Sterling Bancorp
Q1 2019 Earnings Call Transcript

Published: 27 Apr 2019

[Operator:]

Good day. Welcome to the Sterling Bancorp's Q1 2019 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:]

Thanks. Good morning, everyone. Sorry for the slight delay. It must be the NFL Draft that’s causing this – the too many communications back and forth. Hopefully, my beloved Pittsburgh Steelers will pick somebody good. So thanks for joining us to present our results for the first quarter of 2019. Joining me on the call is Luis Massiani, our Chief Financial Officer. We have a presentation on our Web site, which along with our press release provides detailed information on our quarterly results. During this call, we will highlight the strong start to the year, describe our purchase of a commercial loan portfolio from Woodforest National Bank, review the sale and runoff of $1.5 billion in fixed rate residential mortgages, update you on our common share repurchase program and finally, highlight our outlook for the balance of 2019. First, on an operating basis. We begin 2019 in a strong position. Adjusted net income available to common shareholders for the quarter was $105.9 million, an increase of 5% from a year ago. Adjusted earnings per share of $0.50 is 11% greater than first quarter 2018. Operating metrics continue to be strong. Adjusted return on average tangible assets was 148 basis points. Adjusted return on average tangible common equity was 17.0%. Our efficiency ratio was 40.5%, resulting from continued creation of positive operating leverage. We continue to evolve the balance sheet to maximize returns and control risk. We had strong commercial loan volumes in the first quarter as commercial loans grew 5.3% from last quarter and 16% year-over-year. The $864 million growth for the quarter resulted from strong organic growth of $374 million and the acquisition of Woodforest Bank’s ABL and equipment business. We have a very strong pipeline of commercial loan opportunities in the second quarter that should result in continued net growth. In the quarter, we sold $1.3 billion of fixed rate residential mortgages at a gain of $8.3 million. During the quarter, residential mortgages also declined by $156 million as we anticipated. The sale and runoff of this portfolio is consistent with our previously communicated objective of reducing our exposure to lower yielding, non-relationship assets and reallocating capital to higher-yielding relationship-oriented commercial loans. Simply put, we are trading mortgage assets for commercial loan assets at a yield pickup of 150 to 200 basis points. We will continue to transition the asset mix to maximize returns while we manage risk. Deposit balances for the quarter were relatively flat as we chose to limit paying up for transactional interest-sensitive deposits. Our loan-to-deposit ratio was 94%. We are focused on maintaining the ratio below 95% and lowering the cost of deposits. Our cost of deposits increased 11 basis points to 88 basis points over the linked quarter. But in March, we started to see a leveling off of deposit costs. Our deposit mix continues to be favorable at 41% demand deposits, 11% savings, 36% money market and 12% CDs. For the quarter, our core net interest margin increased from 315 basis points to 316 basis points. Given the changes in asset mix, lower FHLB borrowing balances and moderating deposit costs, we anticipate core net interest margin to grow to a range of 325 to 335 basis points by year-end. We are creating a balance sheet that will have a more optimal mix and net interest margin profile. This is consistent with our strategy going forward. Core fee income for the quarter was $24.5 million and we expect to end the year at approximately $110 million as we continue to expand our treasury management, swap, factory, loan and payroll fee income businesses. Core expenses, exclusive of amortization expense, were as planned at $107 million. We are confident that we will end 2019 with approximately $415 million in core expenses. The expenses will trend lower as we continue to reduce financial centers, back-office locations and FTEs. Our credit metrics and capital levels remain strong. Charge-offs were 14 basis points. Nonperforming loans as a percentage of total loans declined by 2 basis points over the linked quarter. Delinquencies also decreased substantially. On last quarter’s call, we highlighted our entire commercial real estate portfolio that has a 47% loan-to-value and a debt service coverage of 1.64x, and our C&I portfolios that are 97% secured with appropriate accounts receivable, inventory and equipment within margin. Total tangible common equity to tangible assets was strong at 8.87%, a 27 basis point increase over last quarter. Tangible book value per common share increased 11.6% over prior year and $0.14 over prior quarter. In the first quarter, we utilized capital to repurchase over 8 million common shares. We will continue to review the use of our capital on a quarterly basis to repurchase shares. Our Board has increased the authorization for share repurchase by 10 million shares. We still view the opportunities for growth to be significant and believe our capital management strategy gives us the most amount of operating flexibility. Lastly, we are confident in our model and our ability to meet and exceed our growth and our return targets in the future. We included a slide on Page 4 that shows the progression of earnings and tangible book value growth over the past seven years. Our adjusted EPS growth has been a CAGR of 29% and our tangible book value growth since the legacy Sterling acquisition has been a CAGR of 13%. Again, for the first quarter of 2019, EPS and tangible book value grew over 11%. In 2019 and beyond, we would 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. So now let’s open up the line for questions. Operator?

