Hello and welcome to Eastern Bankshares Inc. fourth quarter 2021 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 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. 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, press the pound key. Thank you. I’d now like to turn the call over to Bob Rivers, Chairman and CEO. Please go ahead, sir.

Great, thank you Patricia. 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 you and your families are safe and doing as well as possible amidst this latest chapter of the pandemic. Eastern finished the fourth quarter and fiscal year 2021 with strong financial results, capping off another milestone year for the company which we will most remember for the acquisition of Century Bank and Trust Company, by far our largest acquisition to date and the one that we believe will help us further enhance our commitment to deliver an outstanding customer experience and provide competitive financial products and services through award-winning technology, all while serving as an important resource to our communities. At more than four times the asset size of any prior transaction, this acquisition was made possible by the completion of our initial public offering only slightly more than a year ago, quickly validating our commitment to grow and expand our capacity to better serve our customers. For our 56,000 new customers joining us from Century, these benefits have been immediately realized through expanded access to full service locations throughout eastern Massachusetts and southern New Hampshire: enhanced digital and online tools, greater wealth management capabilities, and a suite of insurance offerings. Likewise, these benefits collectively have enabled us to solidify Eastern as the largest community bank headquartered in Massachusetts, increasing our total assets to $24 billion and our deposit share position in the very attractive Greater Boston market to fourth from fifth, while forming the largest dedicated government banking department headquartered in Massachusetts and adding expertise and relationships within some of the largest sectors of our regional…

Great, thank you Bob, and good morning everyone. As Bob mentioned, we had a great milestone in the quarter with the closing and conversion of Century in mid-November. It was a significant financial transaction, and we are confident we came through the conversion and initial integration in very, very good shape. It was a great effort by all our colleagues, including the former Century employees who joined us and the entire former team at Century. Conversions and integrations require a lot of energy and focus, so we were very pleased with our continued organic growth in loans in Q4, especially commercial loans, and the strong results in our fee-generating businesses. We look forward to combining this organic revenue growth with our larger operating platform post-conversion. GAAP net income in Q4 was $35.1 million or $0.20 per share, capping off a record year of earnings for Eastern. Operating earnings for the quarter, which primarily exclude Century-related merger charges, were $44.9 million or $0.26 per share. Given the closing with Century was a noisy quarter, as expected, we provide detail on the non-operating items in the tables at the back of the press release and the presentation, and we would encourage everyone to review those disclosures and the reconciliation of non-GAAP earnings. I’ll also incorporate some comments on those items in my review. On the capital management front, we remain very committed to enhancing long term shareholder value. To that end, our board of directors approved a 25% increase in our quarterly dividend to $0.10 per share payable on March 15. This increase reflects the higher level of earnings from the Century transaction and is our second dividend increase since going public. We also commenced our share repurchase program in Q4 and by the end of the quarter had repurchased 1.1 million…

[Operator instructions] Your first question comes from the line of David Bishop from Seaport Research. Your line is open.

Hey, good morning gentlemen.

Good morning.

A quick question. Just remind us, maybe in terms of the balance sheet repositioning post the Century deal, I know you obviously had the cannabis deposit sale, but maybe some of the other puts and takes there just in terms of their loan portfolio and securities, just giving maybe a sense of the size and maybe the core attrition you might expect over here over the next couple quarters. Thanks.

Sure David, I’ll take that, and Bob can certainly add in as well. I think if you take it one at a time, to unpack your question because there’s a lot there, on the deposit side, really there’s one or two areas. The first one you mentioned, which is cannabis, which we’ve articulated about $500 million in deposits, we will see that run off later this year. As I said, we expect that in Q2. The other key variable on the deposit side is their municipal business. Eastern had always been in the municipal deposit business as well. We’re going to basically look to conform the way they did their business to make it look more like ours. They offered things like collateral and paid higher rates than we did, and as we see going forward sort of on a day-to-day basis, we’ll just try to move those considerations to, again, eliminate--reduce and ultimately eliminate the collateral and bring the pricing so it’s more aligned to ours. As that happens and we have a lot of overlap in customers as well, we do expect some runoff. We don’t expect that to be material, but that’s our expectation. On the loan side, we’re very happy with the loan portfolio. I mentioned the credit quality earlier. The only issue that we see there is there are a couple of sectors where there are some loans that were out of market and areas that we haven’t historically done business in, geographic areas we haven’t historically done business in, and I think on a case-by-case basis, whether or not those are core loans to us or not, we’ll make that determination. As I said, we very much like the business, but just want to be realistic that as we go forward and we operate in more of an Eastern style, that loan runoff could happen. On the securities side, as I mentioned, there’s $2.8 billion coming over. We have retained initially all of that. We do expect a little bit of modest repositioning as we go, but assume that will just take place over the next couple of quarters and I wouldn’t consider that significant.

