Q2 2023 Eastern Bankshares Inc Earnings Call
Hello, and welcome to the Eastman Bancshares, Inc. Second quarter 2020 earnings Conference call.
This call will include forward looking statements, including statements about <unk> future financial and operating results outlook business strategies and plans as well.
Other opportunities and potential risks that management practice.
Such forward looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results or the timing of events could differ materially from the views expressed today.
More information about such risks and uncertainties are set forth under the caption forward looking statements in the earnings press release as well as in the risk factors section and other disclosures in the Companys periodic filings with the Securities and Exchange Commission.
Any forward looking statements made during this call represent managements views and estimates and estimates as of today and the company's undertakes no obligation to update these statements as a result of new information or future events.
During the call. The company will also discuss both GAAP and certain non-GAAP financial measures.
A reconciliation of GAAP to the non-GAAP financial measures. Please refer to the Companys earnings press release, which can be found at investor that Eastern Bank Dot com.
Please note this event is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If.
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 conference over to Bob Rubin Chair and CEO . Please go ahead.
Thank you Joanna and good morning, everyone and thank you for joining our second quarter earnings call as always I'm joined today by Jim Fitzgerald, Our Chief administrative officer, and Chief Financial Officer.
Although the operating environment for banks remains challenging in some respects, we feel very good about our results this quarter and.
In particular, we demonstrated that our journey.
<unk> repositioning in the first quarter strengthened our balance sheet and improved our earnings outlook for <unk>.
<unk> said it well.
Mediately impactful and can be seen in our second quarter results.
Our net interest margin improved 14 basis points during the quarter and is in line with our guidance from last quarter in total our operating revenues were higher than the first quarter as well. In addition, we were able to reduce our wholesale funding by $1 billion.
During the quarter, which allowed us to shrink our asset base and create a stronger balance sheet and earnings profile.
While we expect the challenging environment to continue and potentially become more so over the next few quarters. We have taken steps to ensure that we are well prepared for example, although both are leading credit indicators and traditional asset quality metrics improved in the quarter, we increased our allowance for loan losses and moves are proved.
<unk> higher in the quarter to be consistent with that outlook.
We also believe the fed will keep rates higher for longer and that the heightened competition for deposits will continue for some time.
Although we were able to contain our overall cost of funds in the quarter that was primarily due to the reduction of wholesale funds through the securities sale last quarter.
We continue to see a migration from lower cost deposits to higher cost deposits and expect that trend to continue.
We will look for opportunities to further improve our overall funding position as we move forward.
Our primary focus and strategy for the next few quarters is to position ourselves. So we can gain market share and improve our competitive position in this environment.
The failure of both Silicon Valley and first Republic has created significant turmoil in our market.
Although we operate differently than they did there is market opportunity that is very clear to us our.
Our commercial loan growth was strong in the quarter and we think it demonstrates that we have been very open for business and is consistent with our long term desire to meet our customers needs throughout all phases of the business cycle.
That said, we expect lower growth slower growth for the rest of the year.
As you will hear Jim described further.
In the upcoming quarters, we will continue to focus on opportunities to improve our balance sheet and earnings outlook as.
As the environment becomes more challenging those strengths will potentially provide opportunities to further gain market share and help us strengthen our position as the leading community bank in greater Boston.
Once again, we are pleased with our results this quarter and feel very confident regarding eastern <unk> future growth and performance as always most of the credit for this goes to by 'twenty 100 colleagues, who continue to ensure that eastern remains a strong and reliable financial and community partner, we have been for the past 205 years.
As well as to our customers and community partners through their continued business and support.
And now I'll turn it over to Jim Gray.
Great. Thanks, Bob and good morning, everyone.
First provide some high level comments on the quarter and then take a closer look at the balance sheet income statement and then our outlook for the rest of the year as Bob mentioned, we're very pleased with our results for this quarter, especially given the challenges faced by our industry.
The interest rate environment continues to create headwinds for deposit levels and overall funding costs and we are carefully reviewing all of our loan portfolios as we watch for signs of a weakening economy. Despite of the environment. We produced very good core operating results, while maintaining strong asset quality. This quarter, we feel confident we are very well positioned for future growth.
In our markets.
