Boston Private Financial Holdings, Inc.
Q2 2020 Earnings Call Transcript

Published: 2 Aug 2020

[Operator:]

Good day, and welcome to the Boston Private Financial Holdings' Second Quarter 2020 Earnings Conference Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Adam Bromley. Please go ahead.

[Adam Bromley:]

Thank you, Elisa, and good morning, everyone. This is Adam Bromley, Director of Investor Relations of Boston Private Financial Holdings. We welcome you to this conference call, to discuss our second quarter 2020 financial results. Our call this morning includes references to an earnings presentation, which can be found in the financial Investor Relations section of our website, bostonprivate.com. Joining me this morning are Anthony DeChellis, Chief Executive Officer; Steve Gaven, Chief Financial Officer; Paul Simons, President of Private Banking Wealth and Trust; and Jim Brown, President of Commercial Banking. This call contains forward-looking statements regarding strategic objectives and expectations for future results of operations and financial prospects. They are based on 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 identify 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 SEC. 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 Anthony DeChellis.

[Anthony DeChellis:]

Thank you, Adam. Good morning, everyone, and thank you for joining us on today's call to discuss our second quarter 2020 results. However, before we get into this quarter's results, our team would like to express that we hope this call finds you and your family is in good health, and that you all manages to remain safe during these challenging times. The business and economic outlook in our markets remain a fluid situation and is creating some new challenges for all banks. However, we are encouraged by our firm's ability to adapt quickly to provide uninterrupted service to our clients. Throughout the first 2 quarters of 2020, we have continued to stay intensely focused on our strategic growth plans. While we expect the environment to remain demanding for the balance of the year, we are also optimistic about developments in consumer behavior, which we believe have accelerated some key trends in financial services and present new opportunities. The first half of 2020, for us, can be characterized as finding the right balance between short-term and long-term objectives. Our immediate task became implementing our business continuity plan and adapting to the majority of our firm's employees working remotely. Our company's productivity levels remain high. Remarkably, both clients and employees have adjusted quickly through a work from home client coverage model. This pandemic has tested some of our strengths, but it has not diminished our ambitions for delivering on a highly distinctive and differentiated private banking and wealth management client experience. Our teams continue to demonstrate that they can deliver best-in-class advice and guidance, whether in person or virtually. Challenging times afford all firms an opportunity to distinguish themselves in the hearts and minds of clients, and we believe that Boston Private has to continue to build on its legacy of excellent client service. As mentioned earlier, we also believe that trends in financial services have accelerated significantly moving forward the time line for the future model of private banking and wealth management, in particular. New behaviors have been learned. New norms are evolving. The clock will not be turned back. And while it won't be easy, the opportunity to challenge the largest incumbents for market share is as good as it's ever been for the firms that are willing to reimagine the client experience and innovate. Thus, we have accelerated our own time line for delivering a highly distinctive and comprehensive banking and wealth management platform; one, which delivers highly skilled advisers supported by teams of experts, all underpinned by efficient and empowering technology. We have a simple ambition. We aspire to deliver one of the most compelling value propositions in our industry. At the same time, we've been highly focused on the present environment and the risk management of our loan portfolio and balance sheet in order to ensure our company's long-term success. Our priority has been to intelligently and thoughtfully support the needs of our clients, while relentlessly analyzing and managing risk exposures on our balance sheet. As discussed in Q1, we have put programs in place to support our clients and build a conservative loan loss reserve so that our company can withstand the duration of the pandemic, and we remain highly confident in our firm's capital position. I'd like to expand on a few topics that give our team cause for optimism. First, our technology team remains on plan with all of our projects, especially those aimed at enhancing our overall client experience. These efforts will simultaneously bolster our abilities to work remotely while enabling new avenues for growth. Our enhanced online and mobile banking platform will continue to be refined. And this fall, clients will be able to initiate new relationships via a purely online interaction. In the spring of 2001, following the launch of a dramatically improved wealth management platform, we plan to roll out a direct access online and mobile capability in wealth management as well. This new capability will not only allow clients to initiate a relationship with our firm directly, but will also allow them to have increased flexibility and choice regarding the service model they desire. Our efforts to upgrade our digital capabilities in late 2019 have proved to be not only timely. But have also served to strengthen our abilities to deliver an exceptional client experience. Our client acquisition efforts are trending positively in key areas, including our deposit levels, which have seen good growth year-to-date. Recent momentum in our pipeline make us optimistic about both our bank deposit and wealth management AUM outlook for the back half of the year. We expect the stronger deposit flows to improve our funding and liquidity profile and offer balance sheet management flexibility. In the wealth management and trust business, we have delivered positive flows for the second consecutive quarter, while we regained momentum in hiring high-quality advisers after a temporary slowdown entering the pandemic. Here as well, we are optimistic about the new hire pipeline and our ability to continue to add new high-quality advisers. In regards to our dividend, Steve will have more to say about our thought process, but I will offer that our primary intent was to make a prudent adjustment so that we can continue to stay focused on moving forward on our strategic plan. Getting our payout ratio in line with industry norms is not a new ambition. The current environment simply necessitated a review and a change in the path to a more normalized payout ratio. As we eye the balance of 2020, our team feels confident in our company's capital position and liquidity position. Our loan loss reserve build, which incorporate the conservative assumptions and in our overall ability to stay focused on executing our strategic plan. As mentioned earlier, times like these are a great opportunity for us to distinguish our firm and further strengthen client relationships. We will ensure the long-term success of our company by continuing to earn the trust of our clients each day and by staying true to our value proposition. I would now like to hand it over to Steve, to discuss the details of our second quarter results.

