Q3 2020 Sterling Bancorp Earnings Call
Good day and welcome to the Sterling Bancorp Q3, Twentytwenty earnings call. Today's conference is being recorded at this time.
At this time I will turn the conference over to Mr., Jack Kopnisky, President and CEO of Sterling Bancorp. Please go ahead Sir.
Hey, good morning, everyone and welcome to our third quarter 2020, Oh.
Joining me today is always more siani, our bank, President and CFO, Rob Lowe, our Chief Credit Officer, and it was hardly a hobby.
<unk> Investor Relations group.
Our Investor Grade Relations group, all one person [laughter] yeah, yeah. So.
Strikes or a corridor.
We will take that made a lot of great progress and Oh I guess.
It's called in challenging times, a couple of points to make about the third quarter demonstrate very strong core P.L.R.
We built robust levels of capital our capital levels keep on increasing.
Pretty strong reserves on an improving credit environment, and we continue to invest in our model for future growth, we but we spent a lot of the quarter really ramping up our investment in the technology space for the company.
There there there's a ton of information that we always provide on the press release on our slides so I'm going to really concentrate on a page three as our value proposition and then open it up for questions. There's tons represent the value proposition that we're trying to tell investors a true.
Enable them to consider us as an investment into the bank sector. So lets start on.
Let's start on the on the left hand side no for the quarter PPNR, a $123.3 million or exclusive of accretion income is up 8% quarter over quarter revenue is up.
2% quarter over quarter as you can see we've stabilized the core net interest margin.
Net interest margin at 310 basis points, which is five basis points higher than the prior quarter. We are beginning to stabilize the loan yields.
There, that's where we're spending the most amount of time trying to get the right mix of the assets in there and securities and stabilizing the right or or achieving the right risk. Adjusted returns. We have made significant progress on lowering cost of funds. So overall cost of funds have come down by 21 basis points.
42 basis points deposit costs have decreased 17 basis points to 31 basis points.
I think we still have more to go and that we're still working to drive down the cost of funding through a variety of techniques.
We view our range for the next quarter and beyond in the three or five the Threeq 15 basis point range.
So we think we can we can hold that that that type of margin <unk> margin range.
Commercial loan growth was.
It's good for the quarter on an average basis quarter over quarter on an annualized average basis, we were up 7.6% and that even considers a 160 million dollar sales, while Bob Ramsey, Mpls and and transportation low low Oh small tickets.
Expectation assets.
An annualized basis year over year were up almost 12% Oh <unk> or.
On a on a gross basis deposits continued to be strong average.
Annualized quarter over quarter growth was 3.4% year over year. It was a little more than 12% also remember in this quarter, we have a build up of muni deposits for tax purposes that that ultimately one down as they as they get paid out to this battalions.
Fee income generally was back to pre cobot levels with the exception of load fees. So our volumes for the quarter were okay, but loan fees were down as a result of not getting the expectation of the volume's coming in expenses.
Expenses were in line with our expectations, even with a little more than 2 million dollar a severance cost during that period.
We created positive operating leverage over the linked quarter were back to being able to do that we think that's a driver performance going forward and we continued to demonstrate a strong and growing core PPNR.
Our Aro H.T.H. were 170 basis points on a PPR airbases ROTC ease a little less than 19% in the efficiency ratio was 43% so well.
We're making good progress in this challenging environment.
Secondly, we maintained a robust level of capital. This is actually the highest level of capital in the history of the company TCT over to Uri was 915 basis points tier one leverage at the bank level was 10.5% total.
Total risk based capital at the bank level was 14% and we continue to add to capital through earnings you see what are our dividend payout is we are adding pretty meaningfully to capital through our through earnings and probably most importantly in 2000.
Tony We continue to accrete tangible book value and we expect to be in excess of 5% accretion and tangible book value.
Certainly we have built a strong reserves and let's see.
Improvements in most of our credit metrics.
In our experience in the past we've been many of US on the leadership team have been through many economic downturns and the three things that we have focused on during that period. We know to do is first to maintain strong and increasing levels of capital, which we have done.
Secondly to address credit issues early.
A good example of that is we decided to sell these npls because it would be a long time to resolve the npls and and resi and and small ticket transportation.
And the third thing is building strong loan loss reserves as you saw us do and in this quarter. So the allowance for credit losses was was 146% for the quarter.
We expect to maintain that through the end of the year and that kind of range we.
We think that.
It actually is a higher level.
Of reserves than the.
The models would tell us, but we believe that this is the right time to have very very very strong reserves.
Also keep on emphasizing that we are a collateral base lender, we lend based on our loans are secured on in two ways, one by real estate and others by cuts receivable inventory or equipment business assets. So on the CRB side of it which is about half of our.
Walk, there's about a 50% loan to value for the portfolio.
Just to cut that a little closer on the multifamily side, its 44% loan to value and other CRT, it's 52% loan to value.
And on the CNR I.
Side of this thing the other half of the whole portfolio, 97% of secured with accounts receivable inventory or equipment. So our view is that that.
That are.
We will have challenges as we go through this cycle, but the loss given default is relatively low.
So we believe we can control losses, along the way within the reserve levels and with the knowledge that these are well collateralized loans in most of the.
