Sterling Bancorp
Q3 2017 Earnings Call Transcript

Published: 25 Oct 2017

[Operator:]

Good day and welcome to the Sterling Bancorp Q3 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky, President and CEO. Please go ahead.

[Jack Kopnisky:]

Good morning everyone and thanks for joining us to present our results for the third quarter of 2017and our recent acquisition of Astoria Financial. Joining me on the call is Luis Massiani, our Chief Financial Officer. Our third quarter financial results continue to be strong, as our positive momentum in operating performance enabled us to again achieve record levels of loans, deposits, revenues and profitability. We have grown the profitability and returns by focusing on the creation of positive operating leverage through increasing productivity, eliminating non-core businesses that do not meet our hurdle rates and allocating capital to businesses that fit our strategy and risk tolerances. We have targeted growth in revenues at two to three times the growth in expenses. Over the past year, revenue has increased approximately 13% and expenses have increased less than 1%. On a linked-quarter basis revenue was up 5% and expenses increased 2%. This has allowed us to generate growth in adjusted earnings and earnings per share up 27% and 21% respectively over the prior year and achieve an adjusted return on tangible common equity of almost 16%. We are very excited to have completed the acquisition of Astoria Financial on October 2nd. We were able to gain regulatory approval, shareholder approval and comprehensively planned the integration details in less than seven months since the initial announcement. On October 2nd, we began executing our plan to deliver strong returns to our shareholders, distinctive service to our clients and a great working environment for our colleagues in the combined company. The acquisitions specifically allow us to obtain a long-term, low cost deposit base in highly desirable markets. The acquisition creates an opportunity to drive positive operating leverage by acquiring new sources of revenue, improve revenue production by either reducing costs or reallocating costs to higher margin opportunities. We estimate the transaction will be accretive to tangible book value per share by approximately 15% which is higher than our initial estimates. This is mainly due to the conservative marks we had assumed on Astoria's real estate holdings, loan portfolio and borrowings at the time of announcements. The transaction will be immediately accretive to earnings per share and we are confident in our ability to generate the earnings per share accretion of approximately 9% and 16% that we initially estimated for 2018 and 2019. The combined company will have approximately $31 billion in assets and $20 billion in deposits in attractive markets in metropolitan New York City. As you have seen, we have recruited a number of executives and teams on Long Island to support our growth objectives. We remain very confident in our ability to deliver strong returns, as a result of our core organic operating model and our integration of Astoria into this model. Heading into 2018, we are well positioned to take advantage of the significant opportunities in front of us. Now let me turn the call over to Luis to discuss the financials for the quarter, along with the details and structure of the company, inclusive of the acquisition.

[Luis Massiani:]

