, very well to what they had in place or see coming down the road. So I think all those items contributed to our success and the level of importance we're placing on this on a bank wide basis I think comes through.
Any color on kind of what's still out there in terms of talent. You said that you're talking to some folks. But I'm sure that it's still up in the air a bit, but any extra color on the potential for more adds?
Yes, we are in serious conversations with several more teams, including some larger teams.
That's great. I appreciate that. When we're looking at the negative provision this quarter, how should I think about the provision going forward? More closer to like what it was in the fourth quarter? Is that kind of the right level to think about as we proceed forward? It seems like loan growth will be a little bit less, so perhaps it could be even a little bit lower than that.
Yes, I think Manuel is really going to be a function of the Moody's unemployment rate. At the end of the day, that's kind of what we're tied to. That stayed pretty stable this quarter. What we've said historically is for any real estate loans, commercial real estate, we're probably 55 to 60 basis points is kind of what the reserve on that portfolio is. For C&I loans, it's between 1 and 1.25. And then on the multifamily side, just given our loss history, there being zero, our reserve on that portfolio is probably between 20 and 25 basis points. So, yes, short answer is function of growth and the composition of that growth. I think the anomaly with this quarter was we had a lot of pool PCD loans that came out, and that pool is right now down to around $40 million. So it's not a big pool remaining. So I don't think you should see any one time items like happened this particular quarter.
Again, it's going to be a function of Moody’s. I mean, if the unemployment rate goes up, there'll be an increase in the reserve, but I think you're going to see that industry wide, not just specific to us.
Our next question comes from Christopher O'Connell from KBW.
Hey, good morning. I know you guys confirmed that the expense guide is holding and obviously a little bit of a shake up in the NIM coming out of this environment. But as far as the rest of the 2023 guidance that you gave on last quarter's call, does all that still hold?
Well, the only other guidance we gave Chris is on fee income. So we had $35 million to $37 million on the last call. We obviously had around a $10 million quarter, this quarter with strong swap income. So I'd say we're trending towards the higher end of that range. But beyond expenses and fees, we don't give any other guidance.
Okay. I mean, it's tax rate 28% still good. And it seems like with the $100 million next quarter, that loan growth still should end up kind of in the mid-single digit range.
Yes, I mean, I think our loan growth guidance last time around was only for the first half of the year, and so I think we're going to wait till we report earnings in the second quarter to provide guidance for second half. I mean, obviously to the extent we have good loan opportunities with associated deposits, we're going to be all over that. I think on the tax rate, probably closer to 27% is probably a better number. Obviously with a little bit less income, the tax rate comes down a little bit, given where the margin is. So I'd probably budget around 27% on the tax rate.
Okay, got it. And for the excess liquidity build on balance sheet, this quarter, cash is obviously running quite a bit higher than it has in prior periods. Do you guys intend to take that down kind of immediately over the course of 2Q? Was it just kind of a temporary measure given the turmoil in the system in March, or is it something that you will be holding on balance sheet for a few quarters?
Yes, I think it's probably the high point, like you characterized it. I think a lot of banks went in towards the end of the quarter and made sure they have access to the FHLB items like that. So given where we are right now, I mean, I don't expect it to be higher than that, but I think we're just watching the environment overall and just want to do the right thing overall. I mean, safety and soundness come first, so you want to make sure it's there. Obviously, we have significant amount of collateral that we can pledge and borrow whenever we need. But I don't expect it to be higher than that given where conditions are right now.
Got it. And for deposit flows since the end of March. If you guys have any update on that, that'd be great. In particular in noninterest bearing and maybe how significant you think that mix shift will be going forward.
Yes, I mean, in terms of the mix shift, look, we're going to be pretty similar to other banks with a high level of DDA. I think if you have a low level of DDA, you're not going to see a mix shift out because you don't have much to start with. But starting where we did, there's obviously been a movement towards treasuries and there's money coming out of the system. So we'd expect the number to decline over the course of the next couple of quarters. We really don't provide intra quarter guidance on deposits and loans. Not really sure that's a good practice. All I'll say is we continue to open accounts really well. Our account opening over the last month has been far above what it was prior to the crisis. A lot of that's not funded yet, but the net new account opening is very positive. And then with time with some of these Signature teams that we've hired, once they find their legs over here, we believe that's going to be the next leg of growth over here for deposits.
And we feel pretty comfortable overall in terms of funding the balance sheet.
Yes. As I mentioned in my comments, we have significant amount of deposit opportunity in new customers that we're bringing on in our C&I business and even in our commercial real estate business. And we are seeing some opportunities from former Signature clients who have begun to move their business to us as well. So we're encouraged and somewhat optimistic in terms of deposit group not even taking into account to Signature teams we're bringing on board.
Got it. And for capital levels in the buyback, any change in kind of capital level targets? And do you guys expect to use a little bit of buyback this quarter? Do you guys expect to continue to use that going forward, take a pause? Yes, I guess. Any thoughts on that?
Sure. Mainly kind of dialed the buyback down in the first quarter. I mean, we obviously have a 10b-5 plan out there. I’d say just given the overall environment; this is probably not the right time to step in. I mean, obviously valuations are very attractive, but keeping capital on the balance sheet, supporting customers is important. Probably should see a little bit of build in the capital ratios going forward, you saw around 15 base points increase in risk based capital. Now, I would say our stress testing continues to be very favorable in terms of performance. We obviously had very good performance, very low charge-off levels. Our classified levels are down significantly on a year-over-year basis. So nothing in our stress testing indicates we should be holding more capital. But given the current environment, it probably makes sense to accrete capital years over the next couple of quarters.
