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Boston Private Financial Holdings, Inc. (NASDAQ:BPFH)

Q1 2010 Earnings Conference Call

April 29, 2010 9:00 AM ET

Executives

Tim Vaill – Chairman and CEO

Catharine Sheehan – Director of Corporate Communications

David Kaye – CFO

Jim Dawson – CEO, Private Banking Group

Jay Cromarty – CEO, Wealth Management Business

Analysts

David Rochester – FBR Capital Markets

Christopher Marinac – FIG Partners

Cynthia Mayer – Merrill Lynch

Christopher McGratty – KBW

Mac Hodgson – SunTrust

Cheryl Pate – Morgan Stanley

Tom Alonso – Macquarie

Gerard Cassidy – RBC Capital Markets

Operator

Good morning ladies and gentlemen, and welcome to the First Quarter 2010 Boston Private Financial Holdings Earnings Conference Call. At this time all participants are in a listen-only mode. Later you will have the opportunity to ask questions during your Q&A session. I would now like to turn the presentation over to your host for today Mr. Timothy Vaill, Chairman and Chief Executive Officer. Please proceed sir.

Tim Vaill

Hi good morning everybody. This is Tim Vaill, Chairman and CEO of Boston Private. Welcome to our first quarter 2010 earnings conference call. Joining me this morning are Walt Pressey, President of the Company; Jim Dawson, CEO of our Private Banking group; Jay Cromarty, CEO of our Wealth Management Business; David Kaye, Chief Financial Official and Catharine Sheehan, our Director of Corporate Communications.

At this time, I am going to ask Catharine to read the Safe Harbor provisions.

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

Additional factors that could cause Boston Private's results could 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 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 will turn it back to Tim Vaill.

Tim Vaill

Thank you Catharine and thanks to everyone for joining us this morning. The first quarter of 2010 was a period of continued stabilization in our business as core profitability improved both for the late quarter and on a year-over-year basis. And our capital position remains strong.

Our core revenues increased while operating expenses remained flat and our provisions declined. During the quarter, we generated $5.8 million of net income from continuing operations. After taking into account our TARP dividends and other onetime adjustments we reported GAAP earnings per share from continuing operations of $0.02.

We continue our focus on reducing our credit risk and keeping a strong capital position in place. In the quarter we saw areas of credit improvement and our lowest provision allocation in over two years. Non-performing assets and past dues were also down slightly for the quarter. We’ve continued to pursue a conservative approach to our loan portfolio and have taken the necessary steps to ensure we have adequate reserves.

On the capital side our TCE to TA ratio remained strong at 6.32%, with some decline from last quarter due to a payment to complete the purchase of the remaining 19% of KLS Advisors as had been planned. Our pro forma Tier I risk based capital ratio is a healthy 15.8%. Looking at the banks, revenues were up, deposits were up, loans were up and expenses were down.

All of our banks posted profits for the quarter and Boston Private Bank & Trust Company actually produced record debt income in the history of the firm. Given the challenges we faced in the last two years, this is performance we’re glad to see in our banking sector. At the same time we are managing our business cautiously through these early stages of the recovery, revealing in stress testing our bank credit portfolios under regular basis.

In particular ongoing economic uncertainty may pose some future challenges to the commercial real estate markets in Northern California and the Pacific Northwest. Our wealth management companies had increased revenues for the quarter, while controlling the expenses. Assets under management increased on a net basis and we saw increased flows for the quarter.

The economic uncertainty that clients have grappled with continues to highlight the need for an importance of these trusted advisors who could help clients navigate through the challenges. So all in, I was happy with the performance of all of the Boston private affiliates in the quarter. Incidentally we were pleased to see that Boston Private Bank was recently ranked as the best financial advisor in the nation for high net worth investors based on quality of service and exclusivity according to the latest report from the Luxury institute.

This speaks directly to the kind of personal one-on-one attention that all of our private banks and wealth managers provide. Now let me anticipate your questions about our TARP moneys, both with respect to timing and the possible need for additional capital. In January we repaid the first third of our TARP funds as an initial step towards our goal of completing the repayment in 2010 if possible. Our plan was to carefully asses the pace of the nation’s economy as well as our credit picture and at the right time to work with the regulators on completing our goal.

