Eastern Bankshares, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Eastern is a regional bank holding company operating primarily in New England. Unless stated otherwise, financial results below are for continuing operations; the insurance agency business is presented as discontinued operations. Dollar amounts are in millions.
Key financial metrics
| Metric | Q3 2023 | Comparable period | Nine months 2023 | Comparable period |
|---|---|---|---|---|
| Net interest income | $137.2 | $152.2 in Q3 2022 | $417.1 | $418.1 in 2022 |
| Net interest margin, FTE | 2.77% | 2.87% in Q3 2022 | 2.74% | 2.64% in 2022 |
| Net income (loss), continuing operations | $63.5 | $52.8 in Q3 2022 | $(94.2) | $145.6 in 2022 |
| Net income (loss), including discontinued operations | $59.1 | $54.8 in Q3 2022 | $(86.3) | $157.5 in 2022 |
| Diluted earnings (loss) per share, continuing operations | $0.39 | $0.32 in Q3 2022 | $(0.58) | $0.87 in 2022 |
| Allowance for loan losses | $155.1 at Sept. 30 | $142.2 at Dec. 31, 2022 | 1.12% of loans | 1.05% at Dec. 31, 2022 |
- Q3 interest and dividend income rose 28.1% to $202.2, but interest expense increased to $65.0 from $5.6, chiefly as deposit and borrowing costs rose. Q3 noninterest expense was $101.7, up 6.2%; the GAAP efficiency ratio was 65.07%, versus 55.77% a year earlier. The operating efficiency ratio, a company-defined non-GAAP measure, was 60.83%, versus 54.49%.
- Q3 continuing-operations earnings benefited from a $16.2 income tax benefit, compared with $16.7 of tax expense a year earlier. The nine-month continuing-operations loss principally reflects the $333.2 loss on sales of available-for-sale securities in the first quarter.
- Operating net income, a non-GAAP measure excluding specified items, was $52.1 in Q3 and $146.3 for nine months, down 2.8% and 3.3%, respectively, year over year.
- Nine-month cash from operating activities was $208.9; investing activities provided $1,855.7, primarily reflecting securities sales; financing activities used $1,625.3. Cash and cash equivalents were $608.8 at quarter-end.
Financial position and material changes
- Total assets were $21.1 billion, down from $22.6 billion at December 31, 2022. Gross loans increased 2.5% to $13.9 billion; deposits declined 8.2% to $17.4 billion. Deposit mix shifted toward certificates of deposit, which rose 52.2% to $2.5 billion, while demand, interest checking, and savings balances declined.
- Total securities fell 34.2% to $4.7 billion following the March 2023 sale of available-for-sale securities for $1.9 billion in proceeds. The sale generated a $333.2 million realized loss. Remaining AFS securities had $995.7 million of gross unrealized losses at quarter-end; management attributed the declines primarily to interest rates, reported no credit-loss allowance, and said it did not expect to be required to sell before recovery.
- Total borrowed funds were $715.4 million, including $673.5 million of FHLB advances. Regulatory capital ratios remained above well-capitalized thresholds: total risk-based capital 17.03%, CET1 16.00%, and Tier 1 leverage 12.27%.
- Uninsured deposits were estimated at $7.4 billion including specified internal and collateralized accounts; excluding those accounts, uninsured and uncollateralized deposits were $5.7 billion, or 32% of deposits. Cash plus secured borrowing capacity totaled $5.9 billion, which management said covered 105% of those deposits.
- Book value per share was $13.87 and tangible book value per share, a non-GAAP measure, was $10.14, compared with $14.03 and $10.28, respectively, at year-end 2022. The tangible equity-to-tangible assets ratio was 8.7%, versus 8.2%.
Outlook, transactions, and risks
- Insurance agency sale: The company completed the sale to Arthur J. Gallagher & Co. on October 31, 2023, after quarter-end. Net cash consideration was approximately $498.1 million, subject to post-closing adjustments. The company reported an estimated gain on sale of approximately $389.3 million and approximately $24.2 million of indirect noninterest expenses; these are subsequent-event items, not Q3 results. Management said proceeds would primarily repay short-term FHLB borrowings. Insurance operations contributed $25.9 million of revenue and a $4.4 million net loss in Q3 2023.
- Cambridge acquisition: A merger agreement was announced September 19, 2023. Eastern expects to issue approximately 39.4 million shares; closing was expected in Q1 2024, subject to shareholder and regulatory approvals and other conditions. Integration costs, delays, employee retention, and failure to realize anticipated benefits are identified risks.
- Credit quality: Nonaccrual loans rose to $47.5 million, or 0.34% of loans, from $38.6 million at year-end 2022. Potential problem loans increased to $310.1 million from $187.0 million. Office-related CRE exposure was $832.3 million; three office-related loans totaling $25.8 million moved to nonaccrual in Q3. Management cited higher rates, lower occupancy, and weaker CRE valuations as reasons for monitoring this exposure.
- Management’s allowance forecast assumed a mild U.S. contraction in Q4 2023 and inflation above the Federal Reserve’s 2% target through 2024. A more severe downside scenario would have increased the allowance by an estimated $11.5 million; an upside scenario would have reduced it by $7.2 million.
- Interest-rate modeling showed year-one net interest income down 14.1% under an immediate 400-basis-point increase and up 3.2% under a 100-basis-point decrease. These are model scenarios, not guidance or forecasts; management cautions that assumptions and actual outcomes may differ.
- The company estimated a roughly $10 million pretax FDIC special assessment under the proposed rule; final amount and timing remained subject to the FDIC. Management stated existing resources, brokered-deposit capacity, and wholesale borrowing capacity should meet liquidity and capital needs over the next 12 months. No formal earnings guidance is provided in the supplied filing text.
Important facts for investors to verify
- Final proceeds, working-capital adjustments, sale gain, and related expenses for the insurance agency disposition, including the effect on future earnings and capital.
- Deposit trends, funding costs, uninsured-deposit levels, and execution of the plan to use sale proceeds to reduce short-term FHLB advances.
- Developments in office-related CRE credit quality, potential problem loans, nonaccrual loans, and allowance adequacy.
- Actual net interest income and deposit repricing compared with the filing’s interest-rate sensitivity scenarios.
- Cambridge merger approvals, timing, integration costs, and expected benefits; also the final FDIC assessment amount and timing.