Eastern Bankshares (EBC) Q3 2026 earnings call transcript

Thank you. Good morning, everyone, and thank you for joining us on the call today with me, our Executive Chair and Chair of the Board of Directors Bob Rivers, President Chief Operating Officer Quincy Miller, and our Chief Financial Officer, David Rosado.

We're pleased with our third Florida performance, which reflects disciplined execution of our priorities. We delivered record operating earnings, generated attractive returns, maintained excellent asset quality, and returned meaningful capital to shareholders, all while continuing to drive organic growth across both our banking and fee-based businesses. These results further reinforce Eastern Standing as a premier bank in Greater Boston, one of the nation's largest and most affluent banking markets.

The increase in period-end loan balances was primarily driven by strong commercial real estate relations and broad-based C&I growth. As expected, creep layoffs moderated from the second quarter, leading to solid growth overall in commercial real estate.

Commercial loan pipelines remain strong, although the pace of closings has been somewhat slower than anticipated, as some clients take a more measured approach to investment decisions amid interest rate uncertainty. Overall, customers remain resilient as business activity continues to generate demand for financing.

We believe there are a lot of opportunities in the commercial banking segment, and we are well positioned to gain share. Customers value our ability to deliver a broad set of commercial capabilities typically associated with larger institutions, while also providing the certainty of execution that comes from local decision-making and knowledge. The Eastern brand is highly regarded across our market, and the franchise is deeply rooted.

We live and work here, and our extensive involvement in the communities we serve resonates with customers. On the funding side, period-end deposits grew modestly despite seasonal municipal outflows. While the deposit environment remains competitive and costs move higher, we remain committed to gathering core deposits to support our growth strategy and balancing these efforts with margin performance.

Importantly, the strength of our core deposit base and limited reliance on wholesale funding provide us with the flexibility to stay disciplined while also supporting customer relationships.

Wealth management is an important component of our long-term growth strategy, and we achieved another successful quarter. Assets under management and administration increased from the end of the second quarter, driven by both positive net flows and market appreciation.

Our comprehensive team-based approach continues to differentiate us across our target market of $2 million to $20 million in investable assets.

We offer a level of service to this segment that larger firms typically cannot deliver. Importantly, we get compensated well for these services with an average fee ratio of approximately 70 basis points. Following the early stages of capitalizing on the full potential of this business, the increasing alignment between our wealth and banking teams combined with the attractive wealth demographics across our footprint is generating meaningful momentum, and we are encouraged about its long-term outlook.

Our asset quality remains a clear source of strength reflecting conservative underwriting and proactive risk management. Net charge-offs declined link quarter and, as anticipated, non-performing loans improved for the third consecutive quarter following the Harbor 1 merger. We are 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 investor office portfolio exceptionally well, and it represents only 4% of total loans. The portfolio is well-reserved and continues to perform within our expectations.

While overall credit trends remain favorable, our experienced credit team continues to actively monitor the macro environment and local market for emerging risks that could impact our customers, positioning us to respond quickly and decisively when needed.

Finally, given our profitability, we continue to generate capital in excess of our growth needs. As we have consistently communicated, we are committed to softly right-sizing our capital position over time. That commitment was evident again this quarter as we returned meaningful capital to shareholders through both share repurchases and quarterly dividend while continuing to support organic growth opportunities.

As always, our results reflect the efforts of an exceptional team, and I want to thank our colleagues for their continued commitment and execution. I also want to express my gratitude to our customers for choosing Eastern as their financial partner and to shareholders for their ongoing trust and support. We never take these relationships for granted, and every day we are focused on delivering strong, sustainable performance and value for all stakeholders.

David, I'll hand it over to you to provide further details and third-quarter financials.

Thanks, Dennis, and good morning, everyone. Our third-quarter financial performance was strong and highlighted by record operating that income, further improvement and key profitability metrics, including return on average assets and return on average tangible common equity, positive operating leverage driven by an increase in that interest income and lower expenses, solid balance sheet growth supported by strong commercial lending activity, sustained excellent asset quality and meaningful capital returns to shareholders.