Okay, got it. Appreciate the guidance on the fee income and operating expenses. Noticed you mentioned, I guess in the preamble, you have done a couple of insurance agency acquisitions, but maybe some weakness in the fourth quarter and just year-over-year in those fees, maybe any color on terms of what’s driving that sequential and year-over-year decline? Then I’ll hop off.

Thanks David. Just one reminder, and you may have implicitly included it in your question. There is a seasonality to the insurance business, so the drop from Q3 to Q4 is expected, and if you go back and look historically, you’ll see a very similar drop there. That’s one factor just to keep in front of everybody. A couple things on the year-over-year decline. There’s really a couple things going on. Profits--there’s a component we used to call profit sharing. That’s not the right technical accounting, it’s actually incentive payments that are paid. It’s actually about 10% of the revenue of the business. Each year is a little bit different. Those payments are depending on the carrier, either based on volume or based on underwriting statistics, and they’re a little bit volatile, they’re based on those factors. If you look what’s happening in that year-to-year decline, there’s changes both in the timing of them, because sometimes they’re paid differently each year, and also the amount. That’s what’s driving a lot of that. There are a few other things as well. We took a breather from acquisitions back in 2020 when we implemented a new operating system there, as we’ve articulated in prior calls, and really year 2, which would have been this year, would have been when the revenue from those acquisitions that we would have normally done would have occurred, so there were none this year. I think fundamentally those explain it, and I think we’re very confident that going forward and over the long term, the insurance business is going to be a great success for us.

Yes, and David, just to add to that, the pipeline for agency acquisitions continues to be very strong and would expect to continue that pattern as we have in the past.

Got it, appreciate the color.

Your next question comes from the line of Damon DelMonte from KBW. Your line is open.

Hey, good morning guys. Hope everybody is doing well today.

Hey Damon.

First question, just wanted to get a little bit more perspective on the expense outlook. Jim, I know you gave the full year guidance, but as you think of the first full quarter of the combined operations, you were at 110.3 on an operating basis this quarter. What’s kind of the starting point for the first quarter of ’22, do you have a range for that?

We don’t, Damon. We spent a lot of time crafting the annual numbers. I think a couple things I would say to you, there are a few branches, Eastern branches that we actually are consolidating in the month of January, so there’s a little bit of timing and that’s included in the guidance that we gave you, just to be clear on that. But there are some timing considerations there, and also the equity plan doesn’t really kick in until the second quarter. We did spend a lot of time on the annual number, and that’s what we’ve focused on.

Got it, okay. Have you quantified publicly what the expected impact of the equity plan is going to be?

We haven’t provided a number. It is in the guidance that we’ve given you. One thing I would articulate here is pre-IPO, we had a long term incentive plan for management. Cost was about $10 million to $11 million a year, $10 million to $12 million a year, and as we think about the equity plan, we’re just basically looking to replace that expense. Obviously there’s differences in the plans and differences in timing, but in terms of our approach, it was to in essence replace the cost of the prior plan.

Got it, okay. That’s helpful. As you look at your outlook for loan growth, another decent quarter for you guys. How are you feeling about your pipeline right now going into 2022? What areas of the commercial platform seem to be presenting the best opportunities for growth? What are some of the trends and expectations that you have?

I think, Damon, we’re proud of our commercial teams across the board. They all really are very well positioned and have a great history and track record. As a middle market lender that has a specialty in real estate and commercial, and then what we call community development lending which you might refer to as non-profit lending, we feel like those are three key strengths. The market here in eastern Massachusetts and southern New Hampshire, where we operate, is very strong in all of those sectors. Demand seems very good. We’re a very good competitor, so it isn’t any one place, it’s really the combination of those areas that we expect growth. There’s obviously variability quarter to quarter, but if you look at our track record over time, all three of those units have grown and we expect that to continue.

