Q1 2021 Eastern Bankshares Inc Earnings Call
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Hello, and welcome to Eastern Bancshares, Inc. First quarter 2021 earnings conference call.
Today's call will include forward looking statements, including statements about eastern feature of financial and operating results outlook isn't the strategies and plans, including the pending merger with Central Bancorp, Inc. As well as the other opportunities and potential risks that management foresees.
Such forward looking statements reflect management's current estimates or beliefs and are subject to known and unknown risks and uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward looking statements.
Listeners are referred to the disclosures set forth under the caption forward looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties.
Any forward looking statements made during this call represent managements views and estimates only as of today.
While the company may elect to update forward looking statements at some point in the future. The company specifically disclaims any obligation to do so even if management's views or estimates change and you should not rely on such statements as representing management's views as of any date subsequent to today.
During the call. The company will also discuss certain non-GAAP financial measures.
For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures. Please refer to the company's earnings release, which can be found at investor Dot Eastern Bank Dot com.
Please note this event is being recorded.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If he would like to withdraw your question press the pound key.
I'd now like to turn the call over to Bob reverse chair and CEO.
Well good morning, and thank you for taking the time to join US today I Hope you and your families are well and looking forward to the summer months ahead, especially as vaccinations rise on our ability to enjoy the activities we have in the past increases.
Joining me today on the call is our chief administrative officer, and Chief Financial Officer, Jim Fitzgerald.
At Eastern we are very pleased to share with you. Our first quarter 2021 results. We are reporting our highest ever quarterly earnings coupled with continued strong deposit and solid commercial loan growth due to the PPP lending in the wake of the announcement of the largest bank acquisition in our history and our 30 <unk>.
<unk> of an independent insurance agencies since 2002.
And earlier this month eastern was the lead investor in of Fintech Fund designed to help accelerate technology adoption and community banks across the United States.
We believe that we are well on our way to another year of first for Eastern in addition to eastern 203rd anniversary of <unk> business. We recently marked our sixth month as a public company during which we announced an acquisition that we believe will solidify eastern its leading position in the greater Boston area.
The $642 million purchase price of the century bank almost four times that of any prior acquisition in our history is validation of our commitment to use the capital raised from our IPO to undertake opportunities to significantly scale, our company to better serve our customers over.
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Recent events have also validated the timing of our conversion and the acquisition of century in the months preceding our announcement of the century acquisition and since we continue to see transactions, indicating a new wave of consolidation in our industry that has been driven by a similar rationale and a recognition.
Debt investments in technology, and talent will ultimately determine long term sustainability and relevance.
As such we have a strong sense of urgency to build our position in a market whose share leaders have remained relatively unchanged since the acquisition of fleet by Bank of America, almost 20 years ago, and believe we are well positioned with the capital resources and talent to achieve our goals.
Of course for now we are singularly focused on the conversion and integration of century related work streams and regulatory applications are on track and we are expecting a smooth process with the closing and conversion targeted for mid November.
We will provide another update during our second quarter earnings call.
Amidst all of this we remain mindful of the economy is still recovering and our communities are still hurting we continue to be an outsized participant in the paycheck protection program originating approximately 4700 PPP loans for 450 million $453 million during the first three months of this.
Year, representing more than half the number of generated during all of 2020.
And we continue to be of leading voice on behalf of Rachel Justice at a time when businesses are called upon to speak out more than ever before the.
These efforts along with our significant ongoing philanthropic commitment are among the many reasons why eastern bank earned its highest ever score in J D. Power's recently published 2021 customer satisfaction index, the highest among Massachusetts banks listed in the sixth highest in the United State.
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Of course, we could not do all of this and more without the incredible efforts and commitment of our 900 employees I want to thank them for their continued hard work and many contributions which propelled us to another stellar quarter.
Once again, thank you for your interest in eastern and with that I'll turn it over to Jim for an in depth review of our first quarter financial performance great. Thank you, Bob and good morning, everyone.
