KBRA Affirms Ratings for Dime Community Bancshares, Inc.
20 Jun 2023 | New York
KBRA affirms the senior unsecured debt rating of BBB, the subordinated debt rating of BBB-, the preferred stock rating of BB+, and the short-term debt rating of K3 for Hauppauge, New York-based Dime Community Bancshares, Inc. (NASDAQ: DCOM) ("Dime" or "the company"). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB+, the subordinated debt rating of BBB, and the short-term deposit and debt ratings of K2 for its main subsidiary, Dime Community Bank. The Outlook for all long-term ratings has been revised to Stable from Positive as KBRA considers it less likely that DCOM would be upgraded over the next twelve months owing principally to the more uncertain U.S. banking environment.
Key Credit Considerations
Dime's ratings are supported by the effective integration of the merger-of-equals with Bridge Bancorp, Inc., ("Bridge") which has facilitated the increased scale and diversification of the company's operating profile, including the leading market share position in Long Island among local banks. While KBRA recognizes the positive momentum stemming from the merger, the reversion to a Stable Outlook is due to the uncertain operating environment for U.S. banks, as well as the recent reduction in earnings capacity and below peer capital levels. KBRA acknowledges the improvement in earnings power that was supported by the cost-savings realized from the merger and the enhanced deposit base, primarily from legacy Bridge, with pre-tax, pre-provision revenues to average assets tracking between 1.70%-1.75% throughout 2021 (on a core basis) and 2022, which exceeded similarly rated peer levels during those periods. With that said, the company has experienced a decline in earnings capacity in 2023 due to meaningful NIM compression. Many other banks have experienced similar effects as rising interest rates have resulted in extreme deposit cost acceleration in recent quarters, especially following the regional bank failures, though DCOM’s NIM deterioration has been more pronounced. Moreover, the downward trajectory for NIM is expected to continue as a majority of the loan portfolio is concentrated in CRE, with 79% of total loans being either adjustable or fixed rate as of YE22, which provides less repricing opportunities, especially in this higher rate environment. Additionally, management is being more selective with loan growth given the current environment, which also somewhat limits the upward movement in average loan yields. Dime’s cycle-to-date deposit beta has been respectable relative to other local banks, though with operations concentrated in more competitive/costly markets, deposit costs (1.46% for 1Q23) are expected to continually rise, especially until the Fed pauses/pivots with rate hikes. As such, profitability is expected to remain challenged in the near-term. However, over the longer-term, given that Dime maintains a very low expense base, with noninterest expenses to average assets of 1.40% as of 1Q23, we believe that provides greater upside to the earnings potential in a more normalized interest rate environment. With respect to capital management, both the TCE and CET1 ratios (6.7% and 9.3%, respectively as of 1Q23) have consistently tracked below peers, though management projects these ratios to increase prospectively, though we note that a majority of banks are also in capital preservation mode given the uncertain operating environment. While we understand the management team's logic around maintaining core capital at lower levels due to its internal stress testing, which incorporates the company's favorable long-term credit performance, KBRA believes carrying a higher level of capital into a potential recessionary period would provide more flexibility if rising credit costs materialize across the industry. With that said, we also recognize that the negative impact from AOCI has not been overly impactful to DCOM's capital ratios, even when including marks on the HTM portfolio, given that Dime maintains a relatively smaller sized securities portfolio. Furthermore, with the likelihood of credit problems arising in the CRE space from rising interest rates and headwinds on property values, Dime’s more concentrated loan portfolio, with a relatively elevated level of investor CRE loans (69% of total; 555% of total risk-based capital) could present some risks. However, a substantial portion the company’s investor CRE portfolio is comprised of rent-regulated multifamily loans throughout NYC that has reflected low loss content historically, which also displays conservative underwriting criteria. Additionally, given that DCOM has exhibited among the lowest credit losses through multiple economic cycles, including a cumulative NCO ratio of below 15 bps since 2007, we believe that similar outperformance on the credit front is certainly possible. KBRA also favorably views Dime’s strong performance throughout the volatile liquidity environment in 1Q23, with core deposits growing $278 million or 3% from YE22. Moreover, the company’s uninsured deposit balances are considered rather minimal at 28% of total when excluding collateralized deposits, and total available liquidity sources are ample, which cover nearly 2x those balances. There are also potential tailwinds for core deposit levels over the next year as Dime has recently added seven new deposit focused groups in 2Q23, which reflected strong core deposit levels at their prior institutions, notably higher level of NIB accounts.
A rating upgrade is not expected, though outperformance with credit quality throughout a downturn, stronger capital, and a rebound in earnings capacity, could facilitate positive momentum over time. Conversely, a downgrade is not expected, though any unforeseen deposit outflows or liquidity issues, or higher than peer credit quality problems through a potential downtown could pressure the ratings.
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