Eastern Bankshares Inc (NASDAQ:EBC). reported its third-quarter 2024 earnings, revealing a mixed financial performance that met earnings per share (EPS) expectations but fell short on revenue forecasts. The company's EPS stood at $0.34, aligning with market predictions, while revenue reached $216.54 million, missing the anticipated $227.29 million. Despite the revenue shortfall, Eastern Bankshares' stock rose modestly in premarket trading, reflecting a cautiously optimistic investor sentiment.
Key Takeaways
- Eastern Bankshares met EPS expectations but missed revenue forecasts.
- Stock price rose 1.87% in premarket trading despite revenue miss.
- Successful merger with Cambridge Trust and expansion in wealth management.
- Operating net income increased by 36% from the previous quarter.
Company Performance
Eastern Bankshares demonstrated resilience in the third quarter of 2024, with a solid performance in net interest income and operating net income. The completion of the Cambridge Trust merger and the expansion of wealth management services positioned the company as a leading local full-service bank in New England. However, the revenue miss indicates potential challenges in market demand or competition.
Financial Highlights
- Revenue: $216.54 million, below the forecast of $227.29 million.
- Earnings per share: $0.34, meeting expectations.
- Net interest margin increased to 2.97%.
- Operating net income rose to $49.7 million, up 36% from the prior quarter.
Earnings vs. Forecast
Eastern Bankshares' EPS of $0.34 met the market forecast, while revenue of $216.54 million fell short of the $227.29 million expected. The revenue miss represents a significant deviation, potentially impacting future growth projections and investor confidence.
Market Reaction
The stock price increased by 1.87% to $17.93 in premarket trading, reflecting a cautiously optimistic investor sentiment. The rise comes despite the revenue miss, indicating confidence in the company's strategic initiatives and future potential. The stock remains closer to its 52-week high, suggesting relative strength in the market.
Outlook & Guidance
Looking ahead, Eastern Bankshares expects loan balances to remain flat in the fourth quarter, with net interest income projected between $175-180 million. The company anticipates a net interest margin of 3.00-3.05% and operating non-interest income of $33-34 million. The tax rate is expected to normalize at 22-23%.
Executive Commentary
Dennis Sheehan, CEO, emphasized the company's strong market position, stating, "We are the largest community bank serving the attractive Greater Boston, Eastern Massachusetts, and New Hampshire markets." Executive Chair Bob Rivers reiterated the company's regional commitment, saying, "Our commitment is to Eastern Massachusetts and Southern New Hampshire."
Q&A
During the earnings call, analysts inquired about the company's conservative approach to office loan reserves and the potential for future securities restructuring. Executives highlighted the strong commercial loan pipeline growth and detailed purchase accounting adjustments related to the merger.
Risks and Challenges
- Revenue miss indicates potential sales or market demand challenges.
- Flat loan balance projections may concern growth-focused investors.
- Macroeconomic pressures could impact future financial performance.
- Integration risks from the Cambridge Trust merger.
- Competition in the Greater Boston and Eastern Massachusetts markets.
Full transcript - Eastern Bankshares Inc (EBC) Q3 2024:
Lody, Conference Call Operator: Hello, and welcome to the Eastern Bancshares Inc. 3rd Quarter 20 24 Earnings Conference Call. Today's call will include forward looking statements, including statements about Eastern's future financial and operating results, outlook, business strategies and plans as well as other opportunities and potential risks that management will seize. Such forward looking statements reflect management's current estimates or beliefs and are subject to risks and uncertainties that may cause actual results or the timing of events to differ materially from the views expressed today. More information about such risks and uncertainties is set forth under the caption Forward Looking Statements in the earnings press release as well as in the Risk Factors section and other disclosures in the company's periodic filings with the Securities and Exchange Commission.
Any forward looking statements made during this call represent management's views and estimates as of today, and the company undertakes no obligation to update these statements as a result of new information or future events. During the call, the company will also discuss both GAAP and certain non GAAP financial measures. For a reconciliation of GAAP to the non GAAP financial measures, please refer to the company's earnings press release, which can be found at investor. Easternbank.com. Please note this event is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. I'd now like to turn the call over to Bob Rivers, Executive Chair and Chair of the Board. Please go ahead.