Thank you, Jack. And good morning, everyone. Our performance in the second quarter was strong and is a solid foundation from which we will continue to build on post-merger. Turning to page 4, at September 30, our total portfolio - portfolio loans grew by 14.4% over the prior year and average portfolio loans grew by 16.5%. Average commercial loan grew by 1.5 billion or 18.6%. Our total deposits grew by $751 million or 8%. Based on end of period balances, our loans to deposits ratio was 95%, a decrease of 2% from the linked quarter. Our tax equivalent net interest income for the quarter was $124.7 million, which represented an increase of 6.1% relative to the linked quarter and 16.8% over last year. This was mainly driven by strong loan growth across most of our commercial asset classes and growth in our investment portfolio. Taxable equivalent net interest margin was 242 basis points, which included $3.4 million of accretion income on acquired loans. Excluding the impact of accretion income, NIM was 3.32%, a decrease to 7 basis points relative to the linked quarter. As we will review in later slides, our yield on loans benefited from the recent interest rate hikes. The decrease in NIM was largely driven by a shift in the composition of our earning assets, which included significant growth in our securities portfolio, as we were preparing for the Astoria merger. Investment securities represented 27.7% of our average earning assets in the quarter compared to 25.3% in the linked quarter and 24.4% in the third quarter of 2016. We purchased investment securities in anticipation of repositioning our portfolio to meet our yield duration and interest rate risk objectives post-merger. Our NIM was also impacted by an increase in the cost of interest bearing liabilities, which was driven by higher cost of wholesale deposits and borrowings used to fund asset growth. As you can see on the bottom of the slide, we continue to deliver strong profitability and returns that have consistently improved as we have grown and executed our strategy. For the third quarter, adjusted return on tangible assets was 1.27% and adjusted return on tangible equity was almost 16%. On page 5, let's review the reconciliation of GAAP and adjusted results for the quarter. GAAP earnings were $44.9 million and GAAP diluted earnings per share were $0.33, compared to adjusted earnings of $47.9 million and adjusted diluted earnings per share of $0.35. We realized 21,000 of losses on sales securities. We incurred $4.1 million of merger related expenses in connection with the Astoria merger, which consisted mainly of costs associated with professional fees, client communications and expenses incurred to rebrand the Astoria Financial Center network in preparation for the closing. Our adjusted net income and our adjusted diluted earnings per share for the third quarter were both at record levels. On slide 6 and 7, we review our loan portfolio performance, which were strong. Our loan portfolio at September 30 consisted of a balance of 46% 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 and asset class relative to the linked quarter. We are focusing on growing our Commercial business lines. On an annualized basis, average commercial loans grew by approximately 19% and our total loans grew by over 16%. Looking at yield on loans, we are showing that data on an adjusted basis, excluding the impact of accretion income on acquired loans. Accretion income increased by 509,000 mainly due to one purchase credit impaired construction loan that paid in full in the third quarter and resulted in $1 million of accretion income. On an adjusted basis most of our asset classes saw a nice increase in yields. The yield on our traditional C&I in short term, especially financed loans increased 7 basis points to 5.62%. Pricing on CRE in multifamily loans has increased slightly for new loan originations and our CRE loans lots have also benefited from the increase in market interest rates. We discussed in our June conference call that based on recent rate hikes and our mix of business, we expect that our yield on loans excluding accretion income to increase by 8 to 10 basis points. We saw an increase of 7 basis points in the quarter. On page 8, let's review the changes in our securities portfolio. As we have discussed previously, we have been repositioning our securities portfolio for the Astoria merger, which has resulted in a greater proportion of securities to earning assets than normal in the last two quarters. The total portfolio grew from $3.9 billion to $4.5 billion at September 30 and it was 28.4% of our earning assets. We will move this proportion to approximately 22.5% of earning assets with a significant portion of the decrease being driven by sales of securities from Astoria's portfolio. In the pie charts you can see a shift in the size and composition of the securities portfolio. The average balance securities increased by $481.5 million and reached $3.9 billion for the three months ended September 30. In our municipal securities which now comprise 40.2% of our investment portfolio compared to 36.5% at June 30. Our duration extended to 5.54 from 5.47 years in the linked period and our tax equivalent yield declined by 6 basis points, which was mainly due to the timing of securities purchases during the quarter. Upon the repositioning of the securities portfolio post-merger, our combined portfolio will be in line with our yield duration and interest rate risk targets and we'll have a similar composition and characteristics as our portfolio has had historically. The increased securities balances reduced our net interest margin by approximately 5 basis points in the quarter. Turning to page 9, our deposit growth over the past 12 months were strong and at September 30 our deposits are at a record level. Based on end of period balances, core profits increased by 522 million relative to the linked quarter, due to growth in commercial deposits and inflows in municipal deposits. As typically happens at this time every year, municipal deposits reached a seasonal peak due to September tax collections. Our core deposit ratio was 88.3% and loans to deposits ratio was 95% at September 30. The total cost to deposits was 50 basis points, an increase of 7 basis points over the second quarter of 2017. This increase was mainly driven by our wholesale brokered and other non-core deposits, as the cost of core deposits was 37 basis points in the second quarter and increased just 2 basis points to 39 basis points in the third quarter. Since December 31, 2016, our total cost of deposits has increased from 36 basis points to 50 basis points, which represents a beta of 30% relative to the change in the two year treasury rate. On page 10, we take a look at our non-interest income. We are 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 participations of commercial loans. On aggregate these fees were $3.9 million in the third quarter and increased by nearly $1 million over a year ago. Excluding the impact of net loss on sale of securities, total non-interest income was $14 million. Moving to page 11, to take a look at operating leverage and efficiency, which continue to improve in the third quarter. Year over year, we have grown adjusted total revenue by 13.3%, while adjusted non-interest expense increased by 0.6%. A significant component of the increase in operating leverage has been our financial center rationalization strategy and our decision to exit the mortgage banking and trust business. We have maintained right control over expenses, as adjusted non-interest expense was essentially flat relative to the linked quarter at $56 million and our adjusted operating efficiency ratio decreased to 40.6%. We have continued to make investments on the personnel front, including new hires at commercial banking teams and risk management personnel, which has maintained our FTE count consistent with prior periods. We remain on track to achieve our prior guidance of $220 million to $225 million in OpEx on an annualized basis through September 30. Turning to page 12, let's review our asset quality. Performance in the quarter was strong. Our total non-performing loans decreased by $1.9 million, while criticized classified assets increased by $21.6 million. Delinquencies in the 30 to 89 day past due segment increase $6.4 million. The coverage of our allowance for loan losses to non-performing loans increased from 98% in the linked quarter to 104%. On taxi medallions, we continue to make progress during the third quarter. Total exposure to the industry decreased by 340,000 given repayments and now stands at $48.3 million at September 30. This represents 46 basis points of our total loan portfolio. On page 13, let's turn our attention to the Astoria merger. We closed the transaction on October 2nd. As Jack mentioned previously, the merger math, specifically the impact on tangible book value per share will be better than we had originally estimated. At announcement, we anticipated tangible book value per share accretion of 12%. Based on our latest purchase accounting estimates this will be closer to 15% and it may actually exceed this level. Please note that these figures are preliminary, as we continue to work through our purchase accounting processes. We have completed the restructuring of the Astoria borrowings and securities and you will see the positive impact on NIM and earnings in the fourth quarter of 2017. We have identified substantial cost savings opportunities and our confidence in our ability to realize them within the timeframe we have previously outlined. The main reason why we acquired Astoria, which is their low cost deposit base and attractive markets has remained intact and has grown slightly since the beginning of the year. As of the third quarter, Astoria had $9 billion in total deposits with a weighted average cost of 31 basis points. Since the beginning of the year, Astoria's total cost of deposits has increased by 4 basis points, representing a beta of just 8%. In contrast, given our greater utilization of wholesale deposits, our betas since the beginning of the year has been closer to 30%. On a combined basis, we will have a stronger combined funding profile with a lower beta and significant excess liquidity. We are confident in our ability to use the Astoria platform to grow deposits. And finally, we have begun the transition of the Astoria loan portfolio by making a significant investment in our commercial banking teams and other business lines. Over the past two quarters we have hired 35 commercial bankers, relationship managers and business development officers across all of our business lines. As the teams begin hitting their stride in 2018, we expect to see a significant ramp up in loan and deposit production. The factors above will drive significant operating leverage, earnings growth and higher profitability. We anticipate the Astoria merger and the actions outlined above will result in approximately $250 million in incremental pretax earnings over the next two years. And we can do this regardless of what happens to interest rates. Moving to page 14, we provide a view on what our starting point post-merger will be. The pie charts below present the main components of the combined balance sheet. Please note that this information reflects the impact of balance sheet repositioning and restructuring actions related to the securities portfolio and borrowings, but does not reflect the impact of final purchase accounting adjustments. In the first two weeks post close, we completed the restructuring of Astoria securities and borrowings. Total securities balances are currently at $5.5 billion, but we are continuing to build out our securities portfolio and it will be closer to $6 billion by year end. Turning to the last slide, we had significant momentum heading into 2013. The table below highlights the key components and drivers of earnings on a combined basis. The combined company will have substantial excess capital in liquidity, which we will use to support continued growth of our balance sheet and earnings. Jack?

