Q3 2020 Boston Private Financial Holdings Inc Earnings Call
Good day and welcome to the Boston Private Financial Corp, third quarter 2020, <unk> earnings Conference call.
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Thank you Melissa and good morning, everyone.
This is Adam Bromley Director Investor Relations, Boston Private fund that you're holding welcome to this conference call to discuss our third quarter of 2020 financial results.
Our call. This morning includes replicating earnings presentation, which can be found in the Investor Relations section of our website Boston private dot com.
Joining me this morning are Anthony the Cialis, Chief Executive Officer.
Gabbing Chief Financial Officer I'll sign.
Paul Simon President of private banking wealth and trust and Jim Brown President of commercial banking this.
This call contains forward looking statements regarding strategic objectives and expectations for future results of operations and financial prospects there.
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. We're looking statements I refer.
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 interest.
Factors that could cause Boston private <unk> results to differ materially from those described in the forward looking statements can be found in the company's filings submitted to the FCC.
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.
Boston, probably 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 I can neither child.
Good morning, everyone and thank you for joining us on today's call to discuss our third quarter 2020 results. We hope, it's going fine junior family size and in good health.
All the business and economic outlook in our markets remains uncertain, mainly due to the cobot impact we are encouraged by our operating performance and overall ability to navigate a challenging environment.
You're proud of the work our employees are doing to support our clients each other and our communities our team.
Our team delivered solid results during the quarter and remains focused on moving forward key elements of our strategic plan.
Even as we continue to operate in a remote environment.
Our technology team continues to live deliver outstanding work delivering projects on time and on budget.
During the quarter, we launched the latest upgrade of Salesforce, which will make our advisors more productive improve our client onboarding experience.
He served as a key component of our technology platform.
Our project portfolio remains robust, especially those aimed at enhancing our overall client experience.
Near term priorities include online account opening as well as the critical upgrade of our digital platform for wealth advisors and clients.
Which is scheduled for delivery in early 2021.
The completion of this platform will represent a key catalyst for our recruiting efforts, which are essential for our growth strategy. He will also matched the recent upgrades, we already completed for our digital banking platform.
We are encouraged by improving trends within wealth management and trust.
Continued had counted advisors during the quarter with especially notable progress building our team in northern California.
Our team delivered strong business with new client attrition at its lowest level since 2017.
The segment's outflow for the quarter were primarily driven by client assets going from our fixed income products into our bank deposit products, yes. It stay within the firm, but this does affect our segment reporting.
We believe this reflects the strength of both our value proposition for clients and business model for shareholders. Because we have a broad product set to deliver high solutions, we're going from.
Our funding and liquidity profile continues to strengthen as a result of deposit growth and were.
And we remain optimistic about our momentum and pipeline in both our bank deposit and wealth management, you an outlook for the fourth quarter.
I would also like to provide an update on Dalton Greiner Dejiang EG HMS it sometime them.
Dalton Greiner is our remaining asset management I should say.
Literary with approximately 700 million, even down from 1.1 billion last quarter.
Affirmative value manager, which as you know has been challenging space has been a challenging space the occupied during the last decade has.
As a result of the challenging circumstances, but then the guy he scrapes Dalton Greiner in general we decided to make a change and senior leadership change.
James provided the impetus for some institutional investors to exit.
We believe this anticipated short term disruption will ultimately pay off as we now have the opportunity to more fully integrate the efforts of Boston private wealth.
Merrily, a growth and fixed income manager what its proprietary strategies with the complementary skill sets de G.H.M. value competencies well.
Well, it's tough to predict markets, we are confident that valuable had its day again.
We will eventually be rewarded for making this change now.
Beyond the strategic benefits, we also see operating efficiencies with the two teams working more closely together.
Finally, as we look ahead to the final weeks of 2020.
We're confident in our company's capital and liquidity position, our loan loss reserve levels in our overall ability to stay focused on executing our strategic plan.
As we have mentioned before times like these are a great opportunity for us to distinguish our firm and further strengthen client relationships.
We will ensure the long term success of our company by continuing to earn the trust of our clients each day and by staying true to our value proposition.
I'll now hand, it over to Steve to discuss the details of our third quarter results.
Thank you 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 a GAAP net income of 22.7 million or 28 cents per share our operating results exclude the after tax impact of a $900000 gain related to a previous affiliate divestiture.
Excluding the impact of this item, we had operating net income of 22 million or 27 cents per share.
