Dime Community Bancshares Inc (DCOM) 2020 Q3 法說會逐字稿

Good day, and welcome to the Bridge Bancorp Third Quarter 2020 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Kevin O'Connor, President and CEO. Please go ahead, sir.

Good morning, and thank you for being on the call. This morning, I'm again joined by our CFO, John McCaffery. I'd like to cover our quarterly performance, share some business updates and discuss the status of our planned Q1 merger with Dime Community.

We saw a lot of positive momentum in the third quarter, with net income inclusive of merger expenses of $13.3 million or EPS of $0.66 per share. When cost associated with the merger is excluded, our adjusted net income was $15.4 million or EPS of $0.77 per share. These positive outcomes occurred despite headwinds driven by low rates and the economic uncertainty caused by the global pandemic. These good numbers were largely due to loan growth fueled by PPP, a reduced provision for credit losses for the quarter and another -- and increase in other income. Additionally, deposits grew this quarter by over 8% or $322 million, signaling the effectiveness of our efforts related to expanding the single-product PPP relationships and the overall enhanced liquidity of many of our customers.

Our efforts this quarter have been focused primarily on certain main goals, working with our customers and our communities on pandemic-related issues, including forbearance management and PPP issuance and forgiveness. We've also got to ensure the anticipated closing in early 2021 and the successful execution of the merger to create the new Dime for 2021 and beyond.

On the pandemic front, as we deal with marketplaces differently affected by COVID and the result in economic activity, we have been working diligently with our customers to identify credit issues, provide relief and ultimately manage them back to fully modified payment status. This has been successful, as John will further discuss, as we've reduced loans on forbearance from a high of 17% of the portfolio to just over 1% to $44 million. This success is a testament to the strong underlying credit fundamentals of BNB, including low LTVs and strong debt service coverage ratios. And as importantly, it's a sign of the commitment of our customers to stand by and honor their obligations. We, like all, are concerned as we've moved further along in this process and the path the pandemic ultimately takes. But as of now, the situation appears to have stabilized.

We've also been engaged with our PPP customers, both to work through forgiveness and with new customers, who comprise over 900 of the almost 4,000 loans we originated. We are working to fully develop these relationships, and to date, they as a subset of deposit customers have almost $165 million on deposit with us. One unforeseen result of the PPP activity for us has been for a certain segment of our customer base, it's enhanced their liquidity. This has resulted in increased deposits and a diminished use of traditional lending facilities.

On the Dime front, our focus had been on 3 primary fronts. The equity to complete the transaction has been ongoing and significant progress has been made. Merger applications have been filed to the New York State DFS and the FRB of New York, and we have, in the past week, received certain FRB approvals and await for DFS. Last week, we filed our joint Bridge-Dime proxy statements and mailed to our shareholders. As a reminder, we will both be holding virtual meetings on December 3. We anticipate shareholders will vote to approve the creation of the new Dime.

Secondly, we continue to manage the balance sheet with the eventuality of our merger by reducing longer-term liabilities and rationalizing our holdings of securities. This, coupled with substantial deposit growth, has resulted in an outsized level of liquidity. For the third quarter, we averaged over $530 million in overnight investments, yielding mostly below 10 basis points. While this contributed positively to NII, it had the impact of depressing reported margin by almost 40 basis points. This funding in the combined entity will be utilized to manage down certain of the combined companies' higher cost liabilities, enhancing longer term the NIM of the new Dime.

Finally and most importantly, the organization has finalized a new combined structure, which is being communicated to employees. BNB and Dime employees are working in concert to achieve our overarching goal of retaining the best practices of each organization while minimizing and I say, eliminating customer disruption. Based on the commitment to excellence I'm seeing from our consolidated teams working together to create the new Dime, I am more confident than ever this will truly result in the best community bank for business in New York.

John will now take you through some more details of our third quarter results.

Thank you, Kevin. Overall results, as Kevin said, our reported quarterly earnings were $0.66. Excluding merger charges, earnings were $0.77. Additionally, we continue to see impacts from the various shutdown, government programs and the market's reaction to these events. Increases in deposits drove balance sheet growth during the quarter with total deposits up around $300 million. All deposit categories with the exception of time and brokered deposits, were up.

