Dime Community Bancshares, Inc. /NY/ Q3 FY2020 Earnings Call

Hello and welcome to the Dime Community Bancshares, Inc. Third Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note today's event is being recorded. I would now like to turn the conference over to your host today, Ken Mahon. Mr. Mahon, please go ahead.

Thank you, operator, and thank you, everyone, for joining us this morning. On the call with me today are our President, Stu Lubow; Chief Financial Officer, Avi Reddy; and our Chief Accounting Officer, Leslie Veluswamy. We posted a record earnings quarter in September with core EPS of $0.44, which included a $5.9 million addition to the general allowance for loan losses, which we determine to be an appropriate level for our portfolio in the current environment. This record EPS was aided by three components: net interest margin expansion, year-over-year fee income growth, and excellent expense control. By now we're well into our build-out of the commercial bank model and this year especially, we can see it bearing fruit. The positive impact of that transformation has taken hold. And we're reaping the benefits of scaling the commercial loan portfolio, which enables us to generate significant positive operating leverage. Our Principal and Interest loan deferrals were down to approximately $272 million at September 30 and represent 4.9% of total loans. We're not surprised by the meaningful downward movement in deferrals and we believe that compares favorably to other multifamily bank portfolios concentrated in New York. It's worth repeating that for the six years between 2007 and 2013, which were the years covering the financial crisis, Dime's cumulative net charge-offs were only 130 basis points, with starting loan balances of about $4 billion. This was approximately five times lower than the overall bank index for charge-offs. Given the low LTV nature of our multifamily portfolio, which was on average 52% at September 30, the multi-generational nature of the ownership of the multifamily borrower base, as well as our capital strength and our earnings prospects, I'm confident that the outcome will be a soft landing once again. Multifamily borrowers understand the value inherent in the asset class across various economic cycles. But as long as borrowers are making good faith efforts to return to full payments, we remain committed to helping them and their tenants through this government-driven quarantine. As you recall, prior to the quarantine, this was a fully performing portfolio. There's value inherent in the housing collateral. And for those of you who are leaning on the death of Gotham theory, try traveling on the BQE this week, and you'll see for yourself that economic activity in New York is still robust. The eventual distribution of a vaccine and any additional economic stimulus will certainly help. But most importantly, the low LTV nature of the portfolio and the significant ownership equity in these properties keep us optimistic about the portfolio's credit performance over time. In the meantime, we don't sit idly by; we continually monitor and remain in touch with our borrowers. As I mentioned earlier, Stu is on the call today, and he'll step in and answer any of your questions in more granular fashion during the Q&A. Next, I would like to touch briefly upon Dime's involvement in the Paycheck Protection Program. We began accepting applications for forgiveness a few weeks ago and have contracted with a reputable third party to assist us in the process. Potential unrecognized income from processing these loans is currently $7.8 million. PPP-related deposits were approximately $67 million at September 30. We continue to deepen the relationship with these customers, many of whom are new to the bank. This opportunity would not have been available to the old Dime as a thrift, which did not participate in SBA lending. To another side of how management and the board have improved profitability of the franchise over the last five years, this is a good time to pause and review our progress on the now five-year-old strategic plan built upon improving five fundamental metrics, which are: growing total checking account balances, increasing local business deposits, growing relationship-based commercial loans, growing the sources of and contribution of non-spread revenue, and maintaining appropriate liquidity, reducing CRE concentration, and operating with strong capital ratios. Let's start first with the growth in our checking account balances, which on a year-over-year basis, average non-interest bearing and interest-bearing checking accounts combined increased by 61% to $894 million. Next, in increasing low-cost business deposits, total commercial bank deposits from the Business Bank division plus our Legacy Multifamily division increased by almost 19% on a year-to-date basis to approximately $1 billion. We also grew our relationship-based commercial loans. The Business Banking division portfolio currently is approximately $1.8 billion and that excludes the PPP balances. This business continues to be accretive to our overall net interest margin and has contributed to now two full years or eight consecutive quarters of NIM expansion. Our fourth targeted metrics is non-spread revenue, an area in which Dime has historically lagged. Non-spread revenue with Dime, excluding securities gains and losses, grew by approximately 80% on a year-over-year basis. This was driven by an increase in customer-related swap fee income, as well as income from our SBA and residential businesses. Lastly, we're operating with very strong capital ratios, demonstrated by a 10.22% tangible equity to tangible asset ratio. This ratio again excludes PPP loans. In summary, we continue to make quantifiable progress on all five long-term strategic objectives. For those of you who in 2017 said this would take about three years to turn this ship, it appears you were right. The most satisfying aspect of the transformation for me has been the progress that's been made on the deposit side of the balance sheet, with non-interest bearing deposits now comprising over 15% of our deposit base from 6% at commencement. Improving the quality of our deposit base was the most important guiding tenet of our business model transformation because that is what creates the moat around the community bank's value, it's also one of the areas in which our new partner BNB Bank historically excels. I can say confidently that our business model transformation, which began in 2017, has been a success, and the record EPS this quarter and tangible progress on the balance sheet transformation is playing for most of yield. Finally, just a word on the announced merger with Bridge Bancorp; our integration teams continue to make very good progress and we have built deep working relationships with our soon-to-be colleagues at Bridge across both organizations. Just as an aside, I've sat in the room with our new management team: Kevin M O'Connor, new CEO; Stu Lubow from Dime; Avi Reddy from Dime; John McCaffery from Bridge Bancorp; it's a formidable team, a really strong team going into the new $11 billion-plus bank this will be. As you may have seen in BNB's earnings release, they continue to generate excellent core deposit growth, which confirms our conviction that this partnership is highly complementary. We have made all the requisite regulatory filings and expect to close the transaction in early 2021. Together, we're very determined to create an elite regional bank competitor. At this point, I'd like to turn the floor over to our Chief Financial Officer, Avi Reddy, who will provide some additional color on the third quarter results.

