Boston Private Financial Holdings, Inc.
Q4 2015 Earnings Call Transcript

Published: 28 Jan 2016

[Operator:]

Good morning and welcome to the Boston Private Financial Holdings, Inc. Fourth Quarter 2015 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Clay Deutsch, Chief Executive Officer. Please go ahead.

[Clay Deutsch:]

Good morning, everyone. This is Clay Deutsch, Chief Executive Officer of Boston Private Financial Holdings. Welcome to our fourth quarter 2015 earnings conference call. Joining me this morning are David Kaye, our Chief Financial and Administrative Officer; Corey Griffin, Chief Executive Officer of Boston Private Wealth; and Steve Gaven, our Director of Investor Relations. At this time, I’ll ask Steve to read the Safe Harbor provisions before we make additional remarks.

[Steve Gaven:]

Good morning. 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 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.

[Clay Deutsch:]

Thank you all for joining our call this morning. In the fourth quarter, our Company generated net income of $15 million or $0.17 per share, compared to $0.16 per share last quarter and $0.13 per share in the fourth quarter of 2014. Return on average tangible common equity was 12% for the quarter and return on average common equity was 8%. We have also announced that the Board of Directors approved an increase in the quarterly dividend to $0.10 per share. This marks the fifth quarterly cash dividend increase in the past three years. We remain focused on optimizing our capital structure and will continue to look for ways to return capital to shareholders over the coming year. Before we move into the formal earnings presentation, I would like to take a moment to reflect on our performance in 2015 and offer some thoughts on the year ahead. Performance was uneven across our businesses in 2015. Our Private Bank performed at a high level across all of our markets. Our acquisition and development of high caliber private clients was nicely balanced across the Private Bank with both the East Coast and West Coast contributing strong loan and deposit growth, ahead of our long-term goals. Collectively, our investment management businesses experienced revenue deceleration in the face of secular headwinds that are impacting long-only U.S. managers across our industry. Our wealth advisors generated modest growth for the full year, reflecting lower levels of net flows. The financial performance of Boston Private Wealth has been disappointing, as client attrition related to the departure of client facing employees weighed on revenue development, despite record levels of new client introduction and business development. While the financial performance of the Company in 2015 did not meet our return standards, we did execute on a number of important initiatives throughout the year that strengthened the Company and positions us to deliver on our strategy going forward. I would like to briefly speak directly to three specific areas of interest to our clients and shareholders. First, in 2015, we introduced Boston Private Wealth to the marketplace. I’m proud to say we now have a highly evolved and sophisticated investment platform and client service delivery model married with bespoke private banking capabilities that enable us to truly differentiate in the private client space. When we first set out on this journey, one of our goals was to create an organization that would attract the highest caliber practitioners. To this end, we added 17 professionals to our client advisory and business development staff over the course of 2015. Just yesterday, we announced three outstanding senior hires including a new leadership team on the West Coast. Bill Mikus joins us from Mikus Capital Management as Managing Director Business, Development; he will be locating in Palm Beach. Gerald Graves, Executive Managing Director, West Coast; and Chris Dudley, Senior Wealth Advisor join us from Filigree Advisors, and they will be based out of our recently opened wealth management and private banking Office in Beverly Hills. I would like to welcome Bill, Gerald and Chris to our team. I’m personally very excited about these additions to our Boston Private Wealth practice. Second, we’ve been working very closely with Anchor Capital to strengthen the firm with a specific focus on the firm’s investment team and marketing and distribution efforts. Reflecting on 2015, we are very encouraged by the progress to-date. In 2015, Anchor’s flagship strategy, Mid Cap Value, outperformed its benchmark by more than 5.5%, putting it at the top of its peer group in absolute performance and alpha [ph] generation. Furthermore, the Company’s three largest strategies comprising 92% of assets under management, all outperformed their respective benchmarks in 2015. On the marketing and distribution front, the team has made significant progress in deepening platform representation with considerable upside ahead. Finally, in December, our Board approved a new executive leadership team structure that knits together our Company and private banking executive team. This structure reinforces our goal of being our clients’ most trusted advisor and enables more integrated delivery of our wealth management trust and private banking skill sets to our clients through a more unified Boston Private organization. By integrating the bank and the holding company into one team, we realize multiple benefits. We increase our speed of execution and decision making; we signal our total commitment to an integrated client delivery strategy, client development strategy and implementation plan; we streamline our corporate control functions; we expand and develop our executive leadership capability by capping more fully into in-house executive talent; and finally and importantly, we increase our expense efficiency while affording us the flexibility to further optimize capital return strategies. I believe these benefits will serve us well as we push for greater performance in what appears to be a demanding 2016 environment. With that, I’d like to turn the call over to Dave Kaye. Dave?

