Boston Private Financial Holdings, Inc.
Q4 2012 Earnings Call Transcript

Published: 17 Jan 2013

[Operator:]

Good morning, and welcome to the Q4 2012 Boston Private Financial Holdings Earnings Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Clayton Deutsch, CEO and President. Please go ahead, sir.

[Clayton G. Deutsch:]

Good morning. This is Clay Deutsch, Chief Executive Officer and President of Boston Private Financial Holdings. Welcome to our fourth quarter and full year 2012 earnings conference call. Joining me this morning are Dave Kaye, our Chief Financial Officer; and Mark Thompson, Chief Executive Officer of Boston Private Bank & Trust Company; and Jeanne Hess, our Vice President for Investor Relations. At this time, I'll ask Jeanne to read the Safe Harbor provisions before we make additional remarks.

[Jeanne Hess:]

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 belief 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 identified a number of factors that could cause material differences between actual and anticipated results or other expectations expressed. Additional factors that could cause Boston Private's results to differ materially from those described in the forward-looking statements can be found in the company's filings submitted to the 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.

[Clayton G. Deutsch:]

Thank you for joining our call this morning. For the fourth quarter of 2012, our company reported GAAP net income of $13.1 million or $0.15 per share. For the full year of 2012, we reported $53.3 million of net income or $0.61 per share. Our full year return on equity for 2012 came in at 9.2%. Dave and Mark will walk you through the financials in a moment, but first, I want to share my thoughts on our performance for 2012. Our results for the full year of 2012 were favorable. We're especially pleased with our performance in the second half of the year. As I look back at the year, I see continued evidence of quality improvement, increased earnings stability and evidence that our model can deliver growth. First, with respect to quality. All of our quality metrics continued to improve in 2012. Criticized loans are down 24% year-over-year. We believe we have very strong reserves with low charge-offs. Our tangible common equity to total assets ratio increased by 30 basis points, and all of our capital ratios continue to show steady improvement. Meanwhile, despite an environment of margin compression, we have demonstrated P&L stability. For the full year, our net interest margin decline was only 3 basis points. Our provision is now negligible and is likely to remain low given our ongoing derisking and our strong underwriting discipline applied across all of our markets. We also continued to demonstrate expense discipline. Full year total expense for the Private Bank is down 2% year-over-year. Holding Company total expenses down 10% year-over-year. Fourth quarter expenses were elevated, which Dave will walk you through in more detail in a moment. However, we remain committed to additional reduction in our baseline expenses. On last quarter's call, we told you that we were looking for $10 million in additional expense cuts to be realized in the first half of 2013. We have now fully identified the $10 million as promised, and we have booked the associated onetime charges in the fourth quarter of 2012. We will now implement the $10 million of savings over the next several months without detracting from full funding of our business lines. Finally, we're especially pleased with evidence of client growth, as we fully implement our Wealth Management and Private Banking model. In the third and fourth quarters, we began to see nicely balanced loan, deposit and AUM build, reflecting that our Private Banking and Wealth Management model is beginning to take hold. When normalizing for the loans associated with the pending sale of the Pacific Northwest offices, total loans increased 9% year-over-year. We ended the year with strong deposit growth, bringing our core liability growth much more in line with loan growth. Net AUM inflows for the year were a positive $621 million, a terrific improvement over 2011, when we reported $492 million in net outflows, a swing of almost $1 billion. Core fees, which we define as Private Bank investment management and trust fees, fees from our investment managers, fees from our wealth advisors and gain on sale of loans, core fees increased 2% year-over-year and 5% quarter-to-quarter. Achieving higher levels of AUM growth and associated core fee growth continues to be a big priority for us and a critical element of our ROE enhancement strategy. As we close 2012, we are now in a strong position to begin escalating our dividend payout. Due to the increasing size and strength of our capital base and confidence in our ongoing risk management and earnings power, we have decided that now is the right time to increase our quarterly dividend to $0.05 per share from $0.01 a share the last quarter. Increasing our dividend is an important move which will allow us to reward our shareholders while adequately funding our businesses. We will continuously evaluate a range of return of capital strategies for our shareholders as we move ahead in 2013. Our just-announced share repurchase program represents one of those strategies. With that, I'd like to turn it over to Dave and Mark for more detail on our financial performance, and then we'll come back for questions. Dave?

