Sterling Bancorp
Q2 2017 Earnings Call Transcript

Published: 26 Jul 2017

[Operator:]

Good day and welcome to the Sterling Bancorp Second Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jack Kopnisky. Please go ahead, sir.

[Jack L. Kopnisky:]

Good morning everyone and thank you for joining us to present our results for the second 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 10% year-over-year and operating expenses declined 2%, creating significant positive operating leverage. Even more significant is our operating leverage on a linked-quarter basis where revenues increased 4.4%, or 17.7% annualized, compared to expenses which were essentially flat. We are targeting growth in revenues at 2x to 3x the level of expenses. We have consistently focused on increasing productivity, eliminating non-core business that do not meet our profitability and return targets, while reallocating human and capital resources to businesses that fit our strategy, and managing risk. These efforts resulted in growth in adjusted net income to $44.4 million or 25% greater than 2016's second quarter, and adjusted EPS of $0.33 or 22% greater than 2016's second quarter. Our adjusted return on average tangible assets was 128 basis points and adjusted return on average tangible equity was 15.43%. Adjusted efficiency ratio improved 520 basis points to 42% from last year's same period. Annualized loan growth was 19.2% based on end-of-period balances and 22% based on average balances over the linked-quarter. Total retail and commercial deposits increased by $248 million versus the linked-quarter, or annualized growth of 13.2%. On March 7, 2017, we announced a definitive agreement to merge 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 as a premier low-cost deposit base and will allow us to further accelerate our strategy of building a high performance regional bank. The combined company will have approximately $29 billion in assets and $19 billion in deposits in the New York City Metropolitan area. The transaction will be immediately accretive to both tangible book value and earnings per share. Both companies' shareholders overwhelmingly approved the transaction in June. We expect regulatory approval and closing late third quarter or early fourth quarter of this year. We remain very confident in our ability to deliver strong returns to our shareholders as a result of our core organic operating model and our integration of Astoria into this model. Now let me turn the call over to Luis to detail the financials for the quarter.

[Luis Massiani:]