[Steven Gaven:]

Thanks, Anthony, and good morning, everyone. My comments will begin on Slide 4, where we show a summary of our consolidated financial highlights from the second quarter. This quarter, we reported a net loss of $3.3 million. Earnings were significantly impacted by $25.4 million of total reserve building, reflecting deterring economic conditions related to the COVID-19 pandemic and a more conservative economic forecast, driven by the increased weighting of our downside scenario under the CECL methodology. Loan activity for the quarter was heavily influenced by the Paycheck Protection Program. Loans increased 4% linked quarter, while deposits increased 2% linked quarter. Total AUM as of June 30, 2020, was $16 billion, a 10% increase linked quarter, primarily driven by a recovery in equity market values from March 31 to June 30. Total net flows for the second quarter were negative $40 million. While our Wealth Management and Trust segment contributed $60 million of positive net inflows. Concurrent with our earnings release, our Board of Directors authorized a $0.06 per share dividend payable to common shareholders during the third quarter compared to $0.12 per share in the previous quarter. As you'll recall from our 2019 Investor Day, we outlined a capital return philosophy, whereby we targeted lowering our long-term payout ratio through earnings growth. Given the environment that has unfolded, we are taking conservative view in accelerating our objective of achieving a payout ratio more in line with the industry. This decision allows us to move closer to our Investor Day targets while representing a conservative approach to liquidity and capital management. Moving on to Slide 5. We show a consolidated income statement. Pretax, pre-provision income increased 13% linked quarter to $20.1 million. Excluding the impact of provision expense for unfunded loan commitments, which is recognized in noninterest expense, adjusted pretax pre-provision income increased 16% linked quarter, primarily driven by higher revenue and lower expenses. Slide 6 shows consolidated revenue trends. Total revenue increased 4% linked quarter, primarily driven by growth in net interest income and the linked quarter improvement of miscellaneous income, which included positive marks on derivatives and securities during the second quarter. Total core fees and income declined 5% linked quarter as lower equity market values, as of March 31, resulted in lower second quarter billing rates in the Wealth Management and Trust business. On Slide 7, we show a detailed breakout of our noninterest expense. Total noninterest expense for the second quarter of 2020 was $61.5 million, which includes $2.8 million of provision expense related to unfunded loan commitments, categorized as other expense. Excluding the impact of the provision expense, second quarter total noninterest expense was $58.7 million, a 1% decline linked quarter and a 5% increase year-over-year. The year-over-year increase was primarily driven by technology investments and new hires. As you will recall, our previous guidance for the quarter was for operating expenses to be $60 million to $62 million. Slide 8 shows the past 5 quarters of average loan and average deposit balances by type. Average total loans increased 4% linked quarter, reflecting the funding of PPP loans. During the quarter, our company funded $380 million of PPP loans, resulting in $284 million of average balances. Excluding PPP loans, average total loans were flat linked quarter and year-over-year. Linked quarter, commercial and industrial loans declined 10%, primarily driven by the payoff of loans and lower line usage. Commercial real estate loans increased 3% linked quarter, primarily driven by the increased loan balances attributable to the debt service reserve program. Excluding debt service reserve loans, commercial real estate loans were flat for the quarter. Total average deposits in the second quarter increased 2% linked quarter and 10% year-over-year as a result of higher average noninterest-bearing deposits from commercial clients. Year-over-year interest-bearing deposits increased 8%, primarily driven by higher commercial client money market balances and wealth sweep deposits, partially offset by the intentional runoff of brokered CDS. The typical seasonality, our deposit base experiences in the second quarter as a result of tax payments did not materialize as a result of the delayed tax filing deadline, but we do anticipate some impact on our business as we enter the third quarter. Slide 9 shows a 5-quarter trend of consolidated net interest income and net interest margin. Net interest income increased 3% linked quarter, primarily driven by lower funding costs, PPP income and prepayment penalties. Net interest margin decreased 1 basis point linked quarter to 2.75%. Net interest margin was pressured by lower-earning asset yields, which declined 33 basis points, while benefiting from lower funding costs, which also declined 33 basis points. PPP loans negatively impacted our NIM by 2 basis points as low interest rates on the loans were partially offset by amortization of origination fees. The total cost of deposits decreased 31 basis points during the quarter, driven primarily by a 50 basis point decline in money market rates