Banks to Continue Paying Dividends

At least a few banks have committed to reduce dividend payments at the same time they accepted government investments. SunTrust of Atlanta, which accepted $3.5 billion from the government, cut its quarterly dividend payments to about $188 million each quarter from about $272 million. The company described the cut in a statement as "the responsible thing to do."

Zions Bancorp, which accepted $1.4 billion from the government, reduced its dividends by about 26 percent to $34 million.

"This modification to our dividend will allow us to further strengthen our capital base," said chief executive Harris Simmons.

Other banks participating in the government program said that they will not use the Treasury's money to pay dividends. They said dividends will be paid from other capital, primarily from their new profits in each quarter.

Washington Federal, a Seattle thrift, accepted $200 million from the government. The company will pay its shareholders about $18 million in dividends this quarter, which puts it on pace for $216 million over the next three years.

Chief executive Roy Whitehead said the company pays dividends from its quarterly profits, rather than its capital reserves. He said there was only one exception in the past three decades. Last quarter, he said, the company used $11 million in capital to maintain a consistent dividend payment.

Still, Whitehead said "categorically" that the company would not use the government's investment to make dividend payments.

Some experts questioned the distinction drawn by Whitehead between profits and capital.

"Thinking of them as separate things is kind of a spurious argument. It's all capital," said David Scharfstein, a finance professor at the Harvard Business School who has called for the government to require banks to suspend dividend payments. "Money that goes out the door is money that isn't available to shore up the banks' balance sheet."

Scharfstein and others said that many banks clearly need to buttress their balance sheets. Large losses on mortgage-related investments have drained capital, and investors no longer have much interest in giving more money to banks. But several of the institutions accepting government money have continued to pay dividends in recent quarters even as they post large losses.

Scharfstein said many banks should suspend dividend payments voluntarily. Some industry analysts, however, say that cutting dividends will make it even harder for banks to find new investors.

Capital is basically the money a company keeps in its vaults. A dividend is a distribution of some of that money to shareholders. Companies typically pay dividends four times each year.

The stability of dividend payments is important to investors. Some treat dividends as a source of regular income, others as a barometer of corporate health. As a result, companies generally try to match or raise their dividends each quarter. Some banks entered the current crisis with unblemished dividend histories dating back 30 years and more.

The resistance to dividend cuts in part reflects the reality that the Treasury program is serving at least two purposes. In some cases, the money is going to companies that need help to survive. In other cases, the government is helping healthy companies to expand.

Ed Yingling, chief executive of the American Bankers Association, said he was increasingly hearing from banking executives who feel they should not be forced to accept money with so many strings attached. He said these banks don't need the money, but they are willing to use it to increase lending, so long as they are not punished for doing so.

"The government really needs to make up its mind what this program is," Yingling said.