Northeast Bank
Q3 2020 Earnings Call Transcript

Published: 23 Apr 2020

[Operator:]

Good day, everyone, and welcome to the Northeast Bank Fiscal Year 2020 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 will reference in this morning's call. The presentation can be accessed at the Investor Relations section of the northeastbank.com under Events & Presentations. You may find it helpful to download this 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.Please note that this presentation contains forward-looking statements about Northeast Bank. Forward-looking statements are based upon the current expectations of Northeast Bank's management and are subject to risks and uncertainties. Actual results may differ materially from those discussed in the forward-looking statements. Northeast Bank does not undertake any obligation to update any forward-looking statements.At this time, I'd like to turn the call over to Rick Wayne. Please go ahead, sir.

[Richard Wayne:]

Thank you very much. Good morning, everyone. I am Rick Wayne, the Chief Executive Officer of 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. Before I start, let me say that our thoughts are with the individuals, families and communities, health care workers and first responders affected by COVID-19. It is unimaginable the toll the pandemic is taking around the world. We're doing our best to help the many affected by COVID-19, including donating N95 masks to local hospitals, contributing to local food pantries, homeless shelters and youth programs. We are providing accommodations to borrowers through payment forbearance and meeting the needs of our employees who face new challenges while working at home. We are participating in the Paycheck Protection Program, having originated 194 loans totaling $37.2 million in the initial phase, and hope to originate even more if funds for a second phase are appropriated.Friends, investors and other constituents of the bank often timely and genuinely ask how we are doing. We are doing well. In order to protect our employees and customers we only service deposit customers in branches, 8 out of the 10, which have drive-through windows. Other than employees working in those branches almost all other employees are working at home. Thanks to an exceptional IT and operations group, we've been able to conduct business virtually, no pun intended, the same as before the COVID-19 crisis.On the lending side, we are sourcing and underwriting business, closing and funding loans and managing our portfolio. On the deposit side, we continue to allow for opening new accounts online and continue to service the needs of our customers. It's certainly a different environment, but our professional, hard-working, adaptive and dedicated team has risen to the occasion.On this call, we would like to cover 4 topics

[Operator:]

[Operator Instructions]. Our first question comes from Alex Twerdahl from Piper Sandler.

[Alexander Twerdahl:]

First off, Rick, really appreciate all this detail on LTVs and credit in all your different portfolios. The LTVs all seemingly look great, but certainly, depend on the value of the collateral. Are there any of these segments where the collateral values have either declined recently or over time or may not be fully reflected in the LTVs that we're seeing on these slides?

[Richard Wayne:]

Let me thank you, Alex. That's a good question, and I want to make sure everyone is clear on the methodology that we use. We wanted to, for purposes of this, be using the values where there were appraised value. So I'm going to divide them into two groups. The purchased loans, the way we calculated the LTV -- the way we reported in this slide, LTV, we looked at the original valuation at the time the loan was made, which, as I indicated in the seasoning conversation was quite a long time ago. And then we looked at what our basis was because there's been a lot of paydown, and we bought them at a discount relative to that value. And we tested that methodology by looking at the values that we came up with when we determine the value when we purchased the loan, because as most of you know, when we buy loans, we're not looking at what the value is in the file, we're making our own determination. So we're very comfortable that's a good value.With respect to all of the other -- and so that's about $400 million of our loan book with the remaining $634 million, it's all -- let me break it actually into 2 groups to be more precise. For the remainder of the LASG portfolio, which is another $0.5 billion, those are very recent values because that's a portfolio that we have assembled very recently. With the case of the Community Banking portfolio, we looked at those values at the time the loans were made. So they're a little bit over, but Maine -- and we know this from -- well, first of all, living in -- not living, but working in a state and analysis we've done over time, Maine values never spike up or spike down, pretty steady. And finally, the SBA value, so that's a book that was assembled recently, and we use those value. So I think it's possible when we look at it and say, if we say we're 53% LTV on our LASG book, wanted to look at it and say, yes, but maybe the values have gone down some amount since then. But the point we're really trying to make is we have such enormous cushion there that they're going to go down probably and certainly in the short and medium time, but they're not going down 47%.

[Alexander Twerdahl:]

It's very helpful, Rick. And then kind of maybe a little bit related, I mean, a big portion of the LASG purchase business is resolving these loans and creating transactional income, which has been relatively consistent over the last couple of years. Do you anticipate any change in the timing or ability to recognize some of that transactional income and resolve these loans in the near term?

