Sterling Bancorp
Q4 2016 Earnings Call Transcript

Published: 25 Jan 2017

[Operator:]

Welcome to the Sterling Bancorp Fourth Quarter 2016 Conference Call. Today's call is being recorded. And at this time I would like to turn the conference over to Mr. Jack Kopnisky CEO of Sterling Bancorp. Please go ahead, Sir.

[Jack Kopnisky:]

Good morning everyone and thanks for joining us to present our results for our fiscal year and fourth quarter of 2016. Joining me on the call is Luis Massiani, our Chief Financial Officer. Our positive momentum in operating performance continued this quarter and throughout 2016. As evidenced by our ability to achieve record volumes in loans, deposits, revenues, and profitability. We ended 2016 as a substantially larger, more diversified, and more profitable company. In 2016, we continued to grow our loans and deposit organically, recruit new commercial banking teams, and augmented organic growth with opportunistic acquisitions of commercial finance businesses and portfolios. We also reduced our network of financial centers and consolidated 12 locations during the year. We simplified our operations by divesting our residential mortgage originations business and our trust division. We did not have a competitive advantage in either business and neither were in line with our Commercial Banking strategy. We will reallocate the capital and resources from these divestitures to other businesses where we can achieve risk-adjusted returns that exceed our targets. The positive impact of our strategic initiatives, as demonstrated in our results for full year 2016. Our adjusted net income was $145.5 million. And adjusted diluted earnings per share were $1.11. Compared to $105.4 million and $0.96 respectively for 2015. This represents growth and adjusted earnings and diluted earnings per share of 38.1% and 15.6%. Our adjusted return on average tangible assets for the year was 120 basis points and adjusted return on average tangible equity was 14.9%. We created significant positive operating leverage for the year by growing revenues by 27% and expenses by 16%. We have a strong balance sheet with a diversified commercial loan portfolio that grew by 24.8% in 2016, and a solid funding source of low cost core deposits that grew by 12.6%. We continue to have a solid capital and a strong credit metrics from which to grow the company. Now let me turn the call over to Luis to detail the financials for the quarter and the year.

[Luis Massiani:]

