Eastern Bankshares(EBC) - 2020 Q4 - Annual Report

PART I Business Eastern Bankshares, Inc. operates banking and insurance segments, managing $16.0 billion in assets with a focus on strategic growth and conservative risk management General Corporate Overview Eastern Bankshares, Inc. is a Massachusetts-based bank holding company operating banking and insurance segments, with $16.0 billion in assets and $3.4 billion in equity as of year-end 2020 Key Financial Metrics as of December 31, 2020 | Metric | Value (Billions) | | :--- | :--- | | Total Consolidated Assets | $16.0 | | Total Gross Loans | $9.7 | | Total Deposits | $12.2 | | Total Shareholders' Equity | $3.4 | - The company operates through two primary business segments: a banking business and an insurance agency business (Eastern Insurance Group LLC)[14] - Eastern Bank controls four active subsidiaries engaged in securities, real estate services, and tax credit investments[13] Market Area and Competition The company's primary market is the Boston-Worcester-Providence CSA, a competitive financial services hub where Eastern Bank holds a 2.5% deposit share - The primary market is the Boston-Worcester-Providence CSA, which has a population of 8.3 million and a median household income of approximately $85,000, significantly higher than the U.S. average of $66,000[15] - As of June 30, 2020, the company held a 2.5% deposit market share in the Boston market, ranking sixth among competitors[17] - Competition is intense from both traditional banks and non-bank institutions, particularly those using technology-driven platforms that offer higher deposit rates due to lower cost structures[17] Business Strategy The company's strategy focuses on deepening customer relationships, opportunistic acquisitions, technology investment, and conservative risk management - A key strategy is to pursue opportunistic acquisitions of banks and insurance agencies, leveraging the financial strength from its recent IPO to act as a consolidator[21] - The company is committed to significant investments in technology, including upgrades to its mobile banking platform and commercial lending systems, to enhance customer experience and drive operating efficiencies[21] - During 2020, the company disbursed $1.2 billion in Paycheck Protection Program (PPP) loans to approximately 8,900 borrowers, demonstrating its commitment to supporting small business and non-profit customers[19] Lending Activities The company's $9.7 billion loan portfolio is diversified across commercial real estate, commercial and industrial, residential, and small business segments Loan Portfolio Composition as of December 31, 2020 | Loan Category | Amount (Billions) | % of Total Loans | | :--- | :--- | :--- | | Commercial Real Estate | $3.6 | 36.8% | | Commercial and Industrial | $2.0 | 20.6% | | Residential Real Estate | $1.4 | 14.1% | | Small Business | $1.3 | 13.8% | | Home Equity | $0.87 | 8.9% | | Commercial Construction | $0.31 | 3.1% | | Other Consumer | $0.28 | 2.9% | - The company's regulatory limit on loans-to-one borrower was $685.6 million, while its more conservative internal limits were $75.0 million for commercial real estate relationships and $40.0 million for commercial and industrial relationships[31][33] - The company held loan participation interests, including Shared National Credits (SNCs), totaling $1.0 billion as of December 31, 2020[29] Sources of Funds Deposits totaling $12.2 billion are the primary source of funds, supplemented by borrowings and significant contingent liquidity from FHLB Sources of Funds as of December 31, 2020 | Source | Amount (Billions) | | :--- | :--- | | Total Deposits | $12.2 | | Total Borrowings | $0.028 | - The company had $1.6 billion of remaining borrowing capacity with the FHLB of Boston as of December 31, 2020, providing a contingent source of liquidity[35] Eastern Wealth Management Eastern Wealth Management provides trust, investment, and financial planning services, managing $2.9 billion in assets and generating $21.1 million in 2020 revenue - As of December 31, 2020, Eastern Wealth Management held $2.9 billion of assets in a fiduciary, custodial, or agency capacity for customers[36] - The division generated revenue of $21.1 million in 2020, which represented 11.8% of the company's total noninterest income[38] Eastern Insurance Group LLC Eastern Insurance Group LLC, a key noninterest income contributor, generated $94.5 million in 2020 commissions