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Edited Transcript of STL earnings conference call or presentation 24-Jan-19 3:30pm GMT

Q4 2018 Sterling Bancorp Earnings Call

Jan 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Sterling Bancorp earnings conference call or presentation Thursday, January 24, 2019 at 3:30:00pm 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 Executive VP & 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

* 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, everyone. Thank you for standing by. Welcome to the Sterling Bancorp's Fourth Quarter 2018 Conference Call. Today's conference is being recorded.

At this time, I'd 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 fourth quarter and year-end 2018. Joining me on the call is Luis Massiani, our Chief Financial Officer. We have a detailed -- we have a presentation on our website, which, along with our press release, provides detailed information on our quarter and annual results.

During this call, we will highlight the strong fourth quarter and 2018 results for the company, review the previously announced sale of residential fixed rate mortgages, describe our purchase of $504 million in asset-based lending and equipment finance loans from Woodforest National Bank, update you on our common share repurchase progress and finally, highlight our anticipated outlook for 2019.

First, on an operating basis, we finished 2018 in a strong position. Adjusted net income available to common stockholders for the quarter was $116.5 million and for the year was $450 million, representing increases over prior periods of 34% and 103%, respectively. Adjusted earnings per share for the fourth quarter was $0.52 and for the year, $2, representing increases of 33% and 43% over same periods last year. Operating metrics continue to be at or above our targets for the fourth quarter. Adjusted return on average assets was 158 basis points, adjusted return on average tangible common equity was 18.17%, and our efficiency ratio was 38%. Positive operating leverage continued to increase with adjusted total revenues increasing by $9.1 million and adjusted total expenses decreasing by $5.5 million quarter-over-quarter.

In 2018, we continue to evolve the balance sheet to maximize returns and control risk. For the fourth quarter, commercial loan balances increased at an annualized rate of approximately 10.4%. Commercial loan balances for the year increased 11%. We improved our mix and total loans with targeted double-digit increases in traditional C&I, factoring, equipment finance, public sector and CRE loans and reduced balances in residential mortgage, broker-originated multifamily loans and acquisition development and construction loan -- lending. Commercial loan yields increased 11 basis points, and our overall loan yields increased by 6 basis points. During the quarter, we moved $1.6 billion of fixed rate residential loans into loans held for sale.

Average deposits for the quarter grew by $242 million. Overall, average deposit balances grew 4.2% on an annual basis with targeted business demand deposits growing 12%. We continue to have a favorable mix of deposits with 40% demand deposits, 11% savings, 37% MMDA and 12% certificates of deposits at a cost of 77 basis points. The deposit basis -- the deposit beta over the past year has been 27%. With the pending sale of residential mortgages, the loan-to-deposit ratio is 90.6%.

From a balance sheet perspective, you can expect us to continue to transition lower yielding residential mortgages and broker-originated multifamily loans and replacing them with better-priced, relationship-oriented C&I and CRE loans. The loans will be funded by core deposits that enable us to maintain a loan-to-deposit ratio of less than 95%.

From an income perspective, the core net interest margin of 315 basis points, an overall margin of 353 basis points, was stable relative to last quarter. The change in mix of balance sheet will improve core net interest margins in the future.

Fee income of $27.3 million for the quarter improved by 13% over the linked quarter, driven by strong swap, factoring, loan fees and payroll finance fee income. Expenses declined from the previous quarter by $2 million as we continue to benefit from the integration of Astoria. We expect 2019 expenses to be lower than overall 2018 expenses.

Given the concern in the banking market overall regarding the credit cycle, we included an additional slide in the deck regarding our loan portfolio credit quality. A special note on Page 8 is the overall loan-to-value ratios on our commercial real estate portfolio of 47% and debt service coverage ratios of 1.64x. Additionally, in our C&I portfolio, we provide secured facilities with traditionally proven advanced rates against qualified receivables, inventory and other assets. We feel very comfortable with the level of advanced rates and collateral levels in our various portfolios.

We continue to generate and maintain strong levels of capital. We generate approximately $100 million of excess capital each quarter and maintained tangible common equity to tangible assets in excess of 8.25%.

