Dear Shareholders:
As we entered 2023, we believed the financial services industry would return to traditional banking as was the case pre-Covid. We quickly realized this would not be the case. During the first half of the year, we witnessed the failure of three large regional banks, one in California, the other two in New York. This created a very uneasy environment for the financial services industry. As a community bank, The Dime Bank continues to adhere to sound, fundamental banking practices, not engaging in leveraged lending nor significantly relying on uninsured deposits. Additionally, the Federal Reserve (Fed) continued increasing rates at unprecedented speed thus causing financial institutions’ interest expense to increase substantially. Despite these and several other challenges, your Company performed well in comparison to industry peers of similar asset size.
Dimeco’s financial performance for 2023 was as forecasted. Total assets of $990 million at December 31, 2023, were 2.1% greater than last year. Loan growth of $43.4 million was a 6.4% increase over 2022. Mortgage loans, including residential and commercial, drove most of this growth, contributing almost $30 million. Consumer loans grew by $9.1 million both organically and through some participations purchased from a fintech partner. The investment portfolio declined by $21.7 million compared to 2022. Cashflows from the investment portfolio were used to fund loan demand and paydown overnight borrowings from the Federal Home Loan Bank of Pittsburgh (FHLB). As of January 1, 2023, the bank adopted the Financial Accounting Standards Board (FASB) pronouncement of Current Expected Credit Losses (CECL). The balance in the allowance for credit losses ended the year at $10.8 million. This amount was calculated based upon the qualitative factors and quantitative components of our CECL method.
Deposit balances of $827 million were $39 million or 4.9% greater than 2022. Noninterest-bearing deposits ended the year down $14.8 million over last year while interest bearing deposits were $53.7 million greater. As mentioned in previous quarterly letters, many customers moved money into higher yielding Certificate of Deposit (CD) specials, the equity or treasury markets, or to cover higher expenses. CDs experienced the largest growth in the interest-bearing category with an increase of $108.2 million or 65.8%. In addition, management purchased brokered CDs to pay down higher rated overnight borrowings at FHLB while taking advantage of the yield curve to obtain these funds at lower rates.
Short-term borrowings decreased by $49.5 million due to the acquisition of brokered deposits as well as the repositioning of $17 million to term borrowings at lower interest rates. The remaining decrease was attributable to the maturity of a three-year cash flow hedge at $2.5 million. Other borrowed funds increased by $19.6 million from a combination of the movement mentioned above along with the match funding of certain loans to reduce our interest rate risk exposure. The remaining difference was due to normal payment amortization and maturities.
Stockholders’ equity of $99 million, increased $10.6 million or 12%. $7 million of this increase was from net income, net of dividends paid, while $4 million was from a decrease in accumulated other comprehensive losses. These losses are the result of the mark to market value of the securities within the investment portfolio. The market value of our bonds recovered some value at the end of the year due to the markets’ reaction to projected rate cuts by the Fed in early 2024. While this loss does reduce the tangible book equity, it does not impact the regulatory capital calculations. Dimeco, Inc.’s capital remains above the regulatory minimum requirements to be considered well capitalized.
Net income for the year of $10.8 million was $1.5 million less than the previous year. Interest income grew $9.7 million or 25.1% because of loan growth and repricing of variable rate loans. Additionally, management strategically restructured a portion of the investment portfolio in December 2022 by selling low yielding investments at a loss and reinvesting the proceeds in higher yielding bonds which also contributed to the income growth. The remaining breakeven earn back period for this bond repositioning is 25 months. These gains were offset by a $1.1 million decrease in loan fees from the Small Business Association Paycheck Protection Program (PPP). Interest expense of $14.3 million was $10.5 million more than last year. Deposit expense was $7.8 million higher while borrowings added another $2.7 million. The provision for credit losses increased by $1.7 million to $833 thousand because of our CECL calculation. The growth of our loan portfolio was mainly responsible for the higher provision. Noninterest income increased $1.7 million or 34.9%. Losses recognized on the bond sale mentioned above and amortized losses recorded from a low-income housing investment where the bank received tax credits, did not reoccur in 2023. Noninterest expense increased by $1 million or 4% primarily because of higher payroll and healthcare benefits. Return on average assets was 1.11% while return on average equity was 11.84%.
In 2023, the bank made multiple investments in technology solutions. We implemented a digital resource library for our customers. These short video clips help walk customers through the various features and functionality of our internet and mobile banking products. Operationally, the bank rolled out a customer relationship management system. The goal of this investment is to strengthen the bank’s relationship and interactions with customers by centralizing customer event management and helping our customers reach their financial goals. Also, a data warehouse system was added to centralize and enhance the bank’s reporting and decision making. In the fourth quarter, we rolled out a new and improved business banking platform. This platform enhances our digital business solutions to provide a secure channel for customers to collaborate on financial decisions. Additionally, we continue to look at enhancements to our fraud solutions for both our business and personal customers as fraudsters are constantly developing new schemes to deceive unsuspecting victims.
As we continue to support non-profit and philanthropic organizations within our communities it was also our goal to bring financial literacy to the forefront for our young adults. This year we pioneered a Reality Fair with a local high school whereby the students were challenged to make real life financial decisions. In addition, we sponsored Personal Finance Labs at various school districts which includes a personal budgeting game, online learning with certifications in personal finance, along with the stock market challenge.
In November 2023, our long time Board member, Thomas A. Peifer, retired after thirty-five years of service to Dimeco, Inc. and The Dime Bank. His contributions to the board and the several committees he served on leaves us well positioned as we move forward. We thank him for this dedication and commitment and wish him all the best in his future endeavors.
In December, Aimee M. Skier, was appointed to the board of Dimeco, Inc. and The Dime Bank. Aimee has extensive experience in the insurance industry and along with her diverse background, we look forward to her contributions to the board.
I am excited for the new year and the opportunities that are ahead of us. We fully expect to reach $1 billion in total assets in 2024. This milestone will help us reach our long-standing goal to grow your Company organically and through prudent bank management practices. This achievement will position us for future growth and enhance our operational efficiencies.
We thank you for your continued support and investment and encourage you to recommend Dimeco, Inc. to family, friends, and colleagues. As always, please feel free to reach out to me with questions.
Sincerely,
Peter Bochnovich
President & Chief Executive Officer
Consolidated Financial Highlights 2023
(amounts in thousands, except per share data)