Boston Private Financial Holdings, Inc.
Q4 2007 Earnings Call Transcript

Published: 24 Jan 2008

[Operator:]

Welcome to today's teleconference. (Operator Instructions) I would like to now turn the call over to Mr. Timothy Vaill. Mr. Vaill, please begin.

[Timothy Vaill:]

Good morning, everybody. Welcome to Boston Private's fourth quarter and year-end 2007 conference call. As usual, joining me today are Walt Pressey, President of the Company; Dave Kaye, our Chief Financial Officer; Erica Smith, Investor Relations; and Jim Dawson, President of Boston Private Bank and recently appointed as Head of the Private Banking segment. At this time, I'm going to ask Erica if she will read the Safe Harbor provisions before I make additional remarks. Erica?

[Erica Smith:]

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 these forward-looking statements. I refer you also to the forward-looking statements contained in our press release, which identify a certain 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 other press releases and filings submitted with the Securities and Exchange Commission. 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. Thank you. I will now turn the call back to Timothy Vaill.

[Timothy Vaill:]

Thanks a lot, Erica. With all of the recent activity and volatility in the market since the first of the year, it is somewhat difficult to move our focus back to last year. However, Boston Private had a strong fourth quarter, and frankly a strong year as well. So, we'll get into it. In a moment, I am going to ask Dave to lead you through the quarterly financials in some detail, but first these general comments. We did indeed have a strong quarter, driven by solid investment performance, positive asset flows and loan growth. This type of organic growth sets the stage for stronger, more sustainable earnings. With this, the company continued its growth in revenues, posting a nearly 22% increase for the fourth quarter as compared to 2006. I was gratified that this topline growth came despite a challenging and macroeconomic environment. The credit crunch in the housing markets affects all of us in the residential mortgage lending business in one way or another. We are inevitably going to have some credit issues and potentially some charge-offs at certain points in the economic cycle. We are not totally immune from that. But due to our business building philosophy, our entrenched sound credit culture and client mix, we believe that we will continue to compare favorably against the SNL Bank Index. I believe that the strength of our credit quality stems directly from our client-focused approach across all of our banking affiliates. Our people believe in uncompromising attention to detain and high-quality customized service. This approach has continued to stand us in good stead in the industry. The investment business also provides its share of excitement in the highly fluctuating environment. Yesterday alone, with a 600 point rise in the Dow during the course of the day after an early drop, challenged even the most highly sophisticated inventors. At Boston Private, our intense focus on and communications with our wealth advisory and institutional clients helps keep things in perspective. We maintain a very positive view of opportunities available in the capital markets over the long term. Net-net, our wealth management business continues to grow, and we remain very optimistic about the future. So, with that, I'll turn this over to Dave, and he can chat about the quarter.

[Dave Kaye:]

Okay. Thanks, Tim. Good morning, everyone. As Tim stated, we had solid operating results for both the fourth quarter and the full year of 2007. On a cash basis, we generated $0.52 a share, which was an increase of 4% compared to the prior year. Our GAAP loss per share was $0.55 versus net income of $0.40 during the previous year. GAAP earnings per diluted share include impairment charges of $29 million or $0.75 a share related to goodwill at Gibraltar and $13.9 million pre-tax or $0.22 a share related to intangibles at Dalton, Greiner. Dalton, Greiner had passed the goodwill impairment testing, but when we dug into the intangible testing, we felt it was prudent to revise some of our previous assumptions due to both market conditions and the less robust inflows at the company. Excluding the impairment charges, the fourth quarter earnings would have been $0.42 a share, an increase of 5% when compared to the fourth quarter of 2006. Although, we were disappointed with having to take the impairment charge, we were pleased with the annual growth of our operating earnings, given the challenges facing the banking industry and the volatility in the equity markets. We believe that our performance is a direct result of our diversified business strategy and the strength of our business across each of our three segments; Private Banking, Wealth Advisory, and Investment Management. Our Private Banking discipline had annual operating earnings growth of 7%, while our wealth advisors grow 50% and our investment managers were up 29% year-over-year. Let’s turn to Slide 4 on the quarterly revenues, and we’ll look at the details. Year-over-year revenues increased 22% to a $110.6 million, organic growth in revenues on a same affiliate basis excluding the impact of Charter Bank increased 17% to a $106 million. On a length quarter basis, revenues increased almost 5%. In terms of the revenue drivers behind our segments, net interest income was $51.2 million, which is an increase of 18% year-over-year; wealth advisory fees were $11.1 million, an increase of 57% year over year. But note that this is the second quarter in which Bingham, Osborn & Scarborough or BOS, is reflected on a consolidated basis. The investment management fee income contributed $42.8 million to our results, an increase of 18% year-over-year. Flipping to the next slide on net interest income and margin. Although we had some compression on the net interest margin, volume gains did drive the overall growth of net interest income. On a length quarter basis, net interest income increased by $1.1 million. Our NIM was 346 basis points, a decline of 13 basis points length quarter and 12 basis points year-over-year. This decline was the result of the Fed lowering interest rates three times since September of 2007, and as a result our loans reprised lower, however we weren't able to lower rates and deposit in step of these loans because of the intense deposit competition in many of our markets. In general, we are pleased with the performance of our Private Banking segment, given the challenges faced by the banking industry. We are encouraged by the recent movements in the yield curve and believe that over the longer term, we will be well-positioned to take advantage of this. Moving onto the deposits side on Slide 6; we've witnessed modest growth over the past couple of quarters normalizing for our acquisitions of Charter. Again, we are trying to maintain a disciplined, yet competitive pricing approach which emphasizes the value our clients receive through their Private Banking relationships. We continue to see stiff competition in a number of our markets, but we believe that large acquisitions that have recently taken place provide us with significant opportunities. And normally at this point, I turn it over to Jim Dawson to discuss our loan portfolio, however given the intense focus on credit issues; we've prepared a separate more in-depth credit supplement that Jim and I will review in just a few minutes. So let me continue with a few more slides and then we'll switch over the credit presentation. Please turn to Slide 7, which is loan growth. We had another very strong quarter in our lending program. Our total loan portfolio reached $5.3 billion, which is up $950 million or 22% from the end of the fourth quarter last year. Now $250 million of that was due to the acquisition of Charter, but the organic growth was 16% and spread across the organization. On Slide 8; Investment Management Fees. We are showing that Investment Management fees were $42.8 million for the quarter, an increase of 18% year-over-year. Performance fees and revenues from our SMA business drove a sizeable portion of this increase. Moving on to the Wealth Advisory fees on Slide 9. Here our fees grew by $1 million to $11.1 million during the fourth quarter of 2007. Year-over-year we had a fairly dramatic increase of 57%, but some of that was due to the result of the BOS consolidation. Excluding BOS, the growth would have been 9%. The fee-based component of our Wealth Advisory business is not linked to AUM, but nevertheless grew quite well at 14%. On slide 10, our assets under management and advisory, from both consolidated and unconsolidated affiliates, increased 15% over the prior year approaching $38 billion. On the next couple of slides, I will breakdown the drivers of that growth. Slide 11, you will see that first, the biggest driver of the AUM growth in the fourth quarter was net flows. I was excited to see that our affiliates post $545 million in net new flows. This is our best quarter since fiscal year 2003, and as you can see the past two quarters provided most of the $1 billion in net inflows for the full year. $600 million of that $1 billion in net flows came from our private banks, it's not just our investment managers. On Slide 14, we look at investment performance and you can see that although the broader equity market was down in the fourth quarter. Our affiliates grew AUM through superior investment performance. Finally on Slide 15, let me conclude with another area of focus for our management team; operating leverage. I was a bit disappointed that we didn’t repeat the positive operating leverage we had in the third quarter of '07. And this year was driven by some of the year-end bonus [troughs] at a few of the affiliates, plus in deal cost which we wrote off during the fourth quarter. At this point, I would like to focus on another presentation that we posted entitled, Credit Quality Supplement. I will start off the presentation by walking you through a few credit metrics, and then I will turn it over to Jim Dawson for some additional detail. Jumping to slide 3 on the credit quality supplement, you can see that we've had an increase in NPAs over the past few quarters, but these increases are pretty typical with what the overall industry in experiencing. I don't have the fourth quarter industry statistics, but we've generally faired about 25 basis points to 35 basis points better than average over the past 10 years, and based on some of the numbers, I've seen posted in the past few days, I'd expect that trend to continue during the fourth quarter. On slide 4, another key metric that we show is past due loans. Again, somewhere in the NPA's, we seen that despite our better than average performance, we are not completely immune to the broader economic factors and have thus seen increases here I'd like to point out that our fourth quarter increase in past dues was primarily driven by just three loans, all of which are current today. At this point, I'll turn it over Jim and he can take you through the rest of the deck. Jim?

