Good day, and welcome to the Dime Community Bancshares Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] 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 Ken Mahon, President and CEO. Please go ahead.

Thank you, Sean, and thank you everyone for joining us this evening. On the call with me today are Chief Financial Officer, Avi Reddy; and our Chief Accounting Officer, Leslie Veluswamy. In our prepared remarks, we'll pick up some of the broad themes that underlie the earnings release and then add our outlook for the fiscal year 2020. Opening remarks will be brief so we can take some questions at the end. Three years ago at the beginning of 2017, we took steps to reformulate our business model from that of a brokerage driven multifamily serve model into a full service commercial bank. This effort culminated in the adoption of commercial bank charter in spring of 2019. A primary impetus for the change that was clear to us that the community commercial bank model enabled the possibility of a more diversified balance sheet, and better returns for shareholders in the future, reflected in the form of structurally higher net interest margin, return on equity, and ultimately to better trading multiples, both to book value and to earnings. To that end, Dime's strategic plan is built upon improving five fundamental metrics: one, grow our total checking account balances; two, increase low cost business deposits; three, grow relationship-based commercial loans that have better risk adjusted returns than multifamily loans; four, reduce our regulatory CRE concentration ratio; and five, diversify the sources of non-spread revenue while increasing the contribution of non-spread revenue to total revenue. Of those five metrics how did we perform in 2019? Starting first with growing our checking account balances. On a year-over-year basis, average non-interest bearing and low interest bearing checking accounts increased by 20.4% to $605 million. Every dollar of low cost deposits that we raise increases the franchise value of our company. From every member of our…

Thank you, Ken. I'll first start with our fourth quarter results. Core EPS was $0.27 this quarter compared to $0.13 for the leaf quarter. Included in this quarter results for the $7.5 million provisions related to a previously identified C&I relationship that had already been placed on non-accrual status. As mentioned in the press release, being fully reserved against this relationship is a prudent course of action given what appears to be a very protracted settlement process. We want to share a few details on the credit. The borrower was a subcontractor, which has performed significant work on municipal projects and private projects in the metro New York area for over 20 years. The borrower filed for bankruptcy in the third quarter prior to which they were current on all payments. Dime has extended $20 million of credits to this borrower. We're currently working with a bankruptcy trustee to maximize returns for ourselves and other unsecured creditors. From all accounts we received to-date this appears to be a highly unique situation where the subcontractor was pressured to complete a major public works project on an accelerated time frames, which led to bankruptcy. The charged-down balance of the loan is $10 million of which all of it is a non-accrual. As mentioned previously, we're fully reserved for this $10 million exposure. Beyond that information, we will not be providing any more commentary on this individual credit in the Q&A as a loan is still in the workout process. I'm sure you can all respect that position. Our stock price suffered in late October after our third quarter earnings release likely as a result of the aforementioned non-accrual announcement. We took that as an opportunity to repurchase shares at attractive levels, given the confidence we have in our business plan and the…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

As you grow your C&I originations, I'm curious, are there any areas or industries that you're focusing on? And also who you taking share from, is it from a larger banks or is it other community banks?

Mark, I think just to answer the second question. Yes, the larger banks out there. We said in the past, we really have a unique opportunity here because we're really the only bank that has a $600 million capital base that's highly focused on this with a brand name that resonates. So it's that's kind of where the opportunity is at this point in time. I think right now, there's no specific industries that we're significantly focusing on, we provided some details on our portfolio in our last investor presentation, but it's typical cookie cutter community commercial bank type credits.

Okay. And then prepayment penalty income was strong this quarter. I assume you think that that will decline a bit in, in coming quarters?

