Boston Private Financial Holdings, Inc.
Q2 2008 Earnings Call Transcript

Published: 23 Jul 2008

[Operator:]

Welcome to the Second Quarter 2008 Boston Private Financial Holdings Earnings Call. (Operator Instructions) I would now like to turn the presentation over to your host for today, Mr. Timothy Vaill, Chairman and Chief Executive Officer. Please proceed, sir.

[Timothy Vaill:]

Hey good morning everybody. This is Tim Vaill, CEO of Boston Private. Welcome to our second quarter 2008 earnings conference call. Joining me this morning are Walt Pressey, President of the Company; Jim Dawson, CEO of our Private Banking group; Jay Cromarty, who runs our Wealth Advisory and Investment Management Group; David Kaye, our CFO and Catharine Sheehan Director of Corporate Communications. At this time, I am going to ask Catharine to read the Safe Harbor provisions, before we make additional remarks.

[Catharine Sheehan:]

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 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. You may be aware of our capital plan as a result of two separate press-releases on the topic. Since we have a public offering underway, I regret that we are unable to comment on our capital raising plans or answer any questions regarding them in this session. I refer you to those press releases for further information. And with that I will turn it back to Tim Vaill our Chairman and Chief Executive Officer.

[Timothy Vaill:]

Thank you Catharine. As stated in our press release, we reported the second quarter loss of $2.11 per share on a GAAP basis, which was driven by three P&L charges totaling $82 million. These charges were expected and include the non-cash Westfield Capital compensation charge for the equity ownership restructuring, and another non-cash charge related to goodwill and intangible payments at First Private Bank. Also continued economic deterioration in Southern California has further impacted First Private's loan portfolio and resulted in the need for additional loan loss provisions there as well. Obviously I am very disappointed about these numbers. But while the performance of First Private continues to weigh heavily on our overall results for the last quarter, there are some very strong aspects of our financial results in other parts of the family. You heard me say this before, but it is true

[Dave Kaye:]

Well, thank you, Tim. Good morning, everyone. My remarks are going to be referring to the second quarter earnings release presentation. Let me start off with slide number 5. As Tim stated, we reported second quarter 2008 GAAP earnings loss of $2.11 per share. There were three key items that drove our earnings decline in the second quarter. First, as we mentioned, there was the one-time, non-cash, non-tax deductible compensation charge of $66 million for the equity ownership restructuring at Westfield. And you'll recall that this charge has no impact on the regulatory capital or our liquidity position. Additionally, it has nothing to do with Westfield's core operating performance, which has been exceptional. We are pleased that we have completed the equity restructuring, putting into place additional incentives for Westfield to continue its track record of excellence. Second, there was a non-cash impairment goodwill and intangible charge of $16 million net of tax to reflect the current market value at First Private, driven primarily by the deteriorating market conditions in Southern California. This charge brings the goodwill account at First Private down to zero. These two non-cash charges at First Private and Westfield total $82 million and have impact on earnings of about $2.15 per share. Finally, also included in the earnings number are the provision expenses totaling $31.9 million. 73% of this is directly attributable to First Private, and 9% of it is related to our strong loan growth at our other private banking affiliates. If you turn to slide 6, you'll see that quarterly revenues for the second quarter on a year-over-year basis were up 24% to about $120 million. On a linked-quarter basis, we were up $2.6 million or 2%. It's important to note that all three of our key revenue drivers

[Jim Dawson:]

