Magazine article American Banker

Kansas Bank Issues Holiday Dividend to Boost ROE

Magazine article American Banker

Kansas Bank Issues Holiday Dividend to Boost ROE

Article excerpt

Shareholders of a Kansas bank got an extra Christmas present this year in the form of a special tax-free dividend.

First Federal of Olathe Bancorp Inc. is giving a $4 per-share distribution to shareholders that was paid Dec. 24, and because it was set up as a return of capital, the transaction is tax-free.

Chief executive officer Mitch Ashlock said $57 million-asset First Federal returned the money because the company was overcapitalized, and that was holding down return on equity. It had been trying to reduce capital by repurchasing shares, but after stock buyback offers failed to produce many willing sellers, it decided to refund capital.

"As a mutual for 70 years, we had a huge accumulation" of capital, Mr. Ashlock said. The company has a capital ratio in the 22% range and that it hopes to lower that -- through the refund and buybacks -- to the industry average of around 10%, he said.

First Federal, the parent of First Federal Savings and Loan Association of Olathe, went public in April 2000. Industry experts say mutual thrifts that have recently converted to stock companies often have excess capital for two reasons. First, they had a lot of capital to begin with, and second, to make the conversion they must sell stock at a price based on the company's appraised value.

Companies looking to reduce their capital can repurchase shares, pay out large dividends, or, if they are eligible, return capital. Those that have not reported gains and losses or filed a consolidated tax return at the holding-company level can choose to issue a tax-free return of capital, so long-standing public companies are ineligible. …

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