Eastern Bankshares, Inc.
Q2 2021 Earnings Call Transcript

Published: 31 Jul 2021

[Operator:]

Hello and welcome to the Eastern Bankshares, Inc. Second Quarter 2021 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, including its pending merger with Century Bancorp, Inc., 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 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.

[Bob Rivers:]

Thanks, Ashley, and good morning, and thanks to all of you for joining us this morning. I'm here with Jim Fitzgerald, our chief administrative and chief financial officer, to discuss Eastern's financial results for the second quarter, as well as to provide a brief update on our pending merger with Century. As we move into the second half of 2021, we're encouraged to see that the business environment around us here in Greater Boston and New Hampshire has clearly improved. Including PPP loans, we saw loan growth of $117 million this quarter or growth of over 5% on an annualized basis, which provides further evidence of confidence in business expansion. We also saw continued strong deposit growth, as well as solid performance from our fee-generating businesses. During the quarter, our Eastern Insurance group subsidiary announced our 34th acquisition of an independent insurance agency since 2002 and was recognized by the Boston Business Journal as the second largest insurance broker in Massachusetts based on premium dollar volume generated in 2020, moving up from third last year. While our Eastern Wealth Management Division was named among the largest independent investment advisors in Massachusetts. In addition to helping provide more holistic solutions to our customers' financial services needs, their significant contribution to and diversification of our revenues represent a mark of distinction for our company.

[Jim Fitzgerald:]

Great. Thank you, Bob, and good morning to everyone. As Bob mentioned, we're very pleased with these results, and we look forward to the upcoming Century merger in Q4. It's still fairly early in the process, but we're very happy with the reception of the Century staff and customers and the community in general to our merger. As of today, we remain confident that we can achieve our financial targets for the merger as presented back in April. However, we look forward to providing a full Century update from a financial standpoint at the end of Q3 as we get closer to the expected transaction closing. For Q2, GAAP net income was $34.8 million or $0.20 per share. We did have some nonoperating items in the quarter, including $3.5 million of merger and acquisition costs related to Century. Operating net income was $37.1 million or $0.22 per share. I encourage everyone to review the reconciliation of non-GAAP earnings in Appendix A in both the press release and the earnings presentation to see the adjustments, and I'll include some remarks on some specific items throughout my comments. Book value at June 30 was $18.37 per share, up from $18.14 at the end of Q1, and tangible book value was $16.33 per share, up from $16.12. Yesterday, our board of directors approved a dividend of $0.08 per share payable on September 15. For the first time since the onset of the pandemic, we saw core loan growth. Excluding PPP loans, commercial loans were up 5% on an annualized basis in the quarter, and residential mortgages increased 15% on an annualized basis. We also experienced the continuation of strong asset quality trends with very stable nonperforming loans and a reduction in our COVID-19 loan modifications. These factors and the generally improving economy during the period led to a loan loss reserve release of $3.3 million in the quarter. Net interest income was $104.6 million or $4.5 million ahead of the first quarter. The increase was driven by higher loan interest income of $2.3 million and higher investment portfolio interest income of $2.3 million. PPP fee income was $9.3 million in the quarter or an increase of $1 million from Q1. The average securities portfolio grew by $713 million in the quarter, which was responsible for the higher investment interest income. The net interest margin on a fully tax equivalent basis was 2.69% for the quarter, down two basis points from Q1. The core margin was 2.80% in the quarter, down nine basis points from Q1. We encourage you to review the non-GAAP reconciliation in Appendix E as it excludes the impact of PPP loans and our very high cash position, both of which we expect to change over time. It continues to be a very challenging interest rate environment.

[Operator:]

. And your first question comes from the line of Damon DelMonte with KBW. Your line is open.

[Damon DelMonte:]

Good morning, everyone. Hope everybody is doing well today. So first question, just wanted to talk a little bit about the margin, Jim. You gave a little color on the core. This quarter, it looks like the liquidity drag subsided a little bit from last quarter. Do you expect to see that to continue to decline? And will that ultimately help that 280 core, maybe not compress it as much as this past quarter?

