Boston Private Financial Holdings CEO Discusses Q4 2013 Results Earnings Call Transcript

Post on: 7 Апрель, 2015 No Comment

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

Q4 2013 Earnings Conference Call

January 16, 2014 8:00 am ET

Clayton G. Deutsch — Chief Executive Officer and President

David J. Kaye — Executive Vice President, Chief Financial Officer

Casey Haire — Jefferies

Jennifer Demba — SunTrust

Christopher Marinac — FIG Partners

Good morning and welcome to the Boston Private Financial Holdings Fourth Quarter and Year-End 2013 Earnings 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 Clayton Deutsch. Please go ahead.

Clayton G. Deutsch

Thank you. Good morning. This is Clay Deutsch, Chief Executive Officer and President of Boston Private Financial Holdings. Welcome to our fourth quarter and year-end 2013 earnings conference call. Joining me this morning are Dave Kaye, our Chief Financial Officer; Mark Thompson, Chief Executive Officer of Boston Private Bank; and Jeanne Hess, our Vice President for Investor Relations. At this time, I’ll ask Jeanne to read the Safe Harbor provisions before we make additional remarks.

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.

Clayton G. Deutsch

Thank you for joining the call this morning. In the fourth quarter, our Company generated net income of $17.7 million or $0.20 per share. For the full year 2013, net income was $70.5 million or $0.68 per share. Year-over-year net income growth was 32%. Return on common equity in the fourth quarter which was free of transactions or significant one-time events was 11.6%.

Our revenue growth in the fourth quarter was strong and we ended the year largely achieving our targets for the full year of 2013. As a reminder, our targets have been mid-single-digit loan and deposit growth, double-digit fee based revenue growth, expense management and capital efficiency. For the full year, we are pleased that loans grew 6%, deposits grew 5% and core fees grew 12%. Total expenses declined by 5%.

We increased the dividend to $0.08 per share, our third increase over the past year. Our Investment Managers and Wealth Advisors generated full year EBITDA margins of 31% and 33% respectively. Total full-year net inflows for all three Wealth Management segments was $152 million. We ended the year with assets under management of $24.3 billion, a 19% increase year-over-year.

While we managed against declining loan yields throughout 2013, the fourth quarter showed signs of slowing rate compression. On a linked quarter basis, net interest margin declined 1 basis point to 2.98%. Looking ahead, while economic uncertainty remains high, especially around interest rate developments, it is our belief that 2014 could bring an improved yield environment with growing net interest margin relief.

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 with some concluding comments.

Thanks, Clay, and good morning everyone. My comments will begin with Slide 3 of the earnings presentation, and that can be found in the IR section of our website which is bostonprivate.com. On Slide 3 we show our consolidated P&L highlights for the linked quarter. Total revenue increased 7% on a linked quarter basis. That was driven by a 3% increase in net interest income and a 10% increase in our core fees.

While other income was elevated in the fourth quarter due to a favorable legal settlement recovery, core revenue grew 6% quarter to quarter. Total expenses are up 7% in the quarter to $55.7 million, partly due to $1.2 million in performance incentives at our wealth managers and that’s directly related to the increased fees. We also had some year-end comp accruals, increased sales incentives and additional marketing spend in the Bank. Pre-tax pre-provision income increased 9% on a linked quarter basis to $22.2 million.

Our consolidated full-year financials are shown on Slide 4. While hitting our full year target of mid-single digit loan growth, net interest income declined by 5%. 60% of that decline was due to the sale of the Pacific Northwest offices and the remainder was due to yield compression. Our full year NIM was 3.05%, that’s down 17 basis points from the prior year. We also delivered on our double digit fee growth target in 2013.

Core fees increased 12% on a full-year basis, and that’s due to 12% revenue growth in each of our Wealth Advisory, Investment Management and the Investment Management and Trust within the Bank. Total expenses declined 5% in 2013, and that’s due to savings in restructuring the sale of the Pacific Northwest offices, salaries and benefits and other professional service fees.

The Company booked a provision credit of $10 million in 2013, and that’s partly due to a 26% year-over-year decline in our criticized loans. These results drove our pre-tax income to $99 million and that’s a 43% increase over the prior year. Our pre-tax pre-provision stood at 35% increase year-over-year.

