Dime Community Bancshares, Inc. (DCOM) Q2 2020 Earnings Report, Transcript and Summary

Good day, and welcome to the Dime Community Bancshares, Inc. Second Quarter 2020 Earnings Conference Call and Webcast. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Mr. Ken Mahon, CEO. Thank you. And over to you, sir.

Thank you, operator, and thank you, everyone, for joining us this morning. What a crazy year this has been, and there's still 5 months to go before the end of the year. On the call with me today are our President, Stu Lubow; Chief Financial Officer, Avi Reddy; and our Chief Accounting Officer, Leslie Veluswamy. In my prepared remarks, I'll make some enterprise-wide comments, and then we'll pick up some of the broad themes that continue to underline the earnings release this quarter. As you've seen, we had a very strong quarter end of June with core EPS of $0.39. This was inclusive of the impact of a $6.1 million addition to the general allowance for loan losses, which we determined to be prudent, given the potential impact of the pandemic. Our strong core EPS was aided by net interest margin expansion, fee income growth and expense control. For those that have followed our story over the past few years, in order to diversify our assets and our revenue stream, we began the transition toward a commercial bank model in early 2017. The positive impact of that transformation is taking hold now as most apparent beginning with this quarter's results. It also answers the question we got asked 3.5 years ago, how long is this transition going to take? I suppose at this point, we can say -- easily say that it's going to take 3 years. So we just passed the 3-year mark. And we knew a year ago that these quarters were coming, and I'm glad to see that we finally got here. On a linked-quarter basis, NPLs were going down -- went down this quarter, approximately 15% to $15.3 million, that’s $15 million on a $5.5 billion portfolio. Our loan deferrals were also down to approximately $916 million at June 30 compared to the peak, which was reached in the month of May of approximately $1.1 billion. More encouragingly, of the first tranche of $489 million of loans that was provided forbearance in the month of April, $195 million, or 40% [ has resumed ] full payment and $120 million or approximately 25% is now paying full interest and escrow where required. Together, that adds up to approximately 65% of the April tranche deferrals. Of the remaining loans in the April tranche of $169 million is paying at least full escrow. So the migration of the deferred portfolio to full performing status is well underway. In the years between 2007 and 2013, Dime's cumulative net charge-offs were only 130 basis points of beginning loan balances at the start of the crisis. That's cumulative net charge-offs over a period of 6 years since the beginning of the crisis at that time. That number was approximately 5x lower than the overall bank index. Given the low LTV nature of the multifamily portfolio, which was 50% at June 30, we anticipate our track record to continue. Due to the city's limited geography, multifamily apartment buildings are the primary form of housing in New York City. Many of our borrowers have remained with Dime through intergenerational family ownership across various difficult economic cycles. I'm confident that these owners will continue to manage their properties well through this pandemic. New York City housing has been through many cycles. And while COVID is a unique situation in the past decade, New York City has seen significant investment in the TAMI sector, technology, advertising, media, and information companies. We here at Dime are believers in the long-term demand for housing stock in New York City, and especially given the low LTVs of the loans in our portfolio, we remain optimistic that our credit performance will once again outperform over time. Right now, we are committed to helping our borrowers get through the current environment while improving their payment profile, which we have demonstrated in this quarter's release. As you might expect, we are monitoring all areas of our portfolio proactively, including our exposure to hotels, in which we had about $173 million investment, in restaurants of about $27 million. We have Stu Lubow here, who will answer any of your questions in a more granular way during the Q&A section of the presentation this morning. We have also built a balance sheet with significant capital strength. In the second quarter, we opportunistically raised $44 million of net