Eastern Bankshares Inc

NASDAQ:EBC

Earnings Call Transcript 2021-Q4

[Operator]

Hello and welcome to Eastern Bankshares Inc. fourth 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, 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 the 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 press release which can be found at investor.easternbank.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. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you.

I’d now like to turn the call over to Bob Rivers, Chairman and CEO. Please go ahead, sir.

[Bob Rivers, Chief Executive Officer]

Great, thank you Patricia. Good morning everyone and thank you for joining our fourth quarter earnings call. With me today is Jim Fitzgerald, our Chief Administrative Officer and Chief Financial Officer. We hope your new year is off to a good start and you and your families are safe and doing as well as possible amidst this latest chapter of the pandemic.

Eastern finished the fourth quarter and fiscal year 2021 with strong financial results, capping off another milestone year for the company which we will most remember for the acquisition of Century Bank and Trust Company, by far our largest acquisition to date and the one that we believe will help us further enhance our commitment to deliver an outstanding customer experience and provide competitive financial products and services through award-winning technology, all while serving as an important resource to our communities.

At more than four times the asset size of any prior transaction, this acquisition was made possible by the completion of our initial public offering only slightly more than a year ago, quickly validating our commitment to grow and expand our capacity to better serve our customers. For our 56,000 new customers joining us from Century, these benefits have been immediately realized through expanded access to full service locations throughout eastern Massachusetts and southern New Hampshire: enhanced digital and online tools, greater wealth management capabilities, and a suite of insurance offerings.

Likewise, these benefits collectively have enabled us to solidify Eastern as the largest community bank headquartered in Massachusetts, increasing our total assets to $24 billion and our deposit share position in the very attractive Greater Boston market to fourth from fifth, while forming the largest dedicated government banking department headquartered in Massachusetts and adding expertise and relationships within some of the largest sectors of our regional economy, such as healthcare and higher education. We also added 12 net new branch locations, expanding Eastern’s branch network to 99 offices while welcoming 252 new colleagues, representing more than 10% of our workforce today.

Most recently, we announced that Eastern has entered into an agreement to transfer approximately $500 million in cannabis-related and money service business deposit relationships which were acquired from Century to Needham Bank, a large local mutual bank. Although the marijuana industry represents a fast growing industry in Massachusetts, we evaluated it and concluded that this business is not well aligned with our approach to serving our business customers due to the special handling required with meeting the banking needs of cannabis-related businesses at this time. We think that Needham Bank has solid capabilities to provide extensive service to this important sector, and we applaud the strong commitment they are making to support it.

The successful integration of Century represented yet another landmark achievement amidst the ongoing COVID-19 pandemic, which required our team to virtually work together almost entirely over the course of seven months; however, this was just the main headline of another landmark year in which Eastern Insurance Group closed on two insurance agency acquisitions, our 33rd and 34th since we entered this business in 2022. In addition, we ended fiscal year 2021 with record earnings along with strong organic growth in both commercial loans, excluding PPP loans, and total deposits, as well as new highs in residential mortgage volumes and wealth management sales, and Eastern’s benefits group, a division of Eastern Insurance Group, was ranked by the Boston Business Journal as the second largest employee benefits broker in Massachusetts.

Our continued investments in digital and analytical tools for our small business customers earned us multiple accolades during the year while also continuing to receive among the highest ratings for customer service among banks nationwide. As another example of our continued focus on improving our service levels through new technology platforms, we contracted with a fintech company called Blend to provide an improved digital borrowing experience for our customers and bankers, launching an integrated online application platform designed to make the process of getting a home equity line simpler and faster. This platform has driven a significant improvement in online application completion rates and an increase in overall home equity line originations by over 20%.

We believe that the continued growth and success of our company provides greater resources to increase the support we provide to our customers, the communities we serve, and our employees, a focus that is more important than ever during these challenging times. It also allows us the opportunity to deliver greater value to our shareholders, as demonstrated by the second increase in our quarterly dividend over the past four quarters, which Jim will discuss later.

In 2021, Eastern continued to be an outsized participant in the Small Business Administration’s Paycheck Protection Program with over 6,500 loans, the second highest in Massachusetts, increasing our total PPP originations since the beginning of the pandemic to over 15,500 loans. These totals were in addition to being named the number one SBA lender for 7(a) loans in Massachusetts for the 13th consecutive year, generating twice the number of 7(a) loans originated by the four largest banks in the Commonwealth combined.

In an effort to address the lack of affordable housing, Eastern made a low cost $65 million line of credit to Mass Housing Partnership, the single largest loan we’ve ever originated, while increasing our commitment to Massachusetts’ Affordable Housing Alliance’s One Mortgage program.

