5 Buy-Rated Bank Stock Takeout Targets From KBW

5. Boston Private

Shares of Boston Private Financial Holdings (BPFH) closed at $9.23 Friday, returning 17% year-to-date, following a 22% return during 2011.

The shares trade for 1.7 times their reported Sept. 30 tangible book value of $5.49, and for 12 times the consensus 2013 earnings estimate of 75 cents a share, among analysts polled by Thomson Reuters. The consensus 2014 EPS estimate is 80 cents.

Boston Private had $6.3 billion in total assets as of Sept. 30. The company reported third-quarter earnings of $16.5 million, or 19 cents a share, improving from $14.2 million, or 17 cents a share, in the second quarter, and $11.7 million or 14 cents a share, during the third quarter of 2011. The sequential earnings reflected a decline in provisioning for expected loan losses. The third-quarter provision was a negative $4 million, compared to additions to reserves of $1.7 million in the second quarter, and $4.5 million a year earlier.

Net interest income declined 1% sequentially but rose 3% year-over-year, to $46.4 million in the third quarter. The third-quarter net interest margin was 3.11%, narrowing from 3.35% in the second quarter, and from 3.25% a year earlier, however, Boston Private said that the margin "in the third quarter was negatively impacted by a short term deposit that inflated Average Assets," while in the second quarter, the margin was inflated because of "pre-payment penalties and the recovery of nonaccrual interest income."

CEO Clayton Deutsch said that Boston Private had "implemented a senior executive restructuring that will enable us to save in excess of $5 million per year of senior executive costs."

Following Boston Private's earnings announcement, KBW analyst Christopher McGratty raised his price target for the shares by 50 cents to $10.50, saying "we got what we been hoping for on the expense side--an incremental $10mm of reductions which should be realized over the course of 2013." The analyst estimates the company will earn 81 cents a share in 2013, followed by 2014 EPS of 86 cents.

After spending last "Wednesday in Baltimore with CEO Clay Deutsch," McGratty said "while there's no hiding from the fact that margins are likely to remain under pressure, we also believe BPFH is nearing a stage of capital deployment which, to this point, may not yet be on investors' radars."

Boston Private is currently paying a nominal quarterly dividend of a penny a share. McGratty expects the company to raise the dividend to a nickel early next year, and wrote on Wednesday that "taking it a step further, even with an additional hike in the dividend in 2014 to $0.07/qtr we are left in a position where BPFH ends 2014 with [a tangible common equity ratio of 8.4%], giving them about 100bps of capital flexibility, by our estimation."

Investors could then see the company deploy excess capital through acquisitions or "a share buyback perhaps as soon as 2014."

With analysts' estimates showing only a slight increase in earnings from 2013 to 2014, the return of a meaningful dividend might not be enough to stem pressure on Boston Privates board of directors to throw in the towel, sell the company, and cash out.

BPFH data by YCharts

Interested in more on Boston Private Financial Holdings? See TheStreet Ratings' report card for this stock.

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