Q2 2021 Eastern Bankshares Inc Earnings Call
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Hello, and welcome to the Eastern Bancshares, Inc. Second quarter 2021 earnings conference call today's call.
Forward looking statements, including statements about eastern and future financial and operating results and outlook business strategies and plans and cleaning is pending merger with century Bancorp, Inc. As well as other opportunities and potential risks that management foresees.
Such forward looking statements reflect.
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 and such forward looking statements listeners I refer to the disclosures set forth under the caption forward.
Looking statements and the earnings press release as well as the risk factors and other disclosures contained and 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 manner.
Management's views and estimates only as of today, while the company and May like to update forward looking statements at some point and 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.
And have 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 press release, which can be found at Investor day, Eastern Bank and dotcom.
<unk> 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 and during this time simply press star followed by that and I've got 1 under our telephone keypad, if you would like to withdraw.
Sorry, your question press the pound key.
I would now like to turn the call over to Bob reverse chair and CEO.
Thank you Ashley and good morning, and thanks to all of you for joining US. This morning from here with Jim Fitzgerald, our chief administrative and Chief Financial Officer to discuss <unk> financial results.
For the second quarter as well as to provide a brief update on our pending merger with century.
As we move into the second half of 2021, we're encouraged to see the business environment.
And this year and greater Boston, and New Hampshire has clearly improved.
Including PPP loans, we saw loan growth of 117.
$17 million this quarter.
Our growth of over 5%.
And on spaces, which provides further evidence of the confidence and busy.
This expansion.
We also saw continued strong deposit growth as well as solid performance from our fee generating businesses.
During the quarter, our eastern insurance.
Group subsidiary announced our 34th acquisition of and Independent Insurance Agency since 2002 and was recognized by the Boston business Journal and the SEC.
Current largest insurance broker and Massachusetts.
Based on premium dollar volume generated and 2020 moving up from third last year.
While our eastern.
Wealth management Division was named among the largest independent investment advisers and Massachusetts.
In addition to helping provide more holistic solutions to our customers financial services needs.
And there are significant contribution to and diversification of our revenues represented.
Mark of distinction for our company.
So despite the challenges of record low interest rates and the continuing effects of the pandemic, we remain very optimistic and excited about and since future Easter.
Eastern has a long track record and strong organic growth and we expect that our anticipated combination with century.
We will provide another opportunity for us to scale the company and serve even more customers and the greater Boston region.
We continue to be laser focused on integration planning, which remains on schedule and thanks to the amazing team of colleagues at both eastern and century.
And I'm, particularly grateful essentially.
And then president and CEO, Barry Sloane, and Vice Chair, Linda Sloan K for their guidance and support and making important and timely decisions.
In addition, after collaboration and review by both century and Eastern management teams.
We have jointly developed a branch consolidation.
And plan that we believe is thoughtful and balance of.
On the 17 branches that will be consolidated more than half our eastern locations, which we think demonstrates our commitment to our new and expanded customer base.
Importantly, we are not exiting any city or town, where our combined network currently.
<unk> share operator.
Eastern and century are working together to.
And to ensure the merger has little impact on employees as possible.
As of today, 90% of current century employees working in the consolidated branches are being reassigned to another branch based upon where they live.
<unk> currently work and their branch experience we.
We will seek.
To seize opportunities for many of the remaining 10% likely true normal organizational attrition of.
Of course, we remain committed to delivering an outstanding experience to all of our customers and we expect to staff.
Currently a consolidated branches with employees from both organizations in order to better serve customers with teams who are familiar with both eastern and century customers products and services and procedures.
And starting today and century customers can use eastern bank Atms for free.
We are.
Staff with century shareholders approve this transaction earlier this month.
And are working towards regulatory approval and in mid November closing soon.
And as conversion.
And missed amidst all of these good news we continue to be reminded that COVID-19 has yet to be eradicated as such we remain vigilant.
We're pleased and the ongoing impact upon our customers our colleagues and the communities we serve.
Over a year ago, we stop setting a day upon which we plan to add 60% of our employees who are working from home to return to our offices a position that has been repeatedly validated over time.
And most.
Recently, our stance has been driven by concerns regarding traffic, which we expect to be far worse than before the pandemic as schools reopen and communities remain hesitant about the use of public transportation.
Although rising vaccination rates that made safety less of a concern increasing instances of breakthrough cases.
Regarding affecting those who are fully vaccinated, becoming infected are reigniting doubts about the safety and availability of in person learning and childcare.