The repositioning of the securities portfolio in the first quarter strengthened our liquidity and improved our earnings path, while maintaining very robust capital levels. All of these attribute all of these attributes position us to better withstand today's environment, and we expect will improve our prospects for growth and success over time.
We experienced a 14 basis point improvement in our net interest margin in the second quarter as our margin expanded from 266% to two 8% on a fully tax equivalent basis.
We've reduced our borrowings by 800 million to $350 million at the end of the second quarter were less than 2% of total assets. We also ended the quarter with very meaningful levels of cash at nearly 900 million demonstrating the liquidity enhancements from the first quarter repositioning.
Net income was $48 7 million in the second quarter at $45 3 million on an operating basis.
Earnings were <unk> 30 per diluted share and 28 per diluted share on an operating basis.
Asset quality remained very sound in the quarter with essentially no charge offs.
The decline in nonperforming loans to just $31 million or 22 basis points of total loans and.
And a reserve build of $7 million.
Reserve coverage of nonperforming loans to nearly 500%.
As we continue to expand our market presence loan growth was eight 4% on an annualized basis in the quarter, which was led by commercial and consumer loan growth of approximately 10%.
And mortgage loan growth of 2%.
Our board approved a dividend of <unk> 10 per share payable on September 15th to shareholders of record on September one 2023.
I'll now turn to a review of the balance sheet.
<unk> ended the quarter at $21 6 billion down $1 1 billion from the prior quarter, primarily due to a reduction in cash and borrowings as.
As we mentioned on last quarter's call. We held our cash balance is very high at $2 1 billion at March 31, two.
Due to the uncertainty created by the bank failures and we're happy to reduce those levels as the operating environment stabilized in late April and into May.
We ended the second quarter with just under $900 million in cash as we continue to prioritize maintaining strong balance sheet liquidity.
The cash level was down $1 3 billion from the end of Q1.
Securities ended the quarter at just under $5 billion down from $5 2 billion in the first quarter, primarily due to pay downs.
Loans ended the quarter at 14 billion, increasing $287 million from the prior quarter, primarily due to an increase in commercial loans of $239 million.
$35 million and consumer loans and $13 million in residential loans.
Total deposits decreased $361 million in the quarter, and we continue to see mix shifts towards higher rate interest bearing deposits.
Borrowings decreased by $787 million in the quarter and ended the quarter at $351 million.
Shareholders' equity decreased by $54 million due to a decrease in OCI, partially offset by growth and retained earnings.
Moving to the earnings review GAAP net income was $48 7 million or <unk> 30 per diluted share and operating net income was $45 3 million or <unk> 28 per diluted share.
Net interest income was $141 6 million an increase from the $138 3 million in the prior quarter.
The net interest margin was two 8% for the quarter up from 266% in the prior quarter.
Interest, earning asset yields were up 35 basis points in the quarter, while interest bearing liability costs were up 30 basis points.
As you can see on the waterfall chart on slide six the margin improvements came from loans investment and cash income as.
As well as the reduction in borrowing expense and.
And were partially offset by an increase in deposit costs.
On the funding side the cost of our interest bearing liabilities for the month of June was 177%, which was stable during the quarter as you can see on the top of slide nine.
This was due to the repositioning and the reduction in wholesale funds that took place in the quarter.
Deposit costs were $1 two 2% in Q2.
Up 30 basis points from the <unk>, 92% in the prior quarter.
The 30 basis point increase was slower than the increase of the prior quarter.
Provision for loan losses was $7 5 million in the quarter up essentially from no provision in Q1.
As mentioned, we had loan growth of $287 million in the quarter.
And we also increased our overall ACL factors in the quarter by three basis points, primarily due to higher risk in the Investor office space.
Noninterest income was $53 8 million for the quarter and.
And $58 million on an operating basis.
Eastern insurance had another strong quarter with $27 6 million of revenues.
Up 12% from the same quarter last year.
As we've mentioned in the past there is a seasonal nature to our insurance revenues with the bulk of incentive payments from insurance carriers being received in Q1.
All other noninterest income line item showed increases from the prior quarter.
Noninterest expense was $121 7 million on a GAAP basis.
And $123 million on an operating basis in the quarter.
As we outlined on slide eight the increase in salaries and benefits occupant.
Occupancy and data processing costs totaled $1 1 million in the quarter.
