Q4 2019 Earnings Call
Good day and welcome to the Sterling Bancorp Q4, 2019 Conference call. Today's conference is being recorded at this time I would like to turn the conference over to John Kupinski. Please go ahead.
Good morning, everyone and thanks for joining us to present, our at present and discuss our results for the fourth quarter and fiscal year 2019, joining me on the call. It's really small siani, our chief financial Officer, and Amlan Harman, our newly appointed director of Investor Relations.
Presentation on our website, which along with our press release provides detailed information on our quarterly and year end results.
During the call we will highlight our strong quarterly and year end financial metrics, resulting from strong targeted commercial loan growth diversified deposit growth solid fee income continued strong credit quality superior levels of capital and significant cost controls.
In the fourth quarter reward we were able to execute several strategic actions that will continue to remix the balance sheet to enabled the company to produce increased earnings and positive operating leverage in 2020 and beyond.
During the quarter, we acquired a targeted 839 million dollar equipment finance portfolio.
Issued $275 million of sub debt at favorable rates.
Continue to reposition our balance sheet and earning asset mix.
Repurchased 4 million shares of stock.
On an operating basis, our fourth quarter results were strong.
Adjusted net income available to common shareholders for this quarter was $109 million, a 3% increase over the linked quarter.
Adjusted earnings per share up 54 cents was two cents or 4% higher than the linked quarter and the fourth quarter of 2018.
Adjusted return on average tangible assets was 151 basis points and adjusted return on average tangible common equity was 16.6%.
Our efficiency ratio continues to be among the industry leaders at 40%.
Our tangible book value per share of $13 or nine cents increase 1.5% over the linked quarter and 11.1% over December 2018.
The P.S. 54 cents and tangible book value of $13, a nine cents were a record levels for our company.
During the quarter, we continue to remix the loan and securities portfolios to achieve higher risk adjusted returns.
Total assets increased by $500 million during the quarter, that's where we are now in a position to grow the overall balance sheet given that most of the balance sheet rich repositioning is behind us.
We continue to produce strong loan growth for the quarter inclusive of the equipment finance portfolio acquisition commercial loans grew $791 million or 4.4% over the linked quarter.
On an annual basis targeted commercial loans grew $2.8 billion or 17.2%.
During 2019, we reduced low yielding residential and consumer loans by $566 million, resulting in total growth in portfolio loans of $2.2 billion or 11.6%.
Commercial real estate public finance mortgage warehouse and lender finance portfolios have all grown organically by more than 10% year over year.
We had a strong quarter for deposit growth total deposits increased by $839 million on a spot basis at year end.
Average deposit balances increased by $1.5 billion over the linked quarter.
As the seasonal municipal balances declined in the quarter, we will we were able to replace it grow core commercial and consumer balances.
Bank and broker deposits at more favorable rates.
Deposit costs declined by three basis points from September Thirtyth, 2019, and overall weighted average funding costs declined by 10 basis points.
We're focusing on reducing deposit costs in the targeted high cost municipal relationships and a 1.2 billion dollar consumers CD portfolio that will report reprice by March 30, Onest 2019.
We expect to lower deposit costs by five to 10 basis points in the first quarter of 2020.
Our mix of products channels and funding sources provides flexibility to grow balances, while we lower funding costs.
Our core net interest margin, excluding accretion income on acquired loans was 313 basis points for the quarter.
The declining interest rate environment has resulted in lower asset yields on our floating rate loans and securities that comprise approx approximately one third of our assets.
Coupled with competition for deposits our net interest margin has been pressured but we have been able to maintain a stable core net interest margin over the past 18 months as a result of our we mixing out earning assets and our focus on controlling closet costs.
Assuming no changes in the rate outlook, we anticipate that our core net interest margin will remain in a 315, the 325 basis point range ended 2020.
Just to note on the core interest margin, we held significant cash balances in the quarter to purchase the equipment finance portfolio.
Cash balances would have been invested the margin would have been approximately 317 basis points.
Core fee income growth continued to be solid as a result of commercial loan fee income swap fees Treasury management fees and portfolio fee improvements adjusted fee income was $117 million.
And grew by $15 million or 15% over the four year 2018.
Core expenses exclusive of amortization of intangibles increased modestly from the year ago quarter to $105.5 million or up 1%.
We continue to aggressively reduce our financial center network in staffing and have reallocated a portion of the reductions to support growth in the commercial teams technology and enterprise risk management.
In 2019, we consolidated 24 financial centers, resulting in an 82 financial centers at year end.
We expect to be under 80 financial centers in 2020.
Overall, our expense run rate for the quarter equates to an annualized operating expense level of $419 million as we indicated in our earnings presentation. We expect operating expenses will be in the 420 million to $430 million range for 2020.
Credit quality and capital levels remained strong charge offs decreased by $5 million over the linked quarter as we disposition previously identified equipment loans on an annualized basis.
The $9.1 million of charge offs represents 17 basis points of loans.
The levels of nonperforming loans and delinquency levels improved this quarter.
Substandard loan categories increased but these increases represent secured performing and appropriately marked loans.
Given a stable economy, the low rate environment regulatory oversight and the mix of our portfolio. We expect to continue to see strong credit quality in 2020.
Total tangible common equity, it's a tangible assets was strong at 9% and total risk based capital at the bank was 13.6%.
During the quarter, we repurchased 4 million shares and have 1.6 million shares remaining in our repurchase authorization.
We continue to evaluate the use of excess capital for investment into our core business share repurchases and dividend payouts.
We were able to execute a favorable 275 million dollar debt issuance in the quarter that will refinance existing debt due in mid 2020 from the a story of transaction and provide growth capital for our company.
One of the core fundamental elements of our culture is our focus on constantly reinventing our company.
We believe that great companies constantly change adjust and improved to meet the demands of our shareholders clients and colleagues. Our objective has always been to position the company to be a high performance organization, regardless of changes in the economy rates or the competition.
The majority of questions. We received from investors relate to the dynamics of growth in later cycle lower rate environments I.
I would like to highlight some some of the steps we've taken across a number of areas to position us for continued steady growth.
