Hello, and welcome to the Eastern Bankshares, Inc. Second Quarter 2022 Earnings 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, 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 [change] and in relation to do so even if management's views or estimates change, and you should not rely on such statements as representing management's views due to any [Technical Difficulty] 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 [Operator Instructions]. I'd now like to turn the call over to Bob Rivers, Chair and CEO. Please go ahead, sir.

Great. Well, thank you, Sergio, and good morning, everyone. And thank you for joining our second quarter earnings call of 2022. Joining me today is Jim Fitzgerald, our Chief Administrative Officer and Chief Financial Officer. Our results during the second quarter continued to be strong, reflecting the benefits of investments we've made over the past year to strengthen our franchise within one of the most attractive markets in the United States. Despite the uncertainty brought about by COVID and the shift to remote work, the impacts of higher inflation in the spectre of recession, Greater Boston is considered by many among the best-performing office markets in the country, bolstered by high diversity industry sectors, relatively low reliance on large tenants and the tailwinds of strong demand for life sciences space. In addition to the financial leverage generated by the Century Bank acquisition eight months ago, the effects of which are reflected in our operating net income for the quarter, which was 42% higher than the prior quarter. We're seeing early signs that recent staffing additions to enhance our commercial lending capabilities are contributing to commercial loan growth, net of PPP loans, which accelerated to a 10% annualized rate in the quarter. Since most of these new hires joined us in the past few months, we have yet to realize their full production potential and we believe they're joining our already highly talented team, bodes well for the quarters ahead. Some of these new additions of senior leaders who also bring added expertise in networks within emerging areas of our commercial lending activities. These expanded capabilities further add to those in the higher education and healthcare sectors, which we acquired through the Century transaction and in which we are gaining traction as well. As we have stated in the past, given…

Thank you, Bob, and good morning, everyone. As Bob mentioned, we're pleased with our second quarter results. We think they demonstrate very strong earnings momentum and include many of the benefits we had projected from the Century’s transaction last year, as well as the positive impact to our net interest income from higher interest rates. The outlook for interest rates has changed from our last call and we've updated our outlook based on those changes, and we'll also talk how the outlook impacts our interest rate risk management later in my remarks. Net income was $51.2 million for the quarter or $0.31 per diluted share. Operating net income was $52.5 million or $0.32 per diluted share. Operating net income for the second quarter was 42% higher than the same quarter of 2021. Net interest income was very strong in the second quarter, rising 8% from the prior quarter as the net interest margin increased 21 basis points from Q1. Higher rates improved our asset yields by 21 basis points, and our cost of funds was essentially unchanged from Q1. We also had a strong quarter of loan growth in all of our major portfolios with commercial loans up 10% quarter-to-quarter. Excluding PPP loans, residential mortgages were up 11% and consumer loans were up 13%. Each of these percentages are on an annualized basis. Our Board approved a dividend of $0.10 per share payable on September 15th to shareholders of record on September 2, 2022. We repurchased 4.2 million shares under our share repurchase program in the quarter, up from $2.9 million in Q1. The average purchase price for the shares, excluding commission costs, was $19.24 in the second quarter. First, I'll make some comments on the balance sheet. Assets were down $500 million from $22.8 billion to $22.4 billion in…

[Operator Instructions] Your first question comes from Janet Lee from JPMorgan.

I want to start with the deposit data. So I understand the historically low deposit beta for you guys. Is the sort of around 18% of interest-bearing deposit beta in the right ballpark for what you guys experienced in the prior rising rate cycle? And would you expect your terminal interest bearing deposit beta in this cycle to behave any differently versus that prior one?