The vast majority of cases.
You've also seen in the third quarter credit trends have improved.
The deferral rate is down to 2%.
We've driven that down from 8% to 2%.
Npls are down 30% quarter over quarter.
Primary driver that is obviously the sale of the low.
A little more than $80 million of Npls with the resin the transfer.
Transportation specific.
Ticket transportation the resolutely MPL flow has been relatively stable.
Without the outside sales charge offs were about $13 million or 24 basis points and that's what we expected.
Delinquent screen delinquencies have improved slightly and Weve had a slight increase in class.
Categories. So again for what we see in the future.
We're confident in our ability to control the losses within reserve levels again.
Again, we will continue to see Onesies and Twosies come through the system of of potential losses.
But we believe that we have a good control over that.
Fourth point is that we view our model to be effective into the future. So we continue to adjust our model to.
To deal with the changing environment that we're in and the changing clients client needs. So we've.
We built this model and we want it to continue to be a very contemporary model if you.
If you think about maybe four components of that.
We are first we target high value commercial and consumer segments. We we have not tried to be all things to all people. We focused on areas, where we think we can add value to our clients. Secondly, this is a branch lite model. So we have meaningfully reduce the physical does.
Distribution and replace that with online in Treasury resources and our teams.
Third this is a relationship ship oriented model in the sense that it's a single point of contact advisors that provide value on both the commercial and the consumer side and then.
And then finally moved.
Very deliberately to create a good technology platform for the future, we're making significant investments into the platform.
Over the next several years there'll be about a 30% increase in technology spend to be able to drive automation comprehensive automation within the company to take all manual functions out of the company and to digitize all the offerings to our clients and also our colleagues so we.
This is the right time to make these investments and we want to balance this relationship approach with a very kind of high Tech approach. We believe the clients what both of those things that don't just want the relationship side and they just want the techno.
Technology side, they won both of those things.
Second point is that we have significant diversity in our asset classes. So you can see on page eight of the deck.
If an asset classes, we use we're we're very good at moving capital around to find the risk adjusted returns.
Where we so move capital around through the last several years to try to create that that effect of risk adjusted return and again in this period of time to stabilize the yield the loan yields there.
Certainly is that that we do have.
Diversity in our geographic reach so for the for the third quarter.
While all of the originations 53% of the originations originations came from New York Metro 47% came from outside so again, we try to move capital around to find the right risk adjusted returns out there so let's put.
Metropolitan New York.
It is a terrific place to do business theres tons of diversity, both on the consumer and the commercial side. There are significant amounts of public and non public companies and and we have the opportunity as primarily as a middle market lender to pick and choose where we where we make our lake.
Our loans and and we have plenty of opportunities as we go forward.
And then the final point on the on the models we have had.
Total book value on a CAGR basis over the past five years is created by 14%.
We have traditionally been a top core top performance versus our peers, whether it's return on assets return on equity EPS growth efficiency levels, or frankly revenue and earnings per <unk> ft.
And we continue to believe that we have to evolve this model to make sure that we continue to be very contemporary going forward.
And the last point is that given the strong core PPNR the strong capital levels robust allowance for credit losses, improving credit trends and our model built for the future we're going to resume our share buyback program immediately.
We're targeting 50% near term total payout ratios.
We have plenty of capital we think we were comfortable with where we're at from a metric standpoint. This is by far the best returns given where our stock is has traded so.
So we're assuming that we have a back order over 16 million.
Shares authorized.
Do buybacks and we're confident that the board would grant us more we find more opportunities, but but.
We are resuming this immediately and feel confident in that.
The last point is that on page 17, you will see our outlook for for the rest of 2020 that essentially the fourth fourth quarter.
Lower oil pretty confident in the low growth and net loan growth at $500 million to $700 million.
Pipelines interesting enough pipe pipelines are starting to get back to pre covert levels in terms of opportunities.
So our our team the pipelines kind of ran down at the end of the second quarter into the third quarter there.
They are significantly picking back up again, so there are a lot of opportunities out there.
The loan to deposit ratio well below 95%, so I mentioned before.
The core net interest margin.
We would expect it to be in the three of five 315 range fee income in 115 to 125 range.
Operating expenses in the $420 million to $430 million range, and then as I said the capital management opportunities too.
To do share repurchases, starting now and we continue to have a low effect of last.
Tax rate.
Before I open up for questions I'd be greatly remiss if I didn't thank everybody. This is a really really difficult time over the last six months and our colleagues have been fantastic. They have worked their tails off that been harder.
Hard working from home and in some cases coming back into the offices. So really appreciate all the great things that our colleagues have done. Thank you to all of our great clients.
Sales for the.
For the most part it's interesting most of the clients have figured out how to adjust their models as time goes on so they've been terrific to work with.
Our relationship model has enabled us to really have a great fluid interaction with our clients going forward.
We really appreciate the strong board members, usually the meeting as a board.
Probably.
Twice as often as we've traditionally done to keep the board up to speed with everything that's going on have been terrifically supportive and have have had great ideas and great questions along the way and then finally there are investors investors is kind of stuck with us through this and we hope to entice them to put more money into the queue.
Company and bring on new investors.
And the final point is that we have worked really hard to support the communities that we were in.
