Dime Community Bancshares, inc (DCOM) Q3 2021 Earnings Call Transcript

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Dime Community Bancshares, inc (DCOM -4.38%)
Q3 2021 Earnings Call
Oct 29, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Dime Community Bancshares, Inc. third quarter earnings call. [Operator Instructions]

I would now like to turn the conference over to Kevin O'Connor, Chief Executive Officer. Please go ahead.

Kevin O'Connor -- Chief Executive Officer

Thank you, Andrew, and thank you all for joining us this morning on our third quarter conference call. With me again are Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO. We had a strong quarter with net income of $36.5 million or $0.89 per share. Adjusting for onetime expenses associated with the previously announced branch closures and merger-related items, the net income was $41.4 million or $1.01 per share. Our adjusted ROA was 1.37%, and we continue to operate the bank at a sub-50% efficiency ratio, delivering on our stated merger goals. Our employees have spent a tremendous amount of time putting together a new organization internally in terms of system conversion and new processes and, importantly, externally in terms of working with our customers to ensure the experience has been seamless. I'm happy to report the merger integration is now largely in our rearview mirror, and we are 100% focused on growing our core business. Third quarter loan origination were $465 million at a weighted average rate of 3.56%. These originations were 9% above the prior quarter's $425 million.

Despite higher payoff levels, the production resulted in net loan growth for the quarter of 4% annualized. Our loan pipeline remains strong. And as each quarter goes by, our lending teams are getting more and more comfortable with our new loan origination system and processes. Our focus on growing noninterest-bearing deposits has been unwavering. And at the end of the third quarter, DDA represents 36% of total deposits.

This high level of DDA and our core funded balance sheet position us well for the day the FRB raises rates while also producing strong metrics even in this low-rate environment. As you're all aware, there have been several large merger transactions in our marketplace, none of which have actually closed yet. Post closing of these mergers, we expect there to be some level of fallout, and we believe we are extremely well positioned to capitalize to continue growing our business. Our nonperforming loans remain at low levels, and our capital ratios remained strong. We ended the third quarter with a tangible equity ratio of 8.5%. Our low-risk balance sheet, which performed favorably in stress testing relative to the industry, has provided us the opportunity to actively return capital to shareholders.

During the third quarter, we repurchased approximately $15 million of common stock and expect to continue to manage our capital over time. We definitely see significant value in our stock given our trading levels, earnings trajectory and balance sheet profile. Our budget and planning process for 2022 is in full swing, and we'll provide more color on our expectation in 2022 at the January earnings call. To conclude my prepared remarks, we had a strong quarter with growth in loans and noninterest-bearing deposits. We continue to believe we have a tremendous opportunity in front of us. We have a clarity of mission to be a pure-play community commercial bank focused on being responsive to our customers' needs.

At this point, I'd like to turn the conference call over to Avi, who will provide some additional color on our third quarter results.

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Thank you, Kevin. Our reported net income to common for the second quarter was $36.5 million. Included in this quarter's results was $7 million in aggregate onetime costs associated with our previously announced branch closures and merger-related expenses. We provided a table in the earnings release with the three months ended September 30 pre-provision net revenue, which, on an adjusted basis, was $54.7 million, compared to $52.7 million for the prior quarter.

Our level of pre-tax pre-provision income provides visibility into our ability to produce sustainable 1%-plus ROAs, regardless of the rate environment. We were able to migrate our cost of deposits lower to the tune of 13 basis points in the third quarter, and the current spot rate as of today is even lower at approximately 10 basis points. We believe we have an opportunity over the next several quarters to continue to drive down cost of deposits by a few more basis points as higher-cost CDs roll off and are replaced at lower rates.

Importantly, we believe we've removed a significant amount of rate sensitivity from our deposit base as we have not retained rate-sensitive CDs and money markets. These actions, coupled with a higher percentage of noninterest-bearing deposits than our Metro New York peers, should result in our deposit betas lagging other banks in our footprint when rates rise. The reported net interest margin was 3.20%, up eight basis points on a linked quarter.

