Sterling Bancorp
Q4 2017 Earnings Call Transcript

Published: 24 Jan 2018

[Operator:]

Good day, and welcome to the Sterling Bancorp Q4 2017 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Jack Kopnisky, President and CEO of Sterling Bancorp. Please go ahead, sir.

[Jack Kopnisky:]

Good morning, everyone, and thanks for joining us to present our results for the fourth quarter and year-end 2017. Joining me on the call today is Luis Massiani, our Chief Financial Officer. Let me start by saying how pleased we are with the manner in which our acquisition of Astoria early in the quarter has progressed and the resounding financial outcomes that we will describe today. The integration process has been effective, and we are on pace to deliver strong financial results sooner than we expected that will enable us to continue to create the type of high-performing organization that we detailed at the time of the announcement. There's still much to do to effectively integrate and grow the company, but we are far along in creating the company that consistently provides high-performing results. Louise will detail the charges we have taken in the quarter for the acquisition of Astoria and the changes in the tax law. I will highlight the year-to-date results on an adjusted basis. Earnings for the full year 2017 were $222 million and earnings per share were $1.40. The 2017 earnings were 53% over 2016 and the earnings per share represented a 26% increase over prior year. Our operating metrics were strong for 2017 as return on average tangible assets was 125 basis points and return on average tangible common equity was 15.2%. The operating efficiency ratio was 41.8% for 2017. I would remind you that this level of efficiency occurs before we fully drive the necessary revenue enhancements and expense reductions and reallocations that we have in our integration plan. Our NIM in the fourth quarter was 367 basis points, inclusive of accretion income, which was in line with our forecast. Capital levels were very strong with Tier 1 leverage at the bank of 10.08%, and at the holding company of 9.4%. Credit quality continues to be solid. Commercial loan growth was approximately $1.5 billion for 2017 and deposit growth was strong at, again, $1.5 billion. We had began to leverage the terrific consumer distribution system of Astoria along with our strong commercial team platform. As I previously mentioned, we have much work to do, but we are off to a strong start in realizing the benefits of this transaction. We have found the deposit base is solid, and we are capable of growing core deposits. On an annualized basis, deposits grew 9% for the quarter as an example. We are finding strong receptivity to our operating model with commercial clients in Long Island. We are retaining existing clients, attracting new business and bringing in talented professionals for our teams. There continues to be significant opportunity to drive operating leverage as we bring our operating model that enables us to continue to grow revenues at 2 to 3 times the level of expenses. As we previously presented, the transaction has enabled us to present positive EPS accretion immediately along with significantly growing tangible book value per share. Now let me turn the call over to Luis to detail the financials.

[Luis Massiani:]

