Boston Private Financial Holdings, Inc. (BPFH) CEO Anthony DeChellis on Q1 2019 Results - Earnings Call Transcript

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About: Boston Private Financial Holdings, Inc. (BPFH)
by: SA Transcripts
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Earning Call Audio

Boston Private Financial Holdings, Inc. (NASDAQ:BPFH) Q1 2019 Earnings Conference Call April 18, 2019 8:00 AM ET

Company Participants

Adam Bromley - Director of Investor Relations

Anthony DeChellis - Chief Executive Officer

Paul Simons - President of Private Banking, Wealth & Trust

Steven Gaven - Chief Financial Officer

Conference Call Participants

Michael Young - SunTrust Robinson Humphrey Inc.

Christopher McGratty - Keefe, Bruyette, & Woods, Inc.

Alexander Twerdahl - Sandler O'Neill + Partners, L.P.

Operator

Good morning and welcome to the Boston Private Financial Holdings First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to your host today Adam Bromley. Please go ahead.

Adam Bromley

Thank you, Keith, and good morning. This is Adam Bromley, Director of Investor Relations of Boston Private Financial Holdings. We welcome you to this conference call to discuss our first quarter 2019 earnings. Our call this morning includes references to an earnings presentation, which can be found in the Investor Relations section of our website bostonprivate.com.

Joining me this morning are Anthony DeChellis, Chief Executive Officer; Paul Simons, President of Private Banking, Wealth & Trust; and Steve Gaven, Chief Financial Officer.

This call contains forward-looking statements regarding strategic objectives and expectations for future results of operations and financial prospects. They are based on 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 qualifier contained in our earnings release, which identified a number of factors that could cause material differences between actual and anticipated results or other expectations expressed.

Additional factors that could cause Boston Private'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.

With that, I'll now turn it over to Anthony DeChellis.

Anthony DeChellis

Thanks, Adam. Good morning, everyone. Thank you for joining the call this morning. Our comments this morning will be focused on first quarter results, but I want to briefly touch on two topics before we go into our results.

First, I want to remind you of our upcoming Investor Day to be held on May 6, 2019. At this event, we will discuss the firm's strategic direction and our vision for Boston Private. We will introduce several members of our new leadership team to investors and discuss how our new strategic direction with result in improved shareholder returns. For more information on our Investor Day, including a link to the webcast, please visit the Investor Relations section of our website at www.bostonprivate.com.

I would also like to discuss some management changes we announced during the quarter. First, we announced that Paul Simons would become President of Private Banking Wealth & Trust. Paul will have more to say about our Wealth business during the Investor Day. Jim Brown, who has run Commercial Banking at Boston Private for the last 20 years, became President of Commercial Banking, which is responsible for serving commercial clients.

We also announced two key hires of Bill Woodson and Colleen Graham. Bill Woodson, who will be joining our firm later in the second quarter, will be focused on delivering comprehensive advice-based solutions for ultra-high net worth clients and family offices, while Colleen Graham has joined us as General Council where she will oversee several key control functions including legal, audit and compliance.

With that, I will turn it over to Steve Gaven, who will walk us through first quarter 2019 results.

Steven Gaven

Thanks Anthony, and good morning, everyone. My comments will begin on Slide 3 where we show a summary of our consolidated financial highlights from the first quarter. This quarter, we reported GAAP net income of $19.4 million or $0.25 per share.

Our operating results, which exclude the net after-tax impact of $1.6 million restructuring expense, were $20.7 million of net income or $0.27 per share with operating return on average common equity of 11%. This quarter's results also include a $0.02 benefit to EPS for Redeemable Non-Controlling Interest valuation adjustments related to our Affiliate Partners.

Total AUM as of March 31, 2019 was $16.1 billion, a 1% increase linked quarter driven by positive market action, partially offset by negative net flows. The primary drivers of negative flows include the closure of non-strategic offices and anticipated distributions from existing clients in our Wealth Management & Trust segment. In addition to a single client departure in our Affiliate Partners segment. Tier 1 common equity ratio remain flat at a 11.4% linked quarter, while tangible book value per share increased 18% year-over-year to $8.47 per share.

Slide 4 shows our income statements on a reported basis under GAAP. First quarter financial results show a decline in both linked quarter and year-over-year comparisons because of two divestitures we completed in the second and fourth quarters of 2018.