[Jack Kopnisky:]

Thanks, Luis. As you as you see, we had a strong quarter, which positions us well to deliver on all of our targets we have identified in connection with the Astoria merger. The acquisition affords us a great opportunity to continue to evolve and reinvent the company. We acquired a long-term, low cost deposit base in a very desirable metro New York City markets. We have significant opportunity to create positive operating leverage by enhancing revenue and reducing overall costs. The transaction is uniquely accretive from both an EPS standpoint and tangible book value, as we earn incremental returns in year one and add capital from the transaction. The combined company will have significant attributes that operates primarily in metropolitan New York City where there is great diversity and opportunity, regardless of interest rate and economic cycles. We're focused on three primary market segments, middle market clients with revenues from $10 million to $500 million, business banking clients with revenues of $1 million to $10 million and emerging affluent and affluent clients through a focused single point of contact model. We have a very diversified commercial loan mix. We maintain a low cost, long term core deposit funding of 31 basis points at the present time and strong levels of capital and solid credit metrics. This model is structured to consistently deliver low double-digit earnings and EPS growth, return on tangible assets in excess of 120 basis points, return on - of average tangible equity in excess of 15%, very positive operating leverage and efficiency ratios of less than 40% once the integration is complete. Now, let's open up the lines for questions.

[Operator:]

Thank you. [Operator Instructions] And our first question comes from Casey Haire with Jefferies.

[Casey Haire:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Good morning, Casey.

[Casey Haire:]

Couple of fun questions for you Luis on - regarding slide 19 - sorry 15. So first one loan growth. Obviously, a lot of moving parts here. Can you - the 8 to 10, can you just give us a sense of the components. So I'm assuming you know the legacy Sterling can grow at a double-digit pace. You have some run off of the legacy Astoria to the tune of 6, 700 million or I guess what it's been running at. And then the balance would be coming from portfolio acquisitions. Is that is that a fair way to characterize it?

[Luis Massiani:]

That is. You know, I think that if you look at the prior page, you see that the starting point for loans is going to be $20 billion. So the 8% to 10% is about $1.8 billion to $2 billion of our overall growth. So that's about $500 million a quarter. So one of the things that you have to remember is that, the business - this isn't all just commercial real estate, it is in residential mortgage right, so this isn't necessarily a steady clip of $500 million dollars per quarter. Remember that some of the business lines that we have public sector finance business, the asset base funding business, factoring payroll those are a little bit seasonal and there's a little bit more volatility to the volume and the growth over the course of a year. But we put with the folks that we've hired and the various you know, in the diversity of the business lines we're very confident of being able to get the numbers right along of what you were mentioning as to those are the components of it to get $2 billion of growth for 2018.

