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spk00: Good day and welcome to the Sterling Bancorp 4Q20 earnings call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Jack Kopinski. Please go ahead, sir.
spk01: Good morning, everyone, and welcome to the fourth quarter and year-end 2020 call. Joining me today is Luis Maciani, Bea Ordonez, Rob Rowe, and Emlyn Harmon. We invited more people to this call. 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'll operate as the bank president and will oversee the lines of businesses, operations, and technology. And I'll take care of the staff areas. Luis and I are New CFO Bea Ordonez will report to me also. We're really excited to have Bea join us, and I'd really encourage you to get to know her. She's terrific and brings a lot to our company, and I look forward to working with her over a long period of time. So let's turn to the fourth quarter and year-end results. To say 2020 was challenging would be a massive understatement. We aggressively met the challenges of this near-zero interest rate environment, a global pandemic, and the resulting credit challenges. 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 in core adjusted EPS driven by improved revenue growth. Secondly, we had margin expansion, improved returns, and increasing tangible book value. And third, we had improved credit metrics. So let's start with our strong run rate profitability. As you've seen from the press release, adjusted Earnings per share increased $0.04 to $0.49 compared to the third quarter. Adjusted PPNR, excluding accretion income, was $130 million, which was a $7 million increase, or about 6% versus the linked quarter. 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 2.5 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 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 in the sale of the PPP loans. And expenses were in line with our outlook. We had one extraordinary item, which on the expense line was a $13 million charge for disposition of the financial centers as we've continued to decrease the amount of physical locations we have. Secondly, our margin expansion profitability drove strong improvements in return metrics and tangible book value. Core net interest margin improved by 15 basis points from last quarter. Earning asset yields increased by 6 basis points. Cost of funding liabilities decreased 9 basis points to 33 basis points. Adjusted ROATA improved by 12 basis points to 133 basis points. Adjusted ROATCE improved 66 basis points to 1403 basis points. Adjusted operating efficiency was stable at 43%, and total book value increased by 30 cents 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've created strong earnings flow You know, we pay out a very specific dividend, and we have a lot of excess cash coming off of the earnings side. TCA over TA was 9.55 versus 9.15 last quarter, about a 40 basis point increase. Tier 1 leverage at the bank level was 11.33 versus 10.5 last quarter. And then during the quarter, we've repurchased approximately 1.9 million shares. We will continue to look at repurchasing shares as the opportunities present themselves. Third, we are confident in our credit position. Our non-performing assets declined during the quarter, and we continue to carry strong loan loss reserves. Charge-offs for the quarter were $27.3 million. $11.5 million 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. Non-performing loans continued to improve, decreasing by $14 million during the quarter. Portfolio delinquency remains relatively constant. Loan modifications under the cares act are down to 1% of total loans with a majority comprised of residential real estate borrowers. Remaining commercial modifications are primarily low loan to value real estate properties. Criticizing classified loans did increase significantly from 2.6% to 4.5% and these loans are coming off of the cares act mods. Uh, that are experiencing some degree of cash flow challenges. We've virtually re-rated every loan in our 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 cash flow side. We've kept the allowance for credit losses at around $326 million or 1.49% of total loans. We think that's 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 will continue to do so. We are confident in our ability to manage credit in this challenging time. We're generally, again, a secured lender. Our loan-to-values on the real estate side continue to be in the 50% to 60% range. Ninety-seven percent of our C&I loans are secured by receivables, inventory, or equipment. As 2021 evolves, we'll continue to work through the issues in the credit portfolio, and we're very confident in the outcome there. 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 in our colleagues, technology, and risk management in the future. That's really the targeted three groups that we are investing in. 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 on. If you do the calculation, our revenue and earnings per FT is at the top of the peer groups. So we get a lot out of our colleagues, and they work hard, and 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 in technology is meaningful. And then secondly, in 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 to six clients completed and booked by the end of the first quarter. And we view this as a means to create diversity in funding and fee income and frankly learn about other companies, top performing technology, fintech companies out there providing service to organizations like us. Third piece I'd mention on this is around risk management. We've been very succinct in creating a contemporary environment relative to risk management. We've built up a risk management group, including credit, to be regional bank-like rather than community bank-like. So we've tried to grow into a high level of enterprise risk management. We're trying to anticipate the future and invest significantly in risk management as we go along. 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. We 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 in enterprise risk management. Two items before we open the call to questions. First, you'll note our forecast on page 12 of the presentation. You know, we expect we will run core NIM higher than all of last year, all of 2020. Fee income will continue to grow as improving economic trends and initiatives that we are undertaking will be executed against. We believe that there'll be an improving economic and revenue outlook Core expenses are expected to grow modestly, but we'll be investing, as I mentioned, in 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 as a portion of earnings. We have targeted a 50% increase. number to return capital to our shareholders. And last, before I open this up, I really want to thank a lot of folks. 2021 was a very difficult year and we're still in, obviously, some of the pandemic. But through this process, we really have fantastic folks that work in our company as colleagues. They constantly went above and beyond and they constantly adjusted and changed as the conditions changed. 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's 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 in 2020 as conditions changed. And we appreciate all of you as dedicated investors. I think we have a model that is effective and will continue to evolve. And we're 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... you know, there'll 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.
