Northeast Bank
Q3 2021 Earnings Call Transcript

Published: 22 Apr 2021

[Operator:]

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2021 Third Quarter Earnings Results Conference Call. This call is being recorded. With us today from the bank is Rick Wayne, President and Chief Executive Officer; JP Lapointe, Chief Financial Officer; and Pat Dignan, Executive Vice President and Chief Credit Officer. Last night, an investor presentation was uploaded to the bank’s website, which we’ll reference in this morning’s call. The presentation can be accessed at the Investor Relations section of northeastbank.com under Events & Presentations. You may find it helpful to download the investor presentation and follow along during the call. Also, this call will be available for rebroadcast on the website for future use. The question-and-answer session for this call will be conducted electronically following the presentation.

[Rick Wayne:]

Thank you. Good morning and thank you all for joining us today. I’m Rick Wayne, the President and Chief Executive Officer of the Northeast Bank. And with me on the call are JP Lapointe, our Chief Financial Officer; and Pat Dignan, our Chief Credit Officer and Executive Vice President. After my comments JP, Pat, and I will be happy to answer your questions. For purposes of my comments, I’d like to use the slide deck that we uploaded as a reference tool. Turning to Slide number 3, which is the slide after the forward-looking statement. I want to highlight a few points here. One, on our purchase loans, for the quarter we purchased – we invested $39.9 million on $42.5 million of UPB. We bought this literally the last date of the quarter, so the income from this pool – from this purchase was not reflected in our quarterly results, but we’ll of course be on a go-forward basis. For the year, this is now through three quarters we purchased or invested $136 million and I would compare that for the full year of FY2020 where we purchased or invested $171 million with a quarter to go for us to make apples to apples comparison. On the originated side, we originated $69.3 million of loans, which brings us to $194.8 million for nine months and our entire volume for FY2020 was $171 million, which of course, was impacted by COVID. But we are originating a lot and have a big pipeline. I want to spend a little time now on the PPP and then some more – in the future slides, I’ll go into some more detail. In the quarter, we originated $2.25 billion. I want to say that again, that’s a lot, $2.25 billion of which we sold $2.14 billion to the Loan Source generating a pre-tax gain of $33 million. As you know, from our previous calls, we act as a correspondent to Loan Source effectuating the borrowing from the fed to purchase loans and we share in half of the revenue for that. In the quarter, the March quarter that just ended, we earned $6 million and for the three quarters of our fiscal year, we have earned $16.8 million. So far our average cost of deposits for the quarter was 54 basis points. And JP is going to have a lot to say about that because we consider that to be a really meaningful accomplishment as we’re focusing more and more on improving our funding composition and cost of funds.

[JP Lapointe:]

Thank you, Rick, and good morning, everyone. I will pick up on Slide 20, which shows a quarterly interest cost of our deposit portfolio, which has decreased significantly over the past five quarters from 1.7% in the comparable prior year quarter to 54 basis points in the current quarter and stood at 49 basis points at the end of the quarter. The significant interest expense savings has been achieved from a combination of a low interest rate environment along with our efforts to shift the makeup of our deposit portfolio from time deposits to transaction accounts.

[Operator:]

And we do have a question from Alex from Piper Sandler.

[Alex Twerdahl:]

Hey, good morning guys. Can you hear me?

[Rick Wayne:]

Alex. Good morning. Sorry for the technical difficulty there.

[Alex Twerdahl:]

No worries at all. I’m surprised where you might be the only guy in the country with a home phone still.

[Rick Wayne:]

Mobile phone, I get the iPhone 12.

[Alex Twerdahl:]

Sorry about that. A couple questions for me. First off, I know we can look from the SVA data, which I think through the second week of April, you guys had originated a total of $2.56 billion loans in the round two, obviously you disclosed in the press release what you did through the end of the first quarter. Are you able to give us an update on kind of where that – what that total origination volume is through, I guess, now the third week in April?