Eastern was again ranked among the most charitable companies in Massachusetts, our fifth consecutive year in the top 10, with total donations by the Eastern Bank Foundation exceeding $15 million. Although most of this continued to support local non-profits addressing a wide array of community needs, the Eastern Bank Foundation invested an increasing amount with those working to facilitate greater economic inclusion and mobility in our region. Most notably, Eastern led the establishment of the Massachusetts Business Coalition for Early Childhood Education, which now includes 83 companies representing over 270,000 employees, along with another 20 business associations.

In 2021, the Foundation increased its community COVID relief with another $3.4 million designated to support culturally competent outreach and greater vaccine access within our most at-risk communities, food security, and other related COVID-19 support, bringing our total contributions addressing pandemic relief to $16.5 million over the past two years.

We also increased our commitment to advancing racial and gender equity through the implementation of our Road to Equity plan designed to drive greater transparency and accountability and faster progress in the recruitment and development of diverse talent, particularly within our senior and executive management ranks. This initiative also includes similar actions and measures designed to enhance our products and services for people of color and women within our customer base, and to foster greater diversity among our vendor relationships and charitable grant recipients. For the ninth consecutive year, Eastern received a perfect score on the Human Rights Campaign’s Corporate Equality Index, the nation’s foremost measure of LGBTQ+ workplace equality.

Of course, these many achievements are the result of the hard work and incredible commitment of our 2,081 employees. Many of those who brought our company public in 2020 also played a central role in the Century acquisition through subsequent and new work streams. Forty percent of our colleagues have at our front lines every day in our branches, our insurance offices, and in other critical functions meeting the needs of our customers while bearing the greatest health risks. Those working from home are also working hard amidst the disappearing separation between work and home, especially those with child and other care responsibilities. We can never thank our colleagues enough for all that they have endured and overcome to support our company, our customers, and our communities while delivering value to our shareholders.

Once again, we thank you for your interest in Eastern, and now I’ll turn things over to Jim for an in-depth review of our financial performance.

[Jim Fitzgerald, Chief Financial Officer]

Great, thank you Bob, and good morning everyone.

As Bob mentioned, we had a great milestone in the quarter with the closing and conversion of Century in mid-November. It was a significant financial transaction, and we are confident we came through the conversion and initial integration in very, very good shape. It was a great effort by all our colleagues, including the former Century employees who joined us and the entire former team at Century.

Conversions and integrations require a lot of energy and focus, so we were very pleased with our continued organic growth in loans in Q4, especially commercial loans, and the strong results in our fee-generating businesses. We look forward to combining this organic revenue growth with our larger operating platform post-conversion.

GAAP net income in Q4 was $35.1 million or $0.20 per share, capping off a record year of earnings for Eastern. Operating earnings for the quarter, which primarily exclude Century-related merger charges, were $44.9 million or $0.26 per share. Given the closing with Century was a noisy quarter, as expected, we provide detail on the non-operating items in the tables at the back of the press release and the presentation, and we would encourage everyone to review those disclosures and the reconciliation of non-GAAP earnings. I’ll also incorporate some comments on those items in my review.

On the capital management front, we remain very committed to enhancing long term shareholder value. To that end, our board of directors approved a 25% increase in our quarterly dividend to $0.10 per share payable on March 15. This increase reflects the higher level of earnings from the Century transaction and is our second dividend increase since going public. We also commenced our share repurchase program in Q4 and by the end of the quarter had repurchased 1.1 million shares at an average price of $20.42 per share, excluding commissions.

Book value at December 31 was $18.28 per share and tangible book value was $14.80 per share. At September 30, book value per share was $18.36 and tangible book value was $16.33. The reduction in book value per share reflects the increase in retained earnings being offset by reductions in other comprehensive income and the impact of share repurchases. The reduction in tangible book value reflects those items plus the goodwill in intangibles created in the Century transaction. We included a roll forward of our tangible equity in Appendix I to show the changes from the prior quarter.

The Century transaction closed in mid-November and changed the balance sheet significantly. From the prior quarter, assets increased by $6.1 billion, loans increased by $2.8 billion, securities by $2.8 billion, and deposits increased $6 billion. Century accounted for most of those increases. Excluding Century and PPP runoff, organic loan growth overall was 6% annualized in the quarter and organic commercial loan growth was 7% annualized. We were very pleased with these results. Acquisitions can be an interruption from business as usual, and we were happy to see the same general level of organic growth in these categories as we experienced in the prior quarter. We also added Appendix G to provide the quarterly loan flows to show the impact of Century and PPP on our organic loan growth activity.

