Eastern Bankshares, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Eastern is a Massachusetts-based bank holding company operating banking and insurance agency businesses, primarily in New England. Financial statements are unaudited.
Financial results and key metrics
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue (net interest income plus noninterest income) | $145.9 million | $146.5 million | $451.5 million | $426.4 million |
| Net interest income | $102.7 million | $98.7 million | $307.4 million | $297.6 million |
| Net income | $37.1 million | $28.5 million | $119.6 million | $66.8 million |
| Net interest margin, fully tax-equivalent | 2.53% | 3.04% | 2.64% | 3.33% |
| GAAP efficiency ratio | 67.83% | 74.99% | 66.52% | 71.71% |
- Net income increased 30.2% year over year in Q3 and 79.0% for the first nine months. The main driver was lower credit-loss expense: the company recorded a $1.5 million Q3 release and a $5.4 million nine-month release, versus provisions of $0.7 million and $37.9 million in the respective 2020 periods.
- Q3 noninterest income declined 9.4% to $43.2 million, principally reflecting less favorable rabbi-trust investment marks and lower mortgage-loan sale gains. Nine-month noninterest income rose 12.0% to $144.2 million, including improved swap income, trust fees and insurance commissions.
- Noninterest expense fell 9.9% in Q3 and 1.8% year to date. The comparisons reflect, among other items, lower tax-credit investment impairment and pension-related costs; nine-month 2021 expenses included $3.3 million for a preliminary overdraft/NSF class-action settlement.
- Basic and diluted EPS were both $0.22 for Q3 and $0.69 year to date. The company had no common shares outstanding in the comparable 2020 periods, so 2020 EPS is not comparable. Management-reported non-GAAP operating net income was $37.4 million for Q3 and $121.0 million year to date; these measures exclude specified items and are not substitutes for GAAP results.
Financial position, cash flow and capital
- At September 30, total assets were $17.46 billion, up from $15.96 billion at year-end 2020. Deposits rose 12.3% to $13.65 billion; loans declined 2.3% to $9.50 billion, largely as PPP balances ran off. Available-for-sale securities increased 78.7% to $5.69 billion, driven by purchases.
- Cash and cash equivalents were $1.25 billion, down $802 million from year-end. For the first nine months, operating cash flow was $127.1 million, investing cash outflow was $2.39 billion (including $3.20 billion of securities purchases), and financing cash inflow was $1.46 billion, mainly from deposit growth.
- Total borrowings were low at $30.1 million, including $14.2 million of FHLB advances. The filing reports $3.27 billion of additional capacity across listed liquidity sources, including FHLB, Federal Reserve and unsecured lines, and available IntraFi capacity. Management said resources should meet foreseeable liquidity and capital needs.
- Shareholders’ equity was $3.43 billion, approximately unchanged from year-end. Regulatory capital ratios remained high: total capital to risk-weighted assets was 28.33%, and CET1 was 27.33%; the company said it exceeded applicable requirements and was well capitalized. Tangible equity to tangible assets was 17.9%, down from 19.6% at year-end.
- Credit indicators were generally stable or improved: nonperforming loans were $42.1 million, or 0.44% of loans, versus $43.3 million and 0.45% at year-end; the allowance was $103.4 million, or 1.09% of loans. Loans with active COVID-related deferrals fell to $110.6 million from $332.7 million. Potential problem loans were $463.7 million, including $235.0 million in COVID-impacted industries.
- Available-for-sale securities recorded a $32.6 million net unrealized loss at September 30, compared with a $58.7 million net unrealized gain at year-end. Nine-month other comprehensive loss was $87.3 million, principally from securities and cash-flow hedge valuation changes; this reduced reported equity-related measures despite positive net income.
Outlook, risks and unusual items
- Century acquisition: The company expected to acquire Century Bancorp for $641.9 million in cash, with closing anticipated in mid-November 2021. Shareholder approval and necessary regulatory approvals had been received. The acquisition remained subject to closing conditions; $4.8 million of related costs were recorded in the first nine months, and management anticipated further costs.
- CECL: Adoption of the expected-credit-loss standard was planned for January 1, 2022. The company was validating models and processes and assessing the effect, including the acquisition’s impact; a clear quantified adoption impact is not provided.
- Capital actions: A proposed 2021 equity incentive plan was subject to shareholder approval. Initial non-employee director awards were estimated at approximately $13.75 million. A repurchase program for up to 5% of outstanding shares was announced, but required Federal Reserve non-objection, which was pending.
- Credit and market risks: Management identified COVID-19 disruption, economic conditions, loan losses, interest rates, inflation, securities values, deposit flows, competition, cybersecurity and acquisition execution among material uncertainties. Hotels remained a notable deferral exposure: 43.2% of hotel loans had COVID-related modifications still not back to repayment. The company’s rate-sensitivity model estimated an 18.2% increase in year-one net interest income under an immediate +200 bp parallel rate shift and a 7.9% decrease under -100 bp; these are model scenarios, not forecasts.
- Other items: The preliminary overdraft/NSF class-action settlement was estimated at $3.3 million including related costs; management did not expect pending legal matters to materially affect the financial statements. The filing states disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether the Century acquisition closed as expected, its final purchase accounting, integration costs and realized benefits.
- The eventual CECL transition adjustment and whether subsequent credit performance supports continued allowance releases.
- Credit trends beneath headline nonperforming-loan metrics, particularly potential problem loans, hotel exposure, and loans emerging from COVID deferrals.
- How securities portfolio duration, unrealized losses and interest-rate changes affect future net interest income, liquidity and capital.
- Federal Reserve action on the proposed repurchase program and shareholder approval and expense impact of the equity incentive plan.
- The cover page indicates the company had not filed all required Exchange Act reports during the preceding 12 months; investors may wish to confirm the reporting-history context for this newly public company.