[Rick Wayne:]

Yes. It’s in that range still, it’s maybe $2.6 billion and a little more roughly that it’s not meaningfully is higher than that number, but not meaningfully higher. It has slowed down, but the obvious point is we have in this quarter another $500 million or $600 million that will wind up selling in the current quarter. Is that really the second part of your question I anticipated?

[Alex Twerdahl:]

Yes, I assume everything has to be sold correctly by – if I’m correct, by the end of June, is that right?

[Rick Wayne:]

Correct. Yes. Now it’s possible that the fed will extend the PPP window. We’ll certainly sell virtually all of our production before the end of June. I think an open question, and there is no prediction applied in this is if they extend the window, will there be an opportunity to buy more loans that we don’t know for Loan Source.

[Alex Twerdahl:]

Okay. And then I wanted to drill in on some of the commentary you had on changing the pricing strategy around the loan purchases. And I was wondering if you could maybe help us understand if that’s certainly that should result in more volume. But are you underwriting them now to try to get a certain number of volume in the door per quarter or per year, sort of what are the acceptable yields and how will the complexion of the portfolio change as a result of some minor tweaks to the strategy?

[Rick Wayne:]

Well, I would say that the – this is an incremental change in our strategy. Of course, when there are opportunities arise, bid on loans as we did previously with the generated higher yields. But we have taken a look at how much capacity that we have and say that, if we can bid loans where we – in our view, there’s not a credit risk component and we can bid loans that I don’t want to say on the phone what our bidding strategy is exactly because there are other people listening for obvious reasons. But I think the point is, the way I can say it is that in addition to whatever we would bid before, if we can bid loans and earn roughly what we would do on an originated loan and buying them in bulk, that’s a good strategy.

[Alex Twerdahl:]

Okay. Agreed. And then, sometimes in the call, you give an update on the volumes of loans that you are able to look at during the quarter what you bid on. And obviously we know what you actually want to purchasing. Are you able to provide those figures to us?

[Rick Wayne:]

Yes, I can. Let me just – if you give me – if you ask one more question, while I’m looking, I will tell you that.

[Alex Twerdahl:]

Yes. Well, I wanted to ask a question on the deposit cost strategy. Obviously the growth in the community bank is pretty impressive, and I know that you’ve changed your the strategy there a little bit over the past year. I was hoping maybe you can kind of remind us what the change of the strategy is? And if that’s going to be – if there’s still some runway to grow deposits there and going forward, if that’s going to be the primary funding source for everything?

[Rick Wayne:]

JP, do you want to comment on that, while I’m searching for Alex’s other question?

[JP Lapointe:]

Sure. Thanks, Alex. So the focus there was, looking at our branch network and looking at some of the opportunities that we have to generate some retail deposits, partnering with professional service companies and other that have less lending needs, but have deposit needs and reaching out to them and trying to grow the community bank that way. And it’s been very successful. We’ve been looking outside of our normal, what we had always done in the community bank for our deposit growth. and looking at different opportunities that might present themselves in the main market and elsewhere, which has a lot of to grow that successfully over the past year or so and hopefully continue to do so in the future and becoming less reliant on the able funding arm and the Bulletin Board’s that we have there. So a lot of it has been grassroots efforts outreach to some of these professional service companies and just making sure that our product mix meets the needs of some of these companies to be able to offer them what they need from an institution to place their deposit.

[Rick Wayne:]

Okay. Thank you for that. I think – I’m sorry, go on Alex.

[Alex Twerdahl:]

No, no, you go on.

[Rick Wayne:]

Well, first I was going to acknowledge, you’re right. We do have an old phone. It just rang. I was thinking I was talking on my cell phone. Yes, we do have, because I’m aging myself here. We look at on the purchase side, we’d reviewed $280 million of this some rounding here of loans. We bid on $70 million and we were awarded $42 million.

[Alex Twerdahl:]

Okay. Now, I mean…

[Rick Wayne:]

I would say all the quarters. Go on.