Thank you, Ken, and good morning, everybody. Included in this quarter’s reported results was $0.8 million of merger-related expenses and $0.2 million of securities gains. Excluding these non-core items, core EPS was $0.44. As Ken mentioned, this is a record for Dime as a public company, and we're proud of achieving such a result in the middle of the pandemic. We continue to build our results with a $5.9 million loan loss provision this quarter. Excluding PPP loans, our reserve to loans at September 30 would have been 92 basis points. We ended the third quarter with an adjusted tangible equity ratio, excluding the impact of PPP loans from the numerator, of 10.22%. We strongly believe that our capital levels and loan loss reserve position are sufficient to withstand any disruption caused by the pandemic. Excluding the merger-related expenses and securities gains, core pre-tax pre-provision earnings for the third quarter of 2020 was $26.8 million, representing a 9.5% linked quarter growth and a 46.3% year-over-year growth. Core PPNR to average assets for the third quarter was approximately 1.65%. Importantly, we generated significant positive operating leverage this quarter with revenue growth far outpacing non-interest expense growth. The core NIM, which excludes the impact of $0.5 million of prepayment fees, increased by 13 basis points on a linked quarter basis to 2.88%. Driving a structurally higher NIM has been one of the key tenets of our business model transformation and we're again pleased with this quarter's results. The increase in core NIM was driven by a 28 basis point linked quarter decline in our cost of deposits. The period-end weighted average rate on our loan portfolio, excluding PPP loans, remains steady on a linked quarter basis at 3.94%. The presence of PPP loans, while additive to net interest income in the amount of approximately $2.2 million, was dilutive to our third quarter margin, core margin by approximately four to five basis points. For the fourth quarter of 2020, we have approximately $483 million of CDs at a weighted average rate of 1.03% that are maturing. Repricing these CDs at lower rates provides us an opportunity to continue reducing our cost of deposits and maintaining the upward bias in our core NIM. Our core efficiency ratio is 47.5%. The core expense-to-asset ratio was 1.48%. It remained very well controlled compared to our commercial bank peers. A critical part of the Business Banking build-out is the addition of non-spread income. This trend continued in the third quarter as we recognized $1.5 million of customer-related loan-level swap income and our SBA business and residential businesses contributed $1.4 million of gain on sale income. As you well know by now, we don't provide quantitative NIM guidance. I will say though, that we continue to drive our deposit costs lower, and as mentioned previously, we have a meaningful amount of CDs coming due in the fourth quarter. Replacement rates on our CD repricings are approximately 50 basis points lower than those coming due. This repricing opportunity should enable us to continue lowering the cost of deposits in the fourth quarter and growing the core NIM for the remainder of the year. On a related note, and as we mentioned on our prior earnings call, more of our real estate borrowers are showing a propensity to wait until the reset period before refinancing, or they're taking the FHLB plus 250 option at repricing rather than prepaying their loans early. As a result, prepayment fee income declined to $0.5 million in the third quarter. We don't expect prepayment fees to drop much lower than this $0.5 million quarterly figure in the near-term. We certainly don't mind retaining these loans for longer as they are solid credits and low LTVs with coupon rates that are fairly attractive in the current low rate environment. Finally, with respect to the effective tax rate for the remainder of 2020, we expect it to be between 22% and 23%. With that, we can turn the call over for questions.