[Jim Fitzgerald:]

Right. So great question, Damon. And there's a number of moving parts, so let me sort of try and take it one at a time. You are correct, the cash, we have deployed a lot of that excess cash over this past quarter and prior quarters as well and anticipate continuing to do that at roughly the same pace in the upcoming quarters. So on that score, yes. Century will close in Q4. We'll give a further update there, but just as a reminder, that's a cash transaction. so in and of itself, that will help the liquidity as well. You need to remember, the Century merger, Century has its own balance sheet with its own margin, so that's going to come on-stream in Q4 and really in 2022.

[Damon DelMonte:]

Got it. Okay. That's helpful. And then with respect to the higher risk segments of the portfolio, those that have greater exposure to the ramifications of the pandemic, are there any areas that are of any meaningful concern to you guys? Or do you feel that the greater Boston economy has been pretty resilient and bounced back and most industries are well progressing back to a normal environment?

[Jim Fitzgerald:]

So I'll give you a couple of responses there, Damon, I appreciate the question. First off, we're very pleased with the progress and the reduction of modifications. Very impressed, quite frankly, with the way our customers have come through the pandemic. If you look at what constitutes those modifications, there's one sector which we've talked about in the past, which is hotels, really business hotels, if you will, that's in commercial real estate, that's a pretty decent percentage of those remaining COVID-19 modifications. And what we said in the past, and it's still very true today, is we feel like those customers have done everything that they should have been doing. We've worked with them. We gave them longer-term modifications, so we do expect those modifications to be on the books through the end of this year. That said, that relief was just the normal communication process with those customers. We're very pleased with the way they're working through the pandemic, and we can start to see some recovery, although it's, as I said, those loans will be modified through the end of this year. Although that said, we're optimistic they're all pointing in the right direction.

[Damon DelMonte:]

Okay. Great. And then just last question, kind of bigger picture here, I'm wondering if there's been any opportunities with market disruption with the M&T/People's United deal. I know People's was a decent competitor in the greater Boston area, so just wondering, any color or any takeaways on that situation and what it could mean to you guys for either growth, loan growth, or maybe hiring additional commercial lenders? Thank you.

[Bob Rivers:]

Sure, Damon, this is Bob. Really, it's too early to tell at this point. We expect that there will be some, there always is to some degree in these kinds of combinations. So we're paying very, very close attention and looking for those opportunities, but really, nothing significant that we can see as yet.

[Damon DelMonte:]

Okay. Great. I appreciate it. Thanks a lot, guys.

[Operator:]

Next question comes from the line of Laurie Hunsiker with Compass Point. Your line is open.

[Laurie Hunsiker:]

Good morning. Just wondered if we could go back to the deferrals here. Your deferrals look great. Just wondered if you could specifically hit three categories for us, both in terms of loan balance and in terms of deferral. Just looking for hotel loan balance and deferral. I had last quarter, $178 million and $92 million on deferral, same with restaurants loan balance and deferral and same with retail. Or if you don't have those at your fingertips, I can follow-up with you off line.

[Jim Fitzgerald:]

Why don't we do that? We didn't include those this time, so why we do that, Laurie? The one area I would just comment generally is the hotel numbers that you referenced from the prior quarter are both down, meaning the total exposure and the amounts that are modified. So there's been a little bit of progress there.

[Laurie Hunsiker:]

Okay. Great. And then just back on the margin, I know you've got $800 million of PPP loans remaining. What is the unamortized fees associated with that?

[Jim Fitzgerald:]

Sure. And just to try to make my life easy, on Page 14 of the presentation, we do lay it out for you, Laurie. And it's -- we do it by vintage. Yes, we just do it my vintage. The total is $30 million.

[Laurie Hunsiker:]

$30 million. Perfect. Thanks. Sorry I missed that. Okay. And then on the expense side, just a couple of things. I know you laid out the 17-branch closure. Was that part of the initial what you had targeted? Is there any change in the cost saves you laid out of 45%? Any change in your pre-tax one-time charges? Or how should we think about that? Is that in line with what you were thinking?

[Jim Fitzgerald:]

That's a very good question. It's very much in line with what we were thinking and went through last April. And we're working through a number of all of those integration milestones now and would anticipate giving you sort of very full update at the end of the third quarter. As I said earlier in my remarks, we remain very confident in the financial metrics we put out last April.

