Sterling Bancorp
Q3 2015 Earnings Call Transcript

Published: 27 Oct 2015

[Operator:]

Welcome to the Sterling Bancorp Third Quarter 2015 Conference Call. I will now turn the call over to Mr. Kopnisky, Chief Executive Officer. Please go ahead, sir.

[Jack Kopnisky:]

Thank you. Good morning, everyone, and thanks for joining us to discuss our results for the third quarter ended September 30, 2015. Joining me on the call is Luis Massiani, our Chief Financial Officer. Over the past four years we have been very deliberant in building a high performing business oriented commercial bank serving the Metropolitan New York City market. We have been focussed on building the company that provides strong returns to our shareholders, great service and value to our clients and a high energy results oriented environment for our employees. In the quarter, we have demonstrated the achievement of several meaningful financial objectives. First, excluding the impact of securities gains, the termination of our defined benefit pension plan and other charges co-earnings were $32 million and co-diluted earnings per share were $0.25. This represents growth of 76% and 14% respectively over the same period a year ago. Secondly, our core return on average tangible assets was 121 basis points and core return on average tangible equity was 14.3%. We have been targeting 120 basis points on assets and 14% on equity to be achieved by the end of our consolidation of Hudson Valley Bank targeted at December 31, 2016. Third, our core efficiency ratio was 49% for the quarter. We continued to focus on the creation of positive operating leverage in our model. We have targeted efficiency levels to be at 50% or below. Fourth, we have been strategic in our growth and management of our balance sheet, targeted commercial loan growth for the quarter was $290 million which represents annualized growth of 19.1% where [Indiscernible] the balance sheet to add targeted high quality loans or leveraging the strong low cost deposit base. Lastly, we are working to continue to diversify the revenue mix in the company as we grow accounts receivable management, cash management and our sources of commercial fee income. Turning to the integration of Hudson Valley and additional investments we have made for future growth. We are ahead of schedule in the integration of Hudson Valley and we continue to drive further efficiencies through ongoing facilities consolidation and rationalizing expenses. We have already achieved a run rate decline of $29 million in operating expenses relative to the fourth quarter of 2014. We are leveraging the terrific deposit base we acquired to support loan growth we have enjoyed. During the quarter we added two new teams, one focussed on healthcare and a second will provide syndication services. We will continue to invest in high performing targeted commercial teams and exit non-strategic lower performing functions. Of course our opportunity is to continue to meet and exceed the financial metrics we established on a consistent basis. By executing effectively against our objectives where confidence is the model we have developed and will provide strong shareholder value. 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 September 30, 2015 our total assets were $11.6 billion, which represent a growth of approximately $4.3 billion over the past 12 months and includes $3.5 billion in total assets acquired in the Hudson Valley transaction. At September 30, our total loans increased to $7.5 billion and our total deposits were $8.8 billion. We continue to invest in hiring new teams and expanding our loan originations and deposit gathering platforms. We anticipate we will continue to generate significant growth in loans and deposits going forward. Compared to the same quarter a year ago, net interest income has increased approximately $34 million to $93 million. We continue to work on deploying the excess liquidity that we acquired in the Hudson Valley merger. As of September 30, our total loans to deposit ratio was 86% and our securities comprised 22% of total assets. As we continue to deploy this excess liquidity we will also rebalance our earning assets to have a higher proportion of loans versus securities. On the bottom of the page, we detail our key performance metrics, which show continued strong operating momentum. Net interest margin was 3.8%, which represented 1 basis points decline from a year ago. Included in interest income was $5.8 million or the accretion of the credit mark on prior acquisitions, which compares to $2 million of accretion in the same quarter a year ago. Excluding the impact of the purchase accounting mark accretion net interest margin was 353 basis points in the third quarter. We anticipate that our net interest margin will benefit going forward as we rebalance our earning assets to high quality loans and continue to invest in our speciality lending businesses. Our core operating ratios have continued to improve year-over-year. Our core return on average tangible assets was 1.2% and core return on average tangible equity was 14.3%. 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 earnings were $24.2 million or $0.19 for the third quarter and were impacted mainly the termination of our defined benefit pension plans. We will review the impact of the termination on the next slide. This compares to earnings to $16.3 million and $0.19 for the same quarter a year ago. Our core earnings were $3 million and diluted earnings per share were $0.25 compared to $18.2 million or $0.22 a year earlier. Core net income increased approximately 76% and core diluted EPS increased 13.6% over the same quarter a year ago. Our tangible book value per share as of September 30, 2015 was $6.94 which increased from $6.70 in the prior quarter. Turning to Slide 6, let’s go to the termination of the defined benefit pension plans. Pension accounting is many moving pieces so we will summarize the impact that the termination had on our income, tangible book value and tangible book value per share. As we announced on previous calls, we made a decision to terminate the legacy Sterling and legacy Provident pension plans in the fourth quarter of 2013. Over the last two years we have been working on obtaining the required regulatory approvals to terminate the plans which we received in July of 2015. As you will recall, we had already retired a portion of the pension plan liabilities related to plan retirees in prior period, but this now represents a full termination of all pension plan obligations. This will not have a major impact on run rate operating expenses as our pension plans had already been frozen and participants had seized the total benefits. However, the full termination will eliminate volatility in our