[David J. Kaye:]

Thanks, Clay, and good morning, everyone. My comments will begin with Slide 3 of the earnings presentation, and that can be found in the Investor Relations section of our website, bostonprivate.com. On Slide 3 is consolidated P&L highlights for the linked quarter. Overall revenue increased 1% for the quarter, and that was driven by the core fees, which increased 5% during the quarter. Within the core fee line, we had increases in Investment Management and Trust, wealth advisory and loan sales. A 2% decline in our NII partially offset the core fee growth as loan yields continue to be under pressure. Operating expenses did increase 12% during the quarter, and I'll discuss those increases on the following slide. The other large item in the quarter was the credit to the provision for loan loss of $5 million. Again, that was primarily the result of moving the loans associated with the pending sale of the Pacific Northwest offices into held for sale category. Moving on to Slide 4, the Q4 2012 expense breakdown. We reported total expenses of $62.7 million in the fourth quarter due to roughly $7.6 million in unusual items. The compensation line item was inflated by about $3 million, and that's due to $900,000 in variable comp and another $2 million in noncash charges related to vacation accruals and SERP valuations. The marketing line increased by $1.1 million due to a seasonal emphasis intended to reinforce our Private Bank branding and sales support. It's important to note that the total marketing spend for the year is in line with our budget and media plan. We did book $2 million related to the restructuring of our higher-cost FHLB and other borrowings in the fourth quarter, and that flowed through our other expense line. Finally, in the restructuring line, we booked $1.6 million in severance to fund the final component in our $10 million cost-reduction program. Note that the marketing spend, severance costs and liability we're restructuring will benefit the company going forward. The Q3 and Q4 combined severance costs of $5.2 million will help us save $10 million on an annual basis beginning in 2013, and that will begin to be visible in the run rate in the first quarter of 2013. We expect the liability restructuring to save us $1 million in interest expense annually. On Slide 5, we show the consolidated P&L highlights for the full year of 2012. Pretax income increased 37% year-over-year to $69 million. The increase in pretax income was driven by a 2% increase in NII, a 2% increase in core fees and the provision credit of $3.3 million. Operating expenses were flat year-over-year at about $226 million, and that's in part due to some of the unusual items I discussed earlier. Slide 6 shows the spread and fee-based revenues. In looking at our quarterly revenue trends, you can see that the NII has generally held in the $44 million to $46 million range, with ups and downs driven by prepayment fees and the recapture of non-accrual interest. Core fees, on the other hand, have shown a fairly consistent pattern of growth in aggregate, increasing by 5% on a linked quarter basis and 13% year-over-year. The other revenue line is a little bit more volatile, and that's due to the variable nature of OREO sales and debt repurchase gains. Slide 7 shows our net interest margin. Reported NIM increased 8 basis points in the quarter to 319 basis points. If you recall, we indicated that our core NIM in the third quarter was roughly 317, which mean that NIM essentially held steady. For the full year of 2012, NIM was 322, and that compares to 325 for the full year of 2011. On Slide 8, we show our provision for loan loss. Provision for the quarter was a credit of $5 million compared to a provision credit of $4 million in the third quarter. Again, the credit for the fourth quarter was primarily the result of moving loans associated with the pending sale of the Pacific Northwest offices into held for sale. Continued improvement in our credit quality also helped with the provision. Net charge-offs remained low and were $2 million or just 17 basis points in the fourth quarter and roughly $9 million or just 18 basis points for the full year. Slide 9 highlights our capital position. In the quarter, our TCE-to-TA ratio remained flat at 7.7%, but it was up 30 basis points year-over-year. Also in the quarter, we saw our TCE-to-risk-weighted-asset ratio increase by 20 basis points and then 30 basis points on a year-over-year basis. With that, I'll turn it over to Mark.

[Mark D. Thompson:]

