Hello, and welcome to the Eastern Bankshares, Inc. First Quarter 2023 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 the views expressed today. More information about such risks and uncertainties is set forth under the caption forward-looking statements in earnings press release as well as in the Risk Factors section and other disclosures in the company's periodic filings with the Securities and Exchange Commission. Any forward-looking statements made during this call represent management's views and estimates as of today and the Company undertakes no obligation to update these statements as a result of new information or future events. During the call, the Company will also discuss both GAAP and certain non-GAAP financial measures. For a reconciliation of GAAP to the non-GAAP financial measures, 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. [Operator Instructions] Thank you. I would now like to turn the call over to Bob Rivers, Chair and CEO. Please go ahead.

Great. Thanks, Joanna. Good morning, everyone and thank you for joining our first quarter earnings call. With me today is Jim Fitzgerald, our Chief Administrative Officer and Chief Financial Officer. Throughout our history, Eastern's balance sheet has been a great strength of the company with very strong capital, liquidity and asset quality. This has served us well throughout challenging times in various economic cycles. In Q1, we took multiple steps to bolster our fortress balance sheet as we prepare for the future. As Jim will detail, we made the decision to sell 25% of our securities portfolio to enhance our liquidity and improve the earnings power of the company going forward. As a management team, and with our Board, we spent considerable time analyzing the sale and are very pleased with the outcome. We closed on the sale just prior to the failures at Silicon Valley Bank and Signature Bank. And we were glad to have $2 billion in cash on the balance sheet as the aftermath of those failures was playing out in our markets. We also quickly adapted to the uncertain environment by adding capacity to our backup facilities at the Fed and the Federal Home Loan Bank, with a goal to cover 100% of our uninsured deposits with cash and immediately available funding sources. Importantly, we exceeded that goal, and ended the quarter with coverage of 107%. One of the factors that we considered in deciding to sell securities was the strength of our capital position, which provided us with real flexibility to consider a broad range of options we had and still have some of the highest regulatory capital ratios in the industry. And our TCE ratio was in the top quartile of banks of our size at year-end, giving us a much greater opportunity to…

Great. Thank you, Bob, and good morning, everyone. As Bob mentioned, we took an important step this quarter to reposition the balance sheet to improve our liquidity and earnings outlook. We're pleased that we were able to do this while growing our TCE ratio by 50 basis points from 8.2% to 8.7%, and increasing both our book value and tangible book value per share by $0.60. The repositioning included the sale of $1.9 billion of low yielding securities from our available for sale portfolio at a loss of $280 million after tax. We purchased these securities during the early part of the pandemic when interest rates were extremely low. Although they had excellent credit quality, the very sharp increase in interest rates over the last year caused a decline in their market value. I'll discuss more on the sales shortly, and the expected impact on the -- of the sale to our earnings outlook, which is very positive later in my remarks. The Q1 net loss was $194 million due to the repositioning. Operating net income was $61.1 million, or $0.38 per share, which compares with $49.9 million and $0.31 per share in Q4. Asset quality remained very sound in the quarter with essentially no charge-offs, nonperforming loans of $35 million or 25 basis points of loans and reserve coverage of nonperforming loans over 400%. As expected, loan growth slowed from 2022 levels. Total loans increased $100 million or 3% on an annualized basis in the quarter. Our Board approved the dividend of $0.10 per share payable on June 15 to shareholders of record on June 2, 2023. I wanted to go into more detail on our Q1 balance sheet actions. The security sales took place in early March, just prior to the failures of Silicon Valley Bank and Signature…

[Operator Instructions] First question comes from Damon DelMonte from KBW. Please go ahead.

Good morning, everyone. Hope everybody is doing well today. And thanks for taking my questions. Just want to start off on the margin commentary, Jim. So the $275 million to $285 million, that's for the full year. So that's not like a fourth quarter level. Just wanted to clarify that.

It is for the full year, yes, Damon.

Okay. And based on your commentary it sounded like …

Damon, just to clarify -- sorry, just to clarify, on a fully tax equivalent basis.

