Sterling Bancorp
Q3 2019 Earnings Call Transcript

Published: 24 Oct 2019

[Operator:]

Good day and welcome to the Sterling Bancorp Q3 2019 Earnings 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 and discuss our results for the third quarter of 2019. 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 quarterly results. During the call, we will highlight the solid quarterly financial metrics resulting from strong targeting commercial loan growth, improved deposit growth, strong fee income growth, solid credit quality, and significant cost controls and alignment. We will also discuss our balance sheet re-mixing acquisition of an $8433 million equipment finance portfolio. The announcement of our technology partnership with Deloitte Consulting and our outlook for the balance of 2019 and beyond, given the changes in the rate environment.First on an operating basis, our second quarter results were solid. Adjusted net income available to common shareholders for the quarter was $105.6 million, which was slightly higher than second quarter 2019. Adjusted earnings per share of $052 was 2% or $0.01 higher than both last year 2018 and the linked quarter. Adjusted return on average tangible assets was 150 basis points and adjusted return on average tangible common equity was 16.27%. Our efficiency ratio continues to be among the industry leaders at 39.1% and our tangible book value per share of $12.90 increased 13.8% over September 30, 2018, and 4% over the linked quarter.On a GAAP basis, EPS was $0.59 and earnings were $120.5 million, which included a $12.1 million gain from the termination of Astoria defined benefit pension plan that we excluded from our adjusted earnings. We continue to produce strong organic loan growth of $636 million over the linked quarter, which is an annualized growth rate of 14.4%. Commercial real estate, public finance, traditional C&I, mortgage warehouse and lender finance portfolios have grown organically by more than 10% year-over-year. During the quarter, we saw a runoff of $165 million of non-strategic low rate residential mortgages.On October 7th, we announced the acquisition of an $843 million equipment finance portfolio from Santander Bank. The portfolio is comprised of loans and leases to middle market and corporate clients with an average relationship size of approximately $5 million, a tax equivalent yield a 4.3% and the duration of 3.5 years. We expect this transaction will close by the end of November.We will continue to remix the loan and securities portfolio to achieve higher risk adjusted returns. We will also return to growing the overall balance sheet as we have most of the balance sheet repositioning behind us.Deposit balances increased significantly driven mainly by a seasonal increase of municipal deposits, new brokered CD deposits relationships and a successful launch of our new direct bank channel. We also generate a substantial relationship commercial deposits toward the end of the quarter. Total deposits increased by $630 million at September 30, compared to the linked quarter. For the third quarter, total deposits cost were 92 basis points or 1 basis point higher than prior quarter. We anticipate that the actions we have taken over the past four months will lower deposit cost and overall cost of funding in the fourth quarter. We will continue to specifically target higher balance, higher costs municipal deposit relationships, which did not report price in the third quarter. Although total funding costs increased for the quarter by 1 basis point to 116 basis points. Our spot funding cost at September 30 was 110 basis. Our mix of products, channels and funding sources provide flexibility to grow balances while we lower funding costs.Our core net interest margin excluding accretion income on acquired loans was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprise approximately one third of our assets, which coupled with competition for deposits had pressured our net interest margin. However, as we detail on page 13 of the presentation, we have maintained a stable core net interest margin over the past 12 months, as third quarter NIM was essentially the same as a year ago. This reflects our balance sheet re-mixing, earning asset repositioning and focus on controlling deposit costs.Assuming one additional fed rate cut in 2019. I wish that was an increase. We anticipate that our core net interest margin should remain steady at approximately 315 basis points for the first quarter, as we reduce our proportion of securities earning assets, lower FHLB costs and borrowing balances and reduce deposit costs. At pro long, flat interest rate environment will continue to impact our net interest margin and profitability.Core fee income growth was strong as a result of commercial loan fee income, swap fees, treasury management fees, accounts receivable fee income and bullying income resulting from the restructuring of this portfolio. Excluding the pension gain and securities gains and losses, non-interest fee income grew by $5.3 million or 19% over the linked quarter. We expect core fee income to be over $110 million for 2019.Core expenses exclusive of amortization of intangibles declined from the prior quarter to $101.7 million or 6%. We continue to aggressively reduce our financial center network and staffing and have reallocated a portion of the reductions to support growth in the commercial teams, technology and enterprise risk management areas. We consolidated 10 financial centers and one back office location, bringing the total to 87 financial centers. We expect to be under 80 financial centers in 2020. Overall, we reduced net full time equivalent employees in the quarter by 131 people. Our expense run rate for the quarter equates to an annualized operating expense level of $403 million.Yesterday, we announced a strategic partnership with Deloitte Consulting to provide technology support in the areas of cloud based infrastructure, robotics and automation, enhanced digital banking applications, and artificial intelligence enabled service experiences. We've been successfully utilizing their AI capability over the past year and are excited for this business relationship which will expand our technology capabilities. We view this as an opportunity to use best-in-class capabilities on a variable expense basis, where both parties are aligned to provide the best client and colleague experience and provide incremental positive operating leverage. Most importantly, we will be able to access these capabilities at no incremental core operating costs relative to our current run rate, allowing us to maintain our current expense levels.Credit quality and capital levels remain strong. Charge offs increased to $13.6 million for the quarter, resulting from the continued resolution of three ABL and equipment finance loans that we highlighted last quarter. We expect charge off levels for the fourth quarter to return to the 10 to 20 basis point levels we have realized over the past six quarters. The level of non-performing loans, delinquency, and substandard loan categories all improved this quarter.Total tangible common equity to tangible assets was strong at 9.22% and total risk-based capital was 13.88%. During the quarter, we repurchase 2.8 million shares and have 5.6 million shares remaining in our repurchase authorization. We continue to evaluate the use of excess capital for investment into our core business, share repurchases and dividend payouts, and anticipate we will repurchase between 4 million and 5 million shares in the fourth quarter.Finally, we are confident in our model and our ability to meet and exceed our growth and return targets in the future, even with a more challenging rate environment for several reasons.First, we have effectively repositioned our balance sheet. We now plan to grow the balance sheet. We expect net loan growth in the fourth quarter to be in the $1.12 billion $1.3 billion range.Secondly, we have a model that effectively produces strong organic and acquired commercial loan growth. Our organic loan growth in the commercial group will exceed $1.8 billion in 2019 and coupled with portfolio acquisitions, we can support our growth objectives.Third, we're adding additional funding channels and are lowering the cost of funding to support growth. We have seen strong deposit flows from our direct channel in a short period of time.Forth, we have been very effective, as evidenced by our efficiency ratio in reducing core expense levels, and reallocating savings to higher return businesses. Annual run rate OpEx declined $16 million compared to the prior quarter.Fifty, we have strong credit quality, capital levels, liquidity and core earnings that will enable us to support growth.We have strategically and structurally aligned the company to produce incremental positive operating leverage in the future. We continue to point to the information on page 4 of the presentation that reflects the overall results of our actions over the past several years. Over the five year period ending September 30, 2019, our adjusted EPS growth compounded at an annual growth rate of 18.8% and our tangible book value per common shares grown at 15.4%. We expect to continue to deliver strong financial results.So now let's open the line for questions.

