BPFH
#Good morning, everyone.
Thank you for joining our call this morning.
In the third quarter, our Company generated net income of $19.6 million or $0.22 per share, compared to $0.18 per share last quarter and $0.16 per share in the third quarter of 2015.
Return on average tangible common equity was 14.3% for the quarter, and return on average common equity was 10.2%.
We are pleased with the Company's overall performance during the quarter.
Our Company demonstrated improved credit quality, capital levels, and profitability metrics.
Specific highlights for the quarter include first, our core private banking performance continues to be a valuable source of earnings in 2016.
The private bank generated top line revenue growth, driven by solid and disciplined balance sheet growth.
At the same time, our commitment to risk management remains high, as asset quality metrics remains very strong.
Second, in our wealth management and trust business, we continued to build a unique franchise that is integrated with our private banking clientele.
<UNK> <UNK> and his team continued to show progress reducing client attrition, while staffing the business properly for long-term success.
Third, our investment management and wealth advisory segments continue to demonstrate healthy margins and profitability, despite environmental pressure on revenue growth.
Finally, all of these factors, coupled with ongoing expense discipline translated into improved profitability metrics for the Company.
Our efficiency ratios improved for the Company and for the private bank, while our pretax, pre-provision earnings reached their highest level in the last two years.
Moving ahead, our focus for the Company will continue to be on disciplined growth, balance sheet quality, and generating high quality earnings.
With that, I will turn the call over to Dave for more detail.
Thanks, Dave.
Slide 10 contains financial information for the wealth management and trust segment, which operates under the Boston Private Wealth brand.
Total revenue decreased 3% linked quarter to $10.9 million.
The prior quarter included transactional fees of approximately $150,000, while the current quarter included a revenue adjustment that negatively impacted this quarter's results by $135,000.
Excluding these items, revenue was flat linked quarter, in line with AUM, which was also flat linked quarter.
Total operating expenses decreased 10% linked quarter to $12.3 million, reflecting lower levels of legal and consulting fees, in addition to the impact of previous restructuring charges taking effect.
Overall profitability improved sequentially to a net loss of $800,000.
On slide 11, we show both net flows and new business flows for Boston Private Wealth for the last eight quarters.
Net flows were a negative $120 million in the quarter, reflecting a slow down in new business generation from $235 million to $148 million.
The draw down of the short-term liquidity account in excess of $90 million.
In addition, we made a business decision to exit a large accommodation for an ongoing client relationship, because it was unprofitable.
Turning the net flows positive remains a priority, and we are encouraged by our team's continued progress stemming client attrition.
During the quarter, lost business as measured by AUM declined 12% linked quarter.
We also saw a meaningful slowdown in client attrition, as measured by the number of lost clients.
In the quarter, the client attrition rate was significantly reduced, and reached its healthiest retention level of the last two years.
I will now hand it back to <UNK>.
Thanks, <UNK>.
Let me now address net flows across our other wealth businesses.
Slide 12 shows AUM net flows by segment.
In the investment management segment, we saw net flows of negative $111 million for the quarter.
The wealth advisory segment had net flows of negative $105 million during the quarter.
On a consolidated basis, we had Company-wide net flows of negative $336 million, or 1.2% of our starting AUM of $27.3 billion.
We closed the quarter with AUM of $27.5 billion, driven by positive market action and investment performance.
On slide 13, we show the total revenue for the investment management segment increased 1% linked quarter, with a 6% decrease year over year.
Operating expenses increased 1% linked quarter, though they decreased 4% year over year, representing lower incentive compensation.
Third-quarter 2016 segment EBITDA of 32% remains above our 30% corporate target.
Moving to slide 14, our wealth advisors reported revenues of $12.8 million, up 2% linked quarter and year over year.
Operating expenses decreased linked quarter by 2%, and 4% year over year to $9 million, reflecting a combination of lower performance-related bonuses, and lower amortization.
Third-quarter 2016 segment EBITDA margins increased to 33%.
That concludes our comments on third-quarter 2016 performance.
With that, we will open up the line and entertain your questions.
Yes, why don't we narrow the frame, <UNK>, to investment management, which is one of our three pools.
The other two, I'm really pleased with the progress in Boston Private Wealth, and I think our two wealth advisory firms are very stable and are doing good things to expand their practices.
Within investment management, at the industry level, everything you say is true.
The entire sector faces secular headwinds, so there's no easy solution.
I will tell you, we are pleased with the progress, particularly with Anchor, which is our larger and more significant firm, in the overall picture financially.
They have gotten pretty close to flow neutrality with very strong investment performance and strong distribution.
In the quarter, we lost one large platform mandate at Dalton Greiner which was obviously a setback, and represents the numbers.
Your assertion that it's a tough category is true.
Our goal is to get those firms as close to net neutral as we can, both firms, we think are high integrity, well-managed firms capable of performance, and we like the profitability.
