Q4 2019 Earnings Call
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Your lead entry number has been confirmed you will now be joined to the conference. Please note that an operator will pick up your line to collect your information privately and statements are for you also to the former 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 Express additional factors that could cause Boston 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 Act of our behalf are expressly. Pardon me. This is the operator. We are speaking privately. May I have your name, please?
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You are now rejoining the main conference as we shared our investor Day in May of 2019. We are focused on building a private banking and wealth management firm with a differentiated return profile for shareholders much of our time in 2019 has been focused on positioning our business for ambitious growth.
This is included reorganizing our management structure and refining our processes to improve our ability to effectively and efficiently deliver high-value advice and guidance to our clients all of which we plan a increasingly aided and empowered by technology.
Here are a few updates on our progress during the fourth quarter.
First leading indicator of our ability to achieve the targets. We shared at our investor day remains our ability to attract high-quality talent to Boston private.
We are pleased to share that our next our net advisor count increased by 4 during the quarter and we added six new advisors and relationship managers during the quarter primarily in New York and South, Florida.
We made kyun band advancements to our technology platform when we rolled out a new digital banking platform in November . Our team worked hard throughout 2019 to deliver this key initiative which represents a significant upgrade to our digital platform and client experience for banking clients. We also rolled out precisionlender in December and we are scheduled to roll out and see no wage May improving our technology not only augments our high-touch client service, but also opens up new channels for growth particularly with next-generation client Bots.
The banking technology upgrade nears completion. We have already begun to focus on the 2020 design and development of a dramatically upgraded wealth platform.
We are currently finalizing vendor selection and outlining our vision for both advisors and client experiences before formally launching this project.
We aspire to build a platform that empowers our clients to pursue Solutions and desired outcomes in partnership with our highly-skilled wealth management teams.
Leave our Envision platform will offer a client experience that will be appealing to both existing clients and to the next generation of clients. Who as we know are increasingly consuming Financial Services away from traditional channels. We also expect that a more powerful Tech enabled platform will accelerate our advisor recruiting
In December , we finalized the design of our new advisor Compensation Plan. The new plan is more formulaic and less discretionary if better aligns the interest of our clients advisories in shareholders as it rewards rewards our advisors for growth for delivering on our aspirational client experience and the overall success of the company.
Also during the quarter quarter. We expanded our presence in South Florida by opening a new wealth management office in Miami, which we expect to be a meaningful part of our future growth wage. Well, we will get into more details on close later on this call. We are encouraged by a significant Improvement in new business generation in our wealth management and Trust segments are our team generation 407 million of new business during the quarter the highest levels and 2019 a meaningful sign that our recruiting efforts and platform upgrades are beginning to have an impact.
Full detail later overall net flows were slightly negative doing particular to a known terminating Legacy trust and an unrelated departure of an advisor.
a Steve
Looking ahead. We anticipate that our primary Avenue to grow our advisor population will be through organic hiring and recruiting. We will stay focused on a disciplined approach to hire high-quality advisers who share our values we will not sacrifice quality for quantity. There are obviously other means to grow in viciously and while we are open to Acquisitions, the current valuations for Ras makes inorganic growth the lower probability. We are committed to being prudent and responsible stewards of our shareholders capital and frankly at the moment given a choice. I'd prefer to buy back our own stock which you know, we have done with that. I will turn it over to Steve Gavin who will walk us through fourth quarter 2019 results save. 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 fourth quarter this quarter. We reported net income of 21.2 million or 26 cents per share dead.
During the quarter we benefited.
From a 1.1 million dollar gain related to the revaluation of a receivable we have from the divestiture of BOS, which we completed in December of 2018, excluding the net after-tax impact of this game. We reported operating net income of 20.5 million or 25 cents per share total deposits average seven billion for the quarter a 1% increase year-over-year while the year-over-year comparisons shows 1% growth. We intentionally ran off broker deposits during the quarter and throughout 2019 resulting an average client deposits increasing 6% from the fourth quarter of 2018 to the fourth quarter of 2019 total loans average 7.1 billion for the quarter a 4% increase year-over-year.