[Casey Haire:]

Okay. Got you. And then switching to the net interest - core NIM outlook, the 320 to 330 what does that assume in the way of deposit pricing. Obviously the deposits were very good - the growth this quarter was very good, but you obviously paid up for it. And you know there was no asset sensitivity even with you know, with the June hike. So you know, what - I'm assuming if we don't get further rate hikes, I mean, there could be risks to the margin, I am just trying to understand it, if you could just give us some color there?

[Luis Massiani:]

Yes. So from the core perspective the 320 to 330, you know, I think that yes to the extent that there is no - so we're not assuming it or baking into that 320 to 330 any rate hikes. So we're not assuming that anything happens in December we're not assuming any further rate hikes in 2018. Now there is two things that support that core NIM going forward right. It's the repositioning of you know lower yielding assets that we're inheriting from you know from the Astoria side. And so when you factor in the rebalancing that we're going to be doing in the transition that there is going to happen in the loan portfolio even without rate hikes where you just look at today's new origination yields for the various business lines in which we're in to the extent that the transition in the repositioning of that loan portfolio is successful, you would get to a place where we would maintain NIM and potentially increase it from a core perspective even if there's no rate hikes.

[Jack Kopnisky:]

You know, one thing I'd add to just to be clear and concise on this, the - you know most of the increase in the deposit cost came from us taking on the broker deposits to fund the securities purchases. So I think the core deposit increases only were - there were 2 basis points. The balance of that was we frankly funded the securities purchases by going out in the market AND either borrowing money or bringing in broker deposits.

[Casey Haire:]

Got you. So the core - the broker deposits will be less - you'll be utilizing those less now with Astoria on balance…

[Jack Kopnisky:]

Utilizing - yes, they're going to be a lower proportion, right…

[Casey Haire:]

Got you…

[Jack Kopnisky:]

On total funding profile. So when you're inheriting $9 billion, so is part of the merger we now get $9 billion of deposits at a weighted average cost 30 basis points. The starting point for the cost of deposits already goes down from 50 basis points in the third quarter to you know 40 to 41 basis points in the fourth quarter. And you have a - made a kind of less - less rate sensitive deposit book you know going forward, which will also help support that that core NIM.

[Casey Haire:]

Okay. Last one for me, just the accretable yield of 40 basis points. By my math that's a little over $100 million in 2018. Can you just verify that? And then what sort of expectation do you have for step down as it relates to 2019?

[Luis Massiani:]

So the $100 million is correct for 2018, if that's down you lose about $25 million to $30 million of it annually, roughly.

[Casey Haire:]

Got you. Thank you.

[Luis Massiani:]

Thank you, Casey.

[Operator:]

And our next question comes from Alexander Twerdahl with Sandler O'Neill and Partners.

[Alexander Twerdahl:]

Hey. Good morning, guys.

[Jack Kopnisky:]

Good morning, Alex.

[Alexander Twerdahl:]

I was wondering first if you just had the specific purchase accounting marks for Astoria's loan book in terms of the interest rate mark and the credit mark.

[Luis Massiani:]

We don't have those. We know what they are, we don't have them in final form yet. So we will provide more details on that in the - you know in future. We're going to have to file an S4 in the course of the next you know 30 to 35 days or so, we will have a lot of detail in that document, but we're not ready to share that just yet.

[Alexander Twerdahl:]

Okay. That's fine. And then of the municipal deposit inflows that you had during the quarter, I think it was $464 million that was said in the press release. How much of that - I know there's a lot of seasonality there. How much of that would flow out in the fourth quarter versus over the course of the next couple of quarters?

[Luis Massiani:]

About half of that to - you know about half to two thirds flows out over time. So that's - the munis of the average balance of municipal deposits in the fourth quarter will be you know substantially higher than what they were in the second and third quarter. But from here to December you know, you'll see a - by the December 31 that period and municipal deposit balances will decrease by about $350 million to $400 million roughly.

[Alexander Twerdahl:]

Okay. And then I know you said it on the last call, you talked about some of the enhancements you've made to various lending teams to really encourage deposit growth and cash management and some of the other objectives of really just growing core of good core deposits. Have you started to see the results from that this quarter or is that something that's kind of ongoing and is going to take this a little bit longer to really bring in and obviously the Astoria deal brings in a lot of deposits. But just kind of going forward in terms of the deposit growth that you're expecting could you maybe just talk about or anticipation?

[Jack Kopnisky:]

Yes. So we have - you know, since let's say March 31 we've added about 36 sales relationship managers, some portfolio managers and business development folks. And you know we're starting to see the beginning of that, we have not realized all the investment. So it usually takes you know, six months before you start to realize folks. So for example we've now increased the number of teams. Out of those 36 folks we now have an incremental four additional teams and we're - you know these teams come in. They're building their pipelines, the pipelines will take even if you hired them day one, the pipelines take at least 60 to 90 days to realize anything out of them. But so we're starting to see the beginnings of that. We have not realized all the investment out of those so.