Yes, yes. Got that. And it sounds like from your commentary, you're probably going to be sitting on this cash through probably the second quarter. And it seems like maybe the -- from a cadence standpoint, the margin kind of maybe bounces around this level a little bit, and then it kind of really accelerates in the back part of the year, once you fully kind of get rid of the borrowings and let the brokered CDs mature. Is that a fair assessment?

I'd say slightly differently. But I think I have said the same thing, which is, our original expectation was to shrink the balance sheet pay off the borrowings. We felt like that was the right strategy. The failure sort of interrupted that. And as we've said, many times, we're holding more cash than we would expect to long-term. We do expect to hold it for a little bit longer. So on your timing of Q2, and then seeing improvements in the back half of the year, we wouldn't argue with that. We'll see how that plays out, though.

Okay. Fair enough.

In terms of the bank failures and the cash levels, is how I meant that.

Yes, right. Yes, hopefully, no more banks fail. And then, kind of just given the outlook for slower loan growth, and just some kind of a more cautious tone on the economy a little bit. How should we think about like provisioning going forward? You feel you need to kind of bolster reserves in anticipation of that? Or do you feel that because of the slower growth, and you feel good about your underlying credit that you don't really need to add much in the way of provision every quarter?

Right. So it's a very good question. It's a hard question to answer, as you know, that the couple of factors that go in slightly different directions, loan growth does have a big influence on the level of the provision in any one quarter. As you know, with CECL, you're providing reserves for the life of the loan. So new originations attract that reserve on day one. And you can see that in our last two -- the difference between our fourth quarter provision and the first quarter, right, very strong, loan growth in Q4 $11 million provision, and effectively zero in the first quarter, and a lot of that was due to very modest loan growth. We do as part of the process, we review, both the underwriting and also the portfolio management of all those portfolios and very comfortable with it. I think like everybody we’re -- it's hard not to be concerned about the future and where the economy goes. And we'll obviously address that over time. But I would just say, to answer your question, the way I think it's intended, the slower loan growth does have a large impact on the provision level in any one particular quarter. And all things being equal, which it's very hard to -- we're not guaranteeing all things being equal going forward. But all things being equal, the provision would be much lower, given the lower levels of loan growth than it was in 2022.

Yes, okay. That's helpful. And then I guess, just lastly, no shares or repurchase this quarter. Now that you've kind of taken some proactive measures to improve the flexibility on the balance sheet. What are your thoughts on buybacks, especially with where shares have been trading as of late?

Sure. Good question. And I think what we've articulated over time is three considerations on the buybacks and our strategies there. One is market conditions, which your point on the share price is duly noted. Capital and liquidity are very important. And as I said, there's, as I said last quarter and the quarter before that, I believe there's certainly still some clarity to reach on the liquidity front. So that'll be a factor. I think over time, if you go back and look at our track record, we found that to be a valuable tool. We'll consider and evaluate those liquidity and capital as we go forward and make appropriate decisions and keep it communicate -- keep communicating on that.

Okay, fair enough. That's all that I have for now. Thank you.

Thanks, Damon.

Thank you. The next question comes from the line of Janet Lee at J.P. Morgan. Please go ahead.

Hello. Good morning.

Good morning, Jen.

Good morning, Janet.

I want to start with your NII guidance. So what I mean, you sort of touched on this already, but what is the ultimate level of cash you want to maintain in the next several quarters after you pay down some of your borrowings and after reducing some brokered CDs?

So -- I'm sorry, go ahead, Jen, I couldn't hear the last part of your question.

If you want to vote [ph] it as a percentage of assets that works to just want to see like where the comfort level is in terms of the cash balances you want to maintain.

Right. So I think -- that's a very good question first of all, and it's probably different than an answer either we would have given you or any other of your banks probably would have given maybe 6 or 9 months ago. Liquidity is obviously very, very important. It's always been, but it's particularly important now. I would expect us to hold more cash than we have historically. If you look over the last couple of years, we carry fairly modest levels of actual balance sheet cash, probably in a couple $100 million range. I would expect this to hold more than that going forward. It's a little hard to give you a clear answer, because it's going to depend on not just the economy, but also the banking environment and the state of those challenges that they continue. But I would expect it to be higher than it's been historically, but far lower than the $2 billion we're carrying now. So as we tried to say, our original cons -- original strategy for the reposition was to pay off somewhere between a $1 billion to a -- $1.5 billion to $1.6 billion of wholesale funding and leave a little bit of cash on the balance sheet. That was done in a time pre-bank failures. So we'll probably adjust that a little bit. But we do expect to be paying off the wholesale borrowings as we get past the crisis in the second half of the year.