We continued our efforts to prioritize on balance sheet liquidity to support future client acquisition as we sold approximately 100 million of Residential Mortgages and participated out approximately 100 million of commercial real estate loans during the fourth quarter total AUM, as of December 31st, 2019 was 16.8 billion a 5% increase year-over-year as positive Market action offset negative net flows total net flows for the company were negative $209 million 114 million of which was attributable to the wealth management and Trust segment in ninety-five million of which which was attributable to our investment manager DG. Hm Anthony mentioned we had very strong new business during the quarter but outflows were negative due to a departed adviser took a large terminating trust Tier 1 common equity ratio is 11.4% while tangible book value per common share increased 10% year-over-year to $9.02 for the full year of to Thursday.
nineteen we return
9% of operating net income to shareholders through dividends and share repurchases.
Slide for shows are Consolidated income statement on a reported basis under gaap. As you recall. We completed the divestiture of EOS in the fourth quarter of 2018 Financial results from DMV remain Consolidated in fourth quarter of 2018 results through the closing of the divestiture which primarily explains the year-over-year decrease in revenue and expenses fourth quarter 2018 results also include the 10 impact of a thirteen point eight million related to the impact of notable items and divestiture of BOS to enhance comparability and analyzing Financial in the core business. The upcoming slides include certain non-GAAP operating metrics that exclude the previously mentioned restructuring charge and contributions from bos in the fourth quarter of 2018. Chef reconciliation of gaap to non-GAAP metrics can be found on slide fifteen.
Slide V shows a Consolidated income statement excluding notable items and BOS pre-tax reprovision income decreased 5% year-over-year primarily driven by lower non-interest income while the linked quarter decline was driven by higher non-interest expense.
Increase 2% linked quarter in 5% year-over-year primarily driven by a provision credit during the fourth quarter of 2019 slide six shows Consolidated Revenue Trends wage income was flatland quarter as lower funding costs and borrowing volumes offset lowered loan yields the wealth management and Trust fees declined was primarily driven by lower trustees while core with management fees and the Legacy Boston private wealth business increased 1% excluding the impact of BOS and notable items total operating Revenue during the fourth quarter was 81.8 Million month 1% link order of our Consolidated expenses on a gaap basis total non-interest expense declined on a year-over-year basis primarily as a result of restructuring expense and BLS results that are included in the fourth quarter 2018 results.
Flight eight shows a detailed breakout of consolidate expenses, excluding notable items and BOS results in the fourth quarter of 2018, total non-interest expense decreased 1% year-over-year while increasing 5% linked order the linked quarter comparison reflects higher salaries and employee benefits expense which includes higher incentive compensation as we previously mention. Some of our key initiatives came into service this quarter which caused Information Systems expense to increase linked quarter and Professional Services expense to decline linked quarter due to the conclusion of Technology Consulting engagements fly nine shows the past 5 quarters of average loan balances an average deposit balances by type total average loans during the quarter increased 4% year-over-year to 7.1 billion month as previously mentioned residential balances were impacted by a $100 loan sale during the fourth quarter while commercial real estate balances were impacted by one hundred million of participation.
And I'll ending was driven by higher client following activity on revolving lines of credit total average deposits during the quarter increased 1% year-over-year and 5% linked quarter to seven billion. The linked quarter increase was primarily attributable to seasonality inherent in our client base partially offset by continued intentional run off of broker deposits client activity was especially strong at the end of the quarter as in the. Balances were 7.2 billion, which is approximately $280 million higher-than-average balances while this activity help Drive the end of. Loan-to-deposit ratio to 96% We anticipate the fourth quarter average is more representative where we will be during the four score for the first quarter of 2020.
