After reporting a net loss for the quarter due to an increase in its provisioning for problems in its Southern California and Florida loan portfolios, a top executive at Boston Private Financial Holdings Inc. said Wednesday that the company expects more chargeoffs because of difficult lending conditions in both regions.
The company estimated a net loss for the quarter of $9.2 million to $14.2 million. It said that, excluding special items such as a goodwill impairment charge of up to $25 million at its Los Angeles affiliate bank, it would have reported earning 37 cents per share, beating the average of analysts' estimates by four cents, according to Thomson Reuters.
Boston Private increased its loan-loss reserve by $18.5 million from a year earlier, to $19.6 million. Almost 70% of the increase was due to the company's banking affiliate in Southern California, First Private Bank and Trust Co.
In February the company warned its fourth-quarter loss would be higher than the previously reported $20.4 million because of a an increase in loan-loss provisions.
The $6.8 billion-asset Boston Private said then that it added $16 million to $19 million to its provision for the fourth quarter because of weakness in the residential construction and land loan portfolio at Los Angeles' First Private.
Timothy L. Vaill, Boston Private's chairman and chief executive, said during an earnings conference call Wednesday that the company was challenged by difficult market conditions related to its construction and land development loan portfolio in Southern California and expects to record $20 million to $25 million in noncash goodwill impairment charges that will be included in its 10Q filing.
Mr. Vaill said in the first quarter in Southern California, "declines in the housing market were dramatic and mushroomed very rapidly. As I've said in the past, despite our above-average client profile, we are not immune [to] regional economic market fluctuations."
James D. Dawson, Boston Private Bank and Trust Co.'s president and chief operating officer, said during the call that the company is confident after reviewing its loan portfolios in Florida and Southern California that it "has its arms around the problem" completely.
"Chargeoffs will increase over time," Mr. Dawson said. "We have recognized that there is some deterioration in our credit. We are pleased that nonperformers haven't grown as dramatically, but we still expect chargeoffs will increase. We want to keep chargeoffs to a minimum, but we plan to be more proactive with substandard loans in Southern California."
In January, he said, Boston Private took "immediate and decisive steps" to correct the problem at First Private by revamping its executive committee and naming Mr. Dawson its interim chief executive. "We are in the process of revamping and enhancing our loan-loss reserves, our appraisal policies, lending and dividend policies, and capital and contingency policies," he said.
Analysts said it was not surprising that real estate losses in Florida and California would affect Boston Private. In the fourth quarter, it took a noncash goodwill charge of $29 million, or 75 cents per share, related to Gibraltar Private Bank and Trust Co., its private banking unit in Coral Gables, Fla.
But the higher than expected loan-loss provision in the first quarter could hamper its stock price near term. Boston Private's shares declined 5%, to $9.51, in midday trading Wednesday. "While credit pressures at BPFH are not surprising, we believe earnings visibility remains limited, while additional goodwill writedowns also continue to cloud the stock," John Pancari, an analyst at JPMorgan Chase & Co.'s JPMorgan Securities Inc., wrote in a research note.
Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said investors are worried that Boston Private's criticized assets grew 82%, to $300 million. "That can be frightening for a company with $200 million in tangible capital," he said.
"I think investors continue to be concerned not just about Boston Private's Southern California book but also about their loan portfolio in Florida," Mr. Fitzgibbon said. "They've had some slippage in Florida, but to date it has been manageable."
Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said this was a very difficult quarter for Boston Private and getting the troubled loans off its books could take "many quarters." "Their credit problems unfolded in a very bad way, and things are quite serious," he said. "There is no easy answer for them."
He added, "Troubled loans take more than a few months to solve. The company needs either a large cushion or have the capital to write these things down. It takes time to work these problems out."
Mr. Vaill said Boston Private is reviewing its loans in California and Florida. He called himself "disappointed" by the first-quarter results. "We are not immune to the regional market fluctuations," he said, "and we needed to increase our loan-loss provisions" for Southern California and Florida.
Boston Private's revenue rose 28%, to $117.3 million, from a year earlier as it had strong results from its wealth management businesses.
Wealth advisory fees grew 71%, to $12.4 million, on strong organic growth and fee increases. Investment management and trust fees for the quarter increased 7%, to $40.4 million. Mr. Vaill said the company's private banking segment continues to produce roughly half its overall revenue.
Boston Private's assets under management grew 6% to $36 billion, which included $900 million from its purchase of Philadelphia's Davidson Capital Management.
Boston Private's growth strategy has been to establish hubs by buying wealth managers and private banks regionally. Analysts said it averaged a deal every 18 months.
David Kaye, the company's chief financial officer, said it is "in a pause" on dealmaking right now.
Mr. Fitzgibbon said that he would not be surprised if the company were quiet for a while on the acquisition front. "They've got to prove to the world that they can get these issues behind them before investors will be comfortable with them layering on more acquisitions and complicating the company further," he said.