Thank you, Dave. Good morning, everyone. Let's talk about deposits at Boston Private. Please turn to slide 10. Deposits grew, in Q2, up 2% on a linked-quarter basis to $4.5 billion. Most of the growth was in large CDs and brokerage CDs. Several of our banks also saw increases in our balance sheet deposits. Turn to slide 11 entitled, ‘Consolidated Loans.’ We continue to have strong loan growth, up 4% on a linked quarter basis, with the growth coming primarily from New England and Northern California. Our compound annual growth rate for loans has been 32% for the last five years, with our total loan portfolio increasing to $5.6 billion at the end of the second quarter. As Tim stated earlier, our primary credit issues are with First Private. The rest of our portfolio is performing well within industry standards. If you turn to slide 12, let’s take a look at historical trends of non-performing assets. When we exclude Southern California from our results, you can see that our recent increases narrow the industry trends and perform better than the industry excluding First Private. If you turn to the next slide, slide 13 entitled, ‘Historical Trends’. Looking at past dues, the story remains consistent, with our performance better than industry averages over a ten-year period through the first quarter of 2008. The next slide takes a look at historical trends of net charge-offs. While our net charge-offs increased in the second quarter excluding Southern California, our experiences there are again consistent with industry standards. The next two slides, slides 15 and 16, you see that Southern California accounts for 64% of non-performers, 75% of past dues and 62% of classified loans further evidencing strong impact of this portfolio on our overall portfolio. And the final loan slide, slide 17, shows that our portfolio is diversified across geographic and loan types. The total Southern California portfolio represents just 10% of our total portfolio with a troubled construction and loan component representing just 4% of the total loan portfolio. Let me spend a minute talking about First Private. The economic environment in Southern California continues to plague the firm and our loan problems are primarily confined to First Private. We’ve adjusted loan reserves and adopted a new methodology based on the many reviews we have conducted on the portfolio. We are working closely with regulatory authorities on remediation plans. We have enhanced our underwriting and loan review processes, loan policies and credit administration. We’ve installed a very strong Chief Credit Officer; we’ve hired several experienced workout officers and real estate lenders, and we expect to name a CEO shortly. Secondly, we had a great number of questions about Gibraltar, our South Florida private banking affiliate. South Florida is an economically challenged region. Gibraltar management had the foresight to avoid speculative condo development lending and lending in large projects, 15 to 20 miles inland sometime ago. The Gibraltar credit folks are very close to their clients and they are watching past dues very carefully. From an overall perspective, we have undertaken a series of initiatives which call for closer monitoring and uniform credit practices across our banks which ensures that we have very strong command of our portfolios. The first step was the independent loan review over the past four months, which we will now conduct regularly at all of our banks. Next, we named Jim Shulman to the newly created position of Chief Credit Officer of Private Banking. Jim will work closely with me, with our Chief Compliance Officer and with our credit teams across all of our affiliated banks to evaluate credit risk and to develop programs, policies and practices to strengthen the company’s overall risk management. We’ve now got a first-class team in place that is completely focused on delivering the highest in credit quality. Finally, the plan we have developed calls for closer monitoring of credit exposures and loan concentrations across our banks. It also provides for the consolidation and standardization of some risk management controls and procedures based on best practices around such things as appraisal policies, loan reviews, and loan loss reserve methodologies. Putting in place one set of standards across the enterprise will strengthen our operations and improve our effectiveness in achieving safe and steady growth. And Jim is absolutely the right person to oversee this. Now, let me introduce you to Jay Cromarty to walk through some of the strong performance results we saw in his business segments, investment management and wealth advisory groups, which drove 39% of our revenues over the second quarter. Jay.

[Jay Cromarty:]

Thank you, Jim. Please turn to slide 19 titled ‘Investment Management Fees,’ which you all should note includes the trust and investment fees from the private banking segment as well as those from the investment management segment. These parts of our business continued to deliver strong performance in the second quarter. Investment management fees totaled $42.3 million, an increase of 4% on a year-over-year basis and up 5% on a linked quarter basis. Additionally, if you turn to the following slide number 20 titled Investment Management Segment Investment Performance, you’ll see the outstanding investment performance that continues to be generated by the very talented professionals in this segment. On an asset weighted basis for the year ending June 30, 2008, 85% of this segment's strategies are in the top decile of performance and 88% in total in the first quartile. For the three year period, 77% are in the first decile and 83% in the first quartile On a five year basis the numbers are 56% and 83% respectively. Let me just add a few more performance statistics to further illustrate the competitive investment achievements of our firms. Dalton Greiner's mid-cap value strategy ranks in the top percentile, on a one year, two year and since-inception basis. Westfield Capital's large cap growth and mid-cap growth strategies rank in the top percentile on a one, two, three and five year basis. Anchor's mid-cap value strategy ranks in the top decile on a one, two and three year basis and in the top quartile on a five year and since inception basis. Finally, I want to make note of Dalton Greiner - all of their investment strategies are ahead of their respective benchmarks for the one, three, five, ten year, and since inception time periods. Just a superb effort by Bruce Geller, the CEO; Jeff Baker, the Chief Investment Officer; and the entire Dalton Greiner team, which has also seen a decline in its attrition rate to longer term historic norms and enjoys the best marketing pipeline in several years. During the second quarter, this segment achieved terrific net flows highlighted by Westfield's net new flows of approximately $700 million and $100 million by Anchor. If you please turn to slide 21, Wealth Advisory Fees for the second quarter, this segment generated $12.7 million in fees, up 64% on a year-over-year basis. Please note that these results include Davidson Trust Company which we acquired in February of this year, and reflects the consolidation of Bingham, Osborn & Scarborough in the third quarter of last year. Our revenue growth, though, was a result of expanding existing client relationships, the addition of new client relationships and very high retention rates. We're finding the clients are reaching out to the wealth advisors realizing that they need professionals to help them manage their finances through these turbulent times. If you'll turn to the next slide, Assets Under Management/Advisory, you'll see that our assets grew 6% over $2 billion to $38 billion on a year-over-year basis, or 5% or $2 billion on a link quarter basis from both consolidated and unconsolidated affiliates. Of this $2 billion increase, $1.3 billion resulted from market action and investment performance. The remaining $700 million is the result of net new flows. Turning to the next slide, quarterly AUM net flows, you'll see that the $706 million in total net new flows was driven by our investment management segment which in turn was propelled by Westfield and Anchor with net new flows of $700 million and $100 million respectively. This segment’s achievement was offset very modestly due to small outflows from our private banking and wealth advisory segments. Now let me turn it back to Tim Vaill.