[Operator:]

[Operator Instructions] We will now take our first question from Casey Haire of Jefferies. Please go ahead.

[Casey Haire:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Good morning, Casey.

[Casey Haire:]

I wanted to start up on the NIM. First off just I'm assuming the NIM guide assumes an October cut. And then what's the NIM guide 315 does imply some compression here in the fourth quarter, you know, to 7 bps by my math, I'm just trying to square that with the release that speaks to sustaining the NIM at this – at this 315 level?

[Jack Kopnisky:]

Sorry, I didn't understand your question. You mean, what do you mean for the perspective of a decrease of 7 basis points?

[Casey Haire:]

So the NIM guide right now is three is 315, correct? So to get to 315 for the year, you know to get to that level would imply about 308 NIM in the fourth quarter?

[Jack Kopnisky:]

Yeah. Sorry, that's – you know, so we're – essentially the guide is we're going to maintain it about 315. So the Q4 level we anticipate it's going to be somewhere around 315. And that's going to be driven by, so that's just, you know, kind of, I think semantics of our presenting that, Casey. So we're not envisioning a 308 decrease in the NIM, no. So it's about 315 steady, and it's going to be driven by our ability. You know, there's three givens on NIM, so there's going to be some compression on asset yields, there is another cut in the next couple days. And we think that that's largely going to be offset by, you know, the repricing of borrowings that we have, you know, a substantial amount of those repricing this quarter. And then moving into next year, we repriced the entirety of our borrowing stack except for the senior notes and the subordinated notes, everything else thus reprices on an eight month window. We have about $1.5 billion of CDs that are going to reprice over the next six months, about a third of that happening in the fourth quarter, and then two thirds of that happening in the first quarter of next year. And then the – you know, what we're focusing on right now, which is our number one area is kind of continuing to work through our commercial banking teams on getting the cost of deposits on higher balance commercial municipal accounts down. So that's semantics we think that we're you know, even with a rate cut, we're assuming one for this quarter, we think that we can stay at that roughly that 315 that we're today. So we don't envision it falling below 310, no.

