Boston Private Financial Holdings, Inc.
Q1 2008 Earnings Call Transcript

Published: 28 Apr 2008

[Operator:]

Welcome to the first quarter 2008 Boston Private Financial Holdings earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Timothy Vaill, Chairman and Chief Executive Officer.

[Timothy L. Vaill:]

Welcome to our first quarter 2008 earnings conference call. Joining me this morning are Walt Pressey, President of the Company; Jim Dawson, the head of our Private Banking group; Jay Cromarty, the head of the Wealth Advisory and Investment Management businesses; Steve Hayworth, the CEO of Gibraltar Bank in Florida; and Erica Smith, Director of Investor Relations; and David Kaye, our Chief Financial Officer. At this time I’m going to ask Erica if she will read the Safe Harbor provisions before we make additional remarks.

[Erica Smith:]

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 press release which identified 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 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. And with that I’ll turn it back.

[Timothy L. Vaill:]

As we stated in our press release this morning we reported cash earnings of $0.37 per share. But due to the expected non-cash impairment charge of First Private Bank we will post a loss on a GAAP basis of up to $0.38 a share depending upon the final evaluation of that asset. The impairment analysis is being conducted by Ernst & Young and our goal is to have the final answer by the time we file our 10-Q in a few weeks. Clearly, from an overall earnings perspective we were very disappointed. Yes, the overall banking industry is having a rough time right now, but I don’t think we can look solely in that direction. At Boston Private, we need to prevail and outperform the industry and I am committed to that goal. Having said that, our results demonstrate the importance of our unique business model that continues to prove resilient, even in today’s challenging marketplace. The long-term strategy that we have put in place over the past decade, thoughtful diversification of our operations across both business lines and geographies, is working effectively. Core operations across our three business segments remain strong. In particular, our wealth advisory and investment management businesses experienced solid growth year-over-year. I’ll ask Jay Cromarty to comment about this a little bit later in the call. As announced earlier in the quarter, we were pleased to provide management of our Westfield affiliate, one our best performing asset managers, with an equity opportunity. We fully believe that aligning the interests of our employees with our shareholders will ultimately drive long-term profitable organic growth. From any perspective, the Westfield partnership has been a resounding success and we are proud to have them as a part of the Boston Private family. During the quarter, our Private Banking segment, which represents 50% of our revenue, experienced many of the same credit challenges facing the rest of the banking industry. This was particularly the case in economically challenged Southern California where declines in the housing market were dramatic and mushroomed very rapidly. As I’ve said in the past, despite our above-average client profile, we are not immune from regional economic market fluctuations. As a result, we made the decision to increase the loan loss provision at our Los Angeles affiliate, First Private Bank. We are working diligently and expeditiously to address all of the issues in First Private’s loan portfolio and Jim Dawson will speak to you more about that later in the call. We continue to believe that Southern California is a terrific market over the long term and First Private is a solid organization with high quality people, and uniquely positioned to capitalize on those strong demographics. I mentioned earlier this quarter that we had engaged Chastain & Associates, a nationally known loan review firm, to analyze loan portfolios at all of our banks to give us a third-party perspective. Following the completion of their review at Gibraltar Private Bank in South Florida, the bank’s management team boosted its allowance for loan losses as well, related to the downgrading of certain commercial loans needing a bit more attention. I am pleased to tell you that today at Gibraltar we are not experiencing the same level of loan and market deterioration that we saw in Southern California. Based on Chastain’s review and our confidence in Gibraltar’s experienced management team, we believe the company’s credit and underwriting processes are consistent with a traditional Private Banking business model. However, we agreed with management’s intention, which, as an abundance of caution, decided to strengthen the safety net of the bank. The increases to the provisions at both First Private and Gibraltar were partially offset by the strong private banking revenue growth of 17% across the segment, as well as the debt buy back we executed during the quarter which generated a nice $11 million gain. We recognized last year that our growth necessitated the need to streamline the company and gain more functional focus, so in January we reorganized our management structure. We aligned the company along our three business segments, private banking, wealth advisory, and investment management, which we believe will enable us to continue to build an even stronger growth-oriented company. As we announced, Jim is managing the private banks and Jay is running the fee-based businesses. This change will provide each of our business lines with a deeper layer of understanding and level of commitment while affording our affiliates the opportunity to share ideas, best practices and knowledge. It is a win for all of us. Today we are confident that we are focusing on the right space in financial services, that we are in the right geographic markets and that we have the right diversified business model that has been tested over time, and that we have the financial stability and strong capital position to navigate through these challenging times. We believe that our unique approach will ultimately generate superior long-term shareholder value in the future, just as it did the first 15 years of our existence. I am committed to persevering toward that end. With those highlights illustrated I’m now going to ask Dave Kaye to talk about the financial results of Q1 in more detail.

[David Kaye:]

