Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

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

Q2 2014 Earnings Conference Call

July 16, 2014, 08:00 AM ET

Executives

Clay Deutsch - President and Chief Executive Officer

Steve Gaven - Vice President for Investor Relations

Dave Kaye - Chief Financial Officer

Mark Thompson - Chief Executive Officer of Boston Private Bank

Analysts

Casey Haire - Jefferies

Chris McGratty - KBW

Jennifer Demba - SunTrust Robinson Humphrey

Christopher Marinac - FIG Partners

Tom Alonso - Macquarie

Operator

Good morning and welcome to the Boston Private Financial Holdings Second Quarter 2014 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Clay Deutsch, CEO and President. Please go ahead.

Clay Deutsch

Good morning, everyone. This is Clay Deutsch, Chief Executive Officer and President of Boston Private Financial Holdings. Welcome to our second quarter 2014 earnings conference call. Joining me this morning are David Kaye, our Chief Financial Officer; Mark Thompson, Chief Executive Officer of Boston Private Bank; and Steve Gaven, our Vice President for Investor Relations. At this time, I'll ask Steve to read the Safe Harbor provisions before we make additional comments.

Steve Gaven

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 earnings release, which identify the 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 to differ materially from those described in the forward-looking statements can be found in the company's filings submitted to the SEC.

All subsequent written and oral forward-looking statements attributable to Boston Private or any person 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.

Clay Deutsch

Well, thank you all for joining the call this morning. Today's call will be a little different from our typical quarterly earnings call. Earlier this morning, we announced Boston Private Bank's acquisition of Banyan Partners. The first part of our call will focus on second quarter results and then we will go through the details of the transaction.

Before we discuss the second quarter though I would just like to say how excited we are about the acquisition. We believe the combination of Banyan Partners and Boston Private Bank & Trust results in a nationally significant private client business with a more differentiated and integrated product offering across the spectrum of private banking and wealth management products and services. I'm excited about this combination and we look forward to discussing it with you later in the call.

In the second quarter, our company generated net income of $21.3 million or $0.25 per share. Linked-quarter net income growth was 25%. Return on tangible common equity was 17% in the second quarter, up from 14% in the first quarter of 2014. Excluding the gain on the sale of the Pacific Northwest offices in the second quarter last year 2013, our total revenue increased 9% on a year-over-year basis. We achieved 13% growth in core fees, led by strong topline growth in the Wealth Advisory segment.

Total expenses declined by 4% for the same period, as the second quarter of 2013 included $2.4 million of charges related to liability, restructuring and tax reserves. Total company assets under management as of June 30, 2014, was $25.4 billion, a 17% increase year-over-year. Average loans are up 4% year-over-year, and average deposits increased 8% over the same period.

At this point, I'd like to turn it over to Dave and Mark for more detail on our financial performance. And then I'll return to discuss the fee-based affiliates before going into a more detailed discussion of the Banyan acquisition. Dave?

Dave Kaye

Thanks, Clay, and good morning, everyone. My comments will begin with Slide 3 of the earnings presentation, which can be found in the Investor Relations section of our website, bostonprivate.com.

On Slide 3, we show the consolidated P&L highlights for the linked quarter. Core fees increased 8% on a linked-quarter basis, driven by the increase in Wealth Advisory fees and a gain on sale of loans. Excluding $1.9 million of interest recovered, net interest income was flat as the company executed its sale of non-strategic commercial loans as we look to optimize our capital and liquidity positions.

Total expenses decreased 1% in the quarter to $54.4 million. In the first quarter, you'll recall that expenses were slightly elevated due to seasonal compensation charges for FICA and increases in the 401(k) employee match. Pre-tax pre-provision income was up 18% on a linked-quarter basis to $26.2 million.

On Slide 4, we show our spread in fee-based revenues and the progress that we've made in growing our fee-based revenue on a year-over-year basis. Total revenue increased 9% over the second quarter of 2013, and that's driven by the 13% increase in core fees and a 5% increase in NII for the same period. Within core fees, total Wealth Management fees increased 11% on a year-over-year basis.

