Q4 2022 Eastern Bankshares Inc Earnings Call
Okay.
[music].
Hello, and welcome to the Eastern Bancshares, Inc. Fourth quarter 2022 earnings Conference call. Today's call will include forward looking statements, including statements about <unk> future financial and operating results outlook business strategies and plans as well as other opportunities and potential risks that management policies.
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 press release, which can be found at Investor <unk> got Eastern Bank Dot com.
Please note that 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. Please press star followed by <unk>.
Thank you I would now like to turn the call over to Barbara Vice Chair and CEO . Please go ahead.
Thank you Joanna and good morning, everyone and thank you for joining our fourth quarter earnings call with me today is Jim Fitzgerald, our chief administrative officer, and Chief Financial Officer.
We hope your new year is off to a good start and I'd like to start this morning's call by thanking by 'twenty 100 colleagues at eastern for all of their good work in making 2022, such a successful year together.
Together, we posted record net income for 2022 of $199 8 million, 29% higher than our previous record in 2021.
As always this bottom line result is the product of a number of significant achievements, including the completion of the integration of century bank record commercial loan and home equity originations outstanding asset quality.
The acquisition of two insurance agencies.
<unk> upgrade of our technology platforms as well as many other notable accomplishments for example, eastern was once again recognized by the small business administration as the top small business lender in Massachusetts for the 14th consecutive year and was ranked among the top 10, most charitable companies in our region by the Boston busy.
This journal for the 10th time.
All of this along with the strength of our underlying franchise is a testament to their hard work and tremendous commitment.
In a moment I will turn it over to Jim for an in depth financial review, but I wanted to first provide some high level comments on our results for the fourth quarter and our near term outlook.
The fourth quarter of 2022 proved to be a more difficult environment than earlier in the year.
Like the industry, we experienced deposit outflows and an upward repricing of deposits that quickly increased our cost of funds due to the aggregate 425 basis points of rate hikes by the federal reserve to 2022.
It's been important for us to keep close to and respond to the needs of our customers with competitive pricing to attract and retain long term customer relationships.
We're watching our funding trends very carefully, but do not expect a reprieve from the more difficult competitive landscape over the near term.
We saw a six basis point decline in our net interest margin in the fourth quarter and we expect the margin to continue to contract.
Given the current environment as we look into 2023, we are prioritizing profitability over growth.
We expect higher market interest rates and an overall softening in the economy to reduce loan demand.
Coupled with our higher marginal cost of funds and taking into consideration our required returns we expect the commercial loan growth rate in 2023 to be in the low single digits. Following an extremely successful year in 2022.
We are proud of our diversified loan portfolio and the many commercial customer relationships, we have built at Easter and over the years, we are carefully watching for any signs of credit deterioration, but remain very pleased with all of our credit metrics in Q4.
Our reserves and capital levels are very healthy.
We are taking many steps to realign and adjust to what we expect will be a more challenging year in 2023 as Jim will cover in more detail, we have significantly reduced our expense guidance with.
With the change in the environment and our growth outlook, we have pulled back across the board and reduced our expense budgets. Accordingly, we will continue to evaluate expenses as the next few months and quarters unfold.
We have navigated our way through challenging times before and have successfully worked our way to the other side.
I am very confident we will manage our way through this environment as well as the fundamentals of our company and our strong market position in Boston keep us poised for long term success.
And now I'll turn it over to Jim.
Thank you Bob and good morning, all as Bob mentioned, our Q4 results reflect solid operating results, but also a very challenging and competitive environment.
Income was $42 3 million or <unk> 26 per diluted share and operating earnings were $49 9 million or <unk> 31 per diluted share.
As previously disclosed we were required to use settlement accounting for our pension plan in Q4 and incurred a nonrecurring pre tax expense of $12 million due to the unusually high number of lump sum payout levels. In 2022. This expense is primarily responsible for the difference between our GAAP and opt.
Operating results.
Our operating net income of $49 9 million and 31 cents per share compares with $55 7 million and 34 per share in Q3.
Net interest income was $150 million in Q4 down $2 2 million from Q3 or a decline of 1%.
The net interest margin on a fully tax equivalent basis was $2 eight 1% in Q4.
Compared with $2, 87% in Q3.
The cost of interest bearing liabilities increased from 18 basis points to 77 basis points in the quarter, which exceeded the increase in our interest earning asset yield of 29 basis points.
We experienced loan growth in all of our major portfolios in the quarter commercial loan growth was $313 million in the quarter or 13% on an annualized basis.
Mortgage loan growth was $342 million, including 289 million from our embrace relationship and annualized consumer loan growth was four 8%, which was primarily in home equities.
