Sterling Bancorp
Q1 2017 Earnings Call Transcript

Published: 26 Apr 2017

[Operator:]

Good day and welcome to the Sterling Bancorps’ First Quarter Conference Call. As a reminder today's conference is being recorded. And at this time I would like to turn the conference over to President and CEO Jack Kopnisky. Please go ahead.

[Jack Kopnisky:]

Good morning everyone and thanks for joining us to present our results for our first quarter of 2017. Joining me on the call is Luis Massiani, our Chief Financial Officer. Our positive momentum in operating performance continued this quarter as evidenced by our ability to achieve record levels of loans, deposits, revenues, and profitability. On an adjusted basis, total revenues increased by 13% year-over-year and operating expenses grew by 1%, creating significant positive operating leverage. We have consistently focused on increasing productivity, eliminating non-core businesses that do not need our profitability and return targets and acquiring sources of incremental revenue while reallocating our human and capital resources to businesses that fit our strategy. We are constantly focused on growing revenues at two to three times the level of expenses. These efforts resulted in growth in adjusted net income to $41.5 million or 29% greater than 2016 first quarter. An adjusted EPS of $0.31 or 24% greater than 2016 first quarter. Adjusted return on average tangible assets was 127 basis points and adjusted return on average tangible equity was 15.19%. Adjusted efficiency ratio improved 520 basis points to 43.7% from last year same period. Given our diversified loan portfolio and businesses mix, net operating margins are beginning to expand as we experienced an increase in the weighted average yield on loans and in our net interest margin. On March 7, 2017 we announced a definitive agreement to merger with Astoria Financial Corporation, which is the next step in the continued growth and evolution of our company. Astoria operates in highly attractive markets in New York City and Long Island, has a premier low cost deposit base and will allow us to further accelerate our strategy of building a high performing regional bank. The combined company will have approximately $29 billion in assets and $19 billion in deposits in the New York metropolitan area. We anticipate the merger will close in the fourth quarter of 2017, subject to shareholder and regulatory approval. The transaction will be immediately accretive to both tangible book value and earnings per share. Now let me turn the call over to Luis to detail the financials for the quarter, along with more detail regarding the Astoria transaction.

[Luis Massiani:]