Slide 5 shows our net interest margin. We reported net interest margin increased 10 basis points to 3.14%. However, included in the reported NIM is the $1.9 million of interest recovered from a previous nonaccrual loan. Excluding this item, normalized NIM is closer to 3.01% and that's due to a slightly lower yield on the loan book. Deposit costs increased 1 basis point due to a 2 basis point increase on money market deposits.

On Slide 6, we show the provision credit this quarter of $5 million, and that's due to booking $2.9 million in net recoveries and also $1.2 million of reserve release related to the commercial loan sale.

On Slide 7, we show our tier 1 common equity ratio and that increased 50 basis points to 10.6% due to strong earnings and the flat risk-weighted assets on a linked-quarter basis.

That concludes my comments for this morning. And now I'll turn it over to Mark for a discussion on the Private Banking segment. Mark?

Mark Thompson

Thanks, Dave. My comments will begin on Slide 8. In the second quarter, pre-tax pre-provision income at the Private Bank increased 15% due to a 5% increase in revenue to $57.8 million and a 1% decline in total expenses. Net interest income increased 4% in the quarter, which includes the $1.9 million in interest recovered from previous nonaccrual loans. Core fees increased 20% quarter-over-quarter due in large part to the $1.6 million gain on sale of portfolio loans. You'll recall in the first quarter that the other income line item included $800,000 of gain on OREO.

Slide 9 shows the past five quarters of loan balances by type. Total loans decreased 1% on a linked-quarter basis and increased 6% year-over-year. On a linked-quarter basis, loans were lower due in part to the sale of $57 million in commercial real estate portfolio loans. The strong year-over-year performance was driven by an 11% increase in C&I, a 6% increase in CRE and a 4% increase in residential.

At the individual market level, total loans on a linked-quarter were flat in New England, down 5% in Southern California, and down 1% in San Francisco Bay Area. All of the commercial loans included in the loan sale were collateralized in California with 65% of the loans in Southern California and the remaining 35% in Northern California. On a year-over-year basis, loans increased 6% in New England and 5% on the West Coast.

Now turning to Slide 10, year-over-year total deposits increased 8%, led by 14% increase in demand deposit accounts. On a linked-quarter basis, average deposits including DDA were flat. Year-over-year average deposits are up 8%. On last quarter's call, we noted the high volume of short-term funds at quarter-end. We also noted that a build-up of cash for tax payments is typical during the first quarter. On the West Coast, we have continued to see positive changes in the composition of the deposit base. On a year-over-year basis, demand deposits are up 18% and CDs are down 24%. We are pleased with the success of our Private Banking model on the West Coast and the strategic focus of our market segments resulting in [attracting] [ph] core deposits.

Now I will turn it back to Clay.

Clay Deutsch

Thanks, Mark. Turning to Slide 11, the Investment Management pre-tax income from continuing operations decreased 15% to $2.7 million in the second quarter. This was driven by a 9% increase in operating expenses, which includes a one-time charge of $900,000 to eliminate a recurring referral fee trail. This one-time expense reduced second quarter 2014 segment EBITDA margin to 29%, just below our target of 30%. On a year-over-year basis, the Investment Management fees increased 8% and pre-tax income grew 3%.

The segment overall reported net outflows of $54 million for the quarter, reflecting ongoing macro pressure on active domestic equity strategies. Despite these challenges, our asset managers continue to focus on expanding their distribution efforts. Segment assets under management increased 4% on a linked-quarter basis to $10.9 billion and is up 19% year-over-year.

Slide 12, our Wealth Advisors had another strong quarter and reported a 4% increase in pre-tax income on a linked-quarter basis. Wealth Advisory fees increased 5% to $12 million with expenses increasing by 4% over the same period. On a year-over-year basis, Wealth Advisory fees increased 16% and pre-tax income grew 13%. The segment's second quarter EBITDA margin of 35% remains above our target of 30%.

Segment assets under management increased 1% on a linked-quarter basis to $9.8 billion and increased 15% on a year-over-year basis. Wealth Advisory net outflows were $37 million as compared to net inflows of $206 million in the prior quarter.

More information on AUM net flows can be found on Slide 13. In the second quarter, net outflows were $86 million, down from net inflows of $103 million in the first quarter and up from net outflows of $228 million in the second quarter of 2013. Net outflows continue to be impacted by the investment managers, who face challenging industry-related headwinds.

