Dime Community Bancshares, Inc. (DCOM) Q1 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Dime Community Bancshares’ First Quarter 2018 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note that today’s event is being recorded. Before we begin, please note this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Dime Community Bancshares. Actual results may differ from these forward-looking statements. Please remember to refer to the forward-looking statements disclosure on Page 5 of the company's earnings press release. Dime Community Bancshares cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statement whether in response to new information, future events or otherwise. I would now like to turn the conference over to Ken Mahon, President and CEO. Please go ahead.

Thank you, Andrew, and thanks for joining us this afternoon everyone. Today in the room with me are Avi Reddy, who is the Senior Vice President, Director of Corporate Development Dime; and Leslie Veluswamy, who’s our Senior VP in charge and Director of Financial Reporting. We released around 4:30 today. We’re going to pickup some broad themes that underlie the earnings release, try to keep our opening remarks brief and then get into questions. And first if we ignore the tax benefit for a moment, the benefit from the lower tax rate, pre-tax earnings are up at Dime 7.1% year-over-year. Tangible book value is up 6.9%, despite the fact we paid out about 40% of core net earnings in cash dividends. And as a reminder that there is a powerful little earnings engine here at Dime and the quality of balance sheet that underlies the company. S&P Global released their annual thrift rankings for 2017. Dime ranked number eight and that’s among publicly traded thrifts. When we look at the thrift – the bank rankings every year, Dime falls in the 30 range, 30 to 40 range, but among thrift is still very high as that core profitability and balance sheet quality is what enabling us to transform the business model. Return on assets for the quarter was 93 basis points and return on tangible equity was 10.75% for the quarter. We also lowered the consolidated CRA concentration percentage – CRE concentration percentage to about 750%. To demonstrate how significant that is not – once in the last 20 years has our CRE concentration ever been lower the lowest was 814% in 2005. Dime’s non-performing assets once got above 1% through the financial crisis, really only in 2011 0.25, and 2011 that it reached 75 basis points. The 20 year average CRE concentration, average CRE concentration was 941%. So we’re nearly 200 percentage points below that at the end of the first quarter, significant decrease there. Non-interest expense average assets also declined from last year. It’s 141% in the – 1.41% in the first quarter of 2017. It declined to 1.36% in the first quarter of 2018. This is even as we turned over and added to practically our entire executive suite as many of you know. We added corporate development, Avi risk management, credit administration, business banking, retail operations and residential lending. That’s an addition to Stu Lubow and Conrad Gunther in our business banking build out there. And I think our shareholders can be proud of the fact that we're in the process of transforming this company without blowing up operating expenses. The personnel and infrastructure rebuilding has continued. In addition, we put three new branches on line since last summer and we added almost $2 million a year in banking house expense by moving our headquarters from Havemeyer Street to Downtown Brooklyn. We did that in order to accelerate the gain we had in the banking house over in Havemeyer Street, so we increased book value by $1, at least $1 there, but it did add to operating expense. So all that's been done even with the operating expenses, decreasing as a percentage of average assets, really it’s quite uncommon, very proud of that actually and as you can tell. We also added two new directors to our board last quarter: Rosemarie Chen and Kevin Stein. Rosemarie is a human capital financial services leader at Willis Towers; and Kevin Stein, many of you know are familiar with Kevin from his days from the FDIC. He also worked with Tom Johnson over GreenPoint. He was an investment banker at FBR and at Barclays. We now also have six active teams in our relationship banking division. There are 15 new employees in that division after and we added one team in the first quarter and we added one another team in April, adding new teams is part of the business model now. We continue to recruit additional teams. We would hope that as business developments officers in the New York Market monitor Dime's ongoing commitment to the relationship business. We’ll begin to receive more inbound inquiries as they look for more responsive platform for their customers, a platform that a community bank can offer similar to what Hudson Valley Bancorp was back in the days when they were around. Last quarter, I suggested that you keep an eye on Dime’s non-interest bearing deposits to see how our model transformation is going. In the first quarter, those deposits grew at a 22.5% annualized rate. We actually rewrote our intensive plans to focus almost entirely on low cost deposit growth. And that those incentive plans run right from our universal bankers at the branches right through the executive suite. Rising deposit costs contributed somewhat to the NIM contraction in the first quarter, but we continue to think that by limiting asset growth in 2017 and we were – it was not a pretty picture I note, it didn't look good after the earnings release quarter, but by limiting asset growth in 2017, we took off some of the pressure needed to raise deposits in order to fund that growth and enabled us to keep the deposit rate somewhat in line. And it was a little bit of an uptick as you saw in our deposit costs, but that was really – if you go back to the beginning of the increase in the timing and monetary policy a year ago, you'll find that Dime's beta is at or below the median relative to thrift and even bank peers since last year. There still remains plenty of room inside Dime’s $5.5 billion loan portfolio to increase loan yields without resorting to asset growth to drive earnings. There are $270 million in relationship banking loans today. We expect to cross $500 million by the end of this year. Yields on earning assets rose from 3.52% to 3.58% during the quarter and yields on loans also rose by 9 basis points to 3.65%. With the ten year treasury floating with 3% coupon, we could experience some positive fallout in the form of higher level of prepayments and that will give us more free cash flow and higher prepayment fees and a faster portfolio of turnover rate, which is really the key to increased earnings here, improved earnings. And one example of that today we had a $50 million loan pay loss. That loan was at 3.8% interest rate and we have received a $500,000 prepayment fee from that. So there is a case of addition by subtraction as there is lower rates payoff to just the – the yield on loans are just continue to rise from that, so nothing more than that. For example as we’re looking back in the fourth quarter 2016 is only six quarters ago, Dime originated that quarter and in the fourth quarter 2016 we originated $354 million worth of loans at a 3.21% average rate. Last quarter, while we didn’t do $350 million, we originated in just north of $75 million at a 4.17 rate and this quarter already in the month of April, we’ve originated I believe about north of $50 million.

