Eastern Bankshares, Inc. (NASDAQ:EBC) Q4 2022 Earnings Call Transcript

Eastern Bankshares, Inc. (NASDAQ:EBC) Q4 2022 Earnings Call Transcript January 27, 2023

Operator: Hello, and welcome to the Eastern Bankshares, Inc. Fourth Quarter 2022 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 that this event is being recorded.

All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will a question-and-answer session. . I would now like to turn the call over to Bob Rivers, Chair and CEO. Please go ahead.

Robert F. Rivers: Thank you, Joanna. 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 I’d like to start this morning’s call by thanking my 2,100 colleagues at Eastern for all of their good work in making 2022 such a successful year. Together, we posted record net income for 2022 of $199.8 million, 29% higher than our previous record in 2021. As always, this bottom line result is the product of a number of significant achievements, including the completion of the integration of Century Bank, record commercial loan and home equity originations, outstanding asset quality, the acquisition of two insurance agencies, the continued upgrade of our technology platforms as well as many other notable accomplishments.

For example, Eastern was once again recognized by the Small Business Administration as The Top Small Business Lender in Massachusetts for the 14th consecutive year and was ranked among the top 10 most charitable companies in our region by the Boston Business Journal for the tenth time. All of this, along with the strength of our underlying franchise is a testament to their hard work and tremendous commitment. In a moment, I’ll turn it over to Jim for an in-depth financial review, but I wanted to first provide some high-level comments on our results for the fourth quarter and our near-term outlook. The fourth quarter of 2022 proved to be a more difficult environment than earlier in the year. Like the industry, we experienced deposit outflows and an upward repricing of deposits that quickly increased our cost of funds due to an aggregate 425 basis points of rate hikes by the Federal Reserve through 2022.

It’s been important for us to keep close to and respond to the needs of our customers with competitive pricing to attract and retain long-term customer relationships. We are watching our funding trends very carefully, but do not expect a reprieve from the more difficult competitive landscape over the near term. We saw a six basis point decline in our net interest margin in the fourth quarter, and we expect the margin to continue to contract. Given the current environment, as we look into 2023, we are prioritizing profitability over growth. We expect higher market interest rates and an overall softening in the economy to reduce loan demand. Coupled with our higher marginal cost of funds and taking into consideration our required returns, we expect the commercial loan growth rate in 2023 to be in the low single digits following an extremely successful year in 2022.

We are proud of our diversified loan portfolio and the many commercial customer relationships we have built at Eastern over the years. We are carefully watching for any signs of credit deterioration, but remain very pleased with all of our credit metrics in Q4. Our reserves and capital levels are very healthy. We are taking many steps to realign and adjust to what we expect will be a more challenging year in 2023. As Jim will cover in more detail, we have significantly reduced our expense guidance. With the change in the environment and our growth outlook, we have pulled back across the board and reduced our expense budgets accordingly. We will continue to evaluate expenses as the next few months and quarters unfold. We have navigated our way through challenging times before and have successfully worked our way to the other side.

I am very confident, we will manage our way through this environment as well as the fundamentals of our company and our strong market position in Boston keep us poised for long-term success. And now I’ll turn it over to Jim.

James B. Fitzgerald: Great. Thank you, Bob, and good morning all. As Bob mentioned, our Q4 results reflect solid operating results, but also a very challenging and competitive environment. Net income was $42.3 million or $0.26 per diluted share, and operating earnings were $49.9 million or $0.31 per diluted share. As previously disclosed, we were required to use settlement accounting for our pension plan in Q4 and incurred a nonrecurring pretax expense of $12 million due to the unusually high number of lump sum payout levels in 2022. This expense is primarily responsible for the difference between our GAAP and operating results. Our operating net income of $49.9 million and $0.31 per share compares with $55.7 million and $0.34 per share in Q3.

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Net interest income was $150 million in Q4, down $2.2 million from Q3 or a decline of 1%. The net interest margin on a fully tax equivalent basis was 2.81% in Q4 compared with 2.87% in Q3. The cost of interest-bearing liabilities increased from 18 basis points to 77 basis points in the quarter, which exceeded the increase in our interest-earning asset yield of 29 basis points. We experienced loan growth in all of our major portfolios in the quarter. Commercial loan growth was $313 million in the quarter or 13% on an annualized basis. Mortgage loan growth was $342 million, including $289 million from our Embrace relationship and annualized consumer loan growth was 4.8%, which was primarily in home equities. Asset quality continued to be very sound with net charge-offs of one basis point and nonperforming loans at a very low 28 basis points of total loans, both of which are consistent with Q3 levels.

