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

Welcome to the Eastern Bankshares, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded for replay purposes. In connection with today's call, the company posted a presentation on its Investor Relations website, investor.easternbank.com. Today's call will include forward-looking statements. The company cautions investors that any forward-looking statement involves risks and uncertainties and is not a guarantee of future performance. Please refer to the company's forward-looking statement on Slide 21 of this presentation as well as the risk factors described in the company's SEC filings. The company will also discuss both GAAP and certain non-GAAP financial measures. For reconciliations, please refer to the company's earnings press release and SEC filings. I'd now like to turn the call over to Denis Sheahan, Eastern Chief Executive Officer.

Thank you. Good morning, and thank you for joining us. On the call with me today are Executive Chair and Chair of the Board of Directors, Bob Rivers, President and Chief Operating Officer, Quincy Miller; and Chief Financial Officer, David Rosato. We are pleased with our strong second quarter performance, which reflects the enhanced earning power of the franchise and further reinforces Eastern's position as a premier bank in Greater Boston, one of the nation's largest and most affluent banking markets. Record operating net income increased 20% linked quarter and 30% from a year ago, driving an operating return on average tangible common equity of 15.3%. Our results are a reflection of the priorities we have consistently communicated to investors, organically growing both banking and fee-based businesses and returning capital to shareholders. During the quarter, we grew loan balances and built healthy pipelines, generated meaningful deposit growth increased wealth management assets to another record level and produce positive operating leverage. Combined with the return of a significant amount of capital to shareholders, these results demonstrate we are successfully executing on those priorities and delivering on our commitments. Turning to lending. The increase in period-end loan balances was primarily driven by broad-based growth in the C&I loan portfolio. Partially offsetting this growth were headwinds from commercial real estate payoffs, some of which were expected as we continue to work out acquired nonperforming loans. Looking forward, we are encouraged by the resiliency of customers as the commercial loan pipeline finished June at a record quarter end level and is well diversified across businesses. We continue to benefit from the investments we've made in talent in recent years. In addition, our ability to combine local decision-making with the breadth of products and services typically associated with larger banks continues to differentiate Eastern and contribute to growth. The meaningful increase in deposits was due to seasonal municipal inflows and broad-based growth across business lines. As a result, the loan-to-deposit ratio improved to 91% at quarter end compared to 93% at March 31. While the deposit environment remains competitive and costs move modestly higher, we remain committed to balancing deposit growth with margin performance. Importantly, the strength of our core deposit base and limited reliance on wholesale funding provides us with the flexibility to stay disciplined. Wealth management is an important component of the Eastern franchise and our long-term growth strategy. Momentum continued as wealth assets increased for another record high at $11.5 billion and [ fees ] had strong growth year-over-year. Our wealth business not only provides recurring fee revenue and earnings diversification but also strengthens customer relationships across the franchise. The growing connectivity between our wealth and banking teams, including private banking, continues to create more client engagement and new business opportunities. Our comprehensive solutions-oriented approach is resonating with clients, reinforcing our value proposition. Given the wealth demographics and strength of the Cambridge Trust brand and our footprint, we are encouraged by the long-term outlook of the business. Asset quality remains strong. Net charge-offs were stable but nonperforming loans improved for the second consecutive quarter following the HarborOne merger. We are very confident in our credit profile, including the sectors that have received greater attention in Boston, such as life science, which we have limited exposure. We know our office portfolio exceptionally well and it continues to perform within our expectations. Importantly, every office loan over $5 million is re-underwritten annually, providing us with a current and comprehensive view of each property. Overall, we view our asset quality as a source of strength, reflecting conservative underwriting and proactive risk management. Finally, given our profitability, we continue to generate capital in excess of our growth needs. As we have guided, we are committed to rightsizing our capital position. That commitment was evident again this quarter by returning $106 million in capital to shareholders through share repurchases and quarterly dividend. Notably, even after returning a sizable amount of capital this quarter we increased tangible book value per share at a 7% annualized rate. In addition, given the strength of our balance sheet and enhanced earnings power, the Board approved a new 5% share repurchase program underscoring confidence in the company's long-term intrinsic value. In closing, we are grateful for our customers, colleagues and community partners whose trust and support position us for future growth in the markets we serve. David, I'll hand it over to you to provide further details on second quarter financials.

