Q4 2019 Earnings Call

Opening remarks will be brief so we can take some questions at the end three years ago at the beginning of 2017. We took steps to reformulate our business model from that of a brokerage in multifamily Thrift model into a full-service Commercial Bank this effort culminated in the adoption of a Commercial Bank Charter in the spring of 2019.

a primary

Impetus for the change is that it was clear to us that the community Commercial Bank model enabled the possibility of more Diversified balance sheet and better returns for shareholders in the future reflected in a form of structurally higher net interest margin return on equity and ultimately it's a better trading multiples both to book value and two earnings to that end. I'm strategic plan is built upon impact a five fundamental metrics.

One row our total checking account balances to increase low-cost business deposits three grow relationship-based commercial loans that have better risk-adjusted returns and multifamily loans.

For reduce our regulatory concentration ratio and five diversify the sources of non spread Revenue while increasing the contribution of non spread Revenue to Total write-off those five metres. How did we perform in 2019?

Starting first with growing our checking account balances on a year-over-year basis average non-interest-bearing and low interest-bearing checking accounts increased by 20.4% to 605 million dollars every dollar of low-cost deposits that we raise increases the franchise value of our company from every member of our executive team on down to our entire customer-facing staff. Our compensation plans are highly 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 31% or approximately $133 on a year-over-year basis commercial deposits now comprise 13% of total deposits as compared to approximately 10% of total deposits a year ago.

our third Financial metric is the growth of relationship-based commercial loans the business banking divisions portfolio across the 1 billion dollar Threshold at the end of the second quarter of 2019 and ended the year 1.28 billion compared to $648 million dollars at the end of 2018 this represents your of your growth of 97% off the business banking portfolio now after 3 years represents 24% of total loans

12 ought to provide some historical context. We initially started this business build out in early 2017. And in the first year we achieved approximately 240 million dollars of net portfolio growth in 2018 410 million dollars in that portfolio growth. And now on the third year 632 million dollars of net portfolio growth. Well within Striking Distance of the next Target we established for a bank at the start of the year.

important

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 64 Bankers including approximately 17 of whom a front-line business producers are for targeted metrics is the lowering of the commercial real estate concentration real estate concentration ratio, which not long ago was down. Please feel we've now reduced our Consolidated regulatory cre concentration ratio to 663% at year end 2019 as many of you remember that well over 900% only a few years ago. This is not an insignificant achievement and has reduced the headline risk associated with the Legacy multifamily Diamond models significantly in my opinion.

Final metric as it relates to non spread Revenue, we have invested in our business developed a commercial swap program for loan clients and improved our commercial service fee income generation capability. We grew annual non spread Revenue excluding Securities gains and losses by over 37% on a year-over-year basis to summarize. We've made quantifiable project fi front and you can start to see some positive patterns and Trends emerging we plan to make even more progress in the years ahead and I'm confident with the existing team in place and the new hires we continue to attract black diamonds on a path to be one of New York's preeminent Community commercial Banks fact of challenges staff with the following goal for 2020. I want them to be the best Business Bank in New York phone number and name already resonates in our local markets. Now, we increasingly have the people and the products to achieve that goal.

As I mentioned before the build out of the business banking division was a very timely strategic decision for dime. We now in place a robust and growing platform to generate high-quality loans high-quality commercial loan with good risk-adjusted profitability. We are no longer reliant on transaction and refinance volume activity in the in the New York City multifamily Market those volumes appear to have been impacted by the rent regulated rule changes, but time is no longer significant player in that market.

Turning two deposits in the span of just three years our business banking group now manages a bigger deposit portfolio of about 357 million dollars at the end of the year than that of the Legacy Ridge family business deposit two loans for the business banking division are running at approximately 27% of that loan portfolio compared to approximately 5% for the Legacy multifamily business. Therein therein lies a tremendous opportunity for diamonds. We remix our balance sheet and as the contribution of business banking grows over time, the business banking Asian 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 thoughts 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 and composition of the balance sheet.