I’m going to be referring to the first quarter earnings release presentation and I’ll start off on Slide No. 5 the quarterly earnings growth. As Tim stated we reported first quarter 2008 cash earnings of $0.37 a share, a decrease of 16% from the $0.44 that we reported in the first quarter of 2007. We estimate that a GAAP loss for the first quarter of 2008 is going to be between $0.25 per diluted share and $0.38 per diluted share, and that’s driven by an estimated non-cash impairment charge that ranges between $0.53 and $0.66 a share. So excluding the impairment, it would have been $0.28 per share of earnings. Included in this earnings number is a total loan loss provision of $19.6 million, primarily driven, as Tim said, by First Private. Due to the increases in criticized and non-performing loans and the subsequent provision, as we stated in our 10-K, we consider that to be a triggering event and we have engaged a third-party valuation consultant who is assisting us in the testing for impairment at our First Private affiliate. Management has currently estimated that the company will incur a non-cash goodwill impairment charge in the range of $20 to $25 million. We were disappointed with the additional criticized loans. However, given the deteriorating market conditions we thought it was prudent to take that added caution. We were, however, pleased that the same team of Chastain professionals that reviewed First Private’s loan portfolio did not find significant deficiencies in the loan portfolio at Gibraltar Private. Steve Hayworth and his management team determined that an increase of $3.4 million was prudent given the current economic environment. Please note that Gibraltar required no capital from the holding company to maintain its well capitalized status. Chastain is now off to Charter Bank and then Borel, but Jim Dawson will get into more detail later in the call. Flipping to Slide No. 6 on the revenues, we’ll take a look at the detail. Year-over-year our revenues increased 28% to $117 million. On a linked quarter basis, revenues were up approximately 7%. The revenue drivers of our business are the net interest income of $49.7 million, which was an increase of 15% on an annual basis, the wealth advisory fees were $12.4 million and that increased 70% year-over-year, and then the investment management fees were $40.4 million, which is a 7% increase year-over-year. Please note that this is the third quarter in which our wealth advisory affiliate, BOS, is reflected on a consolidated basis. We also had the Davidson acquisition, so together those contributed $4.4 million in wealth advisory fees contributing to that growth. Slide No. 7 on net interest income and margin. Although we did have some margin compression, most of that was attributable to some interest reversal at First Private. Excluding that interest reversal, our net interest income was relatively flat for the quarter and normalized we would have been at about $339 instead of the $332 shown on this slide. Despite the challenges facing First Private, we we’re pleased with the performance of our private banking segment as it navigates through the challenging environment. We’re encouraged by the recent movements and the yield curve and we believe we have areas where we can grow the company. Slide No. 8 on operating leverage. For the first quarter of 2008 as compared to the first quarter of 2007, at a positive operating leverage of 12.2%, now that does include the gain as I mentioned from the buy back of the convertible notes. So if we take that out operating leverage would have been just slightly negative at about 20 basis points for the same period. You can see on the slide that we’ve held expenses fairly flat from Q4 ‘07 to Q1 ‘08. Now for a closer look at our loan quality I’d like to introduce Jim Dawson to walk you through the private banking section of the presentation.

[James D. Dawson:]

Slide No. 10 is entitled deposit growth. Deposit declined slightly in the first quarter. As we have for the past few quarters, we faced significant competition for deposits in a number of markets, particularly in Boston and in Florida. Slide No. 11 is entitled loans. We continue to have a strong loan growth, although we experience slower growth in some of our geographies. Our compound annual growth rate for loans has been 32% for the last five years with a total loan portfolio increasing to $5.4 billion at March 31. On a linked quarter basis loans grew 2%. Slide No. 12, historical trends, and non-performing assets, despite some of our recent challenges, we remain committed to strong credit discipline. We faced challenges with our loan portfolio at First Private in the fourth quarter. The good news is that at this time we believe the loans impacted are contained to the construction and land portion of their portfolio primarily in the Inland Empire. As a result of the developments at First Private we have taken a number of immediate and decisive steps. Let me review some. First, there was a change in the executive management team and I took over as interim CEO and became a Director. Bruce Farrell of Borel Private Bank, our northern California affiliate, assumed responsibility as the interim Chief Credit Officer, and Mary Fischer, Chief Operating Officer of First Private, was appointed to the Board of Directors at First Private. In addition, Neal O’Hurley, a senior credit professional from Boston Private Bank has been on the ground working the loan portfolio at First Private over the past six weeks. Second, we’re in the process of revamping and enhancing many of our key policies, such as the loan loss reserve methodology, appraisal policy, loan policy, including procedures and lending concentrations, dividend policy and capital contingency policy, just to name a few. Lastly, we hired a new Chief Credit Officer, Ed [Ficks], who has extensive experience in workout situations and has been a senior credit professional for some time. He spent the first 30 years of his career at Bank of America and for the past nine years has worked at banks in Southern California. He started his work with the bank on Monday and we’re excited to have him on the ground. In addition, to augment the team we have hired an experienced workout specialist who began working at First Private full time early this month and just this week had two more seasoned professionals accept offers to join us. One is a work-out officer and one is a real estate lending officer to work with our borrowers. Our work is not done, far from it. The market is changing daily, but we believe we have been conservative in our reserve analysis and our loan classifications for loans in the Inland Empire and elsewhere. The loans in the remainder of the First Private portfolio look to be solid but we remain cautious in this fluid market. Moving on, as of March 31, 2008, our ratio of non-performing assets to total assets was 1.25%, up from 79 basis points December 31, 2007. Next graph shows past due loans. Loans past due totaled $25.7 million representing 63 loans. This is 37 basis points of average assets. While an indicator of challenges in the portfolio, the important metric is whether or not the NPAs migrate into charge-offs and past dues migrate into NPAs. If you look at the next graph we had net charge-offs of $1.7 million, or three basis points annualizes of total loans for the first quarter, an increase from previous quarter but still well below the industry. Slide No. 15, quarterly variances, provides additional detail on the loans. We have two OREO properties, one at First Private and one at Gibraltar, totaling $936,000. We continue to have a repossessed asset on our books that we are currently marketing for sale. As you see, criticized assets increased to $302 million. Slide No. 16 shows concentrations and exposures. A number of investors have asked for a better understanding of the loan portfolio cut across both product type and geography. We have highlighted areas where concentrations are greater than 10%. And Slide No. 17 outlines our NPAs and classified loans by region. We wanted to provide you with this additional information so you can better understand our loan portfolio. In general our loan pipelines today vary by geographic market. In the Northeast, activity is keeping pace. In Northern California the loan portfolio has been growing faster. And we have consciously slowed the loan growth in both Southern California and South Florida. As Dave pointed out this highlights the strength and importance of our diversification strategy. With that, I’ll turn it over to Jay Cromarty.