and is the third largest agency in Massachusetts - The insurance agency generated $94.5 million in commission income, accounting for 53.0% of the company's total noninterest income for the year ended December 31, 2020[39] - Eastern Insurance Group is the third largest insurance agency in Massachusetts and the third largest owned by a banking company in the United States, based on revenue[39] - The agency pursues a growth strategy through acquisitions, having acquired 11 smaller agencies in the five-year period ending December 31, 2020[39] Regulation The company is subject to extensive state and federal banking regulations, including capital requirements and consumer protection, and qualifies as an emerging growth company - Eastern Bank is a Massachusetts-chartered non-member bank regulated by the Massachusetts Commissioner of Banks and the FDIC. Eastern Bankshares, Inc. is a bank holding company regulated by the Federal Reserve Board[41] - Federal regulations require FDIC-insured institutions to meet minimum capital standards, including a common equity Tier 1 ratio of 4.5% and a total capital ratio of 8.0%. As of December 31, 2020, Eastern Bank was classified as a well capitalized institution[48][50] - With assets exceeding $10 billion, Eastern Bank is subject to direct supervision and examination by the Consumer Financial Protection Bureau (CFPB) for compliance with federal consumer financial laws[54] - The company qualifies as an emerging growth company under the JOBS Act, which permits it to use an extended transition period for complying with new or revised accounting standards[66][68] Human Capital Management The company prioritizes Diversity, Equity & Inclusion, offering competitive benefits, and adapted to COVID-19 with remote work and frontline support, maintaining high employee engagement - The company has a strong focus on DE&I, with 50% of its Board of Directors and 40% of its Management Committee comprised of women and people of color[74] 2020 Workforce Demographics | Group | % Female | % People of Color | | :--- | :--- | :--- | | Board of Directors | 25.0% | 33.3% | | Management Committee | 25.0% | 16.7% | | Total Workforce | 67.4% | 22.8% | | New Hires (2020) | 64.9% | 38.8% | - In response to the COVID-19 pandemic, the company securely set up two-thirds of its employees to work from home and provided premium pay to frontline colleagues[81][83] - The company maintains strong employee engagement, with a 92% response rate to its 2020 annual survey, where 93% of respondents reported being proud to work for the company[84] Risk Factors The company faces risks from the COVID-19 pandemic, interest rate fluctuations, geographic loan concentration, acquisition challenges, cybersecurity threats, and extensive regulatory oversight - The COVID-19 pandemic is identified as a major risk, expected to have a material adverse effect on business through reduced demand and higher credit losses, particularly in sectors like hotels, restaurants, and retail[89] - Changes in interest rates pose a significant risk to profitability. The low-rate environment established by the Federal Reserve to mitigate pandemic effects has adversely affected and is expected to continue to adversely affect operating results[95][110] - The geographic concentration of the loan portfolio in eastern Massachusetts and southern New Hampshire makes the company vulnerable to local economic downturns[95][128] - The company faces risks from its acquisition strategy, including competition for targets and difficulties in integrating operations, technologies, and employees of acquired businesses[93][118] - Cybersecurity threats, operational risks from system failures or fraud, and extensive, evolving state and federal regulations are highlighted as inherent business risks[95][131][197] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None reported[229] Properties As of December 31, 2020, the company operates 89 bank branches and 27 insurance offices, with the majority being leased properties - The company operates 89 bank branch offices and 27 insurance offices, with the majority (98) being leased properties[230] - The net book value of all land, buildings, furniture, fixtures, and equipment was $49.4 million as of December 31, 2020[230] Legal Proceedings The company is not involved in any material legal proceedings beyond routine litigation in the ordinary course of business - The company is not involved in any material