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Boston Private Financial Holdings Inc (BPFH)
Q1Â 2019 Earnings Call
April 18, 2019, 8:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
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'll now let turn the conference over to your host today Adam Bromley. Please go ahead.
Adam Bromley -- Director of Investor Relations
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 -- Chief Executive Officer
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 6th, 2019. At this event we will discuss the firms 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 and Trust. Paul have more to say about our wealth business during the Investor Day. Jim Brown, who was on 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 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. Well, Colleen Graham has joined us as General Counsel 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 -- Chief Financial Officer
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've reported GAAP net income of $19.4 million or $0.25 per share. Our operating results which exclude the net after tax impact of a $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 and trust segment in addition to a single client departure in our affiliate partners segment. Tier 1 common equity ratio remained flat at 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 statement on a reported basis under GAAP. First quarter financial results showed a decline in both linked quarter in 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 in analyzing financial trends in the core business, the upcoming slide includes 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. Pre-tax, pre-provision income increased 9% year-over-year, driven by revenue growth of 1% and a 2% decline in expenses. Net income on operating basis was flat year-over-year, as higher pre-tax, pre-provisioned 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 higher funding costs.
At the same time, wealth management and trust fees declined year-over-year as a result of lower a AUM. Linked quarter total operating revenue was flat as lower net interest income in Wealth Management and 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 affiliate 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 best affiliate 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 initiative partially offset by higher occupancy 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 in NIM categories because 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 1 basis point year-over-year and 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 the interest bearing deposits increased 8 basis points from 111 basis points to 119 basis points. In our all in cost of funds, which includes DDA and wholesale borrowings increased 11 basis points from 89 basis points to 100 basis points.
Slide 11 provides the detail on our asset quality. This quarter we booked a $1.4 million provision credit, which was primarily driven by a decline in criticized loans, partially offset by net changes to loss factors. 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 2018 and 14% higher compared to the first quarter of 2018. The year over year increase was driven by Westcoast (ph) special mention loans, while substandard and doubtful categories both declined. ALLL as a percent of total loans, declined to a 107 basis points.
On Slide 12, we show the private banking segment excluding the wealth management and trust portion of our bank. The private bank operated at a 64% efficiency ratio during the quarter. Pre-tax, 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 pre-tax 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 and Trust segment.
Anthony DeChellis -- Chief Executive Officer
Thanks, Steve. Slide 13 shows performance highlights for Wealth Management and Trust segment, which operates under the Boston Private Wealth Brand. Segment's EBITDA margin for the first quarter was 19% down 200 basis points year-over-year. Total revenue decreased to 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 that Steve mentioning at the beginning of our prepared comments. Overall AUM increased 1% linked quarter as positive market action exceeded negative outflows.
Slide 14 shows the Affiliate partner performance. Overall EBITDA margin of 33% exceeded our corporate targets of 30%, a year-over-year improvement in EBITDA and operating expense was driven by lower compensation.
That concludes our prepared comments for the first quarter 2019 reported results. I'll now open the line for your questions.
Questions and Answers:
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 -- SunTrust Robinson Humphrey -- Analyst
Hey, good morning.
Anthony DeChellis -- Chief Executive Officer
Good morning.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Anthony, I was wondering if we could start just with AUM outflows this quarter and kind of the decision to close some branch offices. Could you just talk about sort of the math behind that and how you made those decisions and then should we expect additional closures going forward?
Anthony DeChellis -- Chief Executive Officer
Thanks for the question. The offices were non-strategic. There was one in Madison, Wisconsin; 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 has mentioned were highly concentrated and expected on particularly the private wealth banking side. So, as far as other offices, we don't have any plans at this time. All our offices are always under review along with opening new offices, but there are no other plans at this time.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
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 -- Chief Executive Officer
Correct.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
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 -- Chief Executive Officer
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 and our -- we've always had a good focus on private banking wealth and trust, but net flow is is something we're gonna 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 -- SunTrust Robinson Humphrey -- Analyst
Okay. And if I could switch over to the net interest margin only down 1 basis point this quarter, the change in kind of the interest rate curve here with long and coming down, how do you think that will affect you all, both in your ability to generate greater deposit flows and on the flip side on just the pricing of jumbo mortgage, et cetera?
Steven Gaven -- Chief Financial Officer
Yeah, I mean 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 -- that's been like that for a while. So clearly if the long end moves down, it puts more pressure on it, but kind of from a competitive standpoint, we don't see anything changing dramatically than what we've experienced thus far. Deposit pricing, I would expect deposit cost to continue to creep up higher as we get throughout the year. I don't foresee big changes like we saw last year that Fed is holding steady. Obviously, 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 cost will continue to creep up throughout the year.