Loan originations were $166 million in the quarter. However, due to paydowns and decreased line of credit usage, as Kevin spoke about, net loans grew only by $18 million. However, fourth quarter was starting off strong that the October month-to-date, net loan was up at net $53 million. We also took the opportunity to sell $80 million in bonds and using gains to unwind $125 million in swaps and home loan bank advantage with an all-in cost of 190 basis points.

On the margin, net interest income was up slightly quarter-over-quarter but [increased] balances in interest-earnings cash put pressure on the margin as did the full quarter impact of the PPP loans. Excluding these factors, the adjusted margin for the third quarter would have been 3.22%, just 2 basis points lower than the second quarter adjusted margin. We made some moves during September, which will have a positive impact on margin in Q4. We continue to lower our deposit costs, lowering rates on $1.5 billion in the month of September. Also, the aforementioned reduction in home loan bank borrowings at 1.90% will have a positive effect in Q4.

Noninterest income. Service charges showed a rebound in the second quarter lows as activity picked up in most markets. Our title business had its best quarter in 2017 as real estate activity in our eastern markets increased. SBA gains were also very strong as businesses rushed to close loans while still qualifying for the 6-month payment deferral. Merchant income was up 11% over the same period last year as few people are using cash in order to maintain social distancing.

Noninterest expense ex merger charges were up $2.2 million on a linked-quarter basis. Two factors contributed to this. In the second quarter, we deferred $1 million in expenses related to the origination of PPP loans. The remaining increase is mostly attributable to a rise in incentive accruals. The increase was partially due to the strong SBA gains in title fee income on which we pay incentives.

Credit. All credit metric continued to be strong. The ACL to total loans was 94 basis points and 116 basis points excluding PPP. Provision for the quarter was $1.5 million. We made no changes to the economic outlook in the [DC] model. The decline in payment deferrals didn't have a positive impact on the ACL. We moved the collateral value on Taxi down to $150,000 during the quarter as well.

The majority of the remaining moratoriums on multifamily and investor CRE was average LTVs in the low 60s. Taxi medallions account for less than 10% of the remaining deferrals, and there's only one other C&I loan still in deferral which is less than $300,000. Less than 10% are in their first moratorium, so the remaining will come to their second moratorium, and we'll continue to work with those customers to make sure that they are on solid ground.

Net charge-offs were $1.4 million, and this was related to a retail that was having trouble before COVID began. The tax rate for the quarter was 23.4%. This is higher than recent quarters due to nondeductibility as much as the merger charges that returned. We expect the tax rate for the fourth quarter to be between 23% and 24%, a kind of wide range, but it will depend upon the level of merger charges we take in during the quarter.

I will now turn the call back over to Chad to start the Q&A.

(Operator Instructions) And our first question will come from Alex Twerdahl with Piper Sandler.

I just wanted to ask for maybe a little bit more color and commentary on what you're seeing from a credit perspective. Obviously, deferral is down to 1%. It's some pretty big progress and credit looks pretty strong. But just given that your geography and particularly the part in New York City is -- seems to be under a bit of a magnifying glass right now from an investor and credit standpoint, maybe you could just give us a little bit more commentary on what you're seeing across the footprint and which areas you still remain very concerned about, if any.

I think -- and I think I've had this conversation before. But as we moved from east to west across our footprint, I was in Bridgehampton yesterday and it's still the middle of the summer out there. The restaurants were full. Business and traffic was as if nothing happened, except for people wearing masks. As I go further up the island, the middle of the island still seems to be getting better and the traffic we face every day and our customers feel that.

I mean the measurement of -- those are sort of the anecdotal things. But as I look at balances, customers have larger deposits with us than they had last year. Their need for credit appears to be less. They are feeling reasonably optimistic, and people are getting back to work, again, as again, we move further west. And I think our exposure to New York City is not inconsequential, but the loans that we have there are currently performing.

So I paint a positive picture, but we all know that, that can change on a dime, unintended. But I do think that as we stand now, and I speak for my new partners on the other side, they feel very comfortable, and we do that the diligence that we did in underwriting the loans that we have been making for a number of years and our success through various cycles should bear well for us as we move forward.

Yes. I think, (inaudible) for Kevin, there -- like again, we took a charge-off this quarter for a loan that probably would have been charged off at some point because it was just having trouble before even COVID began. There'll be pockets here and there, but I think compared to the rest of the industry, we were doing pretty well. Even the increase in our past due is mostly due to one residential loan that's currently being refinanced away from us. It's over $3 million, which is most of the increase in past dues. So there are certainly -- certain customers we have our eye on, but I think from a macro standpoint, we feel pretty good.

