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

Yes. Shifting over to the margin. This past quarter, you did highlight that balance sheet growth was strong, but NII and margin guidance moved lower. How should investors think about the interaction between asset repricing tailwinds and continued funding pressure with that growth dynamic?

I'd first go back and just -- so we did lower net interest income from January to our midyear update in July. It was really a function of lack of growth, mostly loan growth, but really deposits as well in Q1 and then accretion income coming in a little lighter. And then third was the deposit pricing pressure. It was important to remember all the components of that. The kind of what we talked about earlier, though, Jared, is the steeper yield curve, the higher rates is helping the long-term asset repricing side of the balance sheet, offset by heightened level of deposit competition. We do think that if we're going to go through a Fed tightening cycle here of one or a couple of hikes that the industry and us will start exercising those historical betas roughly in the 50%. So if the Fed moves tomorrow, you're not going to see a full increase in money market rates and CDs. So we'll start to recoup some of that back. And I think the -- our margin is going to stay in that low to mid 3.60% range for the next couple of quarters and into next year. And I think that's a positive. But then over time, it should start expanding.

So as we look over maybe like the 12 months after a hike, it should be relatively stable as we get out there with those dynamics?

Yes. Yes. And then the question becomes whether there's -- it's one and done or there's going to be a series of increases.

If we see rates remaining higher for longer, how does that alter the earnings trajectory versus maybe what you were expecting 6 or 12 months ago when we were talking about a rate cut versus a rate hike?

Higher for longer is a net positive. The only 2 related issues is dependent on the magnitude of the move impact on AOCI and then on customer demand for financing if rates hit a certain level. And that's not a uniform. There's not like a number there. It's really specific to each customer and what they need to finance.

Maybe shifting over to wealth management, which is obviously a core strength of the company. Wealth assets reached another record $11.5 billion and advisory fees continue to grow. What's driving that momentum? And what gives you confidence that those trends can continue?

So we have a terrific capability at the firm and the demographics of the market lean towards that capability, high degree of net worth, high household income. And bringing together the Eastern and Cambridge team on the wealth side has gone very successfully, and we've had good growth. Where we target -- you started off the conversation, Jared, about the competitors that have come into the marketplace. We can bring service to a much lower level of assets. We target $2 million to $20 million in investable assets. We can bring a lot of service to that asset category that the larger firms will struggle to do. So we have many clients that are well in excess of that, but we target there, and we can bring our full capability as a trust company with trust powers, helping clients with their estate planning, their financial planning in partnership with their attorneys and tax advisers, wrapping a team around the client that is a meaningful differentiator in the marketplace at the asset sizes that we target and our customers really are attracted to it.

And when you look at -- you talked about legacy Cambridge and focus on wealth and the legacy Eastern had the insurance business that you sold. How significant is the opportunity to just sort of deepening the penetration of the legacy Eastern customer base? How long do you think that takes to really materialize?

We believe it's very significant, again, backed by the demographics in the marketplace and the fact that insurance was the primary source of fee revenue for the company. So when you think of your average branch manager or your commercial lender, their focus from a referral perspective in the past was around insurance, the insurance business. It's now wealth. That's the primary fee business. That's a strategic priority. And it's undertapped in terms of potential. And we're in the early innings of taking advantage of it. We're at the point now where we're training our colleagues, building trust with -- between the wealth and private banking and branch colleagues and commercial banking and business banking and mortgage banking. Building that trust, having the appropriate incentives put in place, and we're confident that we're going to continue to see growth in that segment for many years to come.

Maybe shifting to technology and AI. Eastern has consistently talked about using technology to improve productivity and customer experiences. Where are you seeing the most tangible benefit from those investments today?

So I'll comment on a couple and David and by all means, jump in here, too. So the first I'd say is our Salesforce implementation. The Salesforce is now going to -- it's an enterprise-wide solution at Eastern. Just a couple of years ago, it was in certain parts of the company, but wasn't thoroughly throughout. So in terms of building a better customer experience, having it be an enterprise solution is a significant element of improving that customer experience, fully understanding the customer's relationship with the bank. And then in terms of AI, we, like everyone else, are -- we're experimenting with AI. Every employee in the company has access to Microsoft Copilot and between 10% and 20% of the company now has access to Claude. So we're experimenting with it to a great degree. And our perspective on it is, yes, of course, it will help in terms of productivity, but we really want to lean into it in terms of improving the customer experience. And I'll give you one quick example. In the past, in doing customer segmentation, we may have brought in a third party to do that segmentation and you pay a fee for that. We've now built our own customer segmentation using AI. And it's updated like real time, live, and we can tell where are our customers interacting with the company and how can we improve their customer experience. Those are just a couple of examples of ways that we're leaning into and benefiting from the use of technology.