I am very proud of the work done by a multi-family.

Team as they've adapted to our new mission of focusing on unimportant relationships and prioritizing solid margins and returns above chasing balance sheet growth.

For those of you who have seen our investors slides my favorite page and what I point to all the time is the page comparing our loan yields and our deposit costs to thirteen individual peer institutions in our new job market as of the quarter ended September 30th, which is the most recent. That we have pure information for which we have peer information available time, like the median loan a yield of the peer Group by about thirty basis points in total. The peer group of the median at September was 4.3% by comparison in the fourth quarter, the weighted average rate on our total business banking original books real estate and see and I was 5.39% 101 basis points higher than the peer group median portfolio yield.

That shows the earning power of the new model and confident that now we have the infrastructure in place to close the gap with the peer group yield in due time on the other side of the balance sheet. Our projects in. The deposit front is likewise been commendable. If we go back to the fourth quarter of 2016. Just prior to the onset of our transformation. I'm very nearly had the highest cost of deposits when compared to those 13-month Banks now, our cost of the part cost of deposits has moved meaningfully lower than many of those same competitors, and with the recent decline in costs the deposits we experienced in the fourth quarter of 2019. We're fast approaching the peer median, of course the deposits. I'll be able to provide more detail on the cost of deposits in his remarks. Our team is certainly confident that we can continue to do better in terms of improved are non interest-bearing deposit percentages on our way to becoming not only a high-performing Commercial Bank, but in fact the best Business Bank in New York

on a year-over-year basis

Gruden on interest-bearing deposit ratio by approximately 210 basis points. Our goal is to get to 20% non-interest-bearing deposits as quickly as possible now, I'd like to turn over, it's cool to Avi who provide some color on the fourth quarter results and the outlook for 2020 Chevy. Thank you Kim. I'll first start with a fourth-quarter results for quarter compared to $0.13 for the links quarter included in this quarter's results was a seven and a half million dollar provision related to a previously identified cni relationship that had already been placed on non-accrual status as mentioned in the press release being fully reserved against this relationship is a prudent course of action given what appears to be a very protracted settlement process. We want to share a few details on the credit. The borrower was a subcontractor which has the farm significant work on Municipal projects and private projects in the Metro, New York birth.

4/20

Sbarro file for bankruptcy in the third quarter prior to which they were current on all payments Diamond extended twenty million dollars of credits to this bottle were currently working with a bankruptcy trustee to maximize returns for ourselves and other unsecured creditors from all accounts. We received to date this appears to be a highly unique situation where the subcontractor was pressured to complete a major public works project on an accelerated timeframe, which led to bankruptcy the charge down balance of the loan is $10 of which.

All of it is an on a cruise as mentioned previously. We're fully reserved for this ten million dollar exposure beyond that information. We will not be providing any more commentary on this individual credit app. Anei as the loan is still in the workout process. I'm sure you can all respect that position a stock price suffered in late October after our third quarter earnings release likely as a result of the aforementioned non-accrual announcement. We took that as an opportunity to repurchase shares at attractive levels given the confidence we have in our business plan and the underlying fundamentals wage. We wrapped up our repurchases of stock in the fourth quarter and purchased over 750,000 shares for a total cash outlay of approximately $15 the repurchases in the fourth quarter represented approximately 2% of shares outstanding.

in addition

Chief banking officer purchased approximately $125,000 worth of stock in the fourth quarter.

This morning. I bought authorize a 14 share repurchase plan that will allow us to repurchase up to seven and a half percent of your end shares outstanding following completion of the previously on June 13th share repurchase plan.

Importantly core pre-tax pre-provision income excluding the official be extinguishment expense and expenses associated with the branch consolidation was approximately 18.7 million dollars for the fourth quarter of 2019 compared to 16.8 million for the linked quarter and 16.9 million for the year ago quarter that represents 11% year-over-year growth in pre-tax pre-provision income.