The second driver of improved financial results in this quarter. It was the lower loan loss provision, which changed from a $25.4 million provision expense during the second quarter of 2022 or $2.8 million provision credit during the third quarter. The net $2.8 million credit is comprised of a 4.6 million pretty.
In credit, partially offset by a 1.8 million expenses related to unfunded loan commitments, which is recognized in non interest expenses.
The provision release was primarily driven by an improved economic forecast related to the Cecil methodology.
Our release on residential loans associated with improving deferral trends.
Average deposits increased 6% linked quarter and 16% year over year total EPS.
Total average loans were flat linked quarter, while average loans, excluding those related to the pay check protection program.
2% next quarter.
Total eight U N as of September Thirtyth, 2020 was 16.3 billion, a 1% increase linked quarter. While total net flows for the third quarter were negative 407 million, primarily driven by 395 million of outflows at Dalton Greiner.
Moving on to slide four we show a consolidated income statement pre cash.
Pretax pre provision income decreased 1% linked quarter and 19.9 million.
Slide five shows consolidated revenue trends total revenue decreased 1% linked quarter, primarily driven by lower net interest income.
Total core fees and income increased 2% linked quarter, primarily driven by higher wealth management and trust fees.
Third quarter 2020, miscellaneous income includes $900000 of income related to the gain on an affiliate divestiture, which has been excluded from operating results.
Slide six we show a detailed breakout where noninterest expense.
Total non interest expense for the third quarter of 2020, with 60.9 million, which includes 1.8 million up provision expenses related to unfunded loan commitments, excluding the impact of the provision expenses third quarter total noninterest expense was 59.2 million, a 1% increase linked quarter and a 7% increase year over year.
The linked quarter increase was primarily driven by compensation expense related to new hires.
The year over year increase was primarily driven by technology investments.
Slide seven shows the past five quarters of average loan and average deposit balances by type ad.
Average total loans were flat linked quarter, excluding PPP loans average total loans declined 1% linked quarter and year over year.
Within the commercial industrial loan categories commercial tax exempt loans category, which includes Los nonprofits in schools grew 3% linked quarter, while revolving line of credit usage declined to 28% from a recent peak of 35% in March the linked quarter decline in residential loans was primarily driven by a $72 million.
Loan sale executed during the quarter.
Total average deposits in the third quarter increased 6% linked quarter and 16% year over year, primarily driven by a combination of existing and new client balances an increase in wealth sweep deposits and it gets.
An additional factor driving growth in interest bearing deposits was the flow of client assets that were in fixed income products in the wealth management and trust segment into bank deposit products.
We are pleased with the trend of increasing on balance sheet liquidity, which you can see as the average loan to deposit ratios declined to 95% in the third quarter of 2020 compared to 106% during the third quarter of 2019.
Slide eight shows the five quarter trend of consolidated net interest income and net interest margin net.
Net interest income decreased 2% linked quarter, primarily driven by lower loan volumes.
Lower interest, earning asset yields and prepayment penalties received during the second quarter, partially offset by lower funding costs.
Net interest margin decreased 14 basis points linked quarter to 2.61%.
Net interest margin was pressured by lower loan yields, which declined 19 basis points, while benefiting from lower funding costs, which declined by 13 basis points.
During an eight basis point decrease in deposit costs excess.
Excess cash balances as a result of strong deposit growth negatively impacted net interest margin by 80 basis points.
Starting on slide nine we move into our discussion on credit before.
Before before we move into this quarter's results, we would like to remind you of the material changes in our loan composition that have incurred since the global financial crisis. They are.
Today, our largest asset class includes residential loans this port.
This portfolio demonstrated low loss rates through the crisis and the residential housing markets, we operate in Qatar.
<unk> continues to perform at a high level during the pandemic.
At the same time, our current portfolio has lower concentration to the types of loans that were problem areas during the prior crisis, including Southern California construction land in Northern California, commercial real estate, which was adversely impacted by the presence of special purpose properties in the portfolio.
Also the company's tangible common equity as a percent of tangible assets has increased from 5.1% in 2007% to 8.3%.
As of the end of the third quarter.
Slide 10 shows the current state of our adversely graded and nonperforming loans since the onset of COVID-19. Our team has been focused on identifying potential pockets of risk early rating those pockets of risk Accordingly, and then manage those credits proactively in order to minimize loss being.
The increase in our criticized and classified loans year to date primary primarily reflects the downgrade of performing commercial real estate loans.
Special mention category.
These loads comprise 57% of our total criticized and classified loans we always.
We always anticipate with special mention loans that some percentage will emerge and be upgraded in some percentage will be challenged in downgraded the classified.
