EASTERN-BANKSHARES Earningcall Transcript Of Q2 of 2024


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Eastern's new CEO, Denis Sheahan; as well as Jim Fitzgerald, our chief financial officer and chief

administrative  officer.  It's  been  a  very  busy  time  for  us  here  at  Eastern,  and  I  have  a  number  of

topics  to  cover  before  turning  it  over  to  Denis  and  Jim.  Overall,  we  are  pleased  with  our  second

quarter results.

As  you  know,  the  operating  environment  remained  challenging  in  the  second  quarter  with  higher

rates  continuing  to  modestly  compress  our  net  interest  margin  and  some  continued  credit

challenges, particularly in the office market. We have worked our way through these challenges and

maintain a fortress balance sheet to continue to be there for our customers while producing strong

results. Although our overall earnings in the second quarter were lower, and we would like them to

be  long  term.  We're  pleased  that  we  continue  to  meet  these  short-term  challenges  and  are

extremely well-positioned for the future.

We  are  delighted  to  announce  that  we  closed  our  merger  with  Cambridge  Trust  on  July  12  and

successfully converted all banking customers that we get. We are pleased overall with the customer

transition and to report that we've been operating very smoothly since we opened for business on

July 15 as a combined institution. This transaction completes a series of important milestones dating

back to last spring with our securities repositioning in the first quarter, the sale of Eastern Insurance

Group  in  the  fourth  quarter,  and  the  completion  of  the  Cambridge  merchant  this  month.  The

securities sale addressed certain challenges with the balance sheet caused by rapidly rising interest

rates and resulting funding pressures.

The sale of Eastern Insurance monetized and undervalued assets for our shareholders and created

a  significant  gain  and  capital  increase.  And  the  Cambridge  merger  provides  us  with  a  strategic

position we need to continue to excel in our core markets and the earnings accretion to be a top-tier

financial performer. To accomplish all of these in just five quarters is a testament to the strength of

our underlying franchise and the talent and hard work of all of our employees. And we believe our

best days are still ahead of us due to the strategic benefits of the Cambridge merger.

We now have the fourth-largest deposit market share in the Boston MSA and are very close to being

in  the  top  three.  We're  the  largest  bank-owned  investment  advisor  in  Massachusetts  and  No.  10

overall.  With  over  $25  billion  in  assets,  we  are  the  largest  independent  bank  headquartered  in

Boston  and  increasingly  Boston's  hometown  bank  marked  by  a  local  understanding,  accessibility,

and  engagement  that  sets  us  apart  from  larger  banks  headquartered  in  other  states  and  in  some

cases, other countries.

There are many things that comprise Eastern's secret sauce, starting with our people, our culture,

and our deep and extensive community engagement, but one of the most critical ingredients is that

we live, work, and raise our families here, just like our customers. In addition, our partnership with

Cambridge  Trust  is  highly  complementary  with  the  strengths  of  the  two  organizations,  creating  a

better,  stronger  company  than  either  would  have  been  on  its  own.  We  think  there  is  great

opportunity to continue to grow in our market and the platform we've created will give us what we

need to continue to be very successful in the long term. We are very excited to be continuing to use

the Cambridge Trust brand for our wealth management and private banking businesses.

We  are  confident  that  with  the  conversion  of  our  banking  systems  now  completed,  and  the

integration  of  our  wealth  management  systems  scheduled  for  later  this  year,  the  full  power  of  the

franchise  will  be  clear  beginning  in  the  fourth  quarter  and  throughout  2025.  Although  this  call  is

focused on our results pre Cambridge, I'm very happy to share that Denis Sheahan has joined our

executive  team  as  our  CEO.  In  addition  to  Denis,  three  other  executives  from  Cambridge  have

joined our executive team, bringing us additional expertise in wealth management, private banking,

and marketing, which, coupled with the talent of our 300 new colleagues joining us from Cambridge

Trust, will strengthen us going forward. In addition, please join me in congratulating Quincy Miller,

who officially adds chief operating officer to his titles of vice chair and president.

At this point, I'd like to introduce Denis and turn it over to him to make a few remarks. 

Denis Sheahan -- Chief Executive Officer

Thank you, Bob, and good morning, everyone. On behalf of the Cambridge Trust board and myself,

I'd like to thank Bob, the Eastern board, and the entire Eastern team for all their support throughout

the  process.  As  you  know,  mergers  and  conversions  are  a  long  and  challenging  process,  and  we

are very happy with how successful the transition was and the attention and care we were able to

collectively provide our customers. I especially want to thank my Cambridge Trust colleagues for all

their hard work and effort during this time of uncertainty for all of them.

