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Edited Transcript of STL earnings conference call or presentation 24-Oct-19 2:30pm GMT

Q3 2019 Sterling Bancorp Earnings Call

Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Sterling Bancorp earnings conference call or presentation Thursday, October 24, 2019 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

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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

* 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

D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst

* Stephen M. Moss

B. Riley FBR, Inc., Research Division - Analyst

* Steven Tu Duong

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Sterling Bancorp's Q3 2019 Earnings 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 and discuss our results for the third quarter of 2019. Joining me on the call is Luis Massiani, our Chief Financial Officer. We have a presentation on our website which, along with our press release, provides detailed information on our quarterly results.

During the call, we will highlight our solid quarterly financial metrics resulting from strong targeted commercial loan growth, improved deposit growth, strong fee income growth, solid credit quality and significant cost controls and alignment. We will also discuss our balance sheet remixing, acquisition of an $843 million equipment finance portfolio, the announcement of our technology partnership with Deloitte Consulting and our outlook for the balance of 2019 and beyond given the changes in the rate environment.

First, on an operating basis, our second quarter results were solid. Adjusted net income available to common shareholders for the quarter was $105.6 million, which was slightly higher than second quarter 2019. Adjusted earnings per share of $0.52 was $0.02 or 1 -- 2% or $0.01 higher than both last year 2018 and the linked quarter. Adjusted return on average tangible assets was 150 basis points, and adjusted return on average tangible common equity was 16.27%. Our efficiency ratio continues to be among the industry leaders at 39.1%, and our tangible book value per share of $12.90 increased 13.8% (sic) [13.9%] over September 30, 2018, and 4% over the linked quarter.

On a GAAP basis, EPS was $0.59 and earnings were $120.5 million, which included a $12.1 million gain from the termination of the Astoria defined benefit pension plan that we excluded from our adjusted earnings. We continue to produce strong organic loan growth of $636 million over the linked quarter, which is an annualized growth rate of 14.4%. Commercial real estate, public finance, traditional C&I, mortgage warehouse and lender finance portfolios have grown organically by more than 10% year-over-year. During the quarter, we saw a runoff of $165 million of nonstrategic, low rate residential mortgages.

On October 7, we announced the acquisition of an $843 million equipment finance portfolio from Santander Bank. The portfolio is comprised of loans and leases to middle market and corporate clients with an average relationship size of approximately $5 million, a tax equivalent yield of 4.3% and a duration of 3.5 years. We expect this transaction will close by the end of November. We will continue to remix the loan and securities portfolio to achieve higher risk-adjusted returns. We will also return to growing the overall balance sheet as we have most of the balance sheet repositioning behind us.

Deposit balances increased significantly driven mainly by a seasonal increase in municipal deposits, new brokerage CD deposit relationships and a successful launch of our new direct bank channel. We also generated substantial relationship commercial deposits toward the end of the quarter. Total deposits increased by $630 million at September 30 compared to the linked quarter. For the third quarter, total deposit costs were 92 basis points or 1 basis point higher than prior quarter. We anticipate that the actions we have taken over the past 4 months will lower deposit cost and overall cost of funding in the fourth quarter. We will continue to specifically target higher balance, higher cost municipal deposit relationships, which did not reprice in the third quarter.

Although total funding costs increased for the quarter by 1 basis point to 116 basis points, our spot funding cost at September 30 was 110 basis points. Our mix of products, channels and funding sources provide flexibility to grow balances while we lower funding cost.

Our core net interest margin, excluding accretion income on acquired loans, was 315 basis points. The declining interest rate environment resulted in lower asset yields on our floating rate loans and securities that comprised approximately 1/3 of our assets which, coupled with competition for deposits, had pressured our net interest margin. However, as we detail on Page 13 of the presentation, we have maintained a stable core net interest margin over the past 12 months as third quarter NIM was essentially the same as a year ago. This reflects our balance sheet remixing, earning asset repositioning and focus on controlling deposit cost. Assuming one additional fed rate cut in 2019 -- I wish that was an increase -- we anticipate that our core net interest margin should remain steady at approximately 315 basis points for the first quarter as we reduce our proportion of securities to earning assets, lower FHLB costs and borrowing balances and reduce deposit costs. A prolonged flat interest rate environment will continue to impact our net interest margin and profitability.