[Timothy Vaill:]

Well, why don't we go right into the questions, operator? So, let's get started.

[Operator:]

(Operators Instructions). Your first question comes from the line of Dave Rochester from FBR. Please proceed.

[Dave Rochester:]

Hey, good morning guys.

[Dave Kaye:]

Hi, good morning Dave.

[Dave Rochester:]

When you were considering capital raising ideas before you announced the plan. I was just curious if you considered selling of the asset management franchises or shrinking the balance sheet in conjunction with the dividend cut?

[Timothy Vaill:]

Dave, I am sorry. I think we just ought to leave questions about capital off the table here. I understand your point, but we want to err on the side of caution here.

[Dave Rochester:]

Sure.

[Timothy Vaill:]

So, thank you very much. We would prefer you go on another question.

[Dave Rochester:]

Sure, no problem. Just real quick on the credit detail, you guys always provide really good detail here on the classified side. I think you provided the criticized breakout also last quarter, I was wondering if you happened to have that for this quarter as well?

[Timothy Vaill:]

Hi Dave, it is Tim.

[Dave Kaye:]

I think Dave, we had discussions on the criticized versus classified. We made a discussion to disclose the classified loans. I think there is inconsistencies among our peer groups in terms of what would be considered the full criticized, and that full criticized would include watch list loans, loans that would be a special mention, that would really be a past credit loan from a regulatory perspective. So, we choose to book us on the classified loans which we feel there is probably better standard when you are looking at our peers.

[Dave Rochester:]

Okay, no problem. Just on appraisal activity. Is that continuing to occur across the banks or is that just primarily focused at First Private right now?

[Dave Kaye:]

Is your question Dave, whether we are getting updated appraisals everywhere?

[Dave Rochester:]

Exactly.

[Dave Kay:]

Okay, yes absolutely. We have enhanced our appraisal practices across the enterprise and we are ordering appraisals, anytime we have any concerns, about a credit or any downgrade of a credit. So, we are doing that across the enterprise.

[David Rochester:]

Okay and then Jim are you working at this point to sell some of those First Private loans or you trying to off load all the NPA's or are you thinking that, just given what is going on in the market, you would just rather hold them for potential recovery in a couple of years?

[Timothy Vaill:]

Well Dave, let me answer that question. Our current intent is to hold these loans for the foreseeable future. Obviously there are lots of strategies we want to develop over a period of time. We have a terrific workout team at First Private, and as Jim mentioned earlier, we are in the process of hiring and announcing a new CEO, who has a very strong real estate development background and a background in turnaround banking. We want to take the advice of that team, before we rush the judgment on, what we might to do with respect to loans. Obviously, that is the strategy that could be pursued, but it is not something that we contemplate at the moment.

[David Rochester:]

Okay and just one last on capital. I know you do not have the call reports, Dave at this point. But, do you have a sense that each of the bank is leading well capitalized minimums at this point? Also, do you have some kind of estimate for what the holding company's total risk based ratio is for the second quarter?

[Dave Kaye:]

Dave, in response to your first question, yes. Absolutely, all of our banks are exceeding the well capitalized ratios. We would expect that the holding company would be, right around the 11% mark, which is what we have targeted in the past at the end of the second quarter. Although, that is not final.

