BPFH
#Thank you, Keith, and good morning.
This is <UNK> <UNK>, Director of Investor Relations of Boston Private Financial Holdings.
We welcome you to this conference call to discuss our first quarter 2017 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; <UNK> <UNK>, Chief Financial and Administrative Officer; and <UNK> <UNK>, Chief Executive Officer of Boston Private Wealth.
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 are 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>.
Morning.
Thank you all for joining our call this morning.
In the first quarter, our company generated net income of $15.7 million or $0.17 per share.
This compares with $0.19 per share last quarter and $0.21 per share of the first quarter of 2016.
Return on average tangible common equity was 11.4% for the quarter, and return on average common equity was 8.3%.
These return levels are below our targets.
I'd like to briefly touch on the factors influencing the quarter.
Starting on the positive side, our primary goal in early 2017 was to frontload the year with strong growth across all of our businesses.
To this end, in the quarter, we delivered strong growth in all of our key revenue-driving businesses, including mortgage loans, commercial loans, deposits and assets under management in all of our segments.
Second, we saw expansion of our core net interest margin due to our balance sheet positioning and our core deposit strength.
The combination of strong balance sheet growth and net interest margin expansion translated into 16% annualized growth in net interest income in the quarter.
And finally, Boston Private Wealth continues to demonstrate client appeal and stability while posting positive AUM flows, allowing us to now shift our management focus to improving profitability and growth.
At the same time, our quarterly profitability was below our long-term target and our shareholders' expectations.
We were short on revenues, primarily due to lower levels of swap fee income in the quarter.
At the same time, our operating expenses were elevated during the quarter due to seasonal compensation expenses and by investments we have made in our franchise to increase long-term earnings strength.
Specifically, we have added client-facing business development staff to increase the growth of our client base across our markets and we have begun spending on a 3-year technology infrastructure plan to deliver a better client experience, make our client-facing professionals more productive and realize cost efficiencies.
We expect that these expenditures will help our company improve its competitiveness and drive earnings growth.
Despite these expenditures in the quarter, we expect to deliver on our performance targets for the remainder of the year.
The Boston Private management team and I continue to be excited about opportunities to build growth and earnings strength as the year progresses.
With that, I'd like to turn the call over to Dave, and we'll walk through the details.
Dave.
Thanks, Clay.
Good morning, everyone.
My comments will begin with Slide 3, which provides a summary of our key performance metrics.
As Clay mentioned, our return on average common equity for the first quarter of 2017 was 8.3%, and that declined both on a linked quarter and year-over-year basis.
Our Tier 1 common equity ratio of 10% remains at the top end of our target range.
And notably, total AUM is up 4% linked quarter, driven by both positive net flows and investment performance.
It's also up 7% on a year-over-year basis.
Slide 4 shows consolidated revenue trends.
Our primary source of revenue, which is net interest income, increased 4% linked quarter and 8% year-over-year to $53.6 million.
Total core fees and income decreased 6% linked quarter and 4% year-over-year to $36.3 million.
The primary driver of the decreased core fees and income is lower swap fee income that Clay mentioned, and that declined 70% linked quarter and more than 80% year-over-year due to lower client demand.
Another factor contributing to lower core fees and income linked quarter is that we received $1.4 million of performance fees in the fourth quarter of 2016, and that didn't repeat in the first quarter.
Total other income declined, primarily due to the positive impact of $5.1 million of items during the fourth quarter of 2016 that included the net gain on sale and a market value adjustment of the derivatives.
The net gain on sale was attributable to the divestiture of 2 offices in Southern California that represented just over $100 million of deposits.
On Slide 5, we show a detailed breakout of our consolidated operating ---+ our consolidated expenses.
First quarter operating expenses decreased 4% linked quarter to $68.8 million and increased 3% year-over-year.
Our first quarter compensation expenses always include seasonal items such as FICA and 401(k), so year-over-year is a more relevant comparison.
On a year-over-year basis, our total operating expenses are up 3%, or if you exclude the restructuring charge in Q1 of '16, it was up 5%.
Compensation expense is the primary driver of increased expense levels during the quarter.