Core fee income growth was strong as a result of commercial loan fee income, swap fees, treasury management fees, accounts receivable fee income and BOLI income resulting from the restructuring of this portfolio. Excluding the pension gain and securities gains and losses, noninterest fee income grew by $5.3 million or 19% over the linked quarter. We expect core fee income to be over $110 million for 2019.

Core expenses, exclusive of amortization of intangibles, declined from the prior quarter to $101.7 million or 6%. We continue to aggressively reduce our financial center network and staffing and have reallocated a portion of the reductions to support growth in the commercial teams, technology and enterprise risk management areas. We consolidated 10 financial centers and 1 back-office location, bringing the total to 87 financial centers. We expect to be under 80 financial centers in 2020. Overall, we reduced net full-time equivalent employees in the quarter by 131 people. Our expense run rate for the quarter equates to an annualized operating expense level of $403 million.

Yesterday, we announced the strategic partnership with Deloitte Consulting to provide technology support in the areas of cloud-based infrastructure, robotics and automation, enhanced digital banking applications and artificial intelligence-enabled service experiences. We have been successfully utilizing their AI capability over the past year and are excited for this business relationship, which will expand our technology capabilities. We view this as an opportunity to use best-in-class capabilities on a variable expense basis where both parties are aligned to provide the best client and colleague experience and provide incremental positive operating leverage. Most importantly, we will be able to access these capabilities at no incremental core operating cost relative to our current run rate, allowing us to maintain our current expense levels.

Credit quality and capital levels remain strong. Charge-offs increased to $13.6 million for the quarter, resulting from the continued resolution of 3 ABL and equipment finance loans that we highlighted last quarter. We expect charge-off levels for the fourth quarter to return to the 10 to 20 basis point levels we have realized over the past 6 quarters.

The level of nonperforming loans, delinquency and substandard loan categories all improved this quarter. Total tangible common equity to tangible assets were strong at 9.22%, and total risk-based capital was 13.88%.

During the quarter, we repurchased 2.8 million shares and have 5.6 million shares remaining in our repurchase authorization. We continue to evaluate the use of excess capital for investment into our core business, share repurchases and dividend payouts and anticipate we will repurchase between 4 million and 5 million shares in the fourth quarter.

Finally, we are confident in our model and our ability to meet and exceed our growth and return targets in the future even with a more challenging rate environment for several reasons. First, we have effectively repositioned our balance sheet. We now plan to grow the balance sheet. We expect net loan growth in the fourth quarter to be in the $1.1 billion to 1.3 billion range. Secondly, we have a model that effectively produces strong organic and acquired commercial loan growth. Organic loan growth in the commercial group will exceed $1.8 billion in 2019. And coupled with portfolio acquisitions, we can support our growth objectives. Third, we are adding additional funding channels and are lowering the cost of funding to support growth. We have seen strong deposit flows growth from our direct channel in a short period of time. Fourth, we have been very effective, as evidenced by our efficiency ratio, in reducing core expense levels and reallocating savings to higher-return businesses. Annual run rate OpEx declined $16 million compared to the prior quarter. Fifth, we have strong credit quality, capital levels, liquidity and core earnings that will enable us to support growth.

We have strategically and structurally aligned the company to produce incremental positive operating leverage in the future. We continue to point to the information on Page 4 of the presentation that reflects the overall results of our actions over the past several years. Over the 5-year period ending September 30, 2019, our adjusted EPS growth compounded at an annual growth rate of 18.8%, and our tangible book value per common share has grown at 15.4%. We expect to continue to deliver strong financial results.

So now let's open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will now take our first question from Casey Haire of 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 NIM. First off, just the -- I'm assuming the NIM guide assumes an October cut. And then what's -- the NIM guide of 3.15% does imply some compression here in the fourth quarter to 7 bps by my math. I'm just trying to square that with the release that speaks to sustaining the NIM at this 3.15% level.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [3]

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Sorry. I'm not understanding your question. What do you mean from the perspective of a decrease of 7 basis points?

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

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So the NIM guide right now is 3.15%, correct? So to get to the 3.15% for the year, would -- to get to that level would imply a 3.08% NIM in the fourth quarter. Is that right?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [5]

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No. Sorry, that's -- so we're -- essentially, the guidance, we're going to maintain it at about 3.15%. So the Q4 level we anticipate is going to be somewhere around 3.15%, and that's going to be driven by -- so that's just kind of, I think, semantics of our presenting that, Casey. So we're not envisioning a 3.08% decrease in the NIM, no. So it's about the 3.15% steady, and it's going to be driven by our ability -- there's 3 givens on NIM, right? So there's going to be some compression on asset yields as there is another cut in the next couple of days, and we think that that's largely going to be offset by the repricing of borrowings that we have, a substantial amount of those repricing this quarter. And then moving into next year, we reprice the entirety of our borrowings back. Except for the senior notes and the subordinated notes, everything else does reprice within an 8-month window.