In this environment the impact in duration COVID-19 is obviously the key factor determining future loan performance.
Overall, non accrual loans increased linked quarter, and 35 basis points of total loans to 57 basis points do you.
The increase was primarily driven by the downgrade of a single relationship in Northern California. This really.
This relationship has a combined LTV that is below 40%.
We expect it to cure this relationship in the coming quarters.
Net charge offs also remained very low at 200000 for the quarter or one or one basis point of total loans on to utilize basis.
Slide 11 shows the roll forward the changes to criticized and classified loans from June Thirtyth to September Thirtyth.
This quarter's increase reflects the downgrade of approximately $71 million loans, partially offset by loan payoffs and paydowns of approximately 24 million in loan upgrades of 30 million downgrades were primarily related to commercial real estate loans secured by hospitality properties, which continue to be challenged by the lack of business and consumer travel as a result of that.
Pandemic.
On slide 12, we provide additional details our total exposure to commercial real estate loans secured by retail and hospitality corrupt properties fees.
These loans represent approximately 70% of our total criticized and classified loans.
We continue to exercise enhanced monitoring of this portfolio by focusing on three key attributes pre covert LTV property level cash flow sponsor shrine.
Weakness in one or more of these attributes generally prompts a downgrade also.
Also as a reminder, our risk rating decisions do not factor in deferral requests for participation in our debt service Reserve program.
In retail we are seeing improvements in property level cash flow trends with rent collections, increasing from the high Seventys range in June to approximately 80% in September.
This is a notable improvement at 80% collection rates generally suggests that properties generate sufficient rent collections to cover debt service cost irrespective of whether or not they are participating in the debt reserve program.
In hospitality, we have been observing occupancy rates in the low fortys range, which continues to pressure revenue per rep per available room for the properties we have financed.
32% of our total hospitality loans are currently rated as criticized or classified.
On slide 13, we provide an update on our deferral requests we have seen a material decline in deferrals in both commercial industrial loans and residential mortgages since last quarter and we expect continued improvement as we enter the fourth quarter as of September Thirtyth, 4.7% of commercial industrial loans were on deferral, while 3.6%.
The actual loans run deferral.
On Slide 14, we review the allowance for loan losses and provision for credit losses. This quarters provision credit was primarily driven by improved economic forecast related to the current expected credit loss methodology, and resulting in lower reserves on residential mortgages and construction levels reserve levels on commercial real estate loans remain.
Flat at 1.78%.
Total reserves as a percentage of our loan portfolio, excluding PPP loans was 1.23% at the end of the third quarter down from 1.28% in the previous quarter.
Near term provision trends will be determined primarily by loan growth and the level of charge offs the company experiences.
Slide 15, we show the private banking segment, excluding the wealth management and trust portion of our bank. The private bank efficiency ratio increased to 71% driven by lower net interest income I will now turn it over to Paul Simon's to discuss our wealth management and trust segment.
Thank you, Steve and good morning.
Slide 16 shows performance highlights for the wealth management and Trust segment segment EBITDA margin for the quarter was 20% compared to 21% in the prior quarter as Anthony mentioned the headline results of negative net flows of $12 million was primarily driven by flow.
<unk> of client assets from a handful of short term fixed income mandates in our wealth management business into deposit products at the bank.
Outside of existing client flows the segment generated new business of $299 million in the third quarter up from $251 million in the prior quarter, while our actual client attrition for the third quarter was the lowest since 2007 <unk>.
That concludes our prepared comments on our third quarter 2020 reported results and operator, well now open the line for your questions.
Thank you we will now begin the question and answer session to ask a question Press Star then one on your touched on something if you are using the speakerphone. Please pick up your handset that's where pricing.
So let's try your question. Please press Star then too.
At this time, we will pause momentarily to assemble the roster.
The first question today comes from Michael Young <unk> Securities. Please go ahead.
Hey, Thanks for taking the question wanted to start maybe just on on spread income maybe if you could just provide any any kind of the puts and takes we should be thinking about moving forward you know with the excess cash balances you know your ability to deploy those either through growth or or securities.
And then just kind of how we should be thinking about that on a go forward basis.
Sure. Michael This is Steve I'll take that question. So for the fourth quarter I would expect and I are in the $56 million to $57 million range. This doesn't exclude any acceleration of P.P.P. fees.