A lot of our communities have gone through tough times and its been most important that companies like us spend the time and money and effort involves years to support the needs of the community. So weve gone above and beyond the call to to provide more resources backing the communities that that were part so appreciate.
Your interest in the company and let's open it up for questions.
Thank you Sir if you would like to ask a question. Please take note of pressing star one on your telephone keypad if.
If you're using a speaker phone. Please make sure your mute function is turned off to allow your sequential each era.
Then press star one to ask a question.
We will now take our first question from Casey Haire from Jefferies. Please go ahead.
Thanks, Good morning, guys.
Good morning, Casey I want to start off I want to start off on the buyback.
Obviously, you guys won the first of the switch that back on can you just take us through.
You know.
How do you guys arrived at that.
That that 50.
That 50% payout ratio is that something that you pick two or was that a regulator discussion.
And how that might change.
Mike go higher over time.
Okay is that the number that we pick and a target that we pick based on maintaining capital management flexibility and making sure that we still have capital to support.
Whatever happens from a balance sheet growth perspective, and what the near term target that will change over time as we grow as we see kind of to do.
2021 on Volte, so it's a good bet.
Best way to characterize it as a sales like the target that we think provides us with substantial flexibility to take advantage of buying stock at a price that we think makes lot of sense and we will essentially adjusted overtime, we deem that we want to go there we don't see.
They will kind of be greater.
Greater growth opportunities and stock if they need to be at attractive levels. So self selected and it's going to adjust over time, but thats what were targeting for the next couple of quarters.
And I think I'd add to that we did a review this with the fed and the SEC. So they are they are understanding what were doing.
Understood Great and then just switching to the NIM Jack sounds like.
You guys are comfortable with this 3.5 to 315 range, even beyond the fourth quarter here.
You've done a great job on the funding side of things, but.
And it sounds like there is more room to come in the fourth quarter here, but.
I eventually that should run out so what and then you have the balance sheet the assets rolling over into a lower rate environment. So so what what's underlying the confidence to keep the NIM running.
Between drill 515 and then.
And the next.
Beyond the fourth quarter.
The way I would characterize as near term. So I think we're confident into the beginning part of 2021.
And we'll see how that unfolds.
A lot of lot of unknowns going beyond that in security yields and loan mix in loan yields so.
We have seen a couple of categories, where rates have actually gone up on the lending side.
That started the take out that some of the categories, but that's it's really.
Near term.
Fourth quarter or first quarter 2021.
Beyond that we'll we'll see where we end up.
Okay. So said another way so the funding costs sort of you're not going to get much more beyond the 30 bips of cost of funds in the.
In the fourth quarter, and then and then the NIM will track whatever whatever the asset yields new money yield on loans and securities is that is that a fair characterization.
I think there's room so it with one caveat there gauge I think that there is room on that 30 basis point cost of funds to move lower in the next year as well so from a total cost of funds perspective.
We're still not done in not in kind of doing the various strategies from a deposit pricing perspective and.
Wholesale borrowings perspective on some substantial chunks of globally.
Funding stack still so there's room certainly there's not as much room on the funding side is there is potential earning asset pressure, but.
You know the earning asset yields are going to be very much dictated driven by what growth is next year, we're going to be selective in what we do we're going to draw down the securities book and that's going to represent a decreasing portion of our total earning asset mix as well we.
We think that we we can find that better risk adjusted returns with duration profiles that are shorter than investing the securities book in our various.
No commercial finance asset classes, and so you're going to continue to see us standard blocking and tackling and moving to the balance sheet around to make sure that we that leases.
So we sustain high possible possible then so I think that you're bringing up a very good point, which is longer term low rate environment flat rate environment can you continue to sustain this if you were to think about it from a static portfolio perspective, I would say absolutely not you could maintain a static portfolio and have they take the NIM profile, but this is what we get paid to do we get paid.
Managed and allocate capital and resources to various asset classes that were going to allocated to the places where we find the best risk adjusted returns and that include both interest rate risk and credit risk profile. So.
That we will we will have to earn our keep to keep that down below that type of them profile next year, but there is definitely the pathways to being able to do that by modifying the earning asset side of the house and continuing to very aggressively price down all deposits were not down on deposits and wholesale borrowings yet.
Understood. Okay just.
Just just last one for me.
Vision outlook.
You know you guys sound very confident with a a 146 hcl today and I know we're all.
Data dependent.
On the forecast and the outlook, but assuming the outlook.
Stays the same how should we think about.
Provision levels going forward and obviously the special mention Upticked, a little just just a little color on the provision near term.
After the special mentioned, it's interesting because we've been I think that we're going to sell many broken record from the beginning of this in the first quarter call. We said that we're going to actively.
No proactively in very aggressively continue to manage and migrate credits.
Pacification, having gone a little bit of days out of the first quarter call, where we had the same type of dynamic where you sign uptake and special mention though that everybody that Oh, my God assessments and those have increased.
Thanks again.
Putting loans on referral no modification modifying loans das has never been stopped migrating loans through there through what they should be probably credit classification perspective. So we continue to get ahead of this and the spending that the uptick in special mention loans had some component of loans those loans that are on on deferral and where we again sales base.
