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Boston Private Financial Holdings Inc. (NASDAQ:BPFH)

Q3 2008 Earnings Call

October 23, 2008 9:00 am ET

Executives

Timothy Landon Vaill – Chairman, Chief Executive Officer

Walter M. Pressey – Vice Chairman and President

David J. Kaye – Chief Financial Officer

Steven D. Hayworth – Chief Executive Officer

Jim Dawson – CEO Private Banking

Jay Cromarty – Executive Vice President and CEO Wealth Advisory Group

Catharine Sheehan – Director of Corporate Communications

Analysts

[Jonathan Carry] – JP Morgan

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

Lana Chin – BMO Capital Markets

Christopher Marinac – Fig Partners LLC

Murali Gopal - Keefe, Bruyette & Woods

Mac Hodgson - SunTrust Robinson Humphrey

[Fay Elliott] – Merrill Lynch

Operator

(Operator instructions) Good morning ladies and gentlemen and welcome to the third quarter 2008 Boston Private Financial Holdings earnings conference call. (Operator instructions)

I would now like to turn the presentation over to Mr. Timothy Vaill Chairman and Chief Executive Officer.

Timothy Vaill

Good morning this is Timothy Vaill CEO of Boston Private. Welcome to our third quarter 2008 earnings conference call. Joining me this morning are Walt Pressey, President of the company; Jim Dawson, CEO of our private banking group; Jay Cromarty who runs our wealth advisory and investment management group; David Kaye, our Chief Financial Officer; and Catharine Sheehan, Director of Corporate Communications.

At this time I’m going to ask Catharine to read the Safe Harbor Provisions before we make additional remarks.

Catharine Sheehan

Good morning. This call contains forward looking statements regarding strategic objectives and expectations for future results of operations and financial prospects. They are based upon the current beliefs and expectations of Boston Private’s management and are subject to certain risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.

I refer to you also to the forward looking statements contained in our press release which identified a certain number of factors that can cause material differences between actual and anticipated results or other expectations expressed.

Additional factors that could cause Boston Private’s results to differ materially from those described in the forward looking statements can be found in the company’s other press releases and filings submitted with the SEC.

All subsequent written and oral forward looking statements attributable to both 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. And with that I’ll turn it back to Timothy Vaill our Chairman and Chief Executive Officer.

Timothy Vaill

Thanks a lot Catharine. Thank you all for joining us this morning. Clearly these are challenging times and frankly speaking I’m disappointed in the bottom line results we have for you in the third quarter, given here in detail from Dave in a few minutes, but my summary overview is this.

As we announced last quarter, it has been our intention to clear the decks at First Private Bank and deal effectively with the non strategic loans we have there. As we reported at the end of September we have now marked that portfolio to market and put all of the loans up for sale.

When we raised capital last summer, together with bringing in the Carlisle Group as a new investment partner, we recognized that the Southern California markets were still unsettled and had anticipated this in our balance sheet calculations. So this is not news to us, but the amount involved is still significant.

The non cash impairment charges we are taking effectively remove just about all of the goodwill from our books from the banking sector. As you know, we are required to do this impairment testing on a regular basis as well as some significant triggering events occur, and the performance in the overall financial sector in recent times is certainly such a triggering event.

These non cash charges have no impact on our capital account whatever, and really reflect the deterioration in the banking industry in general. So as painful as they are to take, in fact it gives us a clean banking platform going forward, a platform that is earning wealth and growing market share.

With respect to our overall balance sheet, our goals when we set out to raise our new capital was to be certain that we could adequately manage the impact of our problem loans at First Private. Have a strong safety net for the unknowns that might be out there and to give us the drive power to take advantage of the opportunities that might lie ahead in the form of hiring strong teams, picking up new, perhaps disenfranchised customers in the market place, or adding new banking and investment partners to our nationwide franchise.

As you know we added almost $200 million to our capital base in July, and now we are actively looking at adding even more firepower by participating in the Federal Government’s TARP program, specifically the Capital Purchase program which, as you know, is a source of very inexpensive capital that will allow us to expand our lending activities and invest in the growth of our business, as well as to add even further strength to our balance sheet.

If you look beyond the extraordinary circumstances of recent times including the special charges taken this quarter. The underlying fundamentals of Boston Private are pretty good and we’re seeing some positive trends. Our banks outside Southern California are performing very well and we are seeing very strong new commercial and residential lending opportunities as others in the industry pull back.

Furthermore we have very nominal credit card or auto loans and are thus buffeted, to some degree anyway, to the increasing pressures being felt in the consumer sector. On the investment side we have excellent new business flows during the quarter – actually the second quarter in a row – of historical new highs, and we are very pleased by the investment performance of our portfolio managers.

And in our wealth advisory business, strong client retention is occurring and people tend to seek out our tax and planning professionals in these kinds of difficult financial times. In this kind of environment, wealth management services, particularly the high touch approach that we take at Boston Private, continue to be highly valuable to the individuals, families and businesses we serve in this market place.

So in conclusion I’m very happy about the strength of our balance sheet, the potential addition of even more cheap capital near term, the continuing earnings power of our subsidiary companies, and the overall growth potential we see before us in the wealth management industry. We have an experienced and able team in the field which is working hard to steady the nerves of the existing clients, while at the same time opening the door of our safe haven to new prospects.

Our goal is to build on this opportunity. Now I’ll send it over to Dave for more detailed instructions.

David Kaye

Thank you Tim, good morning everyone. My comments will refer to the third quarter earnings release presentation and I’d like to start off with slide number five entitled Quarterly Earnings.

For the third quarter of 2008 we reported a GAAP loss of $5.92 per share. And that was really driven by some non cash charges and an increase in loan loss provisions related primarily to our previously announced sale of loans in Southern California.

