Good day, and welcome to the Dime Community Bancshares Incorporated Third 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, Chief Executive Officer. Please go ahead..

Thank you, Andrew, and thank you all for joining us this morning on our third quarter conference call. With me again are, Stu Lubow, our President and Chief Operating Officer; and Avi Reddy, our CFO. We had a strong quarter with net income of $36.5 million or $0.89 per share.

Adjusting for one-time expenses associated with the previously announced branch closures and merger-related items, the net income was $41.4 million or $1.01 per share. Our adjusted ROA was 1.37% and we continue to operate the bank at a sub 50% efficiency ratio delivering on our stated merger goals.

Our employees have spent a tremendous amount of time putting together a new organization. Internally, in terms of system conversions and new processes and importantly, externally in terms of working with our customers to ensure the experience has been seamless.

I'm happy to report that merger integration is now largely in our rearview mirror, and we are 100% focused on growing our core business. The third quarter loan origination were $465 million at a weighted average rate of 3.56%. These originations were 9% above the prior quarters $425 million.

Despite higher payoff levels, the production resulted in a net loan growth of the quarter of 4% annualized. Our loan pipeline remains strong and as each quarter goes by our lending teams are getting more and more comfortable with our new loan origination system and processes.

Our focus on growing non-interest bearing deposits has been unwavering, and at the end of the third quarter DDA represents 36% of total deposits. This high level of DDA and our core funded balance sheet positions us well for the day the FRB raises rates, while also producing the strong metrics even in this low rate.

As you're all aware, there have been several large merger transactions in our marketplace none of which have actually closed yet. Post-closing of these mergers we expect there to be some level of fallout and we believe we are extremely well positioned to capitalize to continue growing our business.

Our non-performing loans remain at low levels and our capital ratios remain strong. We ended the third quarter of the tangible equity ratio of 8.5%. Our low-risk balance sheet which performs favorably in stress testing relative to the industry has provided us the opportunity to actively return capital to shareholders.

During the third quarter we purchased approximately $15 million common stock and expect to continue managing our capital over time. We definitely see significant value in our stock given our trading levels, earning trajectory and balance sheet profile.

Our budget and planning process for 2022 is in full swing and we'll provide more color on our expectation 2022 at the January earnings call. To conclude my prepare remarks, we had a strong quarter with growth in loans and non-interest-bearing deposits. 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. At this point, I'd like to turn the conference call over to Avi, who will provide some additional color on our third quarter results..

Thank you, Kevin. Our reported net income to common for the second quarter was $36.5 million, included in this quarter's results were $7 million in aggregate one-time costs associated with our previously announced branch closures and merger related expenses.

We've provided a table in the earnings release with the three months ended September 30th pre-provisioned net revenue, which on an adjusted basis was $54.7 million compared to $52.7 million for the prior quarter.

Our level of pre-tax pre-provision income provides visibility into 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 13 basis points in the third quarter. And the current spot rate as of today is even lower at approximately 10 basis points.

We believe, we have an opportunity over the next several quarters to continue to drive down cost of deposits by a few more basis points as higher cost CDs roll off and are replaced at lower rates.

Importantly, we believe we've removed a significant amount of rate sensitivity from our deposit base, as we have not retained rate sensitive CDs and money markets.

These actions coupled with a higher percentage of non-interest bearing deposits than our Metro New York peers should result in our deposit betas lagging other banks in our footprint when rates rise. The reported net interest margin was 3.20, up eight basis points on a linked quarter.

As we did last quarter, we've provided details in the press release on the impact of purchase accounting and PPP. Purchase accounting accretion on loans was approximately $2.5 million in the third quarter. We expect this to moderate to approximately $0.5 million to a $1 million for the next couple of quarters.

By early next year we would have most likely run through all of the remaining net accretion from purchase accounting. Beyond that, they could still be a lingering impact on the income statement depending on payoff activity as some acquired loans are at gross premiums and some at gross discounts.

But in terms of the net accretion, it should wind down by the first quarter of next year. The impact of PPP has also been outlined in our earnings release. We only have $900,000 of remaining unrecognized fees on these loans, so do not expect much noise for this line item going forward.

Excluding the impact of PPP and purchase accounting, the adjusted NIM of 3.10 was above our previously telegraphed range as we were able to hold the line on loan pricing and benefited from reductions in the cost of deposits.

As you will note on our average balance sheet, in the third quarter we had $880 million of short-term investments earning 26 basis points.