[David Kaye:]

Thanks Clay and good morning everyone. My comments will begin with slide three of the earnings presentation and that can be found in the Investor Relations section of our website, bostonprivate.com. On slide three, provide a summary of our key performance metrics. In the fourth quarter of ‘15, return on average common equity was 8% that compares to 7% in both the third quarter of ‘15 and the fourth quarter of 2014. ROE in the current quarter was negatively impacted by higher marketing expenses, higher restructuring and legal costs, and was partially offset by provision credit. Slide four shows the consolidated income statement. Net interest income growth was strong once again, and I’ll walk you through some of the details on that in just a few slides from now. Core fees and income were down 6% linked quarter to $37 million. Fees decreased linked quarter due to lower AUM at Boston Private Wealth, a 4% decline in revenue at the investment managers and lower swap fees at The Private Bank. On a year-over-year basis, core fees were negatively impacted by the lower AUM at both Boston Private Wealth and the investment management segment. Total operating expenses for the fourth quarter of ‘15 were $67.4 million that’s up 9% linked quarter, and I’ll go into a little bit more detail in the next slide. But before moving onto expenses, I wanted to highlight that the effective tax rate of 28% was unusually low for the current quarter and that was driven by reductions to executive compensation. We expect our normal effective tax rate to be in the 32% range going forward. On slide five, we show a detailed breakout of our consolidated operating expenses. Compensation and benefits rose 4% linked quarter, but as you’ll recall, the third quarter was unusually low since it included some one-time adjustments to decreased incentive compensation. Marketing expenses were $2 million higher and that reflects the timing of marketing campaigns at Boston Private. Our professional fees increased $1 million linked quarter and that’s driven by higher legal fees. Finally, we did record a $2 million restructuring expense in the fourth quarter of 2015. If we adjust for the marketing spend the elevated legal fees and restructuring charges, we’d estimate that our run rate quarterly operating expenses to be approximately $62 million to $63 million per quarter going forward. A consolidated full year financials are shown on slide six. For the full year, total revenue increased 8% to $347 million. Net interest income increased 3% and that reflects average earning asset growth of 7%, partially offset by NIM compression of about 6 basis points. Core fees increased 13% to $157 million in 2015. And this increase was driven largely by the acquisition of Banyan Partners which closed in the fourth quarter of 2014. Along with higher revenue from the wealth advisors and also higher banking fees, operating expenses increased 12% or $28 million to $255 million, again the step up in compensation and benefits, intangible amortization and restructuring expense, mostly reflects the acquisition of Banyan Partners. The increase in occupancy equipment includes the impact of Banyan as well as higher expense at our wealth advisors. Moving to slide seven, the top chart shows the relationship between our net-charge offs and recoveries and our provision for loan loss. As you can see, these measures are highly correlated. The chart below demonstrates the continued improvement in asset quality with criticized loans being down 3% year-over-year. We also continue to maintain strong reserves with our ALLL finishing the quarter at 137 basis points. On slide eight, we show the private banking segment excluding the wealth management portion of our bank. In the fourth quarter, net interest income increased 4% linked quarter and it’s up 9% year-over-year to $49.1 million. Our core banking fees were down linked quarter and that’s due to lower swap fees in the current quarter. Total operating expenses of $32 million are up $5 million linked quarter and up almost $3 million on year-over-year basis. Both the linked quarter and year-over-year increase, was heavily impacted by $2 million in marketing expense due to the rollout of our Boston Private rebranding campaign. Pre-tax pre-provision income increased 8% year-over-year due to the strong net interest income growth. On slide nine, we show the past five quarters of average loan balances and deposit balances by type. Total average loans increased 8% year-over-year, led by C&I up 17%, CRE and construction up 6%, and resi up 5%. We maintained strong momentum in building our private clients franchise in Sothern California. Total end of period C&I loans increased to $158 million or 17% in 2015. Of this increase, Southern California accounted for $40 million or 25% of the total growth, despite accounting for less than 10% of our total C&I portfolio. Average total deposits increased 8% year-over-year to $5.9 billion and that was led by a growth in core funding. Demand deposits and money market deposits increased 14% and 8% respectively, while CDs continue to trend lower. Deposit growth has been strong across both our East and West Coast markets. Turning to slide 10, core net interest margin was up 4 basis points, both linked quarter and year-over-year to 2.93%. Net interest income at the bank was $48.8 million in the current quarter and has now posted sequential increases in four straight quarters. We’ve been able to achieve incremental net interest income growth while at the same time better positioning our balance sheet for various interest rate scenarios. Our cost of funds including DDA has come down 2 basis points over the past year. And with that, I’ll now turn it over to Corey Griffin, CEO of Boston Private Wealth. Corey.