As always the safety and wellbeing of our employees remains our top priority and they have responded to this high degree of flexibility with truly remarkable.
<unk> levels of productivity successfully taking the company public and undertaking the largest acquisition and our history within and unprecedented environment.
Given their tremendous performance and increasing preference for working remotely over the past 16 months.
We expect to largely continue operating in this way on the fee.
<unk>, which will allow us to become more efficient and even more attractive employer.
That said, we are always mindful of our colleagues and staff of our frontline and our branches insurance offices and other areas that require them to be on site.
Their safety is of Paramount concern and we are forever grateful for.
For all that they have done to keep our doors open to serve our customers to these employees and to all of our 1900 colleagues. Many thanks for your incredible resiliency and dedication likewise.
Likewise, we remain focused on the health and success of our customers. For example, during 2021, we have processed over 60.
6500, paycheck protection loans.
4 of $543 million, bringing our 2 year total over 15500 PPP loans from 1.7 billion.
Third highest and our market area, providing much needed relief to thousands of businesses.
As we know we will only put all of this behind us when everyone possible fiscal and vaccinated, even in our region, where vaccination rates are among the highest in the U S.
More than a third of the population are still on vaccinated with this in mind earlier. This week, the Eastern Bank Foundation announced an additional $2 million.
And COVID-19 support to increase lacked last mile vaccination outreach and access collaborating with community Health centers Foundation community organizations and other companies to address vaccine access disparities and reach populations living in cities with the highest incidence of Covid.
And <unk> 19 cases.
Despite this caution we are optimistic that the worst phase of the pandemic are behind US and then we are all experiencing the final chapters of the pandemic better days are already here and even better once our head.
With that I'll turn it over to Jim for and in depth review of our second.
Quarter financial performance and our current outlook.
Great. Thank you Bob and good morning to everyone as Bob mentioned, we're very pleased with these results and we look forward to the upcoming century merger and Q4.
It's still fairly early and the process, but we're very happy with the reception of the century staff and customers and the community in general to our merger as.
As of today, we remain confident that we can achieve our financial targets for the merger as presented back in April <unk>.
However, we look forward to providing a full century update from a financial standpoint at the end of Q3, as we get closer to the expected transaction closing.
For Q2, GAAP net income was $34.8 million.
<unk> 20 per share.
We did have some non operating items in the quarter, including $3.5 million of merger and acquisition costs related to century.
Operating net income was $37.1 million were <unk> 22 per share on.
Encourage everyone to review the reconciliation of non-GAAP earnings and appendix a.
And both the press release and the earnings presentation to see the adjustments and I'll include some remarks on some specific items throughout my comments.
Book value at June 30 was $18.37 per share up from $18.14 at the end of Q1 and tangible book value was $16.33 per.
Per share up from $16.12.
Yesterday, our board of directors approved a dividend of <unk> <unk> per share payable on September 15th.
For the first time since the onset of the pandemic, we saw core loan growth excluding.
Excluding the PPP loans commercial loans were up 5% on an annualized.
<unk> basis, and the quarter and residential mortgages increased 15% on an annualized basis.
We also experienced a continuation of strong asset quality trends with very stable non performing loans and a reduction and our COVID-19 loan modifications.
These factors and a generally improving economy during the period.
To a loan loss reserve release of $3.3 million and the quarter.
Net interest income was $104.6 million or 4 and $5 million ahead of the first quarter.
The increase was driven by higher loan interest income of $2.3 billion.
And higher investment portfolio interest income of.
And $3 million.
PTP fee income was $9.3 million and the quarter, 4 and increase of $1 million from Q1.
The average securities portfolio grew by 713 million and the quarter, which was responsible for the higher investment interest income.
The net.
2 per margin on a fully tax equivalent basis was $2.6 9% for the quarter down.
Down 2 basis points from Q1.
The core margin was 2.8% in the quarter down 9 basis points from Q1.
We encourage you to review the non-GAAP reconciliation and appendix E as it excludes.
Net interest act of PPP loans, and a very high cash position both of which we expect to change over time.
It continues to be a very challenging interest rate environment we.
We do expect our asset sensitive position to create a higher level of earnings if interest rates increase.
But given the continuing low level of rates.
And the integrity position, we expect our net interest margin to continue to be challenged.
Noninterest income showed good growth and our insurance and wealth management businesses, and a nice recovery and our debit card revenues from a year ago.
And with 4%, 17% and 36% growth respectively.