[Richard Wayne:]

It's a little bit hard to predict because by its nature, it's transactional. And we have some where we have big discounts where borrowers are asking for pay downs, but they don't always -- or payoffs, but they don't always wind up closing. I think the best way I could comment on that is that we should think about this over the next 9 months rather than the next quarter in two regards. One, I think it's hard to say what's going to happen over the next two months on paydowns. People are so busy dealing with the COVID-19 crisis that refinancing debt, selling property, which generates transactional income and the kind of typical life events are not the highest thing on people's to-do list.So I would not be surprised if that number was lower in the following quarter, although I really couldn't predict how much but -- and the reason I say 9 months because I think over 9 months, those things will just have to -- they will sort out. And the other comment I would make now -- I'm going to make a forward-looking statement, so I'm going to remind everybody we have a forward-looking disclaimer in air. But not that we -- anybody, of course, absolutely 100% not whatever wish the tragedy that's going on to have occurred, but it is. And I think that what we're going to see, and we are built for this there are opportunities to buy loans at better prices. There's going to be more supply, we believe. We believe there's going to be less buyers than there has been. The funds that we're buying, distressed debt for the longest time and more recently, without distressed debt they've been approaching in our world are going to be back to buying distressed debt there's going to be less buyers with liquidity to do this. As you know, there are very few banks to do what we do. And on the origination side, there's going to be less liquidity and less banks willing to lend. And we'd be ever mindful of not being the victim of a falling knife, and really tightening our credit box. So even more so than our already type credit box, I think we're going to have a lot of opportunities. But I think we should be thinking about 9 months. I don't think we should be thinking about the next quarter.

[Alexander Twerdahl:]

Okay. That's helpful. And then just to that point, maybe it's going to be a 9-month thing and not a next-quarter thing, but in terms of your ability to actually transact in the market, can you talk a little bit about whether or not there's any lapses in your abilities, considering that the bulk of your workforce is working remotely?

[Richard Wayne:]

We're doing this better than I ever could have hoped. And I mentioned in my scripted comments about our great IT group and our great operations group. I'll give the same accolades to everybody in the bank. Everybody is working really hard. We've never been busier. We've never been busier that I recall. And with technology that's readily available even to smaller companies like ours, getting into your VPN, having team meetings, using Zoom, we have nCino to manage our commercial, it's a platform to managing our commercial portfolio. We can keep track of things.We have all of the internal controls in place to do this. We are -- as we sit here, we're sourcing business, we're underwriting business. We're closing deals, we're funding deals. We're managing our portfolio. And in fact, we did $65 million of purchased loans in the quarter ending, where it's -- $20 million of that about was done while people were working at home. And just as a touchy feeling though, the whole team is -- we always work well together. I think we have a really great culture, even better now. People are trying to help each other out. People are talking continually on Zoom. People understand that everyone is important in what we're doing and everyone's stepping up. And so I don't really think there's only -- I wouldn't say -- I would say there's probably two practical things. One, people can't get on planes.They will look at purchased -- look at collateral as we did before. We have folks in the New York area that work full-time for us that can look kind of in the mid-Atlantic safely. And we have third parties that can look at collateral around the country for us, but any kind of collateral that's -- Pat and his group can tell you in his sleep what a multifamily property is worth in a particular market or certain kinds of collateral. But if we have collateral, it's tricky. We're passing on that for the time being. So I would say in that regard, it's different. But other than that, we're working really well and as well as we did before.

[Alexander Twerdahl:]

That's great to hear. And then with respect to the purchase market, you talked a little bit about the supply increasing, the demand potentially decreasing. How does that change your internal thought process around the pricing of some of these loans?

[Richard Wayne:]

Well, we want to -- there's a couple of things to figure out. One, we're going to -- we want -- we're going to get higher yields because there's going to be more supply and less buyers. I can say anecdotally, I don't want to put numbers or describe in any way. But we've recently had a loan -- a pool that we bid on. And there were 4 bidders. We came in fourth, which we thought was unfortunate at the time. As it turned out, the buyer wants to and needs to resell at a number that's significantly less than our bid was a month ago. And so we expect we're going to see lower pricing. How much lower, we will report when we reconvene in July. But I think we're going to start to -- and just to put it in context, after the financial crisis, the FDIC was selling performing loans for $0.60. We've been recently buying loans like that for $0.94. I expect that number is going to be declining. I'm not saying it's going to be $0.60. I'm not saying that at all, but I think it's going to be less.

[Alexander Twerdahl:]

Great. And then just -- you guys did a lot of buybacks this quarter, which is fantastic to see, especially given the stock valuation. What -- can you think about the capital position, you think about this opportunity, having really no way of telling how long or how deep the opportunity is going to be for you guys, how do you stack up buying back stock at 65% intangible versus saving capital for the opportunity that exists on the purchased or the lending side?