Great. Thanks, Dave. Good morning. My comments will begin on Slide 10, where I will highlight the performance of our Private Bank. In the fourth quarter, net interest income declined 2%. Core fees increased by 15% on a linked quarter basis. This was driven by a 3% increase in new account fundings in the Investment Management and Trust business. Inflows increased in New England, southern California and the San Francisco Bay Area and were driven by new individual, institutional and nonprofit client relationships as a result of an expanded sales effort and enhanced product offering. Also in the quarter, robust mortgage loan sales in all of our markets helped drive the increase in core fees. Expenses increased in the quarter due to the majority of the $7.6 million in unusual items being booked at the bank. As Dave mentioned earlier, we booked a provision credit of $5 million in the quarter. Now if you'll turn to slide 11, it shows our Private Banking performance highlights for the full year for 2012. Net interest income increased 2% in the year despite the low-yield environment. Core fees were flat at $32.5 million, and other income declined due to fewer gains on sale of OREO in 2012 versus 2011. A 2% decline in total expenses and a provision credit of $3.3 million for the year resulted in a 29% increase in pretax income on a year-over-year basis. Slide 12 shows the past 5 quarters of loans by type. Total loans increased 4% on a year-over-year basis, but declined 3% in the quarter due to the $277 million of loans associated with the pending sale of the Pacific Northwest offices and roughly $135 million of mortgage sales. On a linked quarter basis, we had 6% loan growth in southern California, 2% loan growth in New England and 1% loan growth in the San Francisco Bay Area. Regarding loans by type, we are pleased with how our loan composition has changed on a year-over-year basis. C&I increased 19% and CRE & Construction was flat. Our residential mortgage portfolio originations grew by 13% on a year-over-year basis. This demonstrated loan-generation capacity speaks to the strength of our Private Banking model in client growth and strategy. Total loans have also increased on a year-over-year basis in all 3 markets. Southern California increased by 56%, San Francisco Bay by 4% and New England by 3%. I will now address the liability side of the balance sheet on Slide 13. Total deposits increased 5% to $4.9 billion in the fourth quarter and were up by 8% on a year-over-year basis. Normalizing for the deposits associated with the pending sale of the Pacific Northwest offices that were moved to held for sale, our full year deposit growth was 12%. In the quarter, we continued to see core money market accounts and demand deposit accounts increase and higher-cost CDs continued to decrease. Managing the composition of our liability portfolio helped keep our cost of funds flat at 33 basis points. Now let me turn it over to Clay for a discussion on our Wealth Management business and closing comments for the quarter.

[Clayton G. Deutsch:]

Thank you, Mark. Investment Management fees, found on Slide 14, you'll see were flat in the quarter, as stable pricing was offset by a lack of positive market action. As a result, the Investment Management segment revenue was also flat at $10 million. Expenses increased 2% in the quarter to $8 million. Nevertheless, our EBITDA and pretax margins continued to be strong at 29% and 21%, respectively. The segment overall reported net outflows of $59 million for the quarter due to positive inflows of $147 million at Anchor Capital offset by outflows at Dalton, Greiner. Slide 15 shows the full year performance of our investment managers. Revenue was down 2% year-over-year, while expenses were flat. AUM for the full year was up 11%. Net outflows were $21 million, an improvement from full year 2011 net outflows of $591 million. On Slide 16, you'll see our linked quarter wealth advisory performance highlights. Our wealth advisory revenue increased by 3% in the quarter to $9.7 million. Operating expenses increased 13% to $7.7 million, elevated by professional fees and noncash benefit charges, which in turn drove down the segment's fourth quarter EBITDA and pretax margins. Segment AUM increased 3% in the quarter, and net inflows more than doubled. Slide 17 shows the full year performance of our wealth advisory firms. On a year-over-year basis, wealth advisory fees increased 9% to $37.7 million. Pretax income increased 3%. AUM increased 15% for the year, and net inflows increased to $436 million from $207 million due to very strong performance at both KLS and Bingham, Osborn & Scarborough. More information on AUM net flows can be found on Slide 18. We had our fourth straight quarter of positive net flows. On a linked quarter basis, net inflows increased 34% to $298 million due to strong inflows at Boston Private Bank and our wealth advisors. For the full year of 2012, net inflows were positive $621 million, a tremendous improvement over net outflows of $492 million for the full year of 2011. Importantly, 4 of our 5 Wealth Management platforms achieved our 5% positive net flow growth target for 2012. Slide 19 shows Holding Company costs. Holding Company costs for the quarter increased 15%, primarily due to noncash SERP revaluations. Discontinued operations increased 9% to $1.8 million in the quarter. Holding Company costs for the full year of 2012 declined by 10%. Additional detail can be found on Slide 20. Finally, before taking your questions, just permit me a moment to offer a few perspectives on how we see 2013. We expect a gradually improving economic environment but with elevated volatility and a continuing challenging yield environment. Despite continued industry-wide margin pressure, we are committed to attaining an 11% return on stated equity in 2013, on the way to our long-term return on equity target of 12%. To get there, we are absolutely focused on 3 characteristics which we hope will become distinctive attributes of our company's agenda

[Operator:]

[Operator Instructions] Our first question comes from Dave Rochester of Deutsche Bank.

