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Boston Private Financial Holdings Inc (NASDAQ:BPFH)
Q2 2020 Earnings Call
Jul 29, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Boston Private Financial Holdings Second Quarter 2020 Earnings Conference Call. [Operator Instructions].

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

Adam Bromley -- Director of Investor Relations

Thank you, Alyssa, and good morning everyone. This is Adam Bromley, Director Investor Relations of Boston Private Financial Holdings. We welcome you to this conference call to discuss our second quarter 2020 financial results. 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; Steve Gaven. Chief Financial Officer; Paul Simons, President, Private Banking Wealth & Trust; and Jim Brown, President of Commercial Banking.

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'll refer you also to the forward-looking statements qualifier 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.

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

Anthony DeChellis -- Chief Executive Officer

Thank you, Adam. Good morning everyone and thank you for joining us on today's call to discuss our second quarter 2020 results. However, before we get into this quarter's results, our team would like to express that we hope this call finds you and your families in good health and that you have all managed to remain safe during these challenging times.

The business and economic outlook in our markets remain a fluid situation, and is creating some new challenges for all banks. However, we are encouraged by our firm's ability to adapt quickly to provide uninterrupted service to our clients. Throughout the first two quarters of 2020, we have continued to stay intensely focused on our strategic growth plans. While we expect the environments remain demanding for the balance of the year, we are also optimistic about developments in consumer behavior, which we believe have accelerated some key trends in financial services, and present new opportunities.

The first half of 2020 for us can be characterized as finding the right balance between short-term and long-term objectives. Our immediate task became implementing our business continuity plan and adapting to the majority of our firm's employees working remotely. Our company's productivity levels remain high, remarkably both clients and employees have adjusted quickly through a work-from-home client coverage model. This pandemic has tested some of our strength, but it has not diminished our ambitions for delivering on a highly distinctive and differentiated Private Banking and Wealth Management client experience. Our teams continue to demonstrate that they can deliver best in class advice and guidance, whether in person or virtually.

Challenging times afford all firms an opportunity to distinguish themselves in the hearts and minds of clients, and we believe that Boston Private has continued to build on its legacy of excellent client service. As mentioned earlier, we also believe that trend in financial services have accelerated, significantly moving forward the timeline for the future model of Private Banking and Wealth Management in particular. New behaviors have been learnt, new norms are evolving, the clock will not be turned back and while it won't be easy, the opportunity to challenge the largest incumbents for market share is as good as it has ever been, for the firms that are willing to reimagine the client experience and innovate. Thus we have accelerated our own timeline for delivering a highly distinctive and comprehensive banking and wealth management platform, one which delivers highly skilled advisors supported by teams of experts, all underpinned by efficient and empowering technology. We have a simple ambition, we aspire to deliver one of the most compelling value propositions in our industry.

At the same time, we've been highly focused on the present environment and the risk management of our loan portfolio and balance sheet, in order to ensure our company's long-term success. Our priority has been to intelligently and thoughtfully support the needs of our clients, while relentlessly analyzing and managing risk exposures on our balance sheet. As discussed in Q1, we have put programs in place to support our clients and build a conservative loan loss reserve, so that our company can withstand the duration of a pandemic and we remain highly confident in our firm's capital position.

I would like to expand on a few topics that give our team cause for optimism. First, our technology team remains on plan with all of our projects, especially those aimed at enhancing our overall client experience. These efforts will simultaneously bolster our abilities to work remotely, while enabling new avenues for growth. Our enhanced online and mobile banking platform will continue to be refined, and in this fall, clients will be able to initiate new relationships, via a purely online interaction. In the spring of 2001 following the launch of a dramatically improved Wealth Management platform, we plan to roll out a direct access online and mobile capability in wealth management, as well. This new capability will not only allow clients to initiate a relationship with our firm directly, but will also allow them to have increased flexibility and choice, regarding the service model they desire.

Our efforts to upgrade our digital capabilities in late 2019 have proved to be not only timely, but have also served to strengthen our abilities to deliver an exceptional client experience. Our client acquisition efforts are trending positively in key areas, including our deposit levels, which have seen good growth year-to-date. Recent momentum in our pipeline, make us optimistic about both our bank deposit and wealth management AUM outlook for the back half of the year. We expect the stronger deposit flows to improve our funding and liquidity profile and offer balance sheet management flexibility.

