Q3 2019 Earnings Call
Good morning, and welcome to the Boston Private financial Holdings third quarter 2019 earnings conference call webcast.
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Thank you Keith and good morning, everyone. This is Adam Bromley Director Investor Relations, Boston Private financial Holdings.
We welcome you to this conference call to discuss our third quarter 2019 earnings.
Our call. This morning include references to an earnings presentation, which can be found in the Investor Relations section of our website Boston private dot com.
Joining me this morning, our Anthony the challenge Chief Executive Officer, Steve Gavin Chief Financial Officer, and Paul Simon President of private banking wealth and trust.
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 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 qualifier contained in our earnings release, which identified a number of factors that could cause material differences between actual and anticipated results or other expectations expressed.
Additional factors that could cause Boston privates results to differ materially from those described in the forward looking statements can be found in the company's filings submitted to the FTC.
All subsequent written and oral forward looking statements attributable to Boston private or any person acting on our behalf are expressly qualified bodies cautionary statement.
Lots and 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.
With that I'll now turn it over the Anthony the Josh Thanks, Adam.
Good morning, everyone and thank you for joining the call before we review third quarter 2019 results I'd like to update you on our progress on some key initiatives during the quarter.
We said that our ability to attract high quality talent will be a leading indicator of our ability to achieve the 2022 targets, we shared our investor day.
I'm pleased to share some key additions to our team since our last call.
In August we announced a John Longly joined Us as president of the Western region.
John previously served as head of private wealth at Blackrock after spending 17 years at Citigroup, where he concluded in the role of Chief Executive Officer of Citi Private Bank North America.
John will manage the western regions day to day operations as well as support business development talent acquisition and client management.
Earlier this month, we announced the past wire joined us as head of strategic business development.
Prior to joining Boston private had served as a private wealth advisor at Merrill Lynch for over 30 years.
He earned numerous accolades, including a number five ranking in the Forbes top 250 wealth advisors in the United States from 2016 2019.
And the top 100 ranking in the Barron's top financial Advisors in America from 2017 2019.
I will focus on driving growth across all our markets.
We added three other advisors and relationship managers during the quarter, particularly to support our family office business development efforts.
A full list of new hires can be found on the news on page of Boston private Dot com.
We're encouraged by these additions to our team as we believe it signals the Boston private is a destination for the industry's top talent.
And we are optimistic about the state of our talent pipeline going into 2020.
Our team achieved a key milestone during the third quarter by completing the formula integration of Boston private wealth and Kls professional advisors.
These two firms both share our mission of providing clients with holistic wealth management advice and their combined strengths allow for a more complete set of clients solutions.
The integration represents a continued <unk> simplification of the Boston private business model and it provides a platform for growth in the critical wealth market of New York City.
The combined from ranks as one of the largest restaurant registered investment advisors in the United States focused on serving ultra high net worth a individual.
We believe the size strengths and capabilities of the combined combined from our attractive to both prospective clients in new hires.
We're also excited to open a new modern flagship banking office in downtown San Francisco.
Along with the new co location of our banking wealth and trust teams to facilitate better collaboration.
This new office, along with the hiring or John on the reaffirms our commitment to growing all of our businesses in California.
Finally, our technology platform enhancements and new client solutions across all business units as outlined by more on me at our Investor day remain on time and under budget.
There's obviously a lot more going on at Boston private but these initiatives are examples of the source of confidence we have regarding our ability to grow.
And allows us to reinforce the 2022 targets we shared earlier this year.
With that I will turn it over to Steve Gavin will walk us through third quarter 2019 result, Steve Thanks, Anthony and good morning, everyone. My comments will begin on slide three where we show a summary of our consolidated financial highlights from the third quarter. This quarter, we reported net income of 20 million or 24 cents per share.
Total deposits averaged 6.7 billion for the quarter, a 1% decrease year over year client deposit activity is strong thus far in October and we're confident we will manage back to a 100% loan to deposit ratio during the fourth quarter.
