Below is transcript of the Boston Private Financial Hldg Inc (NASDAQ:BPFH)’s Fourth Quarter 2014 Earnings Conference Call, held on Thursday, January 22, 2015 at 8:00 a.m. ET. 683 Capital Partners, Jabre Capital Partners and Lee Munder Capital Group was among Boston Private Financial Hldg Inc (NASDAQ:BPFH) shareholders at the end of the third quarter.
Boston Private Financial Hldg Inc (NASDAQ:BPFH) is the bank holding company for Boston Private Bank & Trust Company. It is a wealth management company that offers a range of wealth management services to high net worth individuals, families, businesses, and select institutions.
Company Executives:
Clayton Deutsch – President and Chief Executive Officer, Boston Private Financial Holdings, Inc.
Dave Kaye – Chief Financial Officer, Boston Private Financial Holdings, Inc.
Mark Thompson – Chief Executive Officer, Boston Private Bank.
Analysts:
Casey Haire – Jefferies
Jennifer Demba- SunTrust Robinson Humphrey
Christopher McGratty – Keefe Bruyette & Woods (KBW).
Operator
Good day and welcome to Boston Private Financial Holdings, Inc. End Q for 2014 earnings conference call webcast. All participants will be on listen-only mode. After this earnings presentation, there will be opportunity to ask questions. We will now turn this conference over to Mr. Clayton Deutsch CEO and President. Mr. Deutsch, please go ahead.
Clayton Deutsch, President and Chief Executive Officer
Good morning. This is Clay Deutsch, Chief Executive Officer and President of Boston Private Financial Holdings. Welcome to our fourth Quarter and year end 2014 earnings conference call. Joining me this morning are Dave Kaye, our Chief Financial Officer and Mark Thompson, Chief Executive Officer of Boston Private Bank and Steve Gaven, Vice President for Investor Relations. At this time I’ll ask Steve to read the safe harbor provisions before we make additional remarks. Steve?
Steve Gaven, Vice President for Investor Relations
Good morning. This call contains forward looking statements regarding strategic objectives and expectations for future results of operations and financial prospects. They are based upon the current beliefs and expectations of Boston Private’s management, 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 contain in our earning released which identified a number of factors that can cause material differences between actual and anticipated results or other expectations expressed.
Additional factors that could cause Boston Private 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 subject written and oral forward-looking statements attributable to Boston Private or any person acting on our behalf are expressly qualified by this 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 Deutsch, President and Chief Executive Officer
Thanks Steve. Thank you for joining the call this morning. In the fourth quarter, our company generated net income of $12.2 million or $0.13 cents per share. For the full year, net income was $68.8 million or $0.79 per share. Return on average tangible common equity was 9.7% for the quarter and 13.8% for the full year. Near our target range of 14% – 15%. We also announced that the Board of Directors approved an increase in the quarterly dividend to $0.09 cents per share. This marks the fourth time in the past eight quarters we have increased the dividend. We continue to believe that a consistently escalating dividend is the most effective method of returning capital to our shareholders. Before we go more deeply into the financial results, I would like to briefly comment on 2014 and offer some thoughts in the year ahead.
2014 was a pivotal year for our company. In early October, we closed on the acquisition of Banyan Partners. The combination of Banyan Partners and Boston Private Bank Inc. Trust results in a nationally significant private client wealth management business with a more differentiated and integrated product offering across the private banking and wealth management spectrum. Integration of the businesses is well underway and we expect it complete by mid-year. With Banyan, core fees and income will now account for 47% of our consolidated revenue. We continue to see sustained momentum in the build out of our West Coast private banking operations. Mark and his team had done a great job identifying and attracting talented private bankers to our organization and it’s really showing in our results. In 2014, Southern California in the San Francisco Bay Area, accounted for nearly 64% of the company’s total core deposit growth.