[Operator:]

Thank you so much, sir. [Operator Instructions]. We’ll take our first question from Casey Haire with Jefferies. Please go ahead.

[Casey Haire:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Good morning.

[Casey Haire:]

I wanted to start on the NIM. Obviously, a lot of moving parts in the quarter with the portfolio deal and the divestiture. It looks like March was a decent clean look at the NIM trend. Can you just give us a sense as to where the NIM exited the quarter with a March NIM run rate?

[Luis Massiani:]

Yes, Casey, we provided some guidance there in the slide deck where we see NIM shaking out, and it’s kind of what we’ve said in the past, the 3.25 to 3.35 for the year. And you’re going to see that progressively improve as we continue to transition the balance sheet through 2019. It exited pretty close. It sits at the low end of that range that we provided. And then as we continue to rebalance out of some of the lower-yielding assets, we’re going to – we expect to continue seeing that core NIM move up through December this year. So it’s very much in line with the guidance that we previously provided.

[Casey Haire:]

Okay. Sorry, I missed that. So March was around that 3.25 level?

[Luis Massiani:]

Correct.

[Casey Haire:]

Okay, got you. All right. So just looking at the guide going forward, obviously the loan growth with Woodforest was very – you guys were on track there. If there is a sticking point, it’s the deposit side. And so by my math, you guys would need to generate about, a little over $1 billion of deposit growth for the balance of the year and stay under that loan-to-deposit ratio of 95. So are you feeling comfortable about – that the deposit gathering will pick up for the balance of the year or is there room to go higher than that 95?

[Jack Kopnisky:]

Yes. So we are comfortable in the ability to generate deposits. So I’ll take you through kind of the steps of that. So on the commercial side, we still have good growth opportunities and experiences with the core commercial deposit growth, and especially in some of the subsectors that we focused on; the legal community, nonprofits, property management areas. That’s where we’re seeing very good strong growth at relatively low prices. The other part of commercial is there are some higher priced pieces in some regard like municipal balances. So we model this around how we focus on certain segments. Same thing on the consumer side, the consumer side is where there is by far the most competition, especially on the mass market side. But we’ve been able to show some good growth on some of the, again, subsectors that we focus on. We also are experimenting with a couple national online products. We’re doing test and learn in those cases and looking at alternative delivery for deposit gathering. And again, that’s a moderation between rate and volumes. So all that said, we’re comfortable that we’d be able to grow deposits at the right targeted rates as time goes on. It’s similar to the lending side. You have to pick your channels and pick your volume rate opportunities along the way. You can’t just put up blanket rates and hope that they come in. So we’ve been very strategic in how we’re looking at deposit gathering and obviously on the types of – on the flipside of this, the types of categories that provide the right risk adjusted returns on the asset generation side.

[Casey Haire:]

Okay. And Jack, you mentioned that the deposit cost – deposit pricing competition is kind of leveled off here. What is the incremental cost of deposits versus this 110 level here in the first quarter? And then also just as a throw on, the purchase accounting, what should we expect for the balance of the year?

[Luis Massiani:]

Yes, so from a purchase accounting perspective that’s going to be – one of the things that we’ve been a little bit surprised by to start the year has been that there – we had anticipated that we’re going to start seeing some leveling off of runoff in residential mortgage and multifamily assets. But actually in the first quarter, we saw the exact opposite, which is – we disclosed there, we saw about another $155 million of runoff in the resi side. We were expecting closer to 100 million to 125 million. And on the multifamily side, we’ve seen what I’ll call as a little bit of – we’re back to a race to the bottom from the perspective of where new origination yields are. So therefore we’ve started to see some paydown in prepayment activity in that portfolio as well. So we had originally guided to the 15 – about a $60 million to $65 million for total accretion income in 2019. It’s likely going to be higher than that by approximately $5 million to $10 million more because we – again, the accretion income is – there’s a little bit of a uncertainty related to it because it is based on how assets runoff and how purchase credit and impaired loans perform. And we are seeing faster runoff than we had anticipated. So it’s likely that the accretion income is going to move from that 60 to 65 number that we had guided to closer to about 80 – I’d say 75 million to 80 million or so. The second component more so than the marginal dollar of interest expenses or of cost of deposits, I think what we’ve been seeing more recently is from the third to the fourth quarter we had a total cost of deposit increase of about 10 basis points this quarter. So from fourth quarter to first quarter of '19, we saw 11 basis points. Based on what we’re seeing today and I wouldn’t call it odd, I think you used the word leveling off. I wouldn’t say that it’s leveling off. I’d say that the deposit competition has started to show signs of improvement. So I think that you’re going to continue seeing the cost of deposits increase for the next couple of quarters. But that 10 to 11 basis points, that double-digit increase I think is going to be more in the mid to high-single digits at least for the foreseeable future based on what we’re seeing today and the competitive dynamics that we’re seeing in the market today. So it should level it – it’s starting to show signs of improvement, but it hasn’t yet leveled off and you’re still going to see some increase in the cost of deposits quarter-over-quarter.

