Eastern Bankshares Inc
NASDAQ:EBC
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Eastern Bankshares Inc
Earnings Call Analysis
Q3-2024 Analysis
Eastern Bankshares Inc
The earnings call opens with an overview of the successful merger with Cambridge Trust, closed on July 12. Leadership is optimistic about financial targets associated with the merger, emphasizing that capital and asset quality have exceeded original projections. The combination has positioned Eastern Bank as a leading local full-service bank in the Greater Boston area, and they intend to leverage this enhanced capability to drive growth and operational efficiency.
Throughout the third quarter, Eastern reported a GAAP net loss of $6 million, largely due to non-recurring merger-related costs totaling $30.5 million. However, on an operating basis, net income soared to $49.7 million, a 36% increase from the previous quarter, indicating a strong performance that underscores the operational success despite the merger distractions.
The operating net income growth was positively impacted by a significant 33 basis point increase in the overall margin to 2.97%. The bank’s net interest income for Q4 is projected between $175 million and $180 million, with the net interest margin expected to be between 3% and 3.05%. Furthermore, they anticipate that continued decline in short-term rates will further benefit margins, especially as approximately 20% of the loan book is set to reset during this period.
A notable surge was seen in wealth management revenues, which more than doubled to $14.9 million in the third quarter, driven by stronger asset management performance. This transition suggests a robust integration of services post-merger and reflects the bank's confidence in future wealth management growth.
Despite strong overall performance, non-performing loans rose to $125 million due to the addition of PCD loans linked to the Cambridge acquisition. The company's increased allowance for loan losses, now at 143 basis points or $253.8 million, is a prudent move considering the current market uncertainties, particularly in the commercial real estate sector, where the office market has seen significant degradation. The bank retains a robust reserve of 8% against office loans, ensuring coverage against potential losses.
Operating non-interest expenses reached $159.8 million, with much of the increase attributed to salaries and benefits as the bank expanded its workforce post-merger. Management indicated that they expect to maintain tighter control over expenses moving forward, rounding up lower operational costs as merger-induced savings become fully realized. .
As for future projections, the bank's leadership is optimistic about the loan pipeline, now standing at $438 million, with a balanced mix of commercial and community development lending. However, they anticipate loan balances to remain largely flat in the upcoming quarter. For Q4 2024, they project operating non-interest income to remain stable at $33 million to $34 million, with full realization of cost savings from the merger.
Tangible book value per share increased to $12.17, and management approved a 9% increase in the quarterly dividend to $0.12 per share. The bank also successfully repurchased 836,000 shares for $12.6 million, showcasing commitment to returning value to shareholders while maintaining a healthy capital position.
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Hello, and welcome to the Eastern Bankshares, Inc. Third Quarter 2024 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 foresees. 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 that this event is being recorded. [Operator Instructions]
I'd now like to turn the call over to Bob Rivers, Executive Chair and Chair of the Board. Please go ahead.
Thank you, Lori, and good morning, everyone. Thanks for joining our third quarter earnings call. With me today is Eastern's CEO, Denis Sheahan; our new CFO, David Rosato; and James Fitzgerald, our former CFO, who is continuing to serve as a senior adviser to our management team and our Board of Directors.
The third quarter 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 make 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 of this, Eastern during the past quarter was named the #1 SBA lender in Massachusetts for the 16th 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 Denis, who will discuss the business in more detail before handing it off to David to discuss our financial results.
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 fourth largest deposit market share within the Greater Boston MSA, which includes Southern New Hampshire.
In addition, our combined wealth management business with over $8 billion in assets under management makes us the largest bank-owned investment adviser in Massachusetts and the 12th largest in the state overall.
We are 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 savings. 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 Cambridge 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 the top of 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?
Thank you, Denis. I'll start with the financial review of the Cambridge merger before moving into the full results for the third quarter. As a reminder, the merger closed early in the third quarter on July 12. As Denis 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. Those came in as expected, but I'll walk through a few key differences. The interest rate for fair value mark on loans was $250 million at closing, significantly lower than the $413 million estimated a year ago.
The credit mark on PCD loans was $56 million at closing. The credit mark is the 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 Denis 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 million, therefore, will not be accreted into income. This equates to $29 million to $34 million per annum.
On Slide 8, we have provided an estimated schedule of accretion and amortization for the fair value marks 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 million interest rate mark on loans plus a $33 million credit mark on non-PCD loans, which totals $283 million over the lives of those loans. We expect this will create income of approximately $12 million to $14 million 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 to 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 million per quarter over the next few quarters.