Thank you Jack and good morning everyone. Our performance in the first quarter was strong and continued our positive momentum. We reported record results for the first quarter of 2017, which include growth in adjusted revenues, and expansion in both GAAP and core tax equivalent NIM, and new highs in loans, deposits, adjusted net income and adjusted earnings per share. Turning to Page 4, we continue to focus on creating an efficient balance sheet. With a diversified loan portfolio that is funded with deposits. Our total portfolio loans grew by nearly 16% over the prior year and our commercial loans grew by $1.5 billion or nearly 18%. Our total deposits grew by $923 million or 10%. Our loans to deposits ratio was steady at 95% relative to the linked quarter. Our investment securities as a percentage of total assets increased to 23% at quarter end as we have begun repositioning our securities portfolio in preparation for the merger with Astoria. We anticipate we will have a slightly higher balance of securities as a percentage of assets over the course of 2017 as we take advantage of market opportunities and purchase securities over time prior to merger day. Our tax equivalent net interest margin was 355 basis points. This included 3.5 million of accretable yield on acquired loans. Excluding the impact of accretable yield, net interest margin was 3.44%. Our tax equivalent net interest margin increased by 8 basis points relative to the last quarter even though our accretable yield on acquired loans decreased by one million. Our core NIM, excluding accreted yield increased by six basis points from 3.38%. The asset sensitivity of our balance sheet given our mix of businesses is evidenced by the impact of recent increases have had on our margins – the recent increases in interest rate have had on our margins. As we think about our core NIM, please remember that there are several assumptions and inputs that will impact our performance, including the composition of our earning assets, the level of market interest rates and the competitive dynamics in our markets for loans and deposits among other bankers. We anticipate that we should benefit a bit further from the March 2017 rate hike and believe that our corn NIM could increase to a range of 345 basis points to 350 basis points for full-year 2017. On page 5, let's review the reconciliation of GAAP and adjusted results for the quarter. We realized 23,000 losses on sales securities and we incurred $3.1 million of merger-related expenses in connection with the Astoria merger, which consisted mainly of financial and legal advisory fees and client communications. We also continue to amortize non-compete agreements from prior acquisitions. Adjusting for these items, our net income was $41.5 million and our adjusted diluted earnings per share were $0.31, which were both records. We increased adjusted earnings per share by $0.06 or 24% over the same quarter last year, even though we had an increase of over 5.3 million in average shares mainly as a result of our November capital. We continued to focus on growing our public sector finance business and municipal securities portfolio. Our estimated effective tax rate for the year is 32.5% matching our rate in 2016. The adoption of a new accounting standard this quarter requires a tax benefit in excess of compensation costs associated with our stock-based compensation plans be included in income tax expense as a discrete item. In the quarter, we recorded a tax benefit of $742,000 associated with this new standard, reducing our tax rate by 1.3%. We anticipate our effective income tax rate will remain between 32% and 33% for 2017 assuming no changes to current tax law. Also note that the purposes of calculating the tax impact of items that affected adjusted earnings and adjusted earnings per share were used in our full year 2017 tax rate estimate of 32.5%. On slide 6 and 7, we review our loan portfolio performance, which was strong. The composition of our loan portfolio as of March 31, consisted of 42% C&I loans, which includes our commercial finance business lines, and 47% commercial real estate. Commercial loan growth was nearly 18% in the past 12 months based on end of period balances and 24% based on average balances. This includes our traditional C&I, commercial finance and commercial real estate loans. Our weighted average yield on loans moved up nicely during the quarter, increasing to 4.57% which was an increase of eight basis points relative to the linked quarter. Excluding the impact of accretion income on loans, the yield on loans increased by 12 basis points relative to the linked quarter. Our diversified loan portfolio has positioned us well for a rising rate environment. On the next page you can see growth trends by business line. We experienced good growth in traditional C&I, equipment finance, and public sector finance. Mortgage warehouse lending balances declined approximately $130 million or 21% versus the linked quarter. As anticipated and discussed on our prior call the decrease in balances was due to an increase in residential mortgage lending rates, which negatively impacted mortgage refinancing activity and origination volumes. We have a diversified asset origination engine that allows us to allocate capital and resources to various loan types and we were able to offset the decrease in warehouse lending and increase our standings in the quarter. We estimate we’ll be within our previous guidance that total loans will grow at a low-to-mid teens growth rate in 2017. A substantial portion of our loan growth was back ended in the month of March therefore our end of period loan balances and full pipeline positions us meet our previously announced targets. On Page 8 our deposit growth over the past 12 months was strong. And at March 31, our deposits were at record level. Based on end of period balances, core deposits increased by $282 million relative to the linked quarter due to growth in commercial deposits and seasonal inflows in municipal deposits. Year-over-year total deposits increased by $923 million or 10%. And our core deposit balances increased by $552 million. We had a core deposit of ratio of 88.6% and a loans to deposit ratio of 95% at the end of the first quarter. Total cost of deposits was 38 basis points, an increase of two basis points over the fourth quarter of 2016. We continue to focus on hiring deposit gathering teams to drive deposit growth and anticipate that the combination with Astoria will allow us to lower deposit funding costs and give us a more balanced portfolio of commercial and retail deposits longer-term. On Page 9 we take a look at our non-interest income. Given our strategic actions in divestitures of trust in resi mortgage, we experienced a decline in non-interest income in the quarter. Other regulatory driven items such as the Durbin Amendment have also impacted deposit service charges. However, we are seeing increases in other non-interest income, which includes letter of credit fees, miscellaneous loan fees, loan swap fees and gain on sale participations of commercial loans. On aggregate, these fees were $3.6 million in the first quarter and increased $1.6 million over a year-ago. These fees are all linked to our commercial businesses and our more event driven versus low business. So there will be fluctuations in these fees from quarter-to-quarter. However, we're confident in our ability to grow these business lines substantially throughout 2017. Moving to Page 10, we continue to focus on maintaining tight controls over operating expenses and improving our operating leverage. For the first quarter of 2017 our total adjusted OpEx was just under $55 million, in line with our target range of $220 million to $225 million for the full-year and our adjusted operating efficiency ratio was 43.7%. Our total number of FTEs increased by eight on net basis now stand at 978. The increase in FTEs in the first quarter included ten revenue producing-higher hires that are focused on commercial loan to deposit growth across our markets and business lines. We maintain our target guidance of quarter OpEx in a range of $54 million to $56 million and estimate full-year OpEx will be at the higher end of a range at approximately $225 million in 2017. As we have mentioned previously, we will continue to make significant investments in our commercial banking teams, commercial finance businesses and enterprise risk management in preparation for the Astoria merger. Turning the Page 11, let’s review our asset quality. Performance in the quarter was strong. Our total non-performing loans decreased by $5.9 million, while criticized, classified assets increased by $13.1 million, mainly related to one commercial finance relationship is well secured but was rated special mention. Delinquent fees in the 30-day to 89-day pass through segment increased slightly and the coverage of our allowance for loan losses to non-performing loans increased from 81% in the linked quarter to 92%. On tax medallions we continue to make progress during the first quarter. Total exposure to the industry decreased by 1.9 million given repayments and now stands at 49.8 million at March 31, which represents 51 basis points of our loan portfolio. On Slide 12 and Slide 13 we show an update on the pending Astoria merger. Our regulatory applications in merger proxy statement are now filed. We have begun our merger integration planning process which is confirming that the revenue enhancements and cost saving opportunities we identified in our due diligence are significant and achievable within the timeframe we previously identified. We will accelerate additional team recruiting and hiring efforts across all the markets that we serve, in order to attain our targeted loan portfolio structure and growth over time. Longer term we also have the ability to further optimize our balance sheet and capital structure as the combined company will be a larger and more efficient issuer. Turning to the next slide, we will review the key drivers of earnings accretion. The transaction is accretive to tangible book value and earnings at close. And we are confident in our ability to meet our earnings at EPS accretion targets. The main driver of earnings accretion is $100 million in net annual cost savings, which we anticipate we will achieve within two years post-close. We expect to complete the repositioning of the securities portfolio and refinancing of approximately two billion of borrowings immediately post close. By eliminating this negative carry between securities and borrowings, we’ll create long time run rate earnings. The accretion of the interest rate market as a result of marking a story of loan portfolio to current market yields. As the interest rate environment remains at current levels, we will be able to reinvest Astoria’s loan portfolio over and off at higher yields relative to their current book yield also creating higher long-term run rate earnings. The one element of accretion that have a finite life is the accretable portion of the credit market, with represents approximately 5% of our estimate near to. This has to be replaced over time to the rebalancing the Astoria’s loans into a more diversified commercial loan portfolio like ours is today. The accretion of the interest rate and credit mark will flow through income over time and will provide us with a three-year to five-year runway to build this diversified loan portfolio. We have a clear path to accomplish this through our existing teams, new team hires and the ability to grow our commercial finance business lines both organically and through acquisitions. Jack?