Thank you Jack. Performance in the fourth quarter was one of our strongest to date. We reported record results for the three months ended December 31, including growth in revenues, a decline in expenses and new highs in portfolio loans, net income and earnings per share. Turning to page 4, we continue to focus on creating an efficient balance sheet, with a 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 portfolio loans grew by over 21% over the prior year, and our commercial loans grew $1.7 billion or 25%. Our total deposits grew by $1.5 billion or over 17%. Our loan to deposits ratio was 95%, which is in our target range of 90% to 95%. Our investment securities as a percentage of total assets increased to 22% at quarter end, as we initially utilized the proceeds from our November capital raise to purchase securities. Taxable equivalent net interest margin was 352 basis points for the quarter and included $4.5 million of accretable yield on acquired loans. Excluding the impact of accretable yield, net interest margin was 3.38%. Our NYMEX accretable yield was slightly below our target range of 340 basis points, as a greater proportion of loan growth in the quarter was driven by lower yielding floating rate warehouse lending balances, and commercial real estate loan swaps. We maintain our prior guidance on NIM and are targeting to be closer to the high end of our target range of 345 basis points in 2017 as we should benefit from the December 2016 rate hike, the deployment of the proceeds of the November capital raise, and continued organic loan growth. On page 5, let's review the reconciliation of GAAP and adjusted results for the quarter. We realized 102,000 losses on sales securities and we recorded a net gain of $2.3 million on the sale of our trust division. We also continue to ammortize non-compete agreements from prior acquisitions. Adjusting for these items, our net income was $40 million and our adjusted diluted earnings per share were $0.30. We increased adjusted earnings per share by $0.04 over the same quarter last year, and by $0.01 relevant to the lien quarter even though we had an increase of over $2 million in average shares mainly as a result of our November capital raise. On the trust division sale, we realized gross proceeds of $5.1 million. However, in connection with the sale we incurred professional fees, legal fees and settlement associated with the resolution of client matters and incurred severance and retention compensation, which resulted in the net gain of $2.3 million. We have excluded this gain from our adjusted earnings. We continue to focus on growing our public sector finance business and municipal securities portfolio. Our estimated effective tax rate for 2016 is 32.5%, which is also our effective tax rate in the fourth quarter. And assuming no change in the current tax law, we estimate that our effective tax rate for 2017 will remain between 32% to 33%. On slide 6 and 7, we review our loan portfolio performance which was quite strong. The composition of our loan portfolio as of December 31, consisted of 44% C&I loans, which includes our commercial finance business lines, and 45% commercial real estate. Focusing on the commercial classes that we want to grow, commercial loan growth was 25% in 2016. This includes our traditional C&I, commercial finance, and commercial real estate loans. On the next page you can see growth trends by business line. This is the first time we're breaking up the public sector finance portfolio, which we had previously included in our traditional C&I loans. This team joined us a little over a year ago, and have successfully originated a high-quality loan portfolio with almost $350 million in loans outstanding at December 31. Loans in this portfolio are fixed rate and tax exempt. The growth of $23 million in the fourth quarter with net of $40 million in loan participation sold. We also experienced good growth in ADL loans, payroll finance, and warehouse lending, which reached a new record at quarter end of $617 million in outstandings. Please note that due to the potential rising rate environment and impact this may have on the mortgage originations market, we expect balances in warehouse lending will decrease by about one third in early 2017. We have a diversified asset origination engine that allows us to allocate capital and resources to various loan types, similar to our performance in 2016, we are confident we can offset any decreases in warehouse lending and can grow total loan portfolio balances at a mid-teens growth rate in 2017. On page 8, our deposit growth in 2016 was also strong. Based on end of period balances, core deposits decreased by $197 million relative to the lien quarter which was due to seasonal outflows in our municipal deposit business. Year-over-year, total deposits increased by almost $1.5 billion or 17%, and our core deposit balances increased by $983 million or 12.6%. We had a core deposit ratio of 87.5%, and loan to deposits ratio of 95% at year end. We continue to focus on hiring deposit gathering teams to drive deposit growth, and anticipate our composition of deposits will be more weighted towards commercial deposits. On page 9, we take a look at our non-interest income. Given our strategic actions and divestitures of trust and ready mortgage, we experienced a decline in non-interest income for the quarter. Other regulatory driven items, such as the Durbin Amendment, have also impacted deposit service charges. However, we are seeing increases in other non-interest income, which includes letters of credit fees, miscellaneous loan fees, loan swap fees and a gain on sale participation of commercial loans. On aggregate, these fees were $3.8 million in the fourth quarter, and increased $1.5 million over a year ago. These fees are all linked to our commercial businesses and are more event driven verses full business. So there will be fluctuations in the these fees from quarter to quarter. However, we are confident in our ability to grow these business lines substantially throughout 2017. Moving to page 10, we continue to focus on maintaining tight controls over operating expenses, and improving our operating leverage. For the year, our total OpEx was $221 million, which is in line with the target range of $220 million to $225 million. We continue to make progress in becoming an efficient company during the quarter. Our adjusted operating efficiency ratio was 43.4%. Our total number of FTSEs decreased by an additional 25 and now stands at 970. We closed one financial center in the quarter and a total of 12 locations in 2016. We maintain our prior guidance of quarterly OpEx in a range of $54 million to $56 million and estimate full year OpEx of approximately $225 million in 2017. Please note this estimate excludes amortization of intangibles, but it does take into account new hires and recruiting of commercial teams. Turning to Page 11, let's review our asset quality. Performance in the quarter was strong, our total nonperforming loans decreased slightly by $2.2 million, while criticized classified assets decreased by $21.6 million. Delinquencies in the 30 to 89 day past-due segment declined slightly and the coverage of our allowance per loan losses to nonperforming loans increased from 73% in the lien quarter to 81%. On taxi medallions, we have also made progress during the year. Total exposure to the industry decreased by over $14 million during the year to $51.7 million at December 31. Finally on page 12, we summarize our key drivers and outlook for 2017. We anticipate growth of $1 billion to $1.5 billion in total portfolio loans. This includes organic growth and portfolio acquisitions. We anticipate we will fully deploy the net proceeds of our November capital raise by the end of the second quarter 2017 and are actively evaluating several portfolio acquisition opportunities. We are going to maintain our funding profile and loan to deposits ratio of 90% to 95%. So deposit growth will largely match loan growth. Deposit growth will be focused on commercial teams and clients. NIM for full-year 2017 is estimated at the high end of the 345 basis points of our prior guidance. We are not assuming further rate hikes, but if they do occur we are well positioned and should have further upside. We estimate that an additional quarter-point rate hike would further increase core NIM by about 3 to 5 basis point over a six month period. However, please remember this is difficult to estimate and in addition to the overall level and shape of interest rate curves, actual NIM performance will be impacted by other factors such as a competitive environment and the composition of the loan portfolio. Fee income will be approximately $60 million. The decrease relative to 2016 as we need to replace false revenue from the mortgage and trust of the divestitures. The income will be lower in Q1 2017 relative to this quarter, but will ramp up over the course of the year as our new businesses continue to grow. OpEx will remain relatively flat, as we re-deploy savings from our divestitures and financial center consolidations, into growing our commercial teams and businesses, and invest in risk management functions. And finally, assuming no changes to tax law, our effective tax rate will remain at 32% to 33%. Jack.