Thank you, Jack, good morning, everyone. I will review the impact of the Astoria merger, performance in the quarter, the progression of our balance sheet transition and provide an update on our outlook for 2018. Due to the Astoria merger and strong organic growth, we closed the year with total assets of $30.4 billion, portfolio loans of $20 billion and total deposits of $20.5 billion. As we had announced previously, the merger had a significant positive impact on capital and tangible book value per share. At December 31, our tangible common equity to tangible assets ratio was 8.3%, and our tangible common book value per share was $10.53. This represents growth on tangible book value per common share of 30% and 18% relative to the prior year and prior quarter end. We had strong earnings performance in the fourth quarter. But we did have several moving pieces as we incurred significant charges that were related to the merger and changes in tax laws. On a GAAP basis, we incurred a net loss available to common stockholders of $35 million. There were 3 items that contributed to our GAAP loss, pretax merger-related expenses of approximately $30 million; pretax restructuring charges of approximately $105 million, and a charge of $40.3 million in income tax expense to reduce our net deferred tax assets to their estimated value. For the full year 2017, we incurred merger-related expense and other restructuring charges for the Astoria transaction that total approximately $143 million, which was below our initial estimate of $165 million. The difference between the actual amount and our initial estimate is mainly due to the lower restructuring charges on real estate and financial center locations. As we continue to execute on the integration of Astoria, we will incur additional charges related mainly to further real estate consolidations. We estimate these charges will continue to be below our initial $165 million CAGR. Our adjusted earnings and adjusted diluted earnings per share available to common stockholders were $87 million and $0.39. Our adjusted effective income tax rate for the full year 2017 and the fourth quarter was 31.5%, which decreased slightly from the 32.5% tax rate we had estimated through the first 3 quarters of 2017. The decrease was due to continued growth in non-taxable income given stronger-than-expected growth and origination volumes and portfolio balance in our public sector finance business, purchases of municipal securities, an increase in BOLI income and tax benefits associated with investing in stock-based compensation. Our adjusted effective tax rate excludes the impact of the merger-related expense and other charges incurred in the Astoria merger. Our tax equivalent net interest income for the quarter was $234 million, which nearly doubled the $120 million we earned in the linked quarter. This was mainly driven by the Astoria merger. Tax equivalent net interest margin for the fourth quarter of 2017 was 3.67%, which was in line with our expectation for 365 to 370 basis points. This represents growth of 25 basis points over the linked quarter, and as expected, was mainly due to accretion income on acquired loans, which was $33.7 million in Q4 compared to $3.4 million in the linked quarter. Excluding the impact of accretion income, NIM was 3.16%, a decrease of 16 basis points relative to the linked quarter. The decrease in NIM excluding accretion income was due to a change in a composition of our loan portfolio mainly due to the Astoria merger. Traditional C&I and specially financed loans, which were 46.1% of our loan portfolio at September 30 declined to 26.4% of our loan portfolio at year-end. The balance of residential mortgages and multifamily loans both increased to approximately 25% of the total portfolio. Residential mortgage and multifamily loans have a weighted average yield of approximately 470 basis points, including accretion income and 360 basis points, excluding accretion income. By comparison, our traditional C&I and commercial finance loans have a weighted average yield excluding accretion income of approximately 470 basis points. That is why our strategy of rebalancing our loan portfolio by replacing residential mortgages and multifamily loans with diversified commercial loans is so important, as this will allow us to offset lost accretion income and increase our core loan yields and NIM. In the fourth quarter, we grew traditional C&I and commercial finance loans by $368 million, while multifamily loans were stable and residential mortgage loans decreased by $227 million. Longer term, we are targeting a loan portfolio with a mix of 45% C&I, 45% CRE - 45% CRE and multifamily and 10% residential mortgage and consumer. We will do this through organic growth and opportunistic portfolio acquisitions. We have largely completed the repositioning of our securities portfolio by purchasing approximately $2 billion of securities in the fourth quarter. As of December 31, our total securities portfolio was $6.5 billion and represented 23.9% of earning assets. We will decrease its proportion to approximately 22.5% in 2018. The spot yield on the securities portfolio was 3.03%, an increase of 16 basis points over the prior quarter. We maintained our portfolio composition and duration and our comfortable with the risk profile of the portfolio. We will continue to fund earning asset growth mainly through deposits. At December 31, we had $20.5 billion in total deposit with a weighted average cost of 43 basis points and a loans-to-deposits ratio of 97%. Including the deposits assumed in the Astoria merger, our deposit beta has been 16% since the beginning of the year and 4% in the fourth quarter. We anticipate we'll be able to grow deposits through Astoria financial center network and our commercial banking teams. And we're going to generate a balanced portfolio of retail and commercial deposits maintaining a 95% to 100% loans-to-deposits ratio over time. We continue to grow our balance sheet while maintaining tech controls over operating expenses. Adjusted net interest expense annualized in the fourth quarter was $438 million, and our operating efficiency ratio was 41.4%. Total headcount as of December 31 was 2,076 FTEs, which compares to 2,250 FTEs that both companies have in a combined basis at the beginning of the year. We have made good progress on the integration of Astoria and will continue to generate expense savings through 2018. All of the strategic actions that we have outlined above for loans, securities, deposits and operating expenses have the objective of increasing efficiency and driving operating leverage higher. Comparing this quarter to a year ago, adjusted total revenue grew by $140 million, while adjusted non-interest expense grew by $55.4 million. This is equal to operating leverage of 2.5 times. Since the amount of the - since the announcement of the merger, we have recruited 40 commercial bankers across our various business lines and geographic markets. We will continue to focus on investing in personnel and businesses that fit our strategy and culture, that we can achieve our target returns and we can build scale to generate further operating leverage. Our asset quality and capital position are both strong. For the quarter, we had $6.2 million in charge-offs, which represented 13 basis points of total loans annualized. Our total non-performing loans increased by $117 million and delinquencies in the 30 to 89 day past due segment increased $32 million relative to the linked quarter. The coverage of our allowance for loan losses to non-performing loans is 42%. When looking at our allowance and credit ratios, please note that loans acquired in the Astoria merger carry no allowance for loan losses as these are recorded at their estimated fair value at the acquisition date. We have ample capital to execute our strategy. Given the positive impact of the merger at December 31 to tangible common equity to tangible assets ratio was 8.3%, and our regular capital ratios are all above the amounts required to be well capitalized. Looking in 2018, we continue to see opportunities to grow our loan portfolio by approximately $1.8 billion net of runoff, which represents an 8% growth rate. We will do this for our commercial banking teams and through portfolio acquisitions. We expect our loan-to-deposit racial will remain in the 95% to 100% range and that we will utilize the Astoria deposit footprint s to grow deposits and to reduce wholesale funds and borrowings over time. Due to the change in tax law, our tax equivalent net interest margin, including accretable yield, will decline approximately 10 basis point from the current level and is estimated to be in the range of 3.5% to 3.6%. We anticipate that core NIM excluding accretable yield will be between 3 05 and 3 15 for full year 2018. This estimate is based on current interest rate levels, and we are not factoring potential benefits from a more positive interest rate environment. Our focus will continue to be on growing commercial loans and repositioning our loan portfolio with the increased core loan yields and core NIM. We anticipate we will transition approximately $1 billion of resi mortgages to commercial asset classes over the course of the year. To the extent that there is a more favorable interest rate environment, going forward, we should see some upside to our guidance. We will continue to make progress on the integration of Astoria, and we will target $425 million in OpEx, excluding amortization of intangibles in 2018. Expense management will continue to be driven by a reduction in headcount, systems integrations and a reduction in real estate and financial centers. With the change in tax law, we anticipate an effective tax rate of approximately 24% at 25% for the full year 2018. Jack?

