Dime Community Bancshares, Inc.
Q1 2021 Earnings Call Transcript

Published: 2 May 2021

[Operator:]

Good morning, and welcome the Dime Community Bancshares First Quarter Earnings Call. All participants will be in listen-only mode. 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.

[Kevin O'Connor:]

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.

[Avi Reddy:]

Thank you, Kevin. Included in this quarter's results were the following one-time items

[Kevin O'Connor:]

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.

[Operator:]

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

[Mark Fitzgibbon:]

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

[Kevin O'Connor:]

Good morning, Mark.

[Mark Fitzgibbon:]

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.

[Avi Reddy:]

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.

[Mark Fitzgibbon:]

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?

[Avi Reddy:]

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.

[Mark Fitzgibbon:]

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?

[Avi Reddy:]

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.

[Mark Fitzgibbon:]

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

[Avi Reddy:]

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.

[Mark Fitzgibbon:]

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?

[Kevin O'Connor:]

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.

[Stu Lubow:]

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.

[Mark Fitzgibbon:]

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.

[Kevin O'Connor:]

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.

[Mark Fitzgibbon:]

Thank you.

[Operator:]

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

[Christopher Keith:]

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

[Avi Reddy:]

Hey, Chris. Good morning.

[Christopher Keith:]

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?

[Avi Reddy:]

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.

[Christopher Keith:]

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?

[Avi Reddy:]

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.

[Christopher Keith:]

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?

[Avi Reddy:]

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.

[Christopher Keith:]

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?

[Avi Reddy:]

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.

[Christopher Keith:]

Got it. All right, thank you so much.

[Operator:]

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

[Matthew Breese:]

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?

[Avi Reddy:]

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.

[Matthew Breese:]

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?

[Stu Lubow:]

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.

[Matthew Breese:]

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?

[Avi Reddy:]

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.

[Matthew Breese:]

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?

[Kevin O'Connor:]

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.

[Matthew Breese:]

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

[Operator:]

Next question comes from William Wallace of Raymond James. Please go ahead.

[William Wallace:]

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?

[Avi Reddy:]

Yes, it excludes PPP, Wally.

[William Wallace:]

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

[Stu Lubow:]

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.

[William Wallace:]

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?

[Avi Reddy:]

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.

[William Wallace:]

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?

[Avi Reddy:]

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.

[William Wallace:]

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?

[Avi Reddy:]

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.

[William Wallace:]

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

[Operator:]

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.

[Kevin O'Connor:]

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.

[Avi Reddy:]

Thank you.

[Operator:]

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