Hello, and welcome to the Eastern Bankshares, Inc. Third 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 due 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 the investor.easternbank.com. Please note, 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. [Operator Instructions]. I'd now like to turn the call over to Bob Rivers, Chair and CEO.

Thank you, Michelle. Good morning, everyone and thank you for joining our third quarter earnings call. Joining me today is Jim Fitzgerald, our Chief Administrative Officer and Chief Financial Officer. Our performance continued to be strong, demonstrated continued improvement in a number of key measures. Operating net income in the third quarter was 49% higher than the comparable prior year quarter, a new record, driven by our highest ever quarterly revenue, which increased 34% year-over-year. As a result, Eastern's return on assets continue to improve, as did the efficiency ratio, which declined eight percentage points from a year ago. Underlying this progress, our deposit costs continue to be well managed, rising only four basis points from the prior quarter, despite another 150 basis point increase in the Fed funds rate over the past three months and an increase of three percentage points since the beginning of the year. Growth and loan outstandings continued to accelerate during the quarter, rising 16% overall on an annualized basis, driven by record commercial and home equity loan production with net charge offs of just one basis point. As a result, the net interest margin increased 24 basis points during the quarter. In addition, Eastern Insurance Group acquired its second agency of the year in August, and its 36th since 2002, and Eastern Bank was recognized by the Boston Business Journal as one of the most charitable companies in our region, our 10th time in the top 10. We think it is increasingly clear that investments we have been making in the growth of our company are paying off. In addition to significant financial leverage, the acquisition of Century Bank, which closed last November, helped increase our deposit market share to the fourth largest in the Greater Boston market. Our record commercial loan originations reflect just the beginning of the benefits we expect to achieve through the expansion of our commercial lending teams. Our continued significant investments in technology have elevated our digital capabilities better serving our customers and improving process workflows that we believe will ultimately reduce expenses. As always, these results reflect the hard work and tremendous commitment of my 2100 Eastern colleagues with whom I am privileged to work and whom I thank for all that they do every day to serve our customers, communities and each other. Once again, thank you for joining us today and for your interest in Eastern. And now I'll turn things over to Jim for an in-depth review of our third quarter financial performance and outlook for the remainder of 2022 and for 2023.

Thanks Bob, and good morning, everyone. As Bob mentioned, we're very pleased with our third quarter results and think they demonstrate continued momentum from the first and second quarters of this year. We were pleased with the growth in our net interest income and margin due to higher rates and very strong loan growth. Net income was $54.8 million for the quarter or $0.33 per diluted share. Operating net income was $55.7 million or $0.34 per diluted share. Operating net income for the second quarter --operating net income was 49% higher than the same quarter of 2021. Net interest income was very strong in the quarter rising 10% from the prior quarter as net interest margin increased 24 basis points from Q2. Our asset yields increased by 29 basis points in the quarter, and our cost of funds was up eight basis points. We also had a strong quarter of loan growth in all of our major portfolios with commercial loans up 16% quarter-to-quarter, organic residential mortgage growth was 10% and consumer loans were up 6%. All these percentages are on an annualized basis. Our board approved a dividend of $0.10 per share, payable on December 15 to shareholders of record on December 02, 2022. We repurchased 1.5 million shares under our share repurchase program in the third quarter at an average price of $19.52. First, I'll make some comments on the balance sheet. Assets were down $300 million from Q2 and ended the quarter at $22 billion. Deposits were down $430 million in the quarter and were offset by an increase in borrowings of $380 million. Loans were up $505 million while cash was down $210 million. The securities portfolio was down $700 million due primarily to reductions in market value. All major loan categories were up for the…

[Operator instructions] Our first question comes from Mark Fitzgibbon, Piper Sandler. Please go ahead.

Hey guys. Good morning. I'm wondering if you could start by sharing with us and I apologize if you said this at the very beginning, I missed a couple minutes, but the loan pipeline, the mix and maybe average rate.