[Jack Kopnisky:]

Thanks, Luis. We had a strong fourth quarter and overall 2017 as a result of the execution of our strategy. I really want to thank everyone who had hand in delivering these terrific results in 2017. As we look forward to 2018, we continue to focus on creating a high-performing company that produces terrific returns for shareholders, great value for our clients and a growing and an invigorated environment for our colleagues. We will focus on give straightforward objectives

[Operator:]

Thank you. [Operator Instructions] And we'll move to our first question from Casey Haire with Jefferies.

[Casey Haire:]

Thanks. Good morning, guys.

[Jack Kopnisky:]

Good morning.

[Casey Haire:]

I want to start on the loan growth. Luis, you mentioned the asset transition. If you look at the fourth quarter trend, the C&I growth was very good, but it was overwhelmed by the rundown in the resi mortgage, I believe, on a pro forma basis down $400 million. Can you give us some color as to what happened within that resi book? And then as well, how is the C&I pipeline holding up after a strong quarter? I know you mentioned that the resi mortgage book you expect a more balanced, I think you mentioned $1 billion of remixing. Just some color and how we can get comfortable given a $1.6 billion run rate decline here?

[Luis Massiani:]

Yes. So there's the portfolio cash flow is a little bit faster in the fourth quarter than what we had anticipated when we were doing the merger integration planning. But that's a prepayment rates on both multifamily and on the residential side. It's just been a little bit faster. If rates do continue to increase in more in a – you know, rising rate environment, we anticipate that should be slower in the first and second half of 2018. But if anything, if there is a faster reduction on the resi side, it might create an earnings - or an earning assets shortfall for a period of time but that creates liquidity for us to go redeploy other asset classes and portfolio acquisitions over time. So over the course, if you look at it over the long stretches of time, we're very confident in being able to replace the run off the residential mortgage book. But there will be some seasonality and some volatility after that happens over 2018. But we’re very confident on the $1.8 billion to $2 billion of net loan growth that we're forecasting for the full year.

[Casey Haire:]

And just to be clear. And maybe I misunderstood. The runoff in the fourth quarter of mortgage loans was $227 million. So obviously, annualized, it's about $900 million, not $1.6 billion, one. And secondly, we had really good growth on the C&I, especially finance as you mentioned, Casey. And lastly, the pipelines that you mentioned, you asked about the pipeline on the commercial side, are very strong. We ended up the year very strong in terms of C&I in commercial real estate, targeted commercial real estate and our pipelines are very full going into the coming years. So we expect to have another good quarter on this.

[Luis Massiani:]

But let me -- Casey, to be clear like, we do not see a faster runoff on the resi side to be negative. That is not business that we want to be in, those are correspondent loans that were originated over time. But we don't have meaningful relationships. The fact that the portfolio was cash flowing at or faster than what we thought it was going through is actually positive for us. So we do not see that as an issue.

[Casey Haire:]

Yes. Okay. I mean, I was using a pro forma, which includes the mark. So in my mind, it have been a little bit elevated. Okay.

[Luis Massiani:]

Yes. That’s right.

[Casey Haire:]

So switching to, I guess, the deal outlook. I know that's important to your loan growth guide here. Any update there? And do you - loan-to-deposit ratio between 95 to 100. Do still want to say within that even you know, would you pass on a deal if it took you over that -- outside that range?

[Jack Kopnisky:]

So one, there are increasing opportunities for portfolio purchases along the way. So but in essence, so about three quarter s of the loan growth will come from organic means and about a quarter were looking for from asset purchases. So there's an increasing opportunity out there. We're seeing more deals and more things that seem to fit our - what we're comfortable with. The ability to - we do want to stay in that kind of 95% to 100% range. But there are lots of different ways to make those acquisitions happen. There may be a time that we go over hundreds briefly. But ultimately want to get below 95% loan-to-deposit ratio. So the forecast of 95% to 100% is really during 2018. We ultimately want to be able to build to the point that we can create a metric less than 95% in terms of loan-to-deposit ratio.

[Casey Haire:]

Okay, great. And just last one for me. In the 3Q deck, you guys mentioned incremental earnings of $250 million in year 2. I'm not seeing it here in this deck. Is that still a target or an achievable goal for you?

[Luis Massiani:]

It is. The numbers that we laid out from the beginning – for pro forma, for the merger are a - we are in line or better than-anticipated. And we're probably going to achieve them faster than we originally thought. The integration is coming in just as we thought we would. So we’re – you know, no changes there.

[Jack Kopnisky:]

You know, part of that was driven – as we really do believe - we run the whole company on an ongoing basis based on creating this positive operating leverage. So we've seen more opportunities for revenue growth than we thought. And we frankly have seen more opportunities to reduce and redeploy expenses than we thought initially. So we're very, very comfortable with that guidance.

[Casey Haire:]

Great. Thanks, guys.

[Jack Kopnisky:]

Sure.

[Luis Massiani:]

Thank you.

[Operator:]

And we'll move to our next question from Emlen Harmon with JMP Securities.

[Emlen Harmon:]

Hi. Good morning, guys.

[Luis Massiani:]

Hi.

[Emlen Harmon:]

Good morning. Over the course of your remarks, you touched on a few of the areas that you kind of you can kind of push the NIM to the target range from the fourth quarter level. So can you just maybe explicitly talk us through the different shifts in the balance sheet and how they contributed to you getting into that NIM range? So whether it's just the loan mix or - the other areas there?

