EBC - NASDAQ

Welcome to the Eastern Bankshares, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded for replay purposes. 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. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described in the company's earnings press release and most recent 10-K filed with the SEC. Any forward-looking statements made represent management's views and estimates as of today, and the company undertakes no obligation to update these statements because of new information or future events. The company will also discuss both GAAP and certain non-GAAP financial measures. For reconciliations, please refer to the company's earnings press release, which can be found at investor.easternbank.com. I'd now like to turn the call over to Bob Rivers, Eastern Executive Chair and Chair of the Board of Directors. Please go ahead.

Thank you, Dani. Good morning, everyone, and thank you for joining our call this morning. With me today is Eastern's CEO, Denis Sheahan; and our CFO, David Rosato. We believe our strong second quarter performance underscores the strength of the Eastern franchise and our leading position in the Greater Boston area. During the quarter, we've been able to spend more time with our future colleagues at HarborOne, and our confidence in the opportunities and long-term value creation of our combination provides has only deepened. We are very excited about this partnership and look forward to welcoming HarborOne customers and employees to Eastern. Before turning the call over to Denis, I wanted to recognize Nancy Huntington Stager, President and CEO of the Eastern Bank Foundation, who retired earlier this month after 30 years with our company. When Nancy joined Eastern in 1995 to lead our human resources team, she was the first woman to serve on our management committee and went on to actively shape our culture ever since. She served as a key collaborator and trusted partner not only for me but our entire management team, organization and in the communities we serve. With much gratitude and appreciation, I congratulate Nancy on her retirement and wish her the best in her next chapter. With that, I'll hand it over to Denis.

Thank you, Bob. We are pleased with our strong second quarter results, as highlighted on Page 2 of the earnings presentation, and the continuation of positive trends in many areas of the business. Operating earnings were $81.7 million, an increase of 21% from the first quarter. Second quarter performance included a 21 basis point expansion in the net interest margin to 3.59% and continued improvement in the operating efficiency ratio to 50.8% due to higher revenues and effective expense management. These results generated further improvement in profitability metrics. Operating return on average assets was up 21 basis points to 1.3% and operating return on average tangible equity increased from 11.7% at the end of the first quarter to 13.6%. As of quarter end, total assets reached $25.5 billion, up 2% from March 31. Tangible book value per share increased 4% to $12.53, reflecting balance sheet growth and solid capital generation. Robust loan growth of 8% annualized this quarter reflects our ongoing focus on profitable organic growth and continued strategic investments in hiring talent. Our scale, combined with deep local knowledge of the communities we serve, is a competitive advantage that consistently builds meaningful relationships and new business opportunities. Commercial loan pipelines are steady at approximately $500 million, and our customers remain resilient despite economic uncertainties. Deposits finished the quarter strong with 8% annualized growth. Importantly, deposit costs remained stable highlighting our disciplined approach to pricing and favorable deposit mix. Momentum in our wealth management business continued this quarter with assets under management reaching a record high of $8.7 billion. Credit trends continue to be positive, reflecting the quality of our underwriting and proactive risk management approach, addressing issues prudently and quickly. Nonperforming loans of 30 basis points improved for the second consecutive quarter, and we did not have any net charge-offs. The level of nonperforming loans and classified assets peaked in the second quarter of last year and have continued to improve. Overall trends are positive and office loan problems are mostly behind us, but we remain cautious in our outlook. We continue to closely monitor evolving economic conditions and policies that could impact customers. David, I'll hand it over to you to review our second quarter financials.

