Sterling Bancorp
Q2 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good morning, and welcome to the Sterling Bancorp 2015 Second Quarter Conference Call. Our call will be led today by Mr. Jack Kopnisky, President and CEO. Please go ahead, sir.

[Jack Kopnisky:]

Good morning, everyone, and thank you for joining us to discuss our results for the second quarter ended June 30, 2015. Joining me on the call is Luis Massiani, our Chief Financial Officer. Our core operating results for the quarter were very strong and support our progress in the development of a high performance banking organization that provides strong returns to our shareholders, great service to our clients and a high energy results oriented environment for our employees. In addition to the strong results, on June 30, we completed the merger with Hudson Valley Holding Company, which will enable us to continue to expand and grow our company. Now, let me discuss the results. Excluding the impact of merger related expenses and other charges, core earnings were $21.4 million and core diluted earnings per share were $0.23. This represents growth of 36% and 21% respectively over the same period a year ago. On a linked quarter basis, core earnings were up $2.8 million or 15.3%. Our core return on average tangible assets was 113 basis points and core return on average tangible equity was 13.27%. This compares favorably to 95 basis points and 12.4% respectively for the quarter ending June 30, 2014. We are constantly focused on creating positive operative leverage in this model. Year-over-year, our core revenue grew 8.4% and core non-interest expense decreased by 1.2%. For the quarter, our core efficiency ratio was 52.6%, which compares favorably to 56.4% in the linked quarter and 57.8% in the same quarter last year. We have driven significant improvements in performance by growing revenue through organic growth and acquisition while reducing overall costs. We continue to have significant loan and deposit growth as we have leveraged our team-based model to drive broad-based relationships. Our volumes also enable us to begin to leverage Hudson Valley Bank's balance sheet liquidity through the growth of high quality loans. For the quarter, we had organic total loan growth of $480.6 million which represents 18.9% year-over-year growth and 38.9% linked quarter. Our targeted commercial loan growth was $492 million for the quarter representing an annualized growth of 47.7%. The current loan mix after the merger of C&I at 40% and CRE at 44% is strong and will evolve to more of equal parts C&I and CRE. Deposits grew $241.7 million during the quarter representing an 11.9% growth year-over-year and a 11.2% growth over the linked quarter. The deposit base continues to be a strong low cost source of funding. Core deposits defined as total deposits less certificates of deposit represent 92% of total deposits. Total costs of the deposits were 24 basis points for the quarter. Net interest margin was solid at 3.57%. The balance sheet composition changes with the Hudson Valley merger. The current deposit mix after the merger is very strong with 54% of total balances in DDA and 39% in savings and money market deposit accounts. Looking ahead on a core organic basis, we expect strong mid-teen commercial loan growth in the future. And strong high single-digit to low double-digit deposit growth. We continue to focus on diversifying and improving our revenue mix. For the quarter, non-interest income as a percentage of total revenue excluding securities gains was 17.2%. We have growth both organically and through acquisitions in targeted categories. Accounts receivable management fee income increased 22.8% year-over-year as a result of organic growth and acquisitions in payroll and factoring groups. Credit quality remains strong, net charge offs of $1.7 million represents 13 basis points of average loans. Our capital position remains strong, our tangible equity to tangible assets ratio was 8.04%, Tier 1 leverage ratio was 12.86%. We have ample capital to support our organic growth and execute our strategy. Finally, we are most excited to have completed the merger with Hudson Valley Holding Company on the last day of the quarter. This merger provides us with a terrific opportunity to continue to create positive operating leverage by growing revenues and controlling expenses. It also provides us with the ability to expand our footprint and model in Greater New York Metropolitan market. This is the company that has a similar market segment focus and culture. On a combined basis, we have 27 commercial teams and a significant branch network to provide value added relationship service to our clients. We also see significant opportunities to grow and expand our model. Now, let me turn the call over to Luis to detail the financials.

