Eastern Bankshares, Inc. Common Stock 2026 Q3 Earnings Call

Thank you. Good morning, everyone, and thank you for joining us. On the call today with me are Executive Chair and Chair of the Board of Directors, Bob Rivers, President Chief Operating Officer, Quincy Miller, and our Chief Financial Officer, David Rosato. We're pleased with our third quarter 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's 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 originations and broad-based C&I growth. As expected, payoffs moderated from the second quarter, leading to solid growth overall in commercial real estate.

Commercial loan pipelines remained 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.

While we are in 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 linked quarter, and as anticipated, non-performing loans improved for the third consecutive quarter following the HarborOne 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 thoughtfully rightsizing 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 will hand it over to you to provide further details on third-quarter financials.

Thanks, Dennis, and good morning, everyone. Our third quarter financial performance was strong and highlighted by record operating net income. Further improvement in key profitability metrics, including return on average assets and return on average tangible common equity. Positive operating leverage, driven by an increase in net 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-preferenced items. Going forward, we expect the effective tax rate to return to about 22%. We reported record operating net income of $111 million, or $0.51 per diluted share, an increase of 4% linked quarter 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 3-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% linked quarter as growth in net interest income was offset by lower fee income. Starting with slide 5 of the presentation, net interest income grew 2% linked quarter, reflecting the benefit of continued balance sheet growth. Net interest margin declined 4 basis points to 3.62%, 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 repricing, 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 linked quarter. Importantly, our year-to-date net interest margin of 3.64% remains well within our full-year guidance range of 3.60%-3.65%. While the benefits of a steeper yield curve and higher rates are supporting asset repricing, those tailwinds continue to be offset by competitive deposit pricing. As a result, we currently expect net interest margin to remain relatively stable in the fourth quarter and to modestly improve into next year. We show the repricing characteristics of our interest-earning assets on slide 6. We have approximately $8.8 billion of floating rate assets repricing constantly with short-term rates.

Beyond that, we expect approximately $1 billion of fixed rate variable assets repricing in the fourth quarter and roughly $800 million per quarter in 2027. As detailed on slide 7, operating non-interest income decreased by $5.2 million, or 16%, compared to a particularly strong second quarter result. The largest contributor to the variance was a $6.3 million decrease in income from investments for 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. Miscellaneous 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 linked quarter, 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 2025, 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% linked quarter. Notably, 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: a $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 of unfunded 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 linked 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 for liquidity. Total deposit costs of 156 basis points increased nine basis points linked 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% linked quarter. CRE balances grew $229 million, supported by strong originations, although payoffs remained a headwind despite moderating from Q2 levels. C&I balances increased $93 million, reflecting broad-based growth across the portfolio and continued client activity.