Now let's discuss a series of near-term tactics we've announced to better position our balance sheet and improve returns. In December, we announced the sale of approximately $1.6 billion of fixed rate residential mortgage loans acquired in the Astoria merger. The potential benefits of the sale allow us to exit low yielding, nonstrategic loans and notably replace these loans with relationship-oriented, higher-yielding business. We can reduce interest rate risk, improve our core net interest margin, reduce funding pressure on deposit rates and increase tangible capital ratios as a result of these actions. We expect the sale to close in the first quarter of 2019.

Yesterday, we announced the purchase of a $504 million asset-based lending and equipment finance loan portfolio from Woodforest National Bank. We have reviewed many portfolio purchases over the past year and are most comfortable in the structure, pricing and quality of this portfolio. In due diligence, we essentially underwrote each of the more than 100 loans to be acquired and found the loans to match our existing ABL and equipment finance portfolio structures. The average yield of the portfolio is 5.5%. The purchase, which also includes the retention of several commercial bankers and business development officers, is expected to close in the first quarter of 2019 and will be a cash transaction.

Lastly, in December 2018, our board authorized an increase to our share buyback program to a total of 20 million shares. Through the end of December 2018, we have repurchased 9.1 million shares at a weighted average price of $17.54 per share with a total consideration of $159.9 million. We will continue to execute on our approved share repurchase program along with opportunities to grow organically or fund portfolio acquisitions.

In summary, we are very confident in our model and our ability to meet and exceed our growth and return targets in the future. 2018 was a strong year in a challenging rate and competitive environment. In 2019 and beyond, we expect to consistently deliver 10% or greater earnings per share growth, return on average tangible assets of 150 basis points or greater, return on average tangible common equity of 18% or greater and efficiency ratios less than 40% on an annual basis. We will continue to achieve these objectives by strong execution in increasing the productivity of our teams, continuing to reposition the balance sheet, investing in client-centric technology and by retaining, acquiring and developing high-performance, culturally-aligned colleagues. We are constantly seeking opportunities to rethink, refine and transform our business.

I want to thank our shareholders, clients, colleagues and our board for their terrific support over the past year.

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) And we'll go first to Casey Haire with Jefferies.

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

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Starting off on the NIM guide, 3.25% to 3.35%. Obviously, first quarter will be -- as you take on the Woodforest book and sell the resi portfolio that it could be noisy as well as digest the December hike. So maybe if you could just -- I'm assuming we could get a little bit of compression from the 3.15% here, and then in the second quarter, we bolt up to 3.30%, 3.35%. And then what is sort of the progression thereafter? And then what kind of Fed hikes do you guys bake into your guidance here?

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

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Yes. So we're baking -- so the biggest component that's going to be a determining factor, and that continues to progress really over the course of the year, is the performance on the deposit side and on the deposit beta. So you'll see in the release and in Jack's comments, we talked a little bit about fourth quarter was better from a beta perspective relative to the progression from second and third and then into the fourth quarter. That continues based on what we're seeing on the deposit pricing side to date. We should be able to be flat in the first quarter. I don't envision that it's going to have a -- that there's going to be any material compression in the first quarter. And then if we're able to, and I think we will be, complete the sales and the acquisitions in that February time frame, you are going to get a little bit of a benefit from that perspective as well because of the NIM run rate in the first quarter. So I -- as we think about it, first quarter should be flat to slightly up. If there is some compression, I don't think that it's going to be -- and we don't think that it's going to be material, and then you're going to continue to see the ongoing transition of the balance sheet help out as we go forward. We're estimating one more Fed hike. But again, to the extent we have a lot of floating rate assets, getting rid of the residential mortgages, that's going to help out a fair bit there. So with the transitions and the actions that we're taking, we're acquiring 76% of that loan portfolio's floating rate. If it ends up being 2 rate hikes, I think we're going to be better positioned pro forma for these actions than what we are today. So I think it's flat to progressively increasing over the course of the year when you think about first quarter to fourth quarter.

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

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Okay. That's helpful. And then on the deposit outlook, you guys have -- you start [to the] loan growth guide. And with the loan-to-deposit ratio at where it is today, you guys could actually not grow deposits at all and land in the middle to high end of your loan-to-deposit ratio. So do you have -- what is the deposit growth strategy this year? Are you guys looking to grow that? Or are you happy to let the loans grow into your current deposit base?

