Eastern Bankshares, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020, compared primarily with 2019. The requested “2020 Q4” is not a standalone quarterly filing; the 10-K reports full-year results and includes unaudited quarterly figures. Eastern is a Boston-based bank holding company with banking and insurance agency segments. It completed its mutual-to-stock conversion and IPO on October 14, 2020.
Key financial metrics
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $16.0 billion | $11.6 billion |
| Gross loans, year-end | $9.7 billion | $9.0 billion |
| Deposits, year-end | $12.2 billion | $9.6 billion |
| Borrowings, year-end | $28.0 million | $235.4 million |
| Net interest income | $401.3 million | $411.3 million |
| Net interest margin, FTE | 3.19% | 3.96% |
| Provision for loan losses | $38.8 million | $6.3 million |
| Noninterest income | $178.4 million | $182.3 million |
| Noninterest expense | $504.9 million | $412.7 million |
| Net income (GAAP) | $22.7 million | $135.1 million |
| Net operating earnings (non-GAAP) | $102.1 million | $129.7 million |
| Operating cash flow | $69.9 million | $196.2 million |
- Revenue from insurance commissions was $94.5 million, up 4.3%; trust and investment advisory fees were $21.1 million, up 7.4%. Deposit service charges fell 20.3% to $21.6 million.
- Net income per share was $0.13. Return on average assets fell to 0.16% from 1.18%, and return on average equity fell to 1.11% from 8.75%.
- At year-end, shareholders’ equity was $3.4 billion, including IPO proceeds; tangible book value was $16.34 per share. Regulatory capital ratios were elevated following the offering: total capital to risk-weighted assets was 29.61% and Tier 1 leverage was 19.53%. The Bank was well-capitalized.
- Cash and cash equivalents rose to $2.1 billion, primarily from the IPO and deposit inflows. Available-for-sale securities were $3.2 billion. The Bank reported $1.6 billion of remaining FHLB borrowing capacity and $620 million of discretionary lines of credit.
Material changes versus 2019
- GAAP net income declined 83.2%; net operating earnings declined 21.3%. Net interest income fell 2.4%, and FTE net interest margin contracted 77 basis points as lower market rates reduced asset yields.
- Provision for loan losses rose to $38.8 million, reflecting pandemic-related economic uncertainty and credit-rating downgrades, particularly in hotel and restaurant exposures. Allowance for loan losses increased to $113.0 million, or 1.16% of loans.
- Noninterest expense increased 22.4%, driven principally by a $91.3 million stock donation to the Eastern Bank Charitable Foundation. A separate $10.8 million tax-credit investment impairment was also recorded. Management excludes specified items from its non-GAAP operating earnings measure.
- The IPO generated $1.76 billion of net proceeds after offering expenses; $882.0 million was contributed to the Bank. The company also recorded the ESOP’s purchase of shares and issued shares to the Foundation.
- Deposits grew 27.3%, while borrowings fell 88.1%, partly reflecting deposit growth and the transfer of a financial-institution customer product from borrowings to deposits.
- Year-end nonperforming loans were $43.3 million, down slightly from $43.8 million; the ratio to gross loans fell to 0.45% from 0.49%. However, commercial criticized loans (special mention, substandard and doubtful) increased to 7.7% of commercial loans from 2.6%.
Outlook, risks and unusual items
- Management expected pandemic-related effects to continue into 2021, including pressure on borrowers and possible higher credit costs. It expected loan-loss provisions to remain elevated until economic recovery, and its 2021 planning assumed the low-rate environment would persist through year-end.
- At December 31, $332.7 million of pandemic-modified loans had not yet resumed payment; $703.1 million of previously modified loans had resumed payments and were not 30 or more days past due. Management could not reasonably estimate the aggregate amount likely to become delinquent after deferrals.
- PPP originations totaled $1.2 billion to approximately 8,900 borrowers; $1.0 billion remained outstanding at year-end. Management anticipated most remaining PPP exposure would be forgiven during 2021. PPP fees contributed $13.9 million of net accretion to interest income in 2020.
- High-risk industry exposures totaled $1.13 billion, or 11.5% of loans; hotels had the highest modification share, at 51.4% of that category’s loans. The filing highlights continuing risks from COVID-19, concentrated New England lending, commercial real estate and business credit, low rates, LIBOR transition, cybersecurity, regulation and competition.
- Liquidity was described as sufficient for the foreseeable future. The filing cautions that deploying IPO capital may take time and that the resulting larger equity base can weigh on return on equity.
- The Board announced a quarterly cash dividend of $0.06 per share in January 2021. The company said future dividends remain subject to Board discretion, financial condition and regulatory considerations.
- There was no formal numerical earnings guidance. The auditor issued an unqualified opinion on the financial statements; management reported effective disclosure controls and internal control over financial reporting. The auditor did not attest to internal-control effectiveness because the company was an emerging growth company.
Important facts for investors to verify
- Track credit migration, delinquencies and losses as pandemic loan deferrals end, especially in hotels, restaurants, retail and commercial real estate; assess the adequacy of the allowance.
- Monitor PPP forgiveness timing and the effect of fee accretion on reported net interest income and margin.
- Separate recurring earnings from the Foundation stock donation, tax-credit impairment and other adjustments; review the company’s non-GAAP reconciliation.
- Assess the sustainability of deposit growth, liquidity and capital levels, and the pace and returns of deployment of IPO proceeds.
- Review the $12.0 million valuation allowance on the charitable-contribution carryforward, potential stock-based compensation and dilution, and the planned transition to CECL on January 1, 2022.