Mark, typically what we're seeing with that, I guess, with our portfolio is Q2 and Q4 are typically fairly strong quarters for us. And then Q1 and Q3 seem to be lapses to be just with the borrowers trying to get their stuff done by midyear and end of the year. So, that's hard to predict. And I think in general loans are staying on a little longer, they're getting closer to their reset base before prepaying. But, I think what the size of the portfolio that we have, I think for the full year, it's hard to see as having less than $4 million or $5 million of prepayment revenue and therefore for a full year, which kind of a $1 million per quarter-ish. This quarter, obviously, we had a little bit more than that. But I think given the fact that we still have a portfolio that's over 3 billion, you probably should see a 1 million plus of repayment fees, but any individual quarters can go up and down.

And then, I know that you all are deemphasizing multifamily and there haven't been a lot of multifamily sales recently in the metro New York market. But what's your best guess as to how much values have gone down in the last year on buildings that have rent control rent stabilized stuff in places like Brooklyn and Queens?

Cap rates really have stayed low Mark. So, that's part of what did drive the value calculation. And then, Dime's haven't really done loans based on pro forma rents or anything. So, I mean clearly it's impacting the transaction volumes, but it's hard to estimate what that's done. I do think the cap rate have been a big help, the low cap rates have been a big help to that, and we're not really seeing too much disturbance in that marketplace.

And then lastly, I know its small members but the construction portfolios like $118 million now, but it's been growing pretty fast. I guess I'm curious what kind of construction projects you doing and what are your largest construction loans in terms of size?

Mark, it's a pretty cookie cutter construction portfolio. Typically what happens with construction loans you make them and then takes a while for them to fund. I mean, we obviously have internal limits on those and less than 5% of our loan portfolios, it's very manageable, but it's just the standard no different than any other community commercial bank is doing.

How big loans are we talking about? I know they're not all drawn right away, but…

Yes, I mean probably if all being drawn, less than $10 million of size, I mean, that's kind of the size, less than that.

Our next question will come from Collyn Gilbert with KBW. Please go ahead.

Just want to dig in a little bit to the loan book and just starting with some multifamily. I know, Avi, you had said that you had, where it was a 500 or some odd million that was contractually due to mature in 2020, and I think that number was like 600 million or something like that last quarter. But you guys saw a pay down, I think that were higher than what you would have anticipated in the fourth quarter because I think you were thinking that maybe the paid as a multi would be matched with the growth in this business and that balances with the whole flat? So just trying to get a sense of use, where are the behavior you kind of expect on the multifamily side and maybe, do you anticipate pay downs to sort of accelerate or how we should sort of think about the rate of pay downs in that book?

Collyn, again, it's seasonal, right? I think in the first half of the year, pay downs were a little bit slower. People are waiting for the rent regulated rule changes to go into effect. And then we have this seasonal Q4 when pay-out pick up. So, it's hard to predict with that portfolio, but I think that we have to think about. We have capital, we have a balance sheet. If we have more pay offs that things going to be, balance sheet going to be slightly smaller, but we're going to return that capital to shareholders, managing around the capital ratio constraint I described. So, our story is not really about a balance sheet growth story, it's about a re-mixing story. And it's the payoffs are higher than what we think we'll return that capital to shareholder over time.

But really in the multifamily portfolio, a lot of the loans that are there are raised as far as he gets it. So, there's no incentive for them to rush in to refinance, and there's really going back from Mark's question a little bit earlier. There's nothing -- there used to be a lot of juice in those values. They come and take more money out. Those days seem to have passed us by.

So then within that, Ken, would you -- then these loans could see their contractual maturities versus prepay head?

Yes, it's correct. Either they're refinancing debts or their maturities, correct, right.

And then just I hear you on all the moving parts on the NIM and unwillingness to give NIM guidance, but just wanting to understand sort of this strategic direction of how aggressive you guys want to be and pushing out some of the higher college deposits specifically kind of in that online channel? It seems like that part you do have some control over. So just wanted to just kind of get a sense for how you're thinking about pushing through these lower deposit rates and pushing out some of these higher cost accounts?