In the Wealth Management and Trust business, we have delivered positive flows for the second consecutive quarter, while we regain momentum in hiring high quality advisors, after a temporary slowdown entering the pandemic. Here as well, we are optimistic about the new hire pipeline and our ability to continue to add new high quality advisors. In regards to our dividend, Steve will have more to say about our thought process. But we will offer, that our primary intent was to make a prudent adjustment, so that we can continue to stay focused on moving forward on our strategic plan. Getting our payout ratio in line with industry norms is not a new ambition. The current environment simply necessitated a review and a change in the path to a more normalized payout ratio.

As we enter the balance of 2020, our team feels confident in our company's capital position and liquidity position. Our loan loss reserve build which incorporated conservative assumptions and in our overall ability to stay focused on executing our strategic plan. As mentioned earlier, times like these are a great opportunity for us to distinguish our firm and further strengthen client relationships. We will ensure the long-term success of our company by continuing to earn the trust of our clients each day, and by staying true to our value proposition.

I would now like to hand it over to Steve to discuss the details of our second quarter results.

Steve Gaven -- Chief Financial Officer

Thanks Anthony, and good morning everyone. My comments will begin on slide 4, where we show a summary of our consolidated financial highlights from the second quarter. This quarter, we reported net loss of $3.3 million. Our earnings were significantly impacted by $25.4 million of total reserve building, reflecting the tiering economic conditions related to the COVID-19 pandemic, and a more conservative economic forecast driven by the increased weighting of our downside scenario under the CECL methodology. Loan activity for the quarter was heavily influenced by the paycheck protection program. Loans increased 4% linked quarter, while deposits increased 2% linked quarter.

Total AUM, as of June 30, 2020 was $16 billion, a 10% increase linked quarter, primarily driven by a recovery in equity market values from March 31 to June 30. Total net flows for the second quarter were negative $40 million, while our Wealth Management and Trust segment contributed $60 million of positive net inflows. Concurrent with our earnings release, our Board of Directors authorized a $0.06 per share dividend payable to common shareholders during the third quarter, compared to $0.12 per share in the previous quarter. As you'll recall from our 2019 Investor Day, we outlined a capital return philosophy, whereby we targeted lowering our long-term payout ratio through earnings growth. Given the environment that has unfolded, we are taking a conservative view in accelerating our objective of achieving a payout ratio more in line with the industry. This decision allows us to move closer to our Investor Day targets, while representing a conservative approach to liquidity and capital management.

Moving on to slide 5, we show consolidated income statement. Pretax pre-provision income increased 13% linked quarter to $20.1 million. Excluding the impact of provision expense for unfunded loan commitments, which is recognized in non-interest expense, adjusted pre-tax pre-provision income increased 16% linked quarter, primarily driven by higher revenue and lower expenses.

Slide 6 shows consolidated revenue trends. Total revenue increased 4% linked quarter, primarily driven by growth in net interest income and the linked-quarter improvement of miscellaneous income, which included positive marks on derivatives and securities during the second quarter. Total core fees and income declined 5% linked quarter, as lower equity market values as of March 31, resulted in lower second quarter billing rates in the Wealth Management and Trust business.

On slide 7, we show a detailed breakout of our non-interest expense. Total non-interest expense for the second quarter of 2020 was $61.5 million, which includes $2.8 million of provision expense related to unfunded loan commitments, categorized as other expense. Excluding the impact of the provision expense, second quarter total non-interest expense was $58.7 million, a 1% decline linked quarter and a 5% increase year-over-year. The year-over-year increase was primarily driven by technology investments in new hires. As you will recall, our previous guidance for the quarter was for operating expenses to be $60 million to $62 million.