This is still the plan and we will be very prompt in communicating to you, our next step when that time comes. With respect to new capitals repaid TARP, I would say this. We had spend the better part of the last 18 months, improving our balance sheet and stand here today with a very strong capital position.

When the time comes to repay TARP, we will work very carefully with the regulatory authorities and the capital markets to asses our capital situation, at that point in time and make the necessary decisions to complete the task. Our goal of course, is to do the right thing on behalf of our shareholders taking everything into account.

Before I turn this call over to Dave, I will just say that in summary we’ve been working through the impact of the downturn for several quarters and are confident that the actions we’ve taken to reduce risk, increase capital strength and improve our Company’s financial flexibility have put us in a position to benefit from the continued economic improvement, at the same time we remain cautious and watchful in these early stages of the turnaround.

We will continue to manage our business prudently and focus on growth opportunities in our existing markets, areas where we believe we can realize the most success over the near term. While the economic recovery is ongoing and will be for sometime, we are approaching this year with an eye toward getting back to business as usual, generating profits from our core business, maintaining the strong capital position and continuing to closely manage credit and risk.

The results from the first quarter are a solid start. Dave?

David Kaye

Thanks Tim and good morning everyone. Our comments are going to begin with slide five in the presentation. In the first quarter, our GAAP net income from continuing ops was $5.8 million. We had non-cash equity adjustments of $1.9 million for the quarter, and that’s primarily due to the accretion charge we absorbed for the $50 million partial TARP repayment that we made in January.

Preferred dividends were about $1.6 million and again we’re primarily related to our TARP. The non-controlling interest was $700,000 which is lower than prior quarters due to the purchase of the remaining interest of KLS which Tim mentioned. After taking these factors into account, we reported GAAP net income to common shareholders of $1.6 million or $0.02 per share for the quarter.

Moving onto slide six or revenues, our net interest income and fee based revenues were up 10% in the first quarter. We saw improvements in our net interest margin, the loan volumes and AUM levels which drove the increase. Net interest margin increased 21 basis points on a linked quarter basis to 318, and that’s primarily due to decreased deposit and borrowing costs and a full quarter’s realization of the TARP repurchase.

On the next slide, provision for loan losses was $7.6 million in the first quarter, and that’s down from the $13.8 million that we booked in the fourth quarter of 2009. Majority of the provision came from Northern California and the remainder was due to New England. We did not book any provision in the Pacific Northwest or Southern California and that’s due to the improved asset quality and $2.5 million of combined recoveries in those markets.

On slide, despite the decline in the provision I showed you on the previous slide, you can see that on slide eight, we added to the reserves as our ALLL increased to 168 basis points of total loans. The ALLL was strengthen not only by size but by the continued mix shift towards the less risky residential mortgage portfolio in away from the more risky commercial portfolio which also carries a higher reserve.

You can see here that as a percent of total loans, our net charge-offs decreased significantly from 43 basis points to 6 basis points in the first quarter, again that’s partially due to the recoveries that I mentioned. On slide nine, our capital position, our earnings and strengthened allowance allowed us to maintain a strong capital position in the first quarter, despite the fact that we had the $50 million partial TARP repayment and the $20 million earn-out and purchase remaining interest in KLS.

The KLS redemption drove the linked quarter reduction of 34 basis points in TCE to TA ratio and that ended at 6.32% for the first quarter. As for regulatory ratios, our pro forma Q1, the Tier 1 risk based capital ratio remains very strong at 15.8% and you can see here that it exceeds both the median and the top quartile of our peer group which was in Q4 ’09.

Now let me turn it over to Jim Dawson for a further analysis of the credit trends in the banking business. Jim?

Jim Dawson

Thanks Dave, good morning everyone. I’ll make a few general comments before continuing with our slides. Our banks experienced slowing credit deterioration in the first quarter, a decline in consolidated past dues, non-accruals and charge-offs, demonstrated areas of credit improvement, however classified loans did increased in Q1.