If you turn to slide six, I’ll walk you through some of these charges. First there was a non-cash adjustment totaling $30.5 million net of tax or about $0.60 a share. And this was associated with the preferred shares and warrants that were issued in our July capital raise. As a result of the appreciation in the company’s common stock price, the value of these warrants and preferred securities issues increased.

That resulted in a beneficial conversion adjustment. And please note that these charges have no impact on our capital or liquidity position and in fact they simply moved money from one equity account, which is paid earnings to another additional paid in capital.

Up next there were some non-tax goodwill impairment charges totally $196.4 million net of tax or about $3.85 per share. Now about $175 million of this charge was driven exclusively by the decline in bank valuations in the South East and the Pacific North West. It was not a reflection of the earnings performance or the credit quality associated with any of our banks, but rather it’s really a function of where peer banks are currently trading in the public market.

As Tim mention this charge will bring the goodwill accounts of our banking segment down to almost zero. Finally we did book a loan loss provision of $83.6 million net of tax or about $1.64 a share. And that was to cover the net charge off related to the previously announced sale of the land and construction loans in our Southern California affiliate.

As you may recall we had issued a press release in late September with an estimated range of $70 million to $85 million, so we’re at the upper end of that range. The loan sale is still expected to be completed in the fourth quarter of 2008. And at that time we either post a gain or a loss to reflect the final sales price of the portfolio.

Turning to slide seven you’ll see that the quarterly revenues for the third quarter on a year-over-year basis were down about 2% to $103.7 million. On a linked quarter base revenues were down 14% but much of that decline was due to the gain we had in the second quarter on the repurchase of our convertible debt. The remaining decline was due to some reductions in the fee based revenues which Jay will talk about later.

On slide eight you’ll see that the net interest income for the third quarter was up 1% to $50.6 million on a year-over-year basis. But it was down 2% on a linked quarter basis. The linked quarter decline was the result of a reversal of about $2 million in interest income, due to additional nonperforming assets.

The net interest margin declined from $3.39 in Q2 down to $3.22 in Q3 but if I normalize for this interest reversal we would have been at about $3.35 for the quarter.

Moving on to slide nine, operating leverage was obviously negatively impacted by the revenue drop that I just mentioned. Expenses were down 2% over the second quarter of 2008 primarily due to lower variable compensation costs. Now let me turn it over to Jim Dawson to describe some of the details in the banking segment.

Jim Dawson

Thank you, Dave. Morning everyone. While it’s painful to take the charges to mark our non strategic loan portfolio in Southern California to market, it’s absolutely critical that we get this behind us and move on with building great private banks across our enterprise. To that end we have some progress and good results to report that despite the continued tough economic conditions.

These include steady deposit growth, a reduction of classified loans and improved reserves to non performing asset ratios. Please turn to slide 11. Deposits grew in the third quarter, up 4% on a link quarter basis to $4.6 billion with most of the growth coming from large brokerage CDs. We also experienced modest increases in off balance sheet deposits.

One slide 12 you will see consolidated loans. A 7% reduction in commercial and construction loans primarily in Southern California drove down our overall loan results which declined 4% on a link quarter basis. Excluding Southern California, loans were up 1% on a link quarter basis. Overall our loan portfolio has experienced 7% growth on a year-over-year basis and our compound annual growth rate for loans has been 32% for the last five years.

If you turn to slide 13 you will see classified loans. On a link quarter basis classified loans were down 28% a result of the charge offs in Southern California. Excluding the Southern California portfolio we saw a 3.3% decline from the second quarter to the third quarter.

Let’s take a look at nonperforming assets on slide 14. Nonperforming assets as a percentage of total assets increased to 1.75% in the quarter mirroring industry trends. Excluding Southern California we saw an increase to 0.71% from 0.55% trending with and at a level well below the industry.

If you turn to the next slide you will see that our allowance for loan loss as a percentage of nonperforming loans has increased to 1.36% up from 89% in the prior quarter, a result of moving loans into the loans self assayed category.

Slide 16 shows past due loans 30 to 89 days. Net of loans held for sale, this quarter we see a decline which was our total past dues at a level that is significantly lower than industry averages. Excluding Southern California our past due performance is very strong.

If you turn to slide 17 you can see our net charge off trends which increased in the second quarter and in the third quarter virtually all were in Southern California. Excluding Southern California our net charge offs were $700,000.

Slide 18 provides a detailed grid of our non performing assets, past due loans and classified loans. You can see that Southern California loans held for sale accounts for 58% of the non performing assets; 38% of past due loans, 45% of classified loans, further evidencing the net positive effect that the sale of this portfolio will have on our overall portfolio.

Slide 19 will give you a breakout by geographic region of our non performing assets and classified loans. Nonperforming assets increased 12% and classified loans declined by 28% net of the held for sale portfolio.

Finally on slide 20 you can see some detail on our loan concentrations’ and exposures. Our portfolio is diversified across geographic and loan type; 48% of our portfolio is commercial loans and 35% are residential mortgage loans.

By geography the New England portfolio accounts for 41% of total loans with Northern California and Florida each accounting for about 25%. Importantly land and construction loans represent 12% of the portfolio down from 16% in the second quarter.

Let me now spend a minute talking about the banking segment. While the economic environment in the Inland Empire continued to decline our commitment to Southern California is very real and we are well underway to reposition First Private Bank and Trust Company.

We have put the California loan portfolio up for sale and we are pleased to be well underway with this process. Its completion expected in the fourth quarter will mark a new chapter for us and will allow First Private to fully focus on growing our private banking business.

The remainder of the First Private portfolio consists of commercial real estate in CNI loans which are currently performing and are not located in the Inland Empire. Charlie Jackson the new First Private CEO is already deeply entrenched in the business and has brought great stability to the banks since he was hired in the summer.

