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By Robert Marc Gordon

Savings and Loans, or Thrifts, were originally neighborhood institutions whose sole role was to supply home mortgage funds. It was a safe, quiet and regulated industry, until the early 1980s-- when deregulation and sharply rising interest rates put many thrifts and commercial banks out of business. The relatively few thrifts that remained were the healthiest at the time, and many of those were later acquired. For instance, great thrift names like World Financial, and Great Western, indirectly became parts of JPMorgan Chase and Co. (NYSE:JPM).

The relatively few large thrifts that remain, due to deregulation, are no more regulated than commercial banks. In fact, in July of 2011, the Office of Thrift Supervision was merged, meaning the only federal agency regulating thrifts is the Office of the Comptroller of Currency. One other macro concern to thrifts is the “Operation Twist” practice engaged in by the Federal Reserve. The Fed is purchasing longer term notes, and selling shorter term notes, in an effort to flatten yield curves. That practice will put increasing pressure on all banks and thrifts to maintain their interest rate margins.

Hudson City Bancorp (NASDAQ:HCBK)

HCBK is this country's largest thrift, with about $51 billion in assets. It serves New Jersey and parts of adjacent states, plus the Boston area. The realities of a historically flattened yield curve have already become apparent to management at HCBK, which has stated publicly that given market conditions, it has no interest in growing its balance sheet..

HCBK was trading at about $5.50, near the low end of its 52 week range of from $13.26 to $5.09. Its market capitalization is $2.8 billion, pays an annual dividend of $0.32, for a yield of 6.2%. It underwent a one time restructuring in the first quarter of this year that resulted in a one time, after-tax charge of $649 million, utterly swamping earnings from continuing operations and resulting in an incalculable P/E.

In the third quarter of 2011, HCBK earned $84 million, compared to $125 million in the year earlier quarter. HCBK blamed this on a further narrowing on its interest rate margin, and lowered loans outstanding.

HCBK is caught in a trap. It has historically a very narrow interest rate spread, currently hovering around 1.8%, and also a very low loan to value portfolio. It is an exceptionally efficient operation. In the third quarter, its efficiency ratio was just over 33%, the lowest of any bank I have seen. But with the country's economic struggles finding qualified borrowers is a chore, and the increased flattening of the yield curve will take a bite out of HCBK's already tiny margins. I would avoid the issue unless-- or until-- I see some signs of a widening yield curve, or better yet, balance sheet growth.

Washington Federal, Inc. (WFSL)

WFSL is a west coast thrift with 160 offices and about $13.5 billion in assets. Its stock has been trading at about $13 per share. Its 52 week range is from $18.53 to $12.15. Its market capitalization is $1.4 billion, and its P/E is 13. It pays an annual dividend of $0.24, for a yield of 1.9%.

WFSL's fiscal year ends September 30th. For its fourth quarter, therefore, it reported earnings of $30.7 million, or $0.27 per share. That compares with the prior year, when it earned just under $16 million. Its profit increased was greatly added by its 2010 acquisition of Horizon Bank. In October,2011, it acquired six branches in New Mexico from Charter Bank.

WFSL is also contending with the Fed's Twist program. But unlike HSBK, it is still finding ways to grow revenues and profitability. I am comfortable endorsing WFSL for follow up research.

New York Community Bank (NYB)

NYB is the nation's 37th largest bank or thrift holding company. It has about $42 billion in assets, and 242 branches spread across five states. Its stock was trading recently at about $12 per share, near the low end of its 52 week range of $19.33 to $11.13. Its market capitalization is about $5.2 billion, and its P/E is 10.3. It has since 2005 maintained an annual dividend rate of $1.00, for a current yield of 8.7%

In its third quarter of 2011, NYB reported earnings of $120 million, or $0.27 per share. This compares with $0.31 per share in the same quarter of 2010. NYB is dealing with the yield curve flattening just like other banks and thrifts. Yet, NYB is growing its balance sheet, largely through acquisitions. NYB's loan portfolio stood at $29.9 billion as of September 30, 2011, over $800 million more than a year earlier.

NYB is also a well run institution. Its return on assets and equity in the third quarter of 2011 were 1.27% and 16.43%, respectively, and its efficiency ratio in third quarter was 41.65%. Its interest margin in the third quarter declined one single basis point from the year earlier, to 3.19%.

I like NYB and encourage follow up research.

People's United Financial, Inc. (NASDAQ:PBCT)

PBCT is a large, Northeastern thrift with some 370 branches and over $18 billion in assets. Its stock was recently trading at a little over $12 per share, near the midpoint of its narrow 52 week range of from $14.49 to $10.50. Its market capitalization is $4.3 billion, and its current P/E is about 23. It pays an annual dividend of $0.63, for a yield of 5.3%

In its third quarter, PBCT managed to keep its recent momentum. It reported net income of $53 million, or $0.15 per share. This virtually doubled its year ago quarter. Moreover, its interest margins remained strong, at 4.11%, which represented a decline of just two basis points from the prior quarter. It acquired four separate banks in the past twelve months, with an aggregate of some $6 billion in assets, and has merged them apparently without a hitch.

At the close of the third quarter of 2011, PBCT reported very strong Tier One capital of 15%. Its return on equity and assets were 8% and 0.98%, respectively. Its strong capital position accounts for the relatively low return on equity.

PBCT has increased its dividend 14 of the past 15 years, and launched another dividend reinvestment plan this fall. I think this highly successful thrift deserves a close look.

First Niagara Financial Group, Inc.(NASDAQ:FNFG)

FNFG is a large, Buffalo based thrift. It operates through 346 branches, and has about $31 billion in assets. In the second quarter it acquired 195 branches from HSBC Holdings PLC (HBC), which raised the asset base by over $4 billion. FNFG's stock was trading recently at a little under $9, near the low end of its 52 week range of from $15.10 to $8.22. Its market capitalization is nearly $2.6 billion, and its P/E is 13.4. It pays an annual dividend of $0.64, for a yield of 7.6%

In its third quarter of 2011, FNFG reported net earnings of $57 million, nearly 25% more than the year ago quarter. Its loans outstanding, excluding the HBC purchase, continue to rise, and its interest margin is gently trending down to 3.48% a fall of 16 basis points from the year ago quarter. Its efficiency ratio is a relatively poor 67%.

I very much appreciate FNFG's “top down” approach to growing its balance sheet, revenues and profits. I urge further investigation.

Source: 4 Well Run Banks To Buy Now, 1 To Avoid