Deposits increased $6 billion in the quarter. Century added $6.1 billion of deposits and we experienced some modest runoff of higher cost funds post-acquisition, including some seasonal declines in municipal deposits. As we have mentioned, we expect some repositioning of the Century funding over the next few quarters and some reduction in overall deposits. This was always part of our plan to optimize our balance sheet post acquisition and improve our overall financial performance. We were pleased with the very nominal increase in our overall cost of funds post acquisition for the fourth quarter and the fact that our deposit mix remained very strong at 60% checking products, as is outlined in the presentation on Page 12.

Asset quality continued to be sound through the fourth quarter as annualized net charge-offs were five basis points, NPL decreased by $7 million, and the reserve coverage ratio to non-performing loans increased from 246% to 280%. All of the measures were very strong, especially in light of adding $2.9 billion of Century loans. Many of our credit statistics were stronger after the acquisition than they were prior, which is a very, very good outcome.

Our COVID-19 modifications continued to reduce and ended the quarter at $107 million, down from $111 million at September 30. We continue to work with all the customers on modified loans and are comfortable with their progress and the terms of the modifications. There were no COVID modifications within the Century acquired loan portfolio.

For the fourth quarter, post acquisition capital remained very strong with a tangible equity to tangible assets ratio over 12% and our regulatory capital ratios were far above the well capitalized minimums.

I’ll now focus on earnings. Net interest income was $124.6 million on a fully tax-equivalent basis or $20.6 million above the third quarter. The increase was due in part to an increase of $4.9 million in PPP fee recognition compared with the prior quarter and an increase in average earning assets due primarily to the Century acquisition. The net interest margin on a fully tax-equivalent basis for the quarter was 2.54, essentially the same as Q3’s net interest margin of 2.53. I’ll add some comments on the overall purchase accounting impact of the transaction later in my presentation.

We continue to provide a look at the core margin in Appendix E to strip out the impact of PPP loans and the excess cash position. As you will see, the core margin was 2.45% or 9 basis points less than the overall margin. We expect that with the additional runoff of PPP loans and the further reduction of our cash position in 2022, there will be less of a difference between the core and stated margin than there has been over the last year and a half.

We included an update of our PPP portfolio on Page 14 of the presentation. At December 31, outstanding PPP loans originated by Eastern totaled $267 million and included $10.6 million of remaining fees to be recognized. We expect most of these loans to run off and the remaining fees to be recognized in 2022.

Operating non-interest income showed good growth in the quarter and totaled $44.5 million, up from $43 million in the third quarter. Deposit service charges, trust fees, and debit card fees all had good growth quarter over quarter. Insurance revenues experienced an expected seasonal decline compared to the third quarter.

Non-interest expense in the quarter was $143.6 million and $110.3 million on an operating basis. The merger expenses related to Century were $30.7 million in the quarter and are outlined in Appendix H. As we mentioned last quarter, we look forward to leveraging our operating platform post acquisition and are confident the 45% cost savings we outlined at the time of the acquisition will be realized in 2022.

As mentioned earlier, asset quality continued to be sound and we had a reserve release of $4.3 million for the fourth quarter compared to a $1.5 million release for the third quarter. As we have mentioned previously, we adopted CECL as of January 1, 2022, and I’ll provide some insights into our expectations on that later in my remarks.

We had a reduction in a deferred tax valuation allowance in the quarter which created a tax benefit of $2.9 million in the quarter compared to the $11.3 million of expense in Q3. We created the valuation allowance in 2020 after the IPO due to the uncertainty of getting the full deduction for the charitable contribution to the Eastern Bank Foundation. Our higher level of earnings, including the higher levels anticipated post Century allowed us to reduce the valuation allowance.

I wanted to provide some updates on our outlook and some comments on some recent announcements.

Since our last call, our expectation of the interest rate environment has changed. Our most recent forecast expects three 25-basis point increases by the Fed in 2022. This improves our net interest income outlook particularly for the second half of 2022, and we are currently expecting net interest income between $505 million and $520 million for the full year, which is up $10 million to $15 million from our prior outlook. Approximately 40% of our loan portfolio will adjust immediately with a Fed hike, providing an immediate lift to asset yields, but we expect a more significant impact from these rate increases to be felt in 2023.

There is no change in the outlook for non-interest income, non-interest expense, and our 2022 tax rate from the outlook provided last quarter. We continue to expense operating non-interest income to be in the range of $180 million to $190 million and non-interest expense to be in the range of $445 million to $460 million for the full year.

As previously mentioned, we adopted CECL on January 1, 2022 and expect a day one adjustment that will reduce our tangible book value per share by $0.10 to $0.15. The adjustment will flow through retained earnings and includes what is generally referred to as the acquisition double count for the Century portfolio.

As mentioned, we commenced our share repurchase program in Q4. Through January 27, we’ve purchased 2 million shares at a weighted average price of approximately $20.70. Our first priority is to buy shares to offset the dilutive effect of equity grants under our new shareholder-approved equity plan, which included director shares that were granted in Q4 of 2021 and the management awards that we expect to grant later in Q1. The remaining authority we have under our existing approval is approximately 7 million shares. We expect future activity to be based on market conditions.