Slide 8 shows the past five quarters of average loan and average deposit balances by type. Average total loans increased 4% linked quarter, reflecting the funding of PPP loans. During the quarter, our company-funded $380 million of PPP loans resulting in $284 million of average balances. Excluding PPP loans, average total loans were flat linked quarter and year-over-year. Linked quarter commercial industrial loans declined 10%, primarily driven by the payoff of loans in lower line usage. Commercial real estate loans increased 3% linked quarter, primarily driven by the increased loan balances attributable to the debt service reserve program. Excluding debt service reserve loans, commercial real estate loans were flat for the quarter. Total average deposits in the second quarter increased 2% linked quarter and 10% year-over-year, as a result of higher average non-interest bearing deposits from commercial clients. Year-over-year interest-bearing deposits increased 8%, primarily driven by higher commercial client money market balances in wealth sweep deposits, partially offset by the intentional runoff of brokered CDs. The typical seasonality our deposit base experiences in the second quarter, as a result of tax payments, did not materialize, as a result of the delayed tax filing deadline, but we do anticipate some impact on our business, as we enter the third quarter.

Slide 9 shows a five quarter trend of consolidated net interest income and net interest margin. Net interest income increased 3% linked quarter, primarily driven by lower funding cost, PPP income and prepayment penalties. Net interest margin decreased 1 basis point linked quarter to 2.75%. Net interest margin was pressured by lower earning asset yield, which declined 33 basis points, while benefiting from lower funding costs which also declined 33 basis points. PPP loans negatively impacted our NIM by 2 basis points, as low interest rates in the loans were partially offset by amortization of origination fees. The total cost of deposits decreased 31 basis points during the quarter, driven primarily by a 50 basis point decline in money market rates and growth in non-interest bearing deposits.

As we move into our discussion on credit, starting on slide 10, I thought it would be helpful to review Boston Private's credit culture and our process for managing credit risk in our loan portfolio. Throughout the first half of the year, our team has been focused on identifying pockets of risk early, rating those pockets of risk accordingly, and then managing those credits aggressively in order to minimize loss. We always anticipate with special mention loans, that some percentage will emerge and be upgraded, while some percentage will be challenged and downgraded to classified. In this case, the status and duration of COVID-19 is obviously the key factor determining future loan performance. We'll be managing these relationships actively as we always do and as we discussed last quarter, our underwriting LTVs and origination are conserved.

Slide 10 provides detail on our adversely graded nonperforming loans. Overall, non-accrual loans remain stable at low levels of 35 basis points of total loans. Net charge-offs also remain very low at $1.5 million for the quarter or 8 basis points of total loans on an annualized basis. The increase in our criticized and classified loans reflects the downgrade of performing commercial real estate loans to the special mentioned category, as a result of a more proactive bottom up analysis of loan level detail, rather than a deterioration of borrower conditions during the second quarter.

Slide 11 shows a roll forward of the changes to criticized and classified loans from March 31 to June 30. This quarter's increase reflects the downgrade of approximately $179 million of loans, partially offset by loan pay-offs and paydowns of $48 million and loan upgrades of $29 million. Over the past three months, we performed a deep dive on 100% of our hospitality exposures in all of our retail exposures with balances greater than $4 million, which represents approximately 75% of the retail portfolio. This exercise led to the downgrade of 14 commercial real estate loans totaling $153 million of outstanding balances. Within the real estate loans, we downgraded including approximately $75 million of retail loans and $43 million of hospitality loans.

On slide 12, we provide an update on our exposure to several industries, that maybe most immediately at risk by COVID-19. We are closely monitoring potential exposure within our CRE portfolio, particularly retail and hospitality properties. While we believe our exposure is underwritten conservatively, we are closely tracking trends in the underlying properties. Our retail portfolio went into COVID-19 with an LTV just below 50%, and throughout the second quarter, we saw retail properties experiencing increasing rent collection trends. Occupancy rates in the hospitality portfolio have been increasing after bottoming in April. However, this segment remains challenged, due to the impact of COVID-19.

On slide 13, we provide an update on our deferral requests. C&I deferral levels remained flat from the prior quarter, as we granted deferral on principal payments for six months on approximately $126 million of loans or 13% of the portfolio. All of these clients has continue to pay interest on the loan facilities. At the end of the quarter there was $217 million or 7% of residential loans on deferral. This compares to $162 million last quarter. The change from last quarter reflects additional requests that were not processed between our last earnings call in the middle of May. Since the middle of May, we have not seen many new deferral requests. Thus far, clients representing $80 million of deferrals have requested a 90-day extension. The next critical date for extension request is August 1st.

