Q4 2020 Sterling Bancorp Earnings Call
Good day and welcome to the Sterling Bancorp for key for <unk> 'twenty earnings call.
Today's conference is being recorded and that's it.
And at this time I'd like to turn the conference over to Jack Lipinski. Please go ahead Sir.
Good morning, everyone and welcome to the fourth quarter and year end 2020 call.
Joining me today, and so Luis Marciano, and B Ordonez, Rob Rowe and Emlen Harmon.
And find more people to this call.
Oh, Yeah, maybe I'll start with just some recent announcements from a structural standpoint, I think as you all have seen Luis was promoted to the Chief operating officer of the Corporation and he will operate as the bank President and will oversee the lines of business as operations and technology.
And I'll take care of the staff areas, we said and our new CFO be Ordonez will report to me also and we're really excited to have <unk> join us and I'd really encourage you to get to know her and she is terrific and brings a lot to our company and I look forward to work.
And with her over a long period of time.
So, let's turn to the fourth quarter and year end results.
Say 2020 was challenging would be a massive understatement.
And we aggressively met the challenges of this near zero interest rate environment, a global pandemic and the resulting credit challenges.
And as you'll see from our results we have been adjusting our model to set ourselves up for a strong 2021, our fourth quarter results are reflective of those actions during the year to continue to be a high performing company.
We had a strong fourth quarter driven by three factors. One we had really strong growth and core adjusted EPS driven by improved revenue growth.
Secondly, we have margin expansion and improve returns and increasing tangible book value and third we had improved credit metrics. So, let's let's start with our strong run rate profitability as you've seen from the press release adjusted earnings per share increase for the 49.
Compared to the third quarter.
Adjusted <unk> excluding.
Accretion income was $130 million.
Which was a $7 million increase or above.
About 6% versus the linked quarter and.
And frankly, it was down just $1 million relative to the fourth quarter of 2019.
Adjusted total revenue grew by $10 $5 million versus the third quarter and what we've focused on over many many quarters is trying to create positive operating leverage we created approximately two five times positive operating leverage as our core margin increased by 15 basis.
Points quarter over quarter.
Commercial loans loans net of the sale of PPP loans were up 1% in the quarter.
Deposits declined as expected due to the seasonal outflows of.
Municipal deposits.
Fee income, we had a strong quarter for fee income as the economic activity continued to improve.
Of the fee income $3 million worth of fees came and the sale of the PPP loans.
And expenses were in line with our outlook.
We have one extraordinary item, which on the expense line was a $13 million charge for dispositions and the financial centers as we've continued to decrease the amount of physical locations we have.
Secondly, our margin expansion profitability drove strong improvements and return metrics and Tim tangible book value.
Core net interest margin improved by 15 basis points from last quarter, earning asset yields increased by six basis points cost of funding liabilities decreased nine basis points to 33 basis points.
Adjusted.
Ta improved by 12 basis points for a 133 basis points.
Adjusted ROA, TCE improved 66 basis points to $14 three and.
Adjusted operating efficiency was stable at 43% and total book value increased by.
By <unk> 30 per share over the linked quarter.
Year over year total book value increased approximately 6%.
We also continue to have robust levels of capital as we have created.
<unk> earnings flow.
<unk>.
Very specific dividend and we have a lot of excess cash.
Cash coming off of the earnings side.
TCE over Ta was 955 versus $9, one five last quarter about a 40 basis point increase tier one leverage at the bank level was 11, 33, 11, 33 versus 10, five last quarter and.
And during the quarter, we've repurchased approximately one 9 million shares we will continue to look at repurchasing shares as a as the opportunities present themselves.
Third we are confident and our credit position, our nonperforming assets declined during the quarter and we continue to carry strong strong loan loss reserves.
Charge offs for the quarter were 23.2.
$27 $3 million 11, and a half million dollars of that represents the core charge offs and the balance was primarily related to the exit of our remaining taxi medallion portfolio, we wanted to get taxi medallion behind us once and for all.
Nonperforming loans continued to improve decreasing by $14 million during the quarter portfolio delinquency remains relatively constant.
Loan modifications under the cares act are down two 1% of total loans with the majority comprised of residential real estate borrowers remaining commercial modifications are primarily low loan to value real estate properties.
Criticized and classified loans did increase significantly from two 6% for four 5% and these loans are coming off of the cares Act mods.
That are experiencing some degree of cash flow challenges, we virtually re rated every loan and higher portfolio.
These loans are we feel very confident in the loan to value and the borrower supporting these loans, but they are struggling a little bit on the on the cash flow side.
And we've kept the allowance for credit losses of at around $326 million or $1, 49% of total loans, we think thats very appropriate and very prudent.
We consciously decided not to release reserves, we believe that having very strong levels of capital and strong reserves are the right thing to do at this point in the cycle and.
And we'll continue to do so.
We are confident and our ability to manage credit in this challenging time, we were generally again a secured lender.
Loan to values on the real estate side continue to be and the 50% to 60% range.
And 97% of our C&I loans are secured by receivables inventory or equipment.
And as 2021.
Sure.
Evolves, we'll continue to work through the.
The issues and the credit portfolio, and we're very confident and the outcome and our ability to mitigate losses, given the secured nature of the majority of these credits.
Finally, we continue to evolve this model and invest and.
Colleagues technology and risk management and the future that's really the targeted three groups that we are investing colleagues.
We've been able to continue to hire and retain some of the best and the brightest and as we evolve. This model we have different types of skill sets that we're bringing bringing on.
If you do the calculation of our revenue and earnings per FTE is at the top of the peer groups.