[David Rochester:]

Okay, great. Thanks guys, I appreciate it.

[Dave Kaye:]

Thank you.

[Operator:]

Your next question comes from the line of Mark Fitzgibbon from Sandler O'Neill. Please proceed.

[Mark Fitzgibbon:]

Good morning. You have talked about the credit problems being contained at First Private, but it looked like this quarter the rate has increased in classified loans in Florida. Northern California in the Pacific North-West were actually much faster than Southern California. Do you think the problems are contained in those markets as well and with that as sort of backdrop could you maybe share with us your outlook for the provision in the back-half for this year?

[Jim Dawson:]

Hi Mark, I would say that when you say the problems in Southern California are contained, we know the portfolio there. What we do not know is how much further the market is going to drop, so I just want to clarify that. We understand the portfolio, we have government appraisals, we have full complete files, but we do not control the market or what other builders, developers or banks do when they come to sell their inventory. Over the course of the last six months we have had independent long-review and we have adopted new enhanced loan loss reserve methodologies and that has been one of the reasons that we have added to our classified assets and the other reason is there has been some slow-down in the Pacific Northwest. That region was immune for a long time, but six or eight months ago they started to slowdown, so I say those are two reasons.

[Timothy Vaill:]

Mark, let me just add a little color to at Jim's comment too. If you exclude First Private from the numbers, the non-performing loans for Boston Private and all its other banks were 71 basis points for the second quarter, as compared to 70 basis points for the first quarter. That is 90% of the portfolio. The 30 to 89 day in past due loans were 15 basis points and in that charge-off to total loans were 4 basis points. So that the basis upon which we are talking about, the fact that we have credit stability in the banks, other than in First Private. There are some numbers that pop up and down in the various banks. Frankly, when you look at the individual loans, we think they are well contained and we are not concerned about credit, other than in the First Private subsidiary.

[Jim Dawson:]

The other thing I would add Mark is, in the past six months we really have enhanced our risk management and our credit practices, and we are getting out in front of things across the enterprise, most of them we have before. We are being very conservative.

[Mark Fitzgibbon:]

Okay. But the numbers I am referring to, is that the Pacific North-West, classified loans tripled. In South Florida it went up by 62% and in Northern California they went up by 100% in one quarter. Those seem like pretty big increases to me. That was driven, you are suggesting by the loan review?

[Jim Dawson:]

Mark the Northern California Bank is very conservative. Their loan portfolio, I believe had one small amount of accrual at the end of the quarter. The Pacific North-West was a combination of the economy slowing and new loan loss reserve methodology.

[Mark Fitzgibbon:]

Okay. Second question is, I wondered if you could share with us may be the background of the new Chief Credit Officer, I am not familiar with him?

[Jim Dawson:]

Sure. I believe we sent out a press release on that but his name is Ed Ficks. He is a 30 plus year veteran.

[Mark Fitzgibbon:]

I am referring to Jim Schulman. I was under the impression he was the new Chief Credit Officer for the whole company.

[Jim Dawson:]

I am sorry I believe that was part of the press release as well. Jim Schulman is actually a 30 year credit veteran who spent the first 20 years of his career in the banking business in New England at Charlotte, State Street and Bank of New England, and for the last ten years had been in the hedge fund business looking at distressed loans and assets from a different perspective. So, he brings a deep knowledge of bank credit, but also an institutional view. Jim's background as an asset-based lender for a number or years is also very helpful for us.

[Mark Fitzgibbon:]

Okay. Then the last question, I guess, is for you, Jay. Of the $1.3 billion of market appreciation this quarter, was that concentrated in any particular product? Was it Westfield product or a product somewhere else or was it spread out across the affiliates?

[Jay Cromarty:]

Mark, I would just add that it is more than just market value. It is investment performance. The investment performance for the quarter in a number of our affiliate partners was just fantastic. So, it literally added hundreds and hundreds of basis points there. I think if you look at the respective sectors that managers invest in, one might reasonably expect growth to perform better than value. That was the case on an absolute basis.

[Mark Fitzgibbon:]

And it wasn't concentrated in any particular product?

[Jay Cromarty:]

Not in any particular product. Growth versus value there, there is some obvious differences there and it was more from the growth side.

[Mark Fitzgibbon:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of John Pancari from JP Morgan.

[John Pancari:]

Good morning.

[Timothy Vaill:]

Good morning, John.

