Eastern Bankshares, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Eastern provides banking, wealth and trust, and insurance services, primarily in eastern Massachusetts, New Hampshire, and Rhode Island. The quarter-end financials precede the October 2020 mutual-to-stock conversion and public offering.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $98.7 million | $104.1 million | $297.6 million | $310.3 million |
| Provision for credit losses | $0.7 million | $0 | $37.9 million | $4.5 million |
| Noninterest income | $47.7 million | $41.6 million | $128.7 million | $135.0 million |
| Noninterest expense | $109.8 million | $100.7 million | $305.8 million | $307.1 million |
| Net income | $28.5 million | $35.8 million | $66.8 million | $103.9 million |
| Net interest margin, FTE | 3.04% | 3.95% | 3.33% | 4.00% |
At September 30, 2020, total assets were $15.46 billion, net loans were $9.80 billion, available-for-sale securities were $2.21 billion, and deposits were $13.33 billion. Cash and cash equivalents totaled $2.33 billion; borrowings were $29.4 million, down from $235.4 million at year-end 2019. Total equity was $1.71 billion. The allowance for loan losses was $115.4 million, or 1.16% of loans.
For the first nine months, operating cash flow was $14.3 million, investing cash flow was negative $1.62 billion, and financing cash flow was positive $3.57 billion. Cash and cash equivalents increased $1.97 billion to $2.33 billion. The filing attributes substantial cash and deposit growth in part to prospective IPO investor funds held before the offering closed.
Reported nine-month regulatory capital ratios were 14.11% total capital, 12.91% Tier 1 and common equity Tier 1, and 9.74% Tier 1 capital to average assets. The company stated it exceeded applicable capital requirements and was considered well capitalized.
Material changes versus comparable periods
- Q3 net income fell 20.5% year over year; nine-month net income fell 35.7%. Lower interest income and higher credit provisioning weighed on results.
- Nine-month net interest income declined 4.1%, while the FTE net interest margin fell 67 basis points to 3.33%. Lower market rates reduced asset yields; lower deposit and borrowing costs partly offset that pressure.
- The nine-month loan-loss provision rose to $37.9 million from $4.5 million, primarily reflecting COVID-19-related borrower risk and downgrades, including in hotel and restaurant lending.
- Total loans grew 10.7% from year-end 2019 to $9.94 billion, largely because of $1.12 billion of Paycheck Protection Program (PPP) loans. Deposits grew 39.6%; borrowings declined 87.5%.
- Nonperforming loans were $44.8 million, or 0.45% of loans, versus $43.8 million, or 0.49%, at year-end. Commercial special-mention, substandard, and doubtful loans rose to 8.3% of commercial loans from 2.6%, mainly due to COVID-related downgrades.
Outlook, risks, contingencies, and unusual items
- COVID-19 and credit: Management expected elevated credit provisioning until economic recovery and said it could not reasonably estimate aggregate delinquencies after deferral periods. At September 30, $701.2 million of loans from the reported modification cohort remained modified without resumed payments. Potential problem loans totaled $615.4 million, compared with $157.3 million at year-end 2019.
- PPP: Eastern originated approximately $1.12 billion of PPP loans to about 8,800 borrowers and expected most exposure to be forgiven in Q4 2020 or 2021. The SBA-guaranteed loans had no loan-loss allowance. The filing notes possible legal, regulatory, and reputational risks concerning PPP administration.
- Interest rates: Management expected the low-rate environment to continue pressuring net interest income into 2021. Its September 30 model estimated a 24.0% increase in one-year FTE net interest income under an immediate 200-basis-point rate increase, and a 3.1% decline under a 100-basis-point decrease; these are scenario estimates, not guidance.
- Offering and conversion: The company completed its conversion and public offering on October 14, 2020, selling 179.3 million shares at $10 each for approximately $1.79 billion gross proceeds. It donated 7.47 million shares to its charitable foundation effective October 15. These are subsequent events, not September 30 balance-sheet proceeds. The donation and liquidation-account provisions may constrain future dividends.
- Unusual expense: Q3 included a $7.6 million write-off of tax-credit investment balances, which management described as immaterial to the current quarter and prior annual statements. Management also reported no goodwill impairment.
- Other matters: Routine legal proceedings were not expected to materially affect results. The company disclosed substantial unfunded credit commitments of $3.80 billion and standby letters of credit of $62.4 million. Management reported disclosure controls were effective at quarter-end.
Most important facts for investors to verify
- How the post-quarter offering proceeds, offering costs, ESOP financing, and charitable share donation affect pro forma capital, share count, and per-share results.
- Whether modified borrowers resume payments and whether COVID-related commercial exposures—particularly hotels, restaurants, retail, and commercial real estate—lead to further downgrades, delinquencies, or losses.
- Whether PPP forgiveness occurs as expected and how fee recognition changes as loans are forgiven or repaid.
- Whether deposit and cash balances normalize after the conversion, and how liquidity and funding needs evolve alongside loan growth.
- How sustained low interest rates, rate sensitivity, and the planned CECL adoption affect net interest income, margins, and the allowance for credit losses.
- The filing checks “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should confirm the reporting context and subsequent filing history.