Thank you, Jack, and good morning. Our performance in the second quarter was strong and continued our positive momentum. 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 19% over the prior year and our commercial loans grew by $1.6 billion or 19.2%. Our total deposits grew by $717 million or 7%. Based on end-of-period balances, our loans to deposits ratio was 97%, an increase of 200 basis points relative to the linked-quarter. Based on average balances, our loans to deposits ratio was right at our target of 95%. Our tax equivalent net interest income for the quarter was $117.5 million, which represented an increase of 4% relative to the linked-quarter and 13.4% over last year. This was mainly driven by strong loan growth across most of our commercial asset classes. Taxable equivalent net interest margin was 347 basis points, which included $2.9 million of accretion income on acquired loans. Excluding the impact of accretion income, NIM was 3.39%, a decrease of 5 basis points relative to the linked-quarter. As you will review on later slides, our yield on loans benefited nicely from recent interest rate hikes in the second quarter. The decrease in NIM was largely driven by a shift in the composition of our earning assets, which included growth in our securities portfolio and equipment finance loans, in both cases in shorter-term shorter-duration assets. Our NIM also declined due to lower accretion income on acquired loans, lower prepayment penalties on commercial loans, and an increase in the cost of interest-bearing liabilities which was driven by higher cost of wholesale deposits and borrowings to fund asset growth. Going forward, we anticipate NIM will benefit from the June 2017 rate hike, a normalization of prepayment penalties, and the anticipated mix of business in the second half of the year which will be more weighted towards higher-yielding commercial asset classes. We maintain our prior guidance that core NIM will be in a range of 345 to 350 basis points for full-year 2017. As always, when we make NIM projections, there are several assumptions and inputs that will impact actual performance, including the composition of our earning assets, the level of market interest rates, and competitive dynamics in our market for loans and deposits, among other factors. On Page 5, let's review the reconciliation of GAAP and adjusted results for the quarter. We realized $230,000 of losses on sale of securities, and we incurred $1.8 million of merger-related expenses in connection with the Astoria merger which consisted mainly of costs associated with the merger shareholder litigation and various merger integration items including client communications and risk management readiness assessments. We have also continued executing our financial center rationalization strategy and incurred a $603,000 charge to consolidate two financial center locations. Adjusting for these items, our net income was $44.4 million and our adjusted diluted earnings per share were $0.33, which were both records. We maintained our estimated effective income tax rate at 32% to 33% for 2017. However, please note that our full year tax rate estimate will likely decrease upon closing of the Astoria merger. We will update guidance as we finalize our merger accounting estimates. On slides 6 and 7, we review our loan portfolio performance, which was quite strong. Our loan portfolio at June 30 consisted of a balance of 45% C&I loans which includes our commercial finance business lines and 45% commercial real estate. On the next page, you can see growth in yield trends by business line and asset class relative to the linked quarter. We're focusing on growing our commercial business lines. On an annualized basis, total commercial loans grew by 25% and our total loans grew by almost 22%. Looking at yield on loans, we are showing this data on an adjusted basis excluding the impact of accretion income on acquired loans. Accretion income decreased by $594,000 in the quarter, which decreased yield on loans by 2 basis points. On an adjusted basis, most of our asset classes saw a nice increase in yields during the quarter, including CRE where we have started to see slightly better pricing on new loan originations. Our CRE loan swaps have also benefited from the increase in market interest rates. As we mentioned previously, we experienced lower prepayment activity in our commercial loans, which caused us about 3 basis points in yield on loans. Loan balances increased nicely in equipment finance with over $60 million in growth of average balances during the quarter. However, growth was more weighted towards the higher credit quality 3 and 4 risk rated clients and shorter-term loans, which drove the decrease in yields on this portfolio. Based on the June 2017 rate hike, our anticipated mix of business for Q3 and Q4 2017, and a normalization of prepayment activity, we anticipate yield on loans excluding accretion income on acquired loans should increase by approximately 8 to 10 basis points in the second half of the year. On Page 8, let's review the changes in our securities portfolio. As we have discussed previously, we have begun repositioning our securities portfolio for the Astoria merger, which has resulted in a greater proportion of securities to earning asset than normal in the last two quarters. Longer-term, we will move this proportion from approximately 25% to approximately 22% of earning assets. In the pie chart, you can see a slight shift in the size and composition of the securities portfolio between the two quarters. The average balance of securities increased by $161 million and reached $3.4 billion for the three months ended June 30. The lower proportion of municipal securities and higher proportion of MBS and agency securities combined with a shorter weighted average duration contributed to a 4 basis point decline in yield on securities. As we continue to fully reposition the portfolio leading up to the merger, we will focus more on investing in the municipal and other categories, which we anticipate will result in a higher weighted average tax equivalent yield in the second half of the year. Turning to Page 9, our deposit growth over the past 12 months was strong, and at June 30, our deposits are at a record level. Based on end-of-period balances, core deposits increased by $144 million relative to the linked-quarter, mainly due to growth in commercial deposits. As typically happens at this time every year, municipal deposits reached a seasonal low in the second quarter and declined $94 million relative to the linked-quarter. Conversely, municipal deposits experienced a seasonal high in the third quarter, so we expect strong municipal deposit growth in Q3. Our core deposit ratio was 87.9% and loan-to-deposit ratio was 97% at June 30. On the right side of the page, you can see the progression of total deposits and core deposits relative to the linked quarter. The total cost of deposits was 43 basis points, an increase of 5 basis points from the first quarter of 2017. This increase was driven by our wholesale, brokered and other non-core deposits, as the cost of core deposits was unchanged at 37 basis points. As we continue to focus on growing higher-balance commercial deposit relationships, we anticipate the cost of deposits will increase in the second half of the year, similar to the trend that we have seen over the last 12 months. However, the Astoria merger with its close to $9 billion in deposits at a weighted average cost of 30 basis points will be significantly additive to our funding profile, will allow us to lower deposit funding costs and will give us a more balanced commercial and retail deposit base long-term. On Page 10, we take a look at our non-interest income. We're continuing to see increases in other non-interest income, which includes letters of credit fees, miscellaneous loan fees, loan swap fees, and gain on sale of participations of commercial loans. On aggregate, these fees were $3.9 million in the second quarter and increased $952,000 over a year ago. Excluding the impact of net loss on sale of securities, total non-interest income was $13.8 million. We are on track towards achieving our target of over $15 million in quarterly non-interest income by the end of the year. Moving to Page 11, let's take a look at operating leverage and efficiency, which continued to improve in the second quarter. Year-over-year, we have grown adjusted total revenue by 9.9%, while decreasing adjusted non-interest expense by 2.3%. A significant component of the increase in operating leverage has been our financial center rationalization strategy, which continued this quarter with the consolidation of two financial centers. We have maintained tight controls over expenses, as adjusted non-interest expense was essentially flat relative to the linked-quarter at $55 million and our adjusted operating efficiency ratio decreased to 42%. As you may have seen in our recent press releases, we have made a number of new hires including commercial banking teams and other personnel which has increased our FTE count. We expect to see an increase in compensation and benefits expenses in the second half of the year but anticipate that we will continue to be in line with our prior guidance of $220 million to $225 million in OpEx for full-year 2017. Turning to Page 12, let's review our asset quality. Performance in the quarter was strong. Our total non-performing loans decreased by $1.5 million, while criticized/classified assets decreased by $11.9 million. Delinquencies in the 30 to 89-day past due segment decreased by $0.5 million. The coverage of our allowance for loan losses to non-performing loans increased from 92% in the linked-quarter to 98%. On taxi medallions, we continue to make progress during the second quarter. Total exposure to the industry decreased by $1.1 million given repayments and now stands at $48.6 million at June 30, which represents 48 basis points of our loan portfolio. Finally, we announced last week that Kroll Bond Rating Agency initiated coverage on us with investment-grade ratings. We received a BBB+ on senior unsecured debt at the holding company and an A- rating at the Bank. Jack?

