nCino, Inc. (NCNO) Q4 2022 Earnings Call Transcript
Eastern Bankshares, Inc. (EBC) Q2 2022 Earnings Call Transcript
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Eastern Bankshares, Inc. (EBC 2.26%)
Q2 2022 Earnings Call
Jul 29, 2022, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, and welcome to the Eastern Bankshares, Inc. second quarter 2022 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 known and unknown risks, uncertainties that may cause actual results or the timing of events to differ materially from those expressed or implied in such forward-looking statements.

Listeners are referred to the disclosures set forth — under the caption forward-looking statements in the earnings press release as well as the risk factors and other disclosures contained in the company’s recent filings with the Securities and Exchange Commission for more information about such risks and uncertainties. Any forward-looking statements made during this corporate management’s views and estimates only as of today. While the company may elect to update forward-looking statements, at some point in the future, the company specifically disclaims any obligation to do so, even if management’s views or estimate change, and you should not rely on such statements as representing management’s views as of any date subsequent to today. During the call, the company will also discuss certain non-GAAP financial measures.

For a reconciliation of such non GAAP financial measures to the comparable GAAP figures, please refer to the company’s earnings press release, which can be found at investor.easternbank.com. Please note, this event is being recorded. [Operator instructions] I’d now like to turn the call over to Bob Rivers, chair and CEO. Please go ahead, sir.

Bob RiversChairman and Chief Executive Officer

Great. Well, thank you, Sergio, and good morning, everyone, and thank you for joining our second quarter earnings call of 2022. Joining me today is Jim Fitzgerald, our chief administrative officer and chief financial officer. Our results during the second quarter continued to be strong, reflecting the benefits of investments we’ve made over the past year to strengthen our franchise within one of the most attractive markets in the United States.

Despite the uncertainty brought about by COVID and the shift to remote work, the impacts of higher inflation, in the specter of recession, Greater Boston is considered by many among the best-performing office markets in the country, bolstered by a high diversity industry sectors, relatively low reliance on large tenants and the tailwinds of strong demand for life sciences space. In addition to the financial leverage generated by the Century Bank acquisition eight months ago, the effects of which are reflected in our operating net income for the quarter, which was 42% higher than the prior quarter, we’re seeing early signs that recent staffing additions to enhance our commercial lending capabilities are contributing to commercial growth, net of PPP loans, which accelerated to a 10% annualized rate in the quarter. Since most of these new hires joined us in the past few months, we have yet to realize their full production potential, and we believe they’re joining our already highly talented team bodes well for the quarters ahead. Some of these new additions of senior leaders who also bring added expertise to networks within emerging areas of our commercial lending activities.

These expanded capabilities further add to those in the higher education and healthcare sectors, which we acquired through the Century transaction and in which we are gaining traction as well. As we have stated in the past, given these factors and continued strong pipelines, we believe we are still on track for a high single-digit growth in our commercial loan portfolios for the year. Residential and consumer lending balances also grew sequentially at double-digit rates on an annualized basis, reflecting the solid Greater Boston economy and our own increased emphasis on driving higher growth in these categories. In addition, due to our long-standing discipline with respect to deposit pricing in the face of rising interest rates, our already low-cost deposit base of just 6 basis points actually declined by one basis point during the quarter resulting in our net interest margin widening by 21 basis points, our largest single expansion in the quarter, since 2018.

Net of the transfer of about $300 million in cannabis and money service business deposits in early April, our total deposit balances increased slightly during the quarter, and as of quarter end was comprised by almost 60% by checking account balances and 98% by core deposits. We continue to be thoughtful about our branch locations and how they can expand and strengthen our strong deposit franchise and community outreach. Most recently, we opened a branch in Neena, Massachusetts, which complements our network in Boston’s affluent western suburbs. Overall, after taking Eastern Public and completing the largest acquisition in our long history, while supporting our customers and communities in the midst of some of the darkest days in the pandemic, we believe we are beginning to hit our stride in driving greater operating performance and delivering value to our shareholders.