[Jim Dawson:]

Thanks, Dave. If you could turn to supplemental slide 5, Net Charge-Offs. While our Management here is concerned with both, past dues and non-performers, the real key to earnings is whether they eventually result in charge-offs. It's no accident that our charge-off experience has been significantly better than our competitors and there are really three drivers. First, we buy quality companies, not ones that need fixing up, but rather the ones that have a history of good performance. Second, we have solid credit culture. One that is proactive in dealing with situations that may turn sour. And third, our target client base of high net-worth customers perform better than average in terms of credit. I can't stress this last point enough. Our focus is private banking, and working with successful individuals and businesses. In the fourth quarter, we did have a $500,000 charge-off, which represents 1 basis point of total loans. The next slide is entitled Quarterly Variances. To discuss the quarterly details on NPAs and past dues we need to focus on the variances with the industry. As Dave mentioned, we did see an increase in non-performers, however I would like to point out that the number of non-performing loans actually decreased. The increase was driven by a couple of larger loans, which I'll cover in a few minutes. With the past dues again, we had a similar story and that our increase was primarily driven by just three loans. Right now these loans are current, two were matured loans that have been renewed and the other was a $2 million well secured residential mortgage that has been brought current. The next slide is NPA Details, getting back to the NPA increases on slide 7 we've shown our top eight non-performers. These eight loans account for 85% of NPAs and we feel that we've a good handle on the risks here. The loans highlighted in yellow were new to the NPA list during the fourth quarter and you can see the increases were driven by our Boston affiliate with two new NPAs and Florida with one new NPA. Most of the others were discussed during last quarter's earnings release. The next slide is Concentrations and Exposures. We've had quite a number of questions in the past few months from analysts and investors wanting a better view of the loan portfolio, cut across both product type and geography. On slide 8, you can see the areas of concentration highlighted in yellow, and defined as anything exceeding 5% of the loan portfolio. It was no surprise that almost 40% of our loans are residential first mortgages, and most are amortizing commercial real estate loans. One third of these commercial loans have LTVs below 50%, less than 5% are over 80% LTV, and either they have additional collateral or they are SBA loans. And the next slide is Construction and Land. We also know that folks are very focused on construction and land side of our portfolio. So, again, we thought we'd share some important facts about our book year. Vast majority of our loans have fairly low LTVs with only a very small percentage exceeding the 75% threshold. I hope you find this additional information helpful. And with that, I'll turn it back to Tim Vaill.

[Timothy Vaill:]

Well thanks very much, Dave and Jim, for a very thorough rundown on what happened during the quarter and in the year. And I guess, at this stage why don't we turn it over to questions from the audience.

[Operator:]

(Operator Instructions) And we'll take our first question from Mark Fitzgibbon of Sandler O'Neill Please go ahead.