As Bob mentioned, we're very pleased with the these first quarter results and believe they demonstrate progress on our goal to improve our overall financial performance.
We recognize there are a number of items that are specific to this quarter that may not necessarily continue into the future.
In addition to our comments in the press release and the presentation I'll try and add some descriptions of those items as well as the focus on our core earnings trends in.
In addition of I'll include some comments on our overall outlook before taking questions.
I'll start with net interest income, which was $101 4 million in the first quarter down $3 5 million from the prior quarter and about flat from a year ago.
There are a number of items to bring to your attention.
Last quarter included a favorable non recurring item of $3 8 million and included two more business days in tier one.
This quarter included $8 3 million of the PPP fee accretion compared to $6 1 million last quarter.
Driving the PPP fee accretion was $241 million of loan forgiveness.
We did add over $800 million of investment securities in the first quarter, Although we were only able to reduce our cash position by approximately $200 million as we saw very strong deposit growth of $800 million.
Our net interest margin on a fully tax equivalent basis was $2, 71% for the quarter.
Which was down 13 basis points from the prior quarter.
As we have mentioned the negative impact of lower interest rates of significant to eastern especially with the capital we raised in 2020.
And the increased liquidity from that capital raise and the significant core deposit growth over the last year.
We continue to deploy excess cash into the securities portfolio to help stabilize the margin over the medium term and look to fees generated from the PPP program to help us in the short term.
We hope you review the reconciliation of the non-GAAP core margin. We included in the Appendix. We think it provides some very useful information about how excess liquidity in the PPP program have impacted our margin over the last year.
I'll move to noninterest income, which was $55 2 million in the quarter.
Paired to $49 6 million last quarter, and $33 4 million a year ago.
We think it is helpful to look at the non-GAAP operating revenues, which we include in the appendix B on page 22 of the slide deck to get a better picture of these revenues without the impact of certain non core items.
On an operating basis noninterest income was $52 2 million in the first quarter compared to $44 million last quarter and $40 million in Q1 of 2020.
A big driver of the increase over Q4 was our insurance revenue, which was $5 7 million higher due to seasonal payments were received in the early part of the calendar year.
For a quick visual on this please see page nine in the presentation, where a year ago.
Revenue was $27 5 million in Q1, and then subsequently declines of $22 7 million in Q2.
Our insurance revenue in the first quarter was 2% ahead of the year ago quarter, we expect the seasonal pattern to occur this year as it did in 2020 and also prior years.
Another big driver in the increase of non interest income was there of loan level of interest rate swap portfolio, which is reported at fair value.
Although we run a matched book, there's a credit component to our customer facing swaps is positively correlated to changes in interest rates swap.
The swap revenue was $5 4 million in the quarter, which was approximately $3 million more than the prior quarter all of which was due to higher interest rates at the end of the first quarter.
In the first quarter of 2021 interest rates dropped very quickly.
We reported negative swap revenue of 6 million again due to the fair value process.
Other fees were generally in line with prior results.
Noninterest expense was $94 million in the quarter compared to $199 1 million in the prior quarter.
As noted on slide 10, if you exclude the large donation made to our charitable foundation in connection with our IPO in Q4.
The noninterest expense for that quarter would have been $108 million.
<unk> expenses were modestly lower compared to the year ago level of $95 million.
Similar to my comments on noninterest income I would point to the non-GAAP reconciliation of operating expenses on page 22 of the presentation appendix.
On this basis noninterest expense was $92 5 million in the Q1 compared to $101 8 million in the prior quarter and $98 four a year ago.
The current quarter did include higher expense deferrals due to the PPP originations compared to Q4 of $1 8 million.
And lower incentive compensation of $3 9 million.
These were partially offset by payroll taxes, which were $2 $3 million higher than Q4.
As we've discussed we're very focused on improving our efficiency ratio and believe this past quarter demonstrates that focus on progress.
While we do not believe that the efficiency ratio, we reported for the quarter of sustainable we will continue our focus on improving the core components of our efficiency ratio going forward on.