[Casey Haire:]

Great. Thank you.

[Operator:]

Our next question comes from Alex Twerdahl with Sandler O’Neill.

[Alex Twerdahl:]

Hi. Good morning, guys.

[Jack Kopnisky:]

Good morning.

[Alex Twerdahl:]

I was wondering if you can give us a little bit more color on what the loan pipeline was like at the end of the quarter. Jack, you said it was pretty strong in your prepared remarks. Then Luis, you’re talking about another race to the bottom on multifamily. So maybe talk about sort of the complexion of what the loan pipeline was looking like and whether or not the rates and the spreads are wide enough such that they’re actually going to be the types of loans that you guys put on your balance sheet?

[Jack Kopnisky:]

Yes, so maybe I’ll start off with a macro. We’re very comfortable with the estimate we gave everybody for the end of the year that we’ll do an incremental growth of 1.5 billion to 2 billion. So we’re comfortable in that. You can see first quarter we increased by $860 million or so. So secondly, the pipelines are very full. The economy in general is very good. Many of the sectors are performing well. Companies are adding employees, growing, buying things. So there’s a need for capital. Obviously, the flipside of that is there’s lots of providers of capital out there. So it’s a competitive environment as it always will be, but it’s particularly competitive. So you – the process that we go through is you kind of pick through and find the opportunities that fit. So one, the pipelines aren’t very full. So we have a lot of good deals that we like the rates and the structure for. I think I said last quarter that we’re seeing about 50% more in terms of volume year-over-year. And I think I’d continue in that kind of general range that the volume of opportunities is significantly higher. But like all funnels, you funnel them down into the deals that you really want. And again, we think there is meaningful opportunities but you have to be selective in that process. So there are categories of loans that have the right relationship returns that we are seeking. And they generally are in that kind of 5.25 to 5.75 yield range now. And almost all of them, most of them in that category come with the relationship side of this thing. What Luis is talking about is we still – we are seeing more of a runoff on multi-broker originated multifamily loans that were on the book. So again, go back to the original statement. We’re comfortable with the 1.5 billion to 2 billion. The pipelines are very strong. They’re especially strong in kind of traditional C&I, traditional CRE. We have public finances particularly strong along the way. Even the mortgage warehouse business because rates have come down, the mortgage warehouse business has opportunity in them. Where it is not as strong are things like ABL loans where the yields have come down or the spreads have come down over a period of time. And again, there’s lots of volume opportunity, but we’re very selective on the types of deals that we do and types of things we put on the books, factoring and payroll finance in this kind of rate economic cycle aren’t as popular as prior times. But again, that’s one of the advantages to our business mix. We have the ability to look at different levers and different portfolios that we can allocate the right level of capital to it.

[Luis Massiani:]

Alex, if you – in the slide deck, we added – I don’t have the page right in front of me, but there is – we added a bullet there for the weighted average origination yield in the first quarter. It was 5.21. And the pipeline is building at around those levels. So being selective into the asset classes and taking our spots, we’re pretty confident that yields will hold up.

[Alex Twerdahl:]

Okay. And then can you just maybe give us an update, Luis, on where you guys are on the CECL process?

[Jack Kopnisky:]

We’ve done a tremendous amount of work around it and I think that we have made a substantial amount of progress. We are not at this point ready to publicly disclose anticipated specifics or details around what we envision the allowance is going to be under CECL. But we’re very confident that it’s not going to be a one-time material impact from a balance sheet or a capital perspective. I think that the bigger – what we’re spending the most amount of time now is fine-tuning our models and just trying to identify various – what are the components of the book that are most sensitive to changes in assumptions and rates and macroeconomic scenarios and so forth and so not surprisingly as you would envision. I think that the bigger impact is going to be that long term or as we continue to move through 2020 and beyond, there are going to be specific longer-term fixed rate asset classes that based on what we’re seeing in the modeling and the models that we’ve built are not going to be as attractive as they have been in the past because the reserve requirement upfront is just going to make it – it’s going to have an economic impact that’s going to make the asset class a little bit less attractive near term. So I would not characterize or we’d not anticipate seeing anything that’s going to be a material change or increase or have a material impact on capital levels. But long term, one of the reasons for us focusing on the kind of shorter-term working capital facilities and up to three- and five-year types of term loans is the fact that we think that those are going to be much friendlier under CECL than some of the longer-term fixed-rate things that banks have historically focused on.