[Mark Fitzgibbon:]

Good morning everyone, and thank you for taking my question. First, I wondered if you could explain to us, what caused the large rise in earnings in equity investments this quarter? I think it was up like a $1.7 million versus the third quarter.

[Dave Kaye:]

Mark, it's Dave, I'll take that. The earnings in equity investments were the result of the performance fees for the Dalton, Greiner hedge funds, that's recorded in that particular line. We had $2.2 million in annual performance fees for the Dalton, Greiner hedge funds.

[Mark Fitzgibbon:]

And all those get taken in the fourth quarter?

[Dave Kaye:]

Yes.

[Mark Fitzgibbon:]

Okay. So it'll be essentially zero in 1Q, you're saying?

[Dave Kaye:]

Yeah. There's a couple [trips] in the other quarter, but it's really minor. It's basically in the fourth quarter.

[Mark Fitzgibbon:]

Okay. Second question is with respect to the margin. I am wondering, is the balance sheet still asset-sensitive? And given the Fed's recent move, and maybe the likelihood for more Fed cuts, should we expect the margin to continue to come under pressure?

[Dave Kaye:]

I think, Mark, when we run through the exercise on whether our balance sheet is asset and liability-sensitive, now we tend to think it's pretty close to neutral, but slightly liability-sensitive. Now, that would be counter to what you see, of course, in the earnings, because we have seen some compression here on the NIM. And really, a lot of that is related to the competitive pressure as we've seen on the deposits. So, most banks in the industry haven't lowered their deposit rates commensurate with the Fed drop, because the industry is in fierce competition for these deposits, and I think people have had a real challenge in gathering deposits. In short term, I think there will be some further continued compression, but as I said, the thing that affects our NIM most is our ability to gather deposits. So, if our loan growth is far outpacing our deposit growth, then we are going to have some NIM compression regardless of what the Fed does. And naturally, the key that our banks are focused on is getting these deposits in.

[Mark Fitzgibbon:]

Okay. And then, it looked like expenses were maybe a little overstated in the quarter. Is that tied to performance compensation, and should we look forward to first quarter run rate for operating expenses to be lower?

[Dave Kaye:]

A couple of things going on with the first quarter run rate, I am glad you mentioned that, Mark. We did have a little bit higher due to the bonus accruals. We also had some one-time costs associated with some deal write-offs. And so, those will go away. So, the expenses will come down a little bit there, but they'll actually increase a bit as we have our payroll taxes and 401(k) expense and annual merit increases that occur during the first quarter. So, I'd expect them to be a little bit higher there, $80 million in the fourth quarter. We may see $2 million or so increase on that.

[Mark Fitzgibbon:]

Okay. And then lastly, and I know I have asked this question in the past, do you feel that given the growth that you're seeing on the loan side with the balance sheet, that you're going to need to raise any capital during the course of 2008?

[Jim Dawson:]

Mark, this is Jim Dawson. I can speak to the loan growth. We're seeing some pockets of loan growth slow a little bit. As you, I think, can see in the press release in the fourth quarter, the largest growth was coming from Northern California and New England. And Northern California has a terrific opportunity to take advantages of some of the M&A activity in the Bay area. Our affiliate, Borel Private Bank, has been able to pick up some wonderful new strategic relationships and some terrific new employees. So, we do see an opportunity there. And the Northwest, as you know, is still experiencing some growth. So, there are some opportunities there. And New England, we've been fortunate to also pick up some new employees and open some new offices, and that growth continues. Our pipeline remains strong, and we anticipate that to be the case. And in south Florida and Southern California, things have slowed a little bit. So, the short answer is we don't anticipate the need for additional capital. We think the earnings at the banks will be at least equivalent to the growth in the balance sheet.

[Walt Pressey:]

Mark, this is Walt. I just wanted to tell you that we always are looking at opportunities in the marketplace and considering the possibility of raising capital. So, we can't tell you that we will be raising it or won't be raising capital. But the point is that we've spent an awful lot of time focusing on our stewardship responsibilities for capital, making sure we optimize the use of the capital generated by the firm internally and that we focus on growing our business. So we'll stay alert and stay focused. And if there is an opportunity for raising capital, we certainly will consider it.

[Mark Fitzgibbon:]

Thank you.

[Timothy Vaill:]

Thanks, Mark.

[Operator:]

Our next question comes from Lana Chan of BMO Capital Markets. Please go ahead

[Lana Chan:]

Hi. Good morning. Dave, in the past, you've given some guidance on the margin at the end of the quarter. Could you share that with us at this time?

[Dave Kaye:]

Again, I think it's pretty difficult to predict what the net interest margin is going to be in the next quarter. Again, we are seeing a little bit of compression, and I think that we'll continue to see that, a little bit more compression in the first quarter. But if we have a strong quarter of deposit growth, that could offset some of that compression. So, it's really difficult to say, Lana. I don't anticipate it going up at all, and we might see a few basis point decrease in the net interest margin.

[Lana Chan:]

Okay. I am sorry. I was wondering if you could share with us where the margin ended at the end of the fourth quarter.

[Dave Kaye:]

It's at 343.

[Lana Chan:]

343? Okay.

[Timothy Vaill:]

Now, Lana, one thing you should consider and I am sure you are, as well as many of the others, I mean we are getting quite a different change in the 'U' curve. Now, the Fed moves so aggressively on the rates. That's not happening in the short end. But as you go down a little bit longer, there is finally getting some definition in the yield curve. And of course, that will have an impact when that happens, although I don't think we can anticipate any major changes in the short term.

[Dave Kaye:]

The other thing is that the wild card Lana in some of these NPAs that we showed, if some of these come off during the first quarter, we get a fairly large spike in our net interest income and so that could affect our margin as well.

[Lana Chan:]

Okay. Any ideas how much the margin was impacted by the higher NPAs this quarter?

[Dave Kaye:]

About 1 basis point.

