Prepared remarks
Currently, all participant lines are in a listen-only mode. Following the prepared remarks, there will be a question-and-answer session. 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 would now like to turn the call over to Denis K. 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 L. Miller; and chief financial officer, R. 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 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 commercial and industrial 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 have 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 moved 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 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 but also strengthens customer relationships across the franchise. 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 and 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, and 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 sciences, to 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 a 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 will 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 diverse fee revenue growth and lower expenses; solid balance sheet growth, supported by strong commercial lending activity and higher deposit balances; 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 to 49%. This contributed 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 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 remains 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 service 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 Denis 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 commercial and industrial 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 residential 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 13.10% 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 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 12/31/2027. In addition, the board approved a 15-cent 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 nonperforming loans 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 would like to spend a few minutes on our full-year 2026 outlook on Slide 14. We are 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 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 $1.005 billion to $1.020 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 remains strong and trends were positive over the first six 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 million to $200 million. In addition, the successful HarborOne integration and realization of cost synergies are supporting an 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 million to $675 million. Finally, the outlook for operating tax rate and capital levels remain unchanged. This concludes our remarks, and we will now open up the call for questions.
Questions and answers
At this time, if you would like to ask a question, simply press * followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press the pound key. We will pause for just a moment to compile the Q&A roster. The first question comes from Stedi Strickland of Hovde. Your line is now open.
Hey. Good morning, everybody. 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 is 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?
I would label it as relatively constant, and our expectation is the same for the back half of the year. Maybe it accelerated a bit during the second quarter, modestly, but I do not 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 is still more to go here on yield expansion just given I would assume loans in the pipeline are probably above portfolio rates and you still have a good bit of repricing loans, what is on Page 18 of the deck?
I would characterize your comments as consistent with our thinking. There is a multiyear asset repricing story, which we detail in the deck. One small item to point out is if you just look at the loan portfolio, because of the C&I 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 talked about last quarter, is with that long-term asset repricing, what is the state of deposit cost going to be as the back half of the year evolves?
Understood. And just real quick one last one: do you have the weighted average rate on what is in the pipeline today?
No, I do not have it. But directionally, I would say consistent with the second quarter. There is some modest commercial real estate spread tightening occurring; we have talked about that a little bit and others have too. Away from that, we are seeing relatively steady spreads across all of our businesses.
The next question comes from Justin Crowley from Piper Sandler. Your line is now open.
Hey. Good morning. Just on the NII guide, and I know the bias has already been toward 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. So is it fair to think what you have on the asset repricing side is going to be enough to outrun whatever you see as far as funding cost pressure?
I would go back to the same response as we gave earlier: there is a clear back-book repricing that is going to occur on our fixed-rate loan book and our securities portfolio. You saw especially in the securities portfolio a nice uptick in the quarter. That is clear and is largely regardless of what happens to interest rates as well. Deposit pressure is hard to know exactly how that will evolve, especially if the Fed is more aggressive. The two counteracting forces are asset repricing and deposit cost. As we said last quarter, deposits would probably tick up two to three basis points a quarter; that might be another basis point or two higher. If we are right, generally those two should offset each other, with deposit cost eating into the positive asset repricing, costing us a few basis points of margin.
Okay. Got you. That is helpful. Then just on deposit balances and the growth for the quarter, which is strong and looked like most of that came from money market and you kind of called out the seasonality in municipal. Just curious how you are thinking about growth from here just from a mix standpoint.
I think it is going to be generally consistent. CDs will probably grow less than money markets. There is a clear preference for money markets rather than term product, but we did see growth in both of them in the quarter.
Got it. And then just one last one: on the payoff activity on the CRE side, I know it can be tough to predict, but do you have much line of sight or any thoughts on how that should trend through the remainder of the year? Would you expect that pace to slow down given the move we have had in rates?
It was elevated in Q2. We do think there is a moderation in the back half of the year, though it is hard to know exactly how much. We do think Q2 was abnormally high for us. About half of those came out of the HarborOne portfolio and about half came out of the legacy Eastern portfolio.
The next question comes from Jared David Shaw of Barclays. Your line is now open.
Thanks. Good morning, guys. 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 impacting loan yields this quarter?
No. So loan yield is a good base to look at going forward.
