Northeast Bank in Portland, Maine, benefited more than most lenders from the Paycheck Protection Program. And over the past three months, the $1.74 billion-asset bank has put much of the capital it generated in 2020 and 2021 to good use.
Northeast purchases and originates national commercial real estate loans, most of them larger than $3 million. Earlier this month, Northeast announced that it had purchased loans — primarily commercial real estate credits — totaling $1.16 billion since Sept. 30.
The fourth quarter represents Northeast's most productive three-month stretch "by a wide margin," Rick Wayne, the bank's president and CEO, said. Northeast's loan portfolio totaled $1.45 billion at the end of the third quarter, generating net interest income totaling $23.6 million for those three months.
"The current interest rate and liquidity environment has presented this opportunity to us, and the strength of our balance sheet and operations — including our strong capital position — has allowed us to be successful in seizing the opportunities that have arisen recently," Wayne said.
"We've significantly increased our loan portfolio and number of customers," Wayne added.
Small-dollar gains
Northeast also appears to be making the most of its small-dollar lending opportunities.
In partnership with Chicago-based Newity, Northeast has originated nearly 150 Small Business Administration 7(a) loans in the past few months. Luke LaHaie, Newity's co-CEO, predicts that the partners could close more than 1,000 7(a) loans in 2023.
Northeast and Newity focus on loans of $250,000 or less. A nonbank lender created in 2020 to purchase and service Paycheck Protection Program loans, Newity announced a
"It definitely took us longer to get the process going than we thought," LaHaie said. "Everything is more complicated when you actually get into the nitty-gritty. … A lot of the [delay] was learning how to best approach the $250,000-and-below segment, both from borrowers and our own internal processes. Now we feel really good about the whole setup."
With its operational concerns largely ironed out, LaHaie said Newity is close to reaching its near-term goal of originating 50 7(a) loans a month. "One hundred a month is probably achievable later in 2023," LaHaie added.
From Wayne's standpoint, the more loans Newity can originate and package for his bank, the better. Newity originates loans on the front end and services them on the back end. Northeast provides the final credit approval, as well as funding.
"Newity is doing high-quality work enabling us to efficiently book 7(a) loans," Wayne said.
Northeast earns noninterest income by selling the guaranteed portion of the 7(a) loans it books on the secondary market. The residual nonguaranteed portions generate additional interest income.
The strategy "can be quite profitable with high volumes of loan production," Wayne said.
Northeast, along with Newity, is the latest SBA lender to make a significant play for small-dollar loans. BayFirst Financial, a $930 million-asset lender in Tampa, Florida,
For the past two years, Huntington Bancshares, which has $179.4 billion of assets and is based in Columbus, Ohio, has
PPP's legacy
Much of Northeast's fourth-quarter success can be credited to its participation in the $800 billion Paycheck Protection Program. Northeast originated more than $2 billion of PPP loans on its own. It also linked with Newity — then doing business as The Loan Source — to purchase loans from lenders who had rushed to provide credit lifelines to small businesses grappling with the COVID pandemic. Those lenders proved much less enthusiastic about weathering the servicing challenges from an extremely complicated government relief program, so they were eager to exit once they stopped originating loans.
Under the partnership, Northeast leveraged its bank charter to access the Federal Reserve's Paycheck Protection Program Liquidity Facility and facilitate the purchase $11.24 billion of PPP loans. Newity handled servicing. The arrangement generated $103.9 million for Northeast from the sale of PPP loans and correspondent fees through Sept. 30. Northeast reported $252 million of shareholders equity, as well as a 15.6% Tier 1 leverage capital ratio on Sept. 30.
It was that robust capital position that enabled Northeast to take advantage of the opportunity to purchase more loans.
"We had a lot of capital because of the money we made in the PPP," Wayne said. "We were able to use that capital to purchase a high volume of loans."
Wayne's focus on national commercial real estate has served him well during his 35-year banking career, including the last 12 years at Northeast. Wayne led a group of investors that purchased a controlling stake in the 150-year-old Northeast in December 2010. Before that, Wayne spent 16 years as president and co-CEO of Boston-based Capital Crossing Bank, which he and partner Nicholas Lazares built into a $1.2 billion-asset institution before its sale to Lehman Brothers for $210 million in 2007.
Capital Crossing's business model was built around buying national commercial real estate loans at a discounted price, which enhances the yield for the purchaser. Wayne, who brought a number of Capital Crossing executives with him, replicated his old bank's business model at Northeast. After a few years, Northeast added a new twist when it began directly originating commercial real estate loans.
Rigorous underwriting, including an insistence on low loan-to-value ratios, have kept losses at de minimis levels. The bank has yet to charge off any principal on the loans it originated through its national lending division, while losses on purchased loans have been limited. Northeast's fiscal year runs from July 1 through June 30. It reported modest loan recoveries for the 12 months ending June 30, as well as for the three months ending September 30. For the 12 months ending June 30, 2021, charge-offs in the loan portfolio totaled 4 basis points.
"We were built for this moment," Wayne said. "Skill involving buying loans, we have. Experience, we have. Experience servicing the loans we purchase, we have."
The one fly in the ointment for Northeast is funding the assets it's putting on its books. In addition to capital, Northeast is relying on core deposits, brokered deposits, Federal Home Loan bank advances and deposits sourced through listing services. All of that is becoming increasingly costly.
"It's not like it was before [the Federal Reserve] began raising rates and our incremental deposit cost was 10 basis points," Wayne said.
