Eastern Bankshares, Inc.

Welcome to the Eastern Bank Shares, Inc. second quarter 2026 earnings conference call. 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. Thank you for joining us. 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'd now like to turn the call over to Denis 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 Miller, and Chief Financial Officer 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% then 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 CNI loan portfolio. Partially offsetting this growth were headwinds from commercial real estate payoffs, some of which were expected as we continue to work out acquired non-performing loans. Looking forward, we were encouraged by the resiliency of customers as the commercial loan pipeline finished June at a record quarter end level and is well diversified across businesses. We continue to benefit from the investments we've made in talent in recent years. In addition, our ability to combine local decision-making with the breadth of products and services typically associated with larger banks continues to differentiate Eastern and contribute to growth. The meaningful increase in deposits was due to seasonal municipal inflows and broad-based growth across business lines. As a result, the loan-to-deposit ratio improved to 91% at quarter end compared to 93% at March 31st. While the deposit environment remains competitive and costs move modestly higher, we remain committed to balancing deposit growth with margin performance. Importantly, the strength of our core deposit base and limited reliance 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 diversification, but also strengthens customer relationships across the franchise. The growing connectivity between our wealth and banking teams, including private banking, continues to create more client engagement and new business opportunities. Our comprehensive, solutions-oriented approach is resonating with clients, reinforcing our value proposition. Given the wealth demographics and strength of the Cambridge Trust brand in our footprint, we are encouraged by the long-term outlook of the business. Asset quality remains strong. Net charge-offs were stable but non-performing 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 science, which we have limited exposure. We know our office portfolio exceptionally well, and it continues to perform within our expectations. Importantly, Every office loan over $5 million is re-underwritten annually, providing us with a current and comprehensive view of each property. Overall, we view our asset quality as a source of strength, reflecting conservative underwriting and proactive risk management. Finally, given our profitability, we continue to generate capital in excess of our growth needs. As we have guided, we are committed to right-sizing our capital position. That commitment was evident again this quarter by returning $106 million in capital to shareholders through share repurchases and quarterly dividend. Notably, even after returning a sizable amount of capital this quarter, we 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'll 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 diversified fee revenue growth and lower expenses. Solid balance sheet growth supported by strong commercial lending activity and higher deposit balances. A significant capital returns to shareholders and sustained excellent asset quality with positive credit trends. We reported net income of $105.2 million, or $0.48 per diluted share, excluding $1.6 million of non-operating 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% length quarter. Our focus on growing revenues while thoughtfully managing expenses produced another quarter of positive operating leverage. As a result, the operating efficiency ratio improved 49%, contributing to a 21 basis point increase in operating ROA to 138 basis points and a 250 basis point improvement and operating return on average tangible common equity to 15.3%. As displayed on slides five and six, revenue growth accelerated during the quarter as both net interest income and non-interest income contributed meaningfully. Net interest income grew 3% from Q1 as the margin expanded three basis points to 366. Higher asset yields more than offset increased funding costs. Total interest earning asset yields increased four basis points supported by favorable loan and securities repricing, while interest bearing liability costs rose two basis points due to modestly higher deposit pricing. Net discount accretion remains stable at approximately $20 million and contributed 28 basis points to the margin, which was consistent with the first quarter. Growth in operating non-interest income was strong and diversified, increasing $12.8 million or 28% from the first quarter. The largest contributor to the variance was an $8.9 million increase in income on investments for employee retirement benefits. reflecting stronger equity market performance. This favorable impact on fee income was partially offset by a $3.4 million increase in related benefit costs reported in non-interest expense. Non-interest income also benefited from notable growth in investment advisory fees and interest rate swap income. The increase in investment advisory fees was driven by higher 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 eight. Improvement in both non-operating and operating costs drove a $30.7 million or 15% reduction in non-interest expense linked quarter. Non-operating expense decreased $29.2 million, largely driven by lower merger-related costs. On an operating basis, non-interest expense was down $1.5 million. The current quarter benefited from cost synergies achieved following the 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 services costs, primarily related to shareholder advisory fees, as well as an increase in other operating expenses. primarily driven by growth and off-balance sheet commitments. Moving to the balance sheet, starting with deposits on slide nine. Balances increased $814 million or 3.2% link quarter due to seasonal municipal inflows and broad-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 one basis point for the quarter, and the spot deposit rate for June was 1.51%, which is a reflection of elevated competition for deposits in the New England market. We are focused on increasing deposits to support our growth strategy. However, as Dennis stated earlier, we remain committed to balancing growth with margin performance. Looking at loans on slide 10, Period end balances increased $325 million, or 1.4% link quarter. Growth was driven by strong CNI production, which increased more than $300 million, partially offset by continued commercial real estate payoffs. We finished June with a record quarter end commercial pipeline of nearly $1 billion, which gives us strong confidence in origination activity in the coming quarters. Turning to consumer lending, home equity balances increased by $59 million, given the strong underlying demand across our footprint for this product. We see home equity as an attractive area for growth. Residential mortgage balances were down slightly from Q1. Our expectation is the RESI portfolio will remain relatively flat in 2026 as we favor HELOC and commercial loan growth. As seen on slide 12, our capital position remains strong as indicated by CET1 and TCE ratios of 13% and 10.1% respectively. We are focused on right-sizing capital through organic growth, share repurchases, and quarterly dividends. We expect to continue to generate excess capital and are managing our CET1 towards the median of the KRX, which is currently 12%. We returned a significant amount of capital to shareholders during Q2. In addition to $33.1 million of cash dividends paid, we repurchased 3.6 million shares for $72.7 million at an average price of $20.03, which was 46 cents below the VWAP for the quarter. As a result, our diluted common shares outstanding were 217.6 million as of June 30th. 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 December 31, 2027. In addition, the board approved a 15% 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 NPLs improved as expected, falling by $29 million link quarter to $109 million, or 47 basis points of total loans. Notably, NPLs improved in both the Legacy Eastern and acquired 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'd like to spend a few minutes on our full year 2026 outlook on slide 14. We're entering the second half of the year with healthy commercial loan pipelines, an exceptional deposit base, strong asset quality, improved efficiency, continued wealth management momentum, and substantial capital flexibility, all of which position us well to deliver attractive returns for shareholders. With that said, we have revised our full year outlook to reflect our performance through the first six months of the year. On the balance sheet, we are narrowing our loan growth outlook to a range of 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 a billion dollars, 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 $1.5 billion to $1.2 billion for the year with an FTE margin of 360 to 365. 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 posited over the first six months. As a result, we are lowering our provision outlook to a range of 25 to $30 million from our prior range of 30 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 to 200 million compared to the original range of 190 to 200. In addition, the successful HarborOne integration and realization of cost synergies are supporting improved efficiency and expense discipline. Therefore, we are tightening the operating non-interest expense outlook to a range of $655 to $665 million from the previous range of $655 to $675. Finally, the outlook for operating tax rate and capital levels remain unchanged. This concludes our remarks and will now open up the call for questions.