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The deepening housing crisis has opened up buying opportunities among bank stocks.

An analysis by Ratings shows that five bank stocks -- including giants

Bank of America





-- could be worth buying, on the basis of the stocks' reasonable valuations and the companies' strong, sustainable dividend policies.

Bank stocks can still be risky short-term plays, since we probably haven't seen the worst of the housing crisis. Some tempting buys are out there, however, among stocks that are trading well off their highs and paying out alluring dividends.

To find the real gems within the longer list of cheap, high-dividend-yield bank stocks, we filtered the list to highlight value.

The following fundamental criteria help limit risks associated with asset quality and earnings:

  • Dividend yield of at least 5%. A high dividend yield provides some downside protection if the stock falls. Dividends are often a key component in making a bank stock attractive to investors. In a slow-growth industry with often predictable earnings, a generous dividend can attract conservatively minded investors. Normally, seeking a yield of 5% would be too greedy, but not in this market.
  • Price-to-book-value ratio below 2. Another seductive feature of many bank stocks at a time like this is their low price relative to book value. In fact, one of the stocks on the list below is priced at 1.06 times book value.
  • Dividend payout ratio below 100%. We excluded bank holding companies whose total dividends paid out during the first half of 2007 exceeded their earnings. This is a bit harsh, as it is not unusual for a bank holding company to reduce excess capital by increasing its dividend, or to have a bad earnings quarter while maintaining a high dividend. Nevertheless, payout ratios of 100% or more increase the risk of a bank cutting its dividend. Companies can't pay dividends exceeding earnings forever.
  • Nonperforming assets comprising less than 1% of total assets. Banks with good asset quality may still suffer from the housing downturn, but this group has held up well so far.

Five Bank Picks for the Dividend-Minded

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Keep in mind that there are many great banks not on the list.

By excluding those with asset quality problems and with dividend payouts exceeding earnings, our aim was to highlight stocks with limited risk of dividend cuts. As you can see in the Total Return column, all but one of these are down significantly over the past year. Considering how hard several of them have been hit, there may also be strong prospects for price appreciation.

Asset Quality and Earnings

Huntington Bankshares


has the highest dividend yield on the list, at 6.26%. It also has the worst total return over the past year for the group. While the holding company's asset quality is not terrible, problem loans are up significantly from June 2006. The declining asset quality was the main factor in a sharp drop in earnings for the second quarter of 2007, as the company increased its quarterly provision for loan losses by $44 million. Net income for the quarter was $80.5 million, compared with $111.6 million a year ago.

Huntington's adjusted ratio of nonperforming assets to total assets was 0.75%, increasing from 0.47% in June 2006. While this was a large increase, attributed mainly to problems with large credits to home builders in Michigan, Huntington continued to maintain loan-loss reserves exceeding the problem-loan balances. While it is difficult to see how bad Huntington's asset quality could get, the company has been pretty conservative in its reserving.

Even with the large increase in loan loss provisions, the company's dividend does not seem in danger, as its payout ratio is 71%.

Huntington completed its acquisition of Sky Financial Group on June 30, for $3.5 billion in cash and stock. This brought Huntington's total assets up to $50 billion, and added 65 branches in Pennsylvania, Indiana, Michigan and West Virginia. Sky's numbers were not included in Huntington's June 2007 figures.



has been punished less severely than Huntington, with a total return of -12.5% over the past year. FirstMerit's dividend has held steady at 29 cents per quarter for a year, and the dividend yield is a tantalizing 6.15%. More importantly, the company's asset quality has actually improved over the past year, with a ratio of nonperforming assets to total assets of 0.45%, compared with 0.72% a year ago.


raised its quarterly dividend in August, to 64 cents per share from 56 cents per share. The dividend yield is now 5.33%. Wachovia's overall asset quality remains strong, with nonperformers comprising 0.33% of total assets as of June 30, well below our 1% cut-off.

Susquehanna Bancshares


is by far the cheapest stock on the list, relative to book value. Shares slid in late July, when the company announced second quarter earnings of $9.8 million, slipping from $19.3 million a year earlier. The main factor in the earnings decline was a loss of $11.7 million on the sale of securities, as Susquehanna realigned its balance sheet. Susquehanna's dividend payout ratio is the highest on the list, with the company paying out dividends of 85% of earnings during the first half of 2007.

As one would expect in this environment, asset quality declined over the past year, with nonperforming assets of 0.63% of total assets as of June 30, 2007, compared with 0.33% in June 2006. Susquehanna is maintaining solid reserves, with an allowance for loan and lease losses covering 163.7% of nonperforming loans.

Susquehanna has an agreement in place to acquire

Community Banks Inc


, of Harrisburg, Pa., for $860 million in cash and stock. The merger is expected to be completed Nov. 16, and will bring Susquehanna's total assets to about $12 billion, with about 230 branches (after some branch consolidation) in its core market, in Pennsylvania and Maryland.

Finally, Bank of America has made a lot of headlines recently, with its lovely $2 billion purchase of convertible preferred stock from

Countrywide Financial


. It also appears to have shrugged off challenges to its acquisition of LaSalle Bank from

ABN Amro Holding

( ABN). The deal is expected to be completed during the fourth quarter, and will give Bank of America a strong presence in the Chicago market.

Interestingly, Bank of America's quarterly dividend was raised in July, to 64 cents from 56 cents per share. It looks like they were quite an influence on Wachovia, which also increased its dividend to 64 cents from 56 cents per share.

Bank of America's asset quality is strong, with adjusted nonperforming assets comprising 0.34% of total assets, as of June 30, only a slight increase from June 2006, when the nonperforming assets ratio was 0.29%.

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