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

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Well, we're always looking for -- the most key to this is relationship deposit growth. So the way our teams are structured, they are highly incentive to bring in low-cost, long-term sticky deposits, and we want as much of that deposit growth as possible. What this action allows us to do is not have to pay up for non-relationship deposits. So it allows us to focus on the things that we've done pretty well over the period of time, which is relationship-oriented core deposits at lower cost and not have to pay up for a portion of the deposits that are much higher priced and much more competitive, and frankly, much more transactional in the market.

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

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Okay. And just lastly on the loan growth front, you -- if I strip out the $504 million from Woodforest, that leaves about $1 billion to $1.5 billion to go in this year. So how are pipelines holding up after a decent quarter here? And then are you still optimistic on the portfolio acquisition front?

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

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Yes, we're very confident on the organic side of this. We -- right now, the economy is still strong. We're seeing lots of companies that are expanding, hiring more people, buying other companies. So we're confident on that. We also operate in a very large, very diverse, very opportunistic market regardless of the economic environment in Metropolitan New York and then some of the segments beyond. So pipelines are very full. We have a lot of opportunity to continue to grow organically. We're very confident in those guidance numbers on the loan growth side. Obviously, with the ultimate closure of the Woodforest deal, we're already off to a good start on this early in the year, which is important as it creates earnings throughout the year. But we're very comfortable with the guidance on that organically, and then we will continue to look for opportunities to find deals that make sense. There's still continuing good flow of new portfolios and companies that are coming, and we scrutinize [them] very diligently as we did with this deal. And there'll be opportunities, I'm sure, in the future to make some acquisitions.

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Operator [8]

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And we'll go next to Alex Twerdahl with Sandler O'Neill.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [9]

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First off, just wanted to ask how you're planning on funding this, the $504 million acquisition you announced last night. Is the plan still to pay down the wholesale borrowings as discussed in the press release on December 20? And if so, is this going to come from security sales or other borrowings?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [10]

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So we sell the mortgages, we get $1.5 billion, $1.6 billion of proceeds. We're going to use that to pay down borrowings immediately, and we are also going to trim some portion of the securities portfolio. You'll see our slide presentation. We're targeting long term about a 20% to 22% composition of securities earning assets. Today, we're about 25%. So there's portions of the securities book that we can also trim down. But the -- how the progression of the funding side will be is you'll get the proceeds from the mortgage sale. We're going to pay down $1.6 billion of borrowings. We will then borrow $500 million. But longer term, we are going to trim the securities book as well. So net-net, you can -- for modeling purposes, you can decrease the borrowings for the remainder of the year by $1.5 billion relative to the mortgage sale.

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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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Okay. And then, Jack, you're talking a minute ago about the organic pipelines being very full. However, I know that sometimes, just the nature of your businesses, people kind of rush to get loans closed at the end of the year so they can get paid that year. Is there going to be just a little bit of a pause in sort of loan closings in the first quarter as some of those -- the pipeline is a little bit immature compared to how it was at the end of the last quarter?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [12]

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That's funny, Alex. You know the system there. So in this model, everybody rushes to close loans at the end of the year, and then you have to build pipelines up. January, in all banks, really always is a challenge because of that. All that said, our pipelines are pretty significantly ahead of where they were this time last year. So we have good solid pipelines. As the companies evolve too, we're looking at being able to do larger deals and taking a little bigger bites of deals, not to go over too much. But we have some really good opportunities in the pipeline that are better than we would have had this time last year, and so we're very confident in the loan growth number.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [13]

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The first quarter is always slightly softer than the second, third or fourth quarter. So you're definitely -- when you think about some of the seasonality that we have in factoring in payroll finance, in the warehouse lending business, go back 3 years, 4 years, you always see the same dynamic, which is fourth quarter is always very good from an average balance perspective for those businesses. First quarter is not as good, and then you continue to -- and then you start seeing a big -- an ongoing and continued pickup in second, third and fourth quarters. So we don't envision that this year will be any different. But that's one of the good things about getting the Woodforest deal closed here in February is that you -- from an end of period balances perspective, we're going to enjoy a $500 million, and we're also going to see a nice uptick from an average balance perspective driven by that acquisition. So good to get it done in the first quarter.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [14]

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Okay. And then just finally, in the press release, you talked about $500 million of additional buybacks in the first quarter. Is that pretty much a definite number that you're definitely going to do $5 million in the first quarter?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [15]

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It's 5 million shares, not $5 million, so it's 5 million shares. And yes, that is our -- we are -- -- that's our target. That's our plan for the first quarter.