The third-quarter also benefited from a modestly lower effective tax rate, primarily reflecting a higher level of tax preference items. Going forward, we expect the effective tax rate to return to about 22%.

We reported record operating net income of $111 million or 51 cents per diluted share, an increase of 4% link water and 50% from a year ago, reflecting the enhanced earnings power of the company. Net interest income growth combined with well-controlled expenses produced another quarter of positive operating leverage. As a result, the operating efficiency ratio improved to 47.5%, contributing to a three-basis point increase in operating ROAA to 141 basis points, and a 37 basis point improvement in operating return on average tangible common equity to 15.7% compared to the second quarter.

Total revenue of $306.6 million increased 1% link water as growth in net interest income was offset by lower fee income.

Starting with slide 5 of the presentation, net interest income grew 2% link water, reflecting the benefit of continued balance sheet growth.

Net interest margin declined 4 basis points to 362, which was in line with our expectations as higher funding costs more than offset improvement in asset yields. Asset yields increased 2 basis points, driven by favorable loan and securities re-pricing, while interest bearing liability costs rose 8 basis points due to higher deposit costs. Net discount accretion contributed 26 basis points to the margin compared to 28 basis points in the prior quarter, excluding accretion, the margin declined 2 basis points link water.

Importantly, our year to date net interest margin of 364 remains well within our full year guidance range of 360 to 365.

While the benefits of a steeper yield curve and higher rates are supporting asset re-pricing, those tailwinds continue to be offset by competitive deposit pricing. As we saw, we currently expect net interest margin to remain relatively stable in the fourth quarter and to modestly improve into next year.

We show the re-pricing characteristics of our interest earning assets on slide 6. We have approximately 8.8 billion of floating rate assets re-pricing constantly with short term rates. Beyond that, we expect approximately 1 billion to fix rate variable assets re-pricing in the fourth quarter and roughly 800 million per quarter in 2027.

As detailed on slide 7, operating non-interest income decreased $5.2 million or 16% compared to a particularly strong second quarter results. The largest contributor to the variance was a $6.3 million decrease in income from investments per employee retirement benefits, reflecting weaker equity market performance.

This unfavorable impact on fee income was partially offset by a $2.5 million reduction in related benefit costs reported in non-interest expense.

Thiscellaneous income and fees also decreased $3.1 million, largely as the result of gains on the sale of commercial loans recognized in Q2 that did not reoccur in Q3.

Turning to wealth management on slide 8, assets under administration increased to $11.6 billion, including $10.8 billion in assets under management.

AUM increased $156 million link water, primarily driven by $97 million in positive net flows, highlighting the continued momentum in the business.

Wealth management fees declined modestly from the prior quarter as growth in AUM revenues was more than offset by lower tax preparation fees, which are seasonally higher in the second quarter. Compared to Q3.25, fees increased 10%, reflecting strong organic and market driven asset growth over the last year.

As detailed on slide 9, the third quarter demonstrated our ongoing focus on prudent expense management and operating efficiency as non-interest expense decreased $8.3 million or 5% link quarter. Donably, we did not incur any non-operating costs in the current quarter compared to $1.6 million in Q2. On an operating basis, non-interest expense was down $6.7 million.

The current quarter benefited from the following, $2.2 million decrease in salaries and employee benefits, primarily due to lower costs related to employee retirement benefits. That I referenced earlier.

A $1.9 million decrease in occupancy and equipment expenses reflecting lower depreciation and maintenance costs. A $1.8 million decrease in professional services, primarily due to shareholder advisory fees in Q2 that did not reoccur in the third quarter.

And a $1.9 million decrease in other operating expenses, largely driven by a refunded commitment reserves. These declines in non-interest expense were partially offset by a $1 million increase in FDIC insurance costs.

Moving to the balance sheet, starting with deposits on slide 10, period end balances increased $98 million link quarter despite seasonal municipal outflows. On an average basis, deposits increased $667 million or 2.6% from the second quarter.