On Slide 5, we show the spread and fee-based revenues and the progress we’ve made in growing the wealth management component of our revenue. During the fourth quarter, 42% of our revenue came from core fees and that’s compared to only 38% of revenue in the fourth quarter of 2012.

Slide 6 is our net interest margin. Reported NIM showed signs of stabilization in the fourth quarter as it decreased by only 1 basis point to 2.98%. The decline was driven by higher average cash balances. Average loan yields and deposit costs remained relatively flat for the quarter.

On Slide 7, the provision credit of $2 million in the fourth quarter was driven by two factors. First, the declining balance of our classified loans contributed about $2 million. And second, we recorded $2 million in gross recoveries.

Slide 8 shows the stability of our Tier 1 common ratio, and that’s been hovering right around 10% for the past five quarters. As Clay mentioned earlier, we were able to announce the third dividend increase in one year’s time and that’s a result of our earnings momentum and efficient capital management. We’re going to continue to evaluate opportunities to return additional capital to shareholders in 2014.

That concludes my remarks for the morning. I’ll turn it over to Mark for a discussion on the Private Banking segment. Mark?

Mark D. Thompson

Good morning. Thanks Dave. My comments will begin on Slide 9. In the fourth quarter, total revenues at the Private Bank increased by 5% due to 3% net income growth and 7% in core fees. The increase in NII was driven by 4% linked quarter loan growth and a relatively stable NIM which declined only 1 basis point to 2.98%.

The 7% increase in core fees was driven by a 4% increase in Bank Investment Management and Trust fees and a 36% increase in other banking fee income. The increase in other banking fee income was primarily due to 700,000 of commercial loan swap fees. The expenses increased by $2.7 million on a linked-quarter basis due to the year-end compensation accruals Dave mentioned earlier, an increase in marketing and liability restructuring.

Slide 10 shows full-year Private Banking performance highlights. Revenue increased 2% due to a 12% increase in core fees, offset by a 6% decline in net interest income. As Dave mentioned earlier, 60% of the NII decline was due to the sale of the Pacific Northwest offices and the remainder was due to yield compression. The Private Bank also bought a $10.6 million pre-tax gain due to this sale in the second quarter of 2013.

Total expenses decreased 7% due to the Pacific Northwest sale, which rolled through compensation and occupancy. In addition, 2012 included $4 million in restructuring expenses which we did not experienced in 2013. This revenue growth and expense decline drove an 18% increase in pre-tax pre-provision income for the year and an efficiency ratio of 59% which is in our target range.

Now Slide 11 shows the past five quarters of loan balances by type. Total loans increased 4% on a linked-quarter basis due to 10% growth in C&I, 5% growth in commercial and construction loans, and 1% growth in residential mortgages. At the individual market level, total loans were up 3% in New England, 3% in Southern California, and 7% in the San Francisco Bay Area. On a year-to-date basis, total loans increased 6%, driven by strong growth in all three categories.

You will see that we achieved our full-year loan growth target of mid-single digit growth and did it in a balanced fashion. For the full year of 2013, total loans in New England increased 4%, Southern California increased 14%, and the San Francisco Bay Area increased 6%. We were especially pleased to see the strong growth in the San Francisco Bay Area as that market has been in work-down in credit improvement mode since 2010.

Turning to Slide 12, total deposits increased 3% to $5.1 billion in the fourth quarter. We saw a linked quarter growth of 6% in money market accounts and 14% growth in savings and NOW. For the full year of 2013, total deposits increased 5% driven by 14% increase in money market accounts.

Demand deposits are down on a linked-quarter basis due to seasonal flows in year-end private partnerships and privately held businesses. In addition, on a full year basis, there has been a shift from demand deposits into interest-bearing accounts. However, on average, demand deposits are up 7% in the fourth quarter of 2013 versus fourth quarter of 2012. We’re pleased to note that the linked quarter growth and year-over-year deposit increases were achieved without increasing core deposit costs.

Now, I will turn it back to Clay.