[Casey Haire:]

Okay, great, that makes sense. So – and just following up to that. On slide 12, can you just take through, you know, what is the rollover rate on the borrowings, the 233 of the 900 million at 233 this quarter, and then your loan yields were 460, you know, new money in the third quarter, you know, where is that today?

[Jack Kopnisky:]

So, the new money yield is roughly at the same level. So, we haven't seen, there will be some impact to that if, you know, we do have another cut here. But, you know, the 4.5% to 4.6% on the new loan yields, we feel pretty good about that based on what we're seeing in the pipelines for the fourth quarter. You are going to get as we've highlighted there the same time their book is about a 4.3% yield. So it's slightly below that by about 20 basis points. But even factoring there we should – that is the – of their acquisition, we should we about 4.5% new loan yields in the fourth quarter.On the repricing of the borrowing stack today it's at about 190 basis points, the 2%. But there's a cut next week. We're in the next couple days then we should see some you know, we should see some movement down from that today. So there should be somewhere between 20 to 25 basis point decrease in the borrowings that reprice in the fourth quarter and potentially in the next year, could be lower than that. I guess higher repricing that than, yeah.

[Casey Haire:]

Okay. And then the mix shift out of the securities book, you know, down to 15%. Should we assume that this pace continues, you know, was down, I guess, 150 bps. You know when do you, how long do you anticipate getting to that 15% from 21% today?

[Jack Kopnisky:]

That depends. It depends on the performance of the municipal book going forward. So one of the reasons that we've talked about in the past, we are having that larger than the normal, security balances affect substantial chunk of what we do in the municipal side are collateralized deposit, right. So, you know, one of the key areas that we are targeting to – the focus on to reduce the cost of deposits on the funding side is, you know, targeting the higher balance municipal accounts. To the extent that those municipal accounts reprice, the way that we anticipate that they will, the security decreases are going to be, you know, programmatic over time, and it's not going to – it'll take us two to three quarters to get to that 15%. To the extent that, you know, we're not successful in repricing those accounts in for whatever reason, there's deposit outflows that comes from that municipal side, then you're going to get margin – what we will get there much faster could potentially happen this quarter, but more than likely would happen early next year. And so the math from that perspective is, you know, the securities that roll off would be – the security that we would sell in order to fund or to get those numbers down on the securities portfolio are yielding today somewhere between 225 to 240, roughly. And our higher balance commercial municipal – I am sorry – municipal accounts are yielding somewhere between, you know, 215 to 235, depending on the account.So, net-net, if you have a decrease of municipal deposit funding that is offset by security sales with the types of securities that we're going to sell, we're going to decrease the size of the balance sheet, we would decrease the size of the earning assets, but we wouldn't really sacrifice much on the income front because again, in this flat rate environment, we like the municipal business a lot. But in this flat rate environment, there's components with municipal business that don't make sense from an economic perspective. And those are the parts that we're going to focus on. So if you – from your modeling perspective, I would, you know – we don't anticipate that there's going to be substantial municipal deposit outflows. So I would focus on two to three year unwind – sorry – two to three quarter unwind to get to that 15% target, but it could potentially accelerate that we need to fund some deposit outflows on the municipal side.

[Casey Haire:]

Okay, great. And just last one for me. Just tying it all together, I mean, it sounds like loan yields, you know, are coming on even with the cut, you know, somewhere between that 430-450 range, and then your funding costs are 110 and then you have – you know, and falling. So I mean, the incremental NIM seems like it's a decent 320 to 330 and you're talking about 315. So what is the headwind that I'm missing?

[Jack Kopnisky:]

It's the rate and pace of being able to manage down the commercial and municipal accounts. Very clear as to how the consumer components of the house will continue to reprice very clear, what's going to happen on CDs, very clear what's going to happen on borrowings. The commercial and municipal accounts are, you know, the bread and butter especially in the commercial side, bread and butter of what we do. You know we have grateful deposit relationships there that also have lending relationships with us. We are going to protect that book, and we're going to manage that book smartly. But we anticipate there's definitely opportunities to move that cost the deposit down. But at the same time, we're not going to essentially just for the sake of moving deposit rates down sacrifice and of the good work that our commercial banking teams have done over the last seven years of building those deposit relationships. So that is where we're being cautious. We're optimistic of get being able to move those down, but we're being cautious with it as well. And so, if it happens faster, even better. And if the NIM is better than 315, you know, there's path to getting there. But we feel good about being able to maintain it. And to your point, yes, to the extent that we're – that we can get to where we want to get faster on the cost of the positive side, there would be some upside to that. Yes.

