Q2 2019 Earnings Call
Good morning, and welcome to the Boston Private financial Holdings second quarter 2019 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Adam Bromley Director of Investor Relations. Please go ahead.
Thank you Carrie and good morning.
This is Adam Bromley director of Investor Relations of Boston Private Financial Holdings. We welcome you to this conference call to discuss our second quarter 2019 earnings.
Our call. This morning includes 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 are Anthony the JELIS, Chief Executive Officer, Paul Simon President of private banking wealth and trust and Steve Gavin Chief Financial Officer.
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 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 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 attributed 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.
With that I'll now turn it over to Anthony to tell us Thanks, Adam.
Good morning, everyone and thank you for joining the call before we review second quarter 2019 result.
I'd like to share some brief thoughts on the first half for 2019.
We spent the first half of the year building, our management team and enhancing our platform as we begin to implement our strategic vision for growth.
We share our thoughts on the firm's strategic direction and the future of Boston private during our May 2019 Investor day.
If you've not listen to the webcast I'd encourage you to listen to our presentation, which can be found on the investor Relations page.
Boston private at Www Dot Boston private dotcom.
The key component of our vision is to significantly increase the contribution of wealth management revenue as a percentage of our total revenue in order to improve the company's shareholder return profile.
To accomplish this goal we are aiming to grow the firm's AUM to 50 billion by the end of 2022.
Which we will achieve by deepening our relationships with existing banking and wealth management clients and by significantly increasing our relationship manager headcount through various strategic initiatives.
Leading indicator of our progress will be our onboarding our talent.
While these efforts are underway, we will update you on our progress through press releases. We will also provide an advisor count on future earnings calls.
Another key component of growth will be expanding and refining our capabilities in the family Enterprise and family office space.
As we previously announced the Whitson joined US in June to lead the growth of our business in the family office and Ultra high net worth segment.
Boston Privates core competencies and broad capabilities make us well positioned to be a leader in this key segment.
Finally, this quarter, we have formally started the process of consolidating payless and Boston private wealth.
We believe the strength of these two businesses when combined with achieve higher quality outcomes for our clients and allow us to compete at the highest level.
Before we move into the second quarter results I'd like to note, our company's current and ongoing expense discipline.
This will provide critical self funding for the investments, we will be making as we reposition the company for growth.
With that I will turn it over to Steve Kevin will walk us through second quarter 2019 results, Dave 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 second quarter.
This quarter, we reported GAAP net income of $19.4 million or 22 cents per share.
Total deposits averaged $6.6 billion for the quarter, a 4% increase year over year, while total loans averaged 7 billion for the for the quarter, a 5% increase year over year.
Total AUM as of June Thirtyth, 2019 was 16.2 billion flat linked quarter as positive market action offset negative net flows tier one common equity ratio was 11.2% while tangible book value per common share increased 14% year over year to $8.71 per share.
Slide four shows our income statement on reported basis under GAAP as you recall, we completed divestitures of two noncore affiliates anchor and Pos.
In the second and fourth quarters of 2018, we will refer to anchor in Pos has divested affiliates throughout the rest of this presentation.
Financial results from divested affiliates remain consolidated in the second quarter of 2018 results, which primarily explains the year over year decrease in revenue and expenses.
Second quarter, 2018 results, including $12.7 million income tax expense related to the divestiture of anchor which explains a significant increase in net income year over year.
To enhance comparability in analyzing financial trends in the core business. The upcoming slides include certain non-GAAP operating metrics that exclude contributions from divested affiliates and notable items from previous quarters.
A summary of notable items can be found on page four and a full reconciliation of GAAP to non-GAAP metrics can be found on page 16.
Slide five shows consolidated income statement, excluding notable items and divested affiliates pre tax pre provision income increased 11% year over year, and 6% linked quarter driven by expense declines.
Pre tax income declined on a linked quarter basis as the provision expense increased from a $1.4 million credit in the first quarter to a 1.4 million dollar expense this quarter.
Net income on an operating basis increased 5% year over year.
