Updated with comments on USB from KBW analyst Greg Ketron.

NEW YORK ( TheStreet) -- A common theme for bank stock investors in 2012 is the group's expected return of capital to investors, through share buybacks and/or dividend boosts following the completion of Federal Reserve stress tests in March, can support share prices that have recovered quite a bit so far this year.

While executives tend to prefer the "flexibility" of share buybacks when returning capital, many investors prefer just the opposite. A reasonable and steady dividend gives the investor a choice to reinvest or enjoy the income, and provides some support for share prices, as long as the market perceives that earnings are sufficient to support the continued payout.

Buybacks can backfire on occasion, as they did for JPMorgan Chase ( JPM) during the third quarter, when the company bought back $4.4 billion worth of common shares at an average price of $34.72.

After the company reported its third-quarter results on Oct. 13, CEO James Dimon apologized to investors over the timing of the share buybacks, since the share price had declined significantly, closing at $33.20 the previous day.

During the company's fourth-quarter earnings conference call, Dimon indicated a continued preference for buybacks, since JPMorgan Chase was trading below book value.

Then again, investors might prefer to have a choice on whether or not to reinvest a juicier dividend, at today's low price multiples.

Interested in more on JPMorgan Chase? See TheStreet Ratings' report card for this stock.

Morgan Stanley analyst Betsy Graseck said on Monday that she expects all the banks covered by her firm "to hike dividends in 2012," with "median 44% total payout ratioin 2012," with some exceptions, including Regions Financial ( RF) and Bank of America ( BAC).

Regions is in the midst of a transition in its business, with the pending sale of its Morgan Keegan subsidiary to Raymond James Financial ( RF), for "total consideration of $1.18 billion."

The Birmingham, Ala., lender won't be in a position to return capital to investors any time soon, and depending on when the company chooses to request regulatory permission to repay the $3.5 billion in federal bailout funds it received through the Troubled Assets Relief Fund, or TARP, the company will be raising common equity through a public offering of shares.

After the Morgan Keegan deal was announced on Jan. 11, Deutsche Bank analyst Matt O'Connor reiterated his "Buy" rating for Regions, with a $5 price target, and said that his earnings estimates included "the impact of $1b common issuance to repay TARP." O'Connor estimates that Regions will earn 44 cents a year in 2012.

Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.

Bank of America may also be one of the last of the large U.S. bank holding companies to see a significant dividend boost.

The company was able to significantly boost its Basel I Tier 1 common equity ratio to 9.86% as of Dec. 31 from 8.60% the previous quarter, through continued asset sales, including shares of China Investment Bank, and the issuance of additional common shares and the retirement of some preferred shares and long-term debt during the fourth quarter, however, analysts have been lowering their earnings estimates for Bank of America, because of the company's reduction in earning assets.

In light of the company's ongoing transition and the uncertainty over its ultimate exposure to mortgage putback claims springing from the disastrous purchase of Countrywide Financial in 2008, the Fed can be expected to show reluctance to approve a significant return of capital to investors, after rejecting Bank of America's capital plan following the 2011 stress tests.

Interested in more on Bank of America? See TheStreet Ratings' report card for this stock.

Moving on to the bank holding companies that appear primed and ready for dividend increases, TheStreet has identified five that have posted relatively strong earnings results over the past year, with fourth-quarter ratios of dividend payout to earnings of less than 30% during the fourth quarter, according to HighlineFI.

We narrowed down the list to actively traded names with average daily trading volume of at least 50,000 shares, for which fourth-quarter data was available on Friday from HighlineFI. All five of these companies have achieved a return on average assets (ROA) of at least 0.95% for each of the past five quarters.

These five names could all afford a significant dividend boost. Three of them need to wait until the Fed completes its stress tests. Here they are, counting down by forward price-to-earnings ratios:

5. Prosperity Bancshares

Prosperity Bancshares ( PB) of Houston has seen its stock rise 2% year-to-date, closing Friday at $41.32. Based on a quarterly payout of 17.5 cents, the shares have a dividend yield of 1.74%.

The company has been expanding a series of small deals, including an agreement announced on Jan, 19 to buy The Bank Arlington, with one office in Arlington, Texas and total assets of $37 million, following the completed purchase earlier this month of Texas Bankers of Austin, which included three branches and roughly $71 million in assets. Prosperity also has a pending deal announced on Dec. 9, to acquire East Texas Financial Services ( EFBT) of Tyler, for about $20 million.

Prosperity reported fourth-quarter net income of $36.4 million, or 77 cents a share, which was flat from the third quarter, but up from $32.8 million, or 70 cents a share, a year earlier.

The company bucked the industry trend, with income from debit card and ATM fees increasing to $4.2 million in the fourth quarter from $3.9 million the previous quarter and $3.3 million a year earlier, despite the Federal Reserve's implementation of the Durbin Rule's limits on debit card interchange fees, on Oct. 1.

Total loans increased slightly during the fourth quarter and 8% year-over-year, to $3.8 billion as of Dec. 31.

Coveted noninterest-bearing deposit balances grew 6% sequentially and 18% year-over-year, to $1.98 billion as of Dec. 31.

