Dime in NY takes $43 million earnings hit to unload underperforming securities

Dime Community Bancshares joined a growing list of lenders that repositioned their securities portfolios in 2024 by selling low-yielding holdings at losses. The moves create near-term hits to earnings but generate proceeds the banks can reinvest into profitable endeavors.

The Hauppauge, New York-based Dime said in a press release late Thursday that it sold $379 million of debt securities that had a weighted average yield of 1.20% and a duration of just over three years. The $13.7 billion-asset company reinvested all of the proceeds into a new batch of debt securities with a weighted average yield of 5.08% and a duration of about four years.

Dime said it expects to recognize a $43 million pretax loss from the sale in the fourth quarter, though the more than fourfold gain in yield on the new investments was projected to bolster earnings in coming quarters. The bank in November disclosed a common stock offering to raise $125 million in part to support the balance sheet restructuring.

Analyst Steve Moss of Raymond James said that, while the action creates near-term earnings pain, it should drive long-term improvement. He estimated the securities reinvestment would prove $14.7 million accretive to annual net interest income and bolster Dime’s net interest margin by 10 basis points.

The Dime move came in the same week that First Hawaiian in Honolulu disclosed the sale of $293 million of securities carrying a weighted average yield of 1.92%. It was expected to generate an after-tax loss of $19.7 million to be recognized in the fourth quarter. First Hawaiian reinvested the proceeds in an equivalent amount of securities yielding just over 5%. 

Other banks that have announced similar restructurings this year include Associated Banc-Corp in Green Bay, Wisconsin; Union Bancshares in Morrisville, Vermont; Horizon Bancorp in Michigan City, Indiana; Bank of Marin Bancorp in Novato, California; and the Bound Brook, New Jersey-based SR Bancorp.

Securities yields climbed following the sharp increase in interest rates during 2022 and 2023. The Federal Reserve jacked up rates to combat inflation. The shift lowered the relative value of securities that banks purchased prior to the Fed’s rate hike campaign.

Dime also said it was unwinding an employee pension plan by distributing payments. Ending the plan is expected to cost the bank about $1 million in the fourth quarter and another $2 million in the first quarter of 2025.

Dime dived into aggressive growth mode over the past two years, hiring commercial lenders at a rapid clip to capitalize in part on the disruption caused by the failure of Signature Bank in New York last year and the potential for stronger loan demand in the year ahead as interest rates decline. The Fed twice cut rates this fall and could again next week, when it meets for the final time this year.

Dime has hired at least 15 banker teams since last year. The recruiting spree paid off in the form of loan and deposit growth. But the staffing expansion boosted operating expenses, and the loan growth was accompanied by higher credit costs.

Dime reported a 17% annual increase in commercial-and-industrial and owner-occupied commercial real estate loans with its third-quarter earnings. Its deposits increased more than 8% year over year. The bank reported net income of $11.2 million, though that was down 13% from a year earlier, as elevated costs curbed its bottom-line results. Salary and benefits costs rose 18% year over year, and Dime’s quarterly provision for credit losses rose to $11.6 million from $1.8 million a year earlier.

“The momentum in our business is extremely strong,” Stuart Lubow, Dime’s president and CEO, said during the company’s latest earnings call. He acknowledged the rising costs, however, and said the bank expected to “keep expense levels relatively flat in the fourth quarter and into 2025 as we are working on a number of efficiency optimization initiatives.”