Great. Thanks. Sorry for the delay, but we are happy to continue the discussion this morning with Eastern Bankshares. We have Denis Sheahan, the CEO, and David Rosato, the CFO, joining us. Thanks very much, guys.
Thanks for having us.
Thank you.
I guess maybe starting off, Boston has really become one of the more competitive banking markets in the country. It feels like with large nationals, super regionals, and wealth managers all trying to gain share. How would you characterize the competitive landscape today, and where do you think Eastern is best positioned to compete?
The Greater Boston market has always been very competitive. There are lots of smaller mutuals in the market. As a matter of fact, most of the mutuals in the country are in the New England region, so it's not unusual that we have a lot of competition. Yes, the larger organizations are there and have professed interest in coming into the region, if they're not already there. But we really like our position in the marketplace. We have $31 billion in banking assets. We're the number 4 in terms of deposit market share. We've a sizable and growing wealth and private banking business. The Eastern brand is so ingrained in the marketplace. It's our home turf. We work and live and make decisions right in that marketplace. The brand is very well-known, and we really like our position.
Several institutions have made significant investments in the market over the past few years. Have you seen any meaningful shifts in competitive behavior recently, either in deposits, commercial lending, or wealth management?
Not significant, with the possible exception of deposit pricing. Deposit pricing is elevated in the marketplace. We saw this trend in the back half of last year and continued into the first quarter. That's one area where we've definitely seen increase. The changes in competitive behavior would be in that segment.
When you're speaking with clients today, how would you describe sentiment? Are you seeing any change in sentiment given the changing rate outlook, or are they still moving forward with expansion and investment?
Well, I look at our business pipelines as sort of a leading indicator of customer sentiment. In both our commercial and wealth businesses, we are seeing very good activity. Particularly commercial, we have had record pipelines now in each of the last two quarters and good loan closings, and the pipeline continues to fill back up. It is remarkable. So we think that our customers are very resilient. They have gone through a lot in the past few years in terms of tariffs and shocks to energy prices, but they remain resilient, and we would categorize them, I think, as sort of cautiously optimistic. Those pipelines, though, are very robust and give us a degree of confidence about the back half of the year and really what our customers are seeing and feeling that they continue to want to lend or to borrow, excuse me.
On the wealth side of the business, we are also seeing very good activity in terms of net flows. So those to us are good, really concrete manifestations of customer sentiment.
Great. On the deposit side, deposit guidance was increased in the second quarter despite the highly competitive environment. What is driving the confidence in the stronger deposit outlook? What are you seeing to sort of support that?
Sure. I will take that one, Jared. When we decided to defend and grow market share and started pricing for that, it in essence woke up our customer base. It solidified or showed us once again the value of that deposit franchise. It is 130 branches, very dense footprint. Southern Vermont now into a little bit of a presence in Rhode Island. It is a great deposit franchise, and we are continuing to leverage it, and we have confidence that it will continue growing.
You talked about balancing deposit growth and margin performance, and on the call noted that money market balances continue to grow faster than CDs. As you think about deposit gathering today, what are customers telling you that they're valuing the most, and how are you balancing that growth of deposits with protecting profitability?
There is a clear preference for liquidity. Customers are responding, and flows are supporting money market specials over CD pricing, for example. Our CDs have been relatively flat year to date. Money market is where most of the growth has been. Then in money markets, it's really across all the major businesses as well, whether that's retail or commercial or private banking. The challenge obviously with a little heightened deposit competition is maintenance of the margin. The backup in interest rates is helping fixed rate repricing story, whether that's securities portfolio or the fixed rate loan book. That's a multi-year story there. Some of that positive income is being offset on the deposit side. But net net, I think it's a small positive for us over the next couple of years.
As you look out over those years, what does the optimal deposit mix look like for Eastern? How do you balance the opportunity for overall growth with improving mix and commercial operating balances?