[Luis Massiani:]

Yes. So you – so the 316 of core NIM that we had in the fourth quarter, starting point for that. Just because of the change in corporate tax rate and the change in the calculation of tax equivalent NIM, that 3 16 becomes 305, 306. So you're taking about 8 to 10 basis points off the bat from just the – no change in the cash flow of the earning asset portfolio, it was just a change in how the calculation works for tax equivalent NIM. For every $1 billion that we replace of lower yielding assets into the commercial asset classes, generates approximately 7 to 8 basis points of incremental NIM. And then in addition to that, the moving down to the securities portfolio from the 24% that we're at today to about 22% to 22.5% generates another couple of basis points. So between those two things which are the things that we can control, you have approximately 8 to 10 basis points of upside relative to where the run rate is today. In addition to that, I mean, you tell me what's going to happen with rates, right? So year ago we were sitting here and you know the 2 to 10-year spread was at a 125 basis points. Today, it's at 58. So we're focusing on the things that we can control. And that's the ability to transition this portfolio into the type of business mix that we like. And we see approximately 10 basis points of upside in executing that strategy over the next 12 months.

[Emlen Harmon:]

And to be clear, that's not included in the range that you provided, right?

[Luis Massiani:]

That's right.

[Emlen Harmon:]

Yes. And on the expense outlook, you gave us a bit updated guide for 2018 expenses. What portion of the Astoria cost is do you expect to have, kind of fully run rated in 2018 versus kind of how much more is on the come when we look at 2019?

[Luis Massiani:]

Through the end of 2018, you'll have 75% to 80% of the run rate Astoria – the Astoria save will have been executed by then.

[Emlen Harmon:]

Is that executed or fully in the run rate?

[Luis Massiani:]

Fully in the run rate in the fourth quarter. That's right.

[Emlen Harmon:]

All right. Thanks, guys.

[Luis Massiani:]

Sure.

[Jack Kopnisky:]

Thank you.

[Operator:]

And we'll move to our next question from Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

Hey, good morning, guys.

[Jack Kopnisky:]

Good morning.

[Alex Twerdahl:]

First question. I just want to follow up on that expense question. I think in the third quarter deck you had an expense target range for 2018 of $430 million to $440 million. And then in this deck you drop that down to $425 million. Can you just tell us what the difference between those 2 targets are?

[Luis Massiani:]

We are executing the operating expense savings faster than what we had originally anticipated and we have found more cost saves than we had originally anticipated. So it's both the timing and an amount issue.

[Alex Twerdahl:]

Okay, great. And then can you - just to elaborate a little bit more on the loan growth and what happened this quarter. It looks like you ended pro forma the at beginning of the quarter loans at around 97 and then they went up to 2 - or $20 billion even. But then the average loans for the quarter actually was down to like 19, 5, I think. So may be talk a little about the moving parts during the quarter? And then the second part to that question, I know that there's a fair amount of seasonality in several of the loan portfolios. Maybe you can just walk us through what those seasonalities are? And which quarters you expect to see better loan growth on an organic basis particularly in some of the C&I book and which quarters you expect to be more flattish?

[Luis Massiani:]

The second and third part. So second and third quarter and the early part of the fourth quarter are always the stronger quarters for the commercial finance business lines. In particular, what happens at quarter end in the residential warehouse lending businesses that you always see kind of a pop at quarter end. And so the major difference between the $19.5 billion - the $19.7 billion or the average asset balance relative - or average loan balance relative to the end of the period is largely driven by the fact that in the last 3 or 4 days of every quarter, you see about $250 million end of period loan growth or balance growth, specifically in that warehouse lending business. Overall, the start to the year from a pipeline perspective, as Jack mentioned, was strong. And it's been strong across all of the commercial asset classes. So you're always going to see a little bit of a drop off in some of those business lines in the first quarter. But you're building up in the second and third quarters where you see the you know, higher balance it's across-the-board in all of those commercial finance businesses.

[Jack Kopnisky:]

I'd also just add. The reality of this is we had a ton of business that closed the last 2 weeks of the year. We frankly tried to solve that issue. Part of that is the model that we operate in where people want to close quickly. There are some tax reasons why that happened towards the end of the year with some of our clients. But regardless, the average is also into fourth quarter were affected by the significant amount of closings on the C&I side and the CRE side in the fourth quarter.

[Alex Twerdahl:]

Okay, great. Thanks for taking my questions.

[Jack Kopnisky:]

Thank you.

[Operator:]

[Operator Instructions] And we'll move to our next question from Erik Zwick with Stephens.

[Erik Zwick:]

Good morning, guys.

[Jack Kopnisky:]

Good morning.

[Erik Zwick:]

Thanks. Maybe with regard to your NIM outlook. Thanks for the comments on – kind of the rate back assumptions. What are your expectations for deposit betas in 2018?

[Luis Massiani:]

So what we're seeing today. So for the year, if you look at the combined deposit base, and obviously, we weren't combined since the beginning of the year. But all of the analytics that we have been run have been combined basis, beta was 16% from December 31 to 16 to December 31 to '17. So we fully anticipate that the beta on the Astoria deposit footprint is going to continue to be quite low where the place where we are seeing what I’ll call the more beta pressure is on the higher balance commercial account business right? And so when you factor in the combination of those 2, the beta we anticipate will continue to be between 15% to 20%. But again, that's going to be - there's one rate hike 2, 3, 4 that loss will dictate that. But we think that there's going to - in a traditional or in a gradual progression of interest rate hikes, we should - we anticipate to see 15% to 20%.