[John Pancari:]

Just as a follow-up on Mark's question about the Pacific North-West, can you give us some more detail on the drivers, particularly which categories of the loans and whether they are concentrated in homebuilding or where you're seeing the pressure there on delinquencies in classified loans?

[Dave Kaye:]

I will, John. The preponderance of criticized assets in the Pacific North-West are construction loans. They are one-off, which we refer to as infill speculative generally construction loans at the high end of the market or the mid to high end of the market. As I mentioned earlier, the economy there started to slow six to eight months ago and the lenders at Charter Bank, who want to get out in front of the problems in loan loss reserve methodology, prompted us to add more to the reserve. But these are primarily construction loans in infill areas, not in new developments. These are not big tract properties.

[John Pancari:]

Okay.

[Timothy Vaill:]

John, I would just make a general comment about construction lending across the country. Of course, one of the benefits of our strategy is that we have insight into what's going on at the five different banking markets. One of the things that we see, specially in construction lending is that construction lending which focuses on the first-time home buyer, little market borrower, is under some pressure, because little market people are having a tough time getting credit with the demise of many mortgage brokers. I think that in addition that that particular segment of the market is under more pressure than other segments, because the subprime problem is putting some relatively new housing stock back on the market to compete with the homes that are being built. But the good news is that much of the construction lending in the Pacific North-West and then in the South-Eastern Florida and here in the North-Eastern in the Boston area as well in Northern California is focused on big ticket homes, relatively small properties, properties that tend to hold their value more, and we are seeing less concern about that. So, that's just a generic kind of statement about the kind of client we generally serve and the segment of the market that we are in.

[John Pancari:]

Okay. Then one of the question on credits. In terms of Jim Shulman's role as Chief Credit Officer, it seems like some of the roles that you indicated were a bit more skewed towards the credit monitoring angle versus underwriting. So, how active is Jim going to be in the underwriting front and Dave might have said, I guess, how centralized is that function going to become?

[Timothy Vaill:]

John, let me finish the earlier question and just tell you that the top five classified assets are chartered. Three were in that home construction category. One was commercial real estate. And other was the C&I loan just to give you further color on that. Jim's role as a Chief Credit Officer at the holding company is to work with the chief credit officers of all of the banks to bring best practices. Jim will not be in a line of authority for approving the loans, but Jim is establishing and in person meeting next month with all the chief credit officers to go over what we consider to be the best practices to look at improvements and enhancements to our loan policies, underwriting financial institutions' letters that were issued by regulatory agencies, loan loss reserves methodology enhancements, all of that sort of thing. The actual responsibility for underwriting lies with the banks, and our responsibility as the parent company is to assist them with more appropriate additional training and support, and as I said earlier, transport best practices. But loans are made at the local level.

[John Pancari:]

Okay. Then lastly, I know this is just sort of a round capital, not necessarily the exact announcement of the raise. But I know initially you had indicated a comfort level on your change of common ratio really being around the 4.5%, 5% range versus anything north of 6% or so. But it looks like by the implied total targeted capital ratio, it would put you above that 6% range. So, what drove the change in your thinking then on how much capital you need here?

[Timothy Vaill:]

Well John, I think I’m going to differ to the answer to that question and I will leave the arithmetic to you on the capital ratios at this juncture. We’re not prepared to discuss our philosophy on capital raising, until we complete our capital raising.

[John Pancari:]

Okay. All right, thank you.

[Operator:]

(Operator Instructions). The next question comes from the line of Jim Delia from Cambridge Place. Please proceed. Jim your line is open, you may proceed with your question.

[Jim Delia:]

Good Morning.

[Timothy Vaill:]

Good morning.

[Jim Dawson:]

Morning.

[Jim Delia:]

The performance out of your North-West and primarily your Florida portfolio is obviously very good and you have centralized a lot of your lending procedure over the last year. I was wondering if looking backward you can note any of the differences in your loan approval process between those other two regions that have done so well and Inland Empire or if you believe that it was not so much a difference in process as it was a difference in the geographic conditions?

[Jim Dawson:]

Well Jim, clearly the geographic regions have a huge impact. The Inland Empire was growing robustly two years ago. It was a rising tide and it lifted all boats and I have heard some people say bankers look smarter than they are in a good market, and there were some underwriting deficiencies there but they did not surface because the market was improving. We do exchange best practices with our chief credit officers and we do it at quarterly meetings with our chief credit officers telephonically and we’re going to do it…

[Jim Delia:]

I’m sorry.