$50 million at around 5%...

5%, so that continues to help – has a positive impact on the margin as well. Later this year, we also anticipate the expansion of fee revenue from the SBA division and our residential lending group is ready to launch – will be ready to launch by the end of the second quarter. Turning to the outlook for the remainder of 2018, total assets are still expected to approximate the level we are at today, $6.4 billion. The relationship banking division, the portfolio growth there for the full calendar year remains our target of $300 million. We still believe that’s a achievable target and as I said we ended 2017 with a portfolio of $235 million out of relationship banking. Noninterest expense for fiscal 2018 continues to be in a range of $85 million to $86 million. That estimate includes the cost of building out the residential mortgage business and other bank-wide infrastructure mentioned on the last call we’re in the process of converting our core system to fizzer of DNA platform that should be completed by the end of the second quarter. We may carry some modestly higher levels of on balance sheet liquidity, some of the impacts on margin this quarter came from higher liquidity levels on the balance sheet, some of our positioning will depend on what the outlook for monetary policy looks like as we get toward the end of the year. And the effective tax rate for full fiscal 2018 is expected to be between 24% and 25%. So all in all feel steady she goes in the execution of the strategic plan, sure you have some questions on margin and outlook for margin, we'll be happy to answer those for you. At this point Andrea, we'll turn it back to you for questions.

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Mark Fitzgibbon of Sandler O'Neill and Partners. Please go ahead.

Hey, guys. Good afternoon.

Good afternoon, Mark.

Ken, maybe that’s a good place to start. You mentioned you’d ask – respond in Q&A to margin outlook. So what is your margin outlook?