Flight tensions of five quarter trend of Consolidated net interest income and net interest margin core net interest income which excludes interest recovered on previous non-accrual loans was flat linked quarter long as lower funding costs and lower borrowing volumes were partially offset by lower loan yields on the bottom of the slide. We show a net interest margin table including changes and interest earning a life filled in funding costs. The Coronet interest margin decreased one basis point link order to 2.7% during the fourth quarter of 2019 the rate of decline decelerate adapter benefits from the FED cut and September blow through to our funding base and deposit inflows enable the repayment of higher-cost borrowings. The total cost of funds decreased 13 basis points linked Courtney from 112 basis points to 99 basis points.
slide 11 provides
Detail on our asset quality this quarter. We booked a provision credit of approximately 3.7 million, which was primarily driven by a decrease in criticized and classified loans in a decrease in Los factors off the chart below shows asset quality metrics during the quarter overall criticized loans declined 10% in order to 126 million a triple L. As a percent of total loans was a thousand and three basis points with respect to the upcoming Cecil implementation. We have completed our model development and we are in the process of finalizing model validation based on current economic factors palm oil mix and Loan balances among other factors. We anticipate a reserve release that will ultimately lead to a slight increase in capital levels. We will provide more details on the specific impact in our Form 10-K filing a slide twelve. We show the private banking segment excluding the wealth management and Trust portion of the bank the private bank efficiency ratio increased from 63.
percent to 66%
Quarter driven primarily by higher compensation and Technology expense. I will now turn it back to Anthony to discuss our wealth management and Trust segment spending Steve Page thirteen shows performance performance highlights for the wealth management and Truss segment which includes Financial results from Boston private wealth and Kos professional advisers as well as the office operations a Boston Private Bank and Trust Company segment ebitda. Margin for the quarter was 28% reflecting increased hiring at Boston private wealth and kls
As Steve mentioned Consolidated, um was 16.8 billion of which 15.2 billion was in the wealth management and Trust segment an increase of 4% link a quarter and 7% year-over-year.
Net flows for the quarter of 2019 were negative $114 million as outflows were related to a departing adviser and a large terminating trust partially offset off by a 407 million of new business.
Our prepared comments on our fourth quarter 2019 reported results. I will now open up the line for your questions.
that concludes
Yes, thank you. We will now begin the question-and-answer session to ask a question. You may press the star than one on your touchtone phone. If you are using speakerphone, please bring up your handset before pressing the keys if any time your question has been addressed and you would like to withdraw it please press star to at this time. We will pause momentarily to assemble the roster.
and the first question comes from Chris McCready was
hey, good morning. Everybody morning Chris Stieber or Anthem. I'm interested in kind of the progress that you're making on the on the hirings and how it how we should be thinking about the pace of life expense growth as 20 20 volt. I think you said in the past you need to get the technology upgraded and then and then you'll you'll start the hiring efforts and just wondering how we should think about the ramp and expenses next Thursday. I mean on on technology, we don't expect it to be any different than what we've projected as you know, the the hiring is dependent on you know, it's it's not going to be a set number of recorder. It depends done not only who we can attract but who we who we accept. Um, I would expect that we would we hired six in in the fourth quarter back and expect that to be at least what we hire each quarter. Um, Paul Simon's is here. I'm Paul. I don't know if you would add anything of what you expect on a quarter-to-quarter base to 6 or somewhere thereabouts wage.
I think that's I think that's
The right number directionally, but as they said will be both opportunistic and selected and Chris. This is Steve just for modeling purposes. I would think about Opera wage expense in the first quarter and kind of the 60 to $61 range. Obviously, you have some seasonal payroll impact in the comp and benefits line that usually runs to 2 and 1/2 million and then beyond that point expense progression. Um, well will largely depend on kind of pace of hiring. So that's the way I would start to think about throughout the year, but that's where kind of first quarter should shake out.
Maybe you just following that up. See if we think about the hiring and that obviously bring revenues with it. What's the right way to think about either, you know operating efficiency or operating Leverage is kind of the wage. I assume I think I think you should happen to come later. Yeah, exactly. I think you should you should expect to see that model kind of way and operating leverage early on page you're on boarding the talent and then there's there's a lag between, you know the time they start and when transfers a non-revenue starts to build so it's likely that we'll see some operating leverage pressure in the first part of June .
Okay, great. And then maybe on the on the growth front? I think you said you you participated at a hundred of commercial real estate. What was the loan sale on the seaside?