The fourth-quarter net interest margin -- the difference between a bank's average yield on loans and investments and its average cost for deposits and borrowings -- was 3.82%, narrowing from 4.02% the previous quarter and 3.99% a year earlier, with the fourth-quarter margin "impacted by increased amortization expense from the securities portfolio."

The company's ROA has ranged between 1.41% and 1.50% over the past five quarter, according to HighlineFI.

The shares have a rather high valuation in the current market, reflecting Prosperity's expansion and strong earnings, trading for 3.1 times tangible book value, according to HighlineFI, and for 14 times the consensus 2012 earnings estimate of $3.02 a share, among analysts polled by Thomson Reuters.

Prosperity is clearly a growth story, but the earnings could support a dividend increase.

FBR analyst Scott Valentin on Jan. 23 reiterated his "Market Perform" rating for Prosperity Bancshares, with a price target of $42, describing the company as "among the best-managed institutions in our coverage Universe," and "saying that the company's small recent acquisitions "reflect the company s willingness to transact accretive deals that enhance its deposit franchise, and as an alternative use for capital given the lack of loan growth."

Reversing direction, Valentin added that although the company is expected to continue being "an opportunistic acquirer," Prosperity's "attractive deposit franchise makes the company an attractive takeout target for a larger bank looking for an entry point into the Texas market."

Interested in more on Prosperity Bancshares? See TheStreet Ratings' report card for this stock.

4. East West Bancorp

East West Bancorp ( EWBC) of Pasadena, Calif., closed at $21.99 Friday, returning 11% year-to-date. The company announced on Jan. 20 that it would double its quarterly dividend during the first quarter, to 10 cents a share. Based on the new payout, the forward dividend yield on the shares is 1.82%.

The company also announced a new stock repurchase authorization, to buy back up to $200 million worth of common shares.

East West Bancorp reported fourth-quarter earnings available to common shareholders of $64.5 million, or 43 cents a share, increasing from $60.7 million, or 41 cents a share in the third quarter, and $32.2 million, or 22 cents a share, in the fourth quarter of 2010.

The year-over-year earnings increase reflects a decline in the quarterly provision for loan losses to $20 million from $29.8 million, and the prior year period's net decrease in Federal Deposit Insurance Corp. indemnification assets of 36 million, related to earlier failed-bank acquisitions. The indemnification assets declined by $20.4 million during the fourth quarter of 2012.

The net interest margin was a strong 4.13% in the fourth quarter, increasing from 3.98% the previous quarter, but following a trend for most regional banks in the prolonged low-rate, declining from 4.43% a year earlier.

Total loans increased 2% during the fourth quarter to $14.5 billion as of De. 31, with commercial and trade financing loans growing 4% to $3.1 billion, and single family mortgage loans growing 18%, to $1.8 billion.

Average noninterest-bearing deposits grew 7% during the fourth quarter and 30% year-over-year, to $3.5 billion, as of Dec. 31.

East West Bancorp's ROA has ranged between 1.07% and 1.21%, over the past five quarters.

Sterne Agee analyst Brett Rabatin on Jan. 23 reiterated his "Buy" rating for East West Bancorp and raised his price target by two dollars to $25, counting on "outperformance for the shares is likely as a higher valuation ensues from less consternation about the net interest margin as run-off of covered assets occurs." The higher price target is based on a multiple of 12.5 times the analyst's 2013 EPS estimate of $2.2.

The shares trade for 1.8 times tangible book value and for 12 times the consensus 2012 EPS estimate of $1.79.

Interested in more on East West Bancorp? See TheStreet Ratings' report card for this stock.

3. U.S. Bancorp

Shares of U.S. Bancorp ( USB) closed at $27.86 Friday, returning 3% year-to-date. Based on a quarterly payout of 12.5 cents, the shares have a dividend yield of 1.79%.

The company on Friday purchased the failed BankEast of Knoxville, Tenn., from the FDIC, picking up 10 branches and roughly $269 million in deposits.

The Minneapolis lender reported fourth-quarter earnings of $1.35 billion, or 69 cents a share, improving from $1.27 billion, or 64 cents a share, during the third quarter, and $974 million, or 49 cents a share, during the fourth quarter of 2010. The company has been one of the strongest earnings performers among regional banks, with its ROA increasing from 1.37% in the fourth quarter of 2010 to 1.61% in the most recent quarter, according to HighlineFI.

Please see TheStreet's detailed earnings coverage for more on U.S. Bancorp's fourth-quarter results.

During the fourth quarter, the company repurchased 6 million shares under its 50 million share authorization.

CEO Richard Davis said on Jan. 18 when the company announced its fourth-quarter results that following the stress tests, U.S. Bancorp was looking "forward to moving closer to our long-term goal of returning a majority of our earnings to shareholders in the form of dividends and buybacks," and that "raising the dividend is a top priority for our senior management and Board of Directors, and our shareholders deserve to be rewarded for their investment in our Company."

U.S. Bancorp certainly has plenty of room to raise the dividend significantly.