Mark, it’s Avi over here. Look historically the company has not given specific margin guidance. What we can give you is some drivers to think about for the remainder of the year. The margin is obviously going to depend on where rates are headed, the timing of great moves and as Ken mentioned the level of prepayment fees and ultimately what shape the yield curve takes. As mentioned the loans that we put on – starting to put on in the month of April, they have a nice high 4%, low 5% coupon associated with them. And if you think about the portfolio loans that are running off and Ken mentioned the $50 million loan at 3.8% that's obviously going to be beneficial to the margin. In addition to that we really over the last six months taken some actions on our borrowings portfolio to reduce – actually increase the duration on them. So if you go back six months ago, we had a borrowing portfolio of around $1 billion of that approximately $660 million were short term, the stuff that really matures over the course of the next year. Over the last six months, we really turn that out and that number is down to $260 million right now. So around $400 million reduction in our short-term borrowings. Obviously, the wildcards are going to be deposit competition. As Ken mentioned, we're not growing the balance sheet this year, so there is less pressure to raise deposits and we're trying to keep our deposit beta as low as possible and the other wildcard is really going to be on the prepayment fees side. I think just one last point to give you some context. When you look at our balance sheet, the multifamily loans, they repriced every five years. If you think about it, we really have 20% of the portfolio coming due every five years. For the remainder of this year, we have around $480 million of loans and the coupons on them are around 3 – in the 3.40 area. If you go out to 2019, we have around $790 million of loans at a coupon of 3.25. And then if you go to 2020, we have $1 billion of loans at 3.38. So that there's really a lot of room there to reprice the portfolio over time. Obviously, it's also going to be a function of the payoffs and in the multi-family portfolio we saw a little bit of elevated payoff this quarter around 13.5% area. And again it depends on how much liquidity we end up carrying on the balance sheet. So those are all the general drivers I would think about – as you think about modeling on them going forward.

Avi, thank you…

From – Mark even from NYB’s of conference call yesterday, some of the local guys are starting to raise – raise the rates on the typical – what we call typical Dime loans here.

So, thank you for the brief comments, but does that imply the margin probably still down a little bit in coming quarters, do you think?

Yeah, I mean, just conceptually I'd say next quarter there probably be some margin compression. Again if you go back to this quarter's margin, we did increase the liquidity on the balance sheet from 4% – cash and securities was around 4% of the balance sheet, average balance sheet, because we did the securitization only at the end of last year. So the liquidity was really wasn’t on the balance sheet for a full quarter and this quarter it was 9%. That was around a 4 basis point decline in NIM just because of carrying that excess liquidity. And then Mark in the first quarter we also have escrow deposits that generally go out and they bill backup because the escrow payments are usually paid out at the end of June. So that's probably another basis point or so – of margin compression that happened this quarter. So again next quarter those items will not be there, but we are – it is competitive on the deposit side. So I would say there is probably going to be some pressure next quarter, but again our hope is towards the end of Q3 into Q4, the margin really bottoms out at that point.

Now, Avi, as the liquidity bill done, your stress testing did it indicate that where you are today like 9% liquidity is okay, or do you think you’ll continue to build that?

Yes I think we generally feel comfortable with where we are today. We’ve obviously built it up from a very low level. So you go back a couple of years the company had a cash and securities to assets portfolio for around 1%, 1.5%, that's up to 9% right now. Obviously rates are going up, so we want to be cognizant of that. I think the one wildcard mark is just the pay offs in the multi-family portfolio. So if we see more payoffs in that particular portfolio, you could see us carrying a little bit more liquidity overtime. So I’d say it's not – in the near term it's probably not going to trend up significantly, but you could be some modest trending up but not to the extent that we saw this particular quarter.

Okay. And it looked like you had a million to C&I credit go on nonaccrual. Could you give us some color on that?

We're can't talk about individual details on individual credits Mark, but it's a borrower and its unlikely the Dime loan – the old Dime loan fees are personally guaranteed loans. The credit quality of the borrowers is pristine. So that’s just a matter of getting them back up and current again.

Okay and it looks like you bought $6.5 million of equity securities in the quarter. Was that another banker or is that some other type of equity?

In accordance with the new accounting standards what we did was we collapsed our trading securities and our investments available for sale which are essentially mutual funds into a category called marketable equity securities.

Okay. And then lastly candidly it looks like your stock is down almost 10 year-to-date trading at really attractive multiples. You've got plenty of capital. And I know you want to use that excess capital to really drive growth overtime in business banking. But why not buy some stock back and take advantage of the unique opportunity that you have when the prices that’s depressed?

That's a constant conversation here Mark we talk about it all the time. But I'll let our Corporate Development Officer here explain that so you.