I think back in time, precisely when we did disclose our historical deposit beta, it was slightly -- was in the 20%, I think it was slightly higher than the number you referenced, but very similar. And that was from the time period basically 2015 or '16 through the end of '18 or into 2019, and the beta was in the 20% range at that time. The one thing I always want to note about that is in 2019, the Fed reversed course actually started to lower rates and then the pandemic happened in 2020. So there was a huge acceleration. So internally, we feel like that's a little bit of an optimistic number, quite honestly, because if rates continue to rise, the beta would have been higher. So for our internal purposes, we assume a higher beta than that historical number, roughly 150% of that.

Is that what you're assuming for terminal or is that what you're assuming in the 2022 NII guide?

Terminal, you might have to define for me since I'm not clear what you mean by that.

So would you expect 150% higher interest bearing deposit beta versus the prior like 20% range and that being achieved by the end of 2022 or that leads and flows through, say, like mid-2023 or to basically beyond the end of 2022?

So I think we're at July of 2022, in the second quarter, we didn't have any increases. So I don't expect that to be in place by the end of this year. We used that 150% of that 20% beta is really over time. So we would extend well past 2022. Rates move very quickly here. It's pretty hard to calibrate those kind of calculations in the short term.

And on your asset sensitivity, so as you're trying to reduce that to protect from potential rate downside scenarios. Can you give us an update on your NII sensitivity in terms of how much annualized NII you would get from, let's say, a 25 basis point rate increase in Fed funds?

So we're about to do our 10-Q next week. We'll have information in there. We do a number of scenarios, that one isn't one of them. So I don't think I can answer that question, but we will provide the normal disclosures in the 10-Q next week.

And on deposits growth. So I get that it's getting more challenging to grow deposits given what the Fed is doing. But looks like you guys still managed to grow deposits modestly on a period-end basis after accounting for the $300 million cannabis deposits. So how should we think about sort of the magnitude of the decline in deposits and the back half of 2022? And how should I think about the mix of noninterest bearing deposits to total going from the current 35%?

I think a few responses I give, Janet. Eastern's history has been a great deposit gatherer. If you look at our cost of funds and you look at our deposit growth over really an extended period of time, I think it compares very favorably with our peers in the industry. That said, deposits are -- there's been a total change in deposits over the last month or certainly two months, and we had great deposit growth as did the industry in 2020 and 2021. And clearly, we're going to see some of that be challenged. So it's hard for us to know exactly how that's going to play out, but we did signal -- we don't think the deposit growth that we've had historically is going to be a great measure for the next period of time. Deposits are going to be tough to grow, we believe. I think our deposit mix, which we look at in total, not just any one particular category is quite strong. As interest rates increase, we do see what we would consider deposit mix shifts from some of our transaction related accounts into more interest sensitive accounts like money market deposit accounts, for example. So we do expect that shift to occur. It has in previous cycles and the reasons for are kind of obvious, as rates are higher people gave more attention to that. That's factored in the outlook that we gave for net interest income and we would expect that to continue beyond '22 as well.

My last question on loan growth. The color you gave on the flow agreement, that was helpful. So is it fair to assume that the resi growth in the back half of 2022 might slow down a little bit versus what you experienced in the second quarter? And then can you continue growing the consumer balances and then maintain this pace through the back half of 2022? How should I just think about the overall residential and consumer loan growth for full year 2022?

So let me just -- there's a lot there, let me unpack it sort of little bit one step at a time. So I'm going to start with home equity. And like many in the industry, we saw very strong growth in home equity product in the second quarter. It was great to see. We feel like we're tracking maybe not for the high growth rate that we had this quarter to continue, but the growth in dollars to continue. It's a relatively small portfolio, so the 15% or 13% that we had was off a relatively small base. But we do expect continued progress in the home equity portfolio. The percentages I would direct you more towards the dollar growth than the percentage growth in that particular category for that reason. I'd break down the residential portfolio into two components going forward up to this point, and we haven't had -- we've just initiated the arrangement with Embrace, so that's not in any of our historical numbers. The growth that you saw in residential loans in the quarter and what we had in the previous quarter, this was a result from our organic origination team [through] Eastern. Similarly, I think the growth rate may come down a little bit, but the dollar growth that we saw in the second quarter is something I think we think is sustainable for the rest of the year. Embrace would be sort of the new category, as we get going, we'll make sure that's easy -- we'll try and make that easier to understand, that will also show up in residential loans. But in terms of pegging growth, I look at the securities portfolio cash flow, our goal here is to kind of redirect those cash flows away from the securities portfolio into the residential loan category. So you'll see more growth in the residential loan because of that but that will be driven by the Embrace relationship. And as I said, as we get going, it doesn't have an impact. We've just started literally in July, takes a while for the applications to flow through and become originations. So as we get closer to the third quarter, we'll try and be very transparent on that so that you can see that.