[David Rochester:]

I think, excluding the Pac Northwest branches, loans look like they were up around 2.5% for the quarter. Should we continue to see that kind of growth rate going forward? I remember, last quarter, you mentioned seeing more demand that you really needed to get the growth you were looking for. Is that still the case, given the pipeline?

[Mark D. Thompson:]

Looking ahead, for 2013, we would expect mid-digit loan growth rates. So on a quarter-by-quarter basis, I think you can just expect that for the upcoming year.

[David Rochester:]

Okay. So maybe a little bit of deceleration going into 1Q?

[Mark D. Thompson:]

Yes, yes. But still, very strong growth across all of our markets and, clearly, an emphasis to sell loans in conjunction with our Private Banking model and private client strategy.

[David Rochester:]

Okay. And what was the big driver of the C&I growth this quarter? I noticed that was up very nicely.

[Mark D. Thompson:]

With C&I, we had a purposeful strategy to increase and mix our composition of loans across all of our markets. That was primarily driven with privately-held businesses, venture capital and private partnerships in New England and the San Francisco Bay Area, lot of growth in southern Cal with privately-held businesses.

[David Rochester:]

Okay. And switching gears just to the recent tax policy changes. Was wondering if you're seeing any change at all in customer behavior around the new rules in your high-net-worth customer base?

[Mark D. Thompson:]

Well, certainly, we saw a push at year-end to close transactions to take an advantage of the favorable taxes relative to 2013.

[Clayton G. Deutsch:]

And on the Wealth Management side, Dave, I just completed a tour of all of our wealth affiliates, our Wealth Management affiliates. And while, no question, the pace of activity spikes up near year-end, I'm actually surprised at how relatively calm the client base was in general. There was not a lot of kind of radical tax-driven behavior. I think a lot of our clients are largely staying the course with respect to portfolio construction.

[David Rochester:]

Okay. And switching lastly to the new QM rule. Just given what we know so far, do you expect that to impact your strategy in any meaningful way going forward?

[Mark D. Thompson:]

No, we really don't. We expect little to no impact in the jumbo asset class or our interest-only mortgages. All of our Private Banking mortgages are well underwritten, with strong liquidity, income ratios and LTVs. This is separate, however, from the proposed Basel III capital requirements. We continue to watch that very closely.

[Operator:]

Our next question comes from Bob Ramsey of FBR.

[Bob Ramsey:]

Just to follow up on Rochester's question about the QM rules. I know you mentioned they are interest-only mortgages, which are precluded from QM. Does that suggest that you all are willing to originate non-QM mortgages if they meet your otherwise stringent underwriting criteria?

[Mark D. Thompson:]

Yes. We continue to focus on our private client strategy, and residential jumbo mortgages is a very integral part of our overall Private Banking model.

[Bob Ramsey:]

Okay. That's great. And do you anticipate that there could be any change in the ability to sell a non-QM mortgage?

[Mark D. Thompson:]

At this point, we're watching the roads closely, and we're going to continue to move ahead with our strategy, and we'll monitor it very carefully as we move ahead.

[Bob Ramsey:]

Okay. And what percent of your resi mortgage originations are interest-only mortgages?

[Mark D. Thompson:]

We have not disclosed that at this point.

[Bob Ramsey:]

Okay. I guess, I know in the jumbo space, historically a lot of mortgages are interest-only mortgages. Is it reasonable to assume that a significant portion of the mortgages are IO? Or is that not the case?

[Mark D. Thompson:]

It is a popular financing option for our clients managing cash flow, tax advantages, and we expect it will continue to be.

[Bob Ramsey:]

Okay. That's great. That helpful. And then, I guess I was also interested, as you all think about the ROE target that you intend to hit this year, is it reasonable to say that you've got just a hair over $600 million of equity entering 2013 and that's the right base to think of what you'll be earning that ROE off of?

[David J. Kaye:]

Well, we -- as we've said in the past, we're comfortable with our capital ratios. As our balance sheet grows, we would expect our equity to have to grow to support that just to maintain a stable capital ratio.

[Bob Ramsey:]

So then, I guess, what you're saying there is that 11% of that $600 million you actually would expect to earn something north of that, given growing capital turned at 11% ROE?

[David J. Kaye:]

Yes, we would have to.