Okay, that's helpful. And now that your securities portfolio is around your target range as a percentage of assets, is it your plan to continue letting those securities portfolio run off in the next couple of years? Or you have another plan in place?

So I think -- yep, nope. Another very good question, Janet. I think that's going to -- we're not optimistic about deposit growth generally for Eastern or in the industry over the next 18 months, 24 months. We expect deposits to be continue -- continued to be hard to not only grow, but to maintain at current levels. We do expect both -- a little bit of shrinkage in the overall deposit levels and also the continuing migration of low cost to high costs. So without deposit growth, I would anticipate that we would let the securities portfolio run off over the next 18 months or so.

Okay.

We do provide some information about what we think cash flows are and obviously, those are prepayment -- depending on pre-payments, which are pretty volatile in the current market, but we would expect without deposit growth to use that cash flow to fund loan growth.

Right, okay. And can you talk about in your NII guidance of flattish, NII versus 2022, what kind of interest bearing deposit data and noninterest bearing deposit mix is assumed?

Sure. A couple of things. We do provide, I think, pretty good disclosure up until the end of the quarter on the deposit betas. I do get nervous sort of putting deposit -- future deposit betas out there or projecting them, there's mix shifts and things like that really do make it hard. We do expect the deposit betas to continue to grow from the March levels. And we don't know exactly where they're going to stop. We think the rate of growth will be slower than has been over the last couple of quarters and ultimately will slow down a little bit. But we do expect those betas to continue to increase. I think we outlined in the presentation, we saw our checking accounts declined from 57% to 53% in the quarter. We expect that trend to continue, but we expect it to slow down as well, meaning it won't be as fast to decline in the future. We've had -- like all banks, we've had pretty significant -- that composition shift has been pretty significant up to this point. We think that slows down a little bit, but continues -- the trend continues, but at a slower rate.

Right. And my last question, can you give us more color around what you're hearing from your customers on your commercial -- on the commercial side -- well -- as well as on the consumer side? I get that though your loan guidance of low single digits for commercial and flattish for resi and consumer loans. Do you see the loan demand generally moderating or is this guidance basically based on a situation around deposits getting a little bit harder to grow? Like, I want to hear about how the loan growth demand dynamics is changing, or maintaining?

Sure. I think I'll probably take it one kind of sector at a time, Janet. So I'll start with the commercial, because that's really our strategy -- strategic focus as you know. And I forget that the commercial real estate is slower than commercial, and a lot of that is due to interest rate levels are much higher. Building valuations are harder to -- for our customers and all customers, I think they feel comfortable about. So that sectors slowed down significantly. It was -- we had very strong growth there in '22 and '21. And a couple of years prior that and years prior to that as well. But it's slowed down significantly. The interest rate levels -- number one reason that we hear from customers on that. Commercial activity is also slower than it was in '22, which is coming off a very high-level just to reinforce that point. I think they are its -- customers are a little more cautious. We do have good traction. We had good -- pretty good traction in the first quarter and had a pretty good April there. But caution would be the word I would use. On the residential side, it's a very difficult market. There's not a lot of activity. There's not -- there's no refinance activity, and there's not a lot of home sales here. So the mortgage business is very challenging, not just at Eastern, but everywhere, just going to make that very difficult to grow the portfolio. Remember last year, a lot of the growth in the mortgage loans is from our embraced relationship, which we had talked about. And on the consumer, which is really a home equity side. We had a very strong year in 2022. We saw that slowdown at the end of 2022 and saw declines in the first quarter. So that would be my color on that.

Great. Thank you.

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

Well thank you for your interest and your questions today. We look forward to talking with you again at the end of July when we report our second quarter results.

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