2 Regional Bank Dividends to Buy and 1 to Avoid

At one time, regional banks were the stalwarts of the dividend scene. These little giants were financial institutions' go-to stocks when they were looking to minimize their risk and add near-guaranteed income to their bottom line -- but the housing bubble radically changed this investment thesis. Now the regional banking sector is more like a bare-bones graveyard of dividend-paying companies. The real challenge in this sector is finding undervalued companies that were able to maintain their dividends despite the worst financial downturn since the Great Depression.

After some tedious dart throwing, copious highlighting, and actual research, I've discovered two regional banks that are still delivering phenomenal results while also uncovering a former gem that is throwing up plenty of red flags.

Bank of Hawaii (NYSE: BOH  ) -- trust it
Not everything is as cut-and-dried as you'd expect with regional banks. The casual observer might completely ignore Bank of Hawaii given that its revenue before provisions has fallen for what could be a third consecutive year in 2011 -- but that quick glance could cost that casual observer in a big way!

Bank of Hawaii has managed to keep its profits steady in the midst of a contracting revenue stream because it's extremely well-managed. Deposits are up, credit loss reserves are way down, and the company is positioning itself for the future by trimming its risks now. This strategy is producing what some might deem as lackluster results now, but it could add to Bank of Hawaii's already impressive 3.9% dividend yield in the future. Its payout ratio of 50% makes its dividend highly sustainable, giving further proof that this is a regional bank you can trust.

Westamerica Bancorp (Nasdaq: WABC  ) -- trust it
Trust a regional bank operating out of California? No, I'm not insane, but you'd think I was lying to you based on Westamerica's results. Whereas countless regional banks in California have struggled under mounting loan losses -- see Zions Bancorp (Nasdaq: ZION  ) for proof of this -- Westamerica has propelled itself higher.

Since 1992, the company's quarterly payout has jumped by 800%, with only one quarterly distribution decrease in that entire time (which, if I may add, was only by $0.01). Based on its latest quarterly filing, net interest margins are up, tier capital ratios are near record levels, and loan loss reserves remain negligibly small. Paying out a dividend of 3% and having a successful history of dividend increases -- I'd have to say this is a regional banking company you can trust.

Hudson City Bancorp (Nasdaq: HCBK  ) -- avoid it
When in doubt, refer to rule No. 1: never fall in love with a stock.

Back in October, I referred to Hudson City Bancorp as a potentially attractive value in the banking sector. At that time, the company had the best efficiency ratio among all banks with more than $50 billion in assets, and sported a dividend yield just shy of 5%. After a very large balance sheet restructuring, which resulted in a $647 million loss, Hudson City has been forced to slash its quarterly payout by nearly 50% and has seen its efficiency ratio rise 770 basis points to 26%. I would hardly call Hudson City a crash-and-burn candidate, but with its dividend payout and efficiency ratio marching in opposite directions, it's definitely a regional bank worth avoiding.

Foolish roundup
Just because certain regions of the United States are suffering from the housing decline doesn't mean the entire banking sector is a wash. Bank of Hawaii and Westamerica Bancorp both offer steady dividend yields and a history of earnings growth that you may be able to bank on!

Do you have a favorite bank that I've neglected? Share your ideas in the comments section below and consider tracking Bank of Hawaii, Westamerica Bancorp, and Hudson City Bancorp -- as well as your own personalized portfolio of stocks -- with My Watchlist.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always of interest without charging interest.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 06, 2011, at 7:32 PM, baldheadeddork wrote:

    Sean, what's your take on NYB?

  • Report this Comment On June 06, 2011, at 10:09 PM, jimmy4040 wrote:

    Terrible time to buy banks. I have been shorting for months, and there's more room to run. There's no way they can overcome real estate issues and the flattening yield curve. That's even if the big names don't continue to drag down the whole sector.

  • Report this Comment On June 07, 2011, at 3:19 PM, robertwilds wrote:

    READY TO BOUNCE....article, followed by..

    AVOID...AVOID...AVOID...

    Motley fool can't make up their minds...

    HCBK...

    is not a RAD, NOT an eron, NOT.. a Wcom....

    I hpoe...

  • Report this Comment On June 09, 2011, at 8:45 PM, Voltaire wrote:

    Hey Sean....do you and Zeeshan ever talk? I mean really.

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