Bob Rivers, Executive Chair and Chair of the Board, Eastern Bancshares: Thank you, Lody, and good morning, everyone. Thanks for joining our Q3 earnings call. With me today is Eastern's CEO, Dennis Sheehan our new CFO, David Rosato and Jim Fitzgerald, our former CFO, who is continuing to serve as a senior advisor to our management team and our Board of Directors. The Q3 marked a transformational moment in Eastern's history as we closed on our merger with Cambridge Trust, completed our integration, expanded our leadership team and Board and look forward to the future as a newly combined more robust organization. This combination represents a powerful step forward in achieving our strategic vision, positioning us as a stronger, more competitive institution and the Greater Boston region's leading local full service bank offering comprehensive personal, commercial and private banking solutions in addition to personalized wealth management offerings.
Whereas our larger competitors focus on a wider geography, our commitment is to Eastern Massachusetts and Southern New Hampshire as well as other areas of New England, which is demonstrated not only by a management team that lives and raises our families here, but makes strategic lending and community investments entirely within the markets we serve. Time and again, we hear from our customers that a point of differentiation is our deep understanding of local markets and communities. Although we have grown larger to have the talent and technology to better serve and compete for our customers' business, we remain at our core a true community bank, understanding that we can only be as strong as our customers, our colleagues and the communities we serve. As recent evidence
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Bob Rivers, Executive Chair and Chair of the Board, Eastern Bancshares: this, Eastern during the past quarter was named the number one SBA (LON:SBA) lender in Massachusetts for the 6th consecutive year, ranked among the 10 Most Charitable Companies in Massachusetts by the Boston Business Journal for the 13th time, and was recognized by Disability:IN as a 2024 Best Place to Work for Disability Inclusion. And the Eastern Bank Foundation was once again recognized among the top leading women led organizations in Massachusetts by the Women's Edge. Of course, to deliver all of this requires a total team effort from my 2,000 colleagues at Eastern, who in addition to very successfully transitioning our banking and wealth management customers to new systems, also completed a major upgrade of our online and mobile banking platform. It is their incredibly hard work, dedication and commitment to our customers and each other which make these results possible in order to deliver greater value for our shareholders and support for our communities. With that, I'll hand it over to Dennis, who will discuss the business in more detail before handing it off to David to discuss our financial results.
Dennis Sheehan, CEO, Eastern Bancshares: Thank you, Bob. Please note, we have posted a slide presentation on our website, and we encourage you to review the slides as David and I will reference a number of them in our commentary. I want to reiterate Bob's comments about our colleagues at Eastern. I'm incredibly proud of the work our team has completed during the quarter across our banking, wealth and operational divisions. With the merger and conversions behind us, we can now focus on realizing the benefits of the merger and the growth opportunity ahead.
We are the largest community bank serving the attractive Greater Boston, Eastern Massachusetts and New Hampshire markets with the 4th largest deposit market share within the Greater Boston MSA, which includes Southern New Hampshire. In addition, our combined wealth management business with over $8,000,000,000 in assets under management makes us the largest bank owned investment advisor in Massachusetts and the 12th largest in the state overall. We're excited to bring the fuller suite of wealth management and banking services to our client base and to the market. I'll spend greater time in the future speaking to why our position is compelling and in giving you a greater sense of the capability of our firm. But I know you'd like to understand in detail how we performed on the merger.
So let's get into that. I'm sure you can understand there are a number of differences in interest rates, the economy and otherwise since the merger was announced in September 2023, and this is an important backdrop to the variances from the original merger model guidance. Slide 6 gives an overview. In short, we outperformed. We outperformed the original guidance on deal charges, earnings per share accretion and cost saves.
Importantly, capital in the form of either tangible book value or tangible common equity are significantly better than originally projected due to a combination of a smaller balance sheet and rate changes over the past year. The balance sheet is smaller than projected as we decided to sell the Cambridge Trust Securities portfolio and pay off borrowings, which resulted in an even healthier balance sheet. This decision, along with the lower fair value marks associated with the changes in interest rates since announcement shown on Slide 7, resulted in lower earnings per share in the quarter as compared to Street estimates. On the credit front, we took a hard look at Aimbridge loans, and you will note increased reserves in the commercial real estate category, particularly office, which we feel are appropriate at this stage of the cycle. The company's overall allowance for loan losses was prudently expanded to 1.4% in the quarter.
