Sterling Bancorp
Q4 2018 Earnings Call Transcript

Published: 24 Jan 2019

[Operator:]

Good day everyone. Thank you for standing by. Welcome to the Sterling Bancorp's fourth quarter 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 of Sterling Bancorp. Please go ahead, sir.

[Jack Kopnisky:]

Good morning everyone and thanks for joining us to present our results for the fourth quarter and year-end 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 and annual results. During this call, we will highlight the strong fourth quarter and 2018 results for the company, review the previously announced sale of residential fixed rate mortgages, describe our purchase of $504 million in asset-based lending and equipment finance loans from Woodforest National Bank, update you on our common share repurchase progress and finally, highlight our anticipated outlook for 2019. First, on an operating basis, we finished 2018 in a strong position. Adjusted net income available to common stockholders for the quarter was $116.5 million and for the year was $450 million, representing increases over prior periods of 34% and 103%, respectively. Adjusted earnings per share for the fourth quarter was $0.52 and for the year $2, representing increases of 33% and 43% over same periods last year. Operating metrics continued to be at or above our targets for the fourth quarter. Adjusted return on average assets was 158 basis points. Adjusted return on average tangible common equity was 18.17%. And our efficiency ratio was 38%. Positive operating leverage continued to increase, with adjusted total revenues increasing by $9.1 million and adjusted total expenses decreasing by $5.5 million, quarter-over-quarter. In 2018, we continued to evolve the balance sheet to maximize returns and control risk. For the fourth quarter, commercial loan balances increased at an annualized rate of approximately 10.4%. Commercial loan balances for the year increased 11%. We improved our mix in total loans with targeted double-digit increases in traditional C&I factoring equipment finance, public sector and CRE loans. And reduced balances in residential mortgages, broker originated multifamily loans and acquisition development and construction lending. Commercial loan yields increased 11 basis points and overall loan yields increased by six basis points. During the quarter, we moved $1.6 billion of fixed rate residential loans into loans held for sale. Average deposits for the quarter grew by $242 million. Overall average deposit balances grew 4.2% on an annual basis with targeted business demand deposits growing 12%. We continue to have a favorable mix of deposits with 40% demand deposits, 11% savings, 37% MMDA and 12% certificates of deposits at a cost of 77 basis points. The deposit beta up over the past year has been 27%. With the pending sale of residential mortgages, the loan to deposit ratio is 90.6%. From a balance sheet perspective, you can expect us to continue to transition lower yielding residential mortgages and broker originated multifamily loans and replacing them with better priced relationship oriented C&I and CRE loans. The loans will be funded by core deposits that enable us to maintain a loan to deposit ratio of less than 95%. From an income perspective, the core net interest margin of 315 basis points and overall margin of 353 basis points was stable relative to last quarter. The change in mix of balance sheet will improve core net interest margins in the future. Fee income of $27.3 million for the quarter improved by 13% over the linked quarter driven by strong swap, factoring loan fees and payroll financed fee income. Expenses declined from the previous quarter by $2 million as we continue to benefit from the integration of Astoria. We expect 2019 expenses to be lower than overall 2018 expenses. Given the concern in the banking market overall regarding the credit cycle, we included an additional slide in the deck regarding our loan portfolio credit quality. A special note on page eight is the overall loan to value ratios on our commercial real estate portfolio of 47% and debt service coverage ratios of 1.64 times. Additionally, in our C&I portfolio, we provide secured facilities with traditionally proven advance rates against qualified receivables, inventory and other assets. We feel very comfortable with the level of advance rates and collateral levels in our various portfolios. We continue to generate and maintain strong levels of capital. We generate approximately $100 million of excess capital each quarter and maintain tangible common equity to tangible assets in excess of 8.25%. Now let's discuss a series of near-term tactics we have announced to better position our balance sheet and improve returns. In December, we announced the sale of approximately $1.6 billion of fixed rate residential mortgage loans acquired in the Astoria merger. The potential benefits of the sale allow us to exit low yielding non-strategic loans and notably replace these loans with relationship oriented higher yielding business. We can reduce interest rate risk, improve our core net interest margin reduce funding pressure on deposit rates and increase tangible capital ratios as a result of those actions. We expect the sale to close in the first quarter of 2019. Yesterday, we announced the purchase of a $504 million, asset-based lending and equipment finance loan portfolio from Woodforest National Bank. We have reviewed many portfolio purchases over the past year and are most comfortable in the structure, pricing and quality of this portfolio. In due diligence, we essentially underwrote each of the more than 100 loans to be acquired and found the loans to match our existing ABL and equipment finance portfolio structures. The average yield of the portfolio is 5.5%. The purchase, which also includes the retention of several commercial bankers and business development officers, is expected to close in the first quarter of 2019 and will be a cash transaction. Lastly in December 2018, our Board authorized an increase to our share buyback program to a total of 20 million shares. Through the end of December 2018, we have repurchased 9.1 million shares at a weighted average price of $17.54 per share with a total consideration of $159.9 million. We will continue to execute on our approved share repurchase program, along with opportunities to grow organically or fund portfolio acquisitions. In summary, we are very confident in our model and our ability to meet and exceed our growth and return targets in the future. 2018 was a strong year in a challenging rate and competitive environment. In 2019 and beyond, we expect to consistently deliver 10% or greater earnings per share growth, return on average tangible assets of 150 basis points or greater, return on average tangible common equity of 18% or greater and efficiency ratios less than 40% on an annual basis. We will continue to achieve these objectives by strong execution and increasing the productivity of our teams, continuing to reposition the balance sheet, investing in client centric technology and by retaining, acquiring and developing high-performance culturally aligned colleagues. We are constantly seeking opportunities to refine and transform our business. I want to thank our shareholders, clients, colleagues and our Board for their terrific support over the past year. Now let's open the lines for questions.