[Luis Massiani:]

Thank you, Jack, and good morning. Turning to Slide 4, let's review key balance sheet and income statement metrics for the quarter and compare them to the same quarter a year ago. As of June 30, our total assets were $11.5 billion, as our organic growth in total assets was approximately $800 million and Hudson Valley had $3.5 billion in total assets at the acquisition date. Our total loans increased to $7.2 billion and total deposits increased to $8.8 billion. This represents significant growth year-over-year and was driven mainly by the completion of the acquisition of Hudson Valley. However, as we will review on the following slides, organic growth and loans and deposits has also been significant and exceeded our targets. The impact of our strategy of rebalancing earning assets from securities to higher yielding loans is evidenced by our improved earning assets mix, which has resulted in net interest income growth of approximately $5 million or 9% over the same quarter a year ago. Securities comprised 23.1% of our balance sheet compared to 23.9% a year ago and we anticipate we will continue to reduce this percentage over time. On the bottom of the page, we detail our key performance metrics, which show continued strong operating momentum. Net interest margin was 357 basis points, which represented 37 basis points decline from a year ago. Included in interest income was $1.9 million or the accretion of the credit mark on prior acquisitions, which compares to $2.9 million of accretion in the same quarter a year ago. Excluding the impact of the credit mark accretion net interest margin was 348 basis points compared to 365 basis points in the June 2014 quarter. Our core profitability ratios have continued to improve year-over-year. Core return on average tangible assets was 1.13% and core return on average tangible equity was 13.3%. We are continuing to make steady progress towards achieving our long-term performance goals. Turning to Slide 5, let's review the reconciliation of GAAP to core EPS. Our GAAP reported loss per share was $7.6 million or $0.08 for the second quarter. This compares to earnings to $15 million or $0.18 for the same quarter a year ago. Our core earnings were $21.4 million and diluted earnings per share were $0.23 compared to $15.8 million or $0.19 a year earlier. Core net income increased almost 36% and core diluted EPS increased 21% over the same quarter a year ago. Our reported net loss was mainly the result of the merger related expense and other restructuring charges that were incurred in connection with the acquisition of Hudson Valley. Merger related expense of $14.6 million included charges of change in control payments, employee benefit plan terminations, financial and legal advisory fees and merger related marketing expenses. Other restructuring charges which were included in other non-interest expense in our income statement were $28.1 million and mainly included charges for information and technology services, contract termination, impairment of leases and facilities and severance and retention compensation. The amortization of non-compete agreements and acquired customer list was $991,000 in the quarter. The increase over the linked quarter was due to the acquisitions of Damian Services Corporation and the factoring assets of First Capital. Our tangible book value per share as of June 30 was $6.70, which decreased from $6.89 in the prior quarter. Tangible book value per share was impacted by the merger and restructuring charges highlighted above as well as other purchase accounting adjustments recorded in connection with the acquisitions completed during the quarter. In aggregate, these items impacted tangible book value per share by approximately $0.09. The remaining decrease is attributed to the increase in market interest rates, which caused our accumulated other comprehensive income to decline by approximately $8 million relative to the linked quarter and also impacted a fair value of the loans acquired in the Hudson Valley merger. Turning to Slide 6, let's take a look at our loans and deposits on a combined basis for the Hudson Valley. Total portfolio loans were $7.2 billion at June 30 and our mix of business continues to be diverse across C&I, CRE and consumer asset classes. Approximately 40% of our total loan portfolio consists of C&I loans, which includes our specialty finance business lines. We believe these asst classes provide attractive risk adjusted returns and position us well for a raising rate environment. Yield on loans declined 44 basis points year-over-year to 4.6%. The yield on our combined loan portfolio before purchase accounting adjustment is approximately 4.5% at June 30. Our total deposits were $8.8 billion which includes $3.1 billion of deposits acquired in the Hudson Valley merger. Our deposit mix is attractive with 37% of our deposit consisting of non-interest bearing demand accounts and over 17% consisting of interest bearing demand accounts. Overall, the cost of our combined deposit base was 24 basis points at June 30. On Slide 7, we provide an organic view of our loan and deposit growth over the past 12 months. Under an organic basis, we grew loans by $860 million