So we get a lot of our colleagues and they work hard and they're they're really well positioned for the future.
From a technology standpoint.
We are doing two things two big things one we are automating the back office using technology resources, a lot of AI a lot of.
Automation, along the process and we are trying to digitize everything for our clients and our colleagues. So the investment, we're making and technology is meaningful.
And then secondly, and the technology bucket.
We are really confident in our ability to provide.
Technology solutions and back office solutions to technology companies as banking as a service our view is that we will have up.
Up to six clients completed and booked by the end of the first quarter.
And.
And we view this as a means to create diversity and funding and fee income and frankly learned about other companies' top performing technology fintech companies out there providing service to organizations like us.
Third piece I've mentioned on this is around risk management.
And we've been very sustained and creating a contemporary environment relative to risk management, we build out our risk management group, including credit to be regional bank like rather than community bank like so we've tried to grow into.
And our high level of enterprise risk management.
And we're trying to anticipate the future and invest significantly in risk management as we go along and the last thing I'll say about evolving the model is size does matter. So we look to continue to grow both organically and through M&A.
Think the economies of scale.
Allows us to attract the best and the brightest and colleagues to invest heavily in technology and data and invest heavily and enterprise risk management.
Two items before we open the call to questions first you'll note our forecast on page 12 of the presentation.
We expect we will run a core NIM higher than all of last year of 2020.
Fee income will continue to grow as improving economic trends and initiatives that we are in.
And <unk> will be executed against.
We believe that there'll be and improving economic and our revenue outlook.
Core expenses are expected to grow modestly.
And modestly, but we will be investing as I mentioned and people risk management and technology that will enable revenue growth initiatives to happen into the future.
And we also expect to return more capital to shareholders. Both on an absolute basis and so a portion of earnings we have targeted a 50%.
And number two to return capital to our shareholders.
And lastly for open this up I really want to think.
A lot of folks.
2021 was it was a very difficult year, and we will still in obviously some of the.
The pin and pandemic, but through this process, we really have fantastic folks that work and our company as colleagues they constantly went above and beyond and they constantly adjusted and changed as the conditions change we have great clients our clients.
Really worked diligently with us the relationship structure that we have with the teams on both the commercial and the consumer side enabled us to really deal effectively with clients through this transition and by the way. We think that there is great opportunity to capture incremental clients into the future because I think we did it.
Better than others.
We appreciate the strong board members, we had many many meetings and 2020 as conditions changed.
And we appreciate all of you.
As a dedicated investors.
We have a model that is effective and we will continue to evolve and we are optimistic about the year and beyond.
I think there'll be a lot of opportunities as we go forward.
There'll be challenges also but I think there will be.
A lot of great opportunities for us to take advantage of.
So with that why don't we open up for questions you have.
Thank you. So if you would like to ask the question. Please.
And they have telephone keypad, and they're using a speakerphone and make sure thats. When we function is turned off for lawyers similar to reach our equipment.
And that will star one to ask question would pause just for a brief moment, while they are on an opportunity to signal for questions.
Okay.
Once again.
Tier one we will take our first question from Casey Haire from Jefferies. Please go ahead. Your line is open.
Great. Thank you and good morning, everyone.
Good morning, Casey I wanted to start off.
And Jack I wanted to start on credit.
The uptick and criticized classified.
Just curious.
Do you expect this to be the high watermark.
Number one and then you also mentioned that.
And we're very well secured and a lot of these properties based on the Ltvs, it's more of a.
The cash flow issue, if you could just provide some coverage on.
Some some color rather on the debt service coverage.
Sure. So there's a couple of different things there and I'll chime in first and then Rob Rowe will also and will also provide some some color there.
Two things I think that the positive aspect of this is is that the as we called out and are released and the vast majority of the migration is contained to loan debt, we're already and some form of deferral or some form of COVID-19 related modification or whatever we want to call. It. Some some modified payment plan right and so what we.
And our very positively encouraged by the fact that we're not seeing non deferred or non modified loans that are part of this migration rates. So it continues to be contained to that part of the population of loans that we've been working on and that we've been talking about for the past two or three quarters.
And that up until this point Youll see that there has not been any correspondent migration in nonperforming loans. So even though these loans that have migrated from a credit perspective, they have continued to perform.
And in many instances, it's because the overlying on secondary and tertiary Formosa and forms of repayment with.
Gearing towards support and strong borrowers.
But the most encouraging sign is that we continue to see folks so.
These properties are in these various relationships have a tremendous amount of equity in them and therefore, youre seeing guarantors and owners of property stepping up to essentially maintain kind of cash flows and payment streams and the reason for migrating them is is that yes. When you look at the underlying credit statistics of the individual property of the individual loan relationship all of that.
Particular loan you are getting the debt service coverage ratio is that today because of the pandemic don't cover the credit statistics that we require for loans and not be classified right and so the negative side is that youre seeing credit migration and the positive side of that Youre seeing people step up and continue to maintain these loans on our performance status is at the high watermark.
I don't have the magic Crystal ball and shaking the magic eight ball here and it's telling me, we're not sure yet, but what I can assure you is that the migration that you saw between the third and the fourth quarter, we do not anticipate seeing something like that continuing to progress because again. These are loans that we have been dealing with for three quarters. Now these are not loans that popped up as issues and the fourth quarter.
So for the most part and so that gives us a fair amount of confidence and and.
Comfort that we're going to continue to manage out of those population there is going to be some charge offs and the first and the second quarter, where we are we are cognizant of that fact thats why our reserve is what it is the reserve was contemplating that there was going to be some credit migration and we feel very confident where that where that reserve is today and again to the extent that there's further migration.