[Lana Chan:]

Okay. And then looking at the LTVs on page nine, I was wondering in terms of, particularly I guess Southern California and Southern Florida, how aggressive or how proactive have you been in terms of re-appraising some of those LTVs. Are those average LTVs are based off of originally appraised values?

[Jim Dawson:]

Lana this is Jim. They are based on original appraised values unless there's been the passage of time, a modification or a rewrite of the loan. So some of them would be original appraisals, some of them would be as of the fourth quarter. And we are actually reappraising several properties as we speak, because we have some properties, some loans that will be maturing in the first six months of the year. So, there we are aggressively obtaining appraisals for any loan that is coming to maturity and is anticipated to be renewed, and in any loan where there is a modification or if it is an event of the fall to immediately get an updated appraisal.

[Lana Chan:]

And have you seen higher occurrences of loan modification in those businesses, any sort of gauge as to where the LTVs have gone from?

[Jim Dawson:]

Sure. Well it's all over the place, it depends on a region. But in general, we have seen the absorption of new products flow, we have seen some construction projects slowdown a bit. So we are renewing more construction loans than we have historically. And I would say, in general we are seeing a 10% to 15% decrease in values, but it depends on the market and it depends on where price wise we are in the market. It's the entry level and moderately priced houses that have been impacted the most. Homes that are over $1 million or $2 million or $3 million are slowing down, but they are not seeing the percentage decrease and price drop that others are. I have an additional schedule here about loan-to-values for land, and in the case of Southern California as of the fourth quarter with the appraisals we had in hand we didn't have any loans that exceeded 80% loan-to-value on raw land. And we only had 1% over 80% and about 35%. Let see 1% between 70% and 79% and 35% between [60%] and 69%. Generally our real estate loans are written at a 65% loan-to-value, but in cases where we've had a reappraisal because the borrower needed more money, there has been a maturity or some sort of modification we have them reappraised. And if the value has dropped significantly, we won't modify the loan without some additional credit enhancement either a pay down, some additional guarantor, some additional collateral or the like. And in Southern Florida with our loan portfolio about 1.5% of the land loans were over 80%, about 22% were between 70% and 79%, and then the balance were under that.

[Lana Chan:]

Okay. That’s very helpful, Jim. Thank you. And just going back to the margins for one second, Dave. Could you remind me, how much of your loans are, with rates declining now, how much of your loans are variable and tied to prime?

[Dave Kaye:]

It was about 80%. But we have floors as well on these things.

[Lana Chan:]

Okay. So, 80% of your total loans are tied to prime.

[Jim Dawson:]

Commercial loans.

[Lana Chan:]

Commercial loans. Okay, thank you.

[Jim Dawson:]

Lana just let me respond a little bit further. I don’t think I gave you a complete answer. I talked about what we've seen for averages for the values of properties that have been re-appraised. And I told you that we are seeing 10% to 15%, but it really does depend on the region and what the collateral is. We had one experience where we had for us a large development of 20 units. That was adjacent to a publicly traded national homebuilder that had discounted prices dramatically to get cash before the end of the quarter. And their prices were dropped 25% to 30%. Our project had to drop prices 20%, but with our initial loan-to-value that was still adequate to get our loan paid down dramatically; it's not entirely paid off yet. But in some areas, that will happen if the -- what you read about, what we all read about is Lennar or [WCI] or [TOLE] or others dropping prices dramatically or mothballing large projects or selling large tracks of land. And if that’s near projects where we have our borrowers; that does have an impact. And the one I referenced is a real life, somewhat current example. And in some areas our land is seeing a bigger discount than 15% or 20%, but it really is regional, and that's why we've experienced lenders, proactive lenders on the ground watching this.

[Lana Chan:]

Okay thanks Jim.

[Operator:]

Our next question will come from Chris Marinac, FIG Partners. Please go ahead.

[Chris Marinac:]

Thanks, good morning. Jim I was wondering if you can gives us more color on the location of the past dues, were those concentrated in any area?

[Jim Dawson:]

Well let talk about the past dues, you see that our past dues at the end of the quarter were up to about $32 million in New England, Boston Private Bank and Trust Company, about $6 million of the past dues were residential, two loans represented $3.5 million of our past dues. Now, one of them, the $2 million loan, has been bought current, the other loan is occasionally over 30 days and occasionally under 30 days. But both of those loans are to high income borrowers and they do occasionally go past due, but there is very comfortable loan-to-value on both of those. We also have several first time homebuyer loans that have gone past due. And, we may have to pursue foreclosure on a couple of them that. And those are caused by folks who lost their second job or illness or things that do happen. We don't have any first time homebuyer loans that have LTVs that exceed 80%, because they are part of a program sponsored by the Mass Housing Partnership. And MHP has a deposit account in our bank that acts as collateral for any exposure over 80%. So, we don’t think there is lot of exposure on the residential side, on the commercial side our past dues are actually down for the quarter. And Gibraltar's past dues were in good shape, as well as the other banks. There was a spike up in southern California, because there were two loans that went past due, that had matured, that are now current. One of them was a $9 million exposure with 21 units under construction in San Bernardino and 15 of those are actually in Escrow. The other one was actually up in Napa. It was a $5 million loan that was secured by land and I can't tell you, I can't disclose who the hospitality flag will be for the property when it's developed. But a very high-end hotel operator is signing a lease. And then, when that property goes under contraction, the loan will be paid-off.

[Chris Marinac:]

Okay. So, basically you know now, if the quarter ended today, you're past dues will come down, basically, these changes potentially?

[Jim Dawson:]

Yes. There's always some movement from day-to-day and week-to-week. Some have gone over 30 that we expect to have under 30 by the end of the month. But those two large ones make the biggest difference.

[Chris Marinac:]

Okay. And then from a perspective of kind of your reserve coverage and where that is headed, there's only a reason from historical perspective that you would like to that be any greater than it is today?