That concludes our comments on second quarter earnings. Now we'll spend some time walking you through the Banyan acquisition. As those of you who follow our company know, we've been looking for the right partner to elevate Boston Private Bank & Trust from a leading private bank franchise to a national private client business that combines distinctive private banking products and services with a differentiated wealth management offering.

After looking at a number of opportunities over the last two years, we have finally found a special partner that brings us a number of distinctive attributes. Slide 15 offers a brief profile of Banyan Partners. Banyan Partners was founded in 2006 by Peter Raimondi, who previously was the Founder and Chief Executive Officer of The Colony Group, a highly regarded Boston-based wealth management firm. Through a series of targeted acquisitions and robust organic growth, Peter and his team rapidly built Banyan into one of the nation's most highly regarded independent registered investment advisors. Today, Banyan stands at $4.3 billion of client assets with offices across nine attractive markets.

So why Banyan? On Slide 16 is our strategic rationale. First and foremost, Banyan brings strong leadership, talent across the organization and a scalably expandable business model that contribute to the future growth and profitability of Boston Private Bank & Trust. Most importantly, we see in Banyan a partner with a focus on serving the needs of high net worth private clients and investors. We also see technical depth and investment capability to really stand out as a distinctive and high integrity wealth management resource for our private clients.

Culturally, the firm's leaders and professionals share our vision of creating a national private client business of the highest caliber. We specifically have been seeking a hybrid investment management platform, marrying a distinctive set of proprietary strategies with a fully developed manager or manager set of solutions and a more evolved alternatives offering. Geographic overlap is also critical. In Banyan, we have found a partner that is located in the same geographic footprint, but also offers the opportunity to export Boston Private Bank in the highly desirable markets that we do not currently operate in.

After working with the Banyan team through a lengthy due diligence process, it is clear to us that Banyan Partners checks all the boxes and fulfills our business model and organizational desires. When it comes to leadership and talent, Peter and his entire team have built a truly differentiated wealth management firm in a relatively short period of time. All the Peter's key executives will be joining Boston Private Bank & Trust, and we believe they will be critical members of the Boston Private family for years to come.

Culturally, the Banyan team shares our vision of a national private clients business and the Banyan team is excited about the opportunity to expand its product suite for its existing high net worth clients and its rapidly growing stable of newly acquired clients. Through its Silver Bridge acquisition, Banyan brings with it a sophisticated asset allocation platform as well as an alternatives offering that is farther along than our current internal capabilities. We believe this combination will greatly enhance our combined product and service platform and strengthen our competitive position.

Headquartered in Palm Beach Gardens, Banyan has deep Boston roots. Founder and Chief Executive, Peter Raimondi spent his entire professional career in Boston before relocating to Florida. Approximately 30 Banyan employees including the Chief Investment Officer and Chief Strategy Officer are based in Boston. Outside of Boston, we view Banyan's footprint as appealing and as an opportunity to extend Boston Private Bank's distinctive banking products and services to attractive high net worth client markets that are currently beyond our reach.

If you turn to Slide 17, you'll see a summary of the key transaction terms of the deal. Boston Private Bank & Trust will purchase Banyan Partners. Banyan will be combined with Boston Private Bank's Wealth Management business. The combined entity will be structured as a wholly-owned subsidiary of the Bank. The upfront purchase price is nine times baseline EBITDA at close, which we estimate as approximately $60 million. The consideration mix for the upfront payment is 65% cash, 35% Boston Private Financial Holdings' common stock.

There is an additional performance-based earn-out that could be in the range of $15 million to $20 million. The earn-out is payable 55% cash, 45% Boston Private Financial Holdings' common stock. The earn-out will be paid into installments, one at year-end 2015 and one at year-end 2016 and is based on the incremental EBITDA generated by the newly formed combined entity above and beyond a preset of high watermark. We expect the deal to close sometime in the fourth quarter of 2014.

On Slide 18, we outline the financial impact of the transaction. We expect the combination to be 4% accretive to EPS and 230 basis points accretive to return on average tangible equity in year one. The transaction has a very attractive internal rate of return of approximately 25%. Finally, the consolidated companies post-closing tier 1 common equity capital ratio is expected to be 9.5% to 9.8%, which is at the high end of the 9.5% to 10% corporate target.