[Clayton G. Deutsch:]

Yes. And Bob, the only thing I'd underline, I know you get this, but we still get some confusion on, "Am I talking return on stated or return on tangible?" It's return on stated. So your logic on the denominator is sound. Our return on tangible, of course, is already much higher.

[Operator:]

Our next question comes from Chris McGratty of KBW.

[Christopher McGratty:]

Maybe I'll ask a QM question again. Can you help us on what percent of the mortgages on your books are IOs? I know you wouldn't -- you weren't sharing the percent of originations, but any framework around the size of kind of IOs today that you're currently holding?

[David J. Kaye:]

Chris, we haven't disclosed that. It's a sizable portion of our business.

[Christopher McGratty:]

Okay. On the ROE, the 11%, Clay, can you help us with 2 things? One, with the buyback announced last night, is there a meaningful piece of the buyback that helps you get to the ROE guidance? Or is that just kind of opportunistic? And then, secondly, what kind of credit assumptions are you using? Obviously, you're in a period where you're presumably under -- credit's still below trend given where it's been. But does it contemplate a negative provision in that guidance?

[Clayton G. Deutsch:]

A 2-part question, 2-part answer. I guess I'd say first, the announced buyback program, I'll use your word, is more opportunistic. That was not intended to manipulate the ROE. We now, Chris, have a very detailed capital plan. It's a plan we have a lot of confidence in. We believe we're headed into a period of excess capital, very nice capital build. The primary vehicle, we believe, and the vehicle most favored by our shareholders is an escalating dividend. But we also want to have a range of return of capital options at our disposal. We thought gaining approval for a repurchase option was a prudent thing to do. But the ROE attainment is not predicated on share buyback assumptions. Second, you asked about credit trend, and I guess your question is more about quality than growth rate. We've never disclosed "a normalized provision." I know that's a frequently-asked question. I'll try to answer it the following way, though. As Mark said earlier, we feel very confident about the stability of our high-quality loan demand outlook, and we're going to manage that carefully, but I think you heard Mark say, kind of mid-single digits. Thought about another way, I've said to you and others, we want loan demand to be very, very nicely balanced, loan growth to be nicely balanced with deposit growth. So I think you could kind of triangulate loan growth, demand deposit growth, total deposit growth and capital growth, and we'd like for all of that to be balanced. We believe our quality level will remain extremely clean and high quality. And the provision, therefore, I think, will be driven by 2 factors

[Christopher McGratty:]

Okay, understood. Last one. On the expense outlook, with the cost saves coming in, how should we think about any impact from the Pac Northwest sale as it relates to -- we saw the loans moved to held for sale, any expense or fee adjustments in kind of the coming quarters?

[Clayton G. Deutsch:]

Don't believe so. The $10 million is on the going-forward baseline, so we've excluded effects of the Pacific Northwest sale from that. So that $10 million is intended to be a real 10 against our going-forward baseline.

[Operator:]

Our next question comes from Casey Haire of Jefferies.

[Casey Haire:]

So just one more follow-up on the ROE guide. Clay, you mentioned fees -- increased fee contribution is -- it continues to be a priority. It's pretty high right now at -- it's close to 40%. I'm just curious, what -- is there a number you need to get to higher? And what's that number to make the 12% ROE goal next year?

[Clayton G. Deutsch:]

Well, continuing to expand that fee component, Casey, is a real declared priority of ours. We haven't given guidance on a specific number. But I've been pretty clear, we want the rate of fee revenue growth to exceed the rate of total revenue growth. We want to re-weight increasingly toward those fee-generating businesses. It's a very ROE-friendly dynamic. I've said publicly before, to illustrate the sensitivity, if you increased our fee weight by 10 points as a percent of revenue mix, we'd be already beyond the 12% ROE target. So that mix feature is an extremely ROE-loaded metric. So if you all like 39 to 40, a higher number is better.

[Casey Haire:]

Okay. I mean, do you guys -- are you guys still looking -- and do you think you can get there organically? Would you entertain -- are you looking at acquisitions of other wealth managers? What's your appetite there?

[Clayton G. Deutsch:]

Well, I think this past quarter gives us evidence that we can get there organically. There's a very nice step-up in AUM build and associated fee build. And we very much want to keep that drumbeat going. And I think we've laid the foundation to do that. With respect to M&A, I think M&A in this arena is costly. We're going to be very careful. We like special situations, kinds of lift-outs, bolt-ons, things like that. We've done a few, and we'll continue to look. But I'm heartened by the evidence that we can get there the old-fashioned way. I think organic can move the needle for us.