tangible book value and will simplify our compensation plan structure. Moving onto the numbers, the impact of the balance sheet includes adjusted -- to reflect fair value of the pension plan assets on the date of termination and expenses incurred with the actual termination of the plan. This reduced the fair value of pension asset which are recorded in other assets by $4.1 million. Pension accounting rules require that unrealized pension expense be recorded as accumulated other comprehensive losses which reduces stockholders equity. At September 30, 2015 the balance of unrecognized pension expense that had been recorded as a cumulative other comprehensive loss was $5.4 million. So the termination eliminates this balance and increases shareholders equity by the same amount. This also results in the elimination of 4 million of deferred taxes associated with the pension plan AOCI. From an income statement perspective, we end up recording a pre-tax charge of $13.4 million which includes the following items. The reduction in the fair value of the pension plan assets of 4.1 million and the elimination of the pre-tax amount of the AOCI which was $9.3 million. The result of the reduction of $9 million in our GAAP net income, however given the other balance sheet adjustments that we detailed above including the reversal of the AOCI loss that had previously been recorded the net impact on stockholders’ equity was $3.7 million or just $0.03 per share. Turning to slide 7, let’s take a look at our loans. We experienced strong growth across all of our asset classes. Total portfolio loans were $7.5 billion which represented annualized growth rate of 15% over the prior quarters. 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, including our specialty finance business lines. We believe these asset classes provide attractive risk adjusted returns and position us well for a raising rate environment. Yield on loans declined 8 basis points year-over-year to 4.75%. Without purchase accounting accretion, yield on loans was approximately 4.5% for the three months ended September 30, 2015. Turning to our deposits on the next page, total deposits were $8.8 billion at September 30, 2015. Our deposit mix is attractive with 36% of our deposits consisting of non-interest bearing demand accounts and over 18% consisting of interest bearing demand accounts. Over 92% of our deposits were core deposits and our cost of deposits was 24 basis points. Our loans for deposits ratio was 86%. We intend to continue using our excess deposits upon high quality loan growth. We anticipate that long term we will continue to grow loans in the mid teens range and deposits in the high single digits range as we create a more efficient balance sheet targeting a loans for deposits ratio of approximately 95% overtime. On slide 9, let’s look at our fee income, the figures on the slide exclude the impact of securities gains which were $2.7 million for the quarter. As we realized gains in connection with the repositioning of our securities portfolio post merger with Hudson Valley. Total fee income was $16.1 million which was up from $13.2 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 through acquisitions. Accounts receivable and factoring commissions and other fees grew $947,000 or 25% year-over-year and grew $326,000 over the linked quarter. The acquisition of Damian services cooperation and FCC factoring portfolio are performing as we had anticipated. In aggregate these acquisitions are on pace to generate approximately $12 million in total revenue including interest income and fee income over the next 12 months. These acquisitions have been efficient as we have been able to increase revenue with limited incremental operating expense. The Public Finance sector team has also had success originating loans and deposits. As of September 30, 2015 their total loan balances were over $100 million with a robust and diversified line of new opportunities. We anticipate this team will also become a fee income contributor going forward. We have consistently communicated our long term goal 20% or more fee income to total revenue. Due to Hudson Valley business mix we took a step back from previous levels and fee income was 14.7% for the quarter. We will build from this point. On slide 10, you can see the steady progress we have made over the past 12 months in driving operational efficiencies. We achieved a 49% core efficiency ratio for the third quarter of 2015 which represents 570 basis points of improvement over the year ago period. On the right side of the page you can see the improvement we have made on total operating expenses and how this has begun to progress towards merger with HVV. This is a result of the HV merger and an ongoing rationalization of expenses and facilities consolidation. In Q4, 2014 which was the last quarter that was unaffected by the merger, both companies had total operating expenses of $247 million excluding the impact of A.R. Schmeidler which was Hudson Valley’s investment management subsidiary that was sold in January 2015. For the quarter, our total core operating expenses were $54.5 million which represent an annualized expense run rate of $218 million. This represents a decrease in total combined operating expenses of $29 million between the two periods. As we have announced previously, we continue to invest in personal systems and risk management as we have profit and billion asset sized thresholds which will increase operating expenses going forward. However, we have made significant progress on delivering the cost savings we had previously identified and we are still in process of executing several of these expense initiatives. We are progressing nicely towards the overall operating expense targets we have announced upon full phase in of the cost savings. Let's review asset quality on Slide 11. This quarter's performance shows continued progress and strong metrics across all our key credit quality indicators. Charge-offs against the allowance were $1.7 million or 9 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 $5 million driven mainly by the need to provide for organic loan growth and loans from prior mergers that are now part of our allowance. The allowance for total loans and the allowance to NPLs were 63 basis points and 70%. Please remember that these ratios do not include the impact of the remaining fair value mark of $48.5 million recorded in previous acquisitions. Our special mention loans increased by approximately $25 million quarter-over-quarter, mainly due to one credit relationship that has continued to perform but is demonstrating signs of stress. We have continued to work through our substandard and doubtful loans which decreased by $5 million relative to the linked quarter. Jack.

