Business context and reporting period
Eastern Bankshares, Inc. is a Massachusetts bank holding company operating banking and insurance agency businesses primarily in New England. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods, or December 31, 2020 for balance-sheet data.
Financial results and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $104.6m | $98.8m | $204.7m | $198.9m |
| Provision (release) for loan losses | $(3.3)m | $8.6m | $(3.9)m | $37.2m |
| Noninterest income | $45.7m | $47.7m | $100.9m | $81.0m |
| Noninterest expense | $107.3m | $100.8m | $201.4m | $195.9m |
| Net income | $34.8m | $29.9m | $82.5m | $38.3m |
| EPS, basic and diluted | $0.20 | Not applicable | $0.48 | Not applicable |
| Net interest margin, FTE | 2.69% | 3.23% | 2.70% | 3.49% |
| Efficiency ratio, GAAP | 71.39% | 68.82% | 65.89% | 70.00% |
At June 30, total assets were $17.05bn, deposits $13.25bn, loans net of allowance and deferred items $9.49bn, and shareholders’ equity $3.43bn. Cash and cash equivalents were $1.56bn; available-for-sale securities were $4.85bn. Borrowings were limited to $28.4m, primarily FHLB advances and borrower escrow deposits. Book value per share was $18.37 and tangible book value per share, a non-GAAP measure, was $16.33.
For the first half, operating cash flow was $59.6m, investing cash outflow $1.62bn and financing cash inflow $1.07bn; cash and cash equivalents decreased $489.8m. The company reported regulatory capital ratios of 29.13% total capital to risk-weighted assets, 28.08% Tier 1 and CET1 to risk-weighted assets, and 18.66% Tier 1 capital to average assets. It said it exceeded applicable requirements and was well capitalized.
Material changes versus comparable periods
- Net income rose 16.6% in Q2 and 115.4% for the first half. Management attributed much of the increase to lower credit-loss provisions, including releases in 2021 compared with substantial pandemic-related provisions in 2020.
- Net interest income increased, but net interest margin contracted as lower asset yields outweighed the benefit of lower funding costs. First-half net interest margin fell 79 basis points year over year.
- First-half noninterest income rose 24.6%, including higher interest-rate swap income and investment gains in rabbi trusts. Q2 noninterest income fell 4.0%, principally due to less favorable rabbi-trust marks and swap losses.
- Deposits increased 9.0% from year-end, reflecting strong flows partly attributed to government stimulus. Loans declined 1.1%, mainly as PPP balances ran off; commercial real estate lending increased.
- Available-for-sale securities increased 52.3% to $4.85bn. Their net unrealized position shifted from a $58.7m gain at year-end to a $4.8m loss at June 30, primarily attributed to a steeper yield curve. Accumulated other comprehensive income moved from $54.2m to a $6.2m deficit.
- The allowance for loan losses fell to $105.6m, or 1.10% of loans, from $113.0m at year-end. Nonperforming loans decreased to $41.6m, or 0.43% of loans, from $43.3m, or 0.45%.
Outlook, risks and unusual items
- Century Bancorp acquisition: The company agreed to acquire Century for $641.9m in cash. Century shareholders approved the agreement on July 7, 2021; regulatory approval and other customary closing conditions remained. Management expected completion in Q4 2021 and anticipated further transaction costs. It cautioned the deal would reduce IPO proceeds and that elevated equity from the IPO weighs on return on equity until deployed.
- No numerical earnings guidance: The filing provides no formal earnings or revenue forecast. Management said existing liquidity resources should meet foreseeable operational needs.
- Credit and COVID-19: Remaining modified loans not yet back to repayment totaled $149.8m, down from $332.7m at year-end. Potential problem loans were $492.1m. Retail, restaurant and hotel loans totaled $477.5m, $191.2m and $169.6m, respectively; management said these sectors remained particularly exposed to pandemic effects. Loan deferrals are not necessarily reflected in delinquency or nonaccrual measures.
- Accounting transition: The company expected to adopt the current expected credit loss (CECL) standard on January 1, 2022 and was still assessing the effect; a higher allowance could result.
- Legal settlement: A preliminary settlement of two overdraft and nonsufficient-funds class actions was reached; estimated settlement expense and related costs were $3.3m. Management said resolution of legal proceedings was not expected to materially affect the financial statements.
- Other items: Q2 included $3.5m of Century-related acquisition costs and the $3.3m legal settlement accrual. The company declared and paid a quarterly dividend of $0.08 per share. Mark-to-market changes in rabbi-trust investments and derivatives caused notable noninterest-income volatility.
- Key risks cited include COVID-19 and economic conditions, credit losses, interest-rate and securities-value changes, deposit outflows, competition, cyber and operational risk, regulation, and acquisition execution. Management stated disclosure controls were effective at June 30.
Important facts for investors to verify
- Whether Century receives regulatory approval, closes on schedule, and delivers expected strategic and financial benefits; also track remaining deal costs and funding of the cash purchase price.
- Whether credit quality continues to improve as deferrals expire, especially in commercial real estate, hotels, restaurants and retail, and whether the allowance remains adequate.
- The impact of CECL adoption on the allowance, retained earnings and regulatory capital beginning in 2022.
- How deposit growth, excess liquidity and securities reinvestment affect net interest margin, particularly given sensitivity to rate changes and the portfolio’s unrealized losses.
- Whether operating expense growth, including personnel, technology and acquisition spending, is offset by sustainable revenue growth; assess GAAP results alongside management’s non-GAAP measures.