Eastern Bankshares, Inc.

Hello and welcome to the Eastern Bank Shares, Inc. 4th 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 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, please press star followed by two. Thank you. I would now like to turn the call over to Bob Rivers, Chair and CEO. Please go ahead.

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 2100 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 10th 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 of 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. 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 26 cents per diluted share, and operating earnings were 49.9 million, or 31 cents per diluted share. As previously disclosed, we were required to use settlement accounting for our pension plan in Q4, and incurred a non-recurring pre-tax 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 gap in operating results. Our operating net income of 49.9 million and 31 cents per share compares with 55.7 million and 34 cents per share in Q3. 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 non-performing 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 10 cents per share payable on March 15th to shareholders of record of March 3rd, 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 broker 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. Then interest income of $150 million was 2.2 million or 1% lower than Q3. Then an 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 seven 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 seven million of the $11 million provision. The allowance as a percentage of loans increased a modest three basis points in the quarter. Non-interest income on an operating basis was $42 million in Q4. Insurance revenues were $22 million in the quarter of 5% from the same quarter of 2021 and down $1.7 million from Q3. Other operating non-interest 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 RAPI Trust assets and security sales in Q4 compared to Q3. Including the pension settlement cost, non-interest expense was $132.8 million in Q4 compared to $116.8 million in Q3. On an operating basis, non-interest 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 an 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 non-interest income for 2023 to be between $170 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're lowering our operating non-interest expense guidance for 2023 and expect it to be in a range of $465 to $475 million. This is a reduction of $30 million from the Q3 guidance of $495 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.

Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. First question comes from Janet Lee at JPMorgan. Please go ahead.

Hi, good morning.

Good morning, Janet.

I know there's a lot of uncertainty. It's hard to forecast. 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 beta, so I think that gets around 30%. Do you have any updated view on that through the cycle interest-bearing deposit beta?

So, Janet, I think two things. First of all, it's nice to Talk with you. 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. The 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.

Okay. So, I mean, yeah. totally understand totally on the same page that the cycle is very, very different from the prior cycle. But last cycle, you you did better than your your peer in terms of managing deposit costs lower than the industry. But in terms of your preference or planning wise, 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 trying to manage your NIM and then keep your deposit costs stay below tiers in terms of your preference as you look at it through the next few quarters?

Sure. It's a balancing act. First of all, it's a difficult question. 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. You know, it's just a balancing act that we're going through, very similar to the way we've gone through it before.

So in terms of everyone, basically everyone is seeing, you know, not sparing deposit outflows. But in your case, if we back out that broker deposit, I think the deposit outflow is, It's a little bit more pronounced. Is it just a function of your customers, like, leaving in search of, like, higher yields? Like, in what part of your customer base are you seeing, like, the most deposit outflows? And are you planning to, you know, use the brokered CDs going forward to plug the hole? Is that the plan that you're going to, you know, continue considering in the next few quarters?

So I think, let me answer a couple of, there were a couple of questions in there. Let me unpack it a little bit. So we have seen outflows from most of our customer segments, municipal and commercial in particular. On the consumer side, deposits are a little bit steadier there, but we've seen a shift from lower cost deposits to higher cost deposits. Again, to retain customers, we've got higher promotional rates than we've had in the past, and that's helped keep deposits a little more stable than they would otherwise be, but obviously has a cost impact. I think going forward, we're just monitoring. We're carefully watching it, making pricing decisions as we go. As I said, it's a balancing act between the short-term net interest margin considerations, which are very important, but also the long-term customer relationships.

Okay. I might give this a shot, but in terms of 2023, is there any range of guidance you can provide on the NII growth? I know you guys have pulled that off from the slide. Is there any rough range that you can give us as well as sort of the goal in terms of your deposit growth or deposit decline for 2023?

I think what we put in the materials that you have is our outlook, Janet, which is that we do expect further contraction in the margin. As we said a number of times, it was six basis points in the third quarter. And we've given you, I think, pretty good information on the deposit costs in Q4 and throughout the year as well. So that's all part of our outlook, and that's what we've provided.

Okay. All right. Thanks for taking my questions.

Thank you, John.

Thank you. Next question comes from Mark Fitzgibbon at Piper Sandler. Please go ahead.

