Welcome to the Dime Community Bancshares, Inc. second quarter earnings conference call 2021. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star then one on a touch-tone phone. To withdraw your question, press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kevin O'Connor. Please go ahead.
Thank you, Tom, and thank you all for joining us this morning on our 2nd earnings call as the new Dime. With me today is Stuart Lubow, our President and Chief Operating Officer, and Avi Reddy, our CFO. In my prepared remarks, I'll make some comments about our merger and update you on significant events in our first full quarter as the new Dime. I will also provide you some color on progress we've made on the business front. Avi will then provide you some details on the quarter, and we'll leave plenty of time for questions. First, let's start with the merger. As you'll recall, we closed our MOE transaction on February 1st and successfully completed our core systems integration on April 17th. Since that time, we've converted most of our treasury and cash management customers. All of this has been executed seamlessly by our dedicated team.
Importantly, we've delivered the promised cost saves and operated an efficiency ratio of 48%. As I mentioned on our first quarter call, to watch our staff accomplish this while putting our customers first gives me tremendous confidence we are executing and earning the mantle of New York's premier commercial bank. With our merger complete, I'm extremely bullish on our organic growth prospects going forward. During the second quarter, we announced the sale of our 2021 tranche of PPP loans, recognizing a gain of $20.7 million. Apart from providing immediate book value accretion, the sale frees up many of our staff to refocus on serving our community bank customers. Our involvement in the PPP program, especially as the number one community bank on Long Island, will always be a point of pride for myself and our company.
In addition to the sale of PPP loans, we also sold approximately $50 million of criticized loans at par. A testament to our historically strong underwriting standards and low LTVs. During the second quarter, we also announced we would be combining five branches into existing branches. Several of these branches already share common staff, and we expect minimal business impact. Even with these closings, we continue to believe our existing footprint provides us a competitive advantage by having complete coverage and significant brand identity in the greater Long Island market.
Ultimately, our goal is about growing clients, winning new business, and operating with a high-quality balance sheet. We grew non-interest-bearing deposits by 12% on an annualized basis this quarter, increasing the ratio to 33% of total deposits. In addition, we are now operating with a core funded balance sheet with virtually no wholesale liabilities.
As importantly, we originated $425 million of loans in the quarter at a weighted average rate of approximately 3.60%. As a result of these strong originations, and despite a relatively high level of payoffs, we were able to grow core loans by 3% on an annualized basis. The loan pipeline continues to build, and in fact, we have over $500 million of loans approved and waiting to close at a weighted average rate of 3.8%. Again, we've converted our core systems, and all of our lending teams are now more comfortable with our common loan origination system, and we expect loans, excluding PPP, to grow by approximately 6% annualized over the coming quarters. Our non-performing loans declined by 20% on a linked quarter basis.
As I've mentioned before, through merger due diligence, integration, and closing, we've done several third-party reviews of our portfolio and are very comfortable with the strength of our credits and our loan loss coverage. An offshoot of the PPP sale was a material increase in our capital ratios. Our tangible equity increased by 46 basis points in the quarter to 8.29%. I'd like to point out we have multiple levers to create shareholder value, and during the quarter, we purchased approximately $14 million of common stock and expect to continuing managing our capital levels efficiently over time.
We definitely see significant value in our stock given our trading levels, earning trajectory, and balance sheet profile. To conclude my prepared remarks, we had a strong quarter with reported net income of $50 million. We managed expenses appropriately and are running the bank at a sub 50% efficiency ratio.
Our adjusted ROA was 1.29%, and we grew tangible book value by 4.5% or approximately $1 per share in the second quarter. As we begin planning for 2022 in the coming months, I continue to believe we have a tremendous opportunity in front of us. We have a clarity of mission to be a pure play community commercial bank focused on being responsive to our customers' needs. We will focus on growing demand deposits and continue developing loan relationships.
As you're all aware, there have been several large merger transactions in our marketplace, and we believe we are extremely well-positioned and ready to capitalize on any disruption. Within our footprint, we have a unique and best-in-class deposit franchise with an industry-leading level of DDA. We have created a bank with the number 1 market share among community banks with strong brand appeal and scarcity value.
We operate in a high-density footprint with significant wealth and business opportunities. We believe we are very well positioned for the day that Federal Reserve raises interest rates while currently producing strong metrics even in this low rate environment. At this point, I'd like to turn the conference call over to Avi, our Chief Financial Officer, who'll provide some additional color on our first quarter results.
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 same properties. We have provided a table in the earnings release with the three months ended June 30th 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% + 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 our 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. 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. Just for a frame of reference, we're currently purchasing securities at a yield of approximately 125.
