Dime Community Bancshares, Inc. (DCOM) Q2 2018 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Dime Community Bancshares Incorporated Second 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 this event is being recorded. I would now like to turn the conference over to Kenneth Mahon, Chief Executive Officer. Please go ahead.

Thank you, Gary, thanks folks joining us this afternoon on the second quarter earnings call. We'll go right to the headline numbers for Dime. It's earnings per share and net interest margin, the EPS is a little below last quarter but there wasn't one single thing that altered that it was several little things, the provision was up roughly $0.5 million, cost of funds was up about nine basis points that gives a beta, that I believe about 36% which is lower than the peers we've seen reported so far, this quarter. We thought that our betas would be low overall because our cost of funds was pretty high to begin with relatively high to begin with than smaller beta this quarter. The asset size also shrunk you may have noticed as well $125 million that was due to $206 million of prepayment satisfactions in the multi-family area. In the first quarter that was only $132 million. There's been some talk we've seen some articles about the decrease in financings and originations among our peers in the multi-family area. Prepayment fees were also down which seems inconsistent with the payoffs but we've told you in the past as we get closer to the re-pricing period for these loans lot of that balls waiting till they get into their window period where there is no pre-payment fees. So, that's the explanation for the difference, the separation in those two numbers. And then there was an uptick in the tax rate from 24% to 25%. So, each of those contributed a little bit and that's why the EPS ended up at $0.33 a share in the second quarter. Also in the second quarter, we finished our core conversion that was a huge undertaking. It doesn't affect the financials that you can tell, but everybody's been scrambling here for the last six or seven months trying to get up to speed on the new system and I think it'll take us probably another two or three quarters before we can actually deploy many of the new features that come with the new system. We also launched the residential division; they've been on board for about two quarters now. We're starting to make our first loans, we did some this quarter but have more news to report for you at the end of the third quarter in the residential area. We also hired, as I mentioned in the press release that we deployed some new BDO teams in the second quarter there will be two more right now with two more coming on in the next couple of weeks that will be a continuing effort here to bring on teams as we look forward to 2019 -- some growth in 2019 especially if the multi-family portfolio decreases the way it has been. We'll talk about that in a second. Some of the other factors going on at the end of the quarter are good upward signs for the loan-to-deposit ratio stated 124% that's a number that we're comfortable with right now while rates continue to rise. We said at the beginning of the year, we weren't going to grow the balance sheet this year because we felt that growing deposits on the margin would be rather expensive so even though our deposit costs have gone up, I think it could have been a worse situation if we're trying to grow the balance sheet at the same time. Our CRE concentration which is another big metric for us. Now this is a company that three years ago was at almost 1100% CRE concentration at the holding company level, it's down to 718% as of the end of this quarter. I would say the 600s are definitely within shooting range right now. Non-interest bearing accounts which is another big metric that we have highly focused on it was up $25 million in the second quarter to 8% of the non-interest bearing deposits annualizes to 32%. But the important thing for us is what we call the commercial bank balance sheet or the balance sheet inside the balance sheet and that is the of business banking loans that we've been originating in a period of six quarters we've got $368 million of loans on the books as of June 30, 2018. That's from a standing start. The total loans in that portfolio about $429 million there are some outstanding lines of credit where people have not drawn down their lines yet. But $368 million outstanding at the end of the quarter, the weighted average rate on those loans is 4.92% and the deposit balances associated with that are $112 million with the deposit balance weighted average rate there of 33 basis points. That gives us a lot of confidence in the future. You can see from what we reported, we had almost $150 million of originations in that segment this quarter, that's after $50 million in the first quarter. We feel very confident of reaching the target that we said, we outlined for ourselves at the beginning of the year $300 million especially with the new teams coming on. So, it looks like we're going to be able to hit that target. And I think it comes not too soon, because as I said earlier with the multi-family loans starting to move out of the community bank space and where there are other lenders in that market. Having another outlet for Dime to originate loan has been extremely helpful. And then finally in the OpEx area, we guided $85 million to $86 million for the year. We think it's going to be at the low end of the range now with the conversion behind us. A lot of the expense is the additional expenses that we had associated with the conversion are going to start to fall away and certainly by the end of the third quarter. So, nothing [ph] to add at this point, I think that's pretty much it. Given that unless you are going to open up Gary to questions at this point.

