Dividend Dive

Regional banks used to be treasured for their generous dividend yields, but with loan losses mounting, those days are over.

On Thursday, KeyCorp (nyse: KEY - news - people ) said it would cut its dividend in half, weeks after it warned that net write-offs could be twice as high as initially forecast. The news sent its shares down 23.7%, or $3.73, to close at $11.98. During Thursday's session, the stock dipped to an all-time low of $11.64.

KeyCorp blamed its need for capital on an adverse ruling related to a tax dispute resulting from a partnership between KeyCorp and another regional bank, PNC Financial Services Group (nyse: PNC - news - people ). The ruling slapped KeyCorp with an after-tax accounting charge to earnings and capital in the range of $1.1 billion to $1.2 billion.

"If it had not been for the adverse court ruling on our tax treatment of a leveraged lease transaction, we probably would not have considered the capital raising actions. But the ruling forced our hand and prompted the decision to build on our strength with a capital raise, one that we think not only is prudent in light of the economic climate, but also is an appropriate move as we look to the future of the enterprise," said Chairman Henry Meyer.

On Wednesday, KeyCorp's board approved offerings for newly issued shares and convertible preferred stock as a way to raise $1.5 billion in much-needed equity. The board also said it plans to cut its annual dividend in half to 75 cents a share, resulting in $200.0 million, annually.

That lowers its yield to 6.3% from its previous payout of 9.5%, based on Wednesday's closing price of $15.71.

The consensus among analysts is that regardless of litigation charges, halving a dividend after a long history of annual increases, reflects poor management--especially after announcing that write-offs will be significantly higher than expected.

"The decision to reduce our dividend after 43 consecutive years of annual increases was made after great deliberation," Meyer said. "It was a record we were extremely proud of, but we must recognize the current economic realities as we manage our business for the future."

Regional banks, which boasted some of the best dividend yields in 2007, according to the Mergent Dividend Achievers 50 Index, have been scrambling to raise capital by slashing dividends and other measures in order to cover loan losses (See: " Banking's Mean Season"). And as a result, dividend yields have suffered. Index component Provident Bankshares (nasdaq: PBKS - news - people ) slashed its dividend in April. Provident Bank's parent company unveiled a capital-bolstering plan on April 11 that included the issuance of $65.0 million in securities and a $50.0 million subordinated debt offering for a total of $115.0 million in new capital. The plan also included a dividend reduction to 44 cents a share, annually for yearly savings of $29.0 million.

National City (nyse: NCC - news - people ) has cut its dividend twice this year--most recently, to a quarterly dividend of 1 cent a share from 21 cents a share, for a paltry yield of 0.8%.

By comparison, regional banks with steady dividends like Comerica (nyse: CMA - news - people ) and Fifth Third Bancorp (nasdaq: FITB - news - people )--both of which ranked on last year's Index at fourth and seventh, respectively--still have strong dividend yields at 8.3% and 12.0%. However, with shares of Comerica down 26.7% and Fifth Third's stock down 41.5% since the beginning of the year, it's clear that investors are still concerned about massive write-offs and those dreaded dividend cuts.