Eastern Bankshares Q3 2026 Earnings Call Transcript

Eastern Bankshares (NASDAQ: EBC ) reported third-quarter financial results on Friday. The transcript from the company's third-quarter earnings call has been provided below. APIs provide real-time access to earnings call transcripts and financial data. Visit to learn more.

View the webcast at Summary Eastern Bankshares reported record operating earnings in the third quarter, with a significant increase in net income and strong asset quality. The company continues to see robust commercial real estate (CRE) and commercial and industrial (C&I) loan growth, although some clients are cautious due to interest rate uncertainties. Deposits grew modestly despite competitive pressures, with the company focused on maintaining core deposits. Wealth management showed positive momentum with increased assets under management and a strong fee structure.

Eastern Bankshares returned significant capital to shareholders through dividends and share repurchases. The company anticipates stable net interest margins in the near term, with potential modest improvement in the next year. Management remains cautious about external economic pressures but is optimistic about future growth opportunities. Full Transcript OPERATOR 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 19 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'd now like to turn the call over to Denis Sheahan, Chief Executive Officer. Denis Sheahan (Chief Executive Officer) Thank you. Good morning, everyone, and thank you for joining us on the call today. With me are our Executive Chair and Chair of the Board of Directors, Bob Rivers; President and 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 Bankshares' 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, CRE payoffs 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. While we're 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, nonperforming 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, where 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 our 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 on third quarter financials. David Rosato, CFA (Chief Financial Officer) Thanks, Denis, 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% to 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 noninterest 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 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 noninterest 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. 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 noninterest expense decreased $8.3 million, or 5%, linked quarter. Notably, we did not incur any nonoperating costs in the current quarter compared to $1.6 million in Q2.

On an operating basis, noninterest expense was down $6.7 million. The current quarter benefited from 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 unfunded commitment reserves.

These declines in noninterest 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 9 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. Commercial pipelines remain strong and ended September at approximately $1 billion, with a balanced mix between CRE and C&I. Turning 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 KRS. Tangible book value per share of $12.96 declined 1% linked 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 for $56.7 million at an average price of $22.11, which was $0.30 below the VWAP for the quarter. As a result, our diluted common shares outstanding were 215.5 million as of September 30th. Fourth quarter to date, 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 stock's 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. Net charge-offs to average total loans of 9 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 continue to improve in both the legacy Eastern and acquired HarborOne portfolios. Commercial criticized and classified loans increased modestly from the second quarter, reflecting higher balances in both the legacy Eastern and HarborOne 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, produced positive operating leverage, and maintained excellent asset quality, all while executing against our priorities of 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, disciplined 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. OPERATOR At this time, if you would like to ask a question, simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question, press star one. Again, we'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Damon Del Monte with Keefe, Bruyette & Woods. Damon, your line is open.

Please go ahead. Damon Del Monte (Analyst at Keefe, Bruyette & Woods) Hey, good morning, guys.