Q3 2022 Eastern Bankshares Inc Earnings Call
Control measures to the comparable GAAP figures. Please refer to the company's earnings press release release, which can be found at the Investor Doc Eastern Bank Dot com.
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I would like to turn the call over to Bob reversed chair and CEO .
Thank you Michele good morning, everyone and thank you for joining our third quarter earnings call. Joining me today is Jim Fitzgerald, our chief administrative officer, and Chief Financial Officer.
Our performance continued the strong demonstrated continued improvement in a number of key measures operating net income in the third quarter was 49% higher than the comparable prior year quarter, a new record driven by our highest ever quarterly revenue, which increased 34% year over year as a.
<unk> Eastern is return on assets continued to improve as does the efficiency ratio, which declined eight percentage points from a year ago.
Underlying this progress our deposit costs continued to be well managed rising only four basis points from the prior quarter. Despite another 150 basis point increase in the fed funds rate over the past three months and an increase of three percentage points since the beginning of the year.
Growth in loan Outstandings continued to accelerate during the quarter rising 16% overall on an annualized basis, driven by record commercial and home equity loan production with net charge offs of just one basis point as a result, the net interest margin increased 24 basis points during the quarter.
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In addition, eastern insurance group acquired its second agency of the year in August and it's 36% since 2002 and Eastern Bank was recognized by the Boston business Journal as one of the most charitable companies in our region, our 10th time in the top 10.
We think it is increasingly clear that investments we've been making in the growth of our company are paying off in addition to significant financial leverage the acquisition of century Bank, which closed last November helped increase our deposit market share to the fourth largest in the greater Boston market our record commercial loan.
<unk> reflect just the beginning of the benefits we expect to achieve through the expansion of our commercial lending teams are continued significant investments in technology have elevated our digital capabilities better serving our customers and improving process workflows that we believe will ultimately reduce expenses as.
As always these results reflect the hard work and tremendous commitment of my 2100, eastern colleagues with whom I am privileged to work.
And whom I think for all that they do every day to serve our customers communities and each other 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 review of our third quarter financial performance and outlook for the remainder of 2022 and for 2023.
Thanks, Bob and good morning, everyone as Bob mentioned, we're very pleased with our third quarter results and think they demonstrate continued momentum from the first and second quarters of this year. We were pleased with the growth in our net interest income and margin due to higher rates and very strong loan growth.
Net income was $54 8 million for the quarter or <unk> 33 per diluted share opt.
Operating net income was $55 7 million or <unk> 34 per diluted share.
Operating net income for the second quarter. The operating net income was 49% higher than the same quarter of 2021.
Net interest income was very strong in the quarter rising 10% from the prior quarter as net interest margin increased 24 basis points from Q2.
Our asset yields increased by 29 basis points in the quarter and our cost of funds was up eight basis points.
We also had a strong quarter of loan growth in all of our major portfolios with commercial loans up 16% quarter to quarter.
Organic residential mortgage growth was 10% and consumer loans were up 6% all of these percentages are on an annualized basis.
Our board approved a dividend of <unk> 10 per share payable on December 15th to shareholders of record on December 2nd 2022.
We repurchased one 5 million shares under our share repurchase program in the third quarter at an average price of $19 52.
First I'll make some comments on the balance sheet assets were down $300 million from Q2 and ended the quarter at $22 billion.
Deposits were down $430 million in the quarter and were offset by an increase in borrowings of $380 million.
Loans were up 505 million, while cash was down $210 million.
The securities portfolio was down $700 million.
Due primarily to reductions in market value.
All major loan categories were up for the quarter commercial loans were up $357 million or 16% annualized organic residential loans were up $52 million or 10% annualized and consumer loans, driven by home equity loans were up $19 million or 6% annualized and we.
<unk> added $78 million of mortgage loans the embrace relationship we described last quarter.
As mentioned above deposits were down $430 million in the quarter. Although there was little change in average deposits from the second quarter, we talked on the last call about the tightening market for deposits and that we expected price increases in a challenging market going forward.
That didn't materialize and we expect it to continue.
We have begun to adjust our deposit pricing to remain competitive and abuse some of our borrowing capacity to fund loan growth in the quarter.