spk00: Thank you. So if you would like to ask a question, please press star one on your telephone keypad. If you're using a speakerphone, make sure that your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause just for a brief moment to allow everyone an opportunity to signal for questions. Once again, that is star one. We'll take our first question from Casey Hare from Jefferies. Please go ahead. Your line is open.
spk03: Great, thank you. Good morning, everyone. Good morning, Casey. I wanted to start on... Morning, Jack. I wanted to start on the credit, the uptick in Criticized Classified. Just curious, do you expect this to be the high-water mark... Number one, and then you also mentioned that you're very well secured on a lot of these properties based on the LTVs. It's more of a cash flow issue if you just provide some coverage on some color, rather, on the debt service coverage.
spk06: Sure. So there's a couple different things there, and I'll chime in first, and then Rob Rowe will also provide some color there. You know, two things. I think that, you know, the positive aspect of this is that the, as we called out in our, you know, release, the vast majority of the migration is contained to loans that were already in some form of deferral or, you know, some form of COVID-related modification or, you know, whatever we want to call, you know, some modified payment plan, right? And so... What we are very positively encouraged by is the fact that we're not seeing non-deferred or non-modified loans that are part of this migration. 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, you'll see that there has not been any correspondent migration in non-performing loans. So even though these loans have migrated from a credit perspective, they have continued to perform well. In many instances, it's because they are relying on secondary and tertiary forms of repayment with guarantor support and strong borrowers. But the most encouraging sign is that we continue to see folks, so these properties or these various relationships have a tremendous amount of equity in them. And therefore, you're seeing guarantors and owners of property stepping up to essentially maintain equity. you know, kind of cash flows and, you know, payment streams. The reason for migrating them is that, yes, when you look at the underlying credit statistics of the individual property, of the individual loan relationship, or of that particular loan, you are getting the debt service coverage ratios that today, because of the pandemic, don't cover the credit statistics that we require for a loan to not be classified, right? And so the negative side is that you're seeing credit migration. The positive side is that you're seeing, you know, people step up and continue to maintain these loans, you know, on a performance status. Is it the high watermark? I don't have the magic crystal ball. I'm 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 in the fourth quarter for the most part. And so that gives us a fair amount of confidence and comfort that, We are going to continue to manage out of this population. There's going to be some charge-offs in the first and the second quarter. We are cognizant of that fact. That's why our reserve is what it is. The reserve was contemplating that there was going to be some credit migration. We feel very confident 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 the fourth quarter because it's contained to that same population of loans. Rob, anything you add?
spk02: Yeah, so Casey, what I would add is that a couple of the pressure points that we and other banks have talked about and you've been asking about would be the hotel portfolio and then in retail. And hotel has really been exactly as we described last quarter in that we're talking to all our borrowers of the $450 million. About $120 million of it is operating below a one-time debt service coverage ratio. About half of that are really with sponsors and guarantors that have so much liquidity that they could go years coming out of pocket if necessary to cover the cash burn at the project level. So then the other half of that 120 or so is something that we're watching very closely and working with. So that's contained for us in terms of what it could mean down the road in terms of potential loss. Retail is interesting because it's actually performing probably a little better than we would have expected. We do an analysis every month for the top 50 borrowers, and we go and look at the pay-through rate from the tenant to our borrowers, and that was up to 89% in the month of December. That was a little higher than we would have thought given everything that was going on, and that trend had increased through the balance of the second half of the year. Nonetheless, there are still deals there that are below, as we said, below the one times DSCR, and our view there is very clear that if that's the case, they need to either be criticized or classified. And really, it would be the liquidity of the sponsor guarantor that would make that determination of whether they're criticized or classified.
spk03: Great. Thank you. Hope that helps. Yeah, yeah, no, great. Okay, so just switching to the outlook for 21. The loan growth guide, I was a little surprised to see it at a billion, a billion five. Just some color as to what's driving that. I mean... Surprised to see resi consumer you expect to stabilize. Does this bake in more triple P? Is it portfolio acquisitions? Just some color here.
spk01: No, I was just going to say this is organic growth. So there's no acquisitions in this. And we think that that's a good net number to grow. So we have our pipelines now for for the remainder of the first quarter and the second quarter are pretty strong. They're actually stronger than they have generally been in the past. So, you know, areas like, you know, certain sectors of CRE, traditional CNI, as we mentioned, affordable housing and public sector, we actually think there will be continued significant growth in the public sector balances as, you know, 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 runoffs. So we're pretty confident, given what we see in the market today, that is creditworthy and priced appropriately to be able to achieve that target.
