Eastern Bankshares Q2 2023 Earnings Call Transcript

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July 28, 2023

There are 6 speakers on the call.

Operator

Hello, and welcome to the Eastern Bancshares Inc. 2nd Quarter 2023 Earnings Conference Call. Today's call will include forward looking statements, including statements about Eastern's future financial and operating results, outlook, 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 may cause actual results or the timing of events to differ materially from the views expressed today. More information about such risks and uncertainties is 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.

Operator

Any forward looking statements made during this call represent management's views and estimates as of today, 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 certain non GAAP financial measures. For 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. Easternbank.com. Please note this event is being recorded.

Operator

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I would now like to turn the conference over to Bob Rivers, Chair and CEO. Please go ahead.

Speaker 1

Thank you, Joanna. Good morning, everyone, and thank you for joining our Q2 earnings call. As always, I'm joined today by Jim Fitzgerald, our Chief Administrative and Chief Financial Officer. Although the operating environment for banks remains challenging in some respects, we feel very good about our results this quarter. In particular, we demonstrated that our securities repositioning in the Q1 strengthened our balance sheet and improved our earnings outlook, improvements that were immediately impactful and can be seen in our 2nd quarter results.

Speaker 1

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 Q1 as well. In addition, we were able to reduce our wholesale funding by $1,000,000,000 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 our leading credit indicators and traditional asset Quality metrics improved in the quarter.

Speaker 1

We increased our allowance for loan losses and moved our provision 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.

Speaker 1

Our primary focus and strategy for the next few quarters is 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 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 describe further.

Speaker 1

For the upcoming quarters, we will continue to focus on opportunities to improve our balance sheet and earnings outlook. As the environment becomes more challenging, those strengths will potentially provide opportunities to further gain market share and help us and 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's future growth and performance. As always, most of the credit for this goes to my 2,100 colleagues who continue to ensure that Eastern remains the 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.

Speaker 2

Great. Thanks, Bob, and good morning, everyone. I'll 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 our loan portfolios as we watch for signs of a weakening and the economy.

Speaker 2

In spite 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 Q1 strengthened our liquidity and improve our earnings path, while maintaining very robust capital levels. 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 2nd quarter as our margin expanded from 2.66 Percent to 2.80 percent on a fully tax equivalent basis.

Speaker 2

We've reduced our borrowings by $800,000,000 to $350,000,000 at the end of the second quarter or less than 2% of total assets. We also ended the quarter with very meaningful levels of cash at nearly $900,000,000 demonstrating the liquidity enhancements from the Q1 repositioning. Net income was $48,700,000 in the 2nd quarter $45,300,000 on an operating basis. Earnings were $0.30 per diluted share and $0.28 per diluted share on an operating basis. Asset quality remained very sound in the quarter with essentially no charge offs, a decline in non performing loans to just $31,000,000 for 22 basis points of total loans and a reserve build of $7,000,000 bringing reserve coverage of non performing loans to nearly 500%.

Speaker 2

As we continue to expand our market presence, loan growth was 8.4% 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 $0.10 per share payable on September 15 to shareholders of record on September 1, 2023. I'll now turn to a review of the balance sheet. Assets ended the quarter at $21,600,000,000 down $1,100,000,000 from the prior quarter, primarily due to a reduction in cash and borrowings. As we mentioned on last quarter's call, we held our cash balances very high at $2,100,000,000 at March 31st 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.

Speaker 2

We ended the Q2 with just under $900,000,000 in cash as we continue to prioritize maintaining strong balance sheet liquidity. The cash level was down $1,300,000,000 from the end of Q1. Securities ended the quarter at just under $5,000,000,000 down from $5,200,000,000 in the 1st quarter, primarily due to pay downs. Loans ended the quarter at $14,000,000,000 increasing $287,000,000 from the prior quarter, primarily due to an increase in commercial loans of $239,000,000 $35,000,000 in consumer loans and $13,000,000 in residential loans. Total deposits decreased $361,000,000 in the quarter, and we continue to see mix shift towards higher rate interest bearing deposits.