[Corey Griffin:]

Thanks, Dave. Slide 11, contains financial information for the wealth management and trust segments which operate under the Boston Private Wealth brand. Revenue decreased 9% on a linked quarter basis to $11.8 million. As you’ll recall the third quarter of 2015 includes a market value adjustment for the Banyan Partners earn-out of 500,000. Excluding this adjustment, revenue decreased 5% linked quarter due to lower assets under management. Total operating expenses increased 5% linked quarter to $15.1 million. Expenses in the fourth quarter of 2015 included restructuring charge of $2 million. Excluding these charges, operating expenses increased 2% linked quarter, driven primarily by higher legal fees, the benefits of the fourth quarter of 2015 restructuring yields and expected pre-tax operating income margin of 10% the 15%. Turning to slide 12, we show both net flows and gross flows for Boston Private Wealth for the past eight quarters. Net flows were negative $195 million in the quarter, a significant improvement from last quarter’s outflows of $565 million. The improvement in net flows is being incurred by better client retention coupled with robust new business generation in the second half of the year. As we complete the integration and introduce the new models to the marketplace, I’m heartened by our new business generation and we look forward to pushing the business into positive flow territory. Now, I’ll turn it back to Clay. Clay?

[Clay Deutsch:]

Corey, thanks a lot. Moving to slide 13, our wealth advisors reported a 1% year-over-year increase in revenue for the fourth quarter of 2015 to $12.6 million. Operating expenses decreased 8% year-over-year and 12% linked quarter to $8.2 million. The year-over-year decrease reflects lower incentive compensation and lower professional fees at KLS, while the linked quarter decrease reflects lower incentive compensation at both affiliates. Fourth quarter 2015 segment EBITDA margin was 38%, compared to 30% in the third quarter of 2015 and 32% in the fourth quarter of 2014. Full year EBITDA margin for the segment was 34%. EBITDA margins remain above our 30% corporate target. On slide 14 we show that total revenue for the investment management segment decreased 9% year-over-year and 4% linked quarter to $10.9 million, due to the impact of net outflows and market volatility. Operating expenses decreased 4% year-over-year and 1% linked quarter, representing lower incentive compensation and the retirement of senior executives at Anchor Capital. Fourth quarter 2015 segment EBITDA margin was 32%, compared to 34% in the third quarter of 2015 and 35% in the fourth quarter of 2014. Full year EBITDA margin for the segment was 33%. EBITDA margins remain strong in this segment, again above our 30% corporate target. Slide 15 shows assets under management net flows by segment. The investment management segment had net outflows of $294 million in the quarter, reflecting the ongoing challenges facing long-only domestic equity managers. Net outflows were $54 million in the wealth advisory segment. And finally, as we touched on earlier, net outflows at Boston Private Wealth were $195 million, while still negative, a significant improvement from what we saw in the third quarter. This concludes our comments on the quarter and on full year 2015 performance. I’ll now open up the line for your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Alex Twerdahl of Sandler O’Neill. Please go ahead.

[Alex Twerdahl:]

Just quickly, Clay, you said in your initial comments that you are searching for other ways to return capital to shareholders as the year progresses. Can you just tell us again what you consider your restraining capital ratio to be and how much access you might have, and what some of these options to return capital to shareholders might be if it is not just through the dividend?

[Clay Deutsch:]

Yes Alex, let me first go to Dave. We have a pretty refined set of our target capital zone or strike zone. So, I’d ask Dave speak to that and then we can -- we’re looking at a whole range of give back possibilities. Our preferred vehicle remains an escalating dividend, but we’re looking at the whole picture. Dave, target capital?

