Q1 2024 Eastern Bankshares Inc Earnings Call

Participants

Bob Rivers; CEO & chair of the Board; Eastern Bankshares Inc

Jim Fitzgerald; CFO, Treasurer & Chief Administrative Officer; Eastern Bankshares Inc

Mark Fitzgibbon; Analyst; Piper Sandler

Damon DelMonte; Analyst; KBW

Laurie Hunsicker; Analyst; Seaport Research

Presentation

Operator

Hello, and welcome to the Eastern Bankshares, Inc. first-quarter 2024 earnings conference call. Today's call will include forward-looking statements, including statements about turning to 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 can cause actual results or the timing of events to differ materially from the views expressed today.
For information. 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. Any forward-looking statements made during this call represent management's views and estimates as of today, and the Company undertakes no obligation.
We 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. 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 dot Easton-Bell.com. Please note this event is being recorded. All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session. (Operator Instructions)
And I would like to turn the call over to Bob Rivers, Chair and CEO. Please go ahead, sir.

Bob Rivers

Thank you, Sylvia, and good morning, everyone, and thank you for joining our first quarter earnings call. With me today is Jim Fitzgerald, our Chief Financial and Chief Administrative Officer, who will go through our financial highlights in a few minutes.
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. 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 specifically, our capital ratios are robust with a CET1 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 2.5 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 markets. 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 the 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, Dennis Sheehan and his entire management team.
I am pleased to say that those efforts are going very well with an increasing camaraderie built 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 for strong financial returns for our shareholders.
Our partnership with Cambridge Trust also advances our goal to be greater Boston's premier local community bank one characterized not only by expanded and enhanced capabilities and delivering solutions to the financial needs of our customers 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. Illicit 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, our reflection of our extensive community engagement and rising reputation in the market. Those that truly know us recognize that this is Eastern special sauce and a key differentiator and driver of our business. While some of these awards are presented to us as individuals, they are always a reflection of the extremely talented and hard-working team. We are privileged to work with at Eastern for all 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. In yesterday's earnings release, we announced Jim's upcoming retirement, a truly bittersweet and momentous change for our company. When Jim joined us as our Chief Financial Officer in 2012 after serving much at much larger banks as their CFO.
Eastern was a mutual bank with $8 billion in assets because of their prior experience, he brought us a 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 3.5 years ago, three and soon for bank mergers, along with innumerable 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 our 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 confidence.
Thankfully, Jim will continue to serve in his current role until a worthy successor has been identified and beyond. As a special adviser 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. And with all of that said, and so much more that could be. I turn it over to Jim.

Jim Fitzgerald

Well, 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 $0.24 per share, and operating net income was $38.1 million or $0.23 per share.
I'll go through the details shortly. As Bob said, we continue to be and have high expectations for the Cambridge merger, which seems to be a little confusion. So we wanted to be very clear on the timing and regulatory approval, consistent with what we communicated at our 8K in February. We're working with our regulators to receive their approvals.
We expect those approvals later this quarter, and we expect to close the merger in early July up from this time line would be a delay of one quarter from our original expectations. I'll provide more of a provide some specific updates to Cambridge in 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 $0.24 per diluted share, and operating net income was $38.1 million or $0.23 per diluted share.
Overall, we saw modest growth in the balance sheet with core deposits up $121 million or 2.8% annualized and loans up by $115 million or 3.3% annualized, driven by commercial lending. The net interest margin was stable in the quarter at 2.68% and very similar to the prior quarter margin of 2.69%. Expenses were $101.2 million and $97.6 million on an operating basis.
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 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.
Also go through more credit details later in my comments, our Board approved a dividend of $0.11 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, down slightly from the quarter prior quarter due to paydowns in the portfolio and a modestly lower market value loans for $14.1 billion and commercial loans ended the quarter at $10.1 billion. Commercial loan growth was $129 million or 5.2% annualized.
Consumer loans had growth of $8 million or 2.2% annualized and residential loans decreased by $21 million. Core deposit growth was $121 million or 2.8% 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, the arc of our customer base. As I mentioned earlier, we essentially we are essentially core deposit funded. We had no broker deposits at the end of the quarter. And FHLB borrowings were less than $20 million. Shareholders' equity was down $22 million in the quarter as net income of $38 million. 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 as a competitive advantage that we think will create opportunities over time.
Moving to earnings. Net interest income was $129.9 million compared to $133.3 million in Q4. And as I mentioned, the margin of 2.68% was down just 1 basis point from the prior quarter. Interest-earning assets were approximately $200 million lower in the quarter and there was one that one less calendar day in the quarter as well to provision for loan loss was $7.5 million, in line with the last two to three quarters. Noninterest income was $27.7 million and $23.4 million on an operating basis.
As we provide on page 8 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 comps, all line items were pretty consistent with the prior quarter.
As we outlined on page 9 of the presentation, there are a number of moving pieces and noninterest expenses relative to the prior quarter. As we mentioned at the time. Q4 expenses were very noisy and high with the largest contributor being the FDIC special assessment of $10.8 million. Q1 expenses were $101.2 million and were $97.6 million on an operating basis.
These were lower than expected for a few reasons, and there were two favorable items that we don't expect to be recurring. We paid out lower incentive compensation for 2023 than 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 well as a technology upgrade for online mobile product most of these expenses will hit in Q2, and I'll provide a roadmap for our 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 will 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.
Sales price was slightly better than we expected, and we also have two NPLs under contract for sale, both 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 and have provisioned for that outcome in our Q1 results.
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, continuing 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, the portfolio is generally diverse with the high performing multi-family segment being the largest concentration at 31% as a percentage of risk-based capital or non-owner occupied commercial real estate is 154%, which is well below the regulatory guidelines of 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 investor office portfolio declined by $21 million in the quarter from $689 million to $668 million or 5% of total 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 as you can see on the upper rent right-hand corner of that page.
Office maturities are lights for the next two quarters and average approximately $20 million over the next four quarters, a very manageable level, working very closely with the borrowers on all of these maturities, and we'll provide updates as we move through the rest of the year.
As a reminder, the Cambridge trust portfolio, which 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 are the criticized and classified loans and all 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, 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. 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 of 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 cost 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. 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 evident by Q4 of this year. We've updated the loan valuation for the Cambridge portfolio at the end of Q1. Although rates have been 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 2.68%.
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%. And 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 $45 million per quarter on a run-rate basis.
We expect the combined wealth business to have over $60 million of revenues and operating efficiency ratio in the low 50% range. We expect the post merger capital ratios to be strong and support our capital management strategies, as 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. So thank you, Sylvia, we can open it for questions.

