Boston Private Financial Holdings, Inc.
Q4 2014 Earnings Call Transcript

Published: 22 Jan 2015

[Operator:]

Good day and welcome to the Boston Private Financial Holdings, Inc. Q4 2014 Earnings Conference Call and Webcast. [Operator instructions.] Please note this event is being recorded. I would now like to turn the conference over to Mr. Clayton Deutsch, CEO and President. Mr. Deutsch, please go ahead.

[Clay Deutsch:]

Good morning. This is Clay Deutsch, Chief Executive Officer and President of Boston Private Financial Holdings. Welcome to our Q4 and Year-End 2014 Earnings Conference Call. Joining me this morning are Dave Kaye, our Chief Financial Officer; and Mark Thompson, Chief Executive Officer of Boston Private Bank; and Steve Gaven, Vice President for Investor Relations. At this time I’ll ask Steve to read the Safe Harbor Provisions before we make additional remarks. Steve?

[Steve Gaven:]

Good morning. This call contains forward-looking statements regarding strategic objectives and expectations for future results of operations and financial prospects. They are based upon the current beliefs and expectations of Boston Private’s management and are subject to certain risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. I refer you also the Forward-Looking Statements contained in our earnings release which identified a number of factors which could cause material differences between actual and anticipated results or other expectations expressed. Additional factors which could cause Boston Private’s results to differ materially from those described in the forward-looking statements can be found in the company’s filings submitted to the SEC. All subsequent written and oral forward-looking statements attributable to Boston Private or any person acting on our behalf are expressly qualified by these cautionary statements. Boston Private does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements are made.

[Clay Deutsch:]

Thanks, Steve. Thank you for joining the call this morning. In Q4, our company generated net income of $12.2 million or $0.13 per share. For the full year, net income was $68.8 million or $0.79 per share. Return on average tangible common equity was 9.7% for the quarter and 13.8% for the full year, near our target range of 14.0% to 15.0%. We also announced that the Board of Directors approved an increase in the quarterly dividend to $0.09 per share. This marks the fourth time in the past eight quarters we have increased the dividend. We continue to believe that a consistently escalating dividend is the most effective method of returning capital to our shareholders. Before we go more deeply into the financial results, I would like to briefly comment on 2014 and offer some thoughts on the year ahead. 2014 was a pivotal year for our company. In early October, we closed on the acquisition of Banyan Partners. The combination of Banyan Partners and Boston Private Bank and Trust results in a nationally significant private client wealth management business with a more differentiated and integrated product offering across the Private Banking and wealth management spectrum. Integration of the businesses is well underway, and we expect it to complete by midyear. With Banyan, core fees and income will now account for 47% of our consolidated revenue. We continue to see sustained momentum in the build out of our West Coast Private Banking operations. Mark and his team have done a great job identifying and attracting talented Private Bankers to our organization, and it’s really showing in our results. In 2014, Southern California and the San Francisco Bay area accounted for nearly 64% of the company’s total core deposit growth. Finally, our four non-bank affiliates grew revenue 10% and operating income 16% in 2014 year-over-year. I’d especially like to salute our San Francisco-based wealth advisory affiliate Bingham Osborn & Scarborough who received the 2014 Best in Business Impact Award from Charles Schwab. This prestigious award recognizes one firm each year with a track record of ten plus years’ of growth and excellence. It’s voted on by an independent panel of leaders from the financial services industry. We are extremely proud of Bingham, Osborn & Scarborough for this well-deserved and hard-earned recognition. Finally, we are very aware that our shareholders want to better understand how we think about our performance targets in the current environment. I’d like to talk about 2014 and the quarter and then come back to you on how we’re thinking about the year ahead. At this point, I’d like to turn it over to Dave and Mark for more detail on our financial performance, and then I’ll be back to discuss the wealth management affiliates and make some concluding comments on how we’re thinking about performance attainment. Dave?

[Dave Kaye:]