[Operator:]

[Operator Instructions]. We will go first to Casey Haire with Jefferies.

[Casey Haire:]

Thanks. Good morning guys.

[Jack Kopnisky:]

Hi Casey.

[Casey Haire:]

Good morning guys. Starting off on the NIM guide, 3.25% to 3.35%. Obviously, first quarter will be, as you take on Woodforest book and sell the resi portfolio, that could be noisy as well as digest the December hike. So maybe if could just, I am assuming we could get a little bit of compression from the 3.15% here and then in the second quarter, we waltz up to 3.30%, 3.35% and then what is sort of the progression thereafter? And then what kind of Fed hikes do you guys bake in your guidance here?

[Luis Massiani:]

Yes. So we are baking, so the biggest component that's going to be a determining factor in how that continues to progress over the course of the year is the performance on the deposit side and on the deposit beta. So you will see in the release and then Jack's comments, we talked a little bit about fourth quarter was better from a beta perspective relative to the progression from second to third and then into the fourth quarter. That continues and based on what we are seeing on the deposit pricing side today, we should be able to be flat in the first quarter. I don't envision that it's going to have, there is going to be any material compression in the first quarter. And then if we were able to and I think we will be complete the sales and the acquisitions in that February timeframe, you are going to get a little bit of a benefit from that perspective as well as to the NIM run rate in the first quarter. So as we think about it, first quarter should be flat to slightly up. If there is some compression, I don't think that it's going to be and we don't think that it's going to be material. And then you are going to continue to see the ongoing transition of the balance sheet help out as we go forward. We are estimating one more Fed hike but again to the extent we have a lot of floating rate assets getting rid of the residential mortgages is going to help out a fair bit there. So with the transitions and the actions that we are taking, we are acquiring 76% of that loan portfolio is floating rate. If it ends up being two rate hikes, I think we are going to be better positioned, pro forma, for these actions than what we are today. So I think it's flat to progressively increasing over the course of the year when you think about first quarter to fourth quarter.

[Casey Haire:]

Okay. That's helpful. And then on the deposit outlook, you stuck to the loan growth guide and with the loan to deposit ratio at where it is today, you guys could actually not grow deposits at all and land in the middle to high end of your loan to deposit ratio. So what is the deposit growth strategy this year? Are you guys looking to grow that? Or are you happy to let the loans grow into your current deposit base?

[Jack Kopnisky:]

Well, the most key to this is relationship deposit growth. So the way to our teams are structured, they are highly incentived to bring in low cost, long-term sticky deposits. And we want as much of that deposit growth as possible. What this action allows us to do is not have to pay up for non-relationship deposits. So it allows us to focus on the things that we have done pretty well over the period of time, which is relationship oriented core deposits at lower costs and not have to pay up for a portion of the deposits that are much higher priced and much more competitive and frankly much more transactional in the market.

[Casey Haire:]

Okay. And just lastly on the loan growth front. If I strip out the $504 million from Woodforest, that leaves about $1 billion or $1.5 billion to go in this year. So how are pipelines holding up after a decent quarter here? And then are you still optimistic on the portfolio acquisition front?

[Jack Kopnisky:]

Yes. We are very confident on the organic side of this. Right now the economy is still strong. We are seeing lots of companies that are expanding, hiring more people, buying other companies. So we are confident on that. We also operate in a very large, very diverse, very opportunistic market, regardless of the economic environment in Metropolitan New York and in some of the segments beyond. So pipelines are very full. We have a lot of opportunity to continue to grow organically. We are very confident in those guidance numbers on the loan growth side. Obviously, with the ultimate closure of the Woodforest deal, we are already off to a good start on this early in the year, which is important as it creates earnings throughout the year. But we are very comfortable with the guidance on that organically and then we will continue to look for opportunities to find deals that makes sense. There is that still continuing good flow of new portfolios and companies that are coming and we scrutinize them very diligently as we did with this deal and there will be opportunities, I am sure, in the future to the make some acquisitions.