We take an aggressive approach in reserving for potential challenges. As an example, our reserve for total investor office loans represents 8% of loans in that category. So in summary, regarding the merger, client retention has been terrific. We feel good about where we are relative to original expectations. Capital is stronger and asset quality is well marked and accounted for.
David will provide some detail regarding an outlook for Q4, and I preface it by saying the financial metrics of Eastern are markedly stronger than pre merger and rest atop a balance sheet with very strong capital and liquidity providing capacity for future earnings growth. And finally, I'm pleased to report that our Board has approved a 9% dividend increase to $0.12 per share. David?
David Rosato, CFO, Eastern Bancshares: Thank you, Dennis. I'll start with the financial review of the Cambridge merger before moving into the full results for the Q3. As a reminder, the merger closed early in Q3 on July 12. As Dennis mentioned, we are on track to successfully achieve the merger related financial targets that were announced just over a year ago. As part of the merger closing, we mark to market the Cambridge balance sheet.
Slide 7 outlines the final purchase accounting adjustments relative to estimates at time of announcement. Most came in as expected, but I'll walk through a few key differences. The interest rate for fair value mark on loans was $250,000,000 at closing, significantly lower than the $413,000,000 estimated a year ago. The credit mark on PCD loans was $56,000,000 at closing. The credit mark is a result of a very thorough review of all Cambridge loans.
The increase from expectations a year ago was driven mainly by office commercial real estate loans, given the challenges for that sector in the current environment. I'll provide additional color later in my remarks on asset quality. As Dennis mentioned, Eastern sold all of Cambridge's investments in the days after the closing and used the proceeds to eliminate Cambridge wholesale funding. The original securities mark of $172,000,000 therefore will not be accretive into income. This equates to $29,000,000 to $34,000,000 per annum.
On Slide 8, we have provided an estimated schedule of accretion and amortization for the fair value markets that will impact earnings going forward. Most notable is the accretion of the discount on acquired loans. As a reminder, we will accrete into income the $250,000,000 interest rate mark on loans plus the $33,000,000 credit mark on non PCD loans, which totals $283,000,000 over the lives of those loans. We expect this will create income of approximately $12,000,000 to $14,000,000 each quarter for the next year. We have modeled the loan accretion schedule based on the best information we have available.
But as you know, actual accretion recognized will be subject to loan prepayments over time. Those prepayment rates will be based on changes in market interest rates. If rates decline, we'd expect to see faster prepayments in certain loan categories, creating accelerated recognition of the associated discount. However, it's important to remember that although these loans are marked to current rate levels, the underlying interest rates on the loans are relatively low. This means that rates would have the fall pretty far from where they are today before borrowers have incentive to refinance and pay off fixed rate loans.
For this reason, we believe we have strong protection against prepayment risk on these assets and the income stream should have a higher level of predictability. Consistent with all aspects of this merger, Eastern is committed to continuing and growing the strong relationships that Cambridge has fostered with its customers. As the legacy Cambridge loans pay down over time, creating a reduction in accretion income, The acquired loans will be replaced with new loans at market yields continuing to drive interest income. In the bottom half of Slide 8, we also provide expected amortization of the core deposit intangible and wealth intangibles, which will be included in non interest expense. Combined, we expect these non cash expenses to be about $7,000,000 per quarter over the next few quarters.
I'll now move into our results for the Q3 beginning on Slide 9. We reported a GAAP net loss of $6,000,000 in the 3rd quarter due to non recurring merger items, primarily the day 2 non PCD loan reserve expense of $40,900,000 as well as the $30,500,000 in M and A expenses. On an operating basis, net income was $49,700,000 or $0.25 per share. This higher level of operating earnings is driven by a larger balance sheet, a higher margin, which increased 33 basis points in the quarter to 2.97%. On the fee income side, our wealth revenues more than doubled to $14,900,000 in the 3rd quarter.
The balance sheet remains very strong. Tangible book value per share ended the quarter at $12.17 Our Board approved a penny raise in the quarterly dividend and we repurchased 836,000 shares of stock at an average price of $15.08 for a total of $12,600,000 in the quarter. Asset quality also remains strong. Although nonperforming loans increased to $125,000,000 the increase was due to PCD loans that have been conservatively reserved for. I'll discuss asset quality more later in my remarks.