[Laurie Hunsiker:]

Got it. Okay. And then just last question here, thinking about your expense guide, the $390 million to $400 million, super helpful. Can you walk us through 2022? Because there's certainly more moving parts coming on with your benefit plan obviously in the fourth quarter, and then maybe some offsetting things that you're going to do. How should we think about expenses with Century rolled in, cost saves factored, the benefit plans that come in fourth quarter 2022. What was the baseline number in terms of expenses for 2022?

[Jim Fitzgerald:]

So we haven't gotten there yet, Laurie. We're working on that. I think Century is -- there are a number of things related to both the absolute and also the timing as to Century expenses. So we do anticipate to come back at the end of the third quarter and give a complete update there. The only thing I can point you to is we're still very confident that the metrics that we put out back in April are on track, and we're executing against those.

[Laurie Hunsiker:]

Okay. Great. And then, Bob, last question for you. One of the banks in your market had mentioned that there's been some level of conversations going on. But obviously, there's a lot less to think about on the M&A side. Can you just refresh us since it's been a quarter since we've heard from you in terms of your thoughts on bank M&A? Not in terms of M&A, whole bank M&A, how you're approaching that? Obviously, you're digesting this deal, but looking forward, how you're thinking about that? Thanks.

[Bob Rivers:]

Sure, Laurie. So again, first and foremost, we're very focused on Century. Largest transaction in our history, very important. So certainly, all eyes are on that in every way as it should be. That said, we're open to conversations with those who may be interested in partnering with us. We're interested in those combinations as we continue to deploy our capital and scale our company. So that's pretty much our stance at this point. That hasn't changed really since we went public and continue to be very open to those conversations at this point, but really not much more to tell.

[Laurie Hunsiker:]

Great. Thanks for taking my questions.

[Operator:]

Your next question comes from the line of David Bishop with Seaport Research. Your line is open.

[David Bishop:]

Just curious, I think you mentioned a number, I didn't quite hear it, on the preamble in terms of the pipeline. Just curious if you could go over that and just curious maybe where that breaks down by product. And is that mostly existing customers looking for new credits or are you picking up new market share? And then a follow-up if you could, I don't know if you have the average yield on new loan production this quarter versus those rolling off? Thanks.

[Jim Fitzgerald:]

I'll take the second one first because I don't have that. It's a good question. We'll try to add that going forward, David. I don't have it, though, but I appreciate the question. What I said was the commercial loan pipeline, so specific to commercial loans, us just north of $600 million. That's up from the end of the first quarter. Generally, most of that is with existing customers. We're looking for new business all the time, as you would expect and know, and there's certainly new customers in there. The bulk of that commercial business that's in the pipeline and we're working through now is with existing customers.

[David Bishop:]

Got it. Does that break down? Is that all C&I, CRE? Just curious from a product standpoint how that shapes up?

[Jim Fitzgerald:]

Yes, it's combined. I don't have the breakout in front of me. We can try and get more specific on that going forward. But it would look like our business, which is it's not 50/50 literally, but we do, we're very active in commercial real estate. We're very active on the commercial front. And we're very active in our what we call community development lending. So it's really those three sectors. They all contribute very nicely to that overall pipeline.

[David Bishop:]

Got it. And then you mentioned the deployment of excess liquidity into securities investment. Sounds like that's going to stay at about the same pace. Just curious what sort of yields you're seeing with those being on board today?

[Jim Fitzgerald:]

Sure. So we do expect that to continue at the same pace, which we've done the last couple of quarters, and we think that that's just prudent. We have obviously a lot of excess liquidity, so we wanted to be measured and balanced in that. In the second quarter, the yield on new purchases was about 1%. The average duration was approximately four years. So very long. I'm making a cynical comment in a serious question, but reflective of the current environment.

[David Bishop:]

Sure. Great. Thank you for the color.

[Operator:]

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

[Bob Rivers:]

Well again, thanks, Ashley, and thanks to all of you for joining and listening in. Appreciate the questions. And wish you a great rest of summer and look forward to talking with you in 90 days about our third-quarter results.

[Operator:]

This concludes today’s conference call. You may now disconnect.