over the last 12 months and $481 million over the linked quarter. This represents annual growth rate of 19% and 39% respectively. On the deposit side, we grew balances by $609 million over the last 12 months and $155 million over the linked quarter. This represents annual growth rates of 12% and 11% respectively. As of June 30, 2015, our loans to deposits ratio was approximately 82%, which provides us with significant excess liquidity and a solid foundation that continue growing our core loans and earning assets. We anticipate we will continue growing loans in the mid teens range and deposits in the high single digits range as we create a more efficient balance sheet targeting loans to deposits ratio of 95% over time. On Slide 8, we provide greater detail on the areas in which we have generated loan portfolio growth. Our target asset classes of C&I and CRE loans have grown organically 27% and 20% respectively over the same period a year ago. In aggregate, they grew almost $917 million or 25% year-over-year and now represent more than 83% of our portfolio. We will continue to target this business mix going forward. Our pipeline of commercial loans is robust and we are focused on generating loans with strong credit characteristics, attractive risk adjusted returns and where we can also have a significant deposit relationship. On Slide 9, let's look at our deposit base in greater detail; organically our deposits grew 11.9% year-over-year and we have experienced balance growth between our retail, commercial and municipal deposits, which have grown at over 17% year-over-year. On a combined basis with Hudson Valley, we have significantly strengthened our deposit base and now have over 92% to our deposit consisting of core retail, commercial and municipal deposits. This provides us with a low cost funding based upon which to fund further loan growth. As we have discussed previously an important element in our strategy is to continue growing our retail and commercial transaction accounts through a team-based delivery model. On Slide 10, let's look at our fee income, the figures on the slide exclude the impact of securities gains which were $697,000 for the quarter. Total fee income was $13.2 million which was up from $12.5 million in the linked quarter and $12.3 million in the same quarter a year ago. Our fee-based specialty finance businesses are growing both organically and from acquisitions. Accounts receivable and factoring commissions and other fees grew $933,000 or 27% over the linked quarter and now represent 34% of our total fee income. Please remember this was a first full quarter of Damian operations and that the First Capital factoring assets were acquired in mid-May. So we do not yet have full earnings from these businesses. These acquisitions have been very efficient as we have been able to increase revenue with little incremental operating expenses. Adding the impact at our Green Campus partners' team has had in originating loans and deposits, we estimate that we have achieved 50% of our goal of the $0.12 to $0.15 of incremental earnings that we would obtain from our capital raise in February of 2015. We anticipate we will continue to grow volumes and reduce expenses in these businesses and we continue to evaluate opportunities to fully deploy the capital raised. Our target of $0.12 to $0.15 of accretion upon full capital deployment remains unchanged. We have consistently communicated our long-term goal of 20% or more fee income to total revenue. However, please note that with Hudson Valley – with the Hudson Valley merger, we will take a step back from our current levels. As initially, our pro forma income will be approximately [Technical Difficulty] we have included our estimate of incremental expenses associated with crossing the $10 billion in asset size threshold. This builds to an estimated annual operating expense base of approximately $220 million to $225 million, once the full cost savings from the Hudson Valley merger are realized. Including non-cash amortization items, we estimate the total non-interest expense will be approximately $230 million to $235 million. We anticipate we will achieve this run rate for the full year of 2016. Let's review asset quality on Slide 13. This quarter's performance showed continued progress and strong metrics across all credit quality indicators. Charge-offs against the allowance were $1.7 million or 13 basis points of average loans and were level relative to their prior quarter. We continue to add to our allowance for loan losses as our provision expense was $3.1 million driven mainly by the need to provide for organic loan growth. The allowance for total loans and the allowance to NPLs were 61 basis points and 64%. Please remember that these ratios do not include the impact of the fair value mark of $51 million recorded in the Hudson Valley merger and the remaining mark recorded in prior acquisitions. The increase in NPLs was mainly driven by the Hudson Valley merger as organically non-performing loans increased by just $154,000 and criticized and classified assets declined by $7 million relative to the linked quarter. We're working diligently to continue to reduce these balances. Jack?