[Alex Twerdahl:]

Okay. And then just correct me if I’m wrong with the purchase accounting. The accreditable yield piece that’s related to the credit market is going to switch from coming back into NII to the provision. So based on the acceleration of some of that purchase accounting in 2019, by the time we get to 2020, that’s going to be pretty de minimis, correct?

[Jack Kopnisky:]

That is correct. You’re still going to have an interest rate component to it, but the credit component will fall off. Yes.

[Alex Twerdahl:]

Great. Thanks for taking my questions.

[Luis Massiani:]

Thank you.

[Operator:]

From Stephens, we’ll hear from Austin Nicholas.

[Austin Nicholas:]

Hi, guys. Good morning.

[Jack Kopnisky:]

Good morning, Austin.

[Austin Nicholas:]

Can you maybe go back to the margin guidance for the year and the comments on exiting the quarter at kind of the 3.25 level, can you maybe kind of talk us into what gets you from that 3.25 level up to the call it midrange of that level and what would get you to the high end? Do you need to do further portfolio purchases and kind of bulk mortgage sales or can you get to closer to that midrange without any sort of major transactions involved?

[Luis Massiani:]

We can get to the midrange without major transactions involved. I think that the major transactions would be more of a driver of hitting and exceeding the high end of the range from a loan growth perspective. But the math, even excluding major transactions, the math is what Jack outlined before, which is, for every dollar that runs off at a core loan yield or a core NIM of – core loan yield of 3.5% or 3.6%, it’s being replaced by as you saw in the first quarter weighted average origination yields that are over 5%. So that 150 to 175 basis point delta on the asset that’s trailing off versus the assets that’s rolling on gets you to continue – as you continue to progress and you reduce the size of the lower yielding assets or the proportion of the lower yielding assets into earning assets and focus on higher-yielding commercial asset classes, it gets you there. But they would certainly be accelerated and we are in the market for portfolio acquisitions and we’re evaluating a bunch of different alternatives. So that would certainly help. But it’s not a requirement to being able to get to the midpoint of that range.

[Jack Kopnisky:]

Yes. Remember too, some of the math, we have between $150 million to $250 million worth of multifamily and resi runoff at those low yields that we have communicated that we expect to put on commercial loans that are higher yield. So by the nature of the math of those portfolios running down and are adding higher yielding gets us to those numbers.

[Luis Massiani:]

What would really help too, Austin, is if the cost of deposits stops going up too. That will be I think the bigger – that will be a driver of – and obviously we don’t have a magic crystal ball, but we have seen signs of improvement that we talked about. Upside could be driven if we continue to see that leveling off and competitive dynamics remain. I think there could be some upside. That would be one of the catalysts to get us closer to the higher end of that range.

[Austin Nicholas:]

Understood. And then maybe just talking about just the portfolio acquisitions, can you give us any feel on what the market is for those assets as you sit here today versus kind of where we were maybe last year and kind of earlier in the year?

[Jack Kopnisky:]

Yes, we still see an awful lot of portfolio opportunities out there. And frankly, the one – the biggest caution that we have on any of these is on the credit side. So we’re going to make sure that we’re not going to bring on something that has even a sniff of poor credit along the way that we haven’t colored or priced for along the way. This is a time to be thoughtful and select where you want to play. But we still see a tremendous amount of volume coming through. We look at selectively the opportunities and see where we go on this. But the numbers that we have on the estimates for the future do not include purchases. They are just pure organic on what we know we can control day-in and day-out today.

[Austin Nicholas:]

Got it. Okay, great. Jack, Luis, thanks for the questions.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you.

[Operator:]

From KBW, we’ll hear from Collyn Gilbert.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Hi, Collyn.

[Collyn Gilbert:]

Sorry, just to clarify. I apologize. You just said on the portfolio acquisitions, I just want to make sure I understand. Your targeted loan growth of 1.5 billion to 2 billion still includes portfolio acquisitions, right? That’s not – you’re not going to get there organically?