[Erik Zwick:]

And then on the accretable yield, it was maybe a little bit stronger this quarter than I anticipated. Have your expectations for - what you expect to accord for 2018 and '19 for the accretable yield, have those changed? Or can you remind us what your expectations are?

[Luis Massiani:]

Yes. We still anticipate about $100 million in 2018. And remember that those are estimates, right? And it's driven by the performance of the portfolio, prepayments. There is a lot of assumptions that go into that. But yes, the $33 million was a little bit stronger than we originally anticipated. But for now, we continue to think that $100 million is a good number to use over the course of 2018 and that will drop off by about, we anticipate, $15 million to $20 million in 2019. So you’re going to continue to see that step down on the accretable yield. But it's tough to - we haven't changed the guidance because - or our estimate because it's tough to pinpoint. But $100 million is a good number to use for this year.

[Erik Zwick:]

Got it. And maybe one last if I could, how are you thinking about the loan loss provision going forward, given your expectations for the $1.8 billion to $2 billion in growth?

[Luis Massiani:]

Should be about $10 million a quarter. So this $12 billion was a little bit higher and than we will have and what we anticipate having in 2018. Charge-offs were higher than that they have been in the linked quarter so we had $6.2 million in charge-offs. We had a couple of cleanup items there that we took care of in this quarter. But it should decrease by about $2 million or $3 million relative to what we recorded in the fourth quarter.

[Erik Zwick:]

Great. Thanks for taking my questions.

[Luis Massiani:]

Thank you.

[Jack Kopnisky:]

Thanks, Erik.

[Operator:]

And we'll move to our next question from Joe Fenech with Hovde Group.

[Joe Fenech:]

Morning, guys.

[Jack Kopnisky:]

Good morning, Joe.

[Joe Fenech:]

Hey, guys, I appreciate Luis' comments on about mining so much if the resi run off was what it was and that over the long term it works out. Could there be a situation though may be in the short-term where you create an earnings hold that you're unable to fill in a given quarter or you guys pretty confident [Technical Difficulty] that you got enough levers may be at your disposal if there is an accelerated [Technical Difficulty]

[Jack Kopnisky:]

We are very confident that we can fill the whole. There is lots of levers to do that with. So we - everything from securities to going out and purchase assets that have the same or a slightly better earning dynamics. So there are a bunch of levers that we can use to fill the hole if there were one.

[Joe Fenech:]

Okay. And then another question on the accretion, I get conceptually the thought process is to replace the accretion with a pick up in yield from the new commercial loans. With the accretion guidance you've given, Luis, and understand it's going to be a moving target. As best as you can tell, do you think that's a relatively smooth handoff or are we going to see NIM kind of bouncing around for a while here until that accretion really winds down and you kind of get all that - how does that handoff work, is it smooth…

[Luis Massiani:]

Yes. That's a good question, Joe. I think you're going to see a little bit - there will be some volatility in that and a lot of that will be driven by - you're going to have a little bit of a plateau approach as we execute on the portfolio opportunities that we've been looking at and continue to look at. And so over a 12-month window, I think that we're going to get to exactly the place where we have - where we're guiding too. But yes, you're going to see some volatility in that over the course of the year. And it's going to be driven by how quickly can we - some of these business lines, remember, our seasonal, you balances that go up and down based on time of the year, specific nuances of how these businesses finds in industry sectors work. And then the portfolio acquisitions will also add a lever - a level of some uncertainty to that. But from the beginning of the year in December of '18, we fully anticipate that we want to be able to get to those numbers that we laid out there.

[Jack Kopnisky:]

And the volatility would be 5 to 10 basis points, maybe not like 10 to 20 or something like that.

[Luis Massiani:]

Yes. It's not a big – so we're talking about a very little variance from how that – how it shake out. It's just not it's going to be perfect. You have to remember these business lines aren’t residential mortgage and commercial real estate where you're kind of pumping out money on a steady basis, right? These our relationship-driven types of transactions where you're going to have quarters - the public sector finance business is a great example. You have quarters where you book $200 million or $400 million of loans, and then you have quarters in which you book 50. But over a 12-month window, you get to the types of growth rate and the types of return dynamic that we're seeing here.

[Joe Fenech:]

Okay. And then two other quick one for me. How many rate hikes are you guys assuming in the updated NIM guidance?

[Luis Massiani:]

We're not giving any credit to rate hikes. We have, again, as I mentioned you tell me how many there are and what the shape of the curve is, right? Because every rate hike we've had is essentially brought within a flattening of the curve. So we are confident -- more concerned with the overall NIM guidance or with the overall impact that rate hikes will have on NIM. We feel there's other levers that we can pull that to the extent that NIM is short by 5 basis points. There's other opportunities to grow, earning assets in other parts with the access capital that we have and the incremental funding and liquidity. So we have - we're much more concerned with the ability to deliver overall EPS growth and will there be 2 or 3 rate hikes, if there's a 3 and a 4, we'll do it.