While producing record tangible book value and EPS over the past year. We have also successfully remix the asset side of the balance sheet by exiting non relationship low yielding residential and multifamily asset classes and replacing them with targeted relationship oriented.
Higher yielding.
C R E and see an eye loans.
We have made this transition by organic originations through our 35 commercial relationship teams and by acquiring targeted a high quality loan portfolios.
We originated a record $1.6 billion in commercial loans organically this year and acquired two portfolios totaling $1.2 billion for total commercial loan growth of $2.8 billion in 2019.
We have the ability to continue to grow the commercial side of the company and related revenues now that the majority of this transition is complete.
The combination of these efforts and steps we have taken to manage our liabilities have successfully repositioned our balance sheet to maintain a steady year over year core net interest margin. Despite 75 basis points of fed funds reductions, a flatter yield curve and a competitive environment for deposits.
We have developed multiple funding sources that have distinct volume clashed rate and term attributes the financial centers commercial teams digital and wholesale channels enable us to have options and how we fund growth.
The fourth quarter provided a good illustration of this capability as we grew our overall deposits by $839 million, despite nearly $250 million in seasonal municipal run off while also lowering our cost of deposits by three basis points, we will continue to refine.
Existing channels and seek new funding channels.
Our credit qualities remain exceptionally strong for the past eight years, we have focused significant resources on creating a best in class risk management program.
Over the past year, we've enhanced our credit grew by acquiring significant talent and technology to support growth and deal with future credit cycles.
Overall, RCR re portfolio has a loan to value of less than 48% and the debt service coverage of 1.68 times.
Our see an eye portfolio is 97% secured within margin by accounts receivable inventory or equipment.
We believe credit quality will be strong for the near future given a stable economy low rate environment, and Titan regulatory standards across the industry.
We are confident in our more model and our ability to meet and exceed our growth and return targets in the future even in a lower rate environment.
The past year was challenging due to the rate changes in the flat flatness of the yield curve.
We successfully repositioned the company to deliver in 2020 and beyond positive operating leverage and strong earnings per share growth return on average tangible assets of 150 basis points or greater.
Return on average tangible common equity of 16% or greater.
Efficiency ratios of less than 40% and growth in tangible book value of greater than 10%.
We continue to point to the information on page four of the presentation that reflects the overall results of our actions over the past several years over the past five year period ended ending.
December 30, Onest 2019, our adjusted earnings per share growth compounded at an annual growth rate of 21% and our tangible book value per common share has grown at 15%.
Thanks, So now let's open up for questions.
Thank you. Thanks, Good luck to ask a question my phone then the signal pressing star one.
Telephone keypad.
Ziggo Speakerphone, please make sure mute function turned off although your signal to reach equipment.
Again press Star one to ask a question.
Local is just for a moment, although everyone and welcome to signal for question.
We will now take our first question from Casey Har from Jefferies. Please go ahead.
Thanks, Good morning, guys.
Turning to one or.
Wanted to start on the on the buyback.
The guide since for a minimum of 1.6 million shares I know that's the same amount of your authorization I think there's a little bit of confusion.
Right.
In the market the buyback is is poised to slow.
Just would like to get your thoughts as to.
Total capital return ratio in 2020 versus that 105 level.
2019.
Yes. So we were 1.6 is what we have remaining and we're going to see that through as we had talked about in the past.
We were currently working on increasing that buyback authority and so we know without providing specific numbers at the exactly what we're going to be from that perspective, you should assume that we're going to have an increase in our buyback authority similar to what we have done in 2018, and 19 and as long as we continue to generate.
And see continued progression of internal capital generation and the growth that we've outlined in the presentation. Then you can safely assume that we will continue being quite active on the buyback from now we think about the numbers from this year loss, one will buying back 19 million shares.
The over the course of 19.
We will see exactly the same that it'll depend on how things progress over the course, the your balance sheet growth pipeline build.
Since opportunity that show up for portfolio acquisitions, if they do down the road so there'll be some flexibility there, but we will continue being quite active on the buyback global. So there is we don't have a nearly 19 million like we did this year on likely there will on likely to repeat that we didnt see better growth opportunity this year than what we haven't asked.
One of the reason is that while we bought so many shares this year that moves so close to $1.6 billion residential mortgages, which did create some excellent capital capacity that we had but we'll continue being very active indeed, and you should assume that on average we will be actively buying back somewhere between two and half to 2 million Bucks through 2 million sort of every quarter.
Great. Thank you.
Right, so switching to NIM.
First off just just to clarify so you guys. Your 315 to 25 NIM does assume a fed cut.
What would what would that forecast look like if we did not benefit Todd.
We are pretty asset.
Pretty neutral from a perspective while.
With that said cat. So again it was just one or non.
You have slightly higher.
Projections, you will need at the midpoint of the higher end of the rains in Norway cuts sooner, we feel very good about anywhere in the relatively benign environment. We don't have much of a shift in either direction.
But more about what you would see happen that we do have one rate that is similar to what happened this year.
We have $7.5 billion of assets that will reprice immediately and then the no the funding stack in the deposit side, we'll catch over some period of time. So we don't see a meaningfully different than not will play from that we can prospectively the range, but the ability to get to the higher the midpoint of the higher end of that range I think it easier that in a more credit environment.
Okay, great and just digging a little deeper on on the NIM outlook.
You originated yields in the fourth quarter were for 28.
It looks like that's about 20 bips below your core loan yield.
Do you expect what's what's the new money yield today thats being layered in your NIM forecast.
Yeah. There is always so it's for 25 to 450, there's always some volatility in that number based on whichever business line has a better quarter relative to another.
So we feel pretty good but over the course of.
Companies that in 2020, the new origination yield on average over the course of the year, we'll be right that there will be in line with the with the runoff of existing loan yields.
Okay. We don't believe again, assuming watching the rate environment that we're talking about right. So one cup to know cuts right. So where is that we are very competent in that the pipeline reported net add around those levels.
Okay. So around this for it'll vary but around this this for 31 average correct on average.
No.
