Dime Community Bancshares Inc (DCOM) 2020 Q2 法說會逐字稿

Good morning, and welcome to the Bridge Bancorp Second Quarter 2020 Earnings Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kevin O'Connor. Please go ahead.

Good morning, and thank you for joining us this morning. I'm joined on this call by our CFO, John McCaffery. Today, he and I will be discussing our quarterly performance as well as our PPP performance and the planned merger we have at Dime Community, scheduled to close sometime in early 2021.

To begin with, I'd like to share some high-level metrics in the second quarter. Net income for the quarter was $10.7 million or EPS of $0.54, with net interest income growing to $40.4 million, an increase of almost $5 million versus second quarter of last year. We experienced positive growth in total assets coming in at $6.2 billion or a 30% increase versus last year same period. Significant increase in loan growth of $1.2 billion, or 35% compared to the second quarter in 2019, was largely fueled by our PPP loans, which accounted for nearly $950 million of the total. Many of these loans rolled into our nonpublic, nonbrokered deposits, resulting in an $840 million increase.

This quarter's net interest income -- net interest margin was 3%, a decrease of 26 basis points compared to the prior quarter. This decrease was largely due to lower rates on our loan portfolio, higher PPP loan volume and increased deposit liquidity earning a low interest rate. Pretax, preprovision income for the quarter was $18.2 million and an increase of $1.2 million or 7.4% versus second quarter of 2019.

As evidenced by our second quarter release, our results were materially impacted by the PPP program, as it affected not only our financial statements but drove business initiatives and activity. Our strong performance in originations placed us #2 behind only JPMorgan Chase from Suffolk County for loans issued and effectively job saves. We're actually #5 on Long Island, again, following only national money center banks. Our leadership position and long-standing reputation brought 1,000 new business customers via PPP to BNB, a validation of the bank's importance and value to businesses across Long Island.

Along these lines, BNB Bank was also named by the Banking Choice Awards as a top Long Island bank for overall quality. This survey of customers and potential customers again reflects the market perception of BNB Bankers. I make these points as I try to give a bit more texture on our merger with Dime Community.

As those of you who have been following the bank know, growing our footprint has been an ongoing strategic priority for BNB. While we've achieved incredible growth over the past 12 years, both organically and through acquisition, the opportunity to create the largest community bank based on Long Island is very excited. We have found an ideal partner in Dime Bank and Ken Mahon and his team. From a strategic perspective alone, there is a compelling case we made based on our nonoverlapping footprints and complementary business strategies.

In addition to aligning on a shared focus to positively impact our communities, we are perfectly positioned to deploy what has been a highly effective strategy for BNB, leveraging their branches as sales hubs from which to -- which lend us prospects for local businesses. This practice has been hugely successful for BNB as our branch network expanded in western Nassau and Queens, and we anticipate similar success with Dime's higher branch penetration across New York City boroughs.

John will now walk you through more details around the second quarter results.

Thank you, Kevin. Good morning, everybody. As Kevin said, our EPS numbers for the quarter were $0.54, a quarter that had more than a little noise. I'll do my best to walk you through the pertinent factors.

Needless to say, our balance sheet grew substantially during the second quarter. We began funding PPP loans during the first week of April. Every part of the bank worked tirelessly until we funded close to $1 billion in loans. At the same time, many of our customers, who were drawing down their lines in the first quarter as an abundance of caution, paid those lines down for various reasons.

Excluding PPP loans, we originated close to $200 million in loans during the quarter. Year-over-year, excluding PPP, loans outstanding grew $241 million or 7%. Deposits had a strong showing on many fronts. First, because the PPP loans funded through DDA accounts, these accounts were up 59% year-over-year. However, all deposits are up in excess of PPP funding. We'll get to the downside of this in a bit. Public funds are up over $300 million year-over-year as we've added new public fund customers over the past year.

Net interest income close was to -- was up close to $4 million quarter-over-quarter. This did not translate into higher NIM, owing to the increase in the size of the balance sheet. The PPP loans yielded 2.55% in the quarter, including the amortization of the $30 million in fees we collected. We also had $365 million in overnight cash earning only 12 basis points. These 2 factors depressed the margin by 6 and 20 basis points, respectively.

