Eastern Bankshares, Inc. (EBC) Earnings Call Transcript & Summary

Great. Thanks, everybody, for joining us for the last of the mid-caps today. We are excited to have Eastern Bank with us out of Boston, $30 billion in assets pro forma with the HarborOne transaction. Happy to have Denis Sheahan, CEO; and David Rosato, CFO. So thanks for joining us.

Happy to be here.

Our pleasure.

I guess maybe to start, this October will be 5 years since the IPO and the conversion of Eastern. Maybe just give us a little bit of a walk-through of what's changed and how the company has matured over that period of time.

Sure. Happy to, Jared. And as you know, Eastern was a mutual bank for over 200 years before the decision to go public. And Bob Rivers, who was CEO prior to me, he is now Executive Chair and the management team had a vision and a strategy to grow in a really good market in New England. The market that we are in, in New England, Greater Boston, Southern New Hampshire is the best economic region in New England. And so the vision was to grow there. And that growth is a combination of organic growth and through M&A. And so the company has been quite busy. We announced the HarborOne merger this year. It's the third merger in that 5-year period, bringing the assets of the company before the conversion from about a $11 billion in assets to $30 billion, $31 billion when the merger closes. It also included with the Cambridge Trust merger, a significant pivot towards wealth management as the primary fee business. And the company sold its -- what was then its primary business insurance right before the Cambridge Trust merger closed. So there's a lot that has happened during that period. What it's resulted in is in a company that has a very dense franchise right around Greater Boston, Southern New Hampshire and now into Rhode Island in terrific markets with about $9 billion in wealth assets under management and administration, most of it managed. There's a small amount of it that's custody. So it's a company now with strong operating leverage. Our operating efficiency ratio now is around 50%. The vision and the strategy has led to significantly improved profitability. The company's operating return on average assets and return on tangible common equity was 1.3% and 13.5%, respectively, in the second quarter. So it really -- those performance ratios would not be where they are without the strategy and the vision that Bob and the management team laid out 5 years ago when they converted the company to public forum.

You mentioned a few restructurings on the balance sheet side and the sale of the insurance business. Where are you now in the sense of -- are you happy with the current positioning of the balance sheet? Is there an opportunity to do more? How should we be thinking about the composition of assets and liabilities going forward?

Well, the great strength of the company is our core deposit base and liquidity. There's no borrowings on the balance sheet. It's an area that historically, management has paid a lot of attention to make sure that we have an appropriate cost of funds, appropriate cost of deposits, that will continue. It's very important to the net interest margin, the profitability of the company. In terms of on the asset side of the balance sheet, and actually, David, since he joined the firm is coined this phrase, the strength of the company is really on the funding side. It's on the asset side where improvement can be had. Loan growth has been reenergized here year-to-date, and we're very happy with that. And we're hopeful of that, that will continue into the back half of the year. We have a really strong commercial banking business, and we're investing in that business and by adding talent from some of the super regionals in our marketplace, and we'll continue to look for opportunities like that. We did have 2 securities portfolio restructures in that period since conversion. We're sort of less enamored with that at the moment. So I wouldn't think there'd be significant restructures certainly in the near future. More growth in commercial and commercial C&I lending, the commercial book overall, a little bit less on the consumer side. So those would be our priorities in terms of balance sheet.

When you look at the growth outlook, especially on that commercial side, where is that growth coming from? Is it the New England market has consolidated maybe earlier than other parts of the country? Is there still an opportunity to take market share from the bigger national players? Or are you actually seeing some economic resurgence in the markets?

