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Edited Transcript of STL earnings conference call or presentation 25-Apr-18 2:30pm GMT

Q1 2018 Sterling Bancorp Earnings Call

Apr 30, 2018 (Thomson StreetEvents) -- Edited Transcript of Sterling Bancorp earnings conference call or presentation Wednesday, April 25, 2018 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jack L. Kopnisky

Sterling Bancorp - President, CEO & Director

* Luis Massiani

Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer

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Conference Call Participants

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* Alexander Roberts Huxley Twerdahl

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research

* Austin Lincoln Nicholas

Stephens Inc., Research Division - VP and Research Analyst

* Casey Haire

Jefferies LLC, Research Division - VP and Equity Analyst

* Collyn Bement Gilbert

Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst

* David Jason Bishop

FIG Partners, LLC, Research Division - Senior VP & Research Analyst

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Sterling Bancorp Q1 2018 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Jack Kopnisky, President and CEO of Sterling Bancorp. Please go ahead, sir.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [2]

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Good morning, everyone, and thanks for joining us to present our results for the first quarter of 2018. Joining me on the call is Luis Massiani, our Chief Financial Officer. We have a presentation outlining our results for the quarter on our website, which along with the press release, provides a ton of details. Instead of going through the presentation, we're going to summarize the quarter and then open the call for questions.

We continue to be very pleased with how the company's financial performance has progressed. The financial metrics are very strong and positions us to continue to evolve this high-performing model. The quarterly results benefited from the expansion of our model, integration of Astoria and favorable changes in corporate tax rates.

For the first quarter of 2018, our adjusted earnings of $101 million were 143% greater than first quarter 2017, and 16% higher than fourth quarter 2017. Adjusted earnings per share of $0.45 were 45% higher than the same period last year and 15% higher than our recent fourth quarter. Operating metrics were strong in the quarter as adjusted return on average assets was 145 basis points and adjusted return on average tangible common equity was 17.2%. The operating efficiency ratio of 40.3% continues to result from the strong positive operating leverage demonstrated by our operating results and M&A activity.

Revenues increased $133 million and expenses increased by $51 million over 2017 quarter 1, representing an operating leverage ratio of 2.7x. We anticipate our operating metrics will continue to improve throughout the year, demonstrating the value of our core operating model, our business diversification and the opportunistic M&A activities that we -- enhance the outcomes.

Now let me highlight a number of balance sheet and income statement categories and associated activities that will drive continued high levels of performance: First, the taxable equivalent net interest margin for the first quarter was 3.6%, in line with our expectations given the change in the tax laws. Excluding the impact of accretion income and adjusting for the change in tax law, the core net interest margin was 315 basis points, which was an improvement of 4 basis points relative to the linked quarter and in line with our forecast. We have benefited from a rate increase and the continued repositioning of the balance sheet. We expect the overall NIM to be in the approximately 360 to 365 basis point range and the core NIM to be in the 315 to 320 basis point range for the full year 2018.

Secondly, commercial loan growth relative to the linked quarter was an annualized 4% based on end-of-period balances and 9.3% based on average balances. Loan yields, excluding accretion income, increased 14 basis points over the linked quarter. January and February were slow months in terms of net bookings, but volume picked up significantly in March and pipelines are meaningfully greater than prior year. There's also some seasonality in mortgage warehouse and factoring and payroll that will pick up in future quarters.

Additionally, we see new CRE lending opportunities in the metropolitan New York City market to be priced below our targeted ROEs. We have not seen the increases in Fed rates benefiting the relative pricing in this very competitive market. Finally, we completed the acquisition of Advantage Funding on April 2, which brings a loan portfolio of approximately $450 million, priced at average yields of 7.5%. We are expecting strong growth in this targeted business line over the next several years.

Overall, we are confident in the 8% to 10% net loan growth for the year, as we will accelerate organic loan growth and are finding many portfolio acquisition targets in the market.

