Eastern Bankshares Inc

NASDAQ:EBC

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to the Eastern Bankshares, Inc. First 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.

Listeners are referred to disclosures set forth under the caption Forward-looking Statements in the earnings press release as well as the risk factors and other disclosures contained in the company's recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties.

Any forward-looking statements made during this call represent management's views and estimates only as of today. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so, even if management's views or estimates change. And you should not rely on such statements as representing management's views as of any date subsequent to today.

During the call, the company will also discuss certain non-GAAP financial measures. For a reconciliation of such non-GAAP financial measures to the comparable GAAP figures, please refer to the company's earnings release, which can be found at investor.easternbank.com.

Please note, this event is being recorded. [Operator Instructions] Thank you.

I'd now like to turn the call over to Bob Rivers, Chair and CEO.

[Robert Rivers, executive]

Good morning, and thank you for taking the time to join us today. I hope you and your families are well and looking forward to the summer months ahead, especially as vaccinations rise and our ability to enjoy the activities we have in the past increases.

Joining me today on the call is our Chief Administrative Officer and Chief Financial Officer, Jim Fitzgerald. At Eastern, we are very pleased to share with you our first quarter 2021 results. We are reporting our highest-ever quarterly earnings, coupled with continued strong deposits and solid commercial loan growth due to PPP lending in the wake of the announcement of the largest bank acquisition in our history and our 33rd acquisition of an independent insurance agency since 2002.

And earlier this month, Eastern was a lead investor in a fintech fund designed to help accelerate technology adoption at community banks across the United States. We believe that we are well on our way to another year of first for Eastern. In addition to Eastern's 203rd anniversary in business, we recently marked our sixth month as a public company during which we announced an acquisition that we believe will solidify Eastern's leading position in the Greater Boston area. The $642 million purchase price for Century Bank, almost 4x that of any prior acquisition in our history, is validation of our commitment to use the capital raised from our IPO to undertake opportunities to significantly scale our company to better serve our customers over time.

Recent events have also validated the timing of our conversion in the acquisition of Century. In the months preceding our announcement of the Century acquisition and since, we continue to see transactions indicating a new wave of consolidation in our industry that has been driven by a similar rationale and a recognition that investments in technology and talent will ultimately determine long-term sustainability and relevance. As such, we have a strong sense of urgency to build our position in a market whose share leaders have remained relatively unchanged since the acquisition of Fleet by Bank of America almost 20 years ago and believe we are well positioned with the capital, resources and talent to achieve our goals.

Of course, for now, we are singly focused on the conversion and integration of the Century. Related work streams and regulatory applications are on track, and we are expecting a smooth process with the closing and conversion targeted for mid-November. We will provide another update during our second quarter earnings call.

Amidst all of this, we remain mindful that the economy is still recovering and our communities are still hurting. We continue to be an outsized participant in the Paycheck Protection Program, originating approximately 4,700 PPP loans for $453 million during the first 3 months of this year, representing more than half the number generated during all of 2020. And we continue to be a leading voice on behalf of racial justice at a time when businesses are called upon to speak out more than ever before. These efforts, along with our significant ongoing philanthropic commitment, are among the many reasons why Eastern Bank earned its highest-ever score in J.D. Power's recently published 2021 Customer Satisfaction Index, the highest among Massachusetts banks listed and the sixth highest in the United States.

Of course, we could not do all of this and more without the incredible efforts and commitment of our 1,900 employees. I want to thank them for their continued hard work and many contributions, which propelled us to another stellar quarter.

Once again, thank you for your interest in Eastern. And with that, I'll turn it over to Jim for an in-depth review of our first quarter financial performance.

[James Fitzgerald, executive]

Great. Thank you, Bob, and good morning, everyone. As Bob mentioned, we're very pleased with this -- these first quarter results. I believe they demonstrate progress on our goal to improve our overall financial performance. We recognize that there are a number of items that are specific to this quarter that may not necessarily continue into the future. In addition to our comments in the press release and the presentation, I'll try and add some descriptions of those items as well as to focus on our core earnings trends. In addition, I'll include some comments on our overall outlook before taking questions.