[Joe Fenech:]

It safe to say that you feel like, Luis for December hike, maybe a March hike where spreads are today you feel like you are net beneficiary of all these incremental 25 basis point increase that we see over the next few months?

[Luis Massiani:]

Yes, that's right.

[Joe Fenech:]

Okay. Last one for me guys, it looks like non-performers were up but only 118 [ph] million, with only a 100, but that came from Astoria. Can you talk about what drove that remaining $18 [ph] million increase in problem assets?

[Luis Massiani:]

Yes. We still feel very good about credit quality to the $18 million difference was two individual credits that we feel very confident. We're not going to have any meaningful charge-offs on and are not representative of anything else that we have across the board in any of our portfolios. So those are things that we fully anticipate that the NPL numbers should drop off meaningfully in the course of the first half of 2017, particularly related to these specific credits that we had in the fourth quarter.

[Joe Fenech:]

Okay. Thank you.

[Operator:]

And we'll move to our next question from Collyn Gilbert [KBW]

[Collyn Gilbert:]

Thanks, Morning, guys.

[Jack Kopnisky:]

Morning.

[Collyn Gilbert:]

I have so many questions. A lot of them have been answered fortunately. Let me start with just the loan growth. Just reconciling this quarter's dollar - organic dollar loan growth that you guys saw that Sterling saw, I guess the Sterling saw on the C&I side and then the CRE side?

[Luis Massiani:]

So what's the question?

[Collyn Gilbert:]

Sorry. I forgot. What is - sorry it's a long one. What is the dollar amount of Sterling's legacy CRE and legacy C&I growth in the quarter?

[Luis Massiani:]

$543 million.

[Collyn Gilbert:]

For which - what was that, for both combined?

[Luis Massiani:]

For that - for the commercial loan portfolio, 360 - 350 of that coming from the C&I side and the balance coming from CRE.

[Collyn Gilbert:]

Okay. Thank you. Okay, next question. Your revised loan guidance of 1.8 now. It's $200 million less than it was in the third quarter. What is driving that?

[Luis Massiani:]

I think it's - we in the third quarter, we talked about 8% to 10% loan growth. We still have that 8% to 10% loan growth dynamics. So the $1.8 billion is the low end of the range that we showed in the third quarter, but we're confident that $1.8 billion to $2 billion are not - we don’t – we were not concerned about getting to those numbers.

[Jack Kopnisky:]

Yes. So the guidance we gave you is it's really the 8% to 10% guidance and which hasn't really changed before. Just trying to be conservative in the way we're going about this.

[Collyn Gilbert:]

Okay, okay.

[Luis Massiani:]

It's going to be driven by the runoff. So remember that's net cost, right. There are assets that we're going to get rid off and so far those sizes that we wanted to liquidate it in runoff had run off a little faster than we originally anticipated. But again, if you look at it over long stretches of time, we actually see that as a positive because that just creates liquidity for us to redeploying to other assets.

[Collyn Gilbert:]

Okay, that's helpful. And then I know you talked about the mortgage, you talked about security targets. But just curious, I think what we see would indicate what your thinking maybe security balances would be around $6 billion, pro forma with Astoria, $6.7 billion is how the quarter shook out, if I had the numbers right. Just trying to understand what the dynamic was there to have the securities maybe coming on more than what you had originally anticipated?

[Luis Massiani:]

We saw good buying opportunity in the fourth quarter. So there's - I think that you're going to see that from this point forward, as the progression of the growth in securities is going to be substantially slower and reduced relative to what it was in the fourth quarter. So whenever we see a good opportunity, we take advantage of it. But long-term, the plan and the strategy to execute is to move that proportion of security to total earning assets to move it down by about 2%, which will help about NIM a little bit.

[Collyn Gilbert:]

Okay. And the purchases that you did in the fourth quarter, what were the average yield on those?

[Luis Massiani:]

Just over 3%.

[Collyn Gilbert:]

Okay. And the duration?

[Luis Massiani:]

In line with what we have in the portfolio. 4 to 5 years.

[Collyn Gilbert:]

Okay, okay. Okay, that's helpful. And then on - it seems like the fee line was a lot less coming over with Astoria. Was there anything in particular that was driving that?

[Luis Massiani:]

I think that there is a - so one thing in particular is that from a servicing perspective and an MSR perspective on the residential mortgage, those are not things that we continue. So that has created a little bit of a shortfall there. We're running right now at about a $96 million annual run rate. We have to get that - we have to grow that by about $8 million to $10 million to get to the - to get to our guidance. We feel that we have the products and the opportunity to be able to do that. So we confirm - we haven't changed guidance from a fee income perspective. We think that we're going to hit those numbers for '18.

[Collyn Gilbert:]

Okay. Okay, that's helpful. And then just - a lot of movement on the NIM. Obviously, now the impact of the FTE NIM et cetera, et cetera. Do you have a dollar amount of NII that you guys are targeting for 2018 that you could share with us or a relative range maybe?

[Luis Massiani:]

We have not shared that in the past. So I don't have that range to share with you, but we can certainly provide that guidance from that perspective as we go forward.

[Collyn Gilbert:]

Okay, that's helpful. Okay. And then just -- I think I'm getting to the end. Just for housekeeping. What should we be using for the 1Q average diluted share count?

[Luis Massiani:]

225 million.

[Collyn Gilbert:]

Okay. All right. Thanks, guys.

