News and Commentary: Dime Bancorp Jumps Into the Hudson

Dime Bancorp Jumps Into the Hudson

By Brian Graney (TMF Panic)
September 15, 1999

Trying to carve out a business niche for themselves within the rapidly changing financial services field, Dime Bancorp (NYSE: DME) and Hudson United Bancorp (NYSE: HU) today decided to combine their operations to form the largest regional banking firm in the mid-Atlantic. The $3.6 billion transaction is being termed as a merger of equals, with each Dime share to be converted into 0.585 of a share of the combined company and each Hudson share to be exchanged on a one-for-one basis. The new Dime United Bancorp will operate 330 branches in New York, New Jersey, Connecticut, and Pennsylvania. It will sport $32 billion in total assets.

Current Dime shareholders will have a 56% stake in the combined entity, with Hudson United stockholders grabbing the remaining 44% chunk. Dime chairman and CEO Lawrence Toal will assume the same duties at the Dime United, while Hudson United chief Kenneth Neilson will become the new firm's president and COO. According to the merger master plan, Toal will hand off the chairman and CEO reins to Neilson in 2003.

For the most part, the two companies have been heading in similar business directions lately. Dime is changing its loan portfolio mix from its traditional reliance on residential lending, emphasizing growth in higher-yielding areas such as commercial real estate, consumer, and business loans. Those three business lines represented a 36% of total loans receivable in Q2, up from 32% in Q1. Recently, Dime also acquired $945 million in auto loans from Citigroup (NYSE: C), further boosting its nonresidential loan business. However, residential loans still make up the bulk of the company's lending, representing 89% of total loan production in Q2 and 56% of total interest income.

Over at Hudson United, a similar transition is underway. The recent addition of Little Falls Bancorp helped to boost the firm's consumer loan portfolio 32% in Q2 while its commercial and industrial lending portfolio increased 14%. Meanwhile, Hudson United's residential lending portfolio was reduced 9% during the period, according to Tucker Cleary Capital Markets. Low risk is the order of the day, with the company's nonperforming assets at a scant 0.95% of total loans plus other real estate owned (OREO).

Even though the current U.S. housing market remains very strong, focusing on higher-returns business lines is a smart move for any company, financial or otherwise. The rationale behind the merger does not seem to be cost-cutting, as the companies expect to realize a nice but far from impressive $78 million in cost savings and intend to keep branch closings to a minimum.

Rather, the deal expands on Dime's recent strategy of establishing a large, convenient regional banking presence in the densely populated New York and Philadelphia metropolitan markets and then supplementing that footprint with a national lending platform for mortgages and consumer loans. By combining with Hudson United, Toal will have the chance to execute this strategy on a larger scale. If all goes well, the larger scale will also allow for greater profitability and an enhanced competitive advantage vis-a-vis rival lenders. That's the theory, anyway.

What will happen in actuality is still uncertain as the financial services landscape continues to transform itself and companies try to put their fingers on what will be the winning strategies for the future. Obviously, investors didn't think too highly of the future returns that a midcap player such as Dime could achieve under its current strategy, as the company's share price has tumbled 31% so far this year despite consistently higher earnings performance. Whether teaming up with Hudson United will provide the critical mass Dime needs to take its lending business to another level will be determined in the months to come.

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