Q1 2024 Eastern Bankshares Inc Earnings Call
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Speaker Change: Hello, and welcome to the Eastern Bancshares, Inc. First quarter 2024 earnings Conference call. Today's call will include forward looking statements, including statements about eastern future financial and operating results.
The business strategies and plans as well as other opportunities and potential risks that management foresees such forward looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that can cause actual results or the timing of events to differ materially from.
The views expressed today.
Speaker Change: For information.
More information about such risks and uncertainties as 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 company's periodic filings with the Securities and Exchange Commission.
Forward looking statements made during this call represent managements views and estimates I love to date and the company 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 non-GAAP financial measures.
A reconciliation of GAAP to the non-GAAP financial measures. Please refer to the company's earnings press release, which can be found at investor <unk> Eastern Bank Dotcom.
Speaker Change: Note. This event is being recorded.
Speaker Change: 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 and if you would like to withdraw from the question queue simply press Star followed by the number two thank you and I would like to turn the call.
Over to Bob drivers Chair and CEO. Please go ahead Sir.
Thank you Sylvia and good morning, everyone and thank you for joining our first quarter earnings call with.
With me today is Jim Fitzgerald, our Chief financial and Chief administrative Officer will go through our financial highlights in a few minutes.
Speaker Change: We expected a continued challenging environment as we enter 2024 and we've not been disappointed.
Higher for longer interest rates, the inverted yield curve and normalizing credit costs were all present in the first quarter and we expect them to continue through the rest of the year.
Our plan to meet these challenges has been twofold.
The first is to maintain a fortress balance sheet, which we believe will continue to be a competitive advantage over time.
And allow us to capitalize on opportunities as they become available.
Our Q1 balance sheet demonstrates this.
Typically our capital ratios are robust with a CET one ratio of 18, 5% and a TCE ratio of 11, 6%.
Our liquidity position is very strong with balance sheet cash of 700 million and essentially no wholesale funding.
Our credit profile is a real strength with low levels of nonperforming loans very manageable charge off levels and a healthy reserve that covers our nonperforming loans by more than two and a half times.
The second is our anticipated merger with Cambridge Trust, which demonstrates how we are capitalizing on opportunities.
During the course of our integration planning, we have become even more confident that the Cambridge Trust franchise is among the most valuable in our market.
Their wealth deposit and lending businesses are all very additive to our own and will help us solidify our position as a leading independent bank in the greater Boston area.
In addition, we will create efficiencies and synergies that will benefit shareholders as we consolidate the two companies.
Our capital strength allows us to absorb and Mark the Cambridge Trust balance sheet to market to reprice asset yields to market and create a higher net interest margin the combination of expense savings and a better margin accelerates our financial performance metrics and will allow us to significantly grow earnings and EPS.
In an otherwise very very challenging period.
The company's capital position post merger will be very strong and we look forward to revisiting our capital management strategies, including share repurchases following approval of the merger.
We also continue to work with our regulators and expect to receive approvals later this quarter and closed early in the third quarter.
In the interim we are very busy planning for the integration and working closely with Cambridge, Cambridge as CEO, Denis Sheahan and his entire management team.
Speaker Change: I am pleased to say that those efforts are going very well with an increasing camaraderie builds upon a shared set of values and very similar cultures, which gives us confidence that the merger will provide the scale, we need to better serve our customers and the communities upon whose vibrancy, we depend while delivering strong financial returns.
Our shareholders.
Our partnership with Cambridge Trust also advances our goal to be greater Boston Premier local community banks.
Speaker Change: One characterized not only by expanded and enhanced capabilities in delivering solutions to the financial needs of our customers, but with a deep understanding of and commitment to the region.
Recently I was honored to be named among the most influential Boston donations in Massachusetts in Massachusetts by Boston magazine for the fifth consecutive year.
Speaker Change: Listen includes our President Quincy Miller and several members of our board of directors and advisory boards, such recognition and many others. We receive every year a reflection.
Of our extensive community engagement and rising reputation in the market those that truly no us recognize that this is eastern special sauce, and a key differentiator and driver of our business.