All of these moves will help to return First Private to a position of strength. Separately we’ve been paying close attention to softening economic regions including South Florida and Seattle. And while bank valuations in those markets have declined, the earning power of our banks is still strong while they have both seen an increase in nonperforming assets. These increases have been less than others within this region.

Both had the foresight to avoid large speculative and risky lending and they are very focused on watching past dues and monitoring these loans. In New England and Northern California we have very strong and steady results. From an overall credit perspective I feel confident that we effectively are managing the things we can control.

While we’re not immune to the shifting economic conditions, we have the solid and uniform risk management practices in place. Jim Shulman, our new Chief Risk Officer, Chief Credit Officer, has focused very closely with all of our Chief Credit Officers to strengthen credit practices and lending methods. Now let me turn it over to Jay Cromarty to walk you through the performance results we saw in his business segments, investment management and wealth advisory, Jay?

Jay Cromarty

Thank you, Jim. Let me just note at the outset that the revenues from these two groups represent 50% of our total revenues for the quarter. If you could, turn to slide 22 entitled Investment Management Fees. Please not this includes the trust and investment fees from the private banking segment as well as those from the investment management segment.

These parts of our business delivered steady performance in the third quarter amidst strong market headwinds. Investment management fees totaled $39.1 million a decrease of 6% on a year-over-year basis and down 7% on the link quarter base.

Turn to slide 23 to look at investment performance. You can see the outstanding investment performance that continues to be generated by the very talented professionals in this segment. On an asset weighted basis for the year ending September 30th 2008, 87% of this segment’s strategies are in the top quartile of performance for the three year period. I’m sorry, 69%, 83% are on the top quartile on a five year basis.

On a one year basis our top [inaudible] performers included [Anchors] All Cap Value and Balance strategies, [Dalton] [inaudible] All Cap Mid Cap Small Cap and Ultra Value strategies as well as Westfield Capital’s Mid Cap Small Cap and Smith strategies.

Slide 24 is titled Wealth Advisory Fees on this slide you will see that wealth advisory fees decreased 1% on a link quarter basis and increased 24% on a year-over-year basis. As Tim mentioned, our growth as a result of expanding existing client relationship to help the addition of new client relationships and high retention rates. We are finding that individuals and families are reaching out to their wealth advisors. Realizing that they need professionals to help them manage through these turbulent times.

If you turn now to slide 25, Assets Under Advisory Management, you will see that our assets there have declined by 9% or $3.3 billion to $35 billion on a link quarter basis, and we’re also down 7% on a year-over-year basis.

Turning to the final slide, number 26; Quarterly AUM Net Flows. As was mentioned at the outset you will see we experienced another quarter of positive net AUM flows, inflows across all three business segments, setting a company record of $713 million. Particularly you will see the strong inflow from the wealth advisory segment which was up significantly from last quarter to $133 million in total net new flow.

And with that let me now turn it back to Tim.

Timothy Vaill

Thanks a lot, guys. As we have discussed these are extraordinary times, and in our judgment these challenges are not likely to abate any time soon. While we can’t control how long this takes or market performance or our stock price, we are masters of our own strategy and will continue to execute against it to grow this franchise.

We’ve taken some very decisive actions to reduce our credit risks and strengthen our capital position. We’ll continue to build our banking and fee based businesses to ensure our financial and operational strength in these uncertain times and will continue to focus on serving affluent customers in key geographic regions of the United States by providing high class services and wealth and management solutions.

And we’ll take advantage of the market disruptions to grow our client base and expand our business. We think there’s some very, very interesting opportunities that are unfolding in the marketplace today.

So we’re well positioned to maintain the steady course and I’m confident in our future prospects but now I would like to turn the phone over to you and take your questions so operator let’s go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Jonathan Carry] – JP Morgan

[Jonathan Carry] – JP Morgan

Jay can you talk a little bit about the inflows that you saw in the money manager as I understand from what your comments and talking to what [inaudible] as well. That as you saw inflows at most of your investment management affiliates and if you could just talk about what products they saw the inflows and what really drove that performance?

Timothy Vaill

Sure John. I would say that fundamentally we saw greater flows for our growth oriented strategies, and that includes the strategies of Westfield Capital, because you know John, Anchor Capital is our second largest investment manager as the majority of its business associated with the with what some call the SMA business.

But really those organizations that distribute packaged product to their retail base. And that was kind of a mixed quarter and it was a down quarter for the industry as a whole. So the fact that they held their own I think was very strong performance indeed. But fundamentally the short answer is it was principally the growth strategies at Westfield.

[Jonathan Carry] – JP Morgan

And are you able to tell us that that progress continued into this quarter are you able to comment at all?

Timothy Vaill

I’m not going to comment beyond the results ending September 30th.

[Jonathan Carry] – JP Morgan

And then separately on credit can you talk a little bit about the decline in the 30 to 89 day delinquencies and what you’re seeing there in terms of your watch list and early stage delinquency trends in your, you know, specifically in the Florida markets for example and then as well as your other markets?

Timothy Vaill

Sure John thank you for your question. We are very attentive to past dues and our credit portfolios. There’s been heightened and enhanced attention directed at all credit issues in 2008. And our past dues quarter-over-quarter were down about $5 million or $6 million. The southern Florida past dues were manageable at the end of the second quarter and only increased slightly in the third quarter. The total past dues from 30 to 89 days in South Florida are about $4 million. On the total portfolio that's over $1 billion.

[Jonathan Carry] – JP Morgan

And then separately, in terms of the actual – that type of stabilization that you're seeing in Florida, and I know you had to characterize it as that in certain markets in Florida – can you just talk about what you're seeing in terms of the actual stabilization? Is it by certain type of loan type or certain parts of Florida? Can you just give us a little bit more granularity there?