And our overall noninterest income was down compared to Q1 due to seasonal reductions and insurance revenues and a decrease and the fair market value of our interest rate swap portfolio compared to the fair market value increase of $5.4 million and Q1.
The changes in fair value were driven primarily by changes in interest rates.
We encourage you to review the appendix B that reconciles GAAP and operating non interest income.
Noninterest expense from the quarter was $107.3 million. This included the previously mentioned century transaction expense of $3.5 million expenses of $3.3 million.
Excuse me expenses of $3.3 million related to the anticipated settlement of a consumer up consumer class action lawsuits offset by a reversal of a tax credit impairment charge of $1.4 million operating noninterest expense was $99.9 million and the quarter up from $92.5 million and Q1.
Salaries and benefits were up $5.2 million from Q1, primarily due to incentive compensation you might remember I mentioned on the Q1 call and incentive compensation in Q1 was lower than the prior quarter and the second quarter increase was sort of getting back to that prior level.
<unk> expenses were lower than expected in Q.
1 and saw $1.8 million increase from the second quarter. This is just related to timing.
Asset quality continue and improve with a modest decrease and nonperforming loans.
Strong coverage of nonperforming loans ratio and a continued low level of loan charge offs as is included in the appendix.
And the press release loan modifications and continued to reduce in the quarter from $178 million to $150 million, but from 1.8 to 1.6% as a percentage of loans.
All of these factors were included and the decision to release $3.3 billion from the allowance for loan losses and the quarter.
The adjusted effective tax rate was just under 25% and the quarter.
The balance sheet continue to be a source of strength for us and Q2 as I mentioned earlier the loans, excluding PPP loans grew $117 million and the quarter.
With an annualized commercial loan growth of 5% and and annualized residential loan growth.
With a 15%.
These results were a little ahead of our expectations.
The current commercial pipeline is over $600 million and a little larger than where it was a quarter ago.
We continue to think the second half a day will be a little stronger than the first half for commercial loan growth.
We have been pricing residential mortgages to steer more.
More loans to the balance sheet. So we expected residential loan growth, but we're very pleased with the level of growth that we experienced in Q2 to 15%.
And we don't think that growth rate is sustainable and expect to continue to price per portfolio originations and growth.
On the consumer side, our home equity portfolio showed modest growth for the first time and some.
On and our auto portfolio as classes, and which is classified and other consumer is expected to essentially run off by the end of the year.
The securities portfolio grew $860 million and the quarter as we've continued to deploy excess liquidity the.
The composition of the portfolio by sector Hasnt changed materially.
And on page 11, and the earnings presentation.
We continue to invest and bonds with an average duration of approximately 4 years current yields continue to be challenging and <unk>.
Yields on Q2, new investments was approximately 1%.
We continue to see growth in deposits and experienced.
$500 million of growth and average deposits in Q2 as most of you realize our very low cost of funds and 3 basis points leaves really no room for rate reductions.
And as outlined in the graph on page 12 of the presentation and <unk>.
Deposit mix is outstanding with 60% of total deposits and checking accounts and only 2%.
Percent and Cds.
PTT lending has been a great highlight for the last year and our cumulative PPP lending as outlined on page 14 of the presentation.
During the first 3 quarters of 2021, we originated $543 million and new PPP loans and the outstanding balance for both years was 800.
$6 million at 630.
We provide the remaining fees not yet recognized which were $3.6 million from the 2020 vintage and $26.4 million from the 2021 vintage for a total of $30 million.
We anticipate that the remaining fees from the 2020 vintage will be recognized.
2000 and for the end of this year.
And that a good percentage of the 2020.1 fees will also be recognized this year.
We provided an update to our outlook on page 16 of the presentation.
And the outlook exclude centuries, and is very consistent with our prior outlook.
Net interest income has greatly benefited from PPP.
And diamondback and half of 'twenty, and 'twenty, and so far and 2021.
For this year, we continue to expect our net interest income before PPP fees to be between 360 and $370 million.
Operating non interest income is expected to be between 180 and $185 million and 2021.
Operating non expense noninterest expense is expected to be between $390 million and $400 million.
Net charge offs are still expected to be between 10 and 15.
10% and 50 basis points.
And we currently expect the loan loss provision to be less than those charge offs.
The effective tax rate should be between 20.
And this 24%.
Thank you very much and we're ready to open it up for questions.
And at this time I would like to remind everyone and order to ask a question Press Star then and number 1 on your telephone keypad.