Speaker Change: While some of these awards are presented to us as individuals they're always a reflection of the extremely talented and hard working team. We are privileged to work with at eastern It for all of this and more I am extremely grateful to all of our colleagues at eastern and those soon joining us from Cambridge Trust as well as our customers and community partners for their tremendous.
Support.
Before I turn it over to Jim for a detailed discussion of our financial results I'd like to thank him personally for his over 12 years of significant contributions to our company.
Speaker Change: In Yesterdays earnings release, we announced Jim's upcoming retirement, I truly bittersweet and momentous change for our company.
When Jim joined US as our Chief Financial Officer in 2000 2012.
After serving much at much larger banks as their CFO Eastern was a mutual bank with 8 billion in assets.
Cause of that prior experience he brought his vision and understanding of how eastern could best evolve into a major player in the greater Boston market.
Due to his leadership in executing our initial public offering three and a half years ago, three and soon for bank mergers along with a Numerable insurance agency acquisitions and ultimately the divestiture of that business last year Eastern will have grown by almost three times during his tenure.
Serving in the dual role as are both both our CFO and our Chief administrative officer. Jim has also had a significant positive impact in guiding the increasing sophistication and efficiency of our technology and operating platforms. As importantly, he has served as a key mentor coach and friend to our management team.
Starting with myself for whom he has been a strategic partner and confidant.
Thankfully Jim will continue to serve in his current role until a worthy successor has been identified and beyond as a special advisor to Dennis Quincy I as well as our board as we complete our integration of Cambridge trusts and prepare for the next steps in our journey.
Speaker Change: With all of that said and so much more that could be I turn it over to Jim.
Thank you Bob Thank you for that and good morning, everyone as Bob said and you all know it's been a very challenging environment in the first quarter and we expect that to continue for the next few quarters as well.
Given that backdrop, we're very pleased with our first quarter results as our expense levels provided a foundation for solid earnings.
GAAP net income was $38 6 million or 24 cents per share.
Operating net income was $38 1 million or 23 per share.
Speaker Change: Go through the details shortly.
As Bob said, we continue to be and have high expectations for the Cambridge merger.
It seems to be a little confusion. So we wanted to be very clear on the timing of regulatory approval.
System with what we communicated at our 8-K in February we're working with our regulators to receive their approvals.
Expect those approvals later this quarter and we expect to close the merger in early July.
This timeline would be a delay of one quarter from our original expectations.
I'll provide more I'll provide some specific updates to Cambridge at the second half of the year later in my remarks.
I'll start with some highlights for the first quarter as I. Just mentioned net income was $38 6 million or 24 cents per diluted share and operating net income was $38 1 million or <unk> 23 cents per diluted share.
Speaker Change: Overall, we saw modest growth in the balance sheet with core deposits up $121 million or two 8% annualized and loans up by 115 million or three 3% annualized driven by commercial lending.
The net interest margin was stable in the quarter at 268% and very similar to the prior quarter margin of $2 six 9%.
Expenses were $101 2 million and $97 6 million on an operating basis.
Speaker Change: I'll go through expenses later in my remarks in more detail and we'll discuss again during my comments on the outlook.
Asset quality was stable in the quarter and similar to the prior two quarters Npls were up slightly from 53 million to $57 million.
From 38 basis points of loans to 41 basis points of loans during the quarter.
Net charge offs were $7 3 million or 21 basis points of loans on an annualized basis down from $11 million and 32 basis points in the prior quarter.
Speaker Change: Also go through more credit details later in my comments.
Our board approved a dividend of <unk> 11 per share payable on June 14th.
I'll move to some comments on the balance sheet.
We continue to maintain a very high quality high quality balance sheet and we're very pleased with the overall position at the end of Q1.
Cash was approximately $700 million at the end of Q1 consistent with levels at year end.
The securities portfolio was $4 7 billion.
Slightly from the prior quarter due to pay downs in the portfolio and a modestly lower market value.
Loans were $14 1 billion and commercial loans ended the quarter at $10 1 billion.
Commercial loan growth was $129 million or five 2% annualized.
<unk> loans had growth of $8 million or two 2% annualized and residential loans decreased by $21 million.
Core deposit growth was $121 million or two 8% annualized in the quarter.
We continued to experience some migration from lower cost accounts to higher cost accounts.