Pension expense is an example of the progress we have made although it's difficult to directly see in the results. The net of associated expenses down $1 5 million from the prior quarter as a result of the pension changes we implemented last year.
Asset quality continued to be stable in the quarter.
Key metrics like non performing loans loan charge offs and COVID-19 modifications were little changed or had improvements in Q1.
We continue to work with our customers have been very impressed with how they performed independencia.
Like everyone else, we're waiting to see what the post vaccine world looks like and the impact of an improving economy.
Yes.
We provided of new page on our PPP lending on page 15 in the presentation.
It's an area, where we believe we have performed very very well.
Through the end of March we originated $453 million of PPP loans.
In 2021, which joined the approximately $1 $2 billion, we originated last year and we expect to close approximately $150 million more which is currently in our pipeline.
In the presentation, we have separated the 2021 originations from the 2020 originations and show the fees collected of not yet recognized for both categories.
It's very hard to predict the pace of forgiveness, but we would expect that the vast majority of the 2020 originations will be fully forgiven or paid off by the end of this year.
We would also expect that a good percentage of the 2021 originations will be forgiven will be repaid by the end of this year or in 2022.
We also entered a distribution of PPP loans by industry on page 15.
We think it reflects the broad range of both our customers and the market, we serve and shows the dropped strong diversification of our lending.
Loan growth in the quarter continued to be concentrated in PPP loans.
Excluding PPP loans commercial loans were flat quarter over quarter, and we had a small increase in residential mortgages and experienced continued runoff in our consumer loans. The consumer runoff is from our auto portfolio, which we discontinued several years ago, and which is in runoff mode as well as from home equities, which remain under pressure.
We included a page in the presentation with our full year 2021 outlook, which is page 18, as we say on the page the outlook is predicated on the assumption that the economic recovery continues and.
Net interest rate levels don't change materially from where they are today the.
The outlook doesn't include the impact of the century acquisition, which we reviewed a few weeks ago.
Net interest income is very dependent upon PPP interest and fees and the pace of forgiveness as I mentioned earlier, we expect the 2020 PPP originations to be essentially fully paid off or forgiven by the end of 2021 and force for a significant portion of the 2021 originations to be forgiven by the.
End of 'twenty, one or in 'twenty two.
We expect our net interest income, excluding PPP interest and fees to be between 360 and $370 million in 2021.
And for PPP interest and fees to be between 30% and $40 million.
When we think about our loan charge offs and loan loss provision, we exclude PPP loans.
Excluding PPP loans, we would expect our loan charge offs and loan loss provision to be between 10, and 15 basis points for 2021.
We would expect operating noninterest income to be between 180 and $190 million for 2021 and.
And we would expect operating non interest expenses to be between $390 and $400 million for 2021.
We would expect our effective tax rate to be between 22 and 23% for 2021.
As I mentioned above.
We expect commercial loan totals to experience a reduction due to <unk> forgiveness in pay offs.
And the core non pp commercial loan portfolio, we expect loans to be stable in the short term and then experienced modest growth as we get to of post vaccine environment later in the year of.
Our pipeline for commercial loans is approximately $550 million, which is approximately $100 million higher than where it was at the end of 2020.
We expect similar trends on our residential and consumer portfolios as we experienced in Q1 modest growth in residential and a reduction in consumer loans due to the auto runoff and reduction in home equity.
To wrap up although we recognize the difficult current environment and the uncertainty of the economic recovery.
We are optimistic that the combination of the financial progress we have made the date the.
Core strength of our customer franchise, plus the benefits, we expect to come with expense re combination will put us in great position to generate sustainable core earnings growth.
Thanks, very much and we are ready to open up for questions.
Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Damon Delmonte of K B W.
Hey, good morning, guys, I hope everybody's doing well today.
Thank you Dan Good morning, Tim to you.
So my first question regarding loan growth.
You guys just talk a little bit about you know what what areas of like geographically as well as within the loan portfolio that you think will will soon produced some net growth of you guys as we go through 2021.