Clayton G. Deutsch

Thanks Mark. Let’s go to Slide 13. Investment Management pre-tax income from continuing operations grew 69% to $3.6 million in the fourth quarter. This was driven by an 18% increase in investment management fees and strong operating leverage represented by an 8 point increase in EBITDA margin from 27% to 35% quarter-to-quarter.

The fourth quarter was Dalton Greiner’s strongest quarter in seven years while Anchor Capital continues to deliver high margins. The segment overall reported net outflows of $38 million for the quarter, reflecting ongoing pressure on active domestic equity strategies despite strong market lift. Segment assets under management increased 7% and now totaled $10.4 billion.

For full year performance, turn to Slide 14. In 2013, our Investment Managers met our target of double-digit revenue growth for the year with a 12% increase. Operating expenses increased 6% year-over-year due to the strong performance. The EBITDA margin for the full year was 31%, above our 30% target. Assets under management increased 23% to $10.4 billion in 2013. The segment reported full-year net outflows of $265 million.

Slide 15 shows linked-quarter Wealth Advisory performance highlights. Our Wealth Advisory had our Wealth Advisors rather had another very strong quarter with revenue growth of 6% to $11.3 million. Operating expenses also increased 6% in the quarter to $7.8 million due to growth related compensation triggers and the hiring of additional professionals to support our Wealth Advisory growth and client expansion strategy.

Pre-tax income from continuing operations increased 4% on a linked quarter basis. The segment’s fourth quarter EBITDA margin decreased 1 point to 33% but still remains above our target of 30%. Segment assets under management increased 6% on a linked quarter basis to $9.3 billion. Wealth Advisory net inflows were plus $68 million as compared to $16 million in the prior quarter. This was driven by strong new business development across our firms.

Slide 16 shows full year Wealth Advisory performance highlights. As with the Investment Managers, our Wealth Advisors met our full-year revenue target of double-digit growth, producing a 12% increase year-over-year. Operating expenses increased by 6%. Together, these results produced a 33% increase in pre-tax income and a 5 point gain in EBITDA margin. Full-year EBITDA margin for the segment came in at 33%. Assets under management increased 16% to $9.3 billion. Net flows were a positive $293 million.

More information on AUM net flows can be found on Slide 17. In the fourth quarter, net inflows were a positive $147 million, up from $52 million in the third quarter. For the full year of 2013, net inflows were a positive $152 million, which is down from $621 million in net inflows in 2012. Recall that the 2012 inflows were impacted by two successful lift-outs at Anchor Capital.

Finally on Slide 18, you will see that our full year 2013 holding company costs decreased 20% due to savings in restructuring costs, compensation and professional service fees.

Now before taking your questions, I’d like to share just a few perspectives on how we ended 2013 and how we enter 2014. First, we believe our Company is healthy and strong from a risk profile and an overall quality standpoint. We also believe the fourth quarter provides evidence of the growth and return power of our Wealth Management and Private Banking model. The fourth quarter demonstrates that we have built operating leverage into the Company.

Second, we remain committed to disciplined growth and remain committed to managing toward a target return on equity range of 11% to 12%. We remain growth and ROE driven, believing that this focus is highly aligned with our shareholders’ interest.

As we look ahead to 2014, the major environmental factors affecting our margin expansion potential are interest rates and domestic equity markets. We are cautiously optimistic about the potential for gradually rising rates and a steeper yield curve, and the likelihood of less robust growth but moderate growth in domestic equities and flows. We are enthused about the year ahead, we believe we have positioned the Company to perform. We remain committed to our three management themes of, one, disciplined client expansion and revenue development; two, expense discipline; and three, efficient and shareholder reliant capital management.

With that, we are happy to take your questions.

Question-and-Answer Session

(Operator Instructions) Our first question comes from Alex Twerdahl at Sandler O’Neill.

Alexander Twerdahl — Sandler ONeill

Clay, I was just wondering first if you could talk a bit more about what you project will be the drivers of AUM growth into 2014. I mean it’s great to see 7% growth in the fourth quarter, but without the potential tailwinds from the market, can you see that moving higher at a similar pace in 2014?