[Alexander Twerdahl:]

And that's true for both loans and deposits?

[Jack Kopnisky:]

100%. That's right.

[Alexander Twerdahl:]

Okay…

[Jack Kopnisky:]

So one of the things Alex we tried to do - we tried do - we try to anticipate all this. So one of the bright things that Luis and his team did is find securities that you know at higher yields than when we would have necessarily close, so we were able to make that transition. The same thing with people, so over the past six months we've heard of a bunch of folks to add to existing teams and then to add teams because there were some folks that would come over on the commercial side from Astoria, we knew that we need to supplement that. So we took on costs ahead of the actual close to enable us to once that deal close that kind of hit the ground running. So we try to invest ahead of time to realize the benefits of that, as we close a deal and then in the fourth quarter and the first quarter next year.

[Alexander Twerdahl:]

Great. All right. Thanks for taking my questions, guys.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Alex, before you go on the first question that you asked, the loan marks are going to be very much in line with what we announced that you know in March. So if you know for modelling purposes if you just want to go back there are announcement that it's going to be very much in line with those numbers. We were not expecting anything materially different.

[Alexander Twerdahl:]

Okay, great. Thanks.

[Jack Kopnisky:]

Thank you.

[Operator:]

And we'll take our next question from Erik Zwick with Stephens Inc.

[Erik Zwick:]

Good morning, guys.

[Jack Kopnisky:]

Good morning. How are you?

[Erik Zwick:]

Good. Thanks. First maybe can you provide your expectations for the speed at which Astoria's loan portfolio runs off, I guess are you expecting a relatively constant rate of decline which would imply that the drag from the runoff lessens over time as that portfolio gets smaller?

[Luis Massiani:]

So yeah, the answer to that - the short answer is yes. They actually have from - you know, they have a predictable portfolio you know, a little bit of it obviously dictated by whatever happens to interest rates right, to the extent that we do get a you know substantially you know kind of a greater rate environment or higher rate environment in 2018 you would expect that the prepay speeds in the cash flow at which the residential mortgage both comes in is going to slow down a little bit. But you can see what's happened you know, in their performance you know, in the first two quarters of the year and then if you know - kind of you could probably back into what they're - you know with loan portfolio from the page - you know from page 14 what the balance of their portfolio is that's coming over. It's been pretty consistent, the residential mortgage book has been you know, has been cash flowing at about $250 million per quarter give or take but on average it's about that number and the multi-family book is you know also very, very consistent and it's going to become a little bit more consistent as you know prepay speed have slowed down a little bit. So that actually gives us pretty good visibility from the perspective of you know approximately a $1 billion to $1.5 of loans that roll off their books. That doesn't all have to be replaced in the perspective of the loan transition. We are going to be you know, continuing to be active to a much smaller degree in the residential side and also in some of that broker originated multi-family product just to help out the - you know the smoother transition over the next two to three years. But we have very good visibility as to our cash flows and what needs to get replaced and by one.

[Erik Zwick:]

That's great color. I guess moving on, in the press you indicate that the effective tax rate will be lower in the fourth quarter due to a merger related expenses. Can you remind me how much you expect to record of merger related expenses and what that could do to the tax rate in 4Q?

[Luis Massiani:]

So the merger related expenses will be between $150 million to $165 million. So good bogey to use would be you know 160 is a good number. The effective tax rate in the fourth quarter is likely going to be below it - will be between 10% to 15% because we will end up recording effective - our effective tax rate for 2017 will be approximately 25% to 27.5% roughly. As you go into 2018, we anticipate that the tax rate is going to be between 33% to 34% factoring in everything that we're doing pro forma for the merger.

[Erik Zwick:]

Got it. Okay. And just last one, you already referenced the improvement in the day 1 purchase accounting marks on Astoria's assets. As you look out over the next year or so do you see any opportunities to record any gains from selling any branches or a real estate properties or anything of that nature?

[Luis Massiani:]

Possibly, yes.

[Erik Zwick:]

Okay. Great, thanks.

[Luis Massiani:]

Thank you.

[Operator:]

And our next question comes from Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Morning, Collyn.

[Collyn Gilbert:]

Do you - you gave good color in slide deck. But would you mind just walking through specifically what you're doing with the securities book in terms of what you're selling and what you've pre funded - the yield and what you've pre funded and then that the yield on what you're selling just to make sure I understand the movement there that's happening in the fourth quarter?

[Luis Massiani:]

So if you were to essentially - if you were to add - so what have we done, if you took you know, Astoria's portfolio at 9

[Collyn Gilbert:]

Okay. Okay. All right. That's very helpful. And do you - I know it's early yet, but what even just to what deposit attrition has been so far on the balances that come over from Astoria?

[Luis Massiani:]

So far so good, we haven't seen any so far.