I'll start with net interest income, which was $101.4 million in the first quarter, down $3.5 million from the prior quarter and about flat from a year ago. There are a number of items to bring to your attention. Last quarter included a favorable nonrecurring item of $3.8 million and included 2 more business days in Q1. This quarter included $8.3 million of PPP fee accretion compared to $6.1 million last quarter, driving the PPP fee accretion with $241 million of loan forgiveness.

We did add over $800 million of investment securities in the first quarter, although we were only able to reduce our cash position by approximately $200 million as we saw a very strong deposit growth of $800 million.

Our net interest margin on a fully tax equivalent basis was 2.71% for the quarter, which was down 13 basis points from the prior quarter. As we have mentioned, the negative impact of lower interest rates is significant to Eastern, especially with the capital we raised in 2020 and the increased liquidity from that capital raise and the significant core deposit growth over the last year. We continue to deploy excess cash into the securities portfolio to help stabilize the margin over the medium term and look to fees generated from the PPP program to help us in the short term.

We hope you review the reconciliation of the non-GAAP core margin we included in the appendix. We think it provides some very useful information about how excess liquidity and the PPP program have impacted our margin over the last year.

I'll move to noninterest income, which was $55.2 million in the quarter compared to $49.6 million last quarter and $33.4 million a year ago. We think it's helpful to look at the non-GAAP operating revenues, which we include in Appendix B on Page 22 of the slide deck to get a better picture of these revenues without the impact of certain noncore items.

On an operating basis, noninterest income was $52.2 million in the first quarter compared to $44 million last quarter and $40 million in Q1 of 2020. A big driver of the increase over Q4 was our insurance revenue, which was $5.7 million higher due to seasonal payments we received in the early part of the calendar year. For a quick visual on this, please see Page 9 in the presentation, where year-ago revenue was $27.5 million in Q1 and then subsequently declined to $22.7 million in Q2.

Our insurance revenue in the first quarter was 2% ahead of the year-ago quarter. We expect this seasonal pattern to occur this year as it did in 2020 and also prior years.

Another big driver in the increase in noninterest income was our loan level interest rate swap portfolio, which is recorded at fair value. Although we run a matched book, there's a credit component to our customer-facing swaps that positively correlated to changes in interest rates. Swap revenue was $5.4 million in the quarter, which was approximately $3 million more than the prior quarter, all of which was due to higher interest rates at the end of the first quarter. In the first quarter of 2020 when interest rates dropped very quickly, we recorded negative swap revenue of $6 million, again, due to the fair value process. Other fees were generally in line with prior results.

Noninterest expense was $94 million in the quarter compared to $199.1 million in the prior quarter. As noted on Slide 10, if you exclude the large donation made to our charitable foundation in connection with our IPO in Q4, the noninterest expense for that quarter would have been $108 million. Expenses were modestly lower compared to the year-ago level of $95 million.

Similar to my comments on noninterest income, I would point to the non-GAAP reconciliation of operating expenses on Page 22 of the presentation appendix. On this basis, noninterest expense was $92.5 million in Q1 compared to $101.8 million in the prior quarter and $98.4 million a year ago. The current quarter did include higher expense deferrals due to PPP originations compared to Q4 of $1.8 million and lower incentive compensation of $3.9 million. These were partially offset by payroll taxes, which were $2.3 million higher than Q4.

As we've discussed, we're very focused on improving our efficiency ratio and believe this past quarter demonstrates that focus and progress. While we do not believe that the efficiency ratio we reported for the quarter is sustainable, we will continue our focus on improving the core components of our efficiency ratio going forward.

Our pension expense is an example of the progress we have made. Although it's difficult to directly see in the results, the net associated expense is down $1.5 million from the prior quarter as a result of the pension changes we implemented last year.

