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Edited Transcript of DCOM earnings conference call or presentation 25-Jan-18 10:30pm GMT

Q4 2017 Dime Community Bancshares Inc Earnings Call

Brooklyn Jan 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Dime Community Bancshares Inc earnings conference call or presentation Thursday, January 25, 2018 at 10:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Avinash Reddy

Dime Community Bank - SVP of Corporate Development and Treasurer

* Kenneth J. Mahon

Dime Community Bancshares, Inc. - President, CEO & Director

* Leslie Veluswamy

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Conference Call Participants

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* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* Mark Thomas Fitzgibbon

Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Dime Community Bancshares Fourth Quarter and Full Year 2017 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

Before we begin, please note this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Dime Community Bancshares. Actual results may differ from these forward-looking statements. Please remember to refer to the forward-looking statements disclosure on Page 7 of the company's earnings press release. Dime Community Bancshares cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statement whether in response to new information, future events or otherwise.

I would now like to turn the conference over to Ken Mahon, President and CEO. Please go ahead.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [2]

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Thank you, Gary, and thanks everybody for joining us today. I have with me 2 folks from our Finance department. You know both of them. Avi Reddy, who runs Corporate Finance for us, is also our Treasurer; and Leslie Veluswamy, who’s our Director of Financial Reporting. Again, thanks for being here.

Think a good jumping-off point for this conversation today is the article that appeared in American Banker about Dime on January 19 by Hilary Burns. She talked about the transformation of the balance sheet here at Dime, and the folks who follow us know the story pretty well. And I thought it did a nice job of framing what's going on here. But just a few high-level, enterprise-level observations -- number one, Dime is in the process of lowering its CRE concentration percentage. Some of that is coming from the introduction of new asset classes on the balance sheet. Mainly, there's been a lot of focus on C&I and some SBA -- that'll start to build -- and then later this year, the residential loans. We acquired a team from Astoria, if you read -- saw the press release on that recently. But in the fourth quarter, a big portion of it occurred from the loan securitization, we'll talk about that later in the call. So the CRE concentration percentage here is down to about 780% at year-end versus over 900% a year ago.

Just want to remind you, this is not purely a C&I buildout. I've heard that -- I’ve heard it referred to as that throughout the last year. It’s not just C&I. It's really -- it's a relationship business. It's a community -- what we said is community commercial bank, which is very much a relationship business. Number two, Dime is not abandoning our traditional multifamily broker business. We still deal -- do a great deal of work with our brokers, and we encourage them to bring business to us.

But as an example, where over the many years we've been referred to as a mini New York community bank, today I think we look at Signature Bank as our aspirational business model here. It's a relationship model. They do operate in the same segment of the lending business in New York City. They have continued to operate in that business that Dime did. So -- but what they've done is they’ve -- over at Signature, what you know is that they'll lend in that market, but they want some self-funding coming from their borrowers. And that requires some effort on the part of their relationship bank and their business development officers.

Number three, when we turn to liquidity, you'll see -- through the securitization that we did in the fourth quarter, we put some liquidity -- significant amount of liquidity -- actually on the balance sheet. That does bring us more in the line with the regulatory guidance for liquidity, we'll continue to look at that. We look at our stress testing models. We feel comfortable with our assumptions. And -- but you'll see that in the fourth quarter. I think it's almost 8% liquidity on the balance sheet.

Number four, for those of you who are looking at your financial models and trying to project Dime's earnings for 2018 and 2019, we're really guiding toward no growth in assets in 2018. I know from looking at some of the financial models out there, that's going to be some tweaking, in some cases, maybe a little bit more than tweaking. The size of the balance sheet, as we look at the buildout, we'll talk a little bit about the -- how much of that has occurred in 2017. But this is really building a new balance sheet inside the old balance sheet. And that will happen more quickly if we don't grow the old model. And so a lot of -- when we look at the assets and liabilities, we think we can do a better job with changing the margins on a go-forward basis by keeping the existing balance sheet right where it is.