[Jack Kopnisky:]

Thanks Luis. I thought I would summarize the year and the fourth quarter. And I want to highlight the actions we took to deliver high-quality results. We completed the full integration of Hudson Valley Bancorp in the first quarter. We purchased NewStar's $325 million ABL business in the second quarter. Purchased $170 million East Coast franchise business from GE Capital in the third quarter. Completed the sale of our mortgage origination business in the third-quarter and trust division in the fourth quarter. We raised capital through two debt offerings totaling $175 million in the first and third quarters, and an equity offering of $93 million in the fourth quarter. We consolidated 12 financial centers. We added four Commercial Banking teams and most importantly we increased productivity across the company delivering very strong double-digit organic growth. The results for the year and the quarter were impressive as we have discussed. Just to remind you, adjusted earnings were $145.5 million and EPS of $1.11 were up 38.1% and 15.6% respectively over 2015. Adjusted return on average tangible assets for the year was 120 basis points and adjusted return on average tangible equity was 14.9%. Operating leverage continues to improve. Revenues were up 2.2% and expenses decreased 3.2% for the quarter. Adjusted efficiency for the fourth quarter was 43.3%. And overall commercial loans grew by 25% in 2016 and deposits grew 12.6%. It's been about five calendar years since our team came into Provident Bank of New York. If you move to page 14, we highlight the transformation from a thrift business model to one of a diversified regional commercial bank. This is a strategy and a model that works, as evidenced by the significant growth in assets, loans, and deposits, as well as the outcomes in terms of earnings increases from $7.9 million to $145.5 million. EPS growth from $0.21 to $1.11, our OTAs and ROATEs and efficiency ratios that are among the best in our industry and peer group. Finally, we have taken the market cap from $220 million to $3.16 billion with a stock that is appreciated a year end by 302%. We really look forward to new opportunities to continue to profitably grow this company using this model and this strategy. Our view has always been to work to reinvent the company every day so that we can add value to our shareholders, clients, and colleagues. And I would really be remiss if I didn't thank everybody that had a great amount to do with our terrific results for this year -- our shareholders, our clients, our colleagues and the communities that we work in. So ,we really have done a good job this year and we look forward to the coming year. So, let's open it up to questions you have.

[Operator:]

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

[Casey Haire:]

Luis I wanted to focus on the NIM guide. Can you just speak to some of the drivers. Specifically the loan yields which I was surprised to see them down this quarter in a quarter when you fully run rate the GE portfolio, obviously the security yield helped and just as you guys move the mix towards the positive mix towards a commercial one, obviously some pressures with a rate hike. Maybe you could just talk to some of the drivers on how you are getting to that higher 345 guide for the versus the 338 starting point.

[Luis Massiani:]

A large part of the is a different country really didn't have any benefit from the 2016 rate hike. As we have talked about in the past, we have a fair amount of everything that we do in the commercial finance side specifically and then a substantial chunk of the traditional C&I portfolio that are prime and LIBOR base. From that perspective this quarter you didn’t really see any benefit on those especially on the prime side because there wasn’t really a change in rates on prime very late in the quarter so you're going to starting seeing a benefit of that in the first quarter of this year. We've also started to see evidence in the longer duration fixed rate asset classes on the CRE side that pricing dynamics and competitive environment for pricing had gotten a little bit better. So when you're talking about five year fixed-rate, seven year fixed-rate loans, we are seeing changes in that market place and still a little bit early to tell as to where exactly that’s going to shake out but we are starting to see encouraging signs that loan yields and new origination yields are going to be 25 to 50 basis points higher it appears over the course of 2017 relative to '16. So the NIM being down for the quarter and remember that the franchise finance portfolio was relatively small it was $175 million on almost $9.5 billion worth of loans so it would've never been a significant driver of NIM, but more so the composition of the portfolio from the perspective of how much and how funding balances were and things that changed the perspective loan swap business that we are doing in the CRE side that will have a lower yield initially but will have better interest rate performance as rates rise. A bunch of different factors into that but overall with the increase in prime with the ability to redeploy the proceeds of the capital raise I think that the mix and composition of business that we anticipate in 2017 plus the rate hike I think gives us a lot of confidence that we can actually grow -- that NIM should be on the higher end of the range that we provided before.

