Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q4 2022 Earnings Call Transcript

Dime Community Bancshares, Inc. (NASDAQ:DCOM) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Good morning or good afternoon all and welcome to the Dime Community Bancshares, Inc. Fourth Quarter Earnings Call. My name is Adam, and I’ll be your operator for 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 Kevin O’Connor to begin. Mr. Kevin, please go ahead when you are ready.

Kevin O’Connor: Good morning. Thank you, Adam, and thank you all for joining us this morning. With me today are Stu Lubow, President and Chief Operating Officer; and Avi Reddy, our CFO. We are pleased to report another strong quarter for Dime. But before we get into the quarter results, I want to take a moment to comment on our full year performance. 2022 was a very successful year for Dime. And our strong and consistent performance throughout the year reflects the power of our commercially focused community bank model and our dominant market share on Greater Long Island. For the full year, we reported over $145 million in net income and EPS of $3.73 dollars per share. Our return on assets for the four quarters of 2022 were 1.13%, 1.27%, 1.26% and 1.23%.

Stable results during this rapidly rising and unprecedented interest rate environment. We were able to achieve strong returns by keeping our operating expenses controlled and our NIM averaged 3.25% for 2022 compared to 3.14% for the fourth quarter, consistent with our stated posture of operating a moderately asset sensitive balance sheet. We supported our customers and grew loans by approximately $1.3 billion and put in place the talent and infrastructure to grow our C&I business to the next level. I must give full credit to each of our 800 plus employees on delivering record growth and profitability. Turning to our results for the fourth quarter. We generated net income of $38.2 million or EPS of $0.99 a share, a year-over-year increase of 19%.

We had another impressive quarter of net loan growth and again focused on prudent cost control. Loan growth for this quarter was well balanced across various asset classes. Importantly, and the key strategic priority for us, this quarter we grew business loan balances by $215 million and continue to have a strong pipeline in this area. Stu, I’m sure will provide more color on our current pipeline and the mix in the Q&A. As you heard from our peers and consistent with the banking industry at large, the environment for deposit gathering is extremely competitive. Not just competition from other banks, but also from market related products such as U.S. treasuries and money market funds. Despite these headwinds, we were able to maintain average DDA at around 36% of deposits.

We continue to expect some level of migration from DDA to interest bearing accounts, but our laser focused on this, and our incentive compensation plans from top to bottom are designed on prioritizing DDA. We have a strong group of commercial bankers and we had the luxury over the past years of using excess liquidity on our balance. Obviously, their goals and objectives this year will be heavily weighted and refocused even more on deposit generation. In addition to our commercial bankers, we have a specialized treasury management team with a robust product set. Working in tandem with our commercial bankers and retail branches, we have all the right people and systems in place to deliver on 2023 goals. We were not very competitive on consumer deposit front over the past few years.

However, starting in late 2022 and into 2023, we like many others are being more competitive in this segment as well. We think 2023 deposit growth will come from various sources. Some component will be DDA, but will also include a mix of less price sensitive interest bearing accounts and even some market sensitive accounts. Our cycle to date deposit beta for this round of tightening has been approximately 19.7%, 74 basis points versus the increase in cost of — 74 basis point increase in cost of deposits versus 375 basis points of Fed hikes up to mid-December. Our performance on this front compares favorably to our Metro New York competitors. Again, our relatively low betas have been driven by the significant level of DDA in our balance sheet.

This remains a clear differentiator for Dime versus other competitive banks in our footprint. As you know, historically the Metro New York area has been a more competitive market for deposit gathering, while affording robust loan growth opportunities and more stable asset quality performance in other parts of the country. Avi will get into our expectations of betas and NIM in his remarks. Moving to asset quality. Our NPAs and loans 90 days past due were down 22% versus the linked quarter. During the pandemic, we also took a fairly conservative stance on migrating loans to classified status and we’ve seen a significant decline in classified assets this year. Our net charge offs in the fourth quarter were only 1 basis point. Avi will again provide more detail on loan provisioning for this quarter.

Suffice to say we feel comfortable with the level of reserve 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 competitive credit performance has been our bulletproof multifamily portfolio that has an LTV of only 57%. We continue to believe this portfolio will outperform any potential recessionary environment. Also, as this has been a fairly topical question on other earnings calls, a quick update on our office exposure in Manhattan. As mentioned previously, we only have $229 million of loans with an LTV of approximately 53%. Finally, as the AOCI and the balance sheet stable this quarter, we were able to grow tangible book value per share by $0.86 for the quarter or 15.4%.

We had a strong quarter end year. Our balance sheet is positioned to produce strong returns in any economic environment as evidenced by our quarterly and year to date ROAs of over 1.2%. We remain focused on managing our margins in a difficult inverted yield curve environment and we are focused on growing core deposit relationships, which have value in any rate environment. We remain excited to deliver on the opportunities in front of us as a true community commercial bank and are highly focused on being responsive to market conditions and customers’ needs. Our goals for 2023 remain consistent, managing our cost of funds and prioritizing NIM in an inverted yield curve environment, prudently managing expenses and is always maintaining solid asset quality.