As always, these results reflect the hard work and tremendous commitment of my 2,100 Eastern colleagues with whom I am privileged to work and whom I thank for all they do every day to serve our customers, our communities and each other. Once again, thank you for joining us today and for your interest in Eastern. And now I’ll turn things over to Jim for an in depth review of our financial performance and our outlook for the remainder of 2022.

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Thank you, Bob, and good morning, everyone. As Bob mentioned, we’re pleased with our second quarter results. We think they demonstrate very strong earnings momentum and include many of the benefits we had projected from the Century transaction last year, as well as the positive impact to our net interest income from higher interest rates. The outlook for interest rates has changed from our last call, and we’ve updated our outlook based on those changes, and we’ll also talk how the outlook impacts our interest rate risk management later in my remarks.

Net income was $51.2 million for the quarter or $0.31 per diluted share. Operating net income was $52.5 million or $0.32 per diluted share. Operating net income for the second quarter was 42% higher than the same quarter of 2021. Net interest income was very strong in the second quarter, rising 8% from the prior quarter as the net interest margin increased 21 basis points from Q1.

Higher rates improved our asset yields by 21 basis points, and our cost of funds was essentially unchanged from Q1. We also had a strong quarter of loan growth in all of our major portfolios, with commercial loans up 10% quarter-to quarter. Excluding PPP loans, residential mortgages were up 11% and consumer loans were up 13%. Each of these percentages are on an annualized basis.

Our board approved a dividend of $0.10 per share payable on September 15 to shareholders of record on September 2, 2022. We repurchased 4.2 million shares under our share repurchase program in the quarter, up from $2.9 million in Q1. The average purchase price for the shares, excluding commission costs, was $19.24 in the second quarter. First, I’ll make some comments on the balance sheet.

Assets were down $500 million from $22.8 billion to $22.4 billion in the quarter as deposits were lower by $200 million. This was due in part to the transfer in early April of the cannabis and money services deposits we acquired from Century. Cash and securities were down $800 million, offset by loan growth of just over $200 million. The securities portfolio was down $287 million, primarily due to lower market values.

All major loan categories were up for the quarter. Commercial loans, excluding PPP loans, were up $219 million or 10% annualized. Residential loans were up $53 million or 11% annualized, and consumer loans driven by home equity loans were up $43 million or 13% annualized. PPP loans were down $99 million in the quarter, and the total PPP portfolio only had $42 million remaining at June 30.

As mentioned above, deposits were down $229 million in the quarter, which reflected the transfer of the cannabis and money services deposits of $300 million in early April. Average deposits were down just under $500 million in the quarter, which we outlined on Page 12 of the presentation and also reflect the cannabis transfer. Shareholder equity decreased $289 million in the quarter due to the impact of the reduction in accumulated other comprehensive income and share repurchases in the period, partially offset by an increase in retained earnings. Turning to earnings.

As I mentioned, GAAP net income was $51.2 million or $0.31 per diluted share and operating earnings were $52.5 million or $0.32 per diluted share. We feel our results reflect very strong progress in many key areas. Net interest income of $137.8 million was $9.6 million or 8% higher than Q1 and benefited from the increase in interest rates in March and in the second quarter. Asset yields were up 21 basis points in the quarter and quarter over quarter and funding costs were essentially unchanged.

Our deposit costs were six basis points in the quarter, down one basis point from Q1. This combination of higher asset yields and stable funding costs allowed our net interest margin to expand by 21 basis points from 2.42% to 2.63%. The provision for loan loss was $1.1 million in the second quarter, compared to a reserve release of $500,000 in Q1 and a release of $3.3 million in Q2 of 2021. Noninterest income on an operating basis was $48 million in Q2.

Insurance revenues were $24.7 million in the second quarter, up 4% from the prior year quarter and down from $28.7 million in Q1, which is when we receive a higher portion of our revenue sharing payments from insurance carriers. Other operating line items were generally in line with either the prior quarter or prior year. The value of rabbi trust assets was down $7.3 million due primarily to declines in the stock market. This was partially offset by $1.3 million in gains from building sales which resulted in nonoperating noninterest revenue of negative $6.1 million.