What we're seeing and what the physician is of those bars today, we've decided to migrate them and not wait we're deferral period and so forth. The run out. So we're trying to get ahead of this and the perspective of not having a substantially greater uptick in special mention loans. Once provisions of that appears act and kind of deferrals run out. So we're we're essentially continuing to manage that.
Most of the cases of credit for the most part regularly basis as the modifications, we're not we're not happening behind the scenes.
Second thing is you know, we're very comfortable to 146, and we have a substantial amount of our allowance today that is still represented by qualitative factor adjustments that we're making to essentially get that allows for that 1.5% ratio again, if you take out the PPP loans were at about 151 that of the 146 that we have for for GAAP purposes. So.
We're going to continue to work, we like that ratio, where it is it's going to likely stay at those types of levels for the foreseeable future and.
Annualized net charge off rate that we had in this quarter. Excluding the portfolio sales you had about $13 million to $15 million in charge offs. We anticipate that for you know that we're going to have similar types of.
Charge off content for the foreseeable future and we will continue to replenish the lounge retrospective so provision for loan losses will continue to be higher than pre pandemic levels. In the next couple of quarters, but we can gain to think that it should be lowered the same thing that we had last three quarters, which is a decrease quarter over quarter, we anticipate seeing that in the fourth quarter as well.
Great. Thank you.
Thank you.
We will now take our next question from Alex Twerdahl from Piper Sandler. Please go ahead.
Hey, good morning, guys.
Good morning, Alex.
First off I was wondering.
It seems to me the New York City has become somewhat of a controversial geography. So a lot of people on the outside looking in.
Maybe you can just give us a little bit of an update on what you're seeing from the ground in terms of underwriting and ability to underwrite and things like property values, what they've done and debt service coverage ratios and whether or not you feel like right. Now is an environment, where you can really tread forward and make loans in that geography or.
Or if you had to kind of take us a little bit or wait and see approach it as something that's kind of work themselves out.
Yeah, Yeah, yeah yeah.
It's interesting just so everybody writes about the death of New York City for first.
In New York City is a mass so place and there is great diversity and opportunity. So if you think about it it's 19 million people.
There are 800000 small business our businesses in Metropolitan New York.
I think there's about 200000.
Come businesses that have more than $500000 in revenue.
In the city and Metropolitan area and there I think there was 800 public company, so and if I took you through the types of industries and Metropolitan New York, It's extremely diverse.
So it's not just a bunch of finance geeks like us walked around there are lots of diversity around out there. So so one.
And in our case were relatively small player we're still about 1% of the market share in Metropolitan New York. So for someone like US we can kind of pick and choose what types of credits. We go. After so we see a lot of opportunities. Our teams are built on seen many many many deals.
And then picking and choosing kind of what types of deals we want to do so have values come down yes, we're very.
Where values is very very high previously absolutely. So I personally this is Jack Kopnisky comment in Sterling comment, but I think.
Oreos.
Industries and areas go through different cycles, and and they reset prices at different times my views of the prices for New York City have been really high for a long period of time. This no one thought it would be a pandemic that would cause this but prices have now come down.
And there that's come down by varying amounts depending on what type of what type of real estate, especially that you've been in so I said most of the companies that we deal with have figured out a way to adjust their their models and in this process. So.
We view this as theirs.
Constantly plenty of opportunity in Metropolitan New York When you go into this with having very low loan to values. It gives you a good comfort so say values come down by 10% of your loan to values at 50% you have a lot of instead of a lot of room to go.
To make sense out of it.
Well, what we're finding is that there is also an incredible amount of money in Metropolitan New York. So we've had a couple of instances where people come glass with lots and lots of cash balances wanting to look at real estate that have come down in value.
So even even the hotel portfolios for example.
About a quarter of our hotel performers I hope.
Our hotel portfolio, we're continuing to work on my view is that there is always going to be cash for buying those properties in the areas that they're in and may not end up being hotels at the end. They may end up being transported to something else that there's plenty of cash sitting on the sidelines. So in general this is a.
Very diverse market.
There's many opportunities prices values have come down as prices come down there are people with lots of cash that come in and find opportunities to buy at at discounted values as a lender being the collateral based lender.
We feel pretty confident in the values that we have and again our loan amounts that we have against the values.
So.
New York is going through a bit of a transition that lowered the rates.
And I usually use. This example, I may or may not be a good example, but I pass.
Boutique French pastry place that.
When you go into the place that the patients for about $7.
A lot of people that could pay $7 for a a little French based pastry the business went out of the shop.
Shop went out of business somebody is going to come in and maybe with a new pastry have a three or four dollar pastry that there will be a little bit lower more people will be able to afford that the business will do well into the future I think thats happening in many metropolitan areas, and it's especially happening and in New York is probably more.
More than you wanted to know Alex but [laughter].
As my view of New York.
I think it's extremely helpful to get all that commentary on record because it is a challenge to see what's actually happening in the city and we read a lot of headlines and I was there up until March So you know.
Our next question I wanted to just go back to the commentary on.
On the buyback.
You said that you did.
Sort of give a heads up the fed and the MCC.
Before reinstating the buyback was it what was that process like was just kind of give him a call and say hey, here's what we're doing today actually opine on it and before you know.