Third, deposit growth was an annualized 4%. We continue to maintain a strong base of deposits with the Astoria acquisition and have experienced virtually no runoff. The market has become more aggressive for driving growth in certain types of deposits. High-balance money market and CD products have been priced aggressively, especially from banks that have high loan-to-deposit ratios. The core deposit pricing in DDA, NOW, savings and base levels of money market and CDs have not changed, which points to building a deposit base that reflects a strong mix of core deposits. Our deposit mix continues to be strong with approximately 38% DDA, 14% savings, 36% MMDA and 12% CDs at a cost of 47 basis points. We continue to be confident in our ability to match net loan growth with deposit growth in 2018, and ultimately drive loan-to-deposit ratios below 95%.

Finally, operating expense levels continue to be better than planned as we have carefully executed our integration program. We have completed the integration of all personnel with the exception of the branch consolidations, which will occur on a steady pace through 2019. We have notified 7 branches of the consolidation and closed 1 in the first quarter. We anticipate notifying 8 additional branches in the second quarter. We've also begun executing our strategy of streamlining our real estate holdings. We have entered into an agreement to sell Astoria's headquarters building in Lake Success and will continue to reduce our owned and leased locations. We anticipate that over time, we can reduce our real estate footprint by over 35% relative to today. At the same time, we continue to add both new relationship managers and risk-oriented support staff to our company. We are finding many high-quality professionals that are attracted to this model. We expect expenses will be below the $425 million guidance, excluding amortization of intangibles, for 2018.

As I mentioned previously, we continue to improve the financial metrics as the year unfolds. We continue to see meaningful opportunities to grow organically using the team-based model in select commercial and consumer segments. We have also seen a significant increase in opportunities in the quarter to acquire commercial finance portfolios and companies. We are very focused on delivering the value that we have traditionally created over the past 6-plus years of activity.

Now let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will take our first question from Casey Haire from Jefferies.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [2]

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I wanted to start off on the loan growth outlook. I can appreciate that C&I is a seasonally soft quarter for you as it was last year, and it sounds like the pipelines have come up. But if I look at that -- at the pattern last year after a slow start, it really ramped up in the later quarters. Do you expect 2018 to play out similarly for C&I?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [3]

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Yes. Yes, we do. And we'll also supplement it with some of the acquisitions like the Advantage Funding acquisition along the way. So the answer is yes.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [4]

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Okay. And so -- and about the deals, I think you said last quarter, you were thinking 75/25 split between organic and deals to get to that loan growth. I mean, you're there right now with Advantage. And it sounds like you have more opportunities. So is it likely that you're going to go -- it's more of a 50-50 split? Or just some updated thoughts on the M&A opportunity.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [5]

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Yes. I think it's more like 2/3-1/3. But it is kind of fungible. So one of the things we recognized in a market during the quarter -- I'll give you an example on the CRE side. We actually looked at $1.5 billion of opportunities of new loan bookings. We ended up booking about $400 million of the $1.5 billion. The $1.1 billion was about 50 basis points less than our targeted yield and probably about 400 basis points less than our targeted return on equity. So we -- that's some -- we're not going to compromise our target returns. We'll turn to other asset categories. So for example, if yields come up on multi-family and CRE, we will do those types of things to our targeted level and we'll do less of acquisitions. If they stay low and below our targeted metrics and risk-adjusted return levels, we will do more. So that's -- one of the beauties of this model is we have broad diversification in these asset categories and we can pull different levers at different times. And we don't have to originate in one category because we can move the capital to other categories.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [6]

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Okay, great. And just switching to the deposit growth outlook. You guys obviously sound pretty confident on funding your loan growth. It's obviously very competitive, particularly in the money market arena, the jumbo money market arena that you identified. But with an eye on that NIM guide, I mean, we're seeing a lot of your local competitors struggle to grow deposits and deliver on NIM guide. So I'm just curious what's underlying your confidence there.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [7]

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Yes. For one, as I said, on the asset side, we're confident we can move capital around to get the types of lifts in terms of yields on loans to drive the numerator part of the NIM. And we're also confident in the mix that we have on deposits. So if you look at our mix -- and that's why each -- obviously, each bank is a little bit different in their mix of deposits. 75% to 80% of our mix is very core relatively noninterest-sensitive. And I think the increase in those deposit costs went up by something like 1 basis point in the past quarter. It's really the competitive area for deposits is on high-balance money markets and some of the CD sides of these things.