As Jim’s comments indicate and as the numbers indicate, those teams have been able to be focused really throughout the integration of Century. Century’s book is very clean, they didn’t have a big team. As a result, our team could continue to focus on being out in the market. Pipelines are good in all sectors, and we continue to add to the team through recruitment, so--and as we wait for another opportunity for acquisitions, that’s what we’re entirely focused on, is how do we continue to drive growth, particularly commercial loan growth, and again as Jim mentioned, the team is fantastic to start with, has been for a long time, and continues to grow.

Great, okay, that’s helpful. Thanks. If I could squeeze one more in--

And no bias on the team comment, by the way, just because we happen to know them and like them.

I got it. Just to squeeze one more in on the outlook with credit, you’ve had four quarters in a row of provision reversal. What are your thoughts going into 2022, especially with the adoption of CECL? Do you feel you’re going to have to start to provide for loan losses, or do you think you could maybe keep it really low or even maybe more release?

That’s a tough question. We just--sorry I’m laughing, bragged about our commercial loan team a second ago, we may brag about our credit and accounting team now. We just completed--not just, but we’re really--it has been a lot of work to adopt CECL and get everything up and running. I think generally that creates a different accounting than we had in the past, so it’s hard for us to give any guidance on that, but we believe the overall credit environment continues to be very strong. The economic environment is very strong, and that leads to a good credit performance. I don’t believe the reserve releases will continue for that much longer, but it’s hard for us to give any guidance on that, given the adoption of CECL.

Fair enough, that’s good. Great, thanks, and good luck with the blizzard this weekend.

Yes, thanks.

Your next question is from the line of Laurie Hunsicker from Compass Point. Your line is open.

Yes, hi. Thanks, good morning. Yes, I would just echo what Damon said - good luck with the snow.

Yes, the forecast keeps rising every time we look at it.

Absolutely. Just circling back on expenses, can you help us think about--and this is just one of the line items, it looks like you break this out now and I didn’t see it before this, operational losses for the quarter of $1.6 million in December, and you break out historically. Is that something that’s going away, or what is that number? How do we think about that?

Those generally, Laurie - and admire you’re going for details, but those generally are operational losses in the branches or ACH. They tend to be pretty modest, and we think of them as business as usual. We do a lot of transactions through the branches and through the ACH mechanism, and that’s just a cost of doing business.

Got it, okay. Great, that’s helpful. Then can you just refresh us in terms of merger charges, where you are in terms of taking that? I know you had said you were going to be at $64 million - is that still the right number, is it higher, and any thoughts on the timing of when we see it? I’m guessing most of it’s in the first half, but can you help us think about that?

Sure, so--and I didn’t cover it in my comments, maybe I should have. Yes, you are right - the initial anticipated amount we had at the time of the announcement was much higher than what we recorded. If you look at the fourth quarter and prior, it’s $35 million, and that compares to the $63 million or $64 million you referenced. A couple of comments I’d make - we are pretty much done with that. We’ve done all of the branch things, etc., those were booked in November, so we believe we’re complete there. That’s not to say there wouldn’t--you know, there might be a cannabis transaction related straggler, but generally we don’t anticipate much in the way of those expenses this year. One comment on the reconciliation is Century--so we came well under, as you referenced. One honest reminder is Century actually paid a fair amount of--the expenses that were Century-related were paid by Century, so even though they’re in our numbers back in April, the accounting actually went through their books pre-closing.

Got it, that’s helpful. Okay, that’s great, thanks. Then cost saves, obviously the cost saves were projected to be 45%, $37 million or so. How much of that--I guess, where are we with realizing that? How are you thinking about that? Is that ahead of schedule, or can you help us think about that?

Yes, here’s what we’ve said, Laurie, and what I would say again. At the time, we announced 45%. We actually thought it would take into 2023 to get the full amount. What we articulated at the end of last quarter was that the guidance that we’ve given you and confirmed today, $445 million to $460 million of operating expenses, includes 45% reduction or that $37 million you referenced will be in 2022. As I mentioned earlier, and I think you know, we did the conversion in November, a lot of the expenses come out at that point. There were some branch closures and re-positionings that are taking place in January of this and maybe February, but those--essentially all the branch transactions were done in the fourth quarter of last year. One of the strongest things we felt was as we entered 2022, we were trying to get back to business as usual and have all of that in the rear view mirror, and that’s what we believe you will see.