There's a page in our investor presentation. Anybody who's seen it last year, you'll see the yield on loan portfolio. Dime's yield on loan portfolio was about 3.50. In the group of 12 or 14 or so banks in our market that we look at, those portfolio yields range anywhere from 3.50 to 4.50, that's 100 basis points for banks, community commercial banks to look similar to Dime that are in this market. The median yield in there is about 4.05 or so. So we have a lot of runway on the asset yields here that will produce growth in earnings without changing the size of the balance sheet. And similarly, on the cost of deposits, Dime has one of the highest cost of deposits.

It's been a very profitable model over the years, has some Achilles heels to it. The loan-to-deposit ratio is one of them, although when you look at credit costs here, credit costs have been very low for that period of time. It was a very low efficiency ratio and model. Mike Shafir, who is with Global Partners, I saw him the fall of last year. And he said to me, that's the big question we get all the time, how quickly do you think this can happen, transformation can happen? And I said, I thought maybe in a couple of 3 years it would happen over. And Mike said, well, in his experience, it's more like 4 years. I think the reduction in the tax rate is going to help us making it happen a little bit faster than that. It's our goal, at any rate. But ultimately, we're producing a higher-quality balance sheet, and I'll talk to you about that momentarily.

And number five, turning to nonspread revenue -- when you look at community commercial banks, you'll certainly see much higher levels of nonspread revenue than you've seen at Dime, again another area where Dime has underperformed. We think from our SBA platform and from the fact we're going to our core conversion in the middle of the year, in 2018, we expect to see more revenue coming from our commercial services.

In fact, the frustrating part for me has been that some of the banking services that we're offering today, we don't even really have a platform that we can apply our new fee structure to those customers, because we don't have the core processing available to us to do that.

So those are some of the high-level things, some of the enterprise things that I want to say by way of introduction -- when you turn to the press release, the earnings release that we put out today -- I'm not going to go through it line-by-line, you'll have the opportunity to read it. I just wanted to highlight some of the things that have gone in there.

So we did make $51.9 million of earnings last year, it was $1.38 per share, diluted common share. The highlights though -- the relationship banking, the buildout that we've done, that sort of balance sheet inside the balance sheet -- $235 million worth of loans this year, of which $137 million are C&I loans, are deemed C&I loans. But if you want to just look at that part of the balance sheet, out of those loans, those loans have a weighted average rate of almost 4.7%. 23% of it is self-funded, $52 million in deposit balances there, with a weighted average deposit rate of 0.95%, so 9.5 basis points. So clearly a much different balance sheet there than Dime's traditional balance sheet.

And when we look to -- we'll talk later about this, but in 2018, we expect to do about $300 million of that. But even in the traditional multifamily business, we started pricing ourselves in wider spreads in 2017. So where the [rack] rates for what we used to refer to as typical Dime loans here would've been 3.5%. That would've been a competitive rate, 3.5%, say 3 5/8, would've been a competitive rate in 2017.

By July of last year, we started pricing those, repricing there above 4%. And it really did ding the business. But after having sat through so many loan meetings in the first half of the year, where we didn't see a lot of deposits from that business, we thought we need to make the business more profitable for us.

And I think part of the buildout, what you've seen in part of the buildout -- I think what gives me a lot of comfort is that we really chose a good time to build that business. Because we gave Dime an opportunity, another outlet for building loan production here. We weren't solely dependent on the multifamily model.

Dave Martin, who writes for Banking Strategies and American Banker, had a really great article and was very insightful. And he said something in there, he said a lot of bank managers today understand the importance of changing. And it's not so much that they don't understand that the change had to happen. He says that you got to go from trying to fix the model without breaking it. And I thought to myself, that speaks really for where Dime is today in the evolution of our model.

So we go back to the earnings release. We have what we thought was a successful launch of that model. Our goal was to do $250 million of loans; we did $235 million. Our reported book value per share is $16 and $14.50 for a tangible book value per share.