Noninterest expense was $111.1 million in the second quarter. On an operating basis, noninterest expense was $114.4 million compared to $110.9 million in Q1, due primarily to an increase in salaries and benefits expense. We had a full quarter of expense for the equity plan in Q2, compared to one month’s expense in Q1 and a slightly higher incentive compensation expense compared to Q1. Occupancy, data processing and professional fees were all slightly lower in the second quarter compared to the first quarter and were partially offset by increases in marketing expenses.

I’ll include a few comments later in my remarks on the outlook for expenses. The tax rate in the second quarter was slightly higher than Q1, and we provide guidance for the full year tax rate on the outlook slide. Our marginal tax rate is higher than the average tax rate. And as projected earnings increase, the average rate will increase as well.

Asset quality continues to be sound. For the first half of 2022, charge-offs were essentially equal to recoveries and both were very, very modest. COVID modifications continue to perform as expected, and are down to approximately $20 million. There was an increase in nonperforming loans of approximately $25 million due to a movement to nonaccrual in one syndicated credit facility.

The credit facility is in workout, and we’re optimistic it will be resolved without a loss over the next few quarters. Away from that one credit, there was very little change from Q1. As I just noted, the provision for loan loss was $1.1 million compared to a release in Q1 of $500,000. Even with the increase in NPLs, the ratio of reserves to NPLs remained above 200%.

We wanted to review our outlook on Page 16 and make some additional comments. Last quarter, when we provided our outlook for 2022, we had incorporated 725 basis points increases by the Fed in our forecast. We are now assuming an upper bound for the Fed funds target of 3.5% by year-end 2022, which we believe aligns with the consensus view. With that rate forecast, we would expect net interest income of $570 million to $590 million in 2022.

This is up from the prior outlook of $530 million to $550 million, an increase of $40 million. As we outlined on Page 14 of the presentation, the current rate environment creates some different dynamics than we’ve had over the last few years. The increase in rates is clearly helping our net interest income. As I just outlined, we expect that to continue throughout the rest of the year and into 2023 where the impact will be felt for the full year assuming rates remain relatively unchanged in 2023.

The combination of higher rates are naturally asset-sensitive balance sheet and general economic uncertainties require us to start protecting for downside rate scenarios. To that end, we initiated a hedging program in Q2 to convert $1 billion of our variable rate assets to a fixed rate and would expect to do more of that in Q3. I wanted to note there are two primary drivers of our asset sensitivity. The first is our low-cost non-maturity deposits that are long-duration liabilities and the second is our high level of variable rate loans that have short-term repricing intervals.

We have historically used balance sheet swaps to reduce our asset sensitivity and are very comfortable continuing with that strategy. There’s no change in our guidance on noninterest income from last quarter as we still expect $180 million to $190 million for 2022. We did change our overdraft practices starting on July 1 that we previewed last quarter, and that reduction is included in this guidance. There’s no change in our operating noninterest expense guidance as we still expect between $445 million and $460 million for 2022.

As expected, we are watching wage inflation pressures carefully. We have taken some recent steps to increase wages for many of our branch and operations colleagues to help retain and attract workers. We also experienced wage pressure when we recruit for replacements. But we are still comfortable with the expense guidance we provided earlier in the year.

As I mentioned previously, we expect a slightly higher tax rate for 2022 due in part to higher earnings levels. We had a very strong quarter for loan originations on all of our major portfolios in Q2. We continue to expect commercial loan growth to be in the mid- to high single digits over time. Although as you can see from our Q1 and Q2 results, it can be a little volatile quarter to quarter.

We expect this growth to be more visible now that PPP loans have a relatively small impact. We do expect that over time, higher interest rates and a potential weakening economy may impact our commercial loan growth expectations, and we will update as we see any changes over the coming quarters. We have been interested in reducing the size of our investment portfolio over the last year. After considering a few options, we have entered into a flow agreement that enables us to purchase residential loans from embraced home loans.

Embrace is located in Rhode Island and has processed our originations and supported our mortgage efforts since 2016. The flow arrangement provides a means for us to purchase a portion of their originations for our balance sheet. We have started the process with a goal of redirecting the securities portfolio cash flow of approximately $80 million a month into loans. We don’t expect too much of an impact to our balance sheet in Q3, but we’ll provide an update on progress as the year progresses.