[Casey Haire:]

Okay. And just lastly, what -- with the dividend hike, what kind of payout ratio are you guys comfortable with?

[David J. Kaye:]

Well, Casey, that's something that we're going to continually evaluate as we go along. We're comfortable -- in the past, we had targeted -- before we had cut the dividend years ago, we were targeting more of a 20% payout ratio. I'd say we would definitely be more comfortable north of that. But it's something we'll evaluate on an ongoing basis. We don't have a specific ratio that we're targeting right now.

[Operator:]

[Operator Instructions] Our next question comes from Mac Hodgson of SunTrust Robinson.

[Mac Hodgson:]

Dave, could you give any color on your outlook for the margin? I know on a core basis, it was relatively stable, I guess, 3Q to 4Q. And how do you look at that heading into '13?

[David J. Kaye:]

Yes. We did have some -- we did see some stability in the margin. We do expect, going forward, to be ongoing pressure just because we see the loan yields continuing to come down as the new loans are put on the books. But I will say 2 things. One, we've seen a -- over the last quarter, a slowing of the degradation of those loan yields. And then, two, we think we have some opportunity on the liability side to offset that loan yield compression. So overall, I would say still some downward pressure, but hopefully we're able to mitigate that quite a bit.

[Mac Hodgson:]

Got you. And what -- and you may have already said this, but what was the -- can you give me a detail on the FHLB or liability restructuring that's saving $1 million? What was actually done?

[David J. Kaye:]

We just prepaid some amount of liabilities and took a $2 million -- roughly a $2 million charge. It was FHLB and some -- and there was a repo involved as well, and it's going to save us interest expense of $1 million annually going forward.

[Mac Hodgson:]

Is that $1 million part of the $10 million cost initiative, or is that separate?

[David J. Kaye:]

No, that's separate. The $10 million cost initiative is just in the expense line, not interest expense.

[Clayton G. Deutsch:]

Dave's claiming that is intelligent financial management, so he wouldn't let me count it toward the $10 million.

[Mac Hodgson:]

And I think back on -- I think Chris might have asked this earlier, but on the charter sale, remind us, maybe off air, when that's closing and how much expenses related to charter that will come out.

[David J. Kaye:]

We expect it to close in the -- sometime in the second quarter. I don't think it's going to get done by the first quarter, but -- so sometime in the second quarter of this year, we'll finish that. On an annual basis, there's probably $8 million to $9 million worth of expense associated with that.

[Mac Hodgson:]

And I think you had said, on a kind of bottom line basis, it was somewhat breakeven.

[David J. Kaye:]

Yes. It's been -- for all of 2012, it was slightly above breakeven. It did improve a little bit in the back half, but not a material impact on our P&L.

[Mac Hodgson:]

Okay. And did -- the announcement back in August about the new hire at Anchor, can you give me detail if that in fact closed last year and if it was a factor in some of the AUM changes in the quarter? Or will we see it in the first quarter?

[Clayton G. Deutsch:]

Well, kind of yes and yes, we think, Mac. First, just some facts. We -- Mike joined the company, joined Anchor, in December. So it was kind of back end of Q4. The deal changed. We originally had conceived it as an acquisition of Pierre & Co. from an established seller. The deal changed from an acquisition to a hire. So we have hired Mike Pierre, and he's now ensconced at Anchor as part of the investment management team over there. About $100 million-plus of AUM has come over with that hire. And we don't know what the -- we're still in the open period, so we don't know what the ultimate amount will be. So that's where we are, but we're thrilled with it. We think Mike is a real talent, and again, even though the deal changed, we're very pleased with it.

[Mac Hodgson:]

Got you, okay. And maybe just one final one. When you kind of laid out what you're focused on to hit the ROE target, I think the expense side is well understood, same with the capital side for the most part. Kind of accelerated revenue development and kind of the increase in the weight on the Wealth Management side, I think, is more of an unknown, and you've talked about it a bit in the questions, about you think you can do it organically. I didn't know if there was just any more detail you can give on actions you've taken, I guess, with new hires and, otherwise, where we'll see -- and maybe just have some more confidence that we'll continue to see this good momentum on the fee side throughout the year.