Finally, our four non-bank affiliates grew revenue 10% and operating income 16% in 2014 year-over-year. I would specially like to salute our San Francisco Bay’s Wealth Advisory Affiliate Bingham, Osborn & Scarborough who received the 2014 Best In Business Impact Award from Charles Schwab. This prestigious award recognizes one firm each year with a track record of 10 plus years of growth and excellence. It’s voted on by independent panel of leaders from the financial services industry. We are extremely proud of Bingham, Osborn & Scarborough for this well-deserved and hard-earned recognition. Finally, we are very aware that our shareholders wants to better understand how we think about our performance targets in the current environment. I would like to talk about 2014 end of quarter, and then come back to you on how we are thinking about the year ahead. At this point I would like to turn you over to Dave and Mark for more detail on our financial performance and then I will be back to discus the wealth management affiliates and make some concluding comments on how we are thinking about performance attainment. Dave?
Dave Kaye, Chief Financial Officer
Thanks Clay. Good morning everyone. My comments will begin with Slide 3 of the earnings presentation. That can be found in the Industrial Relations section of our website, bostonprivate.com. On Slide 3 we look through the linked quarter reconciliation of the consolidated pre-tax income. Banyan acquisition had a positive net dividend impact of about $700,000 on the fourth quarter results. Banyan’s expenses were abnormally high in the quarter due to increase professional fees, some seasonality for compensation and other one-time expenses. In the fourth quarter, we recorded a $2.4 million provision expense versus a $2.6 million provision credit in the prior quarter. The provision expense was driven by a downgrade of three unrelated relationships. One in Southern California and two in New England.
Net Interest Income per quarter fell $700,000 due to reduced interest recapture and slightly lower, lowering yields. We also have a number of step ups in our expense base mostly due to seasonal marketing expenses, new office space for our wealth advisers, as well some of the depreciation and amortization of intangibles related to the Banyan acquisition. All in all the step-ups set a negative $2.1 million impact on the fourth quarter. And finally, we incurred about $2.2 million of one-time expenses in the quarter. $1.4 million of that is attributable to the Banyan transaction while the remaining $800,000 was the result of a liability restructuring. On Slide 4, we look at the consolidated P&L highlights. Core fees and income increased 21% year-over-year to $39.6 million. Excluding the impact of the Banyan acquisition, core fees and income increased 2% year-over-year. Total operating expenses for the fourth quarter of 2014 $63.8 million and that is up 15% year-over-year. If we exclude the impact of Banyan and the one- time charges, fourth quarter 2014 operating expenses were $54.9 million and that is down about 1% year-over-year.
Our consolidated full year financials are shown on Slide 5. For the full year, total revenue increased 3% to $320 million. As you will recall, 2013 results do include the $10.6 million gain on sale of the Pacific North West operations. If we exclude the gain on sale of the Pacific Northwest, and we also exclude the contribution that we received from Banyan in 2014, full year revenue increased 5%. Total operating expenses excluding the impact of Banyan and the one-time expenses, were down 1% year-over-year. That resulted in core operating leverage of approximately 600 basis points. Slide 6, looks at our spread and fee-based revenue, and we show the progress that we have made in drawing our fee-based revenue. Our fee-based revenue increased 18% linked quarter and 21% year-over-year, largely due to the Banyan acquisition. As Clay mentioned, our fee-based revenue now accounts for 47% of total revenue. That’s up from 43% in the third quarter of 2014, and 42% in the fourth quarter of 2013.
We believe we have a large stable source of recurring revenue derived from distinctive private banking clients that sets us apart in the industry and enables us to grow in a more capital friendly manner. On Slide 7, our net interest margin decreased 10 basis points to 2.83% linked quarter. And that is primarily due to higher cash balances, some lower loan yields, and the lower levels of interest recapture in the fourth quarter versus the third quarter.
On Slide 8, we show the decline on criticized loans for the past five quarters. In the fourth quarter of 2014, criticized loans fell 11% linked quarter to a $160 million. We did have a $10 million increased in our non-accruals, and that partially drove the $2.4 million provision expense during the quarter. On slide 9, our Tier-1 common equity capital decreased an estimated 87 basis points to roughly 9.8% and that is due to the $65 million of goodwill and intangibles created in the Banyan transaction. As we disclosed last quarter, approximately 68% of the up-front consideration was paid in cash. That concludes my prepared remarks for the morning. I will now turn it over to Mark for discussion in the private banking segment. Mark?
