Sterling Bancorp
Q2 2016 Earnings Call Transcript

Published: 28 Jul 2016

[Operator:]

Welcome to the Sterling Bancorp 2016 Second Quarter Conference Call. Today's call is being recorded. I will now introduce your host, Mr. Jack Kopnisky, President and CEO.

[Jack Kopnisky:]

Good morning, everyone, and thank you for joining us to present and discuss our results for the second quarter of 2016. Joining me on the call is Luis Massiani, our Chief Financial Officer. Our positive momentum in operating performance continued this quarter highlighted by higher profitability and performance metrics. For the quarter, GAAP net income was $37.8 million and GAAP diluted earnings per share were $0.29. Our adjusted net income was $35.4 million and adjusted diluted earnings per share were $0.27 representing a growth rate of 66% and 17%, respectively, over the same period a year ago. Our financial metrics continued to improve as reported return on average tangible assets was 1.27% and reported return on average tangible equity was 16.14%. Our adjusted return on average tangible assets was 119 basis points and adjusted return on average tangible equity was 15.14%. Tax equivalent net interest margin was up seven basis points in the linked quarter and the adjusted efficiency ratio was 47.2%, a 540 basis point improvement since this time last year. We created positive operating leverage in the second quarter by growing adjusted revenues by 7.4% and adjusted expenses by 3.6%. The credit metrics and capital ratios remain solid. Both our organic loan and deposit growth rates in the quarter were very strong. Commercial loan balances grew $357 million over the prior quarter or an annualized rate of 20%. We have also better aligned the capital allocation between commercial real estate loans of 46% and C&I loans of 42%. Core deposits increased $461 million or an annualized growth rate of 22%. Loan-to-deposit ratio was 88% and 90% of the deposits were core. Expense levels were as we expected but non-interest income was mixed even though we grew NII 21% over the same quarter a year ago. On the expense side, we added the ABL team late in the first quarter. In the non-interest income area, we were encouraged by swap commercial loan fees and commercial cash management income while we were disappointed with mortgage and payroll finance fee income. During the quarter, we initiated three strategic actions. First, we continued to downsize our financial center network by consolidating seven additional financial centers. Secondly, we anticipate in the third quarter the sale of our residential mortgage originations business. We will reallocate capital and resources from these businesses to other areas of the Company that are more consistent with our strategy and where we can earn higher risk adjusted returns. We also announced the acquisition of a $190 million franchise portfolio from GE Capital that will close in September. We have strong experience in financing franchise operations. Now let me turn the call over to Luis to discuss the financials.

[Luis Massiani:]