Okay, Great and just last one just switching on the funding side.
Which which appears to be a lot of the like slide 10, I think you guys outline a number of of drivers that.
That our help they're going to help you guys achieved that NIM stability.
This year can theres, a number of them, obviously deposit beta accelerating online consumer Cds and borrowings is it possible for you guys to to try to which are the big components.
It's going to provide the most relief to funding costs in 2020, because just given all the moving parts.
I think all of those components cases.
I think there's a we've guided to his last couple of quarters or we are in the early stages of kind of funding stack repricing. So.
It's actually on the deposit side from a wholesale borrowings perspective, I think that there's an element in there.
The big step down did happen in this in the third and fourth quarter. This years, you should see that component of the findings that we'll continue to result in roughly somewhere approximately five basis points are repricing quarter over quarter.
But on the deposit side, it's across the board CB have started to replace already in January how we'd been guiding to that you on the last quarter call, saying that we that we look at the progression of CD costs over the course, especially in the commercial and consumer commercial side, you'll see on that slide that none of it as we repriced at this point so fewer.
I don't know here's a.
What's the lowest hanging fruit, we think that is probably the low hanging fruit because that is those are again certain as to how the will more cynthia around those are going to reprice thoughts.
Other opportunity here is across the board on consumer commercial well, we're still in the early stages of as we said these are full relationships. We are going to protect their relationships. We've been very mindful of not upsetting Apple cart and kind of managing deposit right way.
We're still in the very early stages of that the deposit beta which on the way up was approximately 35% to 40% that we talked about many times on that consumer commercial side is only about 10%. So there's plenty of room, there and we will know yet we amended it smartly we were very focused on the team those relationships, but at the same time, we're confident that there's room for Rob will substantially.
Pieces as we continue to progress in 2020.
Great. Thank you.
The two areas that really are very sustainable on this thing is that the CD side of this thing we have a billion to coming due that will significantly reprice that are in kind of nine.
12 months CD range, and then the muni deposits that as rates have come down we've worked.
To retain the relationship the balances and we work to.
You know the train repriced the transaction oriented unit municipal balances.
We will now take our next question from Steve Moss from B. Riley FBR. Please go ahead.
Good morning, guys.
Just the just follow up on the margin here just as we think about the first quarter margin seems like a core margin here you were 313, but before based point impact from liquidity.
Jack you said by the 10 basis point linked quarter decline in funding costs. So probably looking it sounds like probably 320 ish Mark core margin to start the quarter is that fair.
So I'd say that it's probably say one thing that you have to factor in is that we do have the subordinated debt issuances in a cost us a little bit in the first quarter. So we're actively working on right now and evaluating various alternatives to take out the senior notes sooner than maturity. So the first quarter is going stock would it be it through 20 will be at the lower end of the range.
But then as you essentially rightsize the funding stacks eliminate that three three and half percent cost and senior notes and you continue to replace the funding stack down given the fact that we do anticipate and we have seen in the second half of the fourth quarter.
Asset yields kind of abating and others that does not decreasing anymore, we feel pretty confident that we start the year at the lower end of that range. When we build up to it over the course of the year.
Okay. That's helpful. Luis and then on loan growth here just wondering.
Talking about organic loan growth in deck, but organic loan growth this quarter.
Flattish to down little bit I'm, just wondering what are the dynamics on this quarter and my read into a more loan growth here.
Yes. Good question. So I think we guided last quarter to about a billion to of commercial loan growth and this we realized about 800 million.
There are a couple of factors that affected that one we don't include there's about $100 million worth of lease.
We sat assets we included in the other asset category.
We sold off about $150 million worth of non relationship loans in the quarter mortgage warehouse was was down about $125 million because of the term.
People bought.
More either side of the warehouse faster and then the balance or just some additional payoffs and pay down. So we actually had a a good quarter from organic loan growth.
Basis.
Between four and $500 million off of well over a billion dollars of originations. So that's why there's a because of the some of these these items being a little bit extraordinary it looks like there was an organic loan growth, but there was fairly meaningful.
The organic loan growth.
Okay. That's helpful. And then just as we think about.
You know.
Acquisitions going forward.
Whether what cap type for portfolio purchases versus bank M&A here.
We know we gone through this.
Our history dictates. We you know we always are looking for portfolio acquisitions to change the asset mix and enhance the risk adjusted returns on the revenue side.
We acquire banks.
To find alternative funding sources so.
We are constantly looking for opportunities to.
Third in my comments to reinvent the company and we will continue to do that we think a you know in some cases prices make sense in some cases prices don't make sense.
In many cases, the asset quality doesn't make sense in some cases, the asset quality does make sense in the portfolio acquisition. So we.
Fair enough.
Constantly see opportunities the look at both portfolios and other banks and frankly other funding sources along the way.
Alright, Thank you very much.
Thank you Steve.
Moving now Taco and next question from Alex We know from Piper Sandler. Please go ahead.
Good morning, guys.
Yes.
Yes, just why this done on that last question on acquisitions, just as I look at the long growth targets for 2020 and says that focuses on organic loan growth. So is the assumption that kind of a wall and that leads to that is should be pretty much in hand organically and shouldn't acquisition come along and kind of pushing need towards the top end of the range or.
Our acquisitions of loan portfolios did not and you know.
Contemplated at all on that and that guidance.
Your first comment is true. It's this is an organic number though the way we presented this so it would be that would be the guidance on the net.
Thing that we do over and above that will be over and above that guidance.
Okay. So that no no acquisitions and then similarly, the expense number 420 to 430 that yet as you see it today that doesn't contemplate any sort of acquisitions at that number might have in the past.
That's correct.
Okay, Great and then just on the margin you talked about the range of 315 to 325 is that kind of a range for the full year margin or you're saying that each quarter should be somewhere in that 315 that 325 range implying that.
We're certainly going to see some at least a little bit of margin expansion.
In the first quarter.
The latter yes, yes, so it's essentially that's the range of where we see the liquidity men's shaking out.
