Eastern Bankshares Q2 2025 Earnings Call Transcript

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Provided by Quartr
July 25, 2025

Key Takeaways

  • Positive Sentiment: Strong Q2 operating earnings of $81.7 million (up 21% QoQ), net interest margin expanded 21 bps to 3.59%, and operating efficiency improved to 50.8%, driving robust profitability metrics.
  • Positive Sentiment: Annualized loan growth of 8% and deposit growth of 8%, with a $500 million commercial pipeline, underscore Eastern’s profitable organic growth and disciplined funding strategy.
  • Positive Sentiment: Credit quality strengthened as nonperforming loans fell to 30 bps of total loans, net charge-offs remained at zero, and coverage ratio rose to 424%, despite ongoing caution around office lending.
  • Neutral Sentiment: Full-year 2025 guidance was updated to 3–5% loan growth, 0–1% deposit growth, net interest income of $810–$820 million, and operating fee income of $145–$150 million, reflecting both opportunities and modest revisions.
  • Positive Sentiment: The Harbor One merger remains on track for a Q4 close with 13 branch consolidations planned and integration well underway, reinforcing Eastern’s confidence in long-term value creation.
AI Generated. May Contain Errors.
Earnings Conference Call
Eastern Bankshares Q2 2025
00:00 / 00:00

There are 7 speakers on the call.

Speaker 5

Welcome to the Eastern Bankshares, Inc. second quarter 2025 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. 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.

Speaker 5

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.

Operator

Thank you, Danny. Good morning, everyone, and thank you for joining our call this morning. With me today is Eastern Bankshares, Inc. CEO Denis Sheahan and our CFO David Rosato. We believe our strong second quarter performance underscores the strength of the Eastern Bankshares, Inc. 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 Bancorp, and our confidence in the opportunities and long-term value creation our combination provides has only deepened. We are very excited about this partnership and look forward to welcoming HarborOne Bancorp customers and employees to Eastern Bankshares, Inc. 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 Bankshares, Inc.

Operator

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.

Speaker 4

Thank you, Bob. We're pleased with our strong second quarter results as highlighted on page two 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.

Speaker 4

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.

Speaker 4

Non-performing loans of 30 basis points improved for the second consecutive quarter and we did not have any net charge-offs. The level of non-performing 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.

Speaker 1

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 that 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% late quarter and increased 78% from a year ago, reflecting the enhanced earnings power of the company and with the addition of Cambridge. The results were highlighted by net interest margin expansion, fee income growth, and further operating 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.

Speaker 1

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 359.

Speaker 1

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 and 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, non-interest income was $42.9 million compared to a non-interest loss of $236.1 million in Q1. The first quarter included pre-tax non-operating losses on the sale of available-for-sale securities of $269.6 million related to the investment portfolio repositioning. Operating non-interest income was $42.2 million, up $8 million linked quarter, primarily driven by a $7 million increase in higher income from investments held in Rabbi Trust for employee retirement benefits.

Speaker 1

The increase was partially offset by $3.2 million in higher Rabbi Trust benefit costs reported in non-interest 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 non-interest 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, non-interest expense of $137 million increased $6.8 million from the first quarter due to higher operating non-interest expense and merger-related costs.

Speaker 1

Merger-related costs related to the HarborOne Bancorp transaction were $2.6 million compared to no such expenses in the previous quarter. Operating non-interest 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.

Speaker 1

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 CNI activity drove $219 million of growth, while momentum in CRE accelerated in June, resulting in a higher balance of $117 million.

Speaker 1

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 30.33 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.

Speaker 1

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 non-performing loans decreased $36.9 million to $54.7 million or 30 basis points of total loans.

Speaker 1

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. $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.

Speaker 1

Due to the ongoing housing shortages, we have no multifamily non-performing 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 office 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 four 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 Massachusetts. None of these loans were originated as speculative construction transactions.

Speaker 1

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 perform 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 standalone Eastern and does not contemplate the impact of the HarborOne Bancorp 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 six months.

Speaker 1

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 to $820 million, a modest reduction from previous guidance with FTE margin expectations remaining at 345 to 355, while provision will be based on evolving credit trends. We currently anticipate the provision will end the year between $27 and $32 million, an improvement from our original projection of $30 to $40 million. We increased our forecast for operating fee income to $145 to $150 million, up from $130 to $140 million. Operating non-interest expense is now expected to end the year between $530 and $540 million, an improvement from our previous range of $535 to $555 million.

Speaker 1

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 Redwood COA 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 all 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.

Speaker 1

Given significant overlap between the two branch networks, we plan to consolidate 13 locations, which include six Eastern branches and seven 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.

Speaker 5

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 the pound key. We'll pause for just a moment to compile the Q and A roster. Your first question comes from the line of Mark Fitzgibbons, Piper Sandler. Your line is open.

Operator

Hey guys.

Operator

Good morning.

Operator

Mark.

Operator

First question I had maybe for you, David. Is it likely that we'll see more securities portfolio restructurings in coming quarters, excluding anything that you do related to the HarborOne Bancorp deal?

Speaker 1

Mark, 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.

Speaker 4

Okay.

Speaker 4

On the big drop you had in NPLs this quarter, it was almost $40 million. Were there any loan sales, or were those just payoffs or something else?

Speaker 1

What I would say is credit to our managed asset group. We worked through and did not sell, but worked through and resolved five credits in the quarter. That was the driver.

Speaker 1

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 Bancorp deal, you'll have this New Hampshire, this Rhode Island franchise. 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? 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?