However, our total deposit cost remains very favorable at 1.66% in the quarter a demonstration of the strength of our consumer arc of our customer base.
As I mentioned earlier, we essentially we are essentially core deposit funded.
Speaker Change: Had no broker deposits at the end of the quarter and that's H LP borrowings for less than $20 million.
Shareholders' equity was down $22 million in the quarter as net income of $38 million was.
It was offset by a decline in other comprehensive income and the dividend paid in Q1.
To follow up on Bob's comments, the overall capital and liquidity of our balance sheet is a competitive advantage that we think will create opportunities overtime.
Moving to earnings net interest income was $129 9 million compared to $133 3 million in Q4.
As I mentioned the margin of 2.68% was down just one basis point from the prior quarter.
Interest, earning assets were approximately $200 million lower in the quarter and there was one less calendar day in the quarter as well.
Speaker Change: Provision for loan loss was $7 5 million in line with the last two to three quarters.
Speaker Change: Noninterest income was $27 7 million and $23 4 million on an operating basis.
As we provide on page eight of the presentation. The only significant change quarter to quarter was in interest rate swaps, which was due to a difference in the market valuation component.
Other than swaps all line items were pretty consistent with the prior quarter.
As we outlined on page nine of the presentation. There were a number of moving pieces in noninterest expenses relative to the prior quarter.
As we mentioned at the time Q4 expenses were burned noisy and high with the largest contributor being the FDIC special assessment of $10 8 million.
Q1 expenses were $101 2 million.
Speaker Change: And were $97 6 million on an operating basis.
These were lower than expected for a few reasons.
There were two favorable items that we don't expect to be recurring.
Speaker Change: We paid out lower incentive compensation for 2023, then we had accrued and.
We experienced a reduction in our provision for off balance sheet commitments.
Combined these two items were $3 $2 million favorable.
Last quarter, we guided to include some expenses relative to our corporate headquarters move as.
As well as a technology upgrade for our online mobile product.
Speaker Change: Most of these expenses will hit in Q2.
I'll provide a roadmap for expense expectations as I go through our outlook.
The overall effective tax rate for the quarter was 21%.
Asset quality was generally stable throughout the quarter, but I'll walk through the various components.
As I mentioned nonperforming loans were $57 2 million or 41 basis points of loans up slightly from $52 6 million and 38 basis points the prior quarter.
Of note in the quarter, we resolved one of the Npls, we discussed in Q3 of last year through a collateral sale.
Speaker Change: Sales price was slightly better than we expected.
So have to npls under contract for sale.
Of which we expect to be resolved this quarter and both have sales prices that are in line with our expectations.
We did move a suburban office property into nonperforming loan status and have started the workout process with the borrower.
We expect the sale of that collateral over the next few quarters have provisioned for that outcome and our Q1 results.
Speaker Change: Charge offs in the quarter were $7 3 million or 21 basis points of loans annualized.
As I just mentioned that included the suburban office loan that was moved to NPL status in the first quarter.
We continue to add new pages of additional credit information.
After the asset quality slide on page 13, we provided some information on our overall commercial real estate portfolio on page 14.
Speaker Change: Portfolio is generally diverse with the high performing multifamily segment being the largest concentration at 31%.
As a percentage of risk based capital or non owner occupied commercial real estate is 154%.
Speaker Change: Which is well below the regulatory guidelines a 300%.
As is outlined 90% of the portfolio is located in our home markets of Massachusetts, and New Hampshire markets, we know very very well.
We continue to add to our office disclosures on page 15 the.
The Investor office portfolio declined by $21 million in the quarter from 689 million to $668 million.
Or 5% of the total loan portfolio.
Of this total criticized and classified loans totaled $103 million.
Up slightly from where it had been the prior two quarters.
We added some specific information about maturities as well.
Speaker Change: As you can see on the upper rent right hand corner of that page office maturities are light for the next two quarters and average approximately $20 million over the next four quarters.
A very manageable level.
We're working very closely with the borrowers on all of these maturities and we will provide updates as we move through the rest of the year.
As a reminder, the Cambridge trust portfolio will.
It will be mark to market for both interest rates and credit as part of the closing process.
One additional comment I'd make here is that we are.