We had slowed the flow of non-accruals and classified loans by putting a wall around past credits by continually updating financial information and reviewing risk rates. The private banking segments core profitability improved in the first quarter as a result of our banks in the Pacific Northwest and Southern California, going from a loss in Q4 to essentially breakeven in Q1.

These banks have been making progress with asset quality while transitioning to the true private banking model. We also continue to make progress on building residential mortgage portfolios. Year-over-year the residential portfolio grew 17% while construction exposure got 30% in line with our model. Now let's take a further look at our results.

Slide 11, Total Loans. Total loans increased 1% on a linked quarter basis to $4.4 billion with the majority of growth coming again from our residential mortgage portfolio which increased $47 million due to growth at all four banks. In the past year, our banks in the Pacific Northwest and Southern California purchased hand selected and thoroughly reviewed loans in high net worth ZIP codes to complement organic residential mortgage growth.

This is an important step in their transition to become true private banks because these are high net worth individuals with good credit scores and other banking needs. In Q1, our bank in Southern California purchased $5 million in residential loans and our bank in the Pacific West purchased $7 million.

The next slide shows on a linked quarter basis, past due loans 30 to 89 days decreased from $21.2 million to $19.6 million. We saw declines in Northern California and the Pacific Northwest. In fact, Northern California had no past dues at March 31. Past dues in New England increased $8.3 million due to two loans that were renewed and extended the first week in April. At 45 basis points of total loans, past dues remain well below the Q4 peer group median of 123 basis points.

Next, classified loans on a linked quarter basis increased 6% to $150 million. New England saw an $8.3 million increase due to two commercial real estate loans. Both banks in California experienced roughly $3.5 million increases and the Pacific Northwest saw a $7 million reduction in classified loans. Next slide is non-performing loans. NPLs decreased 3% to $88.1 million in the quarter. Southern California and the Pacific Northwest experienced declines while Northern California and New England experienced increases.

As a percentage of total loans the non-performers are 202 basis points of total loans and remain well below the Q4 peer group median. At the end of the first quarter we had $15.1 million of TDRs all of which were non-accruing. The next slide, loans by region, a look at our portfolio by region shows the size of each portfolio and the percentage of non-performers. On a linked quarter basis, NPLs increased in New England by 22% to $10.2 million. NPLs in Northern California increased 11% to $41.6 million on a linked quarter basis.

We had positive results in Southern California and the Pacific Northwest where NPLs declined 12% and 24% respectively. You can see that all four our banks remained below the regional industry means of NPLs to loans. Next, loans by type, you can see when you look at NPLs by loan type, that the majority of our NPLs are in construction and CRE. On a linked quarter basis, these portfolios have improved. Construction non-performers declined a 11% to $32.5 million. We also witnessed improvement in the CRE portfolio where NPLs decreased 6% to $32.1.

Of the $32.1 million in non-performers in CRE, half is manufacturing, industrial and warehouse and retail represents above 30%. We have presented additional detail on our CRE portfolio in the appendix of this presentation. Slide 17, deposits. Deposits increased 5% on a linked quarter basis to $4.5 billion in the first quarter.

On a linked quarter basis our exposure to broker deposits decreased 9% and our core deposits increased 6%. Our first quarter loan-to-deposit ratio decreased four basis points to 97%. We are well positioned to fund loan growth when the economy strengthens. Even though our average deposits increased 22% year-over-year, our first quarter 2010 cost of deposits including DDA was 1.04% down from 1.69% a year ago.

Now let me turn it over to Jay Cromarty to discuss the wealth advisory and investment management segments.

Jay Cromarty

Thanks Jim. Superior clients service remained the number one priority for our wealth advisors and investment managers in the first quarter. Our firms continue to focus on client retention and new business initiatives which have produced positive results. We’ve made meaningful co-investments with our firms in marketing, in sales programs and have begun to focus on selective growth opportunities in each of our firms respective markets.

We expect these initiatives to yield increased results in coming quarters. Our pipelines are strong and we have witnessed perspective clients making decisions regarding their assets at an accelerated pace. They realized that they need to be more proactive in managing accounts and our affiliate partners are there to assist and to guide every step for the way. Now let's take a look at the results turning to slide 19. Net inflows for the quarter was $69 million, $202 million more than in the prior quarter, our private banking segment posted positive flows for the first time in five quarters and our wealth advisory segment continued to post strong results.

