Eastern Bankshares, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021. Results are unaudited. Eastern is a Massachusetts-based bank holding company with banking and insurance agency businesses; the quarter’s results include the effects of its November 2021 Century acquisition.
Key financial metrics
Amounts below are in millions, except per-share data and ratios.
| Metric | Q1 2022 / March 31, 2022 | Comparable / prior date |
|---|---|---|
| Net income | $51.5; diluted EPS $0.30 | Q1 2021: $47.7; diluted EPS $0.28 |
| Net interest income | $128.1 | Q1 2021: $100.1 |
| Net interest margin, FTE | 2.42% | Q1 2021: 2.71% |
| Noninterest income / expense | $46.4 / $108.9 | Q1 2021: $55.2 / $94.0 |
| Net cash from operating activities | $68.4 | Q1 2021: $64.9 |
| Total assets | $22,836 | December 31, 2021: $23,512 |
| Loans, net of allowance and deferred items | $12,034 | December 31, 2021: $12,157 |
| Deposits | $19,393 | December 31, 2021: $19,628 |
| Borrowed funds | $34.9 | December 31, 2021: $34.3 |
| Shareholders’ equity | $3,008 | December 31, 2021: $3,406 |
| Total regulatory capital ratio / CET1 ratio | 19.42% / 18.53% | Both periods classified as well-capitalized |
Material changes and drivers
- Net income rose 8.1% year over year. Management attributed higher interest income and net interest income mainly to Century, which increased average interest-earning assets; net interest income rose 28.0%.
- Net interest margin fell 29 basis points year over year, reflecting lower yields on loans and securities. Deposit interest expense also increased as average interest-bearing deposits and deposit rates rose.
- Noninterest income declined 15.9%, primarily due to losses on rabbi-trust investments, losses on securities sales, and lower interest-rate-swap income. Higher deposit service charges partly offset those declines. Noninterest expense increased 15.8%, including higher personnel, occupancy, data-processing, and other costs, in part related to Century.
- Loans declined 0.8% from year-end, largely as PPP balances were paid off or forgiven; commercial real estate growth partially offset the decline. Deposits decreased 1.2%.
- Cash and cash equivalents fell 32.6% to $830.5 million. Net cash used in investing activities was $157.3 million and in financing activities was $312.4 million; the latter included $60.6 million of share repurchases and $16.9 million of dividends.
Outlook, risks, and unusual items
- Management expected further Federal Reserve rate increases in 2022 and said they were anticipated to benefit net interest income and margin. About 40% of loans were indexed to a market rate expected to reprice with the federal funds rate. The filing’s model estimated an 11.2% increase in 12-month FTE net interest income under an immediate 200-basis-point increase, and a 6.0% decrease under a 100-basis-point decline; these are modeled scenarios, not guidance.
- Management expected $3.4 million of remaining net PPP loan fees to be recognized during the rest of 2022 and estimated that reduced PPP fee accretion would lower net interest margin by 0.25% based on 2021 average loans.
- The company adopted CECL on January 1, 2022. Adoption reduced opening retained earnings by $20.1 million, net of tax, and increased the allowance for loan losses by $27.1 million. The quarter-end allowance was $124.2 million, or 1.02% of loans; the quarter included a $0.5 million release of provision. Comparisons with 2021 reflect different credit-loss accounting methods.
- Rising rates drove a $463.4 million decline in the fair value of available-for-sale securities during the quarter. The portfolio’s unrealized loss was $539.3 million at March 31, versus $76.0 million at year-end; management attributed the decline primarily to interest rates and stated it did not expect to be required to sell the securities before recovery. Accumulated other comprehensive loss increased to $412.7 million.
- Credit indicators included nonaccrual loans of $33.8 million, or 0.28% of loans, and total delinquency of 0.41%. Loans with COVID-19-related deferrals that had not resumed payment totaled $49.0 million, down from $106.7 million at year-end. Management identified office, retail, restaurant, and hotel lending as sectors that could remain affected by the pandemic.
- Liquidity sources included $830.5 million of cash and cash equivalents and approximately $4.0 billion of additional capacity from IntraFi deposits, FHLB, Federal Reserve, and unsecured lines. The filing states management believes resources are sufficient for foreseeable operating needs. Commitments to extend credit totaled $5.3 billion; standby letters of credit were $65.7 million.
- The quarter included $2.2 million of net losses on securities sales and $4.4 million of losses from rabbi-trust investments. The overdraft and nonsufficient-funds class-action matters were settled; regulators later stated no additional remediation was required. On April 1, 2022, the company transferred $297.7 million of specified deposits to Needham Bank, with no material gain or loss reported.
- Risks highlighted include economic and interest-rate changes, credit losses, securities valuation, deposit outflows, competition, cybersecurity and fraud, regulatory and litigation costs, and acquisition execution. Management reported effective disclosure controls at quarter-end and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether higher rates improve recurring net interest income as modeled, and how deposit costs and funding levels respond.
- The extent to which the large available-for-sale securities unrealized loss affects capital, liquidity, or potential sale decisions.
- Credit performance in commercial real estate and pandemic-affected sectors, including the remaining deferred loans and potential problem loans.
- Ongoing expense levels and the extent to which Century-related costs are offset by revenue and operating efficiencies.
- Actual PPP fee recognition versus management’s estimate, and the effects of the CECL transition on future allowance levels.