Shareholder equity decreased $303 million in the quarter due to the impact of lower OCI and share repurchases, partially offset by an increase in retained earnings.
As I mentioned GAAP net income was $54 8 million or <unk> 33 per diluted share and operating earnings were $55 7 million or <unk> 34 per diluted share.
We feel our results reflect very strong progress in many key areas.
Net interest income of $152 2 million was $14 4 million or 10% higher than Q2 and benefited from higher rates and strong loan growth.
That yields were up 29 basis points quarter over quarter and funding costs were up eight basis points. This combination allowed our net interest margin to expand by 24 basis points.
From 263% to $2, 87% in the quarter.
The provision for loan losses was $6 5 million in the quarter compared to a $1 $1 million provision in Q2 loan growth was the driver of the increase for seven of the $6 $5 million provision was due to the increase in loans and $1 8 million was primarily due to a modest increase in our ACL factor.
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Noninterest.
Trust income on an operating basis was $45 3 million in Q3.
Insurance revenues were $23 8 million in the quarter up 8% from the same quarter of 2021 and down 900000 from Q2.
We started to see a reduction in deposit service charges due to the changes in our overdraft practices, we mentioned earlier in the year.
Our operating line items were generally in line with either of the prior quarter or the prior year.
The value of Rabbi Trust assets was down $2 $2 million due primarily to declines in the stock market and we incurred some small losses on security sales both are excluded from the calculation of operating earnings.
Noninterest expense was $116 8 million in the third quarter compared to $111 million in Q2.
On an operating basis noninterest expense was $117 4 million compared to $114 4 million in Q2 due to an increase in salaries and benefits. This increase was due primarily to higher incentive compensation.
As is outlined in the non-GAAP tables of the press release and the presentation. There was a $2 $4 million increase in benefit expense during the quarter due to lower Rabbi trust losses in the quarter.
Although there are expenses in total were either in line with Q2 or prior years.
I'll include some comments on our outlook for expenses later in the presentation.
Tax rate in the quarter was 24% and we provide guidance for the full year tax rate on the outlook slide our marginal tax rate is higher than the average tax rate and as projected earnings increase the average will increase the average tax rate will increase.
Asset quality continues to be sound through the end of the third quarter net charge offs were very close to zero npls are at very low levels and our reserve coverage to npls is over 380%.
The loan we moved to nonperforming loan status in Q2 paid off in full in Q3, and there was a corresponding reduction in nonperforming loans at 930.
We continue to carefully monitor all of our portfolios through our internal portfolio management processes and.
And don't see any significant adverse trends in our risk ratings and the commercial portfolios nor early delinquencies in the consumer portfolios at this time.
We continue to monitor.
Credit quality trends carefully.
As I mentioned the provision in the quarter was $6 5 million due primarily to loan growth and was sufficient to maintain allowance of about 1% of total loans.
I wanted to review our outlook pages and make some additional comments.
Although the environment is challenging we expect the continuing increases in rates to improve our net interest income for Q4 and.
And into 2023.
We expect to see net interest income for 2022 in the range of $570 million to $580 million.
And we expect to see our net interest margin move into the low 3% range in early 2023, if not late 2022.
We would expect full year 2023, net interest income to have a percentage growth rate over full year 2022 in the low teens.
We expect commercial loan growth to produce another strong quarter in Q4.
Q3 was a record for commercial loan originations and generated 16% growth on an annualized basis.
We would expect those levels to come down but.
Expect Q4 to be above our long term target growth rate of the mid to high single digits.
Higher rates in a slowing economy are expected to have an impact as we transition into 2023.
And we would expect slower loan growth and in 2022.
We will update our views on that next quarter.
Given the change in the liquidity outlook generally we have decided to discontinue our flow arrangement for residential mortgages with embraced home loans that we described on the last call.
Although the program was working well the challenging outlook for deposits and liquidity has reduced our appetite.
We will close out the existing pipeline over the next 90 days.
We would expect our organic mortgage loan growth to decline due to the general slowdown in the mortgage market.
We completed the hedging program, we described on the last call.
We completed the hedging program. We described on the last call in Q3 and feel very good about the long term benefits of reducing our asset sensitivity.