As we did last quarter, we provided details in the press release on the impact of purchase accounting and PPP. Purchase accounting accretion on loans was approximately $2.5 million in the third quarter. We expect this to moderate to approximately $0.5 million to $1 million for the next couple of quarters. By early next year, we would have most likely run through all of the remaining net accretion from purchase accounting.

Beyond that, there could still be a lingering impact on the income statement, depending on payoff activity as some acquired loans are at gross premiums and some at gross discounts. But in terms of the net accretion, it should wind down by the first quarter of next year. The impact of PPP has also been outlined in our earnings release. We only have $900,000 of remaining unrecognized fees on these loans, so do not expect much noise for this line item going forward. Excluding the impact of PPP and purchase accounting, the adjusted NIM of 3.10% was above our previously telegraphed range as we were able to hold the line on loan pricing and benefited from reductions in the cost of deposits.

As you will note on our average balance sheet, in the third quarter, we had $880 million of short-term investments earning 26 basis points. We expect these average short-term investment balances to be at least $250 million lower in the fourth quarter as we used excess cash to pay off broker deposits and also reinvest into securities toward the end of the quarter and into the beginning of the fourth quarter. Reducing these average short-term investment balances, which have very limited positive spread, should provide support for the core margin in the fourth quarter.

As Kevin mentioned, we will be providing more updates on our 2022 expectations during our January earnings call, but the clear opportunity for us over time is to deploy -- redeploy our cash and securities portfolio into core relationship loans. At the end of the third quarter, cash and unencumbered securities represented approximately 14% of total assets. We're very comfortable operating the bank closer to 9% to 10% as it relates to this ratio and, hence, think we have $500 million to $600 million of excess liquidity on the balance sheet, which when reinvested into relationship loans provides a clear catalyst for medium-term NIM and NII expansion. We've demonstrated strong originations. And once loan paydowns eventually moderate, the excess liquidity will be absorbed with both NII and NIM growth.

Of note, the payoff rate across our real estate portfolio was approximately 23% in the third quarter. When this rate eventually moderates, of course, loan growth will accelerate given our current level of origination. Moving on to credit quality. We had a negative provision in the quarter of approximately $5 million. All else equal and assuming no major changes in macroeconomic conditions, we expect the level of reserve releases seen in the last couple of quarters to moderate and our provision levels to be driven more by trends and growth in our loan portfolio. Our existing allowance for credit losses of 88 basis points is still above the historical combined levels of the legacy institutions pre COVID.

We feel comfortable with our current reserve levels based on current economic conditions. We expect core cash operating expenses in the fourth quarter to be approximately $49 million. As Kevin mentioned, we're in the middle of our 2022 budgeting process and expect to provide more color on 2022 during our January earnings call. Noninterest income for the third quarter included a couple of items that we don't expect to repeat. First, approximately $350,000 of referral fees on loan originations and approximately $200,000 related to an insurance reimbursement, which both show up in the other noninterest income line item, and approximately $350,000 additional in the BOLI line item due to mortality proceeds from a death claim. Backing out these items, run rate noninterest income -- noninterest income would have been closer to $8.8 million.

During the third quarter, we purchased approximately 480,000 shares at $32.18. We believe share repurchases continue to be very attractive given our trading levels, prospects and strong balance sheet that performed favorably in stress testing. In the month of October, we are on pace to purchase an additional $9 million of stock. With respect to the go-forward tax rate, we're estimating a rate of approximately 27.5% for the fourth quarter.

Finally, I'd like to end briefly by touching upon progress against the two enterprisewide goals we had laid out at the time of the merger announcement. Our first goal was growing noninterest-bearing deposits to approximately 40% over a three year time frame. By the end of the third quarter, we've already grown this ratio to 36%. We're definitely doing better than our initial time line for achieving our goals. The second equally important goal was managing the bank with a sub-50% efficiency ratio. In this regard, we've operated the pro forma bank at approximately 48%. While PPP and purchase accounting accretion will dissipate in 2022, staying below that 50% mark continues to be a fundamental focus across the organization.

