Sterling Bancorp
Q3 2016 Earnings Call Transcript

Published: 26 Oct 2016

[Operator:]

Good day and welcome to the Sterling Bancorp Third Quarter 2016 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to President and CEO, Jack Kopnisky. Please go ahead, sir.

[Jack Kopnisky:]

Good morning, everyone, and thank you for joining us to present and discuss our results for the third 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 again by higher profitability and improvement across all of our performance metrics. For the quarter, GAAP net income was $37.4 million and GAAP diluted earnings per share were $0.29. Our adjusted net income was $37.8 million and adjusted diluted earnings per share were also $0.29, representing a growth rate of 18% and 16% respectively over our adjusted earnings metrics in the same period a year ago. Our financial metrics continued to improve as adjusted return on average tangible assets was 121 basis points and adjusted return on average tangible equity was 15.28%. Tax equivalent net interest margin was 353 basis points and adjusted efficiency ratio is 45.8%, a 320 basis point improvement since this time last year. We created positive operating leverage in the quarter by growing revenues by 2.4% and decreasing expenses by 0.7%. Our credit metrics and capital ratios remain solid. Both our organic and acquired loan and deposit growth rates in the quarter were strong. Commercial loan balances grew $575 million over the prior quarter for an annualized rate of 27%. We have also better aligned the capital allocation between commercial real estate loans of 45% and C&I loans of 45%. Deposits increased $412 million and annualized growth rate of 17%. Our loan to deposits ratio was 90% and 88% of the deposits we considered were core. We continued to execute the strategic actions that we have previously outlined. First, we completed the sale of our residential mortgage originations business to Freedom Mortgage. We will reallocate capital and resources from this business to other areas of our company that are more consistent with our strategy and where we can earn higher risk-adjusted returns. Secondly, we also completed the acquisition of $170 million franchise portfolio from GE Capital. Lastly, we consolidated an additional financial center, bringing our total to 41 at September 30. Now, let me turn the call over to Luis to detail the financials.

[Luis Massiani:]