proceeds from the issuance of perpetual preferred stock sourced from many of the same investors who are familiar with our story from our earlier preferred issuance in February. This has resulted in capital ratios moving to the top end of our peer group. Our leverage ratio is in excess of 10%. Our Tier 1 risk-based ratio is in excess of 13%, and our total capital ratio is in excess of 16%. Our capital base, coupled with the low LTV and improved core profitability will certainly serve us well in the current environment. Next, I'd like to touch briefly upon Dime's involvement in the Paycheck Protection Program. In the 3 years ago when we started, we did not even have an SBA program here at Dime. So we've made great progress shown by the results here. In the second quarter, we originated $319 million of PPP loans. And as of June 30, our PPP related deposit balances were approximately $104 million. Potential unrecognized income from processing these loans is currently $8.9 million. Many of these customers are new relationships to Dime, and many of these new clients will remember that we were a source of help to them in their time of need. As I've mentioned in the past, Dime's strategic plan is built upon improving 5 fundamental metrics: one, growing our total checking account balances; two, increasing low-cost business deposits; number three, growing our relationship-based commercial loans; four, growing sources of and the contribution of nonspread revenue, and five, maintaining appropriate liquidity, reducing our CRE concentration ratio and operating with strong capital ratios. Now a quick update on each of those, starting first with the growth in checking account balances. On a year-over-year basis, average noninterest-bearing and interest-bearing checking accounts increased by 54% to $841 million. The second metric is that of increasing low-cost business deposits. Total commercial bank deposits from our business banking division, plus our legacy multifamily division increased by almost 37% on a year-over-year basis to $675 million. The second financial objective is growing relationship-based commercial loans. The Business Banking division portfolio is currently approximately $1.6 billion, excluding the PPP loans. This business continues to be accretive to our overall NIM and has contributed to 7 consecutive quarters of core NIM expansion. Our fourth targeted metric is non-spread revenue. Non-spread revenue at Dime, excluding security gains and losses, grew by approximately 83% on a year-over-year basis. This was mainly driven by an increase in customer-related swap fee income. And lastly, we are operating with a very strong capital ratios, as I pointed out earlier. We have reduced our CRE concentration ratio to 545%. And just a reminder, again, that Dime was well over 900% only a few years ago. In summary, we continue to make quantifiable progress on all 5 strategic objectives. The most satisfying aspect of the transformation for me is the progress that's been made on the deposit side of the balance sheet, with noninterest-bearing deposits now comprising 15% of our deposit base. And believe me, when I think back to the years when we were at 6%, 15% seemed like a pipe dream, but we still have a ways to go, and it's still not best-in-class yet, which is our goal. Deposits to loans for Business Banking division are running at 26% of the loan portfolio compared to approximately 6% for the legacy multifamily business. Improving the quality of our deposit base was the most important guiding tenet of our business model transformation. Finally, a last word on our announced merger with Bridge Bancorp. Hopefully, we've already listened to our merger call at the end -- excuse me, at the start of the month, which detailed the strategic rationale. We have had follow-up conversations with many of our shareholders and analysts since that time. In just 4 weeks, we have made important progress in our integration efforts, and our teams are extremely -- working extremely cohesively together. It will be a busy 5 months ahead. We are aiming to close the merger in early January, and I'm extremely excited for the opportunity that lies ahead for our combined franchise. As Bridge also noted in their earnings release, this was a unique opportunity for both companies. Together, we are very determined to create the next great New York Community banking franchise. At this point, I'd like to turn the conference call over to our Chief Financial Officer, Avi Reddy, who will provide some additional color on our first quarter results.