We announced earlier this month a transaction with Needham Bank to assume Century’s cannabis business. It includes approximately $500 million of deposits and the team, including compliance staff that was dedicated to the business. There is no deposit premium for the transaction. Our goals when we announced the Century acquisition were to leverage the larger operating platform to improve our overall financial returns. The cannabis business has a number of complexities and compliance risks that we evaluated and concluded didn’t align with our strategy.

We were looking for a home for the business who would serve our customers well, and are very confident that Needham Bank, especially with the team that’s planning to join them, will do that. The transaction is pending regulatory approval, and we look to close in Q2. We’re very happy with the terms of this transaction.

A few additional comments. We filed an amended 8K earlier this week that provided additional required information on the Century acquisition and related accounting. There are a few things I would like to point out that are included in the filing. The mark-to-market on the loan portfolio was very small at a discount of $7 million. The mark on the deposit portfolio was also very modest at $1.8 million. The accretion of these marks will be over the lives of the loans and deposits, and we expect that they will have a very modest annual impact on our net interest income in 2022 and beyond.

Also in the disclosure is the fair value of the Century securities portfolio, which had a discount of $37 million to Century’s carrying value. At the time of the merger announcement, we expected a premium on the portfolio of $17 million. That swing in valuation was due to interest rates and created additional goodwill; however, we project that the going forward yield is higher than we originally expected. As we point out on Page 11 of the presentation, the overall securities yield at year end was 1.4% compared to the average yield of 1.28% in the fourth quarter. This includes the benefit of that securities mark to market.

We are even more positive about the Century transaction now that it’s complete than we were when we announced it back in April. The successful customer conversion provided us a quick return to business as usual, and the expanded footprint gives us a better market penetration and a bigger opportunity. We expect the strong organic loan growth that we’ve experienced to continue and our ability to leverage our platform and technology is enhanced.

We’re working very hard to capitalize on these opportunities and believe that the changing interest rate environment will likely create some tailwinds at our back. The all-cash nature of the Century acquisition means any improvements in earnings at Eastern will benefit solely our existing shareholders. We are particularly excited by that aspect of the transaction. We felt it was one of the strongest benefits of the transaction, and it’s great to see this benefit being realized so quickly.

In conclusion, we’re very pleased with our Q4 results. The combination of continued strong organic results complemented by the success of the largest acquisition in the company’s history was a fantastic finish to 2021. We believe our larger platform, expectations for continued strong organic growth, and the prospect for a higher interest rate environment puts us in great position for 2022, and we look forward to capitalizing on all these opportunities.

Thanks, and we’d be happy to take any questions.

[Operator]

[Operator instructions]

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

[David Bishop, Seaport Research]

Hey, good morning gentlemen.

[Bob Rivers, Chief Executive Officer]

Good morning.

[David Bishop, Seaport Research]

A quick question. Just remind us, maybe in terms of the balance sheet repositioning post the Century deal, I know you obviously had the cannabis deposit sale, but maybe some of the other puts and takes there just in terms of their loan portfolio and securities, just giving maybe a sense of the size and maybe the core attrition you might expect over here over the next couple quarters. Thanks.

[Jim Fitzgerald, Chief Financial Officer]

Sure David, I’ll take that, and Bob can certainly add in as well. I think if you take it one at a time, to unpack your question because there’s a lot there, on the deposit side, really there’s one or two areas. The first one you mentioned, which is cannabis, which we’ve articulated about $500 million in deposits, we will see that run off later this year. As I said, we expect that in Q2.

The other key variable on the deposit side is their municipal business. Eastern had always been in the municipal deposit business as well. We’re going to basically look to conform the way they did their business to make it look more like ours. They offered things like collateral and paid higher rates than we did, and as we see going forward sort of on a day-to-day basis, we’ll just try to move those considerations to, again, eliminate--reduce and ultimately eliminate the collateral and bring the pricing so it’s more aligned to ours. As that happens and we have a lot of overlap in customers as well, we do expect some runoff. We don’t expect that to be material, but that’s our expectation.

On the loan side, we’re very happy with the loan portfolio. I mentioned the credit quality earlier. The only issue that we see there is there are a couple of sectors where there are some loans that were out of market and areas that we haven’t historically done business in, geographic areas we haven’t historically done business in, and I think on a case-by-case basis, whether or not those are core loans to us or not, we’ll make that determination. As I said, we very much like the business, but just want to be realistic that as we go forward and we operate in more of an Eastern style, that loan runoff could happen.

On the securities side, as I mentioned, there’s $2.8 billion coming over. We have retained initially all of that. We do expect a little bit of modest repositioning as we go, but assume that will just take place over the next couple of quarters and I wouldn’t consider that significant.