[Casey Haire:]

Just as a follow-up Luis, the purchase accounting what's expectation going forward versus the 4.5 million level in the fourth quarter here.

[Luis Massiani:]

So 2006 in total was $18.5 million of accretable yield, if you go back to the other earnings calls you can add up those numbers and you will get just under $18.5 million. We should be closer to $40 million to $50 million this year and it's going to be a little more as we have talked about in the past there will be front load, there is a longer tail to the accretable yield given that the vast majority of what's accretive back our commercial real estate assets that are longer duration. So the first and second quarter will be a little bit higher and then the third and fourth quarter it will pay off a little bit but aggregate for 2017 should be somewhere between $40 million and $50 million.

[Casey Haire:]

Jack a big picture question for you on the M&A front. You guys have done a great job picking up some portfolios this year. You guys are in a unique position as one of the few buyers in the New York marketplace that’s not about to cross any regulatory thresholds and free and clear from enforcement orders. There are some opportunities for you to do some transformational type activities. What is the appetite there given your unique position as one of the loan buyers in New York?

[Jack Kopnisky:]

We think there are a lot of opportunities both on the bank side and the commercial finance side. We literally get called two or three times a week on portfolios or businesses on the commercial finance side and we have been very disciplined about the types of assets we are interested and the type of returns that we expect out of this. Equally so, there are a number of opportunities on the bank side. We primarily look at them as deposit opportunities. So we look at bank acquisitions as the potential for acquiring a strong deposit base and restructuring generally the asset side of the balance sheet of whoever we would acquire to mirror the types of structures that we have. We are interested in -- again we will be disciplined in terms of the price and the structure, and all of that as we look through the opportunities out there but we think there are opportunities now and we view that there will be continue to be opportunities. You only have to look at the side that we put on their on page 14. We have got a little perspective after the five years that we have done this but the basically it has taken a thrift model and turned it into a Commercial Bank model that has pretty high returns and good yield. Luis was telling me one of the interesting statistics that we did and this is a macro statistic. Basically over the past five years we have acquired around 1800 folks, FTSEs. We are about 970 FTSEs now. So almost 45% or 50% less in FTSEs with a balance sheet that is 4 to 5 times larger, that alone is the reason why there will continue to be consolidation in the banking environment. So you've taken a lower yielding, lower return business model and turned it into a higher return, higher yielding business model. We think there is plenty of opportunities. Again, the key is to be disciplined. We’re not going to overpay if we get that far and we will do a very good job of implementation again if the opportunity arises.

[Operator:]

And we will now go to Alex Twerdahl with Sandler O'Neill. Please go ahead.

[Alex Twerdahl:]

I was wondering if you could give us a little bit more color on the outlook for fee income. I see on slide 12 you're projecting $60 million or I think you said Luis you said in your prepared remarks $60 million for the year just down from 2016, but you’ve to replace mortgage banking, investment management and the Durbin stuff. So is income from cash management swaps and syndications is that really -- I mean are you really going to be able to grow that by $10 million over the course of 2017?

[Luis Massiani:]

So we do anticipate and that is our target to be able to do that in addition to the three business lines that you mentioned we also have a growing, the public sector finance business that we were talking about during the call for example has a growing gain on sales component to it that is driven to -- it's not going to fully replace the entirety of what we are losing, for example on gain on sale income on the mortgage banking side but it is going to replace a substantial chunk of it and really when you think about the businesses that we eliminated and you’ve only focused on the revenue side there's a very big gap to fill but remember that those both [indiscernible] business were close to 100% efficiency ratio so even though we may not necessarily replace the entirety of the lost revenue we are going to more than replenish the lost earnings component of it because each one of those businesses that you mentioned the cash management, the syndication side, the commercial gain on sale business as well as the swaps has substantially more accretive to earnings and profitable to earnings and efficient than the businesses that we've eliminated. So the $60 million it's an aggressive goal but it's one that we think that as these businesses ramp up we think that we can get there.

