Sterling Bancorp

Good morning, everyone, and welcome to the fourth quarter and year-end 2020 call. Joining me today is Luis Massiani, Bea Ordonez, Rob Rowe and Emlen 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 will 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 our 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 have 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 1,403. Adjusted operating efficiency was stable at 43% and total book value increased by $0.30 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've created strong earnings flow.

We pay out a very specific dividend, and we have a lot of excess cash coming off of the earnings side. TCE 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 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 2.6% to 4.5% 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 in our portfolio.

These loans are -- we feel very confident in the loan-to-value and the borrowers supporting these loans, but they are struggling a little bit on the cash flow side. We've kept the allowance for credit losses of -- 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 we'll 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.

97% 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 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.

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 FTE 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 and 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 out our 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 in 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.

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 a -- some portion of earnings. We have targeted a 50% 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 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.

Thank you. Good morning, everyone.

I wanted to start on the credit, the uptick in criticized classified. Just curious, do you expect this to be the high watermark?

Number one. And then you also mentioned that you were very well secured on a lot of these properties based on the LTVs.

It's more of a cash flow issue. If you could just provide some coverage on -- 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 will also provide some color there.

Two things, I think that the positive aspect of this is that the -- as we called out in our release, the vast majority of the migration is contained to loans that were already in some form of deferrals or some form of COVID-related modification or whatever we want to call some modified payment plan, right. And so what we are very positively encouraged by the fact that we're not seeing non-deferred or non-modified loans that are part of this migration, right.

So, it continues to be contained. 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.

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, 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 properties stepping up to essentially maintain kind of cash flows and 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 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 people step up and continue to maintain these loans 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're 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 with 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, what do you -- anything to add?

Yes. 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. Half of that, 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 million or so is something that we're watching very closely and working with. So that's a very -- 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's -- 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 Luis said, below the one-time DSCR.

In our view, the air 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.

Okay, so just switching to the outlook for '21. The loan growth guide, I was a little surprised to see at $1 billion, $1.5 billion.

Just some color as to what's driving that? And I know, I mean, surprised to see resi consumer, you expect to stabilize.

Does this bake in more triple paid? Is it portfolio acquisitions?

Just some color here?

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 we -- our pipeline is now 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 areas like certain sectors of CRE, traditional C&I, as we mentioned, the affordable housing and public sector, we, basically, think there will be continued significant growth in the public sector of balances as 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 in the market today that is credit-worthy and priced appropriately to be able to achieve that target.

It doesn't include PPP. So that guide and the target doesn't include PPP.

And the abating of off of resi consumer is because we're now -- in that portfolio started at $5 billion. That portfolio had liquidated quickly over time.

When we post the Astoria merger, so for the past three years, we've seen a pretty significant runoff. But then, at some point, you do get to get to a place for that portfolio, because of consumer behavior, just will extend out some period for some period.

So we anticipate seeing -- 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 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 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 residential mortgage book that should not decrease the overall loan growth as it's happened in the past couple of years.

Got it. Thanks.

And just last one for me. The buyback came in a little bit higher than that 50%, and you guys are now saying above 50%.

How high could that go? And what would be the catalyst to be more aggressive than the 62% here in the fourth quarter?

So, the target that we're setting for next year is a minimum of 2 million shares per quarter. So we're at 1.9 million in the fourth quarter.

We think that 2 million, at a minimum, is going to be -- 2 million shares -- sorry, is going to be a good number to use for how we're thinking about that progression in '21. How high can it go?

Again, I'm shaking the magic eight ball here, case. 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 8.25%. We're sitting on -- 8 to 8.25, sorry.

We're sitting on 9.5 to the extent that we continue to generate the internal. We continue to generate that amount of internally generated capital.

We would be in a position to substantially 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, through that type of level. But 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.

Good morning, guys. On just starting off on the -- circling 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 cover levels to have been four one-time already in the third quarter and shown up in your classified?