It's not going to be as we don't anticipate that it's going to be as significant as what you saw between the third and fourth quarter. Because it's contained to that same population of loans and Rob what do you anything you add Casey.
Casey what I, what I would add is that a couple of the pressure points that we and other banks that talked about and you've been asking about would be the hotel portfolio and and in retail and hotel has really been exactly as we described last quarter and that we are talking to all our borrowers of the 450 million and about $120 million of it is operating below one times.
Debt service coverage ratio half of data about the about half of that or really with with sponsors and guarantors that have so much liquidity that they could go years coming out of pocket it necessary to cover the cash burn at the project level. So then the other half of that 120 or so it's something that we're watching very closely and working with so that's a very.
Contains for us in terms of what it could mean down the road in terms of potential losses.
Retail is interesting because in <unk>.
Actually performing probably a little better than we would've expected, we do and analysis every month for the top 50 borrowers and.
Go and look at the paid through rate from the tenant to our borrowers and that was up to 89% and the month of December that was a little higher than we would've thought given everything that was going on and Thats and that trend has increased through the balance of the second half of the year. Nonetheless, there are still deals there that are below.
Below the onetime and <unk> and our view of the air and very clear that that's the case and they need to either be criticized and classified and really it would be the the liquidity of the sponsor guarantor that would make that determination and whether the criticized and classified.
Great. Thank you. Thank you.
Yes.
Great.
Okay. So just switching to total.
The outlook for 'twenty one.
The loan growth guidance I was little surprises you and at a $1 billion five.
Just just just some color as to what's driving that and I know you.
Surprised to see gradual consumer you expect to stabilize.
Does this bake in.
And more triple paid is it.
Portfolio acquisitions, just just some color here.
No.
I was just going to say this this is organic growth. So there is no.
And acquisitions and this and we think that that's.
A good net number two to growth. So we have we have.
We our pipelines now for.
For the.
And there are the first quarter and the second quarter are pretty strong they're actually stronger than they have generally been in the past.
So areas like.
And certain sectors of.
CRE traditional C&I. So we mentioned the affordable housing and public sector, we actually think there'll be continued significant growth and the public sector of balances is.
And this new administration takes hold on this thing and then it would.
Counteract the potential runoff of some of the other multifamily and some of the resi runoff. So we're pretty confident given what we see and the market. The day that is credit worthy and priced appropriately to be able to achieve that target. It.
Doesn't include PPP, so that so that guide and the target doesn't include PPP and the abating of the of the runoff of resi consumer.
Because we are now and that portfolio, starting with 5 billion net portfolio had liquidated quickly overtime when we close the Astoria merger. So for the past three years, we've seen a pretty significant run off but then at some point you do get to to get to a place for that portfolio because of consumer behavior will extend out some period or for some period. So we.
<unk> seen.
The extent that there haven't been loans that have refined yet in this low rate environment. You don't anticipate seeing that same type of refinance activity and continuing throughout 2021, which is going to slow down the accelerated repayments that we've seen and we're now down to a level, where the small amounts of originations that we do on the residential mortgage side are likely going to offset pretty.
And so whatever run off we see and the existing book. So net net you are this is going to be the first year, where you're going to see a residential mortgage book debt should not decrease the overall loan growth.
And as it has happened in the past couple of years.
Got it thanks, and then just last one for me.
The buyback.
Came and a little bit higher than that 50%.
And you guys are now, saying above 50%, how how how.
How high could that go.
And what would.
What would be the catalyst to be more aggressive than the 62% and here in the fourth quarter.
So we are the targets that we're setting for for next for next year has a minimum of 2 million shares per quarter. So we were at $1 9 million and the fourth quarter.
And we think that $2 million at a minimum is going to be 2 million share sorry is going to be a good number to use for <unk> and how we're thinking about that progression in 'twenty one and.
How high can it go again I'm, taking the magic eight ball here in case it depends on what.
What we see from a growth opportunity out there right. What we do know is what we have been talking about for quite some time, which is our long term target for TCE is eight and a quarter for sitting on a date and a quarter sorry, we're sitting on nine and a half to the extent that we continue to generate the internal we continue to generate that amount of internally generated.
Capital.
We would be and are positioned to substantially.
Would be above that so.
At the current available capacity under the program is just over $14 5 million shares.
That's not to say that we wouldn't re up whenever we get through and through that type of level, but.
At a minimum $2 million and to the extent that we don't see growth opportunities and other components of the business.
And we would likely increase it from there.
Alright, great. Thanks, guys.
Thank you.
Moving on to our next question comes from Steve Moss from B Riley Securities. Please go ahead. Your line is open.
Good morning, guys.
Good morning.
Just starting off on the risk.
Moving back to the credit migration here.
The driver of this this quarter.
Fresh of the data or are you just see maybe more vacancy and delinquencies I guess I'm going to probably expected debt service coverage levels have been for one times already and the third quarter and showing up and your.
And you are quite small.
So it is a refresh of data. So this is Jack alluded to in his comments. This is now a review currently a re underwriting and let's not call. It a full review, but and updated underwriting and view of every loan that was and some first or second stage of Covid deferral and working with borrowers getting updated.
Financial information and rent rolls tax returns et cetera, and then making a and educated underwriting decision regarding the.
And of the current and near term prospects for cash flow and debt service coverage ratio on the loan. So again one of the things that we have talked about in prior calls is.
When we when we first started the kind of the total deferral process for <unk>.
