NEW YORK ( TheStreet) - Among the hundreds of bank stocks that have declined in price amid the market turmoil of the past three weeks, TheStreet has identified five community bank stocks that are excellent buys right now, based on low price multiples and recent events.

In keeping with a generally conservative philosophy, we selected the five bank stocks with the lowest prices relative to tangible book value among holding companies meeting the following criteria, using data provided by SNL Financial:
  • Three-month average daily trading volume above 65,000 shares.

  • Not currently participating in the Troubled Assets Relief Program, or TARP.

  • First quarter annualized ratio of net charge-offs to average loans below 2%.

  • Nonperforming assets ratio below 3%.

  • Positive earnings-per-share for the first quarter of 2010.

  • Nonperforming assets include nonaccrual loans (less government-guaranteed balances) and repossessed real estate.

    Our list of five includes two holding companies selling below tangible book value and two with dividend payouts over 4%.

    Limiting the group to the cheapest relative to book value excluded some very strong banks and thrifts with high dividend payouts.

    The following graphics show that all but one of these bank and thrift holding company stocks sold at much higher levels relative to book value at the end of 2007 and 2006, before the crisis hit. The numbers also show strong potential for some, based on price relative to projected earnings. While each of these banks has a different story to tell, the bottom line is that a profitable institution with good asset quality and prospects for growth should sell for considerably more than book value.

    5. Flushing Financial ( FFIC) of Lake Success, N.Y., was the most expensive relative to book value of the group of five, although the price-to-tangible book ratio was a low 1.15, according to SNL Financial. Shares closed at $14.04 Tuesday, down 4.5% during May, but up 17% year to date.

    Shares are yielding 4% on a quarterly dividend payout of 13 cents.

    While the thrift has experienced some asset-quality deterioration during the credit crisis, Flushing's loan losses have been minimal. Nonperforming assets comprised 2.16% of total assets as of March 31, but the annualized net charge-off ratio for the first quarter was just 0.28%, with charge-offs of just 0.33% in 2009.

    Shares appear very inexpensive at nine times projected earnings for 2012, especially when you consider that they traded at 17 times earnings at the end of 2006.

    With a good dividend payout and so much potential based on value, Flushing is another good, conservative play for investors looking for bargains.

    4. Northwest Bancshares ( NWBI) of Warren, Pa., saw its stock price decline 8% in May to $11.48 at Tuesday's close, although shares were up 4% year to date. A quarterly dividend payout of 10 cents translates to an attractive yield of 3.48%.

    The company had total assets of $8.1 billion as of March 31 and announced on May 6 that it had agreed to acquire for $20 million NexTier of Butler, Pa., a bank with $588 million in assets. NexTier's asset quality problems and need for additional capital justified the low price.

    Northwest CEO William Wagner described the deal as "a good geographic fit," because the two banks had little branch overlap. He also said that Northwest was seeking other deals, and the company certainly had the capital to justify expansion, with a total risk-based capital ratio of 20.67% as of March 31

    After remaining profitable through the credit crisis with minimal loan losses and raising $659 million in common equity when it completed its second-step conversion from a mutual holding company to a bank holding company in December, Northwest is well-positioned for continued expansion and a low-risk opportunity for investors who will get a decent dividend while waiting for growth.

    3. Oriental Financial Group ( OFG) of San Juan, P.R., purchased the failed Eurobank, also of San Juan, from the FDIC on April 30. The acquisition included 22 branches, $785 million in retail deposits and $1.7 billion in assets, with the FDIC agreeing to absorb 80% of losses on acquired loans. The transaction grew Oriental's balance sheet 26% to roughly $8.2 billion.

    Oriental also raised $200 million in a preferred share offering, with the shares subject to mandatory conversion to common stock, pending shareholder approval.

    Sterne Agee analyst Adam Barkstrom estimates that after the conversion, Oriental's tangible book value will be $12.60 per common share. Shares closed at $13.25 Tuesday, down 21% in May, but up 23% year to date.

