Eastern Bankshares, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated results. Unless noted, amounts are U.S. dollars; financial figures are in millions.
Business context
Eastern Bankshares is a Massachusetts bank holding company operating a banking business and an insurance agency business, primarily in New England. At June 30, 2023, it reported $21.6 billion in assets and operated 97 branches.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Change / context |
|---|---|---|---|
| Net interest income | $141.6 | $137.8 | Up 2.8% |
| Net interest margin, fully taxable equivalent | 2.80% | 2.63% | Up 17 basis points |
| Provision for loan losses | $7.5 | $1.1 | Higher provision, reflecting loan growth and office CRE risk |
| Noninterest income | $53.8 | $41.9 | Up 28.5%; includes variable rabbi-trust investment results |
| Noninterest expense | $121.6 | $111.1 | Up 9.5% |
| Net income | $48.7 | $51.2 | Down 4.9%; diluted EPS $0.30 vs. $0.31 |
For the six months ended June 30, net loss was $145.4 million versus net income of $102.7 million in 2022, primarily because of a $333.2 million realized loss on AFS securities sold during the first quarter. Excluding management-defined non-core items, operating net income was $45.3 million for Q2 and $106.4 million for the first half, versus $52.5 million and $107.6 million, respectively, in 2022; these are non-GAAP measures.
- Balance sheet: Total assets were $21.58 billion, down 4.7% from year-end 2022. Loans were $13.96 billion, up 2.8%; deposits were $18.18 billion, down 4.2%; total borrowings were $351.2 million, down 52.6%.
- Liquidity: Cash and cash equivalents were $873.5 million, up from $169.5 million at year-end. Management reported $6.6 billion of total liquidity sources, including $5.8 billion of secured borrowing capacity, equal to 112% coverage of $5.9 billion of uninsured and uncollateralized customer deposits.
- Capital: Common equity Tier 1 ratio was 15.69%, total risk-based capital ratio 16.68%, and Tier 1 leverage ratio 11.72%. The company reported it remained “well capitalized.” Tangible equity to tangible assets was 8.9% (non-GAAP).
- Credit: Allowance for loan losses was $148.0 million, or 1.06% of loans. Nonaccrual loans were $30.6 million, or 0.22% of loans, down from $38.6 million at year-end. Potential problem loans rose to $221.5 million from $187.0 million.
- Cash flows, first half: Operating cash flow was $172.9 million; investing cash inflow was $1.75 billion, largely reflecting securities sales; financing cash outflow was $1.22 billion. Cash, cash equivalents and restricted cash increased $704.0 million.
Material changes and unusual items
- In March 2023, the company sold lower-yielding AFS securities for $1.9 billion in proceeds, realizing a $333.2 million loss. Proceeds supported higher cash balances and reduced wholesale borrowings. The transaction also reclassified accumulated securities losses into retained earnings and reduced regulatory capital ratios.
- Rising market rates increased asset yields, but deposit costs rose sharply: Q2 average interest-bearing deposit cost was 1.71%, compared with 0.10% a year earlier. Deposit competition and migration toward higher-cost certificates of deposit pressured funding costs.
- Deposits fell by $793.4 million from year-end. Certificates of deposit increased $726.9 million, while demand, interest checking and savings balances declined. Brokered CDs were $700.0 million at quarter-end.
- Unrealized losses on AFS securities remained substantial: $838.0 million at June 30, compared with $1.13 billion at year-end. Management attributed the losses mainly to interest rates, stated it did not intend to sell the securities, and considered it more likely than not it would not be required to sell before recovery.
- Commercial loans rated special mention, substandard or doubtful were 2.4% of commercial loans, up from 2.2% at year-end. Office-related CRE exposure was $829.4 million; $101.1 million of commercial real estate office loans were substandard, versus $52.6 million at year-end. None of the office-related loans was on nonaccrual.
- The company recorded a $44.6 million income tax benefit for the first half, principally due to the securities-sale loss and a $23.7 million deferred tax benefit associated with transferring securities after liquidating a subsidiary. It also established a $17.4 million valuation allowance against a capital-loss deferred tax asset.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management’s allowance forecast assumed a mild U.S. recession in the second half of 2023 and continued elevated inflation and further rate increases. A more severe modeled downside scenario would increase the allowance by approximately $11.1 million; an upside scenario would reduce it by approximately $6.4 million.
- Interest-rate sensitivity modeling estimated year-one net interest income would decline 3.5% under an immediate 200-basis-point rate increase and 6.9% under a 400-basis-point increase, relative to the flat-rate case. Management cautioned that these models rely on assumptions and are not precise forecasts.
- The company expected approximately $52.3 million of cash-flow hedge losses to be reclassified as a reduction of interest income over the following 12 months, based on the June 30 forward curve.
- Based on the FDIC’s proposed rule, management estimated a pre-tax special assessment of approximately $10.0 million related to protection of uninsured depositors at failed banks. Final amount and timing depend on the FDIC’s final rule and subsequent adjustments.
- Other cited risks include economic weakness, higher credit losses, deposit outflows and competition, securities-value declines, regulatory changes, operational and cybersecurity risks, and potential impairment of goodwill or deferred tax assets. Management said legal proceedings were not expected to have a material effect; it reported no material change to previously disclosed risk factors.
- Management stated existing resources, including access to brokered deposits and wholesale borrowing, should meet liquidity and capital requirements for the next 12 months. This is a forward-looking statement, not a guarantee.
Important facts for investors to verify
- Whether deposit levels, mix and funding costs stabilize, and how uninsured-deposit balances and available borrowing capacity evolve.
- Whether the securities repositioning improves ongoing earnings enough to offset the realized loss and the reduction in regulatory capital.
- Office CRE performance, risk-rating migration, potential problem loans, and the adequacy of loan-loss and unfunded-commitment reserves.
- Actual results versus the modeled interest-rate sensitivity and the expected $52.3 million hedge-related reduction to interest income.
- The final FDIC special-assessment rule and the company’s resulting expense.
- Underlying operating performance alongside GAAP results, noting that management’s non-GAAP adjustments exclude items that can materially affect reported results.