Timothy Vaill

Yes, I'll talk a little bit about it and I hesitate elaborating too much on the stabilization, because we're in a tough credit market as you all know, and we think it's going to continue through '08 and into '09 nationwide. Florida showed some deterioration earlier than most regions in the country and then started to show some stabilization in certain counties, but we're managing it as if it's not going to improve for some period of time.

We've done quite a bit of work in the credit area in South Florida. The team in South Florida has gone through a reorganization that was initiated by the Chief Credit Officer and the CEO. We've had another check and review in the last 30 days and please to report some very significant improvements in the credit culture and practices there. It's been good to begin with, but it's enhanced now and everybody is all over in taking ownership of credit.

I hesitate to forecast improvement because we're of the mindset that we're in a tough economy, we will be for a while. We'll have some challenges. There were no significant increases to the classified assets in South Florida. Some of the assets that were identified were substandard in Q2 head for the deterioration when they either stopped making payments or in most cases updated appraisals showed some diminution of value, and so we've put them on non-accrual. But the past dues that I mentioned for South Florida were about $4 million and they were all in the 30 to 59 day category. They were not in the slower category.

So I guess I would summarize by saying that the team down there is very focused on their credit practices. You haven't seen much loan growth there. The reorganization has put responsibility for credit solely on the shoulders of the Relationship Manager of the Chief Credit Officer, and we'll continue to be diligent.

Operator

Your next question comes from Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

A couple of questions. Tim, first off, you had mentioned that you see some interesting opportunities in the marketplace. Should we assume that you're suggesting that you folks may start doing some acquisitions again soon?

Timothy Vaill

No, Mark, I don't think that's a fair assumption. At the moment, frankly, our currency isn't at the level I'd like to see it at before we get in there, but as you know it takes a long time to do the due diligence and understand the opportunities, and so you can bet you're life we're looking. But my guess is it will be a while before we think we have the financial strength to do that in the right way to our existing shareholders.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

And then, David, I wonder if you can help us think about provisioning levels going forward now that you've taken this big charge in the third quarter? Can you help us get a sense of what the run rate might look like in fourth here and beyond?

David J. Kaye

Well, Mark, that's going to be a function of the asset quality, or the credit quality. We think that normally we'd put on 100, 125 basis points of provision reflecting loan growth that would be greater in quarters where we see a decline in asset quality, but really driven by any increases or decreases that we might see in the classified loan, so if our classified loans tend to rise, or our non-accruals tend to rise, we'll put additional provision on.

But as we've seen somewhat of a stabilization going on in our classified loans, going forward it would project that it would be returning back to the levels just in the 100 to 125 basis points for loan growth. We feel that we have a good coverage. We have beefed up the allowance for loan loss levels over the past year, and if you look at it as in terms of coverage versus our non-performing assets, we're at about 136%, so we're feeling very good about those levels right now.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

Although, I'm having a hard time seeing how you consider it stabilization if you hadn't charged off the $164 million this quarter in non-performers – correct me if I'm wrong – would have gone from $105 million up to $280 million, or 167% increase, so how is that stabilization?

David J. Kaye

Well if you take out the Southern California, just exclude Southern California, Mark, we went from $93 million of classified loans to $89 million of classified loans, so we went down actually in terms of the problems that we have identified so it was a decline. I don't know how you would not characterize that as stabilization.

As Jim mentioned, if the non-accrual loans are a subset of the classified loans, we did see a rise in non-accruals, but those had nothing to do with new problems. Those were a degradation of some of the existing problems that we had already identified.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

But if you look at non-accruals from the second quarter to the third quarter, they went up by over 30% in South Florida and by 80% in the Pacific Northwest, so clearly there's issues outside of California. Am I thinking about it the wrong way?

David J. Kaye

Well percentages can be misleading when you have $2 million and it increases to $3 million and its one loan. I mean, it sounds dire in terms of a percentage, but it's really the very limited number of loans and hardly something that you would attribute to macro trends.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

And then last question on the margins. Should we assume that the margin will be relatively stable, or could you help us sort of think about the margin going forward?

David J. Kaye

I think, though, there will be some pressures on the margin going forward. We had the recent rate cut and that will affect us, and we are also very focused and going to be aggressively pursuing deposit opportunities there, so you're going to get to the point you're not really going to cut deposit rates any further. As a matter of fact, we might go out and aggressively try and take deposits, so that will be a little bit of pressure on us going forward.

Operator

Your next question comes from Lana Chin – BMO Capital Markets.

Lana Chin – BMO Capital Markets

A couple questions on credit. One, given what's happened with liquidity in the marketplace over the past couple of weeks, with the pending sales there in Southern California loan portfolio, what gives you the confidence that you've got buyers in hand and they won't walk away given this environment?

David J. Kaye

Well we continue to see and get interest calls almost every day about people wanting to know about the loan portfolio, wanting to understand how they can participate in the sales of the loan portfolio, so we see a lot of interest generated from potential buyers. But you're right, there is a lot of variability out there in the marketplace today and we will, hopefully, by the end November have these closed.

But the interest continues on, unless, Jim, you have any –

Jim Dawson

I do. This is an important topic and it ties into Mark's comment earlier about the stabilization, and the reserve, and the increase in non-accruals, and the provisions for the fourth quarter. The key is the held for sale portfolio, and let me just give you some feedback, Lana. We got hit by a two-by-four in the beginning of the year by the FDIC and they tagged one of our banks off base.

We have five banks, four of which were doing exactly what we wanted them to do with high credit standards doing business with strategic borrowers, strategic relationships, but we had an outrider out there and unfortunately the outrider was in one of the toughest regions in the country that had experienced dramatic growth before. But they were making loans in a troubled region, and frankly, the underwriting was very weak.

