Q2 2020 Dime Community Bancshares Inc Earnings Call
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Good day and welcome to the time community Bancshares, Inc. second quarter, Twentytwenty Onyx Conference call.
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Thank you operator, thank you everyone for joining us this morning.
Crazy or this has been under still five months ago before the end of the year.
Call with me today, our presidents to logo.
Financial Officer hobby ready.
Chief Accounting officer Lovely Fellows Bonnie.
My prepared remarks, I'll make some enterprise wide comments and then we'll pick up some of the board themes that continued underlying earnings release this quarter.
As you've seen we had a very strong quarter in imaging with court with core EPS of 39 cents.
It was inclusive of the impact of a 6.1 million dollar additions to the general allowance for loan losses, which were determined to be prudent given the potential impact of the pandemic.
Our strong core EPS was aided by net interest margin expansion.
Income growth and expense control.
Those are far story over the past few years in order to diversify our assets in our revenue stream with again the transition toward a commercial bank model.
2017.
Positive impact of that transformation is taking hold now as most apparent beginning with this quarter's results.
We'll go after the question, we got asked three and a half years of those how long does this transition going to take I suppose this public inside the people he said.
It takes three years. So we just we just about three or more and we knew a year ago that these quarters were coming and I'm glad to see that we find out here.
Oh linked quarter basis, Npls were going down that went down this quarter approximately 15%.
$15.3 million.
That's $50 million under five and a half a billion dollar portfolio.
Our loan deferrals were also down to approximately $916 billion at June Thirtyth.
Compared to the peak, which was reached in the month of May have approximately 1.1 billion [noise].
More encouraging we have the first tranche of 489 million of loans that was provided for parents in the month of April.
195 million or 40% as a result full payment.
120 million or hunt for approximately 25%, how painful interest and escrow where required.
Together that adds up to approximately 65% of the April traunch deferrals.
Other remaining loans in the April Troche 169 million is paying at least full escrow.
So the migration of deferred portfolio to full performing status is well underway.
In the years between 2007 in 2013.
It's cumulative net charge offs were only 130 basis points.
Getting loan balances at the start of the crisis.
Cumulative cumulative net charge offs over a period of six years.
Since the beginning of the crisis at that time.
That number was approximately five times lower than the overall <unk> Bank index.
Given the low LTV nature of the multifamily portfolio.
Which was 50, 50% at June Thirtyth.
We're pretty we anticipate our track record to continue.
Due to the somebody cities limited geography multifamily apartment buildings are the primary form of housing in New York City.
Many of our borrowers have remained with time 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 Kobe Dizzy unique situation.
In the past decade, New York City has seen significant investment in the tiny sector technology advertising media and information companies.
We hear a time are believers in the long term demand for housing stock in New York City.
Especially given the low ltvs are the loans in our portfolio, we remain optimistic that our credit performance will once again outperformed overtime.
Right now we are committed to helping our borrowers got 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 till the telx, which we had about $173 million investment restaurants with about $27 million.
Lastly, lubow here, who will answer any of your questions are more granular way during Q1 I sections of the a presentation. This morning.
We've also built the balance sheet with significant capital strength in second quarter, we opportunistically raised $44 million of net proceeds from the issuance of perpetual preferred stock.
Sourced from 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 one risk based ratio is in excess of 13%.
Our total capital ratio is in excess of 16%.
Our capital base, coupled with the low LTV and improved core profitability, well certainly surface well in the current environment.
Next I'd like to touch briefly upon dimes involved in the Paycheck protection program.
In the three years ago. When we started we did not even how they NSPI a program here in die. So we made great progress shown by the results here the second quarter, we originated 330 $319 million a P.P.P. loans.
At June Thirtyth, or P.P.P. related deposit balances were approximately $104 million.
Potential on recognizing income from processing. These loans is currently $8.9 million.
Many of these customers a new relationships to dawn.
In many of these new clients will remember that we were a source of helps to them and their time need.
As I've mentioned in the past gone strategic plan is built upon improving five fundamental metrics one growing our total checking account balances.
To increasing low cost business deposits.
Number three growing our relationship based commercial loans.
For growing sources of and the contribution of non spread revenue.
