Earnings Call Transcript - DCOM Q2 2021

Operator, Operator

Good day, and welcome to the Dime Community Bancshares Incorporated Second Quarter Earnings Conference Call 2021. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Kevin O'Connor. Please go ahead.

Kevin O'Connor, CEO

Thank you, Tom, and thank you all for joining us this morning on our second earnings call as the new Dime. With me today is, Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO.

Avi Reddy, CFO

Thank you, Kevin. Our reported net income to common for the second quarter was $49.5 million. Included in this quarter's results, $20.7 million of gains associated with the sale of PPP loans. Merger-related expenses declined meaningfully from the prior quarter and were only $1.8 million. With the majority of our systems conversions complete, we don't expect to see much in this line item going forward. Finally, we had $1.8 million of costs related to five branch combinations in the second quarter. In the third quarter, we expect the remaining $4 million of costs related to these five branch combinations to be recorded. This will be partially offset by sales of owned properties. We have provided a table in the earnings release with the three months ended June 30 pre-provision net revenue, which on an adjusted basis was $53 million. This provides a clear glimpse into the go-forward earnings power of the company and our ability to produce sustainable 1% plus ROAs, regardless of the rate environment. We were able to migrate our cost of deposits lower to the tune of 17 basis points in the second quarter and the current spot rate today is even lower at approximately 14 basis points. We believe we have an opportunity over the next several quarters to get the cost of deposits down to the low double-digits. Most importantly, we believe we have removed a significant amount of rate sensitivity from our deposit base. These actions coupled with a higher percentage of DDA should result in our deposit betas lagging the banks in our footprint when rates eventually rise. The reported net interest margin was 3.12%. As we did last quarter, we have provided details in the press release on the impact of purchase accounting and PPP. The adjusted NIM of 3.23% was within our previously telegraphed range. I'll now make a couple of comments that should help with framing the NIM going forward. Having sold our 2021 PPP originations at the very end of the second quarter, we had approximately $600 million of liquidity tied to the PPP sale on the balance sheet at the end of the quarter. The effective yield on the PPP loans that we sold were approximately $170 million. As a result, we expect the reported margin, which as I mentioned was 3.12% for Q2 to be impacted by approximately seven to eight basis points in the third quarter due to the PPP sale liquidity build. Clearly, as we redeploy the cash into securities and core relationship loans, we will be able to build back the margin over time.

Operator, Operator

We will now begin the question-and-answer session. And the first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon, Analyst

Good morning. Nice quarter.

Avi Reddy, CFO

Good morning. Thank you.

Mark Fitzgibbon, Analyst

Just to clarify couple of quick things. Avi you mentioned on – first on expenses, did you say $4 million of benefit to expenses from the five branches that will be closed in the next quarter, or is that annually?

Avi Reddy, CFO

No Mark. So my comment was in terms of the charge for combining the branches, we obviously have some leases associated with those branches. So in the second quarter, we took a $1.8 million charge associated with the lease termination. And then in the third quarter, we expect the remaining $4 million of lease termination to basically hit in the fourth – in the third quarter but that will be partially offset by any sales of some of the properties. Of the five properties there's a couple that we actually own. So I was actually talking about the charge in the third quarter associated with that given the accounting lease standards that we operate under.

Mark Fitzgibbon, Analyst

Got you. Okay. And then on the margin. So it sounds like $1 million to $1.5 million of PPP income but the core margin is going to be sort of 3.04% 3.05%. So that's incremental. Am I reading the tea leaves the right way?

Avi Reddy, CFO

Yes. I mean the easiest way to think about Mark is our reported margin was 3.12%, right? And so within that 3.12% we had $600 million of PPP that had a yield of 1.70%. If you just assume that goes to 10 basis points the 3.12% comes down to 3.05%. Just straight down, it's a straight math. And then obviously we're not going to keep the whole thing in cash.

Mark Fitzgibbon, Analyst

Okay. Great. And then I guess I was curious on that loan sale that you did of the $50 million of criticized loans. Relative to par where did you sell these? And are we likely to see more of these kinds of transactions in coming quarters?