Thank you, Jack. Performance in the third quarter was strong. We reported record results for the three months ended September 30, 2016 as portfolio loans, total deposits and core deposits again reached all-time highs. Turning to page 4, you can see the impact of the execution of our strategy. We continue to focus on creating an efficient balance sheet with larger proportion of total loans to earning assets and loan growth that is funded with deposits. We are pleased with our results to date. Total gross loans held for investment have grown by over 20% year-over-year and our core deposits have grown by over 10% over the same period, allowing us to maintain a loan to deposits ratio of 90%, which is in our target range of 90% to 95% and gives us room to further optimize our balance sheet and earning assets mix. Taxable equivalent net interest margin was 353 [ph] basis points for the quarter and included 4.4 million of accretable yield on acquired loans. Excluding the impact of accretable yield, net interest margin was 3.4%. Both of these ratios are within the guidance we have previously provided. Given our anticipated composition of business mix, organic and acquired loan growth prospects and the completion of the franchise finance portfolio acquisition, we believe we can maintain our tax equivalent and interest margin, both including and excluding accretable yield relatively stable at today's levels and in line with our prior guidance. On page 5, let's review the reconciliation of GAAP and adjusted results for the quarter. We realized 3.4 million of securities gains as we continue to take advantage of the low interest rate environment that generate gains and reposition our investment securities portfolio into high-quality tax-exempt securities. Second, we redeemed 23 [ph] million of the senior notes due July 2018, which we had originally issued in July 2013. This is higher cost debt that does not qualify as regulatory capital. We utilized excess liquidity held at our holding company to repurchase these notes at a premium and we incurred a loss on extinguishment of debt of 1 million. Lastly, we completed the sale of our residential mortgage originations business. This allowed us to close one financial center, exit one back office location and combined with our other corporate actions, reduced our total count of FTEs by 70. In connection with the sale, we incurred a charge for severance and fixed asset impairments of 2 million. We structured this transaction through an earn-out where we will receive compensation based on the originations volume generated by the business over the next 12 months. The anticipated earn-out and remaining pipeline of mortgage loans held for sale are expected to generate sufficient income to recover the charge, which will result in a neutral impact to earnings and tangible book value over time. Also note that we generated mortgage banking fee income of 1.2 million in the quarter. Now that we have sold the business, mortgage banking income will decrease further in the fourth quarter of 2016 and will be negligible in 2017 and beyond. We continue to focus on originating and investing in tax-exempt loans and securities. Given our growth in our public sector finance business and municipal securities portfolio, our estimated effective tax rate for full-year 2016 is between 32% to 33%. Therefore, our effective tax rate for the quarter was 31.2% in order to get our year-to-date effective tax rate to 32.5%. Adjusting for these items, our net income was 37.8 million and our adjusted diluted earnings per share were $0.29, which matched our reported GAAP results. On slide 6 and 7, we review our loan portfolio performance, which was strong across all of our business lines. The composition of our loan portfolio as of September 30 consisted of 45% C&I loans, which includes our commercial finance business lines and 45% commercial real estate. This balanced approach allows us to allocate capital and resources across various business lines and be more selective on the type of assets that we originate. On the next page, you can see growth trends by business lines. Although CRE has grown year-over-year and over the linked quarter, the rate and pace of growth in the CRE asset classes has materially decelerated. Approximately 80% or 459 million of our loan growth in the quarter was generated by C&I and our commercial finance businesses, which included the acquisition of the franchise financial portfolio. However, we also had organic growth of close to 290 million in C&I. Performance in our residential mortgage warehouse lending division was quite strong, as total balances increased by 156 million over the linked quarter. New relationships have allowed this division to reach record results. Our payroll finance and factoring businesses started to see some seasonal growth in volumes and outstanding, which is also reflected in our fee income. Fee income in these business lines was 4.9 million, which represented an increase of 741,000 or almost 18% over the linked quarter. Our public sector finance team continues to generate strong results. As of September 30, 2016, total tax exempt loans outstanding were 373 million. We are confident that we can continue to meet our loan growth targets through a combination of organic loan originations and portfolio acquisitions and we can achieve mid-teens commercial loan growth year-over-year. Moving to page 10, we continue to focus on maintaining tight controls over operating expenses and improving our operating leverage. Through the third quarter of 2016, our annualized OpEx run rate was 222 million, which is within our target range of 220 million to 225 million for full-year 2016. We continue to make progress in becoming a more efficient company during the quarter. Our adjusted operating efficiency ratio was 45.8%. Our total number of FTEs decreased by approximately 13% year-over-year and now stands at 995 FTEs. We closed one financial center. Our total financial centers count is now 41. We also exited one additional back office location that was associated with the resi mortgage business. The anticipated sales of the trust business in the fourth quarter will be additive to our operating efficiency goals and should allow us to reduce our efficiency ratio further. We anticipate our quarterly OpEx, excluding amortization of intangibles will be approximately 54 million to 56 million, which will be a run rate reflective of all of the strategic actions we have undertaken over the course of the year and which also includes new hires. Lastly, let's review our asset quality on page 11. Performance in the quarter was strong. Our total non-performing loans increased slightly by 1.5 million, while criticized classified assets decreased by 14.3 million. Delinquencies in the 30 to 89 day past due segment declined 1.1 million and the coverage of our allowance for loan losses to non-performing loans increased from 70% in the linked quarter to 73% in this quarter. On taxi medallions, we have also made progress. The total exposure to the industry decreased from 58 million in the linked quarter to 52 million at September 30. We continue to work with borrowers and actively manage the portfolio to further reduce exposures. We anticipate we will continue to make progress in the fourth quarter of 2016. Jack?

