Though awash in capital, many community banks are not willing to dole out bigger dividends to shareholders.

Bankers who pay the same $2 year after year do not want to part with capital, knowing that record earnings and strong capital growth will not last forever.

But industry experts said banks that hold back on dividend payments are missing a chance to deploy excess capital, boost return on equity, and appease shareholders who might be considering selling the bank. They said dividends are especially important for banks that cannot buy back their own stock-a more tax-friendly way of using capital.

"It's shareholders' money. Why don't you give it to them?" said William P. Johnson, a partner in Rothgerber, Appel, Powers & Johnson, a law firm in Denver. "You aren't going to get anything for that excess capital."

Anecdotal and statistical evidence suggests that some community banks are taking advantage of good times to dish out bigger dividends. But overall, payout ratios at both community banks and larger banks are holding steady. Though analysts say larger banks on the whole are successfully managing capital through aggressive buyback programs, smaller banks that do not have that ability are just letting capital build up.

For Lawrence Savings Bank, which has never paid a dividend and does not plan to, there is no such thing as too much capital.

The Massachusetts thrift, which lost $50 million from 1988 to 1992, wants to wait until it boosts its 9.11% capital-to-assets ratio before rewarding shareholders, said Paul A. Miller, president and chief executive officer.

"We think it makes sense not to pay one," Mr. Miller said. "I'm 35 years in this business. In reality, you can never have enough capital."

At Sept. 30, the median payout ratio-the percentage of earnings paid to shareholders-was about 21% for banks and thrifts with less than $500 million of assets whose shares are traded on the Nasdaq, according to research by Rockville, Md.-based Danielson Associates Inc.

Institutions with $500 million to $1 billion of assets had a median payout ratio of 33%.

Larger banks, where dividends are a normal part of investor relations, have typically had larger payout ratios. According to Danielson Associates, banks with more than $10 billion of assets paid out a median 39% of earnings in dividends at Sept. 30.

Though no comparable figures were available for past years at all Nasdaq-traded banks, Danielson Associates looked at seven representative community banks and found little change in payout ratios from 1993-just before earnings and capital levels began to soar.

The median for the seven banks, which have assets of less than $1.25 billion, was 38.7% at Sept. 30, compared to 37.1% in 1993.

"The payout ratios are sliding up but not aggressively," said Jon D. Holtaway, a Danielson vice president. Community banks "worry if they jack their payout ratio up to 50% or higher, then they won't be able to maintain the same dividend if earnings were to fall."

In Massachusetts and Connecticut, where many thrifts and banks stopped paying dividends as they worked through the recession of the early 1990s, the payout ratio is now about 28%, according to Advest Group Inc., Boston.

Advest senior vice president James E. Moynihan said that because so many institutions are overcapitalized and in search of a way to deploy the excess, he expects the average payout ratio in the two states to hit 35% in the first quarter. That would about equal the level achieved in the mid- 1980s, before many New England banks foundered.

A few community banks will raise their dividends and bring up the average, he said, but most will continue their parsimonious ways. "Bankers are conservative," Mr. Moynihan noted.

Yet some shareholders demand dividends.

Jerome Davis, an activist investor who owns stock in more than 40 banks and thrifts, is not shy about telling these institutions to pay up.

He has been hammering $37 million-asset Mitchell Bancorp, which went public in July 1996, to issue a special $7 dividend. The North Carolina thrift, which has a 41% capital-to-assets ratio, pays the same 10-cent dividend it did when it first went public.

Mr. Davis, who has a 9.9% stake, is pushing for Mitchell's sale. Though he is looking for more than a dividend, analysts said a payout in either cash or stock can sometimes soothe stockholders.

"Enhancing shareholder value is very important for community banks right now as they try to stay independent," said Jeffrey C. Gerrish, a lawyer who specializes in banking at Gerrish & McCreary, Memphis. "Happy shareholders won't want to sell the bank."

In the end, banks must establish a dividend policy that is comfortable for both shareholders and the balance sheet, according to David A. Lentini, chairman, president, and CEO of Windsor, Conn.-based New England Community Bancorp.

New England Community pays out about 20% to 25% of earnings to shareholders. Mr. Lentini said the rest is held as retained earnings that can be used for acquisitions.

"Investors today are pretty savvy," he said. "If they're really dividend shoppers, they're going to be looking" for banks with better than a 30% payout ratio.

Investors desiring a ratio of more than 80% can buy shares in Community National Bank of Derby, Vt. It is trying to reduce capital, from a ratio of about 10%.

"It's getting harder and harder to deploy capital," said Stephen P. Marsh, chief financial officer.

At Community National, about 55% of dividends are reinvested, Mr. Marsh said. But there are also many stockholders who count on their quarterly cash payout.

"We have a lot of older shareholders that like to see the dividends come in every quarter and use the money for spending," he said.

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