Dime in N.Y. Admits Interest in MOE as Activity Heats Up

Intrigue grows with every deal characterized as a merger of equals.

Mergers of equals are a rarity in consolidation. The paper appeal of smashing two similarly sized institutions in the same or complementary markets is incredibly tempting. But discussions about such transactions often reveal issues in areas such as leadership and culture.

So many talks end shortly after they begin. And when they do lead to agreement, one company always ends up being a little bit more than an equal, industry observers often quip when the concept is mentioned.

Still, the latest slew of deals branded as mergers between equals have been widely praised by investors and analysts. Such enthusiasm has caught the caught the attention of other banks, including Dime Community Bancshares (DCOM) in Brooklyn, N.Y.

"It used to be everyone said there was no such thing as an MOE," says Kenneth Mahon, the $4 billion-asset company's chief financial officer.

Rockville Financial's (RCBK) planned merger with United Financial (UBNK), uniting banks in Connecticut and Massachusetts, "seems like a true MOE," Mahon says. "There are a lot of competitive pressures. So if you take the opportunity to put companies together, there are a lot of redundant costs that are scalable. That makes a merger look attractive."

Besides admitting an interest in the concept, Mahon declined to discuss Dime's specific plans. Mark Fitzgibbon, an analyst at Sandler O'Neill, noted Dime's potential interest in a merger of equals in a Monday note to clients. Fitzgibbon's note followed a recent trip with Mahon to meet with investors in the Southeast.

Flushing Financial (FFIC) in Lake Success, N.Y.; Oritani Financial (ORIT) in Township of Washington, N.J.; and Hudson Valley Holding (HVB) in Yonkers, N.Y., could be good merger partners for Dime, Fitzgibbon wrote, adding that there were "a myriad of other potential partnerships that could also work."

Dime is already considered a potential seller by several analysts. Besides Fitzgibbon, Bob Ramsey of FBR Capital Markets wrote in a note to clients last month that his firm considers Dime "a very saleable franchise," adding that he could see a deal happening in two or more years.

Aging directors and executives are a major reason Dime is viewed as a likely seller. The average director is 66. Vincent Palagiano, the company's chairman and chief executive, is 74.

Aging boards and management teams "tend to be more open to mergers," Mahon says, though he adds that Dime's board eliminated its mandatory retirement age provision to avoid feeling pressured to sell.

While it weighs its options, Dime is also pursuing an aggressive plan this year to increase the size of its loan portfolio. The company, which focuses on multifamily lending in New York City, has set a goal of growing its balance sheet by 8% to 10% in 2014, compared to roughly 3.5% last year.

The company took a big step toward achieving that goal on Friday, announcing it would repurchase $200 million in loans originated between December 2002 and February 2009 that it sold but continued to service. Dime didn't identify the seller, but Fitzgibbon wrote in his note that he suspects it is Fannie Mae.

Dime is primarily a spread lender and already has a low efficiency ratio of 47.5%, so booking more loans is one of the few ways it can boost profit. The company, which has a tangible common equity ratio of 9.55%, would also like to add some leverage.

"We are looking to mitigate some of the interest rate margin pressure with volume and use our capital that is approaching 10%," Mahon says.