Thanks, Clay. Good morning, everyone. My comments will begin with Slide 3 of the earnings presentation that can be found in the Investor Relations section of our website, www.bostonprivate.com. On Slide 3, we walk through the linked quarter reconciliation of the consolidated pre-tax income. The Banyan acquisition had a positive net EBITDA impact of about $700,000 on the Q4 results. Banyan’s expenses were abnormally high in the quarter due to increased professional fees, some seasonality for compensation, and other one-time expenses. In Q4, we recorded a $2.4 million provision expense versus a $2.6 million provision credit in the prior quarter. The provision expense was driven by a downgrade of three unrelated relationships - one in Southern California and two in New England. Net interest income for the quarter fell $700,000 due to reduced interest recapture and slightly lower loan yields. We also had a number of step-ups in our expense base mostly due to seasonal marketing expenses, new office space for our wealth advisors, as well as some depreciation and amortization of intangibles related to the Banyan acquisition. All-in-all, the step-ups had a negative $2.1 million impact on Q4. And finally, we incurred about $2.2 million of one-time expenses in the quarter. $1.4 million of that is attributable to the Banyan transaction while the remaining $800,000 was the result of a liability restructuring. On Slide 4, we look at the consolidated P&L highlights, core fees and income increased 21% year-over-year to $39.6 million. Excluding the impact of the Banyan acquisition, core fees and income increased 2% year-over-year. Total operating expenses for Q4 2014 were $63.8 million, and that’s up 15% year-over-year. If we exclude the impact of Banyan and the one-time charges, Q4 2014 operating expenses were $54.9 million and that’s down about 1% year-over-year. Our consolidated full-year financials are shown on Slide 5. For the full year, total revenue increased 3% to $320 million. As you’ll recall, 2013 results do include the $10.6 million gain on sale of the Pacific Northwest operations. If we exclude the gain on sale of the Pacific Northwest and we also exclude the contribution that we received from Banyan in 2014, full-year revenue increased 5%. Total operating expenses, excluding the impact of Banyan and the one-time expenses were down 1% year-over-year, and that resulted in core operating leverage of approximately 600 basis points. Slide 6 looks at our spread and fee-based revenue, and we show the progress that we’ve made in drawing our fee-based revenue. The fee-based revenue increased 18% linked quarter and 21% year-over-year, largely due to the Banyan acquisition. As Clay mentioned, our fee-based revenue now accounts for 47% of total revenue and that’s up from 43% in Q3 2014 and 42% in Q4 2013. We believe we have a large, stable source of recurring revenue derived from distinctive Private Banking clients that sets us apart from the industry and enables us to grow in a more capital-friendly manner. On Slide 7, our net interest margin decreased 10 basis points to 2.83% linked quarter, and that’s primarily due to higher cash balances, some lower loan yields, and lower levels of interest recapture in Q4 versus Q3. On Slide 8, we show the decline in criticized loans for the past five quarters. In Q4 2014, criticized loans fell 11% linked quarter to $160 million. We did have a $10 million increase in our nonaccruals and that partially drove the $2.4 million provision expense during the quarter. On Slide 9, our tier one common equity capital decreased an estimated 87 basis points to roughly 9.8%, and that’s due to the $65 million of goodwill and intangibles created in the Banyan transaction. As we disclosed last quarter, approximately 68% of the upfront consideration was paid in cash. That concludes my prepared remarks for the morning. I’ll now turn it over to Mark for a discussion on the Private Banking segment. Mark?

[Mark Thompson:]

Okay, thanks Dave. Good morning. Before I begin my comments I would like to highlight that we have changed the reporting format for the Private Bank. Going forward the Private Bank segment will include financial information for our traditional lending and deposit taking activities while the Boston Private Wealth Management segment will include the financial information for the combined Banyan and legacy wealth management and trust businesses. My comments will begin on Slide 10. In Q4 pre-tax, pre-provision income at the Private Bank decreased 6% year-over-year due to a 4% decrease in revenue to $46.5 million and a 2% decline in total expenses. Included in the Q4 results are $1.4 million of one-time expenses. Excluding these one-time items pre-tax, pre-provision income increased 2% from Q4 2013. Slide 11 shows full-year Private Banking performance highlights. Revenue decreased 4% as higher net interest income, up 3% from 2013, was offset by lower fee and other income. As Dave mentioned earlier 2013 results include the gain on sale of the Pacific Northwest operations. Excluding this gain total revenue increased 2% while total expenses excluding one-time items fell 7% for the same period. Slide 12 shows the past five quarters’ of average loan balances by type. Total average loans increased 5% year-over-year in line with our previously stated growth objectives. The strong year-over-year performance was driven by a 5% increase in both commercial and residential loans. Within commercial, end-of-period C&I loans increased 10%. C&I loans grew $68 million in New England, an increase of 10% and $19 million on the West Coast, an increase of 12%. At the individual market level loans grew 7% year-over-year in Southern California and 4% in New England. Loans decreased 2% in the San Francisco Bay Area due in large part to the loan sale we executed in Q2 2014. Now turning to Slide 13, in Q4 we saw continued strength in the development of our deposit franchise. Average deposits increased 10% year-over-year led by money market and demand deposits which were up $337 million and $73 million respectively. On a linked quarter basis average deposits increased 5%. As Clay mentioned earlier in the call, the Private Banking franchise on the West Coast made tremendous strides in 2014. Deposits excluding CDs increased 41% year-over-year in Southern California and 12% in the San Francisco Bay Area. CDs now make up 16% of the deposit base in Southern California, down from 24% at the end of 2013. In the San Francisco Bay Area, CDs are 12% of total deposits, down from 18% last year. Slide 14 contains the financial information for the newly-formed Boston Private Wealth Management segment. The Q3 2014 data represents the legacy wealth management business while the Q4 data shows the results for the combined Banyan and legacy wealth management and trust businesses. At the end of Q3 Boston Private Wealth Management at $13.3 million of revenue, $2.3 million of EBITDA and $9.3 billion of assets under management. Peter Raimondi, CEO of Boston Private Wealth, is working with our private banking leadership to accelerate cross-selling to further promote the Boston Private brand and further develop our distribution channels. Now I will turn it back to Clay.