Total loans average 7 billion for the quarter, a 4% increase year over year. Our end of period total loans was impacted by a 90 million dollar loans that we completed to both prioritize balance sheet capacity to support future client acquisition and manage our liquidity ratios.
Totally U.M. as of September Thirtyth, 2019 was 16.2 billion flat linked quarter as part of the positive market action offset negative net flows.
Total net flows for the company were negative 137 million 100 million of which was attributable to the wealth management interest segment.
No net flows remain negative in the current quarter, we have seen client attrition improves sequentially for the past three quarters departed advisers and anticipated distributions from existing clients have been a primary driver of year to date negative net flows.
Tier one common equity ratio was 11.2% well tangible book value per common share increased 16% year over year to $8 in 90 cents during the third quarter, we implemented a $20 million share repurchase program and we repurchased approximately 670000 shares of common stock at an average cost of $10.
61 cents 12.8 million remains available to be repurchased in the current program.
Slide four shows our income statement on reported basis under GAAP.
As you recall, we completed the divestiture of Pos in the fourth quarter of 2018 financial results from BLS remain consolidated in the third quarter of 2018 results, which primarily explained the year over year decrease in revenue and expenses.
Third quarter 2018 results also include a $5.8 million restructuring charge related to efficiency initiatives.
To enhance comparability in analyzing financial trends in the core business. The upcoming slides include certain non-GAAP operating metrics that exclude the previously mentioned restructuring charge in contributions from BLS and the third quarter of 2018.
A reconciliation of GAAP to non-GAAP metrics can be <unk> can be found on slide 15.
Slide five shows consolidated income statement, excluding notable items and BLS pretax pre provision income decreased 6% year over year.
2% linked quarter, driven by lower net interest income.
Pre tax income and net income both increased 3% on a linked quarter basis, primarily driven by lower provision expense during the quarter.
Slide six shows consolidated revenue trends wealth management and trust fees include revenue from the newly integrated registered investment advisor Pos and trust operations of Boston Private Banking Trust company total operating revenue during the third quarter was 81.3 million down 6% year over year and 1% link.
Quarter, primarily driven by lower net interest income.
On slide seven we show a detailed breakout of our consolidated expenses on a GAAP basis.
Total non interest expenses declined on a year over year basis, primarily due to the previously mentioned restructuring expense in the POS results that are included in the third quarter of 2018 results.
Slide eight shows a detailed breakout of consolidated.
Operating expenses, excluding notable items in Pos results in the third quarter of 2018.
Total non interest expense decreased 6% year over year, while remaining flat linked quarter.
Year over year decrease was driven by lower compensation in technology expense.
As a result of previously enacted efficiency initiatives the linked quarter comparison reflects lower salaries and employee benefits, partially offset by higher octane occupancy and equipment expense.
Related to the opening of our San Francisco Office.
Professional services expense was elevated during the quarter due to consulting fees related to technology implementation and recruiting fees.
Slide nine shows the past five quarters of average loan balances and deposit balances by type.
Total average loans during the quarter increased 4% year over year to 7 billion.
End of period residential loans declined 62 million.
Driven by a $90 million loan sale that was completed in September .
Total average deposits during the quarter decreased 1% year over year to 6.7 billion.
Year over year decrease of 1% was driven by lower commercial client demand deposit balances lower private client interest bearing checking balances and lower brokered CD balances, partially offset by growth in commercial money market balances.
The linked quarter increase in deposits of 1% was primarily driven by growth in commercial client money market balances.
Actually offset by lower private client interest bearing checking balances in lower broker CD balances.
Slide 10 shows a five quarter trend of consolidated net interest income and net interest margin.
Core net interest income, which excludes interest recoveries on previously nonaccrual loans declined 3% linked quarter to 56 million.
Driven primarily by the repricing of variable variable rate loans, and lower interest, earning asset volumes, partially offset by lower borrowing volumes.
On the bottom of the slide we show a net interest margin table, including changes in asset yields and funding costs core net interest margin decreased seven basis points linked quarter to 2.71%.