Full year NIM for uranium is not likely to be a 325. Good we're not going to start the year at that level, we anticipate that there's going to be a progression and expansion of that and then again with the big caveat regarding that we're assuming a relatively benign and stable low rate environment right. So that doesn't always like that kind of throughout that disclaimer, but.
We are going to start that you're going to start at the lower end of the range and then we again as we continue to maintain asset yields in reprice. The funding that we should start value, we'll start seeing some nice NIM expansion over the course of the year.
Great. That's to me like you guys are calling the bottom on the NIM in the fourth quarter based on what you just said.
Yes, yes, so again remember that we have two so especially given the.
Little bit of the driver the NIM of some volatility short term theyre going to be how successful we are in retiring some of that higher cost that we have out there with the senior notes. So we did issue $275 million a sub debt at 4% rate. So thats. Obviously, we'll have a short term impact, but then when you factor in that we're going to essentially take out.
No senior notes I think that you essentially get to the net net neutral position from a perspective of the debt thats, the kind of longer term longer duration, but that's on the books.
But yes, we we feel very good and quite confident based on what we've seen in the second half.
Yeah.
The fourth quarter that the yen asset yields have started to kind of so they have the leveled out they settled down and then we've continued to see very nice progression of repressing the funding stack. So you're right, we're pretty but we're not at the bottom are pretty darn close.
Perfect. That's extremely helpful. And then just finally, a clear of any confusion out there the purchase accounting accretion.
Guidance of 30 to 35 million, that's kind of right around where you've been targeting in the past for 2020 and can you give us any sort of color on where that might go in 2021 is that going to basically trend towards zero for next year.
No some points only when you're still going to have another 15 to 20 million or so so you continue to see step downs every year, but the tale of the the accretion income is pretty long so you're going to see another step down we'll call. It 10 to 10 to 15 10 to 12 million.
Nick inside but they're still going to be some accretion falling through the 2021.
Perfect. Thanks for taking my question.
Thank you.
Next question from Dave Bishop from D.A. Davidson. Please go ahead.
Hey, good morning, gentlemen.
Good morning.
Okay. Appreciate the disclosure in terms of deposit breakdown.
Curious the online Bank initiative.
How big of a piece of the puzzle from as funding source do you think that that grows to and how should we think about that from an all in cost I guess some of that's flowing through the marketing costs. This quarter anyway to sort of benchmark like what the all in cost from that perspective is.
Sure. So we are we're spending approximately 25 basis points on the all of incremental to the interest rate on.
On building out the you know the online channel now I'd caveat that by saying that did say.
I want to say that kind of misleading number because it right. It's just the fact that there are obviously shared services that the online bank also uses from that perspective other infrastructure that we have built right. So but when you think about the direct expenses are associated with originating that.
No kind of originating deposits through that channel its interest rate plus approximately 25 basis points that would it that's what it was in the second half of 2019. So again from an interest rate perspective, we realize in are cognizant of the fact that excess deposits are going to be higher cost pendant through going to be more sensitive, but in a low rate environment were generally benign.
Finally, it environment, we feel very good that it is a very efficient way to generate funding and they did they may very efficient way to generate funding that allows us to continue to manage our efficiency ratio from the level grid is today and potentially decreasing it part of it from there. So we very much like the funding channel me, we've talked about this for some time that.
This was maybe a test and learn function and so far the test and learn had worked out very much in mind to exceeding expectations that we had originally thought so you'll see in that page that you know what are the key messages that we wanted to convey the fact that there had those pretty darn good growth in the spot balanced perspective between the ended the third quarter in the fourth quarter and yet you still saw that we were able to.
Move down that cost of deposits by approximately 35 basis points than when we started so we like the direction that that.
This is headed.
And how big it gets.
Time will tell and it's going to again at the test and then function and we're going to continue to tweak.
The out pricing up and down.
Just based on whatever we see the need to be.
Roughly we anticipate that by the end of 2020, it should represent somewhere between 5% to 7% of the funding stack. So should be somewhere between you think about $20 billion to $23 billion of deposits that we have.
That should be somewhere between a building into a billion in a quarter silver deposits is what we're seeing and again.
We are no. This is that's what we think today, we're going to dial that up and down based on how other deposit channels also grow but so far we very much like the you know the types of relationships and accounts that are being driven through that channel and we very much like the how the channel has responded to the perspective of the money the overall customer access.
Efficient cost and the ability to you know the kind of move that pricing and data pressing up and down kind of almost through an immediate basis, depending on what the funding needs are very efficient yet.
Got it appreciate the color and maybe some commentary in terms of maybe the core relationship driven commercial real estate market, maybe talk about the opportunities you should move into 2020 from a growth perspective.
Yeah, you know we continue to look at the options out there of a variety of commercial real estate projects. Some of it. It's one of the great things about being around Metropolitan New York is there are as many different.
Variations of commercial real real estate opportunities as anywhere in the country. So.
It may be.
Lot of people are obviously concerned around the rent control multifamily.
Projects there are very many other types of projects that we can get the risk adjusted returns out of.
From real estate standpoint that are that are available to us in this market. So we think.
The path is very clear on opportunities on on commercial real estate in this metropolitan area.
Got it.
Thank you find your question has been answered you may when you've yourself from the Q light pressing star too.
We will now take on next question from Collyn Gilbert from KBW. Please go ahead.
Thanks, Good morning, guys.
Hey color.
Just wanted to dig in a little bit to the multifamily portfolio. It looks like if I'm looking at this correctly you guys talk growth this quarter relative to third quarter and it looks like the loan yields kind of hung in a little bit as well. So just wanting to understand sort of how you're thinking about that portfolio what was dry.
Having our what's going to drive the growth and then how the New York City rent stabilized portion is has been trending.
Yes. So again there are a lot of block on this and what we've tended to do unlike other other situations. We attended the only focus on relationship oriented multifamily.
Deals and frankly relationship oriented multifamily deals that do multiple projects. So we most of our multifamily finance that we originate from.
Our direct origination basis do many many have many many projects and do many different types of real estate, they're investing so we do not.
Due to transaction part of it the broker originated.