[Jack Kopnisky:]

Thanks, Luis. Let me summarize the quarter. We continue to have strong momentum in core earnings and profitability, core earnings were up 35.9% over the same time last year and up 15.3% over the linked quarter. The core return on average assets was 113 basis points and core return on average tangible equity was 13.27%. Operating leverage continues to improve as core revenue grew 8.4% and core non-interest expenses declined by 1.2%. The efficiency ratio improved to 52.6%. Commercial loans grew $492 million or 11.7% on a linked quarter basis. This represents an annualized growth of 47.7%. Deposits grew $214.7 million during the quarter representing 11.9% growth year – over year and 11.2% growth over the linked quarter. Fee income from our accounts receivable management businesses increased by 22.8% year-over-year reflecting both organic growth and acquisition. Finally, we are excited with the opportunity to bring Hudson Valley into our company. We are in the process of systematically implementing a well-designed integration plan. On the revenue side, we will transition the approximately $600 million to $700 million in liquidity on Hudson Valley's balance sheet into high quality loans over the next six quarters. We will continue to grow the strong deposit base to create more opportunity for growth and we will increase productivity across all distribution points. On the expense side, we will meet and exceed the $34 million target for expense savings by consolidating the back office expenses and consolidating the number of financial centers. We are already ahead of our plan to reduce expenses. We are well positioned to continue to improve the profitability and drive growth. We are on track to achieve the next level of returns that we committed upon completion of integration of Hudson Valley in December 2016, we expect to be at an ROA of 1.2% or beyond return on tangible common equity of 14% or beyond and efficiency ratios in the low 50% range. So I really do want to thank everyone that has been part of this growth story that means employees, clients, shareholders, advisors -- everybody has worked so hard to drive this level of performance and the opportunity in the future continues to be great. So let's open this up for questions. But, before we do this, Matt Kelley from Piper Jaffray was kind enough to send us a number of questions and I will read and kind of answer up front. I don't want to take any – away from your Matt, but it's easier to just read the questions and respond to them. So first question is, what are the expected additional fee and expense adds from the recent specialty finance acquisitions? As Luis said, we are about 50% of the way there in putting the dollars that we raised to work. So we net-net, we have achieved about $0.06 or $0.07 run rate or about 50% of what we expected which was on an annualized basis, full run rate by the end of 2016, an incremental $0.12 to $0.15. Maybe said in a different way, we have basically covered the cost of the capital raise already in the businesses we already have acquired. Second question was what are the plans for additional acquisitions of businesses and people in this area? So we have a series of things we have looked a lot of businesses to acquire, to supplement the fee income side of what we are doing everything from additional payroll companies to factoring companies to SBA companies to – we even have looked at insurance premium finance and other kind of corporate finance types of activities. And as you have seen us be very disciplined in this process where we would be able to take the incremental fee income, frankly strip out the cost by putting them on our existing platforms. Third question is beyond the targeted Hudson Valley deal cost saves what are the plans for longer term branch and staff reductions? We are very confident and very comfortable that the cost reductions in total will exceed the $34 million that we articulated previously and we are already ahead of plan. We are ahead of plan in part because we froze positions at both organizations and we feel very strong about the opportunities out there. We will – we have articulated that we will consolidate at least 10 branches, so we will take the branch network from 60 to 50 and then we will continuously look at consolidating more – the branches on both sides were frankly less retail branches more commercial branches that are supported by the commercial banking teams. Any update on deposit run-off from a commercial team that departed? We have 27 kind of teams that were very comfortable with. As you have seen, we have terrific deposit flows and asset flows across the board. That one particular team that you are referring to; we have actually increased deposits over that period of time by adding new teams but – also a new team. I will also tell you, we have a pipeline – a very strong pipeline of anywhere from 6 to 10 teams that we are evaluating to add over a period of time. So there are many teams and many folks that want to add – that want to join this model, at the right period of time we would add teams and frankly supplement some of the existing teams to increase productivity of each of the teams. But, we are very comfortable with the teams that we have and the performance levels. And then the last question is, the company still on track to achieve the 120 basis point ROA and 14% ROTCE targets outlined with the Hudson Valley deal and as I mentioned in the closing statement absolutely we are very comfortable – even in spite of a very tough interest rate environment we are – we have found a way over the last three or four years to kind of re-invent the company constantly to get the level of performance metrics out of this. So thank you, Matt, for the questions. And if there are any follow-up please go on. But, let's now open it up to questions that anyone has? So operator, if you could open up the questions please.