Every corner are they going to have to get some sort of a feedback on it for the foreseeable future or is it just kind of now that its and its end.
I guess, what's the best way to characterize it Alex is that that it was more the former than than the latter so with.
Right now we have regular way conversations with our regulators every quarter not tied to the buyback, but just all things regulatory related and as part of those conversations we.
Due to our capital management strategy and.
Pensions and reinstatement of the buyback for the fourth quarter and the regulators have now been notified of note, we unless there's going to be a material change in how we envision that capital management strategy unfolds over the course of the next.
Quarters than we don't there's no.
There is no need to essentially have to address that point to get with regulators at this point now we talk to the regulators all the time, so I can't it's not like we are.
Had specific conversations tied to this particular dynamic. This is just part of the regular way conversation that we have that regulators on every quarter every month.
Got it that's helpful. And then just a final question just from a modeling standpoint, the PPP sales that you did during October.
How is that can actually flow through to the TNL in the fourth quarter.
So we entered needs. So we've entered an agreement we have not completed the sale yet we think that we're going to get it done in the next week or so.
If it slips it will slip into it.
First week of November so we don't see any there is no. There is no risk, though that the sale not completing net.
Net net impact is that there is going to be an increase of about four three to $5 million to $4 million in yield on see an island, which is where our BBB loans are recorded and that the net fee that is associating connected to the loans that are being sold and so that has the gross fee that we received from the FDA and it has committed out of that some origination cost and.
Worth of originated loans.
Okay.
[music].
And is that it for loan sales for PT clearly you do anymore. After this first tranche.
No thats it from loan sales.
For now so we are that this is the loans that we are selling our rob nor smaller balance loans that are going to require so.
So its a smaller amount loan so the $260 million that were selling has a substantial amount of units of loans associated with it.
The smaller loan is there's no real difference between.
Obviously with no loans under 50000, there is a slight difference relative to the no further.
No forgiveness kind of documentation and processing requirements. So we've essentially isolated the component of the <unk> of the PDP portfolio that we thought was going to result in the most amount of operational complexity.
We've decided that domino that theres, both that are out there that are better positioned to be able to the kind of service those loans that now than we are so we're going to focus on the rest of the loan portfolio should not be Nov will stay with us and we anticipate that you're going to see a substantial amount of those loans.
Kind of disappearing or decreasing our books, because they're going to be forgiveness processes that should set so some of those loans should start getting forget it in the fourth quarter, we envision about by the first quarter next year. The rest of the PDP portfolio for the most part should be off the books as well.
Hey, Thanks for taking my questions.
Hey, Alex I'll give you one more one more point on New York City, what are the other listeners on this thing is that it is metropolitan area. If you go into the boroughs the island and Westchester in New Jersey.
Connecticut.
In essence, everything's not all the way back to normal, but it's probably 80% to 90% back to normal flows.
Flows of traffic the area that that most people talk about is actually Midtown and downtown where it's all basically offices slight were in right now.
And tourists driven so those are the areas, where there's less and less active or less activity, probably about 25% of normal activity. The rest of Metropolitan New York.
Seems like it's really come back and come back pretty strong.
We don't have a lot of exposure, that's dedicated to that tourism activity or destination activity on the island of Manhattan, We do have some but it's not a meaningful amount at all for for our company from a portfolio perspective.
Perfect. Thank you.
We will now take our next question from Christopher Keith Kinsey, 18th Sir. Please go ahead.
Hey, guys. Thanks for taking my question.
So.
You guys talked about managing the asset mix and I was just wondering if you could tell us which categories, you're seeing strength in the loan pipeline and maybe a sense of the magnitude of growth over the next few quarters and some of those buckets.
Yes, so the areas that we are we feel confident in in both the risk adjusted return and the opportunity that grow or things like traditional cnine.
There are some sectors of commercial real estate, especially in the warehouse distribution and medical side of this thing.
There's opportunity in.
The leverage finance area, there is opportunity and innovative finance areas. Some of the technology lending that we're we're doing.
So it's those types of areas that tend to be higher higher yields better overall returns and frankly lower lower risk along there. So the risk adjusted returns in those areas or are pretty strong and you know, we we view those opportunities.
As probably being in Ohio.
You know high single digit low double digit types of growth rates.
Got it and then and then do you have a sense for the 2021 total loan growth yet.
We do not we're working through that right now and you know where we're going to work through.
You know what those numbers should be so we're finalizing our plans for 2021 now we have I would tell you too is just as an aside when all the things we're trying to do in 2020 as to get prepared for kind of a strong 2021 and beyond so whether it's the.
That on the loan loss reserve was for and provisions or the margins and things like that we're trying to make sure that we come out of this and that and some good momentum going into 2021, but we have not.
Articulated.
The loan growth category.
Got it Okay. That's helpful. Thank you and then just on the margin side can you tell.
Can you tell us where CRT loans are coming on at and do you have a sense for the amount that are set to reprice over the next few quarters.
Yes, the loans are coming on it's interesting it depends on the category. They are coming on at anywhere from three to quarter four to quarter. There are deals along that path, depending on the type of category and.
The type of cash flows coming out of out of this.