With that, I'll turn the call back to Andrew to open it up for questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Hey guys good morning and congrats on a nice quarter.

Kevin O'Connor -- Chief Executive Officer

Morning, thank you.

Mark Fitzgibbon -- Piper Sandler -- Analyst

First, Kevin, you had mentioned the size of the pipeline was large. I wondered if you could give us some -- the actual size of it and maybe the complexion and what the average rate looks like.

Kevin O'Connor -- Chief Executive Officer

Mark, it's Stu, Stu Lubow. Sure. Right now, the total pipeline is about $1.7 billion. We've got about $1.2 billion in discussion. We had $225 million in underwriting, and we have about $200 million in loans approved and waiting to close. I will tell you that October was a very strong month. We've closed nearly $200 million in new originations. So far this month, we still have a number of loans to close before the end of the month. So it's very strong. The average yield on that portfolio in the pipeline is about 3.70%.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. Great, thanks Stu. And then I guess, I'm curious, are you out in the market trying to hire teams? And are there any new product plans within the lending side of the business?

Stuart Lubow -- President and Chief Operating Officer

I think we're pretty happy with our products and our lending plans, although I will say that we've rolled out a digital product that is focusing on small businesses -- small business lending $250,000 or less. And we've been running that for about six months, and we're going to be rolling that out to our website so that customers can apply right online and get an answer within 24 to 48 hours. So that is part of our plan going forward.

It really will off-line some of the work that's done by our relationship managers on these smaller credits, but also provide better services to our customers. In terms of -- with mergers occurring in the near future, we are talking to a number of individuals from other institutions. As they receive clarity in terms of those deals closing, we'll have some opportunity, but we are getting close to several. But at this point, it's a little early given the fact that those deals are -- have not closed yet.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. And then, Avi, I guess I'm curious how asset-sensitive you think the balance sheet is today and how you're tweaking that. And then also, if you could kind of help us think about the core margin, I -- or the reported margin, I should say. We know it will be down from lower PPP fees, but should it slowly start to begin to build off a base in, say, 1Q?

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Yes, Mark, I think I'll start with the margin. So I'd start with the core margin. The core margin was 3.10% this quarter. Like we said, there's $880 million of short-term investments at 26 basis points. You can probably assume that's $250 million lower in the next quarter. So that in and of itself should result in an upward sloping margin going forward, and it's really all about taking those cash balances and putting them into securities that we need to, but to Stu's point, really putting them into loans over time. So I'd say upward sloping here in Q4 and then continued moderate expansion into 2022.

I think with -- as it relates to the asset sensitivity, I'd really point you to our 10-Q disclosures. Obviously, 10-Q's coming up in a couple of weeks. But if you look back to our June 10-Q and look at our EVE sensitivity in the 10-Q, in a plus-100 basis points, our EVE is up 16 percentage points. And you look at that versus any other bank in our peer group, nobody is even close to that number. So I think a lot of times people get hung up in plus-100 scenarios, gradual ramps, things like that. The whole portfolio is going to reprice over time. And the fact that we have 36% DDA, when you look at the entirety of the portfolio, it's important to focus on EVE. So take us stand-alone numbers, stand-alone book value and look at those EVE disclosures versus the peer group. I think you're going to get a good sense of how much more asset-sensitive we are than everybody in the Northeast.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Great. And then just lastly, Kevin, I'm curious when you feel like the bank would be in a position to consider more M&A and geographically where you'd be considering things.

Kevin O'Connor -- Chief Executive Officer

I think we talked about this last quarter. I think having put all of the integration behind us, we've actually gone through a safety and sound exam in the middle of doing everything else as part of this process. The regulators came in and did a safety and soundness, and I think we passed well. So I think we're there today. And I think we've always talked about contiguous markets make sense for us. So nothing has changed on that one.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Thank you.

Operator

The next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

Thanks. Good morning guys and hello. Avi, maybe just real quick, circling back to the NIM commentary you just gave on the core NIM. I mean you were in the low 3.20s in the first half of the year before the PPP sale where you had the excess liquidity. Do you think we could get back there by end of the first half of next year, sort of like in the second quarter? Or is there too much other pricing pressures that will offset that?