Soon after the onset of the COVID-19 pandemic, we proactively reached out to qualified commercial real estate clients and established a debt service reserve program that we have previously discussed. This program is a portfolio level program, intended to provide our borrowers with flexibility to work with their tenants, who represent their primary source of repayment on our loans.

On slide 14, we review the allowance for loan loss and provision for loan loss expense. This quarter's provision caused our total allowance for loans to increase by 25 basis points to 122 basis points. We increased our reserve levels on commercial real estate loans to 178 basis points. Excluding PPP loans, our reserve coverage on C&I loans, increased to 169 basis points. And the total allowance reserve coverage as a percentage of loans excluding PPP is 128 basis points. The total reserve build of $25.4 million through provisioning was primarily driven by our increased conservatism regarding the economic outlook. During the second quarter, we increased the weighting of our downside economic scenario, as our CECL model is based on a probability weighted composite scenario, comprised of 50% Moody's COVID-19 baseline and 50% Moody's S3 scenario. This compares to weights of 70% baseline and 30% S3 last quarter.

On slide 15, we show the Private Banking segment, excluding the Wealth Management and Trust portion of our bank. The Private Banking efficiency ratio decreased to 68% in the quarter, driven by higher revenues.

I will now turn it to Paul Simons to discuss our Wealth Management and Trust segment.

Paul M. Simons -- President of Private Banking, Wealth & Trust

Thank you, Steve and good morning everybody. Slide 15 shows performance highlights for the Wealth Management and Trust segment. Segment EBITDA margin for the quarter was 21% compared to 22% in the prior quarter. The linked quarter revenue decline was driven by low equity market levels on March 31, which negatively impacted second quarter billing rates, while lower expense levels linked quarter were driven by seasonal compensation expenses in the first quarter. The segment demonstrated continued strength in new business, coupled with low client attrition, ultimately driving positive net flows of $16 million for the second quarter of 2020. As Anthony mentioned, we regained momentum hiring high quality advisors in the back half of the second quarter, following a temporary slowdown during the lockdown phase of the pandemic.

That concludes our prepared comments on our second quarter 2020 reported results. We will now open up the line for your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions]. The first question today comes from Michael Young of SunTrust. Please go ahead.

Michael Young -- SunTrust -- Analyst

Hey, good morning.

Anthony DeChellis -- Chief Executive Officer

Good morning.

Steve Gaven -- Chief Financial Officer

Good morning, Michael.

Michael Young -- SunTrust -- Analyst

Wanted to start on, maybe just some of the asset quality pieces, you provided a lot of really good detail. Wanted to just get a feel for, in the current group of special mention and non-performing that have already been downgraded. Are those more on just cash flow shortfalls, and you all don't see a lot of loss content, because the LTVs or appraised values are still a pretty high. Is that kind of the right way to think about that?

Steve Gaven -- Chief Financial Officer

Hey Michael, this is Steve. I think it is important to kind of take a step back and think about kind of what we've been doing since the onset of COVID. So if you go back to kind of late March, mid-March when it became apparent, what we might be dealing with. We obviously took a lot of time to go through the portfolio, identify those areas most at risk. For us at retail and hospitality. So we went through the process of sweeping the entire hospitality portfolio. We looked at every retail exposure and office exposure above $4 million and in retail, that covers about 75% of the portfolio. In a typical time, when you're thinking about risk rating, you're looking at updated financials, you're looking at appraisals you're talking to the client, and you're making your judgments based on that. Obviously this time, and what we're dealing with is a little different. So we really focused on a couple attributes within the borrower base after we did our sweep. So if you think about the things that are probably most relevant to what we're dealing with now, pre-COVID LTV, that's kind of a margin of safety, as collateral values deteriorate. We also looked at real-time property level revenue trends, and sponsor strength.

So those are kind of the three things we looked at, and so the down rates with special mention really reflect headwinds in one or more of the attributes that I just listed, right? In most cases pre-COVID LTV for us is an area of strength, just given our conservative underwriting. In this environment obviously, revenue trends are among the weaker attributes, particularly in hospitality, where occupancy rates are down, it's putting pressure on RevPAR.