We expect these average short-term investment balances to be at least $250 million lower in the fourth quarter as we use excess cash to pay off broker deposits and also reinvest into securities towards the end of the quarter and into the beginning of the fourth quarter.

Reducing these average short-term investment balances, which have very limited positive spread should provide support for the core margin in the fourth quarter. As Kevin mentioned, we will be providing more updates on our 2022 expectations during our January earnings calls.

But the clear opportunity for us over time is to deploy -- redeploy our cash and securities portfolio into core relationship loans. At the end of the third quarter, cash and unencumbered securities represented approximately 14% of total assets.

We're very comfortable operating the bank closer to 9% to 10% as it relates to this ratio and hence think we have $500 million to $600 million of excess liquidity on the balance sheet, which when reinvested into relationship loans provides a clear catalyst for medium term NIM and NII expansion.

We've demonstrated strong originations and once loan paydowns eventually moderate the excess liquidity will be absorbed with both NII and NIM growth. Of note, the payoff rate across our real estate portfolios was approximately 23% in the third quarter.

When this rate eventually moderates, of course, loan growth will accelerate given our current level of origination. Moving on to credit quality, we had a negative provision in the quarter of approximately $5 million.

All else equal and assuming no major changes in macroeconomic conditions, we expect the level of reserve releases seen in the last couple of quarters to moderate and our provision levels to be driven more by trends and growth in our loan portfolio.

Our existing allowance for credit losses of 88 basis points is still above the historical combined levels of the legacy institutions pre-COVID. We feel comfortable with our current reserve levels based on current economic conditions. We expect core cash operating expenses in the fourth quarter to be approximately $49 million.

As Kevin mentioned, when the middle of our 2022 budgeting process and expect to provide more color on 2022 during our January earnings call. Non-interest income for the third quarter included a couple of items that we don't expect to repeat.

First, approximately $315,000 of referral fees on loan originations and approximately $200,000 related to an insurance reimbursement, which both show up in the other non-interest income line item. And approximately $315,000 additional in the bowling line item due to mortality proceeds from a debt claim.

Backing out these items run rate, non-interest income would have been closer to $8.8 million. During the third quarter we purchased approximately 480,000 shares at $32.18. We believe share repurchases continue to be very attractive given our trading levels, prospects and strong balance sheets that performs favorably in stress testing.

In the month of October we are on pace to purchase an additional $9 million of stock. With respect to the go forward tax rate, we're estimating a rate of approximately 27.5% for the fourth quarter. Finally, I'd like to end briefly by touching upon progress against the two enterprise-wide goals we had laid out at the time of the murder announcement.

Our first goal was growing non-interest bearing deposits to approximately 40% over a three-year time frame. By the end of the third quarter we've already grown this ratio to 36%. We're definitely doing better than our initial timelines for achieving our goals. The second, equally important goal was managing the bank with a sub 50% efficiency ratio.

In this regard we've operated the pro forma bank at approximately 48%. While PPP and purchase accounting accretion will dissipate in 2022 staying below that 50% mark continues to be a fundamental focus across the organization. With that, I'll turn the call back to Andrew to open it up for questions..

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

Hey, guys. Good morning and congrats on the nice quarter..

Good morning. Thank you..

Good morning, Mark..

First, Kevin, you mentioned the size of the pipeline was large.

I wondered if you could give us some, the actual size of it, maybe the complexion and what the average rate looks like?.

Hey, Mark. It's Stu Lubow. Sure. Right now the total pipeline is about $1.7 billion. We got about $1.2 billion in discussion. We had about $225 million in underwriting. And we have about $200 million in loans approved and waiting to close. I will tell you that October was a very strong month. We've closed nearly $200 million in new originations.

So far this month we still have a number of loans to close before the end of the month. So it's very strong. The average yield on that portfolio in the pipeline is about 3.70 ..

Okay, great. Thanks Stu. And then I guess I'm curious.

Are you out in the market trying to hire teams? And are there any new product plans with the lending side of the business?.

I think we're pretty happy with our products and our lending plans.

Although, I will say that we've rolled out a digital product that is focusing on small businesses, small business funding 250,000 unless and we've been running that for about six months and we're going to be rolling that out to our website, so that customers can apply right online and get an answer within 24 to 48 hours.

So that is part of our plan going forward. It really will offline some of the work that's done by our relationship managers on these smaller credits, but also provide better services to our customers. In terms of with mergers occurring in the near future, we are talking to a number of individuals from other institutions.

As they receive clarity in terms of those deals closing, we'll have some opportunity. But we are getting close to several. But at this point it's a little early given the fact that those deals have not closed yet..

