BPFH
#Thank you, Keith, and good morning, everyone.
This is <UNK> <UNK>, Director of Investor Relations at Boston Private Financial Holdings.
We welcome you to this conference call to discuss our first quarter 2018 earnings.
Our call this morning includes references to an earnings presentation, which can be found in the Investor Relations section of our website, bostonprivate.com.
Joining me this morning are Clay <UNK>, Chief Executive Officer; and Steve <UNK>, Chief Financial Officer.
This call contains forward-looking statements regarding strategic objectives and expectations for future results of operations and financial prospects.
They are based upon the current beliefs and expectations of Boston Private's management and are subject to certain risks and uncertainties.
Actual results may differ from those set forth in the forward-looking statements.
I refer you also to the forward-looking statements qualifier contained in our earnings release, which identified a number of factors that could cause material differences between actual and anticipated results or other expectations expressed.
Additional factors that could cause Boston Private's results to differ materially from those described in the forward-looking statements can be found in the company's filings submitted to the SE<UNK>
All subsequent written and oral forward-looking statements attributable to Boston Private or any person acting on our behalf are expressly qualified by these cautionary statements.
Boston Private does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements are made.
With that, I will now turn it over to Clay <UNK>.
Good morning.
Thank you all for joining the call this morning.
In the first quarter, our company generated net income of $22.7 million or $0.27 per share, compared to $0.22 per share on an operating basis last quarter and $0.17 per share in the first quarter of 2017.
Return on average common equity for the quarter was 12% and return on average tangible common equity was 15.2%.
Overall, we are pleased with this quarter's results.
Our company demonstrated positive operating leverage of 470 basis points as pretax, pre-provision earnings increased 23% year-over-year.
Driving operating leverage was strong revenue growth, with expense growth in line with our expectations.
The Private Bank and our market-linked fee businesses offered balanced contributions to revenue growth, as net interest income increased 7% year-over-year and Wealth Management & Trust segment revenue increased 12% year-over-year.
Our affiliates contributed year-over-year revenue growth of 5%.
Our non-interest expense during the first quarter, despite being impacted by seasonal compensation expenses, came in very much in line with expectations following investments in staffing and technology in 2017.
A lower federal tax rate added further benefit to our bottom line.
At the same time, the Private Bank continues to demonstrate very strong credit quality in the form of lower Criticized and Classified loans and a provision credit.
I'm especially pleased by the progress we see at Boston Private Wealth, which continues to demonstrate improved flow, stability, strong revenue growth and margin improvement.
The last thing I would like to highlight in my introductory comments is our successful completion of the sale of Anchor Capital.
On April 13, we completed the sale of our ownership interest in Anchor.
Anchor's financial results are included in our first quarter results, but for presentation purposes, Anchor's assets under management are excluded from our AUM commentary.
As you will recall, we will recognize a tax expense of $11 million to $12 million in our second quarter results and the net financial impact of deconsolidating Anchor will increase the company's Tier 1 common equity by approximately $34 million to $35 million.
With this introduction, I'd like to turn the call over to Steve.
Steve.
Thank you, Clay, and good morning, everyone.
My comments will begin with Slide 3, which provides a summary of our key performance metrics.
As you will recall from the prior quarter, our fourth quarter 2017 results included charges related to the divestiture of Anchor, including impairment of goodwill and federal tax reform.
Our commentary today is based on operating results, which have been adjusted for those notable items.
A full GAAP to operating basis reconciliation can be found at the end of the presentation.
Slide 4 shows consolidated revenue trends.
Total operating revenue for the quarter was $97.1 million, a 1% linked quarter decrease and an 8% increase year-over-year.
Our primary source of revenue, net interest income, increased 7% year-over-year and was flat linked quarter at $57.4 million.
Total core fees and income decreased 2% linked quarter and increased 9% year-over-year.
The linked-quarter revenue decline in our market-linked fee businesses was driven by fourth quarter performance fees in the Investment Management segment.