Our expectation is that we will see a reduction in the securities portfolio and a similar size increase in the residential mortgage loan portfolio as this program develops. We expect the deposit environment to get more challenging as the year progresses. Although we didn’t experience any deposit cost increase in the second quarter, we expect costs will begin to increase. We did see our average deposits declined quarter over quarter and expect volumes to continue to be challenging.

We’re close to completing the 5% share repurchase authorization that received regulatory approval last November. Future repurchase activity beyond that is subject to regulatory approval, and if approved, would be based on market conditions. We’ll continue to be very thoughtful about our use of capital. Thanks.

And Sergio, we’re ready for questions.

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Janet Lee from JPMorgan. Your line is open.

Janet LeeJ.P. Morgan — Analyst

Good morning.

Bob RiversChairman and Chief Executive Officer

Good morning, Janet.

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Good morning, Janet.

Janet LeeJ.P. Morgan — Analyst

I want to start with the deposit beta. So I understand the historically low deposit beta for you guys is the sort of around 18% of interest-bearing deposit beta in the right ballpark for what you guys experienced in the prior rising rate cycle? And would you expect your terminal interest-bearing deposit beta in this cycle to behave any differently versus that prior one?

Bob RiversChairman and Chief Executive Officer

Sure. And good morning, guys. Janet, nice to catch up with you. I think back in time, precisely when we did disclose our historical deposit base, it was slightly — was in the 20%, I think it was slightly higher than the number you referenced, but very similar.

And that was from the time period basically 2015 or ’16 through the end of ’18 or into 2019, and the beta was in the 20% range at that time. The one thing I always want to note about that is in 2019, the Fed reversed course actually started to lower rates and then the pandemic happened in 2020. So there was a huge acceleration. So internally, we feel like that’s a little bit of an optimistic number, quite honestly, because if rates continue to rise, the beta would have been higher.

So for our internal purposes, we assume a higher beta than that historical number, roughly 150% of that.

Janet LeeJ.P. Morgan — Analyst

OK. Is that what you’re assuming for terminal? Or is that what you’re assuming in the NII — 2022 NII guide?

Bob RiversChairman and Chief Executive Officer

Yes. Terminal, you might have to define for me since I’m not clear what you mean by that?

Janet LeeJ.P. Morgan — Analyst

So would you expect 150% higher interest-bearing deposit beta versus the prior like 20% range and that being achieved by the end of 2022 or that leads in — I mean, flows through, say, like mid-2023 or to basically beyond the end of 2022?

Bob RiversChairman and Chief Executive Officer

Sure. No, sorry. Thanks for clarifying. So I think we’re at July of 2022.

In the second quarter, we didn’t have any increases. So I don’t expect that to be in place by the end of this year. We used that 150% of that 20% beta is really over time. So we would extend well past 2022.

Rates move very quickly here. It’s pretty hard to calibrate those kind of calculations in the short term.

Janet LeeJ.P. Morgan — Analyst

OK. And on your asset sensitivity, as you’re trying to reduce that to protect from potential rate downside scenarios. Can you give us an update on your NII sensitivity in terms of how much annualized NII you would get from, let’s say, a 25 basis point rate increase in Fed funds?

Bob RiversChairman and Chief Executive Officer

So we’re about to do our 10-Q next week. We’ll have information in there. We do a number of scenarios. That one isn’t one of them.

So it’s — I don’t think I can answer that question, but we will provide the normal disclosures in the 10-Q next week.

Janet LeeJ.P. Morgan — Analyst

OK. Fair. And on deposits growth. So I get that it’s getting more challenging to grow deposits given what the Fed is doing, but it looks like you guys still managed to grow deposits modestly on a period-end basis after accounting for the $300 million cannabis deposits.

So how should we think about sort of the magnitude of the decline in deposits and the back half of 2022? And how should I think about the mix of noninterest-bearing deposits to total going from the current 35%?

Bob RiversChairman and Chief Executive Officer

Right. No, very timely question. I think a few responses I give, Janet. Eastern’s history has been a great deposit gatherer, right? If you look at our cost of funds and you look at our deposit growth over really an extended period of time, I think it compares very favorably with our peers in the industry.