We will now begin the question-and-answer session. All right. We do have a question from Collyn Gilbert with KBW.

Thanks. Good morning, everyone. Stu, if you could just kind of go through sort of how you're seeing some of these deferrals playing out, kind of as they move into the fourth quarter and then longer-term, and if you have a sense at all as to where you think maybe the risk of loss content is within that book?

Yes. So first of all, obviously we've seen significant migration from June 30 to September 30. If you look at June 30, we were at $916 million; we're down to $335 million. And that includes some portion of about $60 million which is paying interest in escrow. Our next big period is at October 31. We have approximately $200 million in additional loans coming off of their three-month forbearance period, their second three-month forbearance period. And we expect that number to dramatically reduce and migrate to full paying, and that's been the trend so far. And then, the remainder, as we get into the fourth quarter, we're looking at all the loans individually, but what we are seeing is those that were paying and were on Principal and Interest forbearance are moving towards at least an interest-only forbearance. The average LTVs are in the mid-50s. We're not really seeing impairment issues at this point. And we're not seeing any real change in delinquencies. So at this point, we're fairly comfortable with the portfolio and the resulting potential exposure that we have. And we think that these numbers are going to continue to work down. We've been working with our borrowers; we're down to a very manageable level. And we are very granular in our discussions and our approvals. Because we kept everything short in our initial timeframes, and really worked with the borrowers early on, we've been able to migrate forbearance more quickly than some of our peers out there who took a much broader approach to forbearance. So, at this point, we're not seeing impairment, and obviously, potential risk of loss out there. We do have very low LTVs. Some of these will take a longer period of time to come back to full payment. But again the equity, the value is there. These are borrowers we know very well and have a significant history with.

That's helpful. I'm curious about the mixed-use loans. What are the borrowers doing to keep their payments current or maintain satisfactory debt coverage? Are they modifying their businesses? The information you've shared this quarter suggests a positive trend in proactivity and behavior, as well as loan growth. I'm interested in what you're observing from some of your borrowers.

Yes, so what's remaining in the mixed-use, multifamily mixed-use portfolio is basically the classic New York City streetscape with five to six story walk-ups for retail. I think what's happened over the last three months is there's been partial openings, businesses are coming back slowly, tenants are making partial payments and landlords are working with their commercial tenants. The multifamily or residential piece of that is remaining fairly steady and stable in terms of payments. The real change over the last months has been an improvement in the partial payment or payment of some of the commercial rents that were either not paying initially or were coming out of the gate with no payments whatsoever when COVID first hit. So there’s been a migration as the City has opened up to better pay. Now with that said, that's clearly a stress area, and we'll continue to monitor that as we proceed through the pandemic and into the recovery stage. But the landlords are working with their tenants, and certainly, the residential piece remains quite stable.

Okay, that's helpful. And then just to get a little more color on the loan growth that you saw this quarter, because again that was really, really strong. How much of the growth was current customers versus new customers, or maybe just talk about kind of the dynamic that you're seeing there in terms of loan demand?

We're seeing quite a bit of demand. Our teams are in place. This is kind of a building block scenario where over the last few years, we've really built and brought in loan teams that had relationships from elsewhere, and we've been able to significantly grow our pipeline. Even in this environment, we're taking businesses from other commercial institutions, and a lot of these relationships are those that our team members or relationship managers had previous to their moving to Dime. We're seeing a very strong pipeline still, where we're taking business from other commercial banks. I'd say it’s around 60% new business, 40% existing customers.

Okay, okay. That's helpful. Okay, thanks. I'll leave it there. Thanks, guys.

Thank you. All right. There's nothing else at present. I would like to return the conference over to Mr. Mahon for any closing comments.

Sure. Thank you very much. And thanks folks for joining us this morning. I hope the lack of questions means that the press release was satisfactory to your needs. Thank you very much.

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