Eastern Bankshares, Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Good morning. My name is Amy and I will be your conference operator today. I would like to welcome everyone to the Eastern Bankshares, Inc. Q4 2020 Earnings 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 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:]

Great. Thanks Amy. Good morning. I hope that you and your families have been doing well over the past 10.5 months. And wish you the very best for a safe and happy year ahead. Thank you for joining us for the very first earnings call in Eastern’s almost 203 year-history. I am joined today by our Chief Administrative Officer and Chief Financial Officer, Jim Fitzgerald; as well as our Chief Credit Officer, Dan Sullivan, who will participate in the question-and-answer segment of the call. From the beginning 2020 was destined to be one of the significant accomplishments at Eastern. As the year began, we work to build upon our long history as a mission-driven mutual bank, dedicated to our customers, committed to helping to address the social justice issues impacting our communities and providing our colleagues with a diverse, equitable, and inclusive workplace. Our team was also focused on creating the next chapter in Eastern’s history, in initial public offering a significant undertaking under the most ordinary of circumstances. At the same time, we're continued on the completion of two additional transformative initiatives, the implementation of our new online and mobile banking platforms and the upgrade of our insurance agency management system, when the pandemic hit.

[Jim Fitzgerald:]

Thanks, Bob. And good morning to all. I want to extend a welcome to everybody on the call today and a special thank you to our new shareholders who are joining us. We're very pleased with our financial performance in the fourth quarter, our first as a publicly traded company. We recognize the combination of the IPO, the foundation contribution, lack of history as a public company, make these results more difficult to assess than they will be in the future.

[Operator:]

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

[Damon DelMonte:]

Hey, good morning, everyone. Hope everyone’s doing well today. Thanks for taking my question. So, my first question just wanted to ask a little bit about the margin outlook and kind of the direction that you see the core margin moving over the next couple of quarters, Jim, especially as you guys become fully vested with the liquidity on the balance sheet?

[Jim Fitzgerald:]

Sure. Damon, first of all, good morning. Thanks for joining us and appreciate your question. The first place I direct you is to that non-GAAP reconciliation that I referenced in my comments, really what we tried to do there was strip out PPP loans, excess liquidity, et cetera, and give you how we – what we view the margin, the core margin to be. I think going forward and I think that gives you a good baseline for the existing – our existing expectations. Obviously going forward, we see that the PPP – the deferred fees of PPP from last year’s PPP loans that I mentioned, which is $18.5 million. We do expect most of that to come in the first half of this year or certainly in 2021. And we are incrementally investing in the securities – transferring from cash to securities at about a $350 million a month pace. I think that caution there is yields continue to be very compressed in the areas that we're investing. The reinvestment yields there are – investment yields are somewhere between 75 and 80 basis points. It feels like we're competing with the Fed quite honestly in the sectors where we're buying. So, although we do see enhancement from that, we do think it's a very tough environment. And as we've said in the past taken – we are going to take a pretty measured approach there.

[Damon DelMonte:]

Got it. Okay. That's good color. Thank you. And then with respect to the – one of the last comments you made about expenses, just want to make sure I understood this correctly. So, you said third or fourth quarter $100 million to $102 million. And you said you expect about 2% to 3% below that for full year 2021. So, if you annualize that at, call it a little over $400 million kind of cut that by 2% or 3% for the full year, is that right?

[Jim Fitzgerald:]

Correct.

[Damon DelMonte:]

Okay, great. And then just lastly, on the dividend, nice to see that you guys established that, just wondering what your thoughts are, is that going to be something that's evaluated annually or just given the strong capital position, once you get a couple of quarters under your belt, you feel you have capacity to maybe increase that on a non-annual basis and maybe on a semi-annual basis?

[Jim Fitzgerald:]

That's a conversation we'll have with our Board, Damon. So, it's a good point. I think, priorities coming into this work to get it initiated and have the payout ratio be what we think is a reasonable level. I think going forward we'll definitely review that with our Board. Nothing more to really say at this time, I think, we're still trying to get sort of our legs are under arrest as a public company. And we'll take that up with the Board at the appropriate time, but I wouldn't expect that for a couple of quarters at a minimum.