That said, deposits are — there’s been a total change in deposits over the last month. They are certainly two months, and it’s — we had great deposit growth as did the industry in 2020 and 2021. And clearly, we’re going to see some of that be challenged. So it’s hard for us to know exactly how that’s going to play out, but we did signal — we don’t think the deposit growth that we’ve had historically is going to be a great measure for the next period of time.

Deposits are going to be tough to grow, we believe. I think our deposit mix, which we look at in total, not just any one particular category is quite strong. As interest rates increase, we do see what we would consider deposit mix shifts from some of our transaction-related accounts into more interest sensitive accounts like money market deposit accounts, for example. So we do expect that shift to occur.

It has in previous cycles and the reasons for it are kind of obvious, right, as rates are higher people gave more attention to that. That’s factored in the outlook that we gave for net interest income, and we would expect that to continue beyond ’22 as well.

Janet LeeJ.P. Morgan — Analyst

OK. My last question on loan growth. The color you gave on the flow agreement, that was helpful. So is it fair to assume that the resi growth in the back half of 2022 might slow down a little bit versus what you experienced in the second quarter? And that can you continue growing the consumer balances and then maintain this pace through the back half of 2022? So how should I just think about the overall residential and consumer loan growth for full year 2022?

Bob RiversChairman and Chief Executive Officer

Sure. So let me just — there’s a lot there. Let me unpack it sort of a little bit one step at a time. So I’m going to start with home equity.

We’ve — and like many in the industry, we saw a very strong growth in home equity product in the second quarter. It was great to see. We feel like we’re tracking maybe not for the high growth rate that we had this quarter to continue, but the growth in dollars to continue. It’s a relatively small portfolio, so the 15% or 13% that we had was off a relatively small base.

But we do expect continued progress in the home equity portfolio. The percentages I would direct you more toward the dollar growth and the percentage growth in that particular category for that reason. I’d break down the residential portfolio into two components going forward up to this point, and we haven’t had — we’ve just initiated the arrangement with Embrace. So that’s not in any of our historical numbers.

The growth that you saw in residential loans in the quarter and what we had in the previous quarter as a result from our organic origination teams here at Eastern. Similarly, I think the growth rate may come down a little bit, but the dollar growth that we saw in the second quarter is something I think we think is sustainable for the rest of the year. Embrace would be sort of the new category as we get going, we’ll make sure that’s easy — we’ll try and make that easier to understand. That will also show up in residential loans.

But in terms of pegging growth, I look at the securities portfolio cash flow, our goal here is to kind of redirect those cash flows away from the securities portfolio into the residential loan category. So that’s — so you’ll see more growth in the residential loan because of that, but that will be driven by the Embrace relationship. And as I said, as we get going, it doesn’t have an impact. We’ve just started literally in July, takes a while for the applications to flow through and become originations.

So as we get closer to the end of the third quarter, we’ll try and be very transparent on that so that you can see that.

Janet LeeJ.P. Morgan — Analyst

OK. Great. Thank you.

Operator

Your next question comes from Mark Fitzgibbon. Your line is open.

Mark FitzgibbonPiper Sandler — Analyst

Good morning guys. First, I wondered if you could share with us trust and investment advisory revenues held up really well this quarter. And I’m curious where AUM stands and what your flows look like this quarter?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Mark, good morning. it’s Jim. AUM is down. I don’t have the precise amount that it’s down.

I did see your note and anticipated that question. And I think there’s a couple of things that happen. There’s some timing things about when fees are charged. And we don’t see anything different than what you would expect in fees.

The AUM is down, not as much as the market because there’s fixed income assets in there, etc. But the fees are down a little bit quarter to quarter. And our own internal view that was in line with what we expected. They were growing up until the market reversal at the end of the year.

So there’s a little bit of a catch up in some of that, and we do have some trust assets that are a little bit less sensitive to market moves than the asset management side of that. But we didn’t see anything there that was surprising to us.