[David Bishop, Seaport Research]

Okay, got it. Appreciate the guidance on the fee income and operating expenses. Noticed you mentioned, I guess in the preamble, you have done a couple of insurance agency acquisitions, but maybe some weakness in the fourth quarter and just year-over-year in those fees, maybe any color on terms of what’s driving that sequential and year-over-year decline? Then I’ll hop off.

[Jim Fitzgerald, Chief Financial Officer]

Thanks David. Just one reminder, and you may have implicitly included it in your question. There is a seasonality to the insurance business, so the drop from Q3 to Q4 is expected, and if you go back and look historically, you’ll see a very similar drop there. That’s one factor just to keep in front of everybody.

A couple things on the year-over-year decline. There’s really a couple things going on. Profits--there’s a component we used to call profit sharing. That’s not the right technical accounting, it’s actually incentive payments that are paid. It’s actually about 10% of the revenue of the business. Each year is a little bit different. Those payments are depending on the carrier, either based on volume or based on underwriting statistics, and they’re a little bit volatile, they’re based on those factors.

If you look what’s happening in that year-to-year decline, there’s changes both in the timing of them, because sometimes they’re paid differently each year, and also the amount. That’s what’s driving a lot of that. There are a few other things as well. We took a breather from acquisitions back in 2020 when we implemented a new operating system there, as we’ve articulated in prior calls, and really year 2, which would have been this year, would have been when the revenue from those acquisitions that we would have normally done would have occurred, so there were none this year.

I think fundamentally those explain it, and I think we’re very confident that going forward and over the long term, the insurance business is going to be a great success for us.

[Bob Rivers, Chief Executive Officer]

Yes, and David, just to add to that, the pipeline for agency acquisitions continues to be very strong and would expect to continue that pattern as we have in the past.

[David Bishop, Seaport Research]

Got it, appreciate the color.

[Operator]

Your next question comes from the line of Damon DelMonte from KBW. Your line is open.

[Damon DelMonte, KBW]

Hey, good morning guys. Hope everybody is doing well today.

[Bob Rivers, Chief Executive Officer]

Hey Damon.

[Damon DelMonte, KBW]

First question, just wanted to get a little bit more perspective on the expense outlook. Jim, I know you gave the full year guidance, but as you think of the first full quarter of the combined operations, you were at 110.3 on an operating basis this quarter. What’s kind of the starting point for the first quarter of ’22, do you have a range for that?

[Jim Fitzgerald, Chief Financial Officer]

We don’t, Damon. We spent a lot of time crafting the annual numbers. I think a couple things I would say to you, there are a few branches, Eastern branches that we actually are consolidating in the month of January, so there’s a little bit of timing and that’s included in the guidance that we gave you, just to be clear on that. But there are some timing considerations there, and also the equity plan doesn’t really kick in until the second quarter.

We did spend a lot of time on the annual number, and that’s what we’ve focused on.

[Damon DelMonte, KBW]

Got it, okay. Have you quantified publicly what the expected impact of the equity plan is going to be?

[Jim Fitzgerald, Chief Financial Officer]

We haven’t provided a number. It is in the guidance that we’ve given you. One thing I would articulate here is pre-IPO, we had a long term incentive plan for management. Cost was about $10 million to $11 million a year, $10 million to $12 million a year, and as we think about the equity plan, we’re just basically looking to replace that expense. Obviously there’s differences in the plans and differences in timing, but in terms of our approach, it was to in essence replace the cost of the prior plan.

[Damon DelMonte, KBW]

Got it, okay. That’s helpful.

As you look at your outlook for loan growth, another decent quarter for you guys. How are you feeling about your pipeline right now going into 2022? What areas of the commercial platform seem to be presenting the best opportunities for growth? What are some of the trends and expectations that you have?

[Jim Fitzgerald, Chief Financial Officer]

I think, Damon, we’re proud of our commercial teams across the board. They all really are very well positioned and have a great history and track record. As a middle market lender that has a specialty in real estate and commercial, and then what we call community development lending which you might refer to as non-profit lending, we feel like those are three key strengths. The market here in eastern Massachusetts and southern New Hampshire, where we operate, is very strong in all of those sectors. Demand seems very good. We’re a very good competitor, so it isn’t any one place, it’s really the combination of those areas that we expect growth. There’s obviously variability quarter to quarter, but if you look at our track record over time, all three of those units have grown and we expect that to continue.