<unk> early late first quarter early part of the second quarter. It wasn't a carte Blanche approach of like everybody, who asked for one gets one but for the most part everybody who asked very COVID-19 for organic over deferral and so that triggered the start of a comprehensive review of what was the position of each one of those each one of those borrowers and so the reason for my.
Grading those credits now is that Theres been a first round of deferrals and a second round of payment deferral. They have now for the most part all fallen off of a deferral program because you see that the loan deferrals are down to just 1%, but at that point, we're now making a and updated underwriting decision of what is the cash flow dynamics of this property now LTV being a secondary.
But for US a key triggering point of what classifies alone is what are the near term cash flows cash flow prospects of it so.
It was updated updated information and as we said before we're seeing good secondary and tertiary sources of repayment and guarantors stepping up but under our credit policies and this meant that a.
Property Reloaded and is in a debt service below one ex.
And that requires it to be classified and special mention or substandard and we are now going to work on getting our money back with each one of these folks.
Okay, that's helpful and.
And then in terms of this new drivers and charge offs and the first and second quarter are you guys thinking of that and perhaps.
Remaining elevated and the first half of the year, and then moderate and just kind of curious.
And I'm trying to formation.
More likely second quarter is when we would see.
Elevated charge offs I think that we are as you think about the sub standard population of loans. Those are loans that again, we think the way to think about the progression for those loans is a good chunk of those may over some period of time become longer term <unk> one of the things that gives us a lot of confidence as we were talking about before is the fact that there is a substantial amount of equity that's in.
Better than these and these relationships right and so we're seeing we're very encouraged by the behavior that we're seeing from borrowers which is folks are not turnaround and nobody's coming in here to handover keys at this point and time right and so.
It's in everybody's best interest, particularly when you see that type of equity and the property to essentially continue to work with those borrowers right. So I think that as a first stage as you think about sub standards is going to be updated conversations discussions negotiations for borrowers will likely result, and some PDR formation to the extent that there isn't day.
And really a faster economic recovery and then over some period of time as you identify prop.
Properties and business models and businesses that are going to be permanently impaired, which is probably going to take another 90 day 180 days that when you would start seeing some low some greater charge off content, but that for me might.
Manifests itself more we think and the second quarter, then and the first quarter, Rob what do you anything to add there.
I agree completely that the broader trend, we would not see that right away because typically if there are challenged situations. It takes a while for them to resolve to finality and from a broader standpoint, we do have various mechanisms to rate the portfolio. We have our actual just risk rating of every single loan we do all our.
Quantitative and qualitative reserves and then we have our at risk, but next six to nine months out that we all go through everything and Thats the entire executive management team and when you look at the at risk report that has grown slightly but it has not grown anywhere near and relationship to what the criticized and classified has grown at and so that would tell.
US that this is not something thats just right in front of us, but it's the uncertainty why we cant really give you more clarity about for quarters, two three and for.
Okay. That's helpful and then just with debt.
And our loan demand kind of curious as to where you guys are seeing low.
And pricing.
Dave.
And any color there would be helpful.
So weighted average origination yields and the fourth quarter were three just for the three 7% there were 368 or 169 the pipeline of business that we're seeing is right around that level.
And that's a mix of fixed and floating rate loans across the both the CRE and diversified commercial real estate and affordable housing and public sector side for fixed rate loans, and then and the loans that we're seeing and factoring and asset based lending and so forth and and some of the diversified C&I verticals. So now one of the things that gives us.
And again, some some comp.
The comfort and confidence that and move into 'twenty. One is that the weighted average origination yields of about three 7% are pretty darn close to the weighted average yields that we're seeing on the entirety of the loan portfolio, which was about three 760 375, so to the extent that we can continue to.
Debt, you'll see a pipeline that has that type of weighted average yield we should have some some good support for revenue of loan growth that shouldnt.
200, and too much into into the weighted average yield on loans. So we feel pretty good about that and again the pipeline of business will change from a proportion perspective over the course of the year, but this is the second quarter and a relative we've had about a three 7% weighted average yield on originations and Thats, where the pipeline continues to grow.
And that's where it continues to it and we see it building for for 'twenty one.
Great. Thank you very much.
Great. Thanks.
Okay.
We will now take our next question comes from Alex put it on from Piper Sandler. Please go ahead your guidance.
And good morning, guys.
Good morning.
And I wanted to dig and a little bit more to the to the moving parts of the NIM guidance for 'twenty and 'twenty, One and then maybe just starting with in the fourth quarter debt.
Prepaid and the contribution from prepayment penalties et cetera that there should be.
And that loan yield you were just talking about at least a little bit higher.
Yes. So the total it was just under just over four basis points that the prepays added to NIM.
And we're seeing pretty steady volumes, there, we don't want to get into and we will see what happens from a from a quarter over quarter perspective, as we move into 'twenty, one, but we're still going to see some prepay activity and tough to say, what's going to be exactly four basis points next quarter, but it'll be it should be right around there and we've seen some greater activity and the fourth quarter that we had.
And in the third quarter, but it wasn't materially different so although it's I'd say that that three to four basis points of prepay has been pretty steady for for the second third and fourth quarter. A total of 2020. So it was a little bit higher but not not meaningfully higher.
What are we what are we seeing we still yes, we are still seeing a fair amount of low, particularly in the multifamily side of the house feel theres going to be some grade incremental prepay activity and first and second quarter and it.
It'll it'll it'll vary somewhere around there, but it shouldn't.
It's not a main driver of what what the NIM and NIM trajectory is for next year.
And then the card.
