Q1 2022 Eastern Bankshares Inc Earnings Call
Excuse me. This is the operator todays conference is scheduled to begin shortly until that time your lines will again be placed in whole and thank you for your patience.
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Hello, and welcome to the Eastern Bancshares, Inc. First quarter 2022 earnings Conference call. Today's call will include forward looking statements, including statements about eastern feature financial and operating results outlook business strategies and plans as well as other opera.
She entities and potential risks that management for six such.
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 the events to differ materially from those expressed or implied in such forward looking statements.
Listeners are referred to the different 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 following.
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 responsive mutation 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 investors bought eastern bound stopped 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 you would like to withdraw your question press the pound key thank you.
I would now like to turn the call over to Bob referenced Chair and CEO . Please go ahead Sir.
Great. Thank you Patricia good morning, everyone and thank you for joining our first quarter earnings call with me today is Jim Fitzgerald, our chief administrative officer, and Chief Financial Officer.
Our first quarter results were strong as we began to realize the benefits of the acquisition of century Bank and other investments we've made to grow our business and solidify our position as the leading community bank in greater Boston.
Our operating earnings in the first quarter were 23% higher than the same period, a year ago, and we believe we are well positioned to benefit from higher interest rates in the quarters ahead.
Although organic commercial loan growth was slower than prior quarters. We believe that our pipelines are strong and that we are still on track for high single digit growth in these portfolios in 2022 and.
In addition, we have continued to build our talented team in middle market lending commercial real estate.
<unk> developed in lending and added.
Half dozen relationship managers from local banks during the first quarter.
In addition, we continued to build our insurance brokerage business with the March 1st acquisition of the Michaels Insurance agency, marking the 35th acquisition of an independent insurance agency by Eastern insurance since 2002.
Although not fully reflected in our first quarter results. We completed the transfer of about $300 million in cannabis and money service business deposits to Needham Bank on April one as previously announced as always I am Grateful to my 2080 colleagues, who make all of this happen and more are almost seven.
100000 customers, who provide us with the privilege of serving their needs our community partners, who help make our region a better place to live and our shareholders for your continued support once again. Thank you for joining us today and for your interest in Eastern and now I will turn things over to Jim for an in depth financial in depth review of our financial.
<unk> performance.
Great. Thank you Bob and good morning, everyone as Bob mentioned, we're pleased with our results for the first quarter.
We completed some final milestones for the century acquisition to put it largely in the rearview mirror and produce very solid earnings growth over both last quarter and from the first quarter of 2021.
The fed rate increase came in mid March and had little impact on Q1 earnings.
Expected increases in rates will have a significant impact on our net interest income later in 2022 and 2023.
And I will include some comments on that in our outlook.
GAAP earnings for Q1 were $51 5 million or <unk> 30 per share operating earnings were $55 1 million or 32 per share.
Operating earnings were up 23% compared to the prior quarter and were up 18% compared to Q1 of 2021.
Excluding PPP loans overall loan growth was three 1% on an annualized basis and commercial loan growth was four 4% annualized.
Although this commercial growth was a little below the prior couple of quarters, our activity levels and local economy continued to be very strong and we're optimistic about continued loan growth.
We adopted <unk> as of January one 2022, and recorded a $27 million increase in our allowance for loan losses.
This was in line with what we communicated back in January it.
He was recorded through a $20 million after tax reduction to retained earnings we had a small reserve release of approximately 500000 in Q1 as credit quality remained excellent.
We repurchased two 9 million shares in Q1 at an average price of $21 12.
I'll focus on the balance sheet next.
Total assets at $3 31 were $22 8 billion.
From $23 5 billion at the end of the year.
This was driven by a reduction in deposits of $235 million as we implemented some of the funding strategies for the century balance sheet. We have previously discussed.
Shareholders' equity decreased by $400 million due to the impact of lower all other comprehensive income share repurchases and the previously mentioned seasonal adjustments that went through retained earnings.
Loans decreased by $100 million of PPP Paydowns were $190 million, although we experienced $91 million of growth in other loans, primarily in commercial loans.
The securities portfolio decreased by $200 million due primarily lower market values for securities.
Pay downs and sales, which were partially offset by reinvestment.
Turning to the income statement as I mentioned at the outset earnings were $51 5 million.