As the change in NIM was driven by a nine basis point decline in June and loan yield primarily siri and construction yields.
Total cost of funds increased one basis point linked quarter from 111 basis points 212 basis points as higher cost of deposits, partially offset by lower borrowing volumes.
Slide 11 provides detail on our asset quality.
This quarter, we booked a provision expense of approximately 200000.
Which was primarily driven by required reserves for classified loans.
Partially offset by lower reserves for pass rated loans.
The chart below shows asset quality metrics during the quarter.
Overall criticized loans declined 2% linked quarter to 139 million a triple as a percent of total loans was 107 basis points.
On slide 12, we show the private banking segment, excluding the wealth management and trust portion of our bank.
The private bank efficiency ratio increased from 62% to 63% linked quarter, driven primarily by higher professional fee expenses and lower net interest income.
I'll now turn it back to Anthony to discuss our wealth management and Trust segment.
Steve.
Slide 13 shows performance highlights for the wealth management and Trust segment, which includes financial results from the recently integrated Boston private wealth and Kls professional advisors as well as the trust operations of Boston Private Bank and Trust company.
Segment EBITDA margin for the quarter was 33% versus 30% in the second quarter of 2019, and 26% and the third quarter of 2018.
The linked quarter improvement in EBITDA margin was primarily driven by revenue growth of 1% and lower compensation expense.
Hey, AUM in this segment was 14.7 billion flat linked quarter as positive market action offset 100 million of negative net flows.
Net flows of negative 100 million were driven by 271 million of outflows linked to previously announced advisor departures, which were partially offset by 171 million of new client business.
That concludes our prepared comments on our third quarter 2019 reported results I'll now open the line for your questions.
Yes. Thank you well now begin the question and answer session to ask a question you May have press Star then one under touched on file.
If you then speakerphone. Please pick me up perhaps have before addressing that case thats. How your question has been addressed and you would like to withdraw. Please press Star then too.
At this time, we'll pause momentarily to assemble the roster.
As the first question comes from Chris Mcgratty with KBW.
Hi, good morning, everybody.
Good morning, Chris.
Steve maybe start with you.
Your peers, given given the rate environment in the flat curve have been electing to kind of shrink the balance sheet pay off higher cost borrowings.
These securities given that.
Sometimes in Britain spread.
Can you elaborate on kind of thoughts on that strategy given.
Given where you where we are and kind of the rate cycle.
Yes, I mean, we're really focused on driving that loan deposit ratio down and as we said we've had strong client activity. Thus far in the quarter, we're actually looking to build the securities portfolio to get the on balance sheet liquidity.
Back to where we'd like it to be we've done some small.
You know things on the liability side.
But we don't have any kind of wholesale strategies to restructure the liability stack or the wholesale borrowings stack in order to optimize NIM on a go forward based it's really about building that on balance sheet liquidity at this point.
And how much of the.
How much growth should we be thinking about in terms of securities book from here.
I, just I think you'll see it.
Tick up.
Sequentially, a little bit I would think about it more as if you think about getting into year end.
And kind of having loans at that kind of seven $7.1 billion range.
And what that means hurdle the LD ratio.
And kind of the offset Bina Securities book building and then we will look to build out even further into next year.
Okay, and then maybe taking a step back with the loan to deposit north of 100, I understand the comments coming down this quarter.
Does that elevated level kind of impact your ability to reduce deposit costs somewhat up sequentially I'm kind of interested in.
How the repricing of the deposits might be tracking maybe where the September spot rates are in kind of overall them commentary for next couple of quarters. Thanks, Yeah. I think what you saw in the second quarter and into the summer.
LD elevated that obviously put some pressure on deposit costs, but with activity coming back those those deposit cost pressures are starting.
To subside a bit what we saw kind of in September were deposit costs come down about four basis points from August the expectation is that will continue into the into the fourth quarter arms, we expect deposit costs down 10 to 12 basis points.
Through the end of the year from an in perspective flat to slightly down on NIM, just given the pressure on asset yield.