[Operator:]

All right. [Operator Instructions] And our first question will come from the line of Casey Haire with Jefferies.

[Casey Haire:]

Good morning, guys.

[Jack Kopnisky:]

Hi, Casey.

[Casey Haire:]

Just wanted to ask about any updated commentary on the NIM guide, are you guys are on track to your 355 to 365 on the year that excluded HVB, if I remember correctly obviously that's now on board lots of moving parts, just some updated thoughts there?

[Luis Massiani:]

So the guidance from a – Casey from a – what I will call a core basis excluding any purchase accounting adjustments from Hudson Valley merger on a tax equivalent basis, they are going to move a little bit below the 355 to 365 that we guided to in the past and that can be closer to about 345 to 350. But, then on top of that you are going to have some pretty significant accretion from that $51 million fair value mark that we mentioned on the phone. So all in first couple of quarters after the transaction we are anticipating that's going to be about 375 to 380 basis points. But you obviously have to – there is – when you talk about accretable yield, there is always a little bit of a question mark right regarding performance of the portfolio and so forth. So it could move a little bit from those numbers but we do anticipate that it's going to be about 15 to 20 basis points higher than where the core number has been today.

[Casey Haire:]

Okay, great. That's helpful. And just to understand like the loan growth guide is -- I mean the loan growth this past quarter was obviously very strong and 40% annualized and the guide going forward is more reasonable at a mid teens pace. I'm just wondering that – just some color on the growth this past quarter, was it in anticipation of getting sort of head start on the liquidity provided by Hudson Valley, which actually came in a little bit bigger than initially – when you initially announced the transaction $3.1 billion versus $2.8 billion. Were you guys just trying to get a head start and sort of really maybe push it a little bit more on the loan growth front, which is why loan pricing kind of came in a little bit hedged purchase accounting?

[Jack Kopnisky:]

Absolutely. You hit on the – you hit the nail on the head. So well, we – one, our teams are very productive and as you saw the volumes came in across many asset classes. So one of the advantages of this structure is, our balance sheet is very diverse and there is certain opportunities that are afforded to us in the market that we take advantage of. But, that's exactly what we are doing. We are trying to get a head of the volume and put the liquidity to work sooner as we found high-quality loans more or less transition very simply cash and securities that are yielding 1% to 1.5% and the loans are yielding kind of 4% to 4.5%. So that's exactly what we were doing.

[Casey Haire:]

Okay. So the loan pricing, I would expect would be a little bit more stable going forward and the use of borrowings obviously will not be – I mean average basis borrowings were up, we are not going to see that obviously, given the remix?

[Jack Kopnisky:]

Correct.

[Luis Massiani:]

That's right.

[Casey Haire:]

Okay, great. And just following up on the $0.12 to $0.15, so if you guys do – you are half a way there, you basically covered the cost of the raise in February. So do you need more deals to hit that $0.12 to $0.15 or can you grow into it, can you just develop the revenues at your existing acquired subsidiaries?

[Jack Kopnisky:]

No. That's – we are going to do more deals. So we would need some more transactions that we are doing. So the yield that we are getting out of these acquisitions will get us a long way there and it may tick up $0.01 or $0.02 just higher levels of productivity from the existing. But in reality, we are looking for some additional acquisitions to put the equity to work.

[Casey Haire:]

Okay. Thanks for taking the questions.

[Jack Kopnisky:]

Sure. Thank you.

[Operator:]

Your next question will come from the line of David Darst with Guggenheim Securities.

[David Darst:]

Hey, good morning.

[Jack Kopnisky:]

Hi, David.

[Luis Massiani:]

Hi, David.

[David Darst:]

So it relates to our fee income, see, you have got a little bit more build for the full quarter of the factoring acquisition, then should we expect a seasonal surge again or is that the expectation for the third quarter?

[Luis Massiani:]

There will be David. If you look at – you look at the progression of non-interest income in specifically of that line item in 2014, the strongest quarters for the factoring and payroll businesses or the third and fourth quarter, more so the fourth, but constructing a lot more volume towards the latter part of the third quarter. So you are going to see a similar bump up on a relative basis between the first and the second quarter versus third. So we do anticipate a nice increase in volume there.

