3 Overlooked but High-Quality Bank Stocks

NEW YORK (TheStreet) -- Analysts from Sterne Agee on Monday identified three defensive bank stock plays that are strongly capitalized and have repurchased shares.

Saying that there were "opportunities in high quality, small-cap financials that may have been missed," Sterne Agee analyst Peyton Greene listed three buy-rated names with tangible common equity ratios exceeding 10% and nonperforming asset ratios below 3%, that "have been actively repurchasing shares over the past twelve months."

These defensive names trade much higher to forward earnings than shares of the largest U.S. banks, including JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Wells Fargo (WFC), but their ability to repurchase shares is unfettered by the regulatory stress tests being faced by the largest industry players.

These smaller picks, of course, are also free of the daily headline risk faced by the largest banks, including mortgage putback demands, ever-increasing threats to revenue as new rules clamp down on fees and the ongoing agony of exposure to troubled economies in Europe.

Meridian Interstate Bancorp

Meridian Interstate Bancorp (EBSB) of East Boston, Mass., has a mutual thrift holding company structure, with Meridian Financial Services -- the mutual holding company -- controlling 59.5% of common shares as of Sept. 30. Meridian had $1.9 billion in total assets as of Sept. 30.

The shares closed at $12.70 Friday, increasing 8% year-to-date. The company repurchased 360,801 share during the first three quarters of 2011. In August, Meridian's board of directors adopted a new "stock repurchase program of up to 10% of its outstanding common stock not held by its mutual holding company parent, or 904,224 shares of its common stock," according to the company's quarterly filing with the Securities and Exchange commission.

Meridian Interstate Bancorp's shares traded on Friday for 28 times the consensus 2012 earnings estimate of 45 cents a share among analysts polled by FactSet, and 1.4 times tangible book value, according to SNL Financial.

Sterne Agee analyst Matthew Kelly believes that a "second step conversion [to full stock ownership] is likely over the next 12 months," and in the meantime, Meridian Interstate Bancorp "can grow minority tangible book value by ~7% a year through increased retained earnings and continued share repurchases." Kelly's price target for the shares is $15.00.

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