follow the lead of an Ohio thrift that just cut its excess capital by handing out a special tax-free cash dividend of almost $3 per share. Investment bankers, lawyers, accountants, and thrift officials are eagerly awaiting the public release of the Internal Revenue Service's private-letter ruling concerning the tax-free dividend by Enterprise Federal Bancorp, Cincinnati. The agency is expected to release the ruling Dec. 8. The $203 million-asset thrift, which converted to stock form in October 1994, paid a dividend of $3 per share on Nov. 3. The IRS allowed $2.95 of the dividend to be paid tax-free. Since then, Enterprise officials have been contacted by at least two dozen thrifts and taken dozens more telephone calls from investment bankers and other observers trying to learn more about what they did to obtain the IRS ruling. This is the first time that a financial institution has issued a tax-free cash dividend, which was termed a "return of capital," although other industries use it regularly. An H.C. Wainwright bank analyst, Gary Ford, has even issued a research report on the prospect of other dividends, citing Queens County Bancorp in New York City and First Bell Bancorp, Pittsburgh, as likely candidates. "There is a buzz," said J. Kevin McAuliffe, vice president of Capital Resources Inc. in Washington. "All the attorneys, all the financial advisers, and many of the thrifts that have a lot of excess capital are looking into it and trying to determine what the implications are." But officials at both Enterprise and the accounting firm of Grant Thornton, which worked with the thrift to obtain the IRS ruling, caution that the conditions that applied to Enterprise won't necessarily fit all institutions. In fact, observers said, it's likely that only holding company-thrift institutions that haven't filed consolidated tax returns, and whose subsidiaries haven't paid their income to the holding company, are eligible. Such conditions probably limit eligible institutions to those that have converted within the past year. That's because once a holding company retains earnings, dividends must be paid out from earnings before excess capital can be touched. And they note that each institution must weigh its options in light of how the dividend would affect future earnings and whether it could prevent them from using the pooling method to account for any future acquisitions or sales. "Others cannot rely on that ruling because you don't know what particular fact or combination of facts allowed the IRS to rule as they did," said Ron J. Copher, financial services partner at Grant Thornton in Cincinnati. "Because it was fact-sensitive to Enterprise, others need to be very careful in evaluating whether or not they should do it." According to investment bankers and sources familiar with the IRS ruling, Enterprise qualified because it hadn't retained earnings or filed a consolidated tax return, and hadn't paid any dividends at the holding company level. In addition, Enterprise was severely overcapitalized, having raised about $29 million in capital from its offering, including about $7 million from a resolicitation due to a higher reappraisal during the offering. And the thrift's business plan hadn't accounted for the extra capital, which brought its leveraged capital ratio up to almost 20%.

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