[Jack L. Kopnisky:]

Thanks Luis. We continue to thoughtfully manage our Company, as demonstrated by the strong and consistent growth of earnings, earnings per share, return on average tangible assets, return on average tangible equity, and efficiency ratio. Our focus is on creating shareholder value through the creation of positive operating leverage while we maintain strong credit quality, diversified long-term low cost sources of funding, acceptable levels of risk, and strong capital levels. So looking forward, we would anticipate the following from our Company. First, we would continue to grow commercial loan balance at least at a low to mid teen rate. Secondly, we would expect to match loan growth with core organic deposit growth at reasonable rates. We have invested heavily in new deposit teams and have reconstructed a number of teams, adding deposit and treasury management expertise. Third, we would expect the core net interest margin to be in the 345 to 350 basis point range for full-year 2017. Fourth, we would expect to close the Astoria transaction during this quarter or early fourth quarter. We expect to free up liquidity by selling low-yielding fixed-rate assets or having them run-off while growing core deposits through all of the new company's distribution channels. We expect to achieve a 90% to 95% core loan-to-deposit ratio, less than 300% CRE concentration, and very strong levels of capital, as we migrate the balance sheet and change the trajectory of the income statement by improving revenue growth while reducing cost over the next two years. Lastly, we have aggressively added new talent to the organization to support our Company's move to the next level of performance and opportunity. Now let's open up the call for questions.

[Operator:]

[Operator Instructions] We'll take our first question from Casey Haire with Jefferies. Please go ahead.

[Casey Haire:]

I wanted to clarify on the core NIM outlook. It sounds like you had some low prepay and you were expecting a better loan mix in the back half of the year as well as securities, but it is still a pretty steep ramp to get to that 345, and it does sound like Astoria is now closing a little bit earlier. Does Astoria, is that part of the guide for getting to that 345 with the fourth quarter or is that exclusive?

[Luis Massiani:]

No, it's not part of the guide. No, that's exclusive, that's on a standalone basis. So for the third and fourth quarter, what you'll have is a combination of factors that will play into that. So, you get a better mix of business because remember that our commercial finance business lines experience seasonal highs at both the kind of mid-third quarter to mid- fourth quarter time period. So you have a greater proportion of higher yielding loans that will be a part of the business mix in the second half of the year versus the first part of the year. You get some benefit out of the 25 basis point rate hike. Over time you get a normalization of the prepayment penalties. And the last component of that being that deposit growth from when municipal deposits start increasing coming-in in the second half of the third quarter and then they stay to the fourth quarter, it allows you to pay off a substantial amount of borrowings, which you've seen the last two or three years, it's exactly what's happened. Our borrowing levels are higher in the second quarter and then they decrease in the second half of the year. So, you combine all those, and yes, moving from 339 to 345 basis points is significant on the core NIM side, but prepayments by themselves cost us 3 basis points of that. So once those normalize, the ramp from going from 342 or 343, which is what we would've been if we had a normalized prepayment, to where you have to get to get to 345 is not as significant as you would originally think.