Mark Thompson, Chief Executive Officer, Boston Private Bank
Okay. Thanks Dave good morning. Before I begin my comments, I would like to highlight that we have changed the reporting format for the private bank. Going forward, the private bank segment will include financial information for our traditional lending and deposit taking activities. Well the Boston Private Wealth Management segment will include the financial information for the combined Banyan and Legacy Wealth Management and Trust businesses. My comments will begin on Slide 10. In the fourth quarter, pretax, pre-provision income at the private bank decreased 6% year-over-year due to a 4% decrease in revenue to $46.5 million and a 2% decline in total expenses. Included in the fourth quarter results are $1.4 million of one-time expenses. Excluding this one-time items, pretax, pre-provision income increased 2% from the fourth quarter of 2013.
Slide 11 shows full year private banking performance highlights. Revenue decreased 4% as higher net interest income up 3% from 2013 was offset by lower fee and other income. As Dave mentioned earlier, 2013 results include the gain on sale of the Pacific Northwest operations. Excluding this gain, total revenue increased 2% while total expenses excluding one-time items fell 7% for the same period. Slide 12 shows the past five quarters of average loan balances by type. Total average loan, loans increased 5% year-over-year, in line with our previously stated growth objectives. The strong year-over-year performance was driven by a 5% increase in both commercial and residential loans. Within commercial, and the period, C&I loans increased 10%. C&I grew $68 million in New England an increase of 10 % and $19 million on the west coast an increase of 12%. At the individual market level, loans grew 7% year-over-year in Southern California and 4% in New England. Loans decreased 2% in the San Francisco Bay Area due in large part to the loan sale we executed in the second quarter of 2014.
Now turning into Slide 13. In the fourth quarter we saw a continued strength in the development of our deposit franchise. Average deposits increase 10% year-over-year led by money market and demand deposits which were up $337 million and $73 million respectively. On a linked quarter basis, average deposits increased 5%. As Clay mentioned earlier, in the call, the private banking franchise on the West Coast made tremendous strides in 2014. Deposits, excluding CDs, increased 41% year-over-year in Southern California and 12% in the San Francisco Bay Area. CDs now make up 16% of the deposits based in Southern California, down from 24% at the end of 2013. In San Francisco Bay, CDs are 12% of total deposits down from 18% last year.
Slide 14 contains the financial information for the newly formed Boston Private Wealth Management segment. The third quarter 2014 data represents the Legacy Bank wealth management business. While the fourth quarter data shows the result for the combined Banyan and Legacy Wealth Management and Trust businesses. At the end of the third quarter Boston Private Wealth Management, at $13.3 million of revenue, $2.3 million of EBITDA, and $9.3 billion of assets under management. Peter Raimondi, CEO of Boston Private Wealth is working with our private banking leadership to accelerate cross-selling, further promote the Boston Private brand and further develop our distribution channels. Now I will turn you back to Clay.
Mr. Clayton Deutsch, President and Chief Executive Officer
Thanks Mark. Let’s go to Slide 15. Total revenue for the investment management segment, decreased 4% year-over-year in the fourth quarter due to lower year-end performance fees at Dalton, Greiner. Excluding the impact of performance fees, total revenue increased 3% from the fourth quarter of 2013 while operating expenses fell 3% for the same period. Fourth quarter 2014 segment EBITDA margin was 35%, up 2 basis points linked quarter. The segment overall reported net AUM outflows of $258 million for the quarter reflecting on-going pressure on active domestic equity strategies. Client re-balancing continues to drive the majority of net outflows. Slide 16, outlines the performance of the Investment Management segment for the full year. Pretax income from continuing operations increased 15% in 2014. Revenue increased 7% while operating expenses grew 5%, resulting in 200 basis points of positive operating leverage for the segment.
On slide 17, our wealth advisers reported an 11% year-over-year increase in revenue for the fourth quarter of 2014 to $12.5 million. Operating expenses increased 15% due to staff expansion, new office space, and professional fees. The segments fourth quarter EBITDA margin of 32%, remains above our target of 30%. Segment AUM increased 6% on a year-over-year basis. Linked quarter, AUM was up 2% to $9.9 billion. Wealth advisory net inflows were $51 million as compared to net inflows of $40 million last quarter and $68 million in the fourth quarter of 2013.