and growth in noninterest-bearing deposits. As we move into our discussion on credit, starting on Slide 10, I thought it would be helpful to review Boston Private's credit culture and our process for managing credit risk in our loan portfolio. Throughout the first half of the year, our team has been focused on identifying pockets of risk early, rating those pockets of risk accordingly and then managing those credits aggressively in order to minimize loss. We always anticipate with special mentioned loans that some percentage will emerge and be upgraded, while some percentage will be challenged and downgraded to classify. In this case, the status and duration of COVID-19 is obviously the key factor determining future loan performance. We'll be managing these relationships actively as we always do. And as we discussed last quarter, our underwriting LTVs at origination are conservative. Slide 10 provides detail on our adversely graded nonperforming loans. Overall, nonaccrual loans remained stable at low levels of 35 basis points of total loans. Net charge-offs also remained very low at $1.5 million for the quarter or 8 basis points of total loans on an annualized basis. The increase in our criticized and classified loans reflects the downgrade of performing commercial real estate loans to the special mention category as a result of a more proactive bottom-up analysis of loan-level detail, rather than a deterioration of borrower conditions during the second quarter. Slide 11 shows a roll forward of the changes to criticized and classified loans from March 31 to June 30. This quarter's increase reflects a downgrade of approximately $179 million of loans, partially offset by loan payoffs and pay downs of $48 million in loan upgrades of $29 million. Over the past 3 months, we performed a deep dive on 100% of our hospitality exposures in all of our retail exposures with balances greater than $4 million, which represents approximately 75% of the retail portfolio. This exercise led to the downgrade of 14 commercial real estate loans totaling $153 million of outstanding balances. Within the real estate loans, we downgraded, included approximately $75 million of retail loans and $43 million of hospitality loans. On Slide 12, we provide an update on our exposure to several industries that may be most immediately at risk by COVID-19. We are closely monitoring potential exposure within our CRE portfolio, particularly retail and hospitality properties. While we believe our exposure is underwritten conservatively, we are closely tracking trends in the underlying properties. Our retail portfolio went into COVID '19 with an LTV just below 50%. And throughout the second quarter, we saw retail properties experiencing increasing rent collection trends. Occupancy rates in the hospitality portfolio have been increasing after a bottom in April. However, this segment remains challenged due to the impact of COVID-19. On Slide 13, we provide an update on our deferral requests. P&I deferral levels remained flat from the prior quarter, as we granted deferral on principal payments for 6 months on approximately $126 million of loans or 13% of the portfolio. All of these clients continue to pay interest on their loan facilities. At the end of the quarter, there was $217 million or 7% of residential loans on deferral. This compares to $162 million last quarter. The change from last quarter reflects additional requests that were not processed between our last earnings call in the middle of May. Since the middle of May, we have not seen many new deferral requests. Thus far, clients representing $80 million of deferrals have requested a 90-day extension. The next critical date for extension request is August 1. Soon after the onset of the COVID-19 pandemic, we proactively reached out to qualified commercial real estate clients and established a debt service reserve program that we have previously discussed. This program is a portfolio level program intended to provide our borrowers with flexibility to work with their tenants, who represent the primary source of repayment on our loans. On Slide 14, we review the allowance for loan loss and provision for loan loss expense. This quarter's provision caused our total allowance for loans to increase by 25 basis points to 122 basis points. We increased our reserve levels on commercial real estate loans to 178 basis points. Excluding PPP loans, our reserve coverage on C&I loans increased to 169 basis points. And the total allowance reserve coverage as a percentage of loans, excluding PPP, is 128 basis points. The total reserve build of $25.4 million through provisioning was primarily driven by our increased conservatism regarding the economic outlook. During the second quarter, we increased the weighting of our downside economic scenario as our CECL model is based on a probability weighted composite scenario comprised of 50% Moody's COVID-19 baseline and 50% Moody's S3 scenario. This compares to weights of 70% baseline and 30% S3 last quarter. On Slide 15, we show the Private Banking segment, excluding the Wealth Management and Trust portion of our bank. The Private Banking efficiency ratio decreased to 68% in the quarter, driven by higher revenues. I will now turn it to Paul Simons to discuss our Wealth Management and Trust segment.

[Paul Simons:]

Thank you, Steve, and good morning, everybody. Slide 15 shows performance highlights for the Wealth Management and Trust segment. Segment EBITDA margin for the quarter was 21% compared to 22% in the prior quarter. The linked quarter revenue decline was driven by low equity market levels on March 31, which negatively impacted second quarter billing rates, while lower expense levels linked quarter were driven by seasonal compensation expenses in the first quarter. The segment demonstrated continued strength in new business, coupled with low client attrition, ultimately driving positive net flows of $60 million for the second quarter of 2020. As Anthony mentioned, we regained momentum, hiring high-quality advisers in the back half of the second quarter following a temporary slowdown during the lockdown phase of the pandemic. That concludes our prepared comments on our second quarter 2020 reported results. We will now open up the line for your questions.

[Operator:]

[Operator Instructions]. The first question today comes from Michael Young of SunTrust.

[Michael Young:]

I wanted to start on, maybe just some of the asset quality pieces. You've provided a lot of really good detail. But wanted to just get a feel for, in the current group of special mention and nonperforming that have already been downgraded, are those more often just cash flow shortfalls? And you all don't see a lot of loss content because of the LTVs or price values are still pretty high. Is that kind of the right way to think about that?

[Steven Gaven:]

Okay. Michael, this is Steve. I think it's important to kind of take a step back and think about kind of what we've been doing since the onset of COVID. So if you go back to kind of late March, mid-March, when it became apparent what we might be dealing with, we obviously took a lot of time to go through the portfolio, identify those areas most at risk. For us, that's retail and hospitality. So we went through the process of sweeping the entire hospitality portfolio. We looked at every retail exposure and office exposure above $4 million. And in retail, that covers about 75% of the portfolio. In a typical time, when you're thinking about risk rating, you're looking at updated financials, you're looking at appraisals, you're talking to the clients, and you're making your judgments based on that. Obviously this time, and what we're dealing with is a little different. So we really focused on a couple of attributes within the borrower base, after we did our sweep. So if you think about the things that are probably most relevant to what we're dealing with now, pre-COVID LTV, that's kind of a margin of safety as collateral values deteriorate. We also looked at real-time property-level revenue trends and sponsor strength. So those were kind of the 3 things we looked at. And so the downgrades of special mention really reflect headwinds in one or more of the attributes that I just listed, right? In most cases, pre-COVID LTV, for us, is an area of strength, just given our conservative underwriting. In this environment, obviously, revenue trends are among the weaker attributes, particularly in hospitality, where occupancy rates are down, it's putting pressure on REVPAR. On the retail portfolio, what we looked at though is, at this point, about 77% of the tenant base is paying rent. So we feel pretty good about how that's come off the bottom back in April. But that was really the approach we took to risk rating special mention. We think we have a good baseline of criticized and classified, right now. We could see some more downgrades perhaps next quarter in the hospitality portfolio, just given the headwinds that segment faces. But I feel like we have a good baseline right now. And what you'll see going forward is kind of your typical movement in and out of criticized and classified as loans get downgraded or upgraded, paid down or cured.

[Michael Young:]

Okay. And maybe as we're thinking about kind of future downgrades or migration, obviously, you've kind of outlined the most sensitive buckets here in retail, hospitality and restaurants. But is it right to think that it's really going to be those that are in deferral now that maybe come out and can't resume payment? Or are there credits that maybe weren't approved really for deferrals due to some shortfalls already that are in those buckets that could also negatively migrate going forward?

[Steven Gaven:]

Yes. So I think it's important when looking at our risk rating migration is that, keep in mind, we don't take into consideration whether or not a loan is in a program or on deferral when assigning risk ratings. So we kind of put that aside through our process. And based on the approach I just described, that's how we're arriving at our risk ratings. So we shouldn't see this cliff effect, if you will, that loans come off a program or loans come off deferral and then they become problems or they need to be downgraded. We're doing that ahead of time.

[James Brown:]

Michael, this is Jim. I would just add to what Steve said. Steve quoted the 77 percentage rent collection, we're in the high 60s with loans that are on deferral. So it's not like the loans that are on deferral are particularly low. Those have come off the bottom as well.

[Michael Young:]

And then maybe switching gears. I don't know if this is for Anthony or maybe Paul, but it was good to see the positive net flows, again for the second quarter in a row here. Could you maybe just talk about, what is going on in this environment, right now, with customers and client interaction, et cetera, and how you're able to drive those? And just what the outlook is. It sounded like positive trends, you expected, in the back half. So just maybe a little more color there would be helpful.

[Anthony DeChellis:]

Sure. I'll start and then maybe Paul will add something. So as I mentioned in the first quarter call, one of the benefits that we've had from an environment like this is, your clients actually do need to talk to you about more complex things, right? If you're more -- if you weren't thinking about business succession or estate planning or wealth transfer strategies, not just because maybe you're sitting at home, with your family around you and maybe talking about some things you don't normally talk about. The current environment has probably put some topics on the table, maybe we just always naturally defer as human beings, right? They're just not maybe the topic you want to talk about. And so that's allowed us to actually engage with our clients. That may be more often we are about investments or investment process into more expanded conversations about their whole financial well-being. So that's been -- from a client standpoint, I've personally been amazed at how well they've adapted to either a video conference or just a phone call, and I think they're being understanding in the current environment. But I would say that, at the moment, we are seeing things proceed rather well. What I've referenced earlier in my comments about the opportunities that I think it's offering is, if you had a bricks-and-mortar advantage that for the moment anyway, is not the advantage it used to be. And I think that, that, coupled with the fact that clients are becoming more and more comfortable with, a, doing things maybe themselves online, or being open to a different sort of a relationship, still having access to great advice and guidance, but also being able to use technology to get done a lot of the things maybe they would have asked someone to do for them before, is going to create a good opportunity. And we see that dynamic also playing out in potential talent, right? If you've been at home working and you've been at a big firm for the last 10 or 20 years, you're probably more open to the idea of making some sort of a change, and it seems maybe less of a big leap to go to a different firm or a smaller firm and maybe you can start your own firm. So these are all things that were already trends in place. We just think that this pandemic, along with bringing a lot of challenges, has also accelerated some of the things that we probably -- we were going to see anyway. It's just now, I think, been sped up by about three years. Paul, I don't know if you would add anything to that.