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

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Unless the stock goes to like 25, which would be a good thing.

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Alexander Roberts Huxley Twerdahl, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research [17]

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Really good value at 25. That's all my questions.

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

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That's right.

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Operator [19]

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We'll go next to Dave Bishop with FIG Partners.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [20]

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Jack, in your preamble, correct me if I'm wrong, did I hear that you were able to review 100% of the Woodforest portfolio in terms of their pricing and structure? And it sounds like you came away very comfortable in terms of how they're -- how they think about credit underwriting that portfolio. Just maybe walk us through that process.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [21]

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Yes. We actually -- the way we did this in this cycle, we actually reunderwrote all the loans. So we did an underwriting of the actual loans and looked at obviously the pricing and risk-adjusted returns, but more importantly, the credit side of this. So we're comfortable that what we have and how they're marked in all those pieces. The other side of this, Woodforest is a national bank, so this is a little bit different than buying a portfolio from a private equity fund or a nonbank. They've been scrutinized by regulators since they have had this business, so they are more standardized in the way they look at credit then maybe some other portfolios that we've looked at in the past.

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

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Got it. And more of a holistic question here. I know in the past, mining these commercial finance customers from the deposits have been tough. Any change in that [success] here? Is that still a focus? Or is it just maybe to just acknowledge that it's tough to get deposits from these acquisitions? Are there any sort of bright spots on that end?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [23]

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Yes. We've been pretty successful about getting deposits from the acquired portfolios. The -- on ABL, you tend to have fairly thinner balances because of the nature of the churn of those particular types of companies. But we've been pretty successful about getting operating accounts from each of them. And similar on a direct basis on equipment finance loans, we've been pretty successful by getting a broader relationship. So we -- I tasked our teams to do that. Actually, I think our ABL group was one of the highest percentage increase in deposit growth, although off a lower base but -- in this past year because they've done a good job of being able to bring treasury management and deposit solutions to a number of those companies.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [24]

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Got it. That's good to hear. And then, Luis, I think you touched upon it briefly in the earlier question. Remind us -- remind me of the seasonality in terms of first quarter some of the commercial segments. I know there's puts and pulls here. Which tend to be seasonally low? Which tend to be seasonally higher in terms of funding?

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

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Yes. Seasonally low, payroll finance, factoring, warehouse lending always have their lowest balance -- average balance quarter in the first quarter, and then you'll start seeing a pickup late first quarter. And as -- when the winter goes away and spring rolls around, that's when those business lines just start working up again. Other than that, you're going to see some -- it will be flat to some decrease in the asset-based lending and traditional C&I side. But the average balances there should stay -- from an organic perspective, should stay pretty much in line. And then assuming that we get this transaction closed on February 28, you'll see a nice pickup of approximately $200 million of loans and ABL, [and then I expect finance]. Other than those commercial lines, the rest of the portfolio will stay relatively flat [to] have an uptick in the first quarter.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [26]

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Got it. And then in terms of the commercial real estate market, I know many of your peers bemoan the pricing and structure environment there. Any segment or niches there where you're getting a little bit more optimistic on in terms of pricing or some opportunity to grow that a little bit more in 2019 relative to this year?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [27]

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Yes. We had -- we actually had -- actually, we had a pretty good growth in CRE loans last year. I think they were up 12%. And they were mostly focused on non-multifamily -- broker-originated multifamily loans. They've actually run off. It all relates to the relationship you have with the clients. So there are niches where you can find relationships with clients where -- for example, we have several clients that have 15 to 20 different loans that stand on their own. They are priced appropriately. They do deals all the time in certain markets. Those are priced appropriate to what the market is because of the holistic relationship on the loan-to-deposit side of this thing. So it's a little bit less about that category of the CRE. It's more about the type of client and the view of the holistic relationship we have. So we find successes and everything from office to warehouse, a lot of owner-occupied CRE. So again, one of the great things about being in Metropolitan New York in CRE is you kind of pick and choose, and you can pick deals that have relationship components and the risk -- right risk-adjusted returns, and frankly, say no to deals and structures that do not. So things like, as we've said over and over again, multi -- broker-originated multifamily deals are just tough from a price standpoint. They're great from a credit standpoint. But from a risk-adjusted returns, trying to get the types of overall company returns we're trying to get out of this thing, it's just more difficult. So there are other alternatives to do based on how we structure the deal in the broad relationships.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [28]