Transitioning to the income statement for the quarter, Slide 10 provides a summary of both GAAP and operating results and return metrics. As I mentioned, our GAAP loss of $6,000,000 for the quarter was driven by merger items. Operating net income of $49,700,000 was $13,000,000 higher than in the prior quarter, an increase of 36%. There was considerable noise in the quarter due to the merger, which appeared in 3 places. The provision for credit losses included $40,900,000 reserve on non PCD Cambridge loans.
Non interest income included $3,000,000 fixed asset write down that was in other non interest income. And non interest expense contained $27,600,000 of expenses concentrated in salaries and benefits. Please see Slide 33 for a full breakout of M and A costs during the quarter. Note that our operating tax rate for the quarter was modestly elevated at 24.6%. And I'll provide an update on the tax rate we expect going forward when I cover our outlook in a few minutes.
Moving to the margin on Slide 11. It's important to remember that we had a partial quarter of impact of the merger beginning on July 13. For September, our margin on a FTE basis was 3.05. We are encouraged by the recent margin growth and expect additional rate cuts by the Fed to provide benefit, especially if the yield curve normalizes towards a traditional upward sloping shape. Total (EPA:TTEF) non interest income on Slide 12 was $33,500,000 in the 3rd quarter $32,900,000 on an operating basis.
Remember, in Q2, we had an early deposit termination payment of $7,800,000 which skewed our results. Wealth fees increased from $6,700,000 to $14,900,000 in the 3rd quarter, driven by the increase in assets under management from Cambridge, as well as strong market performance. Deposit service charges were $8,100,000 in the 3rd quarter, an increase of $200,000 Please note that certain deposit service charges were temporarily waived for our new Cambridge customers, subtracting approximately $300,000 in income for the quarter. These fees will be reinstated in mid Q4. Moving to Slide 13.
Total non interest expense was $159,800,000 $130,900,000 on an operating basis. There were 2 primary drivers to the linked quarter change in operating expenses. First, salaries and benefits on an operating basis increased $15,400,000 due to the addition of colleagues from Cambridge. 2nd, we saw an increase in amortization expense of $5,700,000 due to the amortization of the core deposit and wealth management intangibles. As I mentioned earlier, we have the vast majority of merger related cost saves reflected in Q3 results.
The balance sheet on Slide 14 shows the level of deposits, loans, borrowings and investments post merger. The balance sheet is extremely healthy with $25,500,000,000 in total assets, a tangible common equity ratio of 10.7%, a loan to deposit ratio in the mid-80s and essentially no wholesale funding. We added approximately $3,900,000,000 in loans and $3,700,000,000 in deposits from Cambridge. Organic growth in the quarter was slow, with essentially flat loan levels and a decline in deposits driven by seasonality. We are optimistic about our local economy, the inflection point we are at in the rate cycle and our prospects for growth moving into 2025.
Moving to deposits and loans on Slides 1516, the key quarter over quarter changes related to Cambridge, while organic activity remained muted. We added high quality deposits through the merger. We continue to have approximately 50% of our total deposits and checking accounts, and our total deposit cost is very well contained at 182 basis points, demonstrating the strength of the combined deposit franchise. On the loan side, we added $2,300,000,000 of commercial loans and another $1,500,000,000 in residential loans from Cambridge. We are enthusiastic about the transition for the Cambridge customers, which went seamlessly, and we are making concerted efforts to continue to welcome and serve those customers who are new to Eastern.
Moving to the credit impacts of Cambridge on Slide 19. The allowance increased from 111 basis points last quarter to 143 basis points this quarter and stands at $253,800,000 The build was comprised of $56,000,000 of the day 1 Cambridge PCD reserves, which were recorded to the allowance with the offset to goodwill. Additionally, we booked a day 2 provision on non PCD loans of $41,000,000 The legacy Eastern provision was $6,000,000 in line with the past several quarters and charge offs totaled $5,000,000 Let's now take a closer look at the acquired loans and how we assess the credit impact of the Cambridge portfolio beginning on Slide 20. The combined credit mark on PCD and non PCD loans was estimated at $44,000,000 at the time of announcement versus $89,000,000 at closing. The PCD pool of loans was expanded over the last year, primarily due to deterioration in the office market.