Thanks, Denis, and good morning, everyone. Our second quarter financial performance was strong with record operating net income and we continue to see positive trends in many areas of the business. Highlights from the quarter include further improvement in key financial metrics, notably, return on average assets and return on average tangible common equity. Positive operating leverage driven by margin expansion accompanied by diversified fee revenue growth and lower expenses. Solid balance sheet growth, supported by strong commercial lending activity and higher deposit balances. A significant capital returns to shareholders and sustained excellent asset quality with positive credit trends. We reported net income of $105.2 million or $0.48 per diluted share. Excluding $1.6 million of nonoperating expenses related to the last remaining HarborOne merger-related costs. Operating net income was $106.5 million, or $0.49 per diluted share, an increase of 20% linked quarter. Our focus on growing revenues while thoughtfully managing expenses produced another quarter of positive operating leverage. As a result, the operating efficiency ratio improved 49%, contributing to a 21 basis point increase and operating ROA to 138 basis points and a 250 basis point improvement in operating return on average tangible common equity to 15.3%. As displayed on Slides 5 and 6, revenue growth accelerated during the quarter as both net interest income and noninterest income contributed meaningfully. Net interest income grew 3% from Q1 as the margin expanded 3 basis points to 3.66%. Higher asset yields more than offset increased funding costs. Total interest-earning asset yields increased 4 basis points, supported by favorable loan and securities repricing while interest-bearing liability costs rose 2 basis points due to modestly higher deposit pricing. Net discount accretion remained stable at approximately $20 million and contributed 28 basis points to the margin, which was consistent with the first quarter. Growth in operating noninterest income was strong and diversified, increasing $12.8 million or 28% from the first quarter. The largest contributor to the variance was an $8.9 million increase in income on investments for employee retirement benefits, reflecting stronger equity market performance. This favorable impact on fee income was partially offset by a $3.4 million increase in related benefit costs reported in noninterest expense. Noninterest income also benefited from notable growth in investment advisory fees and interest rate swap income. The increase in investment advisory fees was driven by higher wealth management assets and seasonal tax preparation fees, reflecting both continued business momentum and the value of our comprehensive wealth management services we provide to clients. The higher swap income was due to increased commercial loan volume and greater customer adoption of interest rate risk management solutions. Turning to expenses on Slide 8. Improvement in both nonoperating and operating costs drove a $30.7 million or 15% reduction in noninterest expense linked quarter. Nonoperating expense decreased $29.2 million, largely driven by lower merger-related costs. On an operating basis, Noninterest expense was down $1.5 million. The current quarter benefited from cost synergies achieved following the HarborOne core system conversion in February and were primarily reflected in lower salaries and benefits as well as occupancy and equipment expenses. These improvements were partially offset by higher professional services costs, primarily related to shareholder advisory fees as well as an increase in other operating expenses, primarily driven by growth in off-balance sheet commitments. Moving to the balance sheet. Starting with deposits on Slide 9. Balances increased $814 million or 3.2% linked quarter due to seasonal municipal inflows and broad-based growth across our business lines. While we expect a portion of the municipal deposits to seasonally outflow in Q3, we are encouraged by overall growth in the quarter. As we guided on our Q1 call, we took targeted actions in Q2 to appropriately position offerings to defend and grow our market share. This resulted in upward pressure on deposit costs. Total deposit costs of 147 basis points increased 1 basis point for the quarter and the spot deposit rate for June was 1.51%, which is a reflection of elevated competition for deposits in the New England market. We are focused on increasing deposits to support our growth strategy. However, as Dennis stated earlier, we remain committed to balancing growth with margin performance. Looking at loans on Slide 10. Period-end balances increased $325 million or 1.4% linked quarter. Growth was driven by strong C&I production, which increased more than $300 million partially offset by continued commercial real estate payoffs. We finished June with a