Dime Community Bancshares, Inc. (DCOM) Q2 2019 Earnings Report, Transcript and Summary

Good afternoon and welcome to the Dime Community Bancshares, Inc. Second Quarter 2019 Earnings Conference Call. [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. Thank you, everyone, for joining us this evening.On the call with me today, as always, are Chief Financial Officer Avi Reddy; and our Chief Accounting Officer, Leslie Veluswamy.In our prepared remarks we'll pick up some of the broad themes that underlie the earnings release and then add our outlook for the remainder of fiscal year 2019. Opening remarks will be brief so we can take questions at the end.As I said a number of times before, at the beginning of 2017, we undertook the strategy of transforming the company's monoline multifamily business model. The primary impetus for the change was because it was clear to us that the community commercial bank model enabled the possibility of a more diversified balance sheet and better returns for shareholders in the future, reflected in the form of higher structural returns on equity and better trading multiples to book value and earnings. To that end, Dime's strategic plan is built upon improving 4 fundamental balance sheet metrics; one, grow our total checking account balances; two, increase low-cost business deposits; three, grow relationship-based commercial loans that have better risk-adjusted returns; and lastly, reduce our CRE concentration ratio.Starting first with growing our checking account balances. On a year-over-year basis, average noninterest-bearing and interest-bearing checking accounts increased by 18% to $547 million. Every dollar of low-cost deposits raised increases the franchise value of the company. From the executive team on down to our entire customer-facing staff, our incentive plans are laser focused on incenting low-cost deposit gathering.Second metric is increasing low-cost business deposits. Total commercial banking deposits from our Business Banking division, plus our legacy multifamily division, increased by almost 26% or approximately $100.5 million on a year-over-year basis. And commercial deposits now comprise 11% of total deposits, as compared to 9% a year ago.Our next financial objective is growing relationship-based commercial loans. The Business Banking division's portfolio crossed the $1 billion mark at the end of the second quarter compared to $648 million at the end of last year and $236 million at the end of 2017. The Business Banking portfolio now represents 19% of total loans.To provide some historical context. When we initiate -- when we initially started this business build-out in early 2017, our net portfolio growth target for our first year in business was $250 million, which we came very close to achieving. In the second year, in 2018, we established net portfolio growth target of approximately $315 million but actually achieved $412 million of net portfolio growth, surpassing our own internal portfolio target.This year, we established a net portfolio growth target range of $650 million to $700 million for the full year 2019. In the first half of the year, we've already achieved $380 million of net portfolio growth, which places us ahead of our goal at the halfway point of the year. Importantly, we continue to attract high-quality commercial bankers to our staff. From a standing start in 2017, the Business Banking group has now grown to 66 bankers, including approximately 15 of whom are frontline business producers.Our fourth targeted balance sheet metrics -- metric is the commercial real estate concentration ratio. We've now reduced on consolidated -- sorry, CRE concentration ratio to 697% at quarter end. As many of you remember, Dime was well over 900% only a few years ago.To summarize. We've made quantifiable progress on all 4 fronts, and we only plan to get better in the years ahead. I'm confident, with the existing team in place and the new hires that we continue to attract, Dime is on a path to be one of New York's preeminent community commercial