Over the past year, distressed office property sales have increased, giving us a clearer picture of values. Slide 20 shows the total unpaid principal balance of PCD loans was 353,000,000 dollars or 9% of total Cambridge loans. We recorded $56,000,000 of reserves associated with these PCD loans via a gross up of the allowance that was recorded through goodwill. Slide 22 highlights our pre investor office exposure post merger, which totals $900,000,000 or 5% of total loans, unchanged from legacy Eastern's percentage. Criticized and classified investor office loans increased to $178,000,000 or about 20% of total investor office loans.
We have reserves totaling $72,000,000 or 8% against our $900,000,000 of investor office loans. When looking at overall asset quality on Slide 23, non performing loans increased to $125,000,000 or 70 basis points of total loans driven by the addition of Cambridge PCD loans. Legacy Eastern levels of non performing loans remain stable from recent quarters. Net charge offs were $5,100,000 in the quarter or 12 basis points of total loans. We feel very comfortable with the allowance of $254,000,000 provides very strong coverage for the loan portfolio.
Moving now to our outlook, which is for Q4 only. We expect to provide 2025 guidance in January once we work through our annual budget process. For Q4, we expect loan balances to be relatively flat. While we don't anticipate much loan growth in Q4, we are seeing a build in commercial lending pipelines, a positive leading indicator cater for future growth. Deposits typically exhibit seasonal declines late in the year and we have the maturity of $185,000,000 deposit acquired from Century Bank that is maturing in mid November.
We expect net interest margin net interest income of $175,000,000 to $180,000,000 and net interest margin to be between $3,000,000 and 305. As I mentioned earlier, we expect declines in short term rates to benefit the margin and net interest income going forward. Approximately 20% of the loan book, net of hedges, resets on short term interest rate. We expect betas on our interest bearing deposits to be 40% to 50% on the way down inclusive of our CD book. Operating non interest income is expected to be in the range of $33,000,000 to $34,000,000 Operating non interest expense is expected to be between $130,000,000 $132,000,000 with fully achieved cost saves.
This includes intangible amortization of about $7,000,000 We also anticipate $2,000,000 to $3,000,000 in non operating M and A expenses in Q4. Lastly, we expect the tax rate to normalize for the full year in the range of 22% to 23%. That concludes our comments for the quarter and we'll now open the line for your questions.
Lody, Conference Call Operator: Thank you. And your first question comes from the line of Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon, Analyst, Piper Sandler: Hey guys, good morning and congratulations on the deal. It's rare that we see anybody bring in deal charges below their initial projections, so great job. I guess my first question, David, to follow-up on a couple of points that you made, on loan pipelines, you said they were strong. I wondered if you could share with us the size of the pipeline and the complexion of it?
David Rosato, CFO, Eastern Bancshares: Sure, Mark. Well, I'll let Dennis handle that.
Dennis Sheehan, CEO, Eastern Bancshares: Hi, Mark. Good morning. So, yes, the commercial loan pipeline is at its 3rd highest level this year. Now admittedly, that's coming off a fairly low level at the end of June, but I'll just give you the two numbers. At the end of June, our pipeline was $228,000,000 It's now, dollars 438,000,000 So we're optimistic that that will continue to grow heading into the New Year and it's certainly better than it was at the end of June.
Mark Fitzgibbon, Analyst, Piper Sandler: And Dennis, is that mostly commercial real estate or is it even mix of C and I and CRE or what does that look like?
Dennis Sheehan, CEO, Eastern Bancshares: Good mix of commercial real estate, C and I and community development lending, very active in all three businesses. And we're certainly we're just seeing some early seeds of increased activity and hopefully will continue into the New Year.
David Rosato, CFO, Eastern Bancshares: Okay, great. Mark, I was just go ahead.
Mark Fitzgibbon, Analyst, Piper Sandler: No, no, please, David, sorry.
David Rosato, CFO, Eastern Bancshares: I was just going to add that tip normal, we've been inwardly focused on the completion of the merger and the bringing on of our colleagues. I think the other positive aspect to this is just a sense in the market among customers of the Fed beginning an easing cycle and demand starting to build as well.
Mark Fitzgibbon, Analyst, Piper Sandler: Okay, great. And then I heard your comments and the discussion around purchase accounting adjustments and that Slide 8 was helpful. It sounds like you expect the net interest margin to sort of gradually rise across 2025. Can you help us think about where the margin might be able to get to by the end of the year assuming we follow the forward curve?