[David Darst:]

Okay. And then you had some BOLI income this quarter, was that a one-time event or is that a new run rate from a purchase or the acquisition?

[Luis Massiani:]

New run rate from a purchase.

[David Darst:]

Okay. And then just on expenses and looking at what you are taking out, how should we think about inflation, new teams and kind of what else come into the run rate or is that in your guidance for full a 230 to 235?

[Luis Massiani:]

That's in the guidance.

[Jack Kopnisky:]

That's in the guidance. Yes.

[David Darst:]

Okay. Got it. Okay. And then just as it relates to your commercial real estate versus commercial growth going forward, you are expecting both of those to be at mid-teen growth rates?

[Jack Kopnisky:]

Yes. Obviously, as much as we can push higher yielding loans the better in those higher yielding loans generally are more in the C&I category than the real estate category. So we are consciously pushing the higher yielding asset classes on the C&I side. And we are being hopefully smart about the real estate investments of that yields.

[David Darst:]

Okay. And then just – if you think about your tangible equity ratio, is there a level that you are comfortable levering that down to?

[Luis Massiani:]

Yes. So there is a little bit of room to go before – below that 804 that we posted for the quarter end. So we can't go – we had been operating at about seven and three quarters, 775 to 880. And we are comfortable moving back down to those types of levels now. Remember that a significant portion of the story here isn't necessarily balance sheet growth, it's the rebalance – it's the continued rebalancing of the earning asset side of the equation. So when you think about securities plus cash that we now have combined with Hudson Valley or close to $3 billion in assets. That number is $2.7 billion – I'm sorry, $2.7 billion to $3 billion that number is going to come down and that's going to be redeployed in the loans. So long way of saying that mid-teens loan growth doesn't necessarily reflecting dollar for dollar growth and assets because we are going to be reducing the size of the securities and the cashes we go along.

[David Darst:]

Okay. But if you are growing deposits at say $850 million and to $900 million a year, is that going to be the level to think about asset growth or will you be at least paying down some borrowings as well?

[Luis Massiani:]

We will be paying down borrowings as well.

[David Darst:]

Okay. Got it. Thank you.

[Luis Massiani:]

Sure.

[Operator:]

Your next question will come from the line of Matthew Kelley with Piper Jaffray.

[Matt Kelley:]

Yes. Hi, guys. Maybe just to help us out a little bit what were the balances of Damian and Green Campus, First Capital loans at the end of the quarter just to give us a sense on loan balances and how that might have impacted some of the other growth trends you saw on the quarter?

[Luis Massiani:]

So the balances in Damian and in First Capital, remember those are more volume based businesses. So there is not – there is – that's not a significant driver of loan growth in any way. The Green Campus partners' guys as we have talked in the past, they are going to have the same types of target that our folks have that our other teams have which are maturity $250 million to $300 million in total balances and they are well on track to achieving those targets. So they were from a loan perspective, they are not – none of those three are what I would call you necessarily a significant contributor to the loan growth that we experienced during the quarter. The two of those businesses are more volume driven. The Green Campus guys are on track. But, they don't – they were not the main driver of growth during the quarter either.

[Matt Kelley:]

Okay.

[Jack Kopnisky:]

Maybe they will give – be specific on a range, so these are in $50 million to $100 million range.

[Luis Massiani:]

On aggregate of the three.

[Jack Kopnisky:]

On aggregate of the three.

[Luis Massiani:]

But, remember that Damian had already been – so Damian had already been acquired in the first quarter. So the Damian – so Damian essentially represent – those are the total balances that are outstanding for those businesses today. But, Damian was already baked into the 331 numbers because we closed that transaction in February. So the loan growth that was generated by those areas in Green Campus that already started generating loans in the 331 quarter as well. So the drivers of growth were not those three – loan growth were not those three businesses.

[Matt Kelley:]

Okay. Got you. And what was the average yield on your CRE originations during the quarter?

[Luis Massiani:]

It depends on the product, multi-family versus traditional CRE. On the multi-family side in the five-year – on the five-year fixed rate area, three in a quarter is what we are seeing the marketplace today. As you move outside of the city, you – you get a 25 to 50 basis point pick up. On new loan yields, on the commercial real estate side in the 5 to 10 year fixed rate on average just around 4%, 375 to 4%. That's what the market bearing in the New York Metro area.