[Casey Haire:]

Okay, all right, fair enough. And then on the loan growth outlook, obviously you guys are year-to-date up 7.5%. I mean do you feel like you can get there organically at this point? Obviously there's some commercial finance opportunities and loan portfolio opportunities, but I guess can you get there organically or are you still entertaining M&A activity?

[Jack L. Kopnisky:]

I think, one, we can get there organically. We have increased production with the existing teams, we've added some new teams, and I think the market is fair relative to opportunities in commercial loan growth. One of the benefits to this model is you have a lot of levers to pull in terms of different product options for clients. So, there are, even as Luis said, for some of the commercial finance businesses that generally are higher yielding, opportunities in growing in the second half of this year is one type of lever. We have many other different – many different product niches we can go after. Secondly, there are still opportunities on the commercial finance side. Frankly, the opportunities in commercial finance side are a little bit less than they were last year about this time, but there are still opportunities, and we filter through many, many deals that we see. Obviously we say no to most of them, but there are going to be ones that fit. But one way to answer your question, Casey, is we can get there organically without the commercial finance side of this.

[Casey Haire:]

Okay, understood. And Jack, just following up on your target loan-to-deposit ratio of 90 to 95, I'm assuming that's longer-term. Obviously with Astoria that's going to drive you a little bit higher and depending on how loans/deposits move quarter to quarter. I guess what is sort of – how high are you willing to let that go, is there any governor from a regulatory perspective where they are not going to let you go too high and how long will it take you to get to that target level?

[Jack L. Kopnisky:]

I think on a combined basis, we'll end up at a little bit less than 105% if you did nothing. But there are a bunch of things that we're looking at doing, you know. There are some of the portfolios that are lower-yielding portfolios that we're acquiring. We will generally run down faster. We will accelerate the deposit activities that we have. So, the two big levers on this are, on the lending side we're going to work to change the mix but running down some of the lower yielding assets, and accelerate the deposit side of this through a variety of different activities. But we believe that you can get to that 90% to 95% in 12 to 24 months after this close. So, we're expecting to get back to that. I think there's no real governor from a loan-to-deposit standpoint, from a regulator standpoint, but once frankly you get above 120%, there are a lot of questions and concerns about this. So we are well within that range and we're well below the range. So, starting that kind of 105% and winding this down over the next couple of years, there are plenty of levers and options to make that happen.

[Casey Haire:]

Okay, great. And just last one, on the prepay, Luis, at this point of the cycle we're actually seeing prepayment penalties moderate at other banks. What's giving you that confidence that you expect it to uptick here in the back half of the year?

[Luis Massiani:]

We have a different business mix than other banks, Casey. So all prepayment penalties are not only driven by commercial real estate. And I would agree with that statement that on the commercial real estate side, you're starting to see prepayment moderate. We've had actually the higher prepayment activity that we had this year is actually in our asset-based lending and in our commercial finance asset classes. And those are not fixed-rate assets. So the prepayment penalties come in for a different reason than just refinancing because of lower rates. And we've had pretty consistent performance in that for the past three of four quarters, although there is some volatility in them. We just had a slower quarter this quarter, but over time that will for sure normalize. So it's not just CRE.

[Casey Haire:]

Great. Thanks for taking all the questions, guys.

[Operator:]

We'll take our next question from Collyn Gilbert with KBW. Please go ahead.

[Collyn Gilbert:]

Just can you remind us what the percent of your loan book re-prices with Prime and/or LIBOR?

[Jack L. Kopnisky:]

Approximately 55%.

[Collyn Gilbert:]

Okay. And then, Luis…

[Jack L. Kopnisky:]

So, that includes Prime LIBOR and then asset that would also mature/re-price within a 12-month window, sorry.

[Collyn Gilbert:]

Okay. Do you know what it would be just with Prime and LIBOR not within that 12-month window?

[Jack L. Kopnisky:]

I don't have it off the top of my head but you could probably take – it would be closer to about 40% to 45%.

[Collyn Gilbert:]

Okay, all right. I appreciate the color on the NIM, it's helpful. I think that was a variable that was a little bit unexpected this quarter. If you look kind of pro forma with the securities book, I mean obviously a lot of movement ahead of Astoria, would you think or how should we be thinking about what the mix is going to look like, and I know you're still going to be shifting a lot of their businesses, but just kind of maybe in the third or fourth quarter or first quarter, what the securities mix and yield is going to look like on a pro forma basis?