[Jim Dawson:]

I thought you asked me another question.

[Jim Delia:]

Oh, no, no. No, I have a follow up but, please go ahead.

[Jim Dawson:]

Okay. We do have quarterly scheduled conference calls with the Chief Credit Officers and we are having semi-annual in-person meetings with the Chief Credit Officers, again to exchange best practices. We do expect all of our banks to reach out in industry associations to ensure that we are accessing the best underwriting standards. We use new independent loan review firm for any guidance on credit administration issues. So, all of that becomes part of the great exchange of information.

[Jim Delia:]

All right. Well, thank you very much.

[Operator:]

Your next question comes from the line of Faye Elliott from Merrill Lynch. Please proceed.

[Faye Elliot:]

Hi, good morning. Can you talk a bit more specifically about your outlook for the overall reserve levels going forward? It appears your reserve coverage of NPAs is dropping and is a little bit below one times, and I wanted to get an idea where you’d like to see that ratio end up?

[Jim Dawson:]

Well, Faye, we have been increasing our reserves as we felt they were appropriate as we have seen in Southern California or in other regions where we have new loan loss reserve methodologies. We have been adding to the reserve. We feel that our credit monitoring and our identification of problems, our risk ratings and our loan loss reserve methodologies have been enhanced significantly in the last six months and we are out ahead of our credit problems. I would say that for guidance, the only thing I will tell you is that I believe the economy in 2008 is going to be challenging; some markets more than others, and we will stay on top of our credits and address the reserves as we see problems.

[Faye Elliot:]

So right now then, you feel that your reserve levels are appropriate for the problems that you see?

[Jim Dawson:]

I will tell you that at the end of every reporting period we make an assessment of the adequacy of the reserve and on June 30th, we felt the reserve was adequate at all of our companies.

[Faye Elliot:]

Okay. Thank you very much.

[Jim Dawson:]

The other thing I would just add on that is our non-performing loans, the total loans, if you exclude First Private, I think Vaill had mentioned earlier that it has remained flat quarter-over-quarter and yet we have added to the allowance for loan loss in our banks, excluding First Private as well so...

[Faye Elliot:]

It just looks like, what’s going on leading to the NPA categorization is somewhat accelerated, and so I was just curious if you wanted or had plans to get ahead of that as the other areas seem to be deteriorating?

[Jim Dawson:]

I guess I would say that we look at a number of different industries including past due loans, that is the first indication of a problem, and it is the raw material for future classified assets and non-performers. I will tell you that on a monthly basis, we actually saw past dues drop over the May to June period.

[Faye Elliot:]

Okay, that is helpful. Thank you.

[Operator:]

Your next question comes from the line of Gerard Cassidy from RBC Capital Markets. Please proceed.

[Gerard Cassidy:]

Good morning, guys. Jim, can you carry this on the construction loan portfolio, the amount of construction loans that are tied to commercial properties, small strip malls possibly or office buildings or things like that?

[Jim Dawson:]

Let us see. When I look at the construction portfolio it appears that approximately 20% is commercial real estate.

[Gerard Cassidy:]

And about how much is land development?

[Timothy Vaill:]

About 30% is land.

[Gerard Cassidy:]

And out of that land development, will it be almost entirely residential land development or is there some commercial land development there as well?

[Timothy Vaill:]

There is some commercial land development, but I would tell you that the majority is residential.

[Gerard Cassidy:]

Okay. Good. In terms of your thinking in Southern California about whether to sell a property or work it out, can you give us some color on what metrics you look to, to determine whether its better to sell it at a buyer sale price versus holding on to it for the market to eventually turn?

[Jay Cromarty:]

Well, I would say that we are not holding on to any properties until the market turns. We do not have any encouragement that, that is going to happen for an extended period of time. So, the properties that we are working out and we will continue to work out are with borrowers who have the wherewithal to work with us, who have the interest in working with us, who can provide either some cash flow or some additional collateral drive. Loans, that borrowers are not cooperating or not keeping interest current, we are trying to take quick exit strategies.

[Gerard Cassidy:]

Okay.

[Jay Cromarty:]

But we do not intend on inventory with the hope that the economy is going to change. My belief is that, we are in for a bit of a ride here.