[Matt Kelley:]

Got it. And then there has been a lot of moving parts on tax rates for banks on the metro New York City market, which will you be using for tax rate with you guys going forward?

[Luis Massiani:]

For the full year 2015, 32.5% to 33%, for 2016 that is going to increase to about 35% to 37%. But, I would – for -- where we stand today, it's going to be closer to – split the middle between those two, 36% is a good number.

[Matt Kelley:]

Okay. Got it. And will it be any effort to put into place tax-advantaged investments or the strategies to reduce that's a pretty big ramp?

[Luis Massiani:]

We are – we are working on it. Unfortunately for us more so than the – more so than the changes in the tax code per se the issue that we average that we breach the $8 billion asset size threshold which brings with a significant impacts on the refracted of the new tax codes and loss of REIT tax advantages and so forth. So the increases isn't just driven by the tax changes actually driven the fact that we have grown about $8 billion in assets. And we are actively going to be looking at extreme lining things to be able to look at tax-advantaged earning assets. So yes, the short answer to that is yes.

[Matt Kelley:]

Got it. Then one last question. Over time, what's the lowest we could see the securities to asset ratio, you mentioned it's going to drift down from where we are right now, which I think was in the mid-20s, you had mentioned low 20s, excuse me, but, how low could you bring that over time?

[Jack Kopnisky:]

It's at 23% today where we would target 18% to 20% over the long-term.

[Matt Kelley:]

Okay. All right. Thank you.

[Luis Massiani:]

Sure.

[Operator:]

[Operator Instructions]

[Jack Kopnisky:]

Well, again, thanks for – yes, go ahead.

[Operator:]

I'm sorry. We have a follow-up question from the line of Casey Haire with Jefferies.

[Jack Kopnisky:]

Sure.

[Casey Haire:]

Thanks guys. Sorry, just one more – just to clarify on the expenses, so the 220 to 225 that you guys are targeting on a long-term basis. I'm assuming that's once you get obviously all the cost saves out, which if memory serves was by the end of 2016. So that's a good run rate for 2017?

[Luis Massiani:]

That's a run rate for 2016 for the full year.

[Casey Haire:]

For the full year. And that bakes mid-teens loan growth and high single digit deposit growth?

[Luis Massiani:]

That's right.

[Jack Kopnisky:]

Correct.

[Casey Haire:]

Okay. And then on a GAAP basis, we are going to see a meaningful ramp up in the non-cash amortization expense if that's – I mean it's currently running at around $4 million per annum and it looks like it's going to be $10 million to $15 million drag?

[Luis Massiani:]

That's right. So the CDI – the CDI generated on the Hudson Valley transaction is going to drive the vast majority of that increase.

[Casey Haire:]

Oh, okay, got it. So it's core deposit not the non-compete, got you.

[Luis Massiani:]

That's all non-cash. That's all non-cash amortization, item CDI plus non-competes and so forth. It's all non-cash amortization.

[Casey Haire:]

Understood. Thanks for cleaning it up.

[Luis Massiani:]

Sure.

[Operator:]

And you have another question that will come from the line of Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Luis Massiani:]

Hi.

[Collyn Gilbert:]

Luis just to go back to the comment on the core NIM coming in a little bit below where you had anticipated before. What is driving that?

[Luis Massiani:]

It was two things. So we have – so one of the things that we did during the quarter is that we increased our security balances on a relative basis in anticipation of closing the merger with – and being able to reposition there, security book into our security book. So even though that's originating greater net interest income it obviously on a net interest margin basis has the negative impact because it's lower than the weighted average earning asset yield. So that was one thing. The second part of that is that the – we continue to be in an environment where the new loan origination in most of the asset classes that we are in is below the weighted average earning asset – weighted average loan yield. So you are still seeing some compression on that front. That's one of the reasons that's important for us and as we move into the third and fourth quarter. We start to see volumes pick up in the specific areas where we have loans that are actually accretive to that number. So we are still in an environment where your loan yields are compressing, but we do have specific business lines that will help us offset that. So we feel pretty good about that that combined guidance with Hudson Valley.