[Luis Massiani:]

So the securities mix will look much more to what our composition of securities was in the first quarter of this year – in the fourth quarter of last year and early part of the first quarter of this year. So, we buy securities, and we're buying securities today to reposition the portfolio on a combined basis, but we take advantage of various pricing, MBS securities versus agency securities versus municipal securities, at any given point in time. Depending on the duration that you're buying and the type of assets that you're buying, it will be more favorable to buy one type of security versus another. So for example, right now municipal securities are experiencing a tighter spreads in the last 10 years relative to treasuries. So, at the moment it doesn't make the most amount of sense to buy municipal securities. So we have defaulted to buying, focusing more on the MBS and the agency side, which are a key component of what we're going to do going forward and we have to build that part out of the portfolio as well, but the growth was more weighted towards MBS than what it was, and MBS and agencies than what it's going to be down the road. And so, as we fully reposition this portfolio over the course of the next three to six months, what you'll end up having in the first quarter of next year is a securities portfolio that is going to essentially double in size relative to where we were in the fourth quarter, but the composition of the mix between agencies, MBSes, municipals, and other securities, is going to be very similar to what we had. And we anticipate that that portfolio based on today's rates has a spot yield of about 3% to 3.05%. So it's about a 10 to 12 basis point increase to where we are today, once we are done with the repositioning of the portfolio.

[Collyn Gilbert:]

Okay, that's very helpful. And then just on the loan growth outlook, Jack, I don't know, how much of it is – as you said, you've got a lot of levers to pull, but how much of it is do you think can come from just sort of the gradual maturation of some of the teams you've hired versus market growth? And I guess I'm just trying to reconcile with commentary that, the view that loan growth is or loan demand is maybe slowing more broadly, just trying to get a sense of how much you are relying on market share grabs or growth in the market versus just the leveraging of the teams?

[Jack L. Kopnisky:]

So maybe I'll start with things that obviously you know. First of all, we operate in Metropolitan New York, so there's as much opportunity in this particular market than, frankly, any market in the country, and the market opportunities are across all the categories. If we were just a CRE lender, you would have some limitation in terms of the ups and downs of that particular market. But because we operate in a really big market, that we have very diverse product set, and frankly we have very diverse teams that target different segments of the population, there is always opportunity. So, my long history of working with commercial lenders is, many times they'll come back and say, 'well, the market is really tough, it's slowing down', when this particular market that should never happen, I mean unless there's some unbelievable event that occurs out there that slows down everybody. So there's always with a diverse balance sheet and diverse offering in a very large market, there is opportunity. So, the second part of that is that the teams, as teams grow, the magic to the teams is, the teams are all a little bit like snowflakes, they are all a little bit different, they are all a little bit focused on different types of segments, and the ability of them is to change the composition as teams to get really great productivity from them is part of the ongoing management of the team. So for example, there are a number of teams that were over-weighted with just lending in certain categories, and now we've added deposit gathering capabilities and treasury management on some of those teams. There frankly were some teams that were more weighted on the deposit side, so we added some lending capabilities. But regardless, we expect the teams to produce about 10% or greater every year. So even with mature teams, their goals and objectives relate to 10% higher in terms of the pre-tax contribution numbers that we expect out of them, and we help refit and restructure those teams. And then the last piece of it, we've been a little bit overwhelmed with the number of new teams and new people that have wanted to join this model. So we have a number of teams that as you've seen some of the announcements, you will see other announcements coming forward in the future where we're adding new teams from wonderful regional and large banks and high-performing individuals. So again, this model is, it operates – it has all of those components, diverse products in a very large diverse market with teams that we constantly evaluate and try to get increased productivity from and then we supplement with new teams, is how that – the answer to the simple question about how you're going to get kind of the loan growth targets, it's those combinations matter. Sorry for the long answer, but it's really those four factors that matter.

[Collyn Gilbert:]

Okay, that's helpful. And then Luis, just two questions. One on expenses, where do you see, and I know obviously you guys maintain your commitment to improving operating leverage and growing revenue 2x to 3x the rate of expenses, but just in general, where do you see yourselves making expense investments or infrastructure investments on standalone Sterling, let's just take Astoria off the table for a minute?