And five maintaining appropriate liquidity, reducing our CRB concentration ratio and operating with a strong tax strong capital ratios.
Now could update on each of those starting first with the growth in checking account balances.
On a year over year basis average noninterest bearing an interest bearing checking accounts increased by 54% $841 million.
The second metric is that of increasing low cost business deposits.
Total commercial bank deposits from our business banking Division plus our luck legacy multifamily division increased by almost 37% on a year over year basis to $675 million.
Second financial objective is growing relationship based commercial loans.
The business banking Division portfolio is currently approximately $1.6 billion, excluding PPP loans.
This business continues to be accretive to our overall NIM as contributed seven consecutive quarters of core NIM expansion.
Our fourth targeted metric not is not spread revenue.
On spread revenue at time, excluding security gains or losses grew by approximately 83% on a year over year basis. This was mainly driven by the Korean 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 theory concentration ratio to 545%.
Just a reminder, again this time was well over 900% only a few years ago.
In summary, we continue to make quantifiable progress I'm, all five strategic objectives.
The most satisfying aspect the transformation for me the progress that's been made on deposit side, the balance sheet 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 saw the ways to go and still not best in class, yet which is our goal.
Deposit to loans for business banking division are running a 26% of the loan portfolio compared to approximately 6% for the legacy multifamily business.
Improving the quality of our deposit base, what's the most important guiding tenet of our business model transformation.
Finally last word on our announced merger with bridge Bancorp, hopefully you've already listen to our merger quality and excuse me at the start of the mine, which detailed the strategic rationale.
We have had follow up conversations with many of our shareholders and analysts since that time.
Just four weeks, we've made important progress in our integration efforts and our teams are extremely working extremely cohesively together.
It will be a busy five months ahead.
Well 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 released this was 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, I'll be ready, who will provide some additional color on a first quarter results.
Thank you Ken I'm. Good morning, everybody included in this quarter was reported results was $3.9 million a severance expense.
Doing organizational restructuring $1.1 million of merger related expenses and $3.1 million of securities gains.
Excluding these non core items core EPS was 39 cents per share.
The 6.1 million dollar loan loss provision we took this quarter was entirely associated with an increase in the general loan loss reserves.
Due to the adjustment of qualitative factors tied to the banks existing encode lost framework to account for the effects of the cobot 19 pandemic unrelated economic disruption.
Excluding PBP launch our results to loans at June Thirtyth would have been 83 basis points.
That's kind of alluded to earlier, we raised $44 million of net proceeds from the issuance of perpetual preferred stock. This is the second time to see all we've accessed the capital markets. It's been very rare for banks less than 10 don't have assets to be able to access the capital markets for perpetual preferred stock, which as you know what is included in bought deal one and total capital.
Do you view this as a testament to dimas favorable perception by the capital markets.
During the quarter, we repurchased approximately 975000 shares at a price a $14.62 I.
I'll share repurchases, what's supported by our internal stress testing analyses.
Upon announcement about module with bridge on July 1st we proceeded to suspend our existing Tenbfive. One plan on now currently not repurchasing any shares.
We ended the second quarter with a tangible equity ratio of 9.76%, excluding the P.P.P. loans from the new many of the ratio the adjusted tangible equity ratio would've been approximately 10.25%. This is a full 100 basis points above the minimum tangible equity ratio of 925, which we mentioned on the price.
Call in terms of where we feel comfortable operating the company.
Excluding the merger related expenses severance expenses and securities in core pretax pre provision earnings for the second quarter, 2020 was 24.5 million, representing 26% linked quarter growth and 43% year over year <unk>.
The core NIM, which excludes the impact of $1.7 million the prepayment fees increased by 16 basis points on a linked quarter basis to to 75.
Driving a structurally higher net interest margin is one of the key tenets of our business model transformation and we're 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 and weighted average rate on our loan portfolio, excluding P.P.P. loans declined by six basis points on a linked quarter to 3.94% the presence of P.P.P. loans, while additive to net interest income and the amount of approximately a million dollars wasn't dilutive to our second quarter core margin by two basis point.
For the second half of 2020, we have approximately $875 million of Cds at a weighted average rate of 152 that are maturing.
