Eastern Bankshares, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are against December 31, 2021. Unaudited. Eastern is a Massachusetts-based bank holding company with banking and insurance agency businesses, primarily serving New England. The Century Bancorp acquisition closed in November 2021 and materially increased the scale of the comparative 2022 results.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $137.8 million | $104.6 million | $265.9 million | $204.7 million |
| Net income | $51.2 million | $34.8 million | $102.7 million | $82.5 million |
| Diluted EPS | $0.31 | $0.20 | $0.61 | $0.48 |
| Net interest margin, FTE | 2.63% | 2.69% | 2.53% | 2.70% |
| GAAP efficiency ratio | 61.87% | 71.39% | 62.12% | 65.89% |
Q2 total revenue was $179.6 million, up 19.5%; noninterest income fell 8.4% to $41.9 million, while noninterest expense rose 3.5% to $111.1 million. The decline in noninterest income was largely attributable to a $7.3 million loss on rabbi-trust investments, reflecting market declines. Six-month noninterest income was down 12.5% to $88.3 million. Management’s non-GAAP operating net income was $52.5 million for Q2 and $107.6 million for the first half; these measures exclude items management considers non-core.
- Balance sheet: Assets were $22.35 billion, down from $23.51 billion at year-end. Loans were $12.40 billion, up 0.8%; deposits were $19.16 billion, down 2.4%. Borrowed funds totaled $43.1 million.
- Cash flow and liquidity: First-half operating cash flow was $165.8 million; investing cash flow was negative $397.6 million and financing cash flow negative $631.1 million. Cash and cash equivalents decreased $862.9 million to $368.9 million. Management reported $3.55 billion of additional borrowing and deposit-channel capacity, including FHLB, Federal Reserve and unsecured lines.
- Capital: At June 30, the total regulatory capital ratio was 18.76%, CET1 was 17.88%, and Tier 1 leverage was 12.21%. The company reported that it exceeded applicable well-capitalized requirements.
- Credit: The allowance for loan losses was $125.5 million, or 1.01% of loans, versus $97.8 million at year-end. Nonperforming loans were $59.9 million, or 0.48% of loans, compared with $35.0 million and 0.29% at year-end; total delinquency remained 0.65%. First-half net charge-offs were negative $0.1 million, reflecting net recoveries.
Material changes versus comparable periods
- Net income increased 47.0% in Q2 and 24.5% in the first half, primarily because Century increased average interest-earning assets. Q2 net interest income rose 31.7%; deposit interest expense also increased as balances and rates paid rose.
- Net interest margin declined year over year, mainly as PPP loan fee accretion diminished. PPP loans outstanding were $42.5 million at June 30, versus $331.4 million at year-end 2021.
- First-half shareholders’ equity fell to $2.72 billion from $3.41 billion. Accumulated other comprehensive loss widened to $661.2 million, principally from falling fair values of available-for-sale securities as interest rates rose. The securities portfolio’s unrealized AFS loss was $847.1 million, versus $76.0 million at year-end; management attributed the decline primarily to rates and stated it did not intend, and was not more likely than not required, to sell the securities before recovery.
- Deposits declined by $464.5 million, including the transfer of $278.0 million of cannabis-related and money-service-business deposits to Needham Bank. Estimated uninsured deposits were $10.1 billion.
- The company repurchased 7.08 million shares for $141.8 million during the first half, at an average $20.01 per share. It declared quarterly dividends of $0.10 per share.
Outlook, risks and unusual items
- Outlook: No formal earnings guidance was provided. Management expected further federal funds rate increases to benefit net interest income and margin, while noting rate, deposit-cost and borrower-credit risks. Approximately 40% of loans were indexed to market rates, with some exposure hedged using swaps. The company’s model estimated that an immediate parallel 200-basis-point increase would raise first-year FTE net interest income by 4.7%; a 100-basis-point decrease would lower it by 7.9%.
- PPP: Management expected to recognize the remaining $0.9 million of net unearned PPP fees during the rest of 2022, bringing estimated 2022 net fee accretion to $9.2 million, compared with $34.3 million in 2021. The decline was estimated to reduce margin by about 0.25%, based on 2021 average loans.
- Credit and economic risks: Management’s CECL forecast assumed positive but slower growth, declining unemployment, and inflation remaining above the Federal Reserve’s 2% target until mid-2023. The filing highlights risks from inflation, rate changes, recession, regional economic weakness, credit losses, deposit outflows, market volatility, cybersecurity, regulation and litigation. Commercial real estate, office, retail, restaurant and hotel exposures are relevant areas to monitor.
- Credit quality developments: A syndicated commercial real estate loan of approximately $25 million moved to nonaccrual and was in active workout; management estimated collateral value exceeded the remaining principal. Remaining COVID-19 payment modifications were $19.9 million, down from $106.7 million at year-end. Potential problem loans were $262.8 million, down from $470.9 million.
- Accounting and unusual items: CECL adoption on January 1, 2022 reduced retained earnings by $20.1 million after tax and increased the loan allowance by $27.1 million. A $3.3 million overdraft/NSF class-action settlement was accrued in 2021 and settled in Q1 2022; regulators ultimately required no additional remediation for the related issue. Q2 noninterest results also included volatile rabbi-trust mark-to-market losses.
Most important facts for investors to verify
- How further rate moves affect net interest margin, deposit pricing, securities values and the company’s disclosed interest-rate sensitivity.
- Whether deposit balances and mix stabilize after the $278.0 million relationship transfer, and how uninsured deposits and available liquidity evolve.
- Trends in nonaccrual loans, especially the syndicated CRE workout, and whether CECL reserves remain adequate under changing economic forecasts.
- Whether securities unrealized losses remain primarily rate-related and whether any liquidity needs could require sales and realized losses.
- Actual PPP fee accretion versus management’s estimate, and the pace and capital impact of share repurchases and dividends.