Consistent with recent trends, money market balances continued to grow as customers maintained a preference per look with it. Total deposit cost of 156 basis points increased nine basis points link quarter with a September spot rate of 159 basis points, reflecting elevated competition for deposits in the New England market. In response to higher short term rates, we took targeted actions to appropriately position offerings to defend and grow market share.

Looking ahead, we remain focused on gathering core deposits while balancing growth with margin performance. Looking at loans on slide 11, period end balances increased $261 million or 1.1% link quarter. Creep balances grew $229 million supported by strong originations, although payoffs remained a headwind despite moderating from Q2 levels.

CNI balances increased $93 million reflecting broad base growth across the portfolio and continued client activity. Commercial pipelines remained strong and ended September at approximately $1 billion. With a balance mix between Cree and CNI earning to consumer lending, home equity balances increased $44 million. Given the strong underlying demand across our footprint for this product, we continue to see home equity as an attractive area of growth.

Residential mortgage balances were up modestly from Q2. However, our expectation is the residential portfolio will remain relatively flat in 2026 as we favor HELOC and commercial loan growth.

Moving to slide 13, our capital position remains strong as indicated by CET1 and TCE ratios of 13% and 9.6% respectively. We are focused on right sizing capital through organic growth, share repurchases, and quarterly dividends.

We expect to continue to generate excess capital but are managing our CET1 towards the median of the KRX. Tangible book value per share of $12.96 declined 1% link quarter, primarily driven by higher unrealized losses in the available for sale securities portfolio reflected in AOCI. Excluding this mark to market impact, tangible book value per share would have increased approximately 2% from Q2, despite returning $89.1 million of capital to shareholders during the quarter.

In addition to 32.4 million of cash dividends paid, we repurchased 2.6 million shares per $56.7 million at an average price of $22.11, which was 30 cents below the BWAP for the quarter.

As we saw, our diluted common shares outstanding were $215.5 million as of September 30th. Worth quarter today, we have also repurchased an additional 1.6 million shares through yesterday for a total cost of $33.8 million. And now have 8.5 million shares remaining in our authorization that runs through the end of 2027.

We continue to view our buyback through two lenses, core and opportunistic. The core component reflects our need to consistently repurchase shares to steadily reduce capital levels. The opportunistic component is more price sensitive as we remain disciplined and focused on creating value for shareholders. As a result, the pace of repurchases may vary from quarter to quarter based on market conditions and the stocks valuation.

While we control capital generation and the pace of buybacks, we do not control valuation. As displayed on slide 14, asset quality remains excellent. That charge offs the average total loans of nine basis points declined from 17 basis points in Q2. And NPLs improved by $24.6 million to $84.8 million or 36 basis points of total loans. Notably, NPLs continued to improve in both the legacy Eastern and acquired Harbor one portfolios.

Commercial criticized and classified loans increased modestly from the second quarter, reflecting higher balances in both the legacy Eastern and Harbor one portfolios. The increase was primarily driven by a small number of relationships.

To conclude, our third quarter results underscore the strength of the franchise. We generated record operating net income, produce positive operating leverage, and maintain excellent asset quality. All while executing guest our priorities, growing organically and returning capital to shareholders.

As we look ahead, we remain encouraged by the underlying momentum across the franchise. At the same time, we continue to operate in a dynamic environment characterized by elevated deposit competition, evolving interest rate expectations, inflationary pressures, and broader macroeconomic uncertainty. While these factors may influence the pace of loan and earnings growth in 2027, we believe our relationship based banking model, discipline expense management, and strong balance sheet position us well to continue delivering attractive returns to shareholders.

This concludes our remarks, and we'll now open up the call for questions.

Damon, good morning. Thanks for joining us. So, pipeline still remained very robust. Actually, the C&I segment is the largest component of our pipeline overall, so we feel really good about that. But certainly the increase in interest rates, as you might expect, has an impact.