[Jack Kopnisky:]

Thanks, Luis. Let me summarize the quarter for everybody. So we continue to have strong momentum in core earnings and profitability. Core earnings were up 76% over the same time last year and up 50% over the linked quarter. The core return on average assets was 121 basis points and core return on average tangible equity was 14.3%. Operating inefficiency ratio improved 570 basis points from last year to 49%. Commercial loans grew $290 million. This represents an annualized growth of 19.1% and fee income from our accounts receivable management businesses increased by 24.8% year-over-year reflecting both organic growth and acquisition. Finally we were pleased with our integration of Hudson Valley to date. We are in the process of systematically executing a well designed integration plan. On the revenue side, we will continue to transition the approximate in $600 million to $700 million in liquidity on our balance sheet into loans over the next five quarters. The former Hudson Valley teams are off to a terrific start in bringing the combined bank resources to our clients. We will continue to grow the strong deposit base to create more opportunities 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 plant to reduce expenses. Overall we are well positioned to continue to improve profitability and drive growth. Thanks to everyone that is been part of this growth story, and please finance, shareholders and advisors. Now let’s open up the line for questions, operator?

[Operator:]

Certainly. [Operator Instructions] Your first question comes from the line of Casey Haire with Jefferies.

[Casey Haire:]

I wanted to start out on the expenses, so on slide 10, the 218 run rate, by my math that puts you guys at over 80% of your cost save goal. I was wondering, I mean, and it sounds like you guys still have a number of things that you're working on, is there an expectation that you guys do better than that 45% target and it’s so how much?

[Luis Massiani:]

Yeah, we do expect so thanks Casey. We do expect to do better. As we get – we get into this each of these opportunities have presented themselves and we target a certain number and then as we get into the actual operating – operating entity and consolidating the company we find generally more operating efficiencies to be gained. So we do expect to exceed the $34 million and we expect it to be in kind of the 10% plus in excess range.

[Casey Haire:]

Got you. And then just reconciling, so you have a bullet on that slide, long-term, non-interest expense target of 230 to 235, and if I run rate including the amortization of intangibles, if I run rate that – this quarter, I am at 232, so you're basically in your comfort zone, is that what you're trying to say or?

[Luis Massiani:]

We are Casey, we are in the comfort zone, but as we've talked about a lot in the past, going over $10 billion does bring with it significant investments as well. So even though there is still noise of potential amount of savings and expense initiatives that we have in connection with both merger, as well as just organic initiatives that we have underway, we will also spend you know, we do have to invest so in building out infrastructure, risk management, the personal and systems that we're talking about as we went through the slide. So we're close to the numbers that we provided before, the 230 to 235, is the same information and target that we had announced in the prior quarter’s earnings call and feel good about tracking to that bogie and doing a little bit better than what we had anticipated.