Our Board approved a dividend of $0.10 per share payable on March 15th to shareholders of record of March 3, 2023. We repurchased 1.5 million shares under our share repurchase program in the fourth quarter, most of these share repurchases were early in the quarter. I’ll now make some comments on the balance sheet. Assets were $600 million higher in Q4 than Q3, and we ended the quarter with $22.6 billion of assets. Total loans ended the quarter at $13.6 billion, increasing $672 million from the $12.9 billion at the end of Q3. Total deposits increased $241 million in the quarter, which included an increase in brokered deposits of $929 million and outflows of approximately $700 million of customer deposits. Borrowings increased $318 million in the quarter and totaled $741 million at the end of the quarter.

The increases in broker deposits and wholesale borrowings were used to fund the deposit outflows and the increases in loans. The securities portfolio was down $160 million as reductions from cash flows and sales were $210 million and offset by market appreciation of $50 million. Shareholders’ equity increased $56 million in the quarter due to retained earnings and improved AOCI, offset by the share repurchases. Moving to the earnings review, as I mentioned, GAAP net income was $42.3 million or $0.26 per diluted share and operating earnings were $49.9 million or $0.31 per diluted share. Net interest income of $150 million was $2.2 million or 1% lower than Q3. The net interest margin was 2.81%, down six basis points as funding costs increased more quickly than asset yields.

The cost of interest-bearing liabilities increased 59 basis points to 77 basis points due to deposit rate increases geared towards core customer retention as well as the use of FHLB borrowings during the quarter. The overall cost of total deposits, including demand deposits, was 37 basis points, up 27 basis points from the prior quarter. The graph on Page 12 of the presentation shows monthly detail on the rise of total interest-bearing liability costs and how the beta is evolving over the cycle. We’ve added some new tables on net interest income and net interest margin on Page 7 of the presentation that provide more detail on these changes as well. The provision for loan losses was $10.9 million in the quarter compared to $6.5 million in Q3.

Similar to Q3, loan growth was the driver, attributing $7 million of the $11 million provision. The allowance as a percentage of loans increased a modest three basis points in the quarter. Noninterest income on an operating basis was $42 million in Q4. Insurance revenues were $22 million in the quarter, up 5% from the same quarter of 2021 and down $1.7 million from Q3. Other operating noninterest income line items were generally in line with either the prior quarter or the prior year quarter. As we disclosed in Appendix A and B in the presentation, there was a reduction in non-operating losses from the rabbi trust assets and security sales in Q4 compared to Q3. Including the pension settlement costs, noninterest expense was $132.8 million in Q4 compared to $116.8 million in Q3.

On an operating basis, noninterest expense was $119.6 million compared to $117.4 million in Q3. Salaries and benefits, occupancy, professional services, and loan expenses were all down in the quarter from Q3, while data processing and marketing were higher. Other expense was higher due to the previously mentioned pension expense and an increase in the provision for credit losses on off-balance sheet credit exposures. I’ll include some comments on our outlook for expenses later in the presentation. The tax rate in the quarter was 17% due primarily to some timing items, and the tax rate for all of 2022 was 22.1%. Asset quality continues to be very sound. Through the end of the fourth quarter, net charge-offs were very close to zero. NPLs are at very low levels, and our reserve coverage to NPLs is over 360%.

We continue to carefully monitor all of our portfolios. We have several early warning signals as part of our credit review process, and based on those early warning signals, we don’t see any significant items of concern at this point. As Bob mentioned earlier, we expect the economy to soften, and we will continue our credit and portfolio review processes diligently. I wanted to review our outlook page and make some additional comments. As mentioned, there’s greater uncertainty in the environment, specifically related to expectations for liquidity in the net interest margin. We expect the challenging liquidity conditions to continue over the next few quarters, and this uncertainty makes our outlook subject to a wider margin of error than prior quarters.