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Got it. That's good color. And then one final question. The pickup in the loan 30 to 89 past due, that's just for end of year waiting for financial statements to renew these loans?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [29]

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Mostly. There's a -- there's one decent sized credit that represents about 40% of that uptick that is actually related to a -- government-related credit that is in the process of paying us down. So we're not concerned about that, and that should be cleaned up relatively shortly here. And then the majority of the rest is exactly as you're referring to, which is just loans that we highlighted in our press release. It's loans that are in the process of renewal or payoffs. So no, we don't see any concerns from the perspective of delinquency trends at this point, and we look at the rest of the credit stacks. NPLs decreased. OREO decreased. We continue to have good performance and experience recently. We're just continuing to -- loans that are coming in the NPLs are actually being worked out relatively quickly, and real estate is actually being worked out relatively quickly as well. So my perspective, we continue to see some positive signs there.

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Operator [30]

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We'll go next to Austin Nicholas with Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [31]

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Maybe just on the remaining resi mortgage portfolio after the sale, can you remind us what we should expect from runoff in that -- in the kind of remaining portfolio?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [32]

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Based on what we're seeing in third and fourth quarter of '18, you should see another $500 million to $600 million of runoff in 2019. I think that's based on what's happened with rates. It's going to be at the higher end of that $600 million -- of that range. But that's been pretty consistent now for 2 or 3 quarters. So we think that that's going to persist in '19.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [33]

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Got it. And then just looking at the traditional C&I yields. They were down quarter-over-quarter. Any color there and then maybe expectations for those yields as you look to the first quarter?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [34]

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Yes. It's mixed of business. And we actually had -- you'll referenced that we had a decrease in commercial loan prepayment penalties. And that -- when you think about our prepayment activity, it's not only commercial real estate. A lot of what we do on the asset-based lending side and in some of our other C&I and commercial-related businesses also had some prepayment activities associated with it. So if you adjust for that, the performance was actually exactly what we thought it would be, which is the vast majority of what we do on the C&I side is floating rate, and it would have been a nice increase in yields quarter-over-quarter. So I think that you can continue to envision that there's going to be some volatility in those -- in the yields in those commercial business lines and in that commercial loan line item. But net-net, if we continue to be in this rate environment and with one more fed rate hike, you should see an uptick in overall C&I and commercial loan yields over 2019.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [35]

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Got it. And then just one last one. Is it still the plan to continue to consolidate branches and get down to that low 90s number by 2020?

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

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There is. So we're down to 106. We closed another 7 or 8 branches in the fourth quarter. That would be -- we have now met the goal that we highlighted when we first announced the Astoria deal in March of '17 when we were taking the branches down from about 140 to the low 100s. The intention is to continue to do -- we're still in the, I'll call it, the middle innings of working out a real estate strategy, and that is going to be one component of it. We're going to continue to consolidate financial centers. And by the end of 2019, we'll be much closer to the low 90s to potentially below 90.

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Operator [37]

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And we'll go next to Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [38]

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Luis, just a first quick question. On the $500 million commercial portfolio from Woodforest, what are you -- I know you guys provided the blended yield on that. But what are you assuming the blended funding cost to be to get that NIM accretion that you're talking about?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [39]

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2%. 2.5% -- well, the blended cost is 2%.

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

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2%. Okay, okay. That's helpful. And then how should we be thinking about the provision, right? This portfolio get -- I apologize. Does it get marked or no? Like will you need to be providing...

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [41]

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So this is an -- it's an asset purchase. But given the -- given that we are acquiring the origination platform, people and their processing system, I guess it kind of is a business combination. So we're not buying a company. We're buying the loans through an asset purchase. But for GAAP purposes, this will get accounted for the same way that the business combination accounting would. So they're going to see -- this will generate some goodwill. We will mark the portfolio to fair value. And as Jack was alluding to before, we spent a lot of time on the credit NIM risk management front with a very lengthy due diligence process. So we have this -- we've got a good mark on this portfolio, and we are very confident that the -- that we have it. It's going to be market direct play from a fair value perspective, but it's going to be no different than it would've acquired a commercial finance business of $500 million. The accounting will be the same.