There is no change in our guidance on non interest income from last quarter, as we still expect $180 million to $190 million for 2022.
We do not expect growth in noninterest income in 2023 due to the reduction in deposit service charges mentioned previously related to overdraft revenue and pressures on wealth mortgage and interest rate swap fees due to market conditions.
We are adjusting our operating noninterest expense guidance for 2022, we expect we expect expenses to be between $455 and $465 million for 2022.
Up slightly from the prior guidance.
We continue to invest in our commercial teams and technology and are confident these investments are critical to our success and will be a long term competitive advantage.
In addition to the outside hires for our commercial team. We mentioned earlier in the year, we've added the support and infrastructure needed to grow at a faster pace we've experienced in 2022.
The 10% and 16% annualized commercial loan growth rates, we experienced in Q2, and Q3, where an early dividend on that investment.
We also have some investments in digital account opening and workflow technology that will be coming on stream in late 2022, and 'twenty early 'twenty three that we're excited about for both our customers and also our colleagues.
The combination of these investments along with salary adjustments, we have made for colleagues at the lower end of the wage scale to help offset some of the inflation challenges as well as general wage pressures will drive our salary and benefit costs higher in 2023.
Then the increases in prior years.
We would expect growth in salaries and benefits of 6% to seven 5% in 2023.
This is well above our long term experience and we would expect that to return to more normal levels as inflation declines.
Included in this increases are included in this increases our health care costs, which are expected to be up 7% in 2023.
We expect the other major.
Expense line items occupancy professional services marketing and other expenses to have increases in the low single digits for the year.
We commenced our second share repurchase authorization in Q3 and for the quarter purchased a total of $1 5 million shares.
As we mentioned on the outlook slide future purchases will be determined by market conditions.
As well as capital and liquidity considerations.
As we pointed out in the outlook, we will recognize a non cash charge in Q4 related to the required use of.
Defined benefit pension settlement accounting for 2022 for our pension plan that I will explain in a moment our.
Our preliminary estimate which is based on data at the end of August and is very preliminary.
Is that the incremental pension expense will likely be in the range of $10 million to $15 million.
As background GAAP requires eastern to use settlement accounting if during a calendar year, the total amount of lump sum distributions.
From our pension plan taken by retirees and other former employees.
Exceeds the settlement accounting threshold, which is the total amount of service and interest costs of the pension plan for that year.
Our pension plan administrators test for the settlement accounting threshold throughout the year, we learned this quarter that the total amount of lump sum payouts for 2022 will exceed the accounting threshold for the year and therefore, we will be required to apply.
Pension settlement accounting retrospectively for all of 2022.
The actuarial work to calculate the incremental pension expense, resulting from the required use of settlement accounting is complex.
Therefore, our estimated incremental expense of $10 million to $15 million is preliminary.
We intend to publicly disclose the actual settlement accounting charge for Q4 promptly after its finalized which we anticipate will be in early December .
In closing, we continue to see a great opportunity to further penetrate our market in eastern Massachusetts, and Southern New Hampshire.
We experienced an improvement in our deposit market share through the century acquisition last year and our growth rate for commercial loans in 2022 stands out in our market. Although we expect the environment to be challenging in 2023, we're confident that we're well positioned in an excellent market for long term growth.
Thank you very much and we are ready for questions Michelle.
Thank you.
At this time I would like to remind everyone in order to ask a question.
The Star then the number one on your telephone keypad.
We'll pause for just a moment to compile the Q&A roster.
Our first question comes from Mark Fitzgibbon Piper Sandler. Please go ahead hey.
Hey, guys good morning.
Mark.
I was wondering if you could start by sharing with us and I apologize. If you said this is the very beginning I missed a couple of minutes, but the loan pipeline the mix and maybe average rate.
Sure. So mark we don't disclose the loan pipeline, it's calculated a little bit differently for different products, but.
On the commercial side, which is where we focus most of our strategic attention. The pipeline is about the same size as it was at the year end coming into Q3, we do expect a good quarter for closings in Q4, and expect that to come down and as I articulated.
We would expect slower growth as the as conditions as 2023, it looks like it will be a more difficult year than 2022.