This quarter's elevated expenses also include staff additions due to strategic hires, and we incurred higher expense levels due to a change in our vacation policy, which is intended to reduce future expenses.
Occupancy and professional services expenses also increased, and that was the cause ---+ as a result of technology investment we're making in order to improve the client experience.
On Slide 6, we show the full consolidated income statement.
Total net income was $15.7 million, a decrease of 13% from the prior year.
However, our pretax preprovision income was up 1% year-over-year.
Slide 7 provides details on our asset quality.
You can see the top chart shows the relationship between our net charge-offs or recoveries and our provision for loan loss.
This quarter's $200,000 provision credit was driven by net recoveries and declining loss factors, partially offset by an increase in loan volume and an increase in criticized loans.
The chart below highlights the bank's asset quality for the quarter.
Criticized loans increased 14% linked quarter, but they remain 19% below last year.
We continue to maintain strong reserves with our ALLL to loans finishing the quarter at 125 basis points.
On Slide 8, we show the Private Banking segment which excludes the Wealth Management & Trust portion of our bank.
Here, net interest income increased 4% linked quarter due to loan and deposit growth, coupled with core NIM expansion.
Total other income decreased linked quarter due to the previously mentioned gain on office sale and other items.
Our total operating expenses here increased 12% both linked quarter and year-over-year to $35.1 million, and that was driven by the compensation expenses noted earlier.
Slide 9 shows the past 5 quarters of average loan balances and deposit balances by type.
Total average loans for the quarter increased 10% year-over-year.
The growth rates of the individual loan categories on the accompanying slide were affected by reclassifications we made at the end of last year.
This reclassification moved some tax-exempt loans that are primarily multifamily loans from CRE ---+ sorry, from C&I to CRE.
If we would have applied the reclassification to prior periods, CRE growth would have been approximately 3% linked quarter and 12% year-over-year, while C&I growth would have been approximately 4% linked quarter and 7% year-over-year.
Average total deposits for the quarter increased 7% year-over-year to $6.3 billion, and that was led by a growth in core funding.
Noninterest-bearing demand deposit accounts increased 14% year-over-year, and that was followed by the savings accounts and money markets at 5% and CDs at 2%.
As you may remember, we divested just over $100 million of deposits as part of the sale of the 2 offices in Southern California, and this is the first full quarter where the divested deposits do not show up in the average deposit figures.
Turning to Slide 10.
Core bank net interest income increased to $54.0 million, and net interest margin at the bank increased 7 basis points linked quarter to 2.98%.
Excluding interest recovered on previous nonaccrual loans, our core net interest margin increased 8 basis points to [2.97%].
NIM expansion was primarily driven by increased yield on loans, which expanded from [3 51] to [3 61] during the quarter.
The bank's all-in cost of funds increased just 2 basis points, that's partially due to some increased brokered CDs that we took to optimize borrowing costs.
With that, I'll turn it over to <UNK> <UNK>, CEO of Boston Private Wealth.
<UNK>.
Thanks, Dave.
Slide 11 contains financial information for the Wealth Management & Trust segment, which operates under the Boston Private Wealth brand.
Total revenue decreased 2% linked quarter to $10.9 million.
Overall, AUM increased from $7 billion to $7.3 billion for the quarter.
Due to a lag in how we bill AUM, higher AUM balances will impact the second quarter core revenues.
Adjusted expenses, excluding last quarter's goodwill impairment charge increased 3% linked quarter, primarily due to seasonal compensation expense.
When comparing the first quarter of 2016 to the first quarter of 2017, you will see that on an annualized run rate basis, we have already taken out nearly $4 million of operating expense.
As a result, year-over-year, adjusted expenses have decreased 6%.
Segment EBITDA, excluding adjustments, decreased $700,000 linked quarter, while it has increased $800,000 year-over-year.
Turning to Slide 12, we show both new business flows and net flows at Boston Private Wealth for the past 8 quarters.
New business flows moderated to $120 million.
Client attrition reached the lowest levels in the last 8 quarters resulting in positive net flows of $34 million.
We remain focused on demonstrating continued stability at Boston Private Wealth as we move towards positioning the company for profitability and growth.
I'll now hand it back to Clay.