[Jack Kopnisky:]

Thanks Luis. We are off to a solid start in our fiscal year. Financially we continue to demonstrate strong operating performance. As we said adjusted earnings were $41.5 million and EPS $0.31 were up 29% and 24% respectively over 2016 first quarter. Adjusted return on assets was 127 basis points and adjusted return on tangible equity was 15.19% a prudence of 12 basis points of 141 basis points over the same quarter last year respectively. Operating leverage increased significantly, revenues were up 13%, expenses up 1% and the adjusted efficiency ratio improved from – improved to 43.7% from 48.9% a year-ago. We continue to grow our company’s platform as demonstrated by the strong metrics, capital levels and the credit performance. We are very excited about the terrific opportunity to progress our model through the merger with a story of financial. First it creates a $29 billion franchise serving small to middle market commercial finance and consumers in high opportunity New York City metro area. There are few banks that provide the asset diversity, core funding and overall returns that the combination will represent. Secondly, our model becomes more efficient and opportunistic as this merger brings greater scale that will drive cost reductions and enhance productivity. Third, we will leverage Sterling’s diversified asset origination capabilities with Astoria’s strong retail franchise, low cost deposits and capital base. Fourth we gain a highly scalable presence in the attractive Long Island markets. And fifth, from a financial standpoint the merger results in earnings per share accretion of 16% after year-two, intangible book value accretion at close of 12% and an IRR of approximately 19%. We’re deep into the integration process and look to hit the ground running after close. We have filed all the necessary applications for regulatory approval, we are very confident that this transaction will enable us to evolve the company to the next level of performance. Now let's open up the lines for questions.

[Operator:]

Thank you. [Operator Instructions] We will take our first question from Dave Bishop with FIG Partners.

[Dave Bishop:]

Hi good morning gentlemen.

[Jack Kopnisky:]

Good morning Dave.

[Dave Bishop:]

Jack I notice the nice increase in the commercial real estate segment you guys obviously had some capacity there in the past and I think we recently the pricing conditions improve so it potentially jump back in pretty aggressively. I'm just curious if that’s case sort of that risk adjusted return is now making it more attractive as an asset class to put the pedal to the metal more aggressively during the quarter end and going forward.

[Jack Kopnisky:]

Yes there are still some sectors commercial real-estate that makes sense for risk adjusted returns standpoint. The margins have increased and that would be a portfolio that we would want to invest in, in general. The margins in broker originated multifamily deals are improving, but still in our case not to the level that we want from a risk adjusted return basis. So there are still sectors of the real estate market that we will invest in and there are sectors that we will not at the present time. I would also tell you that we will continue to always work to create that kind of equilibrium between C&I and CRE. Even though we have some capacity in the CRE side, we want to keep that equilibrium in kind of that 45% to 45% [ph] range between all the categories of C&I and all the categories of CRE.

[Dave Bishop:]

Got it. And then just in terms of the deposit pricing as it relates – as you look forward I know it's a couple of quarters out, but as we think ahead with the retention obviously a story has a very low cost, core deposit base some very low statement accounts and checking accounts. What's the strategy there to sort of make sure you're not run off in terms of if there's a sort of pricing disparity, I guess, between the two companies, what’s the thinking there, I mean, if you have [indiscernible] with a more hawkish rate environment to move up rates which you are going to get on the asset [indiscernible] side. Just maybe walk through strategy I guess what you think in terms of deposit retention on the core side.

[Jack Kopnisky:]

Yes so maybe from a very macro standpoint deposit rates are ticking up. So you have two rate increases, we're going to give back some of that in terms of increasing deposit pricing overall. So we're already – we actually have gone through a pretty deep analysis of this most recently to look at where deposit rates are going and you can see them starting to take up. The challenge or the opportunity is to hold the rating increases down to a lower level of the overall rate increase so that you're accreting margin over time. That's said, with Astoria has a pretty strong base mix. So but 50% of their clients are core clients that really are not all that susceptible to rate increases. They are solid satisfied rate users traditional savings and checking. So I would call them kind of mass market. About 20% to 30% of their depositors are emerging affluent an affluent depositors. And about 20% are small and middle market commercial clients. And you have a different kind of rate strategy across that continuum based on the types of needs that clients have and the types of options you provide the client. So bottom line is there will be some rate increases macro and we have working with their team as we would close this deal to be very specific as to the types of needs from a client standpoint and the types of product offerings that we would provide and great offerings we would provide.