As market rates came down, we continue to manage our deposit rates slowly. We trimmed our course of interest-bearing deposits by 40 basis points over or under the first quarter. We continue to assess our deposits for opportunities to lower rates as we move forward in this environment.

On noninterest income, we get the negative out of the way first. We did take an additional write-down to our one loan held for sale. We felt this was prudent given serial discussions with prospective buyers as well as the situation on the ground for negotiating with the borrower. Additionally, the downside to higher customer deposits is lower fees, especially NSF fees. During the quarter, May seemed to be the low point for service charges, so we look for that trend to continue back to normal levels as we move forward. Other lines of business below the margin, including title, swaps and SBA gain on sale showed quarter-over-quarter growth.

Noninterest expense held flat versus previous quarters. Compensation expense was a driver to this, and there's a decline in compensation expenses that is a combination of lower incentive accruals, payroll taxes, medical insurance, along with slightly higher deferrals of our origination expenses. All these continued -- contributed to the drop in compensation expense.

Addressing credit. The provision for the quarter was $4.5 million. $4 million related to the economic impact of the ongoing pandemic and attendant shutdowns. Offsetting this is a release of $1 million after the aforementioned pay down of the C&I lines of credit during the quarter. The increase in nonperforming loans during the quarter was attributed to one relationship that was previously performing TDR.

I'd like to also point out that our past-due loans are down $1.7 million since the first quarter, and classified loans are flat. As mentioned in the release, we have granted payment moratoriums on 500 loans totaling $630 million through the current crisis. Of these loans, $400 million have reached their 90-day maturities. $230 million are now paying in accordance with the original loans' agreement and $141 million have asked for an extension.

Overall, approximately 90% of our moratorium loans are backed by real estate. Of the higher-risk industries that we're certainly keeping an eye on, such as hotels, retail, office, et cetera, the weighted average LTV is 53% with only $500,000 in loans with greater than 75% LTV. We are targeting for the rest of the year a tax rate of 22.7%.

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

(Operator Instructions) Our first question comes from Alex Twerdahl with Piper Sandler.

I'm just wondering, I appreciate the statistics you gave on loans that were returning to paying versus the ones that were getting the extensions on the deferrals. Can you -- I mean, is there some consistencies just in terms of the types of loans that are kind of going in each direction? And is it possible to apply that to kind of the remainder of the deferral portfolio in terms of what the expectation should be for when those ones roll, I guess, probably in August?

Sure. So actually, we -- for the loans that haven't yet matured, some of those have actually come in and already asked for extensions. By and large, the portfolio that -- parts of the portfolio that are asking for extensions are the ones that have the greatest concentrations, which is our multifamily and nonowner-occupied real estate. Also in the C&I space, Taxi Medallions that we still have, have also asked for extensions.

So of the loans that have asked for additional extensions, some portion of them are from loans that haven't -- $60 million are from loans that haven't even reached their maturity date yet. So we expect, given just applying that kind of percentage across the board of an additional $20 million to $25 million of moratoriums that would be asked to be extended. So they just kind of holds out to come through until now, and that's really most of the portfolio that we've heard from.

Okay. Great. And then I noticed that a couple of categories of loans actually grew during the quarter: multifamily, CRE. Was that -- can you maybe just elaborate on that? Is that just sort of pipeline that had built into the quarter that was closing? And maybe kind of what we should expect for the core non-PPP loan trends as we continue through the rest of the year?

Sure. So those were -- what I just said, they were pipeline loans that still were -- had recently closed, and we got them done during the quarter. There's been a big focus from our lenders on the PPP program for the last quarter. The pipeline is strong. A lot of the customers who weren't customers before but became customers through the PPP program are now coming in and looking to move over their lines of credit and other kinds of business from their -- the bank that they do business with before us. So we do -- we are kind of targeting 7% to 8% overall loan growth for the rest of the year, but this quarter was really a bit of (inaudible) distraction.

So the pipeline is still strong. Obviously, we're going to have a different look at credit as we assess these loans going forward. But as you know, mid to maybe a little bit above mid-single digits for the rest of the year.

Okay. And that's exclusive of what happens with the PPP forgiveness programs.