Slide 18 shows the full year results for the Wealth Advisory segment. Pretax income from continuing operation increased 17% in 2014. Our Wealth Advisers demonstrated strong operating leverage as revenue grew 14%, while operating expenses increased 12%. Net flows were strong for the second consecutive year, coming in at $261 million. More information on AUM net flows can be found on Slide 19. In the fourth quarter the Wealth Advisers and Private Bank each posted net inflows of $51 million. Both the Wealth Advisers and Private Bank have generated positive net flows, 7 of the last 8 quarters.
Now before taking your questions, I would like to briefly comment on how we are thinking of our performance targets. As you know, our performance targets are heavily return on equity driven. And our threshold of good performance has been an 11% return on common equity and a 14% return on tangible common equity. As we enter the early portion of 2015, we do believe that a thin yield interest rate scenario is upon us. While the interest rate environment is volatile and the duration of this environment is hard to predict amid concerns regarding global economic growth and heightened geopolitical risks, I do want to address how we are thinking performance in this environment. The 11% return on equity target remains our standard of good performance with respect to executive compensation and other goal setting kinds of activities. However, we believe the thin rate environment makes a 10% return on equity more realistic in the near term. We remain committed to strong returns and we will work very hard in pursuit of our targets as the year unfolds. That concludes our comments on fourth quarter and full year 2014 earnings. With that, we would like to open the calls and take your questions.
Question and Answer Session
Operator
Yes, thank you. We will now begin the question and answer session. And the first question comes from Casey Haire with Jefferies.
Casey Haire, Jefferies
Good morning guys. Let me start off with the — I mean the outlook Dave, obviously excess liquidity kind of hold you back a little bit this quarter, could you quantify that drag and then also just give us — sounds like we could get a reset here on the first quarter — your best guess as to where we might reset in the first quarter?
Dave Kaye, Chief Financial Officer
Yes, I think the excess liquidity was about half of the drop sequentially and then the other piece was just lower interest recapture, really almost zero interest recapture for the quarter. Some quarters we have had more than others but this was definitely the lowest there. And sorry your second part was — I think the excess liquidity will probably go away in this first quarter. We tend to see some lower deposit balances as clients makes some tax payments later in the first quarter. So the average balances tend to run seasonally a little bit lower. That would eat up some of the liquidity. But there is still little pressure on the loan yields.
Casey Haire, Jefferies
Understood. And then Banyan seems like it got up to a little bit to a slow start. Just curious, my presumption is you guys expect the EBITDA improvement from here. Should we see that more on the revenue side or expense side?
Dave Kaye, Chief Financial Officer
Well I think we are looking forward on both realistically the expenses savings that we been targeting. You know we will probably you will see that more materialize in the back half of the year as they work through the integration and the cost saving efforts there.
Casey Haire, Jefferies
Okay. And just last one for me Clay, you mentioned just strategically speaking that obviously the interest rate environment is challenging. I know you guys are going to be working through the Banyan integration but could you just give us some thoughts on your appetite to perhaps follow up this Banyan deal with another one this year? Another wealth manager? What is the appetite in 2015?
Clayton Deutsch, President and Chief Executive Officer
Well I will just — Casey, I will refer to things I have said in the past. There is no change in it. Our appetite for wealth management is high. And if we can accelerate the development of our wealth management business portfolio through M&A, we will absolutely do that. So we are active lookers and that is about all I can say. We do not declare our intentions beyond that. We are very excited about what Banyan has done for us in the early days. We were looking for a catalyst or a bit of a transformational deal, if you will. And the combination of our Boston Private Wealth Management business in the bank which was itself a strong business with Banyan Partners really does good things for us. But we are going to keep going down on this path. Thanks Casey.
Casey Haire, Jefferies
Okay, thank you.
Clayton Deutsch, President and Chief Executive Officer
Thanks Casey.
Operator
Thank you. The next question comes from Jennifer Demba with SunTrust Robinson Humphrey
Jennifer Demba, SunTrust Robinson Humphrey
Thank you. Good morning. Can you just give us some more details of the credit downgrades that you talked about during the quarter?