spk06: It doesn't include PPP. So that guide and the target doesn't include PPP. And, you know, the abating of the runoff of resi consumer is because we're now, you know, listen, that portfolio started at $5 billion. That portfolio had liquidated quickly over time, you know, when we, you know, post the historic merger. So for the past three years, we've seen, you know, pretty significant runoff. But then at some point, you do get to, you know, to get to a place where that portfolio, because of consumer behavior, just will extend out some period of, you know, for some period. So We anticipate seeing, you know, to the extent that there haven't been loans that have refied yet in this low rate environment, you don't anticipate seeing that same type of refinance activity 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 substantially whatever runoff we see in the existing book. So net, net, you are, this is going to be the first year where you're going to see a, uh, you know, a residential mortgage book that should not, uh, you know, decrease the overall, you know, loan growth, uh, you know, like it has, as it's happened in the past couple of years.
spk03: Got it. Thanks. And just last one for me on the, the, the buyback, uh, came in a little bit higher than that 50%. It's, um, and you guys are now saying above 50%, how, how, um, how high could that go? Um, and, and what would, uh, what would be the catalyst to be more aggressive than the 62% here in the fourth quarter?
spk06: You know, so, you know, we are, you know, the target that we're setting for, you know, for next, you know, for next year is a minimum of 2 million chairs per quarter. So we're at 1.9 million in the fourth quarter. You know, we think that 2 million at a minimum is going to be 2 million chairs, sorry, is going to be a, you know, a good number to use for knowing how we're thinking about the, you know, that, you know, that progression in 21. How high can it go? Again, I'm shaking the magic eight ball here, Casey. It depends on 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. We're sitting on eight to eight and a quarter, sorry. We're sitting on nine and a half to the extent that we continue to generate that amount of internally generated capital. we would be in a position to substantially be above that. So 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 that type of level, but it's at a minimum 2 million, and to the extent that we don't see growth opportunities in other components of the business, we'd likely increase it from there.
spk05: All right, great. Thanks, guys. Thank you.
spk00: Moving on to our next question comes from Steve Moss from B. Riley Securities. Please go ahead. Your line is open.
spk04: Good morning, guys. Good morning. Just starting back to the credit migration here, was the driver of this quarter a refresh of the data, or are you just seeing maybe more vacancy and delinquencies? I guess I would have probably expected debt service coverage levels to have been below one times already in the third quarter and showing up in your class size.
spk06: So it is a refresh of data. So this is, as Jack alluded to in his comments, this is now a review, kind of a re-underwriting, and let's not call it a full review, but an updated underwriting and view of every loan that was in some first or second stage of COVID deferral. working with borrowers, getting updated financial information, rent rolls, uh, you know, tax returns, et cetera, and then making a, an educated underwriting decision regarding the, uh, you know, kind of the current and near term prospects for, you know, cashflow and debt service coverage ratio on the loan. So, you know, again, one of the things that we have talked about in prior calls is, you know, when we, you know, we, when we first started the, you know, kind of the COVID deferral process for, you know, the, in the, uh, 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 for a COVID deferral got a COVID deferral. And so that triggered the start of a comprehensive review of what was the position of each one of those borrowers. And so the reason for migrating those credits now is that there's been a first round of deferrals, 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 an updated underwriting decision of what is the cash flow dynamics of this property now, LTV being a secondary measure. But for us, a key triggering point of what classifies a loan is what are the near-term cash flow prospects of it. So it was 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, to the extent that a you know, property or a loan is in a debt service, you know, below 1X, you know, that requires it to be classified as either special mention or substandard. And we are, you know, now we're going to work on getting our money back with each one of these folks.
spk04: Okay. That's helpful. And then in terms of just the drivers of charge-offs in the first and second quarter, are you guys thinking of that as perhaps, you know, remaining elevated in the first half of the year and then moderating? I'm just kind of curious on charge-off formations.
spk06: More likely second quarter is where we would see, you know, elevated, you know, charge-offs. I think that we are, as you think about the substandard population of loans, those are loans that, again, we think the way to think about the progression of those loans is a good chunk of those may, over some period of time, become longer-term TDRs. 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 embedded in these relationships, right? And so, We are seeing we're very encouraged by the behavior that we're seeing from borrowers, which is folks are not turning. Nobody's coming in here to hand over keys at this point in time. Right. And so the it's in everybody's best interest, particularly when you see that type of equity in a property to essentially continue to work with those borrowers. Right. So I think that as a first stage, you know, as you think about substandard, there's going to be updated conversations, discussions, negotiations with borrowers. It will likely result in some TDR formations to the extent that there isn't a faster economic recovery. And then over some period of time, as you identify properties and business models and businesses that are going to be permanently impaired, which is probably going to take another 90 to 180 days, that's when you would start seeing some greater charge-off content. But that manifests itself more frequently. we think, in the second quarter than in the first quarter. Rob, anything to add there?