Due to lower expenses, while the linked quarter decrease can be explained by the previously mentioned changed and provision expense.
Slide six shows consolidated revenue trends total operating revenue during the second quarter was $81.8 million down 1% year over year in 2% linked quarter.
On a year over year basis net interest income was flat, while total core fees and income excluding divested affiliates declined 3%, which is attributable to lower investment management fees and wealth management and trust fees on a linked quarter basis total operating revenue declined 2%, primarily driven by lower net interest income.
On slide seven we show a detailed breakout of our consolidated expenses on a GAAP basis.
Total expenses declined on a year over year basis, primarily due to divested affiliate results that are included in the second quarter 2018 results.
Slide eight shows a detailed breakout of consolidated expenses, excluding notable items and divested affiliate results in the second quarter of 2018.
Total operating expense decreased 6% year over year and linked quarter.
The year over year decrease was driven by lower compensation and technology expense.
As a result of previously enacted efficiency initiatives.
The linked quarter comparison reflects lower salaries and employee benefit expense due to seasonal payroll tax incurred during the previous quarter and realize savings in information systems expense due to the consolidation of information technology infrastructure.
Slide nine shows the past five quarters of average loan balances in deposit balances by type.
Total average loans during the quarter increased 5% year over year to 7 billion residential and see an island and continue to drive overall loan growth.
Total average deposits during the quarter increased 4% year over year to 6.6 billion the year over year increase was driven by growth in client money market accounts certificates of deposit and non interest bearing DDA accounts.
The average loan to deposit ratio for the second quarter was 107% an increase from 102% from the prior quarter, primarily driven by seasonality inherent in our client base also causing pressure on the loan to deposit ratio was the intentional run off of brokered money market and Cds on a year over year basis average brokered money market accounts and Cds declined $165 million, while linked quarter averages declined $54 million, we replace brokered deposits with wholesale borrowings during the quarter, which was comparatively less expensive.
The runoff of brokered deposits contributed to moderating the increase in cost of deposits, which slowed from a increase of seven basis points last quarter.
In the first quarter of 2019 to four basis points this quarter.
Slide 10 shows a five quarter trend of consolidated net interest income and net interest margin core net interest income, which excludes interest recovered on previous nonaccrual loans was flat year over year at $57.5 million as higher yields on interest, earning assets and higher asset volumes were offset by higher cost of funding on a linked quarter basis net interest income declined 1% as higher funding costs and higher borrowing volumes were partially offset by higher average interest earning asset volumes.
Interest, earning asset yields remain generally flat.
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 11 basis points linked quarter to 2.78%.
Changes in NIM were driven by increased funding costs and volumes, partially offset by higher interest, earning asset yields and volumes.
Overall, the linked quarter increase to our deposit costs moderated this quarter as our total cost of deposits increased four basis points and the cost of interest bearing deposits increased six basis points.
Slide 11 provides detail on our asset quality this quarter, we booked a $1.4 million provision expense, which was primarily driven by loan growth and stable asset quality.
The chart below shows asset quality metrics during the quarter.
Overall criticized loans were flat linked quarter at $142 million within criticized loans classified loans increased by 16 million due to certain CRT loans on the West coast, where we believe the risk of loss is low.
While special mentioned loans decreased by $16 million, a triple as a percent of total loans declined to 106 basis points.
On slide 12, we show the private banking segment, excluding the wealth management and trust portion of our bank. The private bank operated at a 62% efficiency ratio during the second quarter as expenses declined and pre tax pre provision income increased 6% year over year.
Changes in pre tax and operating net income metrics were primarily driven by changes to the provision for loan loss, which increase linked quarter and year over year.
I will now turn it back to Anthony to discuss our wealth management and Trust segment.
Thanks, Steve.
Slide 13 shows performance highlights for the wealth management and Trust segment, which operates under the Boston private wealth Fran.
Segment EBITDA margin for the quarter was 21% versus 19% in the first quarter of 2019 and 11% in the second quarter of 2018.