[Luis Massiani:]

I think David you also have to remember that – I think that the composition of our deposit base and the composition of Astoria’s deposit base are obviously very different. We have a much greater proportion of commercial deposit than what they do. But when you look under the hood and compare, for example, their retail banking operations to our retail banking operations, so the Astoria Financial center network retail client and what is the legacy, provident legacy Hudson Valley retail financial center network client. From a cost to deposit perspective, from an average balance perspective, from a demographics perspective they're actually pretty similar. So even though you have different deposit bases because the composition between retail and commercial are different, on a proportional basis between us and them our retail business their retail business is pretty similar, our commercial business their commercial business is pretty similar as well. So it isn't like we feel that there's a major risk that we now have to reprice our retail base or reprice their retail base because there's a mismatch between the two. When you actually line up the various segments of the deposit portfolios on each side they actually are pretty similar just that the composition of those buckets is different for both companies.

[Dave Bishop:]

Okay, got it. Thanks for the color guys.

[Luis Massiani:]

Thank you.

[Operator:]

Thank you. We will take our next question from Casey Haire with Jefferies.

[Casey Haire:]

Thanks, good morning guys.

[Luis Massiani:]

Good morning.

[Casey Haire:]

I just wanted to follow-up on the NIM outlook. The up guidance of 345 to 350, I don't believe that contemplates another rate hike? If we did get another hike this year what would that look like and lots of moving parts, something here is going to run with a bigger securities portfolio. And then Jack obviously there's deposit pricing pressure just some more color on some scenarios on the NIM outlook for 2017?

[Luis Massiani:]

Yes so the three – you said say the 345 to 350 does not contemplate incremental rate hikes. So we've been the mix the business from the commercial finance and the commercial side of the house had benefited from the last two rate hikes so that’s been nice to see. We've seen a little bit of funding cost right from the deposit side as Jack was alluding to before, but certainly not to the degree or to the benefit that we've had from the perspective of the asset side of the house. So assuming no further rate hikes we should see probably two basis points to three basis points more on the core NIM side. So the 344 should be in that kind of hitting the middle of that range of the 345 to 350. We are going to be – we're already planning for the merger. So we don't want to get struck from the perspective of having a bunch of excess liquidity that we have to reinvest. After we close we're going to take – we feel it's the best way to position the balance sheet and to position that combined balance sheet is to do this over time taking advantage of various market windows. So the greater proportion as you saw in this quarter, the greater proportion of investment security as a percentage of total earning assets which this quarter moved from about 21.5%, 22% historically to about 23% weighs down a little bit on the weighted average on the proportional NIM because the securities book is going to be a little bit bigger than what it was before. But even with that we feel pretty confident that there should be one to kind of two basis points to three basis points of incremental core NIM that comes off of over the course of 2017. There's another rate hike, we'll call it in June, the back end of the year we should be on the higher end of that 350 range that we that we talked about today.

[Casey Haire:]

Okay, great. And then so, I mean is the securities book, I mean are we going to be, I mean historically it's just looking at the last couple years it's been around 25% are you going to be taking that even higher from here?

[Luis Massiani:]

No, we're not. We – historically it was at 25%, we then redeployed and do the mix shift between securities and loans. Last two or three quarters it's been closer to – and this is the 25% while dependent. The 25% you might be talking about total earning assets. The 21.5% or the 23% that I talked about was on the total assets perspective. So you're not going to see an increasing – you're not going to see a significant increase in the proportion of securities to earning assets from this point forward, although we will take advantage of opportunities to build that securities portfolio over the course of 2017, but it's not going to be significant relative to where we stand today.

[Casey Haire:]

Okay got it. So switching gears, on the growth front specifically sort of the inorganic avenues team hires you guys been pretty active in the last month. Maybe some color on what the pipeline looks like going forward? And then number two, the commercial finance opportunities and portfolio lift outs are you seeing shots on goal opportunities there?

[Jack Kopnisky:]

Yes sure. From a team standpoint we would expect to convert a Astoria’s commercial group and that two or three teams upon closing. So we're working through that right now. And then overall we're looking to hire two to three more teams on Long Island over within the next several months frankly. So we have we have a ton of teams team teed up. We have lots of great opportunities to hire teams so that if you added all those things together we should be in mid to higher levels of the 35 to 38 teams by the end of this year with all the hiring. So we're very confident that we can attract the teams and can resolve the teams that we have to higher levels of productivity. On the commercial finance side we are seeing opportunities – the opportunities have been pretty consistent frankly over the last several years in terms of buying assets. We haven't seen any larger thing that we're most interested in but we always have two or three things that we're looking at that would fit that would help accelerate the transition from their structural to our structural portfolio. The key on this is frankly just being patient and thoughtful. So it's kind of like hit or being up the bat a bunch times and finding the right pitch to hit. We want to make sure that we get the right and risk adjusted returns obviously the right credit dynamics, the right fit in terms of asset category. And we don't want to overreact to just frankly plug in things that don't make sense. So bottom line is we are seen opportunities to invest more capital in especially in the commercial finance world, we just want to be thoughtful and patient as we go forward.

[Casey Haire:]

Okay, understood. And just the commercial finance and portfolio lift out opportunities, my understanding is that you'd look to – look for those opportunities only if you didn't have to capitalize them is that correct?