Were <unk> 30 per share opt.
Operating earnings were $55 1 million or <unk> 32 per share operating earnings were 23% ahead of the prior quarter and 18% ahead of last year.
Net interest income for the period was $134 million on a fully tax equivalent basis.
Compared to $124 6 million last quarter, and $101 4 million in Q1 of 2021.
Average, earning assets were up $2 4 billion in the quarter, primarily due to the century acquisition, which closed in November of 2021.
<unk> recognition was $5 $8 million in the quarter down from $10 8 million in the prior quarter.
The net interest margin on a fully tax equivalent basis was $2 2424, 2% in the quarter.
Down 12 basis points from the prior quarter. This was in part due to the lower PPP fee recognition quarter to quarter and also the full quarter impact of the century balance sheet, which had a lower net interest margin than eastern.
Changes in interest rates had a minimal impact to first quarter earnings and I'll discuss the expected impact on increasing rates on our net interest income in the outlook section.
Operating noninterest income was strong.
In the quarter with fees of $53 3 million, we had good sequential growth from Q4 and insurance revenues interest rate swaps and deposit service charges and strong growth from Q1 of 2021 in wealth management in debit card fees.
One item, we would like to make sure people focus on is the seasonality in our insurance revenues.
Most of the annual incentive payments from insurance carriers in Q1 and that is reflected in the relatively higher Q1 revenues in the press release tables.
We incurred $4 4 million of losses on Rabbi Trust assets due to stock market declines in Q1 and incurred $2 2 million of losses on the sale of securities from the century portfolio that were part of our planned portfolio repositioning.
<unk> expenses were $108 9 million and were $110 9 million on an operating basis in the quarter.
Comparisons to Q4 difficult due to the century merger charges, but expenses are in line with our guidance from last quarter and reflect the cost savings of 45% that we expected at the time, we announced the century acquisition.
The tax rate for the quarter was 22 point 20.
<unk> 22, 1%.
Just a few other comments on Q1, we provide a review of the securities portfolio on page 11 of the presentation. As noted there we believe theres minimal credit risk in the portfolio. The unrealized loss at $3 31 was $539 million due to the increase in rates, we expect to recover all of this unrealized loss as the bonds mature.
Sure.
The portfolio provides strong cash flows and we expect $750 million of cash flow throughout the rest of this year.
Which will provide a chance for reinvestment.
We have a small portfolio of held to maturity securities of approximately $400 million.
We provide a breakdown of our deposit portfolio on page 12 of the presentation as.
As you will see approximately 60% of our deposits are in checking accounts we.
We expect the combination of our strong deposit mix and our overall deposit cost.
Seven basis points will provide us with a good competitive advantage as short term interest rates increase.
We feel that our deposit franchise as a long term strength of the company that tends not to be featured as prominently during periods of very low short term interest rates.
We look forward to rising rates, allowing us to spotlight the value of our funding position over time.
We are pleased with the integration of the century loan portfolio and continue to feel comfortable that it will add to our long term growth prospects.
Consistent with what we said last quarter, we expect some payoffs out of the portfolio overtime, but feel very good that the century portfolio will enhance our long term growth.
As noted we did see some payoffs in Q1 in both the century in eastern portfolios, but they are consistent with normal activity levels.
Asset quality in the quarter continued to be excellent.
Loan charge offs were one basis point nonperforming loans were extremely low at $34 million and after the Cecil implementation, our allowance for loan losses as a percentage of nonperforming loans is over 350%.
Our COVID-19 modifications are under $50 million.
Down from over $100 million at the end of the year.
In general this quarter had little noise compared with our results in 2021, which included the century acquisition in 2020, which included the IPO.
We're pleased by that and think that over time that will make it easier to see the progress in our financial performance.
Turning to our outlook, our internal forecast at 725 basis point rate increases for calendar year, 'twenty, two including the 25 basis point hike that occurred in March and six additional 25 basis point hikes at each of the remaining fed meetings this year.
Our margin forecast is a moving target with a variety of forecasts out there and we will continue to update as the year goes on.
With that interest rate hike assumption, we expect our net interest income to be between 530 and $550 million in 2022.
This is up from the $505 million to $520 million level, we discussed in January as.
As we mentioned last quarter the impact from rate increases will have less of an impact in 'twenty two than they will in 2003, when we'll receive the full annual benefit.