[Jack Kopnisky:]

Thanks, Luis. Let me summarize our 2016 third quarter. Adjusted earnings of $37.8 million increased by 18% over last year and 7% over last quarter. Adjusted EPS of $0.29 were 16% higher than last year and $0.02 greater than last quarter. Financial metrics were very strong, adjusted return on average assets was 121 basis points, adjusted return on average tangible equity was 15.28%, the adjusted efficiency ratio was 45.8% and we created positive operating leverage by growing adjusted revenue 2.4% and reduced expenses by 0.7%. Commercial loans grew $575 million in the quarter or 27% on an annualized basis. We maintained a more effective portfolio mix overall with 45% CRE and 45% C&I loans. Deposits increased $412 million or 17% on an annualized basis. The loan to deposit ratio is 90%. Costs of total deposits was 37 basis points and credit quality and capital were solid. We are confident that our strategic actions will allow us to continue delivering sustainable and profitable growth for shareholders. We’ve made substantial investments in people, systems and infrastructure. Continued growth will allow us to generate positive operating leverage and deliver results. Lastly, we continue to be selective in the market as we review both credit transactions and M&A opportunities. We continue to see many opportunities to grow the company in a manner that is consistent with our strategy. Now, let's open it up to questions you may have.

[Operator:]

[Operator Instructions] Our first question comes from Casey Haire with Jefferies.

[Casey Haire:]

Hey, good morning, guys. Wanted to start out on the NIM guide. Luis, it sounds like you guys are pretty confident you can hold it stable here. Is that just for fourth quarter or is that looking ahead to 2017 as well, and what are - what’s driving that stability, given that loan yields came down pretty meaningfully this quarter?

[Luis Massiani:]

Yes. It was a combination - it's a combination of a bunch of different factors, Casey. The first one is the accretable yield will obviously continue to drop off, right. So we had a little bit of a bump this quarter to 4.4 million, but going forward, fourth quarter is going to be closer to 3.75 million to 4 million. And then as you go into 2017, that's going to fall off a little bit. Now, a lot of what happened from the perspective of the core NIM and it’s really driven by the composition of the business mix for the quarter, right. So, for example, the GE portfolio acquisition closed in September, so you don't see the full benefit of that being reflected for the course of the - for the course of the full quarter, which is going to aid NIM in the fourth quarter and into 2017. And for example, we had a larger composition or a larger proportion of loans being driven by the warehouse lending business, which are shorter duration loans that have our floating rate and have a lower yield associated with them. So once you factor in a more regular and normalized composition of business mix, which takes into account that over the course of the year, some of these things, some buckets of loans will increase and decrease based on seasonality, we feel very confident that we can continue to maintain a core NIM number that is going to be relatively closer to the 340 to 345 we've guided to before.

[Casey Haire:]

Okay. And that’s core, correct?

[Luis Massiani:]

Yes, that's right.

[Casey Haire:]

And through 2017.

[Luis Massiani:]

That's right.

[Casey Haire:]

Okay, great. Okay. And then just switching to expenses, the deposit momentum continues, I think, up 16% year-over-year. The centers that I think you closed one or two this quarter, are you guys - is there more room to go, given the deposit momentum and sort of how low can that efficiency ratio go from 45?

[Luis Massiani:]

There is more room to grow relative to consolidating centers. We are evaluating, frankly, we’ll go through a strategic planning process now to look at the centers and the offsets on what we can bring in on the commercial side that offset any issues we may have on consolidating branches on the consumer side. The efficiency ratio, we’re proud of where we've gotten to in the efficiency ratio. I think arguably, the limit is probably into the low-40s in this. So there is opportunity to improve the efficiency ratio, but there is probably kind of a limit in the low-40s. So what we would guide people to today would be kind of low mid-40s over the next 12 to 18 months.

[Casey Haire:]

Okay, great. And Jack, just a question for you. I mean, it sounds like a very strong loan growth quarter this quarter. And it sounds like you guys are very comfortable with the mid-teens growth outlook. I'm just curious on sort of the M&A prospects, given you’re doing very well organically, is there a preference to continue that or are you guys, is there still a decent appetite for M&A activity?