Thank you, Denis, and good morning, everyone. I'll begin on Slides 3 and 4. We reported net income of $100.2 million or $0.50 per diluted share for the second quarter. Included in net income is a GAAP tax benefit related to losses from the investment portfolio repositioning completed in Q1 that accrues over the course of 2025. On an operating basis, earnings of $0.41 per diluted share increased 21% linked quarter and increased 78% from a year ago, reflecting the enhanced earnings power of the company with the addition of Cambridge. The results were highlighted by net interest margin expansion, fee income growth and further efficiency ratio improvement. Looking at Slide 4. We are encouraged by improving quarterly trends across several financial metrics, including operating ROA and operating return on average tangible common equity, reflecting stronger earnings performance and thoughtful balance sheet management. Operating ROA of 130 basis points for the second quarter is up 60 basis points from a year ago while return on average tangible common equity of 13.6% increased from 6.4% over the same period. We continue to generate positive operating leverage as evidenced by an operating efficiency ratio of 50.8%, which improved for the fourth consecutive quarter, supported by higher revenues and effective expense management. Moving to the margin on Slide 5. Net interest income of $202 million or $206.8 million on an FTE basis increased for the fourth consecutive quarter and grew $13.1 million or 7% from Q1. The growth was driven by margin improvement attributable to higher asset yields. Net income included net discount accretion of $16.5 million, up $4.3 million from the prior quarter due to early loan payoffs. The margin expanded 21 basis points to $3.59. Asset yields increased 21 basis points from the prior quarter, primarily driven by higher investment yields, reflecting a full quarter impact of the investment portfolio repositioning completed in early February. In addition, the margin was favorably impacted by higher loan yields at a modest reduction in interest-bearing liability costs. Net discount accretion contributed 29 basis points to the margin compared to 22 basis points in the prior quarter. Turning to Slide 6. Noninterest income was $42.9 million compared to a noninterest loss of $236.1 million in Q1. The first quarter included pretax nonoperating losses on the sale of available-for-sale securities of $269.6 million related to the investment portfolio repositioning. Operating noninterest income was $42.2 million, up $8 million linked quarter, primarily driven by $7 million increase in higher income from investments held in rabbi trust for employee retirement benefits. The increase was partially offset by $3.2 million in higher rabbi trust benefit costs reported in noninterest expense. In addition, investment advisory fees and interest rate swap income grew $800,000 and $500,000, respectively. Turning to Slide 7. We highlight our wealth management business, which is an important component of our long-term strategy. Wealth management fees, which account for nearly half of total operating noninterest income, are less sensitive to interest rate fluctuations, helping to diversify our earnings. Wealth management posted a solid performance in the second quarter with assets under management reaching a record high of $8.7 billion driven by market appreciation. Fees of $17.3 million were up $800,000 linked quarter primarily due to seasonal tax preparation fees. On Slide 8, noninterest expense of $137 million increased $6.8 million from the first quarter due to higher operating noninterest expense and merger-related costs. Merger-related costs related to the HarborOne transaction were $2.6 million compared to no such expenses in the previous quarter. Operating noninterest expense was $134.4 million, up $4.3 million linked quarter. The increase was primarily driven by $3.2 million in higher rabbi trust benefit costs I mentioned earlier. These expenses are reported in the salaries and employee benefits line. As anticipated, following better-than-expected Q1 expenses, we saw a modest uptick in costs across most line items in the second quarter. Moving to the balance sheet, starting with deposits on Slide 9. Period-end deposits totaled $21.2 billion, an increase of $424 million from the prior quarter. This growth was primarily driven by higher municipal balances, which we expect to be seasonally lower in the third quarter. A sizable portion of the period-end growth occurred late in the quarter. As a result, average deposits were consistent with Q1. We continue to benefit from a favorable deposit mix with nearly 50% of deposits in checking accounts, providing a stable and low-cost funding base. We remain fully deposit funded with essentially no wholesale funding, which further enhances our balance sheet strength. Total deposit costs of 148 basis points were consistent with the first quarter while the cost of interest-bearing deposits decreased 1 basis point, driven by lower CD costs. While we remain focused on growing deposits to support our funding strategy and we are committed to doing so in a disciplined manner, our approach to gathering deposits prioritizes balancing liquidity needs with margin protection. On Slide 10, period-end loans increased $385 million linked quarter led by continued strength in commercial lending. Increased C&I activity drove $219 million of growth while momentum in CRE accelerated in June, resulting in a higher balance of $117 million. Consumer home equity lines continued its steady trajectory of quarterly growth, adding $53 million of loans. Commercial delivered a strong first half of 2025 with nearly $500 million of loan growth from year-end 2024. The performance reflects the impact of our opportunistic hiring of growth-oriented talent, continued strength of the Eastern brand and our long-tenured