Stu Lubow, COO

Yes. Mark, it's Stu. Yes, I mean those deals were basically done at par. There were two loans that had seconds on – that had – we took a small hit of about $300,000. But everything else is at par. And we're being quite aggressive in terms of offloading any multifamily deals that we think are just going to take a little longer to turn around. And so, we're looking at it weekly, monthly, et cetera. So, there'll probably be some more. But the average LTV is under 60% on the portfolio. And we see and have had no issues in terms of offloading these notes. So, we're going to manage the portfolio and kind of move things that are somewhat stressed and continue to do that as we continue to originate new business. And I just want to make mention, we're talking about loan growth and our pipeline. We're very excited about the organic opportunity to grow loans. We have almost $2 billion in the pipeline at this point. And just since June 30, we've increased our loan book by almost $100 million. So those loans that Kevin mentioned, that we're waiting to close, that were approved and awaiting closings, are beginning to show up on the balance sheet. Also, for the quarter, we actually closed $600 million in loans for the quarter, loans and lines for the quarter. So there's $150 plus million of lines that are not drawn yet and construction loans that are part of that. So, that are at very attractive rates, prime plus one or thereabout. So although, we actually the balances of loans closed for the quarter of about $450 million, there's another $200 or so million in lines that are yet to be drawn. So, we're very comfortable with the trajectory in terms of our loan growth, as we go forward. And honestly, there's an opportunity in terms of new business coming to the bank.

Mark Fitzgibbon, Analyst

And Stu, I'm just curious, is a lot of the pipeline coming from other banks that are involved in acquisitions?

Stu Lubow, COO

It's coming from all the usual players. The larger institutions were able to do more business with our existing customer base. We've seen some activity from those institutions that are engaged in upcoming transactions, and we expect even more opportunities from the latest transaction that has taken place. We're enthusiastic about that. Additionally, we are exploring adding more teams and personnel from those organizations, as we believe there is significant potential there too.

Mark Fitzgibbon, Analyst

Kevin, considering all the consolidation happening around you, do you feel the need to pursue more transactions, or do you believe it’s better to remain independent and capitalize on the consolidation taking place?

Kevin O'Connor, CEO

I think the latter is where we go. I think, the organic growth opportunities are certainly there. Although, you can't close the door if something comes and there's an opportunity to do something. But we're in a very good position having done the conversion being all in one platform, being the size and scale we are. As Stu said, there's tremendous opportunity out there. And I don't think, it's really coming from those locations yet. I think, there's still sort of a wait and see, but we certainly see opportunities there.

Avi Reddy, CFO

Yes Mark, just to add to that, we've been very active on the buyback front. I mean, we think there's significant value in our own stock today. You saw we purchased around 400,000 shares in the quarter we've been active in July. So, given our balance sheet, we do feel investing in our stock right now is probably the best return of capital, given the low-risk nature of our balance sheet.

Mark Fitzgibbon, Analyst

Thank you.

Operator, Operator

The next question comes from Matthew Breese with Stephens Incorporated. Please go ahead.

Matthew Breese, Analyst

Good morning.

Stu Lubow, COO

Hi Matt.

Avi Reddy, CFO

Hi Matt. Good morning.

Matthew Breese, Analyst

Few questions. So, first, on the $500 million approved pipeline, could you just give us a sense for what the breakdown of the segments are within that? Curious, where you're seeing strength. And then, I couldn't help but notice the difference in origination yields this quarter, 3.60% versus the pipeline yield of 3.80%. We don't hear a lot about loan yields expanding in this environment very often. I was hoping you could talk a little bit about that and whether that's actually going on or there's some normal way kind of bouncing around of yields?

Kevin O'Connor, CEO

Yes. First of all, regarding the portfolio makeup or pipeline, about 20% to 25% is in Commercial and Industrial (C&I) loans. The rest is likely split evenly between owner-occupied Commercial Real Estate (CRE) investments and multifamily properties. This shows a good level of diversification, and we feel comfortable in this position. The C&I market is somewhat weaker compared to the CRE market, but we are still establishing new relationships and securing new loans in the C&I sector. Our line utilization remains below historical averages, presenting an opportunity for growth once the economy stabilizes and liquidity normalizes. However, borrowers are currently hesitant to draw from existing lines or have a substantial amount of cash reserves. As for yields, we experienced significant swap activity this quarter. While we don't anticipate this trend continuing for the remainder of the year due to the yield curve, it did result in a decrease in some of our yields this quarter. Notably, our current pipeline includes various loans and lines, including some construction projects, that are higher-yielding. Overall, the nearly $2 billion loan pipeline has an aggregate yield of about 3.55%. I believe that the figures we see this quarter are slightly atypical, but we are generally within the 3.55% to 3.60% range for the entire $2 billion pipeline.

Matthew Breese, Analyst

Got it. Okay. Very helpful. One other question I had was, could you remind us of what percentage of the loan portfolio is floating rate? And if and when we do get a Fed hike we'll reprice immediately?

Avi Reddy, CFO

Yes, sure Matt. So, 25% of our portfolio is variable rate and then there's another 50% that's adjustable rate. Of that floating rate portfolio, there's $1.05 billion that floats immediately and there's around $500 million with floors on them with a 50 basis point rate hike would also reprice. So, call it for a 50-basis point move, there's $1.05 billion of floating rate stuff. And then, also we have 50% of our portfolio is adjustable rate, which, obviously, when they hit the maturity date, they reset based on a treasury curve.