[Casey Haire:]

Great. Thank you.

[Jack Kopnisky:]

Thank you.

[Operator:]

And we will go next to Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

Hi. Good morning guys.

[Jack Kopnisky:]

Good morning Alex.

[Alex Twerdahl:]

First off, I just wanted to ask how you are planning on funding the $504 million acquisition you announced last night? Is the plan still to paydown the wholesale borrowings as discussed in the press release on December 20? And if so, is this going to come from security sales or other borrowings?

[Luis Massiani:]

So we sell the mortgage, we get $1.5 billion, $1.6 billion of proceeds. We are going to use that to paydown borrowings immediately and we are also going to trim some portion of the securities portfolio. If you see our slide presentation, we are targeting long-term about 20% to 22% of composition of securities to earning asset. Today, we are at about 25%. So there is portions of the securities book that we can also trim down. But how the progression of the funding side will be, is you will get the proceeds from the mortgage sale, we are going to pay down $1.6 billion of borrowings. We will then borrow $500 million, but longer term we are going to trim the securities book as well. So net net, for modeling purposes, you can decrease the borrowings for the remaining of the year by $1.5 billion relative to the mortgage sale.

[Alex Twerdahl:]

Okay. And then Jack, you were talking a minute ago about the organic pipelines being very full. However I know that sometimes just the nature of your businesses, people rush to get loans closed at the end of the years so they can get paid that year. Is there going to be driven just a little pause in loan closings in the first quarter as some of those, maybe the pipeline is a little bit immature compared to how it was at the end of last quarter?

[Jack Kopnisky:]

It's funny. Alex, you know the system there. So in this model, everybody rushes to close loans at the end of the year and then you have to build pipelines up. January, in all banks, really always is a challenge because of that. All that said, our pipelines are pretty significantly ahead of where they were this time last year. So we have good solid pipelines. As the companies evolve too, we are looking at being able to do larger deals and taking a little bit bigger bites of deals. Not to go over too much, but we have some really good opportunities in the pipeline that are better than we would of have this time last year. And so we are very confident in the loan growth number.

[Luis Massiani:]

But the first quarter is always slightly softer than the second, third and fourth quarter. So you are definitely, when you think about some of the seasonality that we have in factoring, in payroll finance and warehouse lending business, go back three years, four years, you always see the same dynamic which is fourth quarter is always very good from an average balance perspective for those businesses. First quarter is not as good. And then you start seeing ongoing and continued pickup in second, third and fourth quarter. So we don't envision that this year will be any different but that's one of the good things about getting the Woodforest deal, closed here in February is that from an end of period balances perspective, we are going to enjoy that $500 million and we are also going to see a nice uptick from an average balance perspective driven by that acquisition. So good to get it done in the first quarter.

[Alex Twerdahl:]

Okay. And then just finally, in the press release you talk about $5 million of additional buybacks in the first quarter. Is that pretty much a definite number that you are definitely going to go $5 million in the first quarter?

[Jack Kopnisky:]

It's five million shares, not $5 million. So it's five million shares. And yes, that's our target. That's our plan for the first quarter.

[Luis Massiani:]

Unless the stock goes to like $25, which would be a good thing.

[Alex Twerdahl:]

Really good value, $25. That's all my questions.

[Jack Kopnisky:]

That's right. Exactly.

[Luis Massiani:]

Thanks Alex.

[Jack Kopnisky:]

Thank you.

[Operator:]

We will go next to Dave Bishop with FIG Partners.

[Dave Bishop:]

Hi. Good morning gentlemen.

[Jack Kopnisky:]

Hi Dave.

[Dave Bishop:]

Jack, in your preamble, correct me if I am wrong, did I hear that you were able to review 100% of the Woodforest portfolio in terms of their pricing and structure and it sounds like you came away very comfortable in terms of how they think about credit underwriting that portfolio. Just maybe walk us through that process?

[Jack Kopnisky:]

Yes. Actually, the way we did this, in this cycle we actually re-underwrote all the loans. So we did an underwriting of the actual loans and looked at, obviously the pricing and the risk-adjusted returns, but more importantly the credit side of this. So we are comfortable that what we have and how they are marked and all those pieces. The other side of this, Woodforest is a national bank. So this is a little bit different than buying a portfolio from a private equity fund or a non-bank. They have been scrutinized by regulators since they have had this business. So they are more standardized in the way they look at credit than maybe some other portfolios that we have looked at in the past.