[Luis Massiani:]

Yes. So we're not going to be in that sense as we're going to do these in ways that do not generate intangibles, and premiums, and so forth. So that’s the case. We view these as first and foremost they either have to be in one of the business lines in which we're in or they have to line up very closely with one of the business lines in which we’re in. Look for example, when we did the three franchise finance portfolio we were already doing franchise financing or equipment financing. In our equipment finance business so again even though we weren't in the business we had a business that was kind of ancillary to it was already dabbling in it. So we focused on the business lines in which we have already, we focus on places where we can, even if we're doing kind of the team without sort of your company purchases you actually really view them as a portfolio of acquisition because you're able to generate a tremendous amount of cost saves like when we did the NewStar acquisition, for example, last year. So the NewStar deal, the franchise financee deal those are the types of things that we're looking at where you don't have a significant intangible creation dynamic you have the opportunity to utilize existing business lines in the infrastructure that we've established in the various business lines in which we are in to generate a tremendous amount of cost saves. And you have an infrastructure that set up where the team is coming in can hit the ground running to generate organic growth like the NewStar guys have done in our [indiscernible] business over the course of 2016 and early 2017. So those are what we're interested in is going to be consistent with what we've done in the past.

[Casey Haire:]

Okay great, thanks. Just one last housekeeping, the accretion outlook on the existing book what does that look like from the $3.5 million level in the first quarter.

[Luis Massiani:]

It’s going to be consistent we talked about last quarter Casey about $15 million to $16 million for the year, that's roughly where it's going to be. We still like that number. This quarter was a little bit lower just because of prepayment activity in the acquired loans was in a significant as it's been in the past but that has a way of [indiscernible] itself out over the course of the year. So we still like the – the numbers that we talked about in the four fourth quarter call which is about $15 million to $16 million for the year that's where it's going to be.

[Casey Haire:]

Okay, thanks for taking all questions.

[Luis Massiani:]

Thank you.

[Operator:]

And we will take our next question from Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

Hey good morning guys.

[Luis Massiani:]

Good morning Alex.

[Alex Twerdahl:]

Wanted to asked an earlier question slightly differently just on deposit repricing in a rising rate environment. Can you tell us maybe what your modeling as deposit rate is for Sterling as a standalone company? And then what the deposit betas would be for Sterling pro forma with Astoria.

[Jack Kopnisky:]

So it depends on the aggregate book of business. So the aggregate deposit portfolio is approximately 45% to 50% total beta. On the retail that has is kind of the barbell approach to it. On the retail side of the house the beta is going to be closer to 25% to 30% on the higher balance commercial account it's going to be 60% to 66%. If you think about what had happened there's been two rate hikes 50 basis points in September we haven't seen a whole lot of funding pressure yet or deposit cost pressure yet. So if you model out that 50% to 56% on the commercial side of the house that's where we're seeing on the next rate hike we should start seeing some deposit cost pressure because again if you are believing that beta there’s been 50 basis points that are off of you know there's another rate hike will go up to 75 basis points you just start to see a corresponding increase from, especially from a commercial side the higher balance commercial side of the house. This is – so that’s on a standalone basis. Performer for the Astoria merger they have a much larger proportion of lower beta of retail deposits than we do. And so when you look at the combined one of the reasons we like the deal so much is that the combination gives us a very nice balance between commercial, very efficient commercial deposit gathering on the high balance accounts. So that consists of 50% of the combined portfolio. And the remainder the other 50% is very low cost retail kind of branch originated deposits both from the Legacy Provident side and the Astoria aside. So we think and fully anticipate that pro forma for the merger and the combined beta of that close to 50%, 45% to 50% that we have is actually going to come down pretty substantially to closer to 33% or so. So that's where we're buying them, and that's why we're merging and that's going to be in rising rate environment that’s the power of the combined business model.

[Alex Twerdahl:]

That's great. And then I want to ask when you typically hire one of these commercial banking teams, how long is it what’s the lag before they actually start bringing on real loan production.

[Luis Massiani:]

So the way I'd position this is at the end of the year, first year with these teams we basically breakeven. So remember our model is one where we look at what contribution they creat. So we're more concerned with the mix of businesses they bring in, the cost dynamics, the allocation of capital, their expense loads. So you basically breakeven kind of at the end of the year one they accrete in the year-two and then they're very profitable by the end of the year-three. So from a deposit or a loan basis it depends on where they're coming from and what niche that they focus on. But if there are opportunities where they bring from their CEO fairly quickly with team, for example, we just hired that has a bunch of very significant deposits teed up. They are not in house yet, but they are teed up and there are some good opportunity. But the general side of this thing from an EVA standpoint we look at them as breaking even by the end of the year-one. And by the way – I’m sorry go ahead Alex.

[Alex Twerdahl:]

I was going to say my follow-up question to that is that with a story of coming end this year and obviously there are loan portfolios going to start running off pretty quickly and you've been pretty vocal about wanting to replace a lot of it, why only hire two or three teams this year? Why not hire 10 teams this year? In that way when the people yield really start falling off in year-two, year-three of that deal these guys are in their full their full stride you need to replace loan yield…

[Luis Massiani:]

Yes in our view we’re hiring probably six or seven teams. So remember we're hiring two or three teams from Astoria that I’ll turn to our model, two or three teams that are extra north of the company we've frankly already hired one team this year. So we're in the kind of six or seven team range to do that. The real answer to the question is we want to make sure we have high performing quality teams and we can manage to that end. So we want to be thoughtful in the types of teams that we would hire.