[Bob Rivers, Chief Executive Officer]

As Jim’s comments indicate and as the numbers indicate, those teams have been able to be focused really throughout the integration of Century. Century’s book is very clean, they didn’t have a big team. As a result, our team could continue to focus on being out in the market. Pipelines are good in all sectors, and we continue to add to the team through recruitment, so--and as we wait for another opportunity for acquisitions, that’s what we’re entirely focused on, is how do we continue to drive growth, particularly commercial loan growth, and again as Jim mentioned, the team is fantastic to start with, has been for a long time, and continues to grow.

[Damon DelMonte, KBW]

Great, okay, that’s helpful. Thanks.

If I could squeeze one more in--

[Jim Fitzgerald, Chief Financial Officer]

And no bias on the team comment, by the way, just because we happen to know them and like them.

[Damon DelMonte, KBW]

I got it. Just to squeeze one more in on the outlook with credit, you’ve had four quarters in a row of provision reversal. What are your thoughts going into 2022, especially with the adoption of CECL? Do you feel you’re going to have to start to provide for loan losses, or do you think you could maybe keep it really low or even maybe more release?

[Jim Fitzgerald, Chief Financial Officer]

That’s a tough question. We just--sorry I’m laughing, bragged about our commercial loan team a second ago, we may brag about our credit and accounting team now. We just completed--not just, but we’re really--it has been a lot of work to adopt CECL and get everything up and running. I think generally that creates a different accounting than we had in the past, so it’s hard for us to give any guidance on that, but we believe the overall credit environment continues to be very strong. The economic environment is very strong, and that leads to a good credit performance.

I don’t believe the reserve releases will continue for that much longer, but it’s hard for us to give any guidance on that, given the adoption of CECL.

[Damon DelMonte, KBW]

Fair enough, that’s good. Great, thanks, and good luck with the blizzard this weekend.

[Bob Rivers, Chief Executive Officer]

Yes, thanks.

[Operator]

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

[Laurie Hunsicker, Compass Point]

Yes, hi. Thanks, good morning. Yes, I would just echo what Damon said - good luck with the snow.

[Bob Rivers, Chief Executive Officer]

Yes, the forecast keeps rising every time we look at it.

[Laurie Hunsicker, Compass Point]

Absolutely. Just circling back on expenses, can you help us think about--and this is just one of the line items, it looks like you break this out now and I didn’t see it before this, operational losses for the quarter of $1.6 million in December, and you break out historically. Is that something that’s going away, or what is that number? How do we think about that?

[Jim Fitzgerald, Chief Financial Officer]

Those generally, Laurie - and admire you’re going for details, but those generally are operational losses in the branches or ACH. They tend to be pretty modest, and we think of them as business as usual. We do a lot of transactions through the branches and through the ACH mechanism, and that’s just a cost of doing business.

[Laurie Hunsicker, Compass Point]

Got it, okay. Great, that’s helpful.

Then can you just refresh us in terms of merger charges, where you are in terms of taking that? I know you had said you were going to be at $64 million - is that still the right number, is it higher, and any thoughts on the timing of when we see it? I’m guessing most of it’s in the first half, but can you help us think about that?

[Jim Fitzgerald, Chief Financial Officer]

Sure, so--and I didn’t cover it in my comments, maybe I should have. Yes, you are right - the initial anticipated amount we had at the time of the announcement was much higher than what we recorded. If you look at the fourth quarter and prior, it’s $35 million, and that compares to the $63 million or $64 million you referenced.

A couple of comments I’d make - we are pretty much done with that. We’ve done all of the branch things, etc., those were booked in November, so we believe we’re complete there. That’s not to say there wouldn’t--you know, there might be a cannabis transaction related straggler, but generally we don’t anticipate much in the way of those expenses this year.

One comment on the reconciliation is Century--so we came well under, as you referenced. One honest reminder is Century actually paid a fair amount of--the expenses that were Century-related were paid by Century, so even though they’re in our numbers back in April, the accounting actually went through their books pre-closing.

[Laurie Hunsicker, Compass Point]

Got it, that’s helpful. Okay, that’s great, thanks.

Then cost saves, obviously the cost saves were projected to be 45%, $37 million or so. How much of that--I guess, where are we with realizing that? How are you thinking about that? Is that ahead of schedule, or can you help us think about that?

[Jim Fitzgerald, Chief Financial Officer]

Yes, here’s what we’ve said, Laurie, and what I would say again. At the time, we announced 45%. We actually thought it would take into 2023 to get the full amount. What we articulated at the end of last quarter was that the guidance that we’ve given you and confirmed today, $445 million to $460 million of operating expenses, includes 45% reduction or that $37 million you referenced will be in 2022. As I mentioned earlier, and I think you know, we did the conversion in November, a lot of the expenses come out at that point. There were some branch closures and re-positionings that are taking place in January of this and maybe February, but those--essentially all the branch transactions were done in the fourth quarter of last year.

One of the strongest things we felt was as we entered 2022, we were trying to get back to business as usual and have all of that in the rear view mirror, and that’s what we believe you will see.