So our relationship approach is yielding good levels of deposit growth. There are some areas where we will play in the money market side and some areas where we will just pass. So our confidence exudes from, one, the asset side of the NIM equation and the mixing of the balance sheet and the types of capital we would allocate, and also being thoughtful in the way that we are pricing the deposits and looking at what areas where we do price up and which ones where we hold the pricing levels.

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [8]

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Yes. Casey, the deposit beta was quite strong in the first -- or quite low in the first quarter. So if you recall our fourth quarter call comments, we had guided to about a 20% to 25% deposit beta. It ended up being just under 15% relative to the movement of 2-year treasury. So from that perspective, we -- the deposit composition and the progression of the deposit cost has been a little bit better than we thought. But we hear you loud and clear, and we are seeing the same things in the market that our competitors are.

So the marginal dollar deposit that's coming in the door will drive that deposit beta up, and we continue to think that it's going to be about 20 to 25 basis -- 20% to 25%. The key difference being here that if you maintain a static balance sheet from an earning asset composition perspective from a mix of securities and loans perspective, I think that the pressure on NIM would be more drastic and more severe than what we anticipated it's going to be.

In the past, we have talked about, for every $1 billion of residential mortgages that we replace with something else given the difference in the core yield that is driven off of that residential mortgage relative to the diversified commercial assets and even CRE assets in the marketplace today, you're picking up about 50 to 75 basis points of incremental core loan yield relative to the residential mortgage that runs off. So for every $1 billion that we've said before, we think that there's a NIM expansion trade there of about 8 to 10 basis points. That's one of the things that gives us -- that ongoing balance sheet transition is really what gives us the ability to drive that net interest margin to maintain it and increase it over the course of the year.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [9]

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Okay. That makes sense. I'm just -- I mean, it just seems like you're going to need -- out of 99% pro forma loan-to-deposit ratio, you're going to need those jumbo money markets to fund $1 billion-plus loan growth after a quarter in which the deposit growth wasn't all that strong. So -- but I hear you on the securities that the 24.5, that, that is a nice -- you could remix out of that as well with some deposit growth.

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Operator [10]

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Our next question is from Alex Twerdahl from Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [11]

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Just wanted to drill in a little bit more to the expense guidance and target that you guys laid out here on the slide and then, Jack, in your prepared remarks saying that expenses will be less than that $425 million, which, if I'm not mistaken, is pretty much unchanged from the guide that you guys put out last quarter. However, I believe that we have another $6 million this year that we're expecting from the Advantage deal. Is that correct? So where -- kind of where are you finding the extra expenses to take out? Is that in the consolidation that's not pulling the numbers? Or is there something else that we should be thinking of?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [12]

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It's a combination of all the above, I think. As we've talked about on a couple of calls now, both third and fourth quarter, the initial estimates that we had put out relative to the Astoria merger, we are finding opportunities to exceed them. We're doing that in a bunch of different areas. One of the key areas being the -- Jack alluded to in his comments about just having a great opportunity from the perspective of reducing the real estate footprint that the combined company has today. And that has both a direct impact from just -- a direct impact and indirect impact across the entire organization with a bunch of hidden costs of having to manage a broader real estate footprint than what you need.

And then twofold, we're still in the, I call it, fifth or sixth inning of finalizing everything that we are going to do from a systems integration perspective. So what you will see from a progression of expenses is you will see in third and fourth quarter of this year, in second half, you will see specific line items like our data processing expense, everything that is related to occupancy and office operations expense will meaningfully decline and will get us to a place where we are going to offset the increase that comes on because of the acquisition of Advantage. We'll see enough opportunities to hit that $425 million and potentially exceed it.