That was also about a hundred million and what we did there Chris was really I think if you go back to our second quarter, we talked about working loan deposit ratio down to 100% by the end of the year and we went through the whole book in and tried to isolate, you know pockets of of the portfolio where um, you know, we didn't have deep relationships with those clients, but it was very salable or easy to participate out because of of credit quality. So we're able to you know, create capacity improve on balance sheet liquidity and now we're on a much better place to on board, you know, more strategic clients as we roll up in New Jersey. Okay. So so less loan sales and maybe strong little bit stronger net loan growth or is that the right way to think about it? Yeah. I mean if you think about if you look at just kind of the developing the loan book into the fourth quarter, we actually took strong originations, you know north of four hundred million. I think that was the strongest origination quarter in a year. So it's not an issue of generating loan growth really what you saw in the fourth quarter was some balance sheet ma'am.
And tactics and quite frankly freeing up capacity.
City as we roll out the new strategy particularly in the family office segment.
Okay. Thanks.
Thank you. And the next question comes from Alex with Piper Sandler.
Morning guys, try to get a better sense for how we should be thinking about the trajectory of a as is and I appreciate your commentary on Job. I'm working on the design for The Invasion platform. Do you do you need that new platform to really come online before we can see meaningful shift in the trajectory they um,
No, I think for our way to think about it is for our traditional businesses at Boston private wealth and trust and kls they're already, you know, Ben's some enhanced to pardon me the platform. The technology part is really to address the emerging Trends. We see in client expectations, but particularly for the Next Generation. So it's it's about improving the experience both for our advisors and clients, but also beginning to open up some perhaps new channels for that particular in emerging client base that off that prefers, you know, just to consume Financial Services in a different way and frankly more directly in to empower that so we still should be able to grow the way we've always grown all be it with some better support page about giving us increased functionality going forward. I guess kind of as we think about the modeling obviously balances drives a big portion of your business how we should wage.
thinking about you know in
When you guys thinking about your modeling for 20 20 and the goals that you put out last May to AAA basically over three years how far into that progress do you envision getting in 2020. Do you think um can really make a meaningful progression forward this year? I would expect to make a a a meaningful progression forward particularly trending toward the back end of the year. It's more sort of the pace that I think will be important by the fourth quarter of this year. When you on board, you know in an advisor it it typically takes them about six months to get seasoned in their seat. There is some immediate flow, but it's really an 18-month process for them to you know, kind of move their business and and get acclimated to you know to a new firm and and a new platform when we originally put out those I think I might have mentioned our previous call when we we put out, you know the goals. There was an organic computer.
of existing client base
You know we had in and we thought we could do more with them better connecting our private bank with our clients on the commercial banking side who has you know, a lot of them tend to be, you know, family Enterprises. There was that element which we thought would take us to twenty-three to twenty-five billion. And then we thought given the then prices of some of the month we thought there'd be five to ten billion dollars a possible acquisition opportunity and then the remaining $15 we would hire over that 4 year period and grow that was sort of how we broke down and thought about it and I think what's still in place is certainly the synergies in our existing client base and working more closely with clients across businesses at the opportunity to hire. It's real life. You know, it's it's really our choice to have backed away from you know, some of the pricing for the evaluation requirements of that ten billion. We thought we could, you know, we could acquire and so we'll see if that environment changes.
In the meantime, that's why I remark that.
We would mainly grow organically, you know, hiring individual advisors or or teams, you know, when they fit when they fit our profile.
Okay, so sort of slow progression early in the year later in the year. We should see the pace be more representative of what it could be potentially in 21 and 22 Yeah. I think you should see it steadily, you know improve how long were we were pleased to see that again? A lot of these folks are are really new to the firm in new clients of you know, 407 million, you know flowing in through, you know, these folks they'll be no more of them each quarter. Um, and you know, they'll will have more and more seasoned people. So I would expect it to be an accelerating on improving trend.
Okay, great. And then just you know see one question on the margin, you know kind of given the current outlook for rates and and what's happening with funding costs during the quarter and Loans et cetera. Do you think there's more room to come down funding costs in the near-term and and and potentially the margin could have bottomed here in the fourth quarter.
