Eastern Bankshares, Inc. — Q1 2021 Form 10-Q
Business and period. Eastern Bankshares is a Massachusetts bank holding company operating banking and insurance businesses, primarily in New England. This unaudited filing covers the three months ended March 31, 2021; income and cash flow comparisons are with Q1 2020, while balance-sheet comparisons are with December 31, 2020. Amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Total assets | $16.73 billion | Up 4.8% from $15.96 billion at December 31, 2020 |
| Net interest income | $100.1 million | $100.1 million in Q1 2020 |
| Net interest margin (FTE) | 2.71% | 3.80% in Q1 2020 |
| Noninterest income | $55.2 million | Up 65.5% from $33.4 million |
| Noninterest expense | $94.0 million | Down 1.2% from $95.2 million |
| Net income | $47.7 million; $0.28 per basic and diluted share | $8.4 million in Q1 2020; per-share data was not applicable then |
| Operating cash flow | $64.9 million provided | $31.6 million used in Q1 2020 |
| Cash and cash equivalents | $1.86 billion | Down $193.7 million from year-end |
| Loans / deposits | $9.92 billion gross loans; $12.98 billion deposits | Loans up 1.9%; deposits up 6.8% from year-end |
| Borrowed funds | $29.4 million | Up $1.3 million from year-end |
| Shareholders’ equity | $3.39 billion | Down from $3.43 billion at year-end; Q1 included $80.4 million of after-tax other comprehensive loss |
- Earnings drivers: Net income rose 464.4% year over year, principally reflecting a $29.2 million swing in loan-loss provisioning—from a $28.6 million provision in Q1 2020 to a $0.6 million release in Q1 2021—and higher swap and rabbi-trust investment income. Management’s non-GAAP operating net income was $46.5 million versus $10.9 million; this measure excludes selected items and is not a substitute for GAAP results.
- Margins and revenue quality: Net interest income was nearly unchanged despite larger average earning assets. Lower market rates reduced loan and securities yields; net interest margin fell 109 basis points. Q1 2021 included $8.3 million of net PPP fee accretion and favorable mark-to-market changes in customer swaps and rabbi-trust investments, which can be variable.
- Credit and portfolio: Allowance for loan losses was $111.1 million, or 1.12% of loans, down from $113.0 million at year-end. Nonperforming loans were $44.0 million, 0.44% of loans, versus $43.3 million and 0.45% at year-end. COVID-modified loans still in deferral totaled $178.4 million, down from $332.7 million; $807.3 million of the $985.7 million modified since program inception had resumed payments.
- Liquidity and capital: Management reported the company exceeded applicable regulatory capital requirements and was “well capitalized.” Reported capital ratios included 29.80% total capital to risk-weighted assets and 28.67% common equity tier 1. Additional stated borrowing capacity was approximately $4.42 billion, including FHLB, Federal Reserve, PPP facility and unsecured lines; availability depends on collateral and facility terms. The filing says existing resources should meet foreseeable operating liquidity and capital needs.
- Cash flow and securities: Investing activities used $1.07 billion, primarily reflecting $1.14 billion of securities purchases; financing provided $816.0 million, mainly from deposit growth. Available-for-sale securities rose to $3.99 billion, but their net unrealized position shifted from a $58.7 million gain at year-end to a $37.5 million loss at quarter-end, primarily due to interest rates.
Outlook, material events and risks
- Management said COVID-19’s economic effects and implications for customers were expected to remain significant. It could not reasonably estimate how much of the deferred-loan balance might become delinquent after deferral periods. Hotels had the highest reported modification share among listed high-risk industries: 51.6% of hotel loans.
- The company originated about 4,700 PPP loans totaling $452.6 million in Q1. It expected most remaining 2020 PPP originations to be forgiven during 2021; forgiveness timing and fee recognition affect reported balances and income.
- On April 7, 2021, after quarter-end, Eastern agreed to acquire Century Bancorp for $641.9 million in cash. Century had $6.4 billion in assets and $5.4 billion in deposits at year-end 2020. Closing was expected in Q4 2021, subject to regulatory and shareholder approvals. Risks include delayed or failed closing, integration costs, customer or employee losses, asset quality, and additional compliance demands related to Century’s marijuana-related and money-services-business customers.
- Interest-rate sensitivity modeling estimated a 22.1% increase in year-one FTE net interest income under an immediate +200-basis-point parallel rate shift and a 4.8% decrease under a −100-basis-point shift. These are model estimates, not forecasts, and the filing notes limitations in modeling low or negative rates.
- Eastern anticipated adopting the current expected credit loss standard (CECL) on January 1, 2022 and was still assessing its impact. The filing also identifies economic, credit, interest-rate, securities-valuation, cybersecurity, regulatory and acquisition risks. Management reported effective disclosure controls as of March 31, 2021.
Important facts for investors to verify
- Whether the unusually large year-over-year earnings increase persists after separating reserve releases, PPP fee accretion and market-sensitive swap and rabbi-trust gains.
- How loan performance develops as COVID-related deferrals end, particularly in hotels, restaurants and other exposed industries, and whether the allowance remains adequate.
- Effects of securities valuation changes and interest-rate movements on accumulated other comprehensive income, capital and net interest margin.
- Century acquisition approvals, final funding and integration costs, expected benefits, and management of the acquired business lines’ compliance risks.
- CECL implementation progress and any later disclosed estimate of its effect on the allowance and retained earnings.