[Casey Haire:]

Great. Thank you.

[Jack Kopnisky:]

Thanks.

[Operator:]

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

[Steve Moss:]

Good morning.

[Luis Massiani:]

Good morning, Steve.

[Steve Moss:]

I wanted to ask about the benefit to expenses from a cost saving plan and if you quantify the total cost as you expect from accelerating the financial center closures?

[Luis Massiani:]

So we have looked at the range of, you know, kind of for 15 core expense to 425. And we're pretty comfortable it be at the lower end of that range from a core expense basis. So, you know, what we've tried to do is, you know, as we grow deposits and opportunities in different deposit channels, like commercial or branch based consumer, municipal and some of the direct bank things, it's allowed us to be more aggressive in being able to turn down some of the financial centers we have, thus been able to reduce some of the cost. The cost we take out, we put in kind of one pocket of real savings and lowering the overall core costs. And then other, we also take some of those costs and reallocate them in areas where we feel comfortable and growing. Putting the back into the commercial teams, putting into technology, putting it into enterprise risk, are the area. So we're comfortable that we're getting down to the point of 80 financial centers by the end of 2020. And those 80 financial centers will be held well in excess of $200 million average balances, deposit balances. We feel that that is the right kind of structure and size for the situation we're in right now and by the demand of the consumers that are coming into those offices.

[Steve Moss:]

Okay, so then for 2020, it's fairly safe to assume perhaps a sub $400 million core expense run rate?

[Luis Massiani:]

We're not ready to talk about sub 400, but we believe that it's 415 you know toward the 415 area.

[Steve Moss:]

Okay. And then my second question on loan growth guidance for the fourth quarter, 1.1 to 1.3, does that include or exclude the acquisition?

[Luis Massiani:]

It includes the acquisition and it is net loan growth.

[Jack Kopnisky:]

Three components, yeah, three components to it, so you have the acquisition, you have somewhere between 400 million to 500 million of organic growth through the commercial teams, and then you're going to, you know, we will again see somewhere between 150 million to 250 million of run off between resi and the acquired resi and multifamily portfolio.

[Steve Moss:]

Okay. And my last question. I am wondering if you have any color around potential impact from CECL in 2020.

[Jack Kopnisky:]

So we've, you know – we're going to shortly and more than likely will our 10-Q filing we'll have some additional information in there, but big picture, you know, it's very consistent what we've talked about in the last, you know, quarter's call. We're going to see an increase, we're talking ranges, but we're going to see an increase of somewhere between 50% and 60% relative to our balance sheet, our allowances for loan loss reserves today. Now you have to remember, that's a little bit of an apple to an orange when you look at our numbers, because the purchase accounting adjustments and the various acquired portfolio that we have, you know, create a little bit of a difference relative to folks that have not had product portfolios and that have, you know, kind of organic loans on their balance sheet. So, now we anticipate it's going to be about a 50% to 60% increase relative to the 104 million that we have today, but about half of that is unwinding kind of left pocket, right pocket type of dynamics between purchase accounting adjustments relative to, you know, required allowances under CECL. So now, we don't envision it being a significant impact to our capital position. And, you know, we feel we've been doing a lot of work around that, as you can imagine, for the past, you know, two years and we will be pretty close to being able to provide kind of full details shortly.

[Luis Massiani:]

And in reality, our provision expense will remain pretty consistent. We don't view – the net effect of all this on a financial statement basis is that provision expense will remain around where we're at today. So when you cut through all the moving, you know, allowances and reserves around, it ends up to that level.

[Steve Moss:]

All right, thank you very much.

[Luis Massiani:]

Thank you.

[Operator:]

We will now take our next question from Ale Twerdahl of Sandler O'Neill. Please go ahead.

[Alexander Twerdahl:]

Hey, good morning.

[Jack Kopnisky:]

Good morning, Alex.

[Alexander Twerdahl:]

First off, can you just remind us the characteristics of those three ABL credits that cause the higher charge off this quarter and I presume that – I guess we'll start with that.