banks.Looking back, the build-out of the Business Banking division was very timely strategic decision for Dime. We now have in place a robust and growing platform to generate high-quality loan originations, with good risk-adjusted profitability. We're no longer reliant on transaction and refinance volume activity in the New York City multifamily market. As you may have seen, transaction volumes in New York City multifamily market have been lower this year than last, but Dime actually grew its loan portfolio on a year-to-date basis as a result of originating $448 million of business banking loans year-to-date. With respect to deposits.In the span of just two years, our Business Banking group now manages a bigger deposit portfolio, about $260 million at June 30, than that of the legacy multifamily business. Deposits-to-loans for the Business Banking division are consistently running at 25% of loan originations compared to approximately 5% of legacy multifamily business. Therein lies a tremendous opportunity for Dime as we remix our balance sheet and the contribution of Business Banking grows over time. Our deposit-generation capability will continue to increase.The Business Banking division build-out has had an important ancillary benefit on how we operate our legacy multifamily business as well. Historically, Dime had only the multifamily business to achieve balance sheet growth. We basically took what the market gave us in terms of rates. Now we have the flexibility to look for multifamily transactions that meet our return hurdles while keeping in mind our goal to improve the quality of the balance sheet.On a year-to-date basis, our multifamily group has originated approximately $144 million worth of loans at a weighted average rate of about 5% while still utilizing the historically sound credit quality box and parameters that Dime has always applied to the multifamily business. Typical RAC rates in that portion of the market during that period from our most active competitors have been closer to 4%. I'm very proud of the work done by our multifamily team, led by Kirk Lloyd, as they've adapted to our new mission of focusing on important relationships, prioritizing solid margins, deposits and returns above chasing balance sheet growth.For those of you who have seen our investor slide deck. One of my favorite pages to talk about all the time is the page where we compare our loan yields to our peer group of about 13 banks in this market; and our deposit cost to the same group, peer group about -- peer group of about 13 banks. As of the quarter ended March 31, which is the most recent period that we have available to us at this point, Dime lagged the median loan yield of the peer group by about 47 basis points.The peer group median at the time was 4.34. We were 47 basis points behind that median. The weighted average rate on our total Business Banking originations, which comprises both real estate and C&I, in the second quarter was 5.3% -- excuse me, 5.36%, which was already higher than the peer group median I just quoted. I'm extremely confident that we have -- now have the infrastructure in place to make up the remaining ground versus the peer group over time.On the other side of the equations, deposits look similar. If you look back at the fourth quarter of 2016, just prior to when the Federal Reserve started to raise interest rates in earnest, Dime was almost dead last from a cost of deposit perspectives, or you can say we're in second place in terms of the highest cost of deposits, when compared to those 13 peer banks. Now our cost of deposits is actually 20 basis points lower than some of those same competitors. That being said, we know we can do much better in terms of improving our noninterest-bearing deposit percentages to that of a high-performing commercial bank, which we typically see in the 20% to 30% range of total deposits. That is our next goal.So at this point, what I'd like to do is turn it over to Avi Reddy, our CFO, who will touch briefly on -- upon our second quarter results.