Sure. So Mark, we don't disclose the loan pipeline. It's calculate a little bit differently for different products, but on the commercial side, which is where we focus most of our strategic attention, the pipeline is about the same size as it was at the end coming into Q3. We do expect a good quarter for closings in Q4 and expect that to come down and as I articulated, we would expect slower growth as the -- as conditions -- as 2023 looks like it'll be a more difficult year than 2022, but the pipeline going into the fourth quarter is at about the same level as it was the prior quarter. In terms of yields, new business on the commercial side sort of in the high load up mid to high fives percent range, those would be for fixed rate, those would be for fixed rates.

Okay, great. And then secondly, Jim, on Page 11, you detail the total securities portfolio yield and it came down a bit from the second quarter to the third quarter. I was just curious why that was.

Sure. Premium amortization, we had one or two selected situations where there were -- we had to accelerate premiumization primarily due to payoffs of the securities.

Okay. And as you kind of think about the size of the securities portfolio and I know you're using cash flow to fund loan growth, how quickly can you shrink down that securities portfolio? Do you have a target in mind for it?

Sure. No. So very good question Mark, in many ways the answer is going to be very similar to what we said last quarter. The cash flow from this portfolio today is about $70 million a month, call it $800 million a year, $800 million to $850 million a year. At this point in the rate cycle, that's what -- those are the changes we expect. We expect to see it come down in those amounts. Obviously, if rates change and there's opportunities to do other things, we'd address it at that point, but at this time, that's what we see.

Okay, And lastly, what would you say your spot deposit rate is today?

Yeah, that's a hard one. Because there's a wide variety of different deposit products in different sectors. So it's hard for me to give you an answer. We do expect to see a pre -- we do expect to see an increase in our deposit costs in Q4.

Thank you. The next question comes from Damon DelMonte, KBW. Please go ahead.

Hey, good morning everyone. Hope everybody's doing well today. Jim, I was just wondering you could revisit the commentary on the decision to terminate the relationship with Encore. I didn't quite get everything that you had said there.

Yeah, it's -- I'm laughing Encore, the casino leader locally, it's… sort of a local joke, but it's embraced home loans and as we outlined at the quarter last time, earlier in the year when the liquidity picture was very different, we were looking to in essence direct security cash flows away from the securities market and developed -- had a pre-existing relation -- very strong pre-existing relationship with Embrace. So what this program was to buy -- loans originated by Embrace based on our underwriting criteria and take them into portfolio on a flow basis. What we articulated at the last call at the end of Q2 was we had targeted amount of $400 million for that, and it was a little bit of an experiment to see how it would work, change in liquidity and the outlook for liquidity really reduces our appetite for that Damon. So we have notified Embrace, we're going to discontinue that. There are loans in the pipeline that will close out in the normal course. And as I said in my comments, we were very happy with the way it was working, but it's really just the liquidity outlook that changed our appetite.

Got it. And then you had said to the last question that the securities portfolio is putting off about $800 million a year in cash flows.

Yes.

And so do you expect all that to be used to fund loan growth or do you think you're going to have to reinvest some of that back in the securities portfolio?

No, we would anticipate as those cash flows are received to bring the securities portfolio down and fund loan growth with those, yes.

Got it. Okay, great. And then I guess, with respect to the margin, commentary points to a higher margin going through year end, excuse me, and into 2023 do you think that you're going to end up peaking somewhere halfway through the year, or do you think that there's still enough flexibility on the balance sheet particularly on the funding side to keep that margin moving higher?

It's a difficult question Damon because the -- it's just a difficult question at this time, given all the uncertainty with rates. In what we articulate and what we can see is the rate increases that have happened and will happen -- and are expected to happen over the next couple of months will definitely improve the margin and we can see that. As you get out further there's, just the rate of the volatility and the questions around liquidity make it hard to get further out than that.

Yeah, fair enough. I know that wasn't an easy question. So I appreciate the response. Again, I guess just lastly credit trends remain strong and you kind of look at the reserve level here. Do you try to kind of hold it in this 101, 102, 103 type range as you look out over the next few quarters?

You're asking all these very good questions that are very hard to answer, Damon. I think what we saw -- what we saw this quarter was that based on our forecast, which the forecast does not have a severe recession in it, it does have a slowing of growth and then modest recession, that we didn't see a big change in our ACL factors. As I said, most of the provision was due to loan growth and that's what we saw this quarter. That's really all we know at this point.