Thank you, Jack, and good morning, everyone. As Jack mentioned, performance in the second quarter was strong. We reported record results for the three months ended June 30, 2016 as portfolio loans, total deposits, core deposits, net income, and adjusted net income reached all-time highs. On page 5, the reconciliation of GAAP and adjusted results for the second quarter of 2016 is straightforward. Adjustments are the elimination of net gain on sale of securities of $4.5 million and the amortization of non-compete agreements and customer lists, which was approximately $1 million. The securities gains were a combination of the current interest rate environment and the continued repositioning of our investment securities portfolio and to high-quality, tax-exempt securities. This repositioning of our securities along with growth in our public sector finance loan portfolio resulted in a greater proportion of our earnings being derived from tax-exempt assets and a revision to our estimated effective income tax rate for 2016. As a result, we have reduced our estimated effective tax rate to 33.25% from 34% and anticipate recording taxes at 33.25% in the third and fourth quarters of 2016. Growth in net interest income was strong. In the second quarter, net interest income was a little over $100 million, a $6.9 million increase over the linked quarter. Accretion of purchase accounting marks was $4.1 million compared to $5.6 million in the linked quarter. Excluding the impact of this accretion, net interest income increased $8.4 million between the periods. Approximately 60% of the increase was due to the NewStar Business credit acquisition and 40% was due to organic loan growth. In total, average loans increased by $568 million over the linked quarter largely driven by the acquisition of NewStar, which closed on March 31. However, we also experienced strong organic growth in our C&I, warehouse lending, and CRE businesses. Our tax equivalent NIM increased 7 basis points to 360. Tax equivalent NIM excluding accretion was 346 compared to 333 for the linked quarter. The increase in NIM was driven by the continued growth in our commercial lending businesses and the prepayment of high-cost FHOB advances which occurred in Q1 2016. We anticipate tax equivalent NIM will remain relatively stable in a range of 355 to 360 and NIM excluding accretion of 340 to 345. Let's move to an update on strategic actions, which is on page 6. The sale of the trust business to Midland States Bank remains on track, and we anticipate it will close late in the third quarter of 2016. While the sale of the business will reduce non-interest income going forward, the trust business and operations are not part of our core strategy. We anticipate the decline in non-interest income will be offset by a reduction in OpEx of a similar amount, which is approximately $2.5 million annually. We have also entered into an agreement to sell our residential mortgage originations business. This will also reduce non-interest income in the future. As with the trust business, we concluded that this business is not a good fit for our commercial banking strategy. Run rate gain on sale income from this business was $1.8 million in the second quarter and direct OpEx was approximately $1.7 million. We anticipate the divestiture will result in a decrease of approximately 75 FTEs. We will retain our $675 million residential mortgage loan portfolio, and we will continue to generate interest income on residential mortgage loans. We believe these dispositions give us the opportunity to reallocate capital and resources to other businesses that are more in line with our strategy and where we can achieve risk adjusted returns that exceed our targets. This includes hiring additional commercial banking teams. We continue to reduce our real estate footprint. In the quarter we consolidated 7 financial centers and our total financial center count is now 42. We are starting to see the positive impact of this strategy through a reduction of our occupancy and office operations expense, which decreased by approximately $0.5 million relative to the linked quarter. As we continue to focus on building our commercial deposits, our interest expense will likely increase. However, this will be offset by a decrease in OpEx and increase in scalability and efficiency, which will continue to drive our efficiency ratio low over time and create positive operating leverage. We are also building and expanding our commercial finance business. During the quarter, we announced the acquisition of a restaurant franchise loan portfolio from GE Capital. This portfolio has approximately $190 million of outstanding balances, and we anticipate closing this transaction in September of 2016. We will integrate this portfolio into our existing equipment finance business, which will result in limited incremental OpEx. The portfolio has attractive yield and term characteristics. We anticipate it will generate approximately $9 million to $10 million in annual net revenue. The portfolio is fully performing and does not include any delinquent borrowers. We expect to build this into a full banking relationship business over time. Moving to our OpEx on page 12, our annualized OpEx through the first half of 2016 was $222 million, which is within our target of $220 million to $225 million for full year 2016. The increase in OpEx in the second quarter was mainly associated with NewStar business credit as we acquired personnel, facilities, and systems in that transaction. We anticipate NewStar will be fully integrated by year end and will result in OpEx savings going forward. The sales of the trust and residential mortgage divisions in the third quarter will also reduce our OpEx in the second half of the year. We continue to evaluate opportunities to expand our commercial banking model and will reallocate a portion of these OpEx savings to continue growing our business. We remain our target of $220 million in OpEx for full year 2016. Lastly, let's review our asset quality on page 13. Performance in the quarter was strong. Our total non-performing loans in [indiscernible] assets decreased by $5 million. Delinquencies in the 30 to 89-day past-due segment held steady and the coverage of our allowance for loan losses to non-performing loans increased from 62% in the linked quarter to 70% at June 30. On taxing medallions, we have also made progress. Total exposure to the industry decreased from $62 million in the linked quarter to $58 million at June 30. We continued to work with borrowers and actively manage the portfolio to further reduce exposures. We anticipate we will continue to make progress in the second half of 2016. Jack?

[Jack Kopnisky:]