[Alex Twerdahl:]

Okay thanks. And just a final question the sort of mid teen loan growth that you projected for 2017, is that inclusive of loan purchases or do you think you can get there on an organic basis?

[Luis Massiani:]

It's inclusive of loan purchases.

[Alex Twerdahl:]

Okay great. Thanks for taking my questions guys.

[Luis Massiani:]

Thank you Alex.

[Jack Kopnisky:]

Yes thank you.

[Operator:]

And we will take our next question from Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks, good morning guys.

[Jack Kopnisky:]

Good morning.

[Collyn Gilbert:]

Luis just going back to the deposit mix discussion, so roughly $2 billion or so that you guys have in demand deposits, is that – how much of that is commercial? Is all of that commercial?

[Jack Kopnisky:]

No not all of it. It's about fifty-fifty between that – about 65% commercial, 35% retail.

[Luis Massiani:]

The overall deposit mix for us on Sterling is about 80% commercial about 20% consumer.

[Collyn Gilbert:]

Okay.

[Luis Massiani:]

And their are mixture is exactly the opposite.

[Collyn Gilbert:]

Got it. Okay. Yes I guess that’s the one deposit segment that’s been seeing the pricing pressure which I guess ties to your comment about the sensitivity on the commercial deposits with rates moving up relative to the retail on the beta?

[Luis Massiani:]

That’s right.

[Collyn Gilbert:]

Just wanted to get that. Okay and then…

[Luis Massiani:]

You also have to remember that we've grown – you also after remember that one of the reasons that the cost to deposit goes increases and has increased over time is that the retail component of power deposit base has represented a smaller and smaller proportion over time because we've been focused on growing our deposit gathering capabilities to the commercial banking teams. So it's not necessarily that the cost of deposit increase isn't necessarily driven by are we paying more for deposits it's just that we have a higher proportion of higher kind of interest cost deposit than what we used to have when you go and you kind of roll back to five years ago we had about 50% of our deposit base was retail. And so now it's that 80%, 20% split that Jack is alluding to that 80% of commercial deposit accounts that's what's driving the increase in cost of deposits, mostly from this point forward you might also have a dynamic where in addition to the proportion of the commercial deposit base you're going to see some funding pressure as well going forward we think.

[Jack Kopnisky:]

Just to be specific Collyn on this thing on little level detail. The demand deposit side of this is not price sensitive, it's actually the high value money market part of commercial deposits that is price sensitive. So extremely low betas on demand deposits even interest bearing demand deposits on the commercial side where you see and then there are money markets have a series of kind of tiers relative to the betas, there are certain types of money markets that are low betas. But the money that gets repriced and things that really a lot of folks focus on in terms of price increases are a portion of commercial money market balances, that are relatively short-term. So that's the area that actually gets hit with kind of rate increases sooner than later.

[Collyn Gilbert:]

Okay that's helpful. And then just a moment of fees. So Luis had indicated expecting kind of it to rebound from here. But just in general can you just remind us of what you think the fee income should be able to grow from let's start at this point at the first quarter level because there was obvious a lot of noise from exiting the business. But starting from here how much do you think you can grow the fee income throughout the rest of the year?

[Luis Massiani:]

On a run rate quarterly basis at the end of the year, we should be closer to $15 million $16 million per quarter. So we are at about $12.5 million to $13 million, we were $12.9 million this quarter. You have to remember that there is some seasonality in those in the commercial finance business lines. So factoring in payroll finance their worst quarter out of the year from a volume perspective is always the first quarter. So you start to see that build up over the second, third and early part of the fourth quarter. We had lower syndication and lower loan participation activity in the first quarter, again more driven by seasonality than anything else. So seasonality by itself helps the second, third and fourth quarter performance. In addition, we're building more capabilities across capital market loan syndications, the loan participations business, cash and cash management and treasury management services. So the $12.5 million to $13 million we are at today we’ve just created that run rate through the end of, in the next two or three quarters to get closer to $15 million to $16 million.

[Collyn Gilbert:]

Okay. That's helpful. And then just one final question on the outlook for credit, I mean everyone's saying it's for one-off but it seems like there has been more broad-based deterioration in some of the credit metrics this first quarter that we've seen among some of these banks. And then tying that with, Jack, I think you kind of said before that your thought is that especially if rate start to move higher than maybe we're at kind of the beginning of a credit cycle. All of this tied together, can you guys, I mean losses have been so low, but just maybe what we should, how we should be thinking about net charge-offs as we look to 2018 and beyond for your business?

[Jack Kopnisky:]

Yes, so from credit is benign now, credit cost are relatively benign now as rates go up you will see credit costs increase, because what would be a normal cycle, we're in the 5 to 10 basis point charge-off range. The normalized range of charge-offs ultimately get to, if you're running a good solid book and all that is really in the kind of 20 to 25 basis point range. The question is just the timing of that based on a lots of factors in the economy, there's a big infrastructure project out there that affects a lot of the clients or there's tax relief obviously those things affect those run-ups on charge-off ratios. So we kind of think of that that's what a normalized charge-off level would be in kind of this model in over a time when rates are relatively normal when the economy is where you would expect.