[Alex Twerdahl:]

And then my second question I just wanted to ask about deposits, you layout some pretty aggressive targets for loan growth 10% to 15% another some of that relies on the portfolio purchases etcetera, but in order to keep loan deposit ratio below 95% as per the target, do you really need to acquire a couple more teams of deposit together as or do you think with the current infrastructure and the different avenues that you have today and I think you said last call they are trying to hit their stride, are those guys going to be able to put up 10% plus deposit growth on their own in 2017 to kind of get to that loan to deposit ratio.

[Luis Massiani:]

The best indicator is what we did this past year. We did about 12.5% which is an increase in deposits. We have the infrastructure from which to grow deposits. We will supplement that with some acquisitions but frankly the acquisitions the teams will come -- that benefit comes later in a year even if you did it now. So the infrastructure that we have now, we would expect to drive deposits and we would also expect to control the cost of deposits. I think you saw our deposit cost drop by a basis point quarter over quarter. We worked really hard to both fund the type of loan growth and get to the right metrics, but also control the cost. We play with the volume versus the cost game all of the time. We also find that the commercial deposits tend to be sticky. There are some high-priced parts of it, but the core deposits cost tended to be pretty sticky. So that’s -- frankly our highest priority this year going into this year and the most difficult challenge is to continue to grow core deposits at low cost. We will find the loans and create the fee income and control the cost, but the deposit side of this is our highest priority and we are allocating a lot of resources around that.

[Alex Twerdahl:]

And just a follow-up to that 14% wholesale at the end of the year is that something that can grow as a percentage of deposit if need be to sort of allow the loan growth to continue?

[Luis Massiani:]

Sure it could.

[Jack Kopnisky:]

It could. Our internal limits and regulatory limits and so forth. Yes. It will definitely go. That is not the intention but in order, that would be an alternative if needed.

[Luis Massiani:]

Yes that would be the second priority. The first priority is low cost core DDA. You can find funding in many different ways, but our preference is to get this core relationship deposit growth.

[Operator:]

We will now go to Dave Bishop with FIG Partners.

[Dave Bishop:]

A question, with all of the changes in corporate tax laws out there is there any two effect we should be aware of either positive or adversely on some of the business segment you guys focus on?

[Jack Kopnisky:]

From a tax rate perspective there is absolutely going to be, I don't know necessarily a negative downturn I'm going to characterize it but there is going to have to be a repricing of some of the business lines that were in particular the public sector finance business and a lot of what we are doing on the municipal security side as well and we’re seeing that happen in real-time. We have had a number of situations where terms sheets that we had out at specific types of levels have changed based on the uncertainty surrounding tax reform. So there will be some impact on the [indiscernible] commercial areas like public sector finance but not broadly in the most of what we do in the traditional C&I and CRE side.

[Dave Bishop:]

Okay, if you don't seem to have a significant had been in terms of achievement for loan growth targets.

[Jack Kopnisky:]

No.

[Dave Bishop:]

Okay. Got it. Then housekeeping item I notice of quarter lower FTSE assessment fees is that a good run rate going forward. Just curious what is driving that.

[Luis Massiani:]

That is a good run rate going forward. We had a reduction. We had been more conservative than we needed to be over the course of the year in 2016 and going forward we are confident that the number for the fourth quarter the good run rate to use. The overall number was about $1.5 million or so, so it might be $1 million to $1.5 million, $2 million in three quarters but that’s a -- that’s steady state relative to the fourth quarter is more indicative of what run rate will be relative to what the prior three quarters of 2016 were.

[Dave Bishop:]

And then how should we think about the loan portfolio mix heading into 2017. I guess [indiscernible] driver fourth quarter, do you think it will grow relatively stable with year-end and continuously C&I sort of leading the way and maybe growing a little bit more percent of the portfolio?

[Luis Massiani:]

I think it is going to be pretty balanced. When you look at the mix of business today of about 45% C&I and 45% CRE, that’s the business mix that we like and that’s the business mix that we intend to maintain. The proceeds of the capital rates from November we are earmarking and intend to deploy those into the commercial finance/C&I side of the business. The ability to continue to grow it on the CRE side will be driven by what the competitive environment and dynamic turns out to be in 2017. So right now we are encouraged and hopeful that we are starting to see signs of better pricing and the ability to generate better risk-adjusted returns in five and seven year fixed-rate CRE loans, if that remains then I think that we’re very confident that the mix of business and the composition of the portfolio will be fast forwarded to 2002 to December 2017 will look very similar to what it does today, just bigger.