[Damon DelMonte:]

Great. Thank you very much for taking my questions.

[Jim Fitzgerald:]

Thanks, Damon.

[Operator:]

Your next question comes from the line of Janet Lee with JPMorgan. Janet, your line is open.

[Janet Lee:]

Good morning, everyone. My first question I have is on capital. Obviously, some of value deployed into securities in the quarter, but you're still sitting on a ton of capital. And we know that you have aspiration to get much bigger M&As one primary way to deploy that. Can you provide us more color around some of the ideal M&A targets such as size, geography and some of the M&A thresholds you may be considering? And also, how would you describe the current bank M&A landscape in your market?

[Bob Rivers:]

Great. Well, Janet, this is Bob, and appreciate the question. Certainly, it is you may have heard it say in the past. We're focused on acquisitions that are really in market and what we mean by that is in our current footprint or immediately adjacent we're trying to leverage the infrastructure that we have here at the company. So, we think that that's the best way to do that. In terms of size what I would say around the size of those acquisitions is certainly bigger than we've done in the past. Generally, we've been a fairly regular acquire of banks about $1 billion in assets in size. And one of the driving reasons for going public was we just did not have the capital internally generated as a mutual loan to acquire banks that were remaining of that size. First of all, they weren't available at that size for us to acquire. So, by definition, and going public, we're looking at acquisitions greater than that size how much greater remains to be seen, but that's certainly what we're focused on we have from a bank perspective. We're also looking at insurance agency acquisitions. We just did two this past year as we reported and as you've seen that's a regular pattern for us has been for many years, that'll continue. We have a nice pipeline of potential deals in that space. They're not significant capital spend. As you know, it's a pretty sizable agency, what we have already. But again, that will be supplementary to it. In terms of the acquisition landscape here, again, we're just waiting to see what opportunities may yield. I think many of us in the market are looking for recovery in the banking sector at this point. So not anticipating any immediate opportunities near term, but nonetheless certainly have made it known generally and through calls like this that we're interested in potential partnership opportunities in that regard.

[Janet Lee:]

Right. Some of the prior acquisitions that you've done in the past, like obviously you have much more capacity with your capital like is MOE something that you would even consider?

[Bob Rivers:]

Certainly not at this particular point in time and certainly don't see any opportunities in that regard that we could undertake anyway.

[Janet Lee:]

Got it.

[Jim Fitzgerald:]

Janet, it's Jim. I just want to add as a reminder for those – there was a three-year restriction on selling Eastern as part of the conversion. So, on a technical basis, the MOA question doesn't quite apply to Eastern at this time.

[Janet Lee:]

Got it. Another question maybe for Bob. So, you've donated a $91 million upfront and stopped donation. So, I believe that you're going to stop donating around 10% of your annual income to the charity that you've done in the past. I know that this upfront donation is obviously very significant probably larger than what you would have donated for the next few years combined. But when you combine that with Eastern now becoming a public company, what's your strategy and plan maybe to maintain that key competitive advantage of your franchise. That's really known for outspoken advocacy and philanthropy, which has been core to your high-quality deposit franchise and brand distinction.

[Bob Rivers:]

Sure. Well, we think the distribution that we've made into the foundation as a result of the offering put this at a much higher level than we would have been able to do on our own. And it was something that our Board was very sensitive to and something that we made sure that this initial contribution, this contribution from the offering would essentially exceed anything that we could do in the future. For example, if we had continued to donate 10% of our net income to charity, and a big part of that was a contribution to the foundation. We would not have been anywhere near the levels for as long as we could see in the foundation. We've already elevated the foundation to a level that we could never get to certainly many, many – for many, many years over time. So, we think we've started the foundation with the resources to support our community engagement efforts at a much higher level really indefinitely. And most of the grants that we've had come out to the marketplace are really a distribution from the foundation. We distributed at least 5% of the assets of the foundation in the form of grants every year. Obviously, those total assets are much higher than they were before. So really that primary fuel for community grants again, has been insured regardless of how much we may continue to contribute to the foundation in the future, which will be a lot lower. A lot of our 10% of net income to charity about $2.5 million or so every year comes in the form of sponsorships to non-profit organizations. Those are always expensed in current year. Those we plan to continue in that basis, but really contributions to the foundation will be much more muted than they were in the past really very, very low again, because of this contribution that we've just made through the foundation. So, in short, we'll be able to continue to be the same sort of advocate that we've been in the past and I would argue even brighter.

