Dime Community Bancshares: Talk About Timing (Rating Downgrade) (NASDAQ:DCOM)

What a difference a few months can make! Back in late September of last year, I performed an analysis of Dime Community Bancshares (NASDAQ:DCOM), a modestly sized bank with a market capitalization today of only $775.1 million. At that time, I felt as though shares were cheap enough to offer some nice upside for investors. Ultimately, the stock did surge, resulting in upside from the time I rated the company a ‘buy’ through late December of about 42%. Since then, however, weakness in its financial position has helped to push the stock lower. Fast forward to today, and the stock is only up 4.2% at a time when the S&P 500 has risen by 22.3%.

Given this performance, you may think that I would be here to reiterate my optimism about the company. But that is not the case. After looking at the most recent data available, I actually think that now is the time for a downgrade. Even though I would love to see the stock appreciate like it did previously, financial performance has gotten worse and shares don’t look all that attractive compared to what else is out there. The only exception to this is that the stock is cheap. But I would argue that the quality of the institution makes that cheapness warranted. So, because of this, I am officially downgrading the company from a ‘buy’ to a ‘hold’ to reflect my view that shares are unlikely to outperform the broader market for the foreseeable future.

A look at recent weakness

When I wrote about Dime Community Bancshares previously, we only had data covering through the second quarter of the 2023 fiscal year. That data now extends into the first quarter of 2024. Before we get to the most recent results, it would be helpful to look at how 2023 ended up. Net interest income for the institution came in for that year at $313.8 million. That’s down from the $374.5 million reported one year earlier. This was in spite of the fact that the firm’s balance sheet largely increased. A lot of the pain for the institution can be chalked up to the fact that its net interest margin declined from 3.25% to 2.46%. But this wasn’t the only weakness the institution experienced. Non-interest income fell from $38.2 million down to $36.2 million. Combined, this resulted in net profits plunging from $145.3 million to $88.8 million.

When it comes to the 2024 fiscal year, the weakness has largely continued. A decline in the value of cash, securities, and loans, as well as a contraction in the company’s net interest margin, pushed net interest income down to $66.3 million in the first quarter of this year compared to the $89.4 million reported one year earlier. It is true that non-interest income went from $9 million to $10.5 million. But that wasn’t enough to stop net income from plummeting from $35.5 million to $15.9 million. It is worth mentioning that some of this pain was also because of higher expenses, namely a rise in salaries and employee benefits costs from $26.6 million to $32 million, as well as an increase in Federal Deposit Insurance premiums from $1.9 million to $2.2 million.

Moving on to the balance sheet, there were both positive and negative changes that the company experienced. For instance, the value of deposits has continued to grow. They totaled just under $10.80 billion in the first quarter of 2024. That was up from the $10.47 billion reported at the end of 2023. On the other hand, the value of securities dropped from $1.48 billion to $1.45 billion, while the value of loans on the company’s books declined from $10.70 billion to $10.69 billion. Even the value of cash and cash equivalents fell, dropping from $457.5 million to $370.9 million. This is not to say that all of these declines were for naught. At the same time this occurred, the value of debt on the company’s books fell. At the end of last year, debt was $1.41 billion. That number as of the end of the first quarter of this year had fallen to $973.2 million. Given how high interest rates are, this is a net positive and may have been worth the decline in cash, securities, and loans.

While I am generally negative about the decline in revenue and profits, I do believe that the drop in debt and the increase in deposits outweighs the decreases seen in cash, securities, and loans. But there’s more to assessing this business than just looking at those data points. We also need to look at how cheap shares are. In the chart above, for instance, you can see how shares are priced relative to earnings. You can also see the same thing for five similar companies that I decided to compare Dime Community Bancshares. On this basis, only one of the five companies ended up being cheaper than it. I then did the same thing using the price to book approach, as shown in the chart below. With a price to book multiple of only 0.69, Dime Community Bancshares is not only objectively cheap, it’s also cheaper than all but one of the five companies that I am comparing it to.

You would think that the combination of growing deposits, declining debt, and the low trading multiples, would make me bullish about the business. However, we also need to pay attention to the quality of the assets in question. We can do this a couple of different ways. In the first chart below, you can see the return on assets, not only for Dime Community Bancshares, but also for the same five companies that I compared it to already. In this case, four of the five companies are higher quality than it. In the subsequent chart, I did the same thing using the return on equity. And once again, I find that four of the five firms are higher than this. So while shares are cheap, they deserve to be cheap because of the low asset quality that we are talking about.

Takeaway

For people who prioritize valuation over all else, I can understand why a bullish view of Dime Community Bancshares might be the conclusion. However, I think the picture is more complicated than that. Recent revenue and profit issues, combined with low asset quality, are problematic in my book. This justifies, to an extent, shares trading on the cheap. Given these factors, I would argue that while there might be upside available for investors moving forward, there are probably better opportunities on the market that can be had. As a result, I’ve decided to downgrade the firm to a ‘hold’. But in the event that we start seeing an improvement in revenue and profits, it would be easy for me to justify an upgrade to a ‘buy’ once again.