[Collyn Gilbert:]

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

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you.

[Operator:]

And we will take our next question from Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good morning everybody.

[Jack Kopnisky:]

Hi, Matt.

[Matthew Breese:]

Just step back a second thinking about the current regulatory environment your growth trajectory over the past few years, we’ve seen a number of banks with that kind of growth that tripped up on some back office compliance type of issues. Could you just walk us through what you're doing in preparation for your story deal to make sure that you don't fall into a similar sort of scenarios and that you're all go in the regulatory front?

[Jack Kopnisky:]

Yes, great question, Matt. So first we spent an awful lot of time with the regulators making sure that they knew step by step what we were doing with the story. So we've been – part of the answer is, we've been extremely transparent relative to what we were considering doing then what we're going to do and then what we have done with the regulators. And frankly the regulators have been very, very supportive in relative to giving us advice and counsel about how to kind of go through the approval process and what their expectations are for the future. So there's really no surprise as relative to what the expectations are from a regulatory environment and what we're doing. So we're clearly as part of this investing pretty heavily in enterprise risk management in a variety of different areas, story is work hard to create a good solid enterprise risk function. We've worked hard to create an effective enterprise risk management function. So part of that is our integration process, planning process of identifying and what we do, what they do, and what the expectations are for the future. So frankly position by position, group by group, step by step, and frankly metric by metric, we are building out the enterprise risk management functions. So that we are kind of ahead of the curve relative to as the two companies come together. My view is that's the only way to do this. For example all banks have BSA/AML groups the bigger you get the more sophisticated and automated you get. But there's an exact productivity major on reconciling the number of inquiries and how you end up dispositioning those inquiries during the day. I think last year, we did more than 100,000 dispositions of inquiries of BSA/AML. For example there's an exact metric about how many of those a person can do, what the controls are and all that. So we've tried to metric the productivity of each function and person in the enterprise risk area. So that we are affective in staffing the area, building the area and I mean the right system to support all that. So it's probably way more information than you expected but our view is that one we know what is expected from a regulatory standpoint. And frankly more importantly, we know what's expected from a risk mitigation standpoint and what the best practices are. And then through the integration planning process, we are step by step kind of building out enterprise risk.

[Matthew Breese:]

Very good. Just from a – maybe a body count standpoint prior to the Hudson Valley deal, what was your BSA/AML staff and then what is expected to be with the story on?

[Jack Kopnisky:]

Yes, we have that in one of the presentations, let me pull up that and I don't think I don't remember what the number is but we have it in the presentation then I’ll cooperate now.

[Matthew Breese:]

I go to the next question while he looks for it.

[Luis Massiani:]

Go ahead, Matt.

[Matthew Breese:]

One thing I struggled with a bit this quarter was you had good margin expansion, you had good average earning asset growth, but net interest income was $108.8 million I thought that was a little bit shy considering the growth in the margin. And no longer, it was weighted towards the end of the quarter, so could you help me maybe understand what happened there. And if there's going to be perhaps an outsized moved in 2Q on net interest income because of that.

[Luis Massiani:]

Yes, so the average balance of loans if you look at the fourth quarter 2016 the first 2017 was essentially flat. The main reason for that is that the warehouse lending balances that we talked about in the fourth quarter earnings call. They are always seasonal in the first quarter and with the increase in rates, they've really kind of drop off of a cliff in the early part of the quarter. So right out of the gate we had finished up the quarter at about $9.6 billion worth of loans at December 31 in the first couple of weeks post the quarter close you had about $250 million that fall almost $250 million or $300 million of warehouse lending balances they kind of disappeared. And so you're able to replace that over time from the perspective of loan growth which is little bit back ended, we were able to replace it over time with increases in security balances but when you have a LIBOR plus 300 or 350 basis point yielding asset that for one day the next goes away, you don’t replace it automatically, Matt. And so from that perspective, you had a little bit of earning asset whole for two months out of the quarter. Second thing you have to think about too is that when you're comparing the growth of the linked quarter, we have too less days of interest income. Right, so February being a 28-day month at the size which we are today close to $9.5 billion almost $10 billion of loans that we have and the types of businesses that we have there would be do have some seasonality. Too less days actually impact us pretty significantly. And so for example you've normalized fourth quarter to first quarter growth from a number of days perspective you get to a place where the growth would have been that the NII absolute level and growth level would be a little bit more in line with what you're thinking. We're in a very good spot from the perspective of where we ended up the first quarter because [indiscernible] balance did come in at the end. And so therefore we're going to – we anticipate we are going to have close to $350 million or $400 million an incremental average earning loans and average earning assets between the second quarter and the first quarter which puts us in a pretty good spot from that perspective.

[Jack Kopnisky:]

To give you the statistics, we had 60% of our originations happened in March. So while the 100% of originations 60% of them happened in March and frankly toward the end of March. So we started off as average balances Luis said the average balances were down. The answer to your question, I don't have the exact answer, but we had about 15% of our staff or 150 people is in enterprise risk, we would expect that that level 15% to 20% would be about the right level of staffing for enterprise risk moving forward.

[Matthew Breese:]

Okay. And then maybe thinking about accretable yields what's projected year one of Astoria transaction, can you remind me of what that is? And then as we think about the repositioning, the securities and borrowings should we basically subtract those two figures from accretable yields for the first year?