[Janet Lee:]

Right, right. That makes sense. And if I can squeeze just one more question. So, besides the pension change, do you have any other efficiency initiatives you're planning to execute to maybe eventually come down closer to the pure level on the efficiency ratio? And maybe if you can talk about sort of a level of efficiency ratio that you're targeting as you look out into 2021? Thanks.

[Jim Fitzgerald:]

Sure. Janet, it's Jim, I'm just going to jump in on that one. I think a few things we – what we've tried to say very clearly as we understand that we need to lower our expenses over time. We've got a very successful company here, and we're going to do that in a very appropriate way. It is going to take some time. We are looking at a number of things and have been. Nothing to report at this point. It's very difficult for us to talk much more than that, but we're very conscious of it. And I think, as I said, I think, the pension plan was really something we had started a while ago and it was a step in that direction. There will be more actions over time. One last technical thing just wanted to make sure there wasn't a misconception to a charitable contribution that Bob mentioned in his remarks a second ago, would be included in the expense guidance I gave earlier. We, those would have been factored into the numbers I gave you.

[Operator:]

Your next question comes from the line of Laurie Hunsicker with Compass Point. Laurie, your line is open.

[Laurie Hunsicker:]

Hi, thanks. Good morning. Very exciting time. I just want to say congratulations and really appreciate the details in the deck and the earnings release. And if we could just stay on expenses, I appreciate the guide there. As we look further out into 2022, assuming that a year from now your benefit plan is in place. So that's maybe round numbers adding $20 million annually. Jim, can you help us think a little bit about how you potentially mitigate that expense or how we should think about modeling that in? Thanks.

[Jim Fitzgerald:]

Sure. Laura here is what I would say on that. And just you are – you know a lot here. I'm just going to give a little bit of background for those who may not have the benefit of your experience. The benefit plans need shareholder approval. We would anticipate doing that probably very late this year. And you won't see – and you would start to see the expense in 2022. I think what we would say on that is we're – it's something we're working through. We understand the need to look at our total compensation and figure out what the appropriate levels are that's Eastern management and our Board. We're very up to doing that, very eager to take that on. Really don't anticipate studying that – we're studying that more, but it's really the second half of this year. As we get closer, we’ll give more commentary on that, I’ll give you our views on that. At this point, it's hard to say anything other than we see it coming, we know what we need to do, and we're in the process of studying it. And we'll report out at the appropriate time.

[Laurie Hunsicker:]

Can you just – and maybe this is jumping ahead a little bit. But can you just comment broadly on your thoughts Bob and Jim, on branch rationalization and your approach there? We're certainly seeing regional banks across the country close branches. How are you thinking about that currently?

[Bob Rivers:]

Yes, certainly it's something that we continue to look at. In general, we think our branch franchise is pretty efficient. And we've made a number of consolidations of branches over the past many years, in fact, at a rate that's typically higher than others in our marketplace in the past. Certainly those, the accelerated use of digital channels in the midst of the pandemic is a game changer here and it’s something that again, within that context, continue to look at our overall physical network in terms of branch size, number of branches, locations, et cetera. But at this point, don't see any major restructuring that we need to do with the branch network. Again, we think it's overall pretty efficient. But as always and in all things, there are ways that we can continue to make improvement in that. And again, given the acceleration of digital channels, something that we're taking a much closer look at given the context with which we use to analyze the decisions in the past, continues to evolve.

