Since late May, Eastern Bankshares (EBC -1.07%) has seen its stock price retreat by around 16.5%. The regional bank, based in Boston with roughly $17 billion in assets under management, has only been a public offering since last October when it was listed at less than $12 per share. The stock price has risen as high as $23.03 before pulling back over the last few months.
Eastern's second-quarter earnings, however, offered confirmation that even at its current price of around $19.24 a share, this is a bank stock that you can buy cheap right now. Here's why.
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Q2 results saw signs of growth and improved credit quality
Eastern generated diluted earnings per share (EPS) of $0.20 on total revenue of $150.3 million. Its EPS missed analysts' expectations by a penny, although operating EPS beat by a penny and revenue also beat expectations. There were some one-time, non-recurring expenses in the quarter that hurt earnings, including $3.5 million of expenses related to Eastern's pending acquisition of Century Bancorp (CNBKA), which will add another $6.4 billion in assets to the bank when the deal finalizes in the fourth quarter of 2021. There was also another $3.3 million of expenses related to the expected settlement of overdraft litigation.
The good news was that Eastern saw signs of loan growth, which has been hard to come by across the industry, with loans (excluding Paycheck Protection Program (PPP) loans) growing nearly $117 million in the quarter, or 1% from the sequential quarter. That included 1.3% growth in commercial loans excluding PPP, which is actually pretty good, as commercial loan growth has been more muted than consumer loan growth. It also included 3.6% growth in the residential real estate portfolio. Net interest income, which is essentially the profit banks make on loans and securities, grew about 4.5% from the first quarter of the year, more than half of which was due to interest income from loans.
Credit quality continued to improve as well. Net charge-offs (debt unlikely to be collected and a good indicator of actual losses) ticked up to 0.10% of loans, which is still very good, but non-performing loans (those that have gone 90 days without receiving a payment) declined in the quarter by about $2.4 million. Additionally, remaining COVID-19 modifications have declined from 1.8% of total loans as of March 31 to 1.6% as of June 30. As a result of the improved credit and macroeconomic outlook, Eastern released $3.3 million of reserves previously built up for loan losses back as profits, its largest release since the pandemic began.
Eastern shareholders have reasons to remain bullish
Eastern experienced core loan growth for the first time since the pandemic began, and CFO Jim Fitzgerald said the pipeline for new loans is at $600 million, a little ahead of where it was at the end of the first quarter.
Fee income declined $9.5 million in the quarter, mostly due to the decline in insurance commissions from the seasonally high first quarter. However, fee income still makes up about 30% of total revenue, and Eastern is still guiding for full-year fee income to surpass last year's numbers and be in line or ahead of numbers in 2019. Deposit costs continue to be a mere 0.03%, which is superb, and 60% of all deposits come from checking accounts, which is also superb.
Eastern is also preparing to integrate Century Bancorp into the bank, its largest acquisition ever, and one that opens up lots of opportunity. The deal is expected to boost earnings at Eastern by 55% and also make the organization much more efficient. There could be further revenue synergies, as Century brings new customers for Eastern to cross-sell its insurance products to, as well as strength in the healthcare, higher education, and marijuana sectors.
Lastly, due to its very large $1.8 billion IPO, even after the Century deal, Eastern will still have $1.1 billion in remaining proceeds, and a ridiculously high common equity tier 1 (CET1) capital ratio of roughly 20%. Banks must hold a certain amount of capital for unexpected losses, and the CET1 ratio measures a bank's core capital expressed as a percentage of its risk-weighted assets such as loans. Eastern's required CET1 ratio is only 6.5%, so it has plenty of available capital to pursue other acquisitions opportunistically, and I expect the bank to launch a share repurchase program later this year as well.
An attractive entry point
As a mutual bank that is technically owned by its depositors, Eastern, like all mutual banks when they go public, debuted on the Nasdaq exchange at a share price that significantly undervalued the bank. With shares going for slightly below $12 on the first day of its listing, Eastern stock only traded at roughly 73% of its tangible book value (TBV), which is a bank's equity minus its goodwill and intangible assets, and essentially what the bank would be worth if it were to be immediately liquidated.
So, the stock price run-up to almost $23 and now roughly $19.24 per share is impressive, but it doesn't tell the whole story. Currently, Eastern trades at just 117% of TBV, which is a low valuation for a bank with such an excellent deposit base, great credit quality, and a strong stream of fee income. The stock is still relatively new, but if Eastern can execute on its acquisition of Century and keep doing what it already does well, then stock in this bank is definitely trading at a bargain right now.