Okay. Thanks Stu. And then, Avi, I guess I'm curious how asset sensitive you think the balance sheet is today? And how you're tweaking that? And then also if you could kind of help us think about the core margin or the reported margin I should say.

We know it'll be down from lower PPP fees, but should it slowly start to begin to build off a base in say 1Q?.

Yes, Mark. I think I'll start with the margin. So, I'd start with the core margin. The core margin was 3.10 this quarter. Like we said, there's $880 million of short-term investments at 26 basis points. You can probably assume that's $250 million lower for the next quarter. So that in and of itself should result in a upward sloping margin going forward.

And it's really all about taking those cash balances and putting them in the securities that we need to, but at Stu's points really putting them into loans over time. So I'd say, upward sloping here in Q4 and then continued moderate expansion into 2022. I think with -- which relates to the asset sensitivity.

I'd really point you to our 10-Q disclosures. Obviously, 10-Q is coming up in a couple of weeks. But if you look back to our June 10-Q and look at our EVE sensitivity in the 10-Q in a plus 100 basis points, our EVE is up 16 percentage points. And you look at that versus any other bank in our peer group, nobody's even close to that number.

So, I think a lot of times people get hung up in plus 100 scenarios, gradual ramps, things like that. The whole portfolio is going to reprice over time and the fact that we have 36% DDA. When you look at the entirety of the portfolio it's important to focus on EVE.

So take us standalone numbers, standalone book value and look at those EVE disclosures versus the peer group, I think you're going to get a good sense of how much more asset sensitive we are than everybody in the northeast..

Right.

And then just lastly, Kevin, I'm curious when you feel like the bank would be in a position to consider more M&A and geographically where you'd be considering things?.

I think we talked about this last quarter. I think having put all the integration behind us, we've actually gone through a safety and sound exam in the middle of doing everything else is part of this process. The regulators came in and did a safety and soundness and I think we passed well. So I think we're there today.

And I think we've always talked about contiguous markets make sense for us. So nothing has changed on that point..

Thank you..

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

Thanks. Good morning guys. Avi, maybe just real quick circling back to the to the NIM commentary you just gave on the core NIM. I mean, you were in the low 3.20s in the first half of the year before the PPP sale where you had the excess liquidity.

Do you do think we could get back there by into the first half of next year, so like in the second quarter? Or is there too much other pricing pressures that will offset that?.

Yes. Well, I mean, we don't give quantitative gains going out six to 12 months. Look, I mean, there's a clear upward sloping NIM here over time. It's going to be the pace at which we reinvest the cash in the securities.

But, I mean, our targets for loan growth, if you think about that 6% annualized loan growth target, that is 500 million to 600 million every year. So, I think the assumption should be -- our deposit costs aren't going to go up till rates increase.

And if you assume rates increase in Q3 and Q4 of next year you're still going to see some moderate compression in our cost of deposits. Whereas as we put these cash and securities to work it is going to grow up and go up. Every quarter it may be slightly different depending on what we do with the loan portfolio.

But clearly, I mean, the goal is to build it back to those levels. And again, having the DDA and having the excess liquidity helps us going forward..

Okay. And then, Stu, I appreciate your commentary on loan production and the portfolio yield.

But just given all the moving parts, I mean, do we think in the fourth quarter based on the pipeline today and the activity that you're seeing in your markets that we could be on track for that annualized target?.

Yes. Well, it's going to be very strong for a quarter. We do expect a couple of packages, large multi-family packages to pay off that are going to refinance elsewhere that we've really decided we don't want to stay in those deals. So, it's going to be moderated a little bit by managing our portfolio and managing risk within our portfolio.

So, it's a little hard to say at this point. I think on the origination side in a normalized environment, I would --and all other things being equal, say -- would have said yes. But knowing that there are a couple of multi-family packages that are going to pay off, I think that will have some effect on overall growth.

But we're still very confident in the long term in terms of our growth prospects..

Wally, I just said in the prepared remarks, I'd mentioned the payoff rates are on 23%, 24% on the portfolio. So, in a normalized environment and especially as rates start going up. If you just assume that's 17%, 18% versus 23%, you get to a much higher growth rate for us if it's call it Q1.

I mean, I think Stu's commentary was around Q4, specifically around a couple of packages. We also mentioned in the press release. Look, I mean, we're repurchasing our $9 million of shares in the first month of the quarter and hoping to continue that for the next couple of months here.

So, we'll manage the capital ratios appropriately to the extent we have some large payoffs come in. But in the medium term we're definitely reiterating that 6% annual loan growth number..