Question and Answer Session

Operator

Thank you. (Operator Instructions)
Mark Fitzgibbon, Piper Sandler.

Mark Fitzgibbon

Happy Friday. Morning, Mark and Warren work, Bob. Jim, let me start off by echoing Bob's, congratulations on your well-deserved retirement.

Jim Fitzgerald

Thank you, Tom.

Mark Fitzgibbon

Thank you, but before I let you off the hook. I was going to ask a question I've asked before, and that is what gives you all 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 their transactions?

Jim Fitzgerald

Yes, sure. Mark. I jokingly would say I anticipated that to be your first question, and it may well appreciate it because we understand the environment as you do. I think just by things we've communicated in the past, we have a very good communication channel with the regulators, very good relations. You know, 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 there's a lot of back and forth through the regulatory applications are voluminous, as you know, into their incremental requests along the way. So we've supplied an incredible amount of detail that they've they are going through. They've been very clear that they want to support us, I think, and they know our time lines for this and have communicated that they believe they will put us in a position to meet them. As I said, we respect that process and understand that it is their process, but appreciate the communication. We have with them, and that's what gives us the confidence.

Mark Fitzgibbon

Okay. And then somewhat related, where is the higher cost saves come from and the EPS accretion versus your original estimates? Post-deal what's kind of driving that?

Bob Rivers

Yes, I think you know, things are generally as we expected. I think, Tom, on the cost savings side, we're expected to be slightly higher than what we articulated last September, I think. So that's one component of it. And I think in this environment, gaining efficiencies is obviously credit 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 of their balance sheet at closing, which is something we believe we're capable of doing. And it's that balance sheet strength, the capital strength in particular 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 market margin in such a way that when you combine it with these churn, you get the 32 basis point uplift that I articulated. It'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 that our last six months is very additive to ours, and we think the market opportunity, especially when the environment gets a little bit easier or better is going to be very significant.

Mark Fitzgibbon

Okay. And then lastly of I think you mentioned you had two NPLs that you are selling, I guess I'm curious where you're selling those where the sales prices are relative to par.

Bob Rivers

Yes, not to come. You know, I'd say this, Mark, we've had if you count them up, right? We've had a total of five properties that were in the process of either taking going through our charge-off process plus provision process and or we've sold and it's a small sample size at some of those or 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 to have each assets a little bit different. So it's hard to give you one number there, but the discounts are significant, as you know, as I said, vary by facts and circumstances.

Mark Fitzgibbon

Thank you.

Operator

Damon DelMonte, KBW.

Damon DelMonte

You want to guys. Thanks for taking my questions. And Jim, congrats on the retirement has been enjoyable working with you. And just first quick, sir, just first question on the expenses, just trying to clarify that. So the the headquarter move impact and the mobile banking impact, those combined, that's $3 million, $3 million for each.

Jim Fitzgerald

That will be heading in second quarter combined, I just have a migration. We have moved into our new headquarters just to make it real and everybody is welcome anytime they're in Boston, the come oversee. We're quite proud of the new space.