[Jim Dawson:]

Well, we have to balance that, I mean, as a credit person I'd like to have 5% set aside, so I could sleep comfortably at night. But the reality is the SEC and our auditors are testing us all the time. And there were some new guidelines that came out in '07 that we have followed very closely. And we have made some minor modifications to our loan loss reserve. We feel as our auditors feel. And our Federal and state examiners when they came in, that we're well reserved and there is always a healthy discussion. It's a very detailed, very thoughtful process. And as I say as a credit person, I would look at more there, but if you look at our history, our charge-offs, our trends, our LTVs, our specific reserves, we are pretty aggressive when we see a problem and we identify a potential loss. I think you see on one of our schedules, we've got some specific reserves on two loans at Boston Private Bank, $4 million a piece. If we were to do it again it would probably increase one a little and would probably decrease the other significantly. So, the short answer is, I think we are adequately reserved.

[Timothy Vaill:]

Chris, just to put a fine point on it, if you go back to the supplement that Dave and Jim went through, and you look at the trend of non-performing assets and the trend of past dues, anybody who is the credit person would want to increase their reserves, but then you turn over the page and look at the charge-offs and you say yourself gee, there hasn't been any real migration from non-performing assets or past dues into the charge-off line over the past ten years of any significance. So, it's very difficult to take that statistical history and face the SEC and tell them that in this environment you need to increase your reserves, given the fact that there has been an up turn in the past dues, so that's what we are faced with.

[Chris Marinac:]

And then Jim last question, how much in land loans do you have across the whole company?

[Jim Dawson:]

We have approximately $269 million in land loans. We have approximately $120 million in South Florida and $120 million in Southern California. And then, we have some in the Northeast, about $25 million in the Northeast. About a third of the land loans in South Florida are owner-occupied. They have lots that are being developed, they're custom homes basically. And I think I mentioned the LTVs. If I didn't, I will now. Yes, I believe I did. I talked about the fact that there were no land LTVs at First Private, over 80% and roughly 1% between 70% and 79%, and at Gibraltar, roughly 1.5% over 80% LTV and roughly 22% between 70% and 79%.

[Chris Marinac:]

Right, Jim. Thank you very much.

[Jim Dawson:]

Yes.

[Operator:]

Our next question comes form John Pancari of JP Morgan. Please go ahead.

[John Pancari:]

Good morning. Jim, could you give us a little bit more color on the LTVs? Really my question around that is, as you had indicated the 10% to 15% average decline in home values, is that representative of what you're seeing in Southern California and Florida?

[Jim Dawson:]

Well, I said 10% to 15% is what we're seeing so far, and that's primarily on homes and home construction. And it's all over the place. We have some properties along the coast, Santa Barbara and some other projects in Southern California where there has been very little decrease in value. And I would say, we haven't seen anything to date that's been more than 20% for homes in Southern California, and we haven't seen anything for homes in South Florida that's been approaching 20%. And I am not saying that that's what's happening in those regions. I am just telling you that our borrowers, our experience, our properties. That's what we are seeing so far. Land is a little bit more volatile, and we are actually reappraising some properties now. Depending on the region -- well, let me talk historically first and then anticipatory second. Historically, the land loans we have seen have been down

[John Pancari:]

Okay. That's helpful. And then, Walt, I know you had just made the comment that given the regulators that it's difficult to just go back and revisit our reserves and everything, and particularly, also in light of your historical charge-off ratio. But, we certainly have had other banks this quarter and last quarter making an about face on that front when they were talking about the regulators previously not being able to boost the reserves, but have certainly taken efforts to boost their reserves. But there has been with a little bit of a higher charge-off ratio than what you had. So, was it really charge-offs that if you start to see that really slip, and you see that these home values or collateral values aren't holding in as much as you thought they would. Is that what's really going to drive you to make a move more materially on the reserve?

[Timothy Vaill:]

Well, certainly, it's not charge-offs all by itself, but the reality is that when you analyze the past dues as we have done, you'll realize that a number of the past dues that were there at the end of the year some current. When you analyze the non-performers as we have done and you realize that there are a number of those non-performers that we expect to return to performing status and then you are faced with the question of should we increase our reserves. It's just pretty hard to make the case. We'd like very much to do that, as Jim pointed out, and we try to be as aggressive as we can on that. And certainly, when we have a volume of new loans, we make sure that they are reserved according to formula. But it's really difficult when you analyze the details of the loans and you realize that we don't anticipate any charge-offs of any magnitude to make the case to increase the reserves.

[Jim Dawson:]

This is Jim. The charge-offs are the raw evidence of a credit problem. But there is a lot more to it. And it's the trend in classified loans. It's the trend in weighted average risk ratings, and most of the time it's the bank identifying that certain pockets are under pressure and appraisals are updated and the banks take initiative to identify, whether it should be a specific reserve or if there is a loan impairment. And then in other cases, it's when examiners come in and look at the portfolio and bring a different view and perhaps require updated appraisals or the like. Now Boston Private Bank & Trust Company had an exam in the summer, Gibraltar had their exam in in the fall, Borel and Charter were early in '07, and I think First Private is schedule for the first quarter. So it's not just charge-offs, charge-offs as I said are the raw evidence, but it trends in the weighted average risk rating, it trends in classified, it's identifying on the C&I side; commercial and industrial side, struggling companies where the secondary source of repayment, the collateral is inadequate and in some cases that true on the residential side too, as the properties become past due. If the cash flows are inadequate then you look to the guarantors and to the collateral. And if you have a past due loan and the collateral values are dropping then you look at whether you have an adequate position or not or whether you should take a specific reserve.

[John Pancari:]

Okay, and then separately on the Dalton, Greiner write down. Can you give us a little bit more color on what you saw that had a major revisit, the impairment that you had taking previously at Dalton, Greiner. Was it your projections in terms of inflows that just seem to be a bit more aggressive than they should have been, because I'm kind of surprised that you cited that the inflows were not as much, just given the pressure that that affiliate had been under, I'm surprised you would expect inflows to be all that buoyant?