relationship managers. Our combination of meaningful scale, which allows us to offer a broad suite of products and services and deep local expertise and presence differentiates us. Our high-quality investment portfolio, as shown on Slide 11, benefited from a full quarter impact of the securities repositioning completed in early February. As a result, the second quarter portfolio yield was up 33 basis points to $3.02. Turning to Slide 12. Capital levels remain robust as evidenced by CET1 and TCE ratios of 14.4% and 10.8%, respectively. Consistent with our commitment of returning capital to shareholders, we repurchased $3 million worth of shares at an average price of $16.36 prior to our merger announcement in April. In addition, the Board approved a $0.13 dividend to be paid in September. Looking at overall asset quality on Slide 13. Reserve levels remain strong as evidenced by an allowance for loan losses of $232 million or 127 basis points of total loans. These metrics are up from $224 million or 125 basis points at the end of Q1. Credit trends continued to improve during the quarter. We did not have any net charge-offs, and nonperforming loans decreased $36.9 million to $54.7 million or 30 basis points of total loans. The reduction in NPLs, which increased the coverage ratio to 424% from 245% at the end of Q1, was driven by payoffs achieved through strong execution of our managed asset group. Criticized and classified loans of $460 million or 3.6% of total loans improved from $596 million or 4.82% of total loans at the end of Q1. Finally, we booked a provision of $7.6 million, up from $6.6 million in the prior quarter, driven primarily by loan growth. On Slides 14 and 15, we provide details on total CRE and CRE investor office exposures. Total commercial real estate loans are $7.3 billion. Our exposure is largely within local markets we know well and is diversified by sector. The largest concentration is the multifamily at $2.6 billion, which is a strong asset class in Greater Boston due to the ongoing housing shortages. We have no multifamily nonperforming loans and have had no charge-offs in this portfolio for well over the past decade. We remain focused on investor office loans. The portfolio of $828 million or 4% of the total loan book decreased $48 million linked quarter. Criticized and classified loans of $118 million or about 14% of total investor office loans improved from $163 million or 19% total investor loans as of March 31. In addition, our reserve level of 4.9% remains very conservative. The investor office loan portfolio includes our relatively limited exposure to the lab and life science sector, which consists of 4 loans totaling $99 million or less than 1% of total loans. Two of the loans are in Cambridge, one in Boston, and the other in suburban Mass. None of these loans were originated as speculative construction transactions. All loans are accruing, and we continue to monitor these loans as part of our ongoing review of the office portfolio. We continue to take a proactive approach in managing investor office exposures. Our credit teams performed thorough assessments of the portfolio on a quarterly basis, and on larger, lower risk rated credits, we conduct ongoing monthly reviews. This in- depth knowledge enables our credit team to take timely and decisive actions as reflected in this quarter's performance. On Slide 16, we provide our updated full year 2025 outlook. Please note, this outlook is for stand-alone Eastern and does not contemplate the impact of the HarborOne merger. We are raising our full year loan growth outlook to 3% to 5%, up from our previous guidance of 2% to 4%, reflecting strong results through the first 6 months. Deposit growth expectation of 0% to 1% is lower than the previous range of 1% to 2%. We continue to anticipate a favorable mix shift from CDs to money markets. Based on lower average deposit balances, we now expect net interest income to be in the range of $810 million to $820 million, a modest reduction from previous guidance, with FTE margin expectations remaining at 3.45% to 3.55%. While provision will be based on evolving credit trends, we currently anticipate the provision will end the year between $27 million and $32 million, an improvement from our original projection of $30 million to $40 million. We increased our forecast for operating fee income to $145 million to $150 million, up from $130 million to $140 million. Operating noninterest expense is now expected to end the year between $530 million and $540 million, an improvement from our previous range of $535 million to $555 million. Our expected full year operating tax rate has been revised to 21% to 22%, down from 22% to 23%. Finally, our current buyback authorization expires this month, and we plan to seek regulatory approval for further share repurchases post the HarborOne close. We are committed to returning excess capital to shareholders through opportunistically repurchasing shares. Before opening up the call for questions, I'd like to take a moment and provide an update on our pending merger. In June, we filed our regulatory applications for our merger with HarborOne and are working closely with regulators to obtain the necessary approvals. We continue to expect to receive approval and close the transaction in the fourth quarter. We also submitted our branch consolidation plans in connection with the merger. Given significant overlap between the 2 branch networks, we plan to consolidate 13 locations, which includes 6 Eastern branches and 7 from HarborOne. Pending regulatory approval, we anticipate beginning the consolidation process in Q1 2026. Integration planning is well underway, and we are very pleased with our progress. We remain focused on delivering a seamless transition for our customers, community partners and employees. This concludes our comments. We will now open up the line for questions.

