Eastern Bankshares, Inc. — 2022 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2022; it does not provide standalone fourth-quarter results. Eastern Bankshares is a Boston-based bank holding company with banking and insurance agency segments, primarily serving Massachusetts, southern New Hampshire and Rhode Island. The November 2021 Century Bancorp acquisition materially expanded the business; 2022 results include a full year of Century operations.
Key financial metrics
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $744.2 million | $623.0 million |
| Net interest income | $568.1 million | $429.8 million |
| Net income | $199.8 million | $154.7 million |
| Diluted earnings per share | $1.21 | $0.90 |
| Net interest margin, fully taxable equivalent | 2.69% | 2.61% |
| GAAP efficiency ratio | 63.10% | 71.26% |
| Net cash provided by operating activities | $229.9 million | $174.5 million |
- At year-end, total assets were $22.6 billion, gross loans $13.6 billion, deposits $19.0 billion and shareholders’ equity $2.5 billion. Assets declined 3.7% and deposits 3.3% from 2021; gross loans increased 10.5%.
- Net interest income rose 32.2%, largely reflecting higher average earning assets following Century and improved asset yields. Interest expense increased sharply, by $31.8 million, as deposit and borrowing costs rose. Net income increased 29.2%; operating net income, a non-GAAP measure, was $213.3 million versus $165.9 million.
- Noninterest income decreased 8.8% to $176.2 million, mainly due to losses on rabbi-trust investments and securities sales and lower mortgage loan sale gains. Insurance commissions rose 4.8% to $99.2 million. Noninterest expense increased 5.8% to $469.6 million, including a $12.0 million noncash pension settlement charge.
- Provision for loan losses was $17.9 million, compared with a $9.7 million release in 2021. The allowance was $142.2 million, or 1.05% of loans, versus $97.8 million, or 0.80%, at year-end 2021. The company adopted CECL in 2022, recording a $27.1 million transition increase to the allowance and a $20.1 million after-tax reduction to opening retained earnings.
- Credit indicators included 0.50% total loan delinquency, down from 0.65%; nonperforming loans were $38.6 million, or 0.28% of loans. Special-mention, substandard and doubtful commercial loans were 2.2% of commercial loans, down from 5.8%.
- Cash and cash equivalents fell to $169.5 million from $1.23 billion. Investing activities used $1.08 billion and financing activities used $215.6 million; cash, cash equivalents and restricted cash declined $1.06 billion for the year.
- Total borrowings rose to $740.8 million from $34.3 million, principally reflecting $691.3 million of short-term FHLB advances. Deposits included $928.6 million of brokered certificates of deposit; estimated uninsured deposits were $9.0 billion. The company reported $2.0 billion of remaining FHLB capacity and a $538.9 million unused Federal Reserve Bank line.
- The securities portfolio totaled $7.17 billion. Available-for-sale securities had $1.135 billion of gross unrealized losses at year-end, principally attributed by management to higher interest rates rather than credit deterioration; held-to-maturity securities had a $53.4 million unrealized loss. After-tax accumulated other comprehensive loss reached $923.2 million, and GAAP equity declined from $3.41 billion to $2.47 billion.
- Operating cash flow was positive, but the filing reports no standalone free-cash-flow measure. The bank was categorized as well capitalized: year-end total regulatory capital ratio was 17.89%, common equity Tier 1 ratio 16.94%, and Tier 1 leverage ratio 12.03%.
Material changes versus the prior comparable period
- Higher market rates lifted the average yield on interest-earning assets to 2.86% from 2.64%, while average cost of interest-bearing liabilities increased to 0.29% from 0.06%. Management’s year-end model estimated a 4.2% decline in next-12-month net interest income under an immediate 200-basis-point rate increase, versus a 15.1% increase in the prior-year model.
- Deposits shifted away from demand, savings and money-market balances; certificates of deposit rose by $1.10 billion, including brokered funding. Management attributed deposit runoff to Century-related deposit runoff, government stimulus balances, competition and the transfer of $278.0 million in cannabis-related and money-service-business deposits.
- Gross loans grew, including commercial real estate growth of $632.8 million and residential mortgage growth of $534.0 million. The company purchased $380.2 million of residential mortgages and $650.5 million of loan participations during 2022.
- Repurchased 10.1 million shares during 2022 for $201.6 million; year-end shares outstanding were 176.2 million versus 186.3 million a year earlier. Quarterly dividends were $0.10 per share in 2022, up from $0.08 in the final three quarters of 2021.
Outlook, management commentary and risks
- Management expected further Federal Reserve rate increases in the first half of 2023 to reduce 2023 net interest income, as liability costs were expected to rise faster than asset yields. The filing gives no specific earnings or revenue guidance.
- The economic baseline used for the year-end credit-loss estimate assumed a U.S. recession beginning in Q2 2023, with a 1.2% peak-to-trough GDP decline and unemployment rising into early 2024. A downside scenario would have increased the allowance by approximately $10.4 million; an upside scenario would have reduced it by approximately $3.1 million.
- Principal risks include deposit competition and liquidity, interest-rate exposure and securities valuation, commercial real estate and other credit concentration, economic weakness in the regional market, cybersecurity and operational risks, regulation and litigation, and acquisition integration. Remote or hybrid work may weigh on office demand and collateral values.
- Management stated that existing resources, including access to brokered deposits and wholesale borrowing, were expected to meet liquidity and capital needs for the next 12 months. This is a management assessment, not a guarantee of funding availability.
- The company reported no pending legal proceeding it believed would materially affect financial condition or results. Two overdraft/NSF class actions settled in 2022; regulators ultimately required no additional remediation on the related issue. The financial statements received unqualified audit opinions, including on internal control over financial reporting. The allowance for loan losses was identified as a critical audit matter.
- Other notable items: a $12.0 million noncash pension settlement charge; a $3.2 million net loss on available-for-sale securities sales; no 2022 goodwill impairment; and no material impact from the January 2023 adoption of the revised troubled-debt-restructuring guidance.
Important facts for investors to verify
- Deposit composition, uninsured balances, brokered funding and current borrowing capacity, including any changes since year-end.
- Subsequent trends in deposit pricing, net interest margin and the relative repricing of assets and liabilities against management’s 2023 outlook.
- Whether the large securities unrealized losses remain unrealized, and the implications of any securities sales for earnings, capital and liquidity.
- Credit performance by commercial real estate property type, office exposure, acquired Century loans, loan participations and purchased mortgages; also track delinquencies, criticized loans and allowance assumptions.
- Progress and cost of Century integration, insurance-agency acquisitions, share repurchases and dividends, including capital impacts and regulatory constraints.