So Collyn, on the Internet side, the DimeDirect piece that we referenced, we're down to around $100 million on that. So, I mean, our rates are below our peers. It's not a big portfolio at this point. I think when you think about deposit cost, we do have CDs maturing over the next three months, that's around $330 million of CDs and the rate on those CDs are anywhere between 210 and 220. And right now, we're retaining probably 70% to 80% of that at a rate that's around call it 40 to 50 basis points lower than that. So, I think the next leg in the cost of deposits decline is going to be driven by a decline in our CD book. We made a lot of changes on the multi-fam -- on the money market side and we will continue to tweak that on the margin. But I think from the CD side, there should be some declines as a lot of our competitors have dropped rates too. I think overall it's we're trying to manage client expectations and also in our competitive environment. So, there is not any one area point to, but the CD piece is probably one that naturally you have a level of retention and we're seeing on 75% to 80% that was with much lower rates.

Okay, that's helpful. And then I just to make sure, I heard you correctly on the expanse guide. Did you say $98 million for 2020?

That's correct. Yes.

Okay, and then just curious. So the FDIC, how we should be thinking about the FDIC expense within that? Will that come back up to normalized levels kind of similar to what you posted in 1, 2Q of last year?

Yes, I mean, it's just, again, they do the calculation and we're not going to get any more credits going forward and that's all in your run rate of 98.

Okay. And then just on the credit, I just want to make sure I understand the steps that you guys have taken to-date. So you started -- if you could just walk through that with me again, you started with the 20 million of outstanding, you took a $5 million charge-off in the third quarter, another $5 million, if I read that right, charge-off in this quarter, but then you hit had a specific reserve and I just trying to get the math there as to how you now feel like you're fully reserved on that $10 million that's left?

Collyn, we started off with 20, we charged off 5 million, and we made an adjustment to the reserve associated with that. So, there's only a $15 million loan as September 30th. At September 30th, we took another $7.5 million specific at that point. So, we were only not reserved for $7.5 million of that loan. We charge the balance of the loan down now to $10 million and we took another reserve right now of 7.5. So, we've taken the full reserve, there's no more income statement volatility on this reserve. It's just how the accounting works. You probably have to think about it a little bit more. But from our perspective, we've taken the full $20 million of provision in, on the loan, both on a specific reserve and general reserves that we've taken against it. So, there will be no more income statement volatility on it because we've taken the full $20 million. Anything that we collect on the loan, it'll also be in recovery going forward.

Okay. That's helpful. And then did, you -- have you offered or can you give us any updates on CECL?

So, we have a range in our 10-K, Collyn. All I'd say right now is, we don't have a big consumer portfolio. We don't have any long duration portfolios. We have very small residential book. So, I think when you look at the guidance that a lot of the other people have out there, you can draw some conclusions to that. But when we file our 10-K, there will be a range in there.

Okay, that's helpful. And then finally, just one quick thing on the borrowing repay. So you paid down, just wanted to go -- so you paid down at 265 and you refinanced at what rate?

I mean, as a mix of overnight two years, three years, five years, across pretty flat all across, so it's probably like 175-ish. So, you're really making up 90 basis points over there on $200 million. So, that's like a 1.8 million basically for your annual run rate that we're saving. The actual 1.8 million to 1.9 million the charge was around $3.8 million. So, that's what we got the two-year earn back on that.

Okay and that was laddered throughout the quarter. I mean, I know you've indicated one basis point of NIM benefit happening in the first quarter tied to that, but just the timing on when you started recently?

I mentioned in my prepared remarks, Collyn, we started the transactions at the end of October and then went from October all the way to the end of the year. So, that's why we've done it. Throughout the quarter, we've been a half quarter impact, but it really only started on October 30 that time frame. So -- and I gave the guidance that it's helped us quarter by one it's going to help an additional one next quarter.

Our next question will come from Matthew Breese with Stephens. Please go ahead.

Just thinking about the municipal deposit effort, I know it's in its infancy right now. But as we think long term perhaps over the next two to five years, what portion of the overall deposit book do you want that to take up? And then just as a follow up there curious about the on-boarding costs of those deposits and how they react to moves in fed funds?