[Jack Kopnisky:]

One of them was a printing sector, printing industry sector exposure. One of them was a lending business or lender finance business. And, you know, one of them was a commercial construction crane operator. So you know, pretty diversified from the perspective of, you know, the industry sectors in which they operate in. And there's always a story to credit. So we could be here for two hours telling you what happened with each one. At the end of the day, you know, it's the nature of the ABL business, you know, we've had three of these pop up, we're now kind of working our way through them, two of them are now behind us where we have essentially executed our collateral and we've charged off and we're going to charge off and then there's one more we're still going and collecting our accounts receivables and selling off some inventory and equipment and so forth. So they should – this third one should also be behind us in the fourth quarter. But you know, at the end of the day, this is what we do in ABL when things go sideways, we go and collect as much money as we can and sometimes, we have to charge off some number. So, end of the day, you know, the three workouts, you know, painful to go through a workout but they actually work the way they should and you know, we collected as much as we could and we moved on from that.

[Alexander Twerdahl:]

And just sort of the difference in this sort of higher charge off level of this quarter then – then maybe indicated that when we talked about in last quarter. Is that a difference in the collateral value versus what you thought they were? Or is there something else we should be thinking about?

[Jack Kopnisky:]

Pretty much though, it is, and it's largely driven by one of the relationships which was more driven by an enterprise value dynamic versus borrowing base or kind of accounts receivable dynamic where it's, much clearer to be, when you're borrowing or lending against accounts receivable, it's easier to kind of figure out how much account receivable and then take some haircut or discount to them to and figuring out or estimating what your realizable value is. In one of the instances, the workout included kind of selling the business as a going concern and that's where some of the, kind of greater uncertainty arises and that's what – that's what resulted in good amount of those charge offs, but that is now done and behind us.

[Luis Massiani:]

We expect a return – instead of 27 basis points to charge offs, we expect to return to that 10 to 20 basis point side. All the rest of the trends that we see in credit, there's nothing that concerns us, alarms us and frankly, as rates continue to come down, your credits going to remain relatively pristine going forward. As long as rates stay low, they're going to be very pristine levels of credit metrics.

[Alexander Twerdahl:]

Got it. Appreciate it. So, it’s safe to assume that the provisional returned to that 10 million to 12 million per quarter following this event?

[Luis Massiani:]

Yes, we anticipate that is the case.

[Alexander Twerdahl:]

Okay. And then just back to the NIM, seems like the acquisition you did has a spread that's much tighter than the sort of the state in NIM, so, if this thing closes in November, presumably that's in the 315 guide is that – is that indicate that kind of what the funding costs coming down, some of the other metrics that the margin is actually excluding the acquisition would be going up a little bit in the fourth quarter?

[Jack Kopnisky:]

That's right. That is correct. We do anticipate, we’re going to put so – some of the, as we put it in – sorry – I don't have the slide deck, just in front of me, but one of the pages that we have in the slide deck shows that has some information on the acquisition and we are going to fund some of that with some security sales. So, it's not that, dollar for dollar the acquisition doesn't impact entirely NIM because we are going to replace them 2% yielding securities with these 4.3 yielding assets. So, that would be a positive. But yes, net, net, this is going to know, it would decrease NIM on a short term basis, and without it that would have been a slightly, we would have been, providing slightly higher guide relative to the net interest margin for the fourth quarter.

[Alexander Twerdahl:]

Okay. Great. Thanks for taking my questions.

[Jack Kopnisky:]

Thank you.

[Operator:]

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

[Collyn Gilbert:]

Thanks, good morning, guys. Just wanted to start with growth and make sure I understand what you guys are saying. So, the fact that you're indicating that the balance sheet repositioning is for all intents and purposes done. So, that means we should not assume any more runoff in the resi book and then also no more run off in the multi book?

[Jack Kopnisky:]

No. There will be runoff in that. So we're just saying we can clearly outrun the runoff, so that we have net growth in this. So, for example, the fourth quarter where, as Louis said, we have the components of organic growth, were $500 million in commercial loan increases, loan growth, we have the same portfolio of $843 million, and we'll net debt against up to a couple of hundred million dollars’ worth of resi runoff during that period of time that comes out to that kind of $1.1 billion to $1.3 billion range. And we're confident as we go forward that that runoff on the resi side, and we're frankly replacing all the multifamily stuff will be in that range. So, we'll have net loan growth and begin to grow the balance sheet again.