[Casey Haire:]

Okay. Great. And just switching to deposits, you guys are coming off, the deposits were down slightly on a quarter, come off a very strong core operating performance in the second quarter. Just wondering if you can was there good underlying core organic growth that was offset by maybe Hudson Valley attrition or decay from the team that was lost earlier in the year? Just some color on the push-pull on deposit growth.

[Jack Kopnisky:]

Yes. So the deposit growth has been very well managed. So we really haven’t experienced any type of attrition in the things that you mentioned. It really has been really focused on managing the deposit base. So what we're trying to balance in to give you more color on this, we're trying to get and enable the commercial teams to drive more commercial deposits that are core as we look at consolidating some of the retail branches and deposits. So, that's the magic to this is, one, we're trying to leverage the overall balance sheet by creating a higher loans to deposit ratio, and two, we're trying to manage the positive base to gain more core commercial deposits and by the way about 75% of our total deposit base are more institutional, 25% as a retail. We want to continue to manage that mix higher so that it becomes the higher percentage of institutional than retail as time goes on.

[Casey Haire:]

Okay. That makes sense. Just last one from me on the special mentioned optic. It sounds like this was nothing systemic. I was just wondering what kind of sector or exposure that credit was and if there was any charge off taken on that credit this quarter?

[Luis Massiani:]

No. There wasn't any charge-offs taken on this. So, we've been managing. So this is category of Medallions, so we have about $65 million worth of Medallion exposure to four clients. There are businesses that – businesses are individuals that owned Medallions that sublet them the ultimate user. So we don't have exposure directly to the actual users. These are businesses that frankly in many cases have other cash flows. The loaned values as it grew when we got into this we're around 55% if I remember correctly. The loaned values today are kind of in the 80% range. This was one credit that is current but as seen some decline in their financial metrics.

[Casey Haire:]

Okay. So, the corporate-owned New York City Medallion?

[Jack Kopnisky:]

Corporate-owned New York City Medallion. That's right.

[Casey Haire:]

Great. Thank you very much.

[Luis Massiani:]

Sure. Thank you.

[Operator:]

Your next question comes from David Darst with Guggenheim Securities.

[David Darst:]

Hi. Good morning.

[Luis Massiani:]

Hi, David.

[Jack Kopnisky:]

Hi, David.

[David Darst:]

Hi. So, Jack, could you run through the $130 million or so of C&I growth, and maybe talk about what's in their specialty categories versus the new C&I teams in the New York Market?

[Jack Kopnisky:]

Yes. So, it really has been fairly balance across all the sectors. One of the great things about this operating model is we've tried purposely from the very diverse in the asset categories. So, we've actually had pretty strong growth across all of those sectors in C&I. So, it starts with traditional middle market C&I and that's frankly we've invested more and more into that category. But then it includes everything from -- there are some warehouse lending to some moderate on the asset on the asset base to factoring and payroll finance come into that as well as equipment finance. But generally for this quarter it has been traditional middle markets C&I, New York City based C&I balances.

[David Darst:]

Okay, great. And then the commercial real estate, is that primarily brought through these C&I teams or are you doing any multifamily in more of a centralized manner?

[Jack Kopnisky:]

Yes. So, what's little bit unique in our model is each of the teams have the ability to do commercial real estate in its non-owner occupied and owner-occupied CRE along with multifamily. So, as you would imagine some of the teams more concentrate on CRE and certain types of CRE than others that create C&I. So, this comes again from Metropolitan New York City CRE generally owner or non-owner occupied, some degree of multifamily. I would tell you one of the things we've modified, are looking at things like cap rates on and appraised value. So, we have been concerned about cap rates where they've gone into obviously valuations that come out of this, so we have picked up our credit criteria around looking at higher quality CRE loans with in essence is lower loan to value ratios.

[Luis Massiani:]

So, David, it's not broker-originated multifamily, if that's a question. Its relationship driven CRE multifamily originated through teams, not through brokers.

[Jack Kopnisky:]

Yes. Good point, if that where we you were going.

[David Darst:]

Indirectly, yes, so, the production around $300 million, is that the right way to think about is your target run rate for growth over the next couple of quarters?