legal proceedings outside of the ordinary course of business[231] Mine Safety Disclosures This item is not applicable to the company - Not applicable[233] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Eastern Bankshares, Inc.'s common stock began trading on Nasdaq in October 2020, raising $1.76 billion in IPO proceeds and initiating a quarterly cash dividend - The company's common stock trades on the Nasdaq Global Select Market under the symbol EBC[236] - The company completed its IPO on October 14, 2020, raising net proceeds of $1.76 billion after expenses. $882.0 million was contributed to Eastern Bank and $149.4 million was loaned to the company's ESOP[244] - A quarterly cash dividend of $0.06 per share was initiated on January 28, 2021[243] - The company is prohibited from repurchasing its common stock through October 14, 2021, due to applicable regulations[242] Selected Financial Data Selected financial data shows significant asset and deposit growth post-IPO, with 2020 net income impacted by IPO expenses and increased loan loss provisions Selected Financial Data (2018-2020) | (In thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Financial Position | | | | | Total assets | $15,964,190 | $11,628,775 | $11,378,287 | | Loans, net | $9,593,958 | $8,899,184 | $8,774,913 | | Total deposits | $12,155,784 | $9,551,392 | $9,399,493 | | Total equity | $3,428,052 | $1,600,153 | $1,433,141 | | Operating Data | | | | | Net interest income | $401,251 | $411,264 | $390,044 | | Provision for loan losses | $38,800 | $6,300 | $15,100 | | Net income | $22,738 | $135,098 | $122,727 | Selected Performance & Capital Ratios (2018-2020) | Ratio | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Return on average assets | 0.16% | 1.18% | 1.10% | | Return on average equity | 1.11% | 8.75% | 9.02% | | Net interest margin (FTE) | 3.19% | 3.96% | 3.84% | | Efficiency ratio | 87.11% | 69.53% | 69.73% | | Tier 1 capital to risk weighted assets | 28.46% | 12.66% | 11.51% | Management's Discussion and Analysis of Financial Condition and Results of Operations The 2020 IPO significantly boosted assets and equity, while net income decreased due to a charitable stock donation and increased loan loss provisions related to COVID-19 Overview The company operates banking and insurance segments, with 2020 GAAP net income significantly lower due to higher credit loss provisions and reduced net interest income Net Income Comparison (GAAP vs. Non-GAAP) | (In millions) | 2020 | 2019 | | :--- | :--- | :--- | | Net Income (GAAP) | $22.7 | $135.1 | | Net Operating Earnings (Non-GAAP) | $102.1 | $129.7 | Outlook and Trends The COVID-19 pandemic led to $1.0 billion in loan modifications and $1.2 billion in PPP originations, increasing loan loss provisions to $38.8 million in 2020 - The company originated $1.2 billion in PPP loans during 2020, with $1.0 billion outstanding at year-end. It received $37.1 million in origination fees from the SBA[256][261] COVID-19 Loan Modifications as of Dec 31, 2020 | Status | Amount (Billions) | | :--- | :--- | | Total Modifications Executed | $1.0 | | Remaining in Modified Status | $0.33 | - High-risk industries, including retail, restaurants, and hotels, represented 11.5% ($1.13 billion) of the total loan portfolio. The hotel sector had the highest percentage of modified loans at 51.4%[261] - The loan loss provision increased significantly to $38.8 million in 2020 from $6.3 million in 2019, driven by the economic distress caused by the pandemic[263] Financial Position The company's financial position strengthened significantly in 2020 due to its IPO, increasing assets to $16.0 billion and deposits to $12.2 billion Year-over-Year Changes in Key Balance Sheet Items (2019-2020) | Account | 2020 Value | Change from 2019 | % Change | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $2.1B | +$1.7B | +466.5% | | Securities available for sale | $3.2B | +$1.7B | +111.1% | | Loans, net | $9.6B | +$0.7B | +7.8% | | Deposits | $12.2B | +$2.6B | +27.3% | | Borrowed funds | $28.0M | -$207.3M | -88.1% | - The allowance for loan losses increased by $30.7 million to $113.0 million, representing 1.16% of total loans (or 1.30% excluding PPP loans), up from 0.92% in 2019[309][123] - Non-performing loans as a percentage of total loans decreased slightly to 0.45% at year-end 2020 from 0.49% in 2019, partly due to the increase in total loan balances from PPP lending[302] Results of Operations Net income