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Yes. Wally, I mean, we don't give quantitative guidance going out six to 12 months. I mean -- look, I mean, there's a clear upward sloping NIM here over time. It's going to be the pace at which we reinvest the cash into securities. But I mean, our targets for loan growth, if we think about that 6% annualized loan growth target, that is $500 million to $600 million every year. So I think the assumption should be our deposit costs aren't going to go up until rates increase. And if you assume rates increase in Q3 and Q4 of next year, you're still going to see some moderate compression in our cost of deposits.

Whereas as we put these cash and securities to work, it is going to go up. Every quarter, it may be slightly different depending on what we do with the loan portfolio. But clearly, I mean, the goal is to build it back to those levels. And again, having the DDA and having the excess liquidity helps us going forward.

William Wallace -- Raymond James -- Analyst

Okay. And then, Stu, I appreciate your commentary on loan production and the portfolio yield. But just given all the moving parts, I mean, do we think in the fourth quarter based on the pipeline today and the activity that you're seeing in your markets that we could be on track for that annualized target?

Stuart Lubow -- President and Chief Operating Officer

I mean, it's going to be very strong for...

William Wallace -- Raymond James -- Analyst

Excluding PPP?

Kenneth J. Mahon -- Executive Chairman

Wally, it's going to be very strong for the quarter. We do expect a couple of packages, large multifamily packages to pay off that are going to refinance elsewhere that we've really decided we don't want to stay in those deals. So it's going to be moderated a little bit by managing our portfolio and managing risk within our portfolio. So it's a little hard to say at this point. I think, on the origination side, in a normalized environment, I would, and all other things being equal, say -- would have said yes. But knowing that there are a couple of multifamily packages that are going to pay off, I think that will have some effect on overall growth. But we're still very, very confident in the long term in terms of our growth prospects.

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Wally, I'd just add in the prepared remarks I mentioned that the payoff rates are around 23%, 24% on the portfolio. So in a normalized environment and especially as rates start going up, if you just assume that's 17%, 18% versus 23%, you get to a much higher growth rate for us, call it, Q1. I mean I think Stu's commentary was around Q4 specifically around a couple of packages. We also mentioned in the press release -- look, I mean, we're repurchasing about $9 million of shares in the first month of the quarter and hoping to continue that for the next couple of months here. So we'll manage the capital ratios appropriately to the extent we have some large payoffs come in. But in the medium term, we're definitely reiterating that 6% annual loan growth number.

William Wallace -- Raymond James -- Analyst

Okay. And then, Avi, you, I believe, suggested that expense and operating -- core operating expense running at $49 million in your prepared remarks. We've been hearing a lot of commentary across the industry about wage pressures that are real and other pricing pressures due to supply chain issues. As we -- as you kind of look at your expense base with the potential for -- I don't know if there's any additional cost saves or anything to come on -- but I'm wondering if you could just talk about that base of expense and what pressures there are to it and what relief valves you may have to offset those pressures into next year.

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Yes. Wally, I mean, when we're going through our budgeting process, I mean, we feel the same pressure as everybody else. We've hired a lot of new people at the bank. And so it's an ongoing process and decisions we need to make here internally. I think the one thing we've done a good job at in the past is we promised operating the bank at a sub-50% efficiency ratio, and we're going to figure out a way to be able to do that next year as well. So if it means growing the balance sheet slightly faster, we're going to figure out a way to do it. But there is obviously some wage inflation, and we're feeling it like everybody else. I think we limited the guidance to Q4 right here because we have really good visibility into Q4, but we're really committed to doing that. And again, at the top of the house, there's only two metrics that matter, growing DDA and managing the bank at a sub-50% efficiency ratio. So we're going to figure it out for next year.

William Wallace -- Raymond James -- Analyst

Thanks, appreciate the time.

Operator

[Operator Instructions] The next question comes from Matthew Breese with Stephens, Inc. Please go ahead.