And then, separately, any thoughts on expected accretion through the rest of the year—should we just assume it steadily grinds lower from here?
If anything, maybe just a slight tick down. Last quarter we talked about a range of $21 million to $22 million. In the last two quarters, we've come in at about $19.5 million. We think that $19.5 million is about that run rate. Commercial accretion is actually coming in higher than our original expectations; however, the residential portfolio is coming in a little slower because prepay speeds have slowed down.
Okay. Thanks. And shifting over to the wealth management side, good trends there. What is the competitive landscape looking like? We are hearing other banks making a big push and hiring. Are you seeing that make it more difficult to attract incremental new customers? How are you trying to differentiate your product from others in the market?
Jared, it is consistently competitive. Yes, others are entering the market and looking to grow in this space, but we have had very robust pipelines and our outlook is to continue that into the back half of this year and beyond. One of the unique things about our franchise is there is a lot of upside within the Eastern customer base. A few years ago, the primary fee business at Eastern was insurance; now the primary fee business is wealth management. So our colleagues in the retail branch division and in commercial lending are thinking about wealth in their referrals, whereas in the past they might have been thinking about insurance. We believe there is a lot of upside both within our customer base and in the market. We are in the early innings of the growth that is possible in this business and we are pretty excited about it. Thanks.
Your next question comes from Damon Paul DelMonte with KBW. Your line is now open.
Hey. Good morning, guys. Hope you are doing well. Thanks for taking my questions. Could you provide a little color on the commercial pipeline? A lot of positive commentary about it being at record levels. I'm looking for a little color on what industries and what types of loans you are seeing interest in.
Good morning, and thanks for the question. It is broad-based. Growth in the second quarter was well diversified across many industries, and it is a testament to the commercial team and the talent we brought in that are now beginning to hit their stride. It is not concentrated in any one particular industry. Our pipeline in commercial real estate and in community development lending is also very strong. We certainly did not experience growth in CRE in the last quarter, but as David referenced, we are working through a lot of acquired loans and payoffs in the marketplace. We expect the payoffs to decrease in the back half and we should see growth in CRE as well. Customers are feeling reasonably optimistic, and that is being reflected in our loan pipelines.
Got it. That is helpful. And maybe just one on expenses: could you talk about your approach to continuing to tightly manage expense growth while balancing investments in technology and strategic hires?
Expense management is a day-to-day activity. This company is relatively thrifty in its mindset and has a good history of thoughtful expense management. We are always looking for opportunities to save money and redirect it into technology.
We work 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 that we lowered the top end on expenses and I feel really good about expenses in the back half of the year. We are always looking for talent; if we have opportunities to bring in talent to help grow revenue in the future, we are absolutely open for business.
Got it. Okay, that's all I had. Thank you very much.
Your next call comes from Janet Lee of TD Cowen. Your line is now open.
Good morning, everyone. This is Brad Dalsandro on for Jared. Question on noninterest-bearing deposits. One of the key themes of this earnings season has been noninterest-bearing deposits, and you have had a couple strong quarters of growth here on an average basis, but end of period is down slightly. Do you expect noninterest-bearing as a percent of total to flatten out here in the back half of the year?
You were breaking up a little, but yes, the question was on noninterest-bearing DDA balances. I feel generally positive about it; it is not going to grow at the pace that money markets are growing, for example, but it is the bread and butter of new customer acquisitions and holding on and growing the relationships you have. So I expect modest growth there only.
Great. And then one quick one on buybacks. CET1 around 13% and continuing to trend towards that stated 12%. With the new 5% repurchase authorization in place, is there any cadence we should think about for buybacks over the next few quarters?
On the current buyback we are getting close to completing it. Our stock has moved up appreciably; we've outperformed the KRX and the industry's moved up. We are trying to prudently manage the pace of the buyback, recognizing that we are trading at a higher valuation. We think of executing the buyback in basically two components: a core amount because we are generating excess capital, and an opportunistic piece that is scaled to trading valuations. I am reluctant to be overly definitive on the pace of getting from currently 13% to 12%; it is clearly our target and we will achieve it, but market trading multiples will determine the final pace.
Next question comes from Laura Havener Hunsicker with Seaport Research Partners. Your line is now open.