[Timothy Vaill:]

Well, let me comment on this and others can pick it up if they'd like to make additional comments. But, whenever you a do either a goodwill impairment analysis or an analysis of intangibles, an awful lot depends upon the assumptions. Anyone whose ever done a discounted cash flow analysis knows that, much of the value that you come up with is determined by your assumptions with regard to the discount rate, or the terminal value or any of the other various assumptions that are applied in the formula. And I think that when we went through and looked at the Dalton, Greiner situation, we were pleased with the firm. Their investment performance is superb at this juncture, and the reality is that, whenever you get into the penalty box as Dalton, Greiner has done since 2006, it takes a while to come out of that process. And even though their investment performance is superb, it's very difficult to focus on when you think the upturn is going to come, sort of quarter-by-quarter. The reality is that the value sector which is where Dalton, Greiner competes is a sector that’s out of favor. The sector that’s in favor today is large cap growth, and Dalton has many talents and many products, but their products are mainly value products and specified in the small cap area as well. So, when we looked at that, and we said to our selves that this analysis puts us reasonably close to where we should be taking perhaps a write down in the intangible. And, you look at the fact that you may not get an upturn because of the situation in the sector, and we felt it was prudent to be little bit more aggressive on the assumptions, and when you’re little bit more aggressive on the assumptions, particularly on the intangible side, this is one of those cliff situations where if you are $1 short on the analysis, you go back and do a discounted cash flow analysis, and that drops the value $12 million. So it was tough call on our part, but we felt that it was better to make that call at this point in time than to potentially run into that situation three or four months down the road if the continued emphasis on large cap growth didn’t result in an upturn in the small cap value product. So a judgment call; and the other point to make here is that, again one of the reasons we focus on cash earnings here is that this does not have any impact upon capital ratios. There is no impact upon liquidity and unlikely goodwill impairment situation this will actually improve GAAP earnings because this amortization of intangibles will ultimately be amortized in to the expense line anyway, it just accelerates that. So it was a tough decision, one we think was prudent, but that was the basis upon which we took it.

[John Pancari:]

Okay. And one last question actually just on a relatively smaller player here but on Sand Hill. Looks like assets under management there have declined over three consecutive quarters now, and I just want to see is there anything to read behind that?

[Jim Dawson:]

No, I don't think there's any particular issue that one needs to think about with respect to Sand Hill. I think Sand Hill is in a terrific market. We had some great people there. We've actually just gone through a reequitization and we have some new owners out there. And so, we think that's going to be a very positive situation. As you know, our business model with respect to wealth advisors and investment managers, we love to have owners. And we're delighted that we're able to put together a package where the employees were prepared to invest some of their own money and become owners in the organization. And we think that would be a very positive factor for everybody involved including shareholders.

[John Pancari:]

Okay. Alright. Thank you.

[Operator:]

Our next question comes from Murali Gopal of KBW. Please go ahead.

[Murali Gopal:]

Good morning. Just had couple of quick questions. In terms of the overall trends that you're seeing out there in the marketplace particularly in South Florida and Southern California, in terms of the request for the loan modifications or construction development slow down, real estate value declining. Are you seeing those trends kind of accelerating further in Q4 versus prior two quarters? Are you seeing the rate of decline kind of slowing down? What are the overall trends that you're seeing in general?

[Jim Dawson:]

Well, the trends have been in place for a few quarters now. And as I said earlier, every market is different. But you asked specifically about Southern California and South Florida. We reiterate, I didn't say it today, but I said it before, in South Florida my perspective is, that the biggest impact has been felt by on condo projects, speculative condo projects. And as we said in the past, we had a total of two loans for condo development in south Florida. So, that's a market that the Management team at Gibraltar Bank decided early on. And they didn't want to be part of it and it proved to be a right decision. And we started seeing it a few quarters ago, I would say it was a little bit deeper in the fourth quarter and the supply and demand curves for residential real estate aren't in balance yet. So, it's helpful that interest rates have dropped. It's helpful that some banks and mortgage companies have stepped back into their lending business, in certain markets. But I would expect that there will be an imbalance for while in certain markets in South Florida. I would think that we are going to have to endure a couple of quarters and if that's all it is, so be it. Now for both, South Florida and Southern California, those are wonderful markets for us in long term. There is an imbalance in the real estate market right now. Residential properties were overbuilt, condos overbuilt, there has been a lot of speculation. But guess what, those are two of the best areas of the country to be in as we move forward. There are lot of people. I think the last thing I read was a million people moving into the LA Basin over the next ten years. I know Florida is attractive to me, when it's called the New England, so it's a good place to visit and nice place to have a second home or eventually for Northerners to move to. So, this is a short term phenomenon, I believe, how short term, will it be Q2 of '08 or Q1 of '09, we don't know, but we will do the best we can to manage through it. Southern California felt the impact pretty quickly last summer and fall. I would say it hasn't got materially worse, but we don't expect it to get materially better, in the near-term. But I can certainly see in the numbers that we get from our Southern California affiliates, they refocused on CNI lending and commercial real estate lending sometime ago, and their commitments and their exposure projected out on the residential development construction and land properties, will drop quarterly as we move forward. Their team is focused on commercial real estate and CNI lending. So, I am not sure I am answering your question and I'm not an economist, I can tell what we're seeing and what my gut is telling all of us, we're seeing for the next quarter. We are working hard to identify issues early on. We're trying to get additional collateral. We're trying to be prudent, and working with successful borrowers, and taking the actions that we feel are appropriate.

[Murali Gopal:]

Sure. That's helpful.

