KBRA Affirms Ratings for Dime Community Bancshares, Inc.

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 is Stable.

The ratings are supported by Dime’s outperformance with regard to credit quality over a long period of time, including multiple economic cycles, with a cumulative NCO ratio of below 15 bps since 2007. This has been somewhat due to DCOM’s market of operations, which was less impacted during the global financial crisis and continues to be characterized as a robust and diverse economy, though is also attributable to its lower risk, albeit concentrated loan portfolio, conservative underwriting, and management’s knowledge of local markets & borrowers. Despite currently being situated with minimal problem loans and negligible NCOs, we recognize that there are headwinds facing the CRE sector, notably within the office and NYC rent-regulated multifamily segments, in which the company reflects a meaningful exposure at 18% of total loans. With regard to the former, it appears to have a quality tenant mix, including a healthy amount in the medical field, which has been more resilient. Moreover, despite some exposure to central business districts (less than 2% of total loans), the borrower selection in that segment is disciplined and performance has remained solid. With respect to the multifamily portfolio, management proactively moved out underperforming loans following pandemic moratoriums, which resulted in a stronger portfolio that has been able to absorb the higher debt service costs despite the minimal ability to increase rents from the change in legislation in 2019. Additionally, upcoming maturities for both office and multifamily are nominal before YE25. KBRA also recognizes Dime’s solid funding base, with a higher level of core deposits, which have grown steadily in recent quarters and should continue to expand considerably over the next few years due to the recent hiring of the deposit-focused teams (14 total since 2Q23). These deposit relationships are high-quality and maintain a higher-level of NIB balances, which, combined with the de-levering efforts, could result in stabilization or even a reduction in deposit costs moving forward. Altogether, given the anticipated core deposit growth, Dime is expected to reflect an enhanced funding and liquidity profile that will position it well to execute its strategic shift in the loan portfolio.

Over the past year, Dime has reported weaker profitability from considerable NIM compression due to its CRE-focused loan portfolio that provides less repricing opportunities and is naturally lower-yielding, as well as rising deposit costs from extreme competition and the meaningful mix shift that has occurred. However, over the longer-term, DCOM should reflect a stronger earnings profile, in part, due to the effective integration with Bridge Bancorp, Inc., which significantly reduced operating expenses (~1.50% to average assets as of 1Q24). As such, in a more normalized interest rate environment and from the build out of its C&I business, the company has the ability to produce stronger-than-peer returns, though it ultimately depends on an improved NIM given that the preponderance of revenues are spread driven (fee income typically tracks around 10% of revenues). A reversion in NIM appears likely in 2Q24 as management is projecting continued deposit growth and a reduction in noncore funding. Given this, ROA possibly bottomed out in 1Q24. Risk-based capital ratios have tracked below peers in recent years due to a considerable amount of share buybacks post-Bridge acquisition and the strong loan growth in 2022, though ratios have been growing over the past year, with the CET1 ratio increasing 80 bps since YE22 (10.0% at 1Q24). Moreover, ratios are expected to continue to build prospectively. We also recognize that regulatory capital measures are not materially impacted when adjusting for negative AOCI due to the smaller sized securities portfolio and shorter duration.

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