Fitch Affirms Dime Community Bancshares at 'BBB'; Outlook Remains Negative

(The following statement was released by the rating agency)

Fitch Ratings-New York-05 February 2021:

Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings for Dime Community Bancshares, Inc. (DCOM) and its principal banking subsidiary, Dime Community Bank at 'BBB'/'F3'. The Rating Outlook is Negative.

Key Rating Drivers

IDRs and VR

In affirming DCOMs rating, Fitch recognizes that the company has, to date, performed reasonably well while simultaneously manging the challenges of the coronavirus pandemic and its merger of equals (MOE) with Bridge Bancorp, Inc. (BDGE). In maintaining the Negative Outlook, Fitch believes that downside risks remain elevated in light of second and potentially third waves of the virus. Additionally, in Fitch's view, pandemic containment measures are likely to have a longer lasting impact on New York's economy and lead to a slower recovery compared with other parts of the country, which could adversely affect commercial real estate.

Similar to the experience of other banks, DCOM's credit quality has remained more stable than would normally be expected in such a severe economic downturn. While this is partly due to its more stable loan mix, it is also largely due to the extraordinary relief measures granted by the CARES Act, which gave considerable latitude in granting borrowers forbearance. Fitch notes that the bank's loan payment deferrals have declined notably from 2Q20 levels. While positive, it is also likely that deferrals have delayed some level of non-performance, which will likely result in asset quality deterioration, particularly if pandemic mitigation measures persist.

With net charge-offs that have averaged 0.05% for the period 2016 through YTD 3Q20, Fitch recognizes that DCOM's loan losses have historically been among the lowest in Fitch's rated universe, benefitting from a large portfolio of rent stabilized multifamily loans that have produced very low losses over various economic cycles. While multifamily loans still made up the bank's largest lending category at 52% of loans as of 3Q20, that proportion has steadily declined as the bank has pivoted to growing its Business Banking unit, and was estimated at to decline to 45%,when the merger was announced, which will also lower its CRE concentration, which stood at 545% of risk-based capital as of 3Q20. At the same time, this greater loan diversity also increases the bank's exposure to other CRE and C&I categories that may be more negatively affected by the ongoing economic disruption.

Fitch continues to believe that the diversification and funding benefits from the MOE, as well as greater scale both to its Business Banking operations and overall, moderately outweigh the integration risk associated with such MOEs. Both banks operate in familiar, adjacent markets and with increasingly similar relationship lending models. Senior management of the combined bank will be comprised of a balanced mix of legacy DCOM and BDGE executives and cultural fit should be enhanced by the familiarity between former BDGE, and now DCOM CEO, Kevin O'Connor, and bank President and COO, Stuart Lubow, given that Lubow previously served as CEO of Community National Bank, acquired by BDGE in 2015.

The merger will yield funding benefits that Fitch sees as credit positive, including meaningful improvement of the bank's loan-to-deposit ratio, which Fitch estimates will be below 110%, down from 124% as of 3Q20. It will also accelerate the bank's remixing of deposits, growing its component of noninterest-bearing deposits and lowering its proportion of time deposits, which will yield tangible improvement to funding costs.

These characteristics accelerate DCOM's objectives of remixing its balance sheet, and when combined with the expected 15% reduction in expenses, should boost profitability over the intermediate term. More immediately, profitability is likely to be determined by loan loss provision levels necessitated by any deterioration in asset quality.

The aforementioned funding benefits are somewhat offset by the anticipated decline in the bank's CET1 capital ratio, which is expected to drop below 10%. Fitch views this decline as credit negative given that it coincides with the uncertain duration and ultimate impact of the pandemic, and given the expectation that the bank is likely to manage CET1 at this lower level for the immediate future.

Derivation Summary

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

DCOM's subordinated debt issuances are rated one notch below DCOM's Viability Rating (VR) of 'bbb' in accordance with Fitch's assessment of the instruments' non-performance and loss severity risk profiles.

DCOM's preferred stock is notched four levels below its VR of 'bbb' in accordance with Fitch's assessment of the non-performance and relative loss severity risk profile for preferred stock.

SUBSIDIARY AND AFFILIATED COMPANY

DCOM's IDR and VR are equalized with those of its bank subsidiary, Dime Community Bank, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities. Lastly, equalization is also supported by sound liquidity management at the holding company.

RATING SENSITIVITIES

IDRs and VR

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Given the Negative Outlook, Fitch does not foresee the possibility of a rating upgrade in the immediate term. Over the medium term, should economic conditions normalize and DCOM complete the integration successfully such that its financial performance show signs of returning to or above historical norms, the Outlook could be revised to Stable. This would be predicated on maintaining a conservative risk appetite and asset quality and loan-loss measures near those of higher-rated peers during this expected period of stress, while also maintaining profitability.

Fitch views the expected improvement in DCOM's loan-to-deposit ratio as a tangible benefit of its merger with BDGE and has placed a Positive Outlook on its Funding and Liquidity factor score. Improvement of its loan-to-deposit ratio to under 100% over the ratings horizon would result in resolving the Positive Outlook to this factor score with an upgrade.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A more prolonged coronavirus-related economic downturn than under Fitch's current global base case, or the re-emergence of infections requiring a re-imposition or sustained lockdown measures would be negative for ratings. While Fitch expects some deterioration in credit fundamentals, evidence of relatively high credit losses that result in impaired loans to gross loans exceeding 3% would likely drive a downgrade.

Fitch believes the anticipated cost synergies related to the MOE are achievable, and expects that Dime will realize its target run rate cost savings of 15% and target efficiency ratio of 50% over the rating horizon. Should these benefits fail to materialize, negative rating action could result. Additionally, negative action is possible should profitability deteriorate due to unexpected expenses associated with the merger, or as a result of elevated or sustained loan loss provisioning such that DCOM's earnings as measured by operating profit to risk-weighted assets, deteriorate below 1% over a period of 12 months.

Should evidence emerge that DCOM is unable to realize the expected benefits of the MOE or that integration efforts result in a distraction such that the existing core business suffers, negative rating action would be considered. The ratings are also sensitive to the cultural and integration risks. Related factors that could result in a downgrade include systems integration difficulties that result in service disruptions or compromised data security, as well as evidence of higher than normal customer defections or employee departures.

The ratings are sensitive to DCOM's approach to capital management, especially in light of the expected reduction of the CET 1 ratio, and elevated risk associated with the pandemic. DCOM's ratings could also be downgraded if the company's CET1 capital ratio drops below 9.5% for two consecutive quarters without a credible plan to build the ratio back up.

DCOM's VR would be sensitive to its ability to maintain sufficient holding company liquidity coverage necessary to meet outstanding obligations. The VR would also be sensitive to the holding company sustaining common equity double leverage above 120%.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The ratings of DCOM's subordinated debt and preferred stock are sensitive to any change in DCOM's VR.

HOLDING COMPANY

Should DCOM begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR from the ratings of the operating companies.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

Dime Community Bank; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Negative
; Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
----long-term deposits; Long Term Rating; Affirmed; BBB+
----short-term deposits; Short Term Rating; Affirmed; F2
Dime Community Bancshares, Inc.; Long Term Issuer Default Rating; Affirmed; BBB; Rating Outlook Negative
; Short Term Issuer Default Rating; Affirmed; F3
; Viability Rating; Affirmed; bbb
; Support Rating; Affirmed; 5
; Support Rating Floor; Affirmed; NF
----subordinated; Long Term Rating; Affirmed; BBB-
----preferred; Long Term Rating; Affirmed; BB-

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