Speaker 4

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. 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, and we're very happy with that. 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. Great, thank you. Sure.

Speaker 5

Your next question comes from the line of Damon Del Monte, KBW. Your line is open.

Speaker 5

Thank you for taking my question. I just wanted to talk a little bit about the strong CNI growth this quarter. Can you just give a little color as to what drove that, 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?

Speaker 4

It's a combination of both. What I would say is we're seeing, you know, 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. 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. You know, 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 overseas and it's beginning to bear fruit.

Speaker 4

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. It's a combination of customer confidence and that we are investing more in growth within our commercial division.

Speaker 1

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 CNI, which was great to see.

Operator

Got it.

Operator

Great.

Operator

Appreciate that color. Secondly, on the margin and the outlook, appreciate the reaffirmed guidance there. David, when we think about the core margin, this quarter, if you take out the fair value accretion, it was up about 13 basis points. What do you think about from a cadence standpoint going into the back half of the year over the next couple quarters, maybe a few basis points of kind of grinding higher.

Speaker 4

Is that fair?

Speaker 1

Yeah, I think the margin honestly is going to be kind of flattish in the back half of the year. I think a lot of it is going to be dependent on our ability on core deposit growth. Right. Away from that, we called out all the way back in January the securities repositioning, we now have a full margin impact of that. That is a tailwind that has occurred. We do have a $2.5 billion swap book that is just going to start amortizing in the back half of the year, with a relatively muted impact. When I think about the third quarter impact of that, about $300,000 pre-tax, it'll be more in the fourth quarter. Lastly, the competitive market for deposits has heated up a bit from our original thinking. We've experienced probably the most repricing down in our CD book that we'll see for the year.

Speaker 1

We're more neutral in the back half of the year from existing CDs versus market rates. You put all that together and fixed rate commercial lending will have a positive role. Residential mortgage will have a positive role. I do think the margin is roughly flattish rather than, I don't want to telegraph, you know, sequential increases each quarter at this point. The only caveat, and we benefited this quarter, was what's so hard to predict is accretion income. We had two large loans that paid off in June and it juiced our margin in the quarter.

Speaker 4

Got it.

Speaker 4

Okay, that's helpful, thanks. Just from a modeling standpoint, is there any way we can get 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? Would we imply those are zero and they kind of net each other out when we look at the full year?

Speaker 1

Yeah. 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 most of that is equity based. 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 compliment. 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. When you have equities up or down, up is a positive impact, down is a negative impact. Got it.

Operator

That's helpful. Okay.

Operator

That's all that I had. Thank you very much.

Speaker 1

Thanks. Damon.

Speaker 5

Your next question comes from the line of Lori Hunsicker, Seaport Research Partners. Line is open. Hi, thanks.

Speaker 5

Good morning. Denis and David, just wanted to go back to where Damon was. Margin, do you have a June spot margin?

Speaker 1

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. As I said to Damon, we had two, all the accretion income, not all of it, but the positive differential linked quarter in accretion came in, in June. If you normalize that for the quarter, the spot margin in June is 3.55%. That's four basis points above the quarter average.

Speaker 1

Okay, great. Going back to credit, your credit was so good this quarter and office, you know, the drop in office non-performers 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 four quarters that you show on the maturity schedule?

Speaker 1

Yes. We have, I believe I'm going from memory here, one criticized loan that's in the next has a maturity within the next year. It's accruing, but it's obviously it's office. There's some issues around it. 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 or non-accruing loans in that next year of maturities.

Speaker 1

Yeah, it's exciting. Okay, great work. Okay. 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, you know, what the tangible book pickup will look like, you know, just what the CECL double count is for past deal, current deal pending, etc. What the earnings drop will be from the elimination of the non PCD. Just how to think about all of that. You're going to be an early adopter, is that correct?

Speaker 1

That would be our plan. This whole thing is subject to being finalized. If it is finalized before the year's over, we would plan to early adopt. Just to be clear, that only applies to HarborOne Bancorp. It's not retroactive to prior acquisitions.

Speaker 1

Okay, thank you for that clarification.

Speaker 1

Okay, for HarborOne versus what we originally announced around the deal, it's between 11.5% less accretive. It's 1% reduction in tangible book value dilution, and from an earn back perspective, it's about 2/10 of a year. Really not that material for us on HarborOne. That non-PCD mark is about $42 million, which was in the original deal announcement.

Speaker 1

Okay. Sorry, that $42 million, that's an after-tax number.

Speaker 1

That's the pre-tax number.

Speaker 1

Pre tax.

Speaker 1

Okay.

Speaker 1

Okay.

Speaker 1

We do announcement. We assume five years.

Speaker 1

Five years.

Speaker 5

Gotcha.

Speaker 5

That's super helpful. Okay, gotcha. 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, you know, what your appetite would be for something like a New Hampshire or a Maine? Would that be on the radar?

Speaker 1

Thanks. We already are in New Hampshire, Laurie.

Speaker 4

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 do some wealth management business in Maine just because our offices are so close, particularly to the Portland area. We don't have strategically plans to expand it to Maine at this point.

Speaker 4

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

Speaker 4

At this point, you know, strategically we're not planning to expand into Maine.

Speaker 4

Okay, great. Thanks for taking my questions.

Speaker 1

You're welcome.

Speaker 5

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

Operator

Thank you, everyone, for your time and your interest this morning and for your questions. Best wishes for a great rest of summer.

Speaker 5

This concludes today's conference call. You may now disconnect.

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