At this point, I’d like to turn the conference call over to Avi who will provide some additional color on our quarterly results and thoughts around 2023.

Avi Reddy: Thank you, Kevin. For the fourth quarter, our reported net income to common was $38.2 million. The reported NIM for the quarter was 3.15%. As Kevin mentioned, our full year 2022 NIM was higher than the 2021 fourth quarter base, reflecting a moderately asset sensitive position. Over the course of the third and fourth quarters, we supported loan demand through the addition of approximately $1 billion of FHLB borrowings. While we have the ability to borrow longer at a lower cost, we intentionally kept the duration of these borrowings to one month or less so that we can benefit from a full repricing in the event that the forward interest rate curve materializes and the Federal Reserve does indeed lower rates starting in late 2023 into 2024.

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 are intentionally staying short and hope to benefit from a full repricing if and when rates do go down. Couple of housekeeping items. Net accredible balance from purchase accounting currently stands at approximately $1.5 million and purchase accounting accretion was fairly immaterial this quarter. Included in the 3.15% margin was 3 basis points of prepayment related income. Average total deposits for the quarter were down 2% and our cost of total deposits increased by 46 basis points. We were again pleased with our deposit betas lagging the level of Fed funds increases in the fourth quarter.

That said, given the rapid pace of rate increases and the absolute level of market rates, we do expect deposit betas to continue to increase from the levels seen this cycle. We continue to have a significant repricing opportunity on our loan portfolio and we continue to proactively manage our loan pricing. The rate on our total pipeline is approximately 6.25%. This is significantly higher than our existing loan portfolio rate of approximately 4.75%. The clear medium to longer term opportunity for us is to reprice our loan portfolio at new origination rates which are approximately 150 basis points to 175 basis points above the overall portfolio rate. Core cash operating expenses excluding intangible amortization and loss on extinguishment of debt for 2022 was $198 million, which was within our full year guidance.

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. Core cash operating expense for the fourth quarter excluding intangible amortization came in at approximately $50 million. Our core efficiency ratio this quarter was 47% and for the full year 2022, we also operated at approximately 47%. Noninterest income for the fourth quarter was approximately $9.5 million or a 19% increase versus core noninterest income from third quarter, excluding the branch sale gain in the third quarter. As we have predicted, revenue from our back to back customer loan swap program and our SBA business picked up in the fourth quarter compared to third quarter levels.

Moving on to credit quality. Our provision for the quarter was $335,000, while we did have approximately $450 million of loan growth in the fourth quarter, we also saw a reduction in results on various individually analyze loans that moved from substandard and doubtful categories into better risk ratings, driving a release in reserves for our individually analyzed portfolios. Needless to say, we are comfortable to leverage results on our balance sheet. Our existing allowance for credit losses of 79 basis points is still above the historical pre-pandemic combined levels of the legacy institutions. During the fourth quarter, our capital levels remained relatively stable despite supporting $450 million of loan growth. As we’ve guided to previously, supporting loan growth and our clients is the first and best use of our capital base.

We will continue to manage our balance sheet efficiently and our tangible equity ratio of 7.76%, including the full impact of AOCI and 8.40% excluding the impact of AOCI is within our comfort zone. Next, I’ll provide some guidance for 2023. We expect loan growth for the first half of 2023 to be in the mid-single digits on an annualized basis. We’ve clearly demonstrated strong loan originations with sequential growth every quarter in 2022. Our focus is on growing solid business relationships, while keeping our multi-family portfolio relatively flat. Given the economic environment and uncertainty around how customers will react to additional Federal Reserve rate hikes, we will update you on our growth goals for the second half of the year on subsequent earnings calls.

As you know, we don’t provide quarterly quantitative NIM guidance. We’re operating in a significantly inverted yield curve with intense competition on the deposit side. As Kevin mentioned, our deposit beta to date has been 19.7%, fairly accredible for a 375 basis point rate shock to the system. Even with some future deposit cost lag, if rate increases have stopped at these levels, we would have been within our previous cumulative cycle guidance for deposit betas of 25%, which was based on around 300 basis points to 325 basis points of rate hikes. However, given the fact that the Federal Reserve is going to the 5% area on rates, we’re now expecting higher cumulative betas as the last 100 basis points to 150 basis points has had a more heightened impact on customer behavior versus the first 100 basis points to 250 basis points.