And I'll just tag on to that for a second. So not only have we built customer segment, we've deployed it. So our frontline staff see that, including the branches. So it will help referrals. But we've also used it to identify assets held away from us so that those customer referrals, that prospecting, those conversations are all now much better informed than they would have been. And that system is real time. It's constantly running and refining itself. So there's -- one of the things that we've done that's kind of interesting is as we put the AI technology in different parts of the bank, we haven't said our goal is cost improvement. We've been basically agnostic to let people come up with ways to make their jobs better, whether it's serving their customers or being more productive. And we have an internal group that takes lessons learned and distributes it to other users. And at the end of the day, we'll wind up having success in both paths.

[Audio Gap] on over $5 million on an annual basis, and we use that to determine its classification and whether it's performing or nonperforming and keep very close to the lease rates and that sort of thing. And so we think we have it well understood. So we're not overly concerned from an asset quality perspective at all.

I would just add to that, thinking about it a little different. Credit is really a competitive advantage for us as a company, not only the quality of the books that we have and our ability to work through credit issues from an acquisition, whether it's Cambridge Trust or HarborOne, but it's the credit skills of the company, whether it's our commercial RMs or our credit approval side of the house, it creates certainty of execution for our customers. Everyone knows the credit box we play in. Our customers are aligned. Our RMs know and we can turn credit decisions quickly. And that's a real advantage. That's one of those things that makes a bank like us be able to compete against larger banks.

What's the state of sort of the office market more broadly in Metro Boston, New York? I just read an article last week that the Midtown office market is back to pre-pandemic levels. It feels like Boston continues to lag. What's sort of your -- not so much from your specific portfolio, but what's your view on the Boston office market and return to office?

Yes. It does continue to lag, but it's improving all the time. We were referencing in a meeting earlier that Fidelity is now back 5 days a week. That's a significant change in the office market and some of the large employers are now coming back 5 days a week. But Boston does lag New York in that category. So the vacancy rates are still elevated. They're in the low 20s, better than they were, but still a long way to go to get back to pre-COVID. The problem, whether it's with us or any other financial institution, the problem loans are pretty well identified. The problem properties are pretty well identified, and they are beginning to resolve. You are seeing sales happen in the marketplace, certainly at significantly reduced valuation, but they are beginning to happen. And there are properties that are re-leasing, which is a good sign. We're -- again, we're off what was the peak pre-COVID, but it is improving all the time.

On capital, you continue to operate with a CET1 ratio above 13%, while actively repurchasing shares. Walk us through, I guess, that path to getting to the 12% target given the still growth backdrop that you are expecting on.

Sure. I'd be glad to. I mean, the really good news in the whole capital story is how much capital we're generating because the company is so profitable. We actually finished last week, the buyback that we announced last November. And so we relaunched another buyback announced it on our July call, and we're starting to execute against that. We look at the buyback really through 2 different lenses. One is we need to be constantly returning capital to shareholders via dividend and buybacks. And in the last 12 months, we've returned about 110% of earnings through buybacks. And then there's an opportunistic sleeve that is more price dependent. When we announced the buyback last November, we were trading about 1.5x book. We -- before this recent pullback in the market, we were just almost at 1.75x. So we're clearly buying a lot more at 1.5x and a little less at 1.75x. So that's the opportunistic sleeve, but the real message is there's an ongoing sleeve of continuous buybacks that we need to work down our capital levels. We've been very careful not to put a date out there just because we don't control the valuation.

Got it. I guess if we're having this conversation a year from now and investors are viewing the company differently with a higher valuation, what do you think would be the biggest drivers to get there?

I think it's continued execution. When we talk with our investors, it's -- they welcome the execution, the improvement in profitability, the focus around the continued protection of the core deposit base, which is a real jewel in our franchise. As much as we talk about deposit pricing and deposit competition, we ended the last quarter with 140 basis point cost of deposits. So continued focus around protection and appropriate growth in that deposit base and emphasis around growth in commercial lending. We've really seen a real improvement in our C&I lending growth rate, looking for that to continue. And then the execution on the fee-based business, the wealth business and otherwise, there are other categories that we would hope to grow there like treasury management, for example, that -- so it's good execution, improvement in profitability, continue to return capital to shareholders. Those are the things that we're focused on as sort of very basic blocking and tackling, but being focused on the areas that we think provide the most return for our shareholders.

But another way to say that is that's just a steady compounder, right? No surprises, steady compounder and that earnings stream will be more highly valued.

Great. Well, thanks very much. With that, I think we can wrap it up unless there's any questions from the audience. But thanks very much for joining us today.

Thank you, Jared.

Thanks, Jared.