Asset quality continues to be stable in the quarter. Key metrics like nonperforming loans, loan charge-offs and COVID modifications were little changed or had improvements in Q1. We continue to work with our customers and have been very impressed with how they've performed into pandemic. Like everyone else, we're ready to see what the post-vaccine world looks like and the impact of an improving economy.

We provided a new page on our PPP lending on Page 15 in the presentation. It's an area where we believe we have performed very, very well. Through the end of March, we originated $453 million of PPP loans in 2021, which joined the approximately $1.2 billion we originated last year. And we expect to close approximately $150 million more, which is currently in our pipeline.

In the presentation, we have separated the 2021 originations from the 2020 originations and show that fee is collected and not yet recognized for both categories. It's very hard to predict the pace of forgiveness, but we would expect that the vast majority of the 2020 originations will be fully forgiven or paid off by the end of this year. We would also expect that a good percentage of the 2021 originations will be forgiven or be repaid by the end of this year or in 2022.

We also added a distribution of PPP loans by industry on Page 15. We think it reflects the broad range of both our customers and the market we serve and shows the strong diversification of our lending.

Loan growth in the quarter continued to be concentrated in PPP loans. Excluding PPP loans, commercial loans were flat quarter-over-quarter, and we had a small increase in residential mortgages and experienced continued runoff in our consumer loans. The consumer runoff is from our auto portfolio, which we discontinued several years ago and which is in runoff mode; as well as from home equities, which remain under pressure.

We included a page in the presentation with our full year 2021 outlook, which is Page 18. As we say on the page, the outlook is predicated on the assumption that the economic recovery continues and net interest rate levels don't change materially from where they are today. The outlook doesn't include the impact of the Century acquisition, which we reviewed a few weeks ago.

Net interest income is very dependent upon PPP interest and fees and the pace of forgiveness. As I mentioned earlier, we expect the 2020 PPP originations to be essentially fully paid off or forgiven by the end of 2021 and for a significant portion of the 2021 originations to be forgiven by the end of '21 or in '22. We expect our net interest income, excluding PPP interest and fees, to be between $360 million and $370 million in 2021 and for PPP interest and fees to be between $30 million and $40 million.

When we think about our loan charge-offs and loan loss provision, we exclude PPP loans. Excluding PPP loans, we would expect our loan charge-offs and loan loss provision to be between 10 and 15 basis points for 2021. We would expect operating noninterest income to be between $180 million and $190 million for 2021, and we would expect operating noninterest expenses to be between $390 million and $400 million for 2021. We expect our effective tax rate to be between 22% and 23% for 2021.

As I mentioned above, we expect commercial loans to experience a reduction due to PPP forgiveness and payoffs. In the core non-PPP commercial loan portfolio, we expect loans to be stable in the short term and then experience modest growth as we get to a post-vaccine environment later in the year. Our pipeline for commercial loans is approximately $550 million, which is approximately $100 million higher than where it was at the end of 2020. We expect similar trends in our residential and consumer portfolios as we experienced in Q1, modest growth in residential and a reduction in consumer loans due to the auto runoff and reduction in home equities.

To wrap up, although we recognize the difficult current environment and the uncertainty of the economic recovery, we are optimistic that the combination of the financial progress we have made to date, the core strength of our customer franchise plus the benefits we expect to come with the expense combination will put us in great position to generate sustainable core earnings growth.

Thanks very much. And we're ready to open it for questions.

[Operator]

[Operator Instructions] Your first question comes from the line of Damon DelMonte of KBW.

[Damon Del Monte, analyst]

So my first question regarding loan growth. Could you guys just talk a little bit about what areas like geographically as well as within the loan portfolio that you think will soon produce some net growth for you guys as we go through 2021?