So we're maintaining that guidance even though, yes, the Advantage deal brings some OpEx associated with it. And there's also going to be some savings that come off of the Advantage deal itself. So once we fully integrate them into the -- the run rate annual operating expense of Advantage for the remainder of the year is about $6 million. We will have some opportunities to chip away at that as well over the course of the next 3 quarters.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [13]

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That's great and very helpful. So when -- just to kind of clarify even further, when we see things like the branch consolidations that you guys just announced and saying 8 more in 2Q, that's fully incorporated in the $425 million? Or if we're sitting here in 3 months and you guys say we've got another X number of branches that we're planning to consolidate over the next quarter, can that $425 million potentially go lower?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [14]

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It can potentially go lower. But these initial ones that Jack alluded to on his comments, those are factored into the $425 million. It will depend on the rate. Again, we've announced 25 to 30 branch closures. That's over the course of 2019. To the extent that we accelerate the remainder other than the ones that Jack has just alluded to now, you would have the opportunity to have a more accelerated decrease in OpEx going forward.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [15]

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That's great. And then just a question on kind of as you look at your funding and appreciate the comments you had on deposit growth and the outlook there, but for borrowings, which ticked up a bit this quarter, can you just talk about kind of how you plan to use borrowings? And how do you strategically layer in different durations and sort of at what rates to kind of augment the deposit strategy?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [16]

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Sure. We'd take -- the vast majority of that is all made up of FHLB borrowings. We take -- we stayed short by design, and we ladder out between the 1-, 2- and 3-year parts of the FHLB curve with a little bit of a bias towards the short end. The intention here is to maintain that 95%, then target that 95% loans-to-deposits ratio. So the growth -- the further balance sheet growth or the loan -- and the growth in loans will be funded by a combination of deposits and a decrease in the securities composition as well. So dollar-for-dollar, loan growth will not -- or loan growth will not result in dollar-for-dollar balance sheet growth going forward. You also have to remember that the balance sheet transition itself allows us to utilize the runoff of the residential mortgage book to fund incremental commercial loans as well. So there's a -- it's a bunch of different factors, but the intention going forward is to maintain a much more kind of 1:1 ratio from the perspective of balance sheet growth being funded with deposit growth and a reduction in securities.

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Operator [17]

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And our next question is from Austin Nicholas from Stephens Inc.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [18]

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Maybe just taking a look at the provision, can you -- I know there's no guidance in the deck and in your prepared remarks. But can you maybe just give a flavor of the outlook for the provision going forward, especially with the addition of Advantage and some of the higher growth coming from that business?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [19]

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Yes. So it's going to -- so remember that we are accounting for Advantage as a business combination, so we're going to take a fair value mark on that portfolio or we've taken a fair value mark on that portfolio already upon completion of the deal. So there will not be a meaningful change in the provisioning requirement going forward short term driven by Advantage, as a lot of that will be factored in into the fair value mark, into the lifetime loss estimate that we're factoring in for the portfolio that was acquired.

So we maintain the guidance. We had talked about fourth quarter being about $10 million to $12 million. It was a little bit higher than that. The medallion portfolio is obviously the gift that keeps on giving. And so therefore, a substantial chunk of the charge-offs that we incurred this quarter were related to one of our medallion relationships, which we are continuing to make progress on. If you set that aside, the provision would have been right in line with what we had estimated in the past. So the $10 million to $12 million continues to be a good number, and I think it's going to be towards the lower end of that range as we move forward through the rest of the year.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [20]

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And if you look at our credit metrics, our credit metrics for the most part have all improved. And I think the other guidance we would probably give you is that charge-offs should be in the annualized basis kind of 10 to 20 basis point range. So we feel confident in we have our arms around this. The overall credit metrics have continued to improve. It's not the pristine time when folks were charging off 5 basis points on an annualized basis, but this is what our expectation is for 2018.

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Operator [21]

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Our next question is from David Bishop from FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [22]

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Just curious, you noted the seasonality in some of the specialty finance segments. As it relates to the change in the federal tax law, anything playing out there, better, in line or even worse than expected in terms of what you might expect from a growth perspective in any of those segments related to the change in tax laws?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [23]

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I'd say that -- so listen, I think to Jack's comments before, I think the pipelines of business we feel very strongly that second, third and fourth quarter are going to be quite good. I think that the nature of the kind of small business investment sentiment and what we're hearing from across the board in all of our markets is pretty positive. We are -- in the pipeline, we have a bunch of different kind of lending opportunities that are not just the traditional commercial real estate stuff that you would see, but we have across the board in C&I very interesting kind of investment in growth-type projects that we're seeing. So that has -- we're not just -- for a very long period of time, we were kind of stuck and we were essentially just refinancing market share out of larger players. I think that you're starting to see a little bit of a change there from the perspective of existing clients and new clients also investing for growth in their businesses, which has been good to see.