Yes Mark look, I mean look I think we're generally comfortable running the company between 8.5% and 9% from a tangible common equity perspective. I mean just a few things to point out. I think we're a little more conservative managing capital than some of peers, we ask ourselves constantly what part of the economic cycle wherein if you think about just broad macro themes we're obviously a liability sensitive bank and rates are going up. But probably, more importantly I mean the bank in the early innings of significant business model transformation. And I think given that we probably want to hold on to a little bit more capital than we otherwise would have. I don't think that precludes and we do evaluate this at all times, any form of return of capital to shareholders. So I think in the medium term the capital structure will be optimized. I think in the near term we’re generally comfortable with where we are. The other thing I would say is as Ken mentioned we're on the lookout for teams and the extent we're able to hire more teams that will result in some balance sheet growth overtime. And the returns that we are seeing on that business is fairly above out current ROA level. So keeping all of that in mind for right now we’re staying pat, but it’s something we’re evaluating on a constant basis.

Yes that’s for a corporate view Mark. From my personal point of view, I purchased some shares. Some of our other executive offices and board members have purchased shares as well throughout this.

Thank you.

Our next question comes from Collyn Gilbert of KBW. Please go ahead.

Thanks, good evening gentlemen. Just for as it relates to the NIM you guys usually give the pre fees in your press release. But I didn't see it this time. What was the prepayment fees this quarter?

Sure Collyn, so that was around a $1 million more than the previous quarter. So the previous quarter was $1.25 million it was in that $2.25 million range this particular quarter.

Okay. And given your commentary on what you're seeing, I would presume the thought level is that that prepays could probably accelerate as the year goes on.

Obviously as I said the Treasury, the plan with that 3% rate right now and that sort of looks like a bright line for where you might get some of the borrowers come back. But I'm must guide a very low leveraged portfolio so the – I thought as the brokers are going to reach out to some of those folks and encourage them to refinance while they can get decent rates. I mean it's already you can see rates moving about 4% already in that marketplace. So if that continues, you might see faster. It’s typically what happens. What makes this cycle unique is that the coupons are so low. And I mean again I listened to Tom Kenny [ph] yesterday from NYB and he talked about altruism in this business win. But it looks like where it’s going to pick back up you've got a big rush of refinances. The unique part about this now is the coupons are starting from a very low base. So you need guys who have low leverage loans and a willingness to move out of that coupon into something higher for – to stick more cash out of the property.

Yes, yes. Okay, okay. And then just in terms of I know you had indicated that the intention is to keep the balance sheet flat. But just in terms of your strategy with the multifamily portfolio I mean is it – I understand you're not seeking new originations, but for those that are coming to you for refinancing or reset will you – is the intention to keep those on balance sheet or will you try to price those to a level that keeps growth still off the balance sheet?

The growth is going to be exactly what we say it is which is 6.4 billion. And so really we're not going to look to growth that portfolio, except we're going to be negotiating the rate. So this is a case where we'll sit and talk to the borrower if we find value for us at a 4.25, and by value I mean the deposits, it has more deposit relationship with it. We’d look keep it on the books. I mean it's a good customer, we like all these credits. And if we can find that it is value for us relative to the value we can get through our business development officers, we’ll look keep it on the books.

And Collyn, just one thing I'd add to that. I mean it really depends on if we're able to get deposits out of the relationship. So everything is really focused on having a full relationship and getting more deposits than we have with them.

Okay. Okay, that's helpful. And then just along the lines on the deposit side so yes, I think, part of the dynamic tend to the point last year where the betas were so low was that you were kind of coming into the market as one of the high rate payers, right. And now folks have kind of caught up to you. In terms of where you think the incremental or where you're seeing the incremental deposit costs coming on to the balance sheet? I mean how do you see that kind of evolving this year? And then overlaying that with what your strategy is to try to change the mix of the of the deposit base.

We got a little ahead actually got behind for the first three quarters. So the loans deposit ratio have gone up a little bit and we’ve took the first quarter and looking to – and try to pick and choose our spots to raise rates, so as to keep the beta as low as we could while we're trying to raise the low-cost deposits. So it'll depend a lot on what the competition looks like out there. And really it’s hard to say, I mean, we were talking earlier today about the fact that you've seen a lot of banks announce that the loan growth seems to be slower this year. And if there isn’t a lot of demand for loans, you may see less pressure on deposit rates than you wouldn’t earlier would. That would be our hope anyway.