[Dave Bishop:]

Got it. And more of a holistic question. I know in the past, mining these commercial finance customers from the deposits have been tough. Any change in that success here? Is that still a focus? Or is it you just acknowledged that it's tough to get deposits from these acquisitions? Any sort of bright spots on that end?

[Jack Kopnisky:]

We have been pretty successful about getting deposits from the acquired portfolios. On ABL, you tend to have fairly thinner balances just because of the nature of the churn of those particular types of companies. But we have been pretty successful about getting operating accounts from each of them. And similarly on a direct basis on equipment finance loans, we have been pretty successful about getting a broader relationship. So we task our teams to do that. Actually I think our ABL group was one of the highest percentage increase in deposit growth, although off a lower base, but in this past year because they have done a good job of being able to bring treasury management and deposit solutions to a number of those companies.

[Dave Bishop:]

Got it. That's good to hear. And then Luis, I think you touched upon it briefly in the earlier question. Remind me of the seasonality in terms of first quarter some of the commercial segments. I know there's some puts and pulls here, which tend to be seasonally low, which tend to be seasonally higher in terms of funding?

[Luis Massiani:]

Yes. Seasonally low payroll finance, factoring, warehouse lending always have their lowest average balance quarter in the first quarter. And then you will starting a pickup late first quarter. When the winter goes away and spring rolls around, that's when those business lines start picking up again. Other than that, you are going to see some, it will be flat with some decrease in the asset-based lending and traditional C&I, but the average balances there should stay, from an organic perspective, should stay pretty much in line. And then assuming that we get this transaction closed on February 28, you will see a nice pickup of approximately $300 million in loans and ABL and then a nice pickup in equipment finance. Other than those commercial lines, the rest of the portfolio will stay relatively flat to have an uptick in the first quarter.

[Dave Bishop:]

Got it. And then in terms of the commercial real estate market, I know many of your peers have known the pricing and structure environment there. Any segment or niches there where you are getting a little bit more optimistic on the terms of pricing or some opportunities to grow that a little bit more in 2019 relative to this year?

[Jack Kopnisky:]

We actually had a pretty good growth in CRE loans last year. I think they were up 12%. And they were mostly focused on non-multifamily. They weren't broker originated multifamily loans. They have actually runoff. It all relates to the relationship you have with the client. So there are niches where you can find relationships with clients where, for example we have several clients that have 15 to 20 different loans that stand on their own. They are priced appropriately. They do deals all the time in certain markets. Those are price appropriate to what the market is because of the holistic relationship on the loan to deposit side of this thing. So it's a little bit less about the category of the CRE, it's more about the type of client and the view of the holistic relationship we have. So we have found successes in everything from office to warehouse, a lot of owner-occupied CRE. So again, one of the great things about being in Metropolitan New York in CRE is, you can kind of pick and choose and you can pick deals that have relationship components and the right risk adjusted returns and frankly say no to deals and structures that do not. So things like, as we have said over and over again, broker originating multifamily deals are just tough from a price standpoint. They are great from a credit standpoint. But from a risk adjusted return, trying to get the types of overall company returns we are trying to get out of this thing, it's just more difficult. So there are other alternatives to do, based on how we structure the deal and the broader relationship.

[Dave Bishop:]

Got it. That's good color. And then one final question. The pickup in the loan, 30 to 89 past due, is that just sort of end of year waiting for financial statements to renew these loans?

[Jack Kopnisky:]

Mostly. There is one decent sized credit that represents about 40% of that uptick that is actually related to a government related credit that's in the process of paying us down. So we are concerned about that and that should be cleaned up relatively shortly here. And then the majority of the rest is exactly what you are referring to, which is just loans, as we highlighted in our press releases, it's loans that are in the process of renew of payoffs. So no, we don't see any concerns from the perspective of delinquency trends at this point. And when we look at the rest of the credits, the NPLs decreased, OREO decreased. We continue to have good performance and experience recently, which is continuing to, loans that are coming into NPLs are actually being worked out relatively quickly. And real estate is actually being worked out relatively quickly as well. So from that perspective, we continue to see some positive signs there.

[Dave Bishop:]

Great. Thanks for the color.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you.

[Operator:]

We will go next to Austin Nicholas with Stephens.

[Austin Nicholas:]

Hi guys. Good morning.

[Jack Kopnisky:]

Good morning.

[Austin Nicholas:]

Maybe just on the remaining resi mortgage portfolio after the sale, can you remind us of what we should expect from runoff in the remaining portfolio?

[Jack Kopnisky:]

Based on what we are seeing in third and fourth quarter of 2018, you should see another $500 million to $600 million of runoff in 2019. I think that, based on what's happens with rates, it's going to be at the higher end of that $600 million of that range. But that's been pretty consistent now for two or three quarters. So we think that that's going to persist in 2019.