Thank you, Ken. I will now briefly touch upon our second quarter results.Core EPS was $0.36 this quarter, which represents 12.5% linked-quarter growth. The reported margin and the margin excluding prepayment fees both expanded in the quarter. This was a direct result of our relationship-based Business Banking build-out. The weighted average rate on loans continued to trend higher as the Business Banking portfolio became a larger percentage of the overall balance sheet. Also, as noted in our press release, the pace of increase in the cost of deposits slowed in the month of June. This slowdown was definitely an encouraging sign. Expenses remained well controlled and relatively flat on a linked-quarter basis.Apart from improving the quality of our balance sheet and risk-adjusted margins, an important part of the Business Banking build-out over time is the addition of noninterest income. We're pleased to report that, this quarter, we saw some early signs of increasing noninterest income. In the second quarter, we recognized $300,000 of customer-related loan-level swap income.Now that we are two years into our Business Banking build-out, developing an interest rate swap program for our commercial customers was the next natural step in our evolution, and we are happy to note that we are now able to provide this service to our commercial clients. In addition, our SBA team has been gelling very nicely with our branch network for customer referrals and produced $300,000 in gain-on-sale income. While our SBA team has a fairly short tenure at Dime, they have already impressed us with their professionalism and pipeline, and we expect this to be a growing source of noninterest income for us over time.Credit quality continues to remain pristine, with nonperforming assets and loans 90 days or more past due dropping by 67% versus the linked quarter. And they now represent only 6 basis points of total assets. Our 30- to 89-day delinquencies stood at only $105,000. We have a phenomenal asset quality track record through multiple cycles, including the 2008 financial crisis. We ended the second quarter with a tangible common ratio of 8.58% and reported tangible book value per share of $15.41 per share.Now I'll move on to the outlook for the second half of fiscal year 2019. At the start of the year, we had guided to net portfolio growth for the Business Banking division of at least $650 million to $700 million. For the first half of the year, we achieved net portfolio growth of $380 million, so we're on track to beat the high end of our goal by the end of this year. We continue to see strong demand for our responsive customer-focused platform and Dime's well-known brand name.As Dime demonstrates longevity and commitment to the commercial bank model, we have been provided more opportunities to add high-quality individuals from our competitors. Our charter chain's conversion from a thrift to a commercial bank, which became effective in April 2019 following all applicable regulatory approvals, is testament to the fact that the Board and management team are fully invested in our business model transformation.The 2019 ending total asset number will be a function of future payoffs in the multifamily business. Ultimately, we are most focused on improving the quality and remixing our balance sheet. We refer to this internally as building a new balance sheet inside the old balance sheet.We don't provide quantitative NIM guidance. The direction of NIM depends on a number of extraneous factors, including future actions from the fed, the shape of the curve and the competitive pricing environment for deposits. What we can say on the NIM is this. The weighted average rate on the $1 billion Business Banking portfolio was 5.21% at the end of the second quarter of 2019, and it was accompanied by $260 million of self-funding deposits at a weighted average rate of 63 basis points.This leads to an implied Business Banking portfolio NIM of approximately 3.75%, which is far above the NIM on our overall balance sheet today. While there are various factors that will affect the changes in NIM on a quarter-to-quarter basis, the medium- to long-term trajectory of our NIM is clearly upwards as the Business Banking portfolio becomes a larger percentage of the balance sheet over time.Additionally, we have $198 million of real estate loans with a weighted average coupon of approximately 3.63% which are scheduled to reach their contractual repricing date in the second half of 2019 and an additional $409 million of repricing loans at a weighted average coupon of 3.37% for the first half of 2020. So in aggregate, that's $607 million of loans with a weighted average coupon of 3.45% that are scheduled to reprice over the next 12 months. Clearly, replacing these legacy loans with business banking loans which have much higher yields and more associated deposits will aid with the upward trajectory of our NIM.Now that we are halfway through the year, we are projecting noninterest expenses for fiscal year 2019 should be in a range of $89 million to $90 million. As it relates to noninterest income, we had positive progress on the SBA front this quarter. In fact, the income we generated in the second quarter of 2019 was equal to the income that we generated for all of 2018. The team in place is a strong one, and our first goal is to have the SBA business get to a $1.5 million-plus annual run rate in noninterest income.We continue to optimize our new core technology platform to help drive higher commercial banking fees. As we acquire and onboard more clients, we expect these fees to grow gradually over time. On a related note on the technology front, we were pleased to add Michael Fegan as the head of our technology group. Michael is already making a very positive impact and will be a key part of our transformation going forward.Lastly, with respect to the effective tax rate for full year 2019, we expect it to be approximately 25%.With that, we can turn the call over for questions.