Watching all of the loans in this portfolio very carefully the two categories that get the most scrutiny or the criticized and classified loans and also those with upcoming maturities. We hope that this additional information helps investors track this portfolio over time.
We updated our look at the multifamily portfolio on page 16 that we provided last quarter.
The shortage of housing continues to persist in our markets and multifamily is a very desirable asset class.
We have no nonperforming loans in the portfolio and vacancy rates are extremely low.
Turning to the outlook, we expect the second quarter to be similar to the first quarter in many ways.
Speaker Change: We expect the margin and net interest income to be similar to Q1 and expect overall loan and deposit growth to also be similar to the overall growth rates of the first quarter.
We expect Npls and net charge offs to be similar to the last few quarters as well.
We expect higher operating expenses in Q2 from a few sources.
Speaker Change: We do not expect a recurrence of the two favorable expense items totaling $3 2 million that occurred in Q1 and that I described earlier.
We expect some normal increases in salaries based on the timing of our annual Merit program.
As well as an increase in marketing expenses.
The combination of these items have all of these items is expected to bring our run rate of expenses to between 104 and $106 million.
We expect some higher than run rate expenses for the costs associated with our headquarters move earlier this month.
And an increase in the technology costs for the transition to our new online mobile product rollout.
These are expected to be out of the run rate by the end of Q2.
And are approximately $3 million.
Speaker Change: We are waiting for the FDIC special assessment amount and we expect to record that in Q2.
We expect the tax rate to be 22% on an operating basis.
Turning to the second half of the year and after the Cambridge closing, we expect to see the benefits of the Cambridge transaction start in Q3.
And be very evidenced by Q4 of this year.
We've updated the loan valuation for the Cambridge portfolio at the end of Q1.
Although rates have increased in April we're still comfortable that the fair value discount on loans will be less than what we presented in the original projections at the time of the acquisition announcement.
We expect the post merger.
Net interest margin in Q4 to be 3% up from the current up from our current levels of $2 six 8%.
As we mentioned last quarter, we expect to liquidate the Cambridge investment portfolio and pay off their wholesale funding at closing.
We expect the EPS accretion to exceed the original projections of plus 20%.
We expect the cash efficiency ratio to be in the mid 50% by Q4 and as we move into 2025.
This excludes the amortization of intangibles created in the transaction that we estimate to be $4 million to $5 million per quarter.
On a run rate basis, we expect the combined wealth business have over $60 million of revenues and operated at efficiency ratio in the low 50% range.
We expect the post merger capital ratios to be strong and support our capital management strategies.
Hopefully you can see from these comments, we continue to be very excited about the opportunity with Cambridge and look forward to providing updates as we move forward.
That concludes my remarks, thank you Sylvia we can open up for questions.
Thank you at this time I would like to remind everyone that in order to ask a question. Please press Star then the number one on your telephone keypad, we will pause for just a brief moment to compile the Q&A roster.
And your first question will be from Mark Fitzgibbon of Piper Sandler. Please go ahead.
Hey, guys Happy Friday.
Alright, Martin good morning, Mark.
Jim Let me start off by echoing Bob's congratulations on your well deserved retirement.
Thank you. Thank you.
Before I, let you off the hook.
Can I ask a question Ive asked before and that is what gives you such confidence that you'll get approval to close the transaction in the third quarter, given how long it's taken some other banks to get approval to close transactions.
Yeah, No sure Mark I jokingly, we'd say I anticipated that to be your first question and appreciate it because we understand the environment as you do I think just by <unk>.
Things we've communicated in the past we have a very good communication channel with our regulators very good relations.
We wish the process was faster, but we certainly respect that they are doing what they have to do.
And much of our communication and Theres a lot of back and forth of the regulatory applications are voluminous as you know and then there are incremental requests along the way. So we have supplied an incredible amount of detail that.
They are going through.
Speaker Change: <unk> been very clear that they want to support us I think and they know our timelines for those that have communicated that they believe they will put us in a position to meet them.
As I said, we respect their process and understand that it is their process, but appreciate the communication, we have with them and that's what gives us the capitals.
Okay, and then somewhat related.
Where does the higher cost saves come from and the EPS accretion versus your original estimates post deal what what's kind of driving that.
Speaker Change: Yeah. So I think you know.