As you recall, the two divestitures of non-core Affiliate businesses Anchor and BOS have financial results consolidated in prior periods, but not in the current period. To enhance comparability and analyzing financial trends in the core business, the upcoming slides include certain non-GAAP operating metrics that exclude notable items in contributions from Anchor and BOS, otherwise known as Divested Affiliates.

Slide 5 shows a consolidated income statement, excluding the notable items in Divested Affiliates. Pretax pre-provision income increased 9% year-over-year, driven by revenue growth of 1% and a 2% decline in expenses.

Net income on an operating basis was flat year-over-year as higher pretax pre-provisioning income in the core business was offset by higher income from discontinued operations during the fourth quarter of 2018. The linked quarter increase in operating net income was driven primarily by a provision credit in the first quarter of 2019.

Slide 6 shows consolidated revenue trends. Total operating revenue during the first quarter was $83.6 million, up 1% year-over-year in flat linked quarter. On a year-over-year basis, net interest income increased by 2% primarily driven by higher yields on interest earning assets and higher asset volumes, partially offset by a higher funding costs.

At the same time, Wealth Management & Trust fees declined year-over-year as a result of lower AUM. Linked quarter total operating revenue was flat as lower net interest income in Wealth Management & Trust fees were offset by increased Private Banking fees and higher total other income. The primary driver of the linked quarter net interest income decline was lower interest recoveries, higher funding costs, and lower average interest earning asset volumes.

On Slide 7, we show a detailed breakout of our consolidated expenses on a GAAP basis. Total expenses declined on a year-over-year in linked quarter basis, primarily due to Divested Affiliates results that are included in previous periods.

Slide 8 shows a detailed breakout of consolidated expenses excluding restructuring charges in the first quarter of 2019 and the fourth quarter of 2018 as well as the Divested Affiliates results in prior periods. Total operating expense decreased 2% year-over-year, while remaining flat linked quarter.

The year-over-year decrease was driven by lower compensation expense as a result of previously enacted efficiency initiatives, partially offset by higher occupancy and expense and professional services expense. The linked quarter comparison reflects lower marketing expense and professional fees offset by higher compensation expense associated with seasonal payroll taxes during the first quarter.

Slide 9 shows the past five quarters of average loan balances and deposit balances by type. The average loan-to-deposit ratio for the quarter was 102% with deposit balances declining during the first quarter, which is consistent with historical seasonality inherent in our deposit base.

Total average loans during the quarter increased 5% year-over-year to $6.9 billion. Residential lending led the way with 10% year-over-year growth, followed by C&I growth of 15%, while CRE and construction was flat year-over-year. Total average deposits during the quarter increased 6% year-over-year to $6.8 billion. The year-over-year increase was driven by growth in money market accounts, certificates of deposits and demand deposit accounts.

Slide 10 shows a five quarter trend of consolidated net interest income and net interest margin. Core net interest income, which excludes interest recovered on previous non-accrual loans increased 1% year-over-year to $58.1 million. On the bottom of the slide, we show a net interest margin table including changes in asset yields and funding costs.

Starting this quarter, we are not including fully taxable equivalent calculations for relevant interest income and NIM categories because of the current difference between fully taxable NIM and GAAP NIM has become immaterial.

Consequently, the asset yield metrics in current and prior periods are also now shown on a GAAP basis. Core net interest margin decreased one basis point year-over-year in linked quarter to 2.89%. Changes in NIM include increased funding costs and volumes partially offset by higher interest earning asset yields and volumes.

On a linked quarter basis, our total cost of deposits increased 7 basis points from 77 basis points to 84 basis points. The base cost of interest-bearing deposits increased 8 basis points from 111 basis points to 119 basis points. And our all-in cost of funds which include DDA and wholesale borrowings increased 11 basis points from 89 basis points to 100 basis points.

Slide 11 provides detail on our asset quality. This quarter we booked a $1.4 million provision credit, which was primarily driven by decline in criticized loans, partially offset by net changes the loss factor. The chart below shows asset quality metrics during the quarter with criticized loans finishing the quarter at $141 million.

Criticized loans are 4% lower compared to the fourth quarter of 2017 and 14% higher compared to the first quarter of 2018. The year-over-year increase was driven by West Coast special mention loans, while substandard and doubtful categories both declined. ALLL as a percent of total loans declined to 107 basis points.