In the fourth quarter, we completed the $280 million securitization of multifamily loans. That was successful for us on many levels. One is that we created liquidity on the books. We have sold already a couple of portions of that as CRA packaged loans and sold them at levels above these levels that we held them on the books for. And we'll talk more about it at the end of first quarter, we'll talk to you about the gains that we had out of those securitizations. But there were clearly CRA-qualified loans in there that we were able to sell as securities, and made a profit on them.

The loan-to-deposit ratio as a result of that declined to 127%. And the credit quality, we said on Page 2 that our credit quality remains pristine; nonperforming loans at 1 basis point. I sat in that -- we had our board meeting this morning, and I saw on a loan committee meeting of the board. This is a loan portfolio of $5.2 billion, the majority of which, as you know, is prewar multifamily loans in New York City. We had one loan for $480,000 that is in the 0 to 30-day delinquent category.

It's a phenomenal track record. I know we can't duplicate it in this new buildout. That's not the nature of what you'll see in commercial bank portfolios. We expect it to be a little bit higher. Wish risks comes significant reward. And that's the model we're on process of building.

As far as the annual operating results -- increase of 6.5% net interest income last year. The NIM continued to shrink in 2017. That was mainly a result of the rising cost of deposits. Dime hasn't been too aggressive in raising our deposits, that's why you saw growth in the borrowed funds portfolio. We're trying to find a level, a good level for us, where we can maintain our handle on the deposit costs. And because we're not growing the balance sheet next year, I think we can find someplace good for that in 2018. I know there's a lot of pressure on that. But certainly, if we were trying to grow the balance sheet and continue to deal with deposits, we think the entire cost of the deposit base would continue to shift up at a higher rate.

Total assets, as I said, grew by $400 million in the growth and assets. Most of that you'll see in the securities portfolio of $338 million, and then some cash at $56 million. Originations were about $900 million last year. That's lower than the $1.5 billion in 2016. But the 2016 number was also our traditional Dime loan product. We expected -- those of you who talked to me on the phone last year, we expected that 2017 was going to bring a smaller market for our multifamily loan product. I think that's turned out to be true. We expect that to continue, although there will be less reliance from Dime on that part of the market.

Deposits were relatively flat year-over-year. And as I said, a lot of the increase -- a lot of the fundings for the growth -- came from borrowings.

Noninterest income of $21 million included the gain of $10.5 million. That was the second parcel over on Havemeyer Street in Brooklyn, that was the Williamsburg property. We owned about 3/4 of the block down there. We saw the way values were going. We talked about this when we sold the large parcel in 2016. In 2017, this is the last parcel closed there. That is the limestone building that we sold for $10.5 million. We had booked for a very small number, then we booked again in the fourth quarter.

Turning to noninterest expense, the -- when you exclude -- there's a lot of noise in noninterest expense for various reasons. But when you exclude the noise, the nonrecurring or noninterest expense number year-over-year was 1.32% at the end of -- for 2017 versus -- excuse me, 1.32% (sic) [1.31%] for 2016 and 1.31% (sic) [1.32%] for 2017. We go to the NIM next. 2.53%. We talked about it, a little bit higher for the year. But in the fourth quarter, the NIM was 2.50%. That's the trend -- sort of the trend number. We do expect some additional contraction in the -- I would say in the first and second quarter, probably a little bit more contraction there. A lot of that contraction will come from the liquidity, the additional liquidity that's been put on the books. But some of it obviously is going to come from the rising cost of deposits. I think you're heard that from some of the other banks that reported so far this quarter, and I expect that's going to be a continuing story for many of our peers in this market.

So as we sort of wind up, I would like to get into now our outlook for 2018. As I said, [too], we expect total assets to be flat for this year. There might be -- there could be a surprise there. It depends on how the year goes in interest rates. But I -- our goal is to keep it at around $6.5 billion for the year. We are widening our spreads. That's happened in the multifamily business. And as you can see, I mean the portfolio yield is about 3.5%. The new loans that are coming on the books today are 4.60% to over 5%. Those that aren't in that range are adjustable rate loans. But even there, a lot of our adjustables have floors of 4.5%.