Thank you, Ken, and good morning, everybody. Included in this quarter's reported results was $3.9 million of severance expense related to an organizational restructuring, $1.1 million of merger-related expenses and $3.1 million of securities gains. Excluding these noncore items, core EPS was $0.39 per share. The $6.1 million loan loss provision we took this quarter was entirely associated with an increase in the general loan loss reserve due to the adjustment of qualitative factors tied to the bank's existing incurred loss framework to account for the effects of the COVID-19 pandemic and related economic disruption. Excluding PPP loans, our reserves to loans at June 30 would have been 83 basis points. As Ken alluded to earlier, we raised $44 million of net proceeds from the issuance of perpetual preferred stock. This is the second time this year we've accessed the capital markets. It's been very rare for banks, less than [ $10 billion ] of assets to be able to access the capital markets for perpetual preferred stock, which, as you know, is included in both Tier 1 and total capital. We view this as a testament to Dime's favorable perception by the capital markets. During the quarter, we repurchased approximately 975,000 shares at a price of $14.62. Our share repurchases were supported by our internal stress testing analysis. Upon announcement of our merger with Bridge on July 1, we proceeded to suspend our existing 10b5-1 plan and are currently not repurchasing any shares. We ended the second quarter with a tangible equity ratio of 9.76%. Excluding the PPP loans from the numerator of the ratio, the adjusted tangible equity ratio would have been approximately 10.25%. This is a full 100 basis points above the minimum tangible equity ratio of 9.25%, which we mentioned on the prior call in terms of where we feel comfortable operating the company. Excluding the merger-related expenses, severance expenses, and securities gains, core pretax pre-provision earnings for the second quarter of 2020 was $24.5 million, representing 26% linked quarter growth and 43% year-over-year growth. The core NIM, which excludes the impact of $1.7 million of prepayment fees, increased by 16 basis points on a linked-quarter basis to 2.75%. Driving a structurally higher net interest margin is one of the key tenets of our business model transformation, and we are pleased with this quarter's results. The increase in core NIM was driven by a 27 basis point linked quarter decline in our cost of deposits. The period end weighted average rate on our loan portfolio, excluding PPP loans, declined by 6 basis points on a linked-quarter to 3.94%. The presence of PPP loans, while additive to net interest income in the amount of approximately $1 million was dilutive to our second quarter core margin by 2 basis points. For the second half of 2020, we have approximately $875 million of CDs at a weighted average rate of 1.52 that are maturing. Repricing these CDs at lower rates provides us a meaningful opportunity to continue reducing our cost of deposits and maintaining the upward bias in our core NIM. Our charter conversion from a thrift to a commercial bank has enabled us to accept municipal deposits. And in a short span of time, we have built the municipal deposit portfolio to $351 million at quarter end. The weighted average rate on this portfolio was 51 basis points at June 30. The growth in the municipal portfolio has helped to reduce our loan-to-deposit ratio to 122.7% at the end of the second quarter on a reported basis. And excluding the PPP loans from the numerator, the ratio would have fallen even further to 115.7%. Our core efficiency ratio was 50.3%, and the expense to assets ratio of 1.52% remained relatively well controlled compared to other commercial banks. Expenses related to COVID-19 in terms of additional pay to our branch staff, business development staff, cleaning related expenses, PP&E and other items totaled approximately $1 million in the second quarter. We expect these expenses to abate over time as we are in Phase IV here in New York and the lockdown conditions of March and early April are in the rearview mirror. A critical part of the business banking build-out is the addition of noninterest income. In 2019, we saw promising early signs of increasing noninterest revenue, and this trend continued in the first quarter as we recognized $2.5 million of customer-related loan level swap income. This helped year-over-year core fee income to grow by approximately 83%. As you well know by now, we don't provide quantitative NIM guidance. That said, in the third quarter, there will be a few items impacting the NIM. First, the additional average balances of PPP loans, that is the full quarter impact will likely have an additional 2 to 3 basis point negative impact on the NIM. This is assuming forgiveness does not take hold in the third quarter, and the unrecognized processing income does not accelerate. Second, we typically have an outflow of escrow deposits at June 30, and the balances build back up over the next 6 months. This will probably have a 0.5 to 1 basis point negative impact on the third quarter margin. And finally, approximately $600 million of our borrowings are tied to LIBOR, where we receive 3-month LIBOR and pay FHLB the corresponding 3-month rate and extend durations via the swap market. Given the increase in LIBOR rate in the month of March, we benefited from receiving an elevated level of LIBOR in the second quarter. With LIBOR rates going down after April, when these borrowings reset, we will see an increase in costs. This is expected to have a 2 to 3 basis point negative impact on the third quarter margin. All that said, we continue to drive our deposit costs lower and as mentioned previously, we have a significant amount of CDs coming due in the second half of the year. This deposit repricing opportunity should enable us to continue growing the core net interest margin for the remainder of the year despite the 3 unusual items I mentioned above. On a related note, and while we said this last quarter too, but it did not play out as we thought, we may see more of our real estate borrowers waiting until their reset period before refinancing or taking the option to reprice their loans rather than prepaying early. While this could lead to a decline in prepayment fee income from the $1.7 million figure we saw this quarter, it will mean we retain solid credits at low LTVs for longer with a coupon rate that's fairly attractive in the current low rate environment. In terms of noninterest expense guidance, we are projecting noninterest expenses for the second half of 2020 to be approximately $50 million. That is for the 6 months ended. And finally, with respect to the effective tax rate for the remainder of 2020, we expect it to be approximately 22%. With that, we can turn the call over for questions.