All in all, we view this transaction as a game changer for us. We expect the combination of Banyan Partners with Boston Private Bank's Wealth Management business to create a national wealth management business with nearly $9 billion of client assets and $50 million of revenue. Our clients will have access to an enhanced product set and our employees will become part of a larger better resourced organization with additional professional and career opportunities.

With that, we'd like to open it up for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from Casey Haire of Jefferies.

Casey Haire - Jefferies

So a question on Banyan. Clay, specifically on the 4% accretion in year one, you mentioned the attractive markets that you guys aren't currently in and that present banking opportunities. I was just wondering does the 4% accretion bake in any sort of incremental revenues on the banking side, and then what kind of cost reductions are baked into that 4% accretion number?

Clay Deutsch

First, Casey, there are no synergies or cross-sell upside, even though we're very excited by the upside opportunity here. So the financial model and pricing model is a roll-forward using the current revenue momentum, Banyan plus us. I think there are all kinds of opportunities before us, but that's how we worked it through. The specific deal structure and you see it referenced on one of the slides presumes $3 million of combination benefits post-closing, having a lot to do with occupancy opportunities, systems opportunities, vendor management, streamlining, et cetera, and then the earn-out kicks in with each additional dollar of EBITDA creation above an initial $3 million gain.

Casey Haire - Jefferies

I'm sorry I missed that. $3 million of opportunity on the costs reduction side?

Clay Deutsch

Well, $3 million of combination benefit, $1 of revenue build will count as much as $1 of expense. But there's $3 million of initial combination benefit we see as well within our reach. And beyond that, the EBITDA earn-out meter begins ticking.

Casey Haire - Jefferies

And then just switching gears, I guess, to the bank side, the quarter came in a little bit flattish, I guess, that's the way to describe it. How was the loan pipeline looking and sort of pricing dynamics? Was it a flat result as a function of just poor demand or are you guys just pulling back in a competitive environment? Just a little color there would be helpful.

Mark Thompson

Not at all. Number one, we've noted the loan sale. But if you look at the trend, year over year we're quite pleased with the loan volumes that we've been able to generate and the strategic relationships that have been generated as a result of the new business activity. Our target is to grow loans mid to high single digits and we're looking to outpace that growth with core deposit growth at the same time. But we remain confident the pipelines in Boston and San Francisco Bay and Southern California remain healthy. The demographics in those markets support our business planning and we would expect to continue to hit our targets in the second half of the year.

Casey Haire - Jefferies

Nice pop in the TCE/RWA ratio, obviously a little bit helped by some clean-up in Southern California. How much hidden capital is there, incremental opportunities to clean up, maybe some more Southern California CRE to sort of boost that, help out that ratio, which will settle down in the mid-9.5 area post this Banyan deal?

Dave Kaye

Casey, your question is are we going to do additional sort of portfolio loan sales. We don't have any intent to do that. This was an opportunity that we had during the quarter and more of an unusual occurrence. So I don't see that it's really something that would be an ongoing selling commercial loans out of our portfolio.

Casey Haire - Jefferies

Okay. So just kind of a one-time cleanup there?

Dave Kaye

Yeah.

Clay Deutsch

Casey, the only thing I'd clarify and it's not a defensive comment, but the word clean-up, those are very high-quality loans and [marks] [ph] being a corporate citizen, we sold those loans, because as I’ve said the last several quarters, we have a real emphasis on liquidity build and we've had a great run with our lending team. This was an opportunity for us to continue to meet client demand and yet [feather] [ph] the balance sheet. So we're pretty happy with the evolution of loan portfolio. The loan sale was premeditated. It was not a clean-up. These are high-quality assets and it was a balance sheet management play.

Operator

Our next question is from Chris McGratty of KBW.

Chris McGratty - KBW

Dave or Clay, on Banyan, just had a couple of questions. Maybe you could fill in a few of the details. I know with your targets margins of 30% EBITDA, what kind of margins were Banyan doing or how are they doing today? And maybe a little help on how sensitive their revenues are to moves in the market versus kind of the traditional just kind of pay-for-service revenues?