The net outflows from our investment management segment were dominated by a large client reallocated from equities to fixed income. The black line on the chart represents the markets effect on our assets under management and in Q1, it had a positive effect of $0.6 billion. Turning to slide 20, we saw assets under management increase by 4% to $18.3 billion on a linked quarter basis. Total fees were $24.1 million for the quarter, an increase of 2% on a linked quarter basis.

In the first quarter, wealth advisory fees increased 1% to $9.3 million, investment management fees increased 1% to $9.2 million and private banking trust and investment fees increased 4% to $5.7 million. With that let me turn it back to Tim.

Tim Vaill

Thanks Jay, thanks Jim. We’re ready to take your questions. So operator please go ahead.

Question-and-Answer Session

Operator

(Operator Instructions). Please standby for your first question. And your first question comes from the line of Dave Rochester from FBR Capital Markets. Please proceed.

David Rochester – FBR Capital Markets

Hey good morning guys. Good quarter.

Tim Vaill

Thank you.

Jim Dawson

Good morning Dave.

Jay Cromarty

Good morning.

David Rochester – FBR Capital Markets

Given the improvement on the credit trends we've seen and more stability in the economy are you guys thinking at this point that the reserve building is done?

David Kaye

Well the reserve building is going to be a function of our asset quality and as I mentioned we did not put additional provision on at, in Southern California and the Pacific Northwest because we’ve seen significant improvements there. We did strengthen the reserves in Northern California and we thought that was appropriate. So as the quality continues to improve, we’ll see a lowering of our provision and a lowering of our allowance.

David Rochester – FBR Capital Markets

Well would you anticipate assuming that trends kind of continue the way you've seen them in the most recent quarter, that you could possibly be releasing reserves by the end of the year?

Jim Dawson

Dave, this is Jim. I am not sure we want to look forward at that possibility. I think our past year is, we’re going to remain very cautious, we’re fortunate to be in some markets in New England and Northern California to fit, first in 12 districts where things are reasonably stable, but we’re not claiming victory yet, we’re going to be very cautious. We have a methodology that’s proving to be appropriate for us and we’re not assuming that there will be tailwinds we’re going to take every month and every quarter and look at our credits very conservatively and very thoroughly.

David Rochester – FBR Capital Markets

Okay, and on the loan growth side, it looked like you guys posted a little bit of growth in the commercial and construction portfolio. Can you talk about the opportunities you're seeing there, and what's driving that growth, and perhaps provide some color on the state of the pipeline today versus where you were a quarter ago?

David Kaye

Yes Dave, actually most of the growth recently has been coming from the residential area.

David Rochester – FBR Capital Markets

Yes.

David Kaye

We’ve purchased a couple of small portfolios in the first quarter in Southern California and the Pacific Northwest, but we have a very good originations and that’s consistent with our goal to have our companies evolve as ideal private banks. Quarter-over-quarter, we’re up 1% for total loans and I would say that our pipelines are looking pretty good. We’re focusing on building strategic relationships, a couple of our banks have been exerting most of their energy and efforts on problem loans but now we’re building some momentum and I’d say the pipelines are starting to build, but we’re going to be cautious with our asset quality and make sure that there are strategic relationships.

David Rochester – FBR Capital Markets

Okay, and one last one on the cost of funding side. It looks like you have some more room to move CD costs down. Can you talk about where you're re-pricing those today, and what the duration of the portfolio is?

David Kaye

Well the duration has come down and I don’t have the specifics on the pricing on each of our banks depending on the size of the particular CD and the term is different Dave, but we have been, that we have seen a meaningful reduction in our deposit pricing in the first quarter. We also saw the reduction due to the Trups repurchase, so we had the full quarter affect on that and both of those things really boosted our net interest margin. So maybe somewhere in there, but may not be as dramatic as we saw in the first quarter.

David Rochester – FBR Capital Markets

Okay, great. Thanks guys.