Dave Kaye, Chief Financial Officer
Sure. It is really three unrelated relationships as we said. One in Southern California, two out of Boston. One was a construction of loan that has been sort of a long standing criticized loan. And we moved more aggressively to take a mark and hopefully come to a resolution shortly on that. So we took a charge-off. And then another was a CRE deal, where they had a loss of a very large tenant and so we downgraded that and also took a charge or reserved. And then the final one, just a borrower that ran into financial difficulties and we put it in elevated reserved in that relationship. So really three different types of relationships and loans. I don’t see any pattern if you look at our overall criticized loans they were down, so these were existing problem loans that got worse, three of them, but overall the amount of criticized loans did improve for the quarter.
Mr. Clayton Deutsch, President and Chief Executive Officer
Jen, all three are paying as agreed. But we are pretty conservative on our loan review and we just felt these are appropriate moves.
Jennifer Demba, SunTrust Robinson Humphrey
Alright, thank you.
Operator
And we do have a question from Chris McGratty from KBW.
Chris McGratty , Keefe Bruyette & Woods (KBW)
Hey good morning everybody. Clay, if I’m doing the math on you ROE guidance, it suggests relatively flat earnings for first ’15 over ’14 . I am interested in your expectation given the credit development of the quarter. I think we in the street had negative provisioning cost, maybe a bit too long but, can you share with us kind of your near-term expectations for the period, over the course of the year?
Mr. Clayton Deutsch, President and Chief Executive Officer
Well I will forward that to Dave, Chris. I’m not trying to duck it but we talked a lot about this.
Dave Kaye, Chief Financial Officer
Chris the provision I said — outside of this three relationships that I talked about, we probably would have been flat or maybe a slight credit. So it was, I don’t know that it changes our overall expectations, as Clay mentioned, we continue to see improvements overall. We do have loans that we have taken previous charges on, that are paying as agreed, so that could represent some potential for recoveries in 2015. It is just difficult to anticipate the timing. I would say that overall if you look at the year, we had almost to $7 million credit for the full year in provision, I wouldn’t expect us to repeat that, that was pretty large. We had some larger recoveries, especially early in the year. But it will probably remain still lower than, lower than normal and could be some slight credits depending on the quarter in which we get recoveries. But I don’t know that this quarter did not really change our overall outlook on the credit situation.
Christopher McGratty – Keefe Bruyette & Woods (KBW)
Okay that’s helpful. The expense summary, didn’t you just said back half of the year, is it kind of cost saves it come in. But if you take out, take out the one-timers in the quarter your $61.5 million from the quarter. Is the natural path over the course of the year kind of slow improvements from this — from this level or is there anything else we should be kind of mindful of?
Dave Kaye, Chief Financial Officer
Well as always we have in the first quarter, we have some seasonality related to the FICA and all the taxes. That generally is in the $1.5 to $2 million range, we see a blip off. Outside of the $2.2 million of one-timers that we called out, that is probably a good run rate to X those out.
Christopher McGratty – Keefe Bruyette & Woods (KBW)
Okay. I understand and maybe, one last thing Dave, on the margin. Is the guidance kind of Q1 some pressure given the liquidity and then maybe some instability? Kind of want that works out — going out of balance year, that effect?
Dave Kaye, Chief Financial Officer
Yes okay. Well we actually say we might have lower excess liquidity so that would help us a little bit just in terms of the NIM that we post in Q1.
Christopher McGratty, Keefe Bruyette & Woods (KBW)
Okay, thanks.
Operator
Thank you. If there are no more questions at the present time, we would like to turn the call back over to the management for an any closing comments.
Mr. Clayton Deutsch, President and Chief Executive Officer
I just want to thank all of you for your interest in our company. As I mentioned earlier and I will come back to Chris’ question. The only change in our thinking is what the first three weeks I have said about the yield environment. I think it is way too early to call it a year, three weeks into January. But we are going to manage ourselves as if it is the thin yield scenario was upon us and we are going to adjust accordingly. But we remain very committed to the kinds of performance goals we have been discussing with you previously and that of we underlined today. Thank you all.
Operator
Thank you. The conference has now concluded. Thank you for your attending today’s presentation. We now disconnect. Have a nice day.