[Operator Instructions] The first question is from the line of Mark Fitzgibbon from Sandler O'Neill.

I wondered if you could give us a sense for what rent collections look like today for your multifamily book, both rent-regulated and non-rent regulated. What you're hearing anecdotally from your customers?

Yes. Mark, it's Stu. Generally speaking, it's -- you have to look at it really on a granular basis on a building by building level because we have customers that are not in deferral, and that's the vast majority of our loans that are collecting rents. Fairly normal pre-COVID in terms of their actual collections of 85% to 90%, which is what they were pre-COVID. And then you have those that are in forbearance or those that have commercial aspects to their abilities in terms of mixed-use and retail that are obviously at lower levels and thereby causing their request for forbearance. So it's really a tale of 2 stories. You got the vast majority collecting in -- very close to what they were historically. And then you have those that were more affected by COVID. And those percentages are obviously significantly less, although improving as you see the migration in our first tranche of forbearance loans that came due on July 1, where payments are starting -- again, starting to come in on those loans as well. And on -- and collections, obviously, are driving those payments. So it's really bifurcated in that fashion.

Okay. And also, I was curious, the yield differential between business banking loans today and your core sort of multifamily commercial real estate stuff has really collapsed the difference between the 2. So I guess I'm curious, does that mean you'll probably do more traditional multifamily stuff again or not necessarily?

So Mark, there was a bit of a mix shift this quarter because we did more of the back-to-back swap loan. So it's not really an apples-to-apples comparison. So we're putting on floating rate assets on the balance sheet that have a fee income component associated with that. So in this quarter, we did around $150 million of loans that were swapped. So obviously, we have floating rate there. So it needs to be viewed in that context. Obviously, on the multifamily portfolio, we're retaining clients, and we're trying to keep some of them out over there. But over time, given the opportunity on the deposit side to lower costs over there, I think we're also trying to get the balance sheet more to a neutral perspective. And so that's what's kind of driving that. Also on the business banking side, we've reduced the cost of those deposits as well. So when you think about the net interest margin of that business, it's still in that 3.70% to 3.75% area, and we really manage that business on a NIM perspective, keeping in mind what percentage of floating rate assets we have on the books over there.

Mark, just to go further on that, in a lot of what we booked in the second quarter in terms of early in the second quarter were loans that were committed pre-COVID and those swap transactions were committed pre-COVID as well. Since that time, we have instituted floors on LIBOR floors on our swaps and have actually increased those LIBOR floors and our spread over LIBOR on those swaps. So you're going to see higher yielding. It was just a group of loans that were committed and closed just after the COVID and were committed pre-COVID. So we've taken steps to ensure that we maintain our spread and our NIM.

Okay. And then just one point of clarification, Avi. I think you said there was $875 million of CDs that were scheduled to reprice at a yield of 1.52%. Is that in the third quarter or in the back half of the year?

No. So it's the second half of the year. Over the course of the next 6 months.

And those realistically reprice sub-minus 1%, I assume?