Asset quality continued to be very sound with net charge offs of one basis point and nonperforming loans at a very low 28 basis points of total loans.
Both of which are consistent with Q3 levels.
Our board approved a dividend of <unk> 10 per share payable on March 15th to shareholders of record of March three 2023.
We repurchased one 5 million shares under our share repurchase program in the fourth quarter.
Most of these share repurchases were early in the quarter.
I'll now make some comments on the balance sheet.
Assets were $600 million higher in Q4 than Q3, and we ended the quarter with $22 6 billion of assets.
<unk> loans ended the quarter at $13 6 billion, increasing $672 million from the $12 9 billion at the end of Q3.
Total deposits increased $241 million in the quarter, which included an increase in brokered deposits of $929 million in outflows of approximately $700 million of customer deposits.
Borrowings increased $318 million in the quarter and totaled $741 million at the end of the quarter.
The increases in broker deposits and wholesale borrowings were used to fund the deposit outflows.
And the increases in loans.
The securities portfolio was down $160 million as reductions from cash flows and sales were $210 million.
And offset by market appreciation of $50 million.
Shareholders' equity increased $56 million in the quarter due to retained earnings and improved OCI offset by the share repurchases.
Moving to the earnings review as I mentioned GAAP net income was $42 3 million or <unk> 26 per diluted share and operating earnings were $49 9 million or <unk> 31 per diluted share.
Net interest income of $150 million was $2 2 million or 1% lower than Q3.
The net interest margin was 281% down six basis points as funding costs increased more quickly than asset yields.
The cost of interest bearing liabilities increased 59 basis points to 77 basis points.
Due to deposit rate increases geared towards core customer retention.
As well as the use of FHL b borrowings during the quarter.
The overall cost of total deposits, including demand deposits was 37 basis points up 27 basis points from the prior quarter.
The graph on page 12 of the presentation shows monthly detail on the rise of total interest bearing liability costs.
And how the beta is evolving over the cycle.
We've added some new tables on net interest income and net interest margin on page seven of the presentation that.
That provide more detail on these changes as well.
The provision for loan losses was $10 9 million in the quarter compared to $6 5 million in Q3 Sim.
Similar to Q3 loan growth was the driver attributing $7 million of the $11 million provision.
The allowance as a percentage of loans increased a modest three basis points in the quarter.
Noninterest income on an operating basis was $42 million in Q4.
Insurance revenues were $22 million in the quarter of 5% from the same quarter of 2021.
And down $1 7 million from Q3.
Other operating noninterest income line items were generally in line with either the prior quarter or the prior year quarter.
As we disclose in appendix, a and b in the presentation. There was a reduction in non operating losses from the Rabbi Trust assets and security sales in Q4 compared to Q3.
Including the pension settlement costs noninterest expense was $132 8 million in.
In Q in Q4 compared to $116 8 million in Q3.
On an operating basis noninterest expense was $119 6 million compared to $117 4 million in Q3.
Salaries and benefits occupancy professional services and loan expenses were all down in the quarter from Q3.
While data processing and marketing were higher.
Other expense was higher due to the previously mentioned pension expense and.
And an increase in the provision for credit losses on off balance sheet credit exposures.
I'll include some comments on our outlook for expenses later in the presentation.
The tax rate in the quarter was 17% due primarily to some timing items and the tax rate for all of 2022 was 22, 1%.
Asset quality continues to be very sound through the end of the fourth quarter net charge offs were very close to zero.
Npls are at very low levels, and our reserve coverage to Npls is over 360%.
We continue to monitor carefully monitor all of our portfolios. We have several early warning signals as part of our credit review process and based on those early warning signals, we don't see any significant items of concern at this point is.
As Bob mentioned earlier, we expect the economy to soften and we will continue our credit and portfolio review processes diligently.
I wanted to review our outlook page and make some additional comments.
As mentioned there is greater uncertainty in the environment, specifically related to expectations for liquidity in the net interest margin.
We expect the challenging liquidity conditions to continue over the next few quarters and this uncertainty makes our outlook subject to a wider margin of error than prior quarters.
We are expecting commercial loan growth to be in the low single digits for 2020 trade due to the impact of higher rates on new originations.
We would expect mortgage and consumer loan growth in a similar range.
We experienced the net interest margin decline of six basis points in Q4, and expect further declines until the funding environment stabilizes.
We added some new tables on page 12, showing the increase in deposit costs and interest bearing deposit costs as well as the total including wholesale funding.
We expect our noninterest income for 2023 to be between 170 and $180 million, we expect reductions in deposit service charges due to changes in our overdraft practices, which you might recall is discussing in prior calls as.