record quarter-end commercial pipeline of nearly $1 billion, which gives us strong confidence in origination activity in the coming quarters. Turning to consumer lending. Home equity balances increased by $59 million given the strong underlying demand across our footprint for this product. We see home equity as an attractive area for growth. Residential mortgage balances were down slightly from Q1. Our expectation is the resi portfolio will remain relatively flat in 2026 as we favor HELOC and commercial loan growth. As seen on Slide 12, our capital position remains strong, as indicated by CET1 and TCE ratios of 13% and 10.1%, respectively. We are focused on rightsizing capital through organic growth, share repurchases and quarterly dividends. We expect to continue to generate excess capital and are managing our CET1 towards the median of the KRX, which is currently 12%. We returned a significant amount of capital to shareholders during Q2. In addition to $33.1 million of cash dividends paid, we repurchased 3.6 million shares for $72.7 million at an average price of $20.03, which was $0.46 below the VWAP for the quarter. As a result, our diluted common shares outstanding were 217.6 million as of June 30. At quarter end, 1.3 million shares remain in the current share repurchase program. The Board authorized a new repurchase program of up to 11.3 million shares or 5% of common stock outstanding. The program expires on December 31 2027. In addition, the board approved a $0.15 dividend to be paid in September. As displayed on Slide 13, asset quality remains excellent. Net charge-offs to average total loans were stable at 17 basis points, and NPLs improved as expected, falling by $29 million linked quarter to $109 million or 47 basis points of total loans. Notably, NPLs improved in both the legacy Eastern and acquired HarborOne portfolios, and we expect further credit resolutions in the quarters ahead. Criticized and classified loans decreased modestly from the first quarter. The improvement was driven by lower criticized balances in the legacy Eastern portfolio largely offset by an increase in HarborOne loans. As we further deepen our knowledge of the acquired portfolio, we continue to refine risk ratings. The increase in Q2 was attributable to a small number of loans, all of which we believe present no risk of loss. Before turning to Q&A, I'd like to spend a few minutes on our full year 2026 outlook on Slide 14. We're entering the second half of the year with healthy commercial loan pipelines an exceptional deposit base, strong asset quality, improved efficiency, continued wealth management momentum and substantial capital flexibility. All of which position us well to deliver attractive returns for shareholders. With that said, we have revised our full year outlook to reflect our performance through the first 6 months of the year. On the balance sheet, we are narrowing our loan growth outlook to a range of 3% to 4% from our prior expectation of 3% to 5%. The change primarily reflects the slower-than-anticipated start to the year in the first quarter. That said, second quarter production was solid and commercial pipelines ended June at a record quarter end level approaching $1 billion, which gives us confidence in continued growth momentum through the balance of the year. Conversely, reflecting the meaningful growth in deposits during Q2, we are increasing our deposit growth outlook to 2% to 3%, up from our previous range of 1% to 2%. From an earnings perspective, softer loan growth in Q1, lower than anticipated accretion year-to-date and a highly competitive deposit environment are impacting our expectations for net interest income and margin. Accordingly, we now anticipate net interest income in the range of $1.05 billion to $1.20 billion for the year with an FTE margin of [ $3.60 to $3.65 ]. While these ranges are modestly lower than the previous outlook, we continue to expect solid profitability in the second half of the year. Credit performance remained strong and trends were positive over the first 6 months. As a result, we are lowering our provision outlook to a range of $25 million to $30 million from our prior range of $30 million to $40 million. As always, actual provision levels will depend on the evolving economic environment. We are also narrowing the outlook range for operating fee income to $195 million to $200 million, compared to the original range of 190 to 200. In addition, the successful HarborOne integration and realization of cost synergies are supporting improved efficiency and expense discipline. Therefore, we are tightening the operating noninterest expense outlook to a range of $655 million to $665 million, from the previous range of $655 to $675. Finally, the outlook for operating tax rate and capital levels remain unchanged. This concludes our remarks, and we'll now open up the call for questions.