The net interest margin excluding loan prepayment fee income increased by 18 basis points on a linked quarter basis to 2.47% as Ken mentioned driving a strong higher name is one of the key tenets of our business model transformation and we were pleased with this quarter's results. The increase in cord name was driven by a 20 basis-point decline in our cost of the project as well as holding a loan yields fairly steady. In fact, the weighted average rate on our total loan portfolio, which excludes prepayment fees and deferred fees and costs increased by two basis points on the link part of the

based on the on

Places we've seen so far we believe this Decline and cost of deposits could be amongst the most significant amongst appears.

The continued uptrend in the weighted average rate on loans is due to the business banking portfolio becoming a larger percentage of the overall balance sheet.

During the fourth quarter and as previously disclosed in our third quarter 10-q filing, we restructured a portion of fhlb borrowing in total. We repaid $207 of borrowing off the weighted average rate of 2.65% and the realized expenses associated with the extinguishment was approximately 3.8 million. The borrowings are prepaid over the course of the course starting in late October and continued until your end and as such the full run-rate benefit was not fully realized this quarter within the 18 basis points of codename expansion pack cost only approximately one basis point was related to the benefit of the lower cost new borrowings that we put on next quarter. We should get an additional basis point of expansion from the restructuring.

Adjusted for now.

Encore items efficiency ratio is 57% and the expense to assets ratio remained relatively well-controlled at 1.55% And this Compares well with other community commercial Banks apart from improving the quality of our balance sheet and risk-adjusted margins a critical part of the business banking build-out is the addition of non spread income bracket 2019. We definitely saw promising early signs of increasing non spread Revenue in the fourth quarter. We recognize approximately $400,000 of customer related loan levels of developing an interest rate swap program for a commercial customers was the next natural step in our Commercial Bank Evolution and we are happy to note that we are now able to provide the service to both of us commercial clients in addition r s b a team has been gelling very nicely with our Branch Network and produced approximately $300,000 in gain on sale income in the fourth quarter.

has impressed

The professionalism and size and growth of that Pipeline and we expect them to be a major contributor to fee income in 2020.

Non-performing assets and Loans 90 days or more past you drop by 25% versus the linked quarter to twelve point six million and represent only twenty basis points of total assets. We package deal with the tangible common ratio of 8.59% and the risk-based capital ratios blue on a linked quarter basis with the common Equity Tier 1 ratio ending up at a very healthy 11.15 for now. I'll move on to the outlook for fiscal year 2020.

We expect Network for your growth for the business banking division of approximately six hundred million dollars for FY 2020 this accounts for amortization and payoffs in the existing portfolio that a seasoning as time passes. We have seen growing demand for a responsive customer-focused platform as we demonstrate longevity and commitment to the Commercial Bank model. We are providing we have been provided more opportunities to add high quality individuals from our competitors are Charter conversion from a thrift store Commercial Bank, which became effective in April 2019 following not applicable regulatory approvals is Testament to the fact that the board and management team are fully invested in our business model transformation.

a 2020

Ending total asset figure will be a function of future payoffs in the multifamily business. Ultimately. We are most focused on improving the quality and re mixing of our balance sheet. This internally as building a new balance sheet inside the old balance sheet in terms of the actual balance sheet size. We will manage it based on the growth opportunities at hand and return Capital to our shareholders a circumstances present themselves in this regard and based on all the stress testing. We have completed we expect to run the company with a tier one ratio in excess of ten and a half percent and at Ang ratio of approximately eight and a quarter to eight and a half during FY 2020.

As we demonstrated in the fourth quarter, we don't have to grow the balance sheet in order to grow our core earnings power per share. We can grow EPS by improving our margins and using the excess Shuffle generated to buy back shares buying back shares continues to represent an attractive investment with the TV or lack of approximately four years.

Have you well know by now?