As well as pressures on mortgage and interest rate swap fees due to market conditions and interest rate levels.
We're lowering our operating noninterest expense guidance for 2023 and expect it to be in a range of $465 million to $475 million.
This is a reduction of $30 million from the Q3 guidance of $495 million to $505 million.
Given the uncertain environment, we're very cautious about adding expenses at this time.
And have undertaken actions to reduce all of our budgets will continue to assess it will continue to assess expense levels as we move forward.
Most.
Comic forecast expect a softening economy that will likely turn into a modest recession.
And we will continue to monitor all of our asset quality accordingly.
The projected slowdown in loan growth is expected to have an impact on loan loss provision levels as I mentioned earlier 7 million of the $11 million provision in Q4 was due to loan growth.
Share repurchase activity will depend on market conditions capital and liquidity levels in.
In particular, we'll be looking for liquidity conditions to improve before considering share repurchases.
At the pace, we had earlier in 2022.
In closing, we continue to focus on our core deposit customers and expect to find the appropriate balance between deposit retention and our short term net interest margin.
Over a long period of time those relationships have been a great source of value for eastern and were very confident they will continue to be in the future.
Thanks, and Joanna we're ready 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 Hasa, just a moment to compile the Q&A roster.
Yes.
First question comes from Janet Lee at J P. Morgan. Please go ahead.
Hi, good morning, good morning, Janet.
I know, there's a lot of.
Uncertainty, it's hard to forecast but.
I just wanted to get more color on your deposit cost.
Thank you.
Quite a you said you were modeling 150% higher than the prior cycle level of 20%.
Interest bearing deposit betas, I think that gets around 30%.
Do you have any updated view on that through the cycle interest bearing deposit beta.
So Janet I think two things first of all it's nice to.
Talk with you welcome back and congratulations.
I think a few things to respond to that.
One thing that we've learned over the in particular, the fourth quarter, but parts of the third quarter as well as that the history. This cycle is different and the history that we all researched and tried to learn from wasn't all that applicable to this cycle. The velocity of change was faster so little harsher and so I don't.
That we're looking at prior betas and extrapolating to this environment. What we did do was provide the information through the end of the year on the couple of pages that we added to show you what we've experienced and as we've articulated here. We think it's going to continue to be a challenge.
And that's that's what.
What we would say to that at this point.
Okay.
Yes.
Totally understand totally on the phone calls that the cycle is very very strong from prior cycle, but last cycle.
Better than Europe , sorry in terms of managing deposit cost on Lora.
G box.
It sounds like you are.
So our planning wise is it your plan to pay up on euro deposits much closer to market rates on nickel deposits or stop that deposit outflows arts.
Are you for.
Try to manage our non mainland keeping deposit costs stable low.
Sometimes.
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<unk> looked at it through the next few quarters.
Sure. It's a balancing act as its first of all it's a difficult question.
<unk>.
It's difficult to answer, but it's a balancing act right. We have many many customers that we've had for a very long time, and we value those relationships those relationships are very important to our future and rates are much higher and <unk>.
We're looking we have repriced many of those and continue to reprice them.
And as I said very much appreciate the long term nature of the relationship and the value of that deposit we.
We obviously are watching our margin as well.
And it's a balancing act between those two things as to how we price deposits there.
It is.
It's just a balancing act that we're going through very similar to the way we've gone through it before.
So.
In terms of where everyone basically everyone is in full.
Non interest bearing deposit outflows.
Like queso by if we back out the political deposits I think that deposit upsides, but more pronounced.
Is it just a function of your car.
La is like Louisville, all sorts of like higher yes.
What part of.
Customer deposits.
Deposit outflows that are you are you planning to use the Blackberry Cds going forward to plug. The hole is that is that the plan that you can add.
Considering in the next few quarters.
So I think.
Let me answer a couple of.
There are a couple of questions in there let me unpack it a little bit. So we have seen outflows from most of our customer segments.
Municipal and commercial in particular on the consumer side deposits are a little bit steadier, there, but we've seen a shift from lower cost deposits to higher cost deposits.
Again to retain customers, we've got higher promotional rates than we've had in the past and that's.
That's helped keep deposits a little more stable than they would otherwise be but obviously has a cost impact.
I think going forward, we're just monitoring we're carefully.
Watching it.
I'm, making pricing decisions as we go as I said, it's a balancing act between the short term net interest margin considerations, which are very important but also the long term customer relationships.
Okay.
Sure.
Local shops.
'twenty 'twenty.
Is there any range guide.