Clayton G. Deutsch

We’re very committed to driving net flows and growing our AUM base. As you look across our three segments, our two Wealth Advisory firms, KLS and Bingham, have a very good track record of pretty stable growth. Both firms are very focused on business expansion and both firms have been expanding their own bases of professionals.

The other bright spot I think in the quarter was real traction developing in Boston Private Bank Wealth Management. There’s been a lot of hard work done there over the last year and a half or so to evolve toward a really exciting and compelling product offering. We have very good investment strategies and there’s been a very concentrated client development, client introduction effort in New England and particularly on the West Coast, and we’re encouraged by what we see there.

And then finally our two asset managers, Anchor Capital and Dalton Greiner, have been delivering good investment performance. Dalton Greiner had its strongest quarter since I’ve been with the Company and seems to be hitting on all cylinders. Anchor Capital continues to undertake an important rotation and diversification from the legacy big broker SMA business which at the industry level is an important business but remains under growth pressure.

Anchor has done a very good job rotating into newer channels and newer platforms where we’re gaining ground in terms of account count but need to continue to do a better job expanding our presence and expanding the size of those accounts. So, sorry for the long-winded answer but I’m liking what I’m seeing in terms of business development across our wealth platforms.

Alexander Twerdahl — Sandler ONeill

Okay, thanks. And then Dave, in terms of expenses, if you stripped out the $1.2 million in performance incentives and the $1.3 million in year-end comp accruals, does that get you closer to what we should use for run rate for expenses, or is it maybe going to be a bit higher than we are looking at, at the end of the third quarter?

Yes, I think all-in, if you look at the additional compensation accruals related to the increased revenues and some year-end and also we have that deferred comp noise I’ll say because it boosts both other revenue of about close to $0.5 million and then it shows up in compensation, so it really nets to zero. This is probably close to $2 million of additional noise in the expense base, but you might not see it going forward.

Alexander Twerdahl — Sandler ONeill

Okay. Is it safe to say that in terms of the efficiency ratio, any improvement is likely to come from the revenue side as opposed to the expense side, stripping out those items you just mentioned?

Yes, that’s correct. I mean we don’t have any specific expense initiatives like we’ve had in the past years.

Alexander Twerdahl — Sandler ONeill

Okay, great. Thank you, guys.

Our next question comes from Chris McGratty at KBW.

Christopher McGratty — Keefe Bruyette & Woods

Clay, I sensed [some] (ph) optimism in your concluding remarks. Is it fair to assume, all else equal, that the 10% to 12% revenue growth in your Asset Management firms and Wealth Advisory is something that can be repeated in 2014?

Clayton G. Deutsch

Chris, we remain committed to our kind of mantra of 5% net flows and we’re still short of that. I’m pleased with flow development across the platforms, but our mantra remains 5% net flows, 10% year-over-year revenue growth and most of our firms are hovering right around there, and 30% or greater EBITDA margins. We don’t crystal ball market action and we certainly don’t budget market action. Do I think domestic equity strategies will repeat 2013? Don’t know. 2013 was a pretty hot year in terms of U.S. equities. So your crystal ball is as good as mine on equity markets, but independent of market action, if remain committed to that 5%, 10%, 30% strike zone.

Christopher McGratty — Keefe Bruyette & Woods

Okay. Another one on capital. Given that third increase in the dividend and kind of your comments on [indiscernible] growth, is this what we should be expecting for 2014 more the same or is there anything that you guys are really contemplating from a capital deployment, whether it’d be an acquisition on either side of the business for 2014?

Clayton G. Deutsch

No, we’re I think, Chris, we said in the past that we’re very comfortable with our capital ratios in that 10% range, 9.5% to 10% Tier 1 common, and that’s where we’ve been for the past five quarters. We’ll continue to evaluate capital deployment opportunities on a quarter by quarter basis and we said that one of our preferred or our preferred method is really the increasing dividend steadily over time.

Christopher McGratty — Keefe Bruyette & Woods

Okay. Just last one, Dave, on the rate sensitivity. Can you remind us how you guys are positioned for rates and then maybe what proportion of your loans are fixed versus floating?