[Operator Instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill.

First question I have for you is how many Business Banking relationship people do you have today. And where do you think that grows to over the next year or 2?

Mark, so in the total group we have 66 people at this point. In terms of frontline business producers, we have 15 right now that we have. And look, we're always looking to hire new people, always looking to add more. I think, when we started off the business, a lot of the team was known to the existing team that we brought on, but over time as Dime shows commitment to the business, we're starting to see looks from a lot of our competitors.And I think it's -- really depends on the opportunity and depends on what they can bring in, but I think we've clearly shown, by growing deposits and by having a better margin on this business, we're looking to spend the money upfront because it's going to pay off down the road.

Okay. And then secondly, Business Banking loans are sort of running about 4x the level of Business Banking deposits. What do you think over time that should get to as the business matures?

Well, Mark, I think that 25% number is a good number to use. We've been in the business now for 2, 2.5 years, so it's probably a good number. I think sometimes we have to have the realities of onboarding loans to meet certain targets that we have. And sometimes, it takes a little while to get the deposits going, but I think now that we've been in the business 2, 2.5 years, 25% is a good number. I think we're always on the lookout for teams that are deposit focused in certain industries, so to the extent we're able to add more of those over time, you could see that number go up, but 25% is a good number.

Okay. And at 38 basis points, your reserve looks sort of in line with what you see at other multifamily lenders, but optically it looks low relative to commercial banks. I guess I was surprised, given the transition of the balance sheet and the strong C&I growth, that the reserve wasn't rising, and I guess I'm curious as to your thoughts. Obviously, I recognize nonperformers are extraordinarily low and went down this quarter, but should we expect the reserve to begin to increase over time as the mix changes?

Sure Mark. So like you pointed out exactly, look, the coverage level on the NPAs is -- I mean it's over 800% at this point in time. I mean in general on C&I loans any net growth in that portfolio were solving around 135 basis points, so to the extent that the C&I portfolio grows more over time, you would have some growth in the results obviously, over time. And on the real estate side, we're really underwriting those loans to the same criteria that we use to underwrite. And we're just looking at global cash flows at this point. So to the extent the C&I portfolio grows, sure, you could see some increase in the overall result level with respect to peers.

And then lastly, and I know it's early since the new rent regulations came into place, but are you seeing any changes yet in landlord behavior and any trends with respect to valuations on buildings?

It's been amazingly quiet, no change at all, Mark. And the interest rate environment may have something to do with that, too.

The next question comes from Matthew Breese with Piper Jaffray.

Just curious. If we think about the Business Banking effort, the C&I portion, how much of that is tied to 1-month or a 3-month LIBOR or some shorter-duration index?

Matt, so none of our loans are really tied to tighter LIBOR. The loans are -- there's a couple of credits here and there, but the portfolio is primarily a prime-based portfolio on the C&I side. And in terms of the overall Business Banking portfolio, so this is the $1 billion portfolio, there's around 35% of that that's adjustable rate. I mean, that said, a lot of our loans have floors on them. So in terms of loans that do not have floors on the portfolio, there's probably $200 million that probably could reset down if there is a rate move down by the fed. So you're talking about $200 million on a $5 billion portfolio that's tied to an index that could go down without a floor.

Understood. And then could you just walk me through what -- the other portion of the Business Banking effort, the commercial real estate portion? What is that price offer? Is that traditional kind of 5-year CMT?

Yes. I mean typically 5-year CMT, yes. That's the vast majority of those loans.

Okay. Okay. And then on the flip side, what is the duration of the CD book and the expectation for how you might reprice the money market effort if we do in fact had a fed cut?

Sure. So on the CD book, the second half of this year, the remaining part of this year, we have around $600 million of CDs coming due. And then the following year, 2020, we have around $700 million. And then the remaining piece, the remaining $100 million, is in 2021 onwards. So it's kind of split out amongst those buckets. I think, so far, we've just had more customers willing to take CDs and lock in rates. And so you've seen CD balances grow.I think the headwind of us growing deposits historically was we had a rather large Internet portfolio that we've reduced now to around $180 million in size. And so that results in a decline in money markets over time, but I think, as mentioned in the press release, we -- in the month of June, we saw a real slowing in the pace of deposits. So it's really going to depend on customer behavior as rates go down in terms of that CD and money market mix.

Okay. And then one thing we didn't talk about was -- and I know it's a smaller portion of the portfolio, but the residential portion has been growing at a robust pace recently. Just curious. Is -- that $10 million to $20 million quarterly increase, is that something we should be looking forward to over the next, call it, 6 months, 12 months?

Yes, that's fair, Matt, yes.

Okay. And then additionally, what is the current buyback appetite?

So we said we have maintained our capital ratios at around 8.5%, so you saw we did buy back shares in the quarter. So that's kind of our capital ratio target, and we'll manage it with the growth opportunity we see in the balance sheet.