So first of all, the Massachusetts economy is a little bit weaker than the nations at the moment, which is unusual. Massachusetts has had a very strong life sciences and innovation economy, that's somewhat weaker now. So GDP growth in the state was lower than the nation. Unemployment is a little higher. We view this as a temporary phenomenon and that over the long term, the expectation is that the Massachusetts economy will become more robust. That said, we -- the growth that we've seen this year has been sort of a resurgence of sort of optimism among our business clients, particularly in the C&I sector. There's been some fair amount of M&A by our clients buying other clients, businesses. And so that has provided opportunity for us in the C&I space. And then the talent that we've brought in, in commercial has also afforded some additional growth there in that segment. In commercial real estate, there is some limited opportunity for growth there because some of our competitors have announced that they're pulling back in that segment because of concentration issues and Eastern is well below the commercial real estate concentration guideline. So on the margin, there are some opportunities for us to grow in that segment as well.

In terms of that commercial growth, you talked about hiring people in that space and the opportunity to continue to hire. Do you have everything else you need in place to see that growth? Or are there systems investments or any other investments the bank needs to make to accelerate that?

There are not. There are modest system investments, nothing of great significance. So we feel that our platforms are very, very good. And in terms of what might we need additionally, it's looking out for opportunities to bring talent in. And so far, we've had a lot of success there, particularly in commercial, somewhat in wealth management, and we're going to be looking to add some talent in the private banking segment as well. And what we found is we have been able to attract the talent because the company's scale is such that we can bring in some talent from the larger institutions, but it's a better environment for them to sort of to apply their trade. They can feel like they're really contributing to the growth of the company, capitalizing on the opportunity they have within their existing customer base and bringing it to Eastern where it's a little bit easier to apply your trade than it might be at a larger organization.

So we have a few questions for the audience through the [ BlackBerry ]. So I'll read those out. And hopefully, you can contribute your thoughts. The first question, what's your current position in Eastern shares? One, overweight or long; two, market weight or equal weight; three, underweight or short; or four, not involved. 2/3 are current holders. That's a good trend for you.

That's a thank you from us.

Second question is, which would have the largest impact on improving the relative valuation of shares of Eastern? Better margin performance, relative margin performance; two, above-average peer loan growth; three, better expense control; four, credit quality outperformance; five, more active share repurchases; or six, an accretive bank acquisition? Sort of a split between buybacks and an acquisition, but definitely capital management at the top of the list. All right. Our next question, will be organic -- what will the organic loan growth be at Eastern in 2026? One, 3% to 5%; 2, 5% to 7%; 3, 7% to 9% or 4, 9-plus percent. Just over half, 3% to 5%. And then our final question, how should Eastern prioritize its use of capital, organic growth, stock buybacks, securities repositioning or M&A? 50% for more buybacks, obviously, followed by organic growth and then M&A. Well, thanks. I guess building off of those, you and David each joined about a year ago and now have a better understanding of the company. What can we expect going forward over the next few years from the two of you?

Well, I think consistent with the answers to some of the questions there, we discuss all those topics frequently and think about them strategically. Certainly, David and I are very organic growth sort of biased, and that's what we think about the company has achieved a great deal of scale now. There's opportunity in the market, lots of new communities, new customers in order for us to deepen the relationship with. So that's certainly going to be an area of focus for us. And in terms of -- there's nothing broken at the firm. It's a highly capable organization, well managed and has been for many years. We're just -- we're looking to sort of to continue that and to help the company in terms of improving performance and profitability. It's something that we talk about all the time at the firm. And the good news is that, that is beginning to occur in a very robust way, and the outlook is for that to continue. We announced a continued improvement following the HarborOne merger. So certainly, that's something that we're going to lean into. And in terms of other things to be looking for, I think I already referenced this in the hiring front, we're open for business. We're looking to attract talent to allow the company to grow at an even greater rate. David, you add anything...

I would just say that we brought in that new voice to the company because we've spent our entire career in public companies. And that's the shareholder. And I was glad to see the responses there around capital management as well. It's consistent with our thinking.

I was going to say, how do you view or what are your capital priorities today? Obviously, you have plenty of capital to support that organic growth, and it's not an either/or proposition for you. You have had success with deals. We've seen consolidation sort of continue at the smaller level now creating a number of middle-sized companies in the market. What are your priorities for capital?