[Joseph H. Cromarty:]

On Slide 19, the wealth advisory and investment management businesses combined constitute approximately 40% of total revenues. For the first quarter investment management fees totaled $40.4 million, an increase of 7% over the same quarter in 2007, in part due to the strength of the trust and investment management businesses at our private banks, most notably Boston Private and Gibraltar. Our investment management segment provided $32.6 million or 81% of the total, a 5% increase over the same quarter in 2007. We were particularly pleased with the results at Westfield Capital. As Tim mentioned we announced the signing of a new agreement with Westfield which we believe over the long-term is the right decision for us, the management team at Westfield and our shareholders. Investment performance is the lifeblood of this segment and I’m pleased to report that our firms continue to post outstanding returns. Over three-quarters of our equity strategies on an asset weighted basis are first quartile performers on a one and three year basis. Almost 60% are first quartile on a five-year basis. More specifically at Westfield Capital all of their equity composites have outperformed their benchmarks on a one, three, and 10 year basis. The same is true of Boston Private value investors. At Dalton Greiner, the news is similarly positive. All equity strategies have outperformed on a one and three-year basis and the overwhelming majority have achieved out performance for much longer periods. At Anchor Capital over 98% of equity assets are invested in strategies that have outperformed their benchmarks on a one, three, five and 10-year basis. Not surprisingly our investment managers’ pipelines for this quarter are robust. If we could turn to wealth advisory segment in Slide 20, for the first quarter we generated $12.4 million in wealth advisory fees which represents a very healthy 71% increase. Note that included in these results were Davidson, which we acquired February 1, and the consolidation of BOS. Excluding the effects of BOS and Davidson Trust, our organic revenue growth was 11% as a consequence of expanding client relationships, increased fees and very strong client retention rates. On a same affiliate basis net income growth was 62%. Slide No. 21, assets under management and advisory, total assets under management and advisory increased 6% or $2.1 billion to $36 billion on a year-over-year basis. Total assets decreased $1.7 billion, or 5% on a linked quarter basis, primarily due to market value declines. The acquisition of Davidson added approximately $908 million of assets under management during the quarter. Turning to Slide No. 22, net flows, we had net outflows of $301 million for the investment management and wealth advisory segments during the quarter, but our private banks added $173 million to reduce the aggregate net outflow to $128 million. Turning to Slide No. 23, market action, on this slide we break out the market impact on a consolidated basis. I think the takeaway here is that essentially in the first quarter the markets took back 75% of the favorable market impact we experienced for all of 2007? Notwithstanding this fact we are pleased with the quantity and the quality of the sales and marketing activities of our investment management firms, their continued solid investment performance, as well as the very high retention rates at our wealth advisory firms. With that, I’ll turn it back to Tim.

[Timothy L. Vaill:]

I think that we’re about ready to take questions here. I just wanted to make one comment and reflection on Jim’s work at First Private, as to how really proud we are of our colleagues at Boston Private Bank & Trust Company and Borel Private Bank and help from Charter and Gibraltar as well. As people have been able to rally to the cause here and I think we’ve got some terrific talent and some terrific production from the team company wide here. Anyway, with that comment I think we should open it to questions.

[Operator:]

(Operator Instructions) Your first question comes from Dave Rochester - FBR Capital Markets.

[Dave Rochester:]

Jim, how much of the Southern California construction portfolio has been reappraised in the last three to six months at this point?

[James D. Dawson:]

I would say within the last three months, Dave, the dollar percentage of the portfolio in Southern California is approximately 75% and there are still some appraisals coming in.

[Dave Rochester:]

And how much are values coming in on those appraisals from the original appraised value?

[James D. Dawson:]

Well they’re all over the place, as you can imagine, Dave. We have some properties that have been reappraised recently that are along the Coast or West LA or a little north of LA, and particularly those along the water are holding up very well. The market is materially different in the Inland Empire. The rest of the region is doing okay. But in the Inland Empire, we’re seeing as little as 20% drop in values of residential properties, but in some cases for finished houses, 30% or 35%. The land is even more dramatic. Most of the land values have dropped a minimum of 30%, and in some cases as much as 70%.

[Dave Rochester:]

Steve, in terms of the Southern Florida construction and home equity portfolios, what portion of those have been reappraised at this point in the last three to six months?

[Steven Hayworth:]

On a performing loan to a client that we’ve had for a number of years where the original loan-to-value may have been 60%, 65%, unless there’s some material reason to reappraise it, we wouldn’t just in the normal course of business unless the house is finished and unsold. And actually we don’t have a single loan on a spec residential construction. Again, what you’ve got to keep in mind, we’ve never done any track lending. We’re talking about an expensive home in Key Biscayne, a waterfront community in Miami, Pine Crest, maybe up in Fort Lauderdale, even down in Ocean Reef. So we don’t have a single one that has been completed and unsold that was completed more than a year ago. In terms of the ones, current appraisals on new properties, and I’m now looking at now comparable properties, I would say in some of the more desirable communities you may see a 5% or 10% give-back over the high of a couple years ago. And some of them we’ve not seen any give-back at all in terms of prices. And we also have no exposure to the condo construction area.

[James D. Dawson:]

I’ve been talking with Peter and Steve at Gibraltar, I’ve also been talking with Jim Chastain, and I can give you a comment that Jim gave to me that maybe haven’t relayed to Steve and Peter. But Jim said that he hasn’t seen a file yet that doesn’t have an appropriate appraisal in there. Meaning that if there’s a loan that’s had some problems or some slow payments or has been downgraded there’s an appraisal in file. If there’s a loan that’s been renewed recently there’s an appraisal in file. Jim Chastain’s comment was that we don’t see, haven’t seen at Gibraltar Private what we see at many other companies, which is a lack of current files. So he was very complementary about the appraisal process and the fact I think he said that the loans that were on the classified list, the majority of them had appraisals in file from the last six months. And he also said that what they’ve seen in South Florida is values that Steve just said. Along the water isn’t an issue. And for the most part most of the diminution of value is on spec condo projects and track developments which Gibraltar doesn’t do and to some extent the West Coast over in Naples, there’s a greater drop in values. But Gibraltar doesn’t have a big exposure there.

