Eastern Bankshares, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Eastern Bankshares is a regional bank holding company with banking and insurance agency businesses, serving primarily eastern Massachusetts, southern and coastal New Hampshire, and Rhode Island. Financial statements are unaudited.
Financial performance
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Net interest income | $138.3 million | $128.1 million; up 7.9% |
| Net interest margin, fully taxable equivalent | 2.66% | 2.42% |
| Net income (loss) | $(194.1) million; diluted EPS $(1.20) | $51.5 million; diluted EPS $0.30 |
| Operating net income (non-GAAP) | $61.1 million; diluted operating EPS $0.38 | $55.1 million; diluted operating EPS $0.32 |
| Operating efficiency ratio (non-GAAP) | 59.06% | 60.39% |
| Net cash from operating activities | $100.5 million | $68.4 million |
Interest and dividend income increased 43.7% to $188.9 million, mainly as loan and short-term investment yields rose. Interest expense climbed to $50.6 million from $3.4 million, reflecting higher deposit rates and increased borrowing. Noninterest expense rose 6.8% to $116.3 million. GAAP noninterest loss was $278.3 million, primarily due to a $333.2 million realized loss on available-for-sale (AFS) securities.
Management’s non-GAAP operating net income excludes specified items, including the securities-sale loss and rabbi-trust effects; it is not a substitute for GAAP results. A $62.2 million income tax benefit was recorded in Q1 2023, including a $23.7 million deferred tax benefit related to transferring securities from a liquidated subsidiary and a $17.4 million valuation allowance against a capital-loss deferred tax asset.
Financial position, liquidity and capital
- Assets and loans: Total assets were $22.7 billion, little changed from year-end. Gross loans increased 0.7% to $13.7 billion; net loans were $13.5 billion. The allowance for loan losses was $140.9 million, or 1.03% of loans.
- Securities and repositioning: Total securities declined to $5.2 billion from $7.2 billion. In March, the company sold lower-yielding AFS securities for $1.9 billion of proceeds to strengthen liquidity and reposition its balance sheet. The sale generated the $333.2 million GAAP loss. AFS securities had $759.3 million of gross unrealized losses at quarter-end, down from $1.135 billion at year-end.
- Deposits and borrowings: Deposits fell 2.3% to $18.5 billion; demand deposits decreased $676.6 million, while certificates of deposit rose $343.0 million. Borrowed funds increased 53.7% to $1.14 billion, mainly from additional short-term Federal Home Loan Bank advances.
- Liquidity: Cash and cash equivalents were $2.14 billion. Management reported $5.0 billion of additional secured borrowing capacity and total liquidity sources of $7.1 billion, covering 107% of $6.7 billion in customer uninsured and uncollateralized deposits. These customer deposits represented 36% of total deposits. The filing separately estimates total uninsured deposits, including certain internal and collateralized accounts, at $8.4 billion.
- Capital: The company reported that it exceeded regulatory capital requirements and remained “well capitalized.” At March 31, total risk-based capital was 16.76%, common equity Tier 1 was 15.80%, and the Tier 1 leverage ratio was 11.09%. Tangible book value per share, a non-GAAP measure, was $10.88, up from $10.28 at year-end.
Investing cash flow was $1.92 billion, chiefly reflecting securities-sale proceeds; financing cash flow was an outflow of $51.8 million. The company paid $16.2 million of dividends and made no share repurchases during the quarter.
Changes, outlook and risks
- Compared with Q1 2022, higher asset yields lifted net interest income and the FTE net interest margin, but funding costs rose sharply. GAAP results swung to a loss because of the securities repositioning; management reported higher non-GAAP operating income.
- Management said the securities sale was decided in early March, before the failures of Silicon Valley Bank and Signature Bank. Proceeds increased cash and may be used over time to reduce wholesale funding. Management expects funding costs and funding betas to improve in 2023, but provided no specific earnings or financial guidance.
- About 34% of loan principal was indexed to market rates; $2.4 billion of floating-rate loans was hedged with swaps. The company’s model estimated Q1 2023 net interest income would fall 0.9% under an immediate 200-basis-point rate increase and 1.8% under a 200-basis-point decrease. Management cautions that modeled scenarios are not precise forecasts.
- Management’s allowance forecast assumed a U.S. recession beginning in Q3 2023. A modeled downside recession scenario would increase the allowance by about $9.0 million; an upside scenario would reduce it by about $4.9 million. These are sensitivities, not forecasts of actual provision expense.
- Office-related commercial real estate (CRE) loans totaled $1.2 billion. Management is monitoring exposure amid higher rates, hybrid-work-related occupancy changes, and lower property valuations. Three business-banking office-related loans totaling $0.8 million were non-accrual.
- Potential problem loans increased 37.5% to $257.2 million, or 1.9% of loans, primarily following downgrades in commercial and industrial and CRE portfolios. Special-mention, substandard, and doubtful commercial loans were 3.0% of commercial loans, versus 2.2% at year-end. In contrast, total delinquency improved to 0.37% from 0.50%, and nonperforming loans declined to $34.6 million, or 0.25% of loans.
- Other risks cited include deposit outflows and competition, interest-rate and securities-value volatility, credit deterioration, economic weakness, operational and cybersecurity risks, regulatory change, and potential impairment or deferred-tax-asset realization. Management reported no material change in the risk factors from its 2022 Form 10-K and no legal proceeding expected to materially affect financial condition or results.
Important facts for investors to verify
- Whether deposit trends, uninsured-deposit levels, and available contingent liquidity remain consistent with reported coverage after quarter-end.
- How the securities sale, reinvestment of proceeds, wholesale borrowing levels, and deposit pricing affect subsequent net interest margin and earnings.
- Whether CRE office exposure, potential problem loans, criticized commercial credits, and the allowance develop in line with management’s assumptions.
- The underlying drivers and sustainability of the $61.1 million non-GAAP operating net income, including reconciliation items and tax effects.
- Regulatory capital after the realized securities loss; the filing notes that realizing AFS losses reduced regulatory capital because those losses had previously been excluded from capital through AOCI treatment.