There are some multifamily competitors out there that haven't adjusted their pricing levels. I know many of them are driven by the Chase Manhattan, which tends to price off the curve. It's been a very aggressive rate in the community bank space there. Some of them are still pricing at those levels. We'll see, as the year goes along, whether the tax reduction has any impact on the back end of the curve. Offsetting that is, again, the growth in Dime's business portfolio. We expect about $300 million worth of growth in that part of the portfolio this year.

Let’s see, noninterest expense, expect somewhere in the range of $84 million to $86 million, as you build your models. And that actually includes the cost of building out the residential mortgage business. That cost, we're not really going to see much recovery of our expense there. It's a little bit of lead time as you build that out. We've brought in a really talented team from Astoria with that. But nonetheless, I wouldn't expect to see much production from that group until the third quarter and then into fourth quarter. Most of the run will come in 2019.

And we also see -- we expect to see more business in our SBA [lending], we don't have the SBA loans, we don't have PLP status yet. That's still in front of us. But that's expected shortly. We have a few more loans there. And then finally, the effective tax rate, expect somewhere between 24% and 25%. It's great compared to what it had been. But again, when you look at our peers, a lot of the folks are dealing with probably anywhere from the, let's say, 18% to 20% or 21%, especially those companies that are outside of New York City.

So at that point, that's the end of my prepared remarks. And I'd like to turn it back to Gary. And if we have any questions, be happy to take them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Mark Fitzgibbon with Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [2]

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Ken, did I hear you right, that you were saying that you expect business banking loans in 2018 to be another $300 million on what you've generated thus far?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [3]

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That's correct.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [4]

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And the mix to be similar, do you think between C&I and relationship CRE?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [5]

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Yes, I would say so, Mark, that's the way it's shaping up.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [6]

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Sort of 60-40? Okay. And then how about on the deposit front? I think you had $52 million of deposits. And I think when you started this, you said over time your goal would be to self-fund. Do the deposit balances sort of eventually catch up, do you think, to the loan balances in that business?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [7]

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Well, expect them to self-fund, I don’t think that -- I hope you didn't intend that to be 100% self-funding coming out of the loans. But we thought the self-funding should be in the range of 20% to 30%, we ended up at 20-some-odd-percent, 22% or 24% -- yes, 22%, I think in the first quarter. What we're finding is that the deposits do lag. The deposits don't come same day as the loan. But you get commitments from the borrowers at that point, and then it takes a while to bring the deposits over. So they do come in time. I'd like to see that number higher, Mark. I think 22% is a good number. I think it can be higher.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [8]

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Okay. And then could you share with us your thoughts on doing additional loan securitizations to try to bring down that CRE concentration? And I'm also curious if you have sort of a goal in mind and a time frame for driving that CRE risk based capital ratio down.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [9]

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We've been talking about possibly doing another securitization later this year. It is impactful on NIM, as you can see. You saw it a little bit in the fourth quarter, you're going to see first quarter of this year as well. Avi, is there anything you want to add in?

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [10]

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Yes, Mark, I would just add that now we've put the process in place. It was obviously a new experience for us, a pretty small community bank, to do a securitization. We have the relationship with Freddie Mac, we have a good relationship with all the vendors who helped us. So I think if we decide to do it, the process will be a lot quicker and a lot more streamlined than last time around. The one thing I would say about the securitization is there are certain fixed costs associated with it, so there's probably a certain minimum size that we would need to do for it to make sense. So if we think about size, the size that we did last time would probably be the minimum size that would make sense from an economic perspective. The other option would obviously be selling loans on a one-off basis, if we needed to do that to manage the balance sheet.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [11]

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Okay. And then on the expense front, are you largely done with the sort of building of people and infrastructure? Should we assume the sort of core expense run rate, maybe in the low $20 million, $21 million range is the right level?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [12]