[Clay Deutsch:]

Thanks, Mark. Let’s go to Slide 15. Total revenue for the Investment Management segment decreased 4% year-over-year in Q4 due to lower year-end performance fees at Dalton Greiner. Excluding the impact of performance fees total revenue increased 3% from Q4 2013 while operating expenses fell 3% for the same period. Q4 2014 segment EBITDA margin was 35%, up two basis points linked quarter. The segment overall reported net AUM outflows of $258 million for the quarter, reflecting ongoing pressure on active domestic equity strategies. Client rebalancing continues to drive the majority of net outflows. Slide 16 outlines the performance of the Investment Management segment for the full year. Pre-tax income from continuing operations increased 15% in 2014. Revenue increased 7% while operating expenses grew 5%, resulting in 200 basis points of positive operating leverage for the segment. On Slide 17 our Wealth Advisors reported an 11% year-over-year increase in revenue for Q4 2014 to $12.5 million. Operating expenses increased 15% due to staff expansion, new office space, and professional fees. The segment’s Q4 EBITDA margin of 32% remains above our target of 30%. Segment AUM increased 6% on a year-over-year basis. Linked quarter AUM was up 2% to $9.9 billion. Wealth Advisory net inflows were $51 million as compared to net inflows of $40 million last quarter, and $68 million in Q4 2013. Slide 18 shows the full-year results for the Wealth Advisory segment. Pre-tax income from continuing operations increased 17% in 2014. Our Wealth Advisors demonstrated strong operating leverage as revenue grew 14% while operating expenses increased 12%. Net flows were strong for the second consecutive year, coming in at $261 million. More information on AUM net flows can be found on Slide 19. In Q4 the Wealth Advisors and Private Bank each posted net inflows of $51 million. Both the Wealth Advisors and Private Bank have generated positive net flows seven of the last eight quarters. Now, before taking your questions I would like to briefly comment on how we’re thinking about performance targets. As you know, our performance targets are heavily return on equity driven, and our threshold of good performance has been a 11% return on common equity and a 14% return on tangible common equity. As we enter the early portion of 2015 we do believe that a thin yield interest rate scenario is upon us. While the interest rate environment is volatile and the duration of this environment is hard to predict amid concerns regarding global economic growth and heightened geopolitical risk I do want to address how we’re thinking about performance in this environment. The 11% return on equity target remains our standard of good performance with respect to executive compensation and other goal setting kinds of activities. However, we believe the thin rate environment makes a 10% return on equity more realistic in the near term. We remain committed to strong returns and we will work very hard in pursuit of our targets as the year unfolds. That concludes our comments on Q4 and full-year 2014 earnings. With that we’d like to open the call and take your questions.

[Operator:]

Yes, thank you. [Operator instructions.]. And the first question comes from Casey Haire with Jefferies.

[Casey Haire:]

Hey, good morning guys. I wanted to start off on the NIM outlook, Dave. Obviously excess liquidity kind of held you back a little bit this quarter. Could you quantify that drag and then also just give us… It sounds like we could get a reset here in Q1 - your best guess as to where we might reset in Q1?

[Dave Kaye:]

Yeah, I think the excess liquidity was about half of the drop sequentially, and then the other piece was just lower interest recapture - really almost zero interest recapture for the quarter. Some quarters, we’ve had more than others but this was definitely the lowest there. And sorry, your second part was. I think the excess liquidity will probably go away in Q1. We tend to see some lower deposit balances as clients make some tax payments later in Q1, so the average balances tend to run seasonally a little bit lower. That would eat up some of the liquidity. But there’s still a little pressure on the loan yields, so…

[Casey Haire:]

Understood. And then Banyan seems like it got off to a little bit of a slow start. I’m just curious - my presumption is you expect an EBITDA improvement from here. Should we see that more on the revenue side or expense side?

[Dave Kaye:]

Well, I think we’re looking for it on both. Realistically, the expenses savings that we’ve been targeting, you’ll probably see that more materialize in the back half of the year as they work through the integration and the cost saving efforts there.