[Alex Twerdahl:]

I was going to say a couple of quarters ago, when we all thought the world was coming to an end and we were looking at sort of the opportunity to purchase loans, it was seemingly very strong based on sort of distressed assets and companies needing to shed certain types of loans. Now, fast forward a couple of quarters where we are today, it seems like credit is no longer as big a concern. However, we’ve had a lot more M&A than we probably were anticipating a couple of quarters ago, which I know sometimes drive some of these loan sales. So I was hoping you could give us a little bit of commentary and sort of how you see the picture today for the loan purchase market.

[Rick Wayne:]

I’m going to start it, I’m going to ask Pat to jump in and answer this. I would say, it hasn’t turned out as we originally thought, as you said. There are not – there is not a ton of loans that we can buy. What’s our thought we’ve maybe we would have bought at $0.80 probably said that earlier. It’s just not the case. We’re really seeing a fair amount, although it’s not – it wasn’t so much in the quarter that just anything, but kind of what we look forward to is, we are seeing fair number of loans that are low LTV, that are may be winning at 6% yield to maturity and with some prepayment, you’re going to make a 7%. We’re seeing a fair amount of loans like that. But it’s not what we thought. And I don’t think – I think there’s probably a universally held view. Credits a lot better than everybody would’ve thought it would’ve been, at least in our world it seems to be bad. You want to answer that, provide Alex some more color?

[Pat Dignan:]

No. I think that’s right. A few quarters ago, it seems like there were two markets, there was the cleaner low LTV stuff, which was trading aggressively or there was a lot of competition for them, and then higher yielding loans, which were – a lot of which were just not selling because of the bid-ask gap. And that seems to have – that piece of the market seems to dry it up. And right now it’s kind of a typical sellers’ we’re seeing out there. There’s a lot of talk of some big sales coming due to M&A, but we haven’t seen any materialize yet.

[Alex Twerdahl:]

Okay. So if we look back at maybe 2019 as an example year for what you did, and obviously there’s a lot of lumpiness in the quarters, would you say the market is looking similar to the way it was in 2019? Or is it a competitive landscape changed as well for purchase market?

[Rick Wayne:]

Pat?

[Pat Dignan:]

Yes. I don’t think it’s changed as much as we thought it was going to change at the beginning of this. A year ago, we anticipated a significant change. So there’s a few players that are no longer in the market, but for the most part the market has not changed that much except what we’ve seen, I guess, over the past year is more cleaner higher quality loans.

[Rick Wayne:]

This is a point I would make though, is rather than looking just at the yield on the purchase loans, let’s think about spread, right? So, if you can buy loans that you earn a 7%, our money process, right now 50 basis points, all day long, 650 basis points is a really great spread on purchase loans. And I’m not suggesting that that’s where the number will be for the quarter. I don’t have that slide open though. We were 8.5% roughly, I can open up and be more precise in my language. But we’re still earning a really great return on our purchase loan book with much lower funding costs. I think that is really the key part of this.

[Alex Twerdahl:]

Agreed. And then on the originated LASG, which is become a much larger percentage of the portfolio over the last few years, as you talk about the change in – the slight shift in the strategy there to try to keep more loans or try to help them refinance with Northeast. Will the refinance loan look a lot like the loan that you’d have on the balance sheet today, or the characteristics would be different for any reason?