[Operator:]

We will go to Collyn Gilbert with KBW.

[Collyn Gilbert:]

Luis just to go back to the NIM comments for a minute. Just trying to understand how you are seeing average earning asset growth balances go into that guide, I know you guys had indicated 10% to 50% loan growth but how are you seeing the securities book playout for the year?

[Luis Massiani:]

It's going to remain at about 18% to 20% of total assets. It is a little higher today than what will be over the course of 2017. The reason for that is that when we did the capital rate we decided to put its work in the rising rate environment of the late fourth quarter we think that we bought some good securities to finish up 2016. So we took advantage of what we thought was a good market opportunity. So today it stands at about 21% to 22% of total assets, it's going to move down over the course of the year closer to 18%, so you will have a larger proportion of loans in part of earning assets and where it is today.

[Collyn Gilbert:]

Okay. And then in terms of the income that’s kicking off, how do you see the mix of those securities changing throughout the year if at all?

[Luis Massiani:]

It's not going to change much. The composition of our portfolio has stayed very consistent for the past two years, consistent MBS agencies and municipal securities between MBS and agencies about 2/3rds of the portfolio, these are about 1/3rd of the portfolio when we anticipate that there will be a minor tweaks here and there but the composition is going to be pretty much where it is today.

[Collyn Gilbert:]

Just in terms of the nice loan growth that you guys continued to see, are you seeing any change in the geographic dispersion of where the growth is coming? Are using better competitive opportunities in different markets, how do you see that kind of evolving?

[Jack Kopnisky:]

The opportunities are generally still, the majority of it is organic round Metropolitan, New York. There is not really much difference from a geographic standpoint and Metropolitan New York. One of the things that is a little unique about our model is the teams in Metro New York can go anywhere to do deals. They're not stuck in a sub-geography. So there are opportunities across the board. From the commercial finance side, again it's a little bit by business line. So there is not really much geographic concentration there either. It's by the nature of the type of products and the niches that they find. One of the benefits to the balance sheet, and the structure of the model is that we go to where the risk-adjusted returns are best so that we can provide, seek those better return areas so we don't get stuck in a product or a geography.

[Collyn Gilbert:]

And then just on the M&A comment utilizing some of these deposit base and maybe remixing the asset side, is that something that you would likely to do over time with a potential target or do you see yourself doing something more aggressive to a balance sheet restructuring in a short term or is it target dependent.

[Jack Kopnisky:]

It is target dependent first but I would tell you that we try to restructure things, if there were assets on a balance sheet that were not assets that we would want, we would mark those assets in the diligence process and have a plan to execute against those assets sooner than later. We would not, part of that is what you would price into a deal. You have a portfolio that you are not interested in keeping or there are challenges because of rising interest rates or lowering interest rates. You want to make sure that you can disposition that sooner than later. That said, it's is still to fill the bucket back up. So basically, that is exiting the bucket but to fill the bucket back up again takes a period of time. And you will just jump at something that didn't make sense for the intermediate and long-term in terms of filling the bucket back up.

[Collyn Gilbert:]

And then just one final question in terms of more broad profitability targets, I know you guys were kind of laid out the path to the higher ROA before. How do you think, you have done such a great job on getting out the cost and operational leverage. Do you think you can continue on that path, and if so, where do you see that ROA and efficiency trending maybe at the end of this year, end of next year what are some of your targets there?

[Jack Kopnisky:]

We feel good about what we have been able to accomplish but there is always room for an improvement. There is always a mix of businesses. I am really sincere when we talk about reinventing the company every day. I think great companies figure out a way to do things better every day and we kind of learned from the process. So the 120 and the 14 and 15 in equity, we have set that as our targets. We expect to get higher than that as the company grows and gets more efficient. We do believe that we can get into lower efficiency ratio, kind of the low 40s, lower 40s efficiency ratio as we get through the year. This model is one where with more volume, we build out the framework pretty well. With more volume, we should get more efficient as time goes on. We build out things like enterprise risk and we would add onesies and twosies in terms of people and groups as we grow up, but the infrastructure the core infrastructure isn't like adding a 100 people or 50 people to something like enterprise risk. So the platforms are in place to grow to continue to get more efficient and we have set the 120 and 14 or 15 as our targets. We would expect to exceed those if things come together the right away. We do expect to even improve on the of 43.5 efficiency ratio as we go through the year as we create more positive operating leverage.