Total revenues decreased 4% year over year, while operating expenses declined 15% year over year.
AUM was flat linked quarter as positive market action offset $127 million of negative net flows.
Slide 14 shows affiliate partner performance highlights overall operating EBITDA margins.
A 36% exceeding our corporate targets of 30%.
The year over year improvement in EBITDA and operating expense reflects the year the early stages.
Efficiency gains from combining calix and Boston private wealth.
That concludes our prepared comments for our second quarter 2019 reported results I will now open the line for your questions.
We will now be a question.
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We are using a speakerphone please pick up your handset before pressing the keys if at any point. Your question has been addressed and he would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Michael Young of Suntrust. Please go ahead.
Hey, good morning.
Good morning.
It was good to see the pretty good expense control, obviously revenue was a little lighter, but as we kind of move forward through the investment phase kind of the build up then.
And revenue and hiring do you expect to be able to kind of match.
From an operating leverage perspective.
The investments with the revenue or how should we kind of think about the pacing of that.
Yes, Michael we are going to be very measured on how we add expense, obviously as we ramp up recruiting and implement.
Some of the technology initiatives that we've been working through we're going to look to harvest gains elsewhere harvest efficiencies in order to properly manage expenses I think for the rest of the year. We're expecting expenses of 58 to 59 million per quarter I was a little lower what we talked about earlier in the year and where you'll see the step up really is comp and benefits line as we hire more people and bring those people on and then in information systems, where we're going to start putting into service. Some of the tech initiatives that we worked on in the first half of the year.
Okay and could you talk just a little bit about some of the savings that you got on the technology side. It sounded like there were some consolidation of systems or.
Just a little more color there would be helpful.
Yes, it's really.
Working through the legacy infrastructure and getting more efficient and more modern so we had some inefficiencies in areas like telephone in telecom, we are working with a large number of providers we've worked that down.
To get more efficient pricing and just more infill efficient infrastructure.
So there's a lot of examples within that line item.
Showed up in the results this quarter.
I would have and again, that's a trend that I think you can expect.
To see is a theme moving forward because I think we're just starting to identify.
As you would expect as we look at our technology. Some of the efficiencies that are available to us that we just haven't.
Taking advantage of in the past.
Okay, that's good to hear.
Then.
Switching over to maybe funding and deposit costs.
Are there other opportunities to kind of reduce.
Some deposit costs I know you have typically some seasonal outflows this quarter and might revert, but any wholesale pricing changes that you plan to make as the fed cuts rates or any other color on that side.
Yes, so as we were expecting to rate cuts in our modeling right now so we expect the July cut September cut.
And what were expecting is we really wont see that relief for probably the fourth quarter, just given the timing of the cuts and then the lag. So most of our products were modeling lags of one to four months betas of 0.5 the 0.8.
Which is not dissimilar to what we saw on the way up.
And we expect to see some of that really flow through in the fourth quarter.
Okay, but no other structural opportunities to kind of reposition deposits. We should just expect it to kind of move in line with.
Rates from here, Yes, I don't I don't expect a big wholesale borrowing restructuring or anything like that.
Okay, Great. That's all for me thanks.
The next question comes from Chris Mcgratty of KBW.
Hi, good morning.
Good morning, Chris.
Hey, Steve.
I want to go back to the margin percentage, so exiting the quarter Youre to 78.
I believe.
If I'm hearing you right the right side of the balance sheet will be a benefit until kind of the exit of the year.
I'm interested in kind of.
Deposit strategies, given where loan deposit ratio is and.
Any kind of sensitivity if the fed does cut in July and does cut in September I mean, how much of a downward bias are we thinking for margin for the next couple quarters.
So I'll I'll attack both of those Chris just on the Eni front.
Based on what I just talked about on what we expect in terms of rate cuts and then shape of the curve I think our yard forecasts as tenure around 2%. So I'd expect NII and kind of $57 million to $59 million range, which translates to a NIM of about 270 to 83rd quarter should be weaker in the fourth quarter as we discussed.