[Jack Kopnisky:]

There has been no deposit attrition. In fact, we've continue to arrange some campaigns. They were running campaigns going into it and we hit the ground running coming out of it. So we expect growth.

[Collyn Gilbert:]

Okay. Good, that's helpful. And then just on the on the loan outlook side right, so that's obviously the million dollar question that's on everybody's minds for given the liquidity that's come over and so you're maintaining your growth targets of that 8% to 10% in loan growth. I mean, how do you balance that just with what we're seeing in the markets. You know, a lot of banks are scaling back on loan growth expectations, we're seeing you know, what probably will be a considerable slowdown in CRE in the New York metro market. I know Jack obviously you talked about the teams and you know the maturation schedule of some of the folks that you've hired. But just you know kind of thinking about it more broadly. You know, is there a point where you say you know, we're not going to meet those growth targets because it just doesn't make kind of sense from a return standpoint or just if you could give a little bit more color as to how you're thinking a little bit more broadly about you know, putting this liquidity to work in what could become you know a more slowing macro environment?

[Jack Kopnisky:]

So let me take a shot at that and in maybe two ways. The first way is, if you think about it - if you go back on page 13 a bit which is the strategic elements, in essence of the $250 million of incremental earnings that we are creating by the end of year two, a minor part of that is actually the loan transition. So you know, you look at the securities and borrowings, you look at the expense savings, you look at the marks. So one, we are very confident to be able to hit that kind of $250 million plus pretax income number. So we've been trying - as we've got around with a bunch of the investor tours in the roadshows and trying to get folks understand there's a great opportunity just by restructuring the company. So the second part about that specifically to your question about loan growth, you know the investment we've made in the teams and the model that we have should enable us to create the productivity levels that let us achieve that in a diverse market like metropolitan New York. So if we were in some other areas of the country, I would probably say tough, really, really tough to overcome the runoff. And then the incremental add, so your net growing by 8% to 10% a year. But there's a lot of diversity in this. We have a small portion of the entire market. There are some slowdowns in different sectors, but there's also some opportunities in other sectors. Second point on that piece is you know, we've created a pretty diverse set of loan portfolio. So we were a mono line business that was only focused on one category, one or two categories. It may be difficult to. So we think because of the team productivity, the opportunity in the market, a big diverse market and a mix of businesses we have, we have a great opportunity to achieve those numbers. Supplementing that is there are always opportunities to buy portfolios. So if none of that you know, if it didn't work to the level we wanted you could always kind of go out and buy portfolios that made sense that had the right risk dynamics. But I fully recognize the point and I understand the point and you know the only thing we'll see is we feel pretty confident that we'll be able to achieve those numbers.

[Collyn Gilbert:]

Okay. Okay. That's very helpful. And then just curious on the dynamic this quarter, so period end long growth was lighter certainly than averages, was it just a timing issue something that came in at the end of the quarter, a pay down and I presume obviously given your targets that you're expecting it to accelerate in the fourth quarter. So just curious about some of the movement there?

[Jack Kopnisky:]

We have some business lines that - you know, if you look at them at any given point in time it's not - not a good reflection of what happened during the quarter. Warehouse lending is a perfect example if you look at period to period and I think warehouse lending balances were down by $35 million bucks. So we were at $687 million at June 30, we were at 640 - I'm going by memory here, so about $640 million at September end. So - but the average balance of warehouse lending - of warehouseman lending balances was substantially higher in the third quarter than was in the second. So the factoring business, the payroll business, the asset base lending business, warehouse lending those are businesses that you know today the balances might be $100 million bucks less than they were yesterday. Tomorrow they're going to be up $250 million higher than they were yesterday. So we manage those business lines to an average balance not to period end. When you look at the average - the growth in average balances you know, quarter-over-quarter we feel very strongly about that. It was a good number.

[Collyn Gilbert:]

Yeah. Got it. Okay. All right. Thank you, guys.

[Jack Kopnisky:]

Sure.

[Luis Massiani:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good morning, everybody.

[Luis Massiani:]

Good morning, Matt.

[Matthew Breese:]

I just want to get - drill down into the margin and make sure I just chicken tie where we are now to the starting point in 2018 with the first full quarter of Astoria. How do you see the core margin progressing from now and then to meet the full year guidance of 320, 330, how do you the margin kind of trending throughout the year?

[Luis Massiani:]

So the core margin will be closer to the high end of that - should be to the - higher than the high end of that range of 330 or right on top of that. And then assuming no further rate hikes, I do think that the you know core NIM would potentially decrease a little bit over the course of the year and it would be - it would fall somewhere between 320 to 330 today. So one of the things that is difficult to for you all to see right now that Astoria obviously had a very - you know, you look at Astoria's standalone numbers historically they added 240 NIM or 250 NIM. The large component of that was the fact that they had the upside down trade between securities and borrowing, right. That is something that we have fixed in the first couple of weeks post-closing because we mark down those borrowings, we restructured them. We've now put - we've taken you know almost $2 billion of funding that was at a - you know at an average cost of almost 3.5% and we've now taken that and we've converted it into a you know kind of a more efficient funding profile going forward. So the core NIM you know, the core NIM is that 3 - will be in that high end of that 320 to 330 that we put on page 15. And then on top of that you add about 35 to 40 basis points of accretion income that comes in the first four quarters post close.