[Laurie Hunsicker, Compass Point]

Okay, great. Then last one from me on net interest margin. If we look at this and we say, okay, we strip out that remaining $10.7 million, $10.6 million in PPP fees, Century obviously we’re going to see a full quarter reflected in the March quarter, but they were running at 180 margin. You mentioned that you’re doing some re-positioning there, you obviously still have cash. How should we think about--in other words, if we strip out what’s going to be probably the remainder of your PPP gains, if we just look at where you would be core in March prior to the Fed potentially moving, how should we be thinking about that on a pro forma combined basis?

[Jim Fitzgerald, Chief Financial Officer]

Right, so there’s a number of things to unpack there, so I’m going to try and go one at a time, or take it a little bit slow.

The first place I’d point you to is our guidance. Previously we were a little bit low, but we’ve increased it to be between $505 million and $520 million for the year. To your point, if you want to focus on the margin, there’s a couple of things going on that are detractors there. You referenced the PPP fees, which are down significantly from where they had been in 2021, and there’s about $10 million left. There is not--as I’ve tried to make clear, there’s not much in the way of purchase accounting that’s going to roll through and make an impact there. The Century margin was below ours, so that’s also a detractor, and as we disclosed in prior 10-Ks and 10-Qs, we had some hedge gains that we had closed out in prior years that amortized, and they basically finish up in early 2022 as well, so those are kind of the detractors.

What you see going forward, though, is the impact of the securities repositioning I tried to articulate, as well as the rate--the complexion of the rate change and also the continued organic loan growth on the pace that we’ve been talking about.

What we’ve said in the past, and I think is still a very fair comment, is in 2022 I don’t know how much the margin is actually going to change from where it is now, but we do think the full impact of all these rate changes will be really seen in 2023.

[Laurie Hunsicker, Compass Point]

Okay, so sorry - just one more question around that, because I feel like maybe something is wrong in my math. I’m looking at the pro forma all combined, and obviously without knowing the actions you’re taking around Century, and I’m closer to a 2.3 margin versus, obviously, the 2.54 that you reported. Am I missing something? Is there any sort of help you can give us, thinking about even just a June quarter margin, what it would look like?

[Jim Fitzgerald, Chief Financial Officer]

Well, one question I’d ask is make sure you have the cannabis and some of the deposit runoff that we’ve talked about in there. That’s obviously not going to change net interest income, but it is going to improve the net interest margin.

[Laurie Hunsicker, Compass Point]

Got it, okay. I will follow up with you guys offline.

I guess Bob, maybe one question for you. Now that you’ve done this deal and obviously you now [indiscernible], how are you thinking about future acquisitions, and any thoughts in terms of what you’re seeing in M&A? Thanks.

[Bob Rivers, Chief Executive Officer]

Yes, really it’s the same as before, Laurie. We continue to be ready to undertake partnerships primarily focused on the banking sector, but obviously continued in insurance agencies and possibly wealth, if we could find something smaller that fit in that particular space. Really, the posture and the interest and the conversations haven’t changed, it’s really sort of a constant flow of engagement around ideas. But really, our primary focus is really finishing up Century, continue to drive organic growth particularly in our commercial and small business businesses, as well as investment in technology, which continues.

Again, we have the capital, we have the interest, and stand ready when an opportunity should arise.

[Laurie Hunsicker, Compass Point]

Great, thanks for taking my questions.

[Operator]

Again, to ask a question, please press star, one on your telephone.

Your next question is from Janet Lee from JP Morgan. Your line is open.

[Janet Lee, JP Morgan]

Hello everyone. To clarify your NII guidance, obviously you’re incorporating three rate hikes now versus one in the third quarter. Is this $10 million to $15 million increase in NII guide just incorporating that additional two rates hikes in the guide, and can you just tell us the annualized NII impact from, say, a 25 basis point rate hike?

[Jim Fitzgerald, Chief Financial Officer]

Sure, so a couple of components. I’m going to go slowly and take them one at a time.

The guidance is up, as you mentioned, $10 million to $15 million. The reason it’s up is dominated by the change in rates. There are other small changes - obviously we do a lot of work to put that together, so there are other small changes, but I think the way you asked the question, it is rate driven--rate outlook driven, and as you said, we went from one rate increase at the end of the year to now three, so that accounts for that at a high level.

I think a single 25 basis point increase by the Fed on an annualized basis adds about $8 million to $10 million of net interest income for Eastern, assuming our normal deposit betas. Again, that’s $8 million to $10 million that’s annualized, which is my comment about why the second half of ’22 is why you’ll see that, and in particular in 2023. But it’s $8 million to $10 million annualized, assuming our normal deposit betas.