[Jack Kopnisky:]

We’re a little bit agnostic in this in the sense that as long as we can achieve the risk-adjusted returns that we’re targeting, there are opportunities on the organic side and there are opportunities on the M&A side and we look at this kind of pragmatically to say, as long as they are - we can achieve the risk-adjusted returns that we want and with the loans that are consistent with our relationship strategy, so we're not just going out and buying loans and making those transaction based. They have to fall into the risk-adjusted return objectives that we want to hit, but they also have to be - have the ability to broaden the relationship with the clients of the loans that we are acquiring. So we think that there is opportunities on both sides. What's happened of late, in our view, the risk-adjusted returns on commercial real estate loans, especially broker originated multifamily loans, are not where our targets need to be. So our teams have been pretty efficient about and affective about shifting capital from one category to others and then as Luis highlighted, we have a variety of categories in the C&I side that we can shift capital to that is giving us - that are giving us the type of risk-adjusted returns that we desire.

[Casey Haire:]

Okay, great. Just one last one clarification, Luis, the 54 to 56 expense guide for the fourth quarter, that is ex-intangible amortization.

[Luis Massiani:]

That's right, excluding intangible amortization. That’s OpEx.

[Casey Haire:]

Great. Thanks for taking the questions, guys.

[Operator:]

Our next question comes from Alex Twerdahl with Sandler O'Neill.

[Alex Twerdahl:]

Hey, good morning, guys. Luis, the margin guidance that you gave, is that reflective of any rate increases in, for example, December or in 2017?

[Luis Massiani:]

It does not, it does not incorporate that. It would certainly - we feel we are very well-positioned for rate increases, the commercial finance business lines in particular are all for the most part, short duration floating-rate assets. So if it happens, I think that that provides, it will make it that much - it will make it easier for us to get to a place where we are stabilizing and potentially increasing NIM, but at this point, we're not giving ourselves credit for potential rate increases. If they do happen, then better for us.

[Jack Kopnisky:]

And we are not holding our breath.

[Alex Twerdahl:]

I understand that. But can you just remind us if you have the number handy sort of what percentage of the overall loan portfolio would re-price, let's say within either immediately or within several months?

[Luis Massiani:]

Within 90 days, you would have and of course it depends on what the benchmark index is, right, but from over a 90-day time period, you’d have pretty much everything in the specialty finance assets other than equipment finance, would essentially reprice within a 90 to 180 day window. So those are all short duration floating-rate assets and then on top of that, you would add a fair amount of the traditional C&I line of credit business that would also be prime index that would likely benefit from that. So it's a substantial chunk of the loan portfolio that would see a benefit in a rising rate environment.

[Alex Twerdahl:]

Okay. And then Jack, just you sort of touched on M&A a little bit and I think maybe you're referring to loan portfolio purchases, but just as you kind of think about some of the bank deals that may or may not exist out there, can you just remind us sort of what your appetite is in terms of geography, and in terms of sort of the size range of what you think you could take down in a full bank M&A deal?

[Jack Kopnisky:]

Yes. So what we’ve generally targeted is metropolitan New York. So as of today, that's still our target. The types of M&A that we look at are ones that have to be generally more commercially focused. The reason we would do bank M&A is primarily on the deposit base that we would acquire and the ability to create positive operating leverage. So we have a pretty good history of being able to increase revenue by the acquired bank, by the nature of how we structure and how we create accountabilities and we have a good ability to reduce expenses fairly significantly. So generally, we’re trying to find more commercial oriented banks in metropolitan New York that have solid deposit bases and where we can execute a strategy where we can create positive operating leverage.

[Alex Twerdahl:]

Okay. And sort of size, is there anything that would be too small?