Conversely, I think that one of -- to Jack's comments before, again, where we have not seen the -- kind of the -- where we've seen, I think, a greater competitive environment on -- which in part, I think, is driven by changes in tax law, has been in pricing for kind of traditional commercial real estate loans. I think that a large component of the -- where you have not seen the benefit in the increase in rate hikes being factored into new origination yields is the fact that from a tax perspective, an origination does not need -- an origination is relatively more attractive at the tax rate -- at the lower tax rate without having to have the corresponding increase in the rate hike.

So that's one of the reasons as to why -- to Jack's point before, to the extent that we see good and better pricing resulting in the traditional commercial real estate side, we will kind of focus on that and we will originate assets there. But the good thing is that we have a ton of other opportunities in the pipeline across the board, in asset classes that are floating rate with good credit spreads and risk-adjusted returns associated with them. So we will be flexible and we will deploy and allocate capital to the places where we see the better risk-adjusted returns.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [24]

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Okay. It's a good point. So one of the things we've built the company on is -- our objective is not to be necessarily bigger. It is to be more profitable. So we look at the returns that we get off of different asset categories and we opt for the margin rather than the volume side of those things. So -- and that's -- it's playing out right now, as Luis said, in this market where there are some good opportunities for risk-adjusted returns in certain categories and there are other categories that -- where a lot of the monoline companies have focused on that are more difficult to get risk-adjusted returns. We're not just going to put on volume for the sake of putting on volume. So we want to create a very profitable, long-term, high-performing company out of the foundation that we have.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [25]

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Got it. And then as it relates to the Astoria residential book in terms of runoff, I know it can be choppy. I think the runoff is a little bit less than we had modeled in for the first quarter. Are you still thinking about between $200 million and $250 million per quarter as 2018 plays out?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [26]

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$750 million to $1 billion for the year, that's what we anticipate. I think that a good -- even in an increasing rate environment, a fair amount of the book is of shorter term or shorter duration, 15-year and kind of ARM portfolio, so it will cash flow to about $750 million for sure. High-end should be about $1 billion.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [27]

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Okay, got it. And then maybe from a team or relationship manager target there, any sort of enumerated targets there in terms of adding to the bench strength either on Long Island or New Jersey across the system?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [28]

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Yes. Great question. So we -- in the quarter, we added 42 new relationship manager types into the teams. And what we're finding is a lot of great professionals that are interested in joining the team. So we added a significant amount of relationship managers over the quarter. And we also -- by the way, we are very cognizant and very proactive of building the infrastructure behind them, so we've added another 70 folks from a staff standpoint that supports. A lot of -- many of those are in the risk management areas, many of those are in the data areas. As we kind of evolve the company, we need an increased sophistication in the systems and infrastructure that we have. So we had a good quarter in acquiring strong talent in the market both, on the client side and we had a good quarter in acquiring really terrific talent in the support side.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [29]

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Remind me in terms of the relationship managers, what's sort of the runway in terms of them to sort of hit their critical mass in terms of the loan-to-deposit funding targets?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [30]

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Yes. It's about -- people take 3 to 6 months to start to get up and running, but we expect each of the teams to produce a minimum of $50 million in loans and $50 million in deposits a year. And the RMs are good components of that as we continue to expand. So those are -- and we expect the teams or groups of people to come in and break even by the end of the first year and start to accrete and really make a great return by the end of the second year into the third year.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [31]

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Got it. One final, number of teams at the end of the quarter, where does that stand?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [32]

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Good question. I think we are...

