EASTERN-BANKSHARES Earningcall Transcript Of Q2 of 2024
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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