Eastern Bankshares (EBC)

Eastern Bankshares filed an IPO registration on June 18. Here are a few of my notes from reading the S-1.

Eastern is a mutual holding company (never did a first step conversion) that is converting to a full stock form organization. They are targeting an issuance of 175 million shares at $10, for an IPO of $1.75B (can be up or downsized). Will list on the NASDAQ under ticker EBC. Upon completion of the offering, 4% of shares will be donated to the bank's charitable foundation. The plan is to use the IPO proceeds to expand the bank through both organic growth and bolt-on acquisition opportunities.

Eastern is a full service community bank headquartered in Boston. They have over 200 years of history since founding in 1818. They currently have 89 branches throughout eastern Massachusetts and southeast New Hampshire. They have 2.4% ($8.7B) deposit share in Boston, which they say is the greatest market share for any full service bank headquartered in the Boston area (which is a fancy way of saying they're actually #6 in Suffolk county).

Eastern Insurance is a subsidiary that is an independent agent in the Property & Casualty and Life & Health segments for both retail and commercial clients. There are 22 non-branch insurance offices built through a roll-up of 31 independent agencies over the last 16 years. The insurance business contributes 15-19% of total net income, and helps boost the bank's fee income ratio to near 30%.

Selected Financial Conditions
Eastern is a $12B (will be close to $14B after the IPO) community bank. They run a fairly traditional balance sheet with a diversified loan portfolio (see below) funded by core deposits. Loans/Deposits are 87%. Deposit costs (as of 3/31) were 0.23% vs. 0.84% for peers (peer group chosen by management).

Nonperforming assets to assets have come up slightly in recent quarters to 0.4%, but that's still a very healthy level. The jump in NPA from 2018 to 2019 was attributed to a "loan participation, through our ABL [asset backed lending] portfolio, in a SNC [shared national credit] program portfolio that had a balance of $16.3 million as of 3/31/20."

Expect credit ratios to continue jumping higher in coming quarters with COVID related delinquencies. Management used 1Q to boost ALLL to 1.20% of total loans. I would expect more provisions in coming quarters. 

CET1 has been running in the 12% range in recent years, and will be boosted to 26% with the IPO proceeds.

Loans

• Commercial & Industrial make up 19% of the total portfolio. They focus on middle-market companies inside of geographic footprint. They do participate in syndications and Shared National Credit Program. SNC was 26% of C&I loans. Asset Based Lending Portfolio (ABL) was 10% of C&I. Portfolio appears diversified across sectors - see below for concentrations.
• Commercial Real Estate is 39% of total. Diversified portfolio with 19% of CRE in multi-family. Poses a risk due to COVID rent negotiations?
• Commercial Construction is 3% of total.
• Business Banking, which focuses on small businesses (under $1 million) is 8.6% of total.
• Residential real estate is 16%. They seem to be selling half or more of originations to secondary market, and don't retain servicing rights.
• Home Equity is 10%.
• Other Consumer is 4.5%. Of this, 60% are auto. They did discontinue an indirect auto loan program in 2018, so expects some of this portfolio to runoff. They did note they do "auto and AIRCRAFT" loans under "other" - curious why they specifically noted aircraft?

Deposits

Pleasantly surprised by the strength of the deposit portfolio. Focus on Demand and MMKT is what gives them the 0.23% average cost. CD's are a minor part, with $156 million of CDs are over $100k.

Rate Sensitivity
Eastern is asset sensitive, with a projected 5.7% increase in NII for a 200bps shock upward.

Income StatementCan see the drivers of the 30% fee income ratio. Insurance as well as a fairly healthy Trust/Investment department (AUM of $2.7B, implying a revenue rate of 0.73%). Salaries seem a little high to me (but that's often the case when I look at stocks). Bank rents all of its properties, so occupancy expense is higher than some peers. I think (but am a little unclear) that the charitable donations line item should go away after IPO due to donating 4% of stock to foundation (which, although is significant dilution, comes with a nice carryforward tax deduction).

Price to earnings ratio on 2019 numbers and issuing max number of shares at $10 would be: 14.5x.

Management
Management is as expected for a metropolitan community bank - lots of non-profit exposure on their lists. None seem to have big M&A backgrounds, but that's not expected for a community bank of this size. They have led Eastern through some bolt-on acquisitions over the past two decades.

Compensation seems high to me, but a lot will be tied to new stock offering going forward, so properly incentivized.

Board of Directors seems weighted toward health care / elder care. That didn't show up in their loan portfolio.

Officer and Director participation in the IPO: they max out at 200k shares. Glad to see a few maxing out their allocation (specifically CEO Rivers), but would have liked a little better uptake. Wish CFO Fitzgerald had maxed out allocation.

Valuation / Outlook
At a $10 price, EBC will IPO at a P/TBV of 0.65. This compares with its hand selected peer group average of 1.05.

However, EBC will be running a capital ratio 23% after IPO. I would love for them to turn around and immediately start buying back shares at 0.6x book, but I don't think that will happen.

I see EBC over time approaching peer group valuation, but the crux will be how well and how quickly they put excess capital to work. Acquisition target banks are cheap right now, so that's a tailwind. 

As of today, I really like EBC and their prospects. A high quality community bank converting at a good time. We will have to watch closely as the IPO approaches and see how the stock responds in early trading.

 

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