Dave Kaye

I think their margins are a little bit below 30% today, but that's part of what we're targeting for with the combined entities to get that up over 30% pretty quickly. In terms of sensitivity to the equity markets, I would consider them fairly akin to like a BOS where they have a portion of their assets in equities. But certainly, it's not like the investment management segment, which is pretty much a 100% US equities. This is more in the 40% range. So it's much less sensitive to equity market movements.

Chris McGratty - KBW

And the 30%, just to clarify, is that a pre-tax or is that an EBITDA margin?

Dave Kaye

EBITDA margin would be the target for that.

Chris McGratty - KBW

And then maybe a comment on the growth in the assets of Banyan, has it been more kind of market appreciation or maybe remind us what the flow situation has been?

Dave Kaye

Well, I think they've had strong organic net flows and that was part of the appeal for us in the combination.

Clay Deutsch

Chris, they have a really strong and appealing client acquisition model. And I think of the many things about Banyan that appealed to us, it's that demonstrated ability to expand the client base that really got us excited.

Chris McGratty - KBW

I want to ask on Casey's question on expanding the banking into new markets. First off, I just want to make sure I heard you that you do plan to lend into kind of the newer markets and that being Florida, is that correct?

Clay Deutsch

Well, I'd stop short of highlighting a specific business line. We're going to be very thoughtful about where we go geographically together with them. I would not presume though that we have to go into every market with all business lines, full product set. Part of the excitement in this combination and frankly work yet to be done is our banking leadership team and the Banyan leadership team thinking together about how do we want to do market development, where do we want to go next. We'll continue to have a heavy emphasis on Wealth Management. We think there is a terrific opportunity, though, to selectively marry private client products and services with that. But we're going to be pretty selective.

Chris McGratty - KBW

Okay. So you're basically tempering the initial reaction that you're going to kind of start over at Gibraltar is the way we'd interpret it, right?

Clay Deutsch

Well, I'm not going to mention any names. But my goal is to expand Wealth Management and Private Banking. My goal is not to be a nationwide lender.

Dave Kaye

Chris, there're significant opportunities, particularly on the deposit side with these clients and particularly high net worth clients in terms of residential mortgages. It's not our intention, as Clay said, to do some of the things we've done in the past in terms of heavy emphasis on commercial real estate you've seen us move away from that.

Mark Thompson

Yeah, Chris, I would just add, we just recently opened a Private Banking, Wealth Management office in Wellesley Hills and the leading product service is Wealth Management. We also have deposit coverage in that office. And it's really somewhat of a task data site for opportunities with our Private Banking model, and we do plan to have a full scale Private Bank office sometime early in 2015. So I think as we start developing the strategy, it clearly is going to be driven with Wealth Management and we will really analyze the opportunity specific to the market for private banking services to complement and in many cases lead a lot of the Wealth Management growth and opportunities.

Chris McGratty - KBW

Just one last one for Dave. Dave, with the balance sheet kind of changes in the quarter, the loan-to-deposit ticked up over 100. Can you tell me about your comfort at the levels and kind of what the implications may be for your margin over the next year-and-a-half if they kind of stay over 100.

Dave Kaye

Well, I think just echoing what Mark said earlier and looking at what we've done in the past, I mean if you look at year-over-year loan growth, year-over-year deposit growth, loans were up 6%, deposits were 8%. It's exactly what we set our target a year ago. And we'd like to see that repeated in the next year. Loans up a little bit less than deposits and sort of that would push us down a little bit in terms of the loan-to-deposit ratio.

Operator

Our next question is from Jennifer Demba of SunTrust Robinson Humphrey.

Jennifer Demba - SunTrust Robinson Humphrey

Two questions, first on asset quality. You guys have had net recoveries now for a while. Wondering do you have a sense of how long you think that could continue and how long we could see this negative provisioning trend?

Dave Kaye

I would say that there are likely more recoveries in the future. I know our folks are working on a number of credits and we have a number of credits as we've disclosed that although that our nonaccrual are paying as agreed, we've seen those work out in the past and generate some of these recoveries. And we expect the ones that we still have left to generate further recoveries going forward. The net recoveries are a combination of the fact that there hasn't been a lot of downgrades of really problem loans in taking additional charge-offs. There is a few, there's not zero. But a combination of the low charge-offs and then these recoveries we have in the pipeline, we could see that continue in the near term. It's just really difficult to predict how long that's going to last.