We have about $1.5 billion of CDs that are going to reprice over the next 6 months, with about 1/3 of that happening in the fourth quarter and then 2/3 of that happening in the first quarter of next year. And then the -- what we're focusing on right now, which is our #1 area, is kind of continuing to work through our commercial banking teams on getting the cost of deposits on higher-balance commercial and municipal accounts down. So the -- that's semantics. We think that we're -- even with a rate cut, and we're assuming one for this quarter, we think that we can stay at that -- roughly the 3.15% that we are today. So we don't envision it falling below 3.10%, no.

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

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Okay. Great. That makes sense. So -- and just following up to that, can -- so on Slide 12, can you just tick through what is the rollover rate on the borrowings, the 2.33 -- the $900 million at 2.33% this quarter? And then your loan yields were 4.60% new money in the third quarter, where is that today?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [7]

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So the new money yield is roughly at the same level, so we haven't seen -- there will be some impact to that if we do have another cut here. But the 4.5% to 4.6% on the new loan yields, we feel pretty good about that based on what we're seeing in the pipelines for the fourth quarter. You are going to get, as we've highlighted there, the Santander book is at about a 4.3% yield. So it's slightly below that by about 20 basis points. But even factoring in Santander, we should -- the Santander acquisition, we should be still at about 4.5% new loan yields for the fourth quarter.

On the repricing of the borrowing stack. Today, it's at about 190 basis points to 2%. But if there's a cut next week or in the next couple of days, then we should see some movement down from that today. So there should be somewhere between a 20 to 25 basis point decrease in the borrowings that reprice in the fourth quarter. And potentially in the next year, it could be lower than that. Again, higher repricing than that, yes.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [8]

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Okay. And then the mix shift out of the securities book, down to 15%. Are we going to -- should we assume that this pace continues where it was down, I guess, 150 bps? When do you -- how long do you anticipate getting to that 15% from 21% today?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [9]

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That depends. It depends on the performance of the municipal book going forward. So one of the reasons, as we've talked about in the past, for having that larger-than-normal securities balance is the fact that a substantial chunk of what we do on the municipal side are collateralized deposits, right? And so one of the key areas that we are targeting to focus on to reduce the cost of deposits on our funding side is, again, targeting the higher-balance municipal accounts.

To the extent that those municipal accounts reprice the way that we anticipate that they will, the securities decreases are going to be programmatic over time, and it's not going to -- it'll take us 2 to 3 quarters to get to that 15%. To the extent that we're not successful in repricing those accounts and, for whatever reason, there's deposit outflows that come from that municipal side, then you're going to get -- we will get there much faster. It could potentially happen this quarter. But more than likely, it would happen early next year.

And so the math from that perspective is the securities that roll off would be -- the securities that we would sell in order to fund -- or to get those numbers down on the securities portfolio are yielding today somewhere between 2.25% to 2.40% roughly. And our higher-balance commercial municipal -- I'm sorry, municipal accounts are yielding somewhere between 2.15% to 2.35% depending on the account. So net-net, if you have a decrease of municipal deposit funding that is offset by securities sales with the types of securities that we're going to sell, if we're going to decrease the size of the balance sheet, we will decrease the size of the earning assets, but we wouldn't really sacrifice much on the income front because, again, in this flat rate environment -- we like the municipal business a lot. But in this flat rate environment, there's components of the municipal business that don't make sense from an economic perspective, and those are the products that we're going to focus on.

So if you -- from your modeling perspective, I would -- we don't anticipate that there's going to be substantial municipal deposit outflows. So I would focus on a 2- to 3-year unwind -- sorry, 2- to 3-quarter unwind to get to that 15% target. But it could potentially accelerate, and we need to fund some deposit outflows on the muni side.