[Dave Rochester:]

On the Southern Florida portfolio in terms of absorption rates, how have those trended on a monthly basis? Are you seeing an uptick in the last couple of months from the fourth quarter or have those remained fairly steady? And if you can quantify what type of sales you’re seeing in some of those projects. I realize they’re not track projects. But what are the sales rates in those housing segments in which you deal with?

[Steven Hayworth:]

What I’m seeing is it’s interesting. I spent a lot of time with a lot of the top realtors and the owners of the largest realty firms in South Florida. And what I am hearing, it was almost around the end of January you began to see some optimism by the realtors. And what they were saying to me is they would have as many appointments in a week as they had during the entire month of November-December timeframe. So they were starting to become more optimistic that people were at least shopping. It’s interesting to look at our pipeline. Our residential pipeline has doubled in four months from approximately $40 million to $80 million in terms of our pipeline. And so what I am seeing and hearing is in the high end I think buyers, they’ve been on the sideline for a while. Everybody wants a deal, including affluent individuals and families, and so they’re getting to the point saying interest rates are probably getting close to the bottom, even though long rates haven’t come down as much as short rates. We’re seeing a lot of interest from around the globe, certainly with the Euro. We’re seeing a lot of interest from Europe. But in talking to one of the top realtors two days ago, they had four or five buyers. Two were from Philadelphia, one was from New York, and one was from Great Britain. And so we are seeing a lot more activity from open houses and from the top realtors. So I am cautiously optimistic that we are going to see improvement in the high end in Southern Florida.

[Dave Rochester:]

And maybe you can go into just a little more color on why you felt that you needed to bump up the provision and the reserve for the portfolio if the outlook is maybe improving or you’re not as cautious as you were before.

[Steven Hayworth:]

If you go back over about the last eight quarters our reserves, let me make one comment first. We have the Federal Savings Bank charter. And so the vast majority of our loans are residential mortgages, first mortgages to financially successful families. And between 2000 and 2005, real estate values, I’m talking about single-family real estate values in Florida, went up approximately 100%. On a seasoned portfolio like ours, even if there’s been 5% or 10%, 15% giveback in certain communities, and by the way, our original weighted average loan to value based on original amount, is 62%. So I’m very optimistic about loan to values. And so what gives me a lot of optimism is certainly the in-flow of people I see coming to South Florida. Clearly, doing business and being very strategic in terms of our lending and remaining so are priorities for us in 2008.

[Dave Rochester:]

And in terms of the increase in the reserve, is it because you’re seeing the additional weakness in pricing?

[Steven Hayworth:]

If you look at actually our past dues actually went down slightly from the fourth quarter and we had no charge-offs. But we did have an 11% increase in non-accruals. It’s only $1.9 million in the quarter. Classifieds went up $26, because we’re being very rigorous in terms of looking at all of our files. So I just think in this an environment it’s prudent to look closely at your reserves and that brings us up to about a $121 in terms of total portfolio so we think that’s a comfortable level.

[Dave Rochester:]

When you move something to classified status at that point is that when you would conduct an updated appraisal or does it need to move into non-accrual status for that?

[Steven Hayworth:]

No, if by the way if we have not done so already we would certainly do it at that point.

[Operator:]

Your next question comes from Mark Fitzgibbon - Sandler O’Neill.

[Mark Fitzgibbon:]

Jim, I wondered if you could break down for us the $302 million of criticized assets and maybe give us a sense for how much of that is construction and land development.

[James D. Dawson:]

There’s been a big swing in the last quarter in the non-performers and approximately $200 million of that $302 million is in Southern California. And almost all of that is land in construction development. Approximately $50 million is in South Florida and that is not land in development. Some of that is commercial real estate. Some of it is construction. But it’s broken down about half in substandard and half in special mention and at the Boston bank there’s about $35 million in classified loans, non-performers. Let me back up for a minute here. I’m going to give you two answers because I’m not sure whether you were asking about non-performers or classified loans. But let me talk first about non-performing loans. Non-performers are up to about $86 million. And about $53 of that is in Southern California. And it’s centered in land and construction development and it’s centered in the Inland Empire. There is one significant loan in that category that is a little bit north of LA but the vast majority of it is in the Inland Empire. Approximately $20 million of the remaining $35 million is in South Florida. And as I was starting to say some of that is commercial real estate and some of it is construction. About $7 million is in New England, there is one construction project that makes up about half of that, and then there’s some C&I that makes up the balance of it. So if I were to give you an educated guess out of the $86 million, I would say that approximately $65 or $70 million of that is construction or land-related. And then as far as the classified loans are concerned, as I was saying earlier, approximately just under $200 million of that is centered in Southern California. And that is the vast majority of it is in the Inland Empire. And then in South Florida there’s approximately $48 or $50 million, and some of that is construction and some of that is commercial real estate.

[Mark Fitzgibbon:]

Steve, I think you had said in your comments earlier that in some markets you’re seeing zero depreciation in the value of the residential real estate and some 5% to 10% drop. Some of the statistics we’ve seen that there’s a huge supply or amount of homes out there for sale, significantly higher than what we’ve seen in years past. So I’m surprised that prices have only come down 0 to 10%. Is that in all your markets or just the super high-end markets or could you maybe give us a little more clarity?

[Steven Hayworth:]

I would suggest that any time we’re looking at now Fort Lauderdale, Miami-Dade County, waterfront properties, I have not seen more than about a 10% maximum reduction and in some of those communities I’ve seen no reduction at all. So in these it would be properties that are $3.5 million and up. We have very little exposure in Naples because we’ve only been there about a year. I really couldn’t give you a great indication of what’s happening over there. Our loan volume is very, very low. We just haven’t had hardly any loan requests. We’ve got 12.5% of our exposure is outside of Florida and that’s basically Aspen, Colorado, and we’ve begun to do some things up in the Hamptons and in New York City. But these are very new. Certainly in the case of New York, very new loan relationships. We’re beginning to get a sense that New York may be at the top and certainly in Aspen we’ve seen no depreciation at all in the values from the $5 to $10 to $15 million homes and about a 5% to 10% in homes above $10 million in Aspen. But our loan to values is very, very conservative when you’re talking about those loan sizes.

