10 Bank Dividends with Room to Rise

NEW YORK ( TheStreet) -- With investors concerned over a recent dividend cut by Hudson City Bancorp ( HCBK) and a high first-quarter dividend payout ratio for New York Community Bancorp ( NYB), TheStreet has identified a group of 10 bank stocks with decent dividend yields and relatively low payout ratios.

After regulators forced Hudson City Bancorp to restructure its balance sheet as the company's long-term leverage strategy of borrowing from the Federal Home Loan Bank of New Yorkand investing the proceeds in securities backfired in a prolonged low-rate environment, the company announced a first-quarter net loss of $555.6 million and reduced its quarterly dividend to 8 cents a share, from 15 cents a share.

The Wall Street Journal on Monday discussed New York Community Bancorp's attractive dividend yield of 6.2% in its Heard On The Street Column, saying investors were concerned over the bank's first-quarter payout ratio, which TheStreet discussed on April 19, after the company reported first-quarter earnings of $123.2 million, or 28 cents a share, while paying a quarterly dividend of 25 cents a share.

In order to come up with a list of 10 bank stocks with attractive dividend payouts that are well-supported by earnings, we isolated the 10 holding companies with the highest forward dividend yields, that also paid out less than half of their earnings for the previous five quarters.

All data was provided by SNL Financial, and we only included names with three-month average daily trading volume of more than 50,000 shares.

In addition to excluding New York Community Bancorp, this conservative approach excludes many of investors' other favorite bank stocks with generous dividend payouts, including , Valley National Bancorp ( VLY), with a dividend yield of 5.08%, based on a quarterly payout of 17 cents and Monday's closing price of 13.51; People's United Financial ( PBCT), with a dividend yield of 4.74%, based on a 16-cent quarterly dividend and Monday's closing price of $13.30; and First Niagara Financial ( FNFG), with a dividend yield 4.69%, based on a 16-cent quarterly dividend and Monday's closing price of $13.66.

Here are our ten conservative bank dividend stock selections:

10. First Financial Bancorp

Shares of First Financial Bancorp ( FFBC) of Cincinnati closed at $16.43 Monday, down 7% from a year earlier. Based on a quarterly payout of 12 cents, the shares have a forward dividend yield of 2.92%.

The company had $6.3 billion in assets as of March 31, with 114 branches in Ohio, Indiana, Kentucky, and Michigan, and a national lending operation. The company underwent a major expansion in 2009, with the purchase of three failed institutions from the Federal Deposit Insurance Corp.

First Financial reported first-quarter net income of $17.2 million, or 29 cents a share, increasing from $11.6 million, or 17 cents a share, in the first quarter of 2010. The company's first-quarter net interest margin -- the difference between its average yields on loans and investments and its average cost of funds -- was 4.68% according to SNL Financial, which was the highest among the 10 banks listed here, although the margin declined from 4.84% a year earlier, as it was "continued to be negatively impacted by the combination of normal amortization and paydowns in the acquired loan portfolio," according to the company.

First Financial's first-quarter return on average assets (ROA) was 1.10%, according to SNL.

The year-over-year bottom-line improvement reflected a 62% increase in noninterest income, which included $23.4 million in income from FDIC loss-sharing agreements during the first quarter. Excluding that income and similar items, noninterest income increased 16% year-over-year, to $14.9 million during the first quarter.

On April 28, Ross Demmerle of Hilliard Lyons reiterated his neutral rating on the shares, saying that the company appeared "to have more than enough capital with a Tier 1 capital ratio of 20.5% and tangible common ratio of 10.4%.," which "could allow for another dividend increase, stock buybacks or acquisitions."

Demmerle said that "in light of an above average uncertain earnings stream" because of purchase accounting rules for loans acquired from the FDIC, and a price at a "premium price to book and price to earnings valuations," the shares were appropriately valued.

The shares trade for 13 times the consensus 2012 earnings estimate of $1.28 a share, among analysts polled by FactSet.

Out of eight analysts covering First Financial, two rate the shares a buy, while the remaining analysts all have neutral ratings.

9. WesBanco

Shares of WesBanco ( WSBC) of Wheeling, W.V., closed at $19.47 Monday, returning 4% over the previous year. Based on a quarterly payout of 15 cents, the shares have a dividend yield of 3.08%.

The company had $5.4 billion in total assets as of March 31, with 112 branches in West Virginia, Ohio and Western Pennsylvania.

WesBanco reported first-quarter net income of $10.2 million, or 39 cents a share, increasing from $7.9 million, or 30 cents s share, in the first quarter of 2010. The company's provision for credit losses declined to $8 million during the first quarter from $11.5 million a year earlier. Despite a decline in interest revenue, net interest income increased 2% year-over-year to $41.5 million, "due to the management of rates on loans and other earning assets, while significantly improving the funding mix to reduce overall cost of funds for both deposits and other borrowings."