We have more conversations with clients about the fact that rates have gone up. And so it does slow things down somewhat, but we're still optimistic overall, and certainly regarding the targets we provided for this year. As we look ahead into next year, we'll have to reassess and we'll provide new guidance at the beginning of the year in terms of once we've had more time to digest the higher rate environment, what our outlook for 27 would be.

Okay, great. And then on the CRE side, are you seeing similar trends with with chaos kind of moderating so far here in the fourth quarter?

Well, certainly speak through the third quarter, payoffs did moderate. We did expect them to. If we go back to the beginning of the year, we did expect elevated payoffs, in part because of the environment, but also because of the harbor one merger. And as we anticipated in Q3, they did modify somewhat, although at an elevated level overall, but in a higher rate environment, yes, we would expect payoffs to some degree.

Okay, great. And then just one for David on securities, the average securities, this quarter were uplinked quarter. Did you just remind us, was that a kind of a full quarter impact from activity in the second quarter, or were those purchases here in the third quarter?

It was both, Damon, you know, so we had, we cash flow about 40 million a month, which we've been, we have been reinvesting this year, plus we've added to that both last quarter and this quarter. Okay.

And, and I think that, that trend of reinvestment and net growth, net modest growth will continue into Q4. Okay, great. Okay.

Thanks.

Yeah, it's the million dollar question, Justin. The deposit pressure continues. It's, I would say it's broad enough to it's, you know, from smaller banks to to larger regionals as well. We think it's going to continue into Q4 and into next year, if we do, in fact, see another 75 basis points of tightening from the Fed. The good news from our perspective is, and we caught it out in our comments, the billion dollars of fixed rate asset reprising in Q4 and the 800 million or so of quarter next year. We believe that the fixed rate asset reprising will outpace deposit cost increases leading to a slightly better margin.

But the, we underestimated deposit pricing in Q3, frankly, as you can see in our results, our Q margin, if you adjust for a little slowdown in accretion in the residential mortgage portfolio, was down to basis points.

Okay, got it. That's helpful.

Well, you know, we can give you a couple of examples of just talking to a senior lender about this of loans that sort of had to be reworked because of the change in interest rates, and it's a combination of, as you'd imagine, with higher rates, the debt service coverage ratio changes. So that requires that the borrower has to put in more equity to meet, to satisfy our requirements. And that happened, you know, in that situation, perhaps in some of the situations it may not. The other thing that has an effect here is with higher rates, sometimes the sale price of a property would need to be renegotiated modestly to accommodate for the buyers need to pay a higher rate on the loan.

So those things have an effect and they can have an effect on the speed to close those loans. I can also have an effect on demand. But we've been through this before, different rate cycles, and I'm confident in the team's ability to sort of weather through this period.

And Justin, I would just add to that, because our credit box is fairly tight and conservative, our customer base has the ability to put up more equity in the example that Dennis cited rather than a more highly levered client base who doesn't have that ability. So on a relative basis, I think we have a better ability to manage through this.

I think we're, you know, we feel like we're on track. We, as we mentioned at the beginning of the year, we knew we'd have sort of an increase in the nonperforming assets, non accrual loans, and we'd work our way through it. So you look at our level of non performers at the end of the quarter, you know, 36 basis points. That's a pretty normalized level. You know, and so we think we're through most of the issues we need to work through on the acquired portfolio.

Yeah, as Dennis says, we're right on track. There's probably another quarter in the queue one at most of working through that portfolio. As you can see that 36 basis points that Dennis referenced, it is essentially half bar one and half legacy split right down the middle.

Thank you.

Yeah, good question, FETI. Yes, it does include additional rate hikes. And, and, and the conclusion still holds.

Well, on the securities portfolio, if you look in the page that we have there, we've been able to drive up security purchases on average about 10 basis points of quarter. Through the last year, some quarters a little higher, some quarters a little lower. We're putting in sick, depending on what asset class you're talking about, whether it's.