Operator

Your next question comes from the line of Christopher Marinac with FIG Partners. Please proceed.

Christopher Marinac – FIG Partners

Thanks. Good morning, everybody.

Tim Vaill

Good morning.

Jim Dawson

Good morning Chris.

David Kaye

Good morning Chris.

Christopher Marinac – FIG Partners

I wanted to ask about the classified assets and I noticed the change in disclosure from last quarter to March and just wanted to know if we could reconcile kind of the classified disclosures in the past compared to how the accruing classifieds are appearing now.

David Kaye

Yes Chris, one of the things that we did starting with the 10-K, there was some confusion. We used to report our non accruals or non-performing assets and then we'd also report our classified loans or classified assets and in the past some of the investors and analysts were adding the two together and really the non-performers are a subset of the classifieds. So what we did was we, starting again with the 10-K we made a decision to break those two out to give some clarity and then we restated the numbers in the release so we have an apples-to-apples comparison going back. But basically it's just -- if you were to take the non-performers out of the classifieds you get the accruing classifieds.

Christopher Marinac – FIG Partners

Okay, so if I added them all together we would have a – we’d be in the ballpark of what you used to do last time on the total…

David Kaye

If while we added the non-performing assets, you have to back out the OREO as well, because, right and then you got the classified loans.

Christopher Marinac – FIG Partners

Got you. Okay, fair enough. And I guess more specifically now for Jim, is the classified trend, do you have any inklings that that may level off or even go down as this year unfolds, I know it might be premature to talk about the whole year just yet but just curious what trends you're seeing?

Jim Dawson

Hi Chris, the trends we’re seeing in the last two quarters flow of classified and non-performers has decreased, but I’m not going to project forward well, to some degree we’re in markets that are driven by the local economy despite our very good credit administration and discipline. We still have to work with the vacancy rates and the run rates that are prevalent in the markets we’re in. So I don’t want to make any predictions but the last two quarters, the flow of downgrades has diminished.

Christopher Marinac – FIG Partners

Okay, great. And then just last question about the investment management side is, are the positive inflows this quarter something that could continue the rest of the year, do you have a feel for if that's a sustainable trend?

Jay Cromarty

Chris, thanks for the question. If you go back several years, you’ll note that our wealth advisory segment really since 2005 has almost consistently every quarter have produced positive net inflows. So I’ll just put that as the trend and allow you to extrapolate from there. The private banks, certainly we’re pleased at their performance this past quarter in terms of net inflows, those are particularly driven by Boston Private bank, certainly they are excited about their prospects but keeping with the theme of the day here we’re not going to make any forecast about what our results would be for the balance of the year.

Christopher Marinac – FIG Partners

Sounds good Jay. Thanks everybody.

Operator

Your next question comes from the line of Cynthia Mayer with Merrill Lynch. Please proceed.

Cynthia Mayer – Merrill Lynch

Hi, good morning.

Tim Vaill

Hi.

Cynthia Mayer – Merrill Lynch

I'm wondering if you could talk a little bit about the 5% growth in deposits. Where are those coming from, what types of clients, what geographies and to what extent do you see this as a trend?

David Kaye

Well the growth Cynthia has come primarily in Northern California and in New England and we’ve benefited to some degree by the increased insurance from the FDIC and a lot of deposits that flowed out a year, or two years ago has started to come back in. We have concerted efforts to build strategic relationships at all of our banks and real focus on deposit generation and I would say more than 50% of the growth is coming from businesses, those would be partnerships, private equity or venture capital partnerships, professional service firms, law firms, accounting firms and then less than 50% would be from high net worth individuals.

Cynthia Mayer – Merrill Lynch

Great, thanks. And can you also give some color on the expected dilution from options and warrants given where the shares are trading now and your internal earnings outlook?

David Kaye

Yes, I think we had about in our current share count or in the current dilution we have about 1.2, 1.3 million of dilution from those types of shares and we would expect that to continue for the rest of the year.

Cynthia Mayer – Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Chris McGratty of KBW. Please proceed.

Christopher McGratty – KBW

Hi good morning guys.

Tim Vaill

Good morning.

David Kaye

Good morning Chris.