Thanks, <UNK>.
Let me now touch on our other wealth businesses.
Slide 13 will show you AUM net flows by segment.
The Investment Management segment showed net flows of negative $30 million.
The Wealth Advisory segment showed net positive flows of $263 million.
On a consolidated basis all-in, the company's net flows were positive $267 million.
On Slide 14, we show that total revenue for the Investment Management segment decreased 13% linked quarter, while increasing 2% year-over-year.
Excluding fourth quarter 2016 performance fees, linked quarter revenue was down 1%.
Operating expenses decreased 7% linked quarter due to compensation expense from the fourth quarter.
The Investment Management segment first quarter 2017 segment EBITDA margin of 30% is right in line with our 30% corporate target.
Moving to Slide 15.
Our Wealth Advisors reported revenues of $12.9 million, up 2% linked quarter and 1% year-over-year.
The linked quarter operating expenses comparison was affected by the revaluation of a retirement liability in the fourth quarter.
On a year-over-year basis, operating expenses are down 3% year-over-year.
First quarter 2017 segment EBITDA margins are 29%, just below our corporate target of 30%.
That concludes our comments on the quarter.
We'll now open the line up for your questions.
Dave, I wanted to dig in on the NIM.
The asset sensitivity really, I thought surprised nicely this quarter.
Specifically, the loan yields, interesting enough like everything, but C&I went up.
So can you just give us some help on where the floating rate loans are on the loans side.
And then, the deposit betas have been excellent.
Are ---+ can you sustain that going forward.
And just some overall help on the NIM outlook.
Well first off, on the individual loan categories, you mentioned a declining C&I yield which looked odd.
And it was a ---+ that was partially influenced by that reclassification that I talked about.
So when we moved some of these industrial revenue bonds from the C&I to the CRE, those were fixed rate obligations and those were generally higher-yielding.
So that caused a ---+ the decline primarily in the yield for C&I.
We have floating rates in both the commercial and industrial and the commercial real estate, I would say, is our ---+ the bulk of the variable rate.
Our residential mortgages will adjust over time, but those are primarily [5 1], [7 1] (inaudible), and it will take time for those to reset.
On the deposit betas, yes, it has been great.
And I think that wasn't unexpected given where we're at in this point of the rate cycle.
I think most banks are really lagging and not showing much increase at this point.
That won't happen as ---+ if rates continue to rise, we would expect there will be more pressure on the deposit side.
But going forward, we could see further NIM expansion of 3 to 4 basis points throughout the rest of the year.
Okay, great.
That's helpful.
On switching to expenses, can you just quantify what the payroll tax impact was and then the vacation policy.
And I believe you are targeting 3% to 4% expense growth on the tech investments.
Is that still good for 2017.
Okay, great.
And just last one for <UNK> and Clay.
On the Wealth Management, obviously, you finally turned the corner on the flow front.
Is this a year that we hit ---+ we turn the corner on EBITDA margins turning positive.
So and I guess best way to answer that question, maybe go backwards a little bit.
With the departures in 2015, we lost about $12 million in revenue.
Since then, we've been balancing rightsizing the cost structure while investing for growth.
So we're building the business for the long-term and our goal is to be profitable this year, but we don't want to overreach and focus too much on costs.
Certainly got off to a good start in the first quarter though.
Short answer to those, yes.
We intend to generate positive margins this year.
And <UNK> and his team are very hard at work on that.
Because of the nature of balancing that out, we're not telegraphing an end of year run rate, but we are committed to positive margins this year in the business.
No.
Well, it continued to be a focus of our actively looking for opportunities like that.
We feel confident that we could achieve some of those this year.
There was none of that in this quarter.
Sure.
I mean that was kind of a point in time in terms of ring fencing certain group of individuals that had gone through, maybe a lot of turnover or had to had significant changes in their client service team.
We do think we're beyond that.
Having said that, we think we have to earn the business every day, so we're constantly monitoring all of our clients to make sure we're meeting our service level agreements.
Over the balance of the year.
No, that was immaterial impact.
No, I think we're looking for deposit growth to facilitate that, Chris.
Yes.