Our guidance you can provide on the NII growth I know you guys hold off on this on the side is there any range that you can give us.
As well as.
Sort of the goal in times.
It's a positive.
Our deposits decline by client funny story.
I think what we what we put in the materials that you have is our outlook Janet which is that we do expect further contraction in the margin.
As we said a number of times it was six basis points in the third quarter.
And we've given you I think pretty good information on the deposit costs in the in Q4 and throughout the year as well so.
That's a that's all part of our outlook and that's what we've provided.
Okay, alright, thanks for taking my questions.
Thank you Jeff.
Thank you. Your next question comes from Mark Fitzgibbon Piper Sandler. Please go ahead.
Good morning.
Mark how are you.
Good Jim just a follow up to try to get at that margin question, a little bit differently, where does your modeling show the margin bottoming out assuming the fed kind of falls the forward curve.
Yep, So markets as we've tried to say a couple of times we're in.
It's a very competitive market it's challenging.
We think things get a little bit more we think things continue to be difficult.
And that is very hard to give you any any more information. We've provided you the information through the end of the year, that's what we see and as I said, we're not expecting any.
We're not expecting that to get any easier over the next couple of quarters. Okay.
And then secondly.
When we see rallies in the bond market are you guys selling or trying to reduce the size of the RFS book and is there any plans contemplated too.
To take losses, and shrink that book down.
Mark Thanks, that's a good question.
I think it's a very fluid environment, we're assessing things all the time and reacting as we see changes.
Sure.
The only way I could answer is that it always when we have decisions. We'll talk we'll we'll communicate but at this point, we're just watching very carefully assessing things and.
And you know in this environment.
It's difficult. So many things are certain we're certainly open to it.
Things all things being on considerably under consideration, but.
But no plans at this time.
Okay, and then just a couple of questions around M&A, it's been pretty quiet on the insurance M&A front any particular reason for that and also given sort of the dearth in bank M&A targets in eastern mass.
Are you guys getting a little more open minded to extending your geographies a bit.
The deal made financial sense.
Sure Mark.
As you know we've focused within our current footprint or immediate Adjacencies for bank acquisitions and insurance acquisitions that continues certainly.
If other opportunities fall outside of that geography, and they come along we have we will continue to take a look we have in the past we tend to be less interested in those for a number of reasons, but certainly we will consider those in terms of the pace of insurance acquisitions, It's really just a matter of pricing.
We always have a very.
Extensive pipeline of potential deals oftentimes the pricing is very challenging relative to our return requirements.
But it's something we continue to take a look at.
Thank you.
Thank you next question comes from Laurie Hunsicker Compass point. Please go ahead.
Yeah, Hi, Bob and Jim Good morning.
Maybe just stick, where where do you and mark where are back on the margin certainly our core deposit franchise is very very strong and they are in the money market Cds and.
And the brokerage deposits, obviously jumped to 5% can you help us think about how high you would take those broker deposits and then maybe asking the margin question. Another way can you refresh us maybe on where your December spot margin wise.
Sure Laurie is good morning.
So I think the broker deposit question.
It's a challenging environment as we've said many times you know.
Historically, we havent used brokered deposits and we've had limited wholesale borrowings.
In this environment, we've used them so.
We continue to make decisions based on cost and balance sheet structure et cetera.
Our margin at December .
Was in the low $2 70 on a FTE basis.
Okay.
That's helpful.
And so nothing that you want to quantify in terms of how how much helpful Diamond broker deposits.
I'm sorry, what was the question Laurie.
And just in terms of thinking about how big broker deposits could be calm right broker deposits are now 5% of your.
The base.
Is there is there any thinking you know you would cap it at 10% or how should we think about that.
Yes, I would.
Answer the question this way our preference is to use customer our own customer deposits much much more so than broker deposits.
It's been a challenging market, we've repriced and continue to look at pricing alternatives with all of our customers our preference would be to grow those and replace the broker deposits.
The velocity of changes in the fourth quarter was what it was and we did use the brokers as you mentioned that we've disclosed.
But our preference is to continue to look at pricing pricing strategies and structures with our existing deposits were existing customers and grow that is our primary source of growth going forward.
Got it got it Okay and then on expenses your expense outlook as a dramatic change from where you are.
Last quarter, so that the 30 million dollar reduction is substantial can you take us through a very high level, where that might come from is that branch closers or how are you thinking about that.
Sure.
And you're right Lori, there's a pretty sharp reduction.
<unk>.
2022 was a very strong year for the company we were on a very good growth path the environment changed.
So.
The reductions coming from basically everywhere some of it's in pulling back on growth plans that we had some of it some.