I think that's everybody's hope. Okay that's helpful. And then just in terms of the credit, the C&I credit that came on that not really came on the books. When was that credit originated or how long has that been in relationship with a bank?

Yes just about a year ago and it's a relationship known to our business bankers. These are people I have worked with before. We think we're going to work our way out of that, but we did set up a specific reserve for that in the first quarter.

Okay. That's kind of a quick timeline for our credit to have been originated and then gone bad. Was it something that did debar or get over extended? Was it something – was it a fraud situation, just curious. I know you don't want to give specifics, but I'm just trying to understand what is – why that timeline was as quick as it was to sort of go bad.

Well I don’t know how to answer that Collyn it's just – I'm not sure it's a quick timeline. I don't know if I grew with that. But he’s – and it’s not overextended in that base when we look at his credit profile, his credit rating is still very good. So we have our attorneys delving into it now.

Okay, okay. And then just to time out to the outlook for the provision, I know you – I thought the strategy was kind of build the reserve as the mix shifted obviously the credit is changing. Is that still the strategy? And if so how should we think about the building of that provision in overall reserve level?

Yes in this quarter because of the specific reserve we did see slight increase in the provision. The provision is really going to be essentially a shift between the decrease in our real estate portfolio offset by the growth in the C&I portfolio.

And Collyn in general as we've mentioned on the past earnings call any new C&I loan that’s coming on the books the provision is around 150 basis points on that particular loan. And any real estate loan it’s approximately 40 basis points. So it’s going to be a function off the mix shift of that portfolio over time as well.

Okay, okay. That's helpful. Okay I'll leave with that. Thank you.

Thanks.

[Operator Instructions] Our next question comes from Matthew Breese of Piper Jaffray. Please go ahead.

Good evening everybody.

Hi Matt.

Just Ken on the $300 million of business making growth, can you just give us your outlook for the composition of that between commercial real estate and C&I?

Not sure. What we can give you is the mix that we've had so far in the portfolio and it's probably a good indicator of what you'll see in the future. So at March 31 we had around $270 million of business banking portfolio. Off that 54% was C&I. On the commercial real estate side 17% was owner occupied CRE. Again that's the piece that doesn't count against us our CRE concentration. Investor CRE was around 25% and construction was 3%. So I think you can use that rule of thumb going forward for $300 million of production for this year, our portfolio growth for this year.

Okay and then do you feel like we're still on track we’re one quarter into this for that three-year outline of getting to where you want to be.

Yes. It feels that way anyway. I mean we had a good month of April so far in that growth.

Okay. And then on the funding side obviously you're a little less competitive in the money market arena. I wanted to just get a sense for the areas you are being more competitive. So it looks like CDs are up quite a bit. And from a modeling perspective, should we expect that to continue, right? So money market down, expected to bleed, but it offset there on CDs and to what extent?

Sure. Matt on the CD product what we're finding is in general it's fairly hard to put customers into either a shot term, call it anything less than nine months, or anything really longer than two years. So the sweet spot for us is really the 13-month to 24-month CD. We've had a lot of success with a 15-month CD out there and we have a comparative rate on that. Over the next 12 months, I believe we have around $550 million of CDs. $585 million dollars of the CDs coming due at a rate of $144 million. So obviously some of those CDs will be rolled over into existing terms. And then some of them will probably have to go to a new rate. So you probably are going to see some small uptick in that. But again if you look at our overall CD portfolio which is over $1 billion there's over $500 million that's not maturing within the next 12 months. So you’re probably going to see nice stability over there and those costs are probably not going to go up.

Okay, got it. That’s all I had. Thank you.

Thanks Matt.

This concludes our question-and-answer session. I would like to turn the conference back over to Ken Mahon, President and CEO for any closing remarks.

Thanks very much again for joining us. And we hope we answered your questions. We feel at this point we're still on target for all the numbers we laid up for 2018 and the business banking build out continues. But thanks for dialing in.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.