[Matthew Breese:]

And was that in the original guidance or the original guidance include the full mark from securities borrowings?

[Luis Massiani:]

It did, yes.

[Matthew Breese:]

I'm sorry which way?

[Luis Massiani:]

So the initial guidance that we provided when we announced the transaction and factored in you know, factored in the loan marks yes, in the accretion.

[Matthew Breese:]

But it did factor in the full restructuring of the securities and borrowings?

[Luis Massiani:]

Yes, it did.

[Matthew Breese:]

Okay, okay. So we're basically right on top with the 100 to 100…

[Luis Massiani:]

Yeah. We're right and this is very consistent, if you go back to I think actually - I think you asked this question Matt to - I think it was in the first quarter or the second quarter earnings call you asked what NIM was going to shake out and I think we said about 365 or 370, so that's exactly what's coming out. The march and everything very much in line. The execution of the balance sheet restructuring on the securities and borrowings is also very much in line with what we thought it was going to be. This is consistent with where we thought this was going to come out.

[Matthew Breese:]

Okay. Understood. And then the accretable yield in the out years, that you look to replace the Astoria loans it should decline I would I would think pretty dramatically?

[Luis Massiani:]

It will, so in 2019 I think you'll see about a $25 million to about a $25 million to $30 million decrease. And then as you continue to move out to 2020 you know, you lose some of that accretable yield Now remember that a lot of that accretion income comes in because we have marked Astoria's loan book to you know from an interest rate perspective to market yields. So to the extent that you are - that to the extent that the interest rate environment remains where it is today or is potentially higher, you essentially get the opportunity to replace that runoff with new originations at the higher market yields. So the risk here really is much more focused on the credit market than it is on the loan market - on the interest rate mark. Interest rate mark we're very confident that we can you know, if we did nothing and we essentially just continued to do the business that Astoria had done historically in residential mortgages and broker originated family, we would be able to replace that just from the perspective of being able to originate at higher yields than what the existing book of business was yielding. What we are focusing on is the balance sheet transition essentially offsets and the ability to be able to put commercial assets that have a higher yield dynamic offset the credit mark which is what we will lose over the course of the next two or three years.

[Matthew Breese:]

Understood. Okay. And then in the loan growth guidance, does that include portfolio acquisitions or…

[Luis Massiani:]

Yes…

[Matthew Breese:]

Okay, it does. And Jack you sound a little bit more optimistic on your ability on the portfolio acquisition front. Could you just talk about that a little bit and the opportunities you're seeing?

[Jack Kopnisky:]

Sure. So we - you know frankly, we see portfolios all the time, like we're looking at several right now. So we see different opportunities across different asset classes. So for example, there are you know, two asset classes that were - that that have many opportunities and that's equipment finance and multifamily real estate loans. Those portfolios, there are many portfolios to purchase along that path. There are other opportunities that are like ABL portfolios and some degrees of other C&I and real estate portfolios that we've looked at various times. So you know, as you've seen us in the past, we've been pretty disciplined about frankly saying you know, either they hit our targets of return and risk or we pass on them. So we've obviously passed on a lot of them. But there are opportunities to - there are kind of continuous opportunities to look at the purchasing portfolios.

[Matthew Breese:]

Got it. And then my last one is really around the better tangible book value outlook. So if you have it - do you have the intangibles that were created? And I'm just curious how is the mark on Astoria's real estate relative to expectations whether or not that came in better?

[Jack Kopnisky:]

It did come in better, but we knew - we kind of knew that we come in better because we took a conservative approach when we were doing the diligence in the first quarter. You know, Astoria owns 60 odd locations you know, headquarters, plus you know a bunch of branches. So we knew that there was - you know we needed time to be able to put a finer point on exactly what that number was and so we took a conservative approach when we were diligence-ing this prior to announcement. But we felt pretty strongly that there was the opportunity to have a you know, kind of a pleasant surprise from the perspective of the fair value of properties. So that certainly kind of moved in our favour. We also had a pretty conservative view on what it was going to require to kind of restructure the borrowings and to get rid of you know, the securities portfolios and those marks also came in better than what we had originally anticipated. In some cases because the interest you know, kind of the yield dynamics of market interest rates were more favourable to us. Also the passage of time also reduces marks because you have financial instruments roll down the curve and have a shorter term to maturity. So everything, we took a very conservative approach across the board on the purchase accounting. And therefore it's you know, it's been a little bit better than what we thought. So it's - but we - as it pertains particularly to the properties, we had a pretty good sense that it might be a little bit higher than what we had originally estimated.