Hey, guys. Good morning. Mark, how are you? Good. Jim, just to follow up and to try to get at that margin question a little bit differently, where does your modeling show the margin bottoming out, assuming the Fed kind of follows the forward curve?

Yep. So, Mark, it's As we try to say a couple of times, we're in very, it's a very competitive market. It's challenging. You know, we think things get a little bit more, we think things continue to be difficult. Beyond that, it's very hard to give you any more information. We've provided you the information through the end of the year. That's what we see. And as I said, we're not expecting any, we're not expecting that to get any easier over the next couple of quarters.

Okay. And then secondly, you know, when we see rallies in the bond market, are you guys selling or trying to reduce the size of the AFS book? And is there any plans contemplated to, you know, take losses and shrink that book down?

No, Mark, thanks. That's a good question. You know, I think it's a very fluid environment. We're assessing things all the time and reacting as we see changes. You know, the only way I can answer is that, you know, is when we have decisions, we'll talk, we'll communicate. But at this point, we're just watching very carefully, assessing things. And, you know, in this environment, it's difficult. So many things are, you know, we're certainly open to things, all things being under consideration, but no plans at this time.

Okay. And then just a couple of questions around M&A. It's been pretty quiet on the insurance. M&A front, any particular reason for that? And also, given sort of the dearth in bank M&A targets in Eastern Mass, are you guys getting a little more open-minded to extending your geographies a bit, if a deal made financial sense?

Sure, Mark. As you know, we've focused within our current footprint or immediate adjacencies for bank acquisitions and insurance acquisitions. That continues. Certainly, If other opportunities fall outside of that geography and they come along, we'll continue to take a look. We have in the past. We tend to be less interested in those for a number of reasons, but certainly we will consider those. In terms of the pace of insurance acquisitions, it's really just a matter of pricing. We always have a very extensive pipeline of potential deals. Oftentimes the pricing is very challenging relative to our return requirements. but it's something we continue to take a look at. Thank you.

Thank you. Next question comes from Laurie Hunsaker at Compass Point. Please go ahead.

Hi, Bob and Jim. Good morning. Maybe just to stick where Janet and Mark were back on the margin, certainly your core deposit franchise is very, very strong seeing the the move in the money markets and the CDs and the broker deposits obviously jumped to 5%. Can you help us think about how high you take those broker deposits and then maybe asking the margin question another way? Can you refresh us maybe on where your December spot margin was?

Sure, Lori. Good morning. So I think the broker deposit question, you know, It's a challenging environment, as we've said many times. Historically, we haven't used broker deposits, and we've had limited wholesale borrowings. In this environment, we've used them. So we continue to make decisions based on cost and balance sheet structure, et cetera. The margin at December was in the low 270s on a FTE basis.

Okay.

That's helpful.

And so nothing that you want to quantify in terms of how much you'll pull down on broker deposits?

I'm sorry, what was the question, Lori?

Just in terms of thinking about how big broker deposits could become, right? Broker deposits are now 5% of your deposit base. Is there any thinking, you know, you'd cap it at 10% or how should we think about that?

Yeah, I would... answer the question this way. Our preference is to use our own customer deposits much more so than broker deposits. It's been a challenging market. We've repriced and continue to look at pricing alternatives with all of our customers. Our preference would be to grow those and replace the broker deposits. The velocity of changes in the fourth quarter was what it was, and we did use the brokers as you mentioned and we've disclosed. But our preference is to continue to look at pricing strategies and structures with our existing deposits, existing customers, and grow that as our primary source of growth going forward. Got it. Got it.

Okay. And then on expenses, your expense outlook is a dramatic change from where you were last quarter. So the $30 million reduction is substantial. Can you take us through very high level where that might come from? Is that branch closures or how are you thinking about that?

Sure. And you're right, Laurie, it is a pretty sharp reduction. You know, 2022 was a very strong year for the company. We were on a very good growth path. The environment changed. So, you know, the reduction is coming from basically everywhere. Some of it's in pulling back on growth plans that we had. Some of it's on looking at things that we were doing and deciding they weren't as important to us at this time. General bell tightening, we are looking at all the things you would expect, branches to some extent, other real estate in many cases, and other opportunities. But the initial reduction was really pulling back. And as I said, we saw a big change in the environment in the fourth quarter. And we knew that we needed to reassess our expense, go forward in the light of that new environment. Right.