[Luis Massiani:]

On standalone Sterling, the vast majority of the infrastructure investment, that is not a place where we would be investing on a standalone basis major dollars going forward. Remember that when – and we've talked about this in the past, the leap over $10 billion is a tough one, and for the last two or three years we've been investing in everything from a broad range of risk management systems and infrastructure, commercial loan management systems on the credit administration side, and that was all done part and parcel of getting over the $10 billion, and I think that we did it in the right way from the perspective of not just thinking about $10 billion but thinking about what the next leap would be once we got over $10 billion. So, I think that a lot of what you're starting to see now on a standalone basis is the fact that as you start getting to $15 billion in total assets, $13 billion in earning assets, you continue to grow. We're going to drive a significant amount of – we would drive a significant amount of operating leverage going forward just from the fact, regardless of what happens with NIM and fee income and everything else, we would continue to drive a substantial amount of operating leverage from the fact that we're just a larger revenue base over the same amount of fixed operating expense base, specifically as it relates to the IT/software kind of infrastructure side of the house. We are adding people no doubt, which is what I was referencing before. The vast majority of the folks that we have hired in the second quarter are commercial facing folks. In the Long Island market we've been very active. We've also been increasing and kind of beefing up the capabilities in our existing teams across the board in all of the business lines, not just the commercial, kind of the regional commercial banking teams. So you are going to see an increase in the comp and benefits line item, but that is not infrastructure related. That's what we've been talking about in the past, which is, now that we're going to inherit Astoria and we're going to have this repositioning of the balance sheet and really repositioning of their loan portfolio as we unwind specifically the residential mortgage business, we're making the investment on the front-end side to be able to generate the types of volumes in business that we need next year and into 2019. On the infrastructure side, there's not a lot happening.

[Collyn Gilbert:]

Okay, that's helpful. One final question, provision obviously came in a little bit lighter this quarter, how should we think about provision build from here?

[Luis Massiani:]

We talked about it last quarter. It's $4.5 million to $5.5 million, assuming that we continue to maintain the types of volume and loan growth that we've had. Provision covered charge-offs by 3.2x this quarter. We like that ratio and we continue to manage to that because we are growing the loan portfolio. Remember that a lot of what happens too is that, and we've talked about it in the past, the accretable yield falls that necessitates a slightly lower provision build over time. So, we continue to manage, it's a combination of the decrease in accretion income, whatever we have from an organic perspective on the loan growth side. What we want to get near-term is to an allowance-to-NPL ratio that will be between 105% to 115%. So over the course of the next couple of quarters, we will continue to build that provision, add about $4.5 million to $5 million, to be able to get to that ratio.

[Collyn Gilbert:]

Okay, that's great. Thank you very much.

[Operator:]

We'll take our next question from David Bishop with FIG Partners. Please go ahead.

[David Bishop:]

A question for you, some of your other peers that sort of been a high-growth commercial model have noted that they're starting to see some of their larger commercial clients, maybe some municipalities, really starting to put the hammer to them from a deposit price renegotiation perspective. Are you seeing much pressure within your deposit base here?

[Jack L. Kopnisky:]

There is pressure and you think about it. The rates have gone up by 75 basis points or so. So there is going to be pressure on the depositors. All that said, rates are still really low. So, you have to put it into perspective. There will be pressure from commercial clients and municipalities to say, we want higher rates. Rates are still really low. So if you can continue to even increase rates on a beta of 25 basis points, if overall rates are up 75 basis points and if you can get a beta between 10 and 25 basis points on 75 basis points, at these rate levels you're still operating in a good marginal environment. So, the answer is, yes.

[David Bishop:]

Got it. And then back on the operating expense side, it's all down to 40 financial centers. From a legacy Sterling perspective, as you move forward past integration, where you see that maybe winding up on a long-term basis?

[Luis Massiani:]

So we don't look at it on – we're not really planning from a standalone perspective anymore. So from the progression of the financial centers is now on a combined basis we're going to have 133 financial centers at close, and that's what we're focusing on now, and the merger gives us the opportunity to be much more aggressive on the legacy Sterling side than what we could be on a standalone basis because you are able to offset any deposit attrition that you would have from further consolidations on our side with what is a very vibrant retail banking market that we're going to be partnering here with the Astoria folks in Western Long Island and in Queens. So, honestly David, we haven't really thought about that because we've been figuring out what the combined opportunity is to continue to shut down and consolidate branches. We've provided guidance on that in the past similar to what we've been able to do with all the mergers that we have done. The target that we have set out there from the perspective of the 15 to 20 branches, that's an initial target that we think is low-hanging fruit where there are branches that overlap between us and them. Longer-term, we are very confident that we can manage, we can continue to find ways to manage 100-plus financial center location network in a much more efficient basis than what we have today. So, you will continue to see us chipping away at those numbers over time and we're very confident that we can be a much more efficient deposit gatherer with substantially less OpEx longer-term than what we will be at closing of the transaction.