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 in view of every loan that was in some first or second stage of COVID deferral, working with borrowers, getting updated financial information, rent rolls, tax returns, et cetera, and then making an educated underwriting decision regarding the -- kind 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 first started the kind of the COVID deferral process in the early -- late first quarter, early part of the second quarter, it wasn't a cart launch approach like everybody who asked for one gets 1, but for the most part, everybody who asked very 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 alone 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 property or alone is in a debt service below one-time, we -- that requires it to be classified or 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 then in terms of just the drivers of charge-offs in the first and second quarter, are you guys thinking of that as perhaps remaining elevated in the first half of the year than moderate? I'm just kind of curious on charge-off formation.

More likely second quarter is where we would see elevated 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's a substantial amount of equity that's embedded in these relationships, right?

And so we are seeing -- we are very encouraged by the behavior that we're seeing from borrowers, which is folks are not turning. Nobody is 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.

As you think about substandard, there's going to be updated conversations, discussions, negotiations with borrowers, 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 180days, that when you would start seeing some greater charge-off content, but that manifest itself more, we think in the second quarter than in the first quarter.

Rob, what do you -- anything to add there?

No, I agree completely that the broader trend, we would not see that right away because, typically, if there are challenged situations, 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 quarters two, three and four.

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? Any color there would be helpful.

So weighted average origination yields in the fourth quarter were 3 -- just 3.7%, or 3.68% or 3.69%. 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 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 new 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 weighted average yields that we're seeing on the entirety of the loan portfolio, which was about 3.76%, 3.75%. So to the extent that we could continue to see a pipeline that has that type of weighted average yield, we should have some good support for loan growth that shouldn't chew in too much 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 in a row that we've had about a 3.7% weighted average yield on originations, and that's where the pipeline continues to -- that's where it continues to -- we see it building for '21.

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 prepaid -- the contribution from prepayment penalties, et cetera, that kind of boosted the at loan yield, you're just talking about Luis a little bit higher?

Yes. So the total -- it was just under -- just over 4 basis points that the prepays added to NIM, and we're seeing pretty steady volumes there.

We don't want to get into -- we'll see what happens from a quarter-over-quarter perspective as we move into '21, but we're still going to see some prepay activity. Tough to say if it's going to be exactly 4 basis points next quarter, but it will be -- it should be right around there.

And we've seen some greater activity in the fourth quarter that we did into the third quarter, but it wasn't materially different. So although it's -- I'd say that, that 3 to 4 basis points of prepay has been pretty steady for the second, third and fourth quarter of 2020.

So it was a little bit higher, but not meaningfully higher. What are we seeing?

We still -- yes, we are still seeing a fair amount of -- particularly 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 shouldn't -- it's not a main driver of what the NIM trajectory is for next year.

And then the cost side yes?

I guess I was just looking -- as I kind of just push it into my model and kind of starting with the fourth quarter, I've 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 4 bps of NIM or 4 bps of loan yield?

I guess just sort of where are you seeing the most pressure right now?

It was 4 bps 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 $3.05 to $3.1 depending on the quarter, that's where you're seeing the greater reinvestment risk, right? So as we're going to see somewhere between -- you'll see between the third and the fourth quarter, there was about a $200 million decrease in the total securities book size.

That was largely driven by just cash flowing of the securities book. It wasn't really sale activity that we did.

So you continue to see that type of prepay activity in the securities book. And you essentially factor in having to buy back $700 million or kind of reinvest $750 million to $1 billion of cash that's thrown off of that securities book.

That's where you would see the most amount of margin pressure. It will be difficult to maintain that securities yield at the 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 NIM.

So -- but there's -- offsets a little bit of that is the we still have room to move some of the funding cost down.

Plenty of balance sheet actions to take that is for sure.

I mean, if you just look into the first quarter based on all the things you just said with 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?

Yes.

Well said.

Okay. And then I want to I 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, has been a couple of quarters maybe since you've really mentioned M&A.

But I just wanted to know if the parameters have kind of changed in this interest rate environment for what kind of deals you would consider. If it's just still traditional banks or if you're kind of looking outside the box into some other types of businesses?

Yes. So one, I think, there's kind of three types of M&A.

One is traditional banks, and the criteria hasn't changed. We look at 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 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 untap.