We learned about that in the beginning of the year and we've paid a heavy price for it, and we've allocated very significant resources, internal and external, to focus on asset quality. As we learn more about the portfolio, and as we learn more about the region, the Inland Empire continues to fall. Land is continuing to drop in value by about 3% a month. We need to get this stuff behind us, as Tim and I both said earlier.

And so we took a very aggressive stance in the third quarter. It started by having Jim Schulman and [Dave Allowesy], who some of you may know, but [Dave] has been in the workout and distress test sale business for 20 plus years. He used to run the workout area for Bank of Boston in the early nineties, and they took a very hard stance. Instead of looking at current appraisals, which can only base value on recent sales, and if they're on their recent sales they have to turn the clock back some period of time, so the values are not appropriate.

We worked with commercial brokers, real estate brokers, to assess what the current values were and [Dave Allowesy] and Jim Schulman went through loan by loan on all of our collateral dependent loans and we took over a $90 million charge against that portfolio. That was step one.

Step two was to have an agent, who we're working with, give us their estimate of reserve prices after looking at all of these loans to determine what they felt the proper reserve prices are. Now this agent has sold over $1 billion of loans year-to-date. They've got a backlog of $1 billion coming up in the next quarter or two. Their experience is – now admittedly, this market has had a lot of change in the last few months, but – their experience is that they hit 75% of their reserve prices. They hit or exceed.

The ones that they don't hit are typically in the 65% to 70% range. And they've had a handful, single-digit, loans in the past year with over $1 billion worth of loans sold where they've had no hit. Now we took their reserve prices and we further decreased that 20% because we saw that the economy is continuing to deteriorate in the Inland Empire.

It's going to take us, and it is taking us 60 days or 90 days to execute our plan, and furthermore, we've had all the disruption in our markets as a result of – well, you see it every day as much as we do what's going on with credit, what's going on with funding, the TARP programs and the bailouts.

So we have an agreement with an agent to sell the program, but we've also put our oar in the water and we've uninitiated contact with the Treasury to explore the possibility of selling the portfolio to the government under the TARP program and compare that to our other alternatives. So this is a key issue for us, but we have addressed it aggressively and decisively and we feel we're as well positioned as we can be as we enter the fourth quarter.

Lana Chin – BMO Capital Markets

And then my second question is related to, I guess, Southern Florida. Some of the PAs in the marketplace are expecting getting those loans sold about $0.50 on the dollar, and so far your charge-offs has been very low in that portfolio. What is, I guess, the composition of the non-performing loans in Southern California and the average loan-to-values, and why is it you haven't seen more charge-offs so far?

Jim Dawson

Well please don't take this the wrong way, but there aren't a lot of private banks that are our peers in South Florida, and I'm not trying to be smart about it. You have heard us say many times before that we did not jump into the [spec rondo] development business. That's not say that we don't have some problem loans. We do have about $30 million in non-accruals right now and many of them are land-based and we're working through them.

The portfolio in South Florida has performed better than the region because we do business with strategic relationships with private banking clients that have a strong net worth that have liquidity. Now that's not true for every single loan. And you've seen our reserves increase, but I will tell you that – I mentioned earlier, Chase & Associates has done their second review at two of our banks. They were very impressed with the progress we have made. They have signed off on our loan-loss reserve for Q3 as our auditor.

So I hear you. We know that market very well. Jim Schulman spent a lot of time down in South Florida with the Chief Credit Officer and the team down there, as have I. Where as I said earlier, we're not out of the woods yet. There are some regions that have shown some stabilization but others that haven't.

Our largest non-accrual loan is – I can't give you too much color because I don't want to disclose non-public information – but our largest land loan is being negotiated with a municipality that has received some funding from the state of Florida, and we do have a reserve set up against that. And we have personal guarantees supported by mortgages in addition.

So as the quarters go by we hope that you'll see that we're doing the right things, and that our bank in South Florida is not representative of some of the other banks in South Florida.

Operator

Your next question comes from Christopher Marinac – Fig Partners LLC.

Christopher Marinac – Fig Partners LLC

I wanted to ask Jay about the investment management business and if he feels that the origins should be changing in this environment either up or down?

Jay Cromarty

Great question, Chris. If you look at what's happening in the intermediary marketplace, the estimated business, we are seeing some slight continued downward movement of pricing, so I think that that's indicative of in terms of overall trend there.

On the other hand I think that the considerable turmoil that we're all witnessing in the hedge fund business may cause a slight of absence back to the more traditional long-only managers. And I think that the strong performers will be able to maintain their pricing disciplines and maintain, if not grow, their margins here.

So I think that the industry has lulled over these last few quarters. It's seen some downward pressures, and indeed that's probably manifested itself in the results you're seeing here, but I think it's the long-only managers. I think it's likely to go up a little bit.

Christopher Marinac – Fig Partners LLC

And then, Jay, on the link quarter change in assets, not just in this quarter but going forward, would you expect that the market is the right proxy for you, whether it's the S&P or other broad indices, or do you think that over time that your assets may go up and down a little bit less, be a little less volatile than the market indices in the given quarter?

Jay Cromarty

Chris, let me address the question from a couple of perspectives. One, is to look at our aggregate equity versus fixed income makeup across the board. And it's a little more balanced that you might see from other investment management-only firms. For example, Anchor has got a fair bit of balance business, but with the banks, clearly the private banks have, and the wealth advisors have a preponderance of a more balance-like portfolio. So that's point one.

With respect to the investment management segment solely, we are approximately two-thirds growth-rated versus one-third value. And there was quite a disparity, as I'm sure you're aware of in this most recent quarter. I mean, just by example the Russell 2000 value went up 5%, while the Russell 2000 growth went down 7%. So one has to be mindful of those kinds of dynamics going forward.