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Casey Haire, Jefferies LLC, Research Division - VP and Equity Analyst [10]

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Okay. Great. And just last one for me. Just tying it all together, I mean it sounds like loan yields are coming on even with a cut of somewhere between that 4.30%, 4.50% range, and then your funding cost are 1.10%, and then you have -- and falling. So I mean the incremental NIM seems like it's a decent 3.20% to 3.30%. And you're talking about a 3.15%. So what is the headwind that I'm missing?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [11]

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It's the rate and pace of being able to manage down the commercial and municipal accounts. Very clear as to how the consumer components of the house will continue to reprice, very clear what's going to happen on CDs, very clear what's going to happen on borrowings. The commercial and municipal accounts are the bread-and-butter -- especially on the commercial side are the bread-and-butter of what we do. We had great full deposit relationships there that also have lending relationships with us. We are going to protect that book, and we are going to manage that book smartly, but we anticipate there's definite opportunities to move that cost of deposits down. But at the same time, we're not going to essentially, just for the sake of moving deposit rates down, sacrifice kind of the good work that our commercial banking teams have done over the last 7 years in building those deposit relationships.

So that is where we're being cautious. We're optimistic of just being able to move those down, but we're being cautious with it as well. And so if it happens faster, even better. And if the NIM is better than 3.15%, there's a path to getting there, but we feel good about being able to maintain it. And to your point, yes, to the extent that we're -- that we can get to where we want to get faster on the cost of deposit side, there would be some upside to that, yes.

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Operator [12]

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We will now take our next question from Steve Moss of B. Riley FBR.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [13]

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I wanted to ask about the benefit to expenses from a cost saving plan and if you could quantify the total cost that you expect from accelerating the financial center closures.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [14]

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Yes. So we have -- we've looked at the range of kind of $415 million core expense to $425 million, and we're pretty comfortable it'll be at the lower end of that range from a core expense base. So what we've tried to do is, as we grow deposits and opportunities in different deposit channels like commercial- or branch-based consumers, municipal and some of that direct bank things, it's allowed us to be more aggressive in being able to turn down some of the financial center -- financial centers we have, thus being able to reduce some of the cost.

The cost we take out, we put it kind of one pocket of real savings and lowering the overall core cost. And then other -- we also take some of those costs and reallocate them in areas where we feel comfortable on growing. Putting it back into the commercial teams, putting it into technology, putting it into enterprise risk are the areas. So we're comfortable that we're getting down to the point of 80 financial centers by the end of 2020. And those 80 financial centers will have well in excess of $200 million average balances -- deposit balances. We feel that, that is the right kind of structure and size for the situation we're in right now and by the demand of the consumers that are coming into those offices.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [15]

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Okay. So then for 2020, it's fairly safe to assume perhaps a sub-$400 million core expense run rate?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [16]

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We're not ready to talk about sub-$400 million, but we believe that it's $415 million -- toward the $415 million area.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [17]

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Okay. And then my second question, on loan growth, the loan growth guidance for the fourth quarter at $1.1 billion to $1.3 billion. Does that include or exclude the acquisition?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [18]

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It includes the acquisition, and it is net loan growth.

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

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Three components to it. So you have the acquisition, you have somewhere between $400 million to $500 million of organic growth through the commercial teams and you're going to -- we will again see somewhere between $150 million to $250 million of runoff between the resi and -- the acquired resi and multifamily portfolios.

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Stephen M. Moss, B. Riley FBR, Inc., Research Division - Analyst [20]

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Okay. And my last question, I'm wondering if you have any color around potential impact for -- from CECL in 2020.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [21]

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We do. So we've -- we're going to shortly and more than likely with our 10-Q filing, we'll have some additional information in there. But big picture, it's very consistent with what we've talked about in the last quarter's call. We're going to see an increase, and we're talking ranges, but we're going to see an increase of somewhere between 50% to 60% relative to our balance sheet, our allowance for loan loss reserves today. Now you have to remember that's a little bit of an apple to an orange when you look at our numbers because the purchase accounting adjustments and the various acquired portfolio that we have create a little bit of a difference relative to folks that have not had acquired portfolios and that have kind of organic loans on their balance sheet.

So we anticipate it's going to be about a 50% to 60% increase relative to the $104 million that we have today. But about half of that is unwinding kind of left pocket, right pocket type of dynamics between purchase accounting adjustments relative to the required allowances under CECL. So no, we don't envision it being a significant impact to our capital position, and we feel -- we've been doing a lot of work around that, as you can imagine, for the past 2 years, and we'll be pretty close to being able to provide kind of full details shortly.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [22]

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And in reality, our provision expense will remain pretty consistent. We don't view -- the net effect of all this on a financial statement basis is that provision expense will remain around where we're at today. So when you cut through all the moving allowances and reserves around, it ends up to that level.