Thanks, Luis. Let me summarize the 2016 second quarter. Adjusted earnings of $35.4 million were 66% over the same quarter last year and 10% higher than the linked quarter. Adjusted EPS of $0.27 were 17% higher than last year and $0.02 greater than last quarter. The financial metrics were very strong. Adjusted return on average assets was 119 basis points. Adjusted return on average tangible equity was 15.14%. The adjusted deficiency ratio was 47.2%, and we created positive operating leverage by growth adjusted revenues by 7.4% and expenses 3.6%. The tax equivalent net interest margin increased 7 basis points to 360 basis points. Commercial loans grew organically by $357 million in the quarter or 20% on an annualized basis. We maintain a more effective portfolio mix overall of 46% CRE and 42% C&I loans. Core deposits increased $461 million or 22% on an annualized rate. Core deposits were 90% of total deposits. Cost of deposits was 35 basis points. Credit quality and capital are solid. Even with a challenging interest rate environment and uneven economy, we continued to consistently deliver strong financial results. I thought it'd be worthwhile to take a little bit of a timeout to say -- hear the kind of the distinctive features or attributes of our model. First, our diverse loan mix allows us the ability to allocate capital in a balanced manner to higher risk adjusted return areas. Secondly, core deposit funding supports our asset growth and will continue to support asset growth. Third, our team-based model is not only client friendly in a value-added way, but the structure allows us to drive increased productivity in an efficient manner. Fourth, we are constantly reinventing the Company through a continuous improvement process and by taking the best attributes of the companies we acquire. And lastly, at the end of the day values created by doing what we say we are going to do and executing against our objectives the level of accountability to deliver results regardless of the environment is one of our core values. So now let's open it up for questions.

[Operator:]

Thank you. [Operator Instructions]. We will take our first from Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

Hey good morning, guys. Hey, can you just remind us what's going on. As I look at the cost of deposits, it's climbed in the first quarter and again in the second quarter. Can you remind us if you have any promotions going on or sort of what's driving the cost of deposits to tick up and whether or not we're now at a level where it's going to sort of stabilize or if we should expect it to go a little bit higher in the back half of the year?

[Jack Kopnisky:]

Yes, we actually took advantage of a number of activities in the market. So one, our teams have been much more focused on driving core deposits but a third of the growth is in free DDA as it has associated cash management functions. So we've elevated the cash management side of it. Where this really increases it, we've gone after and set up a portfolio objective of 1031 exchange money that is a little bit higher cost. And also we took advantage of some opportunities in the market where some of the big banks were getting out of deposit gathering in certain categories. So the answer to your question though, we believe that this is a stabilized number in terms of cost of deposits and if anything it'll start to tick down as we've adjusted rates relative to the flattening of the yield curve.

[Alex Twerdahl:]

Okay, so it's not really due to a promotion, so to speak? It's really more of a mix of the deposits that's driven that --

[Luis Massiani:]

The composition. It's the mix and composition of the deposit base, so the tradeoff between the higher balance commercial deposits is that you're going to pay a little bit more on the interest expense side, but at the same time this is what allows you to be a little bit more aggressive on reducing financial centers and becoming just more efficient by taking costs out of retail and reallocating them into the commercial side. So overall, you might see -- so we think that the interest expense is going to stabilize to -- it's going to be in that range of about 35 basis points on the cost of deposits but over time what you're going to see as we continue to execute the strategy, continue to reduce the financial center network is you'll see an efficiency ratio that continues to tick down a little bit. So, focusing only on the interest expense tells you kind of half the story. You have to focus holistically on the true cost of originating deposits including operating expenses and on aggregate basis you're going to see that become a much more attractive number.

[Alex Twerdahl:]

Okay. Got it. Thanks. And then second question, you've had some really nice growth in municipal securities, which is I guess it's -- I mean, it's awesome, but it's a little bit of a surprise. A lot of other banks have told me that they're really having a hard time finding municipal securities. Can you just remind us sort of what the differences are, what you're looking for, geographies, structures, etc., of what [indiscernible] on the balance sheet?

[Luis Massiani:]

Yes, so the growth in tax-exempt assets has also been driven by the public sector finance team so it isn't just municipal securities. But we did have a nice -- we have seen an increase in the municipal securities side as well. We've expanded the -- I guess the universal alternatives to focus -- we were historically were focused only on New York State and specifically we were focused on municipalities within New York State where our old municipal banking business used to operate. Now that we've become a little bit bigger bank, we've expanded the universe of issuers and we found that from both a credit quality, liquidity, and an overall pledging capacity or a collateral pledging capacity with the securities that we're investing in have actually put us in a better position from all three of those perspectives in our securities portfolio. So we very much like where we are, but you are going to see the growth in that municipal book level off because we're now to the place where we wanted to be.

[Alex Twerdahl:]

Okay, so some of the stuff that you've been doing recently is beyond New York State but it still fits into the underwriting standards that you'd laid out?

[Luis Massiani:]

Double A rated and above type credits. So everything is very high investment grade.

