Three Bank Stocks With Outsized Dividends

NEW YORK ( TheStreet) -- A select group of bank stocks are paying outsized dividends and remain values while their larger peers are in danger of topping out in the stock-market rally.

The biggest banks are paying next to nothing. Investors get zilch from Citigroup ( C). Bank of America ( BAC) and Wells Fargo ( WFC) flip a few coins to stockholders. Even the high-flying JPMorgan Chase ( JPM) pays a nominal quarterly dividend of five cents a share.

Following's recent look at three undervalued banks, which was based on price-to-book ratio, asset quality and consistency of earnings, here are three banks in good financial shape that pay dividends that would be compelling in a bull or a bear market: New York Community Bancorp ( NYB), United Bankshares ( UBSI) and Capitol Federal Financial ( CFFN).

We limited our selection to banks that aren't participating in the Troubled Asset Relief Program with nonperforming assets that are less than 1.5% of the total. Also excluded were a few high-dividend payers with low stock-trading volume. SNL Financial provided the data.

New York Community Bancorp

New York Community Bancorp, which does business in New York state and parts of New Jersey, pays 25 cents a share, translating to a yield of 9.43%.

The company has paid that dividend since the second quarter of 2002, but the stock has languished. That reflects investor concerns the payout may be cut, since the company's ratio of cash dividends paid over income before extra items exceeded 100% over the past three years and the first three quarters of 2009.

Chief Executive Officer Joseph Ficalora has said repeatedly that New York Community is "genuinely committed" to maintaining the dividend, and with the company's common equity boosted by $99 million in third-quarter earnings, an exchange of preferred shares, along with the issuance of $65 million in common shares through direct purchases of additional shares by stockholders, the company's tangible common equity ratio increased to 6.03% as of Sept. 30, from 5.59% in the previous quarter.
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Another worry is that the nonperforming-assets ratio increased to 1.45% from 1.04%. Then again, with nearly three-quarters of the loan portfolio secured by apartment buildings with mainly rent-controlled or rent-stabilized dwellings with below-market rents, actual loan losses have been minimal. The low-risk loan collateral, along with relatively small average loan-to-value ratios of 61% on multifamily mortgages and 54% on commercial real-estate loans, have enabled the company to avoid large loan losses.

The annualized ratio of net charge-offs to average loans was a tiny 0.03% for the third quarter, and has remained below 0.05% this year.

A bright spot for New York Community in the third quarter was a net interest margin (the difference between the average yield on loans and investments and the average cost of deposits and borrowings) of 3.17%, up from 3.06% in the previous quarter and 2.68% a year earlier.

The improved margin helped the company increase its return on average assets to a respectable 1.39% for the third quarter, up from 1.10% in the second quarter and 1.22% a year earlier.

New York Community's shares have fallen 12% this year, trading near the low end of a 52-week range of $8 to $15. They're at 9.5 times earnings, 0.7 times book value and 2.1 times tangible book value. The stock is up 24% over one year.

United Bankshares

United Bankshares of Charleston, W. Va., pays a 29-cent quarterly dividend, or a yield of 6.8%.
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The company, with $8 billion in assets, has seen it shares drop 46% this year. The stock rallied from March until May, but pulled back when United Bankshares announced lower second-quarter earnings from $21.4 million in loan charge-offs.

During the third quarter, charge-offs declined to $4.9 million, the lowest in more than a year. Earnings recovered, with net income of $17.4 million, or 40 cents a share, and a return on average assets of 0.88%. While there was still lot of room for improvement in profits, the company boasted a net interest margin of 3.63%, down slightly from 3.67% in June and 3.71% a year earlier.

The nonperforming-assets ratio was 1.45% as of Sept. 30, up from 1.31% in the previous quarter and 0.77% a year earlier.

United Bankshares paid out much less in dividends than the company earned during the first three quarters of 2009. Over the previous three years, the dividend payout ratio was below 60%. According to SNL, the company's tangible common equity ratio was a decent 5.84% as of Sept. 30.

United Bankshares reported a tier 1 leverage ratio of 8.93% and total risk-based capital ratio (which reflects loan quality and reserve coverage) as of Sept. 30, considerably higher than the 5% and 10% ratios required for most banks to be considered well-capitalized under regulatory guidelines.

For United Bankshares, the dividend appears safe. The stock is trading at 10.3 times current earnings and 1.65 times tangible book value.

Capitol Federal Financial

Capitol Federal Financial is a thrift with headquarters in Topeka, Kan. It had $8.4 billion in assets as of June 30. The company's 50-cent quarterly dividend represents a yield of 6.74%.

Capitol Federal Financial said yesterday that fiscal 2009 net income, ending on Sept. 30, rose 29% to $66.3 million, or $3.15 a share. While it's not a stellar earnings performer, with a return on assets of 0.81% for fiscal 2009, Capitol Federal's dividend appears safe. The company has maintained excellent credit quality through the financial crisis and had a strong tangible common equity ratio of 10% as of Sept. 30. Regulatory capital ratios for main subsidiary Capitol Federal Savings weren't yet available for the third quarter, but the thrift's total risk-based capital ratio was a high 23.07% as of June 30.

The net interest margin for fiscal 2009 was 2.20%, increasing from 1.75% in the previous fiscal year, with the improvement attributed to lower funding costs. Still, the industry average for the second quarter was 3.43%.

Capitol Federal is paying a special annual dividend of 29 cents a share. Factoring in the special payout, the company's earnings more than cover its dividends, with an adjusted ratio of dividends paid out to net income of 72%. A year earlier, the company paid a special dividend of 11 cents a share.

The company is mainly a single-family mortgage lender, but has followed a strategy for several years of supplementing its deposit funding through Federal Home Loan Bank advances, and maintaining a quarter of its assets in mortgage-backed securities.
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When asked about the possibility of the company's net interest margin suffering when short-term interest rates begin to rise, Chief Financial Officer Kent Townsend told that Capitol Financial had locked in some lower rates for the long term, with "our customers wanting to go out three to four years" on CD deposits. The company also restructured $875 million in borrowings from the Federal Home Loan Bank, increasing the average term for those types to 66 months from about one year, and lowering its average cost for that funding by 130 basis points.

Townsend said the company's mortgage-backed securities portfolio mainly comprises securities issued by Fannie Mae ( FNM) and Freddie Mac ( FRE), and hasn't suffered from ratings downgrades.

Capitol Federal's shares have fallen 31% this year and are selling for 2.4 times tangible book value and a trailing price-to-earnings ratio of 9.4.

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