The mix, we're really focused in. You think on the asset side of the balance sheet, the portfolio that's growing the most significantly for us, and this is by design, is the C&I category. Good relationship-based C&I lending that will bring more commercial deposits will be a focus for us. I think hopefully you'll see us do more in that category with good treasury management services along with it. Then understanding the demographics of the marketplace. The Northeast and Massachusetts in particular is high net worth, high household income, are favorable demographics. Perhaps population growth is not. We'll continue to lean into that private banking wealth management segment. More of our deposits, we think, will skew in that commercial category and in the private banking wealth management segment.
On the commercial side, commercial pipelines finished the quarter at a record level, approaching $1 billion. What are you seeing in those pipelines today, and what gives you the confidence that growth can remain healthy in the second half?
It's that the pipeline. We both sit very near to our senior lender. We're constantly asking him, "So what's going on with the pipeline?" You had really good closings in the second quarter, and it's that the pipeline keeps filling back up. Some of that is it's certainly the perhaps I said the cautious optimism, a little bit more optimism in the marketplace, but it's also that we've added talent over the last several years. In particular, in the last two years, we've added talent to our commercial banking team, and they're beginning to hit their stride now. We feel good about as far as we can see, out through the end of the year. We feel good about that pipeline continuing to fill back up.
You've talked about the initiatives and the focus on C&I. We've heard from other banks that CRE is actually becoming, the economics of that are starting to improve. As you look out, how do you see that loan mix shaping up over the next few years?
For us, it has been and will continue to be a focus around commercial, and then I'll comment on each of the portfolios. Less so on residential real estate. We expect that the residential portfolio will be flat to down over the next several years. We also see opportunity in consumer home equity. But the primary growth driver will be commercial within that. CRE has been slow for us year to date. Our gross originations have been excellent, but we've had a lot of payoffs. Some of those payoffs have come through our most recent merger, the HarborOne merger, where we're working through some loans. That's actually been very successful, but it has dampened overall commercial real estate growth. The legacy Eastern portfolio has also had payoffs. There's a good news, bad news about this.
There's more activity in the marketplace, which is a good thing. The Northeast and Massachusetts is relatively frozen in terms of the bid-ask spread between buyers and sellers. That is beginning to loosen. The good news is there's activity. The bad news is it can result in a payoff. We're seeing both sides of that. We wouldn't expect much by way of commercial real estate growth through the end of the year. We're hopeful that it will be renewed in 2027 with a little bit less payoff activity. But continued focus around C&I. We feel good about the outlook there, and those pipelines remain very strong.
The only other thing I would add to that is our largest commercial real estate portfolio is multifamily. And there's such a chronic housing shortage in New England that there will always be this core multifamily projects going on that we'll be financing.
On that specifically, Massachusetts was in the news about a potential rent regulation mandate. How did that influence building and a sort of backlog of sort of demand now that it feels like that's been pushed out on the calendar?
Yeah, that's been pushed out, and it did have an effect for a period of time where we saw some projects and capital perhaps moving to other states for development. Now that appears to be off the table in the near term. We'd expect for opportunity to return to the marketplace. But there is a degree of uncertainty about what will ultimately happen that could prevent some development.
In the past you've highlighted the investments you've made hiring commercial bankers over the last several years. How much of the strong growth you're talking about in the pipelines is a result of those investments beginning to mature versus the overall market or legacy Eastern's position?
Certainly, it's an element of it, but it's also the legacy Eastern team because the company has gone through three mergers in a little over five years. That has an impact. There is a distraction quotient associated with that that the team is now and also the liquidity crisis. Let's not forget that. Those are all behind us now. The company is very growth-focused. Between the legacy team and the relatively new talent that's been brought in, we think we're really hitting our stride.
When you look at the market, obviously there was the acquisition of Webster by Santander, and that's creating a bigger company there. Is that going to be an opportunity for you to emphasize that local decision-making process and take share coming out of that?
No question. What I would first say in terms of the Webster-Santander merger is Webster was more of a Connecticut, New York institution than a Massachusetts. In that context, yes, there certainly continues to be opportunity for us to emphasize the local decision-making, the certainty of execution, the speed of execution that we bring to the market for our clients. Understand that that particular merger is more Connecticut, New York.
Yep. 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?