Now  that  we  have  the  bank  conversion  completed,  we  all  look  forward  to  getting  back  on  offense

and  focusing  on  growth  opportunities  in  all  business  lines  and  in  realizing  the  synergies  and

potential of the combination, and I'm very confident we can do that. We operate in a very dynamic

market,  and  our  market  position  and  franchise  provide  us  great  opportunities  in  both  banking  and

wealth management that we look to capitalize on. Thank you. And I'll now turn it back to you, Bob.

Bob Rivers -- Executive Chair

Thanks,  Denis.  We  also  announced  approval  for  a  share  repurchase  authorization  of  up  to  5%  of

our  shares  or  $200  million.  We  look  forward  to  analyzing  share  repurchases,  along  with  our  other

capital  management  tools  and  we'll  continue  to  look  for  additional  opportunities  to  create

shareholder value. David Rosato will be joining us as our chief financial officer on August 1.

As we mentioned on our last call, we have been planning for Jim's retirement for some time and feel

very  good  about  this  transition.  I  know  many  of  you  know  David  from  his  time  at  People's  United

Bank and Berkshire Bank, and we are delighted he will be joining us next week. We are looking for

someone with extensive financial and M&A experience at a larger bank to help guide and assist us

as  we  grow.  David's  strong  track  record,  particularly  at  People's,  which  grew  from  $14  billion  in

assets to $60 billion in assets during his tenure, makes him a great fit for Eastern.

We look forward to David's insights and contributions as we work our way through the Cambridge

integration. As I also mentioned during our last earnings call, after working with David on the CFO

transition, Jim will stay with us as a senior advisor to me, the executive team, and our board. Jim will

continue to join us on our quarterly earnings calls. So, please don't say goodbye to him just yet.

As  I  said  in  my  opening  remarks,  it  has  been  a  particularly  busy  but  successful  time  for  us  as  we

embark  on  Day  10  of  this  next  chapter,  many  thanks  to  all  of  our  colleagues  at  Eastern  and

Cambridge  Trust  who  have  ensured  such  a  smooth  conversion  of  our  banking  systems.  Although

such  a  complex  transition  is  never  perfect  with  always  inevitable  and  unexpected  bumps  their

extensive  preparation  and  planning  combined  with  the  patient  reassuring  support  and  guidance  of

our customers and each other, cause us to go as well as any of us have ever experienced. Special

thanks to our branch call center and operations teams who are always on point in such transitions

and  who  handle  them  with  incredible  poise  and  responsiveness  and  special  thanks  to  our

technology team, who not only architected such a successful systems integration but literally stood

on  their  heads  the  first  Friday  after  conversion  to  get  us  through  the  CrowdStrike  episode  with

minimal disruption. And now, I'll turn it to Jim.

Jim Fitzgerald -- Chief Administrative Officer and Chief Financial Officer

Great.  Thank  you,  Bob,  and  good  morning,  everyone.  As  Bob  mentioned,  given  the  challenging

environment,  we're  pleased  with  our  overall  results  in  the  quarter  and  feel  very  good  about  our

position going forward. GAAP net income in the quarter was $26.3 million, $0.16 per diluted share

and operating earnings were $36.5 million or $0.22 per diluted share.

The quarter had noise due to merger charges and a number of one-time items that I will go through

during  my  comments  and  explain.  But  first,  I'll  start  with  some  highlights.  As  Bob  mentioned,  we

received non-objection from our regulators for a 5% share repurchase plan as well as approval from

our  board,  as  we  mentioned  through  the  last  two  to  three  quarters,  we  very  much  look  forward  to

adding  share  repurchases  to  our  capital  management  strategies.  The  net  interest  margin

compressed four basis points in the quarter from 2.68% to 2.64% and net interest income was down

$1.3 million in the quarter.

We generated loan growth of $57 million in the quarter or 1.6% on an annualized basis. This was in

line with our experience over the last few quarters and in line with our guidance. Our consumer loan

growth, primarily home equity lines was strong at 14% on an annualized basis. Growth in residential

loans was largely offset by a modest decline in commercial loans.

Deposits  were  generally  stable  in  the  quarter  with  a  reduction  of  $129  million,  although  as  I'll

describe later, $100 million of that was from the early withdrawal of the legacy Century Bank deposit

for  which  we  collected  an  early  withdrawal  penalty.  Although  the  credit  environment  remains

challenging, we had a number of highlights in our asset quality in the quarter. We continue to see

good velocity in the turnover of problem assets. We resolved two more NPLs in Q2 at slightly better

values than we had expected.

This caused a reduction in our nonperforming loans from $57 million to $40 million, and the value of

those assets created net recoveries in the quarter. I'll follow up with more information on the credit

front  later  in  my  remarks.  Overall,  our  balance  sheet  remains  extremely  strong.  In  addition  to  the

asset quality I just mentioned, capital levels were robust with a common equity Tier 1 ratio of 18.6%

and a TCE ratio of 11.7%.