[Luis Massiani:]

That is. We've been very mindful – what we've been to estimate and to provide clarity on is, we do have this billions, and billions in a quarter of excess liquidity that we've acquired in Hudson Valley merger. And so, since we announced that transaction in the last couple of quarters we have been creating $250 million to $300 million of additional loan growth capacity. And so therefore you annualize that to December 2016, that's how you get to the loans to deposits ratio targets that we put out there closer to 92% to 95%. So yes, that's the metric to use. So we're not as focused on the growth rate percentage itself. It just having -- continuing to maintain that absolute dollar amount of growth that allows us to get to those types of loans to deposit ratios.

[David Darst:]

Okay, great. Thanks a lot.

[Operator:]

Next question comes from the line of Matthew Kelley with Piper Jaffray.

[Matthew Kelley:]

Hi, guys.

[Jack Kopnisky:]

Hi, Matt.

[Matthew Kelley:]

Just a question on the expenses, is there been any change in your outlook of the cost that's going over $10 billion compared to what we've been talking about for last couple of months?

[Luis Massiani:]

No. The cost is about what we estimated and we feel comfortable at that level.

[Matthew Kelley:]

Okay. And then, can you help us just on the ramp on fee income from the specialty lending segments and maybe talk a little bit more about where you are in kind of the accretion for those business units that you brought on line and acquired relative to the capital rates, maybe little bit just an update there of how that's proceeding?

[Luis Massiani:]

Yes. We're still pretty much in the same place we were I think in the last call. So it cost us $0.07 to $0.08 relative to raise the money. We are comfortable that we are probably $0.08 to $0.09, $0.10 in that range kind of $0.08 to $0.10 relative to what we feel like we've covered and started to earn back from this. And we still have lots of opportunity relative to investing in other businesses. We've looked at a kind of fee income opportunities and frankly have passed on vast majority of these because the prices that are being asked frankly and the returns that we expect are matching with our criteria. So, we're going to be appropriately cautious on this. But we feel comfortable that we will see opportunities to get us to the rate, the run rate in that kind of $0.12 to $0.15 run rate that we've talked about at the beginning of the year.

[Matthew Kelley:]

Okay. Got it. And then on the syndication banking team that you brought on board during the quarter more recently. Talk about what we should expect there for fee income and then loans that you're retain as part of that process?

[Jack Kopnisky:]

Yes. So one of the great things that we've been able to create again, this diversified balance sheet has enabled us to look at different classes and categories of loans, and we are at the point now where we have the opportunity to take some of them off the balance sheet and sell them. So, for example, the Municipal Finance Group that we brought in about six months ago has done a great job of originating credits. We are going to keep some of them on the balance sheet and we are going to securitize some of them. So, frankly, we haven't put out an exact dollar amount relative what that fee income is out externally, but I think, again, what we're trying to do is balance the balance sheet growth and the productivity of our teams which we feel very good with, with how to create sources of fee income to improve that mix of revenue and get us closer to that 20% target that we've had on this. So, we believe that securitization business will enable us to do that in a much more professional way than we were doing it previously.

[Matthew Kelley:]

Okay. And then just last question going back to the margin, if we're in a flat interest rate environment do you think that the remixing of the balance sheet earning asset-based will be enough to kind of get the margin steady or up a little bit. What's your outlook for the margin in a flat rate environment?

[Luis Massiani:]

The flat rate environment, Matt, it's going to be within the range of guidance that we provided before, that 340 to 350. We do believe that there – so there's obviously continue to be margin pressure in specific parts of the portfolios, specifically on the CRE side in the longer dated fixed-rate assets. The good thing about specialty business lines, the traditional C&I business is that the vast majority of the pain from the perspective margin compression has already been felt because all of those assets price off of a 30, 60, 90 days and they're already at kind of there, what I would call their low rate benchmark indices. So there is some compression still, but as you rebalance and continue to focus on getting that loans to deposits ratio up and remix that securities to -- proposition securities to total asset and you get that low and increased number of loans, yes, the 340 to 350 guidance that we provided for core, then we still feel pretty good about it.

[Matthew Kelley:]

Okay, great. Thank you.

[Operator:]

[Operator Instructions] Next question is from Collyn Gilbert with KBW.

[Collyn Gilbert:]

Thanks. Good morning, guys.

[Luis Massiani:]

Good morning.

[Collyn Gilbert:]

Just a follow-up on a couple of things that have already been discussed, let me just touch on the very last one in terms of the NIM. I think Luis you has said that the loan yield this quarter accretion was 450. Is that right?

[Luis Massiani:]

That's right.

[Collyn Gilbert:]

Okay. And how does that compared to what you're seeing on just a blended origination yield for new loans?