The first-quarter net interest margin was 3.63%, increasing from 3.54% a year earlier. The first-quarter ROA was 0.76%.

After the first-quarter earnings release, Kenneth James of Sterne Agee reiterated his neutral rating on the shares, although he increased his 2011 earnings estimate for WesBanco by 12 cents to $1.57 a share, and his 2012 estimate by 10 cents to $1.70, calling the company's results "a solid quarter." While James said the shares were "attractively valued relative to peers," he also said that "going forward, upside surprises likely will be more difficult given increased estimates, limited additional net interest margin upside and lack of loan growth."

The shares trade for 11 times the consensus 2012 earnings estimate of $1.79 a share.

One of the eight analysts covering WesBanco rates the shares a buy, while the remaining analysts all have neutral ratings.

8. Cullen/Frost Bankers

Shares of Cullen/Frost Bankers ( CFR) of San Antonio closed at $58.19 Monday, returning 5% over the previous year. Based on a quarterly payout of 46 cents, the shares have a dividend yield of 3.16%. The dividend was increased by a penny on April 28.

First-quarter net income was $51.9 million, or 85 cents a share, increasing from $47.8 million, or 79 cents a share, during the first quarter of 2010. The provision for possible loan losses declined to $9.5 million during the first quarter from $13.6 million a year earlier. Net interest income increased 3% year-over-year to $141.8 million in the first quarter.

The net interest margin was 4.03% for the first quarter, increasing from.93% in the fourth quarter, but declining from 4.19% in the first quarter of 2010. The first-quarter ROA was 1.17%.

During the company's earnings conference call on April 27 following the earnings announcement, CEO Richard Evans warned that some lenders were returning to shoddy underwriting practices that led to the credit crisis, saying "It appears that some banks are at it again. In a period of historically low interest rates and very high liquidity, they're compromising sound lending practices in search of a higher return."

Following the earnings release, Michael Diana of Cantor Fitzgerald reiterated his buy rating on the shares with a $73 price target, saying that as the economy improves, his firm expects Cullen/Frost to report "a surge in net interest income," from "powerful loan growth, driven by Cullen/Frost's market share gains during the downturn," and a much higher net interest margin, "driven by asset sensitivity" in a rising rate environment.

The shares trade for 15 times the consensus 2012 earnings estimate of $3.84 a share, which is the highest valuation by this measure among the 10 banks listed here.

Diana is the only one out of 15 analysts covering Cullen/Frost to rate the shares a buy. Among the remaining analysts, 13 have neutral ratings and one analyst recommends selling the shares.

7. Provident Financial Services

Shares of Provident Financial Services ( PFS) of Iselin, N.J., closed at $13.99, returning 13% over the previous year. Based on a quarterly payout of 12 cents, the shares have a dividend yield of 3.43%. The company raised the dividend a penny on April 28, when it reported its first-quarter results.

First-quarter net income was $12.9 million, or 23 cents s share, increasing from $11.2 million, or 20 cents s share, in the first quarter of 2010. The first-quarter provision for loan losses declined to $7.9 million from $9 million a year earlier. Net interest income increased 5% year-over-year, as funding costs declined.

The net interest margin increased to 3.47% in the first quarter from 3.31% a year earlier, according to SNL Financial, as funding costs declined. The first-quarter ROA was 0.76%.

Following the earnings release, Matthew Kelly of Sterne Agee reiterated his neutral rating on the shares, pointing out some coming expense reductions, as "FDIC insurance premiums are set to decline by 37% or $0.7 mil. per quarter," and the company will also be consolidating its administrative offices. Kelly increased his 2011 earnings estimate for Provident Financial to $1.06 a share from a dollar, and his 2012 earnings estimate to $1.12 a share, from $1.10.

The shares trade for 12 times the consensus 2012 earnings estimate of $1.17 a share.

Out of seven analysts covering Provident Finance Services, three rate the shares a buy, while the remaining analysts all have neutral ratings.

6. NBT Bancorp

Shares of NBT Bancorp ( NBTB) of Norwich, Conn., closed at $21.66 Monday, down 9% from a year earlier. The shares have a dividend yield of 3.69%, with a quarterly payout of 20 cents.

The company had $5.5 billion in total assets as of March 31 with over 120 branches in central and upstate New York, Vermont, and northeastern Pennsylvania.

During the first quarter, the company repurchased roughly 107,871 common shares and said it was authorized to buy back roughly 868,000 more under its current buyback program

First-quarter net income was $14.3 million, or 41 cents a share, increasing slightly from $14 million, or 41 cents a share a year earlier. The first-quarter provision for loan losses declined to $4 million from $9.2 million a year earlier. Net interest income declined 3% from a year earlier to $49.4 million. Noninterest income declined slightly year-over-year to $20.1 million, while noninterest expense increased 7% to $45.1 million.