[Operator Instructions] The first question comes from Study Strickland of Hovde

Wanted to start on deposit competition. costs held in better than I might have expected this quarter, just given some of the commentary. Last quarter on expectations on competition and really solid growth here. Has competition maybe been a little bit less of an issue than you expected? I know it's still strong, but maybe a little better than you anticipated? Or do you just expect more of an acceleration in those costs in the back half of the year?

It's -- I would label it as relatively constant. And our expectation is the same for the back half of the year. Maybe it was a little -- it accelerated a bit during the second quarter, modestly, but I don't really see any reason with current market expectations of higher rates that competition will lessen in the near term.

Got it. Fair enough. And then just on the other side of the balance sheet, is it fair to assume there's still more to go here on yield expansion, just given I'd assume loans in the pipeline are probably above portfolio rates, and you still got a good bit of repricing loans on Page 18 in the deck.

Yes, I would characterize your comments as consistent with our thinking. There's there's a multiyear asset repricing story, which we detail in the deck. And just one small item to point out, if you just look at the loan portfolio because of the C&I -- the strong C&I growth in the quarter, the floating rate component of that portfolio ticked up quite a few percentage points, which is a positive if you think about a Fed tightening cycle, possibly beginning. The wildcard, which is kind of what we've talked about last quarter is just with that long-term asset repricing what's the state of deposit costs going to be? That's the back half of the year falls.

Understood. And just a real quick one last one. Do you have the weighted average rate on what's in the pipeline today?

No, I don't have it. But directionally, I would say consistent with the second quarter. There's some modest commercial real estate spread tightening that's occurring. I think -- we've talked about that a little bit. Other banks have talked about it. But away from that, we're seeing relatively steady spreads across all of our businesses.

The next question comes from Justin Crowley from Piper Sandler.

On the NII guide, and I know the bias has already been towards the lower end previously, but following up a little on what was just said, thinking about the margin outlook from here, which kind of implies flat to down through the balance of the year. I thought now that just what you've got on the asset repricing side. Just isn't going to be enough to outrun whatever you see as far as the funding cost pressure that you were talking about. Is that kind of the right way to think about it?

Yes. I would just go back to kind of the same response as we gave to Fed, which is there's a clear back book repricing going -- that's going to go on, on our fixed rate loan book and our securities portfolio. And you saw, especially in the securities portfolio, a nice uptick in the quarter. That's clear. And that's really regardless of what happens to interest rates as well. The deposit pressure, frankly, is hard to know exactly how that will evolve, especially if you think that we're going to have a more aggressive Fed. So the 2 counteracting forces and deposits will as we said last quarter, we'd probably pick up 2 to 3 basis points a quarter. That's probably another basis point or 2 higher is how we've answered that question. And if we're right, it's generally those 2 should offset each other with a little bit with the deposit cost eating into the positive asset repricing, costing us a few basis points of margin.

Okay. Got you. That's helpful. And then just on deposit balances and the growth for the quarter, which is strong. And it looks like most of that came from money market accounts and you kind of called out the seasonality in municipal. But just curious how you're thinking about growth from here just from a mix standpoint.

I think it's going to be generally consistent. The CDs will probably grow less than money markets. There is a clear preference, we believe, for money markets rather than term product, but we did see growth in both of them in the quarter.

Okay. Got it. And then just one last one. Just on the payoff activity on the [indiscernible] side, I know it could be tough to predict, but do you have much line of sight or just any thoughts on how that should trend through the remainder of the year. Would you expect that pace to slow at all just given the move that we've had in rates?

Yes. We -- it was elevated definitely in Q2. We do think there's a moderation in the back half of the year. Hard to know exactly how much, but we do think Q2 was abnormally high for us. And just a little color about half of those came out of the HarborOne portfolio and about half of those payoffs came out of the legacy Easter portfolio.

The next question comes from Jared Shaw of Barclays.

Just to keep on the interest income side. Was there anything on the loan yields. Did you have any interest recoveries from some of those NPL reductions in loan yields this quarter?