Well south of sub-minus 1%. We -- I mean, our highest rack rate right now is 45 basis points. So we'd expect -- typically, on the CDs, we see around 75% retention. So we'd expect to retain around 75% at 45 to 50 basis points, and the remaining 20% odd, we can do with borrowings, which right now has a cost of 40 to 50 basis points as well. So I'd assume a full 100 basis points on that $875 million.

Okay. And then finally, I wondered if we should expect stock buybacks to continue in the third quarter? Or will you be precluded because of the merger from doing more buybacks?

Sure, Mark. So in the prepared remarks, I mentioned that we suspended our 10b5 plan on July 1 in -- with the merger announcement. So obviously, until the shareholder vote, we will be out of the market, given some of the rules out there. So we're not in the market right now and do not expect to be in the third quarter at this point.

The next question is from the line of Dave Bishop from D.A. Davidson.

Just a quick question. Obviously, you guys have been very successful in layering in some of these additional commercial loan products, the back-to-back swaps or so. Just curious maybe what your outlook is for continued growth or a level of commercial swap loan fees heading into the back half of the year?

Yes. I mean, honestly, business is still very strong. We're seeing -- we have a very nice pipeline. I think this quarter was extremely strong. I would expect that our swap fee income would be -- would revert back to similar to first quarter, but still very strong. We still have a very good pipeline, and we see that continuing to grow throughout the year. I don't know that it will be quite as significant as the second quarter, but in line with where we were for the first quarter and on our budget going forward.

And Dave, it's also going to be a function of the rate environment, right? If the curve is flat, this is what the customers want at this point in time. So in our internal budgets, we're probably seeing on the real estate side, probably half of our transactions are going to be swapped loans in the second half of the year. I mean that's the current expectation. But it's obviously in response to what the customers want.

Yes. And I think we do see an uptick in SBA related fee income with the focus on PPP lending at the SBA moving back toward traditional SBA lending. We had a significant pipeline of loans waiting to close. But since the SBA was so involved in PPP, those things were delayed. So we see a significant positive impact of normalized SBA gains on sale, and that's a positive for the remaining 6 months of the year as well.

Got it. That's good color. And then, Avi, I was wondering if maybe you could -- it sounds like there could be some -- several items sort of impacting the reported margin next quarter. I was wondering if you could just walk through some of those headwinds, again, a little bit more granular. And then does that sort of imply a relatively flat to down margin here for the third quarter, just maybe what you're thinking just from a reported versus maybe core basis?

Yes. I'll start with the core basis, Dave. So in the prepared remarks, I did say that with the CD repricing opportunity that we have and our deposit costs, which on a spot basis, the deposit cost at June 30 was 73 basis points, which already is lower than the cost of deposits for the full quarter of 88 basis points. So there's significant room over there. What I did say was in Q3, there's probably 3 items that are unusual. The first one is with the PPP loans, we're going to have a full quarter impact of those average balances, right? So keep the forgiveness side aside for a second because nobody knows exactly how that's going to play out. But just because we have more average loans on the balance sheet that are PPP loans, that's going to probably be 2 to 3 basis points negative on the third quarter margin. Then we have some escrow deposits, which usually leave the bank at June 30 and December 31. And so as we build those balances back, in the first 3 months, you got to replace it -- replace non-interest funding with interest-bearing funding. So that's probably a 0.5 basis point to 1 basis point. And then the last piece is on the borrowings. Some of our borrowings are tied to LIBOR. We synthetically create long-term advances basically through the swap market and receive 3-month LIBOR and pay the FHLB the 3-month rate. So on that piece, that's probably going to be 2 to 3 basis points negative because LIBOR was elevated in Q1, as you know. So you add all those up, that's probably 5 to 6 basis points of a negative impact in the third quarter on the core margin. But in terms of the deposit costs that we're going to be able to reduce, that should more than offset some of these unusual items. What I mentioned on a reported basis was our reported net interest margin had prepayment fees of $1.7 million. We've been saying for a while, we expect those numbers to be lower. But every quarter, we still kind of have that $1.5 million to $2 million run rate. We've not seen that number be below $750,000 to $1 million anytime recently. So that probably would be the low end. But even despite all of that, I would still expect the reported margin to trend upwards. And the core margin definitely would have an upward bias in the third quarter and then definitely in the fourth quarter as well.