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [33]

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37 teams.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [34]

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Yes. I'm glad you said that because I hadn't added them up.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [35]

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I'm sorry, what was that?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [36]

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37.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [37]

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Thirty seven. And again, we've added pretty significantly to the existing teams. We find that in some cases that's more productive than adding new teams. The one area where we've added -- back to the questions on deposit. The biggest area of expertise that we've added is around treasury management and deposit gathering relationship managers. And again, we expect to see the fruits of their labor in 90 to 180 days.

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Operator [38]

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Our next question is from Matthew Breese from Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [39]

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Maybe just starting with the loan growth outlook. I want to make sure I have the message right. And it sounds like given where commercial real estate pricing is, the lack of loan betas there, the preference is for more inorganic portfolio, especially finance deals versus organic growth. Is that the right message?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [40]

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No. So we still prefer organic originations. So about 2/3 of our expectation of the 8% to 10% growth -- net 8% to 10% growth will come organically and about 1/3 of it will come from acquisitions.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [41]

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Right, okay. And then -- yes, understood. And then you noted that there's more portfolio acquisition potential. Why is that? And how do you feel about getting another 1 or 2 deals done this year?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [42]

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Yes. It's interesting. The last probably 6 months, we've seen a significant uptick in the number of deals coming to market. So one, they're coming to market because companies are refining -- businesses and companies are refining their models. So some of these come out of private equity that have held on to these portfolios and businesses for a period of time and they're basically believing that this is the right time to execute a sale. Some of them are coming out of larger banks that want to focus on certain areas and kind of clean up their balance sheet.

So those are the 2 kind of sources of these portfolios. And we are pretty disciplined in the way we price and look at these things. We look at a lot of deals and turn down the vast majority of them because of price or structure. We believe that we can get another deal done by the end of the year. So we think there's enough in the market to be able to accomplish that.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [43]

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Okay, got it. And then on the expense commentary, I think you said 35% less footprint. I think that gets us into the low 80 kind of level for branches. To what extent do you think that keeps expense growth mitigated through 2018 into 2019? And is it possible we can see expenses sub that $425 million in 2019 as well?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [44]

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Yes, it is possible. That is the intention. So if you -- so as you -- we've talked about this in the past. We have -- the guidance that we have put out does not factor in the long-term ability to run our current retail banking footprint substantially more efficiently, not just from -- what is factored into the numbers is just the pure consolidation activity. It's the closures of redundant facilities. It's kind of the low-hanging fruit from that perspective. Longer term, there's the ability to continue to chip away and do exactly what we did since 2011 with the Provident, legacy Sterling and legacy Hudson Valley branch networks. If you added those up, we would have gotten to 90 branches. Before we did the Astoria merger, we were down to 40 branches.

So I'm not suggesting we're going to cut out 50% of real estate in -- and in the financial centers. But there's the ability to think about things differently to run the retail banking footprint more efficiently and to continue to generate a substantial amount of saves and to continue to do what we've done for the past 6 years, which is we take a portion of that expense saving on the retail side and then on the broader consumer side, and you reallocate that into more efficient, higher growth, more profitable kind of risk-adjusted return businesses on the commercial side.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [45]

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And maybe to extend your question a little bit Matt, we do believe that the efficiency ratio will get below 40%. So it's a -- we believe that the dynamics of this model enable us to continue to operate this more and more efficiently as we do on the one side -- again, on the numerator side, we have expected higher levels of productivity from folks; and then on the denominator side, being able to do things like Luis was talking about, maybe take another cut at retail, maybe outsource more activities to get -- trade more volume variable types of expense bases allows us to get below the 40% efficiency ratio.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [46]

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Understood, okay. Turning to the margin. First, was the tax adjustment, the FTE adjustment, was that impact in line with your expectations? Or was it a little bit different? And then two, the new core guidance is 315 to 320. But when I factor in Advantage, which I think is a bump of roughly 5 to 7 basis points, we get -- it seems like by 2Q we'll get at or above 320. So just wanted to square the new guidance, but by 2Q it seems like we'll already be at the high end and kind of get your thoughts there.