Okay. And then, Avi, you, I believe suggested a expense in operating -- core operating expense running at $49 million in your prepared remarks. We've been hearing a lot of commentary across the industry about wage pressures that are real and other pricing pressures due to supply chain issues.

As we -- as you kind of look at your expense base with the potential for -- I don't know if there's any additional cost saves or anything to come on.

But I'm wondering if you could just talk about that base of expense and what pressures there are to it and what relief valves you may have to offset those pressures into next year?.

Yes. Wally, I mean, when we're going through our budgeting process, I mean, we feel the same pressures as everybody else. We've hired a lot of new people at the bank. And so, it's an ongoing process and decisions we need to make here internally.

I think the one thing we've done a good job at in the past is we've promised operating the bank at a sub 50% efficiency ratio and we're going to figure out a way to be able to do that next year as well. So, if it means growing the balance sheet slightly faster, we're going to figure out a way to do it.

But there is obviously some wage inflation and we're feeling it like it like everybody else. I think we limited the guidance to Q4 right here, because we have really good visibility into Q4, but we're really committed to doing that.

And again, at the top of the house there's only two metrics that manage growing DDA and managing the bank at a sub 50% efficiency ratio. So we're going to figure it out for next year..

Thanks. Appreciate. Thank you..

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

Hi, good morning..

Hey, Matt..

Avi, I just wanted to follow up on the topic of paydowns. So, you noted 23% this quarter and the normalized pace is more like 17% or 18%. Are you seeing any signs so far into the fourth quarter that you're heading towards that more normalized pace.

Stu, I think you mentioned there's a couple of lumpy payoffs that you're not particularly -- you're not going to be competitive on the refi.

Just curious if there's anything else that's getting in the right direction there?.

Matt, I don't think for Q4 it would be normalized. I think this is just based on our history over different rate cycles. It just feels like as rates start going up a little bit. You do have some customers coming in right now, to refinance before rates actually go up, right? So, could it continue into Q1? Sure.

But over time once rates do start going up this is going to normalize. So it's more based on a history of what we've seen. Over time, I don't think we're going to see it be much lower in Q4..

Matt, I think there's a little bit of pent-up demand. As you know during COVID there's not a lot of activity particularly in the multi-family market, because there's a lot of uncertainty there.

And as COVID issues have moderated and multi-family has basically come back, I think that pent-up demand surfaced in this quarter and we're seeing the last aspects of that into the fourth quarter. But I think that's the reason and our multifamily was really driving those numbers..

Got it. Okay.

And then, maybe could you discuss where you're seeing origination activity? Is it mostly on the east side of the island? Or you getting a fair bit activity in New York City? Is it Brooklyn versus Manhattan? Maybe some color on where the activities in the Boroughs and Long Island?.

Yes. I mean, I would say, east end is steady as always. I think our activity is more west. Our growth activity is more west from Nassau through into the Boroughs into northern New Jersey..

Okay. And then two other quick ones for me. So the first one is just that SBA gain on sales sell this quarter quite a bit. Just curious what happened there.

And if we can get back to a more normalized pace of something closer to what we saw last quarter?.

Yes. I mean, we have a number of SBA loans that are going to be -- we're going to see gains on sales this quarter. And I think those -- that number will be back to a normalized level in the fourth quarter. We do have a significant pipeline in SBA as well.

So at this point we have over $80 million in terms of loans that we're discussing and there's about the $32 million of SBA loans waiting to close. Some of those SBA loans are construction or leasehold improvement loans that we don't sell until all the funds are dispersed. So there's some timing lag there.

But we're fairly confident that SBA gains will return to normalized levels not only in a fourth quarter but going forward..

Matt, in the first month of the quarter we've already had more gains than the last quarter already. So just to echo Stu's point..

Got it. Okay. Last one for me. In total non-accruals there was a pickup in C&I loans close to $9 million, $10 million.

Could you just discuss what happened there? Was it one credit or a few credit? And if it was one just give us a sense for what happened?.

Yes. It's one credit. It's a an individual involved in real estate investing. We -- the loan is actually still current as an individual that has a significant COVID related businesses, hotels and whatnot and while the loan remains current, we are working with the borrower to secure that loan.

But in the meantime we took a very conservative view of the loan. But I will say at this point, it's still paying, still current..

Great. Okay. That's all I had. Thanks for taking my questions..

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

I just want to thank everybody for participating. I actually want to thank our employees on the call for helping us achieve these great results and look forward to speaking to you all soon. Thank you..

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