[Clayton G. Deutsch:]

Yes. Well, first off, I think your premise is absolutely right. A lot of our plan to hit the ROE target is based on solid revenue growth. And within that, we think we've got to put a real emphasis on fee businesses overall. The main drivers of that will most likely be our Wealth Management and Investment Management activities, but with some nice stepped-up contributions from banking fees as well, and Mark has spoken a little bit to what we're doing there with mortgage throughput and loan sales. But we want to up the level of fee growth. Our target, and we've disclosed this publicly before, but we think our wealth managers should perform to 8%, 9%, 10% revenue growth. And we need to keep that -- we need to attain that and keep it going. Turning to what have we done, we've been working very closely with our non-bank wealth management affiliates on growth. It's almost wholly organic, achieved through client expansion and expansion of their professional bases, their professional staffs. We've added business development capability. But it's primarily organic expansion, with the exception of the couple of very favorable kind of complementary lift-outs we've done to accelerate Anchor. Within the bank, we've spent better than a year making our Boston Private Bank Investment Management platform more contemporary, more expanded from a product standpoint, deeper from a professional leadership standpoint, and that's been on both sides of the house, so our client service and client development folks, as well as our investment management professionals, our portfolio managers. Big expansion there to support deeper capability in New England, but in particular, to build a real presence in our California markets, where we had a very scant presence pre the merger. So all of that's underway. And again, I think that's why, as a management team, we're just -- we're particularly encouraged by what we saw through 2012 kind of come into a crescendo near the end of the year in terms of AUM build. It's a little bit of, if you build it, the revenue follows. So the AUM build, I think, says some good things about where we think our Wealth Management fees could go.

[Operator:]

Our next question comes from Jake Civiello of RBC.

[Jake Civiello:]

How should we think about your willingness to utilize the buyback? I mean, is there a certain dollar price or metric that would inspire you to be more active in the market?

[David J. Kaye:]

We didn't really have any set targets when we disclosed that. Honestly, the cheaper it is, the more attractive it is and the more attractive an opportunity it is. And there has been some -- we've seen volatility in our stock and, certainly, over the last couple of years, and we would intend to take advantage of that if the opportunity presents itself going forward.

[Jake Civiello:]

Okay. And then, is there a certain level of the reserve-to-loan ratio where you'd feel comfortable bringing it down?

[David J. Kaye:]

It's a good question. Right now, if you sort of dissect the allowance for loan loss, we're at about 1.75 in terms of our allowance to total loans. If you look at it, bring it down a level further, we're in the range of -- just the past-rated loans on our books are 1.35 to 1.40 in aggregate. And then we have a certain amount of reserves decked against our problem loans that bring up that full average up to 1.75. So if we see continued improvement and reductions in the problem loans, we'll see that 1.75 move down because we won't need to hold specific reserves against those problem loans.

[Jake Civiello:]

Okay. That makes sense. And then just one final question. With respect to the $900,000 gain on sale of residential mortgages in the quarter, would you view that as sustainable or potentially a good rate to use going forward in 2013?

[David J. Kaye:]

I think there was a larger portfolio sale that we had. That is one of the emphasis -- the fee-based initiatives that Clay talked about is improving that particular line, where we had normally had about, I would say, $500,000 to $600,000 a quarter in just ongoing loan sales or gains on loan sales. So the 1.5 or 1.7 was higher than we had seen, again, driven by the portfolio sale. But that's an initiative of ours, to improve that going forward. So again, an area of emphasis for us in improving our overall fee-based revenue.

[Operator:]

Our next question comes from Tom Alonso of Macquarie.

[Thomas Alonso:]

Just real quick and I'm not -- I'm sorry if you already touched on this. But if I'm thinking about the expense base that we're taking this $10 million out of, is that 55.1 that you guys called out in the slide back, is that a good place to start?

[David J. Kaye:]

Yes.

[Operator:]

Our next question comes from Christopher Marinac of FIG Partners.

[Christopher W. Marinac:]

Clay, was curious, if you look strategically, kind of closer to home in New England, are there acquisitions you can do, particularly on the bank side? Does it make any sense or is it still really an organic expansion, as you've done for years?

[Clayton G. Deutsch:]

Our preference is organic. Now that's not theological, it's just strategic and economic. So we look at lots of things. So far, at least for me, the math just hasn't worked. And qualitatively or strategically, as you put it, I think one of the lessons we learned as we worked through our own merger, converting banks to our Private Banking model is challenging, is challenging. We've had great success, demonstrated success, through organic growth, and we like opening offices, developing our own nameplates, et cetera. We have a Boston Private Banking format that we believe in. We know how to run the drill, and we think it performs. So at least up through present, we've looked. But I think our preference is to fund organic expansion of our Investment Management and Private Banking footprint.

