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
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
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
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
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.