And then the third area is 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 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 in a couple of funds that are fintech-oriented funds that allow us to see technology from an investment standpoint. So it's those three categories that 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 on the lots of opportunities on the traditional banks, can you just remind us the geographic and size parameters that you consider?

Yes, 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 EPS accretive, year one would probably target 10% or more on EPS accretion that have to be total -- tangible book value dilutive, no more than a year or two from an earn back standpoint.

And the IRRs would have to be 18%, 20% plus. And virtually, all the deals that we have done to date have mirrored those criteria.

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?

Yes. Actually, what we have done in this round, the PPP, 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 so as to our ability to focus on some of the categories that we've highlighted.

So I think Chris is asking a slightly different question. So the target of kind of the middle market or lower end of middle market commercial that we target for C&I, maybe some of those folks may be recipients of PPP money, but that's not where PPP or where PPP money is being kind of directed towards an this go around.

It's very small, 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, 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 C&I growth.

Okay. Great.

That's helpful. And then, so to get to that $1 billion to $1.5 billion in loan growth, I mean, do you expect some of your lending segments like C&I and CRE to return pretty close to pre-pandemic growth levels on an organic basis?

We do. Yes.

Okay.

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 is -- the good thing about what we have built on the asset side is that we have seven to eight different business lines at any given point in time, have different loan origination and volume dynamics to them. And so you can -- there is -- 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 million 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.

Okay. Great.

And then just on the CRE side, I'm curious if the impact of kind of the runoff of broker originated multifamily. #1, how much of an impact do you expect that to continue to have?

And then I guess second part of that question is that it seems to imply that there are -- the 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 that service coverage ratios so are you seeing continued activity in multifamily as well? Or is most of that going outside of the bank?

No, we do see increased activity. So not everybody's having challenges with cash flows on multifamily.

The vast majority of properties are cash flowing just fine, and the they're looking at -- 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 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, great. And then 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 excess 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 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 recipient of the new program and as those funds start to get kind of put to work?

Yes. So the struggle, 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 deposits -- our deposit structure. So there'd be a flow just like there was before.

The government stimulus side of this thing, we do think that there will be a higher level of deposits through 2021, and 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, will continue to hold cash, 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.

A quick question. In the 2021 outlook for non-interest expenses, obviously, bumped up a bit there but offset by what you're expecting on the fee income side.

Just curious in terms of some of the drivers you mentioned if you call out, you used there 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 really looking to hire significantly on the lending front for next year?

Yes. So from a lending standpoint, we're continuing to invest in places like we have -- we had a great year with our innovation finance group, which is the technology lending area.

There are certain sectors of the C&I and public finance side. There are certain types of things like lender finance and our securitization group, more capital markets oriented types of lending.

I would say those are the ones we'd add to. The ones we 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've kind of downsized 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 road map that we've created both on the technology side and the data side to improve our offering.

And then as it relates to -- as you just alluded to the downsizing of the physical 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?

Yes, it's kind of interesting because it's a positive effect. As more people use digital and automated and mobile banking, allows us to continue to downsize.

So we -- 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 to -- on a combined basis.

We're down the 78, and we'll probably look at 5 to 10 per year as potential downsizing.

Got it. And then one housekeeping question.

I'm not sure you disclose this, but the outlook for purchase accounting accretion and come in 2021, just curious if you have an update on that?

$15 million to $20 million, David, for the full year, $15 million for the full year.

Okay, great. Yes.

Just as a point on that, David. One of the criticisms we had in the models, we have too much accretion income.

We're down to about zero. So these are core non-accretion income.

People love decretion income three years ago. Two years ago, they hated accretion income.

So we're now down to our fighting weight on this one.

A few questions. First, I couldn't help but think with the increase of the substandard and special mention loans.

During this whole process, you guys have taken a real proactive approach to problem asset disposition. With the increase this time, is that part of the plan at all?

If there's loans or you don't see "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 are in the substandard classified bucket?

Yes.

Yes.

Yes, absolutely. And I would tell you just a point to be made.

