Why I Sold Dime Community Bancshare’s High Yielding Preferred Shares (NASDAQ:DCOM)

Dime Neighborhood Bancshares (NASDAQ:DCOM) has been topic to the identical volatility affecting the regional banking sector since March. When the primary spherical of promoting hit, I bought the financial institution’s most popular shares (NASDAQ:DCOMP) because the dividend yield soared to over 8%. After reviewing the financial institution’s first quarter financials, I’ve opted to promote the 8.3% yielding most popular resulting from some dangers.

Dime Neighborhood’s first quarter earnings had been secure in comparison with a 12 months in the past regardless of an erosion of web curiosity earnings. Curiosity earnings elevated by greater than $45 million, however these good points had been greater than offset by a $50 million enhance in curiosity expense, resulting in a $5 million drop in web curiosity earnings. The place the financial institution was capable of make up the distinction was of their working prices. Dime Neighborhood’s working bills fell by roughly $2.5 million, led by a drop in salaries and advantages. The drop in working bills was adequate to result in a close to $3 million enhance in web earnings in comparison with a 12 months in the past.

Dime Neighborhood’s stability sheet sheds extra gentle into the financial institution’s capital construction. In the course of the first quarter, Dime Neighborhood elevated its money place by $500 million and grew its loans by $200 million. The financial institution procured these funds by means of a rise of deposits by $325 million and so they borrowed greater than $350 million from the Federal Dwelling Mortgage Financial institution of New York. The financial institution was capable of develop shareholder fairness within the first quarter by greater than $20 million, ending the quarter at $1.19 billion.

The place my concern lies with Dime Neighborhood Bancshares is in examination of the financial institution’s earnings relative to the dimensions of its mortgage portfolio. The financial institution’s whole interest-bearing asset yield is up 114 foundation factors from final 12 months however sits at simply 4.5%. That is decrease than the present Fed funds charge, subsequently any new borrowing that the financial institution takes on will should be at a price larger than its earnings. This impact is already beginning to present with web curiosity margin down 45 foundation factors and web curiosity unfold down by greater than 100 foundation factors.

Whereas Dime Neighborhood’s mortgage efficiency appears to be good (97% of the portfolio is passing), I’m additionally involved concerning the quantity of pandemic period loans on the stability sheet. The financial institution at the moment has over 1 / 4 of its loans originating from 2020 and 2021 in addition to one other quarter from 2018 and prior. These older, beneath market charge loans may proceed to burden mortgage yields past 2023. The focus of loans in industrial actual property and multifamily can also be regarding as a downward flip in the actual property market coupled with larger refinancing charges would adversely have an effect on practically all the mortgage portfolio.

Lastly, in evaluating Dime Neighborhood’s monetary ratios to the benchmarks established by the Federal Reserve’s industrial banking information, I’ve extra issues. Regardless of the rise in money through the first quarter, the financial institution has one third of the money commensurate with its stability sheet than its peer group. Additionally, the mortgage to deposit ratio is over 100%, signifying that the financial institution may have to interact in non-deposit financing ought to mortgage demand develop past deposit development or ought to deposits start to say no. Ought to extra borrowing be wanted, the financial institution’s leverage is already practically a full level larger than its friends, creating extra strain on the worth of the financial institution’s fairness.

Whereas I offered Dime Neighborhood Bancshares most popular shares, there’s one possibility on the market for mounted earnings buyers. The financial institution does have a 5% coupon bond buying and selling at 73 cents on the greenback that matures in 2032. At present costs, the bond yields roughly 9%, however there are two caveats. First, the bond may be very thinly traded, with no transactions within the final three months. Secondly, the rate of interest on the bond will reset in 2027 to the three-month time period SOFR plus 218 foundation factors. Because of the reset charge being that far out, buyers who tackle this bond could have to pay attention to the rate of interest danger introduced sooner or later.

Total, Dime Neighborhood Bancshares mortgage focus mixed with its low yielding mortgage efficiency has me too involved to carry the financial institution’s most popular shares. I might take a place within the bonds if I may discover an order alternative, however they’re too thinly traded at the moment. Different regional banks are providing aggressive yields on most popular shares with higher mortgage efficiency and fewer reliability on exterior debt.