[Jack Kopnisky:]

It does not. So we – the 1.5 billion to 2 billion, this is from today going forward. For the balance of the year, to get to the 1.5 billion and 2 billion does not include portfolio acquisitions. It’s organic. We’ve already done one portfolio acquisition in the first quarter. It’s included in the overall number. But from here to the end of the year, our estimate to get to the 1.5 billion and 2 billion does not.

[Collyn Gilbert:]

Okay. Is that a change? I thought I recall you guys saying that you were thinking organic without acquisitions would have been 1 billion to 1.5 billion.

[Luis Massiani:]

I don’t think so.

[Jack Kopnisky:]

Well, 1 billion to 1.5 billion – so 1 billion to 1.5 billion is the same thing as 1.5 billion to 2 billion if you factor in $500 million of acquired growth of Woodforest.

[Luis Massiani:]

In the first quarter.

[Jack Kopnisky:]

So I think it’s the same.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

So there’s no change. I would say no change.

[Jack Kopnisky:]

Yes, but from here on in, from this quarter on, the requirement to get to those 1.5 billion to 2 billion, we are comfortable that we will get there just with organic. And if we found a portfolio, it would potentially magnify that number.

[Collyn Gilbert:]

Okay, got it. Okay, that’s helpful. And then just – Luis, really great color on the NIM certainly for this year and you sort of alluded to what we might see in 2020 just from the accretable yield component. But kind of putting that aside just structurally, if the rate environment holds the way it is, how do you see that – kind of that NIM – the core NIM trending in 2020?

[Luis Massiani:]

Listen, I think it’s – once the balance sheet transition which we will still be working on this through the early part and through the mid-part of 2020, I think that we’ll still be able to support some NIM expansion. But in a flat rate environment, if this environment persists, I think that you would start – at some point you’d see some leveling off of – and flatness to that, right. So I think that there continued to be approximately – when you factor in the entirety of a multifamily book and the fact that we still have about $2.5 billion of residential mortgages, there’s still $5 billion, almost $6 billion of assets that over time will have better repricing dynamics than what they have today. And I think that that is going to help us support and allow us to expand NIM for a period of time. But if this flat rate environment remains, yes, we will have some leveling off at NIM that will be somewhere between 3.35 to 3.40 if we were to – if I had to provide a number now, but that’s way into the future and at that point in time there will be a million other things that have changed and we’ll have to at that point adjust to whatever the new reality is, right. But I don’t think that it’s a secret to anybody that the flat rate environment which we are in today isn’t going to be the most conducive to helping us expand or increase NIM long term. So I would certainly hope that this flat rate environment doesn’t remain forever.

[Jack Kopnisky:]

Yes. One of the unique attributes we have; right, wrong or indifferent is we have – I don’t know if this is a good attribute or a bad attribute, but we have this acquired portfolio that has low yields that we can transition to higher-yielding more targeted opportunities. So we think we have a – I don’t know if I can call it a competitive advantage, but in this environment it allows us to gain that kind of 150 to 200 basis point pickup over some period of time.

[Collyn Gilbert:]

Yes. Okay. And then one other point of clarification. On the NIM guide which the core NIM guide of 3.25 to 3.35, that is for the full year '19, right? That’s not a fourth quarter NIM?

[Jack Kopnisky:]

Correct.

[Luis Massiani:]

Correct.

[Collyn Gilbert:]

Okay. And then just – there was a little bit of movement in the substandard book this quarter. I know some of that came from onboarding of Woodforest. But can you just talk about some of the movement you saw there and sort of expected resolution or just kind of outlook in general for credit?

[Luis Massiani:]

Yes. No issues on the Woodforest side. Every time you do an acquisition, you are always going to bring over some level of classified assets and those were the assets that we alluded to when we announced the transaction in the prior earnings call that there was a component to the book that we didn’t like that was tied mostly to energy and oil and gas, and so those are the credits where, as we said before, we have some lost share/credit enhancement feature. So we don’t anticipate that those credits will be an issue, but they still do come over as classified assets. We also had two credits on the multifamily/commercial real estate side that moved from special mention to substandard, but that have LTVs that we are not concerned about in any way, shape or form. And so if you take a step back and you look at holistically all of the credit quality metrics, I think that they – we continue to feel very good about where we are. You’ve seen essentially charge-offs that have held in pretty nicely at 14 basis points annualized. NPLs were relatively flat and increased by about $1 million. The 30-day to 89-day delinquency bucket showed substantial improvement and moved down from 97 million to about 65 million. So it was down by almost – just over $30 million. And on the special mention in substandard side, those credits – nothing there is causing us really any major headache or heartburn at this point. And we also had actually a pretty good quarter from the perspective of OREO balances, also decreasing. So I think one of the things that we talked about in the past that gives us good confidence and comfort is that we have seen when assets have rolled into NPL, when commercial real estate and residential loans have become OREOs, we actually see a bit in the marketplace that we’re able to work out and sell off properties and so forth and we continue to see that. So we take a step back, big picture, credit has continued to be very, very strong and those moves in substandard aren’t really a cause for concern.