On the retail portfolio, what we looked at though is, at this point about 77% of the tenant base is paying rent. So we feel pretty good about how that has come off the bottom, back in April. But that was really the approach we took to risk rating special mention. We think we have a good baseline of criticized and classified right now. We could see some more downgrades perhaps next quarter in the hospitality portfolio, just given the headwinds that segment base is, but I feel like we have a good baseline right now and what you'll see going forward is kind of your typical movement in and out of criticized and classified, as loans get downgraded and upgraded, paydown insured.

Michael Young -- SunTrust -- Analyst

Okay. And maybe as we're thinking about kind of future downgrades or migration, obviously you've kind of outlined the most sensitive buckets here in retail hospitality and restaurants. But is it right to think that it's really going to be those that are in deferral now, that maybe come out and can't resume payment? Or are there credits that maybe weren't approved really for deferrals due to some shortfalls already that are in those buckets, that could also negatively migrate going forward?

Steve Gaven -- Chief Financial Officer

Yeah. So I think it's important when looking at our risk rating migration, is that keep in mind, we don't take into consideration whether not a loan is in a program or on deferral, when assigning risk ratings. So we kind of put that aside through our process and based on the approach I just described, that's how we're arriving at our risk ratings. So we shouldn't see this cliff effect, if you will, that loans come off a program or loans come off deferral, and then they become problems or they need to be downgraded. We're doing that ahead of time.

Jim Brown -- President, Commercial Banking

Michael, this is Jim. I would just add to what Steve said. Steve quoted the 77% rent collection. We are in the high 60s with loans that are on deferral. So it's not like the loans that are on deferral are particularly low. Those have come off the bottom as well.

Michael Young -- SunTrust -- Analyst

Got it. Thank you. And then maybe switching gears, I don't know if this is for Anthony or maybe Paul, but it was good to see the positive net flows again for the second quarter in a row here. Could you maybe just talk about, what is going on in this environment right now with customers and client interaction etc, and how you're able to drive those and just what the outlook is? It sounds like positive trends you expected in the back half. So just maybe a little more color there would be helpful?

Anthony DeChellis -- Chief Executive Officer

Sure, I'll start and then maybe Paul will add something. So as I mentioned in the first quarter call, one of the benefits that we had from an environment like this, is your clients actually do need to talk to you about more complex things. Right, if you are more -- if you weren't thinking about business succession [Phonetic] or state planning, your wealth transfer strategies, just because maybe you're sitting at home with your family around you and maybe talking about some things you don't normally talk about. You know, the current environment has probably put some topics on the table, maybe we just always naturally differ as human beings, right, just not maybe the topic you want to talk about. And so that's allowed us to actually engage with our clients that may be more often were about investments or investment process into more expanded conversations about their whole financial well-being. So that's been -- from a client standpoint, I personally have been amazed at how well they've adapted to either a video conference or just a phone call. And I think they're being understanding in the current environment, but I would say that at the moment, we are seeing things proceed rather well.

What I referenced earlier in my comments about the opportunities that I think it's offering, is if you had a bricks and mortar advantage that for the moment anyway, is not the advantage it used to be. And I think that coupled with the fact that clients are becoming more and more comfortable, with A, doing things maybe themselves online or being open to a different sort of relationship, still having access to great advice and guidance, but also being able to use technology to get done a lot of things, maybe they would have asked someone to do for them before, is going to create a good opportunity. And we see that dynamic also playing out in potential talent, right. If you've been at home, working and you've been at a big firm for the last 10 or 20 years, you're probably more open to the idea of making some sort of a change and that seems maybe less of a big leap, to go to a different firm or a smaller firm, and maybe you can start your own firm. So these are all things that were already trends in place. We just think that, this pandemic, along with bringing a lot of challenges, has also accelerated some of the things that we probably -- we were going to see anyway. It's just now I think been sped up by about three years.

Paul, I don't know if you would add anything to that?

Paul M. Simons -- President of Private Banking, Wealth & Trust

No, I think that covers it. I mean this is an environment that that lends itself to our strengths as holistic advisors, and we're seeing that in increased engagement, strong retention of clients and it is a challenge. COVID does present a challenging environment for sort of on-boarding of new clients and so we take comfort in the continued strength of our numbers for the second quarter and feel good that that trend is going to continue and accelerate into the second half.