I'll now move into our results for the third quarter, beginning on Slide 9. We reported a GAAP net loss of $6 million in the third quarter due to non-recurring merger items, primarily the day 2 non-PCD loan reserve expense of $40.9 million as well as the $30.5 million in M&A expenses.
On an operating basis, net income was $49.7 million 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 $14.9 million in the third quarter. The balance sheet remains very strong.
Tangible book value per share ended the quarter at $12.17. Our Board approved a $0.01 raise in the quarterly dividend, and we repurchased 836,000 shares of stock at an average price of $15.08 for a total of $12.6 million in the quarter.
Asset quality also remains strong. Although non-performing loans increased to $125 million, 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 million for the quarter was driven by merger items. Operating net income of $49.7 million was $13 million higher than in the prior quarter, an increase of 36%. There was considerable noise in the quarter due to the merger, which appeared in three places. The provision for credit losses included $40.9 million reserve on non-PCD Cambridge loans.
Non-interest income included a $3 million fixed asset write-down that was in other non-interest income. And non-interest expense contained $27.6 million of expenses concentrated in salaries and benefits.
Please see Slide 33 for a full breakout of M&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 impact of the merger beginning on July 13. For September, our margin on an 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 non-interest income on Slide 12 was $33.5 million in the third quarter and $32.9 million on an operating basis. Remember, in Q2 we had an early deposit termination payment of $7.8 million, which skewed our results.
Wealth fees increased from $6.7 million to $14.9 million in the third quarter, driven by the increase in assets under management from Cambridge as well as strong market performance. Deposit service charges were $8.1 million in the third quarter, an increase of $200,000. Please note that certain deposit service charges were temporarily weighed for our new Cambridge customers, contracting approximately $300,000 in income for the quarter. These fees will be reinstated in mid-Q4.
Moving to Slide 13. Total noninterest expense was $159.8 million and $130.9 million on an operating basis. There were two primary drivers to the linked quarter change in operating expenses. First, salaries and benefits on an operating basis increased $15.4 million due to the addition of colleagues from Cambridge.
Second, we saw an increase in amortization expense of $5.7 million 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 $25.5 billion 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 $3.9 billion in loans and $3.7 billion 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 15 and 16. The key quarter-over-quarter changes related to Cambridge while organic activity remain 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 $2.3 billion of commercial loans and another $1.5 billion 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 $253.8 million. The build was comprised of $56 million 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 million. The legacy Eastern provision was $6 million, in line with the past several quarters and charge-offs totaled $5 million.
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 million at the time of announcement versus $89 million 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 million or 9% of total Cambridge loans. We recorded $56 million 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 million or 5% of total loans, unchanged from legacy Eastern's percentage. Criticized and classified investor office loans increased to $178 million or about 20% of total investor office loans. We have reserves totaling $72 million or 8% against our $900 million of investor office loans.
When looking at overall asset quality on Slide 23, non-performing loans increased to $125 million or 70 basis points of total loans driven by the addition of Cambridge PCD loans. Legacy Eastern levels of non-performing loans remained stable from recent quarters. Net charge-offs were $5.1 million in the quarter or 12 basis points of total loans. We feel very comfortable with the allowance of $254 million 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 million deposit acquired from Century Bank that is maturing in mid-November. We expect net interest margin -- net interest income of $175 million to $180 million and net interest margin to be between 3% and 3.05%.
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 million to $34 million. Operating non-interest expense is expected to be between $130 million and $132 million with fully achieved cost saves. This includes intangible amortization of about $7 million. We also anticipate $2 million to $3 million in non-operating M&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.
[Operator Instructions] And your first question comes from the line of Mark Fitzgibbon with Piper Sandler.
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.
Sure, Mark. Well, I'll let Denis handle that.
So yes, the commercial loan pipeline is at its third 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. The end of June, our pipeline was $228 million. It's now $438 million. 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.
And Denis, is that mostly commercial real estate? Or is it an even mix of C&I and CRE? Or what does that look like?
Good mix of commercial real estate, C&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.
Mark, I was -- go ahead.
No, no, please. David, sorry.
I was just going to add that to 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.
Okay. Great. And then, I heard your comments in 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?
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 path 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 1 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 4x as impactful.
