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.