Your next question comes from Mark Fitzgibbon.

First, I wondered if you could share with us, trust and investment advisory revenues held up really well this quarter. And I'm curious where AUM stands and what your flows look like this quarter?

AUM is down. I don't have the precise amount that it's down. I did see your note and anticipated that question. And I think there's a couple of things that happened, there's some timing things about when fees are charged. And we don't see anything different than what you would expect in fees. The AUM is down, not as much as the market because there's fixed income assets in there, et cetera. But the fees are down a little bit quarter-to-quarter. And our own internal view that was in line with what we expected. They were growing up until the market reversal at the end of the year. So there's a little bit of a catch up in some of that and we do have some trust assets that are a little bit less sensitive to market moves than the asset management side of that. But we didn't see anything there that was surprising to us.

And then secondly, Jim, I wondered if you could give us any more color around that -- that went nonaccrual sort of what industry it was, and what the collateral backing it looks like any timing on resolution?

So as you mentioned, it's a syndicated credit were participant, it's local, it's in workouts. Workouts always take a little bit more time than anyone would like, but we believe that, that workout process will happen. It may take a couple of quarters but it will be resolved, and we don't anticipate a loss.

And then last question I had is, I wonder if you could just give us a little more detail on the relationship with Embrace home loans. I assume you've given them kind of the types of loans that you want to buy. What sort of pricing arrangement have you made with them for the loans that you flow?

And just for those on the phone who aren't aware of this relationship, Embrace is a independently owned mortgage company in Rhode Island. They have -- we have outsourced our process. So we outsourced our process into them back in 2016, and has been a very successful relationship. We have what we would call a risk acceptance criteria for our mortgage loan products. We've provided that to them. There's a limitation on states that we’ll accept originations from. But the goal is to make it look and feel as much like an Eastern originated product as possible from a credit perspective. We are in some states that we don't do business in today, but most of those are very close to home.

And pricing, Jim?

So there's a daily pricing formula based on Federal Home Loan Bank rates with a spread. And there's a premium paid to Embrace for both the interest rate and also, we are servicing the loans here at Eastern.

Your next question comes from Laurie Hunsicker from Compass Point Research.

Just staying with Embrace here. So this is a national footprint, you said most of it though will be focused to New England. Am I hearing that right?

Yes, the East Coast, Laurie. So there's a number of states beyond New England, but it's generally speaking, all in the -- it's all in the East Coast and generally speaking, closer to home, close to home, but not just in New England.

And then what is the FICO you're targeting, and what is the FICO in terms of how low you go?

So as I said, we have what we call a risk acceptance criteria. It's the same criteria that we use for our own originations. So there's no change in credit appetite here or anything like that. And in some ways, it's a little bit tighter than their own criteria. But the expectation and belief and confidence is that these originations, the credit quality will look like our own portfolio, absent the fact that they're not just from Massachusetts, as I said earlier.

So your average FICO then, I probably don't have a complete refresh number, but then that puts you in the like mid-$700, $750, $760, is that right?

I don't know the answer to that question, Laurie. We can follow up. But the credit quality of our residential book is quite high. We can follow up with some particulars on that. I don't know it off the top of my head.

And then just one more question on this. Is there a plan to also capture the customer, capture the deposit relationship, or how do you think about that?