[Alex Twerdahl:]

Okay. And then just a final question. With respect to the mortgage banking, can you just share with us what the capital that was tied up with that business was and where you plan to reallocate it?

[Luis Massiani:]

So the capital -- it's a capital-efficient business in that really the only capital associated with it is more on the loans held for sale which hovered between 75 to -- call it $50 million to $100 million depending on the -- there's a little bit of seasonality in it. So more so than a capital usage it was really a -- it's a business that in today's regulatory environment has essentially 100% efficiency ratio. So even though it was very capital friendly, it really is not efficiency ratio friendly and it's not -- and it really doesn't drive anything from the perspective of bottom-line earnings. So the reason for -- more so than a capital allocation that you're going to now allocate somewhere else, this is really more about being able to divert human resources and OpEx that was being dedicated, which is about $8 million a year, to a business that was generating no earnings and to now reinvesting into places where we think that we can be more efficient from a scalability perspective.

[Alex Twerdahl:]

Okay. Great. Thanks for taking my questions.

[Luis Massiani:]

Sure.

[Jack Kopnisky:]

Sure. Thank you.

[Operator:]

We will go next to Casey Haire with Jefferies.

[Casey Haire:]

Hey. Thanks. Good morning, guys. I wanted to sort of touch on the NIM guide pointing to some modest pressure in the back half. Just curious what -- where is that pressure coming from presuming you could also -- I mean, you could continue with immunity securities and also, I mean, the liquidity profile improved this quarter. You guys -- positive mix shift could be an offset. I'm just curious where the pressure comes going forward?

[Luis Massiani:]

The pressure comes mostly from the long duration commercial real estate assets. Right? So, the existing book of business and CRE today, not just for us but pretty much for every bank, is at a higher yield than -- and as that rolls -- it's at a higher yield than what is available in new originations in the market today and so as loans prepay, as loans mature, and as that portfolio of CRE seasons and you have to recycle it into new originations and replace -- and to renew the new maturities I'll call it, you're going to feel some pressure because we're still originating assets today 50 basis points below where the existing weighted average yield on the commercial real estate book is. So, you're going to feel some pressure on that front. On the other asset classes and especially finance, specifically in the commercial finance side of the house, Those are all short duration assets where the vast majority of any interest rate pressure has been -- has already been baked in the numbers so we shouldn't see any pressure on that side. So it mostly does come in from the CRE. We do anticipate that we're going to have, as we've talked about before, loan to deposits ratio targeted more in the 92% to 95% range. We were at 88% this quarter, so there is the opportunity to offset some of that CRE margin pressure with a little bit mix shift going forward as well. So there's -- we feel good about the prospects for the second half but in this type of rate environment, Casey, I think that we need to be a little bit more conservative because we are really not seeing any meaningful improvement in any way, shape, or form, from a pricing perspective on the traditional CRE/C&I asset class. Not just yet.

[Casey Haire:]

Okay. And just following up on that, looking forward to 2017, is that when you would like to get that loan to deposit ratio to 95, and if so, is that a -- is there an opportunity to sort of stabilize the NIM and the 350 level or are we looking at modest pressure going into next year as well?

[Luis Massiani:]

Seventeen will be much closer to 95% for sure. So, that's one of the levers that we will utilize to maintain the NIM at the levels where we want it to be. Yes.

[Casey Haire:]

Okay. Can that stabilize the NIM at 350 or is there still too much pressure on the CRE and some of the commercial portfolios?

[Luis Massiani:]

You don't know if it's going to be -- so a little bit of a difficult question to answer because it's going to depend a little bit on what the mix of new production is into 2017. We like where we are from a diversified business mix perspective, so we have a lot of different levers to pull on the loan side and we can be more selective in the types of business that we do. So, as we've always talked about in the past, we want to get to a place where the loan portfolio gets to be more balanced where between CRE and C&I and we're starting to get there. But over time what we want is for the C&I side of the house to actually be a greater proportion of total earning assets than CRE. And so as we continue to deploy that into 2017, we should have some better pricing power, we should be able to be a little bit more selective, so I think that we should see margin -- we don't envision margin sort of suffering or decreasing substantially from where we are today. So we should be able to withstand some pressure on specific parts of the portfolio.