Repricing BCBS 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 Chaco conversion from a threat to a commercial bank has enabled us to accept municipal deposits and in a short span of time, we have built them in a single deposit portfolio to $351 million at quarter end.
The weighted average rate on this portfolio with 51 basis points at June Thirtyth.
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 P.P.P. loans from the numerator the ratio would have fallen even for the 215.7%.
Of course efficiency ratio was 50.3% any expense to assets ratio of 1.52% remain relatively well controlled compared to other commercial banks.
Expenses related to Corbett 19 in terms of additional paid all brand stuff business development stop cleaning related expenses P. acne and other items totaled approximately a million dollars in the second quarter.
We expect these expenses to abate overtime as we are in fateful here now and the lockdown conditions of March and April R&D albumin out.
A critical part of their business banking build out in the addition of noninterest income.
In 2019, we saw promising early signs of increasing noninterest revenue and this trend continued in the fourth quarter as we recognized due went out million dollars of customer related loan level swap income.
This helped the early your 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 the P.P.P. loans that is the full quarter impact will likely have an additional two to three 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 Thirtyth and the balances build back up over the next six month, that's will probably have a half to one basis point negative impact on the third quarter margin.
And finally, approximately $600 million borrowings are tied to LIBOR, where we received three month LIBOR and pay FHLB, the corresponding three month rate and extend duration to be other swap market.
Even the increase in library in the month of March we benefited from receiving an elevated level of labor and the second quarter with LIBOR rates going down after April when these borrowings reset we will see and an increase in cost.
This is expected to have a two to three basis point negative impact on the third quarter margin.
All that said, we continue to drive on deposit cost lower and as mentioned previously we have a significant amount of Cds coming due in the second half of the on.
This deposit repricing opportunities should enable us to continue growing the core net interest margin for the remainder of the yard. Despite the three unusual items I mentioned above.
On a related note and always said this last quarter to but did not play out as we thought we may see more thought real estate borrow that's a waiting until that he's that period before refinancing or taking the option to reprice that loans rather than prepaying.
Well this could lead to a decline in prepayment fee income from the 1.7 million Figo. We saw this quarter. It will mean, we retained 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're projecting noninterest expenses for the second half of 2020 to be approximately $50 million that is for the six month ended.
And finally with respect to the effective tax rate for the remainder of 2020, we expected to be approximately 22%.
With that we can turn the call over for questions.
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First question is from the line.
Mark Fitzgibbon from Sandler O'neil. Please go ahead.
Thank you and good morning.
I wondered if you could give us a sense for what rent collections look like today for your.
Multifamily book, both the rent regulated and non.
You are hearing anecdotally from your customers.
Yes, hi markets do.
You know generally speaking is it.
You have to look at it really on a granular.
Basis on a building by building.
Level.
Because what we have customers that are.
That are not in deferral and Thats the one.
Majority of our laws that are collecting rents.
Fairly normal free Toby in terms of their or their actual collections of 85% to 90%, which is what they were pretty coated and then and then you have those that are in four banks or those that have.
Commercial aspects to their abilities in terms of mixed use and.
And retail that are obviously at lower levels and thereby causing.
There are a request for forbearance, so it's really a tale of two.
Two 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 by coded and those percentages are obviously significantly less although improving as you.
See the migration in our first.
Tranche of forbearance loans that that.
Came to a on July one.
Where payments are starting again starting to to come in on the on those loans as well.
And and collections, obviously are driving those payments so.
It is.
It's really you know bifurcated in that fashion.
Okay. Thanks, Stuart and also I was curious the yield differential between you know business banking loans today and in your core sort of multifamily commercial real estate stuff has has really collapse. The difference between the two so I guess I'm curious to does that mean, you're probably do more traditional.
All multifamily stuff again or or not necessarily.
Some off that was a bit up on mix shift a this quarter because we did more at the back to back swapped loan. So it's not really a apples to apples all comparisons. So we're putting on floating rate assets. So on the balance sheet that having a fee income component associated with that so so in this quarter, we did around a $150 million of loans out of a slow.
So obviously, we have floating rate that so it needs to be viewed in a in that context, obviously on the multifamily portfolio, while retaining clients and you know what what kind of keeping some of them out over there, but you know overtime given the opportunity on the deposit side due to lower costs over they I think we're also trying.