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

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Okay. Could you -- can you share with us what the mark is?

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

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We're not disclosing that info, but it's a good mark, similar to what we've done in every one of the deals, Advantage, NewStar and others. It's a -- we have -- we render the portfolio. We have a good mark, and we are very confident that any potential -- there's no near-term credit issues that we would have to face at this portfolio given the conservative nature we've taken on the mark.

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

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It's interesting. So we look at these things. It's a combination of what the credit quality is, the price you're paying and the mark. So it's a combination of all those factors and to doing these things. We target all these deals. We target winning all -- put it through the sausage maker, at least a 20% IRR. And so we're -- and we've generally always exceeded that -- the 20% to 30% range of these things. So we take all these things into consideration.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [45]

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Okay, okay. And just curious, maybe a little bit of background on how this came together. And I guess, it seems like it always -- it seems to makes sense from a commercial finance -- entities are selling because they have funding restraints. But I guess, given that this is a little unique, right, and then it's a bank, as you guys already cited, what's your reasoning behind disposing of this business?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [46]

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Relative size of the business to the overall size, and so relative size and composition of the business relative to the overall size of the bank. So typically, what happens -- and again, I don't want to speak for the Woodforest folks here. But what we have seen in the past, similar to when we acquired the NewStar business, a company that size starts in especially finance or commercial finance business line. And many times, it's over -- it kind of outgrows what the overall balance sheet size is for the institution. And there's -- I think that that's exactly what happened here. The $500 million portfolio, you want about a $5 billion asset-sized bank, right? And so when you think about the proportion of that relative to the proportion that our ABL business represents to our business, you'll see that we have a much more diversified commercial finance portfolio with a bunch of different asset classes in it. So they -- I honestly don't want to speak for them. They have their reasons for doing it. But in our history of doing these deals, that's usually one of the things that happens here, is that if the business wants to continue growing the originations platform, and the sales personnel and the business development officers want to continue originating business, always easier to do that with a larger balance sheet and larger funding capacity that we have versus the incumbent organization.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [47]

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Okay, okay. That's helpful. And then, Luis, I think you said it before. But can you just remind us so the provision impact then from the resi mortgage book selling off? Did you...

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [48]

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Yes. It's not going to have a big impact on it. So we've been guiding to that $10 million to $12 million number for -- probably for the last 4 or 5 quarters. That's going to continue being the same boat. The 15 to 30 years had a very long tail to them, which is why from an interest rate perspective, we're -- that's the portfolio that we're focusing on to get rid of. But the way that the GAAP accounting works on -- and then again, next year, it was all going to change anyway with CECL. So this would've been only a full quarter dynamic. The provisioning requirement, given the long tail and the mark that we had in the carrying value that we had on the loans, was not being a major driver of provisioning expense. So for modeling purposes, you shouldn't assume that the provision is going to decrease substantially given the sale.

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

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Got it. Okay, okay. That's helpful. And then just on the expense and fee guide that you provided in the slide deck, they just -- they seem a little aggressive, I guess. I've got to still run it through the model. But then you guys have done a great job on the expense side. I guess I feel probably more comfortable on the expense side especially. I'm assuming a lot of that, as you pointed out, is going to be driven by the continued banking center consolidations. Is that correct? ? Is there anything else that's going to move that number, meaning...