Okay, great. Then last one from me on net interest margin. If we look at this and we say, okay, we strip out that remaining $10.7 million, $10.6 million in PPP fees, Century obviously we’re going to see a full quarter reflected in the March quarter, but they were running at 180 margin. You mentioned that you’re doing some re-positioning there, you obviously still have cash. How should we think about--in other words, if we strip out what’s going to be probably the remainder of your PPP gains, if we just look at where you would be core in March prior to the Fed potentially moving, how should we be thinking about that on a pro forma combined basis?

Right, so there’s a number of things to unpack there, so I’m going to try and go one at a time, or take it a little bit slow. The first place I’d point you to is our guidance. Previously we were a little bit low, but we’ve increased it to be between $505 million and $520 million for the year. To your point, if you want to focus on the margin, there’s a couple of things going on that are detractors there. You referenced the PPP fees, which are down significantly from where they had been in 2021, and there’s about $10 million left. There is not--as I’ve tried to make clear, there’s not much in the way of purchase accounting that’s going to roll through and make an impact there. The Century margin was below ours, so that’s also a detractor, and as we disclosed in prior 10-Ks and 10-Qs, we had some hedge gains that we had closed out in prior years that amortized, and they basically finish up in early 2022 as well, so those are kind of the detractors. What you see going forward, though, is the impact of the securities repositioning I tried to articulate, as well as the rate--the complexion of the rate change and also the continued organic loan growth on the pace that we’ve been talking about. What we’ve said in the past, and I think is still a very fair comment, is in 2022 I don’t know how much the margin is actually going to change from where it is now, but we do think the full impact of all these rate changes will be really seen in 2023.

Okay, so sorry - just one more question around that, because I feel like maybe something is wrong in my math. I’m looking at the pro forma all combined, and obviously without knowing the actions you’re taking around Century, and I’m closer to a 2.3 margin versus, obviously, the 2.54 that you reported. Am I missing something? Is there any sort of help you can give us, thinking about even just a June quarter margin, what it would look like?

Well, one question I’d ask is make sure you have the cannabis and some of the deposit runoff that we’ve talked about in there. That’s obviously not going to change net interest income, but it is going to improve the net interest margin.

Got it, okay. I will follow up with you guys offline. I guess Bob, maybe one question for you. Now that you’ve done this deal and obviously you now [indiscernible], how are you thinking about future acquisitions, and any thoughts in terms of what you’re seeing in M&A? Thanks.

Yes, really it’s the same as before, Laurie. We continue to be ready to undertake partnerships primarily focused on the banking sector, but obviously continued in insurance agencies and possibly wealth, if we could find something smaller that fit in that particular space. Really, the posture and the interest and the conversations haven’t changed, it’s really sort of a constant flow of engagement around ideas. But really, our primary focus is really finishing up Century, continue to drive organic growth particularly in our commercial and small business businesses, as well as investment in technology, which continues. Again, we have the capital, we have the interest, and stand ready when an opportunity should arise.

Great, thanks for taking my questions.

Again, to ask a question, please press star, one on your telephone. Your next question is from Janet Lee from JP Morgan. Your line is open.

Hello everyone. To clarify your NII guidance, obviously you’re incorporating three rate hikes now versus one in the third quarter. Is this $10 million to $15 million increase in NII guide just incorporating that additional two rates hikes in the guide, and can you just tell us the annualized NII impact from, say, a 25 basis point rate hike?

Sure, so a couple of components. I’m going to go slowly and take them one at a time. The guidance is up, as you mentioned, $10 million to $15 million. The reason it’s up is dominated by the change in rates. There are other small changes - obviously we do a lot of work to put that together, so there are other small changes, but I think the way you asked the question, it is rate driven--rate outlook driven, and as you said, we went from one rate increase at the end of the year to now three, so that accounts for that at a high level. I think a single 25 basis point increase by the Fed on an annualized basis adds about $8 million to $10 million of net interest income for Eastern, assuming our normal deposit betas. Again, that’s $8 million to $10 million that’s annualized, which is my comment about why the second half of ’22 is why you’ll see that, and in particular in 2023. But it’s $8 million to $10 million annualized, assuming our normal deposit betas.