[Luis Massiani:]

Great. Thank you.

[Operator:]

And we'll move to our next question from Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good morning, guys.

[Luis Massiani:]

Morning.

[Matthew Breese:]

I'm sorry if I missed this in the opening comments. But I just wanted to get a better sense of the delta between the core NIM in this quarter and what you've spoken about back in October. I think the initial discussions was the range is 320 to 330. And early on, combined it would be at the high end of that. So what were the driving factors that changed it to 316?

[Luis Massiani:]

So there is a couple of different things. So we had higher securities balance than what we had originally anticipated, first and foremost. Second is that the combination of the loan portfolio that comes over, right, is - and so that the misnomer here a little bit Matt is, so we provide guidance in the third quarter as an outlook for the full year 2018. And we continue to believe, so we really haven't changed the guidance to all that much because the real - the big difference between what the guidance that we’re providing now and the guidance we provide in the third quarter is a change in how we're calculating the tax equivalent at NIM. But at the end of the day, what we're talking about here is a difference of essentially 5 basis points on the NIM. So what happened, there's a flattening of the curve have continued to impact new loan origination and we'll be conservative from the perspective of what the potential impact of that may be. Again the 2 to 10 year spread is that 50 basis points, 55, 58 basis points today. And we are more concerned, again, not necessarily the overall level of core NIM, it's essentially continuing to transition the portfolio to a place where we get rid of the lower yielding assets and we book higher-yielding assets over time. So if anything, this is a timing issue, but the you know, the perspective of where the – where we see the progression of deposit cost, where we see our ability to being able to redeploy into earning assets, they're going to create an a accretion to NIM and to core loan yields. That has not changed at all. We're still very positive and think everything that we said before is very achievable. But this is a difference in starting point is all it is. At the end of the day, in 2018, we'll be factoring the types of equivalent adjustment, we're going to be very much in line with what we told you in the third quarter.

[Jack Kopnisky:]

Okay. It's interesting, too, that everybody focuses on NIM. So what we've done in this company, NIM is obviously an important component of how we operate. But there are many, many levers that we pull that we have always pulled to be able to deliver the earnings per share and earnings growth and the returns that we expect. So and as Luis said, this is a big balance sheet transition. So it's tough to be within a range of 1 or 2 or 3 or 4 basis points. But I think we're very comfortable with all the guidance we've given everyone. And if anything, it is better than we expected. How we get to those earnings numbers and those earnings per share numbers and those return numbers, there are different levers that any operator pulls during the year to make those things happen. The simple example, the most simple example of this is what we're trying to do over appeal of time one component of NIM is to create assets, ready assets that are 3% to 3.25% for commercial real estate and C&I assets 4% to 4.25% plus. So that's the beginning part of that. Transition is not perfect. But over time, we have more than - one of the great things about this merger and frankly the way that we set up this company is we've created lots of levers to pull to get the high performance returns and results.

[Matthew Breese:]

Understood. Okay. And then in terms of the balance sheet sensitivity, with each incremental fed hike, what do you expect the impact of the under margin currently - as it currently sits?

[Luis Massiani:]

That depends, right? So it depends on where new origination yields are for a fixed rate assets in particular. But the guidance that we provided previously, which is for every 25 basis points, you should see about 3 to 5 basis points of incremental NIM. We continue to - that continue to be the estimate that we come up with. But again, it depends, Matt. Just because there's a rate hike, we have a lot of asset surprise off of a 1 month and 2 month LIBOR, whatever rate hike also creates a deposit pressure on, especially on high balance commercial accounts that I mentioned before. So until you see a world in which you have asked a steepen at the curve where you can essentially reprice holistically across the board, fix rate assets and securities in all types of loans at a higher dynamic, I don't think that you're going to see necessarily a significant increment in NIM. That's why again for us, it's essentially controlled the things that we can control this what you focus on, which is the composition of our loan portfolio, the types of assets that we originate, high credit quality, so we don't run into charge of issues. And then over time, if the NIM is 305 or if it's 310 or if it's 315, at the end of the day, we're going to generate a double-digit EPS growth because we will pull all the levers to get there. But long story short, it's probably about 2 to 3 basis points for every 25 Bps.

[Matthew Breese:]

Got it. Okay. And then I was hoping my last one you could talk a little bit about New York City commercial real estate. Jack, I think you had mentioned you have a good pipeline there, but we're hearing a lot of chatter about lower transaction volumes, a lot of competition, tighter spreads. And I was hoping you could provide us with what you're seeing and to what extent has in the back off in the 5 and 10-year pass through the new yields in that business?