[Casey Haire:]

Okay. And then just a last one from me

[Clay Deutsch:]

Well, Casey, I’ll refer to things I’ve said in the past. There’s no change in it. Our appetite for wealth management is high, and if we can accelerate the development of our wealth management business portfolio through M&A, we’ll absolutely do that. So we are active lookers. That’s about all I can say. We don’t declare our intentions beyond that. We’re very excited about what Banyan has done for us in the early days. We were looking for a catalyst or a bit of a transformational deal if you will, and the combination of our Boston Private Wealth Management business in the bank, which was itself a strong business with Banyan partners really does good things for us. But we’re going to keep going down this path.

[Casey Haire:]

Okay, thank you.

[Clay Deutsch:]

Thanks, Casey.

[Operator:]

Thank you. And the next question comes from Jennifer Demba with SunTrust Robinson Humphrey.

[Jennifer Demba:]

Thank you, good morning. Can you just kind of give us some more detail on the credit downgrades that you talked about during the quarter?

[Dave Kaye:]

Sure, it’s really three unrelated relationships as we said, one in Southern California; two out of Boston. One was a construction loan that has been sort of a longstanding criticized loan, and we moved more aggressively to take a mark and hopefully come to a resolution shortly on that. So we took a charge off. And then, another was a CRE deal where they had a loss of a very large tenant, and so we downgraded that and also took a charge or a reserve. And then the final one was just a borrower that ran into financial difficulties and we put an elevated reserve on that relationship - so really three different types of relationships and loans. I don’t see any pattern. If you look at our overall criticized loans they were down, so these were existing problem loans that got worse, three of them. But overall, the amount of criticized loans did improve for the quarter.

[Clay Deutsch:]

Jenn, all three are paying as agreed, but we’re pretty conservative on our loan review. And we just felt these were appropriate moves.

[Jennifer Demba:]

Okay, thank you.

[Operator:]

Thank you. [Operator instructions.] And we do have a question from Chris McGratty with KBW.

[Chris McGratty:]

Hey, good morning everybody. Clay, if I’m doing the math on your ROE guidance, it suggests relatively flat earnings for ’15 over ’14. I’m interested in your expectations given the credit development in the quarter. I think we in the street had negative provisioning costs, maybe a bit too long, but can you share with us kind of your near term expectations for the provision over the course of the year?

[Clay Deutsch:]

Yeah, I’ll throw that to Dave, Chris. I’m not trying to duck it but we talk a lot about this.

[Dave Kaye:]

Yeah, Chris, the provision I said, outside of these three relationships that I talked about, we probably would have been flat or maybe a slight credit. So I don’t know that it changes our overall expectations. As Clay mentioned, we’ve continued to see improvements overall. We do have loans that we’ve taken previous charges on that are paying as agreed, and so that could represent some potential for recoveries in 2015. It’s just difficult to anticipate the timing. I would say that overall if you look at the year we had almost a $7 million credit for the full year in provision. I wouldn’t expect us to repeat that; that was pretty large. We had some larger recoveries especially earlier in the year. But it’ll probably still remain lower than normal and could be some slight credits depending on the quarter in which we get recoveries. But I don’t know that this, this quarter didn’t really change our overall outlook on the credit situation.

[Chris McGratty:]

Okay, that’s helpful. The expense run rate, I think you said the back half of the year as kind of the cost saves come in, but if you take out the one-timers in the quarter - call it $61.5 million in the quarter - is the natural path over the course of the rest of the year kind of slow improvement from this level? Or is there anything else we should be kind of mindful of?

[Dave Kaye:]

Well as always in Q1 we have some seasonality related to the FICA and all the taxes. That generally is in the $1.5 million to $2.0 million range we see a blip up. Outside of the $2.2 million of one-timers that we called out that’s probably a good run rate if you ex those out.

[Chris McGratty:]

Okay, understood. And then maybe I missed it, Dave, on the margin. Is the guide for Q1 some pressure given liquidity and then maybe some stability kind of once that works out over the balance of the year? Is that fair?

[Dave Kaye:]

Well I would actually say that we might have lower excess liquidity, so that would help us a little bit just in terms of the NIM that we post in Q1.

[Chris McGratty:]

Okay, thanks.

[Clay Deutsch:]

Thanks, Chris.

[Operator:]

Thank you. And as there are no more questions at the present time I would like to turn the call back over to management for any closing comments.

[Clay Deutsch:]

I just want to thank all of you for your interest in our company. As I mentioned earlier and I’ll come back to Chris’ question, the only change in our thinking is what the first three weeks have said about the yield environment. I think it’s way too early to call it a year three weeks into January, but we’re going to manage ourselves as if the thin yield scenario is upon us and we’re going to adjust accordingly. But we remain very committed to the kinds of performance goals we’ve been discussing with you previously and that we’ve underlined today. Thank you all.

[Operator:]

Thank you. The conference has now concluded . Thank you for attending today’s presentation, you may now disconnect. Have a nice day.