Sure.
Jamie happy to I think as you know.
Primarily our strength is in commercial lending.
Most of its end market, we do a little bit out of market as we have in our disclosures, but really for the question you're asking it's really our core.
Mr, Massachusetts, Southern New Hampshire market.
Activity is pretty good as we said our pipeline is up a $100 million from where it was at the end of the year and activity levels.
Our.
Our strong and improving.
We expect to see modest growth as the rest of the year on covers sort of across the across the footprint both on commercial loans on commercial real estate.
It's just been a little bit slow to mature the growth aspect of that has been slow to materialize as I said activity levels have been pretty good on the pipeline has grown.
But it will look like the growth that you saw on pre pandemic from us in 2019 and 2018 in terms of the loan categories and also the geography.
Got it Okay. That's helpful. Thank you and then with respect to the outlook for net interest income for the year.
Obviously, the margin remains under pressure core margin remains under pressure.
Just given the dynamics of the market right now could you give us a little perspective, most of where you think that will kind of bottom out this year.
Sure.
It's difficult Damon.
Yes.
As we try and stay and I think you know.
Given the liquidity that we have from both the capital raised last year as well of the incredibly strong deposit growth that we've had.
Have more liquidity.
Liquidity is of great thing to have but it's the it's a burden in the current environment. So it's pretty hard to give you better insights then.
Then that are different than what we've already given which is it's a tough environment were modestly investing in the securities portfolio.
That helps us in the medium term and improves the yield debt as cash moves into the securities portfolio of Theres, a slight improvement there.
Loans of obviously been helpful, but as rates.
I have been so low the core margin continues to move downward and we don't see that bottoming in the near term.
Got it Okay. That's helpful. That's all of that I had I'll step back. Thank you very much guidance.
Thank you.
Your next question comes from the line of David Bishop of Seaport Global Securities.
Yes, good morning, gentlemen.
Good morning, Good morning, David.
Noticed.
Within the release on a point to point basis. It looks like the business banking loan growth was pretty strong just curious maybe some commentary, but what drove the strength of the first quarter there.
It's the PPP.
It's PTT loans, David I think.
We're on.
Very good were very good in what we call business banking, but small business lending.
We and the SBA, leading lender in both Massachusetts and on that for a number of time number of years and it's something we do well the <unk>.
The opportunity to use one debt that group really capitalize on and Thats, where all of the loan growth is.
That's where the loan book classified there.
Got it and then sort of circling back to <unk>.
The last question in terms of the deployment of excess liquidity into into securities. Just curious of what youre seeing in terms of on boarding.
New Securities investment yields what you were able to onboard those out.
It's.
It's hard day because rates are moving.
The answer where you would've given you a month ago on different than that I'm, probably going to give you the second here.
It's below 1%.
Okay.
Okay and then the.
The near term outlook continues to be a redeployment of some of that excess cash back into securities is there sort of of target level in terms of our balance sheet.
Youre, hoping to get to over the near term in terms of securities to assets, how should we think about that as a percentage of the assets earning assets.
Sure as you can see what makes that hard as we've had great deposit growth. So.
90 days ago, when we sat here on adult and said, we're going to invest 3% to $350 million a month of securities, which basically we did.
And our cash position didn't really go down very much because we had offsetting deposit increases, which we're very happy about and the long term.
So we don't really have a target that way David I think we're going to continue to do what we've been doing.
And then as we get closer to the century acquisition, we'll talk about that more but obviously that has.
A major component to our thinking as we get closer to that transaction.
Got it I.
I appreciate the sort of the color in terms of the of the expense trends of past this past quarter, obviously, a lot of moving parts play into it and it seems to suggest the guidance, there's a little bit of inflationary pressure into the second half just curious where we should expect or model that.
Sherri pressure from the expense perspective thanks.
Sure I think.
Yeah, I don't want to over interpret your question of are going to make sure I'm answering the right I think.