spk02: No, I agree completely that the broader trend, we would not see that right away because typically if there are challenge situations, it takes a while for them to resolve to their 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 like next six to nine months out, that we all go through everything, and that's 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 in relationship to what the criticized and classified has grown at. And so that would tell us that this is not something that's just right in front of us, but it's the uncertainty why we can't really give you more clarity about for, you know, quarters two, three, and four.
spk04: Okay, that's helpful. And then just with better loan demand, kind of curious as to where you guys are seeing loan pricing these days in any color that would be helpful.
spk06: So weighted average origination yields in the fourth quarter were three, just under 3.7%. There were 368 or 369. 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 both the CRE and diversified commercial real estate and affordable housing public sector side for the fixed rate loans, and then loans that we're seeing in factoring and asset-based lending and so forth in some of the diversified C&I verticals. So one of the things that gives us, again, some comfort and confidence as we move into 21 is that the weighted average origination yields of about 3.7% are pretty darn close to the, you know, weighted average yields that we're seeing on the entirety of the loan portfolio, which was about 3.76, you know, 375. So to the extent that we could continue to, you know, to see a pipeline that has that type of weighted average yield, you know, we should have some, you know, some good support for, you know, loan growth that, you know, shouldn't, you know, chew in too much into the weighted average yield on loan. 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 in a row that we've had about a 3.7% weighted average yield and originations, and that's where the pipeline continues to – that's where it continues to – we see it building for 21.
spk05: Great. Thank you very much. Great. Thanks.
spk00: We'll now take our next question. It comes from Alex. Alex from Piper Center. Please go ahead. Your line is open.
spk04: Good morning, guys. Good morning. I wanted to dig in a little bit more to the moving parts of the NIM Guide for 2021, and maybe just starting with in the fourth quarter, the contribution from pre-payment penalties, et cetera, that kind of boosted the loan yield. You were just talking about, Luis, a little bit higher.
spk06: Yeah, so the total, it was just under just over four basis points that the prepays added to NIM. And, you know, we're seeing pretty steady, you know, volumes there. We don't want to get into, you know, we'll see what happens from, you know, from a quarter over quarter perspective as we move into 21. But we're still going to see some prepay activity. You know, tough to say if it's going to be exactly four basis points next quarter, but it'll be, you know, it should be right around there. And We've seen some greater activity in the fourth quarter than we did in the third quarter, but it wasn't materially different. I'd say that that three to four basis points of prepay has been pretty steady for the second, third, and fourth quarter of 2020. It was a little bit higher, but not meaningfully higher. What are we seeing? We are still seeing a fair amount of particulars in the multifamily side of the house. There's going to be some great incremental prepay activity in first and second quarter, and It will vary somewhere around there, but it's not a main driver of what the NIM trajectory is for next year.
spk04: I guess I was just looking as I kind of just pushed 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 guide. So with the loan yields kind of being pretty close to the book yields, as you said – some contribution from – and to clarify, the prepay, is that four bips of NIM or four bips of loan yield? I guess it was sort of where are you seeing the most pressure right now?
spk06: It was four bips of NIM. And the place where we're going to see the most pressure in 21 is in the securities book. So in the securities book, which our weighted average yield is 305 to 310, depending on the quarter, that's where you're seeing the greater reinvestment risk. Right. So as you know, we're going to see somewhere between you'll see between the third and the fourth quarter, there was about a 200 million dollar decrease in, you know, in the total securities book size that, you know, that was largely driven by just cash flowing of the securities book. It wasn't really sale activity that we did. So we you continue to see that type of prepay activity in the securities book. and you essentially factor in, you know, having to, you know, buy back 700 or, you know, kind of reinvest 750 million to a billion dollars of cash that's thrown off of that securities book, that's where you would see the most amount of margin pressure. It'll be difficult to maintain that securities yield that, you know, the three handle on it.
spk01: Yeah. And then the flip side of it is the cost of funding. You know, there's still some room to continue to move down the cost of funding on this thing. So You know, we're trying to be conservative and under-promise and hopefully over-deliver on the NIM. But there's, you know, the offsets a little bit of that is that, you know, we still have room to move some of the funding costs down.
spk06: Plenty of balance sheet actions to take. That is for sure.
spk04: Okay. I mean, if you just look into the first quarter based on all the things you just said with all these CDs repricing and prepays coming in, would you expect the NIM to kind of come in a little bit above that range and then kind of trend into that range as the year progresses?