In the current rate environment in our modeling right now, we're expecting a 25 basis point rate cut.
In October .
It is between 25 and 60% depending on product and we've still been modeling kind of zero to four month lags again, depending on product.
Great and then maybe if I have you any kind of thoughts on Cecil.
Given the turn in there, yes, so where we arent season, we finalize model selection.
Refining our regression work as we speak.
The real focus right now for US is documentation governance controls will be in a position to comment on seasonal impact next quarter, but all in all we think it's very manageable from an impact standpoint.
Great. Thanks.
Well.
Thank you add the next question comes from Alex Twerdahl, a Sandler O'neill.
Hey, good morning.
Good morning.
First off I was wondering if maybe you could give us all the more commentary on on expenses and kind of how we should be thinking about I guess, a little surprised to see salaries down about a million bucks sequentially. Given some of the key hires that you guys have been making so there's something else and there maybe some bonus accrual reversals or something that may maybe don't doesn't carry forward into the fourth quarter and to do exactly what you saw.
Some bonus accrual reversals.
For variable incentive comp and then in in commission comp just given where some volumes our year to date total expenses expectation is back to that $50 million to $59 million.
Range next quarter.
And within that we are still assuming that.
There is an FDIC insurance cost in there we could get a credit but until the FDIC tells us we won't know.
Okay.
And then with some of these key hires and just logo work suggests that they ran some teams and the places where they're coming from.
It did they come over as as sole individuals are they bring other people with them and then maybe just an overall update on.
On the number of all right is that you guys have ended the quarter.
Given that you had some commentary on on some planned advisor departures.
Sure I am starting with the last part first I think you you met number of advisors is that correct correct right.
So the number of advisors I think on the last call. We say that was being 56 and 58 we are.
At 58 advisors as of this call.
And I think we guided to 60 to 65 by the end of the year and we're still very comfortable with that with that guidance.
The we brought over different advisors.
Normally they come over as individual we don't typically comment on.
Individual advisors, but clearly there were associated with teams and.
Members of those of those.
Teams could join later on but at the moment they've come individually.
Okay, and then just a follow up question as it relates to to the wealth business.
Over the last couple of weeks has obviously been a lot of talk and we've seen the brokers cut their commissions down to zero and I know the product that you guys offer is much different from.
From just trading commissions, but maybe you can talk a little bit about whether or not you expect admission contagion.
Into that product.
Expected pricing you know if theres any sort of pressure that you guys are seeing already leading from some of the moves to the brokers maker made earlier this month.
So starting with the last part first we're not we're not seeing.
Any immediate impact from that we are it is a very different business model.
It can impact sort of be the expense on the expense side.
What zero commissions with some of the custodians, we do business with but as far as the business model is concerned we haven't seen impact and we don't expect C.
Thanks for taking my questions yes.
Thank you had once again please press Star then one if you would like to ask your question.
And the next question comes from lot of Chan with BMO capital markets.
Thank you good morning.
Good morning.
Wanted to talk about the resi mortgage space, we're hearing about pretty intense pricing competition that not only gets from lower rates, but.
Competition General.
Do you guys seem in terms of new pricing there.
Yes, a lot if you think about what we're seeing kind of in the arm space.
New pricing.
Just kind of on the headline basis, the seven ones kind of our key product.
So in the kind of low threes mid threes now the pricing pressure starts to kick in.
When a client can bring more obviously the pricing moves lower so it's going to bring overlarge deposit balances.
Our wealth relationships, you could see that ticked down, but again, the overall economics of that relationships.
Pretty attractive we've actually been holding the line pretty firmly.
On rates, so were not as volume focus as some of the people in our space in the space that we're competing against.
But all in all I, just with the rate environment everything else Theres certainly rate pressure in the resi resin market.
Okay, and just as a follow up given some improvement on gain on sale margin.
Really.
It takes expectation, bringing the loan to deposit ratio down to 100%.
Fourth quarter is that also predicated on additional loan kills.
You could see additional loan sales and participation as a way to get there.