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

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Well, I think it's twofold. Well, I think it's twofold. I think that you have -- so as we alluded to on the earnings release, you've seen a pretty big decrease in the data processing expense from the fourth -- from the third quarter and in the fourth quarter. So we completed the full IT systems integration in August. So we haven't had a full year benefit of that operating expense yet. So when we're guiding from an annual run rate OpEx perspective, you're going to have a -- 2019 will be the first kind of full year of the IT systems integration, the progression of ongoing it. And so the -- we consolidated financial centers over the course of the year. So in 2019, you get the full benefit of having closed those locations. You get the full benefit of having sold the Lake Success headquarters building. You get the full benefit or you start to see the benefit of the ongoing consolidation dynamics. So you have a little bit of a waterfall impact or a snowball impact that we generated cost savings over the course of 2018. And then 2019, it's the first full year of [sales]. Now with that said, we're also reinvesting in the business. We're going to be active in hiring folks. We're going to be active in continuing to invest in IT infrastructure. So our run rate OpEx today is about $415 million. And as we put in our slide deck there, we've maintained that guidance. Confident there because we're going to continue generating sales. We're going to continue deemphasizing some of the things in the investments that we made on the kind of traditional brick-and-mortar retail banking side, and then we're going to redeploy that into continuing to grow the commercial banking and IT and in digital infrastructure that we have. So the $415 million, we are very confident about. On the fee income side, we had a very good fourth quarter. But as I said, as we put out in our earnings release, a lot of the investments that we have made on the fee income side are offshoots and kind of ancillary businesses that we have from our commercial banking side. Our loan swap business, our syndication business, our loan participations business, those are all event-driven with new loan originations and so forth. So these are not steady state. Every quarter, we're going to generate X amount. But given the pipeline that we're seeing building, the investments that we've made, we feel very confident in that $110 million [loan in bogey] that we provided there. And then we'll -- we have enough initiatives in place that we've invested in, and we feel good about being able to generate meaningful growth in the fee income side as well in 2019.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [51]

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Okay, okay. That's great. That super helpful. And then just finally, so I know you guys have talked about -- and Jack, you've talked about you're managing a model here that's going to continue to generate a 10% EPS growth rate and the possibility profile that you currently have. Is that -- should we assume that, that 10% EPS growth rate is still aligned with what you can deliver in '19?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [52]

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Yes.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [53]

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Yes.

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Operator [54]

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(Operator Instructions) We'll go next to Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [55]

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I hope I'm last in the queue, and if I go on too long, please cut me off. I have just a few more questions.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [56]

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As of now, you are.

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

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That's right.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [58]

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So just a couple of clarity questions. Luis, I think you said plan on borrowings being down $1.5 billion for the year. And as I think the loan sale and what's being put onto the deal, the net balance sheet reduction is $1.1 billion. So I just wanted -- does that imply the securities portfolio be down $400 million, consistent with your prior guidance?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [59]

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Yes. Correct.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [60]

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And so what's the yield on the securities coming off?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [61]

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About 2.5%.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [62]

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2.5%. Okay. And then the other clarifying question is going back to Casey's question. So with the Woodford (sic) [Woodforest deal], the remaining growth bogey, the $1 billion to $1.5 billion, is that a target that can be accomplished organically? Or is there another deal assumed in there?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [63]

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It can be accomplished organically.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [64]

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And is that the expectation?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [65]

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Yes, yes. I mean, again, we are -- we kind of have this toggle switch that says wherever we can find the right risk-adjusted returns and the right opportunities. But we're confident that it can be done organically, but there may be a portfolio that we find that has better dynamics than some of the things we see organically. But as we've drawn this up as of now, that can be accomplished organically.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [66]

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Okay. And that segues into the next part of my question, which is, can you just remind us how many teams do you have in-house originating loans? I know there's been some investments along the way, so they've been bolstered. And so with that, can you just give us an update on what the targeted originations are for those teams both in terms of loans and deposits? And how many are matured?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [67]

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Yes. So we have 36 teams in total in the company. And what we've done over the past year is we've added competencies to all the teams in one way, shape or form, either bolstering up treasury management that it has had a very good year for us or -- and/or deposit gatherers, or in the case of whether deposit gatherers primarily, there are more lenders for very specific segments. So we're very confident in how the model works. And as you know, the -- we tend to focus these teams. These teams are focused on a variety of subsegments that are driven in some cases by product, some cases by industry sectors, some cases geographically and in some cases through ethnics and ethnicities. So we've been able to create a flow of that. Again, they're compensated on how they create profitable relationships with clients. So if you cut through all the mechanisms that we used to do that, that's what their incentive to do. I'm not sure if that answered all your question, Matt.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [68]

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Partially. We tend to be more quantitative.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [69]

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So let me give you another -- I'm giving you another quantitative number. So we will have originated in 2018 more than $4 billion in loans through those teams. So we were able to originate -- actually, the $4 billion includes the transportation management company we acquired. But -- so between that, we originated $4 billion. And again, the toggle on that is you also have pay downs. So as pay downs happen and get refinanced, you have the net effect coming out of that. So we're very confident in our ability to continue to originate enough product internally, organically to achieve those numbers.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [70]

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I answered the question. So thinking about it a little bit differently, Matt, I think this might help you out because there's a whole number of teams and this -