spk05: Yes.
spk04: Okay.
spk05: Well said.
spk04: And then I just wanted to touch on something you mentioned in your prepared remarks, Jack, just on scale and just talking a little bit about M&A, which I guess it's been a couple quarters maybe since you really mentioned M&A. But I just wanted to know if the parameters have kind of changed in this industry environment for what kind of deals you'd consider, if it's just still traditional banks or if you're kind of looking outside the box into some other types of businesses.
spk01: Yeah. So, one, I think there's kind of three types of M&A. One is traditional banks, and the criteria hasn't changed. You know, we look at, you know, funding sources, ability to – reduce costs by putting things together and the ability to either get new products or new markets in there. And frankly, there's lots of opportunity nowadays at, in my view, reasonable prices. The second bucket is still on the commercial 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 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. And we have those on tap. And then the third area is on the FinTech area. You know, 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. Um, and that's one of the advantages of, uh, working with our vendors, working as banking as a service. Uh, and, um, frankly, we've invested in a couple of funds that are FinTech oriented funds that allow us to see technology, um, uh, from an investment standpoint. So, uh, it's those three categories that we're, we're reviewing. And as you see, we have lots of capital and, uh, You know, we're pretty good about acquiring and integrating things into our model. So it's those three areas. Okay. And then on the lots of opportunities on the traditional banks, you know, can you just remind us the geographic and size parameters that you consider? Yeah, probably northeast from a geographic standpoint. Probably wouldn't go outside of the northeast unless there is an exceptional situation. And, again, all these would have to be – You know, EPS accretive, year one, you know, would probably target 10% or more on EPS accretion. That'd have to be a tangible book value diluted no more than a year or two from an RMBAC standpoint. And the IRRs would have to be, you know, 18, 20% plus. And virtually all the deals that we have done to date have mirrored those criteria.
spk05: Thank you for taking my questions. Yeah. Thanks Alex.
spk00: We'll now take our next question from Christopher Keith from DA Davidson. Please go ahead. Your line is open.
spk05: Hey, good morning guys. How are you? Good morning. Thank you. Good.
spk04: Good. Hey, so I just wanted to dig in a little more to the loan growth. So my first question is, do you, or how much impact do you expect the new PPP rollout to have on C&I loans? And so what I'm really talking about is I would imagine that that program may cause some pressure on demand from a C&I loan perspective. Am I right in assuming that?
spk01: Yeah, actually, what we have done in this round of PPP is we've outsourced PPP processing. So for that exact reason, we do want to provide our clients a resource. So we've partnered with a company to outsource that business as to our ability to focus on some of the categories that we've highlighted.
spk06: It's exciting. I think Chris is asking slightly different questions. So that, you know, the target of, you know, kind of the middle market or lower end of middle market commercial that we target for CNI, maybe, you know, some of those folks may be recipients of, you know, of triple P money, but that's not where triple P or where PVP money is being, you know, kind of directed towards in this go around. It's very smaller, you know, smaller business profile of clients. So, You know, is there some impact that, you know, where some of our borrowers may be able to access, you know, PPP? Yes, but we don't anticipate that that's going to have a material change, again, because we're targeting more middle market commercial and middle market – kind of smaller corporate and middle market commercial for that CNI growth.
spk04: Okay, great. That's helpful. Thank you. And then so to get to that $1 to $1.5 billion in loan growth, I mean, do you expect – some of your lending segments like CNI and CRE to return pretty close to pre-pandemic growth levels on an organic basis?
spk06: We do, yes.
spk04: Okay.
spk06: You're going to see growth across the board in public sector business and the diversified CRE. Affordable housing is still doing well even through the pandemic. So there's a, you know, the good thing about what we have built on the asset side is that we have, you know, seven to eight different business lines at any given point in time. have different loan origination and volume dynamics to them. And so we're well positioned in many of those verticals to continue to see similar type growth to what we have seen 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 you're going to continue to see some of those verticals that we've been growing for the past couple of years growing at the same level or more than what we've seen in 2019 and 20.
spk04: Okay, great. Thank you. And then just on the CRE side, I'm curious of the impact of kind of the runoff of broker-originated multifamily. Number one, you know, how much of an impact do you expect that to continue to have? And then I guess the second part of that question is that it seems to imply that there are – that transactions are happening, at least refinance activity, maybe with the bank or away from the bank and multifamily, despite what I would assume are pressured debt service coverage ratios. So are you seeing continued activity in multifamily as well, or is most of that going outside of the banks?
spk01: No, we do see increased activity. So, you know, not everybody's having challenges with cash flows on multifamily. The vast majority of properties are cash flowing just fine. And, you know, they're looking at, you know, given wherever they are rate-wise, they're looking at opportunities to refinance in a lower rate environment. So there are many, many properties that are there. And, you know, the flows aren't the same as they were pre-pandemic. but the flows of refinance or new multifamily properties are still solid. Got it.