[Walter Pressey:]

Mark, I just want to point out to you that one of the problems that we have seen over and over again is that the statistics that people get for a particular marketplace tend to be averages for all homes in the marketplace. And clearly there are a lot of track homes that are in big trouble in South Florida. Clearly there are a lot of spec condo developments that are in big trouble. I heard the other day that in Key Biscayne for instance, they’re expecting 10,000 units to be delivered over the next 18 months and there just aren’t that many buyers for sure. So one of the problems is that we here at Boston Private get tagged with the average statistics when in fact our focus in South Florida in particular is at the high end and the waterfront communities and those communities that the homes start at a million and a half and go up and the movement and the value of those prices is quite different. That’s one of the things I think if you take away nothing else from this call, take away that fact for South Florida.

[James D. Dawson:]

We talked about this many times on these conference calls. Our focus is on successful individuals and their families and their businesses. And when you look across our enterprise with one primary exception we have been focusing on successful individuals, their families and their businesses. And we do business with people who have significant incomes and significant net worth and significant liquidity. The exception I’m referring to is in the Inland Empire. We were growing that portfolio. We were doing transactions and there were some successful developers, but as you may know, successful developers view real estate equity as real net worth and many of them don’t like to keep a lot of cash around. Now in the Inland Empire we grew that portfolio by doing transactions. In South Florida we have grown the company. Steve has grown the bank by focusing on high net worth individuals, very successful individuals and families. And some of the builders there are developers and they are builders, but they’re focused on the high end and they do one spec house at a time or two spec houses at a time. One of the comments Jim Chastain made to me was this is very clearly a private bank that focuses on high net worth individuals. Some of the guarantors here are spectacular when you look at their personal financial statements. So the model across our company with one exception in the Inland Empire, the model is holding up and here we are in South Florida. We’re recognizing some trends and we’re trying to get out ahead and get out in front of the real estate challenges. And as Steve said, we’re starting to see some indications that maybe it’s bottomed out. But we want to be proactive about it, and what we’re confirming across our enterprise is that the model of doing business with successful individuals works well and should be able to outperform the market. And we’re really at a point now where we can say we have our arms around our issues. As of today, as of April 23, we know what our portfolio looks like better than we ever have before. We have current information in the files. We have current appraisals in the file, which isn’t to say that we’re not continuing to gather information on some credits. But one of the things we’re finding in South Florida even in the Inland Empire is people aren’t running for the hills. They’re saying we can work this out. We want to make this successful. In some projects they’re so far under water and they have other projects that are underwater where we’re going to have to restructure or sell or foreclose or sell a note or something of that nature. But for the most part we’ve been pleasantly surprised. I know Bruce Farrell has been very surprised and pleased that so many of the clients are returning calls and coming into the bank and bringing information. I just wanted to give a little more flavor to that.

[Mark Fitzgibbon:]

On the investment managers, this quarter you didn’t break out the AUM at each of the subsidiaries. Could you just share with us what AUM was at quarter end for Westfield, Anchor and Dalton?

[Joseph H. Cromarty:]

Westfield, the ending AUM was $11.7 billion. Dalton Greiner, it was $1.4, and at Anchor $7 billion.

[Operator:]

Your next question comes from Murali Gopal - KPW.

[Murali Gopal:]

When I look at the incremental or significant add to the provisions in the last several months and then I look at the charge-offs being three basis points. I’m just trying to reconcile the two and what’s keeping these loans from performing, and what’s keeping guys charging out of part because we would have seen an uptick in charge-offs?

[James D. Dawson:]

You should expect the charge-offs to increase over time. As I mentioned a few minutes ago we now have our arms totally around the portfolios. We’ve recognized some deterioration and some credits. That’s why the classified loan report shows a significant increase. We are pleased that the non-performers have not grown as dramatically but some may migrate into non-performing status as we move forward. And you should expect that charge-offs will increase. We’ve had nominal charge-offs to date. Our goal is to keep charge-offs to a minimum but we’re going to be more proactive with some of these substandard loans in Southern California. As I indicated, most of the borrowers are working with us and we’ll be doing some modifications, restructures, forbearances, enhancing credits where we can get additional collateral. But you should expect that charge-offs will increase. The reserve is put aside for caution based on what we know about our portfolio and what we know about trends in our marketplaces, we are out in front of this now, and we have our arms around the portfolio. We feel we’re properly and adequately reserved. We are working these credits aggressively now. We have cooperative borrowers for the most part. But you should expect that charge-offs will increase.

[Timothy L. Vaill:]

Jim, I just want to add a little bit of color to that comment because we’ve been very proud, historically, of the fact that when we’ve had charge-offs go up or non-performers go up they haven’t fallen into the charge-off category and as you pointed out in the next few months we may well have some that go into that category. We also, however, are reinforcing our focus on workout. Jim mentioned that we’ve hired a couple of workout specialists in Southern California. We’ve also contracted with a firm to provide some workout training for many of our other lenders in other markets because the workout-lending ethic is a little different from just doing your regular loan. Basically, you want to make sure that you get very close to your borrower, that you establish some confidence between the borrower and yourself in terms of working out problems, that you essentially get there before the other creditors get there and do some work to make sure that you get back what’s due to you in this situation. So we’ve turned our attention in many measures to a workout mentality or philosophy. And we’re hopeful that we’re going to be able to return to the historical experience where we’ve had the ability to prevent the non-performers to fall over into the charge-off category.