Year-over-year revenue growth was driven by 12% growth in our Wealth Management & Trust segment.
On Slide 5, we show a detailed breakout of our consolidated expenses.
First quarter adjusted operating expenses, both on a linked quarter and year-over-year basis increased 3% to $70.9 million.
The linked quarter increase was primarily driven by seasonal payroll expense, while the year-over-year increase was driven by investments in staffing, occupancy and information technology.
Amortization of intangibles declined linked quarter by $700,000 as a result of classifying Anchor as held for sale.
Excluding amortization of intangibles, total operating expense increased by 4% year-over-year, in line with our previous guidance.
Slide 6 shows the consolidated income statement for the first quarter.
Pretax, pre-provision income on an operating basis was $26.3 million, a decrease of 9% linked quarter and an increase of 23% year-over-year.
Operating net income of $22.7 million represents a 10% linked-quarter increase and a 45% year-over-year increase.
The company's effective tax rate for continuing operations for the first quarter decreased to 21.5% as a result of the Tax Cuts and Jobs Act.
We expect the company's effective tax rate for 2018 to remain at 22% for the full year.
Excluded in the calculation of the full year tax rate is the $11 million to $12 million expense we will incur during the second quarter related to the Anchor divestiture.
Slide 7 shows the past 5 quarters of average loan balances and deposit balances by type.
Total average loans during the quarter increased 6% year-over-year to $6.5 billion.
Residential Mortgage continues to show the strongest growth at 11% year-over-year and 2% linked quarter.
Average total deposits during the quarter increased 1% year-over-year to $6.4 billion.
Average non-interest-bearing deposits accounted for 29% of average total deposits in the first quarter of 2018, unchanged from the fourth quarter and the first quarter of 2017.
Slide 8 has been updated to show a 5-quarter trend of net interest income and net interest margin trends for the consolidated company.
The table on the top reconciles reported net interest income to core net interest income by adjusting for interest recovered on previous nonaccrual loans.
Net interest income for the quarter increased to $57.4 million, primarily driven by higher yields on interest-earning assets and higher asset volumes, partially offset by higher cost of deposits and borrowing volumes.
Core net interest margin on a fully taxable-equivalent basis decreased to 2.94% from 3.02% in the prior quarter, primarily due to a lower tax benefit on tax-exempt income.
Core net interest margin on a non-FTE basis increased 3 basis points to 2.90% from the fourth quarter of 2017.
The bank's cost of interest-bearing deposits increased 6 basis points linked quarter from 53 to 59 basis points and the all-in cost of funds including DDA increased 8 basis points, from 52 basis points to 60 basis points.
Slide 9 provides detail on our asset quality.
This quarter, we booked a $1.8 million provision credit, which was primarily driven by a decline in Criticized Loans and improved loss rates, partially offset by loan growth.
The chart below shows improving asset quality during the quarter, as Criticized Loans finished the quarter at $124 million.
Special Mention loans decreased $24 million linked quarter, driven by a combination of pay downs and credit upgrades.
ALLL as a percent of total loans finished the quarter at 110 basis points, down from 115 basis points in the previous quarter.
On Slide 10, we show the Private Banking segment, excluding the Wealth Management & Trust portion of our bank.
Total revenue at the bank was flat linked quarter and increased 8% year-over-year driven by 7% growth in net interest income.
Total operating expenses were $39.6 million, an increase of 3% linked quarter and 13% year-over-year, driven primarily by investments in staffing, occupancy and information technology.
I will now turn it back to Clay, to discuss our Wealth Management & Trust, Investment Management and Wealth Advisory segments.
Thank you, Steve.
Slide 11 contains financial information for the Wealth Management & Trust segment, which operates under the Boston Private Wealth brand.
Total revenue increased 3% linked quarter and 12% year-over-year to $12.3 million reflecting higher levels of assets under management.
Operating expenses decreased 9% linked quarter and 23% year-over-year driven by decreased compensation, employee benefits and professional fees.