[Austin Nicholas:]

Got it. And then just looking at the traditional C&I yields, they were down quarter-over-quarter. Any color there? And then maybe expectations for those yields as you look to the first quarter?

[Jack Kopnisky:]

Yes. It's a mix of business. And we actually had a reference we had a decrease in commercial loan prepayment penalties. And that, when you think about prepayment activity, it's not only commercial real estate. Lots of what we do on the asset-based lending side and in some of our other C&I and commercial related businesses also had some prepayment activity associated with it. So if you adjust for that, you will know the performance was actually exactly what we thought it would be which is, the vast majority of what we do on the C&I side is floating rate and it would have been a increase in yield quarter-over-quarter. So I think that you can continue to envision that there is going to be some volatility in the yields on those commercial business lines in that commercial loan line item, but net net if we continue to be in this rate environment then with one more Fed rate hike, you should see an uptick in overall C&I and commercial loan yields over 2019.

[Austin Nicholas:]

Got it. Thanks. And then just one last one. Is it still the plan to continue to consolidate branches and get down to that low-90s number by 2020?

[Jack Kopnisky:]

There is. So we are down to 106. We closed another seven or eight branches in the fourth quarter. We have now met the goal that we had highlighted when we first announced the Astoria deal in March 2017 where we were taking the branches down from about 140 to the low-100s. The intention is to continue to do, we are still in the, I will call it the middle innings of working out our real estate strategy and that is going to be one component of it as we are going to continue consolidating financial centers and by the end of 2019, we will be much closer to the low 90s to potentially below 90.

[Austin Nicholas:]

Understood. Thanks for taking my questions.

[Jack Kopnisky:]

Thank you.

[Operator:]

And we will go next to Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks. Good morning guys.

[Jack Kopnisky:]

Good morning Collyn.

[Collyn Gilbert:]

Luis, just a quick first question. On the $500 million commercial portfolio from Woodforest, what are you, I know you guys provided the blended yield on that, but what are you assuming the blended funding cost to be to get that NIM accretion that you are talking about?

[Luis Massiani:]

2%. 2.5%, well the blended cost is 2%.

[Collyn Gilbert:]

2%, okay. That's helpful. And then how should we be thinking about the provision, right? Does this portfolio get, I apologize, does it get marked or no? Like, would you need to be providing --

[Luis Massiani:]

It's an asset purchase. But given that we are acquiring the origination platform, people and their processing system, I guess it's kind of a business combination. So we are not buying a company. We are buying the loans through an asset purchase. But for GAAP purposes, this will get accounted for the same way that business combination accounting would. So we are going to see, this will generate some goodwill. We will mark the portfolio to fair value. And as Jack was alluding to before, we spent a lot of time on the credit and risk management front with a very lengthy due diligence process. So we have this, we have got a good mark on this portfolio and we are very confident that we have it. It's going to be marked at the right place from a fair value perspective. But it's going to be no different than if we would have acquired a commercial finance business for $500 million. The accounting will be the same.

[Collyn Gilbert:]

Okay. Can you share with us what the mark is?

[Luis Massiani:]

We are not disclosing that info. But it's a good mark, similar to what we have done in every one of the deals, Advantage, NewStar and other. We underwrote the portfolio and we have a good mark and we are very confident that any potential, there is no near-term credit issue that we would have to face with this portfolio given the conservative nature that we taken on the mark.

[Jack Kopnisky:]

So we look at these things as a combination of what the credit quality is, the price you are paying and the mark. So it's a combination of all those factors into doing these things. All these deals, winning all, put it through the sausage maker at least a 20% IRR. And we have generally always exceeded the 20% to 30% range of these things. So we take all those things into consideration.

[Collyn Gilbert:]

Okay. I am just curious, maybe a bit of a background on how this came together and I guess it seems to make sense for the commercial finance entities are selling because they have funding restraints. But I guess given this is a little unique, right and then it's a bank, as you guys already cited, what's the reasoning behind disposing of this business?

[Luis Massiani:]

Relative size of the business to the overall size. So relative size and composition of the business relative to the overall size of the bank. So typically what happens and I don't want to speak for the Woodforest folks here, but what we have seen in the past similar to when we acquired the NewStar business, a company that size starts and especially finance or commercial finance business lines and many times it's over, it outgrows what the overall balance sheet size is for the institution. And I think that that's exactly what happened here. The $500 million portfolio on about $5 billion asset size bank, right. And so when you think about the proportion of that relative to the proportion that our ABL business represents of our business, you will see that we have a much more diversified commercial finance portfolio with a bunch of different asset classes in it. So they obviously don't want us to speak for them. They have their reasons for doing it. But in our history of doing these deals, that's usually one of the things that happens here that if the business wants to continue growing and the originations platform and the sales personnel and the business development officers want to continue originating business, it's always easier to do that with a larger balance, even larger funding capacity that we have versus the incumbent organization.