[Collyn Gilbert:]

Okay, because if I heard you guys correctly, did you say that you thought loan yields or loan pricing was more stable or the outlook for that would be more stable?

[Luis Massiani:]

I think its stable it's just that it's low.

[Collyn Gilbert:]

Okay. Stable from a competitive standpoint, but yet still just low relative to what's rolling off?

[Luis Massiani:]

Yes, exactly. So that's the reason that you see margin is compressing, it's kind of compressing across the industry is that, yes, we are all still stuck in that, right.

[Collyn Gilbert:]

Okay. And just the $2.7 billion of liquidity coming on and I probably could do the math figure this on the timeline. But, how could -- do you anticipate the sort of say that mix shift or see that absorption, if that would put any?

[Luis Massiani:]

It's not a $2.7 billion of liquidity. So the entirety – so the entirety of the balance sheet that we inherited had $3.1 billion or the balance sheet that we acquired $3.1 billion in deposits and about $1.8 billion in loans. So they bring about $1.2 billion what I will call cash and securities to the table they won. If you – we continue to grow loans on average at $250 million per quarter which is what we have been averaging for the past four, five quarters. We would use up that liquidity over the course of the next four to five quarters. So by the end of 2016, we would expect to be back to that 92% to 95% loans to deposits ratio that we have been operating at on a standalone basis for the past year.

[Collyn Gilbert:]

Okay. Great. That's super helpful. And then just one last question, how you guys thinking about mortgage banking, I know it dropped this quarter, but just sort of your thoughts on that that business line going forward?

[Jack Kopnisky:]

That's a business line that frankly I'm not a huge lover of mortgage banking as time goes on. So it's a supplemental business that allows us to take when rates are going down, higher volumes and rates are going up, lower volumes. So a lot of our mortgage banking group does around $800 million to $900 million a year in volume. They help us create wonderful relationships with clients that are much more broad-based. But from a mortgage banking standpoint we have not put a lot of emphasis on that category, frankly, we put more emphasis on growing the accounts receivable management business – the cash management business –

[Luis Massiani:]

Or our funding business.

[Jack Kopnisky:]

And other types of fee incomes like swap fee incomes, loan fee income. The other thing that the mortgage business does for us is that, it helps us – help support the warehouse mortgage business, which we think is a very strong earning asset category and as a lot of upside opportunities depending on the level of lines so we have on the warehouse side with the breadth of the clients.

[Collyn Gilbert:]

Okay. So should we – is that taking all that into consideration, I guess, what did you have for – like $9.4 million or so in 2014 and $6 million plus or $5 million whatever – the first half of the year, is that – we are looking to see that line drop do you think as we go forward? Or I’m sure you will hold the line given just some of the other components of it that you are talking about Jack?

[Luis Massiani:]

So remember that – remember that the first quarter this year had in it mortgage banking and it did have in it the some incremental revenues from the loan sale that we did that and that compressed press. Yes, that compressed greater loan sale activity that would have been normal for the first quarter of the year. The numbers obviously in mortgage banking is always seasonal, right, so more houses get bought and sold in the second and third quarter than do in the first and the fourth. So the way to think [Technical Difficulty] about that is the numbers that you saw for the second quarter this year are much closer to the run rate of what the – what you will see in the latter part of the year. So are you going to do better than the $9.4 million from last year? We will. But, we are not going to annualize the – what I will call the 6-month run rate and use that for a year – use for a year. So we will do better than $9.5 million, but it's not going to be just first half of the year annualized.

[Collyn Gilbert:]

Perfect. Okay. That's great. Thank you, guys.

[Jack Kopnisky:]

Sure.

[Luis Massiani:]

Thank you.

[Operator:]

And at this time, there are no further questions. I will turn the conference call back over to Mr. Kopnisky for a closing remark.

[Jack Kopnisky:]

Yes. Just thanks again for joining us and look forward to continuing to grow the company. Thank you very much.

[Operator:]

And once again, we would like to thank you for your participation on today's Sterling Bancorp 2015 second quarter conference call. You may now disconnect.