Anthony DeChellis -- Chief Executive Officer

Well one of the things we tried to do during the pandemic is just put out a regular pulse [Indecipherable] and see how our employees are doing, but also how our clients are doing. And it is interesting that during this time period, things like our Net Promoter Score are actually increasing, right. So even at a time period where you can't necessarily get in person time, but maybe you're getting screen time, and you're certainly getting phone time, that clients are -- our scores haven't improved across the board on things that matter most to clients. We reviewed that yesterday in our executive team meeting, which I think is very telling, but you can not only manage a time period like this, but you're going to actually make progress with clients and we're seeing that.

Michael Young -- SunTrust -- Analyst

Okay. Thanks.

Operator

The next question comes from Chris McGratty of KBW. Please go ahead.

Christopher McGratty -- KBW -- Analyst

Hey, good morning everybody.

Anthony DeChellis -- Chief Executive Officer

Good morning, Chris.

Christopher McGratty -- KBW -- Analyst

Steve maybe start with you. The margin was obviously a really strong point in the quarter, as you kind of matched one-for-one on the repricing, how do we think about prospective margin, maybe the conversation excluding PPP, how do we think about margin and then probably more importantly, how do we think about just dollars of net interest income from this quarter's level? Thanks.

Steve Gaven -- Chief Financial Officer

Yeah. So I would think about kind of the core NIM at PPP Chris. We are going to see some margin compression going into next quarter, and that's mostly due to the fact that we push through a lot of the deposit cost reductions in the first and second quarter. There's probably another 10 or 15 basis points to move on interest bearing deposit costs, as we get through the next couple of quarters. Then we think we're kind of close to bottoming, although we'll see how the industry reacts, as we get longer into this lower, for a seemingly longer cycle. And obviously we're going to have asset yields repricing down. So we're a bit of an asset sensitive position at this point. So that's where you're going to see kind of core NIM compression, probably 5 to 10 basis points, and that will also depend on our ability to maintain the on-balance sheet liquidity that we've seen through the second quarter quite frankly, thus far in the third quarter.

From a dollar perspective, because of PPP, I think you can see NII flat to up slightly next quarter and that's really a function of the fact that we really didn't start amortizing the PPP fees until May, and even in May, I think we only got about half of the impact in that month. So the only month with the full impact of amortization on PPP was June. So I'd expect NII flat to slightly up, as kind of PPP will offset some of the core NIM contraction that we anticipate.

Christopher McGratty -- KBW -- Analyst

Okay, that's helpful. And just can you remind us the fees that are yet to be realized, and also, should we just assume kind of a straight line or how are you guys accounting for it?

Steve Gaven -- Chief Financial Officer

So it's $11 million fees, straightlined over 24 months. So that's the monthly rate to use in your model.

Christopher McGratty -- KBW -- Analyst

Got it, OK. And then I want to. I want to turn to expenses for a moment. You talked about how you were within your guide, even with the unfunded build. How do we think about -- putting the comments that Paul and Anthony talked about with hiring into the environment that we're in, in terms of expense build?

Steve Gaven -- Chief Financial Officer

Yes, I would think expenses linked quarter going into third quarter should be down $500,000 to $1 million and that's really -- you get some pick up obviously from the off-balance sheet provision build going away, but then you have the offsets being investment in technology and hiring. So that's how I think about expenses for third quarter.

Christopher McGratty -- KBW -- Analyst

Okay. And then maybe last one on the tax rate, how do we think about tax rate normalized?

Steve Gaven -- Chief Financial Officer

So tax rate is tricky in this environment, given kind of where earnings have been. I think for the full year, we're modeling a tax credit of 20% to 25%. That's going to move around a lot though, depending on where pre-tax income shakes out for the rest of the year. So I'd like to give you a more definitive answer, just when you get to these levels of earnings, the tax rate moves around pretty wildly.

Christopher McGratty -- KBW -- Analyst

Yeah understood. Okay, thanks Steve.

Operator

Our next question comes from Alex Twerdahl of Piper Sandler. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, good morning guys.

Anthony DeChellis -- Chief Executive Officer

Good morning.

Steve Gaven -- Chief Financial Officer

Good morning Alex.