The larger increase in all other expenses included an increase of $1 5 million and the provision for credit losses on off balance sheet commitments the effects of higher FDIC insurance premiums as well as an increase in marketing costs.
Tax expense was based on an effective tax rate of 27% in the quarter, which was higher than our guidance last quarter.
There are some complexities from the securities repositioning last quarter that have impacted that right I'll have some comments on our expectation for the tax rate over the rest of the year showing the outlook.
Asset quality continues to be very sound Sim.
Similar to the prior several quarters, we experienced nominal net charge offs in Q2.
Nonperforming loans of $36 million or very low levels and our reserve coverage to npls is over 480%.
We continue to watch for the impact of a weaker economy on the loan portfolios.
Through the end of the second quarter, both our traditional credit metrics and our leading indicators were stronger than they were in the prior quarter.
As I mentioned, though we felt it prudent to add to our reserve levels in the second quarter as we expect credit trends to normalize over time.
We updated the snapshot of our office portfolio and included in Appendix B of the presentation.
As indicated on the slide there hasnt been much change during the quarter, although we continue to closely monitor this asset class.
As we mentioned on slide 18, we have no nonperforming loans in our Investor office portfolio.
And our overall commercial real estate portfolio is performing very very well.
I wanted to provide a few comments on our outlook, which is included on slide 13.
We expect commercial loan growth to slow in the second half of the year to the low single digits.
For mortgage and consumer loans to have little or no growth in the second half of the year.
We're increasing our outlook for operating noninterest income for the full year to a range of 175 million to 185 million up.
Up from the prior outlook due to the strong first half performance.
We expect that some of the items in our other noninterest expense line item will return closer to Q1 levels over the rest of the year.
We would expect to be at the higher range of our prior guidance that was between 465 and $475 million for our non op non operating noninterest for our operating noninterest expense for the year.
We expect the tax rate for the second half of the year to be between 22 and 23%.
Although as we note on this slide it could be volatile quarter to quarter.
We expect our net interest margin to be in the range of two 7% to two 8% and for a full year net interest income to be modestly lower than the level of 2022.
Our forecast was based on the forward curve as of early July which assume the 25 basis point rate increase from the fed that we saw this week.
In closing, we're very pleased with our results for the quarter in what remains a difficult environment. We continue to look for opportunities to improve our overall balance sheet strength and funding profile and are optimistic we will be very well positioned to take advantage of any opportunities is the challenging environment continues.
Thank you and Joanna we're ready to open the line for your questions.
Thank you.
At this time I would like to remind everyone in order to ask a question press star.
Then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
First question comes from the line of Damon Delmonte at Kw. Please go ahead.
Hey, good morning, everybody I hope everybody is doing well today.
So just wanted to start off with a question on the margin outlook Jim.
So if you kind of look at the first two quarters worth of margin that kind of puts you in.
To like 273 range or so.
You kind of expect the margin to hold.
Steady at $2 80 level or do you think it's going to kind of drift down over the next couple of quarters and what are some of the puts and takes that go into that.
Yes, no I think Damon.
As we say on the slide and in my remarks, we expect the margin to be between $2 70 to $2 80. So.
Somewhat aligned with what you said the rate outlook today is higher than it was a quarter ago.
If you go back and look at the forward curve at that time was different so rates are up a little bit. Since then which is why we're seeing a little bit of a modest reduction in our outlook there, but the margin as we said we expect to be between $2 70, and $2 80.
Okay and what are your what are your thoughts on the $900 million of cash that you have are you are you planning on holding that for a little while longer or do you expect to try to reduce borrowings <unk> brokered Cds in the coming quarters.
Yes, I would expect that to come down a little bit although.
We are prioritizing balance sheet liquidity.
Coming through the bank failures that was.
Obviously, that's important so we are expected to come down a little bit, but we would still hold higher levels of cash that we did say a year ago.
Got it okay.
And then.
I guess just.
With loan growth kind of.
Moderating in commercial in the low single digits and not much other growth in the other.
Areas of the portfolio you did a little bit of a reserve build this quarter do you feel like you.
You've adequately.
Got into a level that you want to be at or should we kind of expect a higher level.
Provision similar to this quarter.
Right. So no. It's a good question David.
To answer that.
Two parts right. So if you look at our.
Provision this quarter and prior quarters.
Considerable amount is driven by loan growth. So we had call it $300 million worth of loan growth this quarter and that attracts a higher.