As I mentioned earlier, we feel that our deposit base is the strength of our company and should provide us a strong competitive funding advantage with the rise in rates.
We expect this funding advantage to improve both our earnings level as well as our performance metrics going forward.
Yes.
Follow back up on commercial loan growth as Bob mentioned, we've seen good success in adding commercial lending talent and expect commercial loan growth, excluding PPP runoff in the mid to high single digits for 2022.
We expect to implement a change in our overdraft practices later, this year, which we which we anticipate will reduce fees by two $5 million to $3 million in 2022.
This would equate to $5 million to $6 million on an annualized basis inclusive of that change we maintain our outlook for operating noninterest income in the $180 million to $190 million range in 2022.
We expect to continue we continue to expect operating noninterest expenses to be between $445 $460 million.
We expect the tax rate to be between 21, and 22%, which is up slightly from our outlook in January .
As Bob mentioned, we transfer the cannabis business, we acquired from century in early April the deposits totaled approximately $300 million.
Through April 26, we have repurchased four 9 million shares at a price of $20 83, and total under our current authorization.
These repurchases equate to 52% of our authorized amount of $9 3 million shares future.
Future repurchases will depend on market conditions.
Thanks, Tim we are ready for questions Patricia.
Yes.
Thank you and 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 Janet J.
J P. Morgan your line is open.
Good morning.
Good morning.
So it's good to hear that you guys are expecting.
Stronger rebound personal loans in the future quarters.
Just wanted to better understand.
Look at your core C&I and business banking loan growth, excluding <unk>. It looks like it was pretty much flattish versus peers, so low to mid teens.
That does have to do with small businesses that are coming back that came back at a slower pace in the first quarter versus general market or was that just the markets that you're in are or does that have to do with you spending more energy and.
An effort there.
Closing and integrating the century margin.
Yeah. Thanks, Shannon I think just want to make sure I'm answering the question, you're asking but I think I would answer it. This way I think as we've described in prior calls we have three or four segments in our commercial business. We are a business banking group.
Got a commercial see what we call C&I group, we've got a commercial real estate group.
Our community development lending, which does affordable housing and other nonprofit lending we feel very good about all four of those segments.
In the first quarter you are right. The growth was in commercial real estate all of those sectors had pretty good pay off this quarter again, we described that as normal that's part of the activity activity and backlogs are very good though we think as we've guided in the past overall from those segments, we expect overtime single digit mid to high.
Single digit growth I can't really comment on peers that you did there, but we feel very comfortable so very much a franchise customer oriented business. We are these are our direct customers of ours. So we feel that growth rate is very consistent with.
What we've done in the past and something we feel very good about.
Okay. So youre optimistic view about your loan growth.
In the later quarters, so that's a function of growth.
<unk> pipeline, how about the line Utilizations and do you expect that payoffs that you saw in the first quarter it slowed down a bit.
Just a couple of good questions. A couple of responses, we didn't see any real increase in line utilization. So that wasn't a benefit basically stayed at the same levels were hit it had been.
<unk>.
Payoff activity as it is.
Doing business. So it's hard to predict obviously interest rates have a little bit of an impact there, but there are a variety of factors there.
So we try not to get too exercised about payoffs are obviously something everybody has to deal within their part of the business flow.
While we are excited about is the pipelines and activity levels again, the local market here is very strong we feel very good about our teams and talent and we think we're positioned to take advantage of it and the way that I described.
Okay great.
And turning to deposits aside from the Academy cannabis deposit trends for how should we think about the.
Trajectory as their deposit Ed the rest of your deposits and 2022 should we see more deposit normalization taking place for the rest of the year given the fed's Q2, or how should we think about deposit overall deposit growth in 2022.
Sure.
Good question just to make sure.
Again Im answering your specific question, but may insurers to sort of set the stage a little bit as we talked about through the century acquisition. We did expect to reposition some of their deposits we feel like at the end of the quarter.
Plus the candidates deposits that was essentially complete a lot of that was in municipal deposits and as I said the cannabis deposits. So that's behind US I think and that makes it a little bit noisy what I'm about to say, but if you look the prior couple of quarters really across the industry and certainly the eastern we had very explosive deposit growth.