No.

Okay. So that's sort of a good -- that loan yield is a good base to look at going forward? And then, I guess, just sort of separately -- sorry.

Jared, I was just going to point out accretion income was consistent quarter-to-quarter. So the impact on the margin was the exact same each quarter.

Okay. I guess just on that, any thoughts on expected accretion in sort of through the rest of the year just sort of trending? Should we just assume sort of steadily grind lower from here?

Yes, if anything, maybe just a slight tick down. So last quarter, if you remember, we talked about a range of $21 million to $22 million in the last 2 quarters, we've come in at $19.5 million. We think that $19.5 million is about that run rate. Commercial is actually higher -- is coming in higher than our original expectations. However, the resi portfolio is coming in a little slower because prepay speeds have slowed down.

Okay. And then, I guess, shifting over to the wealth management side, good trends there. What's the competitive landscape looking like up there. We're hearing other banks really making a big portion of hired people. Are you seeing that -- is it more difficult to attract that incremental new customer here? And I guess how are you trying to differentiate your product from others in the market?

Jared, it's consistently competitive. I mean, yes, there are others who are entering the market and looking to grow in this space. But we have had very robust pipelines, and our outlook for that is to continue certainly into the back half of this year and beyond. And one of the unique things about our franchise is that there's a lot of upside within the Eastern customer base. If you go back just a few years, the primary fee business at Eastern was insurance. Now the primary fee business is wealth management. So when you think of the opportunity that our colleagues in the retail branch division and in commercial lending have to refer, it's -- they're thinking now about wealth, whereas in the past, that might have been thinking about insurance. So we believe there's a lot of upside both within our customer base and in the market. And we're finding a way. It's -- we're in the early innings, we believe of the growth as possible in this business, and we're pretty excited about it.

Your next question comes from Damon DelMonte with KBW.

So just curious if you could provide a little color on the commercial pipeline. A lot of positive commentary about it being at record levels. Just kind of looking for a little color on what industries and what types of loans that you guys are getting good looked at?

So Damon, thanks for the question. It's broad-based. If we look at growth that we had in -- just here in the second quarter, it really was well diversified across many industries. And it's really a testament to the team in commercial their focus, the talent that we brought in that is now beginning to hit its stride. So it really and truly is -- it's not concentrated in any one particular industry. And our pipeline in commercial real estate and in community development lending is also very strong. We certainly -- we didn't experience growth in CRE in the last quarter. But as David has referenced, we're working through a lot of acquired loans and beyond that, just payoffs in the marketplace. But we would expect the payoffs to decrease in the back half and we should see growth in CRE as well. But good activity, our customers are feeling reasonably optimistic and that's being reflected in our loan pipelines.

Got it. Okay. Great. That's helpful. And then maybe just one on the expenses. Could you just maybe talk a little bit about your approach with continuing to have a tight restrictor on expense growth, but then also balancing that with investing in technology and other areas of the footprint, making strategic hires and things of that nature?

Sure, Damon. Expense management just it's a day-to-day activity. Fortunately, this is a company that is relatively just thrifty in its mindset and has a good history of thoughtful expenses management. We are looking -- we're always looking for opportunities to save money to redirect into technology. That's -- we're not unique in that, obviously, but we work extra hard on that trade-off trying to push the use of AI and other technology to support our customers and increase productivity. You can tell by our guide we lowered the top end on expenses. And I feel really good about expenses in the back half of the year.

And I'll just add to that, we're always looking for talent. We have opportunities to bring in talent to help grow revenue in the future where we're absolutely open for business.

Your next call comes from Janet Lee of TD Cowen.

This is Brad Dalsandro on for Janet. My question is noninterest-bearing deposits. One of the key themes of this earnings season has been on interesting deposits, and you've had a couple of strong quarters of growth here on an average basis, but end the period is down slightly. Do you expect noninterest-bearing as a percent of a total to flatten out here in the back half of the year?

Brad, you were breaking up a little bit. Was the question, our thoughts around noninterest-bearing DDA balances?