Eastern Bankshares, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Eastern is a bank holding company serving primarily eastern Massachusetts and southern and coastal New Hampshire. Its insurance agency business was sold in October 2023, so the 2023 comparison includes that business as discontinued operations.
Financial performance and position
| Metric | Q1 2024 / March 31, 2024 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $129.9 million | $138.3 million in Q1 2023; down 6.1% |
| Net interest margin, fully taxable equivalent | 2.68% | 2.66% in Q1 2023 |
| Net income from continuing operations | $38.6 million; $0.24 diluted EPS | Loss of $202.1 million; loss of $1.25 diluted EPS in Q1 2023 |
| Operating net income (non-GAAP) | $38.1 million; $0.23 diluted operating EPS | $53.1 million; $0.33 in Q1 2023 |
| Net cash provided by operating activities | $32.6 million | $89.2 million from continuing operations in Q1 2023 |
| Total assets | $21.17 billion | $21.13 billion |
| Loans, gross | $14.09 billion | $13.97 billion; up 0.8% |
| Deposits | $17.67 billion | $17.60 billion; up 0.4% |
| Shareholders’ equity | $2.95 billion | $2.97 billion |
| Allowance for loan losses | $149.2 million; 1.06% of loans | $149.0 million; 1.07% of loans |
- Interest and dividend income rose 7.3% to $202.6 million, but interest expense rose 43.8% to $72.7 million. Deposit interest expense increased $29.5 million as deposit rates rose; the average rate paid on deposits increased to 2.32% from 1.33%.
- Operating revenue (non-GAAP) was $157.8 million versus $163.2 million; the non-GAAP operating efficiency ratio was 61.89% versus 57.97%.
- Cash and cash equivalents were $739.0 million. Borrowed funds totaled $52.8 million, including $17.6 million of FHLB advances.
- Regulatory capital ratios remained strong: total risk-based capital 19.49%, common equity Tier 1 18.51%, and Tier 1 leverage 14.30%. The company reported it remained well-capitalized.
- Available-for-sale securities had a fair value of $4.29 billion and gross unrealized losses of $791.5 million. Held-to-maturity securities had a $443.8 million carrying amount and $393.2 million fair value. Accumulated other comprehensive loss widened to $654.9 million from $608.4 million.
Material changes and credit quality
- The large year-over-year GAAP earnings improvement mainly reflects the absence of the $333.2 million securities-sale loss recorded in Q1 2023 during a balance-sheet repositioning. Q1 2023 also included $8.0 million of after-tax income from the now-sold insurance business. By management’s non-GAAP measure, operating net income fell 28.3%, primarily due to lower net interest income and higher loan-loss provision.
- The loan-loss provision was $7.5 million, versus less than $0.1 million in Q1 2023. A $7.3 million partial charge-off involved a commercial real estate office-property loan that moved to non-accrual.
- Non-accrual loans increased to $57.2 million from $52.6 million at year-end; non-accrual loans were 0.41% of total loans. Potential problem loans rose to $506.3 million, or 3.6% of loans, from $373.7 million, or 2.7%.
- Office-related commercial real estate loans totaled $802.0 million. Two such loans totaling $21.6 million were non-accrual. Management cited higher interest rates, reduced occupancy associated with hybrid work, and lower commercial property valuations as monitoring concerns. Special-mention, substandard, and doubtful commercial loans were 5.4% of commercial loans, up from 4.1% at year-end.
- Deposit balances increased modestly, but the mix shifted: demand deposits declined $209.7 million while certificates of deposit rose $204.3 million. Estimated uninsured deposits, excluding internal and collateralized accounts, were $5.4 billion, or 31% of deposits.
Outlook, risks and contingencies
- No quantitative earnings guidance was provided. Management said existing resources, including brokered deposits and wholesale borrowing capacity, should meet liquidity and capital needs for the next 12 months.
- The proposed Cambridge Bancorp merger remained subject to regulatory approvals and customary closing conditions. Eastern anticipated closing early in Q3 2024; the transaction was expected to issue approximately 39.4 million Eastern shares. Eastern reported $1.8 million of merger-related costs in Q1.
- At March 31, cash and cash equivalents plus secured borrowing capacity totaled approximately $6.2 billion, covering 116% of $5.4 billion in uninsured and uncollateralized deposits. Available capacity included $2.7 billion at the FHLB and $2.8 billion at the Federal Reserve Discount Window. The Bank Term Funding Program had ceased making new loans.
- Interest-rate modeling showed year-one net interest income down 6.7% under an immediate 400-basis-point increase and up 1.1% under a 100-basis-point decrease. Management cautioned that these are scenario estimates, not forecasts; funding costs are modeled to rise faster than asset income in rising-rate scenarios.
- The FDIC special assessment was accrued at an estimated $10.8 million in 2023. Following a higher FDIC loss estimate, any additional company assessment was not reasonably estimable at March 31, 2024; no additional amount was accrued.
- Off-balance-sheet commitments to extend credit were $6.07 billion, with $50.0 million of standby letters of credit. Management identified economic and interest-rate changes, credit losses, deposit outflows, market disruption, operational and cybersecurity risks, regulatory changes, and merger execution and integration as risks. Management reported disclosure controls were effective and no material change in internal controls during the quarter.
Most important facts for investors to verify
- Whether net interest income and deposit costs stabilize, and how deposit mix and uninsured balances evolve.
- Whether office CRE downgrades, non-accruals, charge-offs, and potential problem loans increase; review the office exposure and collateral details.
- Whether the Cambridge merger receives approvals and closes on the expected timeline, and how share issuance, integration costs, and expected benefits develop.
- Whether the FDIC revises the special assessment and whether Eastern records any incremental expense.
- How securities valuation losses, accumulated other comprehensive loss, and liquidity capacity change as rates and funding conditions evolve.