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Okay. Thanks.
Operator
Thank you. And the next question comes from Chris McGratty with KBW.
Christopher McGratty -- Keefe Bruyette & Woods Inc. -- Analyst
Hey, good morning. Maybe on the expenses, we could start there. The departures that occurred in the quarter, obviously the charges notwithstanding, how should we thinking Steve about kind of expense trajectory over the course there?
Steven Gaven -- Chief Financial Officer
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 at the beginning of the year and then building in the back half of the year as we on-board some people, but $59 million to $60 million is still where the expense line should be at a quarterly basis.
Christopher McGratty -- Keefe Bruyette & Woods Inc. -- Analyst
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 a reasonably inexpensive intangible, I'm just wondering how you're thinking about capital return for 2019.
Anthony DeChellis -- Chief Executive Officer
Yes, I think we talked about it on the last quarter as well. It is front and center with our team. We definitely think about the best use of that capital, when the stock obviously -- the entire industry price right now, we do look at it. We really do believe the best use of the capital and this is the teams views (inaudible). My view is really to invest in the business to grow the business. And so that's why we've kept the dividend flat and we've not bought back additional shares, but it's always there Chris. We're always looking at what the best alternative is and right now we think growing the business is where our focus should be.
Christopher McGratty -- Keefe Bruyette & Woods Inc. -- Analyst
Okay great. And maybe I could just see why you're sketchy on the margin. I heard the deposit commentary, but trajectory of the NIM kind of flattish, I may have missed it?
Steven Gaven -- Chief Financial Officer
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 -- Keefe Bruyette & Woods Inc. -- Analyst
Okay. And then the tax rate will bounce back as well I assume?
Steven Gaven -- Chief Financial Officer
Yes. we're modeling a tax rate of about 22%.
Christopher McGratty -- Keefe Bruyette & Woods Inc. -- Analyst
Great, thank you.
Operator
Thank you. (Operator Instructions) And the next question comes from Alex Twerdahl of Sandler O'Neill.
Alexander Twerdahl -- Sandler O'Neill -- Analyst
Hey, good morning guys.
Anthony DeChellis -- Chief Executive Officer
Good morning.
Alexander Twerdahl -- Sandler O'Neill -- Analyst
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 toward the back end of last year?
Steven Gaven -- Chief Financial Officer
No, that was a new decision Alex.
Alexander Twerdahl -- Sandler O'Neill -- Analyst
Okay, so you're clearly taking a hard look at everything. Did you clarify exactly how much the AUM associate with those branches was?
Steven Gaven -- Chief Financial Officer
The AUM outflows associated with those closures was about $350 million of the $503 million of net outflows, at wealth and trust.
Alexander Twerdahl -- Sandler O'Neill -- Analyst
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've been still fees associated with that, would that still be included in the first quarter fee income?
Steven Gaven -- Chief Financial Officer
No, partially. I think a couple of things in the Wealth Management and Trust fee income to keep in mind, most of the assets are built quarterly (ph) in advance, so the revenue this quarter had the impact of negative market action in December and then obviously you had the negative flip outflows in the quarter. So that's really what you saw in that drop 7% linked quarter and 11% year-over-year.
Alexander Twerdahl -- Sandler O'Neill -- Analyst
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 -- Chief Financial Officer
Yeah, I mean I think total fee income for the entire fee income category 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 -- Sandler O'Neill -- Analyst
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 the industry is a little bit high, I mean would you ever think about reducing that to focus more on growth?
Anthony DeChellis -- Chief Executive Officer
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 -- Chief Financial Officer
Yeah, Alex with common equity tier 1 in 11.4%, I get your point in 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 -- Sandler O'Neill -- Analyst
Understood. Thanks for taking my questions.
Anthony DeChellis -- Chief Executive Officer
Thank you.
Operator
Thank you. And this does conclude the question and answer session. So I'd like to turn the floor to Anthony DeChellis for any closing comments.
Anthony DeChellis -- Chief Executive Officer
Thank you. I just want to thank everyone for joining us today and hopefully we'll see you at our Investor Day on May 6th. I wish everyone a nice holiday.
Operator
Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Duration: 23 minutes
Call participants:
Adam Bromley -- Director of Investor Relations
Anthony DeChellis -- Chief Executive Officer
Steven Gaven -- Chief Financial Officer
Michael Young -- SunTrust Robinson Humphrey -- Analyst
Christopher McGratty -- Keefe Bruyette & Woods Inc. -- Analyst
Alexander Twerdahl -- Sandler O'Neill -- Analyst
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