[James D. Dawson:]

We talked earlier about the fact that there is a sequence. Loans that are performing and past credits on occasion have some weakness and they get downgraded. And then if they continue to deteriorate they may become past due. And if they become past due they will likely go on non-accrual. And if they go on non-accrual there’s a workout plan. There’s a modification or an exit strategy or every situation is different. So we’re watching that very carefully. As you see our past dues have not changed dramatically. Our charge-offs have not changed dramatically. But our risk ratings have changed and our classified portfolio has grown. I think one strong reason for the past dues not growing more dramatically and for the charge-offs not growing dramatically is that the borrowers are cooperative and we’re working with them. But we do expect that 2008 will be a challenging year. The economy nationwide is a bit challenged and we have some markets, particularly in the Inland Empire, that we’re going to need to work through. If we get any wind at our backs from the improving economy or an improving region, we’ll be thrilled with that. As Steve indicated we have seen some and heard some positive thoughts and opinions about what’s going on in South Florida and we’ll take every bit of that that we can get. But I expect that we will be on top of our portfolio. We’ll be on top of our troubled credits, particularly in Southern California, and we’ll see some migration in and out. I would expect that you’ll see the classified loan report on a quarterly basis change quite a bit. There will be some things that are resolved and there will be some that migrate into. But over time I would expect that the classified loan number will decrease quarterly going forward with a strong disciplined portfolio.

[Operator:]

Your next question comes from John Pancari - JP Morgan.

[John Pancari:]

Just want to see if you can give us a little bit additional detail around what you’re seeing there in your Pacific Northwest markets, particularly at Charter Bank, in terms of looking at that portfolio. I know Chastain is moving there next, but just want to get an idea of some of the credit transitioning there in their portfolio.

[Walter Pressey:]

Jim, let me comment on this since I sit on their Board. As you point out, John, Chastain will be moving to Charter Bank next and we’ll have a much better focus on that next time we speak here. But I’m very impressed with the approach that the Charter Bank lenders have taken to the marketplace. And I feel pretty good about their strength of lending discipline and their focus on the market. That said that market has grown dramatically as have some of the other markets that we are in. And when you have rapid growth you get a little bit concerned about the possibility of excesses taking place there. I have no sense that there are excesses at this juncture but obviously Chastain & Associates will be looking at Charter Bank to see if the feeling is that that’s the case. And when you look at the economy in the King County area you haven’t seen the same softness in that economy that you’ve seen in others. There’s been a little bit. And certainly it’s not the same this year as it was last year. But the reality is that market is a much different market than it’s been in years past. If you go back 15 years there were just two things going on there. It was timber and Boeing. Now you’ve got 80,000 businesses in King County alone that support all of the larger companies that we’re all familiar with, such as Microsoft, Costco, Starbucks, Eddie Bauer and other firms of that type. And that economy is very vibrant. And we don’t see it softening as much as we see the others. So I’m hopeful that we’re going to find some pretty good strength in that marketplace.

[James D. Dawson:]

When you spend some time in Bellevue, it’s very interesting to see how much activity there is. The economy there has changed dramatically as Walt said from being so reliant on a couple of large companies to being much more diversified. It’s slowed a little more recently but I’m really pleased that we have a strong team there. We have very experienced folks at Charter Bank. These folks came from much larger banks and 20-year histories in commercial banking, they’re out in front, and recognizing that things have slowed a little bit and they’ve adjusted their underwriting and their advanced ratios accordingly. They did have a couple of relationships fall into non-accrual during the quarter. One is a development project with 22 lots and houses to be built. That’s about $3 million and that has slowed. But it is still moving forward. And real estate values in Seattle up until the prior quarter had not seen any deterioration at all. So the activity level has slowed a little bit. But we don’t anticipate any exposure on that project. And then there’s another borrower who is a builder who has been very successful in the Seattle area and he’s building an office building which he will house his company in and he’s also building a spec house. And he’s running a little bit behind but in both cases the advance rates on the collateral are conservative and we don’t see any exposure there.

[John Pancari:]

You seem to have some notable margin support this quarter as you indicated that the margin pressure in the quarter is largely a result of the in-flows into non-performers. So ex-that, it looks like the margin was somewhat stable, and just wanted to see if you could talk a little bit about what you’re seeing there by way of your ability to pass on lower rates to depositors as well as improve your deposit and your earning asset mix.

[Walter Pressey:]

John, if you look at quarter over quarter, our earning assets do show a slight reduction in yield and fortunately our deposit and funding costs have come down a little bit more. In general I would say, and this is a very broad statement, but we’ve been trying to pass on roughly half of the decrease in Fed funds and Fed funds rates on our deposit, interest-bearing deposit relationships. We also have had the impact of treasury rates coming down dramatically and Federal Home Loan Bank rates coming down as well. And prime, of course. So we’ve seen our loan yields in the last quarter drop by about 17 basis points and we’ve seen some investment yields drop a little bit more than that. So all told our interest earning assets across the enterprise have dropped about 20 basis points. And if you look at our cost of funds including demand deposit accounts but fully loaded with borrowing it’s dropped about 26 basis points. So there’s been some improvement there.

[Operator:]

Your next question comes from Christopher Marinac - FIG Partners.

[Christopher Marinac:]

Jim, I just wanted to ask you if you could split up for us the construction versus the land in both Los Angeles and Miami.

[James D. Dawson:]

The construction and the land portfolios in Southern California are approximately 50/50. A little bit less than 50% of the construction and land portfolio in Southern California is land and the rest of it is construction-related. And in Florida, let me just see. In Florida the construction portfolio is about $155 million and the land portfolio is about $115 million.

[Christopher Marinac:]

And then based on any loan sales that you have seen or even contemplated, this is regarding Southern California, is there any guess at this point at what the loss rate is? I know it’s all over the board with what other transactions are. We’ve seen a company or two do 50% losses approximately. I’m curious if that’s in the ballpark of what is out there. My question is for the loss content on the construction and land issues in Southern California. We’ve seen a handful of companies take loan sales and the 50% range or higher have been the number. Now I know it will vary widely from transaction to transaction but based on what you have is that 50% loss content is that in the ballpark or have you assessed that any further?

