Yahoo Finance Eastern Bankshares, Inc. (NASDAQ:EBC) Q1 2024 Earnings Call Transcript
Eastern Bankshares, Inc. (NASDAQ:EBC) Q1 2024 Earnings Call Transcript April 27, 2024
Eastern Bankshares, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Eastern Bankshares, Inc., First Quarter 2024 Earnings Conference Call. Today's call will include forward-looking statements, including statements about 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 risks and uncertainties that can cause actual results or the timing of events to differ materially from the views expressed today. Before information -- more information about such risks and uncertainties is set forth under the caption forward-looking statements in the earnings press release as well as in the Risk Factors section and other disclosures in the Company's periodic filings with the Securities and Exchange Commission.
Any forward-looking statements made during this call represent management's views and estimates as of today, and the company undertakes no obligation to update these statements as a result of new information or future events. During the call, the company will also discuss both GAAP and non-GAAP financial measures. For a reconciliation of GAAP to the non-GAAP financial measures, please refer to the company's earnings press release, which can be found at investor.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. [Operator Instructions] Thank you. And now, I would like to turn the call over to Bob Rivers, Chair and CEO.
Please go ahead, sir.
Bob Rivers: Thank you, Sylvia. Good morning, everyone, and thank you for joining our first quarter earnings call. With me today is Jim Fitzgerald, our Chief Financial and Chief Administrative Officer, who will go through our financial highlights in a few minutes. We expected a continued challenging environment as we entered 2024, and we've not been disappointed. Higher for longer interest rates, the inverted yield curve, and normalizing credit costs were all present in the first quarter and we expect them to continue through the rest of the year. Our plan to meet these challenges has been twofold. The first is to maintain a fortress balance sheet, which we believe will continue to be a competitive advantage over time and allow us to capitalize on opportunities as they become available.
Our Q1 balance sheet demonstrates this. Specifically, our capital ratios are robust with a CET-1 ratio of 18.5% and a TCE ratio of 11.6%. Our liquidity position is very strong with balance sheet cash of $700 million and essentially no wholesale funding. Our credit profile is a real strength with low levels of nonperforming loans, very manageable charge-off levels, and a healthy reserve that covers our nonperforming loans by more than 2.5 times. The second is our anticipated merger with Cambridge Trust, which demonstrates how we are capitalizing on opportunities. During the course of our integration planning, we have become even more confident that the Cambridge Trust franchise is among the most valuable in our market. Their wealth, deposit, and lending businesses are all very additive to our own and will help us solidify our position as a leading independent bank in the Greater Boston area.
In addition, we will create efficiencies and synergies that will benefit shareholders as we consolidate the two companies. Our capital strength allows us to absorb and mark the Cambridge Trust balance sheet to market, to reprice asset yields to market, and create a higher net interest margin. The combination of expense savings and a better margin accelerates our financial performance metrics and will allow us to significantly grow earnings and EPS in an otherwise very challenging period. The company's capital position post-merger will be very strong and we look forward to revisiting our capital management strategies, including share repurchases, following the approval of the merger. We also continue to work with our regulators and expect to receive approvals later this quarter and close early in the third quarter.
In the interim, we are very busy planning for the integration and working closely with Cambridge's CEO, Denis Sheahan, and his entire management team. I am pleased to say that those efforts are going very well with an increasing camaraderie built upon a shared set of values and very similar cultures, which gives us confidence that the merger will provide the scale we need to better serve our customers and the communities upon whose vibrancy we depend while delivering strong financial returns for our shareholders. Our partnership with Cambridge Trust also advances our goal to be Greater Boston's premier local community bank, one characterized not only by expanded and enhanced capabilities in delivering solutions to the financial needs of our customers, but with a deep understanding of and commitment to the region.
Recently, I was honored to be named among the Most Influential Bostonians in Massachusetts by Boston Magazine for the fifth consecutive year, a list that includes our President, Quincy Miller, and several members of our Board of Directors and Advisory Boards. Such recognition and many others we receive every year are a reflection of our extensive community engagement and rising reputation in the market. Those that truly know us recognize that this is Eastern special sauce and a key differentiator and driver of our business. While some of these awards are presented to us as individuals, they are always a reflection of the extremely talented and hardworking team we are privileged to work with at Eastern. For all this and more, I am extremely grateful to all of our colleagues at Eastern and those soon joining us from Cambridge Trust, as well as our customers and community partners for their tremendous support.
Before I turn it over to Jim for a detailed discussion of our financial results, I'd like to thank him personally for his over 12 years of significant contributions to our company. In yesterday's earnings release, we announced Jim's upcoming retirement, a truly bittersweet and momentous change for our company. When Jim joined us as our Chief Financial Officer in 2012 after serving much -- at much larger banks as their CFO. Eastern was a mutual bank with $8 billion in assets. Because of that prior experience, he brought us a vision and understanding of how Eastern could best evolve into a major player in the Greater Boston market. Due to his leadership in executing our initial public offering 3.5 years ago, three and soon four bank mergers, along with innumerable insurance agency acquisitions and ultimately the divestiture of that business last year, Eastern will have grown by almost three times during his tenure.
