Eastern Bankshares(US:EBC)2022-11-03 16:00PART I. FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for Q3 2022 show decreased total assets and equity, with net income growth driven by net interest income, following CECL adoption Consolidated Balance Sheets The consolidated balance sheets show a decrease in total assets and shareholders' equity, primarily due to reduced cash and securities values, while net loans increased Consolidated Balance Sheet Highlights (Unaudited) | Metric | Sep 30, 2022 ($ thousands) | Dec 31, 2021 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 22,042,933 | 23,512,128 | (6.2%) | | Cash and cash equivalents | 158,437 | 1,231,792 | (87.1%) | | Net Loans | 12,752,942 | 12,157,281 | 4.9% | | Total Securities | 7,326,578 | 8,511,224 | (13.9%) | | Total Liabilities | 19,626,770 | 20,105,776 | (2.4%) | | Total Deposits | 18,733,381 | 19,628,311 | (4.6%) | | Total Shareholders' Equity | 2,416,163 | 3,406,352 | (29.1%) | - Shareholders' equity decreased significantly by 29.1% from year-end 2021, primarily due to a large increase in accumulated other comprehensive loss from ($56.7 million) to ($978.8 million), reflecting the impact of rising interest rates on the fair value of available-for-sale securities6 Consolidated Statements of Income The consolidated income statements show significant growth in net interest income and net income for both the quarter and nine-month periods Consolidated Income Statement Highlights (Unaudited) | Metric ($ thousands) | Q3 2022 | Q3 2021 | YoY Change (%) | 9 Months 2022 | 9 Months 2021 | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 152,179 | 102,691 | 48.2% | 418,060 | 307,390 | 36.0% | | Provision for loan losses | 6,480 | (1,488) | N/A | 7,045 | (5,368) | N/A | | Noninterest Income | 43,353 | 43,209 | 0.3% | 131,645 | 144,154 | (8.7%) | | Noninterest Expense | 116,840 | 98,970 | 18.1% | 336,845 | 300,354 | 12.1% | | Net Income | 54,777 | 37,106 | 47.6% | 157,465 | 119,578 | 31.7% | | Diluted EPS | $0.33 | $0.22 | 50.0% | $0.94 | $0.69 | 36.2% | - The significant year-over-year growth in net income was primarily driven by a 48.2% increase in net interest income for the third quarter, reflecting both organic growth and the impact of the Century acquisition11 Notes to Unaudited Consolidated Financial Statements Key notes include the adoption of CECL, segment reporting for banking and insurance, and a probable non-cash settlement charge related to the Defined Benefit Plan - On January 1, 2022, the Company adopted the CECL accounting standard (ASU 2016-13), which replaced the incurred loss methodology. This resulted in a cumulative-effect adjustment that decreased retained earnings by $20.1 million, net of tax3133 - The Company has two primary reportable segments: the banking business and the insurance agency business. For the nine months ended September 30, 2022, the banking business generated $143.2 million in net income, while the insurance agency business generated $11.4 million289290 - Subsequent to the reporting period, management determined it is probable that a non-cash settlement charge between $10.0 million and $15.0 million will be recognized in Q4 2022 related to lump sum payments from the Defined Benefit Plan291293 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights increased net income from higher net interest income, driven by asset growth and rising rates, alongside loan portfolio growth, deposit decreases, and strong asset quality Financial Position The company's financial position shows growth in gross loans, a decrease in total deposits, an increase in the allowance for loan losses, and a reduction in the securities portfolio - Gross loans increased by $622.4 million (5.1%) to $12.9 billion at September 30, 2022, driven by growth in commercial real estate, retail, and commercial construction portfolios364 - Total deposits decreased by $894.9 million (4.6%) to $18.7 billion, primarily due to runoff of higher-cost deposits from the Century acquisition, runoff of government stimulus funds, and the transfer of cannabis-related and money service business deposit relationships415416 - The allowance for loan losses increased by $33.9 million to $131.7 million, mainly due to a $27.1 million one-time adjustment upon adopting the CECL accounting standard on January 1, 2022398 - The securities portfolio decreased by $1.2 billion (13.9%) to $7.3 billion, largely due to a $1.1 billion decrease in the fair value of AFS securities caused by rising market interest rates353354 Results of Operations Results of operations show significant net interest income growth, a provision for loan losses, flat noninterest income, and increased noninterest expense - Net interest income for Q3 2022 increased 48.2% year-over-year to $152.2 million, driven by asset growth from the Century acquisition and higher interest rates. The net interest margin expanded by 34 basis points to 2.87% in Q3 2022 compared to Q3 2021422432436 - A provision for loan losses of $6.5 million was recorded in Q3 2022, compared to a release of $1.5 million in Q3 2021, reflecting increased loan balances447 - Noninterest income was flat in Q3 2022 compared to Q3 2021, as increased insurance commissions and service charges were offset by losses from investments in rabbi trusts and lower gains on mortgage sales450 - Noninterest expense rose 18.1% in Q3 2022 year-over-year, primarily due to higher salaries and benefits related to the Century acquisition and new share-based compensation programs456 Management of Market Risk The company's market risk management focuses on interest rate sensitivity, with a shift in NII sensitivity profile due to hedging activities Net Interest Income (NII) Sensitivity Analysis | Change in Interest Rates (bps) | Estimated NII Change from Flat (as of Sep 30, 2022) | Estimated NII Change from Flat (as of Dec 31, 2021) | | :--- | :--- | :--- | | +400 | (2.5%) | 30.2% | | +300 | (2.0%) | 22.6% | | +200 | (1.3%) | 15.1% | | (100) | (2.3%) | (5.9%) | | (200) | (6.6%) | N/A | - The company's interest rate sensitivity profile has shifted. As of September 30, 2022, a +200 bps rate shock is projected to decrease NII by 1.3%, whereas at year-end 2021 it was projected to increase NII by 15.1%. This change is partly due to the extension of asset duration from the interest rate swap portfolio488 Item 3. Quantitative and Qualitative Disclosures about Market Risk This section refers to the market risk discussion in Item 2, detailing interest rate risk and the shift in net interest income sensitivity due to hedging - The company's primary market risk is interest rate sensitivity. The disclosure for this item is contained within the Management's Discussion and Analysis section509 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2022, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report509 - No material changes in internal controls over financial reporting occurred during the quarter ended September 30, 2022511 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material legal proceedings, with previous overdraft fee matters settled in Q1 2022 - As of the filing date, the company is not involved in any legal proceedings expected to have a material effect on its financial condition514 Item 1A. Risk Factors No material changes to risk factors, except for a revised risk concerning potential increases in FDIC insurance assessment rates - A risk factor was revised to address the October 2020 FDIC decision to increase initial base deposit insurance assessment rates by 2 basis points, effective in the first quarter of 2023, which could increase expenses515516 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company completed its 2021 share repurchase program in Q3 2022 and initiated a new program authorizing the purchase of up to 8.9 million shares - The company completed its 2021 share repurchase program during Q3 2022518 - A new share repurchase program was announced on September 7, 2022, authorizing the purchase of up to 8.9 million shares through August 31, 2023, limited to $200.0 million518