If we had hypothetically fully reinvested the $600 million immediately into purely securities, the impact on NIM from the PPP sale would drop from seven to eight basis points to only two basis points. Given where rates are at this point, we will be patient yet prudent in our approach to deploying the excess cash into securities. As Kevin mentioned, we have a strong pipeline that will also help absorb the excess liquidity over time and help build the NIM from the PPP sale. Purchase accounting accretion on loans was approximately $1.9 million in the second quarter. We expect this to be approximately $1 million to $1.5 million for the next couple of quarters. Early next year, we would have potentially run through most of the remaining net accretion remaining.
Accretion will of course, be a function of paydowns on loans, some of which are at premiums and some at discounts. With respect to the remaining 2020 originations on the balance sheet, which were approximately $460 million at quarter end, we have $2 million of remaining unrecognized PPP fees that are expected to be recognized over the course of the next 12 months. As Kevin mentioned, our loan pipeline of loans waiting to close is approximately 380, which is in line with our overall loan portfolio rate ex PPP. This, coupled with our ability to continue to lower deposit costs should lead to margin stability in the quarters ahead ex the impact of the temporary PPP sale liquidity that I've already outlined. We ended the first quarter with strong capital levels. Our tangible equity to tangible assets ratio, excluding PPP, was 860.
During the second quarter, we purchased 400,000 of shares at $34 and do believe share repurchases continue to be very attractive to us given our trading levels and prospects. We definitely see significant value in our stock given our trading levels, earnings trajectory, and balance sheet profile, and continue to be active on the buyback front in the month of July. Moving to credit quality, our non-performing loans excluding acquired PCD loans as a percentage of total loans was only 20 basis points at June 30th. Our net charge-offs for the quarter were only four basis points. Our loan loss reserve ratio of 102 basis points, excluding the PPP loans, is a level we're very comfortable with at this stage in the credit cycle.
We're comfortable with our guidance of operating by year-end with an annualized run rate for core cash non-interest expense of approximately $195 million, which we expect to hold relatively flat into 2022. As we begin our 2022 budgeting process in the months ahead, we will certainly leave no stone unturned in terms of managing expenses appropriately within the confines of our return profiles and growth prospects. Finally, I'd like to end briefly by touching upon progress against the two enterprise-wide goals we had laid out previously. Our first goal was growing DDA to approximately 40% in a three-year timeframe. In the second quarter, we grew DDA to 33.3%. Notably, when we constructed our short-term and long-term incentive plans, growing DDA to 40% featured prominently.
The second -
A quick thing, Avi, you mentioned first on expenses. Did you say $4 million of benefit to expenses from the five branches that'll be closed in the next quarter, or is that annually?
No, Mark. My comment was, in terms of the charge for combining the branches, we obviously have some leases associated with those branches.
Got you. Okay. On the margin. It sounds like $1 million-$1.5 million of PPP income. The core margin's going to be 3.04%-3.05%. That's incremental. Am I reading the tea leaves the right way?
Yeah. The easiest way to think about it, Mark, is our reported margin was 312. Right? Within that 312, we had $600 million of PPP that had a yield of 170. If you just assume that goes to 10 basis points, the 312 comes down to 305. Just straight down. It's just straight math. Obviously we're not going to keep the whole thing in cash. We're going to start reinvesting that into securities initially and with loan growth. I just wanted to have you see the 312 down to 305, then back up with the investing in securities and obviously with full loan growth and reducing our deposit costs, and the fact that our loan pipelines are pretty strong in terms of current rate.
Okay, great. 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?
Yeah. Hi, Mark. It's Stu. Yeah. Those deals were basically done at par. There were two loans that had seconds on them that we took a small hit of about $300,000. Everything else is at par. 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. We're looking at it weekly, monthly, et cetera. 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. We're going to manage the portfolio and move things that are somewhat stressed, and continue to do that as we continue to originate new business. I just want to make mention, we're talking about loan growth and our loan pipeline.
We're very excited about the organic opportunity to grow loans. We have almost $2 billion in the pipeline at this point. Just since June 30th, we've increased our loan book by almost $100 million. 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. There's $150+ million of lines that are not drawn yet, and construction loans that are part of that are at very attractive rates, prime + 1 or thereabout. Although the balances of loans closed for the quarter were about $450 million, there's another $200 or so million in lines that are yet to be drawn.
We're very comfortable with the trajectory in terms of our loan growth as we go forward. Honestly, there's no dearth of opportunity in terms of new business coming to the bank.
Stu, I'm just curious. Is a lot of the pipeline coming from other banks that are involved in acquisitions?
It's coming from all the usual players. The larger institutions. As we said early on, we're able to do more business with our existing customer base as well. We've seen some business from some of those institutions that are involved in upcoming transactions, and we think there's going to be quite a bit more in terms of opportunities with even the newest transaction that occurred. We're excited by that. We also are looking at additional teams and personnel from those organizations because we think there's a lot of opportunity there as well.