Great. And then just asking on expenses, John, I think you said that salaries were a little inflated due to some deferment of PPP-related expenses. So what's the right level of expenses for the fourth quarter or the right kind of starting point for the fourth quarter?

I think we're still going to come in around $26 million for the fourth quarter. So it was -- in the third quarter, we deferred $1 million for PPP and then a couple of things more just on the incentive front that we are looking to pay our tenants out in December based upon effects we want to close this merger early next year. And we'll be -- listen, not all of our employees are going to be staying so we're going to pay out the incentives, which usually has a component of stock in it. We're going to pay 100% cash as that's increasing the period expense as well for the incentives. And plus, on some of the activities we had in Q3 as far as SBA and title, when they do better, that's great, they can get paid for that activity as well.

The next question will come from Collyn Gilbert with KBW.

I apologize, I missed your opening comments. So if you covered it...

I answered all your questions right there, that was it.

You did. Anyway, it's a pretty simple one. It's just about loan growth and kind of where you see customer demand or loan demand kind of migrating as you move into the end of this year and then into next year.

I mean it's -- the pipeline is strong. Multifamily is strong. I think sort of timing issues, I think we grew along $50 million in the first month of the quarter. Now I think there is a focus -- was a focus on our side to manage the forbearance, and I don't know if it was at the expense at certain times of moving some new business through the pipeline. There is still optimism by our customers, but I would argue that some of it is they're worried about when they're going to be able to get their PPP forgiveness.

So we are really managing thinking about 2021 and beyond. So when we get -- we have $50 million net growth for the first month of this quarter. The pipeline would indicate that probably we can get about that like amount through the end of the year, which is greater than we did last quarter, and I think the focus will be more on new loan growth as opposed to managing.

I mean and I would say with a mature portfolio, if you will, of commercial loans and commercial real estate, and I think it was appropriate that we directed our efforts to make sure that we managed through this process and got our customers back paying than chasing the next incremental loan.

Okay, okay. That's helpful. And then did you see -- I mean I'm just curious as to the split between like originations and paydowns in the third quarter. Was there -- are you guys seeing elevated paydowns?

We had -- we originated $166 million, so paydowns were about $130 million-ish. That's a little bit elevated probably. That's on track. We usually do like $30 million to $35 million as a regular amortization and [pay loss] on a given loan kind of for done deal for that. So I think it was just the originations and the last people using their lines of credit. There are 40% usage on the line. Typically, we're between 48% to 50% on those line usage on those. And our focus is up year-over-year by another $1 million at least.

Okay, okay. That's helpful. And how about new loan pricing, kind of where you're seeing some of the origination yields coming in?

So in the quarter, the quarter origination coupons were 4.04%.

Okay. That's pretty good. Is that, I'm assuming, mix-driven? Are you seeing...

Yes. So I guess on the C&I stuff, but that was the driver. But we're still holding. We're still seeing our multi -- it was 335% and 364% on CRE for the quarter. So again, I think a lot of the numbers we've been talking about for the past a couple of quarters are still holding.

Okay. And then lastly, PPP. What are you guys thinking about kind of the forgiveness schedule as you look...

Delayed, delayed.

That will happen?

So we, like everybody else, have contracted with somebody to create a portal for everything to go through. We've piloted about 70 customers through there. I think there probably have -- of that 70, maybe 40 has actually submitted things to the SBA, which will take 60 to 90 days to process. I think everybody is waiting -- because it's still a cumbersome process. It's lots of information. I think we're all hoping to get through next Tuesday and cooler heads prevail, and they upped the accelerated forgiveness to maybe $250,000, which in our case would probably get rid of 3/4 of the numbers of loans that we have done and about 25% of the dollar value that we did.

I think earlier -- we're talking to customers all the time. And 2 months ago, every customer was clamoring because their accountant told them that they should be worried about forgiveness and now it's the other way around. The accounts are finally, and we're glad we're all on the same page here, go slow because this will only get easier.

The overwhelming job in front of the SBA that we look at every document that were being asked to submit is really -- it's unsustainable. So somewhere along the way, that will change and that will only change to the benefit of the customers. I mean the more we talk to them, the more they recognize it's just free money. Now some of them are holding in the money and holding it in deposit. And that's what's driving our industry to have sort of outsized growth in deposits and, in some cases, lack of loan demand because people are sitting on this liquidity. But it's certainly not going to be a fourth quarter event. It will be a first quarter event and probably leak into the second and third.

