Banker & Tradesman file photo
Eastern Bank has got out of the woods with positive net income in the second quarter after being in the negative in the first quarter after selling securities at a loss as interest rate increases eroded their value.
The bank reported on Friday that its second-quarter net income was at $48.7 million or $0.30 per diluted share, which was a significant jump from the net loss of $194.1 million or $1.40 per diluted share the previous quarter.
The first quarter net loss was due to Eastern Bank “repositioning” its balance sheet by selling $1.9 billion in lower-yielding, available-for-sale investment securities, leading to an after-tax loss of $280 million. The proceeds were used to pay off wholesale borrowings, support customer deposit activity and fund loan growth. The move had generally been praised by analysts as an effort to “rip the Band-Aid off” of the bank’s exposure to interest-rate risk – the same risk that, managed differently, took down Silicon Valley Bank in March.
“Our second quarter results show the tangible benefits of the balance sheet repositioning completed in the first quarter. As anticipated, our net interest margin expanded 14 basis points in the quarter, and the cash raised from the sale was used to enhance our overall financial positioning. Our wholesale funding was less than 5 percent of total assets at the end of the quarter and operating revenues were up $1.5 million,” Bob Rivers, CEO and board chair, said in a statement on Friday.
The bank’s net interest income was at $141.6 million in the second quarter, which was higher than $3.3 million in the first quarter and $137.8 million in the second quarter of 2022. Net interest margin went up to 2.80 percent from 2.66 percent the prior quarter and 2.63 percent from the second quarter last year. Net interest was propped up by healthy yields from loans, securities, and cash.
Non-interest income came from insurance commissions, deposit service charges, and debit card processing fees, among others. Non-interest expense was up from the prior quarter due to higher salaries and benefits, occupancy, and data processing, as well as a $1.5 million increase in provision for credit losses and a $1 million increase in marketing.
Total loans increased $14 billion versus $13.6 billion last quarter and $12.4 billion in the second quarter last year. Quarter-on-quarter growth was driven primarily by the increase in commercial loans.
Total deposits amounted to $18.2 billion from April to June, which was less than the $18.5 billion from January to March and $19.16 billion from April to June of 2022.
Eastern Bank executives said that out of Eastern’s $829 million office-related commercial real estate loans, around $713 million are investor-owned buildings. The bank said it is closely monitoring the loans and that none of them are non-performing yet. It added that the average office loan size is $4 million and that 38 percent of the office loans it holds on investor-owned buildings are located in Boston and Cambridge while the rest is in suburban areas.
For the whole of 2023, the bank sees “modestly lower” net interest income and a “low single-digit” growth in commercial loans, dragged by slowing loan growth in the second half of the year.
Rivers, the CEO said during the bank’s earnings call on Friday that the bank is continuously fine-tuning its forecasts due to uncertainty from the current fast-paced banking environment, as the Federal Reserve raised interest rates Wednesday and regulators are keen on raising capital requirements for the nation’s largest banks, potentially taking more money out of the economy.
“While we expect a challenging environment to continue in the next few quarters, we have taken steps to be well prepared… We increased our allowance for loan losses and moved our provision higher to be consistent with that outlook. We also believe the Fed will raise rates higher for longer and the heightened competition for deposits will continue,” Rivers said.
“Our primary focus moving forward is to gain market share and improve our competitive position in this environment. The failure of both Silicon Valley and First Republic has created significant turmoil in our market. Although we operate differently than they did, there is market opportunity that is evident to us,” he added.