Got it. That's good color. And then I guess one final question. You sort of broke out the amounts reaching the end of deferment. Just curious some of the more recent conversations here. Any sort of insight in terms of sort of the [ procure ] rate that you're expecting for this next tranche that are coming off their first initial [ amount of data period ]?

We're certainly expecting at least a similar migration. What we are seeing is positive chutes in terms of New York City coming back to life. We're obviously entering Phase IV. And you can see in our reports that even COVID-related industries are beginning to come back and pay. So at a minimum, we expect the same 40% and 65%, if not better.

The next question is from the line of Chris O'Connell from KBW.

This is Chris filling in for Collyn. So I just wanted to start, I guess, with loan growth. And maybe for the second quarter, how much of this quarter's growth or origination activity had come from the pre-pandemic era and just how the loan growth pipeline and the composition of that pipeline is going forward?

Yes. I mean, as I mentioned earlier, we're still seeing quite a bit of business and a very strong pipeline. We had originally given growth guidance earlier this year, and we are comfortable with that current guidance. We expect originations to hold. And so we're -- at this point, we're very comfortable with our original growth projections.

Okay. Great. And then on the deposit side, you noted that, I think, just over $100 million or so were PPP related deposits. But obviously, overall deposit strength this quarter was extremely strong. Have you seen any of those PPP deposits roll out as we head into the third quarter or any of the outsized strength this quarter kind of start to fall off as customers deploy those funds?

Well, we expect that. I mean, clearly, over the time frame, we've actually deposited almost $325 million in deposits. And as Avi mentioned earlier, those numbers at June 30 are down to $104 million. And the purpose of those PPP loans where people have used that to pay employees, et cetera. So we do expect that to continue to trend down, and it has. That said, our commercial growth, commercial deposit growth has remained -- non-PPP has remained very strong. And as we continue to garner new business and relationships from our commercial business bankers as well as some new customers from -- and permanent customers from PPP, we're seeing continued growth and stability in our commercial deposit base.

Okay. Great. That's good to hear. And then finally, on the service fees. And obviously, the impacted by customer activity and branches being closed, et cetera, during the crisis. How do you see those rebounding in the second half of the year?

Well, I mean, at this point, service fees truly are a function of transactions. And it's also a function of the amount of deposits that customers are keeping. So we have significant customers that have higher balances. So we're seeing less in terms of analysis, fee income, NSF charges, et cetera, because they have the balances. So I do see that recovering somewhat as businesses begin to open up and transactions continue to increase, but we do expect it to trail what we expected, say, from the first quarter on. But the offset to that is higher balances and lower cost of funds.

The next question is from the line of Howard Henick from ScurlyDog Capital. Howard Henick;ScurlyDog Capital;Analyst: I've had a question actually about the merger. I apologize if that's a little off topic. But my understanding, and correct me if I'm wrong, is that both parties are taking change of control provisions. And I didn't think that was customary in a merger of equals when the party is taking the change of controls are maintaining their jobs. And I'm curious what the rationale for that was. And also, was it taken in cash or stock and why?

Howard, all that information, I'm afraid you'll have to wait for the merger proxy, which will have the background for all that stuff. Howard Henick;ScurlyDog Capital;Analyst: So that hasn't been publicly announced either way?

No, Howard, it has not.

This concludes our question-and-answer session. I would like to turn the conference back to over Mr. Ken Mahon for closing comments. Over to you, sir.

Okay. Thank you, operator, and thank you, everyone, once again for joining. Thank you for your questions, and look forward to speaking with you on our next conference call in October. Have a good day.

Thank you very much, sir. Ladies and gentlemen, the conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.