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Six U.S. banks with solid dividends Add to ...

An analysis of publicly-traded U.S. bank holding companies by TheStreet highlights six bank stocks with attractive dividend yields and strong prospects for growth.

A stable dividend exceeding 4 per cent is quite compelling considering how low interest rates are. Based on first quarter regulatory data and market data from Friday's close provided by SNL Financial, we narrowed down the list using the following criteria:

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  • Bank and thrift holding companies publicly-traded in the U.S., excluding the PinkSheets.
  • Dividend yield greater than 4 per cent as of Friday's close.
  • Price-to-tangible-book ratio below 2.
  • Three-month average trading volume over 25,000 shares.
  • Texas ratio below 20 per cent.

The Texas ratio is a bank's ratio of nonperforming loans and securities to core capital and loan loss reserves, and was among the key ratios investors and regulators focused on as the real estate bubble burst. A Texas ratio of 40 per cent is typically considered a threatening level, depending of course on a bank's overall level of capital and reserves. Keeping our picks below a 20 per cent Texas ratio is pretty conservative.

Limiting the group to bank stocks selling for less than two times tangible book value is also conservative, limiting downside risk over the short term. Most of these bank and thrift holding company stocks sold at higher levels relative to book value at the end of 2007 and 2006, before the crisis hit.

This approach also excludes some compelling bank plays with high dividends, such as New York Community Bank, with shares yielding 6.25 per cent but selling for 2.4 times tangible book, after rising 14 per cent year-to-date.

Hudson City Bancorp

Shares of Hudson City Bancorp closed at $13.01 (U.S.) on Friday and yielded 4.61 per cent, based on a quarterly payout of 15 cents a share. Hudson City of Paramus, N.J. is the largest bank or thrift holding company among our dividend picks, with $61-billion in total assets. It is also a very conservative choice, with improving earnings and minimal loan losses through the real estate crisis.

Main subsidiary Hudson City Savings Bank is one of the most efficient banks or thrifts in the entire industry, with an efficiency ratio of just 21.18, compared to a national aggregate of 55.53 for all U.S. banks and thrifts, according to the Federal Deposit Insurance Corporation.

The efficiency ratio is, roughly, the number of pennies of expense for every dollar of revenue earned. Hudson City's amazing efficiency is what enables the thrift to post decent earnings despite a narrow net interest margin of 2.21 per cent for 2009, compared to 3.47 per cent for the industry.

The margin is the difference between a bank or thrift's average yield on earning assets and its average cost of funds. With the company having already applied with regulators to convert its main subsidiary from a thrift to a commercial bank, Hudson City will have an opportunity to continue improving its spread by diversifying its lending activity.

This quality stock is downright cheap, selling at just 1.2 times tangible book value. Shares are going for 10.8 times current earnings, and a low 9.6 times the earnings for 2012 projected by analysts polled by Thomson Financial. A good indicator of just how much upside potential the shares have over the long haul is that Hudson City's P/E at the end of 2008 was 16, well below its range from 23.3 to 26.7 at the end of the previous three years. And you get paid so nicely as you wait.

Peoples United

Peoples United closed at $14.55 on Friday and, based on a quarter dividend of 15.5 cents, shares were yielding 4.26 per cent. Peoples United has been a volatile stock over the past year, and one reason the dividend yield is so attractive is that shares have dropped 11 per cent year-to-date, through Friday. The Bridgeport, Conn. thrift holding company's results remained positive but mediocre through the crisis, with a return on average assets ranging from 0.26 per cent to 0.51 per cent, while a reasonable target would be 1 per cent. Earnings were weak in the first quarter of 2010 because of merger and systems conversion expenses.

The company's dividend appears safe though because the bank has weathered the crisis well and has a very high level of capital, with a total risk-based capital ratio of 21.24 per cent as of March 31 -- more than twice the level needed for it to be considered well capitalized by regulators.

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