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 it's just the way we got there maybe a little bit different from what people disclosed in the third quarter. But if we see pressure, as you suggested, we'll sell off portfolios.

Again, we feel pretty confident the last given default on any of these deals in the future will be very minimal given the security level.

The math and so 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/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, right?

So the majority of that substandard migration is in the commercial real estate asset class. It's in three -- 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 to work out of those, but it's very different to have to go and repossess a truck in Wyoming or Idaho that manage a 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, 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. So, it's not -- we are -- it's always a part of what we evaluate as getting rid of some of these so than later.

But we're not -- we don't need to give a farm a way 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.

And Matt, I'm glad you said substandard because I think you know that special mention, 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 the special mention names, we're working with those borrowers, and it's probably going to be just final on those.

Yes, 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 just 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?

Yes. 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 to 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 extra, they will be why.

But we are very confident in 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 -- 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're exposed to different types of economic recovery time frames.

They're not a homogeneous pool of loans that we're going to say everything goes bad at the same time. So there's -- the ability to manage this over time is how we are -- what we think is going to result in the highest possible outcome or best outcome from a valuation perspective.

And to the extent that it makes more sense to charge-off more versus less in 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 on to that portfolio.

And I'd add on the income statement, the question you asked about income statement, from what we see today, we would not expect that really affect the income statement.

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?

It was 1 or 2 basis points. 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 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 kind of 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 in 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.

So -- but it was not big. It was 1 or 2 basis points.

Most of my questions have already been asked, but I just wanted to do a couple of clean up. One, do you guys know what -- have you guys disclosed the remaining size of the taxi portfolio?

And what the carrying value of those are?

Carrying balance is down to about $6 million.

Got it, great. And then on as far as the remaining PPP fees, did you guys disclose that?

Sorry, what 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 in this quarter, there's still about $120 million in total loans that are PPP related.

And the forgiveness process or time frame for forgiveness of those loans, is not -- isn't all that clear because these are borrowers that are not taking us up on necessarily a kind of 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 $700,000 of PPP interest income being recognized.

And we anticipate that it should be somewhere close to those numbers for first and second quarter of this year. But it's not a big driver of -- remaining PPP fees are not going to -- are not a driver of the guide that we have for '21.

Got it. 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 like there's a couple of moving parts that are going to 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 if backing out some of the higher prepay income.

So, I guess, what's coming on the asset side? Or where is the compression coming that's going to be driving down from 5 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 or near zero rate environment, that you're going to have pressure on asset yields going forward. We think we can manage that and as Luis said, frankly, the biggest pressure point the securities book, it's going to absolutely come down.

It's a combination. So it's the securities portfolio for sure.

And then second is that the way that we think about it is, to the extent that you have that weighted average origination yield stay to the levels that we have seen for the third and fourth quarter of about 3.7%, 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 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 spreads there could compress further because they are not at all-time lows at this point in time. So a portion of -- we do -- the $325 million 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 -- that, that credit spread compression could drive those numbers lower. And so, therefore, that would result in some pressure as well over the course of '21 as that happens.

I am going to charge you. So you only get one go around yes.

Go ahead. We're 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 whether or not there's still wiggle room to actually justify having the reserve stay at that sort of 1.5 level?

Yes. So we've talked about this for a couple of quarters, Alex, in that the composition of the CECL reserve, I think, when everybody first adopted CECL, we thought that the 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, is that the quantitative models have continued to reflect a reserving requirement that was not nearly to the degree of the $325 million and 1.5% that we've had for -- 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 in anticipation of some credit migration that we were going to see, right? And so we knew full well that as we were putting some of these loans into first and second go rounds 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 migrate into criticized and classified, 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, you would start to materially move down that 1.5%. 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 our portfolio should have 1% to 1.1%, 1.15% 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 toward 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 would 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 and until we understand what's fully going to happen with that substandard book.

Yes. Luis answered that 100% the right way.

The other -- the Jansky 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 Luis 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 time will only tell.

Well said, Jack. Appreciate it.

Thanks, [Alex].

Yes. Thanks, everybody, for taking the time today, and have a great day.

Thanks.