David Rosato, CFO, Eastern Bancshares: So, I would say a couple of things. I would say we're modestly liability sensitive when we think about parallel changes in interest rates. But we are more liability sensitive if the shape of the yield curve becomes normalized or more upward sloping. So which is the much more likely half of interest rates. So instead of specific margins, the way I would think about it is, if you had a parallel rate and moves every 25 basis point move is worth about a basis point.
But if the short end of the curve falls relative to long rates, every 25 basis points is worth about 4 basis points, almost 4 times as impactful.
Mark Fitzgibbon, Analyst, Piper Sandler: Okay, great. And then I wondered if you could share with us how much of the $85,000,000 increase in non performing loans was PCI related versus sort of other stuff that might have come from say the eastern side?
Dennis Sheehan, CEO, Eastern Bancshares: The $85,000,000 increase. So, I mean certainly the biggest component of the increase in non performers in the quarter, Mark, were the Cambridge loans, the PCD loans from Cambridge and most of that was office. I think the vast majority of those loans were office. And I think it's worth sharing with you how the process that our team went through in evaluating those loans, but also broadly the investor office category in its entirety. We recognize that the office market has certainly deteriorated in this past year and knowing that our team did a very thorough review.
We've re underwritten all office loans over $5,000,000 through the second and the third quarter. We did it. It was a massive effort by our team. Our team is in close contact with our borrowers and have a very good sense of what's happening with each loan. So again, if we underwritten every loan over $5,000,000 and every quarter, we review each credit to determine if they are appropriately risk rated and reserved.
And the result of this and clearly with the Cambridge office portfolio, which has seen some deterioration here this year, we established a very strong reserve against those office loans. And as we've mentioned in our comments, overall, we've an 8% reserve against the total investor office book at the end of the quarter. And our reserve as noted, is 1.4% at the end of the quarter. So very strong actions. We believe we have fully accounted for the risk in these loans at the end of the quarter.
Mark Fitzgibbon, Analyst, Piper Sandler: Great. Thank you.
Lody, Conference Call Operator: Your next question comes from the line of Damon DelMonter with KBW. Please go ahead.
: Hey, good morning, everyone. Hope everybody is doing well and thanks for taking my questions here. I guess just with regards to expenses, I think you noted you got majority of the cost saves out. Just looking for a little bit of commentary as we kind of go into 'twenty five, do you feel like there's additional opportunities to extract some savings from the expense base?
David Rosato, CFO, Eastern Bancshares: Hi, Damon, it's Damon.
: Hi, David.
David Rosato, CFO, Eastern Bancshares: The short answer is
: maybe.
David Rosato, CFO, Eastern Bancshares: I caveat my response a little bit for two reasons. I'm just short of only being here for 3 months. I'm still learning the organization and spent most of that time coming up to speed on the Cambridge transaction and the purchase accounting work we just shared with you. But secondly, we're just starting we're at the beginning of the budget cycle. So I haven't worked through one of those, neither has Dennis.
So I think by January, when we're talking about the Q4 and giving guidance for the full year, we'll have a lot better clarity, because we'll know the organization better at that point.
: Okay. Fair enough. And then with regards to capital, obviously, tangible book value and capital ratio came in stronger just given the change in the marks with the deal closing. Just kind of wondering what your thoughts are on the buyback? I saw you were active this quarter.
And then also, do you have any thoughts on potential securities restructuring just given the greater capital flexibility?
David Rosato, CFO, Eastern Bancshares: Yes. So we you can see the numbers. We bought just under $13,000,000 of stock. We spent the quarter mostly being price sensitive rather than volume sensitive. You can see our execution was about $1 below the VWAP.
You're right, we certainly have plenty of excess capital. Hopefully, it supports the loan growth, the pipelines that Dennis was talking about. But the reality is we still can execute on buybacks. We still think our stock is a very good value. And we are talking about whether it makes sense to do a securities restructuring or not.
So that's an active discussion at our ALCO committees. And we may or we may not, as everyone on the call knows, is pros and cons to those transactions. But we're actively thinking about it.