So as I mentioned, we're servicing the loans, so we would have that customer relationship. We're in very early days here, very early beginnings of the program. So we'll try and figure that stuff over time, but we will be servicing the loans and have the relationship from that perspective.

And just last question on this. How much do you plan to add in the next year or so on this?

I think, as I mentioned a couple of times and really over a couple of quarters, we have -- the cash flow from the securities portfolio is about $80 million a month. Our initial plan here is to just get started, see what happens, make sure it's working well for both ourselves and Embrace. As I said earlier, we have a strong partnership with them. So it's important, it works for them and works for us. I think our expectation is we would let this go for the next couple of months, maybe through the end of the year and we would reevaluate and obviously Embrace would have to reevaluate as well.

And then jumping over to your net interest income, within your $138 million of net interest income, how much of that was accretion income, merger accretion income?

Very little, Laurie. I think I remember this conversation back when we closed the Century transaction. And the overall impact on an annualized basis in the early years post Century was less than $2 million or $3 million. It's a very small number. The annualized impact of the accretion of the marks, let me be more clear.

Just checking, I know it was the reversal [Technical Difficulty]. So if I look at your margin then just ex PPP, because you had 11 basis points in last quarter and 5 basis points on PPP this quarter [draw], so your core margin was really up 27 basis points, just remarkable. Can you help us think about especially with the $1 billion hedge that you just put on. How we should be thinking about margin just as we look to September? And I certainly appreciate the guide that you've given us, but just some moving parts that would be super helpful to kind of understand that piece.

I'll try. As we outlined in the outlook, we do see a very nice increase from what the prior outlook was, $40 million for this year. If you look at our margin, there were, it was confusing in part because of Century and also PPP, as you mentioned. The increase from $242 million to $263 million, we don't have a number for what we would expect that over the second half of the year, but we do see continued improvement in it. And I think one of our strategic challenges, as we've talked in other calls is to improve that margin. So we're very excited by that. And hopefully, the guidance on the net interest income itself can help you with that -- those calculations.

I mean, yes, I can back into it. So okay, that's great. I appreciate your guidance. Finally, can you just give us a little bit of a refresh on sort of the warning signals starting to flash, where we stand on office in terms of how you see things, what your balance is there, any details you can give us? And then same question on leverage lending. Can you give us a refresh on those two categories?

So our office portfolio is a little bit -- these are outstandings, a little bit less than $1 billion. That's made up of three major sectors, there's medical, there's about $100 million of that medical offices, things that are combined retail office are about a third of it, and the residual amount is what you would think of as office space. We do very little office space in Boston proper. So there's very little in Boston itself. We have and we do with all of our portfolios very extensive reviews. And in this particular climate, we did an office review just here recently. I think the things that we would say about it or I would say after that review is -- and I said this a lot when we were talking about COVID modifications, we have a very great customer base. We deal with very good sponsors. We worked very hard to get those clients. So when we review our office exposure, the first thing we feel very good about is the people we've done business with, as I said, our clients. They're really great sponsors. We work very hard to retain those relationships. So it's obviously an area that's under a lot of -- we're watching very carefully. But as we did those reviews, we felt very good about our customers and their ability there. And when we think about our overall exposure, as I said, it's not just office itself, it's those three sectors. So reasonably good diversification from that perspective. Leveraged lending [Multiple Speakers] just to leverage lending, we don't have a separate leverage lending group. We obviously support customers who do things like acquisitions and take on additional leverage to do some other business objectives. But we don't have a specific leverage lending group. So it's difficult to give you any -- that's not something we're oriented to do in the way that you asked the question.

And then just on office, do you have an updated LTV there?

I don't. The LTVs are -- our LTVs we do disclose in our public documents, they're all, we think, very appropriate and the office would be very similar to those.