[James D. Dawson:]

It is not in that 50% category with the exception of one loan that’s coming to mind. We have been through the 46 problem loans in Southern California in fine detail. Now by that I mean we’ve been through all of the information we have in the file. We’ve met with as many borrowers as we have been able to meet with. We have updated appraisals on about 75% of those assets. Probably 80% is a more accurate number now. And we have as a team with Bruce Farrell, the Interim Chief Credit Officer, Neal O’Hurley, and Bill Ryan, who is on the ground out there, [Dave Scheiber, Jeff Qualice ], Chastain & Associates, we have been through this portfolio in a great deal of detail with lots of minds. Now one loan comes to mind where we have reserved 50%. So there is a possibility of a 50% loss on that loan. But across the rest of it, even with many of the substandard loans, the initial advance rate may have been a little high in some cases but even with the diminution of value we don’t see losses anywhere near 50%. We’ve reserved in some cases 15%, in some cases 5%. And in a handful of cases we’ve reserved more than 20%. But even the land portfolio, which in many cases shows current appraisals with values dropping a minimum of 30% or 40%, and in many cases beyond that, there’s some that have just received their entitlements. There are some that have some buyers, investors basically, that borrowers have invested in the project who are buying some of the properties personally now to get them refinanced elsewhere. To answer your question succinctly absolutely not 50%, one, maybe two will realize that significant drop. But in most cases when you look at the original value, when you look at the original loan, and then you get updated appraisals that show in some cases pretty significant drops, especially on the land side. There is some other collateral available in some cases. Some guarantors have volunteered commercial real estate property that’s cash flowing so that the cash flow from those properties can keep the loans current. We have reserved in some cases 5% and in many cases 15% against some loans. But only one that comes to mind that’s 50%.

[Operator:]

Your next question comes from Lana Chan - BMO Capital Markets.

[Lana Chan:]

I had a question about your loan loss reserve methodology. When I crunch the numbers on the reserve ratios across the affiliates, Southern Florida and Pacific Northwest have reserve-to-loan ratios of about 1.2% but their NPAs, which are comparable to New England and northern California, but their NPAs are much higher. Can you talk about that and how adequate you feel those are right now?

[James D. Dawson:]

Lana, we think the loan loss reserves are adequate, very adequate. And the methodology changes a little bit from one company to another. The product mix, the loan mix, the diversification, or in some cases concentrations in the portfolios are different from one company to another. And for the most part the methodology is to set aside a certain amount of money based on loan category with the assumption that the loan rates, the advance rates, meet the policy guidelines. Obviously a residential mortgage loan, a first mortgage at Boston Private or Gibraltar or Borel, we do quite a bit of first mortgage lending, and Gibraltar and Boston Private have about 50%, give or take a little bit, of their portfolios in residential mortgage loans and clearly those reserves are much lower than a construction loan or a land loan. But the methodology is to set aside a certain amount of money by loan category and then to look at the loans that are risk rated more aggressively. Risk ratings that show some weakness in the credits and those reserves will be as low as 5% perhaps on a special mention loan that has some strong support or sponsors or guarantors and in some cases if it’s doubtful it will be as much as 50%. But we are small enough where we look at every loan in our classified category and make a determination of whether the reserve for that category of loan, special mention or substandard, is appropriate. Or we do an impairment analysis to actually look at the collateral and make a determination of whether the reserve for that loan is adequate or not. It’s by loan category for past credits and then for classified loans, it’s by loan and there’s always a thorough review of the characteristics of the loan, the repayment ability, the guarantor and the collateral. We always look at the secondary or tertiary ways out and make a determination.

[Lana Chan:]

So if I look at the cost of classified loans for Southern Florida versus Southern California, New England, would it be much different in terms of the loan mix that’s in the classified loan category?

[James D. Dawson:]

The loan loss reserve, as an example, at Gibraltar, has been increased in the last quarter or two because of trends in the local economy. If we were three years back or one or two years forward when the economy in South Florida is strong, healthy, and robust and not overbuilt you would see their loan loss reserve as a smaller percentage of the loan portfolio because of the concentration in residential mortgage lending. The significant increase in the reserve this quarter is getting out in front of what’s been happening in the local economy and recognizing some trends that we’ve seen in the portfolio. We just want to be out ahead of it and on top of it. And if ‘08 stays where it is now or gets a little worse we think we’re adequately reserved for that. It really is a function, Lana, of the condition of the portfolio, the loans in the classified category, but also the qualitative analysis of the region. What’s going on in Northern California today is dramatically different than what’s going on in Southern California in some of the markets we serve there. And in Northern California the economy is doing well. And we would typically use lower rates. Those loan loss reserve methodologies are reviewed by Federal and state examination teams and there’s been some guidance through the financial institutions letters from all of the examiners, all the regulators in the last three years, but even more recently in March there was a new guidance that wanted every management team to be proactive with their reserve allocation and to ensure that they have adequate resources if there’s a migration in the loan portfolio.

[Operator:]

Your next question comes from Gerard Cassidy - RBC Capital Markets.

[Gerard Cassidy:]

Could you share with us in your slides on the assets under management I think it was the second to last slide you showed that the in-flows to the investment management companies were negative in the quarter. Share with us what drove that number down this quarter?

[Joseph H. Cromarty:]

That was principally driven by activity at Westfield but I’m going to comment a little more fully on that. That was principally an account withdrawal from a large public fund in the Eastern United States which retains a continuing relationship of even greater value than the withdrawal.

[Gerard Cassidy:]

And why did they withdraw?

[Joseph H. Cromarty:]

I assume it was for rebalancing here. I think it’s important to underscore they retain a relationship with this institutional investor that is larger than the account withdrawal. I’ll hearken back to what I said earlier just about the performance achievements of Westfield and our other investment advisors.

[Gerard Cassidy:]

You touched on the Florida non-performing loans going up and I think you mentioned it was due to some commercial real estate loans, not residential construction loans, was that correct?

[James D. Dawson:]

That was part of it Gerard. That’s exactly right.

[Gerard Cassidy:]

What type of commercial real estate loans? Were they for offices or strip malls or hotels?