We don't there's about a third of the portfolio. So out of the $10 billion of of loans. There is about a third of the portfolio Reprices over the next 12 to 18 months, where that had some sort of lower pricing event over the next 12 to 18 months now Vegas question Mark on that.
Chris is going to be what happens with prepay activity, we have started to see.
Some incremental prepay activity on the on multifamily and on some CRD loan but.
Still quite manageable relative to <unk> and pretty much in line with we've been down levels.
If there is I guess, the positives and negatives that there is a lot more than kind of stronger rebound economic activity in New York City area gets continues to kind of improve at a faster rate and pace that out that prepaid accelerate but that same time that means that credit is going to be probably better shape than what it is today. So I think that that's a trade off that we.
Would you know that we would take right. So you start seeing faster prepay activity likely means that there's nobody better kind of macro economic backdrop locally better conditions for borrowers, which means that we should see some offsetting kind of provisioning requirements. So kind of the puts and takes and positives and negatives and seeing that but yes faster prepay activity would result.
No you know in some.
Some incremental learning earning asset.
Every year he has pressured so it's about a third of the book.
Got it that's part of that so much.
We will now take our next question from Steve Moss from B. Riley Securities. Please go ahead.
Good morning.
Good morning.
Following up on the buyback here when you guys talk about near term earnings.
Its extent Pat on your term or was that the most recent quarter and are well on on maybe a six month basis, just kind of curious how you guys are thanks.
Yes, it is going to be an annual metric. So we're going to take a look at.
Where we are real and so we're going to look at where we are on a per quarter basis, what that means with respect to the glass kind of rolling four quarters, as well and I don't want that so we said that's what as other and approximately 50% because its not that there was a hard and fast rule mathematical calculation of saying for quarters.
By the time this and as you can pay out so I won't be able to get that impression what what we stated before is how we're thinking about it which is we anticipate that as Ernie can seem to continue to recover that type of long kind of near term and longer term capital return strategy allows us to essentially continue to retain capital to support growth in what happens.
On the balance sheet in whatever opportunities, we see from that perspective, and also allows us to return a meaningful amount of capital to shareholders that go with it.
Where the stock price trades today.
So again I don't want you to come away with the impression of saying there is a mathematical specific approach to how this is calculated but if you were to think about rolling four quarters and then over the front of the following four quarters anticipate what that means from a from a capital return strategy that you know that will get you pretty close to how were thinking about it.
Yes, frankly, we wouldn't turn this on this is just going to be a one quarter thing direct sales just so just to be clear with this is we believe that this is a lesser some dramatic event that happens in 2021.
We think this is the right thing to do for.
Longer period of time.
Okay. That's helpful. And then you know Jack you mentioned about a quarter of the hotel bookings are concerned just kind of curious as to what your approach is to workouts and potential.
Potential resolutions with those borrowers.
Yeah, we're pretty comfortable that even with it. So if you look at we have about $400 million worth of hotel.
Closure above that three quarters of it we're very very comfortable with the you know we you know people are figuring out how to change their model adjusted all that.
The quarter of it we're working through with our clients.
They are we think that we have good loan to values in those in that category, but it will be a longer term workout with a number of those those hotels. So when you're doing those things is sometimes you restructure or sometimes you will take the collateral sometimes you find them.
Our buyer, it's all those types of things what are the other things we did well prior to this is we brought in.
We brought in some very terrific folks from some of the larger banks in the workout area Theyre very sophisticated.
How they.
Deal with challenge credits and we're really happy that they are here and.
We will do a good job of facilitating the workouts and you know frankly.
Frankly get our money back out of these things.
We added 100 million, we do have.
Panther is in more than half of the cases that have significant capacity both in network and liquidity to easily get through the pandemic timeline that we all kind of read about in the newspapers and we would expect that they would do that we're highlighting was that in the third quarter those individual hotels.
But he did not have any annualized SCR one times.
That's why that's very much on our radar screen, but from our perspective as Jack.
As Jack said 100 million, but we look at it in credit and we're really focused on four or five days.
Okay. Thank you very much I appreciate that.
Thank you.
We will now take our next question from Todd Collyn Gilbert from KBW. Please go ahead.
Thanks, Good morning, guys.
I will start with the question first okay.
Can you tell us it's actually I was going to guidance for the second thing for 2020, but movies.
That will hold into 24 modules.
That said as you migrate higher income levels and provisioning levels come down.
Federal migrate higher soda migrate higher closer to where we were prior to the main benefit should be high teens.
Kind of 20, how low 20%, but.
The proportion of tax efficient asset that we have as a sort of the amount of tax efficient asset.
As usual sort of earning assets continue to increase which is going to continue to put.
They did move that tax rate down relative to a reprieve demick levels, but it is going to be higher than solvent that percent that we reported at this quarter. So for modeling purposes, I move that up back to 70 in half that call. It 20% are sort of the odd to be on the conservative side.
Okay, Okay and then.
And then just from a loan.
The loan outlook. Obviously, you guys are moving along the guidance between which will imply nights growth coming in the fourth quarter.
Is that I, just just curious as to what.
I guess you are expecting that growth in the fourth quarter I'm kinda talk a little bit about what is going to be driving that and what you're seeing now that's going to allow.
Oh, I see that kind of loan growth for the year.