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Yes, I think to start the year out, we're going to follow the tax reduction this year. And there are some additional hires that we would – that would have taken us -- we would have taken longer to do some more buildout there, especially in the technology areas. I think we've done a nice job in the credit and compliance area and maybe another hire or 2 there. But those are hires that actually would not have happened this year absent the tax reduction. So there's some things that (inaudible) kind of like to have. And I think in terms of building out the model, it's important that we get ahead of them, now that we can. So I would go with that number for the first quarter, and then we'll give you some guidance as the year goes along.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [13]

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And lastly, just to follow up on a comment you made about the margin, Ken, you said it sounds like a little bit more pressure on the margin in the first and second quarter. Is your modeling suggesting to you that the margin will turn in the third quarter and start to move in the other direction? Or you just haven't -- your crystal ball is fuzzy out beyond the second quarter?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [14]

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Yes, Mark, yes. And it's not even a crystal ball. When it comes to predicting the future, the bogie for everybody, I think, even more than the additional liquidity, is what's going to happen to deposit costs. And you can see that in a lot of the releases that are coming out. I wasn't surprised to see some of what I read so far. So it's really -- we're going to have to see where that goes. And also, the wildcard -- it's not even just trying to predict for interest rates are going. The wildcard for all of us right now is, what is the impact of the tax reduction going to be? It's a huge reduction. And it remains to be seen, Mark.

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Operator [15]

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The next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [16]

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So I, unfortunately, hopped on late, only to hear, Ken, your comment about not growing the balance sheet at all. So I apologize if you're repeating yourself. But can you just run through again the dynamics of what is driving that? I mean, I heard Avi's comments about the securitization. So is the intention just to let the cash flows come due and the legacy portfolios just pay down? And just trying to understand, again, the dynamics of how you're going to keep assets flat. Because I hear, obviously, the $300 million of addition. But that's a fairly small number relative to the size of the balance sheet.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [17]

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No. I mean, we're going to keep it where it is, we're not going to reduce the balance sheet. But Collyn, what I mentioned earlier on the call -- and we don't have too -- if you look at the investor presentation that we've had out there, the last 2 investor presentations, one page we do have out there is where we compare Dime's yield on loan portfolio to maybe 12 other peers in our marketplace. And the portfolio yields range from 3.5% to 4.5%. Dime is at 3.5%. The median yield there is about 4.05%. The loans we're putting on that we put on in the business banking area this year were 4.6%. That's over 100 basis points above what Dime's -- what the existing portfolio is. So what I tried to express was that we have runway without growing the balance sheet there. Now what happens to the multifamily portfolio? What I didn't mention in the phone call, earlier in my prepared remarks -- we've talked to some brokers. Clearly, the brokers are going to watch the long end of the market. They're already talking to their borrowers about coming in and repricing in order to extend their rates where they are today. I think Dime has given itself a great opportunity not to have to get back into that game if we choose not to this year. So I think if it turns out that the brokers start hearing that there's going to be some upward movement in the back end of the curve, you may see more refinancings as the year goes along. Dime will not participate at those rates. We don't have to now because we have another line of business available to us. I think if that happens faster than we expect it to, you might see some pleasant upside surprises later in the year.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [18]

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Okay. Along those lines, are you managing to a certain net interest income level? As you said, obviously the yield on what you're originating is higher than where the portfolio stands. I mean, do you want to sort of maintain at least some level of earnings growth and net interest income growth? Or will that flat-line as well?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [19]

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We think of it only in terms of the composition of the balance sheet. We're at about 10% or so noninterest-bearing deposits now. We don't have really a diverse balance sheet. That's been -- we hear about this all the time, Dime's concentration -- the regulators see this balance sheet, they've known it for many years, it's been a 900% to 1,000% concentration for a long time. I think I've watched over the last couple years some of our more diversified peers trade better. And I think Dime has gotten -- don't want to say punished, I won't use that word. But let's just say Dime has paled by comparison in trading ranges compared to the peers because of this lack of diversification on the balance sheet. So we're not managing to a net interest income as much as we are to a transformational change on the balance sheet.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [20]