We’ve been positioning ourselves for a rising rate environment I think over the past year and we’re in the short term, again if the short end of the curve rises, if there is some degradation in the portfolio or in the net interest income, as not all of our loans immediately reset. Particularly you get a look at our residential portfolio which is mostly [5.1 and 3.1] (ph) ARMs, it takes a while for the pricing to roll through that. But I don’t have the exact proportion, Chris, so let me come back to you on the fixed versus floating.

Christopher McGratty — Keefe Bruyette & Woods

Okay, thanks.

Our next question comes from Casey Haire at Jefferies.

Casey Haire — Jefferies

Clay, I just wanted to expand a little bit on your comments about NIM relief possibly in 2014. I assumed that that’s coming mostly from the asset side with funding costs as possibly at a floor here. So just curious, have loan yields hit bottom or are we within spitting distance? Just a little color there would be helpful.

Clayton G. Deutsch

I think we talked about last quarter as well on the loan side that the residential loan yield seem to have stabilized and new loans are coming on right at about where our overall book yielded. On the commercial side, we do have the new loan, new commercial loans coming on a little bit lower than the average book yield. So we might see some pressure there. But we’ve done some things in the investment portfolio later in the quarter that really didn’t take effect. So that could provide somewhat of an offset.

Casey Haire — Jefferies

Okay. I mean the securities book actually was a little bit bigger this quarter. I mean is this the next that we should be thinking about and what kind of investments were when you guys were reaching out the curve, what were you doing, investment strategy was?

Yes, we went a little bit further out. I think the duration of the securities portfolio tipped up from 3.1 or 3.0 to 3.2. I mean so it was a little bit in terms of mortgage-backed securities. Again hopefully, the yield on the stuff that we put on coming more in the 2.25 range, so that could help our overall book.

Casey Haire — Jefferies

Okay. And then how are loan pipeline sitting at year-end, and any color on geography would be helpful too?

Mark D. Thompson

Sure. In Q4, we were very pleased with loan growth, well-balanced in all of our strategic market segments as well as our geographic markets, and just to call out San Francisco, a very strong growth in that market. We’re confident our growth will continue in the mid-single-digit range. Pipelines are healthy and we feel that the demographics of our three geographies will serve our growth objective as well.

Casey Haire — Jefferies

Okay. And Clay, just last question for you, on the Investment Managers, I mean 2013 was a good year for inflows but the Investment Managers were net outflows. So I’m just curious, how much patience are you willing to have before you consider some strategic alternatives for Anchor and Dalton Greiner?

Clayton G. Deutsch

Our strategic alternative is, we like those firms and we’re working with them to continue to expand those firms. I’m not trying to make excuses, Casey, but at the macro level, domestic equity strategies even with the rally remained under pressure. There continues to be at the macro level an awful lot of flows going to pass some strategies and non-U.S. equity strategies [code for it] (ph), a lot of people missed the rally. We believe that high-performing, active, value-added domestic equity strategies have a place. So we’re committed to those firms. We like the economics and we like the way those firms can perform and we’ll keep working hard to reposition those firms for more consistent flow development, but that’s where we are.

Casey Haire — Jefferies

Got you. Thank you.

(Operator Instructions) Our next question comes from Jennifer Demba at SunTrust.

Jennifer Demba — SunTrust

Just want to ask about the loan loss provision expectations in 2014. You have a credit again this year. It seems like credit quality stats continue to slowly inch down, it’s better rather for the industry. Do you think there’s more loan loss reserve left in 2014 relief left in 2014?

Right. I think really the credit that we had for the full-year was driven by two things, the net recoveries that we had in 2013 and then also the specific provision that we had set aside against our problem loans. During the quarter at the end of the third quarter, we had about $12 million set aside against our problem loans. At the end of the year, that worked down to $10 million, another $2 million decline, and that’s been a big driver. So we do have $10 million set aside against our problem loans. It’s never going to go to zero but there still could be a little bit more in that. I wouldn’t expect the same magnitude that we had in 2013, no.

Jennifer Demba — SunTrust

Okay. Thank you so much.

Our next question comes from Christopher Marinac at FIG Partners.