Mm-hmm. I'd first go back and just. We did lower net interest income from January to our mid-year 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. 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 hikes, that the industry and us will start exercising those historical betas roughly in the 50%.
If the Fed moves tomorrow, you're not going to see a full increase in money market rates and CDs. We'll start to recoup some of that back. I think our margin is going to stay in that low to mid 360 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.
As we look over maybe the 12 months after a hike, it should be relatively stable as we get out there with those dynamics.
Yeah. Then the question becomes whether it's one and done.
Yeah
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 rate hike?
Higher for longer is a net positive. The only two 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. That's not a uniform. There's not 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 in advisory fees continue to grow. What is driving that momentum, and what gives you confidence that those trends can continue?
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. Bringing together the Eastern and Cambridge team on the wealth side has gone very successfully, and we have had good growth. You started off the conversation, Jared, about the competitors that have come into the marketplace. We can bring a service to a much lower level of assets. We target $2 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. We have many clients that are well in excess of that. But we target there, and we can bring a 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 advisors.
Wrapping a team around the client that is a meaningful differentiator in the marketplace at the asset sizes that we target. Our customers really are attracted to it.
You talked about legacy Cambridge and focus on wealth, and legacy Eastern had the insurance business.
Yeah
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-
It's really-
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 is now wealth. That is the primary fee business. That is the strategic priority, and it is under-tapped in terms of potential, and we are in the early innings of taking advantage of it. We are at the point now where we are training our colleagues, building trust 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 are confident that we are 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?
I will comment on a couple, and David, by all means, jump in here too. The first I would say is our Salesforce implementation. The Salesforce, it is an enterprise-wide solution at Eastern. Just a couple of years ago, it was in certain parts of the company but was not 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. In terms of AI, we, like everyone else, we are 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.
We are 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. I will 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 have now built our own customer segmentation using AI, and it is updated 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 are leaning into and benefiting from the use of technology.
I'll just tag onto that for a second. Not only have we built customer segment, we've deployed it so our frontline staff see that, including the branches. It'll help referrals. 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. 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. We have an internal group that takes lessons learned and distributes it to other users.
At the end of the day, we'll wind up having success in both paths.
Over $5 million on an annual basis. We use that to determine its classification and whether it's performing or non-performing and keep very close to the lease rates and that sort of thing. We think we have it well understood. 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's 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 was AmTrust or HarborOne. The credit skills of the company, whether it's our commercial RMs or our credit approval side of the house, create 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. 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 is the state 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 is your, not so much from your specific portfolio- but what is your view on the Boston office market and the return to office?
Yeah. It does continue to lag, but it is improving all the time. We were referencing in a meeting earlier that Fidelity is now back five days a week. That is a significant change in the office market, and some other large employers are now coming back five days a week. Boston does lag New York in that category. So the vacancy rates are still elevated. They are 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 is with us or any other financial institution, the problem loans are pretty well identified. The problem properties are pretty well identified. They are beginning to resolve. You are seeing sales happen in the marketplace at certainly a significantly reduced valuation. They are beginning to happen. There are properties that are re-leasing, which is a good sign.
Again, we are off what was the peak pre-COVID, but it is improving all the time.
Great. 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 loans.
Yeah. Sure. Be glad to. 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. 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 two different lenses. One is we need to be constantly returning capital to shareholders via dividend and buybacks. In the last 12 months, we've returned about 110% of earnings through buybacks. Then there's an opportunistic sleeve that is more price dependent. When we announced the buyback last November, we were trading about 1.5 times book. Before this recent pullback in the market, we were just almost at 1.75.
We're clearly buying a lot more at 1.5 times and a little less at 1.75 times. 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, 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, at the end of the last quarter, we had a 140 basis point cost of deposits. So continued focus around protection and appropriate growth in that deposit base. An 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. 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. So it's good execution, improvement in profitability, continue to return capital to shareholders.
Those are the things that we're focused on, a sort of very basic blocking and tackling, but being focused on the areas that we think provide the most return for our shareholders.
Another way to say that is that's just a steady compounder, right? No surprises, steady compounder. 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. Thanks very much for joining us today.
Thank you, Jared.
Thanks.
Thanks, Jared.