Eastern Bankshares, Inc. — 2023 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2023. This is an annual filing; fourth-quarter figures below are unaudited. The company is a Massachusetts-based bank holding company operating primarily in eastern Massachusetts and southern New Hampshire. Following the October 31 sale of substantially all of its insurance agency business, banking is its sole reportable segment; insurance results are presented as discontinued operations.
Financial performance and position
| Metric | 2023 | 2022 |
|---|---|---|
| Net income, including discontinued operations | $232.2 million | $199.8 million |
| Net income (loss) from continuing operations | $(62.7) million | $186.5 million |
| Operating net income, non-GAAP | $163.2 million | $199.9 million |
| Basic EPS, total company | $1.43 | $1.21 |
| Basic EPS from continuing operations | $(0.39) | $1.13 |
| Net interest income | $550.4 million | $568.1 million |
| Net interest margin, fully taxable equivalent | 2.73% | 2.69% |
| Operating efficiency ratio, non-GAAP | 62.62% | 56.97% |
| Total assets at year-end | $21.1 billion | $22.6 billion |
| Gross loans at year-end | $14.0 billion | $13.6 billion |
| Deposits at year-end | $17.6 billion | $19.0 billion |
| Borrowed funds at year-end | $48.2 million | $740.8 million |
The continuing-operations loss chiefly reflects a $333.2 million loss on sales of available-for-sale securities in the first-quarter balance-sheet repositioning. Total 2023 net income included a $408.6 million pre-tax gain on the insurance agency sale. Management’s non-GAAP operating net income excludes specified items and is not a substitute for GAAP results.
Interest and dividend income rose 31.6% to $796.5 million, but interest expense increased to $246.1 million from $37.1 million, largely due to deposit repricing and greater funding costs. Net interest income fell 3.1%. The continuing-operations provision for loan losses was $20.1 million, compared with $17.9 million.
Net cash provided by operating activities was $261.7 million, including discontinued operations; continuing operations provided $385.4 million. Cash and cash equivalents rose $523.6 million to $693.1 million. Shareholders’ equity was $3.0 billion; tangible equity to tangible assets, a non-GAAP measure, was 11.7%, versus 8.2% in 2022. The bank reported regulatory capital ratios of 19.55% total capital, 18.55% common equity Tier 1 and 14.00% Tier 1 leverage, and was classified as well-capitalized.
Material changes versus the prior year
- Deposits declined 7.3%; demand, interest-checking and savings balances decreased, while certificates of deposit increased. Estimated uninsured deposits, excluding internal and collateralized accounts, were $5.5 billion, down from $7.3 billion.
- The securities portfolio declined 32.2% to $4.9 billion, primarily reflecting $1.9 billion of first-quarter AFS securities sales. AFS unrealized losses remained substantial at $754.6 million pre-tax at year-end, although accumulated other comprehensive loss improved from $(923.2) million to $(608.4) million.
- Loans increased 2.9%. Commercial real estate rose 5.9%, while commercial and industrial loans fell 3.7%, partly due to $214.2 million of loan sales.
- Credit indicators weakened in some commercial portfolios: non-performing loans increased to $52.6 million from $38.6 million; potential problem loans rose to $373.7 million from $187.0 million; and special-mention, substandard and doubtful commercial loans increased to 4.1% of commercial loans from 2.2%. Total loan delinquency nevertheless declined to 0.41% from 0.50%.
- The allowance for loan losses increased to $149.0 million, or 1.07% of gross loans, from $142.2 million, or 1.05%. Net charge-offs rose to $12.1 million from $0.6 million, primarily reflecting commercial real estate charge-offs.
- FDIC insurance expense increased to $21.9 million from $6.3 million, including a $10.8 million special assessment accrued in the fourth quarter.
Outlook, risks and unusual items
- Cambridge merger: The proposed stock-for-stock acquisition remained subject to shareholder and regulatory approvals and other closing conditions at the filing date. Eastern expected to issue approximately 39.4 million shares; the transaction’s stated value was approximately $528.1 million based on the September 18, 2023 share price. The filing gives no assurance of completion or quantified forward guidance for the combined company.
- Funding and liquidity: Management said available resources, including borrowing capacity and brokered deposits, should meet liquidity and capital needs for the following 12 months. At year-end, cash plus secured borrowing capacity totaled $6.8 billion, stated as 123% coverage of $5.5 billion of uninsured and uncollateralized deposits. The Bank Term Funding Program was scheduled to stop making new loans on March 11, 2024; management expected to pledge existing collateral to the Federal Reserve Discount Window.
- Interest rates: Management highlighted deposit competition, repricing costs and rate sensitivity. Its year-end model estimated year-one net interest income would fall 1.4% under an immediate 100-basis-point rate increase and 6.1% under a 400-basis-point increase; these are model scenarios, not forecasts.
- Commercial real estate: Office-related CRE exposure was $818.9 million. The company cited elevated risks from higher rates, hybrid work, lower occupancy and valuation pressure; two office-related loans totaling $14.0 million were on non-accrual at year-end. Management described enhanced monitoring.
- FDIC assessment: The company accrued an estimated $10.8 million special assessment in 2023. Following an updated FDIC loss estimate in February 2024, it expected an additional assessment expense, described as not material, with the amount subject to FDIC calculation and future adjustments.
- Sale and other items: The insurance agency sale generated $498.1 million of net cash proceeds at closing and a $408.6 million pre-tax gain, subject to post-closing adjustments. The sale also produced a $15.9 million non-cash pension curtailment gain included in the sale gain. No material goodwill impairment was recorded.
- Legal and operating risks: The company disclosed shareholder demand letters relating to merger disclosures, which it considered without merit; it made supplemental disclosures. It reported no pending legal proceeding believed material to financial condition or results. Cybersecurity remained a stated risk, although no cybersecurity event materially affected the business in 2023.
Key facts for investors to verify
- Reconcile GAAP continuing-operations results with total-company results and the non-GAAP operating measures, particularly the securities-sale loss and insurance-sale gain.
- Track deposit balances, deposit mix and pricing, uninsured deposits, reciprocal funding, and realized access to the stated borrowing capacity.
- Review subsequent credit trends, reserve adequacy, charge-offs and performance of office, retail and other commercial real estate exposures.
- Confirm the final FDIC special-assessment amount and any post-closing adjustments to insurance-sale proceeds or gain.
- Check the Cambridge merger’s approvals, closing status, share issuance, integration costs and expected benefits against subsequent company disclosures.
- Consider the filing’s stated limitations on forward-looking interest-rate sensitivity models and non-GAAP measures. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.