You might get some but we expect that to really come about as we get into the first half of next year, yeah from a NIM perspective, depending on where excess liquidity ended the quarter with NIM anywhere from kind of high to fiftys to low to Sixtys again, depending on where excess cash balance balances are in terms of redeploying liquidity.
There's a couple of things that we're going to look to do in the coming quarter. So you're starting with loans X P. P. We ended the quarter with 6.85 billion of loans, we're targeting a year end finish of 7 billion.
Most of that growth will come from the residential portfolio, our specialty lending portfolio, which includes as you know the schools and non profits.
And also lower risk segments of multifamily, we don't anticipate growing Siri at this time and we.
We don't anticipate growing the other segments of C. and I at this time, we'll also look to rebuild the securities portfolio, we've been running that down that path really three or four years to fund loan growth do you want to take this opportunity to increase our asset base liquidity. So we'll grow that anywhere from 50 to 100 million.
Over the coming quarters and then.
And then finally on the liability side, we have.
We have some FHLB borrowings that will that run off through the end of the year and then we'll probably look to prepay. Some FHLB borrowings in the fourth quarter to better set up and I for next year.
Okay. Thanks, that's helpful and I guess maybe for.
Maybe for Anthony just wanted to kind of get an update on on hiring and hiring trends.
You know, maybe where we where we stand this quarter. If there have been any hires or what kind of the outlook is I know, it's been difficult and it's worked from home environment et cetera, but.
Just wanted to get an update on kind of your thoughts and plans there and if there was any update kind of the longer term targets as a result of that.
Well as you said I mean, clearly the current environment is not ideal having said that we have managed to add some really high quality people during.
During the last two or three quarters, we expect that to continue.
I think we're speaking to you know as as many people as we have throughout the year. So the opportunities remain remain.
Remained strong.
You know we are looking forward to being on the other side.
Oh, that's when we can you know meat meat folks and you know him in person but.
I do believe you'll continue to see us hiring people throughout throughout the.
Throughout the fourth quarter and in coming quarters.
Okay, and I guess in the in the past you guys have done a good job of kind of calling expenses to try to fund some of the hiring and investment is that still the right way to think about you know kind of the expense trajectory going forward or is there any incremental you know upside pressure on expenses that we should be thinking about.
Hey, Michael.
There has to be right ethylene.
Hello, Michael obviously running an efficient shop, it's something we're you know we're always comps.
Conscious of part of the technology efforts, obviously are are aimed at that.
Covert of course brings new considerations when it comes to you know efficiencies but.
Yeah, there's as far as funding or our gross what we've always got an eye toward our expenses on on how to do that but at the moment, we feel no limitation and being able to invest spoken technology and people.
And Michael just to add to some of the areas. We're looking at obviously given the environment a expense initiatives or are front of mind. You know next month, we are merging one of our branches will continue to look at those opportunities now granted we don't have a big retail branch networks. It doesn't represent a huge opportunity for us, but it's something that we'll continue to chip away at.
Obviously, as we kind of evolve in this new.
New covert environment.
The way, we're thinking about just kind of employee travel he any all that stuff.
That kid can can add up to big numbers and in more normal times I think they'll be efficiencies harvested. There I think you already see starting to see some of that.
And then finally you know.
You will see some expense pressure in that information systems line. We've got two projects that will be going online in the first quarter of next year. She will start to see those amortized costs run through.
Through the P. an album like Kathy said, we'll look at other areas to try to offset some of that expenses Bill.
Okay. Thanks.
Your next question comes from Chris Mcgratty of KBW. Please go ahead.
Great Good morning.
[laughter].
Steve and Andy I appreciate the color on the on the flows.
How should we be thinking about the trajectory of your non interest income given given that I know, it's a small line item, but just given where you are in some of your initiatives how should we be thinking its about them, but the bigger well fine the pace of growth in the next few quarters, given given the hiring efforts in the market.
[noise] are coming from a welfare perhaps.
Hi, Steve.
In the coming quarter, Chris I would expect kind of total fee income.
In the $22 million to $23 million range.
And what you should see there's a continued improvement in wealth management and trust and you'll have.
And you'll have some so a little bit more leakage from the Dalton Greiner outflows you saw this quarter.
If you aren't you talk about the longer term trajectory.
Well I mean.
Obviously, the last couple of quarters prism and the wealth business have been have been driven by market performance no longer term. If we can continue to put up solid growth quarters. Eventually you should see a material impact.
And the revenue lines and the net profit lines from from the wealth business, we are continuing to invest in people and technology.
One of the opportunities I think Cogut is you know is bringing which will take a little while to materialize is the difference on how people are engaging in financial services firms and so that's part of the initiative.
