Saturday, January 28, 2017

An AIM Holding: Boston Private Financial Holdings (BPFH) by Nat Penn. "Not a strong recommendation for BPFH - just hold to learn more about Trump policies"

Boston Private Financial Holdings, Inc. (BPFH, $16.85): “Just Okay Here”
By: Nathaniel Penn, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

Boston Private Financial Holdings, Inc. (NASDAQ:BPFH) Boston Private Financial is positioned to offer wealth management and private banking services to high net worth clients across the United States.  With offices in Boston, New York, Los Angeles, San Francisco, San Jose, Florida, and Wisconsin, the company has total assets of over $8 billion and manages over $27 billion of client assets.
• Net interest income in the fourth quarter of 2016 increased 7% year-over-year and 3% over the previous quarter to $51.5 million.   This equates to $200.4 million for fiscal year 2016, an 8% increase from 2015.
• Average total deposits increased 2% over the prior year to $6.0 billion.
• Total assets under management remain flat at $27.6 billion, potentially indicating an inflection point.
• During the fourth quarter, BPFH realized a net after-tax charge of $4.3 million related to goodwill impairment charges and gain on sale of two South California offices.
• The board of directors approved a 10% increase in the quarterly cash dividend to $0.11 per common share.

Key points: Earnings per share of $0.24 beat consensus estimates by $0.03.  Expense control remained very solid and helped drive some of the beat.  Management alluded to this being a reasonable expense level going forward, despite impact from a one-time expense of $9.5 million for goodwill impairment charges.  This was partially offset by the sale of two Southern California offices for a pre-tax net gain of $2.9 million.  Net interest income was 7.0% higher year-over-year on 1-2% loan growth (to $6.0 billion) and the net interest margin remained at 2.88%.  This is down 3bps from last year and remains disappointing.

Net flows have deteriorated after a “less bad” trend for most of the past several quarters.  However, the weakness came more in the form of less new business generation (i.e. less inflow from “greenfield”-type customers).  Client losses continue to moderate and one recent outflow was even voluntary on the part of BPFH due to its relationship being unprofitable.  Management indicated that the slowdown of new business generation is not a loss of momentum in the underlying selling efforts and likely to remain more episodic.

In order to improve ROE from the current ~10% run rate, management indicated the need for help from the yield curve and continued benign credit.  Credit indicators all remain positive despite them downgrading one large commercial office relationship in Los Angeles.  Everything else looks fine.

What has the stock done lately?
I believe the stock can go higher despite the lift from the Trump presidency.  Catalysts will be elevated market valuations and a major inflection in flows as performance improves.  They will lose earn-out earnings for ~$0.07 headwind to EPS estimates after the fourth quarter of fiscal 2017.  Some analysts have speculated that it may be a reason to sell before then.

Past Year Performance: BPFH has increased 72.92% in value over the past year, but the stock is nonetheless a decent value: It is currently trading at 2.0x book, 2.6x tangible.  It currently has a 2.6% dividend yield with room for growth.

 Source: FactSet

My Takeaway
I would like to think that the trend remains our friend if market values stay high and new business generation re-accelerates.  I am currently maintaining a HOLD rating as the valuation is not compelling here - we'll wait and see what tax and regulatory changes come from the new Trump administration.  Offsetting scarcity value makes this investment “just okay” here.

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