[Collyn Gilbert:]

Okay, that’s great. That’s really helpful. And then just one final question, Jack, as it relates to M&A and appetite just for traditional bank acquisitions. Any update there in terms of movement in the market or where your desires are to fill in either strategically or financially within your franchise?

[Jack Kopnisky:]

Yes, it actually hasn’t changed from kind of the beginning. On the bank side of it, the things that we would look out will be primarily focused on can you find lower cost deposits to add into the model. Almost all of the potential sellers have cost reduction opportunities. And some of them have kind of strategic niches that are interesting either geographically or from a product standpoint. So we kind of put them in that order kind of deposit-focused, are they – most of them are challenged from a cost standpoint and the niches. And then you look at the types of returns you want to come out of this thing. So I’ve said this before, this is a fairly unique time that I can ever think of and that there are a lot of sellers out there. There are a lot of sellers though that have models that you don’t want to buy. That’s how we focused on this. And if there’s things that make complete sense, we would look at them and others, we’ve – most of them we’ve said kind of no to.

[Collyn Gilbert:]

Okay, that’s helpful. I’ll leave it there. Thanks, guys.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you.

[Operator:]

We’ll now hear from Christopher Marinac with FIG Partners.

[Christopher Marinac:]

Thanks. Good morning.

[Jack Kopnisky:]

Good morning.

[Christopher Marinac:]

Luis or Jack, can you tell us about the incremental cost of deposits? Just trying to match up the 5.21 on the loan side with a comparable funding number.

[Luis Massiani:]

Blended average rate somewhere between 175 basis points to 200 basis points and that is a mixed bag of what we’re seeing in the consumer side versus what we’re seeing on higher balance commercial side versus what we’re seeing on the municipal side. But for higher balance commercial accounts, not much has changed yet and you have not seen the improvement. When we say that there’s an improvement and that the market is showing signs of improvement, it’s not that the absolute rate at which the marginal dollar commercial deposits is coming in, it has actually come down. It’s more so that it has not continued to increase as we had seen in the second half of 2017 and in the first half of 2018 where every quarter, deposits rates on the – especially on the high balance commercial side were going up by 25 basis points or more. So blended is about 175 to 200 basis points. And that’s a mix of all the various channels that we have on the municipal, commercial and consumer side.

[Christopher Marinac:]

Okay, great. And then if you were to be at the lower end of the loan-to-deposit ratio range that you gave for this year, would that make any difference to this incremental funding rate?

[Luis Massiani:]

Yes, it would. If we had – so if we were at the lower end of loan-to-deposit ratio range and had to accelerate deposit growth, you’d get the blended rate that would be north – that would be 2% plus.

[Christopher Marinac:]

Got it. And then last question, this goes back to the TCE ratio in the quarter that you mentioned sort of post buyback. Do the – or have the regulators sort of signed off on that or from the CET1 perspective whatever that adjusted Tier 1 would be?

[Luis Massiani:]

I don’t think that – so I would have not used the word sign off. Not exactly sure that the regulators sign off on anything when it comes to that, but that is – you can rest assure that we’ve had – that we have demonstrated our capital plans to and presented our capital plans to the regulators, and we have – we are going to execute the capital plan as we’ve laid it out. So that, again, I would not say that they’ve signed off on it or approved it, but we have – but yes, we got our capital plan as we have outlined, we’re very confident.

[Christopher Marinac:]

Sounds good. Thanks for correcting it. I appreciate it guys.

[Luis Massiani:]

Thank you.

[Jack Kopnisky:]

You got it, Chris.

[Operator:]

From Piper Jaffray, let’s hear from Matthew Breese.

[Matthew Breese:]

Good morning, everybody.

[Jack Kopnisky:]

Hi, Matt.

[Luis Massiani:]

Hi, Matt.

[Matthew Breese:]

Hi. I just wanted to follow up on the NIM and the resi book sale. There’s still some – a piece remaining I think 200 million that will be sold I’m assuming earlier in the quarter. What is the NIM pickup from that and how do you – what do we tag on from the March end, 3.25 NIM?

[Luis Massiani:]

It’s a couple of basis points, 2 or 3 basis points. 200 million won’t have a hold on the -- $26.5 million to almost $27 million of earning assets won’t really drive a meaningful difference. But it always helps.