[Laurie Hunsicker:]

Okay, great. Thanks. And then just Bob wondered if you could just kind of refresh us regarding sort of a, three-pronged thinking about capital management, obviously saw you start the dividend. That’s great. Well, nine months out from a buyback. Can you just comment buyback versus M&A, buyback M&A? How you would rank buyback over M&A or under M&A? Just your thoughts around that?

[Bob Rivers:]

Well, I mean, certainly our primary use of the capital is really a M&A. I mean, that's going to be the lever by which we're able to grow the company. That said, of course, we're mindful of a strong pricing discipline in terms of engaging in M&A. And as we look at potential M&A transactions over time, we'll continue to benchmark those metrics relative to the associated benefits of buybacks as well. But again, we see both as critical levers as well as the implementation of our dividend policy as ways to manage capital. And again, very focused on that in that way.

[Laurie Hunsicker:]

Okay, thanks. And then Bob, just one last question around M&A. Your approach about being protective of tangible book, how you think about a line in the sand in terms of tangible books dilution, and earn back. Any color you can give us around that? And I've realized that it’s early in the process of being public, but that certainly is a focus. Thank you.

[Bob Rivers:]

Yes, certainly. I mean, again, we've heard a lot about this and received a lot of guidance and advice from those on this call, as well as others about how to think about that. So certainly, we appreciate those comments and something we're thinking about. We're also mindful of other metrics that are important when we do acquisitions. So, thinking about those two. And I think it will be a deal-by-deal basis as we undertake an opportunity and look at those numbers, we'll start to consider how those all work together. But nonetheless, we're particularly sensitive to tangible book value dilution as we know that many of you are. And so, something that we're quite mindful of. But in terms of a line in the sand on that particular basis, hard to give an answer there. I guess we're going to see what happens when we finally get an opportunity and kind of work through the numbers.

[Laurie Hunsicker:]

Right. Thanks for taking my questions.

[Operator:]

Thanks. And your finial question comes from the line of Jake Civiello with Janney. Jake, your line is open.

[Jake Civiello:]

Great, good morning, everyone.

[Bob Rivers:]

Good morning, Jake.

[Jake Civiello:]

I know you said in your prepared remarks that it's safe to assume that most PPP forgiveness fees will be recognized in the first half of 2021. You have an update on new PPP originations and how much you ultimately might book in round two, or if you're participating in round two?

[Jim Fitzgerald:]

Actually, yes sure Jake, we may a double or triple from here. I think just at a high level, we're definitely participating in round two. We felt very good about our performance a year ago in round one, and view the PPP process as a great customer – a great thing for our customers and for Eastern. I think the early read we've got is that activities are little – is definitely slower than last year. Coming into this we thought we would have been at a percentage basis of last year may be 50. And I think it's very, very early. It's a little bit slower than that would be my – would be my response. Dan Sullivan is with me he may add more.

[Dan Sullivan:]

Yes, good morning. And thank you. Yes, the last year our – in spring of last year, we did approximately 8,800 loans for $1.1 billion. I think you found that in the materials. Today, this year, in this round we received 3,000 applications totaling about $350 million, right. And again, it's very early there, so we're trying not to over-interpret that, but that's what we've got to date. Again, it's very early.

[Jake Civiello:]

No, I understand that. But that helps me in terms of thinking about it in terms of the starting point. So, thank you. In terms of deposits, do you have an estimate for how much of the non-interest-bearing decline in the quarter was from the conversion subscription dynamics? What I'm trying to understand is if there was core growth in non-interest-bearing in the quarter similar to what you saw in savings and interest-bearing checking?

[Dan Sullivan:]

I don't have that right here, Jake. So, I'm not really going to be able to answer it. I think what we experienced last year and I recognize your question to which is a good one, which is it's hard because of the third quarter blip because of the conversion, we saw the heavy increase in deposits the first half of the year. We believe most of those have stuck and the transitions in and out were, because of the conversion and the subscription offering. But I don't have a specific answer to your question.

[Jake Civiello:]

Okay. Maybe I'll follow-up later.

[Dan Sullivan:]

Sure.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. On behalf of Eastern Bankshares thank you for your participation. You may now disconnect.