Eastern Bankshares, Inc. — 2021 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021. This is a full-year filing, not a standalone fourth-quarter report; the supplied filing text does not provide a clear standalone Q4 income statement. Results include Century Bancorp only from its November 12, 2021 acquisition date, while year-end balances include acquired assets and liabilities.
Business context
Eastern Bankshares is a Massachusetts bank holding company operating banking and insurance agency segments, primarily in eastern and central Massachusetts, southern New Hampshire, and northern Rhode Island. Its principal subsidiary, Eastern Bank, provides commercial and consumer banking and wealth management; Eastern Insurance Group operates as an insurance agent. At year-end, the company had 105 bank branches and 2,059 employees.
On November 12, 2021, the company acquired Century Bancorp for $641.9 million in cash. Century added approximately $7.1 billion of assets, including $2.9 billion of loans and $6.1 billion of deposits at acquisition-date fair value, as well as 29 banking offices. The purchase-price allocation remained subject to refinement for up to one year after closing.
Key financial results
| Metric | FY 2021 | FY 2020 | Change / context |
|---|---|---|---|
| Total revenue | $623.0 million | $579.6 million | Up 7.5% |
| Net interest income | $429.8 million | $401.3 million | Up 7.1% |
| Net interest margin (FTE) | 2.61% | 3.19% | Down 58 basis points |
| Noninterest income | $193.2 million | $178.4 million | Up 8.3% |
| Noninterest expense | $444.0 million | $504.9 million | Down 12.1%; 2020 included a $91.3 million stock donation to the Eastern Bank Foundation |
| Provision (release) for loan losses | $(9.7) million | $38.8 million | Release reflected improved conditions and credit trends |
| GAAP net income | $154.7 million | $22.7 million | Up $131.9 million |
| GAAP diluted EPS | $0.90 | $0.13 | — |
| Operating net income (non-GAAP) | $165.9 million | $102.1 million | Up 62.4%; excludes items management considers noncore |
Net interest income benefited from larger average earning-asset balances and lower funding costs, partly offset by lower asset yields. The average yield on earning assets declined to 2.64% from 3.28%. Insurance commissions were $94.7 million, nearly flat year over year; trust and investment advisory fees rose to $24.6 million.
Financial position, cash flow and liquidity
- Year-end scale: Total assets were $23.5 billion, up from $16.0 billion; gross loans were $12.3 billion, up from $9.7 billion; deposits were $19.6 billion, up from $12.2 billion. The Century acquisition was a principal driver of the balance-sheet expansion.
- Funding and liquidity: Cash and cash equivalents were $1.23 billion, down from $2.05 billion, largely due to securities purchases. Borrowings were $34.3 million. Available additional capacity included approximately $1.84 billion from the FHLB, $456 million from the Federal Reserve Bank of Boston, $790 million in unsecured lines, and $520 million through IntraFi Network capacity.
- Cash flow: Operating activities provided $174.5 million, versus $69.9 million in 2020. Investing activities used $2.0 billion, mainly reflecting securities purchases; financing activities provided $989.0 million. Cash and cash equivalents declined $822.3 million during the year.
- Capital: Shareholders’ equity was $3.41 billion. The company reported regulatory capital ratios of 19.77% total risk-based capital, 19.04% common equity Tier 1, and 13.96% Tier 1 leverage, and stated that it was well capitalized. Tangible equity to tangible assets was 12.1%, down from 19.6%, with acquisition goodwill and the larger balance sheet affecting comparability.
- Credit: The allowance for loan losses was $97.8 million, or 0.80% of total loans, versus $113.0 million, or 1.16%, a year earlier. Net charge-offs were $5.6 million, or 0.06% of average loans. Nonaccrual loans were $33.0 million, or 0.27% of loans; delinquency was 0.65%, up from 0.49%.
- Shareholder returns: The company declared and paid $51.6 million in dividends during 2021. It repurchased 1.14 million shares at an average $20.42 under a program authorizing up to $225 million through November 30, 2022. In January 2022, it announced an increase in the quarterly dividend to $0.10 per share.
Material changes and unusual items
- The Century acquisition materially increased loans, deposits, securities, goodwill and operating complexity. The company recorded $35.5 million of acquisition-related expenses and $259.0 million of acquisition goodwill. Acquired loans were recorded at fair value without carrying over Century’s allowance.
- Available-for-sale securities rose to $8.51 billion from $3.18 billion. The portfolio moved from a $58.7 million net unrealized gain at year-end 2020 to a $76.0 million net unrealized loss at year-end 2021, principally attributed to the steeper yield curve. The 2021 comprehensive loss also reflected these market-value changes.
- 2021 net income included a $9.7 million allowance release; 2020 results included a $91.3 million charitable stock contribution and a $38.8 million loan-loss provision. These items materially affect year-over-year comparisons.
- Net PPP fee accretion was $34.3 million in 2021. The company originated approximately 6,600 PPP loans totaling $543.2 million during 2021; the program ended in May.
- The company adopted CECL on January 1, 2022, after the reporting date. Management estimated a day-one allowance increase of $25 million to $30 million, including $25 million to $28 million related to Century-acquired loans.
- The company recorded a $3.3 million estimate for preliminary settlements of overdraft and nonsufficient-funds class actions. In February 2022, regulators requested additional data and indicated they may require further restitution; management said the amount could not yet be reasonably estimated.
Outlook, management commentary and risks
Management expected Federal Reserve rate increases in 2022 to benefit net interest income and margin; approximately 40% of loans were indexed to market rates expected to reprice with the federal funds rate. This outlook is sensitive to the timing and extent of rate changes, deposit pricing, loan repricing and economic conditions.
Key risks include continued COVID-19 effects, especially on hospitality, restaurants, retail and office-related real estate; regional concentration in New England; commercial-credit and real-estate exposure; interest-rate and securities valuation risk; deposit competition and the approximately $11.0 billion of estimated uninsured deposits; cybersecurity and operational risks; and successful integration of Century. Office, retail, restaurant and hotel loans totaled approximately $1.1 billion, $549 million, $189 million and $189 million, respectively, at year-end.
Other relevant matters include the transition away from LIBOR, the expected CECL allowance change, and potential future regulatory restitution related to overdraft practices. The company also reported that it was no longer an emerging growth company beginning December 31, 2021. Management and the independent auditor reported effective internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the Century acquisition purchase accounting, acquired-loan credit assumptions, integration progress, and any subsequent adjustments to goodwill or fair values.
- Check the actual CECL adoption impact against management’s estimated $25 million to $30 million allowance increase.
- Follow the overdraft and nonsufficient-funds matters, including whether regulators require additional restitution and the eventual amount.
- Assess securities portfolio duration, unrealized losses, interest-rate sensitivity and potential effects on equity and earnings.
- Monitor deposit stability, uninsured-deposit trends, acquired deposit relationships, and the planned transfer of approximately $472.3 million of acquired cannabis-related and money-service-business deposits to Needham Bank.
- Compare future credit performance with the 2021 allowance release, delinquency increase and remaining COVID-19 modifications, particularly in office, restaurant and hotel exposures.
- Evaluate the sustainability of earnings and capital returns after adjusting for acquisition costs, PPP fee income, allowance releases and other items management excludes from non-GAAP operating results.