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [47]

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Yes. So to your first question, the tax equivalent adjustment was in line. But if you go back to the fourth quarter call, we had guided to about an 8 to 10 basis point adjustment for tax equivalent. Remember that, that is for the full year of 2018 because we continue to invest in tax-efficient assets on the public sector side and the municipal securities side. So the full year impact we were anticipating was going to be about 8 basis points. This quarter it was about 5 basis points. But that's because that 5 basis points would have continued to increase over the course of the year under the current -- under the old tax. So the tax equivalent adjustment change and the impact on the net interest margin is what we thought it was going to be for the first quarter. It's just that, that impact would have been larger over the course of the rest of the year, given the growth dynamic that we're seeing in the tax-efficient asset side.

Secondly, yes, we have moved that up to 315 to 320. I think Advantage is going to be very helpful to that. But to Jack's comments before and to my comments, I think, in response to the question from Casey Haire, we are cognizant of the fact that there are -- that the deposit funding dynamic and that the competitive dynamic in the local markets in which we operate in is pretty aggressive. And so therefore, we are being -- I think that we're taking a cautious approach from the perspective of -- remember, the beta that we had, as I mentioned before, was just under 15% in the first quarter. We think that, that is going to be higher as we move through the course of the year and as we continue to focus on generating deposit growth. So I think that Advantage will be helpful.

At the same time, we want to be cautious from the perspective of presenting what we think is the most realistic scenario, which is growth on the funding side will come at some cost from a funding pressure perspective. We are very confident that we are able to offset that with things like Advantage as well as just the transitioning of the balance sheet as well as just the repricing of the short duration assets that we have. But it's a relatively difficult NIM environment going forward.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [48]

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And we've learned our lesson not to go out too far on the limb. So we're trying to be extremely thoughtful in this process and not go too far.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [49]

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Right. I totally get it. Along those lines, can we maybe talk about the stock, the stock performance given some of the fundamentals you guys have posted. And does that change the way or give you any ideas on the capital deployment front, particularly around share repurchases?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [50]

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Not sure how to answer that. Frankly, we're disappointed in the stock performance in the first quarter, obviously. We think we've put together a company and through this integration -- or this acquisition and the subsequent integration, we think that the financial dynamics of this company are very strong now, and they will be very strong in the future. So we have authorization to do repurchases on stock if we so choose, and we will always look at things like the dividend.

But we believe we've demonstrated that this is a financially growing company that presents very strong returns to investors and is in an environment that has a diverse balance sheet and we have lots of options to continue to grow. So we do look at all those options. We put the capital allocation alternatives side by side and look at those all the time. But we think we've created something that hopefully we continue to keep growing and performing at this level or better.

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [51]

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Matt, said a little bit differently, we're pragmatic about the world. To Jack's point, we review everything to the extent that we continue to believe that we have suitable investment opportunities out there, be it from an organic loan growth perspective, organic deposit growth perspective or from an acquisition perspective that allows us to achieve 18% to 20%-plus ROEs and IRRs on those -- on that growth, we will continue to grow. And if we determine that the environment has changed and that we cannot generate those types of returns, we have full capital flexibility and the ability to go buy back up to 10 million shares, which is what we approved in the first quarter in connection with our 10-K. So for now, we are not intending to do anything on the share repurchase front. But we're also not going to say that we're not going to do it because, again, to the extent that we don't find suitable investment opportunities, we absolutely have the ability to manage capital more flexibly than what we have up until now.

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Operator [52]

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And our next question is from Collyn Gilbert from KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [53]

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It seems like that would have been a nice place to wrap up the call. But no, I've got some more questions for you. Okay. So starting -- just curious, are you guys breaking out or do you happen to have the deposit beta within the Astoria franchise versus the legacy Sterling franchise?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [54]

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We do have that. We don't share that publicly, but I can -- what I will tell you is that the beta on the Astoria, on the retail footprint acquired from Astoria has been essentially nonexistent up until this one.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [55]

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Okay, okay. And then just given a lot of the commentary, which I really appreciate in terms of discipline around growth and focus on returns and kind of risk-adjusted returns comments that the pricing that you're seeing isn't sufficient enough on the CRE side, in all of it. Does it change the mix targets for the end of the year? I know you're still sticking to that 8% to 10% loan growth target. But how about the mix change?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [56]