LT family projects, where the only thing you have is is the transaction. So we have a so so in the big added multifamily theres a lot of them.
Done through the brokers, but there are.
Well miles that are done on a direct basis with real estate.
Developers and multifamily owners along the way. So you know pricing has started to stabilize.
That market.
And as our enhanced by other projects and other types of business you out from the client so thats why you've seen kind of the yields hanging in there.
On that period of time.
It also means that we're running off some of the lower yielding style and adding some of the higher yielding relationship going on in multifamily deals.
Okay, and then do you have the balance of what I understand that's good color on Jack on the gross going forward what the balance currently is the New York City.
Multifamily kind of that broke broker originated portion of what you mean reckon told of the total broke we estimate and we'll take that no rent controlled.
When you say you actually need with one [laughter] sorry, Okay, New York City rent controlled multifamily what to balance the outstanding balances of that.
Thanks, a lot supplement or it's about 750 mission.
That is something.
Yes.
Okay and has that changed those balances changed much in the last few quarters.
Some of them that paid off so yes, we had that we've seen runoff in that book of approximately a 100 150 million over the second half of I guess third and fourth quarter.
And so far we have not seen any major changes and performance in the deal in the book of business or any changes in trends in delinquency. So.
We don't have a lot of it we are closely monitoring it and we anticipate that over some period of time a lot of those loans begin coming up for refinance and and kind of renewals in the second half a point 20 and into 2021, and we're going to actively work on figuring out what's the kind of best course of action for.
You know for that portfolio going forward, but right now we can't point to anything that we would say is a tougher can chime in these loans to tend to be older portfolio loans that they tend to be less than 50% loan to value. So.
That's why the were not as concerned because of the rent controlled aspect with portfolio, we out today because of the general loan to value and and they are more mature globals.
So that the repayments in the debt service coverage as are our very strong the vast majority of that portfolio of that not all of it I think probably all of it does but the vast majority of it comes from the you know the acquisition of the storia.
Invading all the way back to when we acquired Hudson Valley. So from an LTV in an underwriting perspective that did not we're not concerned about that portfolio.
Okay. Okay. That's helpful. Thank you for that and then just shifting to.
Opex inefficiency and and Jack.
Can you guys here, you know performance oriented and operating leverage and all all of that.
Just look so your opex you've held at this for 20 kind of how we think about core OPEC since 2018.
Yes, there is there going to be a point where that.
To change or there's kind of investment is going to come down the pike, just trying to sort of it's an impressive Holden I just wonder how long that can last.
Yes.
We are views that can be last or whatever.
40, 40% is what we believe is the right level for that and we make investments we are constantly making investments in people and technology, along the way, but we're balancing that be by taking costs out of other areas. So.
We were constantly changing that mix. So our view is that that will continue to change.
We continue to be consistent at the 40% remember too it's a numerator denominator issue. So the numerators revenue in the denominator is expense so just not a expense issue.
It's also the generation of.
Of of revenue and creating that operating leverage along the way. So I've said this a couple times and some people take this regulate some the wrong, but today, we actually have less people that produce.
That produce higher revenue per ft, and earnings per ft than peer significantly higher the frankly get paid more money. So we believe in that model and it creates the type of efficiencies that we won.
There are two big reasons, why we are more efficient one we're not in inefficient businesses like mortgage or like asset management or like a.
A big branch system. So Thats. One reason were officially the second is the dynamic that I just mentioned our.
Lower numbers of people that produce higher revenue and earnings per ft than peers and that frankly get paid water. So that dynamic trying to works to keep the efficiency ratio.
Got where it is today.
I don't think that.
I don't think yet it can get into the 35 or below 35% or below range.
So if that's a miller just a follow on I think there is a limit to how efficient you can be in financial services, but but and I think it is in that kind of 35% to 40% range with targeted 40% as as an ongoing target on this thing.
Okay. Okay. That's helpful. And then just one last housekeeping item for you Luis.
On the accretion guidance that 30 to 35 million.
You know significantly less than what you guys posted obviously this year. It just thinking about that trajectory there of how you see that going in and.
Just is there an opera I mean, if paydown slow then I mean, I'm, stating the obvious I guess at that accretion number could it could end up being higher just trying to sort of reconcile the patterns X. I think that came in higher than what you were originally anticipating for 2019 as well.
So the pay downs, so the reason for being higher than what we thought a 19 was the fact that yes, a lot of the lot of the remaining.
Mark.
He is still your book was driven by the residential mortgage book, So the mortgage mortgage pay offs accelerated pretty substantially over the course of the year. So we've been running at.
Our 250 to 300 million a year in 18 and 19, we had close to 650 million Bucks or run off right. So that's certainly one of the key drivers as to why that.
That was higher than what we thought and there's always a little bit of progress than that perspective that you're going to have on providing accretion income guide, which as you know there's there's no it's going to be based on overall performance of the book over some period of time.
What remains today.
Not so much on the residential mortgage side, but actually morsel on the multifamily side and on that portfolio we have.
Without having the magic Crystal ball, we do have a little bit more visibility because it is not as it is rate sensitive to obviously the respective repayments until fourth but it is not as efficient marketplaces residential mortgages.
And then at that you start seeing five seven and 10, one origination yields in the residential mortgage side that dropped below 25 basis points, where they were you start seeing a substantial pickup in payoffs and increase that you the multifamily side into serious side of the house did not behave as efficiently as residential mortgage so we feel pretty we feel.
Very good pretty very confident about the 30 to 35 million.
And I don't think about it from the perspective of it being a level over the course of the year because remember these are it never happens level, there's always a higher tail. The tail gets lower as we go every year. So you'll see that similar to what's happened last couple of years, where we started with about $27.8 million of accretion income per quarter, and then that moved 25.
Hi moves the 23rd quarter was about 17 million. This quarter was 19 million because that's a big payoffs and some specific transactions, but you start seeing how it's going to follow the same type of patter, which is it's going to be hired the beginning of the year and then it's going to fall off over the course of 2020 and then into 2021. It will follow the same type of pattern as well, but we feel 35.
