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The following story is the second in a series highlighting investment opportunities among the most strongly capitalized community and regional banks and thrifts with high prospects for growth. The first strong banks story was published yesterday.



) --'s

series on banks and thrifts with excellent growth and expansion prospects began with the two largest companies on the following list,

People's United Financial

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, which has agreed to acquire

Financial Federal

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, and

Hudson City Bancorp


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We narrowed the list of 920 publicly traded U.S. banks and thrifts for which September financial information was available (provided by SNL Financial), using the following criteria: tangible common equity ratio above 7%; positive return on assets for the first three quarters of 2009; nonperforming-assets ratio less than 2%; ratio of loans/total assets above 50%; year-to-date net charge-offs of less than 1% of average loans; average trading volume above 50,000 shares a day; any Troubled Asset Relief Program (TARP) has been repaid; total assets over $5 billion.

While it might seem counter intuitive, look for weaknesses when considering bank stocks that might benefit most in the economic recovery. Yesterday's profile on Hudson City Bancorp highlighted the company's narrow net interest margin, which is far behind the industry average.

The third company on the list is

Cullen/Frost Bankers

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of San Antonio. Primarily a commercial lender, the company had a 4.2% net interest margin for the first three quarters of the year, the highest of the group.

Cullen/Frost also had the highest return on average assets (ROA) for the first three quarters, at 1.1%, down from 1.53% in the previous year, with provisions for loan-loss reserves taking a toll.

The bank's shares have returned 4% this year and are relatively pricey, closing at 2.1 times tangible book value, the second-highest in our comparison. Then again, during more "normal" years such as 2006 and 2007, when the company's return on average assets exceeded 1.6%, the stock was trading at higher than three times tangible book value.

Over the past year, nonperforming assets (including loans past due 90 days or in nonaccrual status, along with repossessed real estate) have increased, comprising 1.52% of total assets as of Sept. 30. The annualized ratio of net charge-offs (actual loan losses) to average loans was 0.76% for the first three quarters of the year. Yet, Cullen/Frost stayed well ahead of that pace, with reserves covering 1.44% of total loans at the end of the third quarter.

Cullen/Frost increased total deposits 23% over the year ended Sept. 30, and the all-important non-interest-bearing demand deposits rose 20%, to $4.3 billion, or 34% of total deposits. That cheap funding is a major component in the company's strong net interest margin -- and continued success.

With Texas entering the recession later than regions more acutely affected by the real-estate bubble, Cullen/Frost will probably be working through problem loans for some time, but with its excellent earnings track record, strong capital base and amazing deposit growth, the company will be buttressed by the economic recovery.

-- Reported by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.