But the pipeline going into the fourth quarter or is it about the same level as it was the prior quarter.
In terms of yields.
New business on the commercial side sort of in the high <unk> mid to high 5% range.
Those would be for fixed rate those would be for fixed rates.
Okay, Great and then secondly, Jim on page 11, you detailed the total securities portfolio yield and it came down a bit from the second quarter to third quarter. I was just curious why that was.
Sure premium amortization, we had one or two selected situations.
There were.
We had the accelerated premium amortization, primarily due to payoffs of the securities.
Okay.
As you kind of think about the size of the securities portfolio.
No you're using cash flow to fund loan growth.
How quickly can can you shrink down that securities portfolio do you have a target in mind for it.
Sure.
Very good question Mark.
And in many ways, the answer's going to be very similar to what we said last quarter the cash flow from the portfolio today is about $70 million a month.
Call it $800 million of our $800 million to $850 million a year.
At this point in the rate cycle. That's that's what those are the changes we expect we expect to see it come down in those amounts.
Obviously, if rates change and there is opportunities to do other things.
We'd address it at that point, but at this time, that's what we see.
Okay, and lastly, what would you say youre spot deposit rate is today.
Yes, that's a hard one.
Because there is a wide variety of different deposit products in different sectors.
So it's hard for me to give you an answer we do expect to see a pretty.
Sure.
We do expect to see an increase in our deposit costs in Q4.
Thank you.
Thank you. The next question comes from Damon Delmonte K VW. Please go ahead.
Hey, good morning, everyone and hope everybody is doing well today.
Jim I was just wondering you could revisit the commentary on the decision to terminate the relationship with encore I didn't quite get everything went well.
Yes.
I'm laughing encores that casino here locally.
Okay.
And then from there.
Boston is sort of at a local joke, but it has embraced home loans and as we outlined at the quarter last time earlier in the year when the liquidity picture was very different we were looking to.
In essence direct security cash flows away from the securities market and developed.
Pre existing relationship very strong pre existing relationship with embrace so what the what this program was to <unk>.
By original loans originated by embrace based on our underwriting criteria.
And take them into portfolio on a flow basis.
What we articulated at the last call at the end of Q2 was we had targeted amount of $400 million for that and it was a little bit of an experiment to see how it would work.
Change in liquidity and the outlook for liquidity really reduces our appetite for that Damon. So we have notified embraced we're going to discontinue that there are loans in the pipeline that will close out in the normal course.
And as I said in my comments, we're very happy with the way it was working but its really just the liquidity outlook that changed our appetite.
Got it and then.
You said to the last question that the securities portfolio is putting off about $800 million a year in.
And cash flow.
Yes.
So do you expect all of that can be used to fund loan growth or do you think youre going to have to reinvest some of that back into the securities portfolio.
No we would anticipate as those cash flows are received to bring the securities portfolio down.
And fund loan growth with those yes.
Got it okay great.
And then I guess with respect to the margin.
Commentary points to a higher margin going through year end.
And <unk>.
In 2023.
You think that youre going to end up, peaking somewhere halfway through the through the year or do you think that there is still.
And our flexibility on the balance sheet, particularly.
Particularly on the funding side can you keep that margin moving higher.
It's a difficult question damage because of the.
It's just a difficult question at this time, given all the uncertainty with rates.
What we articulated what we can see is.
The rate increases that have happened and will happen and are expected to happen over the next couple of months will definitely improve the margin and we can see that as you get out further there is just.
The volatility and the questions around liquidity make it hard to get further out than that.
Yes fair enough.
And then it wasn't an easy question.
I appreciate the response.
I guess, just lastly credit trends remained strong and you kind of look at the reserve level here as you try to kind of hold it.
Yes.
101, one or two or three type range as you look out over the next few quarters.
You are asking all these very good questions that are very hard to answer Damon I think.
What we saw what we saw this quarter.
Was that.
Based on our forecast, which the forecast does not have a severe recession and it does have a slowing of growth and then modest recession.
We didn't see a big change in ACL factors as I said most of the provision was due to loan growth.
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And that's that's what we saw this quarter. That's that's really all we know at this point.
Okay sounds good.
That's all that I had for now thanks, a lot I appreciate it.