Segment EBITDA for the quarter was $2.6 million with an EBITDA margin of 21%.
On Slide 12, we show both new business flows and net flows at Boston Private Wealth for the past 5 quarters.
New business flows for the first quarter were $238 million, which are above the 5-quarter average of $188 million and net flows for the quarter were $77 million.
Slide 13 shows AUM net flows for all of our business segments.
Reported results from the Investment Management segment have been restated to exclude Anchor Capital flows during the past 5 quarters.
In the first quarter, the Investment Management segment showed net flows of negative $15 million and the Wealth Advisory segment had positive net flows of $136 million.
On a consolidated basis, including Boston Private Wealth, the company's net flows overall, were a positive $198 million.
On Slide 14, we show our Investment Management segment, including contributions from Anchor.
Total revenue decreased 7% linked quarter due to $900,000 of performance fees received in the fourth quarter while increasing 5% year-over-year driven by higher levels of assets under management.
Operating expenses, net of fourth-quarter adjustments for the Anchor transaction-related goodwill impairment and legal expenses, decreased 1% linked quarter and increased 2% year-over-year.
The Investment Management segment first quarter 2018 EBITDA margin was 26%, slightly below our corporate target of 30%, due to a correction of trading errors in the quarter and elevated transaction-related legal fees.
Moving to Slide 15.
Or Wealth Advisors reported total revenues of $13.6 million, flat linked quarter and an increase of 6% year-over-year.
Operating expenses increased 29% linked quarter, 12% year-over-year.
The 29% increase is driven primarily by bonus adjustments for prior years that were recorded in the first quarter of 2018 as well as a retirement plan adjustment credit in the fourth quarter.
First quarter 2018 segment EBITDA margin of 24% is below our corporate target of 30%.
First quarter margins absent adjustments would have been in line at 30%.
This concludes our prepared comments on first quarter 2018 performance.
We'll now open up the line for your questions.
Wanted to start just with the deposit flows this quarter and pricing, and if you could just give a little more color there on kind of what were the drivers.
Yes.
I'll start and then I'll have Clay, add to it.
In the first quarter, we always ---+ that's always our seasonally weakest quarter in terms of deposit growth.
So what ---+ we are not surprised by kind of the 1% year-over-year growth in the linked quarter growth trends.
I think on the deposit cost side, they're up 6 basis points linked quarter.
We're in the part of the cycle now where the increases in rates are starting to translate into higher deposit cost.
That's not unexpected.
I think we've done a pretty good job kind of maintaining discipline on the rate volume trade.
And I think on a relative basis, our incremental betas are holding in pretty well.
So Clay, if you have anything to add.
I agree with everything <UNK> said.
The only thing I'd add, <UNK>, and I know all of you in the call are looking at a broad industry universe.
Environmentally, it's very clear that the long awaited kind of deposit repricing event is beginning to unfold in the industry.
In our case, we think it's too early to make a call on what the new normal is on deposit growth because our first quarter is historically pretty lumpy.
A lot of our private partnership clients and private company clients have big ins and outs around tax season and year-end bonuses, et cetera.
So frankly, we've been ---+ we've probably been watching pricing, maybe a little more closely than volume, because there's noise in the volume.
But I think this dynamic is a big thing to keep an eye on.
We're watching it like a hawk.
We have a range of responses in mind depending on how events unfold this year.
And so the driver thus far, has it been more exception pricing or have you guys made changes to the rate sheet.
Maybe some color there.
And then if you could connect ---+ marry that with the loan-to-deposit ratio.
I understand there's some seasonality in terms of flows that you will have throughout the year, but where ---+ what's kind of a maxim that you won't cross there.
I mean, from the pricing kind of more color on that, it's very client-specific and client segment-specific.
So when we look at price adjustments, we're very prescriptive on how we approach the different client segments and different products.
To your point, we're not the type of institution that runs specials or product specials from time to time.
So we're not seeing broad-based kind of pricing dynamic changes.