Speaker 2

Borrowings decreased by $787,000,000 in the quarter and ended the quarter at $351,000,000 Shareholders' equity decreased by $54,000,000 due to a decrease in AOCI, partially offset by growth in retained earnings. Moving to the earnings review, GAAP net income was 48,700,000 or $0.30 per diluted share and operating net income was $45,300,000 or $0.28 per diluted share. Net interest income was $141,600,000 an increase from the $138,300,000 in the prior quarter. The net interest margin was 2.80 percent for the quarter, up from 2.66% 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.

Speaker 2

As you can see on the waterfall chart on Slide 6, the margin improvements came from loans, investment and cash income, as well as a reduction in borrowing expense 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 1.77%, which was stable during the quarter as you can see on the top of Slide 9. This was due to the repositioning and the reduction in wholesale funds that took placed in the quarter. Deposit costs were 1.22 percent in Q2, up 30 basis points from the 0.92% in the prior quarter. The 30 basis point increase was slower than the increase of the prior quarter.

Speaker 2

Provision for loan losses was $7,500,000 in the quarter, up essentially from no provision in Q1. As mentioned, we had loan growth of $287,000,000 in the quarter, and we also increased our overall ACL factors in the quarter by 3 basis points, primarily due to higher risk in the investor office space. Non interest income was $53,800,000 for the quarter and $50,800,000 on an operating basis. Eastern Insurance had another strong quarter with $27,600,000 of revenues, of 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.

Speaker 2

All other non interest income line items showed increases from the prior quarter. Non interest expense was $121,700,000 on a GAAP basis and $120,300,000 on an operating basis in the quarter. As we outlined on Slide 8, the increase in salaries and benefits, occupancy and data processing costs totaled $1,100,000 in the quarter. The larger increase in all other expenses included an increase of $1,500,000 and the provision for credit losses on off balance sheet commitments, the effects of higher FDIC insurance premium 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.

Speaker 2

There are some complexities from the securities repositioning last quarter that have impacted that rate. I'll have some comments on our expectation for the tax rate over the rest of the year during the outlook. Asset quality continues to be very sound. Similar to the prior several quarters, we experienced nominal net charge offs in Q2. Non performing loans of $30,600,000 are at very low levels and our reserve coverage to NPLs is over 480%.

Speaker 2

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 2nd 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 hasn't been much change during the quarter, although we continue to closely monitor this asset class.

Speaker 2

As we mentioned on Slide 18, we have no non performing loans in our investor office portfolio and our overall commercial real estate portfolio is performing very, very well. 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 and for mortgage and consumer loans to have little to no growth in the second half of the year. We're increasing our outlook for operating non interest income for the full year to a range of $175,000,000 to 185,000,000 up from the prior outlook due to the strong first half performance. We expect that some of the items in our other Non interest expense line item will return closer to Q1 levels over the rest of the year.

Speaker 2

We would expect to be at the higher range of our prior guidance that was between $465,000,000 $475,000,000 for our non operating non interest 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 the slide, it could be volatile quarter to quarter. We expect our net interest margin to be in the range of 2.7% to 2.8% and for our 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 assumed a 25 basis point rate increase from the Fed that we saw this week.

Speaker 2

In closing, we're very pleased with our results for the quarter and 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 as the challenging environment continues. Thank you. And Joanna, we're ready to open the line for your questions.

Operator

Thank you. First question comes from the line of Damon Galante at KBW. Please go ahead.

Speaker 3

Hey, good morning everybody. Hope everybody's 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 1st two quarters' worth of margin, that kind of puts you in the like 2.73 range or so. So should we do you kind of expect the margin to hold steady at this 2.80 level?

Speaker 3

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?

Speaker 2

Yes. No, I think, Damon, as we say on The slide and in my remarks, we expect the margin to be between 2.70% and 2.80%. So, somewhat along 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.

Speaker 2

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 270 and 280.

Speaker 3

Okay. And what are your thoughts on the $900,000,000 of cash that you have? Are you planning on holding that for a little while longer? Or do you expect to Try to reduce borrowings and or brokered CDs in the coming quarters.

Speaker 2

Yes. No, I would expect that to come down a little bit, although We are prioritizing balance sheet liquidity. And I think coming through the bank failures that was obvious that it's important. So we expect it to come down a little bit, but we would still hold higher levels of cash than we did say a year ago.

Speaker 3

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 reserve build this quarter. Do you feel like you've radically gotten to the level that you want to be at?

Speaker 3

Or should we kind of expect a higher level A provision similar to this quarter.