Christopher McGratty – KBW

Question on the future put agreements similar to KLS. Dave what's the potential outflow or capital over the next two years from more of these?

David Kaye

Well the intent, these are little bit different than we had with the KLS agreement, I think these firms have expressed an interest in maintaining that 20% ownership and they’ll continue to do so. So what you’re seeing on our balance sheet right now is more of an accounting convention of the right that they have to put that back under certain extreme conditions like if they were to die the value is really reflected there. So it’s our expectation these would be recycled to new owners of the business and so I don’t know that we have really much of an expectation that we’re going to see a significant outflow over the next year.

Christopher McGratty – KBW

So the $20 million this quarter, you don't expect I guess, similar amount in terms of…

David Kaye

No, not at all.

Christopher McGratty – KBW

Okay. In terms of the capital in terms of your TC ratio I guess, you guys are -- you're talking a little bit more about growing the balance sheet in terms of residential mortgages, I guess what's your comfort in terms of what's the right TC ratio for the bank, given where you are from a risk perspective?

David Kaye

Yes, I think we have said in the past that we’re comfortable being somewhere in the 6 to 7% range on the TC basis and we’re right there, right now. So that’s where we would look going forward.

Christopher McGratty – KBW

Okay. And then lastly, I have to ask on succession. I think you guys have an 8-K from a year ago. I guess any update on your plannings?

Tim Vaill

Well Chris, this is Tim. As you know I entered into a new employment contract with the Company in late 2008, and that also, we also stated that we’d make a leadership change in 2010. To that end, the Board of Directors has appointed a special search committee and engaged (inaudible) to support this effort. We are doing both internal and external candidates. That team is hard at work on this task and expects to accomplish its goal and further announcements will be made as appropriate.

Christopher McGratty – KBW

Alright, thanks guys. Good quarter.

Tim Vaill

Thanks Chris.

Operator

Your next question comes from the line of Mac Hodgson of SunTrust. Please proceed.

Mac Hodgson – SunTrust

Hey, good morning.

Tim Vaill

Good morning, Mac.

David Kaye

Good morning.

Mac Hodgson – SunTrust

I missed a part of the Q&A, so I apologize if I repeat any of the questions, just wanted to see if I could get any more color on the recoveries out of Southern California, Pacific Northwest if, obviously, you all were too conservative with your marks or you see an improvement in values, just need more detail there.

Tim Vaill

I think we were appropriately conservative with our marks and these were charge-offs that we had taken at some point in 2009, that have come back and proved to be a benefit for us. So, but it wasn’t an appreciation in value that we’ve seen Chris, sorry Mac.

Mac Hodgson – SunTrust

Okay, and then you mentioned zero provision in those two banks and they were roughly break even. What needs to happen for a positive contribution, is it merely loan growth, is it driven margin, where are they focused on?

David Kaye

Its two things and we’re working on the organic growth now. As we mentioned earlier, we’ve had some good growth in residential mortgage portfolios and we’ve hired two chief lending officers at those two banks, focused on building the commercial C&I and commercial real estate portfolios. So we want and we expect organic growth, but also further reduction in non-accruals. So we’re converting non-interest earning assets into earning assets and we’re pleased with what we’re seeing, both of the chief lending officers are building strong teams and a strong credit culture and we’re starting to see some pipelines.

So it’s primarily organic growth and we think that we’ll see that as we move forward this year.

Mac Hodgson – SunTrust

Okay, great. One last one Dave, on the margin, as we think long term for the company, if I look back and I know historically the last 10 years or so the margins kind of average in the high 3s. Do you feel like that's an achievable level? Again after a couple of years out when we get back to a normal environment?

David Kaye

I think we have a different mix in our portfolio and will going forward, I wouldn’t see a stack in the high 3s and I think we had said before that, we see somewhere in the 325 to 330 range is being a realistic in a longer range.

Mac Hodgson – SunTrust

Okay, great. Thanks.

Operator

Your next question comes from the line of Cheryl Pate with Morgan Stanley. Please proceed.

Cheryl Pate – Morgan Stanley

Hi, good morning.

Tim Vaill

Good morning Cheryl.

