Eastern Bankshares Inc
For the period ended Dec 31, 2023. Filed Feb 26, 2024.
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FY2023 · Filed Feb 26, 2024
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Financial Statements
To the Shareholders and the Board of Directors of Eastern Bankshares, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eastern Bankshares, Inc. (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report February 26, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Allowance for loan losses | |
| Description of the matter | The Company’s loan portfolio totaled $13.9 billion as of December 31, 2023. As of December 31, 2023, management established an allowance for loan losses of $149 million. As described in Note 2 and Note 4 to the consolidated financial statements, the Company uses its allowance methodology to systematically estimate the amount of expected lifetime losses in the loan portfolio. Expected lifetime losses are estimated on a collective basis for loans sharing similar risk characteristics and are determined using a quantitative model based on management’s determination of a loan’s probability of default, loss given default and exposure at default, which are derived from the Company’s historical loss experience, industry loss experience and other factors, adjusted for economic forecasts. The quantitative model is combined with an assessment of certain qualitative factors designed to address forecast risk and model risk inherent in the quantitative model output.Auditing the Company’s allowance for loan losses was complex due to the quantitative modeling used and involved subjective judgment to evaluate management’s assessment of qualitative factors in determining adjustments to the quantitative model output. |
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| How we addressed the matter in our audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s allowance for loan losses process, which included, among others, controls over the appropriateness of the methodology, the development, operation and monitoring of the quantitative model, management’s review of the qualitative adjustments to the quantitative model output and overall model result. We tested management’s quantitative model including evaluating the model validation procedures performed over conceptual soundness of model methodology, and with the assistance of EY Specialists, we assessed model governance policies and procedures, as well as the conceptual soundness of the Company’s qualitative factor framework utilized in determining the overall allowance for loan losses.To test the qualitative risk factors, among other procedures, we assessed management’s methodology and considered whether relevant risks were reflected in the models and whether adjustments to the model output were appropriate. We tested the completeness, accuracy and relevance of the underlying data used to estimate the qualitative adjustments. We evaluated whether qualitative adjustments were reasonable based on changes in economic conditions, the loan portfolio, management’s policies and procedures, external legal and regulatory factors, and lending personnel. We tested whether management’s final qualitative factor weighting was consistent with the external and internal evidence obtained. Further, we performed an independent test over the existence of potential new or contrary information relating to risks impacting the qualitative adjustments to validate that management’s considerations were appropriate. Additionally, we performed an analysis examining quarter-over-quarter changes to the Company’s qualitative factor adjustments to test reasonableness and timing of changes to the Company’s qualitative factors. |
| Goodwill Impairment Assessment of the Company's Reporting Business Reporting Unit | |
| Description of the matter | The Company’s Goodwill related to the banking business reporting unit totaled $566.2 million as of December 31, 2023. As of December 31, 2023, management determined that goodwill of the banking business reporting unit was not impaired. As described in Note 2 and Note 7 to the consolidated financial statements, the Company evaluates goodwill for impairment at least annually, as of September 30, or more often if warranted, using a quantitative impairment approach. The quantitative impairment test compares the book value of equity for each reporting unit to the fair value of each reporting unit. If the book value exceeds the fair value, an impairment is charged to net income. Specifically, the Company’s annual assessment performed as of September 30, 2023 included a comparison of the banking business’ book value to the implied fair value using an average of the income and market approaches. The Company performed a qualitative assessment as of December 31, 2023 to update their goodwill impairment assessment of the banking business. Auditing the Company’s goodwill impairment assessment of the banking business unit was complex due to the significant estimation involved in determining the fair value of the business unit. In particular, the fair value was sensitive to certain assumptions used by management to develop the projected financial information used in the income approach, including the terminal forecasted net interest income assumption. |
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| How we addressed the matter in our audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s goodwill impairment evaluation process, which included, among others, controls over the appropriateness of the methodology, management’s evaluation and oversight of external specialists, and management’s identification and review of significant assumptions utilized in the quantitative impairment test. With the assistance of EY Specialists we tested management’s quantitative impairment assessment including evaluating the impairment methodology, performing a sensitivity analysis to identify significant assumptions, independently testing a selection of significant assumptions used in the model, and independently testing the completeness and accuracy of the Company’s fair value determination utilized in the goodwill impairment test. Additionally, for both the annual impairment test as of September 30, 2023 and the qualitative impairment assessment performed as of December 31, 2023, we have compared the significant assumptions used by management to recent financial performance, the company's peer group and economic trends. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Boston, Massachusetts
February 26, 2024
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