[Luis Massiani:]

Closer to 3.9% to 4%, it depends obviously on a quarterly basis that will change depending on what's the mix of business is, but we had a little bit bigger commercial real estate growth on a proportional basis this year than what we've had in prior quarters. So, it was right just under 4%.

[Collyn Gilbert:]

Okay. Okay. That's helpful. And then, just in terms of the accretion part, can you kind of give us a little bit of color as to how you're thinking about that going forward. I think – so obviously you had $5.8 million this quarter. I think is the balance somewhere around $50 million, is that right for Hudson Valley, or just kind of talk about how you see that line trending over the next few quarters?

[Luis Massiani:]

Sure. Including all of the fair value marks of all of the acquisitions including Gotham, because there is still the sale on Gotham, there's still sale on Sterling and then obviously the vast majority of it is related to the Hudson Valley merger, its $48.5 million today. So the $5.8 million that we had this quarter is going to stay at those levels for next three or four quarters, it will start coming down a little bit from there. But it's still going to be a meaningful number of $5 million plus for the foreseeable future. The thing that you always have to remember is that the reason that we had to take a $5 million dollars provision this quarter which is 3x, 2.5x, almost 3x our charge-offs, is that we had to now provides for loans that are coming into the allowance that were not part of the allowance because they had their fair value mark. So, we're very mindful of it. We don't want to have – we don't want to be stuck in a position where you have these very nice accretable yields, that then all of a sudden goes away and the decrease in that NIM sort of hit the bottom line. So what we're going to see, going forward is that, as that accretable yields starts to come down, the provisioning expense and the provision requirement will also come down. So as the dollar per dollar impact on EPS, our net income is not going to be – its not going to be dollar per dollar decrease in the total, in the absolute dollar amount of accretable yields. Does that make sense?

[Collyn Gilbert:]

Yes. It does. So we should be – okay…

[Luis Massiani:]

So, looking at the model, I think the – you have to think about it is we're going to have higher, so the accretable yield will stay at those levels, but your provision expense should be close to what we had this quarter. And if you go – if you look back at what our provision expense was when we first did the Sterling merger, so the fourth quarter of 2013, first quarter of 2014, you'll see that we were again $5 million to $5.5 million or so provision expense. And then that provision expense decrease through the course of 2014. You should expect to see similar trends because accretable yield will come down, but the provision expense will also come down.

[Collyn Gilbert:]

Okay. That's helpful. And then just going back to the fee discussion for a minute, Jack, I think you kind of gave some color there in terms of what your intentions are for the syndication team. And you guys have talked about this 20% target, obviously it was -- came under pressure just because the nuances with Hudson Valley, is there time line you guys have in terms of wanting to build back up to that 20% level?

[Jack Kopnisky:]

Yes. We have said that we want to do this within the next three years obviously. So, we have a plan to improve the accounts receivable management business. We have a plan under our cash management. And we have which by the way in acquiring Hudson Valley, the resource is on the cash management side are significant and meaningful opportunities. And then, we have a plan for a series of commercial fee income opportunities, one of which is syndication. We've been starting to do more swaps. We've been starting to do more FXs. So it's in those three general buckets that we are moving from 15% to the 20% over that period of time. The downsize on this is, I don't like the volatility in the mortgage business which factors into the overall fee income side. So we have to figure out how to smooth out that volatility over a period of time and our mortgage team has done a lot of those things over the past year or two. But so, on the affirmative side of it, it's really those three categories accounts receivable management, cash management, cash management service charges and other commercial fee income that will drive achievement of that number.

[Collyn Gilbert:]

Okay. That's helpful. And that actually leads to my question maybe about more sort of near term trends, because there is so much seasonality in your factoring business, just kind of maybe if you could give us some thoughts on what you're expecting maybe in the fourth quarter on the fee side? Or just remind us of the seasonality, I think, go ahead?

[Luis Massiani:]

Yes. The seasonality, the stronger months for the factoring business are September, October, November. So, for the fourth quarter we were at $16.1 million of fee income in this quarter excluding the$ 2.7 million of securities gains, $16 million to $16.5 million we feel -- and you're obviously you have to – there's various component to it as well the mortgage banking business will have a solid fourth quarter than it has. So there's seasonality in a couple of different places. But for the fourth quarter, $16 million to $16.5 million, we continue to feel pretty good about. And then in the first quarter of next year, second quarter you do see a little bit of drop off especially in those accounts receivable line items. So, year-over-year when you look at there's been double-digit growth in that line item. You're at little bit before about the proportion of that 20%, it's obviously becomes a little bit of an uphill climb because net income interest income has grown significantly as well, right. So in order for those two to catch up, we have those various initiatives that Jack was alluding to you before, but that percentage of 14.7%, 15% of fee income, the total revenue is likely going to decrease somewhat in earlier part of next year and then over time, that time frame that Jack talked about three-years, you'll start seeing that catch up and that growth accelerate..