We don't provide quantitative name guidance. I want to provide a rationale for taking this contrary approach. We are a business model in transition and we do not want to manage the balance sheet by chasing a toddler learning targets were truly trying to build a business for the medium-to-long-term and this court has named expansion was validation of our thesis.

Inherently, the direction of the name depends on a number of extraneous factors that are outside of our control including future actions from the fed the shape of the curve and the competitive pricing environment for deposits off what we can see on the name. Is this the weighted average rate on the billion three business banking portfolio was approximately 4.95% at the end of 2020 and it was accompanied by $356 a self-funding deposit at a weighted average cost of 69 basis points. This leads to an implied business banking portfolio name in excess of 3.75% Which is far above the name on our overall balance sheet today while there are various factors will affect the changes in them on a quarter-to-quarter basis. The medium-to-long-term trajectory of our name is clearly up for dead as a business banking portfolio becomes a larger percentage of the balance sheet over time.

we have

Approximately $515 a multi-family loans with a weighted average coupon of approximately 3.32% which are scheduled to reach the contractual replacing date in 2020 clear. Am replacing these Legacy loans with business banking loans, which have much higher yields and more Associated deposits. Will Aid with the continued upward trajectory of our name. We're projecting non-interest fences for fiscal year 2020 of approximately ninety eight million dollars while this may seem like a higher expense growth rate than some of our peers. I would like to point out to key important points off first, we highly confident in our business model transformation and the early returns have been on track and very promising. So it makes sense for us to continue to invest in productive lending capacity. Am I such we want to continue to invest in the business and support staff to Aid in our continued transformation second or expense to assets ratio of 1.55% off.

to compare favorably the Commercial Bank

As we grow the business over time the revenue side of the equation will catch up with some of the expenses and this will help with the efficiency ratio overtime. I'll point out again that we still have that was 70% of our balance sheet in lower yielding Legacy broker driven loans, which remains a drag on the revenue side of the equation as time progresses. I'm confident this we will be able to transform the name with having more of a balance sheets in business banking laws as it relates to non-interest income. We had very positive progress on the front this year off somewhat slow start in 2017. We hired a new leadership team in late 2018 and they made very good progress. This field a short-term goal is to have the SBA business reach a two and a half million dollar plus annual income run rate as soon as possible.

We continue to gain significant traction with our clients on a commercial swap program. We expect this business to be over $1000000 plus revenue for us Revenue plus business for us in 2020 from effectively. No contribution up to the second quarter of 2019.

we could

Do you know optimize our code technology platform to help Drive Commercial Banking fees as we acquire an on-board more clients this fee Source will grow as well.

Finally with respect to the effective tax rate for 2020. We expect it to be approximately 22 and a half percent to 23%

with that we can turn the call over for questions.

Thank you. We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press star then to our first question today will come from Mark Fitzgibbon with Piper Sandler, please go ahead. Hey guys. Good afternoon. I'm a as you grow. You see an Irish Nations. I'm curious that there any areas or industries that you're focusing on and and also who you taking share of em, is it from the larger Banks or is it other community bags?

Like I think the store also the second question yet.

The larger larger Banks out there. We've we've said, you know in the past we really have a unique opportunity here because we're really the only bank that has a six hundred million dollar Capital basis. That's you know, highly focused on this with a brand name that resonates. So that's kind of where the opportunity is at this point in time. I think right now, you know, there's no specific industries that often significantly focusing on, you know, we provided some details on our portfolio and our last investor presentation, but it's typical cookie-cutter Community Commercial Bank type credit app

Okay, and then prepayment penalty income was strong this quarter. I assume you think that that will decline a bit in in coming Quarters off. Typically what we're seeing with that I guess without portfolio is cute too and Q4 are typically, you know, fairly strong quarters for us and then q1 and Q3 seem to be less. It could be just with the borrowers trying to get that stuff done by you know, you know media and end of the year. So that's hard to predict it. I think in general, you know loans are you know staying on a little longer they're getting closer to the reset it before prepaying but you know, I think what the size of the portfolio that we have, you know, I I think you know, you know for the full year, you know, it's hard to see us having less than you know, four or five million dollars prepayment prepayment Revenue in there for a fully. Oh, it's kind of a million dollars for quarter ish this quarter. Obviously, we had a little bit more than that. But but I think you know given you know, the fact that we still have a portfolio is over three billion. Yep.

