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.

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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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Fox Chase Bancorp

Fox Chase Bancorp ( FXCB) of Hatboro, Pa., had $1.0 billion in total assets as of Sept. 30. The shares closed at $12.72 Friday, returning 8% year-to-date.

The company has significant excess capital from its second-step conversion from a mutual thrift holding company structure to full stock ownership in June 2010. The tangible common equity ratio was 19.14% as of Sept. 30, according to SNL Financial.

Fox Chase Bancorp bought back 880,000 shares between July 1 and Oct. 25, or 6% of outstanding shares," and on Oct. 26 announced "an additional 5% stock repurchase plan," to begin when the company finished its previous 10% repurchase plan.

The shares traded Friday at 32 times the consensus 2012 EPS estimate of 40 cents, and 0.9 times tangible book value.

Kelly has a price target of $15 for the shares, saying after Fox Chase reported its third-quarter results that as earnings improve and repurchases continue, he expects "the shares shares to trade at and eventually through tangible book value (TBV) over the next 6-12 months" with "TBV growing to $14.82 by year end 2012."

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Lakeland Financial

Shares of Lakeland Financial ( LKFN) of Warsaw, Ind., closed at $25.09 Friday, returning 20 % year-to-date. Based on a quarterly payout of 15.5 cents, the shares have a dividend yield of 2.47%.

The company had $2.8 billion in total assets as of Sept. 30.

Lakeland's shares trade for 12 times the consensus 2012 EPS estimate of $2.14 and 1.5 times tangible book value.

Sterne Agee analyst Kenneth James has a $28 price target for Lakeland Financial, calling the company "a straightforward organic growth story and a high-quality commercial and industrial focused community bank run by a solid management team," that is "somewhat under the radar due to its Indiana footprint and non-promotional management." James calls the company's earnings performance "outstanding with a very rare combination of solid organic loan growth, high profitability (1.20% return on average assets, 13% return on tangible equity), good credit quality, and high capital levels."

The market performance and price-to-earnings multiples for the "Big Four" U.S. bank holding companies stand in stark contrast to Sterne Agee's three defensive picks.
  • Shares of Bank of America closed at $5.64 Friday, down 58% year-to-date. The shares were trading for 5.7 times the consensus 2012 EPS estimate of 99 cents and for just 0.4 times tangible book value.
  • Citigroup closed at $28.17 Friday, down 40% yea-to-date, and trading for 6.4 times the consensus 2012 EPS estimate of $4.37 and 0.6 times tangible book value.
  • JPMorgan Chase closed at $32.33 Friday, down 22% year-to-date. The shares traded for 6.6 times the consensus 2012 EPS estimate of $4.88 and just under tangible book value.
  • Wells Fargo closed at $26.07 Friday, down 14% year-to-date. The shares traded for 8.1 times the consensus 2012 EPS estimate of $3.20 and 1.5 times tangible book value.

>>To see these stocks in action, visit the 3 Overlooked but High-Quality Bank Stocks portfolio on Stockpickr.

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

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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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