Okay, Sounds good. That's all that I have for now. Thanks a lot. Appreciate it.

The next question comes from Laurie Hunsicker, Compass Point. Please go ahead.

Yeah, hi Bob, Jim and Jill. Good morning. Hoping Jim, that you can go back to the expense guide slides or commentary, just wanted to think about that. If I'm doing the math off the operating guide that you have provided, just simply going from right in the middle, the $460 million to $500 million operating expense for full year '23 compared to '22, that's almost 9% growth and completely get your comments around the compensation growth expense of 6% to 7.5%. Just can you help us think a little bit about where that delta is going higher?

Sure. So it's primarily in -- as I tried to say, it's primarily in salaries and benefits, Laurie. There is growth in the other categories, although that's at a more modest level, but the primary increase there is in salaries and benefits.

Right. But just -- I'm just looking off your guide, the salaries and benefits was the highest end of what you gave, which certainly makes sense given where we are with inflation. And then everything else you said those single digits, yet you're full your expense growth guide is up almost 9% or you know what, maybe I can talk to you offline. I feel like I'm missing something here. I'm not quite sure.

Sure, No, happy to do that.

Yes. I'll follow up with you offline. Can you talk very high level, the buyback obviously great to see you buying back this quarter, but it's slowed pretty significantly from last quarter. Can you help us think about how you look at that going forward?

Sure. I just one reminder from the historical side, we did conclude the first repurchase and needed to get regulatory approval for the second. So there was a time period in there where we were pending regulatory approval. So there was just as a reminder there, there was a gap in time where we were waiting for that approval. I think going forward, it's similar to what we would've said previously, but just added the liquidity constraints. Obviously market conditions are very important as we evaluate it, but also our capital liquidity position, and as those change that becomes a factor in the overall decision and we'll make those decisions as we go forward.

Okay. Okay. And any comments around the price, how you think about it up here?

Yes. We do kind of would -- I would think of a standard earn back not standard necessarily, but typical earn back calculations. And when we've done that in the past, we've been very satisfied with that period and that's why we've been, what I would consider be a pretty aggressive buyer of our shares. So that framework is still in place. It's just the additional market conditions as well as liquidity and capital.

Okay. Great. And then just jumping back over to margin net interesting income, was there -- was there any non-accruing loans in income recovery that was booked this quarter associated with your drop and not performers?

There was a modest amount, very small amount. Laurie.

Okay. And then the increase in borrowings in the quarter, can you talk a little bit about that just because your core deposits are so nice and low and cost, and obviously the borrowings aren't. Just how you're thinking about that or how we should think about that going forward?

Sure. So your points are well taken. And I would -- I would just say it this way, obviously the history of the company has been one of our pride points has been, we've been pretty much a deposit funded organization. So our first goal is to continue to experience that have deposits be the vast majority of our funding. Liquidity changed pretty quickly here in the second and third quarter and really in the third quarter and late in the third quarter. As we went through our pricing strategies, we started out -- we didn't change our strategies, but the strategies that we implemented really starting the fourth quarter was to much more aggressively retained deposits. We had small outflows and that's why we needed -- that's what caused the borrowings.

Okay. And so – okay, I guess more importantly, how do you think about using borrowings than going forward?

It's hard to give you a short answer to that Laurie because it, across the spectrum, we've got the pricing -- deposit pricing strategies. The goals of those strategies are to retain certainly in this environment, to retain and ultimately grow deposits. But there are definitely a variety of factors that go into that. We have a lot of borrowing capacity and $380 million is for a balance sheet of our size is not a large amount at the end of the quarter. So the balancing act there is figuring out deposit prices that can retain our existing deposits and ultimately grow them and balance that off with the borrowing capability that we have. We would hope that over time, we would continue to be as deposit funded as possible, but it's a difficult market to do that.

Okay, Great. Thanks for taking my question.

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

Great. Well thanks again, Michelle, and thanks to all of you for joining the call. Thanks very much for your questions and we look forward to talking with you again on our next quarterly earnings call. Thanks again everyone.

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