[Matthew Breese:]

Got it. And then do you have the total intangibles created?

[Jack Kopnisky:]

It's going to be just under a $1 billion the CDI. So CDI is going to work. And these are preliminary numbers. Those were finalizing the work now, but it's going to - the CDI will be approximately $100 million and then there's another 900 and change or so of goodwill that's generated. So it should be between $950 to a $1 billion.

[Matthew Breese:]

Understood. That's all I had. Thank you very much.

[Jack Kopnisky:]

Thank you.

[Luis Massiani:]

Thank you, Matt.

[Operator:]

And we'll take our next question from Dave Bishop with FIG Partners.

[Dave Bishop:]

Hey. Good morning, gentlemen.

[Jack Kopnisky:]

Hey, David.

[Luis Massiani:]

Hi, David.

[Dave Bishop:]

Quick question. Just curious in terms of you know, once you get the ball up and running here, what's the outlook for the number of additional teams you're looking on to bring in 2018 and 2019 beyond, just curious how you're thinking about that in terms of additional…

[Jack Kopnisky:]

Yeah, we would plan to add three to five teams each of those years. So you know six to 10 teams over the next two years incremental.

[Dave Bishop:]

Got it. And then couple of housekeeping items, I saw there was a modest increase in classified loan balances there any color you can provide there on the special mention substandard increase?

[Jack Kopnisky:]

You know, nothing particular to point out from any individual industry sector. There was just regular way you know, transition of the loan portfolio. So no - nothing that we would point to that would be a concern from the perspective of any trends or anything that we're seeing in the broader portfolio now.

[Dave Bishop:]

Got it. One more housekeeping item. I think you touched on the CDI, and the intangible. Any sense what the core deposit amortisation goes to on a full end basis in 2018 quarterly?

[Luis Massiani:]

It's going to be close to $20 million, just under it…

[Dave Bishop:]

That's all in for the year?

[Luis Massiani:]

That's all in for the year.

[Jack Kopnisky:]

Yes.

[Dave Bishop:]

Got it. Okay. Thank you.

[Jack Kopnisky:]

Thank you.

[Operator:]

And we'll take our next question from Casey Haire with Jefferies.

[Casey Haire:]

Hi. Thanks, guys. I just want to follow up on the portfolio deals. I know you've guys have been very disciplined, it feels like the pricing has gotten a little bit you know, a little bit tougher here. What - I know you guys had said that you guys would do those deals without capital raises. Is that still the thought going forward?

[Luis Massiani:]

Yeah, one of the big benefits of this deal Casey is that we're going to be in you know through the issuance of shares and you know, the merger math. We're actually going to have about $150 million to 200 million of excess capital relative to our capital thresholds and our capital target. So I agree with you, one of the reasons that you have not seen us be more active on the portfolio front is the fact as we told you we're going to be patient and we are confident that if you are patient the right opportunity comes along. That's how we did the Franchise Finance deal in 2016. That's how we did the NewStar deal after you know, two or three tries of talking to those guys. We're confident that if you stay - if we stay patient you can get deals at the right price. And now we're in a position where even if we had to pay you know, some form of premium, which we're still going to stay disciplined and we would not require. We could do a sizable portfolio acquisition with no need to raise capital.

[Jack Kopnisky:]

You know, what's interesting, almost all deals is - it's funny in the portfolio purchase world. We generally don't buy the first time we've seen the deal. I think in all cases we've said no, the deal keep on going. They came back and we generally have said no second time. And the third time the deal kind of fit our parameters. So you know, as we said this is not something that you magically turn on a dial or a switch and all these - all the volumes come in, you just have to be disciplined and patient and thoughtful and stick to what you know is right on this and you end up being rewarded. So with excess capital, you know we can do some more things than we could before where we may have had to raise capital, but we are going to stick to our guns and not take incremental risk and we're going to get the right returns out of these things and be patient with it.

[Casey Haire:]

Okay, great. And just in terms of - can you just give us a reminder of where you'd like to live on TCE, is 8.5 on slide 15, is that where you expect to end up or is that where you would like to live going forward?

[Luis Massiani:]

At the 8.5 and it's probably going to be a little higher than that. The 8.5 is where we end up you know for the pro forma for the merger, the closing at the merger. We've been running historically at about seven and three quarters to 8%. We're going to continue that target closer to the 8%. And so that you know, we run the math, it's about $150 million of excess capital roughly.

[Casey Haire:]

Great. Thanks, guys.

[Luis Massiani:]

You got it.

[Jack Kopnisky:]

Thank you.

[Operator:]

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

[Jack Kopnisky:]

Just thanks to everybody for your time and attention and look forward to more conversations. So thank you.

[Luis Massiani:]

Take care.

[Operator:]

And that does conclude today's conference. Thank you for your participation. You may now disconnect.