[Operator Instructions] Your first question comes from the line of Mark Fitzgibbon, Piper Sandler.

First question I had, maybe for you, David, is it likely that we'll see more securities portfolio restructurings in coming quarters sort of excluding the -- any things that you do related to the HarborOne deal?

Possibly, Mark. The -- when we think about the use of capital, we think about organic growth, we think about share buybacks and we obviously think about balance sheet management, which would include the portfolio repositioning. I would say in the sequence of events, getting approval and getting back into the market to buy stock back comes first. With that said and based on interest rates, we do have the capital to pursue another restructuring. But it's a little bit on the back burner right now just because of the merger and the fact that our current authorization expires at the end of the month.

Okay. And then secondly, on the -- the big drop you had in the NPLs this quarter was almost $40 million. Were there any loan sales or those were just payoffs or something else?

What I would say is credit to our managed asset group. We worked through and -- did not sell but worked through and resolve 5 credits in the quarter, and that was the driver.

Okay. And then last question is sort of more strategic, I don't know, for Bob or Denis or both. But following the completion of the HarborOne deal, you'll have this Rhode Island franchise. And I guess I'm curious, is the plan to potentially use that as a springboard to move south into places like Southern Rhode Island or Connecticut or maybe even eventually New York? Because I know historically, you've been a little more focused in sort of Eastern Massachusetts and concentrated there. But would you be open to sort of expanding the footprint to some new markets?

So Mark, this is Denis. We certainly are welcoming the opportunity to engage in the Rhode Island market, and we will look to build out in that market both in terms of our commercial, our consumer businesses and our wealth management business. But we don't have plans to extend into Connecticut from a banking perspective. As you know, we already have a presence in Connecticut from a wealth management perspective. We're very happy with that. But beyond that, we don't currently have plans to expand banking services into Connecticut or down into New York. Certainly would never say never, but it's not something that we're thinking about strategically at all at this point.

Your next question comes from the line of Damon DelMonte, KBW.

Just wanted to talk a little bit about the strong C&I growth this quarter. Can you just give a little color as to what drove that, kind of maybe what type of customers were taking on more credit? And are these new customers? Or are these more of utilization of lines that are currently in place?

Damon, so it's a combination of both. And what I would say is we're seeing -- while there still is some concern about economic volatility with tariffs and trade policy, et cetera, we're seeing increasing confidence from our customer base and in the market broadly. That, of course, is subject to change depending on what comes out of Washington. But certainly, part of the impetus for this growth is we have been adding talent consistently over the past year in our commercial lending division. We're very happy to do that. The message that we've been delivering both to our commercial division and to our customers is we are open for business. We are ready to grow. We have the capital to grow. We have the expertise. And it's beginning to bear fruit. You'll note, I think I said in my comments that the loan pipeline at the end of the second quarter is just as good as it was at the end of the first quarter. Summer is typically a little quieter. But heading into these summer months, we feel very good about that pipeline. So it's a combination of customer confidence and that we are investing more in growth within our commercial division.

Damon, it's David. The only thing I would add to that was it was broad-based. In the first quarter, we did call out franchise as being a driver of growth. But in the second quarter, it was across what we would call all of our verticals within C&I, which was great to see.

Got it. Great. Appreciate that color. And then secondly, on the margin and the outlook. I appreciate the reaffirmed guidance there. David, when we think about the core margin, so this quarter, if you take out the fair value accretion, it was up about 13 basis points. Kind of what do you think about from a cadence standpoint going into the back half of the year over the next couple of quarters? Maybe a few basis points of kind of grinding higher. Is that fair?

Yes. I think the margin, honestly, is going to be kind of flattish in the back half of the year. I think about -- a lot of it is going to be dependent on our ability on core deposit growth, right? But away from that, we called out all the way back in January the securities repositioning, that's -- we now have a full margin impact of that. So that tailwind has occurred. We do have $2.5 billion swap book that is just going to start amortizing in the back half of the year, relatively muted impact. So when I think about the third quarter impact of that, it's about $300,000 pretax. It will be more in the fourth quarter. And then lastly, the deposit -- the competitive market for deposits is heated up a bit from our original thinking. So we've experienced probably the most repricing down in our CD book that we'll see for the year. We are more neutral in the back half of the year from existing CDs versus market rates. So you put all that together and fixed rate commercial lending will have a positive role, residential mortgage will have a positive role. But I do think the margin is roughly flattish rather than -- I don't want to telegraph sequential increases each quarter at this point. The only caveat, and we benefited this quarter, was it's so hard to predict is accretion income. We had 2 large loans that paid off in June and reduced our margin in the quarter.