[Luis Massiani:]

It’s more towards – if you look at what, since the beginning of the year, and when we started talking about the residential mortgage sales. When you factor in the resi sales plus the sales of securities, we've essentially sold them almost $2.5, $2.8 billion of earning assets over the course of the year. And that has essentially gone to fund the acquisitions that was unfortunate at the same time there and part of that was the amount of reduced borrowing just because we didn't like the residential mortgage loans that we sold and so forth. And so, this is – the earning asset composition year-over-year is actually toward to the total balance averting assets year-over-year at decrease because of the resi sales and security sales. And so even though we're going to be continuing to sell some securities and continuing to do some of that bouncy repositioning, we fully anticipate and expect that our $26.4 billion, $26.5 billion of earning assets today are going to starting in the fourth quarter increase quarter-over-quarter similar to what we were doing prior to kind of getting this accelerating this balance sheet transition. So, you will start seeing earning asset growth quarter-over-quarter and year-over-year. We have not done that this year, but that was a targeted strategy of kind of getting the lower yielding components of the balance sheet in a better place.

[Jack Kopnisky:]

Yeah, I would also – we will never be done with reposition because there's always going to be different rate environments and economic environments where you make some make some changes. But one of the reasons why we missed the analysts’ expectations is because we had another quarter of kind of repositioning the balance sheet. Now, in the fourth quarter we feel very confident that when the majority of that as Luis said is behind us and we can start to really target the types of asset categories and situations we want where we want to grow the balance sheet and continue to, as we have in the past demonstrate positive operating leverage.

[Collyn Gilbert:]

Okay. Okay. And then just along those lines and you sort of indicated this Jack, but the multifamily loans were up linked quarter. And so is the intention – as you said the intention is to replace runoff. I mean obviously, you grew this quarter, but can you just talk about sort of how you're thinking about adding the multifamily loans, the structures you're adding, the rates you're adding, and what that replacement looks like?

[Jack Kopnisky:]

Yeah, yeah. So, on the multifamily side where we're getting relationship based multifamily loans that are replacing broker originated multifamily loans and the variance is probably 100 basis points difference, so, on just the loan yield in addition to the deposits we get. So, part of this is just not the category. It's how the loan comes and how it's priced. And then frankly, what other types of things we do with those with those clients. So, we're comfortable that we can replace the multifamily runoff with relationship based multifamily types of lending, but we're not going to see tremendous net growth out of that, that particular category as we go forward.

[Collyn Gilbert:]

Okay, okay, that's helpful. And then just putting aside the movement that you're going to see in some of the legacy assets that you want to runoff that you're talking about. How are you anticipating just traditional pay downs, right, just traditional, acceleration of loan paydowns, given the rate environment. I mean it seems like you guys have done a really good job or, just the origination activity has been so enormously robust that you've been able to offset. But just seems like you were paid down to been less than what we're seeing in kind of the broader market. So, just trying to understand that dynamic a little bit as it, how does – how you're structuring the loans, or is it the seasonality of the loans is different or just kind of in the normal course of your business the pay downs that you're seeing?

[Jack Kopnisky:]

I'd say something slightly different. So, if – by that you mean, kind of the activity that we're seeing on the CRE and the multifamily side, I think that the fact that the stated coupons on the multifamily loans are super low, right. So, remember that the vast majority of what we do on multifamily or the bulk of multifamily today was acquired from Astoria. With that for $3.74 billion multifamily loans of which 75% and 80% of that was acquired from Astoria and the coupon on those banks are 3%. So, I don't think that those loans I guess, I wish I could take credit for being so good at managing loans, but this is the fact that I think we have not yet gotten to the bogey, that those borrowers would have in kind of paying off refinancing their loans just because they are again, three to two and a quarter coupon. So, the market isn't there yet where those types of loans would start repricing and kind of refinancing faster. But we are continuing to be in a decreasing right environment, then you will see, some greater run off there.

[Luis Massiani:]

But the flip side of it too is that, we've had – because of the way we set up the company, you have multiple types of portfolios to grow from. You're not a slave to any one category. So, frankly, just about every category we see various categories in commercial real estate, different C&I, most of that commercial finance portfolios, there are niches out there. So, view this is this is this is robots. There's lots of volume out there. Our pipelines have continued to be full, we can kind of pick and choose what categories we want that goes back to our confidence in kind of holding as best as we can on the loan yield originations as we go forward because you can move capital around along the way, in part because you have optionality in the types of asset categories you can originate in. And I've said this 1,000 times, we're still a small player in metropolitan New York, and then we have a national franchise too. It really gives – this is a robust time, but even if it wasn't a robust time, there's still plenty of opportunities out there. So, the opportunities to look at growth in different categories, kind of outrun the potential pay downs in certain categories that we have.