What we have said to our shareholders, Alex, is we would like to push the business to breakeven in this latter half of 2016, ramping obviously to positive margin territory in 2017.
Our level one operating income margin goal is probably in the 10%-ish range.
Long-term, we think the business is capable of much more.
We have talked with shareholders about a 15% to 20% operating income interval, as representing pretty good industry performance.
You can see some models in the industry doing better than that.
There are models like ours, north of 20% operating income.
In the near term, Alex, I'm being very patient.
I know that's a surprising statement, because we are a very profitability-oriented Company, but our guidance to <UNK> and his team is build the business right.
I believe they are doing that.
We have a pretty compelling client proposition.
The client value added is extremely satisfying right now, but we are going to push that business above breakeven as we roll into ---+ as we finish the year and roll into 2017.
2017 will be a profit built year.
And those are our longer term profit targets.
No, it's a mixture ---+ I will turn it over to <UNK>, but in prior calls, we talked about a mixture of efficiencies, which is why we laid in restructuring charges for the first half of the year.
Long-term though, absolutely.
The purpose of that business in our portfolio is to be a growth business, no two ways about it.
Alex, we are not commenting on the election, those are house rules, but other than that, anything else is fair game.
We will have to blame it on Vladimir Putin, too, but I'm confident it's not structural.
As I think about, to your point, the last four quarters were normal, in the 200 to 250 range.
I'm confident we'll get back to that.
I just think it was this business, as you know as you're in the business, is sometimes lumpy, and I can't point to anything else.
I would love to take Brexit as an excuse, but I won't.
The only thing I would add, Alex, we were encouraged by the client flow in the quarter, and we scratched our head over exactly what you're raising, why was the new business down.
In every quarter, we have had a couple of pieces of very large business that have propelled us.
While we had terrific success with target clients this quarter, it was the absence of a really big one or two outliers.
It was no more complicated than that.
So I don't think we can point to something systemic.
It's a commercial building, and we went through and looked at the tenants, and they were having some issues with timing on the leases and getting those renewed, and so we moved it to classified.
It's still paying as agreed, still cash flowing, and a cautious but appropriate move on our part.
No, it's right in our market in LA, and it's an office building.
Yes, so, thank you.
I will speak to that at least in regard to Boston Private Wealth.
There were two, exactly as you explained departures in the quarter.
One was essentially a money market account, and yes, you know how profitable those can be.
And the other was an accommodation, the departure of an accommodation we made for a client, where it was an unprofitable business, but we did it as an accommodation for a client we continue to have, where we exited that business, which actually improved our bottom line.
And to the second part of your question, yes.
I would say as we are getting into the holistic planning business, we are seeing smaller, more velocity, more touch points, and greater profitability with the clients we are bringing on.
Yes, thanks, <UNK>.
In investment management, it's a challenging rotation from a pretty barren institutional market, and what I mean by barren, there is just a dearth of high-quality US equity mandates in the institutional space.
And our firms in that space, Anchor and Dalton Greiner, have been rotating into the retail platform business.
That's an appropriate ration in our opinion, and yet a challenging one.
In the two ---+ in the wealth advisory space, it is not a, quote, shedding of large clients or anything like that.
We continue to serve a very attractive clientele at KLS, and at Bingham Osborn.
Bingham in the quarter showed a fair amount of stability, with flows slightly positive.
KLS tends to be a little bit more front-loaded firm in the earlier part of the year, because their clientele is very seasonally bonus driven.
In addition, KLS is working through an expansion of the Managing Director group.
They have added four new managing directors, which I think bodes very well for the future, but to accommodate that, they are working through client service transitions, and the like.
But I'm not overly bothered about anything going on in the wealth advisory segment.
Those are two very stable practices, that we think have proven they will perform over the long term.
Probably the greatest sector challenge is in the investment management space.
That's an awfully tough patch right now.
Nevertheless, we continue to like the overall profit performance of those firms, so we are working with them.
Yes, as you know, our shareholders know that our long term ROE targets are higher than what we are generating right now.
Our cost of equity is 9%.
We think anything above that is value added.
I was pleased with the 10.2% in the quarter.
We did guide our shareholders down in this rate environment.
Our long-term house targets of 12% are awfully hard to achieve without a little bit of yield relief.
I think we are doing a pretty deft job of managing the balance sheet.
A modicum of rate relief certainly improves the ROE picture, and yet I'm not going to hazard to guess on rates.
I think that the jury is still out.
I think it's too early to make a rate call.
But we are doing it the hard way, if we can continue to generate quality earnings above the cost of equity, certainly north of 10%, makes us happier as a management team.
To push into that 11% to 12% space, we are going to need a little bit of margin help.
I just want to thank all of you for your ongoing interest in us.
We felt it was a pretty good quarter from a balance sheet management and profitability standpoint, and we maintain an awful lot of confidence in our wealth businesses, and we are going to continue to work hard to generate quality performance.
Thank you.