[Luis Massiani:]

So we announced when we talked to on the merger call, we talked about the first year out of the gate of about $150 million of incremental income or of accretion income. And that $150 million has about a third of that $50 million to $60 million is driven by the balance sheet repositioning on the securities and the borrowings, which creates run rate earnings and so therefore it's not really accretable yield, it’s not accretion income. We've restructured their balance sheet, we've diversified securities portfolio. You've now created a positive carry trade between securities and the borrowings, which is going to create run rate earnings. So that's about $50 million to $60 million of that. And then the remainder, so call it, $80 million to $90 million would be initially accretable yield that is driven off of the interest rate mark and credit mark. The interest rate market essentially just marking there the Astoria loan book to their book yield the current market yields. So in a higher rate environment, you get the opportunity to continue to redeploy the run off of that book into a higher rate environment. So you create again accretion, kind of run rate accretion to where the historical Astoria run rate earnings have been. The credit mark component of it, which out of that $90 million, about $15 million of that, $15 million to $20 million will be credit mark component. That does have a finite life to it. It will a three to four life that will fall that will eventually fall off. And that's what you need to replace from the perspective of having a more diversified higher-yielding loan book than what Astoria has today.

[Matthew Breese:]

Understood.

[Luis Massiani:]

Not a significant component. Now – it's $15 million out of $150 million of incremental earnings that are generated in year-one.

[Matthew Breese:]

And then just for modeling purposes with the accretable yield given what you're talking about, what do you expect the total margin to be? And then ex-accretable yield, the core margin to be kind of roughly speaking for the first year?

[Luis Massiani:]

First year we anticipate let me caveat out this map by saying things will change interest rates will move from here to there. So there's a lot of time until we close the deal and there's a lot of factors that could change this. But right now we're anticipating that the aggregate or absolute NIM including accretable yields should be about 375 basis points to 380 basis points, give or take. Depending on what happens with rates that could move up or down a little bit to the increase that – to the extent that there's an increasing rate environment and additional rate hike this year that should add to that number make it slightly higher. If you extract the accretion the loan market creation out of that you're going to get to about 325 basis points to 330 basis points. So there's going to be a substantial chunk initially and remember something right is that their NIM today is substantially lower than ours is. So initially when you put the two balance sheets together we're going to fix a lot of their NIM from the perspective of the repositioning of the securities portfolio and of the borrowings. But still, the Astoria loan book has a substantially lower yield and substantially lower margin than ours, right? So their loans yield about 350 basis points on average, ours yield 450 points an average or 460 basis points. So your going to see 8K plus B in the weighted average of what the two portfolios are today or on day one. You're going to get to a core NIM that's going to be lower than what we have today. Overtime, when we eliminate the residential mortgage business, as we redeploy the brokered CRE business, you're going to start seeing a weighted average yield on loans that's going to be closer to ours. And you're going to see that accrete over that 3-year to 5-year window. The good thing about this is that the accretion income, especially on the interest rate side, given they have fixed-rate assets given they have for the most part residential mortgages and CREs that are 5-year and 7-year fixed-rate assets, you have a long tailwind to that, or a long tail, sorry, to that accretion income. So it gives you the opportunity to over a 3-year to 5-year window, builds a diversified portfolio to offset the loss accretion income, but the accretion income is going to be there for a long period of time.

[Matthew Breese:]

Great detail, thank you very much.

[Luis Massiani:]

Thank you Matt.

[Operator:]

And we will take our final question from Erik Zwick with Stephens Inc.

[Erik Zwick:]

Good morning, guys.

[Luis Massiani:]

Good morning Erik.

[Erik Zwick:]

Most of questions have been asked so to this point may be just one final one. How much insight do you have into the Astoria regulatory approval process? Do you expect to have a regular dialogue or feedback with them throughout the process or are you more or less just waiting for the final decision at this point?

[Luis Massiani:]

So it’s very transparent. We have worked hard with our regulators to make sure that this is transparent. What usually happens on these things is you submit the initial application and then you have a series of questions that come out of the application two or three times that clarifies the data or needs additional application information. So it's a pretty standard process with good feedback from the regulators. And we frankly want to create transparency with Astoria, also we want to make sure that they know what's going on with this even though we have to operate a separate companies absolutely. But we want to make sure that there are up to speed with the progress that we're making on the application.

[Jack Kopnisky:]

Remember for both the CC and fed regulated this is very much a joint effort with our new partners as story in getting this deal and getting the applications filed in it quickly as we could, getting all of the data and whatever questions get asked of us that we're going to work with them to get those answers as quickly as we can and we are very much in a joint effort to getting this thing through and close as quickly as we can. So we're still we feel very good about the target that we put out of a close in the fourth quarter of 2017. We're confident and feel very good about it.

[Erik Zwick:]

That's helpful thanks for taking my question.

[Jack Kopnisky:]

Appreciate it, thank you.

[Operator:]

And this does conclude today’s question-and-answer session, I will turn the call back to our moderators for any additional or closing remarks.

[Jack Kopnisky:]

Thanks a lot for your attention, and your interest and your investments. Thank you very much for your time. Take care.

[Operator:]

And this does conclude today’s conference call. Thank you again for your participation and have a wonderful day.