spk04: Great. Thank you. And I guess just one last question on the deposit side. And I wonder if your comments on PPP feed into this a bit, but I mean, the industry experienced, you know, excess liquidity and strong deposit growth. And I think a lot of that was related to the the PPP and government stimulus. So do you expect to be able to retain those deposits and continue to see deposit growth through 2021? Or do you think that there's going to be some runoff since your customers are not necessarily recipients of the new program and as those funds start to get kind of put to work?
spk01: Yeah, so that's a smart question. So the structure of the PPP arrangement that we have, the funds that our clients would get still come through our deposit structure. So there'd be a flow just like there was before. You know, the government stimulus side of this thing, we do think that there will be a higher level of deposits through, you know, 2021. We also think that there's a lot of companies, as you've 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 the money from an investment standpoint. So we think that companies in general, and individuals specifically, we'll continue to hold cash back in these kind of uncertain times. So bottom line is we think that there'll still be a pretty solid and strong deposit flow in 2021. That's great.
spk05: That makes sense. Awesome. Thank you. Thank you.
spk00: Moving on to our next question comes from Dave Bishop from Seaport Global Securities. Please go ahead. Your line is open.
spk04: Yeah. Thank you. Good morning, guys. How are you? Hi, David. Good morning. Hey, Jack. Hey, quick question. In the 2021 outlook for non-interest expenses, obviously bumped up a bit there, but offset what you're expecting on the income side. Just curious in terms of some of the drivers you mentioned, I think you call out these that were significant higher in commercial banking and small business verticals. Just curious if there's any sort of new niches you're looking to get into or specifically where you're really looking to hire significantly on the lending front for next year.
spk01: Yeah, so from a lending standpoint, you know, we're continuing to invest in places like we had a great year with our innovation finance group, which is the technology lending area. You know, there are certain sectors of the CNI and public finance side. There are certain types of things like lender finance and our securitization group, more capital markets-oriented types of lending areas. I would say those are the ones we'd add to, the ones we'd kind of modify and not add to would be on the CRE side, so as kind of a trade-off. So that's one piece of the investment in people from a personnel standpoint. The other side of expense increases is the money we're spending on technology. So as we kind of continue, if you look at it this way, you kind of downsize physical distribution in 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 to improve our offerings.
spk04: And then as it relates to, as you just alluded to, the downsizing of the fiscal branch footprint, I think you ended the year at 76 financial centers. Just curious maybe where you see that migrating to over the course of 2021 to 2022.
spk01: Yeah, you know, it's kind of interesting because it's a cause and effect. As more people use digital and automated and mobile banking, you know, allows us to continue to downsize. So, you know, my view of all of banking is that there's probably 50% too many branches in all of banking. We've been pretty good. I think we started with over 150 branches. We're down on a combined basis. We're down to, you know, the 78. And, you know, we'll probably look at, you know, 5 to 10 per year as potential downsizing.
spk05: Got it. Thanks. And then one housekeeping question.
spk04: Not sure if you disclosed this, but the outlook for purchase accounting accretion can come in 2021. Just curious if you have an update on that.
spk05: $15 to $20 million, David, for the full year.
spk06: For the full year. Okay, great. Thank you.
spk01: Yeah, just as a point on that, David, one of the criticisms we had in the models, we had too much accretion income. We're down to about zero. So these are core non-accretion income. People loved accretion income, you know, three years ago. Two years ago, they hated accretion income. So we're now down to our fighting weight on this one. Yeah, I appreciate the other guy.
spk04: Thanks, David.
spk00: We'll take our next. Our next question comes from Matthew Brees from Stevens Corporate. Please go ahead.
spk04: Good morning. Good morning, Matt. Thanks. A few questions. You know, first, you know, I couldn't help but think, you know, with the increase of the substandard special mention loans, you know, during this whole process, you guys have taken a real proactive approach to, you know, problem at the disposition. You know, with the increase this time, you know, is that part of the plan at all? You know, if there's, if there's loans where you don't see quote unquote light at the end of the tunnel, you know, could we see something similar to what we saw earlier this year in the form of a, you know, an asset sale of loans that, you know, are in the substandard classified bucket? Yes.
spk01: Yes. Yeah, absolutely. And, you know, I would tell you just, just the point that we made the, the criticized 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, you know, it's just the way we got there may be a little bit different from what people disclosed in the third quarter. But, you know, if we see pressure, as you suggested, you know, we'll sell off portfolios. Again, we feel pretty confident that the loss given default on any of these deals in the future will be very minimal. Given the security level, the math.