Okay, that’s helpful. To follow up on that, I heard that you’re assuming lower cash levels for 2022, but can you just give us more details around what level of cash you’re assuming versus $1.2 billion in the fourth quarter, and what’s your current appetite for deployment of cash into securities?

Just to make sure I understood the first part of your question, Janet, it was the tax rate?

No, cash - sorry, cash level.

Oh, cash? I’m sorry. Got it. I didn’t connect the dots there, but now I’ve got it. Thanks for clarifying. If you look at our securities portfolio at year end, it’s between $8 billion and $9 billion. We expect some modest repositioning there, but a similar sized portfolio. The cash that we had at the end of the year that you can see - a reminder, we’ve talked about a little bit of deposit runoff from the repositioning of Century and then also the cannabis, so we do expect the cash position to normalize as we get through those elements, which we think are in the first half of this year. We don’t envision--you know, a year ago when we were talking about how much money we were going to invest quarterly in securities, we’re at kind of a steady state now. The portfolio is relatively large and we see managing that, but we don’t see it much bigger than where it is today, given the balance sheet size that we have right now.

Okay, that’s helpful. Following up on Damon’s question earlier on loan growth, I don’t think I’ve heard, what is your current outlook for total organic loan growth ex-PPP and ex-Century acquisition? I think last quarter, you said you were targeting mid to high single digit commercial loan growth, and obviously this quarter we’ve seen many regional banks coming out more bullish on C&I growth outlook, so just wanted to see if there’s any update on your commercial loan growth outlook as well as just total organic loan growth outlook for 2022.

Sure, so just to try and be precise in the answer, when we say our commercial loans, that includes commercial real estate, our commercial loans, typically called C&I, and then also our community development lending group, which is part of our--that’s our commercial roll-up. What we’ve articulated in the past and still see is organic loan growth that we’ve had historically, which is in the high single digits, so last quarter it was 8%, this quarter it was 7% - that aligns very much with what we’ve done historically, and even though the balances are a little bit bigger now, we’re still comfortable with that expectation going forward. Again, high single digits for commercial loan growth, and as I said, if you look at our track record over an extended period of time, we think that’s very consistent. Mortgage and consumer loans, we’ve had--the early part of this year, we had a nice increase in mortgage loans. We do portfolio jumbo loans - that’s something we’ve done for the last year and a half or so with the excess as a good way to use the excess liquidity up. This quarter, we had, call it 5% to 6% annualized growth there. We think that’s probably sustainable. One trend that we’re starting to see the beginning of is a little bit of life in our home equity lines and loans, and with higher rates and probably less mortgage activity, there might be a little bit of a subtle shift from mortgage into home equity. But those consumer categories in total, we think somewhere 5%-ish loan growth organically.

Okay, so excluding PPP, commercial loan growth of high single digits, and for consumer, around mid single digits, 5%-ish, right?

Correct.

Okay, that’s helpful. Lastly, my question on your share repurchases offsetting dilution from your equity plan grants, am I understanding your earlier commentary correctly that the amount of repurchases required to offset dilution plan is 1.2 million shares, and the rest of 7 million of shares that are currently available are sort of dependent upon market conditions?

No, let me just go back and try and say it slowly what our plan is. What we repurchased at the end of the year was 1.1 million, and what I articulated is through yesterday, in essence, we’ve repurchased 2 million shares. That’s one--that’s just a status update, if you will.

Oh, okay.

Our strategy for that is to be very--prioritize buying in shares to offset the dilutive effects of the equity plan, which includes the shares that were issued last year and would be in the year-end counts and are disclosed, and then also the upcoming management grants under the equity plan. The goal is to--the priority, not the goal, the priority is to make sure we offset that dilution. We haven’t disclosed the number of shares there, but we’re on track to do that. Then once we complete that priority, we still have considerable amounts still in our authorization, and future purchases beyond that would be based on market conditions.

Okay, got it. All right, thanks for taking my questions.

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

Again, thank you Patricia. Thanks to all of you. I really appreciate you taking the time to join us this morning and wish you the best for the rest of the winter. We look forward to talking with you again in the spring.

This concludes today’s conference call. You may now disconnect.