Serving in the dual role as both our CFO and our Chief Administrative Officer, Jim has also had a significant positive impact in guiding the increasing sophistication and efficiency of our technology and operating platforms. As importantly, he has served as a key mentor, coach and friend to our management team, starting with myself, for whom he has been a strategic partner and confidant. Thankfully, Jim will continue to serve in his current role until a worthy successor has been identified and beyond as a special advisor to Denis, Quincy and I, as well as our Board, as we complete our integration of Cambridge Trust, and prepare for the next steps in our journey. And with all of that said and so much more that could be, I turn it over to Jim.
Jim Fitzgerald: Well, thank you, Bob. Thank you for that, and good morning, everyone. As Bob said, and you all know, it's been a very challenging environment in the first quarter, and we expect that to continue for the next few quarters as well. Given that backdrop, we're very pleased with our first quarter results as our expense levels provided a foundation for solid earnings. GAAP net income was $38.6 million, or $0.24 per share, and operating net income was $38.1 million, or $0.23 per share. I'll go through the details shortly. As Bob said, we continue to be and have high expectations for the Cambridge merger. There seems to be a little confusion, so we wanted to be very clear on the timing and regulatory approval. Consistent with what we communicated in our 8-K in February, we're working with our regulators to receive their approvals.
We expect those approvals later this quarter, and we expect to close the merger in early July. This timeline would be a delay of one quarter from our original expectations. I'll provide some specific updates to Cambridge in the second half of the year later in my remarks. I'll start with some highlights for the first quarter. As I just mentioned, net income was $38.6 million, or $0.24 per diluted share, and operating net income was $38.1 million, or $0.23 per diluted share. Overall, we saw modest growth in the balance sheet with core deposits up $121 million or 2.8% annualized, and loans up by $115 million or 3.3% annualized, driven by commercial lending. The net interest margin was stable in the quarter at 2.68% and very similar to the prior quarter margin of 2.69%.
Expenses were $101.2 million and $97.6 million on an operating basis. I'll go through expenses later in my remarks in more detail, and we'll discuss again during my comments on the outlook. Asset quality was stable in the quarter and similar to the prior two quarters. NPLs were up slightly from $53 million to $57 million or from 38 basis points of loans to 41 basis points of loans during the quarter. Net charge-offs were $7.3 million or 21 basis points of loans on an annualized basis, down from $11 million or 32 basis points in the prior quarter. I'll also go through more credit details later in my comments. Our Board approved a dividend of $0.11 per share payable on June 14. I'll move to some comments on the balance sheet. We continue to maintain a very high-quality balance sheet, and we're very pleased with the overall position at the end of Q1.
Cash was approximately $700 million at the end of Q1, consistent with levels at year-end. The securities portfolio was $4.7 billion, down slightly from the prior quarter due to paydowns in the portfolio and a modestly lower market value. Loans were $14.1 billion and Commercial loans ended the quarter at $10.1 billion. Commercial loan growth was $129 million or 5.2% annualized. Consumer loans had growth of $8 million or 2.2% annualized, and Residential loans decreased by $21 million. Core deposit growth was $121 million or 2.8% annualized in the quarter. We continued to experience some migration from lower-cost accounts to higher-cost accounts, however, our total deposit cost remains very favorable at 1.66% in the quarter, a demonstration of the strength of our customer base.
As I mentioned earlier, we are essentially core deposit funded. We had no broker deposits at the end of the quarter and FHLB borrowings were less than $20 million. Shareholders' equity was down $22 million in the quarter as net income of $38 million was offset by a decline in other comprehensive income and the dividend paid in Q1. To follow up on Bob's comments, the overall capital and liquidity of our balance sheet is a competitive advantage that we think will create opportunities over time. Moving to earnings. Net interest income was $129.9 million compared to $133.3 million in Q4. As I mentioned, the margin of 2.68% was down just 1 basis point from the prior quarter. Interest earning assets were approximately $200 million lower in the quarter and there's one less calendar day in the quarter as well.
The provision for loan loss was $7.5 million in line with the last two to three quarters. Non-interest income was $27.7 million and $23.4 million on an operating basis. As we provide on Page 8 of the presentation, the only significant change quarter-to-quarter was in interest rate swaps, which was due to a difference in the market valuation component. Other than swaps, all line items were pretty consistent with the prior quarter. As we outlined on Page 9 of the presentation, there were a number of moving pieces in non-interest expenses relative to the prior quarter. As we mentioned at the time, Q4 expenses were very noisy and high with the largest contributor being the FDIC special assessment of $10.8 million. Q1 expenses were $101.2 million and were $97.6 million on an operating basis.