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Okay. So that's really the motivation here. And I know this started, the strategy started, last quarter, and even before that. But this is truly a motivation on your part, your board's part, your management's part, and not a regulatory pursuit.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [21]

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Oh, no. (inaudible) regulatory, you would've heard about it before now. I mean, listen, I do think somewhere out there, somebody looks at that concentration level, and Dime looks like an outlier. And you hear that all the time, and nobody likes to get that kind of attention. But I think if there were an enforcement action, you would've heard about it -- I'm sure you would've heard about it before now.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [22]

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Okay. And then can you just remind us -- the $300 million that you're anticipating putting on the balance sheet and the business banking portfolio, just kind of some of the structures within those credits and size of those credits, and kind of just what those types of credits are looking like?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [23]

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Yes. Well, right now, the median loan size is about $2 million, the average loan size is maybe $3.5 million. The largest loan we have today is an $18 million loan. And then, there are really 4 industry groups -- about 39% of it is real estate developers, roughly 18% is the restaurant business, another 16% fell in nursing homes, and then [factoring], about 16%. So those are the 4 concentrations there.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [24]

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Okay, that's helpful. And these are, I presume, mostly mixed, 5-year fixed?

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [25]

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Collyn, no, on the C&I side, they're pretty much all either based of prime or LIBOR.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [26]

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With a floor of 4.5.

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [27]

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With a floor. So I think we put out in the press release there that around 43% of our business banking originations are floating rate. The piece that's on the commercial real estate side, some of them will be fixed. But on the C&I side, a vast majority of them are floating rate.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [28]

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Okay. And then, just one other question tied to this. And I apologize, Ken, if I missed it, but what's the plan for securities? I know you talked about building liquidity. But how do we think about the securities growth as the year goes out?

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [29]

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Right. Collyn, I think, again, we've come up, constructed the balance sheet and come up with securities to assets of around 8% at this point in time. It's important to note, when you look at our liquidity, unlike many of the peers who actually encumber their securities and use that to either fund municipal deposits or other such fundings, all our securities are unencumbered on the balance sheet. So it's really true liquidity, the 8% cash and securities to assets. So we've gone through pretty strenuous liquidity stress testing on our front. And we felt this was a good number to end the year at. We don't want to give any guidance for that going forward. But to the extent that deposits grow, we'll just reduce borrowings on the balance sheet in terms of keeping the balance sheet the same.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [30]

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Okay. And then just one final question. I mean, it's silly, credit quality has just been phenomenal. But I noticed that the 90-day bucket jumped by about $20 million on the nonaccrual loans. What was the driver of that?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [31]

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[Not] sure it's 90-day. We had an uptick. Those are actually loans that have matured but are performing. So you have loans that are in the process of refinancing now, but they've passed their maturity date, so they -- I think that's the…

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Leslie Veluswamy, [32]

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Yes, that is correct.

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [33]

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Collyn, it also has to do with when borrowers submit things like financials, it's not related to payments of P&I. So there was one idiosyncratic event in there where we expect the financials to come in pretty soon, and the loan will be either paid off or refinanced. So you probably should expect that number to tick down in Q1. The other thing to mention is it's really starting off from a very low base, so an increase kind of jumps out over there.

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Operator [34]

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(Operator Instructions) The next question comes from Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [35]

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I just wanted to talk a little bit about the balance sheet outlook, obviously flat -- $300 million in business banking in growth. You also mentioned that you potentially are planning to do another Q deal at some point in the year. The last one was $280 million. So just curious, how should we be modeling the multifamily segment throughout the year? Should that be coming down or flat with the expectation of a Q deal at some point? Just want to get a better perspective how that's going to move.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [36]