NBT's first-quarter ROA was 1.06%.

Following the earnings announcement, David Darst of Guggenheim Securities reiterated his "buy" rating on NBT's shares with a price target of $26, saying the stock was trading at a "discount to Mid-Atlantic peers," despite the company's "strong profitability."

The shares trade for 12 times the consensus 2012 earnings estimate of $1.81 a share.

All three analysts covering NBT Bancorp have neutral ratings on the shares.

5. Bank of Hawaii

Shares of Bank of Hawaii ( BOH) of Honolulu closed at $47.68 Monday, down 2% from a year earlier. The shares have a dividend yield of 3.78%, based on a quarterly payout of 45 cents.

During the first quarter the company repurchased about 443,000 shares for $20.8 million and said that as of March 31, it was authorized to buy back another $43.1 million worth of common shares.

The company had $13 billion in total assets as of March 31, and has been one of the strongest and most consistent earnings performers among large U.S. banks through the credit crisis. Its first-quarter return on average assets of 1.31% was second-highest among this group of 10 bank holding companies, although it declined from 1.73% a year earlier.

First-quarter net income was $42.4 million, or 88 cents a share, declining from $52.7 million, or $1.09 a share, in the first quarter of 2010. Net interest income declined 7% from a year earlier to $99.7 million "as growth in commercial lending and residential mortgages were offset by continued declines in home equity, auto lending, and other consumer loans."

Noninterest income totaled $53.9 million for the first quarter, declining from $71.8 million a year earlier, mainly because the prior period included $20 million in gains on securities investments, which declined to $6.1 million in the first quarter. Service charges on deposit accounts declined to $9.9 million in the first quarter from $13.8 million a year earlier, from new rules that went into effect last July, requiring banks only to provide expensive overdraft protection on ATM and debit card transactions to customers who opt-in for the service.

After the first-quarter results were announced, Brett Rabatin of Sterne Agee reiterated his neutral rating on Bank of Hawaii, saying that the company's stock buyback appeared to be sustainable.

The shares trade for 14 times the consensus 2012 earnings estimate of $3.40 a share.

Out of 14 analysts covering Bank of Hawaii, four rate the shares a buy, nine have neutral ratings and the remaining analyst recommends selling the shares.

4. Flushing Financial Corp.

Shares of Flushing Financial Corp. ( FFIC) of Lake Success, N.Y., closed at $13.63 Monday, down slightly from a year earlier. Based on a quarterly payout of 13 cents, the shares have a dividend yield of 3.82%.

The company had $4.3 billion in total assets as of March 31, with 16 branches in Queens, Brooklyn and Manhattan, as well as in Nassau County, in New York.

First-quarter net income was $8 million, or 26 cents a share, essentially unchanged from a year earlier. During the first quarter, a $3.6 million impairment charge on a private label collateralized mortgage obligation was offset by an 11% year-over-year increase in net interest income, to $37.2 million. The net interest margin expanded to 3.62% during the first quarter from 3.39% a year earlier, "primarily due to a reduction in the cost of funds."

The first-quarter ROA was 0.74%.

After the first-quarter earnings announcement, David Darst of Guggenheim Securities reiterated his "buy" rating on Flushing Financial with a $17 price target, despite lowering is 2011 EPS estimate by 4 cents to $1.26, in order to reflect the first-quarter results. The analyst maintained his 2012 earnings estimate of $1.45 and said his price target anticipated "earnings power improvement" from net interest margin expansion and growth, along with improving credit trends.

The shares trade for 10 times the consensus 2012 earnings estimate of $1.38 a share.

Four out of six analysts covering Flushing Financial rate the shares a buy, while the remaining analysts have neutral ratings.

3. Community Bank System

Shares of Community Bank System ( CBU) of De Witt, N.Y., closed at $24.21 Monday, returning 2% over the previous year. Based on a quarterly payout of 24 cents, the shares have a yield of 3.97%.

The company in April completed its acquisition of Wilber Corp. of Oneonta, N.Y., bringing its total assets to approximately $6.3 billion, with roughly 170 customer facilities in upstate New York and northeastern Pennsylvania.

First-quarter net income was $16.2 million, or 48 cents a share, increasing from $14 million, or 42 cents a share, in the first quarter of 2010. Net interest income increased 5% year-over-year to $45.5 million in the first quarter, from a decline in funding costs. The first-quarter provision for loan losses was $1.1 million, declining from $1.8 million a year earlier.

The first-quarter net interest margin increased to 4.02% from 3.87% a year earlier, according to SNL. The first-quarter ROA was 1.18%.

