Thrifts with Excess IPO Capital Turning to Special Dividends

After Texarkana First Financial Corp. went public in 1995, the thrift's equity-to-asset ratio shot up to 16%, seriously dampening returns to its new investors.

"Once we sold the stock, we couldn't expand fast enough for our capital," explained executive vice president John Harrison.

And although the institution repurchased 5% of its shares last May, Texarkana First still could not show its shareholders enough return on equity quickly enough.

Making more loans was not the best course of action. "We needed a more immediate way," Mr. Harrison said. The answer was a special dividend - a one-time payout distinct from the regular quarterly dividend.

Such return-of-capital transactions are quickly becoming the preferred tactic for thrift managers eager to please their shareholders. Since July 1995, 28 institutions have declared special dividends, according to Trident Financial Corp., an investment and advisory firm.

"Investors are realizing that special dividends can put a company in a stronger position, with lower capital and higher return on equity," said William J. Wagner, a vice president at Trident.

These one-time payouts, which must be declared within the first year after a conversion, can range from 5 cents to $10 a share. They can be an even more significant tool for capital management than stock buybacks.

Thrift managers can pay a special dividend in only 15 days. But stock buybacks can take up to a year or even two. And share repurchases may not even be an option for some if shares are not available, or their prices are too high, Mr. Wagner said.

Special dividends also let executives sidestep the unwise lending practices that got thrifts in trouble a decade ago.

These dividends can even be delivered tax-free if the thrift does not file a consolidated tax return with its holding company.

To be sure, special dividends have some drawbacks. They can adversely affect holders of stock options, for instance.

To counteract such an impact, thrift managers can adjust the exercise price downward to reflect the dividend, helping retain the gain embedded in the option.

But a direct comparison to share buybacks is not entirely fair. Special dividends are not accretive to earnings per share and do not change the number of shares outstanding. In fact, they can have the effect of reducing earnings per share, while repurchases should be accretive.

"There is a need to weigh the pros and cons," Mr. Wagner said. "It's a case-by-case issue."

Curtis J. Thompson, who works in bank equity sales at Rodman & Renshaw Inc., gave some reasons why thrifts may not want to declare special dividends.

"Though these dividends are a very popular tool," he said, "it can have negative impact in a frothy market. In a softer market, the ability to repurchase shares has much more compelling long-term values. Special dividends may send signs to shareholders too early and put a lot of expectations on a newly public company."

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