[Collyn Gilbert:]

Okay, okay, that's helpful. And then just finally, and I haven't done the math yet, but you guys are still maintaining the eight in a quarter key ratio, but it seems like you're going to end up coming in a lot higher than or maybe my math is just not quite right?

[Jack Kopnisky:]

Well, it’s going to take us a while to get to that. That's a long term target. It's going to take us a while to get to. Total 5 million share repurchase. Not get it to that number. You are correct.

[Luis Massiani:]

We're not going to get there next quarter. You're pretty good at mental math.

[Collyn Gilbert:]

I am not really. I don't even know what it is. Alright, so, that eight in a quarter. I mean that could even be you – I mean, do you see yourselves even hitting that in 2020?

[Jack Kopnisky:]

It depends, yeah. So it depends on what the growth in the balance sheet is and what other potential growth opportunities we see out there. To the extent that we continue to grow the balance sheet at in earning assets at somewhere between 1 billion to a 1.5 billion year-over-year, then it would probably take us. If we got there it would be late 2020. So, we're going to continue being pretty active in the buyback front for some time we envision.

[Luis Massiani:]

So, we have a lot of dry powder.

[Collyn Gilbert:]

Yeah. Okay. All right. Thanks, guys. I'll leave it there.

[Jack Kopnisky:]

Thank you.

[Operator:]

We will now take our next question from Dave Bishop of D.A. Davidson. Please go ahead.

[David Bishop:]

Hey, good morning, gentlemen.

[Jack Kopnisky:]

Good morning, Dave.

[David Bishop:]

Hey, follow-on the subject of the share repurchase program. I mean obviously, it's looking ahead. It sounds like you're going to complete that here in the near future here. Given the expectations for resumption of the growth in the balance sheet, as you envision a strong likelihood of another board authorization into next year to a similar type level, the most recent authorization?

[Jack Kopnisky:]

Yes. Again, it gives us optionality to, buy back shares or look at investing more into the business. So, I think our board is very comfortable of in upping the authorization.

[David Bishop:]

Got it. And then turning to fee income looks like it's going to comfortably hit that 110 level this year. As you look into 2020, do you think most of those drivers are sustainable at that current level?

[Luis Massiani:]

We do. So, we think you know, there are puts and takes in the mix of those fee income categories but we're pretty confident that, the loan fee related types of things will continue to grow, comfortable with accounts receivable, the restructuring that has been done should yield even better returns as time goes on. So, we are comfortable going forward.

[David Bishop:]

Got it. And then with the – you address the ABL issue in the beginning, but could you remind us just in terms of maybe the comfort, I guess that asset class, we've been getting a lot of questions against lately as we move along the credit cycle here in terms the riskiness goes on then asset, your comfort level in terms of potential losses as we manage down the credit cycle. I am just curious maybe just give us an update in terms of the loss history there and, sure you got comfort overall as we sort of migrate through economic trend?

[Jack Kopnisky:]

Vast majority of our ABL is – ABL is secured by 85% accounts receivable, eligible accounts receivable 50% advances against inventory. So, that's the majority of this. There's a couple categories where we had that plus some equipment loans that were in ABL that cause the variation in value and back to Luis's comment on enterprise value. So, most of our portfolio is traditional ABL. There's a portion of it that has some equipment finance or some cash flow dynamics to it. So, we're comfortable with the portfolio. We're comfortable, we know what what's going on in the portfolio. We've done a ton of analysis on it given, frankly, where rates have come. The negative on ABL now is that the rates for ABL, ABL’s come down to the point where in some cases doesn't make sense. We look at a ton of ABL deals. The volume is overwhelming and we pass on the vast majority of ABL deals now because of a pricing one in some cases structure.

[David Bishop:]

Got it. And one final question. I know you had sort of highlighted the public finance segment as a strong close to the second half of the year. Good growth from the third quarter, you still see that sort of carried through into the fourth quarter of this year?

[Jack Kopnisky:]

We do. It's an interesting business, lots of communities want to do infrastructure projects and the infrastructure projects across the America, infrastructure is aged and these projects are generally secured by the revenue of the community, which we think is good credit. And I think we're getting pretty good yields out of those types of credits. So, we're comfortable that that will continue to grow and expand and the demand will be consistent and maybe even higher into the future given the infrastructure that we're financing.