[Casey Haire:]

Okay. Great. And just switching to sort of the loan growth outlook, apologies if I missed this, but I know you guys were guiding to 15% all in and you guys were at great -- in great shape at the halfway point with the 190 from the GE restaurant book. That's basically 12%. Any update on the loan growth guide? I mean, you guys are tracking way above 15% at this point.

[Jack Kopnisky:]

Yes, I think we'd still stick with about the 15%, so we've said kind of low to mid-teen commercial loan growth and, you know, what we're very cautious on is making sure that we get the right risk-adjusted returns out of the assets that originate, so the GE book and the former NewStar book, those had very strong yields, risk adjusted yields, coming out of this compared to where we've kind of stiff-armed our things like multi-family broker originated multi-family loans that are yielding 3% to 3.25%. So, as I said in the summary, one of the benefits to this model is we're able to move capital around to the types of returns and get the type of mix that we want out of this thing. All that said, we may stave off some volume in one place and emphasize volume in the other. So, bottom line is we'd probably stick with what we've said before, kind of low to mid.

[Casey Haire:]

Okay. Understood. And just last question from me on the expense front. I don't -- you guys are making great progress on the brand introductions and you guys are in line with your expense guide and the efficiency ratio is improving so I don't want to give you too hard a time, but the NII -- I mean, the revenues were very good this quarter and yet like -- it really -- we didn't really see it fall to the bottom line and deliver upside surprise. So, I'm just curious were the branch reductions this quarter -- were they late in the quarter and there's more on the come and the other part of that is where do you see the branch count ending up, especially with deposit momentum so strong for you?

[Luis Massiani:]

The short answer to the question is the branches were staggered over the course of the quarter so you don't have the full benefit. So the branch closures didn't happen on the first day. Right? So you do have some incremental OpEx that's driven by that. The increase in the operating expense though was really driven by the acquisition of NewStar more so than anything else. We are -- that's an asset-based lending business. You have to take your time in integrating those businesses. Those are high touch. You're essentially talking to the clients on a weekly and in some cases daily basis so you have to be very careful and make sure that you integrate those businesses the right way. We have a plan that we had -- that we're executing and we are on track to be able to integrate those operations fully into our business in the second half of the year. So over time you're going to see an OpEx number that is going to trend downward, so you haven't really seen the impact of both the integration of that business as well as the branch savings coming in just yet. So second half of the year should be a little bit better from that perspective.

[Casey Haire:]

Okay. Great. Thanks, guys.

[Luis Massiani:]

Great.

[Jack Kopnisky:]

Thank you.

[Operator:]

We will go next to Collyn Gilbert from KBW.

[Collyn Gilbert:]

Thanks. Good morning, guys. Just a follow-up, Jack, on your comments on the loan growth. With that thought on the commercial side and being mindful of the returns that maybe you're not getting on the CRE multi-family, do you -- what do you think the opportunities are for additional acquisitions or portfolio acquisitions on more the specialty space in the back half of the year?

[Jack Kopnisky:]

It's a great question. It's really interesting. So what's happening on all the commercial finance businesses that are stand-alone is their yields are coming down and in essence their cost of funds are going up. So many of them are becoming even more squeezed than banks on a macro basis. So, we are seeing a good amount of opportunities. We're being very disciplined in looking at the risk adjusted returns that we want out of this thing and obviously the credit quality out of this, so there will be opportunity in the future. And what we do is we evaluate the organic opportunities that we have through the teams and the pricing and the returns out of that versus a portfolio that we could acquire and we look at the entire IRRs coming out of each of those. So one, there are opportunities to acquire in the future. We don't have anything imminent, but we see a lot of portfolios going along. And again, we really do try to manage and balance things like putting loans on the books and prefunding them with core deposits also, so we keep that mix of loan to deposit ratio and keep the mix of the right level of funding for the types of asset categories that we're putting on.

[Collyn Gilbert:]

Okay. Okay, that's helpful. And then just also, too, tying into kind of the bigger picture here of what's happening in the broader market, how are you guys thinking about the reserve and where you want to build for potential losses? What are areas where you want to see that reserve start to tick higher?