Matthew Breese, Analyst

Perfect. Two other ones for me. The first one is, just, the tax rate was a bit higher this quarter. You also had some noise. Just curious, if there was also some changes to New York state taxes. How much of that is ongoing and how much of that is just due to some of the noise this quarter?

Avi Reddy, CFO

Yes, sure. Because of little bit of the extra income this quarter Matt, the tax rate was higher. There's also some discrete items in there. In the press release we pointed out that 27.5% is a good rate to use for the rest of the year.

Matthew Breese, Analyst

Okay. Last one, we've talked a lot about consolidation. I'm just curious, have you started to see the hiring opportunities emerge yet? Have the phones been ringing, have the conversations happened? Have you actually brought anybody in from a sold institution or gotten clients that were unhappy because of an acquisition? Could you just give a little bit of anecdote as to what you're seeing?

Kevin O'Connor, CEO

I will begin with the latter point. The client movements are still unfolding, and as is often the case, everyone seems to be in a wait-and-see approach. Initially, their reaction is that nothing will change, but changes do occur. We certainly see opportunities arising. Regarding new hires, we have added several relationship managers, a number of underwriters, and support staff to manage the significant pipeline we currently have. We have successfully recruited from the institutions we have discussed. I received four calls yesterday related to the recently announced deal, which indicates that people are aware of our presence and the opportunities available. Given our size and capital levels, we believe there are substantial opportunities to leverage both the new personnel and the current market disruptions.

Matthew Breese, Analyst

Got it. Okay. Maybe just a follow-up. I don't want to get the cart too far in front of the horse here, but as you do find new people, that can also lead to new markets. I wouldn't expect you to go terribly too far outside of Metro New York City, but might we see you enter some of the more suburban areas around Metro New York City, as folks emerge?

Kevin O'Connor, CEO

Yes. Our pipeline includes a significant amount of business in the Northern New Jersey marketplace. I feel very confident about that market, as I have experience running a couple of banks there and we know the area well. We are definitely expanding beyond Long Island and Manhattan at this stage. New Jersey is a promising market for us.

Matthew Breese, Analyst

Very good. I appreciate all the detail. Thanks.

Kevin O'Connor, CEO

Thank you.

Operator, Operator

The next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace, Analyst

Hi. Thanks. I hopped on a little bit late. So if my questions have already been asked, just let me know and I can read the transcript. But, Avi, you mentioned the buyback. And if you could, could you remind us what's left on the buyback? And as you look about how aggressive to be on that buyback, what are the capital constraints that you look at, whether it's leverage with all the preferred or if it's TCE? Where are you comfortable on capital levels relative to using the buyback aggressively?

Avi Reddy, CFO

We initially had about 800,000 shares and bought around 400,000 shares in the second quarter. This leaves us with approximately 400,000 shares remaining under the buyback authorization. Regarding our capital levels, we're quite comfortable. Our company's risk profile, especially based on the stress tests we've conducted, shows that our capital burn is generally 150 to 200 basis points lower than our peers. I would say we're comfortable operating our bank with a tangible common equity (TCE) of between 7% and 7.5%, and tangible equity between 8% and 8.5%. We're currently above those thresholds. Some of the Paycheck Protection Program (PPP) loans will be coming off our balance sheet. We purchased shares back at $34, which we found attractive, and at slightly lower prices, we believe it's even more appealing. Therefore, we will continue to implement buybacks prudently moving forward.

William Wallace, Analyst

Okay. Thank you very much. And then, if nobody has asked on the expense base. Are there more cost saves to come? And, if so, where might a comfortable run rate be?

Avi Reddy, CFO

Yes. In my prepared remarks, I mentioned that we are comfortable with the core cash, non-interest expense base of around $195 million by the fourth quarter and plan to maintain that steady into 2022. We have outlined some guidelines for efficiency ratios of 47% to 50%, and we will continue to drive that down. We will start our budgeting process in the next couple of months, leaving no stone unturned. As Kevin mentioned at the outset, we promised an efficiency ratio of 50% when we announced the transaction, and currently, we are running the bank at 48%. Our goal is to maintain an efficiency ratio between 47% and 50% over time as we leverage some of the excess liquidity from the PPP, aiming for the lower end of that range into 2022.

William Wallace, Analyst

Okay. Thank you very much.

Avi Reddy, CFO

Thank you.

Operator, Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Kevin O'Connor for any closing remarks.

Kevin O'Connor, CEO

Well, thank you, everybody, for participating. Have a great day and a great weekend and look forward to chatting with you soon.

Operator, Operator

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