[David Bishop:]

Great, thank you.

[Operator:]

[Operator Instructions] We’ll now take our next question from Steven Duong of RBC Capital Markets. Please go ahead.

[Steven Duong:]

Hey, good morning, guys.

[Luis Massiani:]

Good morning.

[Steven Duong:]

Hey. So you guys had talked about I think it looks like a 310, 333, 335 corridor on your NIM, generally in the past. If we do end up getting a December rate cut, do you think that 310 line would hold?

[Luis Massiani:]

It would, but it would be, it'd be so. You see similar, so we get two cuts this quarter, it'd be similar to what happened in the third quarter, which is, that would put some pressure of probably five to seven basis points down. So, I think that it'd be, we still – the 310 I think holds but if it went below 310, it wouldn't be meaningful below 310. Then again, we have not – I caveat that by saying that what you saw in the third quarter and we talked about this in the second quarter call is that, the good thing about having low deposit bases on the way up that was obvious, conversely, you're also going to see that same dynamic on the way down. We're very confident that once those commercial and municipal accounts start repricing, you have that plateau feature where a substantial chunk of the book starts repricing from one day to the next, but it takes a while to get to that point. So, longer term to rate cuts give us greater air cover to continue to move those costs the deposits down. So, short term, there might be some risk to it, but there's no doubt that the commercial side of the house catches up from a cost of funds perspective. And so, two cuts, even if they're two cuts this quarter versus one, it would not meaningfully change, whatever we consider to be the proper run rate NIM number for 2020 because we are confident that the commercial deposit side of the house catches up relatively quickly as well. But it will take a little bit of time to catch up, but once it catches up, that replaces meaningfully down in one shot.

[Steven Duong:]

Understood. And correct me if I'm wrong. I think your historical data has been around 30%. Are you looking at a similar 30% in this go around?

[Luis Massiani:]

We think sells 30 to 35. And that's got the tale two cities and the consumer side is somewhere between 10% to 15%, the commercial and municipal is 40% to 50%. So that commercial – if that 40% to 50% holds true on the commercial side, you would start seeing that, for every two cuts, you should start seeing about a decrease of 25 basis points, and that's what we have started to see play out in the book. So which again, we're pretty confident that it comes down, so we just need to continue focusing on kind of working with all of our commercial banking teams and having the right types of conversations with our clients sooner rather than later so we can start moving those costs down.

[Steven Duong:]

That's good to hear. And then just going on to your CECL comments about the 50% to 60%. Is that – is basically the offset to that going all that going to capital or some of that going to grows up?

[Luis Massiani:]

It’s going to capital.

[Steven Duong:]

Okay. And dovetailing into that, how does that impact your 2020 accretion outlook?

[Jack Kopnisky:]

It does not because the accretion numbers that we provided in the past already said there's going to be then let me caveat this by saying that both my comments before now, not my auditors and legal folks would kill me. Our preliminary results they work and all that good stuff. So, you know, let me caveat that. But it wouldn't change it meaningfully, because we had already started to embed the impact of CECL adoption into 2020, we were providing our prior guidance. So we've been pretty consistent in saying that it's going to be somewhere between 30 million to 40 million bucks of accretion next year. If anything, I think that the bigger impact to accretion is actually the fact that if you continue to see, you know, acceleration of pay downs and so forth, because of low rates and refinancing activity and so forth, that's going to have a bigger impact on the guide that we provided than the adoption of CECL. So we feel pretty good that the numbers that we provided in the past with transitioning down to about 30 million to 40 million bucks in 2020 or we are still going to hold – we still feel pretty good about those.

[Steven Duong:]

All right, good to hear. And then just one last one. Just on your expenses. It looks like you guys came in about 142 basis points on assets. As you start to pick up more assets, do you see that number gravitating lower into 2020?

[Jack Kopnisky:]

Yes.

[Steven Duong:]

All right. Terrific. Thanks for the color guys.

[Jack Kopnisky:]

Thank you.

[Operator:]

It appears there are no further questions at this time. Mr. Kopnisky, I would like to turn the call back to you for any additional or closing remarks.

[Jack Kopnisky:]

I really appreciate everybody's interest in following the stock. So thanks, have a great day. Take care.

[Operator:]

Ladies and gentlemen, this concludes today's calls. Thank you for your participation. You may now disconnect.