[Jack Kopnisky:]

It's probably, our desired size is anywhere in the kind of 2 billion to 5 billion. We generally would not look at something less than $1 billion. There are an awful lot of banks out there that are considering their options less than $1 billion, but frankly, we would - frankly, if we were doing this, we would spend the time and money and effort to focus on something that provides the type of scale and improves - further improves the operating metrics of the overall company.

[Alex Twerdahl:]

And then just a final question and more of a sort of 3,000 foot up-view question but you guys have been showing a lot of really good growth and certainly capital is key in this environment, especially when you're growing. How often do you revisit the dividend, you payout $0.07 a quarter, there is other banks out there that have good growth, they don't pay out anything. I mean is it - is there something you’re pretty committed to or is it something that you figure may be we better use this for a 30-plus million bucks a year in capital payout?

[Jack Kopnisky:]

It’s a tough question because it’s really tough. So, we talk about that a lot and the issue is it is really tough. As a growth company generally you would not be paying out the type of dividends we are but it’s really difficult to go back and cut the dividend because you have a mix of shareholder base that depends on the dividend and so we believe in this operating model we are providing shareholders with really terrific value for the investment in the company both the growth aspect and the dividend that we provide. So we just believe that it is - growth companies generally don't have the dividend we do, we do have the dividend it’s tough to go backwards on the dividend. We talk about this an awful lot.

[Luis Massiani:]

The dividend will stay at $0.07 Alex and then dividend payout ratio will continue to grow, we will get smaller. So we continue to, we’re going to continue redeploying access or internally generate capital into the business but the $0.07 per share will stay.

[Operator:]

We’ll go next to Matthew Breese with Piper Jaffray.

[Matthew Breese:]

Can you talk about the commercial real estate market, your concentration, your concentration levels and the strategy around that concentration? And then as a follow-up, are you seeing any change in the way commercial real estate deals are structured or priced as a result of reaching regulatory scrutiny?

[Jack Kopnisky:]

There are certain sectors of commercial real estate that you can get risk-adjusted returns on. So the sectors that we’re interested in are non-transactional, they’re relationship oriented. So we have both owner and non-owner occupied types of commercial real estate transactions that we continue to get the right risk-adjusted returns on, they are relationship oriented. Where we are not seeing that are transaction based generally driven through brokers that you can get the risk-adjusted returns held off. What's happened over the last two years, part of it is risk-adjusted returns also include some of the covenants within the context of these deals. We saw a covenant slip if you would become more liberal over the last couple of years, it would appear the covenants are starting to get a little bit tighter back to where they should be, it could also appear we have not seen pricing improve in a meaningful way as a result of the tightening by some of the regulators on banks that have higher concentrations of commercial real estate to capital. You would normally expect that we are waiting to see pricing kind of normalize, we've seen maybe 10 basis points improvement but nothing of real significance yet relative to pricing. We believe that will happen as less banks provide capital in some of the sectors of commercial real estate, it has not happened yet.

[Matthew Breese:]

And you did talk a little bit about pressure from the regulators on the broker commercial real estate model. Can you expand upon that and why is that…

[Jack Kopnisky:]

No, I didn’t talk about the pressure on the regulators on the broker, I'm just saying that they are - the concentration levels of all commercial real estate relative to capitals where there is regulatory pressure not specifically on broker originated multi-family.

[Matthew Breese:]

Understood, my mistake. And then going back to the expense guidance is that good into 2017 that roughly 55 million.

[Jack Kopnisky:]

That's right.

[Matthew Breese:]

And then my last one is around the taxi medallion portfolio. Just wanted to get some additional detail around what you're seeing behind the scenes in the market, in terms of new investors coming to the table, is anyone financing these things away from you and what is the underlying corporate lease rates for the corporate medallions.

[Jack Kopnisky:]

Well, let me start on that and then turn over to Luis on some of the behind the scenes. So remember we've done a good job of taking the taxi medallion portfolio for us from $65 million in the first quarter to $52 million this quarter. And those are that is because our clients have paid us down. We are not selling them, we haven’t done anything other than getting paid downs from the clients. So, you want to talk about the background.