spk06: So the, you know, the operational dynamics of the types of loans that are in substandard are different to what we sold. Right. So remember the loans that we've sold. So the sales of the third quarter focused on small balance transportation slash equipment and residential mortgage, which working out of credits like that is a fundamentally different proposition than the type of substandard loans. that Rob and I have been mentioning. So the majority of that substandard migration is in the commercial real estate asset class. It's in the three pressure points that we've been talking about for three quarters of hotel, 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 a 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'm not going to say that we were unable to essentially, you know, to work out of those. But it's very different to have to go and repossess, you know, a truck in Wyoming or Idaho that, you know, manage a credit that's in, you know, 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, in hotels that make sense in 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, TDR them, get them cash flowing again. We are, in many respects, the best owner of these types of assets, and so we have full flexibility there. It's always a part of what we evaluate is getting rid of some of these sooner than later, but we don't need to give the farm away here to be able to work out of those credits. We're very confident that we can realize a substantial amount of value by working these out long-term.
spk02: Matt, I'm glad you said substandard because I think you know that special mention of 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 stuff, the economy builds back. Right. So as you referenced, substandard, certainly for those special mention names, you know, we're working with those followers and it's probably going to be just fine on those names.
spk04: Yeah. Great point. And just as a follow-up there, you mentioned you expect the elevated charge-offs to occur mostly in the second quarter. Could you maybe better define for us elevated charge-offs, what we could be looking at there? And then you also mentioned the reserve is pretty ample. Should we expect any sort of charge-offs to really come from the reserve bucket so there's minimum income statement disruption?
spk06: Yeah, so the specific question of what is an elevated charge-off level, we don't know that yet, Matt. What 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 expected LTVs. We've moved them down from the perspective of what percentage of that portion of the book moves into 30, 60, 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 have actually continued to perform. And so it's difficult to say charge-offs will be X or they will be Y. What we are very confident in is that we have stressed the portfolio, and we are very comfortable with where the level of reserves are, even when you put that portfolio under a substantial amount of stress. And that's not all going to happen at one point in time. So again, the good thing about having, you know, the good thing about the substandards being in, in, in these larger, you know, 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're exposed to different types of, of economic recovery timeframes. They are, you know, they're, they're not a homogeneous pool of loans that we're going to say everything goes bad at the same time. So there's, You know, the ability to, you know, to manage this over time is how we are, you know, what we think is going to result in the highest, you know, highest possible outcome or best in, you know, best outcome from a valuation perspective. And to the extent that it makes more sense to charge off more versus less in, you know, the second quarter, we will. But we can't really pinpoint the 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 onto that portfolio.
spk01: And I'd add on the income statement, the question you asked about income statement, for what we see today, we would not expect that to really affect the income statement.
spk04: Okay. The last one for me is just on the margin. Alex had asked a question on prepay impact. The release indicated that there might have been some interest recovery on residential loans that were in forbearance. What was the impact on that and to what extent do you expect that to continue?
spk06: It was one or two basis points. It was not significant. That is going to continue and there's a glide path for the next two or three quarters of that happening just because we took a very conservative view regarding the initial move of residential mortgages into forbearance because of the broader government programs regarding 12 months of deferrals and so forth that has, in some way, shape, or form, also transitioned into the non-agency, non-government loan world. But we have been very encouraged from the perspective of borrowers on the residential mortgage side taking us up on various programs that we put out there to essentially modify and extend loans and so forth. And so as we continue to see deferred, and you'll see that the loan deferrals that we have in this quarter, the majority of them are still on the residential mortgage side. And so as you continue to work out of those loans and you start putting those loans on longer term payment programs, that's where you're seeing that increased interest income being recognized on that component of the loans. But it was not big. It was one or two basis points.
spk05: Understood. Okay. Well, I appreciate it. Thank you. Great. Thanks, Matt.
spk00: And our final question today comes from Chris O'Connell from KBW. Please go ahead. Your lightning is open.
spk04: Hey, good morning, gentlemen. Good morning, Chris. Most of my questions have already been asked, but I just wanted to do a couple clean-ups. Um, one, uh, do you guys know what the, or do you guys disclose the remaining size of the taxi portfolio and, uh, what the, uh, carrying value of those are? Carrying balance is down to about 6 million bucks. Got it. Great. Um, and then on, uh, as far as the remaining PPP fees, did you guys disclose that?
spk06: Sorry, was the question correct? The remaining PPP fees. Not so negligible amount as well. So with the loan sale that we have, with the loan sale of the 450 this quarter, there's still about $120 million in total loans that are PPP related. And the forgiveness process or timeframe for forgiveness of those loans isn't all that clear because these are borrowers that are not taking a soft bond necessarily, a kind of holistic and quick process. you know, timeframe for resolution of that. So if you set aside the PPP gain on sale from the fourth quarter, net interest income had about $700,000 of PPP interest income being recognized. And we anticipate that it should be somewhere close to those numbers for, you know, first and second quarter this year, but it's not a big driver of, you know, remaining PPP fees are not going to, are not a driver of the guide that we have for, for 21. Got it. Yeah.