I've got the balance sheet more do a neutral suspect, though and so that's what kind of driving that in also on the on the business banking side, we 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 370 to 375 area and we really manage that business on a NIM perspective.
You know keeping in mind, you know what percentage of floating rate assets, we have on the books over there.
Okay, Mark Mark just 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, where loans that were committed creep Hogan.
And no swap transactions were committed recovered as well.
Is that time, we have instituted floors on LIBOR floors on our swap and have actually increase of blood work floors, and our spread over a long LIBOR on those swaps, so you're going to see higher yielding.
It was just.
A a group of loans that were you know committed and close.
Just after the coded and and we'll committed pre covert so.
We've taken steps to ensure that we maintain our spread and our NIM.
Okay, and then just one point of clarification Abhi I think you said there was 875 million of Cds that were scheduled to reprice. The other 152 is that in the third quarter in the back half of the year.
No. It's all itself it's stuff the for the second half of the are.
Okay. So it.
Over the course of the next six months.
Okay, and those realistically reprice sub 1% I assume.
Well well south of sub 1%, we I mean, our highest rack rate right. Now is 45 basis points. So we'd expect you know typically on the Cds, we see around 75% retention. So we'd expect to retain on 75% that 45 to 50 basis points on the remaining 20% odd you know we can do it.
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 or 875 million.
Okay, and then finally I wondered if we should expect stock buybacks to continuing in the third quarter or will you be precluded because of the merger from from doing more buybacks.
Sure I'm not so I'm not prepared remarks, I mentioned that Oh, we suspended our tenbfive plan on July for less than a with the with the merger announcement. So you know obviously till the shareholder vote will be a out of the market you know 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.
Thank you.
Thank you very much.
The next question is from a line of Dave Bishop.
<unk> Davidson. Please go ahead.
Yeah, good morning, gentlemen.
Right and if money.
Oh, just a quick question I, obviously, you guys are going very successful and layering in some of these additional commercial commercial loan products you know the back about swaps or so just curious.
Maybe what's your outlook is for such a new growth for ER level or commercial swap.
Loan fees heading into the back half the year.
Yeah, I mean honestly business is still very strong we were seen we have a very nice pipeline.
I think this quarter was extremely strong I would expect that our swap fee income.
I would be would revert back to somewhere.
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 will be quite a significant as the second quarter, but in line with where we were for the first quarter and our budget going forward and name. It's also going to be a function of though the rate environment. They difficult at this flat. This is what the customers want at this point in time, So you know nine Donald.
Budgets will probably saying on the real estate side, you know probably half of our transactions are gonna be swap loans in the second half of the out I mean that that's the current expectation, but it's obviously in response to what the customers one yeah and I I think we do see an uptick in.
Sta related fee income with the.
With the you know.
Focused on TPP lending at yesterday.
Moving back toward.
Traditional SPD lending, we had a significant pipeline of loans waiting to close.
But since the SPD edws.
You know so involved in PPP those things were delayed so we see a significant positive impact of normalize SP a.
Gains on sale.
And that.
That's a positive for remaining six months of the year as well.
Got it that's good color and then RV.
I was wondering maybe you could it sounds like there could be some several items sort of.
Impacting the reported margin next quarter.
I Wonder if you could just walk through some of those had when you've got a little bit more granular that does that sort of imply.
A relatively flat to down margin here for the third quarter, just maybe what's your thinking just reported versus maybe core basis. Thanks.
Yeah, I'll start with the core basis or they've so you know and in the prepared remarks, I did say that.
The CD repricing opportunity that we have and and our deposit cost, which on a spot basis. The deposit costs at June Thirtyth was 73 basis points, which already is lower than the cost of deposits for the full quarter of 88 basis points. So you know there's a significant room over that what I did say wasn't.
Q3, there's probably three 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 say the 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 ppt loans, that's going to probably be too.
Three basis points.
Negative on the site on the third quarter margin, then we have some escrow deposits, which usually I'll leave the bank at June Thirtyth than December 31st and so as we build those bounces back. The first three months you got to replace that replace noninterest funding with the interest bank funding. So that's probably a half a basis point to one basis point and then the loss pieces on the bar.