Things are generally as we expected I think.
On the cost savings side were expected to be slightly higher than what we articulated last September.
And I think you know the so that's one component of it and I think in this environment gaining efficiencies. It's obviously critically critically important to us and to all banks. So we're very much excited about that and as I said, we spent a lot of time in due diligence analyzing those costs and we're comfortable then and continue to be I think the mark to market up there.
Balance sheet at closing which is something.
We believe we're capable of doing it is that balance sheet strength, the capital strength, and particularly that we alluded to that allows us to afford that if you will and it's really just repricing those loans to market that enhances the Cambridge market March margin in such a way that when you combine it with eastern.
32 basis point uplift that I articulated.
That's really those are the two drivers, Cambridge, So wonderful franchise right they've got a very strong wealth deposit and lending platform as Bob said in his remarks, and we've experienced at our last six months, it's very additive to ours.
Speaker Change: We think the market opportunity, especially when the environment gets a little bit easier or better is going to be very significant.
Okay, and then lastly, I think you mentioned you had two npls that you were selling I guess I'm curious, where you are selling those where the sales prices are relative to par.
Yeah, No I think.
I'd say this mark we've had.
Count them up right. We've had a total of five properties that were in the process of either taking.
Going through our.
Speaker Change: Charge off process slash provision process <unk>, we've sold and it's a small sample size.
Some of those are at discounts of 30% to 40% of the original values. One is a little bit worse than that and some are slightly better.
But I think the discounts that we expect that each assets a little bit different.
So it's hard to give you one number there, but the discounts were significant as you know and as I said very by accident circumstances.
Okay.
Thank you.
Thank you.
Next question will be coming from the line of Damon Delmonte of <unk>. Please go ahead. Your line is open.
Hey, good morning, guys. Thanks for taking my questions and Jim Congrats on the retirement, it's been enjoyable working with you.
Thank you. So just first question first.
First question on the expenses just trying to clarify that so the the headquarter move impact and the mobile banking impact the combined thats $3 million 3 million for each that will be hitting in the second quarter.
And bind.
Speaker Change: And just last question.
And we have moved into our new headquarters just to make it real and everybody is welcome anytime they were Boston to come over and see we're quite proud of the new space.
Excellent.
So I think so then it's going to come off the expense base in the third quarter is that correct.
Correct.
Okay, Alright, great. Thanks for clarifying that and then on with the cash position that you had at the end of the quarter around $700 million or so is the answer.
Just to kind of.
Leave that very liquid and not.
Look to redeploy that into securities in the near term.
Correct Yeah.
Our goal over time, David as we've probably articulated is to bring the size of the securities portfolio down relative to total assets. So.
And if you look at where the.
Yield curve is and the inversion there.
Speaker Change: Our expectation certainly over the next couple of quarters. If we have that amount of cash would be to keep it in cash and earn overnight rates on it.
Speaker Change: Got it Okay, and then just lastly.
I appreciate the commentary around credit and kind of the outlook there.
So is it fair to assume that you're still kind of targeting.
Maybe mid 'twenty net charge off level in kind of a provision that.
Supports the reserve at around this current level.
Speaker Change: Yes, obviously, a volatile line item.
David it quarter to quarter I would expect some.
It's hard to be that precise on a quarter to quarter basis, but.
Over the next couple of quarters, yes on both the charge off level.
The provision.
Okay great.
That's all that I had for now thanks.
Thanks, Sam Thanks.
Thank you next question will be coming from the line of Laurie Hunsicker at Seaport Research. Please go ahead. Your line is open.
Yeah, Hi, Thanks, Good morning, and Jim I wanted to say congrats it's been really great working with you.
Thank you.
If we could just start with margins so you're you're 3% margin guide how much accretion income is in that number and do you have.
And accretion income figure that you can give us for the back half of <unk>.
24, and ended 25, especially as accretion income winds down how how should we be thinking about that.
Sure.
<unk>.
Speaker Change: Laurie.
I'm laughing because I anticipated that question you sort of like Mark asked the timing question and you ask the accretion question.
Say that very fondly by the way that's please take it the way it's intended.
So I think sir.
Yes accretion as is clearly part of that we are working through sort of how we would.