(Operator Instructions) The next question will come from Erik Zwick with Boenning and Scattergood.

So if we kind of back out the impact on the net interest margin from the excess liquidity and the PPP loan fees, you mentioned it was about 3.22% for the margin, so about 40 basis points impact. And you just mentioned now that the PPP is going to take a while to resolve probably into mid-2021. Just curious more on the thoughts about putting some of the excess liquidity to work. And what is the path to kind of moving back towards that kind of 3.20-ish range over the next 2 quarters?

And I think the path, Erik will be in the next quarter, first quarter of 2021, we're going to be one company. And if you look at the 2 balance sheets that were put out together on our press releases, I think there's $0.5 billion of home loan bank advances on their balance sheet that cost...

It's a $1 billion.

$1 billion. Home loan bank advances on the Dime that has a cost of 170 basis points. So I think when we are managing this organization, we are thinking down that path. At some point in time, this will be together, and the $500 million that I'm earning 10 basis points on will be used to pay down borrowings on their side that cost 100...

Plus the cash that will come from the PPP forgiveness that we're going to have the ability to really take out the low-margin parts of the combined balance sheet to have a better margin going forward with the combined company. I could get rid of the deposits to do something with the liquidity that I have now, but I'd much rather pay down the 170 home loan bank net that they've got. That's much better use of net cash. Just not now.

Okay. That makes sense. And then just thinking about the fee revenue, very strong quarter for the SBA gains. Do you have a kind of insight into how that quarter's -- for fourth quarter's shaping up again? I'm just trying to think about the run rate for 4Q for noninterest income.

I think Q3 was really kind of an outlier. I think there was pent-up demand. And again, there was -- the SBA was still giving the payment deferral. So I expect there may have been some pent-up demand as well as holding forward some demand from Q4. So I'd probably look at a full year number to kind of think what that will really be. So we've been about -- we go between $300,000 and $500,000 a quarter on SBA gains, but from a global standpoint, I think we'd get back to normal standpoint there.

Again, maybe next quarter is going to be a little light because of the amount that we had this quarter, but -- and then again, they had a strong quarter in SBA gains as well, Dime. So I think the combined company is going to have a good platform for SBA loans.

There's about $25 million of SBA loans in the pipeline today. How much that gets pulled through in the fourth quarter is to be determined.

Okay. And then just last one for me, thinking about commercial real estate values, more specific kind of on the western end of Long Island. There's obviously some concern once you cross the river into Manhattan. But I guess are you seeing any of that? Are there many properties trading at this point? And any indication of any value kind of commercial real estate values at this point?

I don't know there's a lot of touch points on that at this point to really identify. But the conversation is there's still office space being leased here. There are still industrial buildings being built. I mean cap rates have actually -- the cap rates on Long Island have actually held in as opposed to increased in the borough. So we're still positive about that part of that segment of the market. They step away from retail, big-box retail, but I think as you get into the industrial and most of that space, it's still going well.

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

Thank you. As I conclude, I want to reiterate my comments that I made in our third quarter release, where I thank not only our employees, but I also want to thank our soon-to-be partners at Dime for their extraordinary diligence and compassion and dealing with the issues that we're all facing today with the pandemic: remote work, childcare, home, schooling and health concerns. It's really come clear to me that this is an incredible group of dedicated bankers. They are working tirelessly on the integration that creates the new Dime.

And I wouldn't be remiss if I didn't take this opportunity on behalf of the rest of the management team and the combined Boards, I'll take that liberty to applaud their efforts, diligence and ultimate success. We remain incredibly excited for what is being created. I feel better than I felt in July and I was excited then to do this. Every day, we get closer to putting these 2 companies together and delivering on the promises I think we've made to you as shareholders and to our customers and our communities. So I want to thank, again, all the people that are working very hard to get this done in the face of lots of adversity and challenges.

So I thank everybody on the call for their time today, for their interest in our company. I look forward to hearing from many of you as we get through this process. And any further questions, please don't hesitate to reach out. Probably we'll be talking to some of you at our shareholder meeting in about 1.5 months. But this is an amazing time for this organization and I continue to look forward to working with our partners on the other side. So thank you.

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.