[Janet Lee, JP Morgan]

Okay, that’s helpful. To follow up on that, I heard that you’re assuming lower cash levels for 2022, but can you just give us more details around what level of cash you’re assuming versus $1.2 billion in the fourth quarter, and what’s your current appetite for deployment of cash into securities?

[Jim Fitzgerald, Chief Financial Officer]

Just to make sure I understood the first part of your question, Janet, it was the tax rate?

[Janet Lee, JP Morgan]

No, cash - sorry, cash level.

[Jim Fitzgerald, Chief Financial Officer]

Oh, cash? I’m sorry. Got it. I didn’t connect the dots there, but now I’ve got it. Thanks for clarifying.

If you look at our securities portfolio at year end, it’s between $8 billion and $9 billion. We expect some modest repositioning there, but a similar sized portfolio. The cash that we had at the end of the year that you can see - a reminder, we’ve talked about a little bit of deposit runoff from the repositioning of Century and then also the cannabis, so we do expect the cash position to normalize as we get through those elements, which we think are in the first half of this year. We don’t envision--you know, a year ago when we were talking about how much money we were going to invest quarterly in securities, we’re at kind of a steady state now. The portfolio is relatively large and we see managing that, but we don’t see it much bigger than where it is today, given the balance sheet size that we have right now.

[Janet Lee, JP Morgan]

Okay, that’s helpful. Following up on Damon’s question earlier on loan growth, I don’t think I’ve heard, what is your current outlook for total organic loan growth ex-PPP and ex-Century acquisition? I think last quarter, you said you were targeting mid to high single digit commercial loan growth, and obviously this quarter we’ve seen many regional banks coming out more bullish on C&I growth outlook, so just wanted to see if there’s any update on your commercial loan growth outlook as well as just total organic loan growth outlook for 2022.

[Jim Fitzgerald, Chief Financial Officer]

Sure, so just to try and be precise in the answer, when we say our commercial loans, that includes commercial real estate, our commercial loans, typically called C&I, and then also our community development lending group, which is part of our--that’s our commercial roll-up. What we’ve articulated in the past and still see is organic loan growth that we’ve had historically, which is in the high single digits, so last quarter it was 8%, this quarter it was 7% - that aligns very much with what we’ve done historically, and even though the balances are a little bit bigger now, we’re still comfortable with that expectation going forward.

Again, high single digits for commercial loan growth, and as I said, if you look at our track record over an extended period of time, we think that’s very consistent.

Mortgage and consumer loans, we’ve had--the early part of this year, we had a nice increase in mortgage loans. We do portfolio jumbo loans - that’s something we’ve done for the last year and a half or so with the excess as a good way to use the excess liquidity up. This quarter, we had, call it 5% to 6% annualized growth there. We think that’s probably sustainable.

One trend that we’re starting to see the beginning of is a little bit of life in our home equity lines and loans, and with higher rates and probably less mortgage activity, there might be a little bit of a subtle shift from mortgage into home equity. But those consumer categories in total, we think somewhere 5%-ish loan growth organically.

[Janet Lee, JP Morgan]

Okay, so excluding PPP, commercial loan growth of high single digits, and for consumer, around mid single digits, 5%-ish, right?

[Jim Fitzgerald, Chief Financial Officer]

Correct.

[Janet Lee, JP Morgan]

Okay, that’s helpful. Lastly, my question on your share repurchases offsetting dilution from your equity plan grants, am I understanding your earlier commentary correctly that the amount of repurchases required to offset dilution plan is 1.2 million shares, and the rest of 7 million of shares that are currently available are sort of dependent upon market conditions?

[Jim Fitzgerald, Chief Financial Officer]

No, let me just go back and try and say it slowly what our plan is. What we repurchased at the end of the year was 1.1 million, and what I articulated is through yesterday, in essence, we’ve repurchased 2 million shares. That’s one--that’s just a status update, if you will.

[Janet Lee, JP Morgan]

Oh, okay.

[Jim Fitzgerald, Chief Financial Officer]

Our strategy for that is to be very--prioritize buying in shares to offset the dilutive effects of the equity plan, which includes the shares that were issued last year and would be in the year-end counts and are disclosed, and then also the upcoming management grants under the equity plan. The goal is to--the priority, not the goal, the priority is to make sure we offset that dilution. We haven’t disclosed the number of shares there, but we’re on track to do that.

Then once we complete that priority, we still have considerable amounts still in our authorization, and future purchases beyond that would be based on market conditions.

[Janet Lee, JP Morgan]

Okay, got it. All right, thanks for taking my questions.

[Operator]

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

[Bob Rivers, Chief Executive Officer]

Again, thank you Patricia. Thanks to all of you. I really appreciate you taking the time to join us this morning and wish you the best for the rest of the winter. We look forward to talking with you again in the spring.

[Operator]

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