Is it pretty good, but we feel pretty confident that based on the mix of business that remains that had the mark on it should we should be pretty close to that number.
Okay. Okay, that's great I will leave it there thanks guys.
Thank you.
We will now take on next question from Steven <unk> from RBC capital markets.
Hey, good morning, guys.
Right.
Good morning, just on the just going back to take expenses.
In the quarter other Ics fence line that was a little high that was I think it was higher marketing and retirement plans is that correct.
That is correct so out of the increase or the increase is about three moved about half of that was driven by marketing and.
The 30 or 40% of that other half of them a half was it was.
Net cost on pension and retirement benefits.
Okay, great and how much of that do you expect to gravitate down maybe to 17 million level or at all or possible.
Yes, that's going to see a run rate thats going to be much closer to a third quarter was versus Q4. So those are the advertising was always going to my marketing will always be a little bit of a volatile line item depending on what we do from either promotional perspective were where will the to the discussion that we were having before regarding.
Got it.
And so if.
Yep.
Our.
I guess, so if if.
If that goes down a little bit.
I mean do you think that you could possibly get your.
2020, expensed to below a 420 line.
I think that they're nowhere anything is possible [laughter] scheduled probable no I think that we have no. We have a pretty good handle on the investments that we want to make from that perspective of higher rental banking teams and the development officers and we're building out a lot on the specially on the deposit gathering.
Channels on the commercial side with.
Property management, and legal services and innovation financing that we hired so we feel we feel pretty good that nor are we held that expense line item.
Relatively flat to the past three years factor in everything we able to storia and right now you dynamic that you're going to see going forward is that now that we get to about 80 financial centers that are that that we're going to be at by the end to 331.
You're not going to see the same rate and pace of financial center consolidations that you have seen in the past, which is one of the things that that has resulted in us along to kind of reducing maintain that opic's relatively flat.
We are much more concerned this year with again, maintaining that roughly 420 kind of low end up but also kind of getting back to kind of really meaningfully growing the top line revenue side of the house and again that does require investment.
And we see the need to and we want to continue to invest particularly on the deposit gathering side. So we will be actively looking to hire folks.
And get back to you know the getting kind of more robust in broader distribution channels on the deposit that again, so that you're going envelope were plenty unlikely, but we feel very good about that range and we feel good about that kind of the midpoint below or into that range.
Great.
And then just moving on to your loan portfolio. If we were just looking at the equipment finance portfolio ex Santander. There can you just give us some color was going on in the quarter when that portfolio.
In was one and equipment in particular with yet.
Yeah, that's been flat, it's been relatively flat the the new origination yields that we are seeing in that in that market.
For the type of business that we originate which are kind of higher credit good and higher credit quality middle market commercial borrowers has has gotten extremely tight so youre not that you are not going to see no organic growth and equipment finance, we see better risk adjusted returns and better credit spreads and other components of the portfolio.
You will mean, we diversified CRT.
All the projects that were doing on the affordable housing side.
As well as public sector in summary, other more diverse no commercial lines. So you know equipment is no. It's over $2 billion today, we know the what the of the portfolio. We acquired consent than there is exactly what we thought it wasn't in many respects, it's actually a little bit better no just given that we've had some nice funding that we inherited some funding.
Commitments from Santander, there as well, which is actually worked out very well because we we've actually been able to grow those relationships slightly over the course of the quarters. Since we closed it but we are not the focal point is not going backwards and going forward because credit spreads have are not really what we want them to be right now.
Got it is that a similarly, the same story on your ABL side.
Absolutely, 100%, we think that that is.
No that's a market that's a sector of the market that.
You're not going to see growing organically because there is a broad universe of competitors not just banks, but more so credit funds and alternative asset managers and insurance companies that have jumped into the.
Into the ABL game and from a spread perspective in the pricing perspective, we don't like what we're seeing there.
But more so than on the pricing side, we're we're starting to see some.
The we've seen creeping into that business a combination of some enterprise value lending that a lot of market participants are adding on to kind of what traditionally be alluded that we really don't like so you're not going to see that business growth organic got it got it and.
And then just moving out your warehouse line, how much and commitments you have today relative to where you were a year ago.
So the portfolio has grown about 25% year over year firm commitments perspective facility well do the percentage of facility usage has always been approximately 55% to 65% always hovers in that range, you've never want to be a warehouse lender, where you're you're where your where you're the loan.
Lending relationship or your relationship is being used to its fully expect might be able to they might be able to use and you haven't paid ability to use it for a short period of time to know how utilization right, but in the warehouse lending business you really want to focus on on clients that have diversified sources and there are managing.
That does that utilization rate to somewhere call. It on average about 60%, but year over year commitments in the book.
Because the amount of committed facilities increased about 25%.
Did you guys still seeing that continue like somewhat continuing in 2020.
Yes, we know the one of the good things about the big slightly bigger bank. The we were before that you can obviously go in for provide financing to larger.
Dependent originators as well so we that's a book that we realize in are cognizant of the fact that had some volatility quarter over quarter, which I know there's not.
Not the most favorite thing that folks like the C and so therefore, we get that that is it is a mortgage business. After also there is some volatility to it but we have a very consistent track record over the last five years of growing that business. There instead of the the we inherited that business in the Sterling merger.
In 2000, and Lake 13 that business at about 200 million Bucks and outstanding. This quarter. We had 1.3 just under $1.3 billion, an average outstanding that business has grown very nicely and it's going to continue to do so because larger balance sheet size allows us to provide financing to larger in independent originated which is again, it's been scalable very efficient the growth in.
That book has been essentially on top of the same infrastructure that we inherited about five or six years ago, we'd like it a lot, but it's never going to be a disproportionate size of our business because we understand that the volatility aspect coveted not you know, it's not an investor fan favorite we get that.
Understood and just one last one from me your Securities book, It you're looking to get it down to 15% the ended the year.
On earning assets what can we expect as far as like quarterly run off in the book.
So it's more so we want to get there isn't that the spectrum of growing the rest of the balance sheet more so than running off any particular component of it. However, with that said, we we continue to see the trend that we have been team for the past few quarters, given the rate environment that we've had.