Speaker Change: One of the problems, we've got right now as rates are moving around its a little bit volatile, we're still a quarter away from closing so.
Speaker Change: It feels a little premature to put too much information about what the exact state of play is now because it's going to be different.
Speaker Change: But we are sort of studying how we present that to you.
And we'll follow up.
I don't want to give you an answer you know off the top of my head because I think that that's an appropriate but.
We understand the question we understand the importance of the question and it's something we spend a lot of time internally. So if you give us a little bit of time, we'll try to figure out how to give yourself and everybody.
Sort of a better roadmap there.
Okay, Okay, and then sort of in line with that pro forma intangibles.
Do you have a do you have a number for us.
On that.
We will do that in the same way I think our expectation and.
Timing again is it makes us a little bit of hard right. If you go back to the original merger presentation, which was September 19th.
The pro forma tangible book value that we presented at that presentation pretty confident was $10 at 16th sense, that's sort of at the end of the day the tangible book value per share that was in the presentation.
We're very comfortable it's going to be higher than that.
Rates are moving around both on the eastern portfolio, and obviously, the Cambridge portfolio as well.
So we're trying to figure out ways that how best to present that so at this point I can say that will be higher than that.
And let us come back to you with some more.
Thoughtful answers.
Okay, Okay, and then and then on the office.
Really appreciate all the details you guys have added what of.
Of your 668 million office back how much.
Speaker Change: Is the non performers there.
And any refreshes on those loans that you can provide.
Yeah. So I think we can go through the history, because it's a small size there has just been.
Yeah.
I may Miss like a small business loan somewhere but I don't believe I am we've had four nonperforming office loans three reported first in the third quarter of 2023.
Two of those were sold one in the fourth quarter one in this quarter and the third one is this.
This quarter, meaning the first quarter of 'twenty four right. So let me again.
Three npls from the third quarter of 23, one was sold in the fourth quarter of 23, one was sold in the first quarter of 2004 and the third one will be sold in the second quarter of 'twenty four.
Speaker Change: <unk>.
And in addition to that we had.
Retail commercial real estate loan.
Went nonperforming.
In the fourth quarter of 24, and that's slated to be sold in the second quarter I'm, sorry, the fourth quarter of 'twenty, three and we sold in the second quarter of 24 and this new Nonperformer. We're just getting started its one nonperforming just recently.
Speaker Change: Gotcha, and it's wrong okay.
So for NPL.
Yeah, the suburban office that went into nonperforming.
That didn't work out that you're hopefully getting rid of it.
How much was that and then how much did you actually provision for it in this first quarter.
So we don't like to give out specifics.
Speaker Change: Customer information, but I would say this it's a suburban office it was though.
Heavy is discounts to both our loan value and also the original purchase price of the building of all four.
And it was in the provision and net charge offs for this quarter of $7 million most of that was concentrated in that in that asset.
Okay.
Okay got you Okay, and then just last last here E. T Z. Their office exposure do you have anything refresh that you could share with us on that you know what their balances currently.
Speaker Change: How their brokers looking anything that you can share there.
Sure a little bit right.
Again, it's their information, but I think you can see from their public information.
Approximately $250 million.
Any ways, Cambridge Trust, and eastern where competitors in the commercial real estate.
Speaker Change: Arena. So we know many of those properties well and I think our key.
Our view is it's very similar to eastern's most of the loans that they originated had good underwriting characteristics and very similar to ours. The location is theres some in Boston itself and some of the suburban areas.
$250 million generally looks very similar to the things that we would've expected and quite frankly look similar to our portfolio in many ways.
And as I said, I've said a couple of times.
Speaker Change: I'll go through the.
Speaker Change: As part of the Mark to market process, it will be for both interest rates and credit.
And we feel like we're developing a very good understanding of those assets.
Alright, perfect. Thanks for taking my question.
Excellent.
Thank you.
Speaker Change: There are no further questions at this time I will now turn the call over to Bob Burrows for closing remarks.
Well. Thank you for your interest in quick interest and your questions. This morning, and we look forward to sharing more with you during our next earnings call at the end of July.
Okay.
Thank you, Sir ladies and gentlemen. This concludes today's conference call you may now disconnect your lines.
Yeah.
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Okay.
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Yeah.
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