[Matthew Breese:]

Okay. Yes, I know. Just a point of clarification. And then with the backup in the yield curve, are there additional portfolios you are considering selling that you’re going to get a better price on today than you were call it couple of months ago? And what are the spreads like on those books that potentially you’re considering selling?

[Luis Massiani:]

So the spreads would be or the all-in yield would be 3.5 to 3.75, so similar to what we did on the residential mortgage side. They would be mostly fixed rate assets. And I think that the – so the strategy is to do similar to what we did in the – with Woodforest is to line up potential sales with acquisitions or organic growth and really maintain the balance sheet and average earning asset size close to where it is today and increase it from here. So I’ve said, obviously it doesn’t happen perfectly from the perspective of being able to find something to sell something, but that would be the strategy long term is that we don’t want to create – we would not anticipate creating an earning asset hole by executing on sales before finding something or having something lined up that would backfill pretty substantially.

[Jack Kopnisky:]

Actually, history is if you look back at the one chart we included on EPS and tangible book value accretion, we’ve been pretty consistent. We were trying to create a company that doesn’t have booms or busts and you could easily sell off this and then work through many quarters to earn it back, and we’ve tried not to do that. We’ve tried to do it kind of consistently and methodically so that there is confidence in the earnings stream and the tangible book value growth.

[Matthew Breese:]

Right. Understood. Okay. And then along the same lines as we think about the mix shift in the balance sheet and where you want to be from an interest rate sensitivity perspective. Can you give us an update on whether or not you want to drive at an asset-sensitive balance sheet or balance sheet neutral? And if you’re going for more of a neutral type balance sheet, what are the assets you like today that helped get you there versus before?

[Luis Massiani:]

So after the sale of the mortgages and the pay down of the FHLB borrowings where borrowings have decreased by about 1.5 billion, almost 1.6 billion, we are more asset-sensitive today than what we want to be especially in this rate environment. And that has been a strategy that I guess it’s by design that we have – that we did that, because we knew that that was going to happen when we sold these fixed rate resi’s and paid down the borrowings. What gets us there? An asset class that we talked about in the past. Public sector business is going to have – we’re going to grow it significantly over the course of the year and that is going to decrease our asset sensitivity pretty substantially. And the second component being the commercial, so non-multifamily commercial real estate, which when you see the growth in commercial real estate quarter-over-quarter and year-over-year, it’s being driven by the non-multifamily CRE and yields in that asset class we like, and we like the interest rate dynamics and a lot of what we were doing there is going to be fixed rate as well, which is going to help reduce asset sensitivity. We’re going to have – as part of our Q, we’ll provide our asset sensitivity disclosures and so you’re going to see that we moved from a neutral position to being more asset sensitive than what we want to be. We want to be slightly asset sensitive, so you’re going to see us reduce that pretty substantially and focus on originating kind of longer-term fixed rate loans that have the right type of interest rate dynamics that are going to allow us to reduce that number going forward.

[Matthew Breese:]

Okay. Understood. The other one I have was just on the mention of the lower branch count by 2020, lower FTEs along with it and in the projection that the 415 million in expenses ex-AIM, it’s probably going to head lower. Could you give us an idea of how much lower? And then if you’re tracking cost saves, what are the areas you’re reinvesting in?

[Jack Kopnisky:]

Yes. Well, we’re – the 415 is the number we’re going to stick to for 2019, but we have opportunities in a couple of areas. One, obviously the lower branch count, getting that down more significantly and getting this down into the kind of the 70 to 80-branch network is kind of optimum for us. Second part of this is, we have a lot of opportunity to automate and using AI and outsourcing the transactional part of our back office. I really give a task to everybody in the company that over the next year and a half that we want to be able to automate all transaction processing in the company either using AI or finding other more volume variable means to support costs. So those two things and obviously we still have more real estate to disposition as we go, which drive some of these cost down. So the flipside of it, where you invest is really in areas that you have value. So the areas you have value are in the client support, client interaction process, whether teams into financial center or teams in the commercial areas, it’s in things like technology, making sure that we have more digital capabilities and growing that. It is things like enterprise risk management whereas the world gets a little more complicated with CECL and everything else that we’re ahead of the curve on all those types of things. Those are the areas that we want to allocate capital to. And again part of our – the model we build and through the M&A we’ve done and the organic things we’ve done, it creates some flexibility along that. But we’re trying to move expense dollars from transaction processing environments in areas like financial centers where you just don’t have the volumes you had before into areas that you can add value with either clients or supporting the areas that interact with clients.