Following the earnings release, David Darst of Guggenheim securities reiterated his neutral rating with on Community Bank System's shares, with a $27 price target, while raising his 2011 earnings estimate by six cents to $2.01 a share, and increasing his 2012 estimate by three cents to $2.08. Darst said the bank's valuation was in line with "banks in the Mid-Atlantic and New England with a similar profitability profile."

The shares trade for 12 times the consensus 2012 earnings estimate of $2.08 share.

Out of six analysts covering Community Bank System, two rate the shares a buy, while the remaining analysts all have neutral ratings.

2. Dime Community Bancshares

Dime Community Bancshares ( DCOM) of Brooklyn has seen its stock return 5% over the past year, closing Monday at $13.95. Based on a quarterly payout of 14 cents, the shares have a dividend yield of 4.01%.

Dime had $4.1 million in total assets as of March 31, with 26 branches in Brooklyn, Queens and the Bronx, as well as in Nassau County in New York.

First-quarter net income was $11.1 million, or 33 cents a share, increasing from $9.5 million, or 28 cents a share, during the first quarter of 2010. The provision for loan losses declined to $1.4 million from $3.4 million a year earlier. Net interest income increased 7% year-over-year, to $35 million.

The company reported that a decline in its portfolio yield was "offset by prepayment fee income, which contributed meaningfully to net interest margin." The first-quarter net interest margin was 3.62%, declining from 3.71% in the fourth quarter, but rising from 3.46% a year earlier.

Dime's first-quarter ROA was 1.08%.

After the first-quarter results were announced, Matthew Kelley of Sterne Agee reiterated his neutral rating on Dime Community, saying the company had achieved "another solid quarter" and had "maintained strong credit and capital metrics" through the recession. While the analyst said the shares were fairly valued, he estimated "potential terminal value" ranging from $17 to $19 a share, "or 10x-11.5x pro forma 2012 earnings with 25% cost saves."

Kelly lowered his 2011 earnings estimate for Dime by a nickel to $1.29 a share, and his 2012 estimate by six cents to $1.30.

The shares are trading for 10 times the consensus 2012 earnings estimate of $1.41 a share.

Two of the eight analysts covering Dime Community rate the shares a buy, while the remaining analysts all have neutral ratings.

1. City Holding Company

Shares of City Holding Company ( CHCO) of Charleston, W.V., closed at $32.30 Monday, down 3.5% from a year earlier. The stock is the highest-yielding among this group of 10 bank holding companies, with a yield of 4.21%, based on a quarterly payout of 34 cents.

The company had $2.7 billion in total assets as of March 31, with 68 offices in West Virginia, Kentucky, and Ohio.

During the first quarter, City Holding Company repurchased 270,745 common shares, and said that as of March 31, it was authorized to buy back roughly 294,000 more shares under its current buyback plan.

First-quarter net income was $9.6 million, or 62 cents a share, increasing from $9.3 million, or 58 cents a share, during the first quarter of 2010. For both periods, the provision for loan losses was $1.1 million. Net interest income declined 3% year-over-year, to $22.8 million, which was mostly offset with an increase in noninterest income, which mainly reflected securities losses booked in the prior period.

Service charge income declined 11% year-over-year to $9.1 million during the first quarter, showing the effects of the Electronic Funds Transfer Act and Federal Reserve Board Regulation E, with the new "opt-in rules" for expensive overdraft protection on ATM and debit transactions and the "implementation of an enhanced customer service providing 'real-time' processing of electronic transactions," combining to reduce checking account service fees.

Despite the fee revenue decline, City Holding Company's first-quarter ROA of 1.44% was the highest among this group of 10 banks.

Following the company's first-quarter earnings announcement, Kenneth James of Sterne Agee reiterated his neutral rating on the shares, saying they were likely to remain bound within a range of $30 to $35. The analyst lowered his 2011 earnings estimate by seven cents to $2.44 a share, and his 2012 estimate by 12 cents to $2.64 a share.

City Holding Company's tier 1 leverage ratio of 10.24% and tangible common equity ratio of 9.63% show the company is very strongly capitalized. With the capital strength and a business model under pressure as fees decline, it's no surprise that the company said at a KBW 2011 Bank Boston Conference in March that it is actively seeking acquisitions in its market area, targeting banks with assets between $100 million and $1 billion.

The shares trade for 12 times the consensus 2012 earnings estimate of $2.65 a share.

All nine analysts covering City Holding Company have neutral ratings on the shares.

>>To see these stocks in action, visit the 10 Bank Dividends with Room to Rise portfolio on Stockpickr.

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

To contact the writer, click here: Philip van Doorn.

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To submit a news tip, send an email to: tips@thestreet.com.
Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.

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