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Sterling Bancorp (NYSE:STL)
Q3 2020 Earnings Call
Oct 22, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Sterling Bancorp Q3 2020 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Jack Kopnisky, President and CEO of Sterling Bancorp. Please go ahead, sir.

Jack L. Kopnisky -- President & Chief Executive Officer

Hey, good morning everyone, and welcome to our third quarter 2020 call. Joining me today is Luis Massiani, our Bank President and CFO; Rob Rowe, our Chief Credit Officer; and Emlen Harmon, who runs our Investor Relations Group -- our Investor Relations Group of one person.

So we had a -- so we had a strong third quarter, where we think we've made a lot of great progress in a difficult and challenging time. A couple of points to make about the third quarter. We demonstrated very strong core PPNR. We built robust levels of capital and our capital levels keep on increasing. We created strong reserves on an improving credit environment and we continue to invest in our model for our future growth.

We've -- we spent a lot of the quarter really ramping up our investment in the technology space and for the company. There is a ton of information that we always provide on the press release and our slides. So I'm going to really concentrate on Page 3, as our value proposition and then open it up for questions.

This does represent the value proposition that we're trying to tell investors to enable them to consider us as an investment into the bank sector. So let's start on the left-hand side. For the quarter, PPNR of $123.3 million exclusive of accretion income is up 8% quarter-over-quarter. Revenue is up 3% quarter-over-quarter. As you can see, we've stabilized the core net interest margin at 310 basis points, which is 5 basis points higher than the prior quarter.

We are beginning to stabilize the loan yields. So we're -- that's where we're spending the most amount of time trying to get the right mix of assets in there in securities and stabilizing the right or achieving the right risk adjusted returns. We have made significant progress on lowering cost of funds.

Overall cost of funds have come down by 21 basis points to 42 basis points. Deposit costs have decreased 17 basis points to 31 basis points, and we think we still have more to go, and that we're still working to drive down the cost of funding through a variety of techniques. We view our range for the next quarter and beyond in the 305 basis point to 315 basis point range. So we think we can hold that type of margin range.

Our commercial loan growth was good for the quarter. On an average basis, quarter-over-quarter on an annualized average basis we were up 7.6% and that even considers a $160 million sale of the resi NPLs and transportation low or small ticket transportation assets.

On an annualized basis, year-over-year we were up almost 12% on a growth basis. Deposits continue to be strong. Average annualized quarter-over-quarter growth was 3.4%. Year-over-year it was a little more than 12%. Also remember in this quarter we have a buildup of muni deposits for tax purposes that ultimately run down as they get paid out to municipalities.

Fee income generally was back to pre-COVID levels with the exception of loan fees. So our volumes for the quarter were OK, but loan fees were down as a result of not hitting the expectation of the volumes coming in. Expenses were in line with our expectations even with a little more than a $2 million severance cost during that period.

We created positive operating leverage over the linked quarter. We're back to being able to do that. We think that's a driver of performance going forward and we continue to demonstrate strong and growing core PPNR. Our ROATAs were 170 basis points on a PPR and our basis ROTCEs a little less than 19%, and the efficiency ratio was 43%. So we're making good progress in this challenging environment.

Secondly, we maintain a robust level of capital. This is actually the highest level of capital in the history of the Company. TCE over TA was 915 basis points. Tier 1 leverage at the bank level was 10.5%. Total risk-based capital at the bank level was 14%, and we continue to add to capital through earnings.

You see what our dividend pay-out is. We are adding pretty meaningfully to capital through earnings. And probably, most importantly, in 2020 we continue to accrete tangible book value and we expect to be in excess of 5% accretion in tangible book value.

Third, we have built strong reserves and have seen improvements in most of our credit metrics. Our experience in the past, we've been -- many of us on the leadership team have been through many economic downturns. And three things that we have focused on during that period and we know what to do is, first, to maintain strong and increasing levels of capital, which we have done.

Secondly, to address credit issues early, and one good example of that is, we decided to sell these NPLs, because it would be a long time to resolve the NPLs in resi and small ticket transportation. And the third thing is building strong loan loss reserves, as you saw us do in this quarter.

So the allowance for credit losses was 146% for the quarter. We expect to maintain that through the end of the year in that kind of range. We think that it actually is a higher level of reserves than the models would tell us, but we believe that this is the right time to have very, very, very strong reserves.

We also keep on emphasizing that we are a collateral-based lender. We lend based -- our loans are secured in two ways, one by real estate and others by accounts receivable inventory or equipment around business assets. So on the CRE side of it, which is about half of our book, there's about a 50% loan-to-value for the portfolio.

Just to cut that a little closer, on the multifamily side, it's 44% loan to value and other CRE it's 52% loan to value. And on the C&I side of this thing, the other half of the whole portfolio, 97% is secured with accounts receivable inventory or equipment.

So our view is that that our -- we will have challenges as we go through this cycle, but the loss given default is relatively low. So we believe we can control losses along the way within the reserve levels and with the knowledge that these are well collateralized loans in most -- the vast majority of cases.

You've also seen, in the third quarter, credit trends have improved. The deferral rate is down to 2%. We've driven that down from 8% to 2%. NPLs are down 30% quarter-over-quarter, primary driver of that is obviously the sale of the little more than $80 million of NPLs with the resi and the transportation -- small ticket transportation.

The rest of the NPL flow has been relatively stable. Without the outside sales charge-offs we're about $13 million or 24 basis points and that's what we expected. Delinquencies have improved slightly and we've had a slight increase in crit [Phonetic] class categories.

So, again, for what we see in the future, we're confident in our ability to control the losses within reserve levels. Again, we will continue to see onesies and twosies come through the system of potential losses, but we believe that we have a good control over that.

Fourth point is that we view our model to be effective into the future. So we continue to adjust our model to deal with the changing environment that we're in and the changing client needs. So we've built this model and we want it to continue to be a very contemporary model.

And if you think about maybe four components of that; we are -- first, we target high value commercial and consumer segments. We have not tried to be all things to all people. We focused on areas where we think we can add value to our clients.

Secondly, this is a branch light model. So we have meaningfully reduced the physical distribution and replaced that with online and tertiary [Phonetic] resources and our teams.

Third, this is a relationship-oriented model in the sense that it's a single point of contact advisors that provide value on both the commercial and the consumer side. And then finally, we've moved very deliberately to create a good technology platform for the future. We're making significant investments into the platform.

Over the next several years, there will be about a 30% increase in technology spend to be able to drive automation, comprehensive automation within the company to take all manual functions out of the company, and to digitize all the offerings to our clients and also our colleagues.

So we are -- this is the right time to make these investments and we want to balance this relationship approach with a very kind of high-tech approach. We believe that clients want both of those things. They don't just want the relationship side and they don't just want the technology side. They want both of those things.

Second point is that we have significant diversity in our asset classes. So you can see on Page 8, the different asset classes we use. We're very good at moving capital around to find risk adjusted returns where -- so we've moved capital around through the last several years to try to create that effect of risk adjusted return, and again, in this period of time, stabilized the yield, the loan yields.

Third point is that we do have diversity in our geographic reach. So, for the third quarter all of originations, 53% of the originations came from New York Metro, 47% came from outside. So, again, we try to move capital around to find the right risk adjusted returns out there.

So Metropolitan New York is a terrific place to do business. There is tons of diversity, both on the consumer and the commercial side. There is significant amounts of public and non-public companies. And we have the opportunity as -- primarily as a middle market lender, to pick and choose where we make our loans and we have plenty of opportunities as we go forward.

And then the final point on the models. We've had -- our total book value on a CAGR basis over the past five years is accreted [Phonetic] by 14%. We have traditionally been a top quartile performer versus our peers, whether it's return on assets, return on equity, EPS growth, efficiency levels or frankly revenue and earnings per FTE, and we continue to believe that we have to evolve this model to make sure that we continue to be very contemporary going forward.

And the last point is that given the strong core PPNR, the strong capital levels, the robust allowance for credit losses, improving credit trends in our model build for the future, we're going to resume our share buyback program immediately.

We're targeting 50% near term total pay-out ratios. We have plenty of capital. We think we are comfortable with where we're at from a metric standpoint. This is by far the best return, given where our stock is -- has traded. So we're resuming that. We have about -- a little over 16 million shares authorized to do buybacks and we're confident that the Board would grant us more if we find more opportunities, but we are resuming this immediately and feel confident in that.

The last point is that on Page 17 you'll see our outlook for the rest of 2020, the -- essentially the fourth quarter. We are pretty confident in the loan growth and net loan growth at $500 million to $700 million. Pipelines interestingly, you know our pipelines are starting to get back to pre-COVID levels, in terms of opportunities.

So our team -- the pipelines kind of ran down at the end of the second quarter into the third quarter. They are significantly picking back up again. So there are a lot of opportunities out there. And we'll keep the loan-to-deposit ratio well below 95%.

So I mentioned before, the core net interest margin, we would expect it to be in the 3.05%-3.15% range. Fee income in $115 million to $125 million range. Operating expenses in the $420 million to $430 million range. And then, as I said, the capital management opportunities to do share repurchase is starting now and we continue to have a low effect of last tax rate.

Before I open this up for questions, I'd be greatly remiss if I didn't thank everybody. This is a really, really difficult time over the last six months, and our colleagues have been fantastic. They have worked their tails off. They've been hard working from home, and in some cases, coming back into the offices. So really appreciate all the great things that our colleagues have done.

Thank you to all of our great clients. Clients, for the most part, it's interesting, most of the clients have figured out how to adjust their models as time goes on. So, they've been terrific to work with. Our relationship model has enabled us to really have a great fluid interaction with our clients going forward.

We really appreciate the strong Board members. We've been meeting as a Board probably twice as often as we've traditionally done to keep the Board up to speed with everything that's going on. They've been terrifically supportive and they have had great ideas and great questions along the way.

And then finally, our investors. Our investors has kind of stuck with us through this, and we hope to entice them to put more money into the company, and bring on new investors. And the final point is that we've worked really hard to support the communities that we're in. A lot of our communities have gone through tough times.

And it's been most important that companies like us spend the time, and money, and effort, and volunteers to support the needs in the community. So we've gone above and beyond the call to provide more resources back in the communities that we're a part of.

So appreciate your interest in the company, and let's open it up for questions.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We will now take our first question from Casey Haire from Jefferies. Please go ahead.

Casey Haire -- Jefferies LLC -- Analyst

Wanted to start off on the buyback. Obviously you guys were the first to switch that back on. Can you just take us through, how you guys arrived at that 50% pay-out ratio? Is that something that you picked or was it a regulator discussion and how that might change -- might go higher over time?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Casey, it's a number that we pick and a target that we pick based on maintaining capital management flexibility and making sure that we still have capital to support whatever happens from a balance sheet growth perspective. And that's a near-term target that will change over time as we see kind of 2021 unfold.

So it's a -- the best way to characterize it is, it's sounds like the target that we think provides us with substantial flexibility to take advantage of buying the stock at a price that we think makes a lot of sense, and we will essentially adjust it over time when we deem that we want to -- we don't see kind of greater growth opportunities and stock continues to be at attractive level. So self-selected and it's going to adjust over time, but that's what we're targeting for the next couple of quarters.

Jack L. Kopnisky -- President & Chief Executive Officer

And I think I'd add to that, we did review this with the Fed and the OCC. So they are understanding that what we're doing.

Casey Haire -- Jefferies LLC -- Analyst

Understood. Great. Then just switching to the NIM, Jack, sounds like you guys are comfortable with this 3.05% to 3.15% range even beyond the fourth quarter here. You've done a great job on the funding side of things but -- and it sounds like there is more room to come in the fourth quarter here. But eventually, that should run out. So what -- and then you have the balance sheet, the assets rolling over into a lower rate environment. So what's underlying the confidence to keep the NIM running between 3.05% 3.15% in the next -- beyond the fourth quarter?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah, the way I would characterize this is near term. So I think we're confident into the beginning part of 2021, and then we'll see how that unfolds. A lot of unknowns going beyond that in security yields and loan mix and loan yields.

So we have seen a couple of categories where rates have actually gone up on the lending side. They've started to tick up in some of the categories. But that's really a near-term, a fourth quarter or first quarter 2021. Beyond that we'll see where we end up.

Casey Haire -- Jefferies LLC -- Analyst

Okay. So another way to -- so the funding cost, sort of, you're not going to get much more beyond the 30 bps of cost of funds in the fourth quarter. And then the NIM will track whatever the asset yields, new money yields are on loans and securities. Is that a fair characterization?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah, I think there's room. So with one caveat there Casey, I think that there is room on that 30 basis point cost of funds that move lower in next year as well. So from a total cost of funds perspective, we're still not done in kind of doing the various strategies from a deposit pricing perspective and a wholesale borrowings perspective on some substantial chunk of the fundings tax still.

So there is room. Certainly, there's not as much room on the funding side as there is potential earning asset pressures. But the earning asset yields are going to be very much dictated and driven by where growth is next year, and we're going to be selective in what we do. We're going to draw down the securities book and that's going to represent a decreasing portion of our total earning asset mix as well.

We think that we can find better risk-adjusted returns with duration profile that are shorter than investing in the securities book in our various commercial finance asset classes. And so you're going to continue to see us kind of blocking and tackling and moving the balance sheet around and make sure that we sustain the highest possible NIM.

So I think that you're bringing up a very good point, which is longer term low rate environment, flat rate environment, can you continue to sustain this? If you were to think about it from a static portfolio perspective, I would say, absolutely not, you can't maintain a static portfolio and have that type the NIM profile. But this is what we get paid to do. We get paid to manage and allocate capital and resources to various asset classes, and we're going to allocate it to the places where we find the best risk adjusted returns and that includes both interest rate risk and credit risk profile.

So that's -- we will have to earn our keep -- to keep that, you know that type of NIM profile next year, but there is definitely the pathway to being able to do that by modifying the earning asset side of the house and continuing to very aggressively priced down all deposits. We're not down on deposits and wholesale borrowings yet.

Casey Haire -- Jefferies LLC -- Analyst

Understood, OK. Just last one from me. The provision outlook, you guys sound very confident with a 1.46% ACL today and I know we're all data dependent on the forecast and the outlook. But assuming the outlook stays the same, how should we think about provision levels going forward. And obviously the special mention up-ticked a little. Just a little color on the provision near term.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Yeah. So the special mention, it's addressing, because we're been, I think that we're going to sell these broken record from the beginning of this, and in the first quarter call, we've said we're going to actively and -- kind of proactively and very aggressively continue to manage and migrate credits through those classifications and I'm having gone a little bit of deja vu to the first quarter call, where we had the same type of dynamic where you saw an uptick in special mention loans and everybody was like, "Oh my God, special mention loans have increased."

Again, so putting loans on deferral, modification -- modifying loans to us has never been stopped migrating loans through their -- through what they should be from a credit classification perspective. So, we continue to get ahead of this, and special -- the uptick in special mention loan has some component of loans -- of those loans that are on deferral and where we, again, seeing -- based on what we're seeing and what the position is of those borrowers today, we've decided to continue to migrate them and not wait for deferral periods and so forth to run out.

So, we're trying to get ahead of this from a perspective of not having then a substantially greater uptick in special mention loans once provisions of the CARES Act and kind of deferrals run out. So we're essentially continuing to manage the classifications of credit for the most part, regular way basis as if modifications were not happening behind the scenes.

Second thing is, we are very comfortable with the 1.46%, and we have a substantial amount of our allowance today that it still represented by qualitative factor adjustments that we're making to essentially get that allowance for that 1.5% ratio. Again, if you take out the PPP loans, we're at about 1.51%, instead of the 1.46% that we have for GAAP purposes.

So we're going to continue to -- we like that ratio where it is. It's going to likely stay at those types of levels for the foreseeable future. And if you annualize our charge-off rate that we had in this quarter, excluding the portfolio sales, you had about $13 million to $15 million in charge-offs. We anticipate that for -- that we're going to have similar types of charge-off comped into the foreseeable future and we'll continue to replenish the allowance from that perspective.

So provision for loan losses will continue to be higher than pre-pandemic levels in the -- over the next couple of quarters, but we continue to think that it should be lower. It's the same thing that we've had in the last three quarters, which is, it had decreased quarter-over-quarter. We anticipate seeing that in the fourth quarter as well.

Casey Haire -- Jefferies LLC -- Analyst

Great, thank you.

Jack L. Kopnisky -- President & Chief Executive Officer

Thank you.

Operator

We will now take our next question from Alex Twerdahl from Piper Sandler. Please go ahead.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, good morning guys.

Jack L. Kopnisky -- President & Chief Executive Officer

Good morning, Alex.

Alexander Twerdahl -- Piper Sandler -- Analyst

Hey, first off, I was wondering, it seems to me that New York City has become somewhat of a controversial geography, still a lot of people on the outside looking in. Maybe you can just give us a little bit of an update on what you're seeing from the ground in terms of underwriting and ability to underwriting in things like property values, what they've done and debt service coverage ratios, and whether or not you feel like right now is an environment where you can really tread forward and make loans in that geography or if you had to kind of take a little bit of a wait and see approach as some things kind of work themselves out?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah. Yeah, you know, it's interesting. So everybody writes about the depth of New York City. First, Metropolitan New York City is a massive place, and there is great diversity in opportunity. So if you think about it, there is 19 million people. There are 800,000 small business -- or businesses in Metropolitan New York. I think there's about 200,000 businesses that have more than $500,000 in revenue in the City, in the Metropolitan area. And there -- I think there is 800 public companies.

So -- and if I took you through the types of industries in Metropolitan New York, it's extremely diverse. So, it's not just a bunch of finance geeks like us walking around. There are lots of diversity around out there. So one, and in our case, we're relatively small player. We're still about 1% of the market share in Metropolitan New York.

So, for someone like us, we can kind of pick and choose what types of credit we go after. So we see a lot of opportunity. Our teams are building on seeing many, many, many deals and then picking and choosing kind of what types of deals we want to do. So have values come down? Yes. Were values very, very high previously? Absolutely.

So I personally, this is a Jack Kopnisky comment, not a Sterling comment. I think industries and areas go through different cycles, and they reset prices at different times. My view is the prices for New York City have been really high for a long period of time. This -- no one thought it would be a pandemic that would cause this, but prices have now come down. And there -- they have come down by varying amounts depending on what type of real estate, especially, that you've been in.

So I said most of the companies that we deal with have figured out a way to adjust their models in this process. So we view this as, there is constantly plenty of opportunity in Metropolitan New York. When you go into this with having very low loan-to-values, it gives you a good comfort. So say values come down by 10% and your loan-to-value is at 50% you have a lot of -- you still have a lot of room to go to make sense out of it.

What we're finding is that there is also an incredible amount of money in Metropolitan New York. So we've had a couple of instances where people have come to us with lots of cash balances wanting to look at real estate that have come down in value. So even the hotel portfolios, for example, about a quarter of our hotel performers -- hotel portfolio were continuing to work out.

My view is that there is always going to be cash for buying those properties in the areas that they're in. They may not end up being hotels at the end, they may end up being transformed something else, but there is plenty of cash sitting on the side line. So, in general, this is a very diverse market. There is many opportunities. Prices -- values have come down.

As prices come down, there are people with lots of cash to come in and find opportunities to buy at discounted values. As a lender, being a collateral based lender, we feel pretty confident in the values that we have, and again, the loan amounts that we have against the values. So, New York is going through a bit of a transition. They've lowered their rates.

I usually use this example, it may or may not be a good example. But I pass like a boutique French pastry place that when you go into the place, the pastries were about $7. You know a lot of people that could pay $7 for a little French pastry. The business went out -- the shop went out of business. Somebody is going to come in and maybe with a new pastry, have a $3 or $4 pastry that the rent will be a little bit lower, more people will be able to afford that. The business will do well in the future.

I think that's happening in many metropolitan areas, and it's especially happening in New York. It was probably more than you wanted to know, Alex, but that's my view of New York.

Alexander Twerdahl -- Piper Sandler -- Analyst

No, I think it's extremely helpful to get all that commentary on record because it is a challenge to see what's actually happening in the City and we read a lot of headlines and I was there up until March, so, you know.

Anyway, next question. I want to just go back to the commentary on the buyback and you said that you did sort of give a heads up to the Fed and the OCC before reinstating the buyback. Was it -- what was that process like? Was it just kind of giving them a call and saying, "Hey, here's what we're doing." Did they actually opine on it? And before you know every quarter they're going to have to give some sort of feedback on it for the foreseeable future or is it just kind of now that it's end, it's end.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

I guess the best way to characterize it, Alex is that it was more of the former than the latter. So it's regular -- we have regular way conversations with our regulators every quarter, not tied to the buyback, but just all things regulatory related. And as part of those conversations, we reviewed our capital management strategy and intentions and reinstatement of the buybacks for the fourth quarter. And the regulators have now been notified.

And no, we -- unless there's going to be a material change in how we envision that capital management strategy unfolding over the course of the next quarters, then we don't -- there is no need to essentially have to address that point again with the regulators at this point. Now, we talk to the regulators all the time.

So I can't -- it's not like we had specific conversations tied to this particular dynamic. This was just part of the regular way conversation that we have with regulators on every quarter, every month.

Alexander Twerdahl -- Piper Sandler -- Analyst

Got it. That's helpful. And then just a final question. Just from a modeling standpoint, the PPP sale that you did during October, how is that can actually flow through the P&L in the fourth quarter?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

So we've entered in an agreement, we have not completed the sale yet. We think that we're going to get it done in the next week or so, but if it slips, it will slip into, call it the first week of November. So we don't see any -- there is no risk of the sale not completing. Net-net impact is that there is going to be an increase of about $3.5 million to $4 million in yield on C&I loans, which is where our PPP loans are recorded.

And that's the net fee that is associating connected to the loans that are being sold. And so that has the gross fee that we received from the SBA, and it has netted out of that some origination cost and so forth of originating those loans, so $4 million.

Alexander Twerdahl -- Piper Sandler -- Analyst

Okay. And is that it for loan sales for PPP or will you do anymore after this first tranche?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

No, that's it for loan sales for now. So we are -- the loans that we are selling are smaller balance loans that are going to require -- so it's smaller balance loans, so the $260 million that we're selling has a substantial amount of units of loans associated with it. The smaller the loan is, there is no real difference between, obviously with loans under $50,000, there is a slight difference relative to the forgiveness, kind of documentation and processing requirements.

So, we potentially isolated the components of the PPP portfolio that we thought was going to result in the most amount of operational complexity, and we've decided that there is folks that are out there, that are better positioned to be able to kind of service those loans than we are.

So we're going to focus on the rest of the loan portfolio should not be -- will stay with us, and we anticipate that we're going to see a substantial amount of those loans kind of disappearing or kind of decreasing on our books because there is going to be forgiveness processes that should settle. Some of those loans should start getting forgiven in the fourth quarter, and we envision by the first quarter of next year the rest of the PPP portfolio or the most part should be off the books as well.

Alexander Twerdahl -- Piper Sandler -- Analyst

Great, thanks for taking my questions.

Jack L. Kopnisky -- President & Chief Executive Officer

Hey, Alex. I'll give you one more point on New York City. One of the other missed numbers on this thing is that it is Metropolitan area. If you go into the Boroughs, the Island, Westchester and New Jersey, Connecticut; in essence, everything is not all the way back to normal, but it's probably 80% to 90% back to normal you know flows of traffic.

The area that most people would talk about is actually Midtown and Downtown where it's all basically offices, like we're in right now and tourist driven. So those are the areas where there is less and less active -- or less activity, probably about 25% of the normal activity. The rest of metropolitan New York seems like it's really come back and come back pretty strong.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Yeah. And Alex, we don't have a lot of exposure that's dedicated to that tourism activity or destination activity on the Island of Manhattan. We do have some, but it's not a meaningful amount at all for our company from a portfolio perspective.

Alexander Twerdahl -- Piper Sandler -- Analyst

Perfect. Thank you.

Operator

We will now take our next question from Christopher Keith from D.A. Davidson. Please go ahead.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Hey guys, thanks for taking my question. So you know, you guys talked about managing the asset mix. And I was just wondering if you can tell us which categories you're seeing strength in the loan pipeline and maybe a sense to the magnitude and growth over the next few quarters in some of those buckets?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah, so the areas that we feel confident in both the risk adjusted return and the opportunity to grow are things like traditional C&I. There are some sectors of commercial real estate, especially in warehouse, distribution and medical side of this thing. There is opportunity in the leverage finance area. There is opportunity in innovative finance area, some of the technology lending that we're doing. So it's those types of areas that tend to be higher yields, better overall returns, and frankly, lower risk along there.

So, the risk-adjusted returns in those areas are pretty strong and we view those opportunities as probably being high-single digit, low-double digit types of growth rates.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Got it. And then do you have a sense for the 2021 total loan growth yet?

Jack L. Kopnisky -- President & Chief Executive Officer

We do not. We're working through that right now, and we're going to work through what those numbers should be. So we're finalizing our plans for 2021 now. We have -- I would tell you too as a -- just as a sideline, all the things we're trying to do in 2020 is to get prepared for kind of a strong 2021 and beyond.

So whether it's the -- what we've done on the loan loss reserves or in provisions or the margins and things like that, we're trying to make sure that we come out of this in -- with some good momentum going into 2021. But we have not articulated the loan growth category.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Got it. Okay, that's helpful. Thank you. And then just on the margin side, can you tell us where CRE loans are coming on at? And do you have a sense for the amount that are set to reprice over the next few quarters?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah, the loans are coming on -- it's interesting, it depends on the category. They are coming on in anywhere from 3.25 to 4.25 [Phonetic]. There are deals along that path, depending on the type of category and the type of cash flows coming out of this. We don't -- go ahead.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Yeah, it's about a third of the portfolio. So, out of the $10 billion of loans, there is about a third of the portfolio that reprices over the next 12 to 18 months or that had some sort of you know a pricing event over the next 12 to 18 months. Now, the biggest question mark on that, Chris, is going to be what happens with prepay activity. We have started to see some incremental prepay activity on multi-family and on some CRE loans, but still quite manageable relative to -- and pretty much in line with pre-pandemic levels.

If there is -- I guess the positives and the negatives is, there is a kind of stronger rebound of economic activity and New York City area gets -- continues to kind of improve at a faster rate and pace. That's how -- it means that prepays accelerate, but at the same time that means that credit is going to be probably in better shape than what it is today.

So I think that that's a trade-off that we would take rate. So you start seeing faster prepay activity, likely means that there is very -- better kind of macroeconomic backdrop locally, better conditions for borrowers, which means that we should see some offsetting kind of provisioning requirements. So, kind of the puts and the takes and positives and negatives in seeing that, but yes, faster prepay activity would result in some incremental earning asset and in CRE earning asset yield pressure. So it's about a third of the book.

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Yeah, that's perfect. Thank you so much.

Operator

We will now take our next question from Steve Moss from B. Riley Securities. Please go ahead.

Steven Moss -- B. Riley FBR -- Analyst

Good Morning.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Good Morning.

Steven Moss -- B. Riley FBR -- Analyst

Just following up on the buyback here. When you guys talk about near-term earnings, it's interesting, pay-out on near-term earnings, is that the most recent quarter or do you think about it on a maybe a six month basis? Just kind of curious how you guys are thinking about that?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

It's going to be an annual metric. So we're going to take a look at where we are. So we're going to look at where we are on a per-quarter basis. What that means from the perspective of the last kind of rolling four quarters as well. And I don't want to -- so we said that's why it has an approximate 50%, because it's not that there is a hard and fast rule mathematical firm calculation of saying four quarters multiply this time this and that's what you can pay out.

So I want people to get that impression. What we stated before is how we're thinking about it, which is, we anticipate that as earning continues to recover, that that type of long -- kind of near-term and longer-term capital return strategy allows us to essentially continue to retain capital to support growth and what happens on the balance sheet, whatever opportunities we see from that perspective, and also allows us to return a meaningful amount of capital to shareholders at where the stock price trades today.

So again it's -- I don't want you to come away with the impression of saying there's a mathematical specific approach to how this is calculated. But if you were to think about rolling four quarters and then over -- the following four quarters anticipate what that means from a capital return strategy that would get you pretty close to how we're thinking about it.

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah. Frankly, we wouldn't turn this on if this is just going to be a one quarter thing.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Correct.

Jack L. Kopnisky -- President & Chief Executive Officer

So just to be clear, well this is -- we believe that this is, unless there's some dramatic event that happens in 2021, we think this is the right thing to do for a longer period of time.

Steven Moss -- B. Riley FBR -- Analyst

Okay, that's helpful. And then Jack, you mentioned about a quarter of the hotel book is a concern. Just kind of curious as to what your approach is to workouts and potential resolutions with those borrowers?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah, we're pretty comfortable that -- so if you look at it, we have about $400 million worth of hotel exposure, about three quarters of it we're very, very comfortable with -- people are figuring out how to change their model adjust and all that. The quarter of it, we're working through with our clients. They -- we think that we have good loan to values in those -- in that category, but it will be a longer-term work out with a number of those hotels.

So what you do in those things is sometimes you restructure, sometimes you take the collateral, sometimes you find another buyer. It's all those types of things. One of the other things that we did well prior to this is we brought in some very terrific folks from some of the larger banks in the workout area. They're very sophisticated in how they deal with challenged credits. And we're really happy that they're here, and they'll do a good job of facilitating the workouts and frankly get our money back out of these things.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

The only thing I would add is, in that $100 million, we do have sponsors in more than half of the cases that have significant capacity both the net worth and liquidity, it easily get through the pandemic timeline that we all kind of read about in the newspapers. And we would expect that they would do that.

What we're highlighting is that in the third quarter those individual hotel properties did not have an annualized DSCR of 1 times, and that's why that's very much on our radar screen. But from our perspective, as Jack said, it's a $100 million, but we look at it in credit, and we're really focused on four or five names.

Steven Moss -- B. Riley FBR -- Analyst

Okay. Thank you very much. I appreciate that.

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah. Thank you.

Operator

We will now take our next question from Collyn Gilbert from KBW. Please go ahead.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. Good morning, guys.

Jack L. Kopnisky -- President & Chief Executive Officer

Good morning.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

I will start with an easy question first. Do you -- in terms of the tax rate, obviously you gave guidance of what you expect it to be for 2020. But Luis does that really hold into 2021 or do you see that starting to migrate higher as income levels and provisioning levels come down?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

It will migrate higher. So it will migrate higher closer to where we were prior to the pandemic. So it should be high teens to kind of 20% -- kind of low 20%. But the proportion of tax efficient assets that we have as a -- sort of the amounts of tax efficient assets that we have is proportionate to our total earning assets that's continuing to increase, which is going to continue to put -- let it move that tax rate down relative to overall pre-pandemic levels, but it is going to be higher than 12.5% that we recorded at this quarter. So, for modeling purposes, I move that up back to 17.5% to call it, 20% or so to be on the conservative side.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay, OK, that's helpful. And then just on the loan outlook. Obviously you guys are maintaining your loan growth guide, which would imply some nice growth coming in, in the fourth quarter. Is that just curious as to -- I mean, I guess you are expecting good growth in the fourth quarter. Can you just talk a little bit about what's going to be driving that and what you're seeing now that's going to allow you to see that kind of loan growth for the year?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah. So it's actually the same categories that I mentioned. So it's things like lender finance and I failed to add public finance out there in the last question, but things like traditional C&I, some of real estate areas, lender finance, innovation, all those types of things, I guess the pipelines are starting to build and they're getting closer to pre-pandemic levels. So we feel pretty confident that as those build, we'll be able to find the right types of credits to make.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Okay, that's helpful. And then just on the opex side. So you guys have indicated that you've cut some FTEs during the quarter. But yet the opex guide held flat. Do we -- at some point, will there be savings seen from those reductions or are those savings going to just be reinvested in some of the digital and tech initiatives you guys have?

Jack L. Kopnisky -- President & Chief Executive Officer

Reinvested. So similar strategy that we have -- that we have followed for quite some time now, which is we continue to more so than trying to cut opex. At the level of opex at which we run the company today we're pretty darn efficient. And so, our strategy continues to be to kind of redesign staffing models across the company in places where we don't see kind of scalable growth opportunities, and reinvest those dollars into places where we do.

So it's going to -- that is why it's a flat guide. We are going to be replacing some of that opex. This is not going to happen immediately from one quarter to the next. So there might be a decrease in opex next quarter relatively to what happens longer term, but that range of running the company at that, call it for $420 million to $430 million level of opex is one where we think that we can -- where we get the best bang for the buck by reinvesting those dollars into places where we think that we will be able to grow in a more scalable, more efficient, more profitable way.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. That's helpful. And then just lastly, on kind of the outlook for net charge-offs. Jack, I think we talked about this last quarter. And Luis, you gave color that you kind of are expecting net charge-off to hold in this quarter to more normalized range. Is that -- and I think what you're saying is you're not anticipating any -- much more in the way of loan sale? Just trying to understand if there's going to be maybe more one-offs did you...

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

I didn't say that. I didn't say that.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. All right. So my question is [Speech Overlap]

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Yeah, that's was a good -- it's a good question, it's a great question. I think that, again, I hate to sound like a broken record. I think our strategy from day one since we started to enter this, kind of this credit cycle has been kind of get rid of stuff as early and as quickly as we possibly can to focus on the components of the business that we want to focus on. Similar to what, I mean how we identified opportunities to get rid of the non-core assets this quarter.

If there is other opportunities like that, particularly related to anything that we see popping up on the residential mortgage side or other business lines or other commercial assets that we have that don't -- that aren't really growth opportunities for us, we will absolutely take advantage of that and we will continue to have -- you know our strategy is to kind of cleanse charge-offs in the provision for loan losses and the earning stream of as much as we can from a credit perspective over the -- by the end of this year.

So we're going to continue to aggressively manage credit. With that said, in the asset classes that are core to us and in places where we're growing, we anticipate seeing a continued kind of stable charge-off rate, similar to what you saw in this quarter.

So I would say kind of specific components of non-core assets are places where we don't grow, where we don't see a good opportunity for those credits to churn, we might essentially execute some sales, but the regular way core business of what we do kind of the -- our core commercial asset classes on the C&I and CRE side, we think that it's going to be a progressive and programmatic approach to charge-offs that should be relatively close to what we've seen for the last couple of quarters.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. So then if you think about that on the reserve, right. So that the charge-off that you guys took this quarter, there were some reserve already assigned to those which has allowed the reserve to bleed lower. Just trying to think about what-- and I know you said part of that 1.46%, I'm sorry, 1.51% is qualitative. Can you give any -- a little bit tighter numbers around that? Just because obviously that you know we see higher elevated net charge-offs, trying to model what that's going to mean to the reserve and the provisioning is going to be.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

You'll start seeing -- so over time, you would see a provision to total ACL loans that migrate down toward 1.1% to 1.2%. Now that -- that's going to be dictated, again, by what we see from a -- there is -- so there is components of the loan portfolio that we integrate today from CECL modeling perspective are going to have higher kind of loss content, and we provide a fair amount of detail on and you can see where those components of the portfolio are.

And as those, again, given a substantial chunk of the allowance today is composed of qualitative factors, we think that, again, if you maintain a relatively stable and inline kind of macroeconomic forecast assumption, you would see a steady kind of decrease simply, of that allowance to those types of kind of that, call it 1.2% or 1.25% level over time as you get rid of some of these regular way charge-offs over time.

So it's -- again, I just think, we don't have a magic crystal ball. We don't know exactly how charge-off content appears in the books. But you should -- similar to what you saw this quarter, which is proactively managing out of some asset classes where there is higher loss content that is not going to be representative of what charge-offs are and the core run rate, kind of core businesses that we continue to originate loans in every day, every month [Phonetic].

Rob Rowe -- Chief Credit Officer

So Collyn, as Luis said, we don't have a magic crystal ball. So what's different, as we all know about this environment is that it's pandemic driven. It impacts certain elements of the service economy and it's hard, right, to model that, and it's not we've ever been through this before, right. So that's why it makes it very difficult in this situation, which I know you know, trying to figure it out.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

But our 1.50% reserve migrate slower over time.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Yeah. Okay. That's super helpful. Okay, great. That's all I had. Thank, guys.

Jack L. Kopnisky -- President & Chief Executive Officer

Thank you.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Thank you.

Operator

[Operator Instructions] We will now take our next question from Matthew Breese from Stephens, Inc. Please go ahead.

Matthew Breese -- Stephens Inc. -- Analyst

Hey, good morning.

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Good morning, Matt.

Matthew Breese -- Stephens Inc. -- Analyst

Just following up on Collyn's line of question there. Maybe just a little bit different. So it seems like, clearly there is a portion or portions of the book that you would consider selling if it helps you achieve the goal of expedited problem asset disposition. Should we expect if that's the case that the reserve already contains the potential charge-off that you think is warranted?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Yeah.

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And if we were to take that one step further. So you have deferrals down to $460-some-odd-million. If you were to try to get out of that portfolio -- all of it tomorrow, you mentioned that you feel like the reserve contains all future loss content on the problem loans you see right now. Do you feel like the reserve covers, if you had to get out of -- all the deferrals tomorrow?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

So short answer to that is, yes, but [Indecipherable] you know the hypothetical that you're laying out isn't one that we contemplate because we don't want to get rid of every one of those loans as part of the deferrals. So we are very confident that there is a substantial amount of those loans that are on deferral that have a clear -- that are temporarily impaired because of the pandemic and that have a clear path to getting back to some regular.

So I guess it is a difficult question to answer because if we were to try and sell some of those loans, I think that there would be no loss content in many of those loans, because people would realize that it's a temporary impairment and that there is a clear path for that company to be able to get back on the feet and that borrower to be able to service the debt over time.

So -- we, the short answer is yes current reserve covers loss content that we see in the portfolio. Second part of that question is, don't think about this as, we are not thinking about those payment deferrals as if that all of goes bad over some period of time because we know that there are substantial amount -- substantial components of that payment deferral book that are going to be -- that need temporary support and are going to be able to make it through this, just based on the underlying kind of circumstances of each one of those credits.

Matthew Breese -- Stephens Inc. -- Analyst

Okay.

Rob Rowe -- Chief Credit Officer

Matt, since you brought it up, what I would say is that New York Metro area has lagged the rest of the country on unemployment rate coming down. It is now, as you know, coming down. So that's why you'll see resi is lagging on deferrals, but we would expect that will continue to decline because the unemployment rate is coming down. Equipment finance, we do know that's coming down still even in this month a lot, very significantly because the transportation -- the production and transportation of goods in this country actually is back to pre-pandemic levels. So just the -- just some highlights on that book as well.

Matthew Breese -- Stephens Inc. -- Analyst

Okay. And then, I couldn't help but notice in the deck you widened the margin range by 5 bps, now it's 3.05% to 3.15% from 3.05% to 3.10% previously. What should we read into that for the fourth quarter? And maybe one way to measure that, what was the September margin and is that a good proxy for the fourth quarter?

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

So we think the fourth quarter, as Jack alluded to earlier in the call, we are quite confident that near term we have the ability to maintain that NIM stable at 3.10% to higher than that. Again, as we talked about before, we have not yet finished what we're going to do on managing down cost of deposits and cost of wholesale borrowings with substantial amount of the loan portfolio, particularly our floating rate loans, which is about 50% of our book has repriced at this point. And so you're not seeing incremental margin pressure in there.

And you do start getting -- we're now into the part of the repricing of our book that it just takes longer to do, because now it's part of pay-downs, the refinance activity on the fixed rate side of the house. So we think that, again, near term, we think that there is the ability to -- a good -- kind of good opportunity for us to maintain that NIMs stable to slightly increasing.

The longer-term discussion -- the longer-term NIM discussion that we had before is what -- is where we see -- that's where the challenge is going to be, right. It's -- and that's where it comes back to reallocation of assets, changing the earning asset mix, decreasing securities, moving away from some of the kind of the lower rate, kind of fixed rate type of origination opportunities and other types of asset classes, trying to find new avenues for tax -- kind of tax efficient assets and so forth. So, next year is the tougher dynamic and there is always pressure to the NIM. But we like where that 3.10% to 3.15% range is near term.

Matthew Breese -- Stephens Inc. -- Analyst

Understood. Okay. And then last one from me, Jack, over the years one point you've repeatedly make is that the company is focused on generating operating leverage. And one of the real strengths this quarter was that the top line moved quite a bit higher. How sustainable do you think that is in this interest rate environment? And do you feel like you can create that positive operating leverage in 2021?

Jack L. Kopnisky -- President & Chief Executive Officer

Yeah. So, by far, that's the toughest part of this. It is not easy, but as we said, we've been pretty good over the years about kind of figuring out the mixes and the adjustments along the way, but that's frankly what we're focused on.

We're focused on how can you make sure that you're driving more revenue growth than expenses along the way? And this is -- and we factored in the investments into the technology platform to be able to make the company more and more contemporary. So we are -- that's we're working toward.

So our expectation is that we will be able to create positive operating leverage. We have to get down to the nits and gnats to make sure that happens. And frankly, there's always plenty of opportunity to do that as you proactively manage businesses. So there's always going to be times where you have opportunity to grow revenue like crazy, and you're going to fund that with expense and there is other times where revenue opportunity isn't as great and you're going to have to cut expenses.

We've been pretty good in both of those scenarios, taking the action along the way. So we think that there is opportunity to do that into the future.

Matthew Breese -- Stephens Inc. -- Analyst

That's great. That's all I had. Thanks for taking my questions.

Jack L. Kopnisky -- President & Chief Executive Officer

Thank you.

Operator

There appears to be no further questions. At this time, I'd like to turn the conference back to the host for any additional or closing remarks.

Jack L. Kopnisky -- President & Chief Executive Officer

Just to thank everybody, you know it's been tough on all of you too on the phone, during the last six months and we appreciate the communication back and forth. And if you have questions, please feel free to call any of us. We appreciate you following the company and we hope you will consider investing more money in the company. Thanks a lot. Have a great day everybody.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Jack L. Kopnisky -- President & Chief Executive Officer

Luis Massiani -- Senior Executive Vice President & Chief Financial Officer

Rob Rowe -- Chief Credit Officer

Casey Haire -- Jefferies LLC -- Analyst

Alexander Twerdahl -- Piper Sandler -- Analyst

Christopher Keith -- D.A. Davidson & Co. -- Analyst

Steven Moss -- B. Riley FBR -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Matthew Breese -- Stephens Inc. -- Analyst

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