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Operator [23]

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We will now take our next question from Alex Twerdahl of Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [24]

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First off, can you just remind us the characteristics of those 3 ABL credits that caused the higher charge-offs this quarter? And I presume that -- I guess we'll start with that.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [25]

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One of them was a printing sector -- printing industry sector exposure, one of them was a lending business or a lender finance business and one of them was a commercial construction crane operator. So pretty diversified from the perspective of the industry sectors in which they operate in. And there's always a story to credit, so we could be here for 2 hours telling you what happened with each one. At the end of the day, it's the nature of the ABL business. We've had 3 of these pop up. We're now kind of working our way through them. Two of them are now behind us where we have essentially executed our collateral and we've charged off what we're going to charge off, and then there's one more where we're still going in collecting our accounts receivables and selling off some inventory and equipment and so forth. So they should -- this third one should also be behind us in the fourth quarter.

But at the end of the day, we know this is what we do in ABL, when things go sideways, we go and collect as much money as we can, and sometimes we have to charge off some numbers. So end of the day, the 3 workouts -- painful to go through a workout, but they actually work the way they should, and we collected as much as we could, and we've moved on from them.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [26]

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And just sort of the difference in the sort of higher charge-off level this quarter than maybe indicated at the -- when we talked about it in last quarter. Is that a difference in the collateral value versus what you thought they were? Or is there something else that we should be thinking about?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [27]

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Pretty much. It is, and it's largely driven by one of the relationships, which was more driven by an enterprise value dynamic versus borrowing base or a kind of accounts receivable dynamic where it's much clearer to be -- when you're borrowing or lending against accounts receivables, it's easier to kind of figure out how much the accounts receivables are and then take some haircut or discount to them to the -- and figuring out or estimating what the realizable value is. In one of the instances, the workout included kind of selling the business as a going concern, and that's where some of the kind of greater uncertainty arises, and that's what resulted in a good amount of those charge-offs. But that is now done and behind us.

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

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And we expect to return to -- instead of 27 basis points of charge-offs, we expect to return to the 10 to 20 basis point side. All the rest of the trends that we see in credit, there's nothing that concerns us, alarms us. And frankly, as rates continue to come down, credit is going to remain relatively pristine going forward. As long as the rates stay low, there are going to be very pristine levels of credit metrics.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [29]

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Got it. Appreciate it. So safe to assume that the provisional return to that, $10 million to $12 million per quarter following this event.

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

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Yes.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [31]

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Yes. We anticipate that is the case.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [32]

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Okay. And then just back to the NIM. It seems like the acquisition you did has a spread that's much tighter than sort of the state of NIM. So if this thing closes in November and presumably that's in the 3.15% guide, does that indicate the kind of funding cost coming down? So the other metric to the margin is actually -- excluding the acquisition, would be going up a little bit in the fourth quarter?

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

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That's right. That is correct. We do -- that is going to put -- so some of the -- as we put in -- I'm sorry, I don't have the slide deck just in front of me, but one of the pages that we have in the slide deck shows some information on the acquisition, and we are going to fund some of that with some securities sales. So it's not that -- dollar per dollar, the acquisition doesn't impact the entirely NIM because we are going to replace some 2% yielding securities with this 4.3 yielding assets. So that would be a positive. But yes, net-net, this is going to -- it would decrease NIM on a short-term basis. And without it, there would have been a slightly -- we would have been providing a slightly higher guide relative to the net interest margin for the fourth quarter.

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Operator [34]

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We will now take our next question from Collyn Gilbert of KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [35]

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Just wanted to start with growth and make sure I understand what you guys are saying. So the fact that you're indicating that the balance sheet repositioning is, for all intents and purposes, done, so that means we should not assume any more runoff in the resi book and then also no more runoff in the multi-book?

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

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That's not what we're saying.