[Luis Massiani:]

Well, so the reserve factoring in the credit market that we've had on the acquired loans and the fair value accounting on the business combinations, we're at just over 110% to total loans, right? So our allowance plus mark to the total loans is just over 110%. That number is -- there's still a little bit of room for that number to go down, but we want that number to stay at 1% to slightly above 1%. And so we're going to be reserving going forward based on that overall target. So as I've mentioned in the past, as that reserve or the allowance that you booked on -- the credit mark that you booked on the purchase accounting goes down, you have to be replacing that over time with an incremental allowance to support the loans that you acquired that are now part of your allowance. Where we are going to be -- we're pretty diverse as we've talked about in the past. We have 9 or 10 different business lines. When you think about the commercial finance side of the house, what we really like about that is that -- those are 5 or 6 different business lines that are really uncorrelated to one another, so we fully anticipate that you feel pressure if, for example, on the factoring side of the house that doesn't necessary mean that payroll or asset-based lending or warehouse lending are going to be seeing those big types of stress. So, one of the reasons for building that diversified book of business and the ability to have all of those levers to pull is that you can actually, as Jack was saying before, allocate capital, grow or reduce exposures in a much more flexible fashion than if you just focus on one asset class. We continue to be 45% of our book is TRE [ph] so places where we're going to continue to reserve is largely on the CRE side of the house and that will continue to drive the provisioning and reserve requirements going forward for the most part.

[Collyn Gilbert:]

Okay. Okay, that's helpful. And then, Jack, you just indicated in your opening comments just -- I think you had said that payroll finance wasn't quite up to what you would -- had hoped this quarter. Anything in particular driving that or just kind of what your outlook is there for that line?

[Jack Kopnisky:]

Yes, we still like the business a lot and it's a very high yield business. What's happened in the business though is a whole bunch of smaller engines have come in and taken the margins down. So, we need to reposition what we're doing in payroll finance. There are plenty of opportunities out there, but it's a good example of we're not going to compromise our risk adjusted return objective. So, if there's opportunity in the market at the right margins and the right type of business, we'll continue to invest capital heavily in that. If it gets compromised, we will reallocate to other areas that may have a better risk adjust return out of it. So, it's more than anything else lots of entrants have come in, small companies that are dealing and providing a close to this level service and have compressed margins. We -- by the way, we do anticipate that the margins will actually get better over time because some of the entrants are under-capitalized to be able to support the business out there. But that's probably the one area that we're disappointed in from a growth perspective.

[Collyn Gilbert:]

Okay. Okay, that's helpful. And then just finally I know the taxi book obviously is not a big part of the business, but just interested in your comments, Luis, that that portfolio is going to likely come down over time. Just wondering how you were able to reduce outstandings this quarter and how you expect it to come down over time.

[Luis Massiani:]

We've asked for our money back from borrowers.

[Collyn Gilbert:]

Oh, you guys are brilliant.

[Luis Massiani:]

There are specific relationships that we have -- that are no longer with us but that was by -- so where we -- as we've always talked about in the past, the book consisted of 4 or 5 relationships and we've always addressed that there's on relationship that was in trouble and that became an NPL in the first quarter and so forth. Other relationships have other diversified sources of cash flow and repayment that we have been able to work with our borrowers and get to mutually satisfactory agreements of paying down balances, and we anticipate we're going to continue doing that and we'll make progress in the second half of the year.

[Jack Kopnisky:]

Yes, what's interesting about our book is these aren't just -- each of the borrowers have either a different source of income, an additional source of income, or we have additional collateral. So, what we're doing is we're working the mix of collateral we have and some of those additional sources of income. And we do view that this is -- will continue to decline. We actually had one of the borrowers completely -- to answer your question, we had one of the borrowers completely pay off, pay in full, for this particular quarter. So, we're comfortable with where we're at. As Luis said upfront, we're just basically asking for our money back and we're working through some alternatives to make that happen.

[Luis Massiani:]

Yes, so there's more to come on the medallion portfolio, but there will be -- in the second half of the year we'll provide more guidance as to where that's going to shake out.

[Collyn Gilbert:]

Okay. Okay, that's helpful. Thanks, guys.

[Luis Massiani:]

[Indiscernible].

[Jack Kopnisky:]

Sure. Thank you.

[Operator:]

[Operator Instructions]. We will take our next from Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Good morning, everybody. Just a follow-up on the taxi portfolio. The taxi industry itself, what are you seeing in terms of the fundamentals, whether it's corporate lease rates or driver utilization trends? Are things improving?