Alexander Twerdahl -- Piper Sandler -- Analyst

First off, just wanted to go back to the commentary on Boston Private Wealth. I appreciate your comments on the momentum and the pipeline for hires and customers, etc. But maybe just to ask it a little bit more bluntly, you guys had a strategy to grow AUM to about $50 billion over the next couple of years that was suspended last quarter. Are we back on track for that target, or is that still a suspended target?

Anthony DeChellis -- Chief Executive Officer

Yeah, I think I addressed this in Q1, but I'm happy to go through it. So when we look at our wealth business, one of the key area to grow was A, taking our existing business and expanding it right. So when you look at a $50 billion number, we thought that $16 billion with existing clients can get to $23 billion or $24 billion. We thought we would hire the next $15 billion that really required bringing in 10 to 12 really high quality people a year over a four year period. And the area where we have slowed down, we'll have to replace it with hiring, is really we thought we would be able to acquire a $10 billion of smaller firms $5 billion in size or one firm $10 billion in size, given the price movement in some of those assets, we've not turn -- we've turned our attention sort of away from that and focused just on hiring. So the piece that comes in -- the question is the $10 billion that we were going to acquire, mainly because we're just put off by some of the prices to accomplish that and we focused on hiring. So we haven't -- that $10 billion piece, is a piece in question. We were slowed down because of the pandemic, but we've seen conversations now accelerating as Paul said, particularly through the back half of the second quarter. And so that original piece that we thought we could hire our way into, we're still committed to.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And then with some of the hires that you guys have already brought on sort of at the end of last year in some of their momentum, do you foresee kind of a -- I don't know if it's a floodgate opening or some event or some quarter where we're going to really start to see AUM build as a result of hiring and customer acquisition?

Anthony DeChellis -- Chief Executive Officer

That is certainly the plan, and when we look at -- and Paul probably can comment a little bit more on this, but when we look at some individual hires we've made, they're actually ahead of plan. There is some noise, as we continue to sort of adjust the business. But when we look at individual hires, we normally expect them, if we hire the right people within a 12-month period or so, they are bringing $300 million to $350 million in AUM. And we've seen a couple of the folks we've hired actually be on a better pace than that.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And then back to the question on the downgrades. Steve, great color. I think you talked about 75% of the portfolio has been reviewed at this point, everything over $4 million. Is there an expectation that the other 20% would be reviewed in subsequent quarters, and could result in additional downgrades?

Steve Gaven -- Chief Financial Officer

Let me just clarify, so all of hospitality has been reviewed, Alex, on retail and office, it's anything above $4 million. I'll ask Jim to comment on how he thinks about the remaining part of the portfolio and the approach we took and he will give you his thoughts on what we can expect in coming quarters.

Jim Brown -- President, Commercial Banking

Yeah, thanks. But just to be clear, 100% of the loans over $4 million have been reviewed in retail hospitality and actually office as well, we just didn't see the same weakness in office that we did in retail or hospitality. But every other loan is still reviewed the same way we would always review loans. But we really took a much-much higher degree of review for all the loans of over $4 million, because obviously that's -- as Steve said, that's where 75% of the exposure is and I would say probably a higher percentage than that in terms of loss exposure.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And then just can you remind me for the other sort of the rest of the portfolio, do they get reviewed annually?

Jim Brown -- President, Commercial Banking

I mean, we're looking at everything quarterly at this at this point. But under ordinary circumstances you would review loans annually. Yeah.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And then just as it relates to the reserve, I guess, under the old model, an increase in special mention would result in an increase in the reserve. You attributed most of the reserve increase this quarter to just the changing weighting and the scenarios. So, I mean how should we think about the reserve level? From here it seems like some of the buckets certainly have very healthy reserve. You know if the scenarios don't change meaningfully, are you done with the reserve build at this point?

Steve Gaven -- Chief Financial Officer

I think for the most part, Alex, the big step up in reserve building has been done in the first half of the year. Obviously, we took the opportunity this quarter to reevaluate the economic forecasts, change the weighting. And really, the reason why we changed the weighting is, when we went through the narratives that Moody's provides, the baseline basically had the U.S. economy reopening uninterrupted in the forecast, and just based on what we're seeing in our markets and what we're seeing more broadly, we thought it made sense to wait that downside scenario equal to the baseline. I think as a level of conservatism there, as you mentioned, if you look at the loan level pools, I think we've built up reserves in an appropriate place. So on a go-forward basis, we should get back to -- your traditional provision and allowance build kind of tracking loan growth and in charge-off levels. Again, if there is a big downgrade in the economic environment that will have an impact on allowance, but we think we've done a good job conservatively and appropriately building allowance in the first half of the year.