Allowance and goes through the provision.
That will change is if loan growth comes down which is what we guided to and what we anticipate that component of the provision would come down accordingly.
The ACL buildup that we had this past quarter I would consider a fine tuning we had.
Overall, given the size of the portfolio as I said I would consider a fine tuning it's hard to give you any more color on what happens in the future will depend on on the environment.
Got it okay, great. Thanks for taking my questions.
Thanks Damian.
Thank you. The next question comes from the line of Mark Fitzgibbon of Piper Sandler. Please go ahead.
Hey, guys good morning.
Good morning.
Tim on your on your fee income guidance.
The high end of your guide of 185 implies sort of fees of call it $41 million a quarter for the last two quarters of the year.
I know youll have some some decline in insurance commissions, but what are what are some of the other areas, where you expect things to soften up.
It primarily is insurance Mark So if you look at the prior years and the quarterly trends over the course of the year.
Starts out very high and moves down over the course of the year. Some of that's insurance payments and there were some anomalies in the fourth quarter as well so that reduction is primarily.
Primarily it's essentially all in the insurance line.
Okay.
Secondly was curious if you are contemplating any additional balance sheet restructuring moves.
I think mark we continue to look at all sorts of balance sheet opportunities, but we don't anticipate anything.
I wouldn't say the first quarter actions were.
Pretty significant certainly nothing like that is as Bob said and I said, we continue to look for ways around the edges to improve the funding profile and the balance sheet generally, but I would expect those to be very very modest.
Okay.
Do you have a sense for the dollar amount of office loans, either mature or reprice in say 2023 or 2024.
We can come back on that.
It's steady it's not lumpy, it's steady over time.
And we can come back on that as to whether or not we would provide that.
Great and then lastly.
Given some transactions in the industry recently.
Wondered if youre thinking on M&A has changed at all do you think transactions, who can kind of get done in this environment in your market.
And Bob can comment as well I think we're always students of the acquisition game those are interesting transactions.
We'd love to understand them better and we will take the time to do that.
<unk>.
Facts and circumstances and things align as you know so it's really hard to comment other than say those were.
Certainly the Pac West transaction looked.
Like it has some very clever attributes.
I mean, we're certainly interested in opportunities and stay in active contact with.
Potential partners and.
If we can find a situation that that we can make the numbers work and works for us strategically it certainly have an interest.
Thank you.
Thank you. Your next question comes from the line of Janet Lee of Jpmorgan. Please go ahead.
Hey, good morning good.
Good morning, Jeff.
One understand what to make sure that I understand the comment further.
For the rest of FY2023 the trajectory of NIM.
Fairly steady versus the second quarter and taking your NII.
AI sensitivity into your account.
The fed start.
Cutting rates in 2024.
That means for you.
NII and NIM trajectory.
So we haven't provided any guidance for 2024, yet Janice agenda.
It's too much of a moving target at this point I think what we've put on the slide what I articulated in my comments. It was for the rest of this year and.
Obviously, the environment's moving very quickly and as I said, we haven't put anything out for 2004 yet.
Okay Sir.
I know it's very.
Difficult to get but if you have to make your best guess as to way yet.
Interest bearing deposit.
But bottom.
Total like what would be.
Yes.
Get much below 29% today.
Chad those are really hard to.
Guess is the right word it's not something.
We watch the trends like you watch the trends and we'll continue to watch them, it's really hard to make predictions in that in that space.
Okay, and I apologize if this came up already but.
Any near term plans for share repurchases given your capital levels.
High versus peers.
Sure.
Similar to what we've said over time on share repurchases really three three criteria. One is market conditions. Two is capital and three has liquidity and those are three evolving and interrelated subjects.
As we.
As we reported we didn't report any share repurchases, but it is something we continue to evaluate and if you look at our track record over a longer period of time, something we're interested in but it's really those three criteria market conditions capital and liquidity that we need to feel very confident about.
And we'll obviously communicate as we make decisions going forward.
Okay. Thanks for taking my questions.
Thank you there are no further questions at this time I will now turn the call back over to Bob Weber for closing remarks.
Great well. Thank you again for your interest and your questions and best wishes for a great rest of summer.
Thank you. This concludes today's conference call you may now disconnect.
And the questions and best wishes for a great rest of summer.