Mark FitzgibbonPiper Sandler — Analyst

OK. And then secondly, Jim, I wondered if you could give us any more color around that SNC that went nonaccrual sort of what industry it was and what the collateral backing it looks like any timing on resolution?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sure. So it’s — as you mentioned, it’s a syndicated credit were participant. It’s local. It’s in workouts.

Workouts always take a little bit more time than anyone would like, but we believe that, that workout process will happen. It may take a couple of quarters, but it will be resolved, and we don’t anticipate a loss.

Mark FitzgibbonPiper Sandler — Analyst

OK. And then last question I had is, I wonder if you could just give us a little more detail on the relationship with Embrace home loans. I assume you’ve given them kind of the types of loans that you want to buy. What sort of pricing arrangement have you made with them for the loans that you flow?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sure. And just for those on the phone who aren’t aware of this relationship, Embraces independently owned mortgage company in Rhode Island. They have — we have outsourced our process. So we outsourced our process into them back in 2016 and has been a very successful relationship.

We have what we would call a risk acceptance criteria for our mortgage loan products. We’ve provided that to them. There’s a limitation on states that will accept originations from. But the goal is to make it look and feel as much like an Eastern originated product as possible from a credit perspective.

We are in some states that we don’t do business in today, but most of those are very close to home.

Mark FitzgibbonPiper Sandler — Analyst

In pricing, Jim?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sorry. Yes. So it’s price — there’s a daily pricing formula based on Federal Home Loan Bank rates with a spread. And there’s a premium paid to Embrace for both the interest rate and also, we are servicing the loan to Eastern.

Mark FitzgibbonPiper Sandler — Analyst

Thank you.

Operator

Your next question comes from Laurie Hunsicker from Compass Point Research. Your line is open.

Laurie HunsickerCompass Point Research and Trading — Analyst

Great. Thanks. Good morning. Just staying with Embrace here.

So this is a national footprint. You said most of it though will be focused to New England. Am I hearing that right?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Yes, the East Coast, Laurie. So there’s a number of states beyond New England, but it’s generally speaking, all in the — it’s all in the East Coast and generally speaking, closer to home, close to home, but not just in New England.

Laurie HunsickerCompass Point Research and Trading — Analyst

Great. Thanks. And then what is the FICO you’re targeting? And what is the FICO in terms of how low you go?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

So as I said, there’s — we have what we call a risk acceptance criteria. It’s the same criteria that we use for our own originations. So there’s no change in credit appetite here or anything like that. And in some ways, it’s a little bit tighter than their own criteria.

But the expectation and belief and confidence is that these originations, the credit quality will look like our own portfolio, absent the fact that they’re not just from Massachusetts, as I said earlier.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. So your average FICO then, I probably don’t have a complete refresh number, but then that puts you in the like mid-$700, $750, $760, is that right?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

No. I don’t know the answer to that question, Laurie. We can follow up. But the credit quality of our residential book is quite high.

We can follow up with some particulars on that. I don’t know it off the top of my head.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. Great. And then just one more question on this. Is there a plan to also capture the customer, capture the deposit relationship? Or how do you think about that?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

So as I mentioned, we’re servicing the loans, so we would have that customer relationship. We’re in very early days here, very early beginnings of the program. So we’ll try and figure that stuff over time, but we will be servicing the loans and have the relationship from that perspective.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. OK. And sorry, just last question on this. How much do you have to add in the next year or so on this?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Yes. It’s — I think, as I mentioned a couple of times and really over a couple of quarters, we have — the cash flow from the securities portfolio is about $80 million a month. Our initial plan here is to just get started, see what happens, make sure it’s working well for both ourselves and Embrace, as I said earlier, we have a strong partnership with them. So it’s important.

It works for them and works for us. I think our expectation is we would let this go for the next couple of months, maybe through the end of the year, and we would reevaluate and obviously Embrace will have to reevaluate as well.

Laurie HunsickerCompass Point Research and Trading — Analyst

Got it. Got it. OK. And then jumping over to your net interest income, within your $138 million of net interest income, how much of that was accretion income, merger accretion income?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Very little, Laurie. I think I remember in this conversation back when we closed the Century transaction. And the overall impact on an annualized basis in the early years post Century was less than $2 million or $3 million. It’s a very small number.

