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3 Small Banks With Attractive Dividend Yields

Banks come with a lot of baggage these days -- high regulation, heightened capital requirements, insane competition... and the list goes on.

One way to avoid many of these problems is to find small banks that fly under the radar of costly regulatory requirements and risky Wall Street-style business models.

Even better yet, many of these small banks love to pay their shareholders handsome dividends. Here are three such banks.

1. Trustmark Corp (NASDAQ:TRMK)Trustmark Corp is a bank holding company that operates in five states in the southeastern United States. The bank has lending, deposit, wealth management, and insurance operations. Trustmark has $12.2 billion in total assets as of the second quarter and was the 82nd largest U.S. bank holding company the last time the Federal Reserve took count on March 31, 2015.

It also sports a 3.8% dividend yield.

For banks, there are a few keys to a sustainable dividend. Of course, there must be profits and cash to fund the dividend checks over time, but there must also be strong credit risk management practices protecting the bank from loan losses. Because banks use high leverage, a relatively small number of bad loans can quickly deplete capital reserves. Without a capital cushion, banks can't pay a dividend -- even if management wants to pay one, regulators will step in and prevent it.

Breaking that down at Trustmark, the bank's profitability is more or less in line with its peers. The bank returned 8.5% on equity in the second quarter, edging out the peer average of 8.4%. Trustmark lagged its peers in cost controls, however, reporting an efficiency ratio of 66% versus a 61% peer average. A bank's efficiency ratio is calculated by dividing its non-interest expenses by net revenue. A lower ratio indicates higher efficiency.

The bank's financial performance is neither outstanding nor unsatisfactory. It's instead close to average. How, then, does it pay a dividend that's 73% higher than the peer average? Simply by maintaining a higher payout ratio.

All companies must choose what to do with their profits. Reinvesting in the company, building capital levels, buying back shares, and paying dividends are the most common choices. Trustmark has simply chosen to allocate...