So I don't think that you can get a high R-squared between on-movement of assets, vis a vis the S&P 500 or some broad-based equity market.

Christopher Marinac – Fig Partners LLC

Just one follow-up question for Dave. Do you have any estimates on the risk-based capital ratios for Tier 1, or totaled at the end of September?

David J. Kaye

Again, we're not final in terms of the calculation, but the total risk-base ratio would be about 13%, 13.1%, and our Tier 1, I believe, was around 11%, 11.1%, or something like that. Let me check on that. I can get back to you on that one, Chris.

Christopher Marinac – Fig Partners LLC

That would be great, Dave.

Operator

Your next question comes from Murali Gopal – KBW.

Murali Gopal - Keefe, Bruyette & Woods

I know you have talked about this in the past, but when I look at the allowance for loan losses in South Florida, about $80.7 million, and when I look at that in relationship to the classified and non-accrual loans, the coverage is kind of light, particularly when you look at the other affiliates and the kind of coverage that they have. Could you take us through the methodology that you use and what makes you more comfortable with a relatively low coverage in South Florida?

James Shulman

I will, Murali, thank you for your question. At first look it does appear low relative to the size of the portfolio, but you have to remember that Gibraltar is an OTS bank, there a federal thrift, and they're required to have 65% of their assets in residential mortgage assets, so a high percentage of the portfolio at Gibraltar is residential mortgage loans.

And the methodology is to do a FAS 114 analysis of all of our classified loans to determine if there is any exposure, and to take specific allocations against loans where we see any shortage of collateral, any collateral deficiency. We've analyzed all of our classified loans. We have taken current appraisals and cash flows and we have stress-tested them to be more conservative.

And we have taken reserves against those specific loans, and then we've taken reserves against the pools of loans based on historical charge-offs, peer analyses, and qualitative factors, so – and as I said earlier, we’ve also had the independent third party loan review, [Chafton Associates], review the loan amounts reserve methodology and the adequacy and we’ve also had our auditor review it. So, we feel comfortable with the reserve at Gibraltar, based on the assets and the condition as of September 30.

Walter M. Pressey

Murali, this is Walt. Let me just add one brief comment to Jim’s point about the first mortgage loans at Gibraltar and he mentioned this earlier but I just want to re-emphasize this. These mortgages are largely jumbo mortgages to high net worth individuals with a loan-to-value ratio of about 62% at close and typically the average loan size is in excess of $650,000.

These people have very strong balance sheets, the loans are very strong and we are having very good success with that product in that particular market. That’s why the coverage is somewhat lower than perhaps you would see in some of the other banks.

David Kaye

And though there was some increase in non accruals as I mentioned earlier, Murali, the classified loans did not change and there was one $4,000 loan that was overdue between 60 and 90 days. So we did, as you may know, we did add $2 million to the reserve in the quarter to get it to a level that we felt comfortable with.

Murali Gopal - Keefe, Bruyette & Woods

And then when I look at the loan growth sequentially, I know you’d said that you’d seen a lot of demand in your markets with the larger players pulling back on credit. When I look at the loan sequentially, there is only 1% [inaudible] per quarter and I am trying to reconcile the two.

David Kaye

Well, the reconciliation is we have been tapping the brakes on loan growth because we need to fund that loan growth with inexpensive core deposits and the core deposits have been slower to grow, so we have tapped the brakes on the loans. One thing you may not see in our numbers is we had a $51 million loan sale in the quarter.

We sold some residential loans that were 7-1s, 10-1s, and 15 year amortizing assets. We don’t typically have those on our balance sheets. So we sold about $51 million. But loan growth has slowed and it’s a discipline that our banks have adopted as a consequence of deposit growth slowing.

Murali Gopal - Keefe, Bruyette & Woods

Okay, and could you talk a little bit in terms of what you are experiencing in retail deposits and particularly given all the turmoil in the money market funds during the quarter and is it settling down or what are you seeing there?

Unidentified Corporate Participant

Well, every day seems to be different. It depends on what the prior day’s market activity was in some respects. The increase in FDIC insurance to $250,000 and the unlimited insurance on demand deposit accounts is helping us. The capital raise that we did in July has been helpful. A lot of our clients have, as I indicated earlier, moved some of their money off balance sheet to Federated, which we provide for them. We provide some suite products.

So it’s a day-to-day thing. We have had some challenges as a result of other bank failures. When Indymac failed and when Fannie and Freddie had their issues, all banks had the same experience, but we haven’t lost relationships. We’ve lost some deposits but those relationships are teed up, in our minds, to go back at very aggressively with this new FDIC insurance program and at some point when the dust settles in the market.

Murali Gopal - Keefe, Bruyette & Woods

Okay, and Jay, going back to one of the things you mentioned, maybe my previous understanding was incorrect. I always thought the management that you guys had was more heavily rated like 90% or so in equities and 10% or so in fixed income. But, if I heard you right, it is probably a lot more balanced than that. Is that right?

Jay Cromarty

Yes, it is much more balanced than that. Clearly. Let me try to give you a little more color behind that, but as of quarter end, the private banking assets were about $4.5 billion and those are heavily balanced. Wealth advisory was $9.3 billion, again heavily balanced. So you can draw your conclusions from that, I think.

Murali Gopal - Keefe, Bruyette & Woods

Sure, and I know you had record closing during the quarter. Could you talk a little bit in terms of what redemption were for the outflow for the quarter and how that compares with the last couple of quarters?

Jay Cromarty

Give me just a minute and I can respond to that here.

Murali Gopal - Keefe, Bruyette & Woods

Sure. And the one last question while we are waiting for that. I was going to ask in terms of flows, could you break it in terms of where the flows came from, was it all mostly left field or was it distributed more evening?