[Rick Wayne:]

Obviously the credit part of it would look the same. If we didn’t like the credit, we would not extend it. It’s to be negotiated. It really depends on kind of where the loan was sourced from. If we bought it on a purchase loan that may have been had a low rate of 3% or 3.5% when it was underwritten and we bought it at a discount to get a better yield, that’s a loan that you would expect that we would extend 5.5%, maybe 6%, maybe lower depends what you can negotiate. But our goal would be to at least on the rate part of it is to, maybe the rate would come down a little bit as an enticement for the borrower to stay with us. There’s a lot of reasons why a borrower should want to stay, there’s no closing costs, there’s no appraisal, there’s no legal, it is very few friction costs they’re already there. Hopefully, we have a good relationship with them. And so there may be a little bit of pricing concession. And then there’ll be some cases where the pricing goes up. Our goal – I’m not suggesting at all, that we’re going to take a portfolio, an originated portfolio or portfolio finance one where we’re earning a six, we’re going to earn a four. We’re still going to earn very good returns on it. I’m just making if you look at, on the originated side last quarter, we had more pay downs than we had originations. We think it’s a huge opportunity with $1 billion loan book to try and get loans that are longer and stickier and develop closer ties with those customers.

[Alex Twerdahl:]

Understood. Two more questions for me. First off, you guys essentially raised a bunch of capital this quarter through all the PPP, or if you did, which is awesome as you think about the capital position, certainly growing loans is probably your first priority, but where does repurchasing shares fit in the sort of in the scheme of capital allocation?

[Rick Wayne:]

Well, we have a lot of capital now. We always have to think about whether we can use our capital in the business or if not. Think about whether we ought to think about repurchasing shares or some other return of capital. In part, it depends upon the price. Maybe we talked about this, sometime when we were trading at $25 bucks would have been one thought now, which who knows how long it’ll last. I’m looking at my – $30 bucks, it depends. It depends on where the stock price is relative to our tangible book certainly, within the realm of possibility that we could repurchase more shares. So if we don’t feel comfortable that we have a way to use the capital on our lending business.

[Alex Twerdahl:]

Got it. And then, final question for me, which you sort of went through it already, but on Slide 4 with the correspondent fee, the moving parts there, perhaps it’d be worth just kind of going through one more time, how the revenue that $11.8 million of revenue that’s yet to be recognized from the correspondent fee summary will actually sort of the timing on that. Especially, as maybe some of these loans start to be forgiven in the next couple of quarters. And then also how that will impact the servicing interest, which we’d expect probably to go up next quarter, just because of all the loans that the loan source has purchased from you guys. But maybe if there’s a way to sort of frame what the expectation could be over the next couple of quarters, as some of the forgiveness starts to play into the numbers.

[Rick Wayne:]

JP, do you want to do that please?

[JP Lapointe:]

Sure. Thank you, Alex. I’ll break your question into a couple of parts. The first, I think you’re correct, I think we’ll see the servicing component increase next quarter. If that’s the end of the PPP and the end of the PPP payoff and loan sources that have the ability to purchase any additional loans then that’ll kind of be the highest point that it’ll be at and then as they’re forgiven over time, we will gradually come down as a servicing portfolio runs down. On the other aspect, on the – the amortization of the correspondent fee and the purchase accrued interest, we had set that up originally when all of these loan purchases occurred to be recognized over an approximate life of the loans, which we determined to be about two years. So we do have that amortizing over that life. But we do look at it each month to see if the loans are being forgiven quicker than how we’re recognizing that. So right now there hasn’t been any pickup there where the loans are running off faster than, how we’re recognizing those fees, but if it comes to a time, where those are being forgiven at a pace faster than how we’re recognizing that the income they could accelerate our recognition at that point.

[Alex Twerdahl:]

Great. That’s helpful. Thanks for taking my questions.

[Rick Wayne:]

Alex, great. Thank you very much.

[Operator:]

Okay, sir. I will now turn the call over to Rick Wayne for any closing remarks as we have no further questions.

[Rick Wayne:]

Thank you. First, Alex, thank you for that set of questions. I hope that was helpful to you and others on the call, to everyone else on the call, and Alex, of course. Thank you for listening in, supporting us. We will have another call in July when we talk about our fourth quarter and our fiscal year end results. In the meantime, as I always suggest, if you have any questions feel free to call anyone of us and to the extent that we’re able to answer those. We will do that. And with that, I will say goodbye to you. Thank you.

[Operator:]

Thank you, ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.