[Luis Massiani:]

I think that you know the data and what we’re seeing in the market from a cash flow perspective on the asset class is very much in line with the transactions that you've seen at the TLC website recently for corporate and individual medallions. So I don't you know from the perspective of utilization rates they are stabilizing and they are slightly up. The asset class and the medallions are actually cash flowing, we’ve talked about this on prior calls that to the extent that you have restructured in many cases turn these deals into TDRs with the expansion of the principal amortization terms or moving into interest only type of transaction structures. The cash flow is covering the debt service and it is providing sufficient cash flow for there to be on cap rate basis of value that is supported by or a value that is consistent with and supports the valuations that you’re seen hitting the TLC website in recent transactions. So, I think that the market has there is it's not that we are out of the woods yet because I think that there is still a fair amount of uncertainty as to exactly where the value of the medallion shakes out over time, but it is cash flow positive and it is cash flowing to a place where it is supportive of the values where we have our medallions marked and that consistent with what you see on the TLC website for the recent transactions that have happened. So it’s going to take a long time to play - for this thing to play itself out, so we’re going to be talking mad about taxi medallions for a while on these calls but we continue to be not just hopeful but confident that there is value in the asset class and that there are more people participating, there is more investors looking, there is more people willing to provide financing, it’s just that the medallion values that used to be $1.2 million and $1.3 million are now worth closer to $650,000 to $750,000 bucks. So it is certainly the asset class is certainly gone through a dramatic change in value but there is still is value and there is still cash flow positive, the medallions are still cash flow positive so there is a support for value there.

[Operator:]

We will go next to Joe Fenech with Hovde Group.

[Joe Fenech:]

Guys apologize if I've missed this, but specifically the CRE concentration at quarter end, can you tell us what that was?

[Jack Kopnisky:]

At the bank level it was just under 290% of total risk-based capital.

[Joe Fenech:]

And Jack I appreciate your comments on whole bank M&A and where the focus would be on the deposit side primarily, but your opportunistic in the sense with the Hudson Valley purchase. Would your focus change a bit if some of these competitors where to run into issues on the CRE front in terms of either geography or maybe business mix of the target or would your comment earlier still stand in terms of the strictness of your criteria?

[Jack Kopnisky:]

It probably still stand, the other thing I would add to my comments previously is it; it also depends upon price obviously. So there are certain things that we may compromise a little bit that criteria because the price is so good and the financial metrics coming out of this is so positive. But again generally we’d say in metropolitan New York and we would stick to that general set of criteria, the only asterisk on that would be if we are able to buy banks that have most of those conditions in a kind of 125 to 150 of book that may adjust that versus a two times book that some of the banks are going for now.

[Joe Fenech:]

And in terms of the 290% since you guys are bumping up against the threshold, are you purely looking at sort of allocating capital just solely on risk-adjusted returns or is the 300% sort of in your mind too in terms of where you’re allocating capital in terms of loan growth, is that a limiting constraint for you at all?

[Jack Kopnisky:]

It actually isn’t limiting because in part, where our guideline is to be able to take that up to 350% of capital. We think frankly the range from 300% to 400% of risk-based capital is where you just need more reporting and more diligence in how you evaluate portfolios relative to the regulatory environment and it’s really once you get over 400, it really kind of sets off some of the more meticulous criteria the regulators are requiring. That said, our preference is to keep that below 300% for getting the regulatory environment for a second. So we're trying to keep that in that in environment. So, for certain types of real estate we'll do deals and again with the right risk-adjusted returns and certain that we will and others we will pass on.

[Joe Fenech:]

And if you were to say hypothetically for whatever reason go to 350, would there be any incremental expense pickup relative to the guidance you provide or do you feel like you have all the systems and monitoring capabilities to do that today?

[Luis Massiani:]

No expense pickup.

[Jack Kopnisky:]

No expense pickup.