J.P. Morgan analyst Vivek Juneja on Jan. 20 reiterated his "Overweight" rating for USB, with a price target of $35.50, saying "favorable business mix, growth in some revenues, including investment banking, above-average earnings and tangible book value growth and defensive role in times of economic uncertainty," and that "in addition, USB is likely buying back stock given strong capital ratios."

KBW analyst Greg Ketron on Wednesday reiterated his "Buy" rating on U.S. Bancorp, with a $35 price target, and said "USB has the most optimal banking model for the current environment and has a proven track record of best in group performance and return metrics," and that "owning USB over the past ten years would have earned investors the top return in the group." Ketron said that KBW's own stress test analysis indicates that U.S. Bancorp "is positioned for the highest return of capital in 2012," with $9 billion in excess Tier 1 common equity. "Given USB's history of 80%+ payouts, we expect an increase in the div yield to 3%," he said.

The shares trade for 2.6 times tangible book value, and for 10 times the consensus 2012 EPS estimate of $2.68. While the price-to-book ratio is quite a premium to other large regional bank stocks, the forward P/E is not such a high premium, and with USB, you have the "gold standard" among regional banking names, with earnings performance through thick and thin.

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

2. Fifth Third Bancorp

Shares of Fifth Third Bancorp ( FITB) closed at $13.23 Friday, returning 4% year-to-date. Based on a quarterly payout of eight cents, the shares have a dividend yield of 2.12%.

Fifth Third followed the fourth-quarter trend of for many of the large regional players, but saw revenue pressure, mainly from the Durbin rule limiting debit card interchange fees.

Fourth-quarter earnings available to common shareholders were $305 million, or 33 cents a share, declining from $373 million, or 40 cents a share, in the third quarter, but increasing from $270 million, or 33 cents a share, in the fourth quarter of 2010.

During the fourth quarter, the company took a $54 million pretax charge related to "changes in the fair value of a swap liability that Fifth Third entered into in conjunction with its sale of Class B Visa shares in 2009," along with a $14 million charge "to increase litigation reserves associated with bankcard association membership."

card and processing revenue decline to $60 million from $78 million the previous quarter and $81 million a year earlier.

Please see TheStreet's detailed earnings coverage for more on Fifth Third's margin, loan and deposit growth, and credit quality improvement.

The company's ROA has ranged between 0.96% and 1.35% over the past five quarters.

During the company's earnings conference call on Jan. 20, Fifth Third CFO Dan Poston said "we intend to continue the process of normalizing our dividend by moving it to levels more consistent with the Fed's near-term payout ratio guidance of 30%."

Jefferies analyst Ken Usdin on Jan. 23 reiterated his "Buy" rating for Fifth Third, with a price target of $15, while lowering his 2012 EPS estimate to $1.35 from $1.40 and his 2013 estimate to $1.40 from $1.50, "mainly on higher expenses."

Despite what he called "a disappointing fourth quarter," Usdin said there remains a lot to like, as the core business is growing well, credit is improving, and the capital return story has yet to play out." The analyst said that "already boasting Basel III Tier 1 common of 9.7%, we believe Fifth Third has $1.3B-$1.8B in excess capital," and that he expects "FITB to payout 50% of earnings (dividends and buybacks) in '12 and 70% in '13."

The shares trade for 1.3 times tangible book value and nine times the consensus 2012 EPS estimate of $1.41.

Interested in more on Fifth Third Bancorp? See TheStreet Ratings' report card for this stock.

1. Wells Fargo

Shares of Wells Fargo ( WFC) closed at $29.60 Friday, returning 7% year-to-date. Based on a quarterly payout of 12 cents, the shares have a dividend yield of 1.62%.

The company repurchased 27 million common shares during the fourth quarter.

Wells Fargo posted fourth-quarter earnings of $4.1 billion, or 73 cents a share, increasing slightly from $4.1 billion, or 72 cents a share, the previous quarter, and $3.4 billion, or 61 cents a share, a year earlier.

Please see TheStreet's earnings coverage for detailed review of Wells Fargo's fourth-quarter results,

Wells Fargo's ROA has ranged between 1.11% and 1.27% over the past year, for the best and most consistent earnings performance among the "big four" U.S. bank holding companies.

Atlantic Equities analyst Richard Staite on Friday called Wells Fargo a "key pick" in the banking sector, citing the company's strong mortgage banking revenue and growth in net interest income, and saying the company "should see a significant boost to earnings in 2012 and 2013 with costs set to decline by at least 12%. It is gaining market share and returning capital to shareholders."

Wells Fargo's executives were coy about dividend plans for 2012, but the numbers show plenty of room for a significant dividend increase.

Guggenheim Securities analyst Marty Mosby on Tuesday said the stress tests results will "WFC's strong capital position and profitability as they are able to increase their dividend by 50%, resulting in a payout ratio around 30% and a dividend yield above 3%."

The shares trade for 1.7 times tangible book value and for nine times the consensus 2012 EPS estimate of $3.19.

Interested in more on Wells Fargo? See TheStreet Ratings' report card for this stock.

>>To see these stocks in action, visit the 5 Bank Stocks That Need a Higher Dividend portfolio on Stockpickr.

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

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

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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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