On Slide 12, we show the Private Banking segment, excluding the Wealth Management & Trust portion of our bank. The private bank operated at a 64% efficiency ratio during the quarter. Pretax, pre-provision income increased 7% year-over-year driven by a 3% increase in total revenue and a 1% increase in total operating expenses. Changes in pretax and operating net income metrics were primarily driven by changes to the provision for loan loss, which increased linked quarter and decreased year-over-year.

I will now turn it back to Anthony to discuss our Wealth Management & Trust segment.

Anthony DeChellis

Thanks Steve. Slide 13 shows performance highlights for Wealth Management & Trust segment, which operates under the Boston Private Wealth brand. Segment's EBITDA margin for the quarter was 19%, down 200 basis points year-over-year. Total revenue decreased 11% year-over-year due to lower AUM while operating expenses declined 7% as a result of previously enacted efficiency initiatives.

Net flows during the quarter were negative $508 million primarily driven by the closure of non-strategic offices and anticipated distributions from existing clients as Steve mentioned at the beginning of our prepared comments. Overall AUM increased 1% linked quarter as positive market action exceeded negative flows.

Slide 14 shows Affiliate Partner performance. Overall EBITDA margin of 33% exceeded our corporate targets of 30%. A year-over-year improvement in EBITDA and operating expenses was driven by lower compensation.

That concludes our prepared comments for the first quarter 2019 reported results. I'll now open up the line for your questions.

Question-and-Answer Session

Operator

Yes. Thank you. We'll now begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Michael Young with SunTrust.

Michael Young

Hey, good morning.

Anthony DeChellis

Good morning.

Steven Gaven

Good morning.

Michael Young

Anthony, I was wondering if we could start just with the AUM outflows this quarter and kind of the decision to close some branch offices. Could you just talk about sort of a math behind that, and how you made those decisions and then should we expect additional closures going forward?

Anthony DeChellis

Thanks for the question. The offices were non-strategic. There was one in Madison, Wisconsin, and I believe one in Naples, Florida where literally we had a person or at most a person and an assistant. So they were non-strategic so we closed those offices. The outflows, I think, as Steve had mentioned, were highly concentrated and expected, on particularly the Private Wealth Banking side. So as far as other offices, we don't at this time. All offices are always under review along with opening new offices, but there are no others planned at this time.

Michael Young

Okay. And so the majority of the outflows this quarter was it more related than to the one client that was mentioned earlier?

Anthony DeChellis

Correct.

Michael Young

Okay. Any color to provide there? Any sense of any future outflows that we should expect in subsequent quarters that you guys maybe have an eye on at this point?

Anthony DeChellis

I think - if we're talking about the Private Banking side, it does tend to be a little bit seasonal and that people make large charitable contributions typically at the beginning of the year or at the end of the year. And so that was the vast majority of that outflow you saw. So clearly, with Paul arriving at the firm in our - we have always had a good focus on Private Banking Wealth & Trust but net flows is something we're going to be very focused on and with Bill Woodson and Eddie Marshall joining in the near future, that's certainly part of that effort.

Michael Young

Okay. And if I could switch over to the net interest margin, only down one basis point this quarter? The change in kind of the interest rate curve here with long incoming down, how do you think that will affect you all both on your ability to generate integrated deposit flows and on the flip side on just the pricing of jumbo mortgage, et cetera?

Steven Gaven

Yes, I think from a pricing perspective on jumbo mortgage, that's been really competitive, particularly the category we play that jumbo prime space is very competitive. That's been like that for a while. So clearly, if the long end moves down that puts more pressure on it, but kind of from a competitor standpoint we don't see anything changing dramatically than what we have experienced thus far.

Deposit pricing, I would expect deposit costs to continue creep up higher as we get throughout the year. I don't foresee big changes likely we saw last year if the Fed is holding steady. Obviously, as the Fed begins to increase or conversely decrease short-term rates. That's a different story. But right now, we expect, just given the competitive backdrop, that deposit costs will continue to creep up throughout the year.

Michael Young

Okay, thanks.

Operator

Thank you. And the next question comes from Chris McGratty with KBW.

Christopher McGratty

Hey, good morning.

Steven Gaven

Good morning, Chris.

Christopher McGratty

Maybe on expenses, if I could start there, the departures that occurred in the quarter, obviously the charges notwithstanding, how should we be thinking, Steve, about kind of the expense trajectory over the course there?