Mortgage backs, which were primarily doing hybrid arms or municipal bonds. You're you're putting in yields at 6% to 6.5% dependent on asset class. So quite additive to the to the portfolio. And then the second question was just on the loan was on the loan side. And as with as much talk about competition on loan spreads, we're actually seeing loan spreads for the most part being held relatively stable. So you're talking 175 to 200 basis points across our bread and butter. The main spread competition is this what I would call them the larger more marquee names and the markets that also would have strong fee income opportunities.

I would caution you a touch there. I would. I would expect expense to tick up a bid in Q4 relative to Q3. We've kind of went, you know, the investment advisory fees that we called out.

Link quarter drove that down. That's not repeatable maintenance operating expense there was a little below trend. I would think more about the average of the second and third quarter, which puts puts that expense base. Call it.

One sixty three one sixty four and that neighborhood.

Hi, Tyler. Good morning.

If if you look over many years are limited positive ratio has ticked up, but if you look at our nine thirty balance sheet, we have two billion dollars ward deposits. Then we have loans today and we've made comments about our residential mortgage portfolio being a little larger than normal because of acquisition. So we're certainly focused on growing our deposit base to fund loan growth, but we're not at a point where we believe it would be a constraint on loan growth.

Yeah, we do. So it was 156 as we said for the for the quarter. We ended September at 159.

Sure. The spot margin for September was three sixty two. Okay, great.

So we're certainly focused that we have seen tech AI spend go up this year, modestly. We're in the middle of a budget process where we are seeing increased ask for tech spend and people to support that tech spend. At the end of the day, if we will be able to, we will be able to absorb that in our full expense space in a manner that puts you over your expenses while under control. They will increase and they will increase modestly, but we don't, we don't think the tech AI spend is, is we're going to be sitting here in January delivering bad news. On the expense line. And then as far as your question about branch rationalization, we don't have a program you refer that some others may have of rationalizing branch.

No more than we would in any other period. Anything we think about there, whether it's expansion or potential branch closure is sort of onesy tosy. We evaluate each of our markets and our presence there in terms of its growth potential or profitability, etc. So we don't have a, you know, a significant plan in terms of branch rationalization.

That's exactly what we're focused on. We're not focused on on them at all.

Thanks, Lauren.

Yeah, Jared, I did chuckle to myself when I read your note last night. The art practice is guidance in January, big year update in July, not quarterly guidance. So there really wasn't we haven't removed anything.

That's just what our practice is.

100%. And I slightly referenced that in the comments around the margin. You know, even though the margin was down, it's still within that guidance, but we have not changed any of our thoughts for full year 26 relative to what we put out on in July.

So, Jared, it's largely, it's the same guidance.

Yeah, so again, a really important question. Our goal, our thought today is we'll be able to achieve the historic 50% deposit betas that we have done that we did in the last up cycle. Every one of these cycles is different, as we all know, what's different. This cycle is the industry move before the Fed moved, right? That's kind of what we're experiencing on deposit cost last quarter. And slightly in Q2.

The level, it's the level of deposit competition, which is also driven by the level of loan demand. Ultimately is going to control that beta, but there's nothing other than the fact that the industry moved sooner. That should be different to cycle. The deposit power of our franchise is only stronger now than it has been in the past as we're bigger and more important in our market.

So, we will stand by the historical averages we've been able to achieve, which is essentially a 50% beta.

Jared, yes. I mean, certainly there has been a change in the competitive environment with some of the consolidation that's happened. You know, we've been able to attract talent to our company. We're very pleased with that. Very high caliber talent. And we've been able to keep our pipeline at an elevated level. And we're, you know, good growth and CNI and now growth returning and Cree. So, we are benefiting to a degree, yes, from the consolidation and our outlook with absent higher rates, we'll give you some guidance in January as to what we think 2027 will look like. But the team is is in place to be able to take more share in the market.

Thank you for joining us. We look forward to speaking with you following our next quarterly earnings. This concludes today's conference call. You may now disconnect.