Yes, I guess I was just looking and as I kind of just push into my model and kind of starting with the fourth quarter I'm kind of come up with the NIM to be a little bit higher than the guidance. So with the loan yields kind of be pretty close and the book yields and you said.
Some contribution from <unk> and to clarify on the prepay is that four bps and NIM are four bps and loan yield.
And just sort of where you're seeing the most pressure right now.
It was for bps of NIM and the place where we're going to see the most pressure in 'twenty, one and in the Securities book.
So and the Securities book with a weighted average yield is three $305 to $3 10, depending on the quarter.
And Thats, where youre seeing the greater reinvestment risk right. So as we're going to see somewhere between Youll see between the third and the fourth quarter. There was about a $200 million decrease and and.
And the total securities book size.
That.
That was largely driven by just cash flow and the securities book or wasn't really sale activity that we did so that you continue to see that type of prepay activity and the securities book.
And you essentially factor in and having to buy back 700, or three president and kind of reinvest and $750 million to $1 billion of cash that's thrown off for that Securities book, That's where you would see the most amount of margin pressure and it'll be difficult to maintain that securities yield debt with a three handle on it.
And then the flip side of it is the cost of funding there's still some room to continue to move down the cost of funding on this thing. So we're trying to be conservative and under promise and hopefully over deliver on the on the NIM. So.
But there is.
Offsets a little bit of that is the we still have room to move some of the funding cost plenty of balance sheet actions that take that is for sure.
Okay. I mean, if you just look into the first quarter based on all the things you just said with the Cds repricing and Prepays common and would you expect and NIM to kind of come and a little bit above that range, and then kind of trend into that range as the year progresses.
Yes.
Okay, well set and.
And then I was just wondering.
Yeah.
I wanted to touch on something you mentioned in your prepared remarks Jack.
On a scale and just talking a little bit about M&A, which I guess, it's been a couple of quarters, maybe since you mentioned M&A.
But I just wanted to know if the parameters and kind of change and this interest rate environment for what kind of deals and you would consider if it's.
And that's just still traditional banks or if you kind of looking outside and the Boston to some other types of businesses.
Yes.
So one I think theres kind of three types of M&A, one is traditional banks and the criteria hasn't changed and we look at fund.
<unk> funding sources.
<unk>.
And reduce cost by putting things together and.
The ability to either get new products or new markets and they're so and frankly, there is lots of opportunity nowadays.
And my view reasonable prices.
And second bucket is still on the commercial.
And finance side, so buying portfolios or commercial companies that allow us to adjust and change the asset mix is something we're looking at there's not as many.
Portfolios and businesses out there today as there have been.
This time last year for example.
But those there are some and some interesting pieces. There are some pieces of that though that are more fee oriented.
Which is something that we're looking at.
Capital markets oriented.
Syndication oriented things like that that allows us to get more deeply into institutional types of fee income opportunities. So.
We have those on untapped and then the third area is almost on the Fintech area.
We have a lot of terrific.
Vendors and supporters that we're using on fintech to accelerate that but there are some opportunities to potentially acquire fintech companies along the way that can supplement what we're doing and how we're how we're doing it.
And that's one of the advantages of.
Working with our vendors working as banking as a service.
And frankly, we've invested and a couple of funds that are fintech oriented funds that allow us to see technology.
From an investment standpoint so.
And those three categories that were we're reviewing and as you see we have lots of capital and.
We're pretty good about acquiring and integrating things into our model. So.
It's those three areas.
Okay, and then I have a lots of opportunities on the traditional banks can you just remind us the geographic and size parameters that you'd consider.
Yes, probably northeast from a geographic standpoint, probably wouldnt go outside of the northeast unless there is an exceptional situation and and again all of these would have to be.
EPS accretive.
Year one.
And would probably target, 10% or more on EPS accretion debt.
To be total tangible book value dilutive no more than a year or two for.
And earn back standpoint, and the <unk> would have to be.
<unk>, 20% plus and virtually all the deals that we've done and to date have.
Mirrored that those criteria.
Thank you for taking my questions.
Yes, Thanks, Alex.
Okay.
We will now take our next question from Chris for Keith from D. A Davidson.
Please go ahead and license openings.
Hey, good morning, guys how are you.
Good morning, Thank you good.
Hey, so I just wanted to.
And a little more and the loan growth.
So my first question.
Do you or how much impact and you expect.
The new PPP rollout to have on C&I loans.
So.
Really talking about is I would imagine that that program may cause some.
Question on demand from our C&I loan perspective.
And my right and assuming that.
Yes, actually what we have done and this round the PPP of we've outsourced PPP processing show for that exact reason, we do want to provide our clients a resource. So we've partnered with a company to outsource that that business so as to.
Our ability to focus on some of the categories that.
We've highlighted so to say I think Chris was asking.
Current question, so the target of <unk>.
And of the middle market or lower and middle market commercial that we target for C&I.
Maybe some of those folks may be recipients of trip.
Triple T money, but that's not where triple b or the.
Pvp money's being kind of directed towards and this go round, it's very smaller and smaller business profile of clients. So.
Is there some impact that where some of our borrowers may be able to access.
PPP, yes, but we don't anticipate that thats going to have a material change again, because we're targeting more of a middle market commercial and middle market kind of smaller corporate and middle market commercial for that C&I growth.
Okay, Great. That's helpful. Thank you and and so.
To get for that one to $1 $5 billion and loan growth.
Do you expect.
Some of your lending segment like C&I and CRE to return.
Pretty close to pre pandemic growth levels on an organic basis.
We do yes.
Youre going to see growth across the board and potent and public sector business and the diversified CRE affordable housing is still doing well even through the pandemic.