Steven Gaven

Yes. Chris, $58 million to - $59 million to $60 million is what we talked about last quarter that still holds. You may see a little lower in the beginning of the year and then building in the back half of the year as we onboard some people, but $59 million to $60 million is still where the expense line should be on a quarterly basis.

Christopher McGratty

Okay, great. And then maybe on capital, Anthony, You've not been there a few months, and I'm assuming you're going to talk a lot more about it at Investor Day. But just philosophically, how are you guys thinking about capital return? You guys have a high yield in the past. You bought back stock and your stock is reasonably inexpensive on tangible. I kind of was wondering how you're thinking about capital return for 2019?

Anthony DeChellis

Yes, I think we talked about this on the last quarter as well. It is brought in center with our team. We definitely think about the best use of that capital when if the stock obviously where the entire industry is priced right now, we do look at it, but we really do believe the best use of the capital, and this is the team's view and not just my view, is really to invest in the business to grow the business and so that's why we kept the dividend flat, and we've not bought back additional shares. But it's always there, Chris. We are always looking at what the best alternative is, and right now, we thing growing the business is where our focus should be.

Christopher McGratty

Okay, great. And maybe I could just, Steve, wanted to just to get you on the margin. I heard the deposit commentary but trajectory of the NIM kind of flattish. I may have I missed it.

Steven Gaven

For NIM, I would expect to see NIM compression in the second quarter and then a rebound back half of the year. Obviously, it's dependent on where the curve is, but as you saw last year, we had that kind of deep deposit seasonality, which resulted in NIM compression from an NII perspective, probably flattish to this quarter, in the second quarter.

Christopher McGratty

Okay. And then the tax rate will bounce back as well I assume?

Steven Gaven

Yes, we're modeling a tax rate about 22%.

Christopher McGratty

Great, thank you.

Operator

Thank you. [Operator Instructions] And the next question comes from Alex Twerdahl with Sandler O'Neill.

Alexander Twerdahl

Hey, good morning, guys.

Anthony DeChellis

Hey Alex.

Steven Gaven

Good morning.

Alexander Twerdahl

Just to clarify the branches that you closed for the AUM. That was a new decision that wasn't part of the restructuring that was announced kind of towards the back end of last year?

Steven Gaven

No, that was a new decision, Alex.

Alexander Twerdahl

Okay. So you're clearly taking the hard look at everything. Did you clarify exactly how much the AUM associated with those branches was?

Steven Gaven

The AUM outflows associated with those closures was about $350 million of the $503 million net outflows at Wealth & Trust.

Alexander Twerdahl

And then kind of like where in the quarter did that, I mean as we think about fee income and the run rate for several of these items going forward, was that something that would have impacted - would have been still - the fees associated with that would still be included in the first quarter as fee income?

Steven Gaven

No, but partially. I think a couple of things in the Wealth Management & Trust fee income to keep in mind. Most of the assets are built quarterly in advance. So the revenue this quarter had the impact of negative market action in December and then obviously, you had the negative outflows in the quarter. So that's really what you saw in that drop, 7% linked quarter and 11% year-over-year.

Alexander Twerdahl

But we should really just look at the AUM at the end of the first quarter to kind of think about fee income going into the second quarter?

Steven Gaven

Yes, I mean I think total fee income for the entire fee income categories, including all those categories. It was I think $24.3 million in the quarter. $24 million to $25.5 million is probably a good number to use going forward, obviously, depending on where markets are.

Alexander Twerdahl

Okay. And then just kind of going back to the capital, you talked about growth being the best use of capital. I mean, keeping the dividend flat is great but your dividend payout is still - maybe relative to the rest of industry is a little bit high. I mean, would you ever think about reducing that to focus more on growth?

Anthony DeChellis

No. Not at this time. Our expectation is to keep the dividend consistent with where it is. I mean, we're always, obviously, looking at the best use of funds for the firm, but there is no thought of doing that now.

Steven Gaven

Yes. Alex, it was common equity Tier 1 in 11.4%. I get your point on the payout ratio, but we want to grow into a lower payout ratio. We're not going to cut to get to a lower payout ratio.

Alexander Twerdahl

Understood. Thanks for taking my questions.

Anthony DeChellis

Thank you.

Operator

Thank you. And this does conclude the question-and-answer session. So I would like to return the floor to Anthony DeChellis for any closing comments.

Anthony DeChellis

Thank you. I just want to thank everyone for joining us today and hopefully, we'll see you at our Investor Day on May 6. I wish everyone a nice holiday.

Operator

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