So just a moment to compile the Q&A roster.
And your first question comes from the line of Damon.
Thank you Marty with <unk> Your line is open.
Hey, good morning, everyone and hope everybody is doing well today.
Thank you Dan and good morning to you.
Good morning so.
First question just wanted to talk a little bit about the margin Jim.
And you gave a little color on on the court.
This quarter it looks like the liquidity drag subsided, a little bit from from last last quarter. You can expect to see that to continue to decline and will that ultimately help that debt $2.80 core maybe not compressing as much as this past quarter.
Right so great.
Great question.
And vendors and.
A number of moving parts. So let me sort of try and take it 1 and at a time.
You are correct that.
Cash and we have deployed a lot of that excess cash over this past quarter and prior quarters as well and anticipate continuing to do that at roughly the same pace and and.
And the upcoming quarters.
And on that score yes.
On century will close in Q4, we will give a further update there, but just as a reminder, that's a cash transaction. So.
No.
And today and on itself that will help build liquidity as well.
And each of remembered.
Century merger century has its own.
So on sheet with its own margins, so thats going to come on stream in Q4 and really in 2022.
Got it okay.
Helpful.
And then.
With respect to the higher risk segments of the portfolio those data have greater exposure to the the ramifications of the pandemic.
Are there any areas that are of any.
And any meaningful concern to you guys or do you feel that.
And the greater Boston Academy has been pretty resilient and and bounce back and most industries.
Well progressing back to a normal environment.
So I'll give you a couple on.
And about responses, there and payment.
And I appreciate the question.
First off we're very pleased with the progress and the reduction of the modifications brief and track quite frankly with the way our customers have come through the pandemic.
If you look at the.
And what constitutes those modifications there's 1.
To which we've talked about on the past switches hotels.
And really the business hotels, if you will that's and commercial real estate, that's a pretty decent percentage of those remaining COVID-19 modifications.
And what we've said in the past and it's still very true today as we feel like those customers have done everything that they.
They should have been doing we've worked with them and we gave them longer term modifications. So we do expect those modifications to be on the books through the end of this year.
That said that release was.
Just the normal communication process with those customers, we're very pleased with the way they're working through this pandemic.
And then Mike and we can start to see some recovery, although it's going on as I said those loans will be modified through the end of this year. Although that said were optimistic they are all pointing in the right direction.
Okay, great and in per day.
Okay.
And then just last question kind of bigger picture here.
And I'm wondering if there's been any.
Any opportunities with market disruption and what the <unk> People's United deal.
I know.
Peoples has a decent competitor and the <unk>.
Greater Boston area and I'm, just wondering if any.
Any color on your takeaways on on that situation and what it can mean for you guys for EBIT growth loan growth or maybe.
Hiring additional commercial lenders and thank you.
Sure Damon, but really it's too early to count on.
At this point and we would expect that there'll be some there always is to some degree and these kinds of combinations. So we're paying.
Paying very very close attention and looking for those.
And <unk>, but really none.
Nothing significant that we can see it yet.
Okay, Great I appreciate it thanks, a lot guys.
Sure. Thanks Ana.
Your next question comes from the line of Laurie Hunsicker with Compass point Your line is open.
Yeah, Hi, Thanks, good morning.
Opportunity.
Just wondering if we could go back to the deferrals here on your deferral tens of Kobe.
And just wondering if you could specifically 3.
Drink category for us.
And both in terms of loan balance and in terms of backgrounds and protein bar.
How loan balance and the per.
And I had last quarter 170.
Good morning, and $92 million on deferral on.
Same with restaurants, and 1000 deferral and same with retail or if you don't have those at your fingertips I can follow up with you offline.
What we can do that we didn't include those this time, so why don't we do that Laurie.
And Barry I would just comment generally as the hotel numbers that you referenced from the prior.
Quarter are both down and really the total exposure and the amounts that are modified has been a little bit of progress there.
Okay, Okay, great and then.
And then just back over to margin and I know, you've got 800 million and PPP loans remain and what what is the unamortized fees associated with that.
Sure.
And.
And just to try and make my life easier on page 14 of the presentation, we do laid out.
Formulary and we do it by vintage.
We just do it by vintage this whole is $30 million per day.
Perfect. Thanks, Barry and Thats right, Okay, and then on the expense side.
Couple of things I know you laid out the 17 branch closure was that part of the initial what you had targeted is there and.
Any change and the cost saves you laid out a 45% any changed and your.