Lastly, Kevin, I'm curious, given all the consolidation that's going on around you, do you feel the need to do more transactions, or do you think you're better off staying independent and taking advantage of the consolidation around you?
I think the latter is the way we go. I think the organic growth opportunities are certainly there. You can't close the door if something comes and there's an opportunity to do something. We're in a very good position having done the conversion, being all on one platform, being the size and scale we are. As Stu has said, there's tremendous opportunity out there. I don't think it's really coming from those locations yet. I think there's still sort of a wait and see. We certainly see opportunities there.
Yeah. Mark, I'd just add to that. We've been very active on the buyback front. 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.
Thank you.
If you have a question, press star then one to join the queue. The next question comes from Matthew Breese with Stephens Incorporated. Please go ahead.
Good morning.
Hey, Matt.
Hey, Matt. Good morning.
A few questions so first,
Our line usage continues to be lower than historical levels. There's an opportunity there once the economy normalizes and liquidity is somewhat flushed out. Borrowers are somewhat reticent to borrow under their existing lines or have a significant amount of cash. In terms of yields, I think that in the quarter, we did have some significant amount of swap activity this quarter, although we don't see that continuing throughout the rest of the year given the yield curve. That did drive down some of our yields for the quarter. It just so happens that this quarter or the pipeline does include a number of loans and lines and some construction deals that have higher yielding nature in terms of what's in the pipeline.
I will say that the overall $1.8 billion or almost $2 billion of loans in the total pipeline have a total yield of about 355. I think this quarter, what's out there for now is a bit of an anomaly, but we're in the 355-360 range in terms of the entire $2 billion pipeline.
Got it. Okay. Very helpful. One other question I had was, could you remind us of what % of the loan portfolio is floating rate and if and when we do get a Fed hike will reprice immediately?
Yeah, sure, Matt. 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 that with a 50 basis point rate hike would also reprice. Call it for a 50 basis point move, there's $1.5 billion of floating rate stuff. 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.
Okay, 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?
Yeah, sure. Because of a 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.
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?
I'll start with the latter. I think the client moves are still yet to be seen. As in most of these cases, everyone's is in a wait and see mode. Their initial reaction is nothing's going to change, and then things change. We certainly expect opportunity there. In terms of new personnel, we have brought on several relationship managers. We have brought on a number of underwriters and support staff to get through that significant loan pipeline we have, and we have been able to take folks from those institutions we're talking about.
I will tell you, I got four calls yesterday from the recently announced deal. People are aware that we're out here and there's a real opportunity. At our size and capital levels, I think there's going to be some real opportunity to take advantage of not only the personnel but the disruption in the market.
Got it. Okay. Maybe just a follow up. I don't want to get the cart too far in front of the horse here. 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. Might we see you enter some of the more suburban areas around Metro New York City as folks emerge?
Yeah. Our pipeline does include a fairly significant amount of business in the Northern New Jersey marketplace.
Thank you.
The next question comes from William Wallace with Raymond James. Please go ahead.
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. Avi, you mentioned the buyback, and if you could you remind us what's left on the buyback? 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 threshold?
Yeah. Sure. We had around 800,000 shares when we started off. We purchased around 400,000 shares in the second quarter. There's remaining 400,000 shares basically left in the buyback in terms of the authorization. Well, in terms of capital levels, we're very comfortable where we are right now. The risk profile of our company, more importantly, the stress testing that we've done, stress testing provider provides us what type of capital burn we have and what type of capital burn the peer group has, and we generally screen around 150-200 basis points lower than them from a stress testing perspective. I'd say we're comfortable running the bank between 7%-7.5% TCE, between 8%-8.5% tangible equity. I mean, we're over those levels at this point. We got some PPP in there, which is going to come out of the balance sheet.
At these levels, again, we bought back shares at $34. We feel it was attractive then. Slightly lower than that, we feel it's even more attractive. We'll continue to use that judiciously as we go forward.
Okay. Thank you very much. If nobody's asked on the expense base, are there more cost saves to come? If so, where might a comfortable run rate be?
Yeah. In my prepared remarks, I'd mentioned we're comfortable with that core cash non-interest expense base of around $195 million, by the fourth quarter, and holding that very steady into 2022. I think we've laid out some guidelines for efficiency ratios of 47%-50%. We're going to continue to drive that down. We're going to start our budgeting process here in the next couple of months, and we're not going to leave any stone unturned over there. As Kevin mentioned upfront, we promised an efficiency ratio of 50% when we announced the transaction. We're running the bank at 48%. We want to promise that we're going to be between that 47%-50% over time as we leverage some of this excess liquidity from the PPP, getting back to the lower bound of that into 2022.
Okay. Thank you very much.
Thank you.
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.
Well, thank you everybody for participating. Have a great day and a great weekend, and look forward to chatting with you soon.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.