[Gerard Cassidy:]

Sure. Then maybe Dave, is there any possibility that you guys will be giving the information that you used to give on the individual asset managers, I think you stopped doing that in the first quarter, but last year you used to give the individual revenue numbers for the asset managers. Is that available anymore?

[Dave Kaye:]

No, we have switched over to our segment reporting which is how we manage the business, so we have consolidated all our information at the segment level.

[Gerard Cassidy:]

I see. So we can get it in an appendix or anything like that?

[Dave Kaye:]

No, we have not chosen to disclose that.

[Gerard Cassidy:]

Okay. But you used to disclose it, correct? I am not asking for something that was not disclosed?

[Dave Kaye:]

Right. That was when we had our…, each of our affiliates was considered a segment but we switched over to the broader grouping of segments in the first quarter.

[Gerard Cassidy:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Mac Hodgson from SunTrust. Please proceed.

[Mac Hodgson:]

Good morning. I had a question on charge-offs in the quarter I knew eventually, they were coming in and I did not know if you could provide anymore detail behind the charge-offs in the quarter, maybe what were the losses and where it takes on the basket of loans that were charged down. I know they want a huge increase in OREO, so anymore detail, Jim you can pry on that, it would be helpful.

[Jim Dawson:]

Sure, Mac. The bulk of the charge-offs were in Southern California. We took a $21 million in charge-offs on a total of $23 million for the period.

[Mac Hodgson:]

And the $21 million in charge-offs, was that against specific 10 loans, that had a balance of $60 million or so, I am just curious, what sort of loss rates you took with those charge-offs?

[Jim Dawson:]

Well, they were all over the place. We did an impairment analysis of every classified loan in the portfolio in Southern California. We made a determination based on current appraisals discounted for marketing cost, carrying cost, insurance, taxes, et cetera, brokerage cost, and based on that analysis we took charge-offs on approximately 8 or 10 loans.

[Mac Hodgson:]

Okay. So, it is probably fair to assume that they are going to remain, the charge-offs will remain at this elevated levels, the next several quarters as you work down that portfolio?

[Jim Dawson:]

Well, the ordinary course of the ordinary flow is to add to the provision in anticipation of loan problems, and charge them off when you recognize a charge-off, and hopefully you have a more than healthy loan loss reserve at the end of the process. But, that is the way it goes, it is like going through bow constructors, it goes in the front, and works its way through the snake. So, I would say as we add to the reserves, you should expect that charge-offs will follow.

[Mac Hodgson:]

Okay, thanks. And Dave, maybe just a question on the margin, some expansion this quarter I was curious, if you could provide any guidance on kind of where you think the margins shake out rest of the year?

[Dave Kaye:]

Yeah, we did see a pickup in our margin. We had declines in both the investment, earning assets and on the loan side. But it was more than made up for on the deposit and the borrowing side. So we did see declines on the earning assets around 35 basis points, and obviously greater than that on the liability side. I think that one of the things that affects our net interest margin of course is rising NPAs and that did have another effect on Q2. It also hurt us in Q1. So, if we can get some of these NPAs off, we will see a pickup there, but I would say that net interest margin is fairly stable outlook right now. Again, that could change given movements in NPAs and stuff.

[Mac Hodgson:]

Okay, great. Thanks.

[Operator:]

The next question comes from the line of Lana Chang from BMO Capital Markets. Please proceed.

[Lana Chan:]

Hi good morning.

[Timothy Vaill:]

How are you, Lana?

[Lana Chan:]

Good, I am good. I was hoping to get more detail, on some of the recent reappraisals that you have got in Southern California and perhaps some of the other markets. Just following up, on the previous question, as you know, Jim I think you said, you took charge off on 8 to 9 loans in Southern California? What were the total of those loans? Just trying the gauge about the discounts you are getting on those charge-offs?

[Jim Dawson:]

Lana, every region is different. I know that is the question you asked. I would say the, discounts or the diminution we are seeing in Southern California, South Florida and Pacific NorthWest, are much more modest in the 10% range or the 15% range recently. In Southern California, they are all over the place depending on a region, depending on whether it's land, depending on whether it's entitled or not. I would say, the recent appraisals for completed homes, single-family residences, in development projects and over the course of the last three months have probably continued to drop another 20%. Now, if you look at it on an annual basis. It is a higher percentage. It is probably 30%, 35%. So it depends on what the date of the original appraisal was? But real estate values for single-family residences in the Inland Empire have dropped dramatically over the past year. Land in some areas has been as small as 35% to 40%, but it is dramatic as 60% or 65% or 70% in some areas. So it is all over the lot. It depends on how close they are to the highway? How close they are to other communities? What other inventories is in the market? So that is really the best council I can give you…

[Lana Chan:]

Okay.