[Collyn Gilbert:]

Okay. That's helpful. And then Luis, I think you said it before, but can you just remind us, so the provision impact then from the resi mortgage book selling off --

[Luis Massiani:]

Yes. It's not going to have a big impact on it. So we have been guiding to that $10 million to $12 million number probably for the last four or five quarters. That's going continue being the same bogey. The 15 to 30 years had a very long tail to them, which is why from interest rate risk perspective, that's the portfolio that we are focusing on to get rid of. But the way that the GAAP accounting works and then again next year it was all going to change anyway with CECL, so this would have been only a full quarter dynamic. The provisioning requirement, given the long tail and the mark that we had and the carrying value that we had on those loans, was not been a major driver for provisioning expense. So for modeling purposes, you shouldn't assume that the provision is going to decrease substantially given the sale.

[Collyn Gilbert:]

Got it. Okay. That's helpful. And then just on the expense and fee guide that you provided in the slide deck, they seem a little aggressive, I guess. I have got to still run it through model. And you guys have done a great job on the expense side. I guess I feel probably more comfortable on the expense side, especially I am assuming a lot of that, as you pointed out, is going to be driven by the continued banking center consolidations. Is that correct? Is there anything else that's going to move that number?

[Luis Massiani:]

I think it's twofold. Well, I think it's twofold. I think that you have, so as we alluded to on the earnings release, you have seen a pretty big decrease in the data processing expense for the third to the fourth quarter. So completed the full IT and systems integration in August. So we haven't had a full year benefit of that operating expense yet. So when we are guiding from an annual run rate OpEx perspective, you are going to have, 2019 will be the first full year of the IT systems integration, the new progression of ongoing. So we consolidated financial centers over the course of the years. So in 2019 you get the full benefit of having closed those locations. You get the full benefit of having sold the Lake Success headquarters building. You get the full benefit or you start to see the benefit of the ongoing consolidation dynamic. So you have a little bit of a waterfall impact or a snowball impact that we generated cost savings over the course of 2018 and then 2019 is the first full year of those savings. Now with that said, we are also reinvesting in the business. We are going to be active in hiring folks. We are going to be active in continuing to invest in our IT infrastructure. So our run rate OpEx today is about $415 million. And as we put in our slide deck there, we have maintained that guidance constant there because we are going to continue generating saves. We are going to continue deemphasizing some of the things and the investment that we make on the traditional brick-and-mortar retail banking side and we are going to redeploy that into continuing to grow the commercial banking and IT and digital infrastructure that we have. So the $415 million, we are very confident about. On the fee income side, we had a very good fourth quarter. But as we put out in our earnings release, a lot of the investments that we have made on the fee income side are offshoots and ancillary businesses that we have from a commercial banking side. Our loan swap business or syndication business or loan participations business, those are all event driven with new loan originations and so forth. So these are not steady-state. Every quarter, we are going to generate X amount. But given the pipelines that we are seeing building, the investment that we have made, we feel very confident in that $110 million low-end bogey that we provided there. And then we have enough initiatives in place that we have invested in that we feel good about being able to generate meaningful growth from the income side as well in 2019.

[Collyn Gilbert:]

Okay. That's great. That's super helpful. And then just finally, so I know you guys have talked about and Jack you have talked about you are managing a model here that's going to continue to generate a 10% EPS growth rate and the profitability profile that you currently have. Should we assume that that 10% EPS growth rate is still aligned with what you can deliver in 2019?

[Jack Kopnisky:]

Yes.

[Luis Massiani:]

Yes.

[Collyn Gilbert:]

Okay. That's all I had. Thanks guys.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you.

[Operator:]

[Operator Instructions]. We will go next to Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good morning everybody.

[Jack Kopnisky:]

Good morning Matt.

[Matthew Breese:]

I hope I am last in the queue and if I go on too long, please cut me off. I have just a few more questions.

[Luis Massiani:]

As of now, you are.

[Jack Kopnisky:]

You are. That's right.

[Matthew Breese:]

So just a couple of clarity questions. Luis, I think you said you plan on borrowings being down $1.5 billion for the year. And as I think about the loan sale and what's being put on through the deal, the net balance reduction was $1.1 billion. So does that imply that securities portfolio would be down $400 million consistent with your prior comments?

[Luis Massiani:]

Yes. Correct.

[Matthew Breese:]

And so what's the yield on the securities coming on?

[Luis Massiani:]

About 2.5%.