Jennifer Demba - SunTrust Robinson Humphrey

My second question is on Banyan. Clay, just wondering when you look at your financial modeling, do you consider any revenue attrition?

Clay Deutsch

Jen, yes is the answer. I mean as you might imagine, you know we're very analytical management team. You got to know us. We have kind of stressed this deal every which way imaginable. We've looked at all kinds of conversion scenarios and client consent scenarios. We think the combination is pretty storm-proof and we've taken a lot of steps to design protection into it. But we like the combination even under some adverse scenarios. I think what gives me confidence is Banyan itself is a company assembled through the combination of some high-quality firms. They have managed those integrations with extraordinary care and demonstrable success in client conversion and retention and talent conversion and retention. So we're going into this with, I think, a level of confidence. We look at all kinds of down-cases and we still like what it does for us.

Operator

Our next question is from Christopher Marinac of FIG Partners.

Christopher Marinac - FIG Partners

Clay or Dave or Mark, was curious if you could elaborate on the increase in commercial loan yield on average in the quarter. Is that something that was more influenced by the loan sale and do you have any, I guess, thoughts about just sort of where that yield should shake out in the future?

Dave Kaye

Chris, the yield on the commercial loan book, the increase was driven by the recoveries that we had. We had about $1.9 million in net recoveries. I think we showed a 4.62% yield for commercial and construction over the quarter. You saw that was up from 4.37% in the prior quarter. But really on a normalized basis, we would have been more in the 4.37% or 4.36% range right about on average with what we did in the first quarter.

Christopher Marinac - FIG Partners

And then I guess just as a follow-up on the transaction terms of Banyan, how do you think about payback period either on this particular deal or maybe in general as you look at transactions, those things sort of eating up at the upfront dilution to book value that you may have or so how quickly it needs or kind of what your tolerance level is on any transaction you look at?

Clay Deutsch

The only immediate negative impact is there is an immediate reset of our capital level. We're unconcerned about it, because we have so de-risked the company that we're trying to run the company in a pretty lean capital way. Our house target is around 10%, 9.5% to 10%. This takes us down into the 9%s. We're building capital at this earn rate at about 20 basis points to 30 basis points a quarter. So we will very quickly be back into what we view as an excess capital situation. It is year one, are we accretive? And as you know, we're extremely ROE focused. So we believe we remain capital strong. We have very quick capital rebuild. We'll continue to focus on excess capital distribution strategies and we like the ROE accretion. So we think the economics of the deal are pretty attractive. But with that, Dave, if you want to elaborate?

Dave Kaye

Yeah, I think over the past year or so, we've really tried, if you look at our Investor Relations presentation, to emphasize sort of the tier distinct businesses within our organization, the Wealth Management side of the business, which has negative tangible book value. And I think any time you go into a deal like this, it is going to be dilutive to your tangible book value. But these types of businesses aren't valued on a multiple tangible book value. And that's why we've tried to provide sort of transparency on that side of the business and say, look, these have negative tangible book value, but they're valued on the basis of their earnings. And as Clay said, it's highly accretive to the ROE and especially ROTC. And part of that is because there's tangible book value dilution. But we view this as a very attractive deal.

Christopher Marinac - FIG Partners

I just want to make sure I heard you right. Is this also accretive to the EBITDA margin? Would it allow you to just hold your margin at where it is?

Dave Kaye

Well, I think initially we're going to build up to that 30%. I think overall we're running a little bit higher than 30% overall, the combination of our existing wealth managers and investment managers. So not immediately accretive to EBITDA margin, but it's something that we expect the combined entity to get right up in there shortly.

Operator

Our next question is from Tom Alonso of Macquarie.

Tom Alonso - Macquarie

Just a quick modeling one first. The jump-up in marketing and business development expenses this quarter, it seems like that's a seasonal thing you guys have had over the past two years. So shouldn't we expect to kind of move back down in the third quarter?

Clay Deutsch

It is just as you described. It's a seasonal type issue. I think if you looked at first quarter, it's probably low. Second quarter is high and somewhere in between is probably a good run rate.