[David Kaye:]

Yes, target capital, we’re really looking at as we said before in the past, the common equity Tier 1 in the 9.5% to 10% range. We’re right in that range right now right at 9.8%, so we feel good about our overall capital.

[Clay Deutsch:]

Alex, is that helpful?

[Alex Twerdahl:]

Yes, it is. Thank you. And then can you -- why were legal expenses so much higher in the fourth quarter; is there something that happened that you had to address?

[Clay Deutsch:]

I’d say the common theme is we had several matters generally associated with protecting our client base from solicitation.

[Alex Twerdahl:]

Okay. And then finally, just to talk about some of the outflows that continue to come from Banyan customers; with the new hires and with some of the things that you did during the fourth quarter, do you expect the outflows or the net outflows to reverse in the first quarter 2016?

[Clay Deutsch:]

Alex, by handicap, as you know, I’ve been not allowed to get guidance on the flows. I will say this though and then maybe Corey wants to add. We did disclose a bit more in this call on gross flows. We’re really encouraged; you’ll see an almost 2X step-up in our new business generation. I think Corey and the team are doing a very good job working client retention down to an acceptable level. I also made a bit of fuss as you heard over Bill Mikus and Filigree Advisors joining us. We’ve achieved that degree of new business generation with very little representation on the West Coast. And that represents half our clientele and it certainly represents more than half of the long-term economic potential in the Company, given the size of the wealth community in San Francisco and the Bay Area and in Southern California. So, I’m not trying to avoid your question. I really can’t pan a predictive number, but we’re absolutely committed to breaking the flows into positive territory. It’s going to be driven by continuous expansion of our new business generation ability married with getting the client retention levels down to a more normal and acceptable rate. I think we’re doing a great job on that. Corey, anything you want to add for the business set?

[Corey Griffin:]

Yes, I guess I’d just further underline something you said earlier about the new business for the year. It was, to underline that point the Clay made, is the best new business year in the firm’s history. And I’d say that’s something we’re certainly going to continue to focus on. And with respect to the outflows, you heard this before that was more even driven by the departures in personnel in the beginning of the summer; we’re not expecting those types of events to occur.

[Alex Twerdahl:]

Did you lose anymore PMs during the fourth quarter?

[Clay Deutsch:]

No.

[Alex Twerdahl:]

And can you remind us the PMs that you did lose, those were legacy Boston Private guys, right, versus Banyan guys coming over

[Clay Deutsch:]

Largely.

[Operator:]

Our next question is from Casey Haire with Jefferies. Please go ahead.

[Casey Haire:]

I just wanted to follow up on the flow question. Of the PMs, the legacy PMs that have left and how much AUM is still in-house and potentially at risk for further outflow?

[Clay Deutsch:]

Well, again Casey, as you know, unfortunately, we haven’t revealed the dollar totals. I will say this; we’re well past the halfway mark on what we thought were the AUM at risk. So, I take a lot of encouragement in that bend upward you see from Q3 to Q4.

[Casey Haire:]

Okay, got you. And on the investment management side, Clay, I appreciate that you guys have turned around the performance, but you guys are still frightening as are all active managers, the secular outflow trend. It’s had one positive flow quarter in the last two years. What’s giving you so much confidence you can turn that around, and given the powerful headwind there?

[Clay Deutsch:]

I certainly won’t deny the headwind. I do look at the fundamentals. So, I really like what the team’s doing with investment process, discipline. The old saying in the industry, you got to start with selling performance, seven and the nine strategies are adding value and the flagship strategy is literally number one in a 45 from peer group. So, we’re doing the job on client value added, now for generation. We’ve done a very significant recast of the marketing and distribution effort. And I believe that we all know that ownership of these firms is volatile from a revenue standpoint. The firm has actually had remarkable profit stability. So I think, we’ve got to stay -- what I told the team is stay focused on the horizon; we’re doing all the fundamentals right. And I think there is a lot of value in that firm.

[Casey Haire:]

Okay. Just last one, switching to expenses Dave, it sounds like there was some timing issues around some marketing expenses, so the core run rate is somewhere 62.5 to 63. Can you comment on -- so what was going on with the restructuring in wealth management, because if you guys are expecting a 10% to 15% pre-tax margin, by my math that looks to be about 10 million to 12 million annualized cost savings. Can you clarify that and what’s the timing and when that’s realized?

[David Kaye:]

We had -- we’ve taken a restructuring charge in the fourth quarter, as you said. We believe that will result in reduced expenses going forward in the wealth management business. A lot of the legal fees as well, we’re in the wealth management business, so we’re expecting that to revert back to more normal levels. When you take the cost saves into account from restructuring and some other things we’ve done in the fourth quarter, coupled with the lower legal fees, we do feel we can get back quickly into that 10% to 15% EBITDA margin initially. And then we’re going to need to have revenue growth. And I think we have capacity. If we get some revenue growth, we continue with the strong new business generation, as Corey said, and we can get revenue growth, we can start heading closer to our desired EBITDA target.

[Casey Haire:]

Okay. So, the 62.5 to 63 that includes the improvement in the wealth management, not just the fading of the legal and marketing expense?

[David Kaye:]

Yes. And we’re going to have -- we invest in the business as we always do, we had some normal modest, inflationary expenses but those cost saves coupled with those other things should get us in that 62 to 63 range.

[Casey Haire:]

And you also have the FICA [ph] balance in the first quarter, which obviously can be -- will be lumpy in the first quarter.

[David Kaye:]

That is in average Casey, so first quarter tends to be elevated because of the FICA.

[Casey Haire:]

Excellent. Thanks for clarifying.

[Operator:]

Our next question is from Chris McGratty of KBW. Please go ahead.

[Chris McGratty:]

Dave, a question for you on the credit outlook. Your numbers look great, your reserve keeps coming down and you’re growing the book at the same time. How should we be thinking about provisioning or reserve levels into the next 12 to 18 months?

[David Kaye:]

Well, I think the chart that we laid out is a good indicator. I mean if we can continue to have net recovery that’s going to heavily influence our provision level, because it’s pretty highly correlated. The only trouble I have is that it’s really hard to predict the net charge-offs and net recoveries on a quarter-to-quarter basis. I’ll stake with what we’ve said in the past and we still think we’re in an environment where you expect lower than normal provision due to the fact that we’re not seeing the net charge-offs elevate and we still have potential for more recoveries. Although that is coming down over time as we work out of our problem loans.

[Chris McGratty:]

A question on the margin if I could. Your security yields have been kind of gradually moving in the right direction. Can you remind us couple of things, what the duration is; what you might be buying and kind of the outlook for the margin as it relates to -- if we assume, we get another hike this year how the margins will perform? Thanks.

[David Kaye:]

I mean, I think that overall our duration is a little under four, three, eight, three, nine. [Ph] We have been buying some minnies [ph] and you saw some -- a nice tick-up in the minnie yields went out a little bit longer duration on that. If we get additional rate hikes in the future, we’re hoping for -- obviously the steeper curve helps our margin, we could expect margin expansion, slight margin expansion over the coming quarters as that happens.

[Chris McGratty:]

Okay.

[Clay Deutsch:]

Chris, the only thing I’d add, I believe you should always expect us to be a little lower yield than the peer group. We have taken a little bit of extension move, but we remain freaks about credit quality. So you’re going to see us, I believe with a squeaky clean relatively lower yield securities book perhaps in the average bear and that’s by design.

[Chris McGratty:]

Okay, that’s very helpful. Have you seen any changes in depositor or I guess deposit rates given the move or too soon?

[Clay Deutsch:]

Nothing yet.

[Operator:]

Our next question is from Chris Marinac of FIG Partners. Please go ahead.

[Chris Marinac:]

Thanks, good morning. Clay, you mentioned and Dave mentioned about the capital in the earlier question. I’m just curious on would the balance sheet grow any faster than it has the past few quarters?

[Clay Deutsch:]

The headline, the answer Chris is no. We remain convinced, we can satisfy our client needs and our client expansion needs with balance sheet growth overall of up to about 8%. We also like that number, because it fits a sustainable growth rate without a need for additional capital. So, we think at that 5%, 6%, 7% loan growth rate and 8ish percent deposit growth rate that we’re doing really nice job with the expansion of the franchise, and yet still in a position where we can accumulate capital, recycle some capital into the Company and still have capital build for return of capital. So, we like that equation. I don’t see us departing that near-term.

[Chris Marinac:]

And I guess as a follow-up on the investment management side, Clay. Does the EBITDA margin begin to turn upward before the outflows turn positive, just trying to get a gauge of that?

[Clay Deutsch:]

Well, narrowly in the case of Boston Private Wealth, short answer, yes. Because we have taken our medicine on the restructuring charges; we’re resetting expenses at a lower burn rate. And I think that will become clear as ‘16 unfolds. There is absolutely no question though that we’ve kind of spring loaded the business for margin expansion as we drive revenue growth. So, as Dave hinted, the reset in that business already gets us closer to that 10 to 15 kind of run rate. Our target margin rate though is substantially above that. That’s going to be enabled by the combination of flows reversal and revenue growth married with restructuring and streamlining of the business.

[Chris Marinac:]

And it sounds like that’s something that you think could happen this year.

[Clay Deutsch:]

It’s an expectation of Corey, let’s put it that way. Not trying to be geared [ph] about, Chris. We I think have said publicly before, our target margin zone for that business is minimum 20%; we want to push that into north of 20 territory. So, step one has been get the reset to that 10 to 15 range, do all the right things on new business development, shut the door on client retention. And I think we have a business that begins to perform in a pretty attractive way from a margin expansion standpoint. Obviously, we are held then to prove that to you as ‘16 and unfolds, but I think we’re setting up pretty nicely for that.

[Operator:]

[Operator Instructions] Our next question is from Jennifer Demba of SunTrust. Please go ahead.

[Jennifer Demba:]

Thank you. Good morning. Following up on the strategic hires that you’ve announced last night, are you intending to make more of these hires in 2016 and are those -- the cost of those hires fully loaded into that $63 million type expense run rate?

[Clay Deutsch:]

Why don’t we start with that last bit? Yes. So, those additions are in what we’ve told you. Going forward, Jen, yes, I mean one of our goals in putting together Boston Private Wealth was to build the platform that would then allow us to do subsequent additions. So, I’m really encouraged with Mikus Capital and Filigree. I think the structure of both of those additions was pretty elegant from a cash and capital standpoint. And I think the quality of those professionals is extraordinary. So, we’d like to continue down that path. I’ve nothing to disclose at this time but that’s a build and add-on strategy; we’re going to keep pursuing.

[Operator:]

Our next question is from Jake Civiello of RBC Capital. Please go ahead.

[Jake Civiello:]

Good morning, guys. This is more of a longer term thought question, but loan growths of private banks obviously have been solid and with challenges in core fee revenue businesses leading to lower non-interest income, spread lending continues to become more important as a percentage of total operating revenue. So, Clay, I think when you first joined Boston Private, fee revenue represented about closer to 65% in total revenue and that number today is trending closer to 50%. So, question is what’s your ideal revenue mix in the longer term?

[Clay Deutsch:]

Well, I do think long-term, just the fundamentals, the macro fundamentals suggest that the wealth businesses in aggregate should outgrow balance sheet driven banking. And that has nothing to do with do I have a favorite or not have a favorite; it has to do with economic fundamentals. As our team here knows, I love our Private Bank; I also like our wealth management businesses. The fundamentals suggest that the corpus of discretionary wealth available for investment in the United States is going to meaningfully outgrow household balance sheets. So, over the long -- I think it’s important, we not overreact to two weeks in January, where we have equity market disturbance. If you look at the fundamentals and take the long view as you suggested Jake, take the long view, there is a pretty compelling case that long-term, wealth linked revenue should grow at a more rapid rate than balance sheet driven revenue. That’s an economic statement, not a strategy statement. Our strategy is to marry our wealth management trust and private banking skills into a rapidly growing client base. We want to stand at the middle of their financial affairs; we want to manage their money. If we do that well and we’ll do that well, I think over the long-term, our wealth linked revenue will probably outpace our balance sheet growth. I think that’s a fundamental driver of the macro economy, not anything we’re doing or not doing. But long-term I do think that fee mix will rise.

[Operator:]

Our next question is a follow-up from Casey Haire of Jefferies. Please go ahead.

[Casey Haire:]

Thanks for the follow-up. Dave, follow-up on the credit quality front; can you give us a sense, what were gross charge-offs in the quarter and for the year for that matter? I’m just trying to get a sense of what the loss content look like when the recovery stayed?