[Timothy Vaill:]

One of things we have to be careful of when you think about statistics too, and Jim touched on this earlier in his comments, is that even within a particular region, there are a couple of different markets. There is market for the first time homebuyers, there is the market for new homes being built and then there is market for the high net worth homeowners. And the values in those markets can change at different rates. And I think it's fair to say, maybe bit of an over statement, but it's fair to say that the high net worth end of the market tends to be less volatile when you have the kinds of changes that Jim was talking about, where big builder is dropping prices dramatically to raise cash for the end of the quarter, that's affecting a different market, different segment of the market, even in the same region than some of the places where we have mortgages. So statistics are a little bit hard to just to apply directly.

[Murali Gopal:]

Sure, that's helpful. And in terms of loan growth, obviously you had a very good quarter in terms of loan growth. But when I look at the residential real estate loans quarter-over-quarter, they seem to be more or less flat. Was that a deliberate attempt to kind of pull back on those loans or was there just some kind of softness in the market?

[Timothy Vaill:]

Are you talking about the first mortgages, residential mortgage loans?

[Murali Gopal:]

Right.

[Timothy Vaill:]

No, it's not a deliberate attempt. That's a good business for us. The entire market went through a lot of change in the fall and in the fourth quarter. We continue to sell a lot of 30-year fixed rate product in the secondary marketing to get some fee income for it. Certain pockets were still very active, but I would say that a lot of our mortgage growth came in the first half for the year.

[Murali Gopal:]

Okay. And moving on to net interest margin, you guys use obviously a lot of the FHLB borrowings to fund balance sheet growth. So, I am just curious how sensitive is your margin to changes in the LIBOR rates, assuming all of it is equal. My question is if the Fed cuts rates one more time and LIBOR rates kind of move in sync, what's the kind of benefit that you would see. Obviously, FHLB borrowing rate goes down. I am just trying to get a field for -- but hasn't happened because LIBOR rates, I guess, were held up pretty well through most of Q4. So there is probably some benefit there. So, I'm just trying to get a feel for that.

[Dave Kaye:]

No, I don't think in the short term, we get much of a benefit. Over the long term, if the FHLB rates drop, we will see some benefit, but nothing like in the first quarter that I'd expect.

[Murali Gopal:]

Okay. And lastly, in terms of the extreme volatility that we are seeing in the equity markets and just given that most of your assets under management are in equities, what's the kind of, when you look at your clients and just given the volatility that new funds are maybe moving more into more safer havens like money market funds, or are you showing anything on that front from your clients? And historically, how has that played out in volatile markets in terms of [net flows]?

[Dave Kaye:]

We had our best quarter in terms of flows that we had in the last five years. So, I don't know that it -- the volatility of the equity markets obviously didn't have a significant negative effect on us. I think we are going to compete against other asset managers on our performance, and I think we are set up very well in terms of asset, our investment performance. If you look at our one-year performance, in 79% of the assets, the AUM in our investment management segment ranks in the top quartile of its peer group. That's a great statistics, and that's one that is always going to be folks in the equity market, and they tend to seek out the top quartile performers. I mean that's where the flows really go. So, we are encouraged by that fact. And again, on a three-year basis, 76% of our AUM ranks in the top quartile of its peer group. So, we are really encouraged by that. Volatility of equity market obviously in any particular quarter can bring us down. The markets drop significantly. Our AUM will go down, but we are focused on over the long term, bringing in flows, and we think that the investment performance is a key there.

[Murali Gopal:]

Okay.

[Timothy Vaill:]

In addition to that, though, especially in the high net worth segment, you will find our wealth advisors have an awful lot of people, more people asking for help when the volatility of the markets occurs, because when markets are good and the stocks go up, they say, "Why should I pay a fee? Buy a stock, it goes up. Who needs to pay anybody for advice on that." But when there is some volatility, they begin to understand the complexities of the market, and that tends to make it a little bit easier. Now, as Dave pointed out, we are always outselling the product as we believe this product is sold or not bought. So, we always have a pretty good pipeline going for us. But some of those sales are easier to make when the market is volatile than when it's not volatile. And I think that's a great statement.

[Murali Gopal:]

Okay. And lastly, what was performance fees at Westfield in the quarter?

[Dave Kaye:]

I have that.

[Timothy Vaill:]

Well, Dave is looking for that. I want to come back to you about mortgage loans just to build a right expectations going forward. There is a lot of seasonality to that business. Part of it is driven by the weather in the Northeast and the Northwest, but more of it is driven by the school year. And the best quarter for mortgage loan is the second quarter, and the third quarter was right behind it. Typically, the first quarter and the fourth quarter are quietest quarters for mortgage activity. And we expect that this year, in '08, we're budgeting similar growth to past years from mortgage lending. So, it's an important part of our business. It's an [entrée] into a lot of important strategic relationships with individuals. And as I have said in the recent past, we had one borrower coming for a residential mortgage. He was a general partner in a large private equity firm, and he was so impressed with the service, he opened the door for us to talk to him about the partnerships, banking relationship and we got a $30 million deposit out of it. I think it was in the third quarter of last year. So, it's an important part of our business.

[Murali Gopal:]

Okay, great. Thanks, thanks a lot.

[Dave Kaye:]

Murali, just to get back to your question on performance fees, let me run down some numbers for very soon. Q4 of '07, we had a total of $5.2 million in performance fees. $2.6 million of that came from Westfield, another, about $400,000 came from Dalton, Greiner. And both of those would show up under our investment management fees. We then had an additional $2 million from Dalton, Greiner related to their annual hedge funds and that actually shows up in the line, Earnings in Equity Investments. So, but they total up to about $5.2 million as compared to Q3 of '07, we had $2.7 million in total and then in Q4 of '06 we had $2.3 million.

[Murali Gopal:]

Okay, great. Thank you very much.

[Operator:]

(Operator instructions) Our nest question comes from KC Ambrecht of Millennium. Please go ahead.