[Operator:]

And we will now go to Brody Preston with Piper Jaffray.

[Brody Preston:]

It's just a follow-up on the M&A, I was wondering what kind of size parameters around the type of bank you might acquire?

[Luis Massiani:]

We’ve looked at a number of parameters. We probably would -- we would not do and M&A less than a $1 billion. So given the regulatory environment and the time it takes to get things done. We view that we should focus on something that is more substantial. So there are opportunities that are generally focused on the $3 billion to $5 billion range is where we have been but there are some opportunities that may make sense that are mergers of similar size. So we look at the full range of that.

[Brody Preston:]

And then just one more, circling back to deposits. I know you sort of outlined that you wanted to grow core deposits and really manage your deposit cost but you’re kind of surrounded by a lot of banks that don’t have good funding profiles and have indicated that there are starting to get a little bit more competitive on deposit pricing. So I was wondering if you could maybe just give a little bit more detail as to how you're going to manage the deposit cost given that environment?

[Laurel Krzeminski:]

So the model that we have is a little bit different than most. Obviously, so we operate through 30 years of teens, our focus isn't on doing transactional business. It's focused on the full relationship with the client. So virtually every one of our clients have to have a deposit and our preference is obviously their primary deposit and primary demand deposit. So our motto isn't built on going out and doing a loan that’s a transaction, nor a deposit that’s a transaction. We still and we operate in a market where it is a competitive but we have all 1% market share of the entire Metropolitan, New York marketplace. So there are a tremendous amount of opportunities out there to build relationships with clients that are full, that are not transactional. All of that said, there is a portion of any balance sheet on the funding side that you can go out to and pay up for those deposits. So the key to good managers and good teams is being able to primarily focus on core deposits as part of the relationship and using many times cash management to set up the structure with the clients and then at various times supplemented that with more costly price money that maybe more transactional in nature. So that’s how this model works and we have demonstrated over the period of time that it will continue to work as long as we remain disciplined on the relationship side of this.

[Operator:]

[Operator Instructions]. And we will now go to a follow-up question from Casey Haire with Jefferies.

[Casey Haire:]

Luis just wanted to touch on the provision outlook . If memory serves, there is a direct correlation with the lower purchase accounting on the provision as less purchased loans come into the allowance. I'm just wondering, does that hold and then, the second part I guess, net charge-offs on the year were fantastic at 8 bps or so, can we expect some normalization going forward that would maybe put some upward pressure on the lower purchase accounting?

[Luis Massiani:]

We don't see anything right now, Casey that we can point to that would say, that’s what is going to generate a more normalized charge-off over the course of the next two or three quarters. If you look at the overall trends from delinquencies, special classified asset special mention loans, everything on the delinquencies side. The portfolio has continued to perform very, very well so from that perspective we are not seeing any migration or deteriorating trends that will lead us to believe that there should be a major change in charge-off performance in the near future but that’s obviously always a risk and I wish we could say that we have the crystal ball that says we are going to have less than 10 basis points in charge-offs but we are not, obviously. So over time there will be a immigration back to more normalized credit trends which should be somewhere in the 20 to 25 basis point range. We’re not seeing a catalyst to get over the near term so we think that the asset quality should remain pretty consistent in the early part of 2017. And the issues that we are dealing with today are the same issues that we have talked about in the last 2 or 3 earnings which is the large [indiscernible] relationship which today represents close to almost 30% of our total NPLs and those discrete types of situations that again we've been dealing with for quite some time. So we’re pretty encouraged from that perspective. The provision will decrease a little bit as the accretable yield rolls off. So the last two quarters we have had $5.5 million of provision assuming that credit continues to remain at the same level of strength and quality that we have today, we should start seeing that number decrease to $4.5 million to $5 million in the early part of 2017 and then also will be driven by what loan growth turns out to be and what types of asset classes we draw, there will be some tweaks to that but yes you should expect that all things held equal we should start seeing that provisioning requirement come down as the accretable yield rolls off.

[Operator:]

And there are no other questions. I would like to turn it back for any additional or closing remarks.

[Jack Kopnisky:]

Just thanks everybody for your time and thanks for your support and investments for the year. Have a great day.

[Operator:]

Thank you very much. That does conclude our conference for today. I would like to thank everyone for your participation and have a great day.