Matthew Breese -- Stephens -- Analyst

Hi, good morning. Avi, just wanted to follow up on the topic of paydowns. So you noted 23% this quarter, and the normalized pace is more like 17% or 18%. Are you seeing any signs so far into the fourth quarter that you're heading toward that more normalized pace? Stu, I think you mentioned there's a couple of lumpy payoffs that you're not particularly -- you're not going to be competitive on the refi. Just curious if there's anything else that's getting in the right direction there.

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Matt, I don't think for Q4 it will be normalized. I think this is just based on our history over different rate cycles that it just feels like, as rates start going up a little bit, you do have some customers coming in right now to refinance before rates actually go up, right?

So could it continue into Q1? Sure. But over time, once rates do start going up, this is going to normalize. So it's more based on a history of what we've seen over time. I don't think we're going to see it be much lower in Q4.

Stuart Lubow -- President and Chief Operating Officer

Matt, I think there's a little bit of pent-up demand. As you know, during COVID, there's not a lot of activity, particularly in the multifamily market because there's a lot of uncertainty there. And as COVID issues have moderated and multifamily has basically come back, I think that pent-up demand surfaced in this quarter, and we're seeing the last aspects of that into the fourth quarter. But I think that's the reason. And our multifamily was really driving those numbers.

Matthew Breese -- Stephens -- Analyst

Got it. Okay. And then maybe could you discuss where you're seeing origination activity? Is it mostly on the east side of the island? Are you getting a fair bit of activity in New York City? Is it Brooklyn versus Manhattan? Maybe some color on where the activity is in the boroughs and Long Island.

Stuart Lubow -- President and Chief Operating Officer

Yes. I mean I would say East End is steady as always. I think our activity is more west. Our growth activity is more west from NASA through into the boroughs and into the Northern New Jersey.

Matthew Breese -- Stephens -- Analyst

Okay, OK. And then two other quick ones for me. So the first one is just that SBA gain on sales fell this quarter quite a bit. Just curious what happened there and if we can get back to a more normalized pace of something closer to what we saw last quarter.

Stuart Lubow -- President and Chief Operating Officer

Yes. I mean we have a number of SBA loans that are going to be -- we're going to see gains on sales this quarter. And then I think those -- that number will be back to a normalized level in the fourth quarter. We do have a significant pipeline in SBA as well. So at this point, we have over $80 million in terms of loans that we're discussing. And there's about $32 million of SBA loans waiting to close.

Some of those SBA loans are construction and/or leasehold improvement loans that we don't sell until all the funds are disbursed, so there's some timing lag there. But we're fairly confident that SBA gains will return to normalized levels, not only in the fourth quarter, but going forward.

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Matt, in the first month of the quarter, we've already had more gains than the last quarter already, so just to echo Stu's point.

Matthew Breese -- Stephens -- Analyst

Got it. Okay. Last one for me. In total non accruals, there was a pickup in C&I loans close to $9 million, $10 million. Could you just discuss what happened there? Was it one credit or a few credit? And if it was one, just give us a sense for what happened.

Stuart Lubow -- President and Chief Operating Officer

Yes. It's one credit. It's an individual involved in real estate investing. We -- the loan is actually still current. It's an individual that has significant COBRA-related businesses, hotels and whatnot. And while the loan remains current, we are working with the borrower to secure that loan. But in the meantime, we took a very conservative view of the loan. But I will say, at this point, it's still paying, it's still current.

Matthew Breese -- Stephens -- Analyst

Okay, thats all I had. Thank you for taking my questions.

Operator

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

Kevin O'Connor -- Chief Executive Officer

I just want to thank everybody for participating. I actually want to thank our employees who are on the call for helping us achieve these great results and look forward to speaking to you soon. Thank you.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Kevin O'Connor -- Chief Executive Officer

Avinash Reddy -- Senior Executive Vice President and Chief Financial Officer

Stuart Lubow -- President and Chief Operating Officer

Kenneth J. Mahon -- Executive Chairman

Mark Fitzgibbon -- Piper Sandler -- Analyst

William Wallace -- Raymond James -- Analyst

Matthew Breese -- Stephens -- Analyst

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