[Jack Kopnisky:]

Yes. So from a multifamily standpoint, so a couple of things. From a high-end real estate, it is absolutely slowed down. And frankly, we didn't do a lot in very high-end real estate anyhow, whether there condos or high-priced rental units. Multifamily units has slowed so the business of just multifamily transactions through brokers had slowed. All that said, our pipelines, frankly, haven't fallen because remember, we're a lot more relationship-oriented. So we have a lot of our clients. In fact, we were just talking about the office today and about a number of clients that have come on board that like the model that we offer the single point of contact. So in the real estate side of it, we've seen pretty strong pipelines. Frankly, stronger than we saw in the third quarter in commercial real estate in New York City. So the pipelines have actually picked up on commercial real estate between the third quarter and how they exist at today. All that said, there's obviously a little bit less activity. Prices, one of the frustrating things that we have is the prices, the rate increases still have not completely interpreted into or transitioned into higher yields. So the competitive environment is such that we're not getting as how yields as you would expect off of kind of the rate increases that we've seen out there, especially in his fixed rate side obviously. So we've seen that challenge out there. So we're trying to get folks to extend yields that are commensurate with some of the rate hikes and some of the things in the market. So overall, I tell you that the market has slowed. Our pipelines are a little bit better than they were just because of the relationship approach we have in some of the types of clients that we have. And that yields are not increasing. They're not decreasing but they're not increasing at the level that we would have expected with rates moving up overall.

[Matthew Breese:]

Great. It's very helpful. I'm sorry. Just one last one. Why have you expected the year-over-year runoff in the residential book, if you could give me a color on that?

[Luis Massiani:]

About $1 billion.

[Matthew Breese:]

I'm sorry. Say that again.

[Luis Massiani:]

$1 billion.

[Jack Kopnisky:]

$1 billion.

[Matthew Breese:]

Understood, okay. Thank you.

[Jack Kopnisky:]

Thank you.

[Operator:]

[Operator Instructions] And we'll take our next question from David Bishop from FIG Partners.

[David Bishop:]

Hey, good morning, gentlemen.

[Jack Kopnisky:]

Hi, David.

[David Bishop:]

In talking about the transition of the growth of the core deposit base, especially in Long Island. Maybe talk about expectations for additional team adds and relationship manager adds, curious and may be a benchmark in terms of what [indiscernible] still opportunities to seasoned bankers there to try and remix that deposit side?

[Jack Kopnisky:]

Yes. Great question. So we continue to have a significant amount of folks that we have in our pipeline to join the company. We've done it actually in two ways. Luis mentioned that we've added about 40 relationship managers over the year. And part of that is hold teams, part of that is additions to teams. We had the benefits of this model is we've done both. We've actually added significant resources to that teams be up and in many cases, more deposit-centric types of resources to do teams. Whether its treasury management or dedicated relationship managers that have a competency in deposit gathering. And we have seen new team opportunities. So we would plan to add anywhere from 4 to 6 new teams during 2018. At least half of them would be on Long Island. Again, we have very good pipeline to that end it. So one, we have very good flow of folks that want to join us. And two, that we think we can both reinforce existing teams by adding competency and by hiring incrementally - incremental teams.

[David Bishop:]

Got it. And then the one follow-up question. I guess you exit the year with, I guess, close to 130 financial centers. Maybe you look through the rest of the year, what do you think may be end 2018, maybe 2019 from a longer-term financial center footprint?

[Jack Kopnisky:]

Yes. By the end of 2019, we expect to be below 100 financial centers. So over the next 12 to 24 months, we expect to consolidate 30 financial centers or more.

[David Bishop:]

30 more. Got it. Thank you.

[Jack Kopnisky:]

Yes thank you.

[Operator:]

And we'll move to our next question with Casey Haire with Jefferies.

[Casey Haire:]

Thanks, guys. So just quick question on the borrowing state. They ticked up to about 16% of the balance sheet here as you guys used to fund the securities bill. Just wondering what the NIM guide contemplates in terms of borrowings? Is that an opportunity if you break that down? Or what is the NIM guide baked in for borrowings?

[Luis Massiani:]

It does not bake anything in. But yes, it is upside that we would have. So we're not giving it yet. Remember that - so the - the deposit growth or the funding growth to replace that, that at the moment, we're envisioning it was earmarked to fund asset growth, right? To fund earning asset growth. But to the extent that deposit growth is greater than what we anticipate and absolutely we would have some positive upside there from the perspective some of those borrowings.

[Casey Haire:]

Okay. And is 16 kind of the ceiling? Or are you comfortable taking that higher that deposit growth comes in a little later in a given quarter?

[Luis Massiani:]

No. We're comfortable taking it higher. We have given the composition of the balance sheet and the amount of commercial real estate and residential assets that we have. We have close $10 billion of liquidity that's available to us. So this is not a - the ability to take that number higher to cover some short-term funding shortfall, we could actually do that. To the extent that it made sense to fund that incremental earning asset or loan or whatever the situation is. But we have to have good and clear visibility that our intention is not to generate balance sheet growth on the line and also fund. So we'd have to have good visibility on that over time. You can maintain that number at 16% or drive it lower.

[Casey Haire:]

Okay, great. And just last one on the cost saves. Luis, you mentioned that the magnitude is a little bit better than you guys were initially thinking. I believe your - I believe the initial thought was a little over $100 million of cost saves. Just what is that number today as you see it?

[Luis Massiani:]

It's about 10% higher.

[Casey Haire:]

Great. Thank you.

[Luis Massiani:]

Thank you.

[Jack Kopnisky:]

Thank you.

[Operator:]

And there are no further questions in the queue at this time.

[Jack Kopnisky:]

Okay. Thanks, everybody, for your great questions. This is a lot of moving parts, but we are very confident in what we're going to deliver. And again, create - continue to create a high-performing company. So thanks for your support and thanks for the questions. Have a great day.

[Operator:]

And again, this concludes today's conference. Thank you for your participation. You may now disconnect.