[Richard Wayne:]

Well, on the stock repurchase side, we were getting investors, smart investors, investors that pay attention to our stock that were urging us to buy back when our stock was trading above tangible book, buy back at $18, buy back at $19. On the theory that -- and it's a rational one, not what we adopted, but it's a rational one that the intrinsic value of our stock in their view was worth more than that. So we will be paying more than tangible book. Over time, it's going to be smart. At that time, we only had, as indicated in the stock repurchase slide, something like $250 million of capacity to grow our balance sheet. And we thought that at that level, it was much better for us to use our capital to invest in our business. When the stock went down to levels that were just ungodly, I mean it was down to $6 or $7 at one point, it became irresistible. It was -- we thought the most profitable thing we could do was to buy back our stock.Now we wouldn't use all of our capital to buy back our stock because we have a business to run. But with the relief we got -- regulatory relief, increasing our loan book now by $140 million, we think we can do both. We think we can buy back our stock where the prices make sense. And we can -- and still have enough capital to grow our balance sheet. I'm not saying we're going to do this, but just to -- as a math model, if you take a look at what your earnings are, and you multiply them by 10, and you take that by 80, but -- let me just use real numbers, but I'm not trying to say we're going to do this. We may do better, we may do worse, I don't know. But let's say you made $20 million in the year. So $20 million under our Tier 1 test, we could divide that by 0.09, actually. And I don't have a calculator in front of me, but I'll call that $225 million. I'm probably off a little bit. And if you loan 80% of that, that gives you about $170 million of additional loan growth from earnings -- from organic earnings. So between the $400 million we have ready now, the additional amount we're going to get as we earn money, the pay downs that we have, we think we can -- we have lots of ability to originate and purchase loans and if the stock price stays where it is, to buy back stock.I want to make one comment also, which I saw in your note, but I think for the broader audience, at the end of -- within the third quarter, while the window was open, directors went in the market and bought 75,000 shares. Now that we file with the FDIC rather than the SEC, we, of course, put that on our website, and anybody can find it on the FDIC website, but it sometimes not readily is available. So I'm just mentioning that for anybody who didn't know it.

[Alexander Twerdahl:]

That's fantastic. Two more quick questions, if I may. One, just as I look at the funding side of things here and maybe not quite as important as credit today, but the margin is still important for a bank. It seems like your funding is still relatively expensive at 170 basis points cost of deposits versus what the market has done over the last couple of weeks. How quickly do you think that $170 million can start heading back down towards 1% or even potentially lower?

[Richard Wayne:]

JP, you want to take that, please?

[Jean-Pierre Lapointe:]

Sure. Thank you, Rick. Alex, agreed. The cost of deposits was still a little high during the quarter. The cost of interest-bearing deposits for the quarter was 1.86%, which was down from 1.98% in the previous quarter. However, at the end of the quarter, the weighted average rate of our interest-bearing deposits was 1.8%. So obviously, lower at the end than it was during the quarter. Additionally, in the first 5 days of April, we lowered the rates on our money markets, both ABLE and Community Bank by at least 30 basis points. So that's about almost $300 million that will have 30 basis points savings on. Also, we have about $72 million of CDs that are scheduled to mature in our fourth fiscal quarter at a weighted average rate of 2.19%, which either we let the money run off if we don't need it or if we put it back on the books, we're saving about 100 basis points on that $72 million over the next quarter, so. In this upcoming three months.

[Alexander Twerdahl:]

That's great. That's very helpful. And then final question for me. The income tax expense that you guys -- the nonrecurring item this quarter related to -- I think related to the stock buyback. Is that something that we're going to see every time you guys buy back stock? Or is that some sort of a -- something that's kind of a onetime thing? From here on out, we're not going to see it?

[Richard Wayne:]

No, it's one and done. The really crazy thing. And before 1990, there was some tax rules that allowed companies and banks to take more bad debt expense than they actually encouraged. It's kind of like depreciation recapture. So there were triggering events to having to recapture that, one of which was the stock repurchase. But this round, we've used it all up. So if we were to purchase more shares in the future, we would not have that tax -- associated tax costs.

[Operator:]

[Operator Instructions]. I show no further questions in the queue at this time. Now I'll turn the call over to Rick Wayne for closing remarks.

[Richard Wayne:]

Thank you. First, thank you, Alex, for all of those good questions. I hope that the others on the call found the answers good. They were certainly good questions. I want to, just on a personal note, wish all of you, health and safety and that we all get through this challenging, challenging time in good shape. I want to thank many of you who have either e-mailed or called asking how we're doing, very, very much appreciated. I hope when we talk again in July, we -- the world is in much better shape and -- when we have that conversation. So thank you very much. We always appreciate your input. We always try and improve our presentation to address any things that you think are -- would be helpful and that we can do so. I encourage you as you have other thoughts on this to let us know.And with that, we will say goodbye and wish you a nice day and soon to be a nice weekend. Thank you very much.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.