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

Ken, given the numbers you just referenced about business banking, deposits, and loans. It looks like deposits are only running at about 26% of loans. Do you expect that's going to improve over time or you are hiring, some of the teams you're hiring are they more deposit focused?

Some of the recent teams are more deposits focused than loans yes. But we thought from the beginning, I mean we looked at again you got to back to the community national balance sheet. We thought maybe the 20% to 30% range, but yes 25%, right now it looks like 25% mark correct.

Okay. And then, in terms of the margin the environment certainly become more challenging with the yield curve in the competitive situation on deposit gathering out there. I think last quarter you had suggested that you thought the margin might turn in the third or fourth quarter of this year or bottom out at least. Do you still feel that way or is it probably a little further out?

Mark, I think again last quarter we said we don't give quantitative guidance for the margin and we did say and towards the end of Q3 and Q4. If you look at the core margin this quarter, it was only down four basis points. If you go back to last quarter, it was down nine basis points. So definitely headed in the right direction. Again, it's our hope, sometime in Q4 does bottom out. But you know again it's a function of where the shape of the curve at that point and where deposit costs in pressure, and our PAT. I think I just want to piggyback on your question Mark, so you were asking about the deposits on the business banking side. If you just take a step back and look at the business banking portfolio. Some $375 million of loans, the weighted average rate on that is 4.97. You take into account the $105 million odd of deposits over there that are at a cost of around 33 basis points of that around $65 million is -- $66 million is zero cost and there are some money markets in there. So that funding, if you give dollar for dollar credit on that and then if you even assume that our whole portfolio, the rest of it is wholesale funded which obviously we wouldn't fund it like that because we have some retail deposits. The margin on that $375 million is probably $330 million to $340 million depending on how you slice the numbers. So, I think what you really should focus on is as we build that portfolio from $375 million to become a bigger and bigger piece of our balance sheet that's where the margin is headed. Obviously, quarter-to-quarter it's going to depend on the level of pay off that we have in the portfolio and if you know -- this particular quarter the $250 million odd that paid off of the weighted average rate on that was around 3.73. So, the stuff coming off with a slightly higher yield than existing portfolio, so that hurt some of the loan yields a little bit. I think the other point to look at is if you just go to our press release and look at the weighted average rate on the loans and you look at the peers and weighted average rate on the loans, I mean that's probably a better reflection of where the loan yields are going to end up next in the quarters going forward. Because the yields are kind of skewed a bit by when the loans are actually booked and pre-payment fees and such and you look at the weighted average rate on those loans on the real estate portfolio, the weighted average rate increased by eight basis points and on C&I portfolio, the weighted average rate increased by 32 basis points. So again, we're a liability sensitive back. But for this bank to see that type of movement in the weighted average rate if we're able to keep those deposit costs like Ken said pretty steady, it's good for the margin in the medium term.

Okay. And then Dime Direct, I think you reference in the press release $115 million of deposit outflow. How much is left at Dime Direct and is that something you are going to continue to focus on given the competitive nature of that space?

Well, still over $0.5 billion. But I think when we…

Mark, its June 30th balances in Dime Direct were around $510 million to be exact. So, you go back a year and that portfolio was around $950 million odd. We've seen a little bit of outflows in July as well, there's competitors over there that are coming in. Lot of the national banks are coming in at the rate of 2%. Our posted rate on that is 1.35%. But as Ken said upfront, we're kind of managing the deposit betas keeping in mind our loan-to-deposit ratio. And so, right now at 1.24% Ken mentioned we feel comfortable over there. So, it's again an engine we can turn on and turn off. We'd like to think the customers that are remaining, the stickier customers that said it's a rate driven product. And I think most banks are trying to figure out what type of affinity we have with them and how do we keep these customers around.