[Timothy Vaill:]

I would just add one comment to that. One of the things that you have to also think about is the extent that the project is completed and it turns out if the project is not started, you often can get a little better price then if the project has just begun. If the project is near completion you even get a better price than if the project is just in the middle because these projects take a long time to get done. You have the taxes, insurance, the carrying cost. If you have to deal with the weather and then situations like that you have got to keep the project moving. There is as a lot of cash flow coming out of the builder’s pocket, to try to get it done, and all those factors have a significant impact. So, it is almost a property-by-property situation. It is not necessarily just a region. It is a status of the construction project itself.

[Lana Chan:]

Okay, that is helpful. I also wanted to see on the classified loans, the increase from quarter-to-quarter. Did that primarily come from the continued deterioration in the residential housing or are you seeing any deterioration in any of the other segments.

[Jim Dawson:]

I want to be careful on how we define the residential segment because our residential mortgages, first mortgages perform exceedingly well.

[Lana Chan:]

Right, I was talking about the residential construction.

[Jim Dawson:]

Yeah I thought so; I just wanted to be cleared about it. Most of it is in residential construction and raw-land. There has been some in C&I and some in commercial real estate, but the majority has been in land development and residential construction.

[Lana Chan:]

Okay thanks, Jim.

[Jim Dawson:]

You bet.

[Operator:]

Your next question comes from the line of Christopher Marinac from FIG Partners. Please proceed.

[Christopher Marinac:]

Thanks; Jim is the Chaston review finished and Seattle would be a charter bank?

[Jim Dawson:]

Hi Chris the Chaston review that was performed in the Pacific North-West was completed. But I want to elaborate Chaston is on-board to do loan reviews on a regular basis, minimum of two and maximum four times a year depending on the bank size and complexity. So they are a strategic partner now that is going to be working with all of our banks, and yes it was completed in the second quarter. The results of their examination, as well as the adoption of a new loan loss reserve methodology are reflected in the numbers.

[Christopher Marinac:]

Great and then just a separate follow-up had to do with just your comments at the very outset this morning about broker deposits and deposits in general. Could you just give us more outlook about what you think may have transpire across the company on deposit flows?

[Jim Dawson:]

Well as you know Chris industry wide deposits are tough to come by. There is some markets that have a little more life than others. But across our industry deposits are tough to come by. We have never been a company that chooses to pay up for deposits. We expect to bring businesses and strategic relationships to Boston Private and to all of our affiliate partners because of the relationships we established with people we have and our proactive outreach with our clients. So, I guess the guidance I would give you is -- we expect that we will outperform the industry. We expect that we will continue to grow deposits. Our goal would be to grow deposits at reasonable prices and I think the cost of our deposits went down about 40 basis points quarter-over-quarter. So, but we did in some areas fund a loan growth, of course we had to go to the brokered market to get a funding source.

[Christopher Marinac:]

Okay, is there ever a level of broker that you do not want to surpass?

[Jim Dawson:]

Oh yeah, each of our banks are well within the policy limits adopted by their Boards. The other day we were just looking at access to liquidity between on balance sheet liquidity and access to lines of credit and the like. I think it was about $1.7 billion that we can access if we need to. But each board reviews a quarterly or monthly report on policy limits, including brokered deposits and other liquidity ratios.

[Christopher Marinac:]

Good. Thank you, Jim.

[Jim Dawson:]

Thanks, Chris.

[Operator:]

At this time, I am showing you have no further questions. I would like to now turn the call back over to Mr. Timothy Vaill for closing remarks.

[Timothy Vaill:]

Thanks a lot. Let me just close by restating that we believe the steps that we have taken to strengthen our credit operations positions in our company for a strong recovery is within this revised risk management culture. And we believe that core business strategy is very sound, and we are focused on staying true to that strategy, serving the high net worth customers in key geographic regions of emerging affluence. Diversifications across the banking and fee-based segments position us for long-term stability. We believe we are well positioned to maintain a steady course, and I am confident of our future prospects. So, with that, let me thank you again for joining us this morning and for investing in our business.

[Operator:]

Ladies and gentlemen, thank you for you participation in today's call. You may now disconnect. Have a wonderful day.