buy out a competitor and convert to a stock institution. The transaction, though accomplishing a merger and a conversion in the same breath, would not run afoul of the regulatory ban on such deals: The conversion would happen after the merger, and the buyer is the one that would convert. Dime Savings Bank of Williamsburgh plans to buy $503 million-asset Conestoga Bancorp, Roslyn, N.Y., for about $103 million in cash. Immediately after the purchase, Dime, which is not connected with Dime Bancorp of New York, would convert to a stock institution and form a new holding company, Dime Community Bancorp. The new company would have over $950 million in deposits, with 15 branches in Brooklyn, Queens, the Bronx, and Nassau County. Though neither the acquisition nor the conversion by themselves is unusual, the combination in this form is rare, observers say. In 1994, two mutuals in Minnesota merged, with the resulting institution converting shortly afterward. "Both things have been done individually," said Vincent F. Palagiano, chairman and chief executive of $667 million-asset Dime. "All we're trying to do is do them simultaneously." The deal is similar in some respects to the controversial merger- conversion, where a mutual thrift converts to stock form and is immediately acquired by a larger stock institution. Regulators placed a moratorium on such transactions because of concern that some insiders were benefiting at the expense of depositors. In this transaction, however, the buyer is converting. This helps both companies to grow strategically, benefits Conestoga shareholders and Dime depositors. In addition, though Dime plans to raise some capital in its conversion, the thrift won't be significantly overcapitalized after the deal. "The way the deal is structured for Dime, it makes a lot of sense," said Salvatore DiMartino, thrift analyst at Advest Inc. in New York. "They will be able to go ahead with their conversion and at the same time efficiently utilize the excess capital raised in the conversion, plus enhance their market position." Dime already has $80 million in capital, with a leverage capital ratio of 12%, enough to complete the deal without the conversion. After the purchase, Dime would have a capital ratio of about 5%, enough to satisfy regulatory requirements, but not quite enough to satisfy Mr. Palagiano. So the merger is conditional upon Dime's receiving regulatory approval for the conversion in an initial public offering immediately afterward. Dime officials have not yet determined how much stock to issue, what the stock offering price would be, or how much they hope to raise. But Mr. Palagiano said the combined transaction would not leave Dime stuck with too much capital after the conversion and no way to leverage it. He noted that thrifts that got into trouble in the late 1980s had reached for unwise investments because they had excess capital to leverage. "We're not doing it to raise capital," Mr. Palagiano said. "If I raised capital right now, what the hell would I do with all of it?" Under the proposed merger, Conestoga shareholders would receive $21.25 in cash for each share of their stock. That's 122% of Conestoga's June 30 book value and 26 times trailing fourth-quarter earnings.
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