[Jack Kopnisky:]

Sure. So, I think there's a -- in -- as we viewed this, there's a stabilized part of the taxi medallion or the taxi business that relates to the cash flows that are spit off by the taxis. And we are seeing some of that stabilization now that ultimately goes to support the valuation. We've also seen the potential for other investors to come in to look at financing taxi medallions in part because of the apparent stabilized values of the cash flows. So, we are seeing some stabilization, and again, it boils down to how much money that each cab throws off and what the multiple on those cash flows are.

[Luis Massiani:]

So, cash flows, Matt, are -- so obviously cash flows are reduced from what they were at peak levels, but they do support what I call restructured loan terms, right? So, with borrowers we've worked in some cases to move them to interest only. We've extended amortization terms, very similar to what other -- most other lenders are doing in the industry, and what we've found is initially when we restructured those terms it was a little bit of we'll have to wait and see if the cash flows that are being thrown off by the medallions and by the cabs themselves are going to support these [indiscernible] terms and what we found is that the answer is yes. So, from that perspective, I think that there's been a little bit of a -- there has been an overall stabilization in the market and that's been two-fold. I think that utilization rates are up. Cash flows are slightly up, not nearly to where they would've been at peak levels, but they do support kind of the new loan terms that are in these restructured loans. And then most importantly, there seems to be third party capital that is increasingly becoming more interested in participating in medallion. So, we get calls from a variety of different third parties on a weekly basis asking us about are there opportunities or we want to get out of the business, so there just seems to be more conversations and more people taking a look at the industry, so as more capital comes into it, I think it's going to help to stabilize pretty significantly the overall exposures, not just for us but for everybody in the industry.

[Matthew Breese:]

Is a third party looking to potentially buy a medallion from you? Do you think a transaction like that could happen over the next 3, 6 to 12 months?

[Luis Massiani:]

For our particular portfolio?

[Matthew Breese:]

Yes.

[Luis Massiani:]

Potentially. Never say never. Right now at the levels of which they -- again, it's a -- we haven't had any firm discussions or we haven't really made significant headway in that regard, but yes, that's absolutely a distinct possibility. If we ever got to a place where we felt that it made more sense to maybe take a slight haircut and just eliminate the exposures and something that worked for everybody, we would absolutely explore that. So, we don't have anything set in stone or that we're working with anybody on it, but that is -- that would be a distinct possibility over the course of the next 12 to 18 months, yes.

[Matthew Breese:]

Got it. Okay. But, the point is that the market is stable enough [ph] for that kind of transaction could take place?

[Luis Massiani:]

Absolutely. That type of transaction you might have folks that buy the loan from you not just the mid, so there's folks that are trying to participate from a lender perspective. There's folks that are trying to participate from buying the actual assets, as well. So, there's more folks taking a look at various parts of the industry, which I think is going to be beneficial for everybody.

[Matthew Breese:]

Got it. Okay. And then just thinking about the NewStar integration and the overall expense guidance, what do you expect the trajectory of non-interest expenses to be for the back half of the year thinking about your overall expense guidance for 2016?

[Luis Massiani:]

Sure. So, we're tracking to 222 right now. NewStar business -- the NewStar acquisition added about $1.5 million of expense in the quarter, and that number's going to start coming down progressively over the back half of the year. So, if you take out that $1.5 million, that gets you back to the 220 at which where we were before but then you also have to factor into that that staggered over the course of the second half we're also going to close the residential mortgage and the trust sales. And overall OpEx in those business on a quarterly basis is about $2.5 million to $3 million or so. So steady state for the fourth quarter of -- NII or, sorry, OpEx in the fourth quarter of 2016 will probably be about on a run rate of $216 million or so. So there's going to be a decrease from where we are today. You're just not going to see that in the full year, but as you project out to 2017, run rate for fourth quarter's going to be well below 220 and that's assuming that we've already reinvested a portion of those savings into hiring new teams and new business lines and portfolio acquisitions and so forth.

[Matthew Breese:]

Got it. That's all I had. Thank you very much.

[Luis Massiani:]

Great. Thanks, Matt.

[Jack Kopnisky:]

Thank you.

[Operator:]

And with no further questions in the queue, I'd like to turn it back to our presenters for any closing remarks.

[Jack Kopnisky:]

Just thanks for your interest in the Company, and thanks for your support. Appreciate it. Have a great day.

[Operator:]

That concludes today's conference. We thank you for your participation. You may now disconnect.