Thank you.
Question comes from Laurie Hunsicker.
At this point. Please go ahead.
Yeah, Hi, Bob Tim and good morning.
Hoping hoping Jim that you can go back to the expense guide.
But their commentary.
Just wanted to think about that if I'm, if I'm doing the math the operating guide that you.
You have provided just simply calling from <unk>.
In the middle of the $460 million to $500 million operating expense for full year 'twenty three.
Compared to 2002 that is almost 9% growth.
And completely get your comments around the <unk>.
Compensation expense of six to seven 5%.
Yes.
You helped us think a little bit about where where that delta is going higher.
Sure. So it's primarily in south as I tried to say, it's primarily in salaries and benefits Laurie.
There is growth in the other categories, although thats at a more modest level, but the primary increase there is in salaries and benefits.
Alright.
I'm just looking at your guide.
<unk> benefits.
The agenda of what you gave which certainly makes sense given where we are with inflation and then everything else you said low single digits, yet your full year expense growth guidance is up almost 9%.
Alright.
I can talk to you offline I feel like I'm missing something here I'm not quite sure.
Sure no happy to.
Yes, I'll follow up with you offline.
Can you talk very high level, the buyback obviously, great to see you buying back this quarter, but it slowed pretty significantly from last quarter can you help us think about how you look at that going forward.
Sure just one reminder.
From the historical side, we did conclude the.
First repurchase and needed to get regulatory approval for the second so there was a time period in there where we were.
Pending regulatory approval so there was.
Just as a reminder, there there was a gap in time, where we were waiting for that approval.
I think going forward, it's similar to what we would have said previously, but just added the liquidity constraints obviously.
Market market conditions are very important as we evaluate it but also our capital liquidity position and as those change that becomes a factor in the overall decision and we'll make those decisions as we go forward.
Okay, Okay, and any any comments around how.
How you think about it up here.
Yes.
Yes, we do.
I would think of as standard earn back not standard necessarily both typical earn back calculations and when we've done that in the past we've been very satisfied with that period and that's why we've been what I would consider to be a pretty aggressive buyer of our shares.
So with that framework is still in place, it's just the additional market conditions as well as.
As liquidity and capital.
Okay, Great and then just jumping back over to Mark and Pat.
Income was there was there any non accruing loan income recovery. It was booked this quarter associated with your top performers.
There was a modest amount.
Very small amount.
Laurie.
Okay.
Okay, and then the increase in borrowings in the quarter can you talk a little bit about that.
Core deposits are so nice model in cost and obviously borrowing clients.
How youre thinking about that or how we should think about that going forward.
Sure.
So your points are well taken.
And I would just say it this way obviously the history of the company has been one of our price points has been we've been pretty much at the deposit funded organization. So our first goal is to continue to continue to experience that have deposits be the vast majority of our <unk>.
Funding.
Liquidity changed pretty quickly here in the second and third quarter and really in the third quarter and late in the third quarter.
As we went through our pricing strategies, we started out.
We didn't change our strategies, but the strategies.
We implemented it.
Starting in the fourth quarter was much more aggressively retained deposits.
We had small outflows and that's why we need it.
What caused the borrowings.
Okay and so.
Okay, I guess more importantly, how do you think about using borrowings bank going forward.
It's hard to give you.
But short answer to that Laurie because it across the spectrum, we've got the pricing deposit pricing strategies the goals of those strategies or retain certainly in this environment to retain and ultimately grow deposits, but there are definitely.
A variety of factors that go into that we have a lot of borrowing capacity in $380 million for our balance sheet of our size is not a large amount at the end of the quarter.
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The balancing act there is figuring out deposit prices that can retain our existing deposits and ultimately grow them and balance that off with the borrowing capability that we have we would hope that over time, we would continue to be as deposit funded as possible, but it's a difficult market to do that.
Okay, great. Thanks for taking my question.
Thank you.
There are no further questions at this time I will turn the call back over to Bob <unk> for closing remarks.
Great well, thanks, again, Michel and thanks to all of you for joining the call. Thanks very much for your questions and we look forward to.
With you again on our next quarterly earnings call. Thanks again, everyone.
This concludes today's conference call you may now disconnect.
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