: Great. I appreciate that color. And then just lastly, the cash balances at the end of the quarter were a little bit higher than last quarter. Just kind of curious as to how we think about the average earning asset base going forward. Does the cash stay on the balance sheet?
Does it will there be an outflow of deposits that have to be used to fund that? Or would it be reinvested in securities? Just kind of you guys have $3,400,000,000 of earning assets. Just kind of what's a good target over the coming quarters? Thanks.
David Rosato, CFO, Eastern Bancshares: Sure. Thanks. So cash is up $130,000,000 I think linked quarter. It's just shy or right around $900,000,000 part. So while I just said we're thinking about securities restructuring, our ALCO is also thinking about just security purchases to utilize some of that cash.
So the goal is organic loan growth. We just telegraphed we expect flat loan growth in Q4, but we're feeling better about Q5 I'm sorry, not Q5, 20, 25, though we're just at the beginning of our planning for 2025. We did call out the expected maturity from Legacy Century deposit. If you recall, that's a similar deposit to what happened in Q2. Q2 was an early termination.
We received a $7,800,000 prepayment penalty. We won't that won't happen in November because it's just we expect it to go until maturity. So a little bit of that cash will fund that, plus we have we'll have some seasonal deposit outflows. But net all of that, we're still sitting on a very healthy cash position that will, A, fund loan growth, B, probably leads to some modest additional security purchases.
: Got it. Okay, great. That's helpful. That's all that I had for now. Thank you.
David Rosato, CFO, Eastern Bancshares: Thanks, Damon.
Lody, Conference Call Operator: And your next question comes from the line of Laurie Hunsicker with Seaport Research. Please go ahead.
Laurie Hunsicker, Analyst, Seaport Research: Great. Hi, thanks. Good morning. And just to echo Mark's congratulations. Yes.
Wondered though if we could start with office, just some specifics. So the commercial non accruals that you give of $105,000,000 can you just share with us the breakdown of CRE versus C and I versus business banking? And then very specifically of that $105,000,000 how much is office non performers?
Dennis Sheehan, CEO, Eastern Bancshares: So Laurie, we're not going to go into detail on specific non accruals, specific categories. But what we I'm happy to talk about is and share with you is in terms of the PCD loan, the increase in the PCD loans was largely office at Cambridge. As you can understand, given the environment and the weakening in office overall, the office was the largest category there that at end had significant reserves assigned against it.
Laurie Hunsicker, Analyst, Seaport Research: Okay. Right. So, well, so you don't have you're not disclosing how much you have in office non performers?
: No. Am I just going
Laurie Hunsicker, Analyst, Seaport Research: to assume that your your PCD commercial real estate is 204,000,000 plus whatever Eastern Legacy was is all
Dennis Sheehan, CEO, Eastern Bancshares: About a third of the PCD loans, the 204,000,000 were office. And that's the category that had the most significant reserve against it.
Laurie Hunsicker, Analyst, Seaport Research: Right. Totally understand that. Just I mean for tracking purposes, I'm just trying to understand what the office non performers
David Rosato, CFO, Eastern Bancshares: are.
Laurie Hunsicker, Analyst, Seaport Research: Or maybe we can come back to that. So I guess, can you help me think about of your $178,000,000 the criticized and classified office, how much of that is coming due here in coming quarters? And then just any color on those loans in terms of vacancy rates, how you're thinking about that? So
David Rosato, CFO, Eastern Bancshares: Laurie, I would start from the starting point of we closed this transaction. We had the ability to
: do
David Rosato, CFO, Eastern Bancshares: all these fair value marks, PCD, non PCD. So it's a and since deal announcement, there was one distressed property sale prior to the deal announcement. And then starting late in Q3 and then Q4 of last year into this year, you're starting to see more distressed sales, which translates into it's much easier to ascertain values in commercial real estate, especially in office. So we had the benefit when we went through the purchase accounting to have substantially better knowledge than when the deal was announced. And the reality is office weakened over that time period, commercial real estate weakened over that time period.
And hopefully, we're starting to see some signs of stabilization. So that is kind of our purview as we approach this. Dennis caught out and I caught out in our script, 8% total reserve against investor office of $900,000,000 very healthy reserve. So on Page 22, we break out what are very small future maturities, right, dollars 61,000,000,000 this quarter, dollars 74,000,000 in the next quarter. So within that $61,000,000 for example, there is one loan on non accrual, but it's fully reserved for, no additional loss expected.
