Wall Street loves stocks whose prices are supported by strong dividends. This is especially true for the banking industry, where profits are under pressure from the narrow spread between short-term rates paid on deposits and long-term rates collected on loans and securities investments. Many bank holding companies continue to pay generous dividends, even as their earnings decline significantly, to keep shareholders happy.

This makes sense as long as a bank is well-capitalized and expects its earnings to recover within a reasonable amount of time. Who wants to rock the boat and push down the stock price? But even banks with a strong balance sheet can't keep this up for too long. So if you're thinking about buying a bank stock on the basis of its dividend, it's important to do your research.

Below is a list of 10 banks with actively traded stocks that have the highest dividend payout ratios. (We excluded banks that are publicly listed but have little trading volume because they are so closely held.) They were screened from regulatory filings for holding companies with more than $500 million in total assets.

Most of the companies on this list pay dividends sufficient to make their common stock yields very attractive. Considering the low returns on income-producing investments these days, a bank holding company stock yielding more than 5% , or 6% in the case of

First Commonwealth Financial

(FCF) - Get First Commonwealth Financial Corporation Report

, seems like a steal.

Paying Up To Keep Shareholders Happy
These banks have held dividends steady even when earnings decline.

First Commonwealth paid out 17 cents per common share in March, exceeding their earnings of 15 cents per share. Two other companies,

First Citizens Banc Corp.

(FCZA)

and

New York Community Bancorp

( NYB), also paid first-quarter dividends that exceeded earnings. Both did so in 2006 as well.

With First Citizens' dividend payout ratio at nearly 122%, it's not surprising that the company's leverage capital ratio -- the ratio of its core capital to total assets -- fell from 8.81% in December 2006 to 8.02% in March 2007. While this is still considerably higher than the December 2006 national aggregate of 6.44%, it shows how capital can quickly erode when an expanding bank pays generous dividends.

By comparison, both First Commonwealth's and New York Community's leverage capital ratios actually increased in March over December. In the case of NYB, total assets declined as the company continued to trim its securities portfolio and payoffs of multifamily loans exceeded new borrowings. But NYB's level of capital also increased, partly due to a decline in unrealized losses on securities.

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The increase in First Commonwealth's leverage ratio mainly reflected a decline in assets resulting from a reduction in securities that are classified, for accounting purposes, as held for sale.

Big Payouts Can Eat Into Capital Reserves

Return On Assets, Equity

First Financial Bancorp

(FFBC) - Get First Financial Bancorp. Report

was paying out 119% of what it earned in 2006, and it maintained its dividend at 16 cents a share in the first quarter. But the payout ratio actually dropped to 72.73% because earnings improved. In its 10-Q report for the first quarter of this year, First Financial cited many factors for the earnings improvement, including an improved net interest margin and reduced staff expenses, as it outsourced mortgage origination, servicing and technology functions.

A high dividend payout may be an alarming sign, but if you look deeper, it may have been a one-time event.

S.Y. Bancorp's

(SYBT) - Get Stock Yards Bancorp, Inc. Report

payout ratio of 114.9% for 2006 reflected its retirement of $20 million in trust-preferred securities. The company maintained its dividend at 15 cents a share in the first quarter of 2007, but its payout ratio dropped to 38.46%. S.Y.'s first-quarter 2007 earnings were strong, with return on assets and equity of 1.62% and 16.44%, respectively. This is in line with its earnings performance last year.

FirstMerit Corp.

(FMER)

has an attractive yield of 5.41% on its common stock. Its payout ratio for the first quarter of 2007 was 74.36%, down from 96.22% for 2006. The high payout ratio for last year reflected a weak fourth quarter, when the company's earnings slipped as it beefed up its loan loss reserves.

All of the bank holding companies mentioned in this article are very well capitalized and are likely to remain that way in the near future. The primary risk is that in the current interest-rate environment, holding companies with declining earnings may need to cut their dividend, which could hurt share prices.

When you are attracted to a stock because of a high dividend yield, it is very important to do a little extra research and find out if the company's earnings comfortably support the dividend. If the dividend appears high in relation to earnings, find out if it is because of a temporary drop in earnings, or extraordinary finance activity. If not, the high dividend may eat sufficiently into the company's capital to force it to lower the dividend.

Philip van Doorn joined TSC Ratings as a banking analyst in February 2007. He has a varied background, with a B.S. degree in business administration from Long Island University. He previously worked as a loan operations officer with Riverside National Bank in Fort Pierce, Fla. Before that he was a credit analyst, monitoring banks and thrifts at the Federal Home Loan Bank of New York.