[Robert Rivers, executive]

Sure, Damon, happy to. I think, as you know, primarily, our strength is in commercial lending. Most of it is in market. We do a little bit out of market as we have in our disclosures. But really, for the question you're asking, it's really our core Eastern Massachusetts, Southern New Hampshire market. Activity is pretty good. As we said, our pipeline is up $100 million from where it was at the end of the year. And activity levels are strong and improving. We expect to see modest growth as the rest of the year uncovers sort of across the -- across that footprint, both in commercial loans and commercial real estate. It's just been a little bit slow to -- the growth aspect of that has been slow to materialize. As I said, activity levels have been pretty good, and the pipeline has grown. But it will look like the growth that you saw in pre-pandemic from us in 2019 and 2018 in terms of the loan categories and also the geography.

[Damon Del Monte, analyst]

Got it. Okay. That's helpful. And then with respect to the outlook for net interest income for the year, obviously, margin remains under pressure. Core margin remains under pressure just given the dynamics of the market right now. Could you give us a little perspective as to where you think that will kind of bottom out this year?

[Robert Rivers, executive]

Sure. It's difficult, Damon, because as we try to say, I think you know, given the liquidity that we have from both the capital raise last year as well as the incredibly strong deposit growth that we've had, we have more liquidity. Liquidity isn't a great thing to happen. It's a burden in the current environment. So it's pretty hard to give you better insights than we -- that are different than what we've already given, which is it's a tough environment. We're modestly investing in the securities portfolio. We think that helps us in the medium term and improves the yield that we're -- as cash moves into the securities portfolio, there's a slight improvement yield there. PPP loans have obviously been helpful. But as rates have been so low, the core margin continues to move downward, and we don't see that bottoming in the near term.

[Operator]

Your next question comes from the line of David Bishop of Seaport Global Securities.

[David Bishop, analyst]

Noticed within the release on a point-to-point basis, looks like business banking, loan growth was pretty strong. I'm just curious, maybe some commentary, what drove the strength in the first quarter there.

[Robert Rivers, executive]

It's the PPP. It's PPP loans, David. I think we're a very good -- we're very good in what we call business banking. But small business lending, we've seen the SBA leading lender in both Massachusetts and New Hamp for a number of time -- number of years. And it's something we do well. The PPP opportunity is one that we really capitalize on, and that's where all the loan growth is.

[David Bishop, analyst]

We're going to classify there. Got it. And then sort of circling back to the last question in terms of the deployment of excess liquidity into securities, just curious what you're seeing in terms of onboarding new securities investment yields, which you're able to onboard those at.

[Robert Rivers, executive]

It's hard, David, because rates are moving. As we would have given you a month ago, it's different than I'm probably going to give you in a second here. It's below 1%.

[David Bishop, analyst]

Okay. And then the near-term outlook continues to be redeployment from net excess cash back into securities. Is there sort of a target level in terms of balance sheet you're hoping to get to over the near term in terms of securities to assets? How should we think about that as a percent of the assets or any assets?

[James Fitzgerald, executive]

Sure. As you can see, what makes that hard is we've had great deposit growth. So 90 days ago, we sat here both and said we were going to invest $300 million to $350 million a month in securities, which basically we did. And our cash position didn't really go down very much because we had offsetting deposit increases, which we're very happy about in the long term. So we don't really have a target that way, David. I think we're going to continue to do what we've been doing. And then as we get closer to the Century acquisition, we'll talk about that more. But obviously, that is a major component to our thinking as we get closer to that transaction.

[David Bishop, analyst]

Got it. And then I appreciate the sort of the color in terms of the expense trends this past quarter. Obviously, a lot of moving parts play into it, and it seems to suggest the guidance. There's a little bit of inflationary pressure into the second half. Just curious where we should expect to model that inflationary pressure from an expense perspective.

[James Fitzgerald, executive]

Sure. I think -- yes, I don't want to over interpret your question or I do want to make sure I'm answering it right. I think the guidance that we're giving is, I think, pretty straightforward, and I think it's pretty consistent with what we tried to guide last quarter as well. The one thing we've pointed out is the first quarter had the benefit of the -- in particular, the PPP expense deferrals. And that's -- obviously, that helped. But I think in terms of the guidance, we're -- I'm not sure we can give much more than we've already given.