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Well, I think Avi's answered the question about the Q deal there. We haven't really come to any conclusion yet about doing another one. All we know is [we] have the ability to do it. So I wouldn't necessarily model that in without making a prediction for you, making a commitment to you, I wouldn't try to model that in. As far as regular runoff out of the portfolio, we've seen it fall to the low teens, the amortization and payoffs has fallen to the low teens through 2017. And I guess you could use that as a guide to see what kind of payoffs may come through there. But if you want to see an uptick there, I would watch the direction of rates. You'll starting hearing noise in the marketplace that borrowers are starting to come in and refinance. When you hear banks talk about an uptick in new originations and so forth, that'll be your clue that there's some more activity in the market than we expect.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [37]

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Okay. And as we work through this process of remixing the balance sheet, what is the ideal breakdown for the loan portfolio that you're shooting for?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [38]

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When I first talked to Stu Lubow a few years ago, and we were talking about maybe him coming in with his team, first thing I did was run to the Community National balance sheet to see what did that look like. And that was a bank that started from 0 and grew to $1 billion roughly. I was curious to see what that balance sheet would look like. They did have about 20% single-family loans out there. I don't think we'd want to see that high a level on our balance sheet in the next couple of years. But certainly, some portion of that, some portion of owner occupied loans, maybe some SBA loans out there. Multifamily will still end up comprising, I would say -- boy, I tell you, you're asking me to look out 3 years. Let's go with 50% of the loan portfolio, it's still a great asset class. The problem is it's not a very lucrative asset class right now. That may change over time.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [39]

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And the time frame you're thinking to kind of get to these marks is about 3 years, you think?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [40]

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Yes, I would look for a 3-year time horizon for that.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [41]

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Okay. And as we kind of work towards that 3-year time horizon, in terms of profitability, expectations during that time; and then the ultimate kind of goal of profitability -- I don't know if you want to measure by ROA or ROE, but maybe just frame for us what we're looking at for the near term, and then the ultimate goal at the end.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [42]

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The whole value, the whole reason to do this is core deposits. And so as we were talking about in the board meeting this morning, if you want to look at any metric for Dime to see how much success we're achieving, it's the growth of that core deposit number. I mean, your typical community commercial bank -- a good community commercial bank, I think we can agree, tends to be in the 25% to 30% core deposit range. Some of them are higher, you get a bunch that are in the high teens. But I mean, that's a target that we would love to be at. And just a word about the multifamilies and the payoffs and so forth -- the idea of having this line of business, these business development officers -- which, by the way, you may see more of this year -- that's one that Mark Fitzgibbon had asked earlier about, on the expense side. If we have the opportunity to grab more teams, we will do that. And we have the infrastructure now on the credit side is that we hired -- Kevin Corbett came in from Astoria, terrific credit administrator here. So we have the infrastructure here to underwrite the credits now that didn't exist here at Dime before. If we do see more faster movement of payoffs, and we have the opportunity to grow that $300 million more than -- above that of good credits, we would take the opportunity to do that. Because the idea there is not to bring on more risk but to get more self-funding than you would out of the traditional Dime loan product.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [43]

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Okay, understood. But do you have any, like, ROA aspirations at the end of this?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [44]

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It's the same answer you get from everybody, I think, Matt. Not to make light of it, everybody wants -- they used to be want to be at 1% ROA and low to mid-teens in ROE. You got to tell me whether the expectation is going to be higher now that we will have a lower tax rate.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [45]

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Right, understood. Okay. The other question for me is really, as you remix, obviously there is a bent towards higher risk loan categories away from traditional regulated multifamily. How do you see the provision kind of working out? And maybe talk about provision to average loans over time.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [46]

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We're provisioning at about -- Leslie? 1.5%?

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Leslie Veluswamy, [47]

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1.50.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [48]

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1.15? So -- pardon me?