[Jack L. Kopnisky:]

To add to what Luis said, just to remind everybody, we publicly said that we would expect to take at a minimum a net 35% of cost out of this transaction. We are very, very confident that we will exceed that number as part of that and obviously the financial centers on a combined basis are a good part of that.

[David Bishop:]

Got it. Thank you for the color.

[Operator:]

We'll take our next question from Matthew Breese with Piper Jaffray. Please go ahead.

[Matt Breese:]

I apologize, I hopped on a little late, but I did have a question in regards to commercial finance portfolio acquisitions. I think you noted that some of the opportunities there declined year-over-year, and I just wanted to get a sense for why you think that's occurred, and then with that, does that change your time frame at all from being able to remix the Astoria asset side of the balance sheet?

[Jack L. Kopnisky:]

One, it doesn't change the timeframe at all. I mean there's still opportunities out there. My comment was that there is a little bit less opportunities now than there were prior, but there are still opportunities out there. And again, it's all about at what price and value you buy the portfolios. We looked at a number of things that just in our view were mispriced and now there are portfolios we've looked at that are just not the types of asset compositions that we were interested in. So, there are still portfolios out there. We're just being selective. There's a little bit less than there was maybe this time last year, but it does not change the timing on this. And a good example of that is you've seen us just on an organic basis be able to really kind of accelerate some of the C&I stuff that we're doing. We're going to continue to do that on an organic basis to drive the mix and make the transition happen in the timeframe that we suggested.

[Matt Breese:]

Got it, okay. And then on the commercial lending team front, could you just give us an update on where you stand in terms of the overall number of teams, and then the goal once the balance sheet is so much bigger of where you need to be once the deal is closed?

[Jack L. Kopnisky:]

So we will end the year at around 36 to 37 teams on a total basis. So, we have kind of onboard now a little above 33 teams. We're in the process adding another three teams or so, and that's inclusive of the transition from Astoria. And we would plan to add three to five teams a year. And again, we've been very fortunate that there are so many folks that have contacted us and have been interested in joining the organization. So we feel very confident that there are the types of teams and the types of high-performance teams out there that we can bring in and accelerate. So that's how we would – we expect to end at around 36 or 37 teams this year and we would expect to add three to five teams each year over the next three years.

[Matt Breese:]

Got it, okay. And then my last question, it's really around the pro formas highlighted or published with the acquisition. Has anything changed between then and now as far as what you think you can achieve with Astoria, are any of the targets different?

[Luis Massiani:]

No, I don't think that – nothing is meaningfully different, Matt. I think that the more work that we've done on the purchase accounting front, I think that it's going to be a little bit more favorable than what we had originally anticipated. Given what's happened to rates, sort of the markdowns that we would have had on the Astoria borrowings, they are going to be a little bit less than what we had originally assumed. We are probably taking a bit more of a conservative approach than what it's going to end up happening with write-up on owned properties on the Astoria side. So, there's two or three different elements that from just a pure purchase accounting perspective I think it moved more in our favor. So I think that that's a positive. From the perspective of cost savings opportunities, we are very confident that similar to what we've done in the prior two sizable mergers, we are going to – we have identified the opportunities that we thought we were going to and they are what we thought they are, and we are going to be able to kind of get to that number and exceed it, because again, there is a tremendous amount of opportunity there. So I'd say that everything that we thought we were going to find as we continue to do the work from an integration planning perspective, it's been that or better to what we thought. But from an overall EPS accretion perspective and the return targets that we've put out there, we feel confident about meeting those and potentially exceeding them in the first couple of years post merger.

[Matt Breese:]

That's great. That's all I had. Thank you.

[Operator:]

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

[Jack L. Kopnisky:]

Just thanks to everyone who joined us on the call and look forward to good things happening in the future, so thank you very much. Take care.

[Operator:]

This concludes today's presentation. We thank you for your participation. You may now disconnect.