[Operator]

Your next question comes from the line of Laurie Hunsicker of Compass Point.

[Laurie Hunsicker, analyst]

Jim, I just wanted to go back to your net interest income guide that you gave, very helpful. Did that also assume the Century in there closing at mid-November? Or was that not part of that guide?

[James Fitzgerald, executive]

That was not. Just to be clear, the guidance that I gave does not include Century. As Bob said, as we get closer, we'll talk more about Century. But we did talk about it a couple of weeks ago, and the outlook excluded Century.

[Laurie Hunsicker, analyst]

Okay. Perfect. That's helpful. And then Slide 9, love the slide. I just wanted to circle back here on -- within noninterest income, the insurance revenue line of $28.1 million this quarter. During the linked quarter adjustment or rather the year-ago adjustment, if I'm taking out $4.8 million, that takes me down to $23.3 million or so as a potential run rate. And then you just had NorthBridge that closed at the beginning of this month, and I couldn't find any revenues on them. Can you just help us think a little bit more about what insurance agency revenue specifically could look like for this year?

[James Fitzgerald, executive]

Sure. To start off, Laurie, you're doing a very good job. You figured out what we were hoping to provide you the data to figure out. I think the way I personally think about it is when you look year-over-year, which, in this particular case, I think, is the appropriate one because of the seasonal payments, insurance revenues are up 2%. We think that's good guidance for how the year would play out. The acquisitions that we've done really this year have been very small, really don't change our outlook on that particular line item.

[Laurie Hunsicker, analyst]

Okay. Okay. And then, I guess, just in terms of insurance agency acquisitions still probably thinking hopefully to do 2 to 4 per year, is that still the target? Or have things shifted?

[Robert Rivers, executive]

Yes. No, the pipeline is still very strong, and we would expect the same for this year.

[Laurie Hunsicker, analyst]

Okay. Okay. Great. And then on deferrals -- and if you don't have that, I can follow up with you off-line. Hotel deferrals that look like were $92 million of your $178 million. Just wondered if you had deferrals and sort of the other 3 watch buckets of restaurants, retail and entertainment. And if not, I'll hit you off-line.

[James Fitzgerald, executive]

We don't. I think the -- given the overall level, and as you rightly pointed out, the $91 million or $92 million that are in hotels really are a pretty high percentage of the modifications. That's the only breakout I've got.

[Laurie Hunsicker, analyst]

Okay. All right. Fair enough. I guess, Bob, last question to you. We last heard from you, obviously, 3 weeks ago with a very exciting acquisition. But since then, the M&A market has just been on fire. So can you sort of refresh us on what your appetite would potentially look like? And certainly, there are less players now in the Boston MSA. But what it would potentially look like? As you are doing this transaction, would you consider another if it comes your way while you're doing this? And just any other sort of viewpoint in terms of the movement we've seen in the last few weeks, would appreciate that.

[Robert Rivers, executive]

Sure, sure. First of all, the outlook is the same. Our focus remains the same market area, same size of transactions. The market continues to consolidate as it has over many years, although certainly, we've seen that heat up in recent months. And I mean, certainly, we'd be open to discussing other potential opportunities if they were to come along. But first and foremost, we're very focused on Century. It's a large deal for us relative to size. We want to make sure that we execute it well. And so all resources are very much focused on that and other critical projects that we would normally have in the course of the year. So to be clear, we certainly wouldn't attempt to integrate 2 organizations at the same time. However, to the extent that there were interested parties in having discussions for future date, we certainly would be open to those.

[Operator]

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

[Robert Rivers, executive]

Great. Well, again, thanks to all of you for participating in the call and listening in. Thanks to all of you who asked great questions, as usual. And wish you a terrific weekend. Look forward to connecting with you again in 90 days or so for our next earnings call. Thanks.

[Operator]

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