Pre tax onetime charges or how should we think about that is that and minus what you're thinking.
Sure.
Very good question, it's very much in line with what we were thinking and went through last April and were working through a number of all of those.
Integration.
Milestones now and would anticipate given you a true very full update at the end of the third quarter.
As I said earlier on my remarks, we.
We remain very confident and the.
Financial metrics, we put out last April.
Got it Okay and then just last question here.
Thinking about your your expense guidance to $3.90 debt 400.
Super helpful can you walk us through 2020 here because there.
And certainly more moving parts coming on with the benefit plan, obviously, and the fourth quarter and and maybe some offsetting things that youre going to do how should we think about it.
Expenses with century rolled and.
Cost saves factored and benefit plans that come in fourth quarter of 2022, what what would be a.
Our baseline number in terms.
For 2022.
So we haven't gotten there yet Laurie and we're working on that I think century is there are a number of things related both to the absolute and also the timing as to central expenses. So we do anticipate to come back at the end of the third quarter and give us a complete update there.
The next day, 1 thing I can point to 2 rigs and we're still very confident debt metrics that we put out back in April are on track and we're executing against those.
Okay, Great and then Bob last question for you.
1 of the banks and your market.
Had mentioned that there has been some level of conversations going.
On but obviously theres a lot less and think about on the M&A side can you just refresh us and thats been a quarter since we've heard from you in terms of your thoughts on bank M&A and non insurance M&A. This whole bank M&A, how you're approaching that obviously youre digesting a sale, but looking forward, how youre thinking about that thanks.
Sure Laurie so again.
It's and foremost we're very focused on century.
Largest transaction and our history very important so certainly on.
All eyes are on that in every way as it should be that said, where we are open to conversations with those who may be interested in partnering with us we're interested in.
And for combinations as we continue to deploy our capital and scale our company.
So.
And it's pretty much our standard at this point that Hasnt changed really since we went public and and continues to be very open to those conversations at this point, but really not much longer zone.
And those thanks for taking my question.
Yeah.
Your next question comes from the line of David Bishop with Seaport Research. Your line is open.
Yes. Thank you good morning, gentlemen, how are you.
Good morning, David how are you.
Good good hey.
Just curious I think.
You mentioned a number.
And quite here on the preamble in terms of the pipeline just curious if you could go over that and I'm, just curious, maybe where that breaks down by product and is that mostly existing customers.
Looking to for new credits or are you picking up new market share and then.
A follow up if you could I don't know if you have the average yield on new loan production this quarter versus what's rolling on.
I'll take the second 1 first because I don't have that that's a good question and we'll try and add that going forward David.
I don't have it does so.
And I appreciate the question.
What I.
Of the commercial loan pipeline, so specific to commercial loans is just north of $600 million.
That's up from the end of the first quarter.
Generally most of that is with existing customers. We're looking for new business. All the time as you would expect and know.
And there are certainly new customers in there.
I said, where the bulk of that.
Net commercial business is and that's in the pipeline and we're working through now is with existing customers.
Got it and does that breakdown is.
Was that all C&I and CRE, just curious from a product and point worth.
Shapes up yes.
And this combined I don't have the breakdown.
But in front of me, we can try and get more specific on that going forward our business, but it would.
It would look like our business, which is it's not 50.50 literally but we do and we're very active and commercial real estate were very active on the commercial front and we're very active and our what we call community development and land community development lending so its really those 3.
<unk>, they all contribute very nicely put on overall pipeline.
Pipeline.
Got it and then you mentioned the deployment.
And the excess liquidity into securities investment sounds like Thats going to stay at about the same pace and just curious what the what sort of <unk>.
And those came on board with that.
Sure. So we do expect debt.
And you're at the same pace, which we've done the last couple of quarters, and we think that debt just prudent and we have obviously a lot of excess liquidity. So we wanted to be measured and balanced and that.
And the second quarter the yields on new purchases.
<unk> was about 1% the average duration was approximately 4 years.
So.
Very well.
Okay.
Cash Mega cynical comment and a serious question but.
Reflective of the current environment.
Sure.
Great.
Purchasing for the ethylene.
Thanks, David.
There are no further questions at this time I would now and turn the call over to Bob <unk> for closing remarks.
Well again, thanks, Ashley and thanks to all of you for joining and listening and appreciate the questions.
And.
Thank you.
Wish you a great rest of summer and look forward to talking with you.
And 90 days and on our third quarter results.
This concludes today's conference call you may now disconnect.