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

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No. No. There will be runoffs in that. So we're just saying we can clearly outrun the runoff so that we have net growth in this. So for example, in the fourth quarter, where -- as Luis said, where the components of organic growth are $400 million or $500 million in commercial loan increases, loan growth. We have the Santander portfolio of $843 million, and we'll net that against up to a couple of hundred million dollars' worth of resi runoff during that period of time that comes after that, kind of $1.1 billion to $1.3 billion range. And we're confident as we go forward that, that runoff on the resi side, and we're, frankly, replacing all the multifamily stuff, will be in that range. So we'll have net loan growth and begin to grow the balance sheet again.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [38]

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I think the comment, Collyn, is more geared towards if you look at what -- since the beginning of the year, when we started talking about the residential mortgage sales, when you factor in the resi sales plus the sales of securities, we've essentially sold almost $2.5 billion, $2.8 billion of earning assets over the course of the year. And that has essentially gone to fund the acquisitions, the workforce and the portion of the Santander. And part of that was going to reduce borrowings just because we didn't like the residential mortgage loans that we sold and so forth. And so this is -- the earning asset composition year-over-year has actually lowered, the total balance of earning assets year-over-year have decreased because of resi sales and securities sales.

And so even though we're going to be continuing to sell some securities and continuing to do some of that balance sheet repositioning, we fully anticipate and expect that our $26.4 billion or $26.5 billion of earning assets today are going to, starting in the fourth quarter, increase quarter-over-quarter, similar to what we're doing prior to kind of getting this -- accelerating this balance sheet transition. So you will start seeing earning asset growth quarter-over-quarter and year-over-year. We have not done that this year, but that was a targeted strategy of kind of getting the lower-yielding components of the balance sheet in a better place.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [39]

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Yes. I would also -- we will never be done with repositioning because there's always going to be different rate environments and economic environments where you make some changes. But one of the reasons why we missed the analyst expectations is because we had another quarter of kind of repositioning the balance sheet. Now in the fourth quarter, we feel very confident that the majority of that, as Luis said, is behind us, and we can start to really target the types of asset categories and situations we want where we want to grow the balance sheet and continue to, as we have in the past, demonstrate positive operating leverage.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [40]

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Okay. And then just along those lines, and you sort of indicated this, Jack, that -- so multifamily loans were up linked quarter. And so is the -- as you said, the intention is to replace runoff. I mean obviously, it grew this quarter. But can you just talk about sort of how you're thinking about adding the multifamily loans, the structures you're adding, the rates you're adding and what that replacement looks like?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [41]

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Yes. Yes. So on the multifamily side, we're getting relationship-based multifamily loans that are replacing broker-originated multifamily loans. And the variance is probably 100 basis points difference, so on just the loan yield, in addition to the deposits we get. So part of this is just not the category, it's how the loan comes and how it's priced and then, frankly, what other types of things we do with those clients. So we're comfortable that we can replace the multifamily runoff with relationship-based multifamily types of lending, but we're not going to see tremendous growth out of that particular category as we go forward.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [42]

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Okay. Okay. That's helpful. And then just putting aside the movement that you're going to see in some of the legacy assets that you want to runoff that you're talking about, how are you anticipating just traditional pay-downs, right, just traditional acceleration of loan pay-downs given the rate environment? I mean it seems like you guys have done a really good job or just the origination activity has been so enormously robust that you've been able to offset that. But it just seems like your pay-downs have been less than what we're seeing in kind of the broader market, so just trying to understand that dynamic a little bit. Is it how you're structuring the loans? Or is it the seasonality of the loans is different? Or just kind of in a normal course of your business, the pay-downs that you're seeing, what...

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [43]

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Actually, I'd say something slightly different to that. So if by that, you mean kind of the activity that we're seeing on the CRE and on the multifamily side, I take that back to the -- the stated coupons on the multifamily loans are super low, right? So remember that the vast majority of what we do on multifamily or the bulk of multifamily today was acquired from Astoria. That's for $3.7 billion, $4 billion of multifamily loans, of which, 75%, 80% of that was acquired from Astoria, and the coupons on those things are 3%. So I don't think that those loans -- I guess I wish I could take credit for being so good at managing loans. This is the fact that I think we have not yet gotten to the bogey that those borrowers would have in kind of paying off or refinancing their loans just because they are, again, 3% to 3.25% coupons. So the market isn't there yet where those types of loans would start repricing and kind of refinancing faster. But if we continue to be in a decreasing rate environment, then you would see some greater runoff there.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [44]

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And the flip side of it, too, is that we've had -- because of the way we set up the company, you have multiple types of portfolios to grow from. You're not a slave to any one category. So frankly, just about every category we see, various categories in commercial real estate, different C&I, all -- most of the commercial finance portfolios, there are niches out there. So we view this as this is robust. There's lots of volume out there. Our pipelines have continued to be full. We can kind of pick and choose what categories we want. That goes back to our confidence in kind of holding as best as we can on the loan yield originations as we go forward because you can move capital around along the way, in part because you have optionality in the types of asset categories you can originate in.