Just the trends in deposit cost and obviously, we're starting with the quarter with a high loan to deposit ratio. So theres still wholesale borrowings that will that will roll off.
From a loan deposit ratio I think you saw this happened last year as well we are at 105 in the second quarter that work down to 100%.
By year end, that's our plan this year.
And depending on how and when deposit seasonality comes back we'll adjust lending accordingly.
But the goal is to get that ratio back down to 100% by year end.
Okay.
And the I think you said, 50% to 80% beta that deposit betas is that kind of the assumption on the way down yes.
I guess the question that push back will be given where the loan to deposit ratio. Do you think you can be that aggressive given the deposit growth has been somewhat of a challenger today, yes. So those those are the broadband as we use in the modeling obviously when you get to there is a pool of obviously more price sensitive clients.
Where you know that theres not as much leverage and weve accounted for that in our modeling.
Okay. Okay.
Maybe two other housekeeping the.
The provision in the quarter and looking back at the last time, you had a provision.
Anything meaningful was with three or four years ago.
It sounds like its mostly related mostly growth related.
Could you speak to the pipeline of recoveries, because I think thats been a big supporter of the provision in the last couple of years, Yes, I mean, there's not a big pipeline recoveries I think thats to your point its been about six years of provision credits I think we've exhausted.
Most of those you see where the credit quality is and has been you've seen where the charge offs charge offs have been there is not a lot more opportunity for big recoveries.
Right now.
Okay. Thanks, and then the last one the tax rate.
It seems like it's been a little lower than the first half how do we think about the back half tax tetrasun.
22% is what I would use Chris.
And that's and that's an empty.
Thats ft number yes.
Okay.
So little pickup thanks.
Thanks.
The next question comes from Alex Twerdahl of Sandler O'neill.
Hey, good morning, guys.
Good morning.
First off Anthony just back here.
Sort of the comment that lead off the call about the leading indicator for the ATM tranche will be the onboarding of talent can you share for us.
Any early successes Youve had with Onboarding count in kind of what the number is today versus where it was the investor day and kind of what the pipeline looks like right now for.
For talent acquisition in the third quarter.
Sure I'll ask Paul Simon to comment on it in a second I think we're.
We're generally on track to what we expected.
Some of the early hires helped us sort of prepare for the integration of Kls.
On the refinement of our platform so adding people like bill what's in as an example, and certainly more omni who came on even earlier.
The help refine our technology platform, which is where some of the efficiencies are coming from allowing us to invest back in growth.
But I think we're on track what we expected to see as far as the interest level in the firm and the talent, we expect to onboard but I have Paul Simon's here. This morning.
Who is the president of our wealth business. So I'll have him add some additional comment yes, I would just add that the talent recruitment initiative on the on the advisor side is.
Well underway.
Theres a natural lag time as you know in both the Onboarding and ramp up.
Three to six months in most cases.
So we did see in the second half of June and carrying into July for example.
A pickup in top line growth from early spring hires.
So we expect to continue to see that sort of stack and built.
Into the second half and as Anthony said in his opening comments.
Going forward, we'll provide more detailed updates on.
On the advisor count.
Okay, and so when you are at.
If you're at 54 at the Investor Day, what do you think you'd be at add on at the end of 2019 in terms of advisors.
Did you say that at the end of 2019.
Yes.
The way we look at it is not necessarily in the.
The number of advisors.
It's more of the the size of the business that they would they would run so I would expect.
By the end of the by the end of the year.
Yes, we're not we're not looking necessarily looking for numbers. We're looking for people who are running big businesses I would expect us.
It'd be well.
Over 60, maybe 60 to 65 by the end of the year.
I think we're at 56 to 58 now and that includes some.
Net.
That's a net number because we have had some people who.
Hello.
Exited the firm.
So we will reported.
In terms of sort of.
The overall business that there would be potentially you can bring the firm as well as the number of advisors. So we're.
We're typically looking to bring in high quality people.
Okay. That's very helpful. And then with the consolidation of Kls and Boston or have it well will there be some additional cost saves when that finalizes and when will that be.
