Eastern Bankshares (EBC) Q2 2026 earnings call transcript

I'd now like to turn the call over to Dennis Shien, 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 Rosado. 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% bank quarter and 30% from a year ago, driving and 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 meaning full deposit growth, increased wealth management assets to another record level, and produced 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 CNI 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 non-performing loans.

Looking forward, we were encouraged by the resiliency of customers as the commercial loan pipeline finished tune 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 and wholesale funding provide 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 to 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 engagements 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 not performing loans improved for the second consecutive quarter following the Harbor 1 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 right-sizing 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 increase 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, Dennis, 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 for 48 cents per diluted share, excluding $1.6 million of non-operating expenses related to the last remaining Harbor 1 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 in 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 non-interest income contributed meaningfully. Net interest income grew 3% from Q1 as the margin expanded three basis points to 366. Higher asset yields more than offset increased funding costs.

Total interest earning asset yields increased four basis points, supported by favorable loan and securities re-pricing, while interest bearing liability costs rose two basis points due to modestly higher deposit pricing.

Net discount accretion remains stable at approximately $20 million and contributed 28 basis points to the margin, which was consistent with the first quarter. Growth in operating non-interest 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 non-interest expense.

Non-interest 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 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 eight, improvement in both non-operating and operating costs drove a $30.7 million or 15% reduction in non-interest expense length quarter. Non-operating expense decreased $29.2 million largely driven by lower merger related costs. On an operating basis, non-interest expense was down $1.5 million. The current quarter benefited from cost synergies achieved following the Harbor 1 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 and off-balance sheet commitments.

Moving to the balance sheet, starting with deposits on slide nine, balances increased $814 million or 3.2% link quarter due to seasonal municipal inflows and broad base 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 one 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% link quarter. Growth was driven by strong CNI 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 right sizing 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 30th. At quarter authorized a new repurchase program above 2.11.3 million shares or 5% of common stock outstanding.

The program expires on December 31st, 2027. In addition, the board approved a 15 cent dividend to be paid in September. As displayed on slide 13, asset quality remains excellent. That charge offs the average total loans were stable at 17 basis points and NPLs improved as expected falling by $29 million link quarter to $109 million or 47 basis points of total loans.

Notably, NPLs improved in both the legacy eastern and acquired Harbor 1 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 Harbor 1 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 the 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 six months of the year. On the balance sheet, we are narrowing our loan growth outlook to a range of three to four percent from our prior expectation of three to five percent. 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 a billion dollars, which gives us confidence in continued growth momentum through the balance of the year. Conversely, reflecting the meaningful growth and deposits during Q2, we are increasing our deposit growth outlook to two to three percent up from our previous range of one to two percent. From an earnings perspective, softer loan growth in Q1, lower than anticipated accretion year to date, at a highly competitive deposit environment or impacting our expectations for net interest income at margin. Accordingly, we now anticipate net interest income in the range of a billion five to a billion twenty for the year with an FTE margin of three sixty to three sixty five.

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 remains strong and trends were positive over the first six months. As we saw, we are lowering our provision outlook to a range of twenty five to 30 million dollars from our prior range of thirty to forty 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 one ninety five to two hundred million compared to the original range of one ninety to two hundred. In addition, the successful hardware one 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 six hundred and fifty five to six hundred and sixty five million from the previous range of six fifty five to six seventy five.

Finally, the 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.

Hey, good morning, Fatty. 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.

Yeah, I would characterize your comments as consistent with our thinking. There's a multi-year 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 CNI, the strong CNI 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 wild card, which is kind of what we talked about last quarter, is just with that long-term asset repricing, what's the state of the deposit cost going to be as the back half of the year evolves? I understand.

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.

Is that kind of the right way to think about it? Yeah, I would just go back to kind of the same responses as we gave to FETI, which is there's a clear back book re-pricing going that's going to go on on our fixed rate, loan book at 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 FET. So the two counteracting forces and deposits we said last quarter would probably take up two to three basis points of quarter.

That's probably another basis point or two higher. Is that how we'd answer that question? If we're right, it's generally those two 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.

I think it's going to be generally 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.

Yeah, 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 harbor one portfolio and about half of those payoffs came out of the legacy Easter portfolio.

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 loan yield is a good base to look at going forward. And then I guess just sort of consistent quarter to quarter. So the impact on the margin was the exact same each quarter.

Yeah, if anything, maybe just a slight tick down. So last quarter, if you remember, we talked about a range of 21 to 22 million dollars in the last two quarters we've come in at 19 and a half. We think that 19 and a half is about that run rate. Commercial is actually higher is coming in higher than our original expectations. However, the res support followers coming in a little slower because prepay speeds slow down.

