A Kentucky thrift company is taking some drastic-and unusual-steps to improve its profitability and remain independent.
Frankfort First Bancorp said it will eliminate its employee stock ownership and management recognition plans, will execute a reverse 1-for-2 stock split, and distribute $4 a share in cash to shareholders.
Reverse stock splits and cash outlays are frequently used to boost profits, but the trend among community banks is to start offering employee benefits, not end them.
"It's very uncommon to take benefits away from themselves and from employees," said Gary R. Bronstein, the attorney for the $138 million-asset company. "But in the long term, it's better for the shareholders."
About 3% of the company's three million shares are held in the employee and management plans.
The company will pay shareholders $1.1 million and hold the shares that were part of those plans. Mr. Bronstein said the company won't need shareholder approval to eliminate the stock plans.
William C. Jennings, Frankfort's president, said the directors want to reduce its excess capital, which accumulated as a result of its conversion from mutual form in 1995.
Mr. Jennings said the company needed to reduce its costs and increase its profitability because its return on equity, 2.01% last year, was too low to satisfy shareholders.
"We would have been forced to do something to become more profitable," Mr. Jennings said. "There aren't that many opportunities for growth here, so the only other avenue would be to sell."
Mr. Jennings said the employee stock ownership and management recognition plans were too expensive to administer.
"If you have got a lot of capital and you can wipe out those plans, it can be beneficial in the long run," said Chris Hargrove, a consultant with Professional Bank Services Inc. in Louisville.
Frankfort First is the parent of First Federal Savings Bank, with two branches in Frankfort, the capital city of 26,000 people between Lexington and Louisville.
The plan is part of an effort to save more than $500,000 per year and help Frankfort First increase its book value 7%, Mr. Jennings said.
An unwanted result could be to make the company a more attractive acquisition candidate. "That may be a problem for us later on," Mr. Jennings said. "We're hoping to survive on our own."