Yes.
To Alex if you think about interfering deposit costs, uh, you know, one twenty fourth quarter that could you know, get down to 1061 weight range in terms of nym. I think you're in the kind of the low-to-mid 30s into the first quarter and depending on how the rate, you know environment plays out. You could see some more Improvement the back half of the year, but it does feel like, you know given what we know today that you know, two sevens kind of off the bottom of of where we'd expect rates to be again, based on what we see in the right environment today.
Great. I really appreciate all the color guys. Thank you.
Thank you. And once again, please press * then 1 if you would like to ask a question.
And the next question comes from Michael Young was SunTrust.
Thanks. Good Morning Anthony. I wanted to quickly follow up on the commentary. Obviously if that the pricing can shift at any time, but given where things stand correctly. It sounds like we should lower our total expectations, you know for for where we think we'll get at the end of this process. But can you talk about any of the offsetting factors wage or other impacts that may have in terms of your overall profitability targets and or your ability to buy back more stock. I think you mentioned that as an alternative since you you know might pursue that strategy. You just talked about kind of how that will affect everything overall. Sure. You know, I think what I you know, my comment was is that given a choice between buying an overpriced? Um, all right in our own stock, I would I would pick our own stock, you know, as far as how we use our Capital. We're really not changing what we've said in the past. We still want to log
Use it for growth. It's just how we spend that money or how we spend that.
Capital, you know, we met initially we anticipated might include the acquisition of an RA. We are leaning more toward, you know, the acquisition of talent and possibly buying back with more of our you know of our stock but we haven't changed any prior stock buyback plans that we put in place last year. So for the moment that that remains consult sorry, what was the other part of your question?
Just does that reduce kind of the overall profitability Target? If you're able to scale, you know, maybe less quickly or end up at a lower kind of balance at the end of you know, this this kind of growth range. Well, I mean, you know the balance if you can hire a really good advisers, um, you know, and they and they can onboard quickly that's you know, that usually it's just a lot harder takes a little bit more time a lot more work frankly than you know, buying a group of high-quality advisors where they're also tends to be more certainty in in moving that business days to the firm. It's just more expensive. So we actually it should be a better, you know done this many times in my career hiring advisors one at a time is much more difficult, but in the end it should produce much better value creation for shareholders. It's just a it's just a longer a longer process. So, you know the way I would think about is, you know, we I broke down.
for you where we saw the components of a um coming from, you know, the part and things can change as you said, you know, the the
Piece of it that um, you know of getting fifty billion ten billion of it. We thought we would acquire will lean more toward still aiming toward that goal if possible is just leaning more toward service advisor hiring as opposed to buying buying those Ras.
Okay, and and maybe Steve just as a quick follow-up on the deposit growth this quarter. You just kind of provide a little more detail on that. How much of that do you expect to stick around long and you know, just any other color on on how that transpired. Yeah sure. It was a lot of client activity really in the last two weeks of the quarter is about four hundred million of deposits really wage is liquidity events within those clients businesses, you know, some of that will stay some of that will go, you know, as we commented earlier, um, the 96% you know off. L d ratios probably overstated in in terms of being lower than than core course probably closer to 100% So I think there's just some adjustments that happens in that long, you know Lake water activity. It happened as we get into the first glorious the second quarter 2020.
okay, and
For question, just on a whim. Do you have any visibility for any other you know kind of larger outflows or exits as we move into the first part of twenty-twenty? I don't have you come on that.
No, we don't have there's there's there's no immediate visibility into significant outflows from the wealth business in the in the first quarter off.
Okay. Thanks. That's all for me.
Thank you, and this concludes our question-and-answer session. I would like to turn the conference back over to mr. Anthony chalice chief executive officer for any closing remarks.
Thank you, and thanks everyone for joining us today. We appreciate you being on the call. Of course. We're here for any for any follow-up. Other than that. I wish you all a great day. Thank you. Again. Thank you. He conference has concluded. Thank you for attending. Today's presentation sent your lines.