Even as financial stocks rebound, many banks, especially smaller ones, have remained in a defensive posture of buying back shares to boost shareholder value.
The six interest rate hikes by the Federal Reserve since last June have put pressure on banks' valuation and prompted many bankers, who thought their shares were being unjustly penalized, to buy them back. 
Buybacks, which reduce the number of shares in circulation and improve the stock's per-share value, "are a bullish sign for a company's future and a positive signal for investors," said Mark Fitzgibbon, a managing director of research at Sandler O'Neill & Partners.
Repurchasing "did make sense during the time when stock prices hitched," Mr. Fitzgibbon said. Now, as investors look for cheaper names in the financial sector, and the gap between big banks and smaller ones narrows, he expects buybacks will stop as investors' capital flows back into financial stocks.
The lower the price/earnings ratio, the more sense a buyback makes, particularly if shares are trading in single-digit multiples of per-share earnings or below book value, analysts say. The average bank trades at about 12.2 times earnings, Mr. Fitzgibbon said.
If a share's price exceeds 10 times earnings, buyback strategies are more difficult to justify, and banks should refrain from buying their own stocks when they are trading at a multiple of more than 20, he said.
Among the banks he covers, Mr. Fitzgibbon said he would not be surprised to see BankNorth Group of Burlington, Vt., with a multiple of 9.3 times this year's estimated per-share earnings, repurchasing shares during the fourth quarter. He said he also expects Republic Security Financial Corp. of West Palm Beach, Fla., with a ratio of 9.8, to repurchase "more aggressively."
Erick J. Reim of U.S. Bancorp Piper Jaffray said that 12 of the 15 banks he covers have buyback programs in mind, including Charter One Corp. of Cleveland, Community First Bankshares of Fargo, N.D., and Westamerica Bancorp of Fairfield, Conn.
Rising share prices do not affect buybacks as much as slowing consolidation, Mr. Reim said. "We saw buybacks even in 1997, when evaluations peaked," he said. The repurchasing trend will continue at least until next year, when merger and acquisition activities will pick up and offer more profitable ways for banks to spend their excess capital, he predicted.
"M&A is always low when share prices are low," particularly when the valuation of the acquiring bank is not attractive enough to the target bank's shareholders, Mr. Reim said. As long as that is the case, decreasing outstanding shares makes sense, he said.
"Compare it to the alternatives," Mr. Fitzgibbon said. Buying bonds and issuing loans bear the risk of lower returns, he said, and dividends provide no returns at all.
Mellon Financial Corp. is an unusual case of a highly valued bank that is continuing to repurchase shares. After a nearly 7% reduction in its shares outstanding since January 1998, its price/earnings multiple is more than 18. Yet Mellon is in the midst of a 25 million-share buyback announced May 16.
Eric E. Rothmann of First Security Van Kasper said that buybacks might be too easy a solution. "You have to build business. You have to think about ways to expand the net-income basis," which a number of small banks have not done well, he said.