And then, one final question if I may. On that one large relationship that paid off I think was $54 million was that sort of a long-term customer. One of the rates that you just couldn't compete with others on or could you give us some color on that?

Yes, that was actually a very good borrower. But he got terms that I'm not even sure there is any community bank out there that would have given him. He would have gone directly to Fannie Mae for that loan, but we have a terrific relationship with that borrower. He kept deposits with us and we got some fee income out of that pay off as well. So, sad to see him go but it wasn't where our business is today.

Thank you.

The next question comes from Collyn Gilbert with KBW. Please go ahead.

Just to go back to some of the NIM dynamics. So, the deposits ran off this quarter out of Dime Direct what was the cost of those?

Collyn 1.35. That's been our posted rate on Dime Direct.

Okay. That's helpful. And then the borrowings that you added this quarter what was the blended rate of those borrowings?

So, we added around $63 million of borrowing Collyn this quarter. And the rate on those borrowings was 2.77. And so, these are all longer-term borrowings that we added. So, the term is around 4.8 years on that.

Okay. Okay. And I presume…

We noted in the press release to call in again on the borrowing side, we'd really try to extend the durations on the borrowing and not really borrow short. So, we could have obviously funded that with shorter term borrowings but we didn't. We went out a little bit longer.

Okay. And then the CD's that I think you guys had indicated last quarter that you had like $500 million or so of CD's that were set to mature.

Yes.

So, at a rate of 1.44 just trying to think about that repricing rate and will you - I mean your thought on CD's. I'm just thinking about the rest of the duration of what you are adding. Are you trying to go a little bit longer too on some of the CD's as well?

Yes. So, Collyn last quarter you had the number right. This quarter the stuff that's coming due over the next 12 months it's around $715 million. So, it's a little bit more. That said, when you look at our money market base we have these guaranteed money markets and those balances have reduced a similar amount. So, you can think of those interchangeably where if you have a guaranteed money market you know that's how customers probably moved into a CD. So again, on the CD products it's silly dependent on customer preferences. We've seen the most amount of interest in the 15 to 18 months term. It's really hard to get customers into a term over two years. And people on the shorter term it's again on harder side. So, I think that 15 to 18 months is our sweet spot in terms of - while we're gaining traction on the CD portfolio.

Okay.

There's also some money coming out of the Direct bank and going into CD. So, we may be losing in Direct bank but they're staying as customers though.

Okay. And then just in terms of the teams Ken that you had referenced that you've added. Is that assuming, I guess that's already in your expense guide for this year?

Yes.

Okay. And then just finally on the reserve, I thought or at least in my mind I was doing this and I am assuming it was I recall you guys saying that the intention of that thought would be that you would kind of need to start to be building reserve a little bit more. Just given that the change in mix of the loan book. But I guess it's been a couple of quarters now or even this quarter where the reserve actually fell down. How are you thinking about the reserve going forward or how should we be thinking about the reserve in the provision?

Collyn, I think what we said last time around was any C&I loan that comes on the books the reserve on that is 1.5%. So that's just a good rule of thumb to use. Any real estate loan that comes on the books, it's around 40 basis point. Now if we have a reduction in the real estate portfolio that would basically roll off. So, I don't think we're necessarily building the reserve for the overall portfolio, we're going to build a reserve based on the profile of the portfolio going forward. And so, C&I originations are more, you are going to see more of a provision going forward keeping with that 1.5% reserve in methodology.

Okay. That's helpful. Okay, I'll leave it there. Thank you.

Thanks.

The next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

Just following up on the reserve question. How do you anticipate the implementation of CSOL [ph] considering the newness of the business banking division will that have an outside impact on your reserve and resetting that more so than some of your peers?