Damon DelMonte

Excellent cost on. So I think that it's going to come off the expense base in the third quarter. Is that correct?

Jim Fitzgerald

Correct.

Damon DelMonte

Okay, 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 intent just to kind of leave that very liquid and not look to redeploy that into securities in the near term.

Jim Fitzgerald

Correct. Yes. We're our goal over time, Damon, 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, our expectation certainly over the next couple of quarters, if we have that amount of cash would be to keep it in cash and are earn overnight rates on it.

Damon DelMonte

Got it. Okay. And then just lastly, appreciate the commentary around credit and kind of the outlook there. So is it fair fair to assume that you're still kind of targeting it may be mid 20 net charge-off level and kind of a provision that supports the reserve around this current level?

Bob Rivers

Yes. Obviously a volatile line item, Damon. And quarter to quarter, I'd 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 and the kind of provision.

Damon DelMonte

Okay. Great. And that's all I have for now. Thanks.

Jim Fitzgerald

Thanks.

Bob Rivers

Thanks.

Operator

Laurie Hunsicker, Seaport Research.

Laurie Hunsicker

Yes, hi. Thanks. Good morning. And Jim, I wanted to say congrats, it's been really great working with you and so thank you, but if we could just start with margin. So your 3% margin guide, how much accretion income is in that number? And do you have an accretion income figure that you can give us for the back half of '24 and into '25, especially as accretion income winds down? How or how should we be thinking about?

Bob Rivers

Yes, store option, Laurie, I'm laughing because I anticipated that question. You're sort of like Mark asked the timing question in U.S. The accretion question that I said that very thoughtfully, by the way, that's a please take it the way it's intended.
So I think there yet. Yes, accretion is clearly part of that. We are working through sort of how we would one of the problems we've got right now as rates are moving around. It's a little bit volatile, we're still a quarter away from closing. So it feels a little premature to put too much information about what the exact status is now because it's going to be different and but we are sort of studying how we present that to you and we'll follow up on.
I don't want to give you an answer off the top of my head because I think that that's inappropriate. But we would I think 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, trying to figure out how to give yourself and everybody sort of a better road map there.

Laurie Hunsicker

Okay. And then sort of in line with that pro forma intangibles, you have a do you have a number for us on that?

Jim Fitzgerald

You know, we'll do that in the same way. I think our expectation and timing again is it makes us a little bit 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 and $0.16. 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.
Some 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 you know how best to present that. So at this point, I can say that will be higher than that some and let us come back to you with some more thoughtful answers.

Laurie Hunsicker

Okay. And then and then on office, then I really appreciate all the details you guys have added. What of your $660 million office book, how much is the nonperformers there and any refresh on those loans that you can provide?

Bob Rivers

Yes. So I think, yes, we can go through the history because it's a small size, there's dispense. Yes, 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 and two of those were sold one in the fourth quarter, one in this quarter. And the third one is this quarter, meaning the first quarter of '24 plan.
So let me again, the 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 '24. And the third one will be sold in the second quarter of '24. And in addition to that, we had a retail commercial real estate loan that 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 '23. And we've sold in the second quarter of '24. And this new nonperformer, we're just getting started as one nonperforming just recently and it's all Okay.

Laurie Hunsicker

So for impaired, I gather the suburban office that went into non-performing that that's been worked out that you're hopefully getting ready for the quarter. How much was that? And then how much did you actually provisioned for it? And then first quarter.

Jim Fitzgerald

So we don't like to give out specifics of customer information, but I would say this it's a suburban office. It was the heaviest discounts to both our loan value and also the original purchase price of the building of all four. And it was in that the provision and that charge offs for this quarter of $7 million, most of that was concentrated in that in that asset.

Laurie Hunsicker

Got you. Okay. And then just last last tier MCATC., their office exposure, do you have anything refresh that you could share with us on that. You know what their balances currently are there buckets looking anything that you can share there,

Jim Fitzgerald

Sure or a little bit right on again, it's their information, but I think you can see from their public information. So approximately $250 million in many ways, Cambridge trust and Eastern were competitors in the commercial real estate arena. So we know many of those properties well, and I think our 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 there some in Boston itself and some of the suburban areas. So the $250 million generally looks very similar to things that we would have expected and quite frankly, look similar to our portfolio in many ways. And as I said, I've said a couple of times, you know, it will go through the 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.

Laurie Hunsicker

Perfect. Thanks for taking my question.

Jim Fitzgerald

Thanks, Laurie.

Operator

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

Bob Rivers

Well, thank you for your interest in credit. Interested in your questions this morning, and we look forward to sharing more with you during our next earnings call at the end of July.

Operator

Thank you, sir. Ladies and gentlemen, this concludes today's conference call. You may now disconnect your lines.