This isn't a shift business model necessary necessarily we're we're now going full bore into mortgage banking that you just some opportunistic sales we look across the loan book.
We're looking at clients, where we don't have a full relationship and there's not really an opportunity to have a full relationship.
So it's a matter of freeing up capacity as we get into next year, particularly to get the family office offering going where theres really attractive lending opportunities that bring to bear kind of the whole bank. So.
Part of its liquidity management, but part of its also just getting capacity for those new clients that are part and parcel to the new strategy.
Okay and just one last question about an aide how do you how should we think about the pace.
Buybacks.
For the remainder authorization.
Yes, we're just going to continue to be opportunistic I think you can see where we were buying back at.
In the pace, we're buying back yet.
We have no.
Tensions right now to meaningfully shift our approach. So we'll continue to be opportunistic and we exhaust the 20 mail 20 million, we'll we'll evaluate whether or not it makes sense to put another authorization place.
Okay, great. Thank you.
Welcome.
Thank you add the next question comes from Christopher Marinac with Janney Montgomery Scott.
Thanks, Good morning, I wanted to ask if the new advisors you have have any debt specific deposit gathering goals and if that's a source of the deposit growth in the future.
It certainly part of our overall business model.
To have advisor to deliver the the complete.
Bank.
And their compensation system will will reflect that.
Paul I don't have you'd want to add anything to that no I think that covers it okay.
Okay, Great and then.
And they do you think that the the negative at U.M. has a shot at reversing in the next couple of quarters or just any further color on that.
Yes, what I, what I am confident of is the is the people that we've hired.
Over the last few quarters are now settling in other jobs.
And we are optimistic about the impact that theyre going to have.
On the firms so I'm I'm optimistic about our.
Our M&A numbers going forward.
Great. Thanks, guys appreciate it.
Thank you and the next question comes from and how much was Ulysses.
Good morning, one it's just follow up on a previous question.
On analyst day on the analysts that you spoke about the rise in assets and the wealth management segment that are gonna grow three times the rate of the growth of the balance sheet, how should we think strategically about your capital distributions.
Adam This is Steve I'll take that question, so I think from a capital distribution perspective.
Once the strategy really starts to set in and we see that topline growth.
Pickup.
The expectation is that will keep the dividend kind of where it is right now and worked that down to a lower payout ratio.
As we get into excess capital positions as we.
Execute against the strategy, if there arent smart M&A opportunities available, we'll look to return that through share buybacks.
And seems just a follow up if you execute successfully in your strategy the rate at which the cap that excess capital is generated should rise is that correct correct, yes, because you're looking at right now.
If you look at kind of the core are are we in the payout ratio and what we're growing the balance sheet is pretty much keeping capital ratios flat to slightly up or down depending on kind of accounting march from quarter to quarter, but as that strategy starts degree now in our OE rises net spread between payout in our OE gets greater that provides more flexibility for share repurchase.
Thank you.
You're welcome.
Thank you and then ask questions Hello, Chris Mcgratty with KBW.
Okay, great. Thanks.
Two quick two quick ones one the the 10 million jump in classified.
Could you just provide a little color on that probably one credit or too and then also Steve kind of a rule of thumb for each 25 can you just remind us what the eni or with the margin sensitivity might be.
Sure So I'll take the first one.
You saw that uptick I think is about 10 or $11 million 7.5 was was one credit where there is some lease expirations coming up.
The rest there were six loans in total that drove that increase they were kind of spread across regions and product and product. So nothing systemic and they're really the one $7.5 million credit.
Drove that I'll get back to you on the Eni sensitivities.
As we don't typically.
Disclose that until we have the IR simulations and the Q.
Thats right and then in terms of loss content for that.
Roger credit what are the expectation there.
We believe the risk of loss is low.
Thank you.
Yes.
Thank you.
I'd like to return the Florida, nothing to Charles for any closing comments.
Thank you all for joining the call today, and we look forward to next quarter.
Have a good day.
Thank you think conference has now concluded. Thank you for attending today's presentation may not a centralized.