Yes, it's actually the same categories that I mentioned.
So its things like lender finance side, and I feel the AD public finance side out there in the last question, but things like see in traditional C and I have some more real estate areas lender finance innovation all those types of things that like I said that the pipelines are starting to build and they're getting.
Closer to preprint pandemic levels. So.
We feel pretty confident that you know as those bill will be able to find the right types of credits to to to make.
Okay. Okay.
That's helpful. And then just on the Opex side. So maybe you guys have indicated.
During the quarter, but yet the Opex guidance held flat did we at some point of whatever savings full from those reductions although sales and then just reinvesting in some of the digital and tech in a sense that path.
Reinvested so similar strategy that we have.
Ali for quite some time now which is that we continue more so than trying to cut opex at the level of Opex that which we run the company today, we're no we're pretty darn efficient. That's our strategy continues to be to kind of redesign staffing models across the company in places, where we don't see.
Kind of scalable growth opportunities and reinvest those dollars into places where we do so it's going to it that is why the flat side.
Youre going to be replacing some of that Opex is not going to happen immediately from one quarter to the next so there might be a decrease in opex next quarter, rather than you know what happens longer term, but that range of running the company at that call. It 24 30 level of Opex is one where we think that we get valuable where we get the best things are the bulk buy and reinvesting those dollars.
In the places, where we think that there were going to be able to grow in a in a more scalable more efficient more profitable way.
Okay. Okay. That's helpful and then just lastly.
On kind of the outlook for from that charge off yeah, Jack I think we talked about that last quarter.
And Lily gave color that you kind of expecting that tied up the whole than let's call it as more normalized range.
Is that.
So.
And I I think what you're saying is you're not anticipating much more in the way of loan sales just trying to understand if theres going to be maybe more I would say that as you know.
Oh, I didn't say that [laughter], Okay, alright no.
Yeah, No. That's a good good question. It's a great question I think that you know again I hate to sound like a broken record I think our strategy from day one since we started to enter this kind of this credit cycle is been kind.
Kind of get rid of stuff as early and as quickly as we possibly can to focus on the components of the business that we want to focus on.
Similar to what that in order to how we identified API.
Opportunities to get rid of noncore assets this quarter.
There's other opportunities like that particularly related to anything we see popping up on the residential mortgage side.
Other business lines or other commercial asset that we had that don't doubt that aren't really growth opportunities for us we will absolutely take advantage of that and.
And we will continue to have no our strategy at that kind of cleanse.
Charge offs in the provision for loan losses in the earnings stream of as much as we can from a credit perspective over by the end of this year. So we're going to continue to aggressively manage credit with that said in asset classes that are core to us in places, where we are growing we anticipate seeing a continued kind of stable.
The charge off rate similar to what you saw this quarter, so I would say no.
The specific components of noncore assets or puts it or we don't grow where we don't see that opportunity for those credits to turn we might essentially execute some sales, but but.
But for regular way core business of what we do kind of our core commercial asset classes on the Cnine theory side, we think that it's going to be a progressive in programmatic approach the charge offs that should be relatively close to what we've seen for the last couple of quarters.
Okay.
So then if you think about that and then the right. So that you know the charge off that's what this quarter. There were some reserves already find it out which is which is allowed to be lower than.
Just trying to think about what and I know you said part of that 1.6, I'm sorry, one just want a qualitative can you give a little.
A little bit tighter numbers around that just because obviously that could be higher.
Hi are elevated that tradeoff.
On trying to model whats happening to the reserve in the provisioning it's going to be.
Youre starting to overtime overtime, you will see a provision that totally feel loans that migrate down towards 1.1% to 1.2%.
Now that that you know that that's going to be dictated again by what we see from a there's so there's components of the loan portfolio that we anticipate today from seasonal modeling perspective are going to have higher no kind of lost content and we provide a fair amount of detail on and you can see where those were those components of the portfolio or.
And as those out and again, given a substantial chunk of the.
House today is composed of qualitative factors.
We think that again, you get you to maintain a relatively stable and in line kind of macro economic forecast assumption you would see us they kind of decrease in Liza that allowance those types of kind of that call it 1.2% or one of the quarter level overtime as you get rid of some of these you know the regular way charge offs over time, so it's out.
You know again I, just think that we don't have a magic Crystal ball, we don't know exactly how to charge off content appears in the book, but you.
But you should be similar to what you saw this quarter, which is pro.
Proactively managing out of some asset classes, where there is higher loss content no that is not going to be representative of what charge offs are the core run rate kind of core businesses that we continue to originate loans in every every day.
Collin as we said we don't.
We don't have a magic basketball with different and we all know about this environment is that its pandemic driven it impacts certain elements of the service economy.
Our right to model that and not maybe never been through this before I think thats why it makes it very difficult with the situation in China.
You're trying to figure out, but our 150 reserve migrate flow over time yeah.
Yeah, Okay. That's super helpful. Okay, Great. That's all that's all I had thanks guys.
Thank you.
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I think as a reminder to ask a telephone question. She said that by pressing star one.
We will now take our next question from Matthew Breese from Stephens, Inc. Please go ahead.
Hey, good morning.
Morning, Matt.
Just following up on calling the line of question there, maybe just a little bit different so it seems like clearly, there's there's a portion or portions of the book that.