Alexander Twerdahl -- Piper Sandler -- Analyst

Thank you for taking my questions.

Anthony DeChellis -- Chief Executive Officer

Thank you.

Operator

[Operator Instructions]. The next question comes from Christopher Marinac of Janney Montgomery Scott. Please go ahead.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Hey, thanks, good morning. Wanted to ask about the unrealized securities gains that you have and would you consider utilizing them at this point and just curious if that's an option for you going forward?

Steve Gaven -- Chief Financial Officer

We typically aren't active sellers out of the portfolio, Chris. We will do it from time-to-time, if it makes sense. As you can imagine, redeploying that cash is difficult in this environment. We think we have ample capital. When we look at our capital with our allowance build at kind of 12.3% CET-1 plus ALLL, we feel really good about where we are from a capital perspective. So we don't think we need to be opportunistic in building capital, by selling securities and other portfolio.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Did this enter at all into your dividend discussion this quarter? Just sort of curious if you could have bought yourself another quarter or two, and maybe it's moot, if the pandemic gets worse. Just curious on your thought about that?

Steve Gaven -- Chief Financial Officer

Yeah, so I mean when we thought about the dividend, obviously we run a number of different stress scenarios to test earnings levels, as well as capital and we marry that with what we discussed in our May 2019 Analyst Day, where we talked about kind of normalizing that payout ratio closer to 30%, which is typically where you'd see companies our size operating at. And taking all that information together, looking at the earnings trajectory that we think can materialize kind of in 2021 and 2020, and understand the risk in our portfolio, we think that $0.06 per share is a good number. We don't think it's at risk. And obviously if things get better quicker, we can always increase that dividend if it makes sense. But that was really how we thought about the dividend decision going into the quarter.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Okay, great. And then I guess just a final question back of the portfolio, I mean is there any sort of testing that you envision in the next couple of months in terms of the LTVs, where perhaps a loan is sold in the marketplace or that you derisk and test those values? I'm just curious if you sort of feel that those LTVs are defendable?

Steve Gaven -- Chief Financial Officer

Well, obviously, those LTVs had origination pre-COVID, those will change obviously. There aren't a lot of reference points, as you can imagine because there's just not active -- there's not active capital markets activity in commercial real estate at this point. But the reason why we point out those LTVs, not that we think those are the LTVs today per se, but I think it does illustrate that at the origination, the underwriting is very conservative. There's a lot of margin of safety. So in order for these properties to be underwater, we need to see kind of significant deterioration in collateral values, and we'll probably see that in some asset classes. But we see it -- we feel like we're pretty well protected based on the underwriting going into this crisis.

Christopher Marinac -- Janney Montgomery Scott -- Analyst

Great, thanks for taking my questions. I appreciate it.

Anthony DeChellis -- Chief Executive Officer

Thank you

Operator

Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Anthony DeChellis for any closing remarks.

Anthony DeChellis -- Chief Executive Officer

Thanks. And thank you all for joining us today. As indicated in our remarks, we expect the current dynamics or the of the current environment to persist for the balance of the year. Offering both challenges and opportunities, which we are confident we will continue to navigate well. We look forward to updating you on our next call. In the meantime, we wish you all well and navigating what I'm sure are your own set of unique challenges and opportunities. We wish you a great day and hope that you stay safe. Thanks.

Operator

[Operator Closing Remarks].

Duration: 46 minutes

Call participants:

Adam Bromley -- Director of Investor Relations

Anthony DeChellis -- Chief Executive Officer

Steve Gaven -- Chief Financial Officer

Paul M. Simons -- President of Private Banking, Wealth & Trust

Jim Brown -- President, Commercial Banking

Michael Young -- SunTrust -- Analyst

Christopher McGratty -- KBW -- Analyst

Alexander Twerdahl -- Piper Sandler -- Analyst

Christopher Marinac -- Janney Montgomery Scott -- Analyst

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