[David Kaye:]

So we had gross charge-offs for the full year of $2 million. I’m sorry, what did you say -- and gross recoveries…

[Casey Haire:]

Gross charge-offs for the quarter as well.

[David Kaye:]

Sorry, gross charge-offs for the quarter is effectively zero.

[Casey Haire:]

Okay. And then Clay, just following up on the strategic hires, what opportunity are we looking at with these hires at Filigree and Mikus, to the extent you’re comfortable disclosing? I mean is bigger than a breadbox, I mean just trying to get sense on what kind of books of business we could be seeing added onto the wealth management house?

[Clay Deutsch:]

Yes, I’m not trying to avoid the question. We haven’t disclosed it. I think it will be very clear in the first quarter, probably first and second quarter. Both of those practices, Mikus Capital and Filigree are standalone firms. So, these are not breakaway folks; they both have established books of highly attractive and loyal clients. So, I think the client pool rate, if you will, should be very high, because again, these are really strong independent practices with loyal clientele. So, we haven’t given any forward guidance on the client take rate or how we think that’s going to unfold, but we would have hired this talent with no client crossover. We think that they’re good, but both of these teams are going to bring pretty established clientele with them and we’re excited about that.

[Corey Griffin:]

Can I add to that? This is Corey. I guess in addition to what they’re bringing with them, the West Coast side specific is a strategic higher with significant presence the bank does in Southern California as well as the Bay area. And yet we have not dedicated leadership from Private Wealth for those businesses -- that footprint out there. So that group is meant to come in and exploit our client base out there and bringing into the wealth management. So, we had a new business here that was a record last year without real dedicated leadership from Private Wealth group in California.

[Operator:]

Our next question is a follow-up from Chris McGratty of KBW. Please go ahead.

[Chris McGratty:]

Thanks for taking the follow-up. Dave or Clay, can you remind us, I think we’ve got in the past, if you look at your fee income, the proportion that is actually tied to markets versus, I think you explained it in the past is more contractual and less dependent on equity values?

[David Kaye:]

Yes, I mean we would expect the sort of 40% to 50% correlation between the equity markets on our overall fee revenue.

[Chris McGratty:]

Okay. So if I’m taking the three line items, it’s roughly $35 million. You’re saying the 40% to 50% of that is tied to the market. Is that the way to thing about?

[David Kaye:]

Yes, it will vary with the markets. Not equally -- the wealth advisory revenues are less linked; the investment manager revenues are more highly correlated, but in aggregate, when you look at all three of those combined, yes, somewhere in the 40.

[Clay Deutsch:]

The way I think about it Chris, because I think, I know where you’re going. We worry a lot about market exposure. I think of it as half of a half, and I’m rounding up and down. But half our revenue, if you want to be precise, about 40% of our total company revenue is wealth management linked and our beta on that revenue is typically about half of market action. So, you can stress -- you can flex equity markets up and down, and kind of model what you think is going to happen to that revenue expansion and compression.

[Operator:]

That concludes our question-and-answer session. I would like to turn the conference back over to Clay Deutsch for any closing remarks.

[Clay Deutsch:]

Yes, I guess all I’d say, there has been a lot of -- I followed all the other releases in the industry, there has been a lot of commentary on industry conditions, challenging environment, all of that. The sector has taken a pounding. Chris McGratty could give me the number, but I think the KRX is down 18% from the peak. I think the sector concerns have a lot to do with energy, credit exposure, interest rate exposure, equity market exposure. We’re very focused on building our market linked businesses. As has been noted by the analyst community, I feel very good about our credit quality. That’s not an arrogant statement. We are on a heightened alert but we feel very good about credit quality. We have very little energy exposure and we feel good about credit quality. I like what we’ve done with balance sheet composition. And I like where we are with respect to interest rate sensitivity. And I think the appropriate focus you all have had on the call has been what do we really think the long-term potential of our market linked or wealth linked businesses is. And we’re hard at work proving that those businesses have very attractive return characteristics albeit with an elevated level of market volatility. So that’s how I think about the company notwithstanding challenging environment. Yes, I think we’re pretty well-positioned vis-à-vis the big risk factors that everybody is pointing to as they try to figure out how to properly value the sector. With that, thanks for your interest in us and we look forward to the year.

[Operator:]

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.