Got it. Okay. That's helpful. And then just from like a modeling standpoint, is there any way we can -- any guidance on how to think about the rabbi trust income? I guess actually I should ask, the guidance for the full year for fee income and expenses, that's based off of what you've already realized in rabbi trust income and expenses, right? So would we imply like those were 0 and they kind of net each other out when we look at like the full year?

Yes. So from a macro perspective, positive equity markets lead to positive rabbi trust income, meaning the liability side is more fixed. The asset side, we have partial hedge on and it's -- and most of that is equity based. So we had a strong Q2 for equity market returns, and that led to positive change for rabbi trust income. Not a perfect hedge. One goes through fees, we have the offset in the comp line. But if markets remain steady for the back half of the year, the rabbi trust income and expense isn't that much of a needle mover either way. But when you have equities up or down, up is a positive impact, down is a negative impact.

Your next question comes from the line of Laurie Hunsicker, Seaport Research Partners.

Just wanted to go back to where Damon was. So on margin, do you have a June spot margin?

I have a June spot margin for you, Laurie. What I would say is -- what I want to give you is a normalized June spot margin because as I said to Damon, we had 2 -- all the accretion income, not all of it, but the positive differential linked quarter in accretion came in, in June. So if you normalize that for the quarter, the spot margin in June is 3.55%. So that's 4 bps above the quarter average.

Okay. Okay. Great. Okay. And then going back to credit, and your credit was so, so good this quarter and office. The drop in office nonperformers from $43 million down to $10 million, and your criticized office going from $163 million down to $118 million. I'm looking on Page 15 at your maturities. Are any of the $118 million in criticized office maturing in those next 4 quarters that you show in the maturity schedule?

Yes. So we have, I believe, I'm going from memory here, one criticized loan that's in the -- has a maturity within the next year. It's accruing, but it's -- obviously, it's office, there are some issues around it. So it is in there. That's why I was going to call out when you look at that schedule, this is the first time since we've been showing that, there's no NPLs and -- or nonaccruing loans in that next year of maturities.

Yes. It's exciting. Okay. Great work. Okay. And then maybe just if you can sort of more broadly help us think about the FASB's recently proposed ASU with respect to the CECL double count, if you can just remind us in terms of what the tangible book pickup will look like, just what the CECL double count is for past deal, current deal, pending, et cetera? And then what the earnings drop will be from the elimination of the non-PCD, just how to think about all of that? And then [indiscernible] you're going to be an early adopter, is that correct?

That would be our plan. Yes. This whole thing is subject to being finalized. So if it is finalized before the year is over, we would plan to early adopt. And that would -- just to be clear, that only applies to HarborOne, right? It's not retroactive to prior acquisitions.

Okay, okay. Thank you for that clarification. Okay.

Yes. So for HarborOne, first, what we originally announced around the deal, it's between 1% and 1.5% less accretive. It's 1% reduction in tangible book value dilution. And from an earn-back perspective, it's about 0.2 of a year. So really not that material. For us, on HarborOne, that non-PCD mark is about $42 million, was what we had -- was in the original deal announcement.

$42 million, okay. And sorry, that $42 million, is that an after-tax number?

That's the pretax number. And again, deal announcement, we assumed 5 years.

Five years, got you. That's super helpful. Okay, got you. And then one last question, Denis, going back to you, kind of back to where Mark was exploring with potential geography. Can you help us think about what your appetite would be for something like a New Hampshire or a Maine? Would that be on the radar?

Well, we already are in New Hampshire, Laurie. That's a terrific market for us, both banking and wealth management. We have sizable operations in New Hampshire. So certainly, it's a market that we're looking forward to growing in. We do not have any operations in Maine at this point. We simply do some wealth management business in Maine just because our offices are so close, particularly to the Portland area. But we don't have strategically plans to expand it to Maine at this point.

Okay. But would you -- I guess the question would you consider an acquisition there at some point in the near medium term if the opportunity presented? Would Maine be a market of interest or not so much?

So not at this point. We -- again, strategically, we're not planning to expand into Maine...

There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks.

Great. Well, thank you, everyone, for your time and your interest this morning and for your questions. Best wishes for a great rest of the summer.