[Operator:]

We will go next to Collyn Gilbert with Keefe, Bruyette & Woods.

[Collyn Gilbert:]

I got disconnected there for a second, so I apologize if I'm repeating the stuff that was already covered, but Luis I just wanted to confirm did I hear you say that the expense range that you gave for the fourth quarter is also good for next year?

[Luis Massiani:]

Yes, that's right.

[Collyn Gilbert:]

Can you just share with the yield on the GE portfolio?

[Luis Massiani:]

Approximately 7%. That’s inclusive of fees.

[Collyn Gilbert:]

And then just some housekeeping things. The 2 million charge that you took for closing the mortgage business, what line did that come out of, was that all comp or did it come out of other areas?

[Luis Massiani:]

So I’d say half of it was comp half of it was other expenses, it was fixed asset impairments on facilities that we existed and branches that we closed that were associated with the ready business.

[Collyn Gilbert:]

You guys talk about losing income this quarter to Durban, what was that all about and why now?

[Luis Massiani:]

So the interchange hits us 12 months after we became a 10 billion consolidated organization. So we had always - we had been - we had always been mentioning that in the second half of 2016 is when we would start becoming subject to the loss of interchange revenue on Durban.

[Collyn Gilbert:]

And then what is your outlook just on maybe the provision from here and how you're thinking about that sort of the trajectory of the reserve as we look out?

[Luis Massiani:]

It’s going to very consistent that what we've done for the past five or six quarters which has hovered between $4.5 million to $6 million and it’s largely driven by what the loan growth prospects are for any given quarter. So without having our credit magic crystal ball just yet, we are still working on that one, we think that we you know it's going to be close to 5 million to 5.5 million which is where we've been for the past three or four quarters and that supporting growth of 250 million and 300 million and in this case we had slightly higher growth of some of the acquisitions on the portfolio side. But to the extent that we continue to grow those types of levels on the loan side which we feel confident that we can achieve those mid-teen types of levels, you're going to continue to see some; we're going to continue providing for that loan growth.

[Collyn Gilbert:]

And how are you thinking about net charge-offs holding in as we look out over the next year or two?

[Luis Massiani:]

Year or two, it's difficult to go out two years but from the perspective of what we are seeing on the delinquency trends, we’re not seeing any major pressure points at this point. So near term, we anticipate to be close to where we’ve been for the past five or six quarters which has been hovering between call it 9 basis points like we had this quarter to 15 or 16 basis points. So we feel pretty good about those and to the extent that there would be a migration and delinquency trend from 30 to 89 day bucket and beyond or an increase in criticizing classified loans, then that would certainly be a leading indicator that you would start to getting to higher charge off levels but the vast majority of the growth this year in criticize and classified has been because of loans that we have acquired, it hasn't been migrations or it hasn't been deterioration or migrations in the credit quality of the book that - of the seasoned portfolio. So we feel pretty good that the credit continues to hold in and will continue to hold in nicely for over the near term.

[Operator:]

We will go next to the Dave Bishop with SIG Partners.

[Dave Bishop:]

Hey Jack, sort of circling back to the M&A question here. As you look across the potential for additional adds in the specialty segment arena especially finance arena, does it get more competitive I guess maybe in the bidding process here, obviously you’ve got some bags pulling away from the commercial real estate sector now focusing on sort of C&I specialty finance growth. You think that restraints may be the potential to do full-in additional deals within that segment or within those segments?

