Eastern Bankshares, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020. The financial statements are presented for Eastern Bank Corporation, the mutual bank that was undertaking a reorganization into Eastern Bankshares, Inc.; the filing states that no Eastern Bankshares common shares were outstanding as of September 23, 2020. Amounts below are in U.S. dollars.
Business context and key financial metrics
The company operates a New England banking business and an insurance agency. Its banking activities include commercial, consumer, residential, wealth-management and trust services. The unaudited interim statements should be read with the company’s prospectus; management cautions that interim results are not necessarily indicative of full-year results.
| Metric | Q2 2020 | Six months ended June 30, 2020 | Comparison |
|---|---|---|---|
| Net interest income | $98.8 million | $198.9 million | Down 4.6% and 3.5%, respectively, year over year |
| Provision for credit losses | $8.6 million | $37.2 million | Versus $1.5 million and $4.5 million in 2019 |
| Noninterest income | $47.7 million | $81.0 million | Up 4.4% in Q2; down 13.3% for six months, year over year |
| Noninterest expense | $100.8 million | $195.9 million | Down 0.8% and 5.1%, respectively, year over year |
| Net income | $29.9 million | $38.3 million | Down 14.8% and 43.7%, respectively, year over year |
| Net interest margin, FTE | 3.43% | 3.49% | Six-month margin was 4.03% in 2019 |
For the six-month period, return on average assets was 0.61% versus 1.21% in 2019, and return on average equity was 4.64% versus 9.20%. The six-month efficiency ratio was 70.00% versus 68.89%.
- Balance sheet at June 30: Assets were $14.0 billion, up 20.4% from year-end 2019. Loans were $10.0 billion, up 11.4%; deposits were $11.8 billion, up 24.0%; equity was $1.69 billion.
- Funding and liquidity: Cash and cash equivalents were $1.43 billion, compared with $362.6 million at year-end. The company reported $29.2 million in borrowed funds, down from $235.4 million. Available additional borrowing capacity was reported at approximately $4.04 billion, including FHLB, Federal Reserve, PPP liquidity-facility and unsecured lines.
- Cash flows, six months: Operating activities provided $2.0 million, investing activities used $1.02 billion, and financing activities provided $2.08 billion. The $1.07 billion increase in cash was driven largely by deposit growth; loan growth used $997.9 million of cash in investing activities.
- Capital: The bank was described as well capitalized and above applicable regulatory requirements. Six-month total capital to risk-weighted assets was 14.00%; Tier 1 and common equity Tier 1 ratios were each 12.77%.
Material changes versus comparable periods
- Lower market rates reduced interest income: six-month interest and dividend income fell 7.2%, while lower funding costs reduced interest expense 49.3%. Management says the bank’s asset sensitivity and rate cuts weighed on net interest income.
- Credit provisioning rose sharply amid COVID-19 uncertainty. The allowance increased to $116.6 million, or 1.17% of loans, from $82.3 million, or 0.92%, at year-end 2019. Management downgraded $1.7 billion of commercial loans; $511.9 million moved into special-mention or worse classifications.
- Loan and deposit growth reflected pandemic-related activity, including $1.1 billion of PPP originations and strong deposit inflows. PPP loans were 100% SBA-guaranteed and had no loan-loss allowance. Deposits also included a $299.5 million financial-institution product transferred from borrowings.
- Credit indicators weakened: nonperforming loans rose to $55.4 million from $43.8 million at year-end; the total delinquency rate increased to 0.84% from 0.49%. Special-mention, substandard and doubtful commercial loans rose to 8.9% of commercial loans from 2.6%.
- Q2 noninterest income included $7.7 million of rabbi-trust investment income, versus $1.8 million a year earlier. Management identifies such investment gains and related benefit costs as noncore items; its non-GAAP Q2 net operating earnings were $27.0 million versus GAAP net income of $29.9 million.
Outlook, risks and unusual items
- Management expected COVID-19 to materially affect results through at least the remainder of 2020 and likely into 2021. It expected loan-loss provisions to remain higher than comparable prior periods as the effects of loan modifications and PPP lending waned; it could not reasonably estimate the aggregate loans likely to become delinquent after deferrals ended.
- Through June 30, approximately $946.1 million of loans had been modified, with about 56% receiving full payment deferrals and 44% principal-only deferrals. Most deferrals were expected to end in Q3 or Q4 2020. The company continued to recognize interest income on modified loans.
- PPP lending generated approximately $35.8 million of SBA origination fees, of which $4.1 million net of deferred costs was recognized in interest income during the first half. Management anticipated most PPP exposure would be forgiven in late 2020 or early 2021; forgiveness timing and fee amortization remain relevant.
- Management reported that Federal Reserve rate cuts would reduce net interest income over time. Its June 30 model estimated a 17.0% increase in one-year FTE net interest income under an immediate 200-basis-point rate increase and a 2.4% decrease under a 100-basis-point decline. These are model scenarios, not guidance.
- COVID-related exposures include commercial real estate retail loans of $437.3 million and hotel loans of $179.6 million, as well as affected restaurant, construction, entertainment and other borrower categories. Management cited economic contraction, credit losses, market and interest-rate volatility, deposit changes, operational and cybersecurity risks, and LIBOR transition as risks.
- The mutual-to-stock conversion and public offering were underway. The filing said the subscription offering had expired September 16, 2020 and management expected closing in October, subject to final regulatory approval. The plan included an ESOP subscription of up to 8% and a charitable foundation stock donation equal to 4% of shares issued and outstanding after the offering. Approximately $4.5 million of offering costs had been deferred at June 30; if the offering did not close, those costs would be expensed.
- The company adopted lease accounting on January 1, 2020, recognizing $92.9 million in operating lease right-of-use assets and $96.4 million in lease liabilities at adoption. Management reported no goodwill or intangible-asset impairment at June 30, despite evaluating COVID-19 effects.
Most important facts for investors to verify
- Whether loan deferrals convert into delinquencies or nonaccruals, particularly in the commercial real estate, hotel, restaurant and small-business portfolios, and whether the allowance proves adequate.
- PPP forgiveness pace, outstanding balances, and the timing of recognition of remaining fees and deferred costs.
- Post-pandemic net interest margin and deposit pricing, including the effect of persistently low rates and LIBOR transition on loans and hedges.
- Completion and final terms of the conversion and offering, including regulatory approvals, share issuance, ESOP participation and the foundation donation.
- Whether elevated cash and deposits remain stable and how loan growth, liquidity capacity and regulatory capital evolve.