decreased 83.2% in 2020 to $22.7 million, primarily due to a $91.3 million stock donation and a $32.5 million increase in loan loss provisions Summary of Results of Operations (2020 vs. 2019) | (In millions) | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $401.3 | $411.3 | (2.4)% | | Provision for Loan Losses | $38.8 | $6.3 | +515.9% | | Noninterest Income | $178.4 | $182.3 | (2.2)% | | Noninterest Expense | $504.9 | $412.7 | +22.4% | | Net Income | $22.7 | $135.1 | (83.2)% | - The net interest margin (FTE) decreased by 77 basis points to 3.19% in 2020 from 3.96% in 2019, reflecting the impact of the lower interest rate environment[332] - Noninterest expense was significantly impacted by a one-time $91.3 million stock contribution to the Eastern Bank Charitable Foundation in connection with the IPO[345] - Noninterest income was supported by a $6.3 million increase in gains on sales of mortgage loans and a $3.9 million increase in insurance commissions, but was offset by a $5.7 million decrease in interest rate swap income[342] Liquidity and Capital Resources The 2020 IPO significantly enhanced liquidity and capital, with regulatory capital ratios far exceeding well-capitalized minimums and substantial contingent FHLB borrowing capacity - The net proceeds from the IPO significantly increased liquidity and capital resources at both the holding company and the bank level[369] Regulatory Capital Ratios as of December 31, 2020 | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Total risk-based capital | 29.61% | ≥10.0% | | Common equity Tier 1 capital | 28.46% | ≥6.5% | | Tier 1 risk-based capital | 28.46% | ≥8.0% | | Tier 1 leverage | 19.53% | ≥5.0% | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with NII and EVE analyses showing positive sensitivity to rising rates as of December 31, 2020 Net Interest Income Sensitivity as of December 31, 2020 | Change in Interest Rates (bps) | % Change in Net Interest Income | | :--- | :--- | | +400 | +50.0% | | +300 | +37.7% | | +200 | +25.5% | | -100 | (5.0)% | Economic Value of Equity (EVE) Sensitivity as of December 31, 2020 | Change in Interest Rates (bps) | % Change in EVE | | :--- | :--- | | +400 | +11.5% | | +300 | +9.3% | | +200 | +6.9% | | -100 | (6.9)% | Financial Statements This section presents the company's audited consolidated financial statements for the three years ended December 31, 2020, reflecting significant asset and equity growth post-IPO Consolidated Balance Sheet Highlights (as of Dec 31) | (In thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $15,964,190 | $11,628,775 | | Net Loans | $9,593,958 | $8,899,184 | | Total Deposits | $12,155,784 | $9,551,392 | | Total Liabilities | $12,536,138 | $10,028,622 | | Total Shareholders' Equity | $3,428,052 | $1,600,153 | Consolidated Income Statement Highlights (Year Ended Dec 31) | (In thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net Interest Income | $401,251 | $411,264 | $390,044 | | Provision for Credit Losses | $38,800 | $6,300 | $15,100 | | Noninterest Income | $178,373 | $182,299 | $180,595 | | Noninterest Expense | $504,923 | $412,684 | $397,928 | | Net Income | $22,738 | $135,098 | $122,727 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, financial disclosure, or auditing scope - None reported[644] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, despite the shift to remote work - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[644] - Management's report on internal control over financial reporting concluded that the company maintained effective internal controls as of December 31, 2020, based on the COSO framework[646] Other Information The company reports no other information for this item - None[647] PART III Directors, Executive Officers, Corporate Governance, Compensation, and Security Ownership Information for Items 10 through 14 is incorporated by reference from the company's 2021 Annual Meeting of Stockholders proxy statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2021 Proxy Statement[650][651][652] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, including Consolidated Financial Statements and an index of key corporate governance exhibits - The Consolidated Financial Statements are filed as part of this report[655] - An index of exhibits filed with the report is provided, including key corporate governance and compensation documents[658][663] Form 10–K Summary The company reports no summary for this item - None[664]