This is Leslie Veluswamy, Director of Financial Reporting. With respect to CSOL [ph] we are monitoring estimates on our annual basis. And we do not expect it to have a significant impact to us, but we do expect some impact. With respect to the implementation, as you know it does roll through retained earnings so you won't see that through the 2020 P&L for the first quarter, but you will see it flow through equity.

That answer your question Matt?

Yes. I got it. And then Avi, I think you mentioned that longer term with the business banking division your hope is to get the margin up to I think you said 3.40 is that accurate?

Yes, Matt. I mean the math is just based on -- you know right now if you assume where the weighted average rates are the percentage that's funded with no cost deposits and some money markets that they bring in I mean that's, I mean any good commercial bank should have a NIM over 3%. So that's kind of where we want to be. It's obviously going to depend on the shape of the curve and a lot of things going forward, but if you segment our portfolio into two pieces and said let's take the legacy business and let's take the new business, the new business is 3.30, 3.40, the old business is lower and that's why you are getting to the current NIM overall.

I mean one thing to remember there is we're still working on that legacy balance sheet, it still represents 90% of the assets of the company. So, while we're focused internally here on building the commercial bank balance sheet, it's still relatively small at this stage anyway. Relatively small part of the total balance sheet here.

Right. So, as we think about the 3.40 you said the timeframe for remixing the balance sheet which was three years and Ken just your statement there. Does that mean that we might see more of a blended lower margin, but still over 3% by 2020 is that kind of the message you want us to get there?

Matt, I think you know if you think about the portfolio, you got to think about it in terms of portfolio growth rate. So, I think we've on the last earnings call, we'd mentioned that the goal for this year was to grow the portfolio on a net basis. The business banking portfolio by at least $300 million and I think now we're very comfortable with those growth estimates right now. So, we're going to end up the year with the business banking portfolio of around $550 million. So, we've not laid out any estimates yet for the future years. We'll leave that up to you for now and when we get closer to the end of the year we'll give you target for the next year. So, it's really going to be a function of that, but in that business when we're putting on new loans we're trying to make sure that the margin on that, the margin of net interest margin in 3% plus for sure.

Got it. Okay.

Protecting the margin really is the function of where the market rates offer deposits and how quickly you can grow the non-interest bearing accounts here relative to the total deposit base. We don't exacerbate the problem though by growing the balance sheet. That was the whole drill at the beginning of the year.

Right, understood. Okay, alright. That's all I had. Thank you.

Okay, Matt.

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

Gary, you have one more.

I see Ms. Gilbert popped in right when I was saying that.

Sure. Okay.

Ms. Gilbert, please go ahead.

Okay. Sorry about that. Thank you. Just actually, I'm not pointing on the business banking. So, I know you guys you continue to reference that. Can you just remind us again what that split is because between what your balance is as business banking loans and then how they break out between your C&I that you, the C&I is like 1.70? Yes, anyway you know where I am going with versus CRE.

Hi, Collyn, it's Avi over here. So, the portfolio right now is $375 million of business banking. The split is the $172 million of C&I loans and the rest is commercial real estate on that particular portfolio. And within the commercial real estate portfolio there is a piece that's owner-occupied. That peace is around 30% off the commercial real estate piece of the business banking portfolio.

Okay. And that $375 million you say you're still on track to get to -- what was the number again for the - by the end of this year?

Yes. We started the year with $240 million, so we're on track to get to that $540 million - $550 million by the end of the year. So, think about it as another at least $170 million between net portfolio growth.

Okay perfect. Thank you. Thanks for that.

Okay. Well thank you everyone for your questions and we hopefully kept this short enough for you. And actually, our next conference will not be in for Jan of 2019 the quarterly calls. There is not too much movement from quarter-to-quarter. So, we're going to skip the October call, but of course you can call Avi or Leslie or myself with questions at the end of the third quarter and enjoy the rest of the summer. Thank you, Gary.

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