The rest of the loans are accruing. If you go through Q2 of $25,000,000 to $70,000,000 there's no concern about any of those loans. They're all accruing. There's no special reserves. We expect all to be paid off at maturity.
So point being, our reserves at 143 basis points, though our uplink quarter are merger driven and we're standing by our reserve levels. The only other point I would add is if you walk through and just think about legacy Eastern in Q3, net charge offs of $5,000,000 $6,000,000 reserve. That portfolio has been our credit teams here have been well on top of that through this whole cycle. I mean, I'll speak for myself as a newcomer here going through my first CECL committee, my first allowance committee and observing the teams and the process, very impressed. And that gives me, in a short period of time, an awful lot of confidence around the credit understanding of the market, the understanding of our portfolio.
You heard Dennis in his comments talking about re underwriting all of our loans, commercial loans in Q1 and Q2, standard practice here.
Laurie Hunsicker, Analyst, Seaport Research: Right. And so and I appreciate that and I appreciate all the details you guys give in your deck. It's so helpful. So sorry, just one more office question here. So of the $61,000,000 that is maturing next quarter, I had in my notes that half of that actually was from an Eastern Credit, EBC.
So I guess maybe can you just help us think about that 30,000,000 dollars loan and you said it's fully reserved. Any color in terms of vacancy rates? Any color in terms of is that going to be extended or how should we be thinking about that?
Dennis Sheehan, CEO, Eastern Bancshares: So it wasn't a $11,000,000 loan, David, right?
David Rosato, CFO, Eastern Bancshares: Yes. There's $11,000,000 loan on non accrual fully reserved for. I think what you said, Larry, was just to clarify, some of I did not say or mean to say that all those maturities were coming from Cambridge's portfolio. It's more legacy Easter importantly.
Laurie Hunsicker, Analyst, Seaport Research: Right. Okay. Okay. Your forward guide and I appreciate that you're going to refresh us in January. Just two things.
Number 1, your net interest income and margin guide that does include the accretion schedule you laid out in Slide 8?
David Rosato, CFO, Eastern Bancshares: Yes.
Laurie Hunsicker, Analyst, Seaport Research: Okay. And then tax rate, and this is sort of just a more general question. Sort of as we look to next year, how should we be thinking about it because there's such a wild swing? In other words, are we thinking maybe you're back to the 21% that Eastern was legacy or CATC added a higher tax rate? Just any helpful guidance you can give there on tax rate looking forward beyond Q4 would be helpful.
David Rosato, CFO, Eastern Bancshares: Yes. I think next year is going to look basically like what we have on the page, probably 22% to 23 percent. Again, we haven't gone through the budget. Taxes post merger can be a little complicated. We're still have some outstanding tax issues from years before nothing.
So just normal stuff, takes 3 years to close every tax year. So we could have some variability in Q4, but I think this 20% to 22% to 23% is I'm thinking of that at least today as probably a run rate for a bunch of quarters forward.
Laurie Hunsicker, Analyst, Seaport Research: Great. Thanks, David. And then just last question, Dennis, to you. Can you help us think a little bit about M and A? You've completed this deal.
Just how you see M and A in Eastern?
: Thanks.
Dennis Sheehan, CEO, Eastern Bancshares: So, thanks, Laurie. So, our focus is on the integration of the Cambridge merger and even thinking back to the Century merger, there's a lot of opportunity for us to capitalize on. So our primary focus is going to be on organic growth. But that said, we're all very, very pleased with how the team worked so well on the integration of the Cambridge merger. There's a lot of capability at this firm.
And I'm very confident that if an opportunity were to arise, if we get a call about a merger opportunity that this team would be able to engage on it very, very effectively. But again, our primary focus is organic growth.
Laurie Hunsicker, Analyst, Seaport Research: Great. Thanks.
Dennis Sheehan, CEO, Eastern Bancshares: Thank you.
Lody, Conference Call Operator: There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks.
Bob Rivers, Executive Chair and Chair of the Board, Eastern Bancshares: Well, thanks everyone for your interest and your questions, and we look forward to sharing more with you during our next earnings call at the end of January. Until then, best wishes for happy and healthy holiday season.
Lody, Conference Call Operator: Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.
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