spk04: And then just circling back, and I was covered a bit earlier on the NIM guidance. I mean, it's obviously you're above the range right now. And it seems, you know, like there's a couple moving parts that are going to benefit on the funding side over the next couple quarters, at least, while the, you know, the asset yields kind of held up pretty well this quarter, even if, you know, backing out some of the higher prepay income. so I guess what, uh, you know, what's coming on the asset side or where's the compression coming? That's, uh, that's going to be driving you down from, you know, five bits above that range, uh, down into that range over the course of the year.
spk01: Yeah. Again, remember this is the full year and, and frankly, we just believe that in a zero rate environment or near zero rate environment, you're going to have pressure on asset yields going forward. We think we can manage that. Uh, and, uh, You know, as Luis said, frankly, the biggest pressure point is the securities book. It's going to absolutely come down.
spk06: It's a combination. So it's the securities portfolio for sure. And then, you know, second is that the way that we think about it is to the extent that you have that weighted average origination yield stay close to the levels that we have seen for the third and fourth quarter of about 3.7%. I think that that would give us, you know, substantial, you know, comfort that we would be close to the high end of the range if not, you know, slightly above the high end of the range that we've provided. However, we're being conservative there because there is the potential for greater credit spread compression on new loan originations. There is a chance that commercial real estate and multifamily loans and credit spread there could compress further because they are not at all-time lows at this point in time. So a portion of the 325 is above the range that we provided. We are being conservative in that we feel good about where the weighted average origination yields are today. but there is potential that those, you know, that that, you know, that credit spread compression could drive those numbers, you know, lower. And so therefore that would result in some, you know, some pressure as well over the course of 21, if that happens.
spk05: Got it. Understood. That's all I had. Thank you. Great. Thank you. Thank you.
spk07: I was going to charge you.
spk06: So you only get one go around.
spk04: Sorry, is my line open? Yeah, yeah, yeah. We were just teasing you. I didn't hear myself come back into the queue. If I missed this, I'm sorry, but I don't think we actually really talked about the level of the reserve. And I think you said in your prepared remarks that you decided consciously to keep or to not release reserves. And I was just wondering if you could go through sort of the moving parts in there. and, you know, whether or not there's still wiggle room to actually justify having the reserve, you know, stay in that sort of one and a half level.
spk06: Yeah, so we've talked about this for, you know, for a couple quarters, Alex, in that the, you know, the composition of the CECL reserve, I think when everybody first adopted CECL, we thought that the, you know, CECL 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, you know, have continued to, you know, have continued to reflect a reserving requirement that was not nearly to the degree of the $325 million and one and a half percent that we've had for, you know, since, you know, since June 30. And so a substantial chunk of our reserve has historically been and continues to be qualitative factor driven. The reason for that was an anticipation of some credit migration that we were going to see. We knew full well that as we were putting some of these loans into first and second go-arounds of deferrals, that not all of those loans were going to all magically come back at the end of this year with things being just perfectly fine and getting back to normal status. Some of those loans or a good portion of those loans were going to migrate into criticized and classified loans. which requires a higher level of reserve against them under the quantitative reserve requirement. So today the allowance is now more, relative to what it was in the third quarter, we have more quantitative reserves. We still have a very good chunk of qualitative factors that are associated with this. And so what we would need to see in order for that number to start coming down is to see some improvement in substandard, particularly in the substandard component, to the extent that you start seeing those balances of substandard loans decrease, would start to materially move down that one and a half percent and we think that again you know we uh you know 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 you know one to one point one one point one five percent reserve 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 economic activity we would see some migration back towards those levels over the course of 21. so It's too early to say if you're going to see that in the first or second quarter, but by the end of this year, we anticipate seeing a substantially lower reserve than the 1.5% that we have today. And again, a lot of this continues to be driven by qualitative factors because we are being conservative until we understand what's fully going to happen with that substandard book.
spk01: Yeah, Luis answered that 100% the right way. The Jack Kupnitsky qualitative way to answer that is, We've been through cycles like this. 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 Louise said, you see very specific improvement in the outcomes on this. Our view is there's no reason to release reserves right now. There will be, hopefully, as the year goes on, But, you know, time will only tell. Well said, Jack.
spk07: Appreciate it.
spk05: Thanks, Alex. Thank you.
spk00: We have no further questions. I'd like to turn it back to you, Jack, for any additional or closing remarks.
spk01: Thanks to everybody for taking the time today and have a great day. Thanks.
spk00: And that concludes today's call. Thank you for your participation.
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