[James D. Dawson:]

The largest one that comes to mind and Steve can elaborate if he wishes, the largest one that comes to mind was an office building where there was a lease maturity and the current lease was not in the file. Now if we determine that a lease has been executed or when it’s executed that will likely be an upgrade to the credit. But that’s the largest one that comes to mind.

[Steven Hayworth:]

And that’s been a performing loan for six, seven years now. There’s Fat Tuesdays in there. They’re still there, they’re still operating. We just didn’t have a copy of the renewal on file so we wanted to be proactive in classifying it until we get the additional documentation.

[Gerard Cassidy:]

What part of Florida was that in?

[Steven Hayworth:]

That’s in South Beach.

[Gerard Cassidy:]

Finally what were the total non-performing assets? You give the good data on the non-performing loans but what were the total OREO numbers and the 90 days past due and still accruing numbers consolidated?

[James D. Dawson:]

Gerard, there are a couple of OREO properties. The total is $936,000 and there’s a repossessed asset of $475,000 which is the Plain in Southern California. There is one lien holder who we’re trying to negotiate with and then that Plain has had a buyer on the sidelines, actually more than on the sidelines, the buyer has actually been doing some work on the Plains. So we’re hopeful that we can negotiate with that lien holder this quarter and finally get rid of that. And then you asked about past dues, I think. The past dues for the end of March were approximately $26 million, an increase of about $4 million over the prior quarter.

[Operator:]

Next we have a follow-up from Murali Gopal - KPW.

[Murali Gopal:]

Just going back to Gibraltar for a minute, what percentage of the loan book was looked at in detail? What percentage was reappraised and I know you said the original average LTV was 60%. Do you have an updated LTV? And I’m also looking to see what outliers you may have in LTV with more than 90%.

[Steven Hayworth:]

Weighted average, let me just reinforce. Weighted average on the entire real estate portfolio based on original appraisals around 62%. A little more color on that, when you’re talking about single-family greater than a million dollars that drops to 47%. On the commercial side on land greater than a million it’s 48%. And again these are on original appraisals. And so again on the residential side over the last, this is a very seasoned portfolio. So you’ve had significant appreciation since 2000. And maybe a little bit of a give-back. But my hunch is that we’re talking about a weighted average loan to value for our entire real estate portfolio based on today’s value somewhere in the 50% to 55% range.

[Operator:]

Your next question comes from Mac Hodgson - SunTrust.

[James D. Dawson:]

We were also asked about the penetration rates of the reviews of the portfolio. The commercial real estate portfolio was reviewed in its entirety and the residential construction portfolio, 95% was reviewed. The multi-family construction, 100% was reviewed. Commercial real estate, 73% was reviewed. And the land portfolio was 71%. So it’s been a very thorough review by Pete [Rafalski], his lending team and our independent loan review people.

[Mac Hodgson:]

I was curious what the recommendations of the Chastain review were and if they make recommendations and maybe if the reserve-build in the quarter was at the recommendation or just done in conjunction with information they compiled?

[James D. Dawson:]

I’m not going to give you all the details because that’s really confidential information and we’re still working with Chastain on some of their written reports. Their recommendations are fairly consistent with what we’re hearing from the FDIC or the various regulatory agencies. And it’s also consistent with what we’re seeing in the financial institution letters, the guidance we get from the regulators. And they’re focusing more on administration. The most important question you asked was about the loan loss reserve and was these Chastain recommendations and how do they feel about it? Chastain was an integral part of the review of Southern California, working with and under the leadership of Bruce Farrell but the rest of the team out there whose names I mentioned earlier. And we’ve been through that portfolio with a fine tooth comb and we have taken into account the recommendations that Chastain had for risk ratings and their observations of the portfolio. The determination of the adequacy or the addition to the loan loss reserve was management’s and the Board’s. And Chastain is well aware of that and appears very comfortable with that. They have not opined on that to us. But our relationship with Chastain is 12 years old. We know them very well. We don’t know them so well that they would not be independent and thorough as anyone in the lending business at Boston Private can attest. And so at the end of the day, and this should be true for every company, its management’s and the Board’s decision on the adequacy of a loan loss reserve but it’s with strong input and guidance from Chastain. The same is true in South Florida. Their review was to give us their thoughts and risk ratings for the portfolio they looked at. We have reviewed their findings with them. We’ve been through the loan portfolio reviews with Chastain and management. Steve and Peter and the Board at Gibraltar have determined that the loan loss reserve should be increased by roughly $4 million in Q1. Now, the other suggestions they make as I was starting to say earlier, tie into good administration. And it’s consistent with the evolution of our business, even though we’ve been lending money for 150 or 200 years, or longer than that. It still continues to evolve. And the focus now of our banks and the focus of the regulators is on appraisal practices, appraisal reviews, maintaining current information in the files, how to account for interest reserves, ownership of credits and review of risk ratings, things of that nature.

[Mac Hodgson:]

On the capital front, you saw some growth in the tangible equity ratio. This quarter, maybe just speak quickly to your comfort with where it is now and its growth going forward with earnings.

[David Kaye:]

We’re pleased with the tangible growth. We had cash earnings and that contributed. We also, as we had mentioned, we had a little bit of a blip down when we had the contingent payment in the fourth quarter. When we issued stock with one of our affiliates that sent the tangible capital up. So are we comfortable with a $350? We want to see that continue to move north. And we expect, given that we’re in a pause of acquisitions, we’re not doing any acquisitions, and we expect that that will continue to move forward as long as we have our normal earnings.

[Operator:]

We have reached our allotted time for our Q&A session today.

[Timothy L. Vaill:]

Thank you all very much. As perhaps you all know we have our annual meeting coming up here shortly so we’re going to be moving to that. I really appreciate the time and attention and the questions we’ve had this morning. You should feel perfectly free to call Erica or Dave or Walt or any of us if you want to follow up after this call is over. So again thanks for taking the time this morning and we look forward to talking to you again very, very soon. Thank you.