Book, particularly the MBS, both the municipal Securities book of about two and half a million dollars really does not cash flow much on a monthly basis, which we like a lot because we're sitting on a substantial amount of unrealized gains there.
But the MBS book castles at somewhere between $75 million to $100 million per quarter. So.
If you will we did absolutely nothing and we did not reinvest a single security and of course, new year you'd have approximately 2 million somewhere between 340 million Bucks a drop in the book that's not the essentially the intention is to get to that target level by growing the rest of the balance sheet and just maintaining the security flat. So we'll be investing but if they if we did.
Nothing you have about a 400 million or level.
Got it I appreciate the color guys.
Thank you.
We'll now take our next question from Matthew Breese from Stephens incorporated. Please go ahead.
Good morning.
Morning.
Jack just focused on your comment in regards to late stage credit couple of related question. So the first is as we wind back a tape and we look at all the portfolio deals you've ever done.
I was hoping for a little bit of review here, So where do balances stand in totality for the portfolio purchases.
What about stand today versus where you when you purchased them how they performed from a credit perspective versus your initial expectations and if the remarks, along the way on these books could you give us some idea of what the average Mark was.
Just just for credit comfort.
[laughter] long list.
As I really long.
Hi, I'm not sure weekend, we can go through each portfolio. We've acquired there theres been that eight portfolio acquisitions over the period of time, but I would tell you that.
For the most part what we have tried to do for oil start from macro standpoint, well. We've tried to does create a diversified mix of portfolios in the company and there are at different types of times, they're going to be more or less favorable relative to the risk adjusted returns.
And frankly the growth rates in those portfolios so.
We just have this conversation about equipment and they'd be L. One of the reasons, we looked at the.
Entered their portfolio, we we essentially bought a year's worth of production at a really good yield at really good quality compared to.
What we would be able to date.
The year on given the market dynamics of equipment. So we were very opportunistic with with the portfolio.
Buying that they are we basically bought the whole years' worth of volume, we would have expected on the equipment side.
Luis mentioned maybe ill.
The yield the returns on NPL in the credit quality on the structure of the deals that things are people are doing in the market, mostly non banks have really diminished over the last several years. So.
So we've tried to as Weve purchased portfolios. We've tried to look at which portfolios. We have an opportunity to continue to diversify with a REIT risk adjusted returns out there some of them, we buy and we frankly run down because it was a one time by most of them we use as a platform.
From two.
To grow from into expand we believe again in this current example, this into their portfolio. We believe that the relationships that were incumbent in that portfolio allow us to go back to those clients and expand the relationship both on the equipment signed and other other banking so.
Services, so each portfolio has a different dynamic in a different need.
Going forward, but at the end of the day, we're trying to take this mix.
Both organic acquired by banks and acquired portfolio to create the right risk adjusted return out there.
To give you some big picture stats on average the credit marks that we've taken on these boats. So we anticipate matsons portfolio of them different just based on whatever the interest rate environment was at the time. So the interest rates are so when interest rate perspective, Mark said, we have been kind of all of your place.
From a credit perspective on average it's been about to have to set for all the portfolio that we have we have acquired.
Each one of those portfolios the existing book of business than we have clarity has performed very much in mind or better than what we had originally thought and so one of the reasons for it in 2019 cross having a higher accretion income level that we had originally anticipated is the fact that has some of these assets the loss.
Performed better than what you thought they would want us, particularly the purchase credit impaired loans. They performed better than what you had originally mark them up and that's always results in some volatility accretion income side, because it's something pays off the mark on it and move that amount of money when you're actually going to get to accrete up back in income right. So thats one of the reasons that device before the end of outperformed the fact that the.
If you think it has been higher than what we had originally thought is the fact that a lot of the portfolio that we have acquired and actually performed inline or better than expectations. The one portfolio that has not moved in our favor was the when would be advantage transportation finance transaction. We did in March of 2018.
Existing portfolio performed very much in mind and slightly better than what we had originally anticipated, but when we go back to the earnings calls and we announced that transaction, we would always guided to the fact that we were going to essentially tweaks to the origination engine that we inherited from advantage or going to move it a little bit further upstream because there was a there was a component that.
Credits that day that again focused on that we did not like from a credit quality perspective.
And what we have found over the course alive two years in mind, we what we're talking about and the equipment side. There is the fact that credit spread in that industry to us don't make sense and so today viewer to ask where does that portfolio stands that portfolio actually about $110 million lower than we acquired into its $457 million we acquired it today.
We're at just over 300 million or show in remaining outstanding balances.
Portfolio by design, we have essentially kind of stepped off the throttle because we don't like what we've seen kind of perspective credit spreads and in risk adjusted returns of the business other than that the other business lines that we have in the other portfolio that we have acquired I think that the financial performance kind of speaks for itself you have not seen big pickup from credit perspective.
You've seen kind of pretty steady progression of what we guided to kind of perspective of what those portfolios are going to resulting from an income and expense perspective. So.
The as we've talked about in the past the benefit of acquiring a portfolio in today's M&A World is the fact that again going back to the Santander example, we've had nine months that we're working on that transaction, we had the opportunity to select assets that we wanted we had the opportunity to essentially under we're underwriting review every asset that we acquired.
We feel very comfortable and that's what we've talked about in the past the us these portfolio acquisitions, realizing that not only are not organic originations from a risk perspective to us. They are because they go through the exact same level of of vetting end of due diligence that we would do for any organic origination and we get the benefit of essentially marketing.
So thats why that's where we like it I know that some folks know consider an organic origination better than an acquisition I like we can we can debate that as much as everybody wants we very much like the aspect in the ability of us being able to re underwrite the entirety of the portfolio and marketing it offense, we feel that that's a that's a.
A good way to continue to grow the business and to allocate capital and liquidity.
The other AD I think on this was dependent upon what price you pay.
The dynamics of things are you Mark you want to make sure that the credit quality is exactly what you want it to be.
Want to make sure that Youre ongoing business is what you think it's going to be but then you get to the point, where you are buying it at a certain price and your marketing it at a certain price. So the net result of the answer the.