Okay. Great. And then I wondered if you could share with us how much of the $85 million increase in non-performing loans was PCI related versus sort of other stuff that might have come from, say, the Eastern side?
The $85 million increase. So 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 million 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 this again, it's re-underwritten of every loan over $5 million. 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 been 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.
Your next question comes from the line of Damon DelMonte with KBW.
I guess, just with regards to expenses, I think, you noted you got the majority of the cost saves out. Just looking for a little bit of commentary as we kind of go into '25. Do you feel like there's additional opportunities to extract some savings from the expense base?
Damon, it's David. The shorter answer is, maybe. 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 then 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 Denis. So I think by January, when we're talking about the fourth quarter 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 ratios 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?
Yes. So we -- you can see the numbers. We bought just under $13 million 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 Denis 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, there's pros and cons to those transactions. But it's -- 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? Is it -- there will be an outflow of deposits that have used to fund that? Or will it be reinvested in securities? Just kind of you guys are short $3.4 billion of earning assets. Just kind of what's a good target over the coming quarters?
Sure. Thanks. So cash is up $130 million, I think, linked quarter. It's just shy of right around $900 million 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. 2025, 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'll recall, that's a similar deposit to what happened in Q2. Q2 was an early termination. We received a $7.8 million 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'll have some seasonal deposit outflows but not all of that, we're still sitting on a very healthy cash position that will, a, fund loan growth, b, probably lead to some modest additional security purchases.
And your next question comes from the line of Laurie Hunsicker with Seaport Research.
And just to echo Mark's congratulations. Wondered though if we could start with office, just some specifics. So the commercial non-accruals that you gave of $105 million, can you just share with us the breakdown of CRE versus C&I versus business banking? And then very specifically, of that $105 million, how much is office non-performers?
So Laurie, we're not going to go into detail on specific non-accruals in 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. We're the -- as you can understand, given the environment and the weakening in office overall, the office was the largest category there that -- and had significant reserves assigned against it.
Okay. Right. So -- well, so you don't have -- you're not disclosing how much you have an office on performers? Am I just going to assume that your PCD commercial real estate, the $204 million plus whatever Eastern legacy was is all office?
About 1/3 of the PCD loans, the $204 million were office, and that's the category that had the most significant reserve against it.
I totally understand that. Just I mean, for tracking purposes, I'm just trying to understand what the office non-performers are? Or maybe we can come back to that. So I guess, can you help me think about of your $178 million, 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 Laurie, I would start from the starting point of we closed this transaction, we had the ability to do all these fair value marks, PCD, non-PCD. So it's -- and since deal announcement, there was one distressed property sale prior to the deal announcement and then starting late in the third quarter and then fourth quarter 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. Denis called out and I caught out in our script, 8% total reserve against investor office of $900 million, very healthy reserve.
So on Page 22, we break out what are very small future maturities, right, $61 billion this quarter, $74 million in the next quarter. So within that $61 million, 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 second quarter of '25 to $70 million, 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 are up linked 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 million, $6 million 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 Denis in his comments talking about re-underwriting all of our loans, commercial loans in Q1 and Q2. Standard practice here.
Right. And so -- and I appreciate that. I appreciate all the details you guys have given your deck, it's so helpful. So sorry, just one more office question here. So of the $61 million that is maturing next quarter, I had in my notes that half of that actually was from an Eastern credit, you received, though. I guess, maybe can you just help us think about that $30 million 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?
So it wasn't -- it's an $11 million loan, David, right?
Yes. There's $11 million loan on non-accrual fully reserved for. I think what you said, Laurie, 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 Eastern portfolio.
Right. Okay. Your forward guidance, and I appreciate that you're going to refresh us in January. Just two things. Number one, your net interest income and margin guide, that does include the accretion schedule you laid out in Slide 8?
Yes.
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, they're -- 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 fourth quarter would be helpful.
Yes. I think, next year is going to look basically like what we have on the page, probably 22% to 23%. 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 just normal stuff. It 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, is probably a run rate for a bunch of quarters forward.
Great. And then just last question, Denis, to you. Can you help us think a little bit about M&A? You've completed this deal just how you see M&A in Eastern?
So thanks, Laurie. So our focus is on the integration of the Cambridge merger and even thinking back to the Century version, 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 got 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.
There are no further questions at this time. I will now turn the call over to Bob Rivers for closing remarks.
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 a happy and healthy holiday season.
Thank you. And this concludes today's conference call. Thank you all for participating. You may now disconnect.