[KC Ambrecht:]

Hi, guys. Thanks for taking my question. You see I have a few more questions; I'd like to kind of go back to the loan books in California and Florida if you could, because spread income represents about 70% of your bank. I just want to make sure we are on the same page. So, starting with California and this after I was looking at PSF kind of implode these past few quarters. You have $520 million in loans and I'm just going through your slide here; $260 million in construction and $156 million in commercial real-estate. So, you guys are talking about your LTVs, I am little concerned about where the bulk of these loans went, let me start with that question. What vantage?

[Jim Dawson:]

Well they are spread out, they were not written at one time. I would say looking at the maturity date, the origination dates we’ve a couple from '05 and then the rest of them would be from '06 and '07. And they have pretty well distributed throughout that period.

[KC Ambrecht:]

Okay, because when PSF went back through and reappraise their loan book in the Inland Empire, they had a significant deterioration of appraisals which lead to the LTVs to skyrocket. So, I mean you guys are saying your LTVs, what are your LTVs on your construction land development book in California?

[Jim Dawson:]

Lets see, I have a bi-collateral and since most of Southern California's residential portfolio is construction, not first mortgages, that should be representative. And as I said earlier, the LTVs that we have are based on either the origination date or if there has been a modification, renewal or if we’ve anticipated any problems they have been updated.

[KC Ambrecht:]

But do you reappraise the properties when you have a problem?

[Jim Dawson:]

Absolutely.

[KC Ambrecht:]

Okay but.

[Jim Dawson:]

Absolutely, it's in the documentation, if there is an event of default we review all documentation and we get an updated appraisal.

[KC Ambrecht:]

Okay. I guess my problem is that your NPAs are going up as the percent of your loans, so they are up 31%, link quarter and 230% year-over-year, but your reserves are only up 1% to 3% over the same period, but your saying that we like our LTVs until there's a problem and then if there is a problem then we reappraise?

[Dave Kaye:]

First of all you are looking at our overall reserve increase, which [accordingly] is about 2 basis points. But we had an 18 basis point increase in First Private in the allowance. So, we are recognizing that fact. It's just that, it doesn't translate into overall because First Private happens to be a pretty small portion of our overall loan book. So, Southern California is not a big part, and we did increase their allowance. But, it didn't have an effect on the overall portfolio as much as you think.

[KC Ambrecht:]

Okay. I just want to go back just one last time, because according to the Management team of PSF, their opinion is that unless you have reappraised your properties in California, particularly in the Inland Empire, which is where they are, which is where you are, you don't know you have a problem until you reappraise. And when you reappraise then you realize your LTVs are over 100%. And so that brings me on my next question. What are the interest reserves on some of these projects, like how many months, like how should we think about your interest coverage?

[Jim Dawson:]

Yeah.

[KC Ambrecht:]

Your reserve coverage?

[Jim Dawson:]

Let me answer these and then you can continue with your questions. We don't have all of our loans in the Inland Empire. We have a lot of loans that are along the coast up towards Santa Barbara. We had some actually that and I mentioned earlier, up at Napa we have a lot in the Pasadena and [Careda] area, and what we have in the Inland Empire is concentrated pretty much in the western portion near routes 10 and 15. And your other question was?

[KC Ambrecht:]

Reserve coverage, and how you think about that?

[Jim Dawson:]

Yes. 33% of our construction loans in Southern California have a 12 months reserve. And 44% have a six months reserve. Now that's a current calculation, when the loans were originally made most of them had 12 months reserves some of them had less depending on the strength of a guarantors. Did you have another question KC.

[Operator:]

Looks like our next question comes from Jennifer Thompson of Oppenheimer. Go ahead.

[Jennifer Thompson:]

Hi, good morning. I actually just had a follow-up question regarding the margin, I understand you don't want to give guidance. So, theoretically just thinking about, you know that you had say 13 basis points of margin compression in an environment where we had less rate cut impact then we had more recently and who knows what's going to happen beyond this. So, all else been equal, wouldn't that imply potentially more margin pressure going into the first quarter and if not what is the offset is it just the steeper yield curve? Are you assuming more deposit flows? Kind of how should we think about it, it seems like your comments were, yes well there might be some margin compression in the first quarter, but what are the offsets to these material Fed cuts more recently?

[Dave Kaye:]

Yes that’s a good question Jennifer. I would say first of we had some deposit rate cuts at several of our affiliates, but those didn't take place until sort of mid to end of December and then some of them were in the beginning of January. So, obviously none of those cuts really took place or impacted the fourth quarter at all, right or in any material sense. As you said, our ability to attract deposits is going to be the biggest driver of our net interest margins. So, and then I think the other factor is that on the loan side we do have some floors that will kick in and help us out there versus some of the other cuts where they were approaching the floor and now I think in this latest round of cuts we'd actually have some of these loans to hit the floor. So, that should help us a little bit.

[Operator:]

Okay. That’s concludes today's question-and-answer session. I'll turn it back over to the speakers for any closing remark.

[Timothy Vaill:]

Well, again thank you all very much for joining us this morning. We're heading into a very interesting year, pre-election year. You never quite know what the stock market is going to do. People are anticipating changes in tax laws and so forth. And it's very hard to predict how this is going to turn out. But and also, with the economy near the, that word it begins with an [R], it's hard to tell how the people are going to react to that. But our goal all along is to work very, very closely with our high net worth clients and our institutional clients to help them meet their own specific needs. And we stay very close to them, we make sure that their diversification is in place and that we help them through, whatever tough times they might have. And that's our goal in life, and each of our affiliates works very hard in that respect. And I think that will result in good overall comparative results for us in the quarters going forward. So, again thank you very much for all of the interesting questions this morning. And we look forward to talking to you again in the future. Thank you.

[Operator:]

This concludes today's teleconference. You may disconnect at any time. Thank you and have a great day.