Speaker 2

Right. So, no, it's a good question, Damon. I would answer that Two parts, right? So if you look at our provision this quarter and prior quarters, a considerable amount is driven by loan growth. So we had, call a $300,000,000 worth of loan growth this quarter and that attracts a higher allowance and goes through the provision.

Speaker 2

So that will change as 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

Speaker 4

As I said, I would consider a

Speaker 2

fine tuning. It's hard to give you any more color on what happens in the future. It will depend on the environment.

Speaker 3

Got it. Okay, great. Thanks for taking my questions.

Speaker 2

Thanks, Damon.

Operator

Thank you. The next question comes from the line of Mark Fitzgibbon at Piper Sandler, please go ahead.

Speaker 3

Hey, guys. Good morning.

Speaker 4

Mark, good morning. Jim, on your fee income guidance, The high end of your guide of $185,000,000 implies sort of fees of call it $41,000,000 a quarter for The last two quarters of the year. I know you'll have some decline in insurance commissions, but what are some of the other areas where you expect things to

Speaker 2

It primarily is insurance, Mark. So if you look at the prior years and the quarterly trends over the course of the year, Yes, it starts out very high and moves down over the course of the year. Some of that's insurance payments and there are some anomalies in the Q4 as well. So that reduction is primarily not primarily, it's essentially all in the insurance line.

Speaker 3

Okay.

Speaker 4

Secondly, I was curious if you are contemplating any additional balance sheet restructuring moves?

Speaker 2

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 Q1 actions were pretty significant, certainly nothing like that. 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.

Speaker 3

Okay. And do you have

Speaker 4

a sense for the dollar amount of office loans that either mature or reprice in, say, 2023 or 2024?

Speaker 2

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.

Speaker 4

Great. And then lastly, given some transactions in the industry recently, I wondered if your thinking on M and A has changed at all. Do you think transactions can kind of get done in this environment in your market?

Speaker 2

We're and Bob can comment as well.

Speaker 3

I think

Speaker 2

We're always students of the acquisition game. Those were interesting transactions and we'd love to understand them better and we'll Take the time to do that. It's facts and circumstances and things align as you know. So it's really hard to comment Other than say those were certainly the PacWest transaction looked like it had some very clever attributes.

Speaker 1

I mean, Mark, we're certainly interested in opportunities and stay in active contact with potential partners. And If we can find a situation that we can make the numbers work and works for us strategically, we'd certainly have an interest.

Speaker 2

Thank you.

Operator

Thank you. Your next question comes from the line of Janet Lee at JPMorgan. Please go ahead.

Speaker 5

Hello, good morning.

Speaker 2

Good morning, Jen.

Speaker 5

I want to understand I mean, I want to make sure that I understand the prior comment. So for the rest of 2023, the trajectory of NIM could be fairly steady versus the Q2. And taking your NII sensitivity into your account, should the Fed start cutting rates in 2024? What would that mean for your NII and NIM trajectory?

Speaker 2

So we haven't provided any guidance for 2024 yet, Janice. Janet, it's too much of a moving target at this point. I think what we put on the slide and what I articulated in my comments was for the rest of this year. And obviously, the environment is moving very quickly. And as I said, we haven't put anything out for 2024 yet.

Speaker 5

Okay, fair. And I know it's very difficult to guess, but if you have to make your best guess as to where your non interest bearing deposits Would bottom as a percentage of total. Like what would be your guess there? Like could it dip Much below 29% today?

Speaker 2

Jen, those are really hard to And guess is the right word. And 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 space.

Speaker 5

Okay. And apologies if this came up already, but Any near term plan for share repurchases given your capital level is still very high versus peers?

Speaker 2

Sure. No. Similar to what we've said over time on share repurchases, really 3 criteria. 1 is market conditions, 2 is capital and 3 is liquidity. And those are 3 evolving and interrelated subjects.

Speaker 2

As 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.

Speaker 5

Okay. Thanks for taking my questions.

Operator

Thank you. There are no further questions at this time. I will now turn the call back over to Bob Rivers for closing remarks.

Speaker 1

Great. Well, thank you again for your interest and your questions, and best wishes for a great rest of summer.

Operator

Thank you. This concludes today's conference call. You may now disconnect.

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Earnings Conference Call
Eastern Bankshares Q2 2023
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