Besides making our teams more efficient delivering a better client service is on sort opened some new doors for you know.
For opportunity. So there should be you know a revenue impact from both the traditional way we brought in business, but we hope that the future also holds a new avenues for us to grow that one.
Great Thanks for that.
One other exciting topic taxes lots been written about potential [laughter] potentially going higher but with the change in administration I guess two questions. One can you help us on the near term sustainable tax rate into anything different in the way you even managing taxes that would you know.
You can't use the same math, what when taxes went down a proportional math when you talk to the wind down a couple years ago.
Yeah, So Chris on on fourth quarter tax rate, 10% is what I would use your model, we're not actually doing anything different from a from a tax a tax management perspective.
So obviously, if we see the corporate tax rate go to 20%, which is where I think the biden plan as it going to you know Oh R 22 to 20, 21% to 22% tax rate that weve experienced last.
Experienced last couple of years, what will go up by a couple of points when that gets passed.
There's obviously, okay elements of that plan that will affect other things that we need to get more color on but you know, it's probably I think right now we're looking at about three to four a three to 400 basis points higher.
Okay. So three to four for the seven points got it and then the 10% in the in the fourth quarter you referenced that seems a little little low does that does that normalize you know into next year. You can you just let us know where that would normalize.
On a full year basis.
Yeah. The way, we think about the tax rate just just given the environment. We're in you know last year again, we were we were at the 21% to 22% range most of the year, obviously with the provision build in the first quarter pretax incomes down considerably so probably for the full year, you know using rough numbers down maybe about half.
And that's why you saw the tax rate because you go from 22% to a full year rate, which will be 11%. So as pre tax income continues to go higher or in the coming quarters, you should see the attach rate follow.
Okay got it thank you.
Our next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.
Hey, Thanks. Good morning can you give us any commentary about the visibility of criticized assets I mean would you expect them to kind of trickle higher or do you have.
Any thoughts about them and reversing in the near term.
Yeah, Chris This is Steve I'll start and then I'll ask Jim Brown to comment as well, but.
But to your first question no we don't see criticizing classified go meaningfully higher from there.
From this level like we said on the last call.
We were pretty proactive in risk rating the portfolio early on and we established what we think is a pretty good baseline of criticized and classified loans right. Now. So you will see moving in and out like you typically would he saw some.
You saw some of that this quarter you saw some downgrades you also saw upgrades and payoffs, we kind of expect that to be the way that that pool of loans will pull kind of behave in the coming quarters as we work through the current environment, but Jim anything else you would add on entre to size and classified for Christmas question.
Yeah sure. Thanks, Steven and thanks for the question, Chris I I would characterize it the way Steve did I wouldn't expect to see you know meaningful movement upward going forward. The real you know the real driver in Q2, Q3 was hospitality and I think at this point, we've captured the universe of the coal but.
Coal fired related impact in hospitality.
Thanks for that is it possible that the loss content really doesn't doesn't change and that these just linger with you for a while so to your point. They don't they don't necessarily go up but your loss expectations are kind of already embedded in the reserves.
Yeah, I would I think that's fair Chris I mean, we took the first half of the year like we said to really go through the portfolio in detail reserve appropriately. We think that's reflected in where the allowances today so from an allow.
So from an allowance perspective, we don't see that going meaningfully higher as it relates to provision expense in the coming quarters, I think you'll probably see it you know go back to Kinda alone you know loan growth and then levels charge off you know obviously, we have to contend with the forecast and what that means when you run it through our models but.
All else being equal I would think that you know loan growth and charge offs will influence provisions in the coming quarters.
Okay, Great and then just a follow up to your explanation on the taxes a minute ago [laughter]. This the frac of the tax Chessmen would only be three or 4% due to any new investments that you're making or is it already the tax position that you have in place I didn't know if you're changing things if the but no sorry.
Again, it's based on that on the our tax strategy as an in place than has been in place.
Got it just wanted to clarify thank you all very much.
Thank you.
This concludes our question and answer session I would like to turn the conference back over that doesn't need to tell is for any closing remarks.
Great. Thank you.
Thank you for attending the call today, we appreciate your interest or 2020 is obviously a year, we will all remember him I imagine we would all agree that it's not done delivering remarkable occurrences personally I expect that Q4 will be as eventful as any quarter. So far this year or whenever the next quarter brings so anyway.
Thank you and your families all the best as we continue to navigate these challenging times.
Thank you all for attending today until next time Ah stay safe.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.