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Leslie Veluswamy, [49]

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1-5-0.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [50]

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1.5, all right. So we're provisioning at about 1.5% now on the new product. That's much higher than we were doing on the New York City multifamily level. So I guess the wildcard is going to be Cecil in a couple years, although we run a parallel model on the Cecil. But there haven't been any losses. And most we can do is, again, look at the Community National balance sheet for our guide. It's the same lenders over there that we have here. But you can't predict the future there. I just want to go back for a second, Matt, to the question you asked me about the targets. Our strategic plan calls for those numbers. And again, it's not an uncommon number. I think we all feel that if you get your company above 1% ROA -- and the higher above, the better, obviously -- but if you breach the 1% ROA and the low to mid-teens ROE, you're doing a pretty good job then, and probably deserve to continue to run your company. So that's kind of the -- that's the longer answer. And some of that will be -- also, if you know Dime's income statement, it's a very low level of nonspread revenue here. It's another element to this business that we want to drive that gets neglected, when you look at the Dime model today.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [51]

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Right, okay. And then, can you talk about that? I know SBA will be a part of this story, that comes with some fees. And maybe frame for us what kind of income that could bring to the table?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [52]

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The SBA could be -- and we've got a target out there of, let's call it, $2 million in fees for 2018 from SBA. But even with the core conversion that we're going through now, just to give you an idea how anachronistic this model was -- under the old model, the account analysis that typically commercial customers are used to wasn't even optimized here, and won't be until we get to June, when we get through the core conversion. So there's a lot of upside there. And we'd like to put as many good account analysis customers on as we can. We have to be a little careful not to grow too fast, either. But we want to get as many of those customers into account analysis as we can. But that ability isn't even there today. So there's plenty of room there for us.

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Operator [53]

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The next question is a follow-up from Mark Fitzgibbon with Sandler O'Neill.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [54]

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Just to follow-up on one thing -- with no balance sheet growth in 2018, capital is going to build faster than it has. And your capital ratios will probably push up closer to 9% over the course of the year. So I guess I'm curious, would you contemplate share repurchases? Is that part of the strategy here?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [55]

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It's on the table as we review the fallout from the reduction, from the tax benefit. So we put out a press release a couple weeks ago, and we talked about some things that we would consider. Share repurchase is one of them; dividends, of course, is another; and then some reinvestment in the business. But yes.

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Avinash Reddy, Dime Community Bank - SVP of Corporate Development and Treasurer [56]

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Mark, I think the other thing we want to weigh, without acting too hastily, is obviously, there's bills floating around in Congress where community banks get additional benefits if they keep certain leverage ratio constraints. I think the numbers thrown out right now are 8% and 10%. That's a pretty wide range. So I think in terms of share repurchases specifically, we wait and do it cautiously. But as Ken said, everything's on the table.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [57]

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So just at a high level, am I thinking about this the right way? So if you have no balance sheet growth, a little bit of margin compression, higher expenses but a lower tax rate, it kind of looks like the earnings are only up a little bit, maybe even flattish from 2017. Am I thinking about it the right way, or am I missing something?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [58]

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I don't know how -- it'd be tough to come to that conclusion with the lower tax rate, would be my impression, without trying to analyze your model. I mean, it's such a big reduction in the taxes that even if we didn't move earnings here, it'd be hard to get to the same place in 2018 that we ended up in 2017.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [59]

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But the offset is the narrower margin and the higher cost?

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [60]

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Narrower margin, higher cost. What was the operating spend from this year, about $83 million, I think?

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [61]

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$82 million.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [62]

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And we've got $84 million to $86 million in there, so it's another million dollars a quarter. I'm not sure how your model takes you to a flat EPS number, Mark, year-over-year.

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Mark Thomas Fitzgibbon, Sandler O'Neill + Partners, L.P., Research Division - Director of Research and Principal [63]

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Yes. I mean, it's modest earnings accretion. But just want to make sure I was thinking about it the right way.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [64]

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Even modest sounds very modest.

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Operator [65]

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This concludes our question-and-answer session. I would like to turn the conference back over to Ken Mahon, President and CEO, for any closing remarks.

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Kenneth J. Mahon, Dime Community Bancshares, Inc. - President, CEO & Director [66]

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Well, thanks, folks, for dialing in for our first conference call since 2006, we haven't done it in a long time. But a lot of action going on over here on the balance sheet, and we're happy to get in front of you and talk about it.

So thank you very much. And thank you, Gary.

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Operator [67]

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