Our  liquidity  is  very  strong  with  $750  million  in  cash  and  essentially  no  borrowings.  Our  board

approved a dividend of $0.11 per share for shareholders of record on September 3 and payable on

September  16,  2024.  I'll  move  on  to  comments  on  the  balance  sheet.  Assets  were  $21  billion  at

June 30, down by $100 million from Q1.

Cash was $750 million at the end of Q2, which was up slightly from Q1. The securities portfolio was

$4.5 billion, down $197 million from Q1. In addition to runoff and amortization, we sold $85 million in

available-for-sale  securities  that  I  will  provide  some  detail  on  shortly.  Loans  ended  the  quarter  at

$14.1 million, an increase of $57 million from Q1, consumer loan growth primarily home equity lines

accounted for $51 million of the growth.

As  I  mentioned,  deposits  were  down  $129  million  in  the  quarter  due  to  the  early  withdrawal  of  a

legacy  Century  deposit  contract.  The  withdrawal  was  triggered  by  the  sale  of  a  business  and

generated a penalty of $7.8 million that I will review shortly. We experienced a continuation of the

deposit mix shift as demand deposits declined by approximately $150 million on an average basis

and  interest-bearing  deposits  increased  by  $300  million  on  an  average  basis  in  the  quarter.

Shareholders'  equity  increased  $15  million  in  the  quarter  due  to  an  increase  in  retained  earnings

and paid-in capital.

Accumulated other comprehensive income was essentially unchanged during the quarter. Next, I'll

comment  on  asset  quality.  As  I  mentioned,  we  saw  a  reduction  in  NPLs  from  $57  million  to  $40

million or from 0.41% of loans to 0.28% of loans. The reduction was primarily due to the resolution of

two NPLs that we've discussed in the past.

We  did  better  on  those  resolution  in  terms  of  value  than  we  expected  and  recorded  recoveries  of

approximately  $2  million.  These  recoveries  more  than  offset  charge-offs,  creating  a  net  recovery

position for the quarter compared with net charge-offs of 21 basis points last quarter. We continue to

monitor and manage the office exposure in the portfolio. We did move one loan into NPL status and

have the collateral of that loan and the collateral of the NPL from last quarter, both being marketed

for sale.

We've  been  pleased  with  the  pace  that  our  team  has  moved  through  problem  loans  through

resolution.  We  expect  that  to  continue,  the  recoveries  this  quarter  were  a  great  outcome,  but  not

something we expect in future quarters. We also have accelerated our timing in dealing with office

loan  maturities,  we  dealt  with  two  loans  in  the  second  quarter  that  don't  have  a  maturity  until  the

fourth quarter. One of the lessons learned from a few quarters ago as most borrowers have already

made their decisions about the future of these properties before the maturity.

We've  continued  to  add  information  on  both  the  CRE  portfolio  and  the  office  portfolio  in  the

presentation.  The  CRE  portfolio  information  is  on  Page  15,  and  the  office  portfolio  is  on  Page  16.

There  isn't  much  new  on  the  overall  CRE  portfolio.  The  multifamily  portfolio  continues  to  be  a

favorite  asset  class  in  our  markets  due  to  the  acute  housing  shortage  and  the  overall  portfolio  is

diverse with no NPLs other than the office segment.

On  Page  16,  we  added  some  information  on  the  office  breakout  between  pure  office,  mixed-use,

and  medical  office  and  updated  the  criticized  and  classified  totals.  Criticized  and  classified  office

loans increased from $103 million to $116 million in the quarter. We have spent considerable time

on the Cambridge loan portfolio, in particular, the office segment, and will record those loans at fair

value during the purchase accounting process. As we have mentioned, we competed in the same

market with Cambridge Trust and know the credit and value landscape of the local office and CRE

markets extremely well.

Next,  I'll  comment  on  earnings.  As  I  mentioned,  GAAP  net  income  was  $26.3  million  or  $0.16  per

diluted  share  and  operating  earnings  were  $36.5  million  or  $0.22  per  diluted  share.  Net  interest

income  was  $128.6  million  in  the  quarter,  down  from  $129.9  million  in  the  first  quarter.  The  net

interest margin was 2.64% compared to 2.68% in the prior quarter as interest-bearing liability costs

increased faster than interest-earning asset yields.

The  provision  for  loan  losses  was  $6.1  million  or  $1.4  million  less  than  the  $7.5  million  in  the  first

quarter.  Noninterest  income  included  two  one-time  items.  As  mentioned,  there  was  an  early

withdrawal of a legacy $100 million Century deposit contract, and we collected an early termination

payment  of  $7.8  million.  To  partially  offset  the  impact  to  liquidity  and  net  interest  income,  we  sold

$85 million of securities from our AFS portfolio at a loss of $7.6 million.