And so there is a you know the good thing about what we have built on the asset side is is that we have seven to eight different business lines and in any given point in time.
Different loan origination and volume dynamics to them and so you can.
We're well positioned and many of those verticals to continue to see similar type growth and what we have seen prepaid and both in 2019 and 2020. So if you go look at the progression of 2020 public sector still grew by about 350 to 400 million that's going to continue this year, so youre going to and continue to see some of those verticals that we've been growing for the past couple of years growing at the same.
Level, where more and what we've seen in 2019 and 20.
Okay, great. Thank you and then and then just on the CRE side, I'm curious and the impact of kind of the run off of <unk>.
Broker originated multifamily.
Number one.
How much of an impact ex that.
Debt to continue to have and then and then I guess.
Second part of that question is it seems to imply that there are.
The transactions are happening at least.
Finance activity, maybe with the bank or away from the banking and multifamily despite.
What I would assume are pressured debt service coverage ratios.
So are you seeing continued activity and.
Multifamily as well or is most of that drilling outside of the bank.
So we do see.
Increased activity so.
And not everybody's having challenges with cash flows on multifamily the vast majority of properties, our cash flow and just fine and they're they're looking at given wherever they are rate wise and we're looking at opportunities to refinance and a low rate environment. So there are there are many men.
And properties that are there and.
And the flows arent the same as they were pre pandemic, but the flows of refinance or new multifamily properties are are still solid.
Got it great. Thank you and then I guess just one last question on the deposit side.
And I Wonder if you comment pump and you can see heat and debates.
But I mean.
The industry experienced excellent liquidity and strong deposit growth and I think a lot of that was related to the PPP and government stimulus. So do you expect to be able to retain.
That those deposits and continued to see deposit growth through 2021, or do you think that theres going to be some runoff and.
Your customers are not necessarily recipient for the new program and and.
Those funds start to get kind of put to work.
Yes, so the strike and Thats a smart question. So the structure of the PPP arrangement that we have the funds that our clients would get still come through our deposits our deposit structure. So there'll be a flow just like there was before.
<unk> been stimulus.
Side of this thing.
And we do think that there will be a higher level of deposits through.
2021, we also think that there's a lot of companies as you have seen on the commercial side that have continued to create and hold liquidity on their balance sheet frankly, just like Luis mentioned on the security side for us there's not many places where those companies would put them on.
From an investment standpoint, so we think that that companies in general and individuals' specifically, we will continue to hold cash.
Hold cash back in these kind of uncertain times. So bottom line is we think that they will still be a pretty solid and strong deposit flow in 2021.
That's great that makes them.
Awesome. Thank you.
Thank you.
Yes.
Moving on to our next question comes from Dave Bishop from Seaport Global Securities. Please go ahead good items.
And.
Yes. Thank you and good morning, guys. How are you hi, David Good morning.
Hey, Jack Hey, quick question and the two.
2021, the outlook for for non interest expenses, obviously bumped up a bit there, but offset by what youre expecting on the fee income side. Just curious in terms of some of the drivers you mentioned and I think we call out you used the word significant higher and commercial banking and small business verticals, just curious if theres any sort of.
New niches youre looking to get into or specifically, where you really look at the higher significantly.
And the lending upfront for.
And next year.
Yes, so from a lending standpoint.
We are continuing to invest and places like we have had a great year with our innovation Finance group, which is the technology lending area.
And there are certain sectors of the C&I and public finance side for certain types of things like lender finance and our securitization group, where capital markets oriented types of lending.
I would say those are the ones, we would add to the once we kind of modify and not add to would be on the CRE side. So as a as kind of a trade off there. So that's one piece of the investment in people from.
From a personnel standpoint, the other side of ex.
Expense increases as the money, we're spending on technology. So as we kind of continue if you look at it. This way you can kind of downsized physical distribution and the financial centers, we're spending more money on digitizing the offering to our client and automating the back offices.
And there's a pretty good roadmap that we've created both on the technology side and the data side too.
Improve our offering.
Okay.
And then as it relates to.
And you just alluded to the downsizing of the physical branch footprint and I think you ended the year at 76 financial centers, just curious, maybe where you see that migrating to over the course for 2021 and 2022.
And it's kind of interesting because it's a cause and effect is as more people use digital and automated and and.
Mobile banking.
How's us to continue to the downside so.
And my view of all of banking is that Theres, probably 50% to many branches and all of banking.
We've been pretty good I think we started with over 150 branches were down.
On a combined basis were down 70.
<unk> 78, and we will probably look at five to 10 per year.
As potential downsizing.
Got it thanks, and then one housekeeping question.
Not sure we disclose.
As this but the outlook for purchase accounting accretion income in 2021, just curious if you have and update on that.
$15 million to $20 million David for.
For the full year.
For the for you Okay, great. Thank you.
Yes, just as it is.
As reported on that David.
The criticisms, we had and our models we had too much accretion income were down to zero and so these are core non accretion income people loved accretion income three years ago.
Two years ago, they hated acoustic and so we're now now down to our fighting weight on this one.
And I appreciate the color guys.
Thanks, David and I will take.
Our next.
Next question comes from Matthew Breese from Stephens. Please go ahead.
Good morning.
Good morning, Matt.
A few questions.
Paresh I couldn't help but think.
The increase of the substandard and special mention loans. During this whole process you guys have taken a real proactive.
Our approach to.
Problem and Thats a disposition.
Yes.
The increase this time.
Is that part of the plan at all.
And as long as we don't see clinical light at the end of the tunnel.