And I've said this a thousand times, we're still a small player in metropolitan New York, and then we have a national franchise, too. It really gives -- this is a robust time, but even if it wasn't a robust time, they're still plenty of opportunities out there. So the opportunities to look at growth in different categories kind of outrun the potential pay-downs in certain categories that we have.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [45]

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Yes.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [46]

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Okay. That's helpful. And then just finally, and I haven't done the math yet, but you guys are still maintaining the 8.25% TCE ratio, but it seems like you're going to end up coming in a lot higher than that or maybe my math is just not quite right.

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

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Well, it's going to take us a while to get to that. That's our long-term target. It's going to take us a while to get to 4 million to 5 million share repurchase, not getting to that number, you are correct.

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

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We're not going to get there next quarter. You're pretty good at mental math.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [49]

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I'm not really. I could be -- I don't even know what it is. All right. So that 8.25%, I mean that could be even be -- I mean do you see yourselves even hitting that in 2020?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [50]

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It depends. So it depends on what the growth of the balance sheet is and what other potential kind of growth opportunities we see out there. To the extent that we continue to grow the balance sheet at -- and earning assets at somewhere between $1 billion to $1.5 billion year-over-year, then it would probably take us -- if we got there, it would be late 2020. So we're going to continue being pretty active in the buyback front for some time, we envision.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [51]

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So we have a lot of dry powder.

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Operator [52]

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We will now take our next question from Dave Bishop of D.A. Davidson.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [53]

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While we're on the subject of the share repurchase program, I mean obviously looking ahead, it sounds like you're going to complete that here, in the near future here. Given the expectations for a resumption of the growth in the balance sheet, have you envisioned a strong likelihood of another Board authorization into next year to a similar type level than the most recent authorization?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [54]

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Yes.

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [55]

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Yes.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [56]

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Again, it gives us optionality to buy back shares or look at investing more into the business. So we're -- I think our Board is very comfortable in upping the authorization.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [57]

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Got it. And then turning to the fee income, it looks like it's going to comfortably hit that $110 million level this year. As you look into 2020, do you think most of those drivers are sustainable at that current level?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [58]

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We do. We do. So we think there are puts and takes in the mix of those fee income categories, but we're pretty confident that the loan fee-related types of things will continue to grow. We're comfortable with the accounts receivables. The BOLI restructuring that has been done should yield even better returns as time goes on, so we are comfortable going forward.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [59]

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Got it. And then I know with the -- you addressed the ABL issue in the beginning, but can you remind us just in terms of maybe the comfort, I guess, in the -- that asset class? We've been getting a lot of questions, I guess, lately as we move along the credit cycle here in terms of riskiness of that asset, your comfort level in terms of potential losses as we manage on the, I think, the credit cycle. Just curious, maybe just give us an update in terms of the loss history there and sort of your comfort overall as we sort of migrate through the economic.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [60]

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Vast majority of our ABL is ABL that's secured by 85% accounts receivable, eligible accounts receivable, and 50% advances against inventory. So that's the majority of this. These - there's a couple of categories where we have that plus some equipment loans that were in ABL that caused the variation in value, back to Luis' comment on an enterprise value. So most of our portfolio is traditional ABL. There's a portion of it that has some equipment finance or some cash flow dynamics to it. So we're comfortable with the portfolio. We're comfortable we know what was going on with the portfolio. We've done a ton of analysis on it given, frankly, where rates have come. The negative on ABL now is that the rates for ABL had come down to the point where, in some cases, it doesn't make sense. We look at a ton of ABL deals. The volume is overwhelming, and we pass on the vast majority of ABL deals now because of pricing, one; and, in some cases, structure.

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David Jason Bishop, D.A. Davidson & Co., Research Division - Senior VP & Senior Research Analyst [61]

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Got it. And one final question. I know you had sort of highlighted the public finance segment has a strong close to second half of the year. Good work from the third quarter, do you still see that sort of carrying through into the fourth quarter of this year?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [62]

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We do. It's an interesting business. Lots of communities want to do infrastructure projects and the infrastructure projects across America. Infrastructure age, and these projects are generally secured by the revenue of the community, which we think is good credit, and I think we're getting pretty good deals out of those types of credits. So we're comfortable that, that will continue to grow and expand and the demand will be consistent and maybe even higher into the future given the infrastructure that we're financing.