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I think you will see that the commercial -- the growth on the commercial real estate side, including multi-family and ADC, is not going to be meaningful at all. I don't think that balances will decrease from an absolute dollar terms perspective there either. But you're not going to see high single-digit or double-digit growth on that side. So the growth will be more weighted towards what I was alluding to before, which are kind of these more differentiated C&I, both on traditional C&I and commercial finance opportunities that we're seeing across the other business lines, which we believe are just more attractive. So I do think that at the end of the year, you will see a greater proportion of growth being generated and being represented by traditional C&I plus commercial finance than CRE.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [57]

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And it helps our mix. Our directive -- where we're trying to get much more balanced on the C&I versus the CRE side. So it's an area where we want -- where we get higher risk-adjusted returns anyhow, but it's an area that we will continue to put more capital into.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [58]

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Okay. Okay, that's helpful. And then Luis, do you have or are you willing to share what the credit mark was on Advantage?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [59]

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That is not public information, but it's not a material number, not a -- it's not something that you're going to see that will move materially any performance in the -- for the second quarter or anything like that. But we've -- by design and as we've talked about in the past, there are a couple of portfolios that the folks at Advantage had or a couple of sectors that they were -- that they had in their portfolio that we are not enamored with and that we are going to be liquidating. And a substantial chunk of the credit mark is going towards making sure that we don't have any issues in those portfolios. The vast majority of the book from Advantage has very strong performance with very limited delinquency levels. So there is not a big mark that is going on the run rate business that we continue to -- that we will continue to focus on.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [60]

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Okay. Just the sectors that you were not enamored with or that you might pull away from, what were those within that portfolio?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [61]

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They're like -- certain areas like black cars -- fleet black cars, things like that. And when you start to get into financing less than $100,000 vehicles, that's where they're a little more difficult. So the flip side of it is we believe that because of the funding advantage we bring to this business line, we think the more targeted types of categories are ones that we can really be much more price competitive in the market, everything from tractor trailers to tow trucks to other types of specialized fundings out there, so through manufacturers. So we think this is an opportunity to grow the business in, as Luis was saying, in very specific types of categories, not across the board. So it's frankly what we've done with almost all the businesses, we've focused on profitable niches and segments where we're comfortable on the risk-adjusted returns that we're getting out of those categories.

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [62]

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The stuff that we don't like is less than 10% of the portfolio that we acquired. So it's not a big...

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [63]

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Okay, got it. Okay, that's helpful. And then just finally, not a big number, but just curious, the uptick in the equipment finance net charge-offs in the quarter, what drove that?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [64]

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One loan transaction, not really indicative of any other exposures that we have in the portfolio. It was a relatively large relationship and it had -- and it drove a large charge-off. But the delinquency stats and everything else from the performance in the portfolio, nothing really to -- this was not a broad-based increase in provisioning or charge-off levels related to equipment. A discrete situation that -- that was just a little bit larger in size than what the traditional equipment financial relationship looks like. That's all.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [65]

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Okay, okay. And then that's all -- I mean, do you anticipate what you did this quarter cleaned it up? Or is there -- should there be more lingering coming?

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Luis Massiani, Sterling Bancorp - Senior EVP, CFO & Principal Accounting Officer [66]

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No. On the equipment side, so when you look at the charge-off, the aggregate charge-off levels for the quarter, they were about just over $8.5 million. 2/3 of that were represented by the medallion and by this relationship. So I think that this cleans it up, so we don't anticipate that we would have a charge-off of that again. Always in credit, you don't know you have an issue until you have an issue. But we don't anticipate at this point or we're not seeing anything in the portfolio that would result in a single $3 million charge-off in the equipment finance portfolio in the following quarters.

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Operator [67]

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That will conclude today's question-and-answer session. I'd like to hand the call back to the speakers for any additional or closing remarks.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [68]

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That's great. Thanks a lot for following the company and those were great questions, so we appreciate it. Have a great day. Thank you.

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Operator [69]

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That will conclude today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.