Hi. Good morning. Going back to Slide 14 and your NII guide of about a billion dollars, how much do you have modeled for accretion income in that figure? Is that roughly $80 million full year and about $40 million in the back half?
Yes. For the full year it is about $80 million, and about $40 million in the back half. It was $19.5 million in Q1 and $19.7 million in Q2, running slightly below our original expectations.
Okay. On expenses: no more merger charges, which is great, but you still have some cost saves you are picking up. Can you help us think about what the HarborOne cost saves are going to look like and when they are fully realized? Is it a three-quarter event or four-quarter event? How much are you still picking up?
Those cost saves are basically done—the 40% that we advertised is fully baked into the run rate.
Okay. So that $55 million is fully baked now into the run rate?
Yes. Regarding the professional services line, it had a big jump. It had been running about $2.3 million, it was up last quarter, and now it is almost $6 million. That included a $2 million one-time expense related to shareholder advisory services. Going forward, that $2 million falls out of the run rate; the ongoing run rate is about $4 million for that line.
Okay, great. And then last question on borrowings: you increased borrowings on a weighted basis for the quarter, but at period end you cut it roughly in half and it was costing about 3.70%. How are you thinking about borrowings for the back half of the year?
Borrowings are the wildcard balancing loan growth and deposit growth. We had really strong growth in the quarter of both loans and deposits; deposits outpaced loans, so after netting out securities growth we were able to reduce borrowings. Those borrowings are essentially Federal Home Loan advances. For the back half of the year, it is hard to be precise. We're telegraphing good loan growth, so the wildcard will be what we do with the securities portfolio and how deposit competition and our success evolves. That number can move $100 million or $200 million in a quarter and that is, from my perspective, no big deal.
I will leave it there. Thanks so much.
The next question comes from Matthew Breese of Stephens. Your line is now open.
Hey. Good morning. Couple of quick modeling questions and then a couple of big-picture. First, within the NII guide, any sort of forecasted changes to rates? You spoke a couple times about potential rate hikes. How does NII or the NIM respond at this point to each 25 basis point hike or move?
Part of the NII change is volume-related and part is interest-rate related. Our original guidance had two cuts, so 50 basis points of cuts; we are now thinking there is one tightening in the back half of the year—a 75 basis point differential on the short end of the curve and a flatter yield curve. From an interest rate risk perspective, we are still relatively neutral to interest rates. A 25 basis point steepening or flattening is about one to two basis points to margin; that has been consistent for quite some time.
Very helpful. Within fee income, the income or losses from investments for employee retirement benefits is hard to model. In the last couple of years it's been about $10 million a year. Is that a reasonable place to be going forward?
It is hard for you to predict and for me to predict because those investments have an equity market component. When we think about it, we try to be neutral and assume no market impact. Don't forget there is an offsetting employee benefit expense as well. You are making a judgment on what equity markets will do; I try to be neutral about that. The reality is it has been a positive this year and last year as well.
Big picture: considering the backgrounds of some of the executives now at Eastern and continued disruption in Connecticut with Webster being sold, is there opportunity there for you on either side of the balance sheet in terms of hiring opportunities? Have you considered that?
Yes. We are open to talent opportunities in any of the markets we operate in. We do have a wealth management office in Connecticut, so perhaps there are opportunities there. We are always looking for talent.
Another question: larger banks have been entering Boston and making pushes over the last several years. How much is competition coming from new entrants versus existing players, and for the new entrants, how are they doing in terms of deposit market share? Historically Boston has been parochial and loyal to existing banks; has that changed?
It continues to evolve. We've had new entrants here before and that will continue. This is a very attractive market; it's our home base. We are the local bank and we offer local decision making combined with a broad product set. Competition in wealth management and banking continues to increase, but we are comfortable that we can continue to deliver strong results for our shareholders quarter after quarter and year after year.
I would echo that. The increased pressure is more on the consumer front; on the commercial side many players have been here for well over a decade. We carve out our own niche as a $30 billion local community bank and offer a great value proposition for clients looking for that. We continue to compete and will continue to compete into the future.
There are no further questions at this time. I will now turn the call over to Denis Sheahan for closing remarks.
Thank you, everybody. Thanks for your interest and your questions. I look forward to speaking with you at the end of our next quarter.
This concludes today's conference call. You may now disconnect.