Given the level of Fed funds increases in the competitive environment in general, there’ll be a lingering impact of deposit cost catch up over the course of 2023. Our best estimate right now is that cumulative betas end up in the 30% area for total deposit costs and deposit costs peak towards the back half of this year. The loan to deposit ratio ended the year at 103% up from 97% in the prior quarter and slightly above our target range of 95% to 100%%. Going forward, we will exercise price discipline and pace deposit growth to approximate the growth in well-priced lending opportunities. We’re keenly focused on deposit gathering to our seasoned relationship bankers, treasury management teams and competitively priced consumer deposits. Our goal is to operate over the course of 2023 with a loan to deposit ratio below 108%.

Should rates decline in future years, 2024 and beyond, we do expect prepayments in the multifamily portfolio to pick up, which will lead to a natural normalizing of the loan to deposit ratio over time. As mentioned previously, our core cash operating expense base excluding intangible amortization was $50 million for the fourth quarter or $200 million annualized. We expect core cash operating expenses for 2023 to be between $206 million and $209 million. Included in this guidance is approximately $2 million of additional expenses related to the industry wide FDIC surcharge and also $2 million of additional expenses for our pension plans for 2023, which is related to the poor performance of the equity markets in 2022. Obviously, both these items are outside of our control.

Absent these items, the expense guide would have been closer to $202 million to $205 million. Be that as it may, we remain focused on controlling the things we can and we will do everything in our part to beat the guidance of this year and we continue to evaluate opportunities for expense reductions across the bank. We expect non-interest income to be within the range of $35 million to $37 million. This guidance take into account the full year impact of the Durbin amendment on interchange. We expect to manage our capital ratios efficiently and are very comfortable operating the company at our current capital levels. We are very active on the share repurchase front in 2021 and 2022 and should our capital levels build for any reason we will not be shy to enter the market via repurchases, given the value we see in our stock.

Finally, with respect to the tax rate for 2023, we expect it to be approximately 28%. With that, we can turn the call back to Adam for questions.

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Q&A Session

Operator: Thank you. And our first question today comes from Mark Fitzgibbon from Piper Sandler. Mark, please go ahead. Your line is open.

Mark Fitzgibbon: Hey, good morning guys. First, wondered — Avi, I could just — could you just go through your fee income guidance again? I didn’t catch all that?

Avi Reddy: Sure. Yes, so the guide for this year Mark is $35 million to $37 million on fee income. This is the first year that we’re going to have a full impact of build. And if you remember, starting July 1 we did have an impact for the second half of this year. Seasonally, Q4 is a little higher with certain fees that we recognize in the fourth quarter. So the guidance for next year is really $35 million to $37 million. We’re really expecting good income on the loan swap program that we have and on the SBA side and our treasury management business really is kicking in on all cylinders at this point. So that’s going to offset the full year decline for the interchange income there. So really $35 million to $37 million for next year.

Mark Fitzgibbon: Okay. And I heard your comments on the margin, Avi, but could you help us think at a high level when you think that perhaps the margin kind of bottoms out? Does that relative to when the Fed has done raising rates or some other metric?

Avi Reddy: Yes, I think so. What we said in the prepared remarks Mark was, we do think deposit costs are going to continue to increase over the course of the year and probably stabilized by the back half of this year. What I would point out is, when you look at our front book and our back book in terms of loan originations, the front book is coming on in the low 6s and the stuff that’s amortizing is around 4.40% for this prior quarter. So it’s going to — that’s going to benefit us going forward, obviously. But the one quarter the Fed does stop hiking, you’re going to see then the impact of repricing stop and deposit costs over power for a quarter or two. So I’d say, towards the back half of this year, we’re highly focused on stabilizing the NIM.

And obviously, we believe this company should have a NIM in the 320 to 330 area in the medium to longer term. Again, it kept DDA at 36%, we’re happy with that. And we’re still growing our customer base at this point in time. So yes, I think really just a function of deposit costs catching up a little bit and a little bit laggard in the first half of this year.

Mark Fitzgibbon: Okay. And what would you say the spot deposit rates are today?

Avi Reddy: Yes, we were a little bit over 1% at the end of the year.

Mark Fitzgibbon: Okay, great. And then I guess just strategically thinking about it, given the funding challenges out there and the fact that you guys aren’t wildly overcapitalized, would it make sense to kind of slow loan growth even more just kind of slowed down the growth in the balance sheet and kind of protect margin, if you will?

Stu Lubow: I think — Hi, Mark, it’s Stu Lubow. I think we’re talking about mid-single digit growth this year. The last 18 months have been significantly higher than that. We are seeing a moderation in our pipeline. But a big part of our growth in the early part of this year was the multifamily portfolio. And that portfolio we’re really just servicing our existing customers and doing swap deals on that portfolio. We don’t expect to see any real growth in that portfolio at all for the year. So just a natural remixing of the portfolio and our focus on C&I and owner occupied CRE is going to result in a moderation in terms of growth. I mean, today we have about a $1.5 billion pipeline at an average yield of $628 million, but only about $200 million of that is multifamily.