In terms of kind of regionally, we see pricing pretty consistent across the regions.
Again, it's really on the client segment-specific analysis that we do it.
And on loan-to-deposit ratio, for the quarter, is on an average basis 102%.
And we can see that drift up a little bit depending on seasonality like we said, we see a lot of deposit build in the back half of the year.
So we keep an eye on it.
We're not too concerned at 102%.
Confident that deposit pipeline is building nicely and that ---+ will normalize back to the 100% range over the year.
Okay, great.
And Clay maybe just one more on just overall profitability and kind of you've had your historical targets there.
Any adjustment with the sale of the business plus lower tax rates now.
Where do you think that we're going to shake out and what are you kind of aiming for going forward.
Good question, <UNK>.
I'd comment the following way.
I don't think our thresholds have changed.
We basically, in effect, just took the reset tax rate and kind of adjusted our profitability norms right in line, if you will.
The other dynamic though is, with the sale of Anchor, our historic spread between return on tangible common equity and return on stated has narrowed, because of the reset of goodwill.
But our ROTCE and ROE targets remain very much in line with our historic guidance but adjusted for those 2 factors.
Alex, this is Steve.
No, right now, I think, we're still comfortable with that guidance.
Obviously, we've talked about deposit growth being the regulator on the loan growth clearly, especially with the loan-to-deposit ratio now a touch above 100%.
Within the loan categories, we saw continued strength in mortgage this quarter.
CRE kind of trending in line with where we'd expect.
C&I is a little weak and there's a couple of things going on there.
We had a couple big pay downs in the quarter that brought down the balances.
We had to re-class of about $13 million from C&I into construction.
And then just the competitive environment on C&I is really tough.
So we're seeing a lot of deals that ---+ pricing spreads and just terms is not something we're comfortable doing right now.
So I guess, right now we're still comfortable with what we talked about last quarter, but obviously, deposit growth is going to be the key regulator on that.
Our current thoughts on that, Alex, is flattish to just slightly up, just given pricing dynamics and given our loan portfolio where it sits today.
Yes, I mean, we talked about this last quarter when we first announced the divestiture.
We're kind of still working through all the options we have at hand.
So again, we'll relook at the capital stack, but obviously, we've been very supportive of the dividend and where it is.
Obviously, with an 8% to 10% organic growth rate, we'll use some capital to support that.
The share repurchase, that's really replacing the repurchase program we had out that expired back in February.
And if you recall, we used about half of that authorization, while it was outstanding, and we've been pretty opportunistic in how we approach share buybacks.
So the valuation needs to make sense for us to be in the market.
Chris, like I said, I think, we're considering all those options now.
Those aren't callable until June.
So between now and then, we will continue to look at all our options and if it makes sense at that time, that's something we'll definitely consider.
Yes, those are good numbers to use.
Yes, the way I would think about the kind of expenses for the rest of the year, Chris, I take '17 actuals, back out Anchor, we disclosed that back in December, when we announced divestiture I believe, so you have the full year look, so that'll have the adjusted kind of like-for-like expense base in the new world order, if you will.
Grow that 4% to 5% and just add back a quarter of Anchor and then obviously, you have the higher seasonal comp in the first quarter, but I think all of that should give you what you need to get a sense of how expenses play out for the rest of the year.
Correct.
I guess, from my view, I'm pleased that the quarter gives us a good start to the year.
What I was most looking for was positive evolution of the bank balance sheet.
Boston Private Wealth performing in line with the expectations we have had from the start and finally, critically important to demonstrate operating leverage after our expense step ups last year in staffing and technology.
In that regard, I see things in the quarter that make me feel good about the year going forward.
I think our most closely watched item is where this call began with your questions, evolution of the deposit base and the effect that has on our revenue build is something we're monitoring very closely.
But all in all, I saw things in the quarter that I've been looking for and things that I like.
Thanks for your interest and we'll be talking with investors now as we get into IR season.