Looking at things that we're doing in deciding we didn't they weren't as important to us at this time general belt tightening we are looking at all the things you would expect branch branches to some extent other real estate in many cases and other opportunities, but the initial reduction was really.
Pulling back and as I said, we saw a big change in the environment in the fourth quarter and we knew that we needed to reassess our expense go forward in the light of that new environment.
Okay. Okay. That's helpful tax rate, how should we be thinking about that for 'twenty three.
Right I think.
Good question and I would say what we've got at the end of the third quarter, we've got 22% to 23% and I think that would be Mike updated guidance for you.
Okay and then.
The question here and <unk> com.
You had a drop.
In insurance revenue linked quarter.
Maybe any any thoughts around that and then I know March is typically your strongest month, our strongest quarter rather for insurance.
Are we still thinking that we would see maybe a $4 million to $5 million.
To increase or can you help us think a little bit about that.
Sure what I would.
Suggesting what we do internally Laurie is I wouldn't look at a linked quarter I Wouldnt look at the insurance revenues linked quarter because of the seasonal seasonality changes I would look at the prior year and Youre absolutely right. There is a big increase in the first two quarters, but in particular, the first quarter. That's when many of used to be called profit sharing it's that's not quite the technical term.
But a lot of that is realized and there is a very.
There is a noticeable increase so I would look at the prior year and look at the growth rates that you've seen this year and use that rather than linked quarter because of that seasonality.
Gotcha, Okay, and and I guess any any thoughts about the drop in the December quarter.
Looking again at a linked quarter, but any any thoughts on that.
No.
I think it was very much in line with our expectations and it was 5% ahead of the prior year, which again I think is the.
Appropriate benchmark.
Got it got it Okay and then just last question on loan loss provisioning was there was there anything that was a specific reserve set aside in that $11 million I realize 7 million with growth you had no charge offs.
Anything specific.
No.
No I would consider I would describe it as sort of modest modest changes in our eight els ACL factors that the provision itself as a percentage of loans were up three basis points, so very modest.
But I know there were no.
Specific items or.
No specific problems in the quarter.
Okay, great. Thanks for taking my question.
Great. Thank you.
Thank you next question comes from Damon Delmonte at <unk>. Please go ahead.
Hey, good morning, guys hope everybody's doing well today.
So great.
Great.
Kind of sticking on the demand.
The margin topics that thats been pretty popular this morning.
Wanted to come out a little bit differently could you provide a little color on the asset yield side of things.
Ernie assets had only gone up 33 basis points with loans going up about 32 basis points why wasn't there more lift in the loan yield this quarter.
So I think.
Damon that's interesting because we looked at you know our view is the loan yields were up 32 basis points. When we think about the rate moves in the quarter itself. We thought that was in line.
With our expectations.
Obviously, the securities portfolio is fixed rate and that didn't move that's why the interest earning assets are below the loan yields.
But when we look at the and we provide information on the fixed variable and the amount of the variable that has been hedged we thought that 29 basis points was sort of in line with our expectations.
Okay.
And then could you just give us an update on the embrace home loan relationship.
Sure I'm still and still active with that or is that was this quarter just like a onetime.
So just.
Just as a quick history right at the end of the second quarter. We described what we were trying to do the goal at that time was.
<unk> $400 million of residential mortgages at the end of the third quarter really for a few reasons, but in particular because of the changing liquidity landscape.
Didn't separate but we stopped discontinued it.
The pipeline had built up and that's what we closed primarily in the fourth quarter.
There was a little bit of a straggler into early Q1 here, but the relation theres no new no originations and the growth will be very very modest in Q1.
Got it Okay, and then just lastly.
Can you just provide an update as to what your exposure is with regard to.
Office space and commercial real estate in the greater Boston area.
Sure. So in total and this is consistent with prior calls.
On this question if you look at our total office portfolio and strip out either things that have either owner occupied for <unk>.
Commercial customers and or have a retail component to it which I think the risks are different portfolios, a little bit less than $700 million.
There is a little bit of exposure, but not much and in Boston itself. Most of it is outside of the city.
We're obviously watching the portfolio very carefully but as I said in some of my remarks, all of our early warning signals don't cause us to see any any significant issues at this point.
Got it okay well. Thanks, that's all that I had everything else has been asked and answered. Thank you.
Great. Thank you. Thank you.
Thank you there are no further questions at this time I will now turn the call back over to Bob <unk> for closing remarks.
Great well. Thank you for your interest and your questions. This morning, we look forward to talking with you again at the end of April when we will report our first quarter results.
Thank you. This concludes today's conference call you may now disconnect.