The annualized impact of the accretion of the marks, let me be more clear.

Laurie HunsickerCompass Point Research and Trading — Analyst

Just checking. I know it was the reversal — so I’m looking — if I look at your margin then just ex PPP because you had 11 basis points in last quarter and five basis points on PPP this quarter I mean, so your core margin was really up 27 basis points, just remarkable. Can you help us think about especially with the $1 billion hedge that you just put on. How we should be thinking about margin just as we look to September? And I certainly appreciate the guide that you’ve given us, but just some moving parts that would be super helpful to kind of understand that piece.

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Yes. OK. Sure, Laurie. I’ll try.

It’s — as we outlined in the outlook, we do see a very nice increase from what the prior outlook was, $40 million for this year. If you look at our margin, there were, it was confusing in part because of Century and also PPP, as you mentioned. The increase from $242 million to $263 million, we would — we don’t have a number for what we would expect that over the second half of the year, but we do see continued improvement in it. And I think one of our strategic challenges, as we’ve talked in other calls is to improve that margin.

So we’re very excited by that. And hopefully, the guidance on the net interest income itself can help you with that — those calculations.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. I mean, yes, I can back into it. So OK. That’s great.

I appreciate your guidance. Finally, can you just give us a little bit of a refresh on sort of the warning signals starting to flash where we stand on office in terms of how you see things, what your balance is there? Any details you can give us? And then same question on leverage lending. Can you give us a refresh on those two categories?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sure. Sure. So our office portfolio is a little bit — these are outstanding, a little bit less than $1 billion. That’s made up of three major sectors.

There’s medical, there’s about $100 million of that medical offices, things that are combined retail office are about one-thirds of it, residual amount is what you would think of as office space. Most — we do very little office space in Boston proper. So there’s very little in Boston itself. We have and we do with all of our portfolios, very extensive reviews.

And in this particular climate, we did an office review just here recently. I think the things that we would say about it or I would say, after that review is — and I said this a lot when we were talking about COVID modifications, we have a very great customer base. We deal with very good sponsors. We worked very hard to get those clients.

So when we review our office exposure, the first thing we feel very good about is the people we’ve done business with, as I said, our clients. They’re really great sponsors. We work very hard to retain those relationships. So it’s obviously an area that’s under a lot of — we’re watching very carefully.

But as we did those reviews, we felt very good about our customers and their ability there. And when we think about our overall exposure, as I said, it’s not just office itself, it’s those three sectors. So reasonably good diversification from that perspective. Leveraged lending.

Yes, just to leverage lending, we don’t have a separate leverage lending group. We obviously support customers who do things like acquisitions and take on additional leverage to do some other business objectives. But we don’t have a specific leverage lending group. So it’s difficult to give you any — that’s not something we’re oriented to do in the way that you asked the question.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. OK. And then just on office, do you have an updated LTV there?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

I don’t. The LTV is our LTVs we do disclose in our public documents, they’re all, we think, very appropriate and the office would be very similar to those.

Laurie HunsickerCompass Point Research and Trading — Analyst

OK. OK. Great. And then Bob, just one last question to you.

If you can talk a little bit about your M&A appetite here. How you’re thinking about things, obviously, the Century deal went very, very well, but interest rate marks are very painful on a buyer’s tangible book. Can you just refresh us in terms of how you view M&A currently? What you’re seeing out there? What makes sense to you?

Bob RiversChairman and Chief Executive Officer

Yes, sure. Thanks, Laurie. I mean, certainly, we’re very interested in any opportunities that might come our way. We’re ready engage organizationally and undertake those as they arise.

Certainly, we’re going to evaluate each opportunity on its financial merits and whether it be the impact of interest rate marks impact on any dilution to our tangible book value. We’re very careful and sensitive to. So again, we’ll evaluate them as they come across. But certainly, we remain interested in engaging in those conversations.

But for now, we’re really encouraged that we have this opportunity to really lean into our organic results. We’ve been building the engine here, particularly in the commercial lending groups. You can see the results of those starting to pay off. So we’re very excited about our prospects in that regard.