We are expecting commercial loan growth to be in the low single digits for 2023 due to the impact of higher rates on new originations. We would expect mortgage and consumer loan growth in a similar range. We experienced a net interest margin decline of six basis points in Q4 and expect further declines until the funding environment stabilizes. We added some new tables on Page 12, showing the increase in deposit costs and interest-bearing deposit costs as well as the total, including wholesale funding. We expect our noninterest income for 2023 to be between $170 million and $180 million. We expect reductions in deposit service charges due to changes in our overdraft practices, which you might recall us discussing in prior calls, as well as pressures on mortgage and interest rate swap fees due to market conditions and interest rate levels.

We are lowering our operating noninterest expense guidance for 2023 and expect it to be in a range of $465 million to $475 million. This is a reduction of $30 million from the Q3 guidance of $495 million to $505 million. Given the uncertain environment, we’re very cautious about adding expenses at this time and have undertaken actions to reduce all of our budgets. We’ll continue to assess expense levels as we move forward. Most economic forecasts expect a softening economy that will likely turn into a modest recession, and we will continue to monitor all of our asset quality accordingly. The projected slowdown in loan growth is expected to have an impact on loan loss provision levels. As I mentioned earlier, $7 million of the $11 million provision in Q4 was due to loan growth.

Share repurchase activity will depend on market conditions, capital, and liquidity levels. In particular, we’ll be looking for liquidity conditions to improve before considering share repurchases at the pace we had earlier in 2022. In closing, we continue to focus on our core deposit customers and expect to find the appropriate balance between deposit retention and our short-term net interest margin. Over a long period of time, those relationships have been a great source of value for Eastern, and we’re very confident they will continue to be in the future. Thanks. And Joanna, we’re ready for questions.

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Q&A Session

Operator: Thank you. . First question comes from Janet Lee at J.P. Morgan. Please go ahead.

Janet Lee: Hi, good morning.

Robert F. Rivers: Good morning Janet.

Janet Lee: I know there’s a lot of uncertainty, it’s hard to forecast, but I just want to get more color on your deposit cost. I think in the second quarter, you said you were modeling 150% higher than the prior cycle level of 20% for the interest-bearing deposit data. So I think that gets around 30%. Do you have any updated view on that due to cycle interest-bearing deposit beta?

Robert F. Rivers: So Janet, I think two things. First of all, it’s nice to talk with you and welcome back, and congratulations. I think a few things to respond to that. One thing that we’ve learned over — in particular, the fourth quarter, but parts of the third quarter as well is that the history this cycle is different and the history that we all researched and tried to learn from wasn’t all that applicable to this cycle, but velocity of change was faster. It’s a little harsher — and so I don’t think that we’re looking at prior betas and extrapolating to this environment. What we did do was provide the information through the end of the year on the couple of pages that we added to show you what we’ve experienced. And as we’ve articulated here, we think it’s going to continue to be a challenge and that’s what we would say to that at this point.

Janet Lee: Okay. So I mean, yes, I totally understand, totally on the same page that the cycle is very, very different from the prior cycle. But last cycle, you did better than your peer in terms of managing deposit costs lower than the industry, but in terms of your preference or planning lives, is it your plan to pay up on your deposits much closer to market rates and retain the deposits or stop that deposit outflows or are you still like trying to like manage your NIM and keep your deposit costs stay below peers in terms of your preference as you look out into the next few quarters?

Robert F. Rivers: Sure, it’s a balancing act. It’s — first of all, it’s a difficult question. It’s difficult to answer, but it’s a balancing act, right. We have many, many customers that we’ve had for a very long time, and we value those relationships. Those relationships are very important to our future and rates are much higher, and we’re looking — we have repriced many of those and continue to reprice them. And as I said, very much appreciate the long-term nature of the relationship and the value of that deposit. We obviously are watching our margin as well, and it’s a balancing act between those two things as to how we price deposits. It’s just a balancing act that we’re going through, very similar to the way we’ve gone through it before.

Janet Lee: So in terms of everyone is seeing — I mean, basically, everyone is seeing noninterest-bearing deposit outflows. But in your case, if I — if we back out the broker deposits, I think the deposits outflows was a little bit more pronounced. Is this just a function of your customers like leaving in search of like higher yields, like where — like in what part of your customer base are you seeing like the most deposit outflows and are you planning to use the brokered CDs going forward to plug the hole, is that the plan that you’re going to continue considering in the next few quarters?