These were lower than expected for a few reasons. There were two favorable items that we don't expect to be recurring. We paid out lower incentive compensation for 2023 than we had accrued and we experienced a reduction in our provision for off-balance sheet commitments. Combined, these two items were $3.2 million favorable. Last quarter, we guided to include some expenses relative to our corporate headquarters move as well as a technology upgrade for our online mobile product. Most of these expenses will hit in Q2, and I'll provide a roadmap for expense expectations as I go through our outlook. The overall effective tax rate for the quarter was 21%. Asset quality was generally stable throughout the quarter, but I will walk through the various components.
As I mentioned, non-performing loans were $57.2 million or 41 basis points of loans, up slightly from $52.6 million and 38 basis points the prior quarter. Of note, in the quarter, we resolved one of the NPLs we discussed in Q3 of last year through a collateral sale. Sales price was slightly better than we expected. We also have two NPLs under contract for sale, both of which we expect to be resolved this quarter, and both have sales prices that are in line with our expectations. We did move a suburban office property into non-performing loan status and have started the workout process with the borrower. We expect the sale of that collateral over the next few quarters and have provisioned for that outcome in our Q1 results. Charge-offs in the quarter were $7.3 million or 21 basis points of loans annualized.
As I just mentioned, that included the suburban office loan that was moved to NPL status in the first quarter. We continue to add new pages of additional credit information. After the asset quality slide on Page 13, we provided some information on our overall commercial real estate portfolio on Page 14. The portfolio is generally diverse, with the high-performing multi-family segment being the largest concentration at 31%. As a percentage of risk-based capital, our non-owner-occupied commercial real estate is 154%, which is well below the regulatory guidelines of 300%. As is outlined, 90% of the portfolio is located in our home markets of Massachusetts and New Hampshire, markets we know very, very well. We continue to add to our office disclosures on Page 15.
The investor office portfolio declined by $21 million in the quarter from $689 million to $668 million, or 5% of the total loan portfolio. Of this total, criticized and classified loans totaled $103 million, up slightly from where it had been the prior two quarters. We added some specific information about maturities as well. As you can see on the upper right-hand corner of that page, office maturities are light for the next two quarters and average approximately $20 million over the next four quarters, a very manageable level. We're working very closely with the borrowers on all of these maturities and we'll provide updates as we move through the rest of the year. As a reminder, the Cambridge Trust portfolio will be mark-to-market for both interest rates and credit as part of the closing process.
One additional comment I'd make here is that we are watching all of the loans in this portfolio very carefully. The two categories that get the most scrutiny are the criticized and classified loans and also those with upcoming maturities. We hope that this additional information helps investors track this portfolio over time. We updated our look at the multi-family portfolio on Page 16 that we provided last quarter. The shortage of housing continues to persist in our markets and multi-family is a very desirable asset class. We have no non-performing loans in the portfolio and vacancy rates are extremely low. Turning to the outlook, we expect the second quarter to be similar to the first quarter in many ways. We expect the margin and net interest income to be similar to Q1 and expect overall loan and deposit growth to also be similar to the overall growth rates of the first quarter.
We expect NPLs and net charge-offs to be similar to the last few quarters as well. We expect higher operating expenses in Q2 from a few sources. We do not expect the recurrence of the favorable expense items totaling $3.2 million that occurred in Q1 and that I described earlier. We expect some normal increases in salaries based on the timing of our Annual Merit program, as well as an increase in marketing expenses. The combination of these items, of all of these items is expected to bring our run rate of expenses to between $104 million and $106 million. We expect some higher than run rate expenses for the costs associated with our headquarters move earlier this month, and an increase in the technology costs for the transition to our new online mobile product rollout.
These are expected to be out of the run rate by the end of Q2 and are approximately $3 million. We are waiting for the FDIC special assessment amount, and we expect to record that in Q2. We expect the tax rate to be 22% on an operating basis. Turning to the second half of the year and after the Cambridge closing, we expect to see the benefits of the Cambridge transaction start in Q3 and be very evident by Q4 of this year. We've updated the loan valuation for the Cambridge portfolio at the end of Q1. Although rates have increased in April, we're still comfortable that the fair value discount on loans will be less than what we presented in the original projections at the time of the acquisition announcement. We expect the post-merger net interest margin in Q4 to be 3%, up from the current -- up from our current levels of 2.68%.
As we mentioned last quarter, we expect to liquidate the Cambridge investment portfolio and pay off their wholesale funding at closing. We expect the EPS accretion to exceed the original projections of plus 20%. We expect the cash efficiency ratio to be in the mid-50% by Q4 and as we move into 2025. This excludes the amortization of intangibles created in the transaction that we estimate to be $4 million to $5 million per quarter. On a run rate basis, we expect the combined wealth business to have over $60 million of revenues and operate at an efficiency ratio in the low 50% range. We expect the post-merger capital ratios to be strong and support our capital management strategies. As hopefully, you can see from these comments, we continue to be very excited about the opportunity with Cambridge and look forward to providing updates as we move forward.
That concludes my remarks. Thank you, Sylvia. We can open it for questions.
Operator: Thank you. [Operator Instructions] And your first question will be from Mark Fitzgibbon at Piper Sandler. Please go ahead.
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