David Kaye

Good morning.

Cheryl Pate – Morgan Stanley

I just wanted to touch on the NIM a little bit further as well. I wonder if you can talk about how much of an impact NPLs would have had on NIM this quarter.

David Kaye

I don’t think the -- you’re talking about an increase in NPLs or if we already resolved all the NPLs.

Cheryl Pate – Morgan Stanley

Yes I guess the potential improvement we could see going forward as NPLs come down.

David Kaye

Five to seven basis points probably.

Cheryl Pate – Morgan Stanley

Alright, and second question would be on the AUM mix in terms of equities versus fixed income and liquidity products. Can you talk about sort of where that is current quarter versus a year or so ago, and are you seeing more movement back into equity products at this time and a willingness for clients to move back down the risk curve a little bit?

David Kaye

Sure, let me give you what the current asset allocation is of our AUM as of the end of the quarter. Its 50% equities, its 35% fixed income and its 15% alternative and within the equities, its two-thirds value. So that’s where we stand right now. If you look, if you compare that to a year ago, we would have a higher equity component which was reflective of the stable of companies we had at that time, which were more equity going into. Within our high net worth client base which is roughly 60% of our total AUM, we continued to see more balanced asset allocations within the institutional segment which is 15% of our total AUM. Its heavily skewed towards equities and then within the SMA business again 25% of our total AUM its skewed towards equities.

And you’ve seen some migration within the SMA and the institutional segments from equities to fixed income and more recently some back to equities here, but that’s a fast moving dynamic and it’s really hard to speculate on where that will go.

Cheryl Pate – Morgan Stanley

Okay, thank you.

Operator

Your next question comes from the line of Tom Alonso with Macquarie. Please proceed.

Tom Alonso – Macquarie

Good morning guys.

Tim Vaill

Hi Tom.

Tom Alonso – Macquarie

Just circling up on your comment on the, those two New England loans that were past due and you said you renewed and extended. Were those, are those now TDRs or are those you just reopened (ph) the loan.

Tim Vaill

Those were loans were updated financial information was received and leases were signed and they are accruing but they are under consideration for upgrade now. So no they are not TDRs.

Tom Alonso – Macquarie Capital

Okay. I got you, okay. And then just on part repayment, it seems like you got a bit more cautious in your commentary if I'm hearing you correctly. Is that a fair way to look at it?

Tim Vaill

I don’t think we really changed our view back in January we indicated basically the same thing that there were several considerations that we had to bear in mind of course the nation’s, pace of the nation’s economic recovery is probably the overwriting goal, overwriting consideration. But also our own internal picture with respect to our credit portfolio so you could see that that’s modestly improving at the moment. And thirdly it would be the ongoing discussion with the regulators on the whole TARP repayment and so frankly I don’t think we’ve changed our view on that at all and as I mentioned when the right, we’ll go ahead and make the next step.

Tom Alonso – Macquarie

Okay, good. It just seemed like last quarter you were talking about definitely repaying in 2010 and probably earlier in the year rather than later and maybe I misheard the comment earlier but it seemed like you were sort of, repayment of 2010 wasn't a certainty.

Tim Vaill

Well, I mean that’s…

Tom Alonso – Macquarie

I understand nothing is certainty…

Tim Vaill

Because they’re partners of this thing, nothing is a certainty but it’s certainly our goals to repay in 2010 if we possibly can and that still remains.

Tom Alonso – Macquarie

Okay, fair enough. Thanks very much.

Operator

Your next question comes from the line of Jake Seville [ph] of RBC Capital Markets. Please proceed.

Gerard Cassidy – RBC Capital Markets

Hi guys, this is Gerard. How are you?

Tim Vaill

Hi Gerard.

Gerard Cassidy – RBC Capital Markets

The question I have for you, when you look back at your loan growth and you go back into the late 90s, early 2000 versus where the peak was in let's say '06, '07 for the commercial real estate exposure, construction lending was a really big driver of loan growth during the ten year period, if you will. What will be the driver of loan growth going forward? I presume the commercial real estate driver will not be it, particularly in construction lending because of the lessons learned. So, where do you see the balance sheet being driven by, on the loan front?