For the initial question is every one of the portfolios as worked off from a return standpoint.
We got there maybe a different ways that we designed it but we each of them have met or exceeded the targeted returns in some cases, because it's performed better credit quality wise in some cases, it's because we bought it at a discount or a price that made sense.
Through.
Different cycle, so we're very comfortable with these things and.
Again, it's all Bob there's a there's multiple factors that go into this thing.
Right now that's extremely helpful. And then maybe just tying this into what we saw from a special mention and substandard loans.
Progression standpoint, or any of those the increase from acquired books.
Or what categories for the in your work at expectations.
What timeframe do you think we should see those resolved.
Yes, so the increase was driven by commercial real estate credits and.
We will reveal credits one of the deal credits within acquired credit we feel very good about the different to the other through credit that we had talked about rehman HDL perspective in 19.
That we have now fully gotten behind this is Jack alluded to in his comments and most of them more the are off our books and fully exited.
In every one of those situation the assets are in the loan relationships are performing and they are very well secured so we have a combination of collateral. We are the combination of good marks on each one of these and we feel good about being able to work out of these in a relatively sort of timeframe. So the next quarter to feel we feel.
Are you confident that we're going to be able to exit the relationship to work out to them in the way that doesn't make sense and should not have a.
Big impact from the credit quality perspective were charged off perspective.
Okay.
Can you talk a little bit about the Deloitte and innovation Finance group two recent announcements I don't think I've a good handle on.
What these are poised to do near term long term could you just help me kind of I understand what the impact might be over the next year two years from these two.
The partnership and the innovation Finance group.
Yes, so deloitte side of this thing what we've been working with the Lloyd for now probably 18 months or so.
They they have done a number of things for us not the least of which was they provide us with the tools on the artificial intelligence side as we've used AI weve use their kind of machines to.
To put in place in a variety of different areas, but because the Lloyd side of it is bond multiple areas. So.
One.
Simple thing delayed over the years have built up a very very large technology support mechanism.
We do we started a process with them, where we do simple things like all the laptops and all the we're fulfillment up devices in the company now is fulfilled by them rather than frankly, the fragmented way we were doing it before.
They provide us with the T. help desk.
Again, the metrics on their performance on IP help desk versus what we were using before are dramatically different.
Third as they look at.
Helping us put everything into the cloud so we're using their mechanisms that go into the cloud.
Then continued on that we're using them to do projects like.
A voice activated internally.
This activated.
You know kind of artificial intelligence that provides internal support and external support to things like call centers. So there aren't many many different pieces, where we're using them and frankly, we're already experiencing performance levels that are significantly more than what we were doing ourselves.
Or we were outsourcing to other people in essentially at the same cost if you bake in all the cost because the other question will come up is this a lot more expense. So the answer in total is no. We are we are basically moving costs from one area to another and the performance.
Much higher so unlike the big banks that can go on and they're spending capital where they are building. All these things themselves. This is our answer to our own partially I'd answer too.
How we can be could be very contemporary in terms of providing the right levels of technology spends and actuation out of all of our technology dollars show on so thats, how the partnership works and again the final part of the.
I need to provide the box on our AI processes as we work to take all manual processes out of the company and automate down more outsource them going forward. So never a little bit of an answer to Colins question about efficiency to we're using technology to drive down ultimately drive down.
The costs and create better efficiencies along the way.
And the technology team that we have.
Is is a team that is focused on a very specific niche and it's actually lending and deposit gathering to companies that have kind of residual types of earning stream. So this is not venture lending and it's not spec lending is lending against.
Software companies that.
Have a variety of cash flows coming in from.
Contracts. They have so that's a successful group has worked for a couple of different very.
Highly recognized businesses on the technology side, and they're already off to a really good start both on again, the the lending side and also.
Deposit gathering side.
Just a follow up there could you give a sense for the team you hired the size of their book from the prior to Shim both on the loan deposit side that they're looking to recapture.
I'll be honest I don't know.
If you go this is a three person team by the way, it's not 30 or 40 people.
Understood. Okay last one is just on the extent, we might see share repurchases.
We should talk.
In regard to share repurchases, perhaps in terms of.
Of capital goals in regards to tangible common equity tangible assets.
Is the long term goal still to get you around 88 in the quarter percent and should we think about share repurchases as a as a tool to help you get there as a essentially a plug perhaps.
The answer is yes to all the above but most Italy, we generate a lot less capital and.
One of the reason for that kind of moving a little bit away from that providing that type of guidance is that similar to have in 2019, but we had robust share repurchase activity, we generate sufficient capital that we don't we didn't really to into too much of that.
Into that capital ratio so.
We anticipate that the balance sheet starts growing again this year relative to 2019 remember that we were not anticipating any major sales of asset like we had with the residential mortgages earlier in the year, which created a lot of excess capital on the balance sheet. So, but we think that to bounce it gets back to growing and Thats. The reason that 12 were being a little bit more.
Conservative on the kind of the outlook for no buybacks or it's still going to be meaningful we're still going to you to use it as a tool to get to that longer term target, but that is a longer term target I don't see scenario barring some substantial.
Growth opportunity either organic or on the acquisition front I do not envision that we will get date in the quarter by the end of this year.
Bob will be pretty darn.
That's all add thanks guys.
Appreciate it thanks, Matt.
This is the add on our question and answer session I would now like to turn the call over.
Hey follow thanks, a lot for following us through the year.
You really want to thank our colleagues and our clients and our shareholders. Obviously in investors. We hope you by the stock [laughter] and you know.
All serious we are turning our attention from kind of repositioning the balance sheet yet in a company that in an environment in 2018, where you had.
Fed increases in rates and then in 2019, just a reversal to the three decreases and it's it's.
Because it's enabled us to reposition the balance sheet and turn our attention now into 2020 on kind of getting back to creating that positive operating leverage where we're growing revenues faster than expenses. So we appreciate you all following us us and if you have any questions give us call. Thanks, a lot have a great day.
This concludes today's call. Thank you for your participation you may now disconnect.
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