I think our view was that it would be very hard to grow deposits from those levels just given the factors that caused that the stimulus as you mentioned et cetera.
So I think we're in an environment, where it's going to be much more difficult to grow deposits over the next looking forward, but we feel very good about our market position and our capabilities as I tried to say a couple of times our deposit.
Strength the strength of the company long term has been our deposit structure, we think we compete very well there.
Okay great.
And my last question in here.
Revised 2022, NII guidance can you tell us what level of deposit beta is now that you also have bottom century deposits on your balance sheet.
Yeah.
No.
It's not something we've disclosed different companies do it differently.
<unk>.
The calculated differently. There's so many assumptions that go into it I just don't feel like it's apples. We can presented in a way that I am confident would be taken sort of apples to apples with other banks, but generally we've got what we believe is a very low beta relative to others. We expect it will be a little bit higher this time, just because of the.
Environment's, a little bit different but other than that I think we.
Just tried to incorporate that into the guidance that we gave.
Can you can you remind us what it was in the prior rising cycle.
I don't think we've disclosed that as I said I'm not comfortable doing that everybody calculates it slightly differently, depending on which.
If you think about the last cycle rate rates went up and then they came down if you calculated a different time periods you get different answers so.
The information was all public you can see the cost of funds changed in that period and Thats why I would lead you to it I wouldn't.
That's how I would do that.
Okay. Thanks.
And your next question comes from the line of Mark Fitzgibbon from Piper Sandler Your line is open.
Hey, guys good morning.
Mark.
Jim should we assume that swap income is going to be a little bit lighter in <unk>. It looked like it was a bit elevated this quarter.
Sure So mark just as a reminder.
We have a mark to market there is a fair value process of our swap book and in the first quarter interest rates were up.
That creates a higher fair value.
And that was a component of that and you can see that in prior in particular first quarter a year ago activity low level activity was reasonably strong it's been an area where there is because of the LIBOR shift there's been a lot of uncertainty and swap new business has been low because of that we did see a return there in the first.
<unk>, we expect that to continue but the mark to market elements of that we.
We don't expect unless rates continue to go up we wouldn't expect that to continue.
Okay, and then secondly.
Although your deposit costs are certainly low they have started to creep up the last couple of quarters. I guess I'm curious are you seeing pressure on the consumer side of the house or is it coming from the commercial side.
No I think thats, just adding the century deposits, which had a slightly higher cost than eastern corner. The eastern cost is the same it.
It's just the combination of the balance sheets.
Okay.
And then I wondered if you could maybe discuss sort of the M&A environment as it relates to the insurance agency business.
There are pipeline of deals out there as pricing attractive today, you guys have been a little quiet recently on that front I'm just curious.
Yes, no the pipeline continues to be as active as it has been now for a while mark.
Again, the pricing metrics still very favorable for smaller deals and Thats, where we focus.
When we get to things that are at.
At the higher end as we would describe over several.
Several million dollars in revenue for example, the pricing metrics start to deteriorate.
A little bit so we've really kept our focus on smaller agencies.
Within a few million dollars in revenue or less.
As was the case with Michaels and Thats, what we see in the pipeline right now and would expect that activity this year.
Would be consistent with activity of prior year is that as we would acquire.
A couple three insurance agencies this year.
Thank you.
And your next question is from the line of Damon Delmonte from <unk>. Your line is open.
Hey, good morning, guys hope everybody's doing well today.
Morning, David first question good morning.
So first question I think in in Bob's prepared remarks. He mentioned is about a half a dozen relationship bankers had been added.
Two eastern.
Was this a team of lenders was it individuals and is there.
Can you give a little more color about those hires.
Sure sure. So it wasn't it wasn't a team they were all individual hires.
And they were all.
Different in many ways that is they were.
Evenly distributed across our major commercial banking lines middle market commercial real estate.
The development lending.
They came from competitors that were both large and small who came from competitors that were experiencing acquisition related disruption and several came from organizations that werent. So it was really a mix.
In many ways, which can be a very good thing when you think about acquiring others that might follow them and it's one of the reasons that we feel so optimistic about our commercial loan growth in the subsequent quarters as these folks come online.
Got it and.
With regards to the commercial loan growth outlook I think the commentary with mid to high single digits.