[Paul Simons:]

No, I think that covers it. I mean this is an environment that lends itself to our strengths, as a holistic advisers, and we're seeing that in increased engagement, strong retention of clients. And it is a challenge. COVID does present a challenging environment for sort of on boarding of new clients. And so we take comfort in the continued strength of our numbers for the second quarter. And feel good that, that trend is going to continue and accelerate into the second half.

[Anthony DeChellis:]

But one of the things we tried to do during the pandemic is just put out a regular pulse, those of our -- see how our employees are doing, but also how our clients are doing. And it is interesting that during this time period, things like our Net Promoter Score are actually increasing, right? So even at a time period, where you can't necessarily get in-person time, but maybe you're getting screen time, or you're certainly getting phone time that clients are -- our scores have improved across the board on things that matter most to clients. We reviewed that yesterday in our executive [indiscernible] meeting, which we -- which I think is very telling. That you cannot only manage a time period like this, but you can actually make progress with clients, and we're seeing that.

[Operator:]

Next question comes from Chris McGratty of KBW.

[Christopher McGratty:]

Steve, maybe start with you. The margin was obviously a really strong point in the quarter. As you kind of matched one-for-one on the repricing. How do we think about prospective margin, maybe the conversation excluding PPP, how do we think about margin? And then probably more importantly, how do we think about just dollars of net interest income from the -- from this quarter's level?

[Steven Gaven:]

Yes. So I would think about kind of the core NIM and PPP, Chris, we're going to see some margin compression going into next quarter. And that's mostly due to the fact that we pushed through a lot of the deposit cost reductions in the first and second quarter. There's probably another 10 to 15 basis points to move on interest-bearing deposit costs as we get through the next couple of quarters. Then we think we're kind of close to bottoming, although we'll see how the industry reacts as we get longer into this lower for seemingly longer cycle. And obviously, we're going to have asset yields repricing down. So we're a bit of an asset-sensitive position at this point. So that's where you're going to see kind of core NIM compression, probably 5 to 10 basis points. And that will also depend on our ability to maintain the on balance sheet liquidity that we've seen through the second quarter, and quite frankly, thus far in the third quarter. From a dollar perspective, because of PPP, I think you'll see NII flat to up slightly, next quarter. And that's really a function of the fact that we really didn't start amortizing the PPP fees until May. And even in May, I think, we only got about half of the impact in that month. So the only month with a full impact of amortization on PPP was June. So I expect NII flat to slightly up as kind of PPP will offset some of the core NIM -- core NIM contraction that we anticipate.

[Christopher McGratty:]

And just can you remind us, the fees that are yet to be realized? And also, should we just assume kind of a straight line? Or how are you guys accounting for it?

[Steven Gaven:]

Yes. So it's $11 million of fees, Chris, straight-lined over 24 months. So that's the monthly rate to use in your modeling.

[Christopher McGratty:]

And then I want to turn to expenses for a moment. You talked about how you were within your guide, even with the unfunded build. How do we think about putting the comments that Paul and Anthony talked about with hiring into the environment that we're in, in terms of expense build?

[Steven Gaven:]

Yes. I would think expenses linked quarter going into third quarter should be down $500,000 to $1 million and that's really -- you get some pickup, obviously, from the off-balance-sheet provision build going away. But then you have the offsets being investment in technology and hiring. So that's how I think about expenses for third quarter.

[Christopher McGratty:]

And then maybe the last one on the tax rate. How do we think about the tax rate normalized?