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, they're thinking now about wealth whereas in the past, they 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. We're in the early innings, we believe, of the growth is possible in this business and we're pretty excited about it.

So Damon, good morning, and thanks for the question. It's broad based. If we look at our 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 Cree 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 Cree as well. But good activity, our customers are feeling reasonably optimistic. And that's being reflected in our loan pipelines.

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 footprint, making strategic hires and things of that nature?

Sure. Damon, expense management, 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 always looking for opportunities to save money to redirect into technology. We're not going 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. If we have opportunities to bring in talent to help grow revenue in future, we're absolutely open for business.

Was the question or thoughts around non-interest-bearing DDA balances?

Okay. Okay. Good. Let me make sure we answered the right question. Feel generally positive about it. It's not going to grow at the pace that money markets are going, for example, obviously. But it's the bread and butter of new customer acquisitions and holding on and growing the relationships that you have. So I expect modest growth there only.

The, yeah, I mean, what I would say is on the current buyback that we're getting close to completing, you know, the bar stock has moved up appreciably. You know, we've outperformed the KRX, and then obviously the industry's moved up. So we're trying to work through and prudently manage the buyback and the pace of the buyback, recognizing that we're trading that a higher valuation, whether it's price earnings or price to book. So we think of executing the buyback in basically two components, a core amount, because we're generating excess capital.

This quarter, we essentially bought either return capital in the totality of what we earned in the quarter. And the other component is the opportunistic piece that is more scale to trading valuations. So little reluctant to get overly definitive on the pace of getting from currently 13% to 12%. It is clearly our target, and we will achieve it. But the market trading multiples will will be a determinant in the final pace.

Yeah, so for the full year, yeah, so either way, and it's about 80 million dollars full year. It's about 40 million dollars in the back half of that. In the back half. Yeah, it was 19. It's been 19, 19, 5, 2, 1, 19, 7, 2, 2, running slightly below our original expectations.

Those cost saves are basically done. The 40% that we advertised or telegraphed.

It's about four million going forward. That two million will fall. That two million falls out of the run rate going forward.

And those Baroings are essentially federal home loan advances. Right.

So, the wild card is going to be what we wind up doing in securities portfolio, and then how deposit competition and our success of all over the quarter. That number, you know, can move one or two hundred million dollars in a quarter, and that's from my perspective, no big deal.

Hey, Laurie, I just went from the thought there is from an earnings perspective, that becomes the issue. You know, that's three and three quarter-ish, maybe a little higher money relative to deposit costs, you know, average deposit costs of, you know, 147 basis points in the quarter. Right, perfect.

Matt, the, so part of the NII change, you know, is volume-related. We're slow on low growth in Q1, but it's also interest rate-related. And it's roughly, our original guidance had two cuts, so 50 basis points total of cuts. We're now thinking there's one tightening in the back half of the year. So a 75 basis point differential on the short end of the flatter yield curve. So that's the interest rate question and the thought around. Part of one of the reasons around the lower net interest income outlook. From an interest rate risk perspective, we are still relatively neutral to interest rates and have been for a long while.

With that said, 25 basis points of steepening or flattening is about one to two basis points to margin. And again, that's been consistent for quite a period of time for us. I know I've talked about it on previous costs. Great.

For the last couple of years, it's been about 10 million bucks a year. Is that a reasonable place to be?

It's hard for you and it's hard for me. It's those investments have an equity market component. When we think about it, we try to think with no market impact. So no effect in fee and comment. Don't forget, there's an offsetting employee benefit expense as well. But we've had strong equity markets, especially in Q2, and that produced that income. It's basically from a modeling perspective you're making a judgment on what equity markets will do in each water. And I try to just be neutral about that, to be honest with you. But the reality is, it's been a positive this year, and it was a positive last year as well.

So, Matt, you may or may not recall, we do have a wealth management office in Connecticut. So, perhaps thinking about other areas of the income statement or balance sheet, we'd welcome those opportunities. And we are always looking for talent, as I said earlier. And then the other one I had, there's been to Jared's point, a bunch of larger banks, even going back the last handful of years to enter or try to enter or make a big push in Boston.

I don't, and our president, Quincy Miller, is here right next to me. Quincy, how would you describe it? Yeah, I would, I'd echo that. You know, what I'd say is they've all been here on the commercial side.

That's not new. They've been here for well over a decade. The increased pressure is really more on the consumer front. And but we carve out our own niche here as, you know, a 30 billion local community bank. We offer a great value proposition for clients who are looking for that. And so, you know, we continue to compete and we'll continue to compete into the future, I think, very well.

I will now turn the call over to Dennis Shien for closing remarks. Thank you, everybody. Thanks for your interest, your questions. I would look forward to speaking with you at the end of our next quarter.