You would consider selling if it helps you achieve the goal of extra.
Extradited probably.
Problem Aspen asset disposition.
Should we expect if that's the case.
The reserve already contains the potential charge off that you think is warranted.
Yes, yes.
Okay, and if we were to take that one step further.
So you have deferrals down to 460, some odd million.
If you were to try to get out of that portfolio. All of it Tomorrow. You mentioned that you feel like the reserve contains all future loss content on the problem loans you see right now do you feel like the reserve coverage you know if you had to get out of it or deferrals tomorrow.
So I am so short answer to that is yes, but you know I know.
Feeling that the hypothetical that you're laying out isn't one that we contemplate because we don't want to get rid of every one of those loans as part of the difference. So we're very confident that there is a substantial amount of those loans that are on deferral that hattie clear that are that are temporarily impaired because of the pandemic and then have a clear path to.
Getting back to Bob.
There's some regular so I guess there is a difficult question to answer because if we were to trying to sell some of those loans I think that there would be no loss content in many of those loans because people would realize that its a temporary impairment that there's a clear path for that stuff.
For that company will be able to get back on their feet and borrowed to be able to service at that over time and so the.
We know that the short answer is yes current reserve covers lost content that we see in the portfolio second part of that question is don't think about this as we are not thinking about those payment deferral of that that all goes that over some period of time, because we know that there are substantial amount there have been substantial components of that that payment deferral book better.
I want to be you know that need temporary support in are going to be able to make it through this just based on the underlying kind of circumstances of each one of those credits.
Understood Okay.
Since you brought it up but what I would say is that.
Your Metro area has lagged the rest of the country on unemployment rate coming down. It is now as you know coming down.
That's why you'll see readied is lagging on deferrals, but we would expect that will continue to decline because the unemployment rate is coming down equipment finance.
We do not have that's coming down still even in this month a lot of very significantly because the transportation to production and transportation of goods in this country actually is back to pre pandemic levels. So just the just some highlights on that book as well.
Okay.
And then I couldn't help but notice in the deck you widen the margin range.
Hi Fi Bips now, it's three or five three scheme from three or five to 310 previously.
What should we read into that for the fourth quarter and maybe one way to measure that what was the September margin and is that a good proxy for the fourth quarter.
So we think the fourth quarter as Jack alluded to earlier in the call. We are quite confident that near term we have the ability to maintain that means stable at three times higher than that.
You know again, we talked about before we have not yet finished what we're going to do on managing down costs, the deposits and capital so borrowings.
Substantial amount of the loan portfolio, particularly to our floating rate loans, which is about 50% of our book has has repriced at this point, so you're not seeing incremental margin pressure there and you do start getting it we're now into the fall into that part of the repricing of our book that it just takes longer to do because now as part of you know paydowns that refinance activity on it.
Fixed rates out of the house. So we think that again near term, we think that there is really mean vacate good.
Kind of good opportunity for us to maintain that mid staples stable to slightly increasing the longer term no discussion over the longer term NIM discussion that we had before is what he knows where we see that for the challenges going to be right. It's and that's where it comes back to reallocation of assets you know changing the earning asset mix decreasing securities movie.
Im away from some of the kind of the lower rate kind of fixed rate type of.
Origination opportunities and other types of asset classes.
Trying to find new avenues for tax kind of tax efficient assets and so forth. So next year is the is the tougher dynamic and you know there is always pressure to the NIM, but we we like where that three time to 315 ranges in near term.
Understood. Okay, and then last one for me you know Jack over the years one point you've repeatedly make is that you know the company is focused on generating operating leverage and one of the real strength this quarter was that topline.
Moved quite a bit higher.
How sustainable do you think that is in this interest rate environment and do you feel like you can create that that positive operating leverage in 2021.
Yeah. It was in so by far that's the toughest toughest part of this this is not easy, but as we said we've been pretty good over the years about trying to fix for figuring out the mixes of the adjustments along the way, but that's that's frankly, what we're focused on we're focused on how can you make sure that you're driving more revenue growth.
Ram expenses, along the way and this is a.
And we've factored in the investments into the technology platform to be able to make the company more and more contemporary so.
Well, that's what we're working toward so like I said, our expectation is that we'll be able to create positive operating leverage.
We have to get down to the nits and nats to make sure that that happens.
And frankly, there's always plenty of opportunity to do that as you proactively manage business. So there's always going to be times, where you have opportunity to grow revenue like crazy and you're going to fund that with expense and there is a part of there's other times, where revenue opportunity isn't as great and you're going to EPS cut expenses, we've been pretty good in.
Both of those scenarios.
Taking actual along the way so we we think that there's opportunity to do that into the future.
That's great. That's all I had thanks for taking my questions.
Thank you.
There appear to be no further questions at this time I'd like to turn the conference back to the host for any additional or closing remarks.
No just thank everybody you know it's been tough on all you to on the phone and during the last six months and we appreciate that communication back and forth and you have you have questions. Please feel free to call any of US. We appreciate your following the company and we hope you will consider investing more money in the company.
Thanks, a lot have a great day everybody.
This concludes today's call. Thank you for your participation ladies and gentlemen, you may now disconnect.
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