[Steven Gaven:]

So tax rate is tricky in this environment, given kind of where earnings have been. I think for the full year, we're modeling a tax credit of 20% to 25%. That's going to move around a lot though, depending on where pretax income shakes out for the rest of the year. So I'd like to give you a more definitive answer. Just when you get to these levels of earnings, the tax rate moves around pretty wildly.

[Operator:]

Next question comes from Alex Twerdahl of Piper Sandler.

[Alexander Twerdahl:]

First off, just wanted to go back to the commentary on Boston Private Wealth. I appreciate your comments on the momentum in the pipeline for hires and customers, et cetera. But maybe just to ask it a little bit more bluntly. You guys had a strategy to grow AUM to about $50 billion over the next couple of years. That was suspended last quarter. Are we back on track for that target? Or is that still a suspended target?

[Anthony DeChellis:]

Yes. I think I addressed this in Q1, but happy to go to go through it. So when we look at our wealth business, one of the key area to grow was, a, taking our existing business and expanding it, right? So when we looked at a $50 billion number, we thought the 16 with existing clients can get to $23 million or $24 billion. We thought we would hire the next $15 billion. That really requires bringing in 10 to 12 really high-quality people a year over a 4-year period. And the area where we have slowed down, we'll have to replace it with hiring, is really, we thought we would be able to acquire $8 billion to $10 billion of either smaller firms, $5 billion in size or 1 firm, $10 billion in size. Given the price movement in some of those assets, we've now turned -- we turned our attention sort of away from that and focused just on hiring. So the piece that comes in -- the question is the $10 billion that we were going to acquire mainly because we're just put off by some of the prices to accomplish that, and we focused on hiring. So we haven't -- that $10 billion piece is a piece in question, we were slowed down because of the pandemic, but we've seen conversations now accelerating, as Paul said, particularly through the back half of the second quarter. And so that original piece that we thought we could hire our way into, we're still committed to.

[Alexander Twerdahl:]

And then with some of the hires that you guys had already brought on sort of at the end of last year and some of their momentum. Do you foresee kind of a -- I don't know if it's a floodgate opening or some event or some quarter, where we're going to really start to see AUM build, as a result of hiring and customer acquisition?

[Anthony DeChellis:]

That is certainly the plan. And when we look at -- and Paul will probably comment a little bit more on this. But when we look at some individual hires we've made, they're actually ahead of plan. There's some noise as we continue to sort of adjust the business. But when we look at individual hires, we normally expect them, if we hire the right people within a 12-month period or so, they'll bring in $300 million to $350 million in AUM. And we've seen a couple of folks we've hired actually be on a better pace than that.

[Alexander Twerdahl:]

And then back to the question on the downgrades, Steve. Great color. I think you talked about 75% of the portfolio has been reviewed at this point. Everything over $4 million. Is there an expectation that the other 25% would be reviewed -- are reviewed in subsequent quarters and could result in additional downgrades?

[Steven Gaven:]

Let me just clarify, so all of hospitality has been reviewed, Alex, on retail and office, it's anything above $4 million. I'll ask Jim to comment on how he thinks about the remaining part of the portfolio and the approach we took, and he'll give you his thoughts on what we can expect in coming quarters.

[James Brown:]

Yes, thanks, 100, but just to be clear, 100% of the loans over $4 million have been reviewed in retail, hospitality and actually office as well. We just didn't see the same weakness in office that we did in retail or hospitality. But every other loan is still reviewed the same way we would always review loans. But we really took a much, much higher degree of review for all the loans over $4 million because, obviously, that's -- as Steve said, that's where 75% of the exposure is, and I would say, probably a higher percentage than that in terms of loss exposure.

[Alexander Twerdahl:]

And then just can you remind me for the other, sort of, the rest of the portfolio, do they get reviewed annually?

[James Brown:]

I mean, we're looking at everything quarterly at this point. But under ordinary circumstances, you would review loans annually, yes.