Yes, yes, yes. I mean who know what's going to happen. I don't think if we -- right now, we can't actually apply for forgiveness on one of these loans yet. I just suppose there will be some guidance coming out soon. People are talking about a blanket forgiveness below $150,000, which should only be about $150 million of our loans. Numerically, it's a high percentage of the loans numerically, but dollar-wise, it's about $150 million.

Okay. Great. And then just a final question as it relates to the margin, which seemed to be flat exclusive of the liquidity and the PPP. As you kind of look forward and the ability to reduce deposit costs and funding costs, is it enough to offset continued repricing on the loan side? Or do you anticipate some core margin compression over the rest of the year?

I think it will be under pressure. I think on the floating-rate loans, prime and LIBOR kind of down where they are, but if you have the 5-year treasury to 25 basis points. And as our real estate portfolio goes in, we'll -- that puts some pressure on the repricing there. And coming along with that, typically those loans don't necessarily reprice to whatever the state of repricing as they come in. They want to refinance the deal. So that would also have an impact. It would be a positive one. We have really kind of been holding pricing and -- competitively holding pricing near to the mid-3s on multifamily and CRE. So let's see what happens.

Our next question comes from Collyn Gilbert with KBW.

John, my first question for you, just on the PPP loans, what are you anticipating the overall income contribution to be from the program?

The overall income contribution?

Yes.

So we have -- so right now, I guess, the program is split up. I think it's about $2 million per month based upon amortization and ballpark, it's at like $1.3 million in amortization fees and $700,000 of interest income.

Okay. Okay. All right. That's helpful. And I know a lot of uncertainty, but just for modeling purposes, for what you guys are doing internally and maybe we should be doing here. What should we assume on the forgiveness schedule on those, do you think?

So I -- on the forgiveness itself, I think -- I don't think we're going to get much in the way of forgiveness until the first quarter of next year. I see like maybe kind of blanket forgiveness on lower balances, which I said is only $150 million of our $950 million. So that's kind of what I'm thinking about given we're really kind of nowhere on that.

So there's proposals out there that actually do a second round of this for certain of these customers. So it's going to be interesting to see how that plays out, too. So I would not expect any forgiveness in this year. I think most of the forgiveness will happen in 2021.

Okay. Okay. Got it. And then sorry if you just covered it, John, I apologize. But just in terms of the outlook on lowering deposit costs, can you just remind us sort of what your strategy is there and how much lower you think you can go based on what's kind of maturing and just what your appetite is for liquidity right now?

Right. So -- well liquidity-wise, we've got a lot. So it's interesting, the DDA is still high. We're trying to figure out how much PPP money is still in the portfolio. I mean obviously, everything is fungible and people have even put that into money markets, some people it into existing accounts. So we think there's still a substantial amount of that money is still sitting there.

We did lower -- quarter-over-quarter, it was 40 basis points. Unfortunately, we can't lower our DDA any more than we already have. But we don't have a big CD book, so repricing is not much of an issue. We kind of look at individual -- really tranches of accounts that have between -- they were paying between 10 to 15 basis points or 25 and 35 basis points. And I mean we kind of track up and then we target sometimes down from that. That's how we've done it all the way through.

We do let all the branch managers know ahead of time in case some of our customers may push back on it. But there's still room to lower some. We do have a couple of large relationships that we may let go because they're kind of costing us more money. But I -- probably it's 40 basis points on -- maybe we do in 10, 15 on that.

Okay. Okay. All right. Got it. And one other housekeeping item before moving to credit. The -- you had indicated, John, about the benefit to expenses on the loan deferral -- or sorry, loan origination costs. What was that actual dollar amount in the quarter?

What was -- how much did it drop by or what was the...

Yes. What was the...

Quarter-over-quarter, it dropped about $400,000, first quarter versus second quarter. But it was $400,000 larger deferrals to start.

Yes. Okay. Do you happen to have the actual number? I don't know if you gave it in the first quarter.

I don't have the actual -- no, that's the base number.

Okay. All right. And then just shifting to credit. So how sort of -- how are you thinking about the trajectory of the reserve from here? Kind of what will be the drivers of increasing that reserve ratio or subsequently decreasing it? Or just sort of how you're thinking about the qualitative and quantitative parts of the reserve and provisioning from here?