The  early  withdrawal  penalty  is  included  in  our  operating  earnings,  which  is  consistent  with  the

treatment of early withdrawal penalties in our retail CD portfolio, which are generally much smaller

amounts.  The  securities  loss  of  $7.6  million  is  included  in  our  nonoperating  results,  which  is

consistent with our past practices on securities gains and losses. I'll provide our views on the core

run rate for earnings shortly. The other categories that our noninterest income were in line with Q1

and the trends that we've experienced over the last few quarters.

Expenses  also  had  a  number  of  one-time  items.  As  we  outlined  in  the  presentation,  noninterest

expense was $109.9 million in the quarter and $105.3 million on an operating basis, included in the

operating amount of $105.3 million with three items that are nonrecurring. The second FDIC special

assessment  was  $1.9  million.  We  incurred  $700,000  of  severance  and  early  retirement  expenses

and  $900,000  of  occupancy  expenses  related  to  our  move  to  our  new  corporate  headquarters,

which was completed in Q2.

Excluding these items, our core expenses were $102 million in the second quarter. The tax rate also

had  some  noise  this  quarter  primarily  in  GAAP  results.  You  may  remember  we  had  a  number  of

fairly  complicated  tax  events  in  2023  due  to  the  combination  of  the  balance  sheet  restructure  and

the sale of Eastern Insurance. We trued up some of those amounts in this quarter, and they were

slightly higher than what we recorded last year.

Most  of  those  tax  benefits  in  2023  were  included  as  nonoperating  items  and  that  is  where  this

increase  was  recorded  as  well.  This  explains  the  31%  tax  rate  on  our  GAAP  results,  but  the  25%

rate on our operating results. The 25% operating tax rate is higher than where we expect to see the

run rate for the full year, which is 21%. I can appreciate that there are a number of one-time items

and some accounting noise in these results.

When we look at the results and try to get to our core results in the quarter, we start with net interest

income  of  $128.6  million  and  the  provision  for  loan  losses  of  $6.1  million.  These  items  are  both

straightforward. For noninterest income, we exclude the early withdrawal penalty, the securities loss,

and the Rabbi Trust gains, which results in a total of $23.5 million. For expenses, we removed the

FDIC  special  assessment,  the  severance  and  early  retirement  amount,  and  the  headquarters

moving costs, which results in core noninterest expenses of $102 million.

I  apply  our  operating  tax  rate  for  the  quarter  of  25%  against  those  earnings,  which  results  in

approximately $33 million of what we consider a core level of net income. I hope that's helpful. All of

the  items  I  adjusted  out  are  referenced  in  our  presentation.  I'll  now  make  a  few  comments  on  our

outlook.

We  are  very  excited  about  the  closing  of  the  Cambridge  transaction  on  July  12.  As  both  Bob  and

Denis  mentioned,  we're  pleased  with  the  bank  conversion  over  the  weekend  of  the  12  and  have

seen a smooth transition for customers and colleagues. As you know, the closing of the merger is

just the beginning for the financial processes that need to take place so we can ultimately provide

our results and answer your questions. We are underway with the purchase accounting valuations

for loans, deposits, and the wealth business, and we expect them to be completed toward the end of

the third quarter.

In addition to the valuations themselves, the loan marks need to be added on a loan-level basis to

the  loan  system  for  accretion  purposes.  We  would  expect  our  first  full  report  to  be  with  our

third-quarter results. That said, we can confirm the prior guidance we provided for the transaction.

We  liquidated  the  Cambridge  investment  portfolio  and  used  the  proceeds  to  pay  off  wholesale

funding shortly after closing.

We expect the post-closing merger net interest margin to be 3%, an increase from our current level

of  2.64%,  the  return  on  assets  to  be  1%-plus,  and  a  return  on  average  tangible  equity  to  exceed

10%.  All  of  those  metrics  are  meaningful  improvements  from  where  we  are  operating  today.  We

expect tangible book value dilution to be less than our original projections, and the EPS accretion to

exceed  the  20%  from  the  original  projections.  We  expect  the  cash  efficiency  ratio,  excluding  the

amortization of intangibles to be in the mid-50% range.

We expect the combined wealth business to generate revenues of $60 million annually. We're very

excited  about  using  share  repurchases  as  part  of  our  capital  management  strategy  going  forward.

Share repurchases will be subject to market conditions and capital and liquidity conditions. As both

Bob  and  Denis  mentioned,  the  Cambridge  transaction  is  transformative  for  Eastern,  and  we  look

forward to providing a full update next quarter.

On  a  personal  note,  I'd  like  to  thank  everyone.  I've  enjoyed  interacting  with  all  of  you  and  look

forward to working with David Rosato in what will be a very smooth transition. And with that, Julie,

we can open up for questions.

Operator

Questions & Answers:



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