I missed the part about that was inclusive of some of the runoff of century are not inclusive of some of that Rob.
Inclusive.
So okay.
Okay inclusive yes.
Got it got it okay, great and then.
On the fee income side, Jim I think you made a comment about you're adopting a new overdraft policy pretty much waiving certain fees.
When did you say that was going to kick in.
Second half of the year statement.
Okay.
Second half of <unk> second half of 2022.
Okay. Okay.
<unk>.
I guess that probably covers everything else.
Asked and answered so thank you very much okay, great. Thank you.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Our next question comes from the line of Laurie Hunsicker from Compass point Your line is open.
Yeah, Hi, Thanks, good morning.
Just going back to where where Dana was to the overdraft and SaaS, you said, two and a half to $3 million and 2022 appreciate the detail on page 15, how how much was.
Overdraft NSF total for this quarter.
Yes, Laurie the reduction annualized.
Which we've outlined at $5 million to $6 million about 50% would be about 50% Paul.
Perfect. Okay. Thanks, and then and then in <unk>.
Sir.
Revenue insurance fee income.
Higher.
Okay.
Realize that it's usually higher in first quarter, but how should we be thinking about the delta from first to second is that $4 million to $5 million drop or do you have a refresh number there.
Yeah, you know what I would.
Yeah, you know what I would encourage you to Laurie is just look at last year. So first quarter of this year was about 2% higher than last year.
2021, and you can see and we do try to provide the quarterly drop to Q2 I don't know it off the top of my head, but it's.
It's there and.
I would look again, the 2% growth this year versus last year, and then look at the seasonality from 2021 to get a good judgment there.
Okay. Okay.
That's great and then and then onto expenses and again I'm just looking at your slide 15 and to your comments.
You know just looking at where you are for non interest expense. This quarter you were one O nine if we add back.
The Rabbi Trust employee benefits.
2.2 ships of 111, and obviously hitting that run rate looks like and maybe I just need your help understanding that that looks like the benefit plan expense didn't hit this quarter and I was thinking of what or did it hit and I'm I'm missing something.
Can you just refresh us on that and then also how much the amount was.
Sure.
The benefit plans.
Which.
Included at a high level in the proxy.
Were issued in March so not for the full quarter two I think the point of your question there.
Got it and then what what will be the full run rate there.
Yes, so I think one of the things we've said in the past and would say again is this first year's grant was sort of not sort of this first shares grant.
The goal was to try and recreate the long term incentives expense that we had as a mutual company, which was approximately $10 million a year, so going forward there'll be additional brands, but this grant itself.
The strategy that was to replicate the expense that we had in that prior plan, which was as I said and we've disclosed other places about $10 million a year.
Got it.
Okay got it Okay, and then asset sensitivity and appreciate your comments do you have do you have a refresh on that as of March 31.
In other words here at December 31st as of.
December 31.
You know 100 basis points of positive seven 6% on NII do you have a comparable.
Number there.
That is about the same.
Okay.
I think one of the one of the things that we said last quarter Laurie in this call was that for every 25 basis point.
Increase in rates, we would have at that time, we said, we'd anticipate $8 million of incremental net interest income with some of the balance sheet restructuring SaaS down a little bit, but I would say, it's $7 million for a 25 basis point increase.
That's great Okay, Great and then Bob just last question now that you've closed century can you just refresh us in terms of how youre thinking about bank M&A.
Sure. So we are ready for another partnership when one comes available so certainly open for that.
<unk> focused on our organic growth as you can see in our hiring activity.
That has been much more aggressive than it's been in the past so very focused on building the commercial loan book and the overall organic growth of the company generally and trying to prove improve our multiples so that for future deals, we're even better positioned for those acquisition opportunities when they arise.
Great and then just one last question on that as you think about another partnership are you still focused sort of in and around greater Boston and expanding out from there or have you jumped geographies at all what's your what's your not at all nine now famous before Laurie we're still focused on the immediate region that we're in.
Immediately adjacent geographies, so again that remains our focus.
Great. Thanks for taking my questions great. Thank you.
And there are no further questions at this time I will now turn the call over to Bob <unk> for closing remarks.
Well once again, everyone. Thanks for your interest and really appreciate you joining us today and we look forward to talking with you again.
After our second quarter release.
This concludes today's conference call you may now disconnect.
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