Growing so some of our borrowings that tape delay bars, we synthetically create long term advances basically.
The swap market and and received three month LIBOR and pay the FHLB the three months and so on that piece, that's probably going to be two to three basis points negative because LIBOR was elevated in Q1 as you know so you add all those up that's probably five to six basis points of a negative impact in the.
Third quarter on the core margin, but in terms of the deposit costs that were going to be able to reduce that should more than offset some of these unusual items. What I mentioned on the reported basis was our reported net interest margin had prepayment fees off $1.7 million, we've been saying for a while we expect those numbers to be lower.
But you know every quarter, we still kind of have that one after two non run rate, we've not seen that number will be below 750000 or million Bucks you know anytime.
Recently, so you know that probably would be the low end, but you know even despite all of that I would still expect the reported margin do you know 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.
Sort of broke out the a the amount of saw reaching the end of deferment just curious on some of the the more recent conversations here any sort of insight in terms of sort of the cure rate that you're expecting a FERC for this next trucks that are coming off their first initial Miami Dade appropriately.
Well we were expecting.
At least a similar.
Migration.
Well, we are seeing is.
Positive shoots in terms of.
New York City coming coming back to life were obviously the entering phase four.
And.
And.
You can see in in our reports that.
Even kobe's related.
Industries are beginning to to come back and pay so at a minimum we expect the same.
40 and 65%.
If not better.
Got it thank you for the color.
Thank you very much.
Your next question Assembly line of <unk> from KBW. Please go ahead.
Hi, Good morning, this is Chris filling in for cone.
I'm sorry, 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.
I had come from the pre pandemic era, and just how the you know loan growth pipeline and the composition about pipeline is going forward.
Yes, I mean as I mentioned earlier, we were still seeing.
Quite a bit of business and a very strong pipeline. We did originally given growth guidance.
Earlier this year and we are comfortable.
With that occurred in guidance.
We expect.
Originations the 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 or PPP related deposits, but obviously overall deposit strength this quarter, which you know extremely strong.
Have you seen any of those PPP deposits rollout as we head into third quarter or any.
The you know you know.
Outside of strength this quarter kind of Ah you start to fall off as customer support those funds.
We expect that I mean, clearly over over the timeframe we've actually the.
Positive.
Was $325 million in deposits and.
And as Abhi mentioned earlier the those numbers at June 30 that are down to 104 million and you know.
The purpose of those PPP loans were where people use acid 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 as remain non PPP has remained very strong and as we continue to acquire new business and relationships.
From our commercial.
Business bankers as well as some new customers from.
Permanent cuts or customer from BBB.
We were seeing continued.
Growth in stability in our commercial deposit base.
Okay, great that's good to hear.
And then finally I'm on the service fees.
And obviously the I, you know impacted by customer activity or in branches being close et cetera. During the crisis, how do you see those rebounding in the second after the year.
Well I mean at this point.
Service fees truly are.
Our functional transactions and it's also a function of the amount of deposits that customers are 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.
You know they have the balances so.
I do see that recovering somewhat as a as businesses begin to open up and transactions continue to increase but we do expect it to.
To trail.
What we expected.
Say from the first quarter on.
But you know the offset to that is higher balances and lower cost of funds.
Great. That's all I had thank you.
Thank you very much.
The next question is from a line of Hollywood.
Scurlydog capital. Please go ahead.
Good morning, guys.
I've got 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 a change of control provisions.
And I didn't think that was customary and merger of equals Wendy parties, taking the change it controls are maintaining their jobs and I'm curious what the rationale that that was and also if it was taken wasn't taken in cash or stock and why thank you.
Hi, good morning Howard.
Well that information I'm afraid you'll have to wait for the merger proxy you'll have the background a full access.
So that hasn't been publicly announced either way.
No no how is that it has not.
Thank you.
[music].
Thank you very much.
This concludes our question profession.
I would like to turn the conference back to Mr. Ken.
Well what do yourself.
Okay. Thank you operator, thank you everyone. Once again for joining thank you for your questions and look forward to speaking with you on our next the conference call in October.
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Thank you very much.
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