Tom Alonso - Macquarie

In the press release, you highlight $25 million in annual fee-based revenue from Banyan. And if we look at your income statement on the private banking side, you're running somewhere a little bit higher than that. And if you kind of slapped those two together, it's a little over $50 million and you guys talk about in your pro forma as a $50 million revenue run rate. Is that just conservative on your part of is there something that you guys do expect to fall out there?

Clay Deutsch

I think what we were trying to describe is that within our Private Banking, Wealth Management and Trust fees, we were just talking about the Wealth Management component of that, so separating out some of the trust administration fees.

Tom Alonso - Macquarie

And then just lastly, looking at Banyan, like you guys had said, this is a firm that has a history of sort of acquiring other firms and being good at mergers. Is the plan to sort of once it's integrated into your platform is to sort of allow them to continue to do that, or are those sort of organic opportunities where you're going to focus?

Clay Deutsch

Well, yes and yes. We absolutely believe that this combination will up the average of our organic growth rate. And a big part of the appeal of this is the demonstrated power of their client acquisition model. I also like their acquisition model. And I think once we demonstrate to ourselves and to our shareholders that this combination has high return potency, the opportunity to continue to invest behind this business excites us. I've been looking for a business line we can create meaningful earnings expansion around. And I think our management team is really excited about this as an opportunity to do just that. So my answer is yes to both, organic growth. Nowhere in the description of this model have we priced in any subsequent additions. But that's a feature that appeals to us. Step one though is get all this grounded and prove that this model will work. We're highly confident, but we will prove that. And then we'll continue down the path.

Operator

And our next question is a follow-up from Casey Haire of Jefferies.

Casey Haire - Jefferies

Clay, just a strategic question for you. Just given the secular pressures facing the investment managers and the wealth managers, obviously a pretty good story, I'm just curious what's preventing you from perhaps exiting the Investment Management strategy and clipping that into perhaps another Wealth Management acquisition or property.

Clay Deutsch

We're very confident that our wealth advisors are demonstrating an ability quarter-to-quarter-to-quarter to manage to about 4%, 5%, 6% net flows per annum. Linked quarters are up and down, but the baseline is 4% to 6% positive net per annum. The Bank has come up off the mat very nicely. Our Bank was slightly negative to neutral during most of the downturn. The Bank has had positive net flows. And this combination of course just doubles down on that. And then you come to our two investment managers. Both of our investment managers, Dalton, Greiner and Anchor, in my opinion, are high-quality businesses with high-quality teams. It is true that in the institutional arena, the allocation to active domestic equity kind of boutiques has been quite barren and it's been quite barren even into the recovery.

Having said that, we see Dalton, Greiner and Anchor both doing a good job, trying to hold serve in institutional, but expanding their retail platform marketing efforts. Dalton, Greiner has had a very nice second quarter and very nice first half of the year and not only in P&L terms, but in AUM development terms. The AUM development challenge for us is pretty local to Anchor. Anchor has an awful lot of AUM in midcap value. That's a category that has been slightly out of favor during the rally. But they're doing a very nice job expanding their position with retail platforms. So I'm committed to both firms. I'm unprepared to wave the white flag. We're going to continue to work with those businesses to build their business. The P&L profile of both those firms is highly attractive. So that's where we are on the whole portfolio and on investment managers specifically.

Casey Haire - Jefferies

The tax rate jumped up a little bit this quarter. Is that the new go-forward rate? And then where is the $900,000 one-time charge to eliminate the recurring fee? Where does that show up?

Dave Kaye

So on the latter question, it would show up in professional service fees. And then on the tax question, 32.5% is probably a good run rate. It did jump a little bit over that. And I think that was due to the fact that we just had some additional net income above the run rate that was more, say, one-time in nature. But we've had some of these one-times for several quarters. So a little bit more lumpy in nature.

Operator

And this closes our question-and-answer session. I'd like to turn the conference back over to Clay Deutsch for any closing remarks.

Clay Deutsch

Well, I want to thank all of you for your interest in us. I think as you sense, we're pleased with our results. We're especially excited about this combination with Banyan. I know a number of our own employees and Banyan employees are listening to the call. We'll talk more about all this. But I have very good feelings about what we're going to do with this combination.

So thanks for dialing in and we'll have more to say about all this as it unfolds.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Boston Private Financial Holdings' (BPFH) CEO Clayton Deutsch on Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts