Sterling Bancorp
Q3 2018 Earnings Call Transcript

Published: 24 Oct 2018

[Operator:]

Ladies and gentlemen, thank you for standing by. Good day, and welcome to the Sterling Bancorp’s Q3 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky, President and CEO. Please go ahead, sir.

[Jack Kopnisky:]

Good morning, everyone, and thanks for joining us to present our results for the third quarter of 2018. Joining me on the call is Luis Massiani, our Chief Financial Officer. We have a presentation on our website, which along with our press release provides detailed information on our quarter. Our third quarter of 2018 reflect strong financial metrics with adjusted earnings of a $114 million, which is a 139% greater than the third quarter of 2017. Adjusted earnings per share of $0.51, is 46% higher than the same period last year and $0.01 higher than our linked quarter. Operating metrics were strong as adjusted return on average assets was 155 basis points and adjusted return on average tangible common equity was 18.09%. The operating efficiency of 38.9% continues to result from the strong positive operating leverage demonstrated by our organic performance model and M&A activities. Revenues increased a $134 million and expenses increased $15 million over the third quarter 2017, representing an operating leverage ratio of 2.7 times. Look it's been one year since we completed the acquisition of Astoria Financial Corp, which double the size of our company. On Page 6 of the presentation, you’ll see a highlight of the differences between before and after Astoria. To demonstrate the power of an acquisition like Astoria, earnings for the first nine months of 2017 prior to the acquisition were $133 million. For the first nine months of 2018 earnings were $333 million. EPS increased from $0.98 to $1.45 during that same period. Additionally, if you compare third quarter 2018 earnings and the EPS to fourth quarter 2017 earnings increased 36% and EPS increased 31%. Tangible book value increased by 27% from a year ago. We have met or exceeded our objectives in completing this transaction in subsequent integration. We will continue to consolidate financial centers and transition the acquired loan book into 2019 and beyond. But the integration of Astoria is effectively complete and it was a successful one. Before I discussed the details of the performance on the quarter and our view of what you can expect in the future from us, I want to discuss the current market environment and our positioning to ensure continued success in 2019 and beyond. First, as the economy has expanded, we have seen an approximate 50% increase in the pipeline of opportunities for organic commercial loans. Unfortunately, many of these opportunities do not come with a credit structure we're comfortable with or a yield that meets our hurdle rates. Our view is that this is a period of time where we need to be disciplined and stick to our established credit fundamentals and return targets. We're being selective in our approach to new commercial loan opportunities. We are also reviewing many commercial finance portfolio acquisition opportunities that have the potential to achieve the credit standards and return characteristics that we are seeking. We are very confident that these opportunities will result in portfolio acquisitions that will supplement appropriate organic growth over the coming quarters. Second, given the continued increase in market interest rates and non-strategic value of many of the loans and asset categories we acquired in the Astoria merger, we are evaluating the potential sale of a portion of these mortgage portfolios. The benefits of potential sale are numerous. We accept low yielding non-strategic assets. We can accept at or above marked value while reducing interest rate risk. We accelerate the balance sheet transition. We improve core net interest margin. We can reduce pressure on funding costs by improving our funding profile and reducing our loan to deposit ratio. We can create increased tangible capital and a sale provides increase liquidity to either purchase higher yielding portfolios or grow organically. We strongly believe in the model we have created and we have demonstrated strong performance each quarter since 2011. We continue to see substantial opportunities to execute our strategy of growing loans and diversifying our balance sheet. However, we pride ourselves on being pragmatic and flexible regarding the allocation of capital and resources. To that extent that targeted growth is not available, we will look to share repurchases until such time as we find higher yielding investment opportunities to meet our risk adjusted return hurdles. We have authorization to potentially repurchase up to 10 million shares that would increase it, if needed depending on where we see the best and most attractive investment returns. We are managing the Company for the intermediate and long-term, not the short-term. With that environmental background, let me highlight a number of balance sheet and income statement categories and the associated activities that will enable us to continue to appropriately drive results. First, commercial loan growth based on average loan balanced increased by $331 million, relative to the linked quarter and spot balances increased $1.8 billion, since the completion of the Astoria merger. Our commercial loan growth has partially offset by continued run-off of resonate to mortgage loans which based on average loan balanced declined in the linked quarter by $270 million and have decreased by $879 million since the completion of Astoria merger. Based on current market conditions and our estimate of one-off in the residential portfolio, we are targeting commercial loan growth to be in the 8% to 10% range and overall loan growth to be in the 6% to 8% range excluding any potential sale of Astoria mortgage assets. Secondly, total deposits grew by $490 million or 9% on an annualized basis. We enjoyed solid core commercial deposit growth along with seasonal municipal deposit growth consistent with the tax collection cycle. Our deposit mix improved and continues to be strong with approximately 42% DDA, 11% savings, 35% money market savings and 12% CDs at a cost of 68 basis points. The cost of deposits increased by 13 basis points, which was primarily due to increases in the higher balance muni, commercial and broker deposit segments. The total deposit beta since the fourth quarter of 2017 has been 24%. We anticipate deposit cost to moderate as we lower the current loan to deposit ratio of 95.7% over time. Third, the core net interest margin for the third quarter was 316 basis points, a decline of 5 basis points relative to the linked quarter and within the guidance we provided. We are being cautious in adding new loan and yields to meet our standards. We anticipate that exiting a portion of low yielding mortgage portfolio reducing municipal deposit rates and targeting a combination of organic and M&A loan growth will improve our core net interest margins. The 2018 core net interest margin will continue to be in the 315 to 320 basis point range. Fourth, core operating expense levels continue to be better than planned in our at or an annualized run rate of $420 million for 2018. We project we will further reduce OpEx to $415 million in 2019. As I mentioned previously, we have completed the majority of the integration but we’ll continue to lower the number of financial centers. Since the merger, we have consolidated 15 financial centers and anticipate consolidating an additional 22 over the next 18 months. Fifth, credit quality and capital ratios remain very strong. Charge-offs for the quarter were 8 basis points, non-performing loan declined from the linked quarter. We have low levels of charge-offs and strong loan loss reserves and capital levels. Finally, let me emphasize, we have built flexibility and the operating model of this company. We have a diverse asset mix relatively low cost funding and have demonstrated an ability to grow the Company organically and through acquisitions. We have clear paths that we can execute against to achieve 10% plus EPS growth in future years, regardless of the general rate environment, and we have various alternatives deliver high performance results. In summary, we're very confident that organic loan growth and deposit growth will occur in the fourth quarter and beyond, and that we will find portfolio acquisitions to meet our standards over the next several quarters. We have consistently met or exceeded our growth targets and when we expect to do so in future quarters as pricing and current structure is more normalized. We expect to consistently deliver 10% or greater earnings and EPS growth, return on average tangible assets of 150 basis points or higher, return on average tangible common equity of 18% or greater, and efficiency ratios of less than 40% on an annual basis. Our focus remains on building a company that creates ongoing positive operating leverage where revenues grow 2 to 3 times that of expenses. So now, let's open up the call for questions.

[Operator:]

Thank you. [Operator Instructions] And we'll take our first question from Casey Haire with Jefferies.

[Casey Haire:]

Jack, question for you on the strategy, just given the backdrop that you laid out in terms of loan growth, obviously, skinny pricing and structure, structures that are not fitting your parameters. It just doesn't seem like this is the environment to grow loan speed organically or through M&A. So why not pursue, pivot the strategy towards moderating growth immediately, maybe even selling some of the Astoria loans, improving liquidity and being more aggressive on the buyback today?

[Jack Kopnisky:]

So one, we are going to sell some of the mortgage loans, we've already -- we just said that. So, we're going to sell first of the mortgage loans to increase liquidity. Two, we are going to do share repurchases. Three, we did lower the guidance on the loan, so we took it from 8% to 10% growth to 6% to 8% overall. So allows us -- there are still opportunities in the market. We're just being more selective. So, the answer to your questions directly, we are going to do all three of those things. So, we're going to sell the mortgage portfolios for all the reasons that I gave in the script. We're going to do share repurchases until such time as we find other investments that have higher yields. And three, we did lower of the expectation on loan growth.

[Luis Massiani:]

Casey, I'd add that on the M&A side. Remember, if you're buying a portfolio that has been seasoned with outstanding for some time, the pricing term and structure that is going to be different than what you're seeing the new origination market today. So the pressure is that Jack is alluding to or more on the organic side of what we're seeing market participants doing. To the extent that we stay patient and to the expense that we find the right opportunity, the right size of the right price where the ability for us to re-underwrite and to reserve for the appropriately upfront similar to what we did with the Advantage Funding deal. That’s the type of transaction that we’re interested in, we think that those are available, we just have to stay patient to find the right one.

[Casey Haire:]

And I guess on the NIM outlook. Can you give us some updated thoughts? I guess, I was very surprised by the loan yields kind of holding flat specifically to C&I. So, where is the new money yield on C&I loan production? And was there something that elevated the second quarter loan yield within C&I, specifically?

[Luis Massiani:]

So, the prepayment activity that we were talking about was reflected that's in the press release. That was part of the C&I portfolio, was not part of commercial real estate. We’ve talked about this in prior calls. A substantial portion of what we do on the diversified C&I and the franchise finance has prepayment activity associated with it too, and there was a $1.4 million decrease in prepayment activity specifically related to the C&I side into the traditional that would be embedded in the traditional C&I and commercial finance portfolios. So if you normalize to that and that happens, that's not perfect. But it happens every other quarter, so there should be some bump up in prepayments going forward. But again, it's not perfect, and there'll be a little bit volatile from quarter-to-quarter, but there will be some prepayment activity going forward there always is. New origination yields are fine. From the perspective of the deals that we're doing that's similar to the message that we've provided in prior quarters, it's 5% cost type yields that we're seeing on the C&I side. When you look at asset-based lending, payroll and factoring, those are yields that are in excess of 6.5%. So, those businesses from a yield and a return perspective were fine. Issue is that the volume has not been exactly we wanted it to be because a lot of the new originations have been competed away for term construction.

[Jack Kopnisky:]

And then, I’ll take the other end of this. On the deposit side, we probably, we had very good -- we had good deposit flows over the quarter. We did pay up on some of the higher price deposits by selling of some of the mortgages, keeping a little dry powder in terms of having a lower loan to deposit ratio. We're going to move back on some of the pricing of some of the more interest-sensitive about deposits out there. So that also would have affected the NIM.

[Casey Haire:]

And regarding the Astoria loan sales, I mean, is there amount in mind that you’re comfortable sharing?

[Luis Massiani:]

$1.5 billion to $2 billion focused mostly on the fixed rate components of the book that we acquired from Astoria.

[Casey Haire:]

And that would be resi mortgage, right, Luis?

[Luis Massiani:]

Yes,

[Casey Haire:]

Primarily.

[Luis Massiani:]

Yes, primarily. It's all resi in its…

[Jack Kopnisky:]

It's all residential mortgage initially we are exploring other opportunities for some of the commercial real estate components as well, but the residential mortgage is the lower hanging fruit that we can that we can address first.

[Casey Haire:]

And just last one for me. On the expenses, 415 you're at I think I believe a 420 run rate today. What -- there's a lot of financial centers consolidation on the comp, is that a conservative number or is there going to be -- you’re going to have to pay for growth on top of that little backfill to say from the branch cuts?

[Luis Massiani:]

That's an all inclusive number that factors in remaining branch cuts as well as reinvestment into the business. We're going to continue hiring folks. So from that perspective, our strategy has not changed. We think that there continues to be good talent to hire out there, both on front lines on the sales side as well as in more internal places. So, we're going to continue investing in the business. And that factors in everything that we're doing from personal perspective, investing in risk management, investing in technology and so forth, so that that's an all-in number.

[Casey Haire:]

I'm sorry, just one more just the loan growth. What is the base for -- there's no update for the 2018 guide and we're at now 3% year-to-date. So, what is the base for 2018 that loans grow 6% to 8%?

[Luis Massiani:]

So, the fourth quarter is going to be flat to slightly note to up single digit relative to the third quarter. You're going to see some pressure on the warehouse lending balances, which not surprisingly given the interest in the increase in rates and slowdown or refinance. Balances on the warehouse lending side, we anticipate, are going to be lower at period end fourth quarter than what they were in the third quarter. And we continue to see that. The wildcard is what happens with the progression of the residential mortgage book over the course of the next two months. We started to see a little bit of a slowdown in October because of the increase in rate, but the portfolio continues to cash flow at a pretty rapid clip. So, it should be flat to slightly up relative to third quarter.

[Operator:]

And moving on, we'll go to Austin Nicholas with Stephens.

[Austin Nicholas:]

Maybe just taking a look at the capital management slide you put out a couple months ago, with the current strategy at that time of growing loans in 8% to 10% range, not really tapping the buyback. It's fair to say that we've moved down to the alternative one where loan growth is in that 5% range and buyback of 7 million to 8 million shares or we -- are we somewhere in between that kind of initial strategy and that alternative one?

[Luis Massiani:]

I think we've moved to the middle tier, and our connotation would be kind of a 6% to 8% range in total loan growth. But it's the middle tier of still being able to achieve the 10% EPS growth by doing that level of loan growth and share repurchases. We are mixing this a little bit more by taking a shot in this as with the sale of mortgage portfolio or part of mortgage portfolio.

[Austin Nicholas:]

And then I guess just on maybe on the buyback a little more detail there on how we should think about how active you're likely to be in repurchasing shares?

[Luis Massiani:]

So, we have 10 million -- so, we have an authorization for 10 million shares. We're going to do this progressively, taking advantage and being pragmatic of when we when -- what the competing investment alternative is relative to buyback our own shares. We're going to do that progressively over the course of the year. But, we've provided in the guidance slide, you see what our target TCE ratio is, and you can pretty clearly see what you're on the map. You can see what the excess capital component is and we anticipate that over a 12 month window, there would be at least $350 million to $400 million of excess capital that we will continue to generate that through the expense that we were not successful in identifying an alternative investment opportunity. We will be pragmatic about the world. And if it makes sense from an economic perspective and an intrinsic value perspective on our shares, we will absolutely buyback and fully execute that 10 million, if that is, that's the best and most efficient use of our capital.

[Austin Nicholas:]

And then maybe just on a portfolio purchase expectations or optimism. Can you maybe give us a feel on how that's maybe changed since the end of the last quarter in terms of the sizing or the pricing on this deal that you're seeing come to market?

[Jack Kopnisky:]

I will tell you we have never seen as many deals as there are today, so whether, there are a variety of deals out there, there are more deals that have would appear to have appropriate pricing and appropriate structures than we have seen the prior quarter and frankly at the beginning of the year. Again, these deals all happened as we discussed with Astoria, we were very disciplined Astoria and all the prior banks, and all the prior commercial finance portfolio purchases we made. We have been pretty disciplined about looking to this. And sometime when you hang around the hoop, there is good opportunities too, you may turn things down once and then come back again. But there is a significant amount of opportunities that we are running out to determine to make sure if they fit our structure in. There are some other bidders too in some of these portfolios, but we think we're an advantageous bidder for a variety of different reasons in the way we won the Company and frankly our demonstrated results. So, there is a meaningful and significant opportunities over the next several quarters to find portfolios or deals that makes sense.

[Austin Nicholas:]

And then maybe just one last one, I appreciate the full year guidance for the NIM being impact. But could you maybe give us some clarity on the fourth quarter specifically just given maybe some of your more variable rate loan beginning to re-price upward with LIBOR moving a little bit more in the fourth and the third?

[Luis Massiani:]

So, we think that the NIM should stay at about 315. It will stay at about 315 or 320 for the fourth quarter. We are being cautiously optimistic from the perspective of we have not seen the same level of re-pricing in the early parts of this quarter, on the higher balance commercial and municipal deposit accounts. And so, we kind of rewind back to the second and third -- or the early part of the third quarter, we did see a substantial chunk of greater re-pricing activity. So far this quarter had been better than the third quarter, so the deposit beta we anticipate should be lower than -- on a linked quarter basis between the fourth and the third quarter than it was in the third and the second quarter. But again, we are being cautiously optimistic on that front. The re-pricing of the loan on the floating rate side will have some impact, which you have to remember that these asset sensitivity profiles what we are going to end up being is not where it is today because we only have about $4 billion, $4.5 billion with 25% of the book that is really tied to that short bend of the curve. We have to transition out of the residential mortgages and the commercial real estate that we acquired, which is still about 8.5 billion almost 9 billion of loans to get to the place where the short end of the curve moving up, will be meaningfully more impactful for our NIM. So from that perspective, we are going to -- we are anticipating we are going to be relatively flat. We should see to the extent that there is a discontinued progression on the deposit pricing side, we know we should do a little bit better than the 316 that we had this quarter on a core basis.

[Operator:]

And moving on, we will go to Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

A couple of more questions about the residential mortgage sale. The 1.5 billion, 2 billion, is there a specific timing associated with that? Is that something that would definitely happen in the fourth quarter? Is it contingent upon finding an acquisition on the commercial finance side to fill that balance sheet cap that will be left?

[Luis Massiani:]

No, right now, we are targeting doing this in the fourth quarter and it could be agnostic to finding a -- this is a steppingstone that we have to accomplish anyway because the opportunities that we're seeing on the commercial finance side are big enough that as we have talked about in the past. We have to have some balance sheet management to be able to do a deal and maintain the liquidity and funding profile that we want. So, we are, this is the -- we’re going to do this anyway, so our plan is to do it sooner rather than later, and we are anticipating doing it in the fourth quarter.

[Jack Kopnisky:]

And remember too, this takes some interest rate risk off the table. If rates go up, this potentially becomes less positive going forward, creates all times of the advantages by doing this now rather than waiting. I am sorry Alex, I cut you off.

[Alex Twerdahl:]

That’s okay. Now, I totally agree that it has to be done, but at least in the near term I got to imagine that shedding to $1.5 billion to $2 billion of mortgage loans is going to lead a fairly substantial earnings hole. So maybe, Luis, you can kind of just talk us through the earnings that we've lost from doing this and including there’s kind of the purchase accounting adjustments that we should including in our model going forward that would be associated with these loans?

[Luis Massiani:]

Yes, so the purchase accounting adjustments so, assuming a $1.5 billion for the fix rate, the purchase accounting adjustment will decrease by about half relative to guidance that we provided before. So, the $75 million of accretion income that we have provided for 2018, would be -- sorry, half of the residential mortgage would decrease -- sorry, it's not the entirely of the $75 million and the residential mortgage represents about 50% of the $75 million. So, it's 50% of the 50%. So, the $75 million of 2015 would result in, we lose moved approximately $20 million to $25 million, about $20 million of that on the accretion income on the residential mortgage loans that we acquired. Now, from a core NIM perspective at a $1.5 billion, you would see an increase of about 12 to 15 basis points on a core NIM basis. And that’s based on to-date wholesale borrowing cost to funds, if you kind of extrapolate that out, this is led to the concept that Jack was talking about of just releasing pressure is the fact that, we’ve stayed pretty short on the curve from wholesale borrowings perspective. So taking out a $1.5 billion to $2 billion of wholesale borrowings which is about half of the wholesale borrowings that we have today, will result in a substantially greater core NIM. So at the end of the day this had to be -- we’re doing this because we anticipate we’re going to be able to be replaced that on a relatively short basis with other assets. And those assets are likely going to be on the acquisitions that we’re talking about. So, once you have those acquisitions in place, there would be no drop-off in a perspective of GAAP or core NIM, if anything there should be, the strategy that we’re employing always going to be accretive to both of those numbers.

[Jack Kopnisky:]

And once we transact this thing, I think in fairness, you all are trying to build models on this thing. We’re negotiating kind of the sales this thing as we go forward. Once we complete this thing, we’ll work with you on your models to be more explicit around what the NIM effect is and what the earnings effect is. But this is our view of accelerating the transition of the balance sheet at exactly the appropriate time, so that we free up capital and free up liquidity to be able to do the things we want to do in the future appropriately.

[Operator:]

And next we’ll go to Dave Bishop with SIG Partners.

[Dave Bishop:]

Sticking with that topic, any sense what we can think of in terms of potential gain from a $1.5 billion divestiture, any sort of scale or sense that we can think of in terms of pointing at into the earnings stream?

[Luis Massiani:]

There won’t be a significant gain on the sale, no. So, there is a good mark and as we talked about, we will get out of the securing value or better, but this isn't going to be a significant driver of capital. Capital will be generated more as we continue to work out of the real estate that we are going to start seeing some additional sales of locations and so forth sitting in the fourth quarter and then into the first quarter. But the downside and reducing of this is more driven, it's not driven by generating capital from a gains perspective. This is more driven by just easing off on funding pressures and kind of improving the liquidity profile of the balance sheet.

[Dave Bishop:]

And you said in terms of the financial center outlook over the next 18 months, how many are you thinking of exiting?

[Jack Kopnisky:]

22, additional financial centers, so we had originally talked about doing pretty much the total 30. We're now up to 37 in total from the beginning of Astoria.

[Luis Massiani:]

We've done 15 to date. We're going to do an additional 22.

[Dave Bishop:]

I'm sorry, there is 22, got it. In terms of the expense guidance for next year, does that contemplate additional lending teams? Are you still out there being opportunistic in listing out additional lending teams as you come across even opportunist perspective?

[Jack Kopnisky:]

No, we're still being very optimistic. I tell you what we've found there. We're actually lifting our teams and putting them into existing teams. In some cases, we found that there's an effectiveness on economies of scale by a certain size of the teams as we go forward, but we're still finding lots of opportunities out there that folks that can bring the right client contacts and right the expertise to the Company. That's one of the things that we've constantly done in this company. And we must not be clear enough with everybody on this, but we've tried to continue to reinvent the Company. So, as we change the size and the scope of the Company, we made constant adjustments to both, the balance sheet, the portfolios and also the people as time gone. You think that's what high performing companies, do they, they adjust as the market dictates and as the opportunities present themselves. And we worked hard to be able to create a company that is flexible and has all turned those moving forward regardless of the kind of economic and rates situation.

[Operator:]

And moving on, we'll go to Joseph Fenech with Hovde Group.

[Joseph Fenech:]

So my first question was on that near-term earnings hole. Just building on that, appreciate the near-term will be valuable guys with these actions, but looking at longer term. Is there anything you could give us that we can kind of hang our hat on whether that's blessing, a longer term EPS, consensus forecast or a profitability forecast or just something we can use as a measuring stick in a target for how you expect to play this -- how you expect this play out longer term that all said and done? Otherwise, it would seem to me as though the problem with a market unwillingness to give you a multiple on that projected EPS has been the issue for the stock that's going to process or is that just all too much to expect at this point until you execute on the divestiture?

[Luis Massiani:]

So from blessing an EPS forecast, I think that would probably be a little bit too much. But, I think that we -- this is what we've been talking about all along, which is we continue to see the opportunity to through a variety of different avenues via through growth or through capital management and through the various actions that we're talking about being able to generate the 1.6% plus ROE, 15% plus ROEs and 10% EPS growth. And so, that's our focus is and we’re going to continue focusing on that. And I’ll leave up to you all, Joe, and you guys are smarter than we are. You'll figure out how you value that. I think that you see our run rate today. We were $0.51 to $0.52 and you factor in the various mechanism and avenues that we have to be to generate growth that gives you a good guide to where we see things are going to shape out in 2019 for the full year. We’re very confident that being able to deliver that EPS growth. How we’re going to get there? It's going to take -- it’s going to take some -- it’s not going to be as straight line from point A to point B because we are in the middle of executing a balance sheet transition and full integration of a very deal that we did last year. So, we’re confident in generating the results. How we’re going to get there is there is going to be a little bit more flexibility.

[Joseph Fenech:]

Then on the expense side guys, you consistency talked about and you delivered on this, the opportunities that we see, the cost save expectation out of Astoria, you said the integration behind you now. Is there still a cushion there in that forward guidance? Will you might have the opportunity to exceed it? Or is that opportunity mostly past now?

[Jack Kopnisky:]

I am going to tell you, I think we are as demonstrated by the efficiency ratio, I think we’re really good at managing kind of the operating leverage in the Company. So, there is always opportunity to make things more efficient and effective. And frankly, we have a group even internally transformation management group that works with each in lines of business to increase efficiency effectiveness first and also efficiency. So effectiveness in driving revenue and productivity and efficiency in terms of allocating the right cost to different areas. So, one way to answer your question. There always opportunity to improve the efficiency and effectiveness of the Company. Secondly back to the question of what we saw on the guidance. That’s the challenge with all the market. What we have try to do is, we try to stay, look this is a company that we have historically always delivered and we are going to continue to deliver and what we care about is that the returns of the Company rather than the size of the Company where we’re at. So, we’re clear about a 10% EPS growth, we’re targeting about 150 or above and return on assets and 18 and above on equity and the efficiency ratio is less than 40%. Those numbers are high performing numbers that are metrics. We’re less concerned by getting to $40 billion or $50 billion or whatever. We’re more concerned about the returns. And obviously, the market isn’t seen in that way. So, the share buybacks and the balance sheet manage that we’re taking in a much more aggressive stands to address that, but in the end that’s what we care about. We care about producing the Company that demonstrates consistently those types of returns.

[Joseph Fenech:]

I guess just trying to figure out ballpark thought, Jack, back to my question was. Is this a one quarter kind of sort of I won't call it a hiccup, but transition in the earnings gap? Is it a multi quarter situation? Or is it a transition strictly from an earnings standpoint? Or does it just kind of execute and you’re kind of back on the trajectory that you just talked about?

[Jack Kopnisky:]

I’m not sure how to answer that question because the variables of being able to put assets on the books over a period of time. So what we’ve said is, we expect to put meaningful assets on the books over the next several quarters to be able to offset the exit of this portfolio. But in the end, we think this is the most efficient and effective way to create long-term value out of there.

[Joseph Fenech:]

And assuming since these are portfolio, potentially portfolio acquisitions of stock multiple as an issue for you here for any of the stock that you’re looking at?

[Luis Massiani:]

That’s correct.

[Jack Kopnisky:]

That’s right.

[Joseph Fenech:]

And then last one for me. Jack, obviously, some concern in the market about national lending platforms in light of the Ozark's disclosure even though their issue seems to be very specific to them from a decade or so ago. You did talk about seeing credit structure is already acceptable to you, assuming others are making those loans. How close do you think we are too seeing, but I’ll call it the ramifications of bad decision making? Do you think the problems people are likely to see are still a ways out given sort of the strength of the economy?

[Luis Massiani:]

Yes, it's interesting. This happens every time. I guess I'm getting old enough to know that have gone through 5 or 6 cycles where rates go up when they've been low for a period of time. And the exact same thing has happened over that period of time that's happening now. Banks start to stretch on credit structures. They start to stretch on are they taking less yield and then all of a sudden at some point in the future, folks will back up and say, oh my gosh, these loans aren't paying. I'll you one example, we have I may get these numbers wrong by a little bit. But our ABL group is actually seen -- saw 350 potential opportunities year to date. That's an incredible amount of deal flow coming in. In the end, they're doing about 50% or 75% of what they did before because the credit dynamics of what is happening in ABL has gone off track. The yields aren't where they need to be in some cases and the credit structures aren't where they need to be. So, there's a lot of people trying to put money to work and they’re stretching the credit parameters. So, there will be a crunch at some point in time. Look at the capital markets, a lot of the capital markets are providing lots more depth. There's more leverage in the market and they're usually in a kind of canaries in the cave before things start to go right from a credit standpoint. So I don't know the answer exactly, but there will be a credit crunch at some point in time. I do not think it will be anywhere close as that as what had been in many of the past times impart because the regulatory environment has been structured such that it's prevented a lot of the issues in the banking sector. I can't say the same thing in the non-banking sector. But in the banking sector, I think the regulators have done a good job of limiting some of the craziness that happened before in real estate, commercial real estate and its limited some of the banks and companies to go into leverage lending in a more highly leveraged manner. So, I think the regulatory environment is, will help prevent that, but I think there will be some credit challenges in the future in the industry.

[Operator:]

Moving on, we'll go to Collyn Gilbert with KBW.

[Collyn Gilbert:]

So I just want to make sure I understand here. So, the loan guidance that you guys put in the slide deck. Does that include the sale of this resi book that you're talking about?

[Luis Massiani:]

It does not. So, it does the 8% to 10%, and well, the 8% to 10% is -- doesn't that to begin with. The 6% to 8% does not include that.

[Collyn Gilbert:]

And then, how about portfolio acquisitions I think because I thought in the past, your loan targets did assume perhaps an acquisition. Does it is still?

[Luis Massiani:]

The portfolio acquisitions would take to the higher end of the range or exceed it.

[Collyn Gilbert:]

And then just broadly, I know there's a lot of moving parts here for you guys selling this portfolio. But are you -- is kind of the funding source that you're anticipating paying down with this sale? Is it borrowings? Or do you think you can unload some of the higher-cost muni deposits? And just trying to think about the blend -- okay, so the blended yield on the $1.5 billion, did you say what that was, Luis?

[Luis Massiani:]

That's about 350.

[Collyn Gilbert:]

And then, so in terms of maybe what the associated borrowings are through munis in borrowings, is that like a 250 funding source or?

[Luis Massiani:]

Today, it's slightly higher than that is about 265. Going forward, that is a component of the deposit book also borrowings have a beta of one over some short period of time. The municipal components that we're talking about are the ones that have the highest beta of our portfolio. And so, today, it's about a 50 to 75 basis point difference between the spread on those loans and the cost of the of the weighted average cost of the deposit of the funding that we're talking about. Going forward that is going to be a, if that spread will narrow.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

But today it's about 50 to 65 basis point difference.

[Collyn Gilbert:]

And then I just want to make sure I understand your comment from the accretions. So you guys are targeting total accretion income in 2019 of roughly $75 million, and then associated with the sale leaving that will be $20 million to $25 million that will go with this portfolio?

[Luis Massiani:]

It will be [indiscernible] not 25. The 25 is too much, it's about 20.

[Collyn Gilbert:]

20, got it. Okay. So, just on the portfolio acquisitions, is there a concern at all? Or have you guys thought about, I know you've been very patient in pursuing these. And I'm presuming that means because pricing is just going to keep getting better and better, or you think pricing is getting better and better on these portfolios. But do you think the window there, how do you see that window? I guess, what I'm asking that is, clearly we're sitting in a banking environment where, loan generation and asset growth is just the outlook is accelerated quite meaningfully. So I would imagine, thanks for going to start to look to need to supplement assets. So, do you think the competitive landscape changes for pricing on these assets? And if so, do you feel like you need to execute this more quickly than waiting further into '19?

[Luis Massiani:]

Two things there. First and foremost, I think that the best deals are done in the worst of times. And from that perspective, the tougher the environment gets and the more stretched some of these non-bank lenders and others get from a funding perspective, the better off we're going to be for pricing and from a timing of being able to do these deals. We're very confident that as things -- as conditions continued to get a little bit further stretched, that's when good, really good opportunity show up. And secondly, not every bank out there does the businesses that were in. A lot of, a lot of other folks are involved in these, but these are -- we were very competent with the infrastructure and platform that we've created and the ability of providing a plug and play type of opportunity for the management team that would join us or for the person who's know we are very good at managing the assets, that we are looking at here from an acquisition perspective and not everybody else can say that. And so from that, this isn't a broad universe of buyers. You look at equipment finance and those types of things, those are more commoditized type of things that there is, there would be more competition for; and the other types of businesses that we’re looking at, it’s not a broad universe of bank buyers that we would be looking at least.

[Collyn Gilbert:]

And then just trying to understand, Luis, you reconciled the C&I, the drop in the C&I loans quarter-to-quarter. But ironically, I feel like while all this obvious discussion could be mute when you look at the yield on the resi book in this quarter was 528. I know obviously accretions in there, but I mean it’s one of your highest yielding assets. So, what’s going on there? And then the potential sale, I presume of this the lower yielding tranche of that. Does that, do we see that yield actually increase than or just kind of walk me through how, what’s going on with that?

[Luis Massiani:]

So, there is, so you’ll see an increase a lot. So, this is what we’re focusing on that components of the book is, because when you look at the $4 billion rough numbers, $4 billion a residential mortgage assets that came to us from Astoria. The total $4.5 billion, the incremental $500 million or so of assets are driven by the legacy Provident business in Rockland and Orange County. And those are mortgages that we’re going to keep because those are mortgages that are tied to deposit customers that have been most for a very long period of time back to the Provident days. So, we look at the $4 billion of Astoria mortgages. $1.5 billion of those are 15 year and 30 year home loans that are fix rate and those are the ones that have that 3.5% weighted average yield. And the remaining of the loans are either floating rate today already or a 5/1, 7/1 and 10/1 ARM that are going to start coming in the reset periods relatively quickly. So one of the few things is going to happen with the reset rates on the, on that I guess $2.5 billion of non fix rate loans. And those loans are going to stay with us and they’re going to reset in which case, we're going to get a bump up in yields which will be perfectly fine with us. Or they’re going to pay off at par where we’re going to get our money back relative to the market we have today from purchase accounting perspective. So, the strategy behind the eliminating the fix rate, because those are the more is that going to be with us for a very, very long period of time. And we’ve started to see a slowdown specifically in the 30 year fix rate portion of that book, because 30 year fix loans yes, when rates go up those are the ones that typically slowdown the most and we started to see that happen there. And so, the yield on the residential mortgage books, not that we don’t like it, that 528 does include the accretion income. There is the components of the residential mortgage book that have we have retain, we will continue to either enjoy the benefits of the reprising asset or what sense to get the money back at par which we can then redeploy into something else. So, there is flexibility in the resi, we don’t want to get rid of the entirety of it because there is components of it that we perfectly fine owing for a period of time.

[Collyn Gilbert:]

So, then how should we think about the potential run off in the book once you complete the sale?

[Luis Massiani:]

The run off would stay at roughly the same rate where we are going today because the two components that we’d be selling are the components that are not running off meaningfully. So, in this quarter we had $250 million of run-off. If you tell me, Collyn, where rates are going to be for new mortgage originations in the next three months, I can tell you with a better certainty if these assets prepay or not.

[Collyn Gilbert:]

I am not doing that.

[Luis Massiani:]

It’s the function of the alternative, financing alternatives that the individual mortgage borrower won’t have, right. So, somebody is coming into their adjustable rate period and they can adjust for another 12 months at 4.5% or 5%. In some cases, the reset rates are going to be much higher than that. They can essentially refinance into the 5/1 or 7/1 ARM at a lower rate than that. Then you know what that asset is going to repay over some relatively quickly period of time because it’s a very efficient market. So, the way that we are thinking about it today is, the components of the books that are cash going which is about $200 million to $250 million per quarter are the ones that we would retain because that is from a yield perspective on a core basis as well as a prepayment activity and a cash flow activity perspective, it’s more attractive components of the book.

[Collyn Gilbert:]

And then just, you said it, Luis, but like the target, the TCE target of 8.3%. I mean that's sending a pretty clear message, right, because obviously, and this is going to be even more, I mean, you're going to be shrinking the balance sheet, I presume maybe even more, which is going to generate even more capital through this acquisition or sorry, the sale. So that's obviously a lot of capital that you can have to put to work. I hear what you're saying on the buyback, you're going to be sort of progressive or whatever the word was that you used. Just curious though why, what's the process to increase that authorization? And why have you not done it yet?

[Luis Massiani:]

I think I said pragmatic, not progressing.

[Collyn Gilbert:]

Well, I would say at $17.39, it's pretty pragmatic to be buying it back right now.

[Luis Massiani:]

Exact.

[Collyn Gilbert:]

Anyway. So, I said that million times to you. I just want to say it again, but go ahead. So, what's the authorization process?

[Luis Massiani:]

The authorization process is we don’t need to have secondary approvals or anything like that. This is essentially our management and our board of directors approving an increased share repurchase authority and similar to how we announced our $10 million share buyback authority in February, sorry that we did it in February and we made it public in connection with the first quarter earnings. This would be to say we wanted to increase in 10 million. We could do that very quickly. This is not a…

[Collyn Gilbert:]

You don't have to wait for any kind of board meeting or any you could do that it off board cycle.

[Luis Massiani:]

Yes.

[Collyn Gilbert:]

And I'm just curious, how come you have not done that yet?

[Luis Massiani:]

Because we're going to use the $10 million and then we'll use, again we think that there's going to be good opportunities to continue to invest in other assets going forward. So, to the extent that we have at the end that we determined that the best use of capitalists take more than 10 million shares and then we can do that from one day to the next. So it's not, we haven't done it. There are no other reason than that we're going to use a $10 million first and then we’re going to reassess with the investments the alternatives are and at that point did it makes sense to continue buying back shares, we will.

[Jack Kopnisky:]

Bluntly, call in, it is better for us to use capital to buy things and grow things than it is to share repurchases. Maybe we're bullheaded on this thing, but because we've demonstrated this, the returns that we've created out of those buying things or building things have been better than share repurchases. It's loudly clear that everybody in the broader, every investor out there, once has to look at share repurchases and put this capital to work rather than holding it all in a tank until such time we put it to work. So we're now, this is given where the stock is kind of flown to floating down to this is the right thing to do now and we fully expect to find things that we can put more capital to work for in the future that gives us higher returns. But in the interim, we're going to put this capital to work.

[Collyn Gilbert:]

Okay, and then I think I probably know the answer to this given what you just said, Jack, but I'm just going to ask it anyway. I mean again, you've got a lot of capital that you're building here. Any reconsideration on how you're thinking about the dividend?

[Jack Kopnisky:]

We actually, we just had a board meeting yesterday and talks about the dividend and it's an ongoing conversation with the dividend. Again, we positioned ourselves as a growth stock and somebody that keeps on growing at 10% or more outside in the industry. Our view is we're not getting credit for that. So most investors are looking at bank stocks as value plays and, we're going in kind of sequentially here's the opportunities to buy things or to grow things. Here's the opportunity to do share repurchases and here's the opportunity to improve the dividends. So, all those things are on the table.

[Operator:]

[Operator Instructions] Moving on, we'll go to Matthew Breese with Piper Jaffray.

[Matthew Breese:]

I'm sorry to harp on NIM once more. I just want to make sure I had my numbers accurate. So, I think you said, with the divestiture it would he would be 12 to 15 basis points of accretive to the core NIM. Is that accurate?

[Luis Massiani:]

That is correct.

[Matthew Breese:]

And so, is that included in the 2019 guide? Or should we assume that once completed, that 2019 guide could also be 12 to 15 basis points higher?

[Luis Massiani:]

Is not included, it would be higher.

[Matthew Breese:]

And then, as we think about post the divestiture, how should we think about your ability and environment to defend the NIM? I mean once done, can we start to see some margin expansion on a go-forward basis as the Fed hikes? Is that the situation you'll be in?

[Luis Massiani:]

I think for every dollar of fixed rate assets that we take off the books that we replaced with something else, yes, we start to get to a position where we're going to be able to defend that NIM in a substantially better fashion. That's, that has two components to it, if the transitioning of the balance sheet and then the being more like the right word would be selective regarding the higher balance commercial and municipal tied to deposits that we would take, where we would focus on exclusively places where we have full relationships with operating accounts and access to liquidity accounts and cash management product and so forth. So both components to that would, both side of both asset and net deposit would hold so far and funding with allow us to protect the NIM a little bit better.

[Jack Kopnisky:]

Yes, you think about this way. This creates better asset sensitivity. So we've been working our way back to the level that we were previous to Astoria acquisition of getting to being kind of 60% of the loans being variable rate and 40% fixed. We've been just the opposite of that to this point. So by this action, it gets us a little closer to improve data sensitivity that ends up being able to slow off with the increases in rates.

[Matthew Breese:]

And I think you mentioned a second chapter this could be a commercial real estate divestiture. What could look at that look like and what's the next leg of funding that you would look to, perhaps, run off the balance sheet?

[Luis Massiani:]

So, too early to tell you to give you specifics on it, Matt, but we have another $1.5 billion or so long-term fixed rate commercial real estate. It's been really multi-family loans that would be the next leg that we would book to do something with. What we would do with proceed for something like that news, we have $4 billion of wholesale barring that are all relatively short-term. There's 300 in -- about $300 million of senior notes, but we still have outstanding that have a yield or cost of 3.5% that are also a component of funding that isn't really giving us anything other than high cost of funds. So we can take care of that as well. So, there's plenty of things that we can still chip off from a borrowings perspective and unwinding some higher cost municipal that that we couldn't -- that we wouldn't sit around with the excess liquidity for a long period of time.

[Matthew Breese:]

And just thinking about the portfolio deal process, following the Advantage deal, commentary has been very positive about the landscape for portfolio deals very, there's been a lot of confidence you can get one done prior to the end of the year. So, one, is there a likelihood that we could see something announced by the end of the year would be the size of that potentially? And then two, could you help me just better understand the process. How do you bid on these things? How do they come back to you? And eventually you get to win. Help us better understand how ultimately be seeing end up things in your hands?

[Jack Kopnisky:]

So, the answer to the question is we’re looking to things. So, we see things all the time and most of what we look at and evaluate we pass on because either not the right price, they’re not right yields, they’re not the right credits structure, is not the right strategy. Anyone of those 4 to 5 things that we look at, but once we do generally have been the most likely scenarios, these are mostly coming out of the private equity firms that, firms that have purchase businesses or portfolios and their cost to funds keep ongoing up and their ability to manage the portfolio purchase may or may not luck. So, a lot of these were coming out of the private equity funds. Some are coming out of banks that these end up being non strategic assets. So, we look at these things, we determine whether if they do fit, we then in some cases their exclusive, in most cases they are bids, when they are bids, we look at the opportunity -- we evaluate the portfolio, look at trying to get those second round and then getting the due diligence and going from there. So, the answer is, the likelihood is over this quarter and next quarter that we have the opportunity to purchase anywhere from a $0.5 billion to $2 billion worth of assets. That’s what we are targeting as an objective to make happen. We are again this is the hardest things for U.S. analysts and investors. We can’t be specific about the exact timing because frankly we’re not going to stretch to things that don’t make sense just to put the numbers on the board. I said that to Luis before we came on the call. We could have taken the pain of this quarter away on the loan growth side just by doing out of buying $300 million or $400 million or $500 million worth of assets at yields that would look okay today, but we’d be terrible in the future. We’re not going to do that. We’re not going to climb the balance sheet up on a short-term basis to be able to look it just for the quarter we’ve rather stick to the long-term. So, long way to answer, sorry for the long answer on this thing, but that’s the process we’re looking -- we look at when we look at these deals. We’re trying to be very smart and like I said do this over the terms of this thing, and not frankly take on assets that we’ll regret in the future that either don’t said or look at short-term, but don’t -- aren’t accretive for the long-term in terms of returns and quality.

[Matthew Breese:]

How many active bids you have out there or active NDA do you have out there on portfolios?

[Jack Kopnisky:]

Probably a half dozen.

[Matthew Breese:]

On that $500 million to $2 billion range?

[Jack Kopnisky:]

Yes, stretch to $400 million up to $2 billion range, somewhere around there, yes.

[Matthew Breese:]

And then two quick ones for me. Just curious on the share repurchases up to what levels do you find shares attracted to repurchase? And then the second one is just a better sense of where that provision can go over the next year?

[Jack Kopnisky:]

The provision and what way for me you to provision for what the progression or provision for loan losses, it is?

[Matthew Breese:]

Yes, the provision was a bit below what I was thinking this quarter. So just want to get a sense of that's a good run rate.

[Luis Massiani:]

Yes, we have been guiding the $10 million to $12 million and that was with some asset growth attached to it. So the reason for the provision being lower than what it's been in prior quarters is driven by the fact that there wasn't from an average balance perspective and amended period balance perspective, there wasn't a whole lot of loan growth. So, we didn't have to provide for too much on the growth side.

[Jack Kopnisky:]

And loan charge-offs.

[Luis Massiani:]

And loan charge-offs, yes, charge-off for $4.5 million relative to 7.5, last couple of quarters 7.5 to 8 million. So, that’s the reason for that provision. Our guidance from a $10 million to $12 million number going forward is, continues to be good. And I think that's a good target for you to continue to use. On the share buy backs. Again, it depends on the, it depends on the investment alternatives. We're not going to sit on the capital to expect that the stock continues to trade at these levels and below, we determined its intrinsic value, we’ll continue to execute repurchases. If that's what we determined is the best and most efficient use of our capital. So, if you were to tell me today that the share price is back at 24, 25 bucks then, yes, we're probably not going to buy it then. At 17 and change where it is this morning, 17.50 or so, if those types of levels remain, you can expect us to know to be pretty pragmatic about the world. And you know, buying shares in a way that we think makes sense is that the best use of our capital, had to sound like a broken record, but it really is at the end of the day, the -- it's how we think about it. It's the universal. We get paid to allocate capital and resources and if that's the best and most efficient use of our capital, we will use it that way.

[Matthew Breese:]

And how quickly can you expect to execute on that buy back?

[Luis Massiani:]

We’ll execute tomorrow. So, we’re ready to go.

[Operator:]

And I'll turn it back to Mr. Kopnisky for any additional or closing comments.

[Jack Kopnisky:]

Thanks for your time and thanks for your terrific questions. And again, I’ll emphasize the actions we're taking on this. We're being selective and we're trying to be smart. And as Luis said, good patrons of the capital we have. We are taking action on the mortgage portfolio and we're going to look at doing share buybacks. So, we appreciate it and before to continue good things from the Company going forward. Thanks.

[Operator:]

And that does conclude today’s conference.