Jay Cromarty

Sure. Let me take care of the second question first, if I can. The positive flows, as I stated earlier, were predominantly from the investment management segment and largely to the growth strategy so that would mean a significant portion of that went to Westfield Capital. Dalton Grinder saw some positive net flows for the quarter, particularly in one of their newer strategies which is a modified long/short, what some might refer to as the 130/30 strategy here. But the dominant flows were in the investment management segment but again, I will just emphasize what I said earlier that we saw positive flows across all three segments. Coming back to your earlier question for the quarter, the outflows were less than $300 million and in the previous quarter, it was a comparable number.

Murali Gopal - Keefe, Bruyette & Woods

Ok, great. Thank you very much

Operator

Your next question comes from Mac Hodgson – SunTrust Robinson Humphrey.

Mac Hodgson - SunTrust Robinson Humphrey

Jim, I had a question in regards to the sale of the southern California loans. You mentioned that you guys are kind of also looking at what the treasury is doing with the Tarp to buy distress assets. It seems like there are still some details that need to come to light on that plan. I was wondering if the plan is to delay the loan sale through the broker and just wait on kind of more clarity on the Treasury’s plan, or do you guys still plan to kind of go ahead as planned with the broker’s sale?

Jim Dawson

Well Mac, that is a great question and something we have been talking about here. The Tarp Program has not been rolled out in detail. We don’t know how quickly it will be outlined and we don’t know what the priority will be for the asset purchases. There is a lot that we don’t know. What we do know is that we have made contact with the Treasury. We’ve put our oar in the water. We want to be able to consider that as an alternative if it is beneficial to us. But I don’t think we’re going to delay one minute executing our current plan.

Unless we have very clear indication from the Treasury that we can participate and that it will be beneficial to us. So we think we can get feedback from them within a few days on whether we will quality for the program. Then the next step will be for them to determine what the asset prioritization is and then the third, importantly, will be the price. So, we’ll play that out Mac, but we do not anticipate delaying the sale of these assets one minute if the top program can’t be beneficial to us or if it gets delayed.

Mac Hodgson - SunTrust Robinson Humphrey

You are pretty confident that this will take place, the sale will take place in the 4th quarter?

Jim Dawson

We’re confident that the sale will take place in the 4th quarter. There may be some of the 70 loans that don’t get totally liquidated in the 4th quarter, but we expect substantial progress, if not the sale of all of the loans.

Mac Hodgson - SunTrust Robinson Humphrey

OK, great. Thanks. Dave, I had a quick question on capital. From the capital raise in the 3rd quarter that you all did, how much of that was down streamed into First Private to offset the charges taken, if that is the right way to take a look at it, and maybe how much you have left? And then with regard to the Tarp, kind of capital purchase program, are you guys targeting a specific ratio to justify kind of where you want to go out?

David J. Kaye

Well, I will take it in order. One, we raised $173 million net in July and we down streamed about $80 million to First Private to cover the charge-offs down there, in terms of the targeting any specific ratio with the TARP, no. Our ratios right now are well above the industry average. So it is not a matter of just trying to get to a certain ratio, we feel very comfortable with our ratios.

It would be a matter of having access to very, what we see as inexpensive tier one capital, and using that for some opportunities that may arise. Again, the July capital raise was a defensive capital raise, and we feel very well positioned there to absorb any losses, and we’re doing that but this may afford us some additional opportunities, not necessarily to target certain ratios.

Operator

Your next question comes from the line of [Fay Elliott] – Merrill Lynch.

[Fay Elliott] – Merrill Lynch

I was looking at your allowance levels and your MPA levels; and not to beat a dead horse on this, but it seems like the rhetoric is you’re expecting some more deterioration. Maybe we don’t really know how to quantify it at this point, but why would we see a decline in the ratio of the allowance to MPAs if we’re thinking that we might see some additional deterioration in other areas?

Jim Dawson

I would say that there was actually an increase in the allowance for loan loss relative to our MPAs. You have to pull out the non-performing assets that are associated with the loans held for sale. You can’t have allowance with regard to those particular assets. Those assets were marked-to-market and are being in the held-for-sale bucket.

You have to look at the allowance relative to the non-performing assets that we actually have on our balance sheet not in the held-for-sale category, and that is up to 136% of the allowance over the non-performing assets that we’re not going to sell. So we saw an increase in that, and I think that’s well above – the industry average is probably about 65% to 75% coverage.

[Fay Elliott] – Merrill Lynch

But you’re also saying that these assets could, while they are in held-for-sale, they may also still, and they’re not accruing, I guess they also may have an additional write-down. We don’t really know what the price is on them yet?

David J. Kaye

I think, as Jim said, that we don’t know what that price was. We used a third party to get a market to where they felt the value was, and then we put an additional haircut on that to reflect these uncertain economic times; so we feel that we are adequately positioned to absorb these losses; but it’s a dynamic world out there, and we’ll see when the sale actually takes place. Right now we’re feeling comfortable.

[Fay Elliott] – Merrill Lynch

So if next quarter we don’t see a sale of these loans, will they be marked lower since the decline is coming at a 3% rate per month? Will we see an additional mark?

David J. Kaye

I think we would have evaluate that as to why they are not selling; if we believe that what the appropriate fair value for these instruments are. I can’t just say that they’ll automatically go down; but we have to evaluate it at that time.

Jim Dawson

Let me just elaborate, too. It’s our intention to dispose of this held-for-sale portfolio in Q4. It’s our strong intention, and you will see significant activity in that portfolio, whether the entire portfolio is liquidated or not, you will see significant activity. And the process here would be to get bids and then to negotiate, and then make a determination if we feel that some of the loans would be better off working out ourselves.

Or if what often happens is when it becomes public that a bank is undergoing this process, borrowers step up and start to negotiate directly with the banks because they don’t want to be in the hands of another note holder. So just so you know, we do not anticipate having this held-for-sale portfolio at the end of the fourth quarter. It will be reduced very significantly, and we’ll be able to give you a much more concrete feedback at the end of the quarter.