[Christopher W. Marinac:]

Okay. And just a quick follow-up, could you just refresh us on your progress on the wealth advisory side in California? And are you hitting your goals there?

[Clayton G. Deutsch:]

Yes, happy to talk about it. We have 3 baited hooks, if you will, in California. KLS has a southern California office to augment their New York headquarters. The center of the practice has been New York, but they have a southern California office which has been showing nice growth since opening a little over 2 years ago. Bingham, Osborn & Scarborough, San Francisco-based, a very appealing and steadily growing wealth advisory boutique, a group of professionals we're very excited about, very strong client performance. And then we have the West Coast, Boston Private Bank Investment Management platform, which is really starting to kick in. We're seeing very nice growth through the Private Bank in our southern California market, and we're seeing a growth ramp now emerging in San Francisco in the Bay Area. So we're kind of 3 for 3. I think we have 3 Wealth Management growth options on the ground in California.

[Christopher W. Marinac:]

Clay, just thinking ahead, if you do nothing on the acquisition side, then you can continue to execute as you are, and it probably may be your best return.

[Clayton G. Deutsch:]

I am very wary of expensive acquisitions. So again, we have our head on a swivel. I mean, we'll look, but we are organically preferring. I believe -- we are convinced that we can drive superior growth through our base businesses. And I said before publicly, our strategy is not M&A-dependent. We're trying to prove that our strategy can perform more than satisfactorily, primarily organically. And we're viewing M&A as only a kind of special-purpose supplement, would have to be very attractive pricing and would have to bring us something really special to fill in gaps in our established businesses. But we are organically preferring.

[Operator:]

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

[Christopher McGratty:]

Follow-up on the size of the investment portfolio. How should we think about, I guess, balance sheet growth going forward? You talked about the loan growth, but how should we think about securities?

[David J. Kaye:]

I think that would grow in line with our overall balance sheet growth and the loan and deposit growth that Mark laid out.

[Christopher McGratty:]

Okay. And then what's left, I guess, on the -- you guys continue to buy back some of the debt. What's left to continue to take out? And then can you remind us how big the FHLB outstandings are, the higher cost is?

[David J. Kaye:]

So on the debt repurchases that we've been doing at the Holding Company level, we had the convertible TruPS that really have been coming to us through a reverse inquiry process. There's only -- I think it's a little bit less than $10 million, $9 million or so and change left on that piece, and we have $400 million in FHLB borrowings, Chris.

[Operator:]

And our next question is a follow-up from Bob Ramsey of FBR.

[Bob Ramsey:]

I know, in terms of buybacks, you've been asked it a lot of ways, but you sort of described the decision process as being opportunistic to take advantage of volatility in the stock. I'm just curious if that decision is largely subjective or if you all are approaching it from a financial analysis point of view, looking at IRRs or tangible book value earn-back or other some measure that sort of influences when and how aggressive you will or won't be.

[Clayton G. Deutsch:]

Bob, we've -- I mean, you've got to know us. We've got tons of financial analytics. We're quantitative, not impressionist, so we run all kinds of matrices of strike prices and accretion and you name it. Having said that, we're not trying to be vague, but we are trying to be honest. We do not have a fixed intent with the buyback. The evidence is overwhelming that shareholders most prefer an escalating dividend, and that is our primary vehicle, and we're excited about coming out with the $0.05. You're seeing, in our industry, all kinds of other stuff, special dividends, buybacks. I think the evidence on special dividends is unclear. As you know, the evidence on buybacks, I'll be a little self-deprecating, the evidence most investors believe management teams are bad buyers of their own stock. I understand that. We're going to try to be very disciplined, though. We think this is a very nice option to have above and beyond a steady dividend or even an escalating dividend for special purpose use. And I can't really say much more than that. But it's a tool that we wanted to have. We think it gives us flexibility to more finely manage our capital.

[Operator:]

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

[Clayton G. Deutsch:]

Well, I -- we're pleased with the year, and we're especially pleased with some of the growth suggestions coming forward in the fourth quarter evidence. I want to thank all of you for dialing in and, Mac, hope you feel better.

[Operator:]

Thank you. The conference is now concluded, and we thank you for attending today's presentation. You may now disconnect, and have a nice day