As Denis said, it's number one, it's organic growth. The organic growth won't consume all the capital that we have. As a new public company, we're still a little under in dividend yield. So there is some dividend growth consistent with the earnings power of the company. But we've been barred from buybacks just because of the HarborOne. So we're looking very forward to getting back into the market, very consistent with what we just saw. And then last and not a focus by any means is just if an M&A opportunity presents itself, it's something we have to consider, but it's certainly not a priority for us.

Denis, coming from Cambridge, Cambridge had a relatively large wealth franchise that's now, as you said, the biggest contributor to fees at Eastern. How has that been integrated into the franchise? And how do you see that evolving over the next few years?

Sure. So the integration of Cambridge Trust into Eastern was relatively complex because you had both the bank system conversion and then the wealth system conversion and two separate dates with a lot of energy needed to do that well. And Eastern has done a fantastic job on the integration. First, the system integration is complete. Second, the cultural integration continues. That doesn't happen quickly. It's going very well. We're paying very close attention to it because you're bringing two wealth management divisions together. Admittedly, Cambridge was much larger, bring it together with Eastern under the Cambridge Trust brand for wealth management and private banking. So still work to be done there, but we're well on our way. I think it's an area that really excites me about the potential of the combined company because I'm sure as many in this room know, Massachusetts doesn't have the most robust population growth. We're not the Southeast. We're not other parts of the country. But what we do have is a very good wealth demographic, very good household income. And so our wealth and private banking business can really play into that pretty effectively. Another thing associated with that business that excites me is it's a relatively untapped area within Eastern. The primary fee business at Eastern was insurance. So when you think of referrals coming out of the branches and coming out of the commercial lenders, they were for that business, not particularly for wealth. Now the calendar is open for the wealth division to take advantage of that. And that process is well underway. And I'm confident in time that the team will do that very effectively. The gentleman who runs that business for us at Eastern, I worked with him for 20 years at a prior organization, and he knows exactly what to do. So we're very much looking forward to scaling that business at Eastern over time.

Let me see if there's any questions in the audience. Happy to open it up. As you've grown and the bank has integrated these other deals, how has the pace of investment in technology been? And where do you see maybe an opportunity or a need to make more investments? And I guess, as you continue to scale higher?

Yes. So Eastern has always had a robust investment in technology. It has done a lot of the right things from my perspective coming in and being relatively new to the firm in terms of not being solely dependent on the core providers, but having capability, particularly when it comes to things like online banking and sales force, et cetera, that are leveraging those core systems whether it's to the customer's benefit or for sales management, et cetera. There are some investments we'll continue to make in those areas. In the small business online is an area we know we need to make some additional improvement and that will be coming in 2026. But aside from that, we're not envisioning very significant increases in technology spend.

We're all expecting a rate cut out of the Fed this month and then another likely in the year. How is the balance sheet positioned for that? And what's been some of the deposit pricing dynamics in the market?

Sure. I'll be glad to take that. We're essentially interest rate neutral. But with that said, a steeper yield curve is obviously better for us, better for the industry. It will be interesting because most likely next week, it happens. We've underperformed in the first half of the year on deposits. We've got a little bit more aggressive on pricing. The -- it's -- so deposit growth is picking up. We'll see what happens as we integrate HarborOne into the company. Their deposit cost is a little higher than ours. So we've got a plan for that. But steeper yield curve, a real positive for us.

Great. Any final thoughts?

I thought the answers to the questions were very consistent with how we're thinking about those topics, whether it be loan growth, as David referenced, the share repurchase being a priority for us or one of the priorities. When you think about loan growth in our region, again, like the economic growth is not the most robust. But with the company's profitability dynamic now, we're going to be generating a lot of capital that affords us the opportunity to do even more on the share repurchase side, as David referenced. So we're looking forward to that.

And I would just add, we're highly focused on trying to be top quartile performer across ROA, ROE.

Great. Well, thanks, everybody. I think that's where we're trying to get done today.

Great. Thanks, Jared.

Thank you, Jared.