And really, after a period of a couple of years where we were very busy with both the IPO and the integration of Century to really have a year that’s cleaner, if you will, to focus fully and entirely on continuing to build the organization’s capability is really just a tremendous opportunity for us and one that we’re taking advantage of.

Laurie HunsickerCompass Point Research and Trading — Analyst

Thank you for taking my question.

Bob RiversChairman and Chief Executive Officer

Sure. Thank you.

Operator

Your next question comes from Damon DelMonte from KBW. Your line is open.

Damon DelMonteKeefe, Bruyette and Woods — Analyst

Hey. Good morning, guys. I hope everybody is doing well today. Just — a lot of great questions asked and answered.

So just a couple of follow ups here. Credit obviously remains strong, absent the one Shared National that moved into nonperforming status. But as you kind of look at the — some of the underlying trends in the Greater Boston market and New England market. How are you feeling about provision level going forward? Do you feel that you’re going to be able to keep it similar to this quarter’s level? Or do you think you’re going to need to start to incorporate some measure of factors related to economic uncertainty? And I know you haven’t adopted so yet.

I know that comes up at the end of the year, but just kind of what your thoughts there.

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sure. Just one technical thing in. We did adopt CECL January 1 of this year. So…

Damon DelMonteKeefe, Bruyette and Woods — Analyst

My mistake.

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

No Worries. So I think I’m going to answer your question, I’m going to break it into two components. I think CECL, do CECL second, right? I think our view of the local economy and where we have lent, we feel cautiously optimistic about. Obviously, there’s uncertainty and volatility in today’s market, more so than there was certainly six months ago.

But Boston is doing very well. We think our position, the way that we’ve lent our history, our customer base is really strong and can continue to do very, very well, in spite of the fact that it’s likely to get a little bit more volatile. So we’re cautiously optimistic there. That’s what we read the same publications that everybody else as and are certainly aware of recession fears, et cetera, and we tried to lead that into our outlook as well.

So on the fundamental credit side, I think we feel very good. We’re always — everybody is always worried about credit for all the right reasons. And we’re watching it very carefully because we talked about in the office portfolio in particular. But we do feel very good.

And as I reaffirm, we feel very good about our customers in that space. We have a great staple of leading customers in our market. I think in terms of the provision and CECL, it’s a little bit hard to say. As you know, CECL starts with an economic forecast, the forecast that we used and I think most banks used for this quarter expected a slowdown but not a recession.

And how that forecast evolves into the third and fourth quarter will — and that forecast comes from outsiders. It’s not an internal forecast. So I think it’s a little bit hard to say. We do feel like our underwriting statistics, which play a role in those CECL models are very, very prudent and very strong.

And we don’t see any major issues as we’ve talked about in a couple of ways here. So I don’t — but it’s hard to give you an answer on the provision based on CECL because of that thing that’s a little bit outside of our control. If you look at the results this quarter, the actual allowance for credit losses essentially stayed the same, went down very slightly, and we had some loan growth, and that’s what resulted in the $1 million provision that we put forth.

Damon DelMonteKeefe, Bruyette and Woods — Analyst

Got it. OK. That’s helpful. I appreciate the color.

And then, I guess, secondly, obviously, very active to the buyback this quarter. Should you guys exhaust that during this back half of the year? What are your thoughts on seeking out approval for a new buyback? Or is that something that you would wait until 2023, ’24?

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Sure. So just to repeat what you said in there, we are very close to exhausting that first 5% authorization. What I said in my remarks and what we say in the deck is essentially all we’re going to say, Dam, which is it requires regulatory approval. We respect that, and we understand that they need to do their process.

So we don’t like to — we’re not going to say anything more until we have something else to say.

Operator

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

Bob RiversChairman and Chief Executive Officer

Well, thanks, everyone, for joining the call, for your interest to be your questions, and have a great rest of summer.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Bob RiversChairman and Chief Executive Officer

Jim FitzgeraldChief Administrative Officer and Chief Financial Officer

Janet LeeJ.P. Morgan — Analyst

Mark FitzgibbonPiper Sandler — Analyst

Laurie HunsickerCompass Point Research and Trading — Analyst

Damon DelMonteKeefe, Bruyette and Woods — Analyst

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