David Kaye

Thanks for your question Gerard. If you look at the period, you outlined, a lot of that growth was coming from Southern California. We have two, the two largest banks have had strong organic growth for the last 10 years and then, we expect that to continue. I would say the mix as an enterprise will be a little bit reoriented with more residential mortgage activity and with more C&I activity, not a lot of construction especially speculative construction, in fact we have an initiative underway that our chief credit officer is working on with chief credit officers of all the banks to focus on C&I loans, professional service firms, and maybe some not for profits to identify the right market opportunities and the strategic relationships that are truly private banking relationships and those are not generally not going to be construction loans. Those will be C&I or commercial real estate.

Gerard Cassidy – RBC Capital Markets

How challenging, it seems like when we talk to banks around the United States especially the ones that were very involved in commercial real estate lending, everybody's pointing to the C&I as the savior for loan growth. How challenging are you guys going to find this and will the spreads because of competition, come in quicker than maybe most people are thinking?

David Kaye

Well let me first state Gerard, we’re not going to jump into anything haphazardly we’re not going to ask the banks to grow their portfolios dramatically and change one risk to another risk because, we’re growing too quickly or we’re not prepared for that types of C&I growth we’re looking for. We’re going to be very careful with it. We’re going to be very measured. We’ve got some excellent people on the staff now. And will continue to build that components. So it is going to be a competitive business as we move forward, but we think with the types of relationships we have with the focus on strategic relationships and experience lending staff and the products and services we can bring to our private banking relationship, we can price it and get a little bit of a premium over what a retail bank or a transactional bank would look for.

Gerard Cassidy – RBC Capital Markets

Speaking of commercial real estate you guys in your, I think in slide 26, talked about the amount of the commercial real estate portfolio that's going to be re-financed in the next three years. Can you share with us what you're seeing in the 2010 vintages that are re-financing as we speak? Particularly the vintages that were done in '06, '07. Are you running into valuation problems with these loans when they come up for re-financing, or how is that going?

David Kaye

Gerard let me just give you a little bit more color on your previous question because I want, you know our bank, you know our company and you saw the growth that Boston Bank had and that’s really the model that we’ve been using and that the banks especially the newer smaller banks are copying, and you saw the growth that Boston Private Bank & Trust Company experience, you saw the NIM, you saw the margins and you saw the asset quality.

So I think we, I think we’ve got a history and a method and a model that works going forward and as I said early, we’re not going to be crazy about, like double the size of the C&I portfolio in a period of two to three years. With respect to loans that are coming due, we’re not being surprised by loans that are coming due because it’s not as if we haven’t paid attention to them for the last several years. We’ve as I mentioned earlier built a wall around all of our past credits, we get updated financial information on all of our real estate loans regularly, we get updated rent roles, we get tax returns, we get personal financial statements in some cases. So and if a loan is at all deteriorating we’re getting appraisals long before maturity.

So I really can't say that the maturity triggers anything dramatic, we know we’re a small enough company and we’re close enough to our credits where we know it’s going on before they mature. The short answer to your question is yes, there is some diminution of value in most areas and some is 5% and some is 20 or 25%. But and if its land obviously that could be more dramatic. But we’re not being surprised by it and we have cooperative private banking borrowers, many of whom have liquidity and they can pay their loans down to a more reasonable undervalue. In other cases, if we have an existing relationship with the cooperative borrower, it’s not getting worse and the payments are current, we’ll find another way to renew it and if it’s been not accruing before, it’s probably on a forbearance agreement.

So we’re not being surprised, values have continued to drop a little bit but in many pockets they’re stabilizing.

Gerard Cassidy – RBC Capital Markets

Thank you.

Operator

(Operator Instructions) And there are no further questions, I’ll now like to turn the call back over to Timothy Vaill for closing remarks.

Tim Vaill

Thank you very much. Again we really appreciate your joining in the call this morning. We think we’ve made some significant progress in this quarter. I look forward to talking to you in the next quarter as well. Thank you very much and good morning.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

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Source: Boston Private Financial Holdings, Inc. Q1 2010 Earnings Call Transcript
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