Got it. And within the commentary around the margin, I know you guys don't give guidance on that, but any sense as to where deposits kind of shake out within the next couple of quarter in terms of cost there, or I guess, how much of your deposit base do you think you can keep at kind of reasonably low rates? Or what percentage of the deposit base do you guys consider kind of highly rate sensitive?
I mean, look, we're a relationship bank, so we'd like to think the whole base is relationship focused. We do have a consumer portion of the deposit mix, as Kevin said, which was around 32% of our base. I would say on the commercial side, a lot of those rate increases have already happened at this point in time, and the customers that wanted to move have moved. At the same time, commercial clients do like keeping cash in this environment. Some of them are also looking at treasuries, right? But now treasury rates are going up and down a lot, so it's a little hard to predict over there. I think what we're focused on more is keeping relationships, not losing customers based on rate to some extent, especially in this environment. But I do think over time there is an opportunity to reduce the cost of deposits when rates eventually do go down. And I think us and a lot of other peers in our market are going to do that. I would say the other piece of Signature going away is you have a competitor in the market who is paying very high rates on deposits not being around anymore. And so I think that's going to help all of us in our market in the medium to longer term, something that's not in the numbers right now. But as stuff stabilizes, I think that should be a positive as well for deposit costs in metro New York.
Great. And just I know you guys have the expense guide, which is pretty specific, but was there anything in particular timing or something seasonal on the compensation line this quarter that I expect it will reverse a little bit next quarter?
No, nothing seasonal. Just we have a fixed cost base and we have a variable cost base. I think profitability for the industry overall this year is going to be below what it was last year and we appropriately adjust our compensation metrics over time. So nothing seasonal.
Got it. And then last one for me. I mean there's been to lot of earnings calls and there's been a lot of discussion kind of around the state of the commercial real estate market, particularly some about New York. Can you guys just give us an update as to what you're seeing, how you guys are feeling about the market overall? And I guess traditional CRE as well as kind of the multifamily market.
Yes, well, as I mentioned in my comments, we have a very small office portfolio in Manhattan, only about $225 million, the average LTV is about 52%, good debt service coverage all are current 30 loans. The average loan size about $7 million to $8 million. So from that perspective, we're not real concerned. We're always looking at credit. We have not been in that space in the last several years, and we're not big into the retail space either. So at this point, we are monitoring our portfolios, but we're not seeing any real weakness. On the multifamily side, I know there's been a lot of talk about repricing, but we haven't had one borrower come to us ask for a restructure, about 75% of what has hit the repricing period has opted for the, they have opted for the repricing and not moved their relationship. And we haven't had to deal with the issue of right sizing or restructuring any loan.
So at this point, we're looking at it, we're monitoring it, but we haven't seen any real deterioration at this point in credit, and that shows in our delinquencies and our metrics as well.
Our final question comes from Adam Hurwich from Ulysses.
Hi. I have a question that's a little bit longer term, and if you don't want to answer, that's fine as well. You look at the total interest expense in year-over-year, you went effectively from about $5 million to $55 million. It's startling. I'm sure a year ago, nobody even considered that as a possibility. I'm looking forward in not next two quarters, but a year, two years. Think further out, and you've got a normalization potentially of an interest rate environment after an extended abnormal interest rate environment. And could you share with us how you think structurally about the business model for Dime?
Yes, Adam, I'll take that. I think we're a company that should have a margin between 3.25 and 3.50, given our risk profile in a moderately sloping positive rate environment. Obviously, last year, our margin got up to around 3.35 to 3.40. The issue is obviously the inverted curve, right? So I think there's various scenarios that could play out. But if you play out a scenario where the curve is either flat or moderately upward sloping, that is the level we aim to achieve and get back to. Obviously, the industry was operating with the level of DDA, that we may not get back to that level, but adjusted for that, there's no reason why we shouldn't be in the low to mid-3s on margin. Obviously, the opportunity for us is to hire teams, very productive deposit teams, and that's going to drive part of that. I think what we've shown this quarter with our expense to asset management is we're a sub 150 expense to asset bank at $12.5 billion - $13 billion of assets, and assuming marginal growth on the asset side, we can continue to drive that lower.
So I think all-in, when we set our medium to longer term plans, we want to be 115 to 130 ROA bank across any environment. And we definitely believe that's achievable again over the next couple of years.
Yes. Adam, if rates are stable and get back to a normal curve, there's no reason that this bank can't earn, even at today's rates, those kinds of margins. I mean, as I said earlier, we're putting loans on today at the low to mid-7s. And this isn't the first time in the history of banking that rates have been in the 4s and 5s. It just takes time. You've had nine months of rate increases. It takes time to in a stable environment or a modestly rising rate environments banks usually do very well in this rate environment. So I would expect that to happen with us as well, particularly since we built out a very strong lending engine. And hired some very good teams. So I think the future bodes well from that perspective, and particularly as we kind of move away from the multifamily portfolio, which is the lowest yielding asset, probably from a risk adjusted basis, a very safe asset, but the lowest yielding asset in our product stack. And so as we move away from that, we're looking at 100 basis point more rate in terms of the new loans we're putting on it. And so I think that will help us as well.
Got it. Frankly, given the disruption, it's pretty impressive how you guys are managing through it.
Good luck.
Thank you. That is now the end of the Q&A session. I'll now hand you back to Kevin O'Connor for closing remarks.
Again, I want to thank everybody for participating. I appreciate all the questions. I think you can hear from us that we're excited about the opportunities that are out there in front of us. Obviously, a challenging environment short term, but believe we are certainly well positioned to take advantage. And I think we're demonstrating that with the opportunistic hires we're doing. So again, appreciate the support, appreciate the interest in the company and the very good dialogue and questions. And have a great day.
This concludes today's call. Thank you for joining. You may now disconnect your lines.