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Operator [63]

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(Operator Instructions) We'll now take our next question from Steven Duong of RBC Capital Markets.

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Steven Tu Duong, RBC Capital Markets, LLC, Research Division - Analyst [64]

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So you guys had talked about a -- I think, it was like a 3.10%, 3.30%, 3.35% corridor on your NIM generally in the past. If we do end up getting a December rate cut, do you think that 3.10% line would hold?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [65]

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It would, but it would be -- so you'd similar -- so if we get 2 cuts this quarter, it would be similar to what happened in the third quarter, which is that would put some pressure of probably 5 to 7 basis points down. So I think that it'd be -- we still -- the 3.10%, I think, still holds. But if it weren't below 3.10%, it wouldn't be meaningful below 3.10%. Then again, we have not -- I caveat that by saying that what you saw in the third quarter, and we talked about this in the second quarter call, is that the good thing about having low deposit betas on the way up is obvious. Conversely, you're also going to see that same dynamic on the way down.

We're very confident that once those commercial and municipal accounts start repricing, you have that plateau feature where a substantial chunk of the book starts repricing from 1 day to the next, but it takes a while to get to that point. So longer term, do rate cuts give us greater air cover to continue to move those costs of deposits down? So short term, there might be some risk to it, but there's no doubt that the commercial side of the house catches up from a cost of funds perspective. And so 2 cuts -- even if there are 2 cuts this quarter versus 1, it would not meaningfully change whatever we consider to be the proper run rate NIM number for 2020 because we are confident that the commercial deposit side of the house catches up relatively quickly as well, but it'll take a little bit of time to catch up. But once it catches up, that reprices meaningfully down in one shot.

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Steven Tu Duong, RBC Capital Markets, LLC, Research Division - Analyst [66]

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Understood. And correct me if I'm wrong, I think your historical beta has been around 30%. Are you looking at a similar 30% in this go around?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [67]

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We think so, 30% to 35%. And that's got the kind of tale of 2 cities, in the consumer side, it's somewhere between 10% to 15%. The consumer and -- the commercial and municipal is 40% to 50%. So if that commercial -- if that 40% or 50% holds true in the commercial side, you would start seeing that for every 2 cuts, you should start seeing a decrease of 25 basis points, and that's what we have started to see play out in the book to which, again, we're pretty confident that it comes down so we just need to continue focusing on kind of working with all of our commercial banking teams and having the right types of conversations with our clients sooner rather than later so we can start moving those costs down.

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Steven Tu Duong, RBC Capital Markets, LLC, Research Division - Analyst [68]

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That's good to hear. And then just going on to your CECL comments about the 50% to 60%, is that -- is basically the offset to that going -- all of that going to capital? Or is some of that going to gross up?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [69]

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It's going to capital.

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Steven Tu Duong, RBC Capital Markets, LLC, Research Division - Analyst [70]

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Okay. And dovetailing into that, how does that impact your 2020 accretion outlook?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [71]

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It does not because the accretion numbers that we provided in the past already -- so there's going to be -- and let me caveat this by saying that both my comments before and now are not -- my auditors and legal folks would kill me, are our preliminary result work and all that good stuff, so let me caveat that. But it really -- it wouldn't change it meaningfully because we had already started to embed the impact of CECL adoption into 2020 when we were providing our prior guidance. So we've been pretty consistent in saying that it's going to be somewhere between $30 million to $40 million of accretion next year. If anything, I think that the bigger impact to accretion is actually the fact that if you continue to see acceleration of pay-downs and so forth because of low rates and refinancing activity and so forth, that's going to have a bigger impact on the guide that we provided than the adoption of CECL. So we feel pretty good that the numbers that we provided in the past, transitioning down to about $30 million to $40 million in 2020, are still going to hold. We still feel pretty good about those.

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Steven Tu Duong, RBC Capital Markets, LLC, Research Division - Analyst [72]

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All right. Good to hear. And then just one last one, just on your expenses, it looks like you guys came in at about 142 basis points on assets. As you start to pick up more assets, do you see that number gravitating lower and lower into 2020?

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Luis Massiani, Sterling Bancorp - Senior EVP & CFO [73]

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Yes. We do.

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Operator [74]

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It appears there are no further questions at this time. Mr. Kopnisky, I would like to turn the call back to you for any additional or closing remarks.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [75]

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I really appreciate everybody's interest in following the stock, so thanks, have a great day. Take care.

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Operator [76]

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Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.