[Luis Massiani:]

I’d say, Matt, a couple of things. So when we started the post-acquisition of Astoria, we were at 128 branches. We’re down to 99 branches today. And that already exceeds the target that we had put out when we announced the deal in the first quarter of 2017. So the thing that gives us comfort of being able to continue to cut out branches is that the more branches we cut, we’ve seen limited attrition in deposits. And so therefore we can continue to provide the same level of client experience and service and do it in a more cost economical way where we’re cutting out fixed operating expense, we’re going to continue to do that. The good thing is that long term, we’re cutting out a bunch of expenses and run rate, it gets better. Obviously getting out of real estate, getting out of financial centers is always messy. A lot of the financial centers that we’re getting out are going to be places where we have lease locations. So all of these things always take time. And there’s always some level of restructuring charges that need to be incurred as you plateau and you step down to kind of the next wave of 15, 20, 25-plus branches to get down to the 80 financial center count that we talked about for 2020. From an OpEx perspective, 415 – this is more of the strategy that we have deployed since 2012 which is you continue to reallocate or deemphasize investment into areas that are not efficient and you reallocate that OpEx and you reallocate that investment into areas that are. And so for every financial center that we cut out that had $75 million in branches that costs $1 million to run when you factor in rent and maintenance and headcount and so forth that you can reallocate under the commercial side where if you allocate that $1 million of spend to a commercial team, be it deposit gathering or lending, that is going to generate $250 million or $300 million of volume, that makes perfect sense, because you’re picking up 3x the balance sheet size, 3x the revenue relative to what you can do in the financial center side. So this isn’t about continuing to necessarily reduce the absolute dollar of OpEx, it’s about being able to create the positive operating leverage dynamic which is you continue to deemphasize less efficient, less scalable components of the house and reinvest it into areas where you can grow in a much more cost economical basis. We think that long term if we continue to generate revenue growth of 2x to 3x expense growth, every other metric will fall into place.

[Matthew Breese:]

Understood, very helpful. My last one is, I understand your CECL comments in regards to the first day kind of true-up reserve, but just in terms of the overall change in methodology, how would the allowance, the breakdown of qualitative versus quantitative factor is going to change and migrate? And then in terms of the historical look back, how far back is your data going?

[Luis Massiani:]

How far back is our data going? That’s a good question. I think that there – so each component of these – so I guess we could talk about this for a couple of different hours, so how much time do you have? So each component of the loan portfolio or – the loan portfolio has many different components to it and each one of those components is going to be modeled out in a different way. And so depending on how – on what component of the model we’re – or what component of the loan portfolio we’re talking about, you might have portions of the portfolio that are essentially being modeled out based on a snapshot of information as of today, based on whatever their debt service coverage ratio dynamics or the LTD ratio dynamics are. And then there’s other components of the portfolio that are going to be driven by five, six-plus years of historical data and performance because CECL says a lot and it says nothing all at the same time. And so you have a lot of flexibility as to how you model out specific components, of how you segment your portfolio, and then of how you model that portfolio out using a variety of different modeling approaches and methodologies. So the best way that I could characterize it is that there are – for the more plain-vanilla asset classes where there is a lot of publicly available information and where there is a lot publicly available data points, you usually do not have to rely on your historical data as much as you rely on refining and getting your data, your snapshot of data as of X point in time to the right place where you can then feed some of the – when you can feed these models and look at all these public data points to be able to model those out. And then when you run into asset classes that are not – that don’t have as many public – that doesn’t have as much information that’s publicly available or there isn’t macro data points that you can use, that’s when you rely on your own data and then you’re looking back into the archives and getting as many data points as you can from your own data sets. How it changes from qualitative to quantitative? Listen, given the benign credit environment in which we have been in, for us and pretty much for every bank out there, the component of our loan – allowance for loan losses today that’s represented by quantitative factors is relatively small and the vast majority of it is driven by qualitative factors. I think that now that you’re moving to a loan level kind of forward-looking modeling approach, that will flip because you’re going to now have – since you’re changing from a what has happened historically to what might potentially happen in the future, your model is going to determine more of what – or your quantitative approach is going determine more of what the allowance requirement is. And so therefore, it will flip I believe that it’s going to be less qualitative, more quantitative going forward than what it has been given the benign credit environment in which we’ve been in for some time now. Hope that helps.

[Matthew Breese:]

It’s more than sufficient. I appreciate it and thanks for answering my questions.

[Luis Massiani:]

You got it.

[Operator:]

And there are no further questions at this time. Mr. Kopnisky, I’d like to turn the conference back to you for any additional or closing remarks.

[Jack Kopnisky:]

Just thanks everybody for joining today. Have a great day.