[Matthew Breese:]

2.5%. Okay. And then the other clarifying question is going back to Casey's question. So with the Woodford deal, the remaining growth bogey, the $1 billion to $1.5 billion, is that a target that can be accomplished organically? Or is there another deal assumed in there?

[Jack Kopnisky:]

It can be accomplished organically.

[Matthew Breese:]

And is that the expectation?

[Jack Kopnisky:]

Yes. Again, we kind of this toggle switch that says wherever we can find the right risk-adjusted returns and the right opportunities, but we are confident that it can be done organically. But there may be a portfolio that we find that has better dynamics than some of the things we see organically. But as we have drawn this up as of now that can be accomplished organically.

[Matthew Breese:]

Okay. And that segues into the next part of my question which is, can you just remind us how many teams do you have in-house originating loans? I know there has been some investments along the way, so they have been bolstered. And so with that, can you just give us an update on what the targeted originations are for those teams, both it terms of loans and deposits and how many are matured?

[Jack Kopnisky:]

Yes. So we have we have 36 teams in total in the company. What we have done over the past year is we have added competencies to all the teams in one way, shape or form, either bolstering up our treasury management that has had a very good year for us and/or deposit gathers or in the case of where there is deposit gathers primarily, there are more lenders for very specific segments. So we are very confident in how the model works and as you know, we tend focus these teams. These teams are focused on a variety of sub-segments that are driven, in some cases by product, some cases by industry sectors, some cases geographically and some cases through ethnicities. So we have been able to create a flow of that. Again, they are compensated on how they create profitable relationships with clients. So if you cut through all the mechanisms that we use to do that, that's what their incentive to do. I am not sure if that answered all of your question, Matt.

[Matthew Breese:]

So partially.

[Jack Kopnisky:]

Okay. Tell me what is --

[Matthew Breese:]

As we move forward, we tend to be more quantitative.

[Jack Kopnisky:]

So let me give you another quantitative number. So we will have originated in 2018 more than $4 billion in loans through those teams. So we were able to originate, actually the $ billion includes the transportation management company we acquired. So between that, we originated $4 billion. And again, the toggle one that is you also have paydown. So as paydowns happen and get refinanced, you have the net effect coming out of that. So we are very confident in our ability to continue originating enough product internally, organically to achieve those numbers.

[Luis Massiani:]

I answered the question. So thinking about it a little bit differently, Matt, I think this might help you out because the whole number of teams and some teams do loans, some teams do deposits. So the way that you are thinking about it, which is each team, what does it represents, that's now how we think about it. That's not how we manage the business, specifically the loan growth. If you look at the various line items and you look at the progression of our earnings release, what you are going to see in 2019 and what we anticipate seeing is, we are going to have about $400 million to $500 million worth of growth that comes from the public sector side. You are going to see about $500 million to $750 million of growth that comes on the broad commercial real estate side including all of our CRE categories, unit category and multifamily. And then the remaining commercial businesses, the remaining C&I and commercial finance business lines will represent about $500 million to $750 million of growth. excluding the Woodforest acquisition. You add up the Woodforest acquisition, put those three items on the public sector, CRE and broad commercial side, you get to about $2 billion to $2.5 billion worth of commercial loan growth. That's going to be offset by the $500 million to $600 million of runoff that we are going to see in residential. That gets you to that range that we are putting there of $1.5 billion to $2 billion.

[Matthew Breese:]

Perfect. Okay. Understood. Okay.

[Luis Massiani:]

Hopefully, that's quantitative enough for you.

[Matthew Breese:]

Yes. You nailed it.

[Luis Massiani:]

There you go.

[Matthew Breese:]

Jack, you still have quite a bit of confidence in the portfolio deal outlook. In prior quarters, you talked about how many bids you have outstanding or NDAs. Could you give us some color there? And confidence level on, in terms of those outstanding bids, the pull-through?

[Jack Kopnisky:]

Yes. So how can I answer this question without going too far?

[Luis Massiani:]