Operator

Your next question comes from [Gerard Cassidy] – RBC Capital.

[Gerard Cassidy] – RBC Capital

In looking at the assets under management, I know you guys don’t want to say much about what has happened post the end of the quarter, could you give us some flavor since you had some very strong inflows, did most of the inflows come in any of the quarter, end of quarter, what was the driver behind the inflows, besides the performance of the funds, of course.

David J. Kaye

Well fundamentally, most of the flows were institutional and it’s hard to respond to that because often in the institutional businesses, as I know you’re aware Gerard, the decisions get made and they take some time often to be affected. So I don’t have the specific answer to your question, were they evenly distributed across the quarter, were they front-ended or back-ended; but I think it’s fair to say in the institutional business, generally the decision predates the actual funding by a little bit of time.

[Gerard Cassidy] – RBC Capital

The three big custody banks that reported their numbers last week, and obviously they have had challenges of their own to deal with. Most of them had declines in the assets under management, some more so than others. And what we’ve discovered is the breakout of the assets under managements, whether it is equities, fixed income, money market, influence how much of the decline was represented in the most recent quarter. Can you give us a breakdown as a percentage of the assets under management totally, how much is in equities, how much is in fixed income, and how much is in money market funds similar to the three big base banks?

David J. Kaye

Well we can’t with precision on this call, Gerard, but your question is a good one, and I think we’ll endeavor to have that for future calls here. I would say broadly we are probably an aggregate 50% to 55% in equities at quarter end, and I would say probably the remainder probably is skewed more towards fixed income and include a fair amount of municipal exposure for our private clients there.

[Gerard Cassidy] – RBC Capital

And then finally, maybe Tim, you might want to address this. As a result of what’s happened here at Boston Private over the last 18 months, what are the lessons that you guys are drawing from this experience and how is that going to shape the way you look at the future and the way you guys lead Boston Private going forward?

Timothy Landon Vaill

Well, Gerard, I think we need about two hours to answer that particular question; maybe even two days. There certainly are a lot of lessons for sure. Being able to anticipate activities in the market and respond to them a little quicker is certainly one, making certain that we have the kind of risk management environment and credit controls that we want to have across the system.

Recognizing that we have a very diversified portfolio with different regional pressures, and I think we are working hard in all those areas to make certain that we’re able to stay in front of challenges that will not only come up in the future here. Obviously it’s been a painful time, as Jim mentioned, particularly in southern California, and I think that one of the key lessons from my perspective, anyway, is to make certain that we stay focused strategically with our clients, that we don’t allow ourselves to be lured into areas that perhaps appear to be profitable but particularly aren’t strategically driven for us.

We know that our strategies work very well, the kind of clients that we lend to, wealthy individuals and their families and their businesses have worked extraordinarily well, and I would just point to the dynamic success at [Borell] private bank and the great success that Boston private bank is leading the pack here, which if you take a look at their loan problems, they’re virtually zero to speak of, and yet they are still very aggressive in the marketplaces because they are very strategically focused. So that’s a key lesson that we’ve learned here as well.

Operator

Your next question comes from Mark Fitzgibbon – Sandler O'Neill.

Mark Fitzgibbon – Sandler O'Neill & Partners L.P.

Not to beat a dead horse on credit; but we were on this call exactly a year ago talking about southern California. Most of the questions related to the construction portfolio, people were concerned that there were problems there because other bank markets in that inland empire were having issues. And you folks had sent an action team out there and said we don’t really see that in our portfolio; we’re different.

We’re hearing the exact same kinds of commentary from banks in the Pacific Northwest and in south Florida, and you all are suggesting that you guys are different. Can you help us sort of think about what’s different this time?

Timothy Landon Vaill

Mark, I’m not going to revisit southern California. You’re absolutely right, we got hit by a 2 x 4 right between the eyes in the first quarter and we learned some important lessons about relying on independent third party vendors and even the regulators to identify some issues. There’s an entirely different culture at this company in 2008 than there was in 2007. That’s number one.

Number two; we have been much closer to the portfolio in south Florida than we were in southern California. We’ve been living it and breathing it.

Jim Shulman’s only been here since June, but he and I have both been living it and breathing it with the credit folks down there and the CEO down there. We have not relied on independent vendors, with the exception of [Jasman] and Associates, but we’ve tested ourselves their work and have – you know, I’m now on the Board of Directors at all of the banks, looking at all of the information. We’re in the process of adding another Board member from the holding company at all of our banks, and we are immersed in that business, and so that’s the biggest difference.

And you know I’ve talked a lot about what we think is going on in south Florida and we’re prepared for some challenges. In the Pacific Northwest, similarly we are very focused on asset quality and credit practices. We don’t know that portfolio as well as we know the Florida portfolio because we have been partners with Florida a little bit longer.

But we have immersed ourselves in the Pacific Northwest. We have gone over loan by loan, appraisal by appraisal, new loans, [Jasman] has complete a review there, and we do expect that the Pacific Northwest will have some challenges as we go forward, whereas is some segments inn Florida things may be stabilizing. I’m not sure that’s the case in the Pacific Northwest.

We’ve got some challenges right now with some residential construction. There was an article in the New York Times the other day about commercial real estate, increased vacancies, so we expect that that market will be more challenging as we go forward into the fourth quarter and the beginning of next year.

Operator

(Operator instructions) There are no further questions. I would now like to turn the call back over to management.

Timothy Vaill

Thank you all again very much for joining us this quarter, and I look forward to a steady dialogue as we go into the future here. Thanks very much, operator.

Operator

Thank you. Thank you for your participation in today’s conference. This concludes our presentation.

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