Yes, Alan why don't I start I'll have Anthony jump in.
I think less of that as a cost saving story more as a revenue growth story, there will be some cost savings integration will happen.
In the third and fourth quarter, but this isn't a big play on we're going to put these two together and look to suck out a lot of expense is really about.
Do harvest gains are going to see us like I said earlier reinvesting in the franchise and that's a that's a franchise, we certainly want to reinvest in.
And so as I said in my opening comments, combining the two businesses because they have.
Similar skills, but they've got.
More powerful skills, depending on which.
Im which element you're looking at and so bringing them together is really to grow the overall business.
More rapidly.
That will be natural.
Efficiencies just by there are some redundancies in there, but as Steve said, that's not the main reason for doing this study.
It's really a growth story, and we will be adding people to kls overall, there won't be a reduction and people there, but there will be some minor efficiencies, but as Steve said, it's really about growth.
Okay, and then just kind of sort of technical accounting stuff I can't recall, the exact ownership structure of Kls, but is there anything from a accounting accounting standpoint with.
Potential minority interest or anything like that that we should be thinking about in our mono.
We've owned them 100%.
Since 2010 or somewhere thereabouts.
Great. Thanks for taking my questions.
Sure.
The next question will come from Christopher Marinac of Janney Montgomery Scott.
Hi, Good morning, just wanted to follow up on the expense point, you're making a minute ago. So there's efficiencies and overhead ratio progress that we see that we see should that continue you seem to be making a lot of headway quickly towards a longer range goals that you outlined in may.
Yeah, Chris I mean, it's not going to happen overnight right.
We're doing a lot of things.
On the infrastructure side in the technology side.
And you've seen you've seen some of that come through.
And we've been focused on infrastructure, then we're going to move more onto what I would call the operation side and implementing things like Encino.
In fully leveraging salesforce and that will create efficiencies on top of that.
And then that will allow US then to fund the growth initiatives.
That we're focused on so.
I would just think about as consistent discipline or we're going to look to drive efficiencies wherever we can and then responsibly reinvest that so we can turn that expense into revenue generating expense I mean that that last points. Steve made is really what it's all about because it's increasing the productivity of our individual employees. The great thing about some of the things are more has been able to do coming on board.
Is not only lowering the expense.
But also and as Steve said, Where's precision lender Encino, we'll just make our people far more productive while reducing the overall cost of our processes.
Got it Thats helpful. And then just a question on the AUM flows should we see some reversal or is it possible to see a reversal in the second half of this year or just maybe your thoughts on kind of when the negative flows switch to positive.
That certainly.
Our expectation.
We're not surprised by we've obviously done this.
Well done this long time.
It's natural when you sort of come in and you have to sort of reset.
The structure of things.
To see.
The negative flows at first but we certainly expect to see positive flows by the end of the year.
Great. Thanks, very much guys.
The next question will come from Lana Chan of BMO capital.
Hi, good morning.
Running on them.
Just wanted curious about your thoughts on given the more challenging rate environment does that impact your 2022 goals that you laid out in Investor day.
No they don't.
So even with lower NIM potential outlook going into the next few years.
You can still achieve that ROTC.
Early E target.
Yes, John I mean, when we when we set those when we set those targets and when we get our modeling we actually.
We accounted for what we thought was a pretty.
Challenging rate environment.
So we don't see that materially changing the outlook now for I guess.
Significantly worse from here, we will revisit that but as of right now we're not moving off those targets.
Okay great.
Just wanted to get a little bit more color on the increase in NPL, which you mentioned some of the commercial real estate loans I think you said in California could we get more color on that.
Sure.
There there's one it was two two relationships.
One of which I think is already paid off or will soon pay off and one that we just up a vacancy issue in a building.
On the commercial side.
Yes.
Okay. Thank you.
And this concludes our question and answer session I would now like to turn the conference back over to Anthony the Cialis for any closing remarks.
Thank you all for joining us today, we appreciate it and we look forward to next time. Thank you.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines have a great day.