Okay. That's helpful. Tax rate. How should we be thinking about that for 23?

Right. I think, good question. And I would say what we've got, at the end of the third quarter, we're guiding 22 to 23%. And I think that would be my updated guidance for you.

Okay. And then, Just a question here in fee income. You had a drop in insurance revenue link quarter. Maybe any thoughts around that? And then I know March is typically your strongest month or strongest quarter, rather, for insurance. Are we still thinking that we would see maybe a $4 to $5 million delta increase? Or can you help us think a little bit about that?

Sure. What I would suggest and what we do internally, Laurie, is I wouldn't look at a linked quarter. I wouldn't look at the insurance revenues linked quarter because of the seasonality changes. I would look at the prior year, and you're absolutely right. There is a big increase in the first two quarters, but in particular, the first quarter, that's when many of it used to be called profit sharing. That's not quite the technical term now, but a lot of that is realized, and there's a noticeable increase. So I would look at the prior year and look at the growth rates that you've seen this year and use that rather than linked quarter because of that seasonality.

Gotcha.

Okay.

And I guess any thoughts about the drop in the December quarter? I'm just looking again at a linked quarter, but any thoughts on that?

No, I think it was very much in line with our expectations and it was 5% ahead of the prior year, which again, I think is the appropriate benchmark. Got it.

Got it. Okay. And then just last question on loan loss provisioning. Was there, was there anything that was a specific reserve set aside in that 11 million? I realized 7 million was growth. You had no charge off. Any, anything specific?

No, I would consider, I would describe it as sort of modest, modest changes in our ACL factors that, you know, the provision itself as a percentage of loans went up three basis points. So very modest There were no specific items or no specific problems in the quarter.

Okay, great. Thanks for taking my question.

Great. Thank you.

Thank you. Next question comes from Damon Del Monte at KBW. Please go ahead.

Hey, good morning, guys. Hope everybody's doing well today. Thanks, Damon. So, great. kind of sticking on the the the margin topic since it's been pretty popular this morning um i wanted to come at it a little bit differently um could you provide a little color on the asset yield side of things um you know earning assets had only gone up 33 basis points with loans going up about 32 basis points why wasn't there more lift in the loan yields this quarter um so i think uh

Damon, that's interesting because we looked at, you know, our view is the loan yields were up 32 basis points. When we think about the rate moves and the quarter itself, we thought that was in line with our expectations. Obviously, the securities portfolio is fixed rate and that didn't move. That's why the interest earning assets are below the loan yields. But when we look at the and we provide information on the fixed variable and the amount of the variable that has been hedged, we thought that 29 basis points was significant. you know, sort of in line with our expectations.

Okay. And then could you just give us an update on the Embrace Home Loan relationship? Sure. Are you still active with that or is that, was this quarter just like a one time?

Yeah. So just as a quick history, right, we, at the end of the second quarter, we described what we were trying to do. The goal at that time was about $400 million of residential mortgages. At the end of the third quarter, really for a few reasons, but in particular because of the changing liquidity landscape, we didn't sever it, but we stopped, discontinued it. The pipeline had built up, and that's what we closed primarily in the fourth quarter. There was a little bit of a straggler into early Q1 here, but there's no originations, and the growth will be very, very modest in Q1.

Got it. Okay. And then just lastly, can you just provide an update as to what your exposure is with regard to office space and commercial real estate in the greater Boston area?

Sure. So in total, and this is consistent with, I think, prior calls on this question, if you look at our total office portfolio and strip out either things that have either owner occupied for commercial customers and or have a retail component to it, which I think the risks are different. Portfolio is a little bit less than $700 million. There is a little bit of exposure, but not much in Boston itself. Most of it is outside of the city. We're obviously watching the portfolio very carefully, but as I said in some of my remarks, all of our early warning signals don't cause us to see any significant issues at this point. Got it.

Okay. Well, thanks. That's all that I had. Everything else has been asked and answered. Thank you. Thank you. Thank you.

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

Great. Well, thank you for your interest and your questions this morning. We look forward to talking with you again at the end of April when we'll report our first quarter results.

Thank you. This concludes today's conference call. You may now disconnect.