I would answer it this way. I think that we have been very consistent over the course of 2018 and highlighting the three or four different things that an acquisition had to have the key criteria that we look at. First and foremost, our number one priority or filter when we look at these things is that we very much like, to Jack's point before, we very much like businesses that are part of a regulated entity and if they are part of an OCC regulated bank like this one is, even better. Now that gives us the confidence it is a bank eligible portfolio. The structuring requirements of the portfolio, the underwriting requirements of the portfolio are very similar to what we do whenever you focus on those types of businesses. When you start straying out into unregulated, into the specialty finco, we always find that the quality and the credit box that those portfolios are underwritten are just different than what we do. So first and foremost, division of a bank. Second, we don't pay big premiums for these deals. We are not disclosing the premium publicly, but this is very much in line with deals we have done in the past. It required no capital or no equity raise. So we can be confident in that this meets the criteria from the perspective of being a premium that we consider to be very attractive to us. Third, it has to be in business lines in which we are already it. We are in ABL and we are in the equipment finance business. We have an established infrastructure of risk management, with credit personnel, collateral management personnel that can go in there and re-underwrite portfolio and know what they are looking at. So these are asset classes that we know very well. They are asset classes that we can re-underwrite and that we can get very confident and comfortable regarding the market and the fair value and the carrying balance of what these loans are going to be once we own them. And the third thing is, As Jack mentioned, these have to be transactions that have an IRR dynamic to us of more than 20%. So that's why Woodforest is, that's why we passed on so many things is because we have a pretty good selection criteria. Deals like Woodforest meet all of those and those are the types of deals that we focus on. We have ongoing a number of different opportunities that we are taking a look at that vary between asset classes and size. But the filter are those four component that we talked about it and we are going to be patient. If we do a deal, that's great. And we don't, we will use our capital and we will buyback more shares or we would do something else. We don't have gun to our head when it comes to how we think about these M&A opportunities. I think that we demonstrated that we were quite patient in 2018. And I think we have done and we are announcing a deal that we are very confident in and that we like a lot and that is consistent with all of the criteria that we been laying out for quite some time now. Our M&A criteria is not going to change. We are going to continue to explore opportunities under those of those four or five different filters and when we find one that works, great. And if not, that's fine too.

[Matthew Breese:]

Right. Okay. I appreciate that. That's on the portfolio deal M&A front. Do you have any updated color on whether or not whole bank M&A is on the radar? And how activity in your marketplace is trending?

[Jack Kopnisky:]

Well, there is lots of opportunities right now. So I have said this to a lot of people. I have never seen more times when there is more banks that want our interest in selling and so few banks that are interested in buying. So again everything is related to price and timing on that. All that said, we put that on the back burner for a period of time. There will be a time when it is appropriate for us. And it's like Luis mentioned on the portfolio deals, it has to come together in the right price and in bank's case, the right culture, the right situation. And so we are always going to look and we are always going to have conversations. But right now that's a little bit more on the back burner than it is on the front burner right now.

[Matthew Breese:]

Great. Okay. And my last couple, just looking at Woodford, they happen to be located in Texas.

[Jack Kopnisky:]

Woodforest. Not Woodford.

[Luis Massiani:]

Yes.

[Matthew Breese:]

Yes. Understood. They are located in Texas. And so I was curious if the acquisition exposes you to the energy sector at all and in what ways?

[Jack Kopnisky:]

Yes. So actually the team that we are acquiring is actually in Detroit. So Woodforest equipment and ABL team is actually in Detroit. And they cover generally the Midwest and the Southwest, which are areas where we are interested in adding capacity. So one of the other side benefits of the Woodforest, it balances out some of the areas that we didn't have as deeper coverage as we had previously. It does have some energy-related credits involved in this. But the energy-related are not spec energy. They are kind of fundamental equipments that relates to the operating of energy types of companies. So again, if that's part of the underwriting and we are very comfortable with the mix of businesses.

[Luis Massiani:]

Matt, energy is not a significant component of the portfolio and you can assume when we talk about credit marks as being conservative, those are the areas that we absolutely focus on. But it's not a significant component of what they did. It's not, as Jack said, it's a Texas based bank, but this was not a Texas based business. It's not an energy based business.

[Matthew Breese:]

Got it. Okay. And then that leads to my last one which is, I know there were portions of the Advantage folio that weren't asset classes that you necessarily wanted to be in. Is there anything like that here? And when we look at the $504 million, would that be netted by anything that you don't necessarily want?

[Luis Massiani:]

About 10% of it. And you can assume that it's the energy-related type stuff. But it's not even that high. But it's the same thing that we talk about with Advantage, same thing that we talked about when we did NewStar. Every time that you acquire these businesses, as long as the business and the origination platform focuses on 90%-plus of what it does in business lines that fits our credit box, then we are very confident that we can work out the rest and we have done that with NewStar, we have done that with Advantage already and we will do the same thing here. So it's not a significant component of the book and it's not, again, we are going to have this market at a place where we don't have to take a drastic action on that component of the book. We are not concerned from that perspective.

[Matthew Breese:]

Understood. Okay. That's all I had. I appreciate you being patient with me. Thank you.

[Luis Massiani:]

Thanks Matt.

[Jack Kopnisky:]

Anything else?

[Operator:]

There are no further questions in queue. I would like to turn it back over to today's speakers for any additional or closing remarks.

[Jack Kopnisky:]

Yes. Great questions everybody. Thank you so much for your time. Have a great day.

[Operator:]

That concludes today's conference. Thank you for your participation. You may now disconnect.