I guess it's going to depend upon if we get additional shutdown. New York seems to be kind of doing better than the rest of the country. And since most of our loan book is in New York, we are -- again, I think we -- I wouldn't say, at this point, we would think we're going to ratchet down the economy another notch next -- or in the coming quarter. It's going to be more about, I think, individual problems that are going to bubble up at the moratoriums, coming for their pass at a second round and who's going to be able to start paying again. So it would be more individual names than overall factors going forward.

Okay. Okay. And what do you see now? I know it's hard to determine this. But just based on what you're looking at within the deferred book and just borrower outreach, et cetera, et cetera, do you have a sense of what you think that charge-offs will do in the next few quarters?

I would think I'd be Pollyanna if I was to say they would -- reckon to pick up. There are some conversations around some, like, individual names of people who are looking for relief. And -- but I couldn't give you a dollar amount. But we've been pretty low all the way up until this point. And I think we'd be comparatively lower than some of our peers. But one loan can kind of shake that out. But I know of nothing right now that's kind of -- that would be significant as far as a charge-off goes.

(Operator Instructions) Our next question comes from Erik Zwick with Boenning and Scattergood.

First, just wanted to maybe take the discussion on your outlook for loan growth in the back half of the year a little bit further. I'm curious what industries you're seeing kind of the pipeline building. The outlook for mid- to high single-digit growth would be, I think, a very healthy and positive result at this point, especially just as I think about some of the comments other banks have made kind of looking for maybe something more flattish at this point. So I'm curious, one, again, kind of where that strength is coming from? And two, just how you're thinking about underwriting today given the unknowns in the economic environment at this point?

Sure. I mean, I -- unfortunately, I don't think our pipeline reports are the report by industry code. I think that there will be -- certainly, there'll be some -- there'll be some real estate in there. That's still kind of individual properties that are performing in the cash flow, especially out here in Long Island, where certainly, the multifamily space here is pretty strong. And based upon the traffic -- I hate coming in this morning to work. Things are kind of getting back to normal. So I think we're going to be careful. I mean as I think the credit people are all kind of talking about what we look at as far as higher cap rates and just a harder look at -- so our -- yes.

Okay. So in our pipeline, we've got about $140 million of C&I, new money. Also multifamily and CRE nonowner kind of follow up on the heels of that, of this land and construction. But I think -- in C&I, I'd say $137 million is exposure, not necessarily outstanding, so there'd be some kind of haircut on that. But I guess -- and as we've set a strong SBA portfolio as well. The SBA, I think, is kind of -- the SBA pipeline is kind of overtaken by PPP now that it's coming back online.

Okay. I appreciate that. And then looking at the decline in service charges and fees in 2Q, I'm curious how much of that was due to fee waivers versus the lower customer activity and higher balances you mentioned? And how much would you expect that to potentially rebound in 3Q or into 4Q?

The fee waivers, actually, if you look at the fee waiver versus the fees set, it was a lower percentage of waivers versus what was set. I think really, it's almost entirely due to the higher balances. The NSF fees were down by 80%, I think, in 1 month. So that's really what's driving it. I guess it's going to be driven by activity going forward. People may begin to spend money and balance checks. And additionally, our customers who are -- have their account on analysis, when their balances are higher, they earn higher earnings credits and there's less shortage fees assessed there as well. So I guess, as you see, our liquidity dry or liquidity go down and our balances decline somewhat, then we should see an uptick in efforts. It hasn't been necessarily on fee waivers.

Got it. And then just one last one for me, a bit of a follow-up on Collyn's question about expenses. The $24.4 million run rate in 2Q was kind of lower than the first. The mix was different as well with lower salaries and benefits and then higher in that other category. Just curious about your expectation for the run rate going forward at this point.

Yes. I think we're going to probably drift back up towards the $25 million range going forward just kind of with -- would it roughly be for the year anyway, around $25 million a quarter.

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. I appreciate this opportunity to talk about the quarter. Obviously, the PPP has been a driver for a lot of what we've done here. And if there's any further questions or specific things, please reach out to us afterwards. If not, everybody, have a great day. Thank you.

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