    Barkstrom said on May 3 that the shares were "fairly valued" at $16.72, or roughly 10 times Sterne Agee's "normalized" earnings estimate of $1.70. With shares dropping so much since that report was published and selling for just six times the 2011 consensus earnings estimate of $1.88 among analysts polled by Thomson First Call, Oriental Financial looks like a bargain.

    Oriental Financial has stood out among Puerto Rico banks through the real estate crisis, with the best credit quality by far, with a nonperforming assets ratio staying well below 2.5%, and very light loan losses. The company's low-risk acquisition of Eurobank has positioned itself for growth when the Puerto Rico economy recovers, and because the capital raise is behind it, patient investors should be rewarded.

    2. Westfield Financial ( WFD) of Westfield, Mass., was trading below book value Tuesday, when shares closed at $8.04 or 0.97 times tangible book. The stock declined 10% during May through Tuesday's close, and had a dividend yield of 2.49% on a quarterly payout of 5 cents a share. Shares were flat year to date.

    Westfield had total assets of $1.2 billion as of March 31 and loads of excess capital, with a total risk-based capital ratio of 38.41%. Rather than increase the dividend, the company has stuck with its policy of returning capital to shareholders via buybacks, announcing on Tuesday that its board of directors had approved a 10% buyback of 2.9 million common shares. The company is close to completing a previous buyback of 3.1 million shares that began in January 2008.

    The thrift holding company has remained profitable through the crisis, with minimal loan losses. Net income for the first quarter was $1.4 million, for an ROA of 0.45%. Earnings of 5 cents a share supported the dividend, with the high payout ratio not being a threat, because of Westfield's excess capital.

    Keefe Bruyette & Woods analyst Damon DelMonte has a market perform or hold rating on the shares, with a $10 12-month price target, which would be a healthy 24% gain from Tuesday's close.

    With the company in such solid shape, with strong asset quality and a significant buyback, Westfield is a compelling play.

    1. Bank Mutual ( BKMU) of Milwaukee tops the list with the lowest price relative to tangible book value. Shares closed at $6.44 Tuesday, down 8.5% in May and 5% year to date. The price-to-book ratio was 0.85, and with a quarterly dividend payout of 7 cents, shares were yielding 4.35%.

    The thrift holding company had total assets of $3.41 billion as of March 31 and was strongly capitalized with a total risk-based capital ratio of 21.99%, greatly exceeding the 10% required for most banks and thrifts to be considered well capitalized. Such a high level of capital makes the dividend appear safe, although one of the reasons investors may have shied away from the stock is that it has paid dividends exceeding its earnings for several years.

    Net income for the first quarter was $2.3 million, for a return on average assets (ROA) of just 0.26%. Contributing to the weak earnings was a narrow net interest margin -- the difference between a bank's average rate earned on loans and investments and its average cost of funds -- of just 1.76%, declining from 2.35% a year earlier. In comparison, the banking industry's net interest margin expanded to a seven-year high of 3.83% during the first quarter, as reported in the Federal Deposit Insurance Corporation's Quarterly Banking Profile .

    Bank Mutual explained in its first quarterly earnings release that it was repositioning its balance sheet for "what we believe will be higher interest rates in the future," by investing cash inflows from loan repayments into short and medium-term securities and overnight investments.

    Sterne Agee analyst Mike Shafir said in a report maintaining his firm's neutral rating on the shares that Sterne agreed that Bank Mutual's "healthy capital position will allow it to navigate through this credit cycle" but that "a higher rate environment is necessary" for the bank to grow its earnings significantly.

    Despite the neutral rating, Bank Mutual looks good as a long-term play and is certainly worth considering, with the shares selling below book value. Even with a narrow net interest margin, the company is profitable, and with the U.S. economy coming out of recession, interest rates will begin to rise.

    -- Written by Philip van Doorn in Jupiter, Fla.

    Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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