You should see a million plus of prepayment fees, but any individual quarters can go up and down and then you know, I know that you all are D emphasizing multifamily and there haven't been a multi-family sales recently in the mention.

York Market, but what's your best guess as to how much values have gone down in the last year on on buildings that you know have rent-controlled rent-stabilized stuff in in places like Brooklyn and Queens?

You know cap rates really have stayed low marks. So that's part of what the drives in value calculation and then you know dimes never really done loans based on proper form of rent or anything. So, I mean clearly it's impacting the the transaction volume, but you know, it's hard to estimate what you know, what that's done. I I do think Iraq has been a big help the low cap rights have been a big help to him. That's where you're not really seen too much too much of disturbance in that the market place and and then last month. I I know it's small numbers, you know, but the construction portfolios like a hundred and eighteen million now, but it's been it's been growing pretty fast. I I guess I'm curious what kind of construction projects do you do and you know, what are what are your largest construction loans in terms of size?

It's a it's it's a pretty cookie-cutter construction portfolio.

Typically what happens with the construction loans you make them and then takes a while for them to find. I mean, we obviously have you know internal limit limits on those then, you know it less than you know, 5% of our, you know loan portfolios. It's very manageable, but it's it's just a standard no different than any other community Commercial Bank is doing

And how big loans are we talking about? I know they're not all drawn right away. But yeah, I mean probably if you know bombing dolls, you know less than you know ten, you know, ten million dollars. I mean, that's kind of the same less than that. Okay. Thank you.

Our next question will come from Colin Gilbert with KBW, please go ahead thanks gud evening guys. Just want to dig in a little bit to get the loan book and just to starting with the multifamily. I know you had said that you had sure it was at five hundred or some odd million that was contracted due to mature in 2020. And I think that number was like six hundred million or something like that last quarter, but you guys saw pay Downs. I think that were higher than what you would have anticipated in the fourth quarter cuz I think I'm thinking that maybe the the paid on the multi would be matched with the growth and the business and that balances would hold flat. So just trying to get a sense of you, you know, where the behavior you kind of expect on the multifamily side and maybe do you anticipate pay Downs to sort of accelerate or how we should sort of think about you know, the the rate of of birth

Pay Downs within that book.

To call again. It's it's seasonal rate. I think in the first half of the state owns a little bit slower people are waiting for the rent regular rule changes to go into effect. And then you know, we have the same, you know seasonal Q4 web payoffs pick up so it it's hard to predict with that portfolio. But but I think the way to think of our you know, we have you know, we have Capital we have a balance sheet. If we may have more payoffs if he's going to be balance sheets going to be slightly smaller, but we're going to return that Capital to shareholders, you know, managing around the capital ratio constraints I described so our store is not really about a balance sheet birth story. It's about a re mixing story and if the payoff the higher than what we think will will return that Capital to shareholders of the time but you know, the really in the multifamily portfolio a lot of the loans that are there are raised at bar whiskey get today. So there's no incentive for them to rush into refinance and there's really a going back to Mark's question a little bit earlier. There's nothing there used to be a lot of juice in the in the birth.

In those values that come and take more money out those days seem to have passed us by so then within that can would you then then these loans could could see their contractual Charities versus Pay prepay head.

Think they tore their McDermott or is correct, right? Okay. Okay. Okay, and then just hear you on all the moving parts and the name and you know unwillingness to give him Guidance just wanting to understand sort of the Strategic direction of how aggressive you guys want to be in pushing out. Some of the higher costs deposit specifically kind of in that online change. It seems like you know that part you do have some control over. So just wanted to kind of get a sense for how your