Could we see something similar to what we saw earlier this year in the form of an asset sale of loans that.
Our and a substandard classified bucket.
Yes, yes, yes.
Yes, absolutely.
I would tell you just just a point to be made the criticized and classified level that we're at right now is still better than I think the median of peer banks. So we're pretty close to that so it's just the way we got there maybe a little bit different from what people disclosed and the third quarter.
<unk>.
If we see pressure as you suggested and it will self portfolios again, we feel pretty confident that the loss given default on any of these deals in the future will be very minimum minimal given the security level, the math and so the the operational dynamics of the types of loans that are and substandard are different and what we saw right.
So remember the loans that we've sold and so the sales of the third quarter focused on small balance transportation slash equipment, and residential mortgages, which working out of credits like that is a fundamentally different proposition and the type of sub standard loans debt.
And that Robyn and I haven't mentioned and right. So the majority of that sub standard migration is and the commercial real estate asset class and three the three pressure points that we've been talking about for three quarters of hotel and retail some office.
These are exactly the types of loans that we are very good at working out of because it's much more manageable for your workout function of a bank to be able to manage these types of credits. So the equation for us on going forward is slightly different because when we were talking about the transportation Finance book There was an element of I am not going to say that we were unable to essentially.
To work out of those but it's very different to have to go and repossess.
Truck in Wyoming, or Idaho, and managing credit that's in Midtown Manhattan for US right and so if you think about going forward to the extent that we see prices for particular verticals for example, and hotels that makes sense and the secondary markets, we will absolutely execute those but we have plenty of capital we have.
A big reserve against these things and so to the extent that we have to work. These out over some period of time TDI and then get them cash flow and again, we are in many respects the best owner of these types of assets and so we have full flexibility. There. So it is not we are its always a part of what we evaluate is getting rid of some of these sooner than later credit.
And we're not we don't need to give a formal way here to be able to work out of those credits were very confident that we can realize a substantial amount of value by working these out long term and.
And Matt I'm glad you said sub standard because.
You know that special mentioned those are those are with guarantors owners, who have plenty of liquidity to carry this thing through to the other side of the pandemic and then as the.
The economy builds back right. So.
As you referenced and substandard and certainly for those special mention names.
We're working with those borrowers.
And it's probably going to be just fine on those names yeah, great point.
And just as a follow up there you mentioned you expect the elevated charge offs will occur mostly in the second quarter could you maybe better defined for us elevated charge offs for what we could be looking at there and then you also mentioned the reserve.
Pretty ample.
Should we expect any any sort of charge offs really.
Come from the reserve bucket and so there's there's minimum.
Income statement construction.
Yes.
And the specific question of what theirs and elevated charge off level, we don't know that yet Matt.
We do know is that we have stressed the portfolio that we have particularly that substandard book, we stressed it from the perspective of moving down.
Ltvs and.
And expect that Ltvs, we've moved them down for their perspective of what percentage of that portion of the book moves into 30, 60, and 90 day delinquency buckets, which again, we have not seen yet any migration from a delinquency perspective, because the vast majority of the loans that we migrated and you'll.
And I have actually continued to perform and so it's difficult to say charge offs will be extra they will be why we are very confident in is that we have stressed the portfolio and we are we're very comfortable with where the level of reserves or even when you put that portfolio under a substantial amount of stress and thats not all going to happen at one point in time, So again, the good thing about having.
The good thing about the sub standards being in these larger kind of being larger commercial real estate exposures is that each one of these loans will have a different dynamic to them and they will and they are exposed to different types of.
Economic recovery Timeframes they are.
Not a homogeneous pool of loans that were going to say everything goes bad at the same time. So there is the ability to manage this over time is how we are what we think is going to result, and the highest the highest possible outcome or best and best outcome from a valuation perspective.
And to the extent that it makes more sense to charge off more versus less than the second and second quarter, we will but we cant really pinpoint a specific number because each one of these is a little bit different but the stress numbers are there and the reserves are there against the stress levels that we put on to that portfolio and and I would add on the income statement.
Question, you asked about the income statement for what we see today, we would not expect.
And that really affect the income statement.
Okay.
The last one for me just on the margin Alex had asked a question on the prepay impact.
The release indicated that there might have been some interest recovery on residential loans that were and forbearance and what was the impact on that and to what extent do you expect that to continue.
It was one or two basis points. So it was not significant.
That is going to continue and there is a glide path for the next two or three quarters of that happening.
Because we took a we took a very conservative view regarding.
The initial move of residential mortgages into forbearance because of.
And the broader government programs regarding 12 months of deferrals and so forth that you know that.
And in some way shape or form also kind of <unk>.
Transitioned into the non non agency and non government loan world.
But we have been very encouraged from the perspective of.
Borrowers on the residential mortgage side, taking up taking us up on various programs that we've put out there to essentially.
Modify and extend loans and so forth and so as we continue to see deferred and then youll see that the loan deferrals that we have and this quarter. The majority of them are still in the residential mortgage side and.
And so as you continue to work out and the out of those loans and you start putting those loans on longer term.
Payment programs, and Thats, where youre seeing that debt increased.
Interest income being recognized on that component and other loans, so, but it was not bake and one or two basis points.
Okay, well I appreciate it thank you.
Thanks, Matt.
And our final question today comes from Chris O'connell from K B W. Please go ahead good items.
Okay.
Hey, good morning, gentlemen.
And Chris most of my questions have already been made.
Just wanted to do a couple of clean up.
One.
Do you guys know.
Guys disclosed.
And size of the taxi portfolio and what the carrying value of those are.