Matt, I think what we said in the past is a lot of our peers have between 10% and 15% of their deposit base in municipals. I think there's no reason why Dime can't get to that stage is obviously a long term target for us. So, if you think about deposit base shifting across $4.5 billion, $500 million of that should have been municipal, if we had the capability to take it. Obviously, we're new to the business, but we have people who have been in the business a long time with significant established books of business. We ended the year with around $20 million in deposits. We're already up to over $50 million as of today. The rates in that right now are probably 175 and 195. That's obviously when you onboard a new client. It's obviously giving them a rate that's able to lure them away from some of our competitors as well. But I think over time, we should be no different than some of our peers over there, and what it's really done is, it allows us not to focus on promotional deposits on the consumer side. And obviously, on the consumer side, when you raise deposits, it's not just the promotions, it's taking off time from people in the branches, it's advertising, it's all of that. Here with the much leaner infrastructure, we're able to raise those deposits. So, in fact at the start of the year, we have checking accounts as well associated with that. So that $15 million of the deposits is probably $5 million to $6 million checking accounts associated with that. So, again, it's a huge opportunity for us and one of the key things a management team and board looked at when we thought about it the charter change.

Okay, understood. And going back to the multifamily question, I understand you have $515 million set to hit their contractual resets this year. But, we've been in the business banking. That initiative has been off the ground for some time now. You've adjusted your multifamily prices for some time now. As you've gone through the quarters, and a number of multifamily loans have hit their contractual reset. Even though you're pricing is a little bit out of the market. What's the recapture rate, how much of that 515 if we were to apply what you've done historically, do you expect to maintain and keep?

It really depends on the rate because there's competitors out there who are pricing a lot below us and so it depends on where is that. I think we're keeping customers with us who've been with us a long time and who don't want to move to another bank. But if somebody is just going straight after the rate, a lot of those accounts would go elsewhere.

Can you give us an idea of where you are rate wise versus the market right now?

Yes, we're probably in the high 3s to low 4s on a multifamily side. Again, a lot of the customers with us have been with us a long period of time, and they're okay paying slightly above market plus that's kind of where we're at high 3s to low 4s.

And with the adjusted pricing on a quarterly basis, could you give us an average of how much of that product you're actually able to originate?

Yes, we had a -- there's a table in our press release, which has a breakdown of it. So, what we started doing is on the origination side, we break it out between business banking and non-business banking. And so for business banking, we've done around 85 million real estate loans at 511. All other loans were on 65 million at 4.08%. Within that $65 million, there is around $30 million of residential originations at a rate of around 375. The remainder is probably multifamily, which is around $30 million of multifamily at a rate north of 4%.

[Operator Instructions] Our next question will come from William Wallace with Raymond James. Please go ahead.

Avi, in your prepared remarks you said, you've got 550 million I believe of multifamily that reaching its contractual re-pricing date in 2020, is that correct?

Yes. I said 513, I believe.

513, okay. And then what did you say that weighted average yield was?

3.32.

And if it re-prices rather than prepays, what are the characteristics of those? How much will they will they price up?

Generally, the FHLB plus 250, Wally, but in reality, I mean, our customers have very good solid customers. i mean, they can get a rate somewhere else that's a lot lower than that.

So, they're more likely to leave?

Right, I mean, some of them would stay on the ones that have been with us for a significant amount of time. But then they're not going to reset at the FHLB plus 250. We're going to find something in the scene that works for both of us.

This will conclude today's question-and-answer session. I would now like to turn the conference back over to Mr. Mahon for any closing remarks.

Thanks folks for tuning in. We were pleased with the, some of the fundamentals in the financials this quarter, because we're focused on the foundational things that are going to move the stock price and the earnings over time. So, appreciate the questions and look forward to talking to you on the next earnings release. Thanks.

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