On the guidance that we're giving is I think pretty straightforward and I think it's pretty consistent with what where we tried to guide last quarter as well. The one thing we pointed out is the first quarter had the benefit of the <unk>.
In particular of the PPP expense deferrals.
And.
Obviously that helps but I think in terms of the guidance.
Yes, I'm not sure we can give much more than that we've already given.
Got it I'll stop there and the opex into the queue.
Great. Thanks.
Your next question comes from the line of Laurie Hunsicker of Compass point.
Yeah, Hi, Thanks, good morning.
Good morning, good morning.
Jim I just wanted to go back to your net interest income guide.
That you gave very helpful did that also of film.
Three of their closing at the mid November or was that not part of that guidance.
That was not.
Just to be clear the guidance that I gave does not include century as Bob said as we get closer we'll talk more about century, but we did talk about on a couple of weeks ago and the outlook excluded century.
Okay perfect that's helpful.
And then slide nine loved the slides right.
I just wanted to circle back here on within non interest income the insurance revenue line of.
Of $28 1 million this quarter of doing the linked quarter adjustment or rather of the year ago adjustment. If I'm, taking out 4.8 that takes me down to $23.3 million or so.
As the potential run rate and then you just had north bridge that closed at the beginning of this month and I Couldnt find any revenues on them can you just help us think of little bit more about what insurance agency.
Revenue, specifically could look like for this year.
Sure to start off line Youre doing a very good job.
You figured out what we are hoping to provide you the data to figure out.
I think the way I personally think about it is when you look year over year, which in this particular case I think is the appropriate one because of the seasonal payments insurance revenues were up 2%.
We think that's good guidance for how the year would play out the north of the.
Acquisitions that we've done really this year has been very small really don't change our outlook on that particular line item.
Okay, Okay and then.
Just in terms of insurance agency acquisition sales.
Probably you're thinking of hopefully to do two to four per year is that is that still the target or have things shifted.
Yes, no. The pipeline is still very strong and we would expect the same for this year.
Okay, Okay, great and then on deferrals and if you don't have the second follow up with you on.
Offline.
Hotel deferrals that looked like or $92 million of your $178 million just wondered if you had deferrals of sort of the other three watts buckets of restaurants retail and entertainment and if not I'll.
Ill hit you offline.
We don't I think the.
Given the Youll brawl level of energy.
Rightly pointed out the 90 $192 million out of our hotels really are pretty high percentage of the modifications.
But thats the thats, the only break out with guidance.
Okay, Alright fair enough I guess, Bob last question to you. We last heard from you obviously three weeks ago with the very exciting acquisition, but since then the M&A market has just been on fire. So can you can you sort of refresh us on what your appetite would potentially look like and certainly there are less players now in the Boston MSA.
But what it would potentially look like as you were as you are doing.
This transaction would you consider another if it if it comes your way, while you're doing that.
And just any other sort of viewpoint in terms of of the movement. We've seen in the last few weeks wed appreciate that thanks.
Sure sure.
First of all of the outlook as is the same our focus remains the same same market area sales size of transactions.
The market continues to consolidate as it has over many years, although certainly we've seen that heat up.
In recent months.
And.
I mean, certainly we'd be open to discussing other potential opportunities if they were to come along.
But first and foremost we're very focused on century to large deal for us relative to size, we want to make sure that we execute it well and so all resources of very much focused on that and other critical projects that we would normally have in the course of the year so to be clear, we certainly wouldn't attempt to.
Integrate two organizations at.
At the same time.
To the extent that they were interested parties in having discussions for a future date, we certainly would be open to those.
Great. Thanks for taking my questions.
And there are no further questions at this time I will now turn the call back over to Bob Herbert for closing remarks.
Great well again, thanks to all of you for participating in the call on listening in thanks to all of you who asked great questions as usual and.
Wish you a terrific weekend look forward to connecting with you again.
In 90 days or so for our next earnings call.
Thank you. This concludes today's conference call you may now disconnect.
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