[Alexander Twerdahl:]

And then just as it relates to the reserve, I guess, under the old model, an increase of special mention would result in an increase in the reserve. You attributed most of the reserve increase this quarter to just the changing weighting of the scenarios. So I mean, how should we think about the reserve level? From here, it seems like some of the buckets certainly have a very healthy reserve. If the scenarios don't change meaningfully, are you done with the reserve build at this point?

[Steven Gaven:]

I think for the most part, Alex, the big step-up in reserve building has been done in the first half of the year. Obviously, we took the opportunity this quarter to reevaluate the economic forecasts, change the weighting. And really, the reason why we changed the weighting is when we went through the narratives that Moody's provides, the baseline basically had the U.S. economy reopening uninterrupted, in the forecast. And just based on what we're seeing in our markets and what we're seeing more broadly, we thought it made sense to weight that downside scenario equal to the baseline. I think there's a level of conservatism there. As you mentioned, if you look at the loan level tools, I think we've built up reserves to an appropriate place. So on a go-forward basis, we should get back to your traditional provision and allowance build kind of tracking loan growth and charge off levels. Again, if there's a big downgrade in the economic environment, that will have an impact on allowance. But we think we've done a good job conservatively and appropriately building allowance in the first half of the year.

[Operator:]

[Operator Instructions]. The next question comes from Christopher Marinac of Janney Montgomery Scott.

[Christopher Marinac:]

I wanted to ask about the unrealized security gains that you have, and would you consider utilizing them at this point? And just kind of curious if that's an option for you going forward?

[Steven Gaven:]

We typically aren't active sellers out of the portfolio, Chris. We'll do it from time to time if it makes sense. As you can imagine, redeploying that cash is difficult in this environment. We think we have ample capital. When we look at our capital, with our allowance build at kind of 12.3% CET 1 plus ALLL, we feel really good about where we are from a capital perspective. So we don't think we need to be opportunistic in building capital by selling securities out of the portfolio.

[Christopher Marinac:]

Did this center at all into your dividend discussion this quarter? I'm just sort of curious if you could have bought yourself another quarter or 2. And maybe it's moot if the pandemic gets worse. Just curious how you thought about that.

[Steven Gaven:]

Yes. So we -- I mean, when we thought about the dividend, obviously, we run a number of different stress scenarios to test the earnings levels as well as capital. And we married that with what we discussed at our May 2019 Analyst Day, where we talked about kind of normalizing that payout ratio closer to 30%, which is typically where you'd see companies in our size operating at. And taking all that information together, looking at the earnings trajectory that we think can materialize kind of in 2021 and 2020 and understand the risk in our portfolio, we think that $0.06 per share is a good number. We don't think it's at risk. And obviously, if things get better, quicker, we can always increase that dividend if it makes sense. But that was really how we thought about the dividend decision going into the quarter.

[Christopher Marinac:]

And then I guess just a final question back on the portfolio. I mean, is there any sort of testing, do you envision, the next couple of months in terms of the LTVs, where perhaps a loan is sold in the marketplace or that you de-risk and test those values. I'm just curious if you sort of feel that those LTVs are defendable.

[Steven Gaven:]

Well, obviously, those LTVs at origination pre-COVID, those will change, obviously. There aren't a lot of reference points, as you can imagine, because there's just none active -- there's not active capital markets activity in commercial real estate at this point. But the reason why we point out those LTVS, not that we think those are the LTVs today per se, but I think it does illustrate that at the origination, the underwriting is very conservative. There's a lot of margin of safety. So for in order for these properties to be under water, we need to see kind of significant deterioration in collateral values. And we'll probably see that in some asset classes, but we feel like we're pretty well protected based on the underwriting going into this crisis.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Anthony DeChellis for any closing remarks.

[Anthony DeChellis:]

Thanks. And thank you all for joining us today. As indicated in our remarks, we expect the current dynamics of the current environment to persist for the balance of the year, offering both challenges and opportunities, which we are confident we will continue to navigate well. We look forward to updating you on our next call. In the meantime, we wish you all well in navigating, what I'm sure are your own set of unique challenges and opportunities. We wish you a great day and hope that you stay safe. Thanks.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.