Eastern Bankshares, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited results. Eastern is a Massachusetts-based bank holding company with banking and insurance agency businesses, operating primarily in New England.
Financial performance and position
Amounts in U.S. dollars; financial figures are in millions unless stated otherwise.
- Q3 earnings: Net interest income was $152.2, up 48.2% year over year; GAAP net income was $54.8, up 47.6%; diluted EPS was $0.33 versus $0.22. Total revenue was $195.5 versus $145.9.
- Nine-month earnings: Net interest income was $418.1, up 36.0%; net income was $157.5, up 31.7%; diluted EPS was $0.94 versus $0.69. Total revenue was $549.7 versus $451.5.
- Net interest margin: 2.87% for Q3, versus 2.53% a year earlier; 2.64% for the nine months, unchanged year over year. Deposit and borrowing interest expense rose as rates increased.
- Noninterest items and costs: Q3 noninterest income was nearly flat at $43.4. Nine-month noninterest income fell 8.7% to $131.6, notably reflecting rabbi-trust investment losses and net securities-sale losses. Noninterest expense rose 18.1% in Q3 and 12.1% for nine months, partly due to Century acquisition-related staffing, compensation, occupancy and technology costs.
- Loans and credit: Gross loans were $12.9 billion, up 5.1% from year-end 2021. The allowance for loan losses was $131.7, or 1.02% of loans, compared with $97.8, or 0.80%, at year-end; the increase includes the $27.1 CECL adoption adjustment. Nine-month net charge-offs were $0.3. Nonaccrual loans were $34.0, or 0.26% of loans.
- Deposits, liquidity and borrowings: Deposits declined 4.6% to $18.7 billion from year-end; estimated uninsured deposits were $9.8 billion. Cash and cash equivalents fell to $158.4 from $1.23 billion. Borrowed funds increased to $422.7 from $34.3, including $384.2 of FHLB advances. The company reported $1.8 billion of additional FHLB borrowing capacity, a $543.2 million available Federal Reserve line and $790.0 million of discretionary credit lines.
- Capital and comprehensive income: Total assets were $22.0 billion, down from $23.5 billion at year-end. Shareholders’ equity fell to $2.42 billion from $3.41 billion. Nine-month other comprehensive loss was $922.1, largely from securities and cash-flow hedge fair-value changes; the AFS portfolio had $1.185 billion of gross unrealized losses. The company said it remained well-capitalized; its September 30 total risk-based capital ratio was 18.47%.
- Cash flow: For the nine months, operating cash flow was $226.5; investing activities used $572.5 and financing activities used $727.4. The net decrease in cash, cash equivalents and restricted cash was $1.07 billion.
Material changes versus comparable periods
- Profit growth primarily reflected higher average interest-earning assets following the 2021 Century acquisition and higher asset yields. Q3 net interest income increased faster than funding costs, but deposit costs were rising.
- Loan growth was concentrated in commercial real estate, residential real estate, home equity and construction; business banking balances declined, in part as PPP loans ran off.
- Deposits declined amid runoff of acquired and stimulus-related balances, market competition for deposits and a $278.0 million transfer of cannabis-related and money-service-business deposits.
- Shareholders’ equity and tangible book value were materially reduced by market-value losses, particularly on available-for-sale securities. Nine-month repurchases totaled $170.8 million; the company completed its prior authorization and disclosed a new program of up to 8.9 million shares or $200 million through August 2023.
Outlook, risks and unusual items
- Management expected 2022 rate increases and anticipated early-2023 increases to support year-over-year net interest income in Q4 2022 and into 2023, while noting greater uncertainty for 2023. Rate sensitivity modeling showed estimated net interest income down 1.3% under an immediate 200-basis-point rise and down 6.6% under a 200-basis-point fall, relative to the modeled flat-rate case.
- Management’s September economic forecast assumed slower growth and a mild 2023 recession, with inflation and rising rates among the cited pressures. The filing identifies risks including credit deterioration, deposit outflows and increased borrowing needs, securities-value declines, competition, cybersecurity, regulatory and litigation exposure, and higher FDIC assessments.
- The company estimated a noncash defined-benefit pension settlement loss of $10–$15 million for Q4 2022; the final amount was not yet determinable.
- PPP loan balances fell to $23.1 million from $331.4 million at year-end. Management expected $0.4 million of remaining net PPP fees to be recognized during the rest of 2022 and said declining PPP fee accretion had weighed on margin.
- Management reported no material pending legal proceeding expected to affect results. It also reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether deposit runoff continues, how uninsured deposits behave, and the pace and cost of replacement funding.
- How rising rates affect net interest margin and funding costs, including actual results versus the filing’s modeled rate scenarios and management’s outlook.
- Whether the large unrealized securities losses remain primarily rate-related and how they affect tangible capital, liquidity or securities-sale decisions.
- Credit trends in commercial real estate, pandemic-affected sectors and other potential problem loans, and the adequacy of the CECL allowance.
- The final pension settlement charge, continued share repurchases and the effect of these items on capital and per-share book value.