And then Bob, just one last question to you. If you can talk a little bit about your M&A appetite here, how you're thinking about things? Obviously, the Century deal went very, very well, but interest rate marks are very painful on a buyer's tangible book. Can you just refresh us in terms of how you view M&A currently, what you're seeing out there, what makes sense to you?

I mean, certainly, we're very interested in any opportunities that might come our way. We're ready to engage organizationally and undertake those as they arise. Certainly, we're going to evaluate each opportunity on its financial merits and whether it be the impact of interest rate marks, impact on any dilution to our tangible book value, we're very careful and sensitive to. So again, we'll evaluate them as they come across. But certainly, we remain interested in engaging in those conversations. But for now, we're really encouraged that we have this opportunity to really lean into our organic results. We've been building the engine here, particularly in the commercial lending groups. You can see the results of those starting to pay off. So we're very excited about our prospects in that regard. And really after a period of a couple of years where we were very busy with both the IPO and the integration of Century to really have a year that's cleaner, if you will, to focus fully and entirely on continuing to build the organization's capability, is really just a tremendous opportunity for us and one that we're taking advantage of.

Your next question comes from Damon DelMonte from KBW.

Just a lot of great questions asked and answered. So just a couple of follow-ups here. Credit obviously remains strong, absent the one Shared National that moved into nonperforming status. But as you kind of look at some of the underlying trends in the Greater Boston market and New England market. How are you feeling about provision level going forward? Do you feel that you're going to be able to keep it similar to this quarter's level, or do you think you're going to need to start to incorporate some measure of factors related to economic uncertainty? And I know you haven't adopted [chiefly], I know that comes up at the end of the year, but just kind of what your thoughts there.

Just one technical thing. We did adopt CECL January 1st of this year…

My mistake…

So I think I'm going to answer your question, I'm going to break it into two components. I think do CECL second. I think our view of the local economy and where we have lent, we feel cautiously optimistic about. Obviously, there's uncertainty and volatility in today's market, more so than there was certainly six months ago. But Boston is doing very well. We think our position, the way that we've lent our history, our customer base is really strong and can continue to do very, very well, in spite of the fact that it's likely to get a little bit more volatile. So we're cautiously optimistic there. That's that we read the same publications that everybody else reads and are certainly aware of recession fears, et cetera, and we tried to weave that into our outlook as well. So on the fundamental credit side, I think we feel very good. We're always -- everybody is always worried about credit for all the right reasons. And we're watching it very carefully as we talked about in the office portfolio in particular. But we do feel very good and as I reaffirm, we feel very good about our customers in that space. We have a great staple of leading customers in our market. I think in terms of the provision and CECL, it's a little bit hard to say. As you know, CECL starts with an economic forecast, the forecast that we used and I think most banks used for this quarter expected a slowdown but not a recession. And how that forecast evolves into the third and fourth quarter will -- and that forecast comes from outsiders, it's not an internal forecast. So I think it's a little bit hard to say. We do feel like our underwriting statistics, which play a role in those CECL models are very, very prudent and very strong. And we don't see any major issues as we've talked about in a couple of ways here. So I don't -- but it's hard to give you an answer on the provision based on CECL because of that thing that's a little bit outside of our control. If you look at the results this quarter, the actual allowance for credit losses essentially stayed the same, went down very slightly and we had some loan growth, and that's what resulted in the $1 million provision that we put forth.

And then, I guess, secondly, obviously, very active with the buyback this quarter. Should you guys exhaust that during this back half of the year? What are your thoughts on seeking out approval for a new buyback, or is that something that you would wait until 2023, '24?

So just to repeat what you said in there, we are very close to exhausting that first 5% authorization. What I said in my remarks and what we say in the deck is essentially all we're going to say, Damon, which is it requires regulatory approval. We respect that and we understand that they need to do their process. So we don't like to -- we're not going to say anything more until we have something else to say.

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

Well, thanks, everyone, for joining the call, for your interest, to your questions, and have a great rest of summer.

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