Bearing balances down to about 6 million Bucks.
Got it great.
And then one.
As far as the remaining PPP fees did you guys disclose that.
Sorry, what was the question correctly and the remaining PPP fees.
And so negligible amount as well so.
With the loan sale that we have.
With the loan sale for 450 this quarter.
About $120 million and total loans that are PPP related.
And the for given this process for timeframe for forgiveness of those loans.
And is not.
And all of that clear because these are borrowers that are not taking us up on necessarily and kind of a holistic and quick.
Time frame for resolution of that so if you set aside the PPP gain on sale from the fourth quarter net interest income had about $700000 of Pvp interest income being recognized and we anticipate that it should be somewhere close to those numbers for first and second quarter. This year, but it's not a big driver of <unk>.
Remaining PPP fees are not going and are not a driver of the guide that we have for for 'twenty one.
Got it.
And then just circling back and it was covered a bit earlier on the NIM guidance.
I mean, obviously you are above the range right now and it.
Seems like there is a couple of moving parts that are going and benefit on the funding side over the next couple of quarters at least while the asset yields kind of held up pretty well this quarter.
Even backing out some of the higher prepay.
Income so I guess what.
What's coming on the asset side or where is the compression coming that's going to be driving it down from five bps above that range down into that range over the course of the year.
Yes, again remember this is the full year and frankly, we just believe that in a zero rate environment and near zero rate environment Youre going to have pressure on asset yields going forward. We think we can manage that.
And and.
And as Louis said, the frankly, the biggest pressure point as the Securities book, that's going to absolutely come down it's a combination and so its the securities portfolio for sure and then second.
And second is that the way we think about it is to the extent that you have that weighted average origination yields stay close to the levels that we have seen for the third and fourth quarter of about three 7% I think that that would give us substantial comfort that we would be close to the high end of the range if not slightly above the high end of the range that we've provided however, we're being conservative.
<unk> there because there is the potential for greater credit spread compression on new loan originations and there is a chance that commercial real estate and multifamily loans and credit spreads there could compress further because they they are not at all time lows at this point in time. So a portion of we do re up the 325 is above the range that we provided we are being.
<unk> and that we feel good about where the weighted average origination yields are today, but there is potential that those that that credit spread compression could drive those numbers lower and so therefore that would result in some some pressures while over the course of 'twenty one.
That happens.
Got it understood. That's all I had thank you.
Great. Thank you.
Okay.
Valerie and thanks for taking my slide into Q.
Thanks for having to.
Charge offs. So you only get one go around.
[laughter].
Yes.
Alright, and my line open.
Yeah, Yeah, Yeah, Yeah, we're just teasing you.
And then here myself coming back into the queue.
And if I missed this I'm, sorry, but I don't think we actually talked about the level of the reserve and I think you said in your prepared remarks that you decided you consciously to keep or to not release reserves and I was just wondering if you could go through sort of the moving parts and there.
And whether or not there's still wiggle room to actually justify having the reserve.
Stay and that sort of one and a half level.
And so we've talked about this for for a couple of quarters, Alex and that the composition of the seasonal reserve.
I think when everybody first adopted T. So we thought that the seasonal reserve was going to be largely quantitative and not as much qualitative.
And what's happened since adoption and through the first two quarters of the pandemic is that the quantitative models have continued to have continued to reflect a reserving requirement that was not nearly to the degree of the $325 million and one 5% that we've had for sense since June 30, and so a substantial chunk.
And of our reserve has historically been and continues to be qualitative factor grip and the reason for that was in anticipation of.
Some credit migration that we were going to see rate and so we knew full well that as we were putting some of these loans into first and second go around of deferrals that not all of those loans were going to all magically come back at the end of this year and with things being just perfectly fine and getting back to normal status and so that some of those loans or a good portion of those loans were going to mine.
Right into criticized and classified which requires a higher level of reserve against them under a quantitative.
Under the quantitative reserve requirement. So today the allowance is now more relative to what it wasn't the third quarter. We have more quantitative reserves, we still have a very good chunk of qualitative factors are associated with this and so what we would need to see and order for that number to start coming down is to see some improvement and substandard and.
And the sub standard component to the extent that you start seeing those balances are substandard loans decrease you would start to materially move down at one 5% and we think that again we.
Over time, we will figure out what the right level of reserve is but pre pandemic. We were thinking that you know our portfolio should have a 11111, 5% reserve to total loans, we think that over some period of time as you continue to work out of some of these problem credits and some of these problem credits get back to more regular way <unk>.
Cannot make activity, we would see some migration back towards those levels over the course of 'twenty. One so it's too early to say, if youre going to see that and the first for second quarter, but by the end of this year, we would anticipate seeing a substantially lower reserve and the one 5% that we have today and again a lot of this continued to be driven by qualitative factors, because we are being conservative and.
And until we understand what's fully going to happen with that sub standard book.
Yes, we see it every day.
100%, 100%.
And the right way or the other.
Jack up this key quality as a way to answer that is we've been through cycles like this and I've been through seven cycles like this I think in my career.
The right way to do this over time is keep the reserves high until as Louis said Youll see very specific improvement.
In the outcomes on theirs.
And our view is Theres no reason to release reserves right now.
And will be.
Hopefully as the year goes on but.
Timely and retail.
Well said Jack I appreciate it.
Thanks, Alex.
Thank you.
Okay.
Alright.
First we have no further questions I'd like to credit back to you Jack for any additional or closing remarks.
Thanks to everybody for taking the time of day and have a great day and thanks.
Okay.
Thank you for your participation.
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Yes.
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