[Jack Kopnisky:]

No, to-date it has not gotten more competitive, this is actually fairly good buyer's market as it relates to commercial finance assets and it’s a buyers' market in part because there are a lot of portfolios out there for sale because the yields have come down and their margins have compressed. The flipside of this is there is only certain types of banks that have platforms to be able to take on portfolios like this. So, a lot of - it's interesting the read, a lot of banks want to move from CRE to C&I and they go out and hire a team. The tough part about this is it is actually the team that matters first, its’ actually the platform you're putting them on and the accounting because almost all of the C&I business is really advanced rates against things like accounts receivable and inventories. So unless there is a system in process that is time and tested to monitor those activities it is pretty tough to acquire portfolios. So to-date, it may change in the next quarter but to-date we have not seen more competition for these portfolios, we've seen that there is a lot of opportunities presented, frankly we say no to the vast majority of opportunities, Luis and I probably get a call every week on a new opportunity that is out there and obviously we turned down most of them because….

[Luis Massiani:]

A lot of consumer asset classes, there is a lot of marine recreational vehicle type things that we’re starting to see out there. So there is - those are things that we’re not going to do because we're going to stick committing on commercial side which are the existing platforms that we have with asset-based lending and factoring. But there certainly is a cluster of opportunities out there from the perspective of asset classes that we continue to invest in and we are already in.

[Dave Bishop:]

And then maybe shifting gears on the deposit side may a housekeeping, looks like the average cost of deposits popped up a little bit here, anything driving that?

[Jack Kopnisky:]

Just continue, it continues to be the composition of the business mix. The more that we continue to focus on migrating the focus of everything that we do away from the retail side to more of a commercial, we're going to see a bump up in the cost of interest expense, right you know the - of the interest expense. You're going to see a continued reduction in what I call the all-in in cost of operating the deposit, right or the OpEx of the deposit because when you focus on commercial, you’re going to get more banks for the buck, you’re going to get higher balance accounts that costs you less on a per account basis to service. So, interest expense is one of the things that we focus on we obviously are going to continue managing so that the interest, the cost of interest expense does not get out of control but at the same time even though interest expense is increasing you continue to see for the past five quarters our ability to continue to drive the efficiency ratio down. So the efficiency ratio decreasing and the operating leverage isn’t, solely driven by the shift of retail to commercial as stated by things like getting out of the residential mortgage business and some of the other things that we've done but the more that we continue to focus on eliminating branches on reducing the headcount and getting more focused on the commercial side of the house versus you’re going to continue seeing even though you might see a little bit of an increase in interest expense overall that's going to be a positive for operating leverage and for the total OpEx in the business.

[Dave Bishop:]

And then in terms of the deposit growth this quarter any sort of bigger account wins so to speak from your teams out there, I know you have shifting, focusing on some of the LCR issues plaguing some of the larger bags, I’m wondering if that played a role in some of the growth we saw this quarter?

[Jack Kopnisky:]

We just had you know we've had folks that - we’ve hired deposit focused teams over the course of the last 12 months that are starting to hit their stride. So rather than focusing on one particular win, this is just you know we've balanced out the teams in a way. We are much more balanced in to loans and deposit generation when you’re starting to see the impact of having some of these deposit focused teams as their stride. So that's all, so no real big win that we would point to.

[Operator:]

And we will take a follow-up question from Casey Haire with Jefferies.

[Casey Haire:]

So just wanted the investment management line of about 1.02 million this quarter, is that - where would that run once you guys sell that business and you anticipate that sale taking place this quarter, mid-quarter just some update there?

[Jack Kopnisky:]

It’s going to be mid-quarter, so we are knocking on wood hopefully we're going to do it and we're going to be able to closer in November this quarter. We’re still awaiting for final court and regulatory approvals, so hopefully we're going to get that finally behind us. That number is going to - that 1.2 million is going to decrease by about $1 million going forward. However that’s only the revenue line item there is going to be a corresponding decrease on the OpEx side, so the efficiency ratio in that business isn't the best. So you're going to have - you're going to see a decrease in the fee income, you're also going to see a decrease on the OpEx side given we're going to reduce some headcount and also some operating expenses as part of selling the business.

[Operator:]

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:]

Again thanks for everybody on the phone call that follows the company and invest in the company and we appreciate your interest, so have a great day.

[Operator:]

This concludes today's conference. Thank you for your participation, you may now disconnect.