Okay. And then my last one is just you provided a lot of color on where you want to take the Business Banking effort expenses for the remainder of the year. Just curious, what are you looking to do from a profitability perspective? What is the targeted ROA for the end of '19 or the end of 2020 at this point?

We don't provide profitability targets, Matt. We'll leave that up to you and the modeling that you do. I think we've given you the pieces where we're telling you that the margin on that business is 3.75%. You can see all the expenses in there at this point in time. If you look at that business by itself and you assume a 3.75% margin, the marginal ROA on that is well over 1% at this point in time.So it's just a function of how big that portfolio becomes as a percentage of our overall book, and you should see the ROA increase over time. On a quarter-to-quarter basis, it's hard to predict, but 2, 3 years from now, we're going to have a structurally different profitability than what we have now, as Ken pointed out in his earlier remarks.

[Operator Instructions] The next question comes from Collyn Gilbert with KBW.

Just two quick ones on the multifamily side of things. So can you just remind us, do you guys have any exposure to the MCI part of the rent-stabilized multifamily space?

No, no.

No, no, we don't.

Okay, okay. And then just your thoughts broadly as to how you sort of are thinking about that portfolio trending given obviously the changes in the legislation there. And maybe some of the -- maybe give us an update on how some of your current borrowers are thinking about it; and just, yes, kind of a sense of how that larger portfolio is going to kind of perform. I don't mean from a credit perspective. I know you guys laid it out pretty quickly -- or pretty well. But just from a growth perspective and a paydown perspective.

Collyn, so I'll say how we're approaching customers who have deposits with us and customers who we know well. We want to keep them, good customers. And so payoffs have been slow in general in the first half of the year. In our press release you would have seen, in the second quarter, they picked up a little bit, but look, if we're able to get the yields that we are in that business that we have been doing, we'd like to do more of that business. I mean it's a good business. It's a low-expense structure associated with that business.So we're committed to being in it. In the second quarter, we did around $75 million of loans at 4.99. We do that all day long. I think, in terms of the payoffs, it's just a function of what borrowers want to do. We're not below 4%. A lot of our peers are below 4%. So we'd like to keep it at the rates that make sense to us, but over time you are going to see the multifamily book shrink as a percentage of the overall portfolio. Right now, we're down to around 68%. A year back, we were between 80% and 85%, so it's going to keep trending down, but we're still going to do business for good customers.

When you talk to people that are closer to that market, they will tell you the reaction of existing owners is pretty benign so far. It's really going to -- and you've heard this from others as well. It seems like it's going to be more impactful on volume of business going forward, and the good news for Dime is we're not in that business anymore.

Yes. Okay. Well, to that point, Ken, and Avi, connecting your comments on pricing, I mean, I guess there could be a case to be made if you want to be optimistic on how this all plays out. It's that the likes of you all or in NYD or that you have been doing this for so long could sort of emerge as a lender of choice, right, I guess, if you see consolidation among the weaker players or the weaker providers, whereby pricing could come back into the hands of you guys rather than the borrowers. Number one, do you see that as a possibility? And number two, if the market were to start to move like that, would you guys reconsider getting more active in the space again?

You have to really think about who's driving prices in that market right now. And from our point of view, it's Chase Manhattan and Fannie and -- for the agencies. New York Community may a little bit but less. I think they have less influence in the pricing market now than those two bigger guys.

And Collyn, just back to Ken's earlier points. I mean the big reason for the transformation is deposits, right? And that makes the commercial business very profitable over time. It brings in fee income. It reduces our concentration ratio, so very committed to the 4 pillars that Ken laid out. Obviously, the better yields that we can get on the multifamily portfolio, the better.

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

Thank you again for tuning in to the conference call, and we hope you got enough information out of the earnings release to help you out. And thanks very much, and we'll talk to you at the end of -- actually at the beginning of the new year. Have a good afternoon.

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