[Collyn Gilbert:]

Okay. That's helpful. And then I just want to make one final clarification. The 230 to 235 you were talking about on the expense front. That does include cost tied to the $10 billion, correct?

[Luis Massiani:]

That does, yes.

[Jack Kopnisky:]

It does.

[Collyn Gilbert:]

Okay. Very good. That's all I had. Thanks.

[Luis Massiani:]

Thank you.

[Operator:]

And we have a follow-up question from Matthew Kelley with Piper Jaffray.

[Matthew Kelley:]

Yes. Just a question on the provision, how much of the provision was related to the increase in special mentioned Medallion loans just to be clear?

[Luis Massiani:]

I don't have that number, off the top of my head, Matt, but it is not a specific – it was not a -- the increase in the provision was not related to that loan in particular. It's related to organic growth and more so of the new loans that are coming into the provision from prior acquisitions. The Medallion loans are well provided for and we are not anticipating increase provision based on Medallion portfolio at this point.

[Jack Kopnisky:]

And they present less than 1% of the total loan portfolio?

[Luis Massiani:]

Yes.

[Matthew Kelley:]

Got it. And then, on the special mentioned increase that we saw just sequentially $27 million sequential increase, how much of that was related to Medallion loans?

[Luis Massiani:]

The vast majority of it, so about $20 million of that $27 million, I think it was little bit less than $27 million, so it's about $20 million of it was Medallion related. And the important -- so, the credits continue to perform today, but obviously they are showing signs of stress just with everything that's happening in the Medallion sector which is why we decided to down rating the special mentioned, but today continue to be in a position where we're cash flowing and we're having daily conversations and weekly conversations with [Indiscernible] continue to make sure we're on top of it.

[Matthew Kelley:]

Okay. Got it. And then, by the time we reach this time next year, so summer, fall of next year the fee income run rate should be $5 million or $6 million higher annually with the addition of all these transactions on a specialty lending segment, correct? Because I mean, $12 million of revenue lift is the outlook there, and I think its split about 50-50 between spread income and fees, is that correct?

[Luis Massiani:]

Little bit more – its 60%, so its 60-40, 60% spread, 40% fee, but yes, pretty close.

[Matthew Kelley:]

Okay. Got it. And what you have in place now, when would you anticipate being a full run rate production on both loan generation and fee generation for the businesses you have in place now?

[Luis Massiani:]

When we'll be in full….

[Jack Kopnisky:]

You mean account receivable management or do you mean overall, the whole company?

[Matthew Kelley:]

As a result of the acquisitions the deals that you put on over the last couple of months, when would you anticipating we're at a full run rate getting the $12 million that you've targeted?

[Luis Massiani:]

On the Damian side, for example, the Damian and the First Capital side, those are already at revenue run rate, but those revenue run rate should continue to increase organically now. But there has been no drop off or attrition from a client perspective up to this point in neither one of those, our public finance sector team is probably half way there from where there – from what we're envisioning their loans outstanding are going to be. We treat them similar to how we treat other commercial teams and what we put forth from a perspective of targets for loans to deposits, so they're probably 40% or 50% of the way there. As we mentioned in the past that team also becomes a loan participants and syndicator as they build their portfolios, so they'll start contributing to fee income as well, not just to the loan side of the equation. And then, on the asset-based healthcare side and the loan syndication side, those are brand new teams, so it will take them a while to ramp up, but by the end of next year and fourth quarter 2016 there should be a meaningful contribution from both of those teams to the fee side of the equation as well. So run rate with the businesses that we have today in the new hires, so you're looking probably three to four quarters before they're hitting on all cylinders.

[Matthew Kelley:]

Okay. Great. Thank you.

[Luis Massiani:]

Sure.

[Operator:]

And there are further audio questions at this time.

[Jack Kopnisky:]

Great. Appreciate everybody's interest and attention and look forward to talking you soon. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. You may now disconnect your phone lines.