When Boston Private Financial Holdings Inc. sold two more wealth units last week, management painted the transactions as prudent moves to firm up capital.
This may be true, but the sales also derailed the company's long-term plan to be a national player in private banking. And they underscored how many regional wealth management players are curbing their ambitions and cleaning up problems left over from an expansive period that is quickly becoming a distant memory.
"Growth for the industry will be slower over the next couple of years, and people are going to look for ways to shrink their balance sheets," said Christopher McGratty, an analyst at KBW Inc.'s Keefe Bruyette & Woods Inc. "Boston Private is still a growth company, but growth will be more moderate and more focused."
Boston Private announced last week that it had sold Gibraltar Private Bank and Trust Co. in Coral Gables, Fla., to private investors for $93 million in cash and Rinet Co. LLC, an advisory firm in Boston for the ultra-wealthy, to its management team for $6 million.
David Kaye, the company's chief financial officer, said in an interview Friday that the company has "shifted from geographic expansion to focusing on its current markets."
As recently as two years ago, Boston Private's strategy had been to establish hubs by buying other regional wealth managers and private banks. Analysts said it averaged a deal every 18 months, had expanded into six markets and had an eye on 12 to 15 other regions. But then the recession hit and did so especially hard in the company's new markets, such as Florida.
In April, Boston Private sold two other units — Sand Hill Advisors LLC in Palo Alto, Calif., and Boston Private Value Investors.
Gerard Cassidy of Royal Bank of Canada's RBC Capital Markets, said Boston Private's strategy "ran amok." When the economy collapsed, the company found itself holding portfolios of bad construction loans in Southern California and Florida, thanks to First Private Bank and Trust in Los Angeles and Gibraltar, respectively.
"Senior management at Boston Private really underestimated the risks in these construction loan portfolios," he said. "I think the bleeding has stopped in Southern California because they have written off so many of the loans, but Gibraltar was just starting to weigh on them heavily."
Cassidy said that, in the near term, selling Gibraltar gives Boston Private the capital it needs to exit the Troubled Asset Relief Program and allows the company to leave Florida.
"Boston Private needs to pull back to their roots," he said. "I think that they can be a dominant New England private bank with asset management capabilities. It may take time to accomplish this, but in the long run, their real competitive advantage is as a Boston private bank."
In the past five years Boston Private added regional hubs in California, Florida, New York and the Pacific Northwest that offer private banking and wealth management services.
Kaye said in the interview that, for now, Boston Private plans to focus on organic growth in four regions — Southern California, Northern California, New England and the Pacific Northwest. (Gibraltar operated in Florida and New York.)
"We want to build density in our current markets," he said. "We are nowhere near tapping our potential in these markets. There is less risk to grow in current markets than taking on a whole lot of risk associated with entering a new region."
Timothy L. Vaill, Boston Private's chairman and chief executive, said during a conference call Friday that it has spent the past 18 to 24 months making strategic decisions to "improve profitability."
Boston Private does not plan to sell other units, he said, and by selling Gibraltar and Rinet, it "strengthened its capital base, improved its credit metrics and risk profile and created additional financial flexibility." Gibraltar had $1.4 billion of Boston Private's $7.3 billion of assets under management at June 30.
Kaye said during the conference call that selling Gibraltar and Rinet improved Boston Private's tangible common equity ratio by 100 basis points, to 6.2%, taking it "from the bottom quartile … to now above the median of peer companies." The company now has enough capital to repay the $154 million it got from Tarp, he said, but did not say when it planned to do that.