Yes, Chris, we'd like to keep a pretty similar liquidity profile to what we have baseline, year before.
Yes, Chris, that's always a tough one to predict.
We'll probably see some recoveries in the coming quarters.
But again, it would be hard for me to project beyond year-end and say, okay, it's going to continue into '18.
But I think in ---+ over the course of the second half or the remainder of 2017, yes, we'll see some recoveries.
No.
I think that when you looked at the early stage buckets, the [30] to [89] past due was up.
It was driven primarily ---+ there was one $9 million loan that was in negotiations and so they had stopped the payment, but it's subsequently paid off in early April.
And in the special mention categories, we had 2 loans probably totaling about $15 million, one on the East Coast, one on the West Coast, that were downgraded from past to special mention.
It was a result of upcoming lease renewals.
And I think in one case, there was a ---+ a tenant had left and they're negotiating with new tenants.
So just moved into the watch list.
We want to make sure we're out ahead of things and raising issues where we see that we need attention.
Just so I get it, Chris.
You're talking about in the affiliates or including the wealth business.
Or how would you like me to.
.
Yes.
It's really the 3 buckets of fees in the overall fiduciary piece in terms of just looking of those relative to AUM on an average basis, those percentages seemed to come down first quarter.
So I was curious if we go back to where they were or if there is a net improvement year-over-year.
Yes.
Hard to say.
I mean the only thing I have some confidence in, Chris.
The positive flows in the first quarter will help us a bit with second quarter revenue.
There is usually a following quarter effect because of the way we bill.
So there is a little bit of updraft most likely.
Our investment managers face pricing pressure in the platform business, yet the pricing drip down has been very measured of late.
So I would be hopeful we'd get some revenue expansion and investment management net.
And I don't see any weird thing coming on their expense side.
So hopefully, we'll get stable to improving margins there.
The 2 Wealth Advisors doing a really good job had positive flows in the first quarter.
Those businesses tend to have pretty stable economics.
They're enjoying fee stability.
And again, I don't see any unusual cost structure thing coming at us.
Their cost structure is driven almost totally by staffing.
And then <UNK> has already addressed his business.
We like where it sits today and we're working on client attraction, revenue build and margin improvement.
So I guess when I net it all out, I sure as heck don't foresee margin degradation.
And I think we'll go sideways to potentially improving.
Well, again, given our small size, I don't think it's a market limit.
We're serving really deep pools of attractive clients on both coasts.
So the mitigants are more self-imposed financial limits driven by maintaining liquidity.
So I think our ability to keep pace on deposit build while maintaining our target capital levels is how we get to, in effect, the resulting growth rate.
We like balance sheet expansion in this rate environment.
And I think the anatomy of our NII development this quarter kind of validates that.
So I like what we're doing.
From a risk standpoint though, I don't think you'll ever wake up one morning and see us heating up the balance sheet 15%, 18%, 20%, that's kind of not us.
So that's ---+ does that address it clearly.
But we think the floating from 7% to 8% up to more like 8% to 10% is really doing good things for the revenue build.
Well, <UNK> and I talk a lot and I talk a lot with our affiliates.
They're ---+ we're always, to some extent, affected by macro shocks, and that's kind of in the who knows category.
But a big macro shock does expose us to market action.
Now separately, flows, flows are fundamentally about client behavior and about our ability to maintain client appeal.
So that's kind of on us.
I do think flows tend to come perhaps a little more readily in a rally.
They're a little more dear in a big selldown, but that's kind of how we parse it.
We're always thinking about macro effects that drives market action that has big effect on our portfolios.
And we've told you in the past that our portfolios have about a 50% beta relative to market action.
So if U.S. equity markets are plus 10, we're kind of blended ---+ we're quite often up 5.
If markets are down 5, we'd be down half of that sort of thing.
But that's how we parse it.
Macro events, market action, and then client behavior and what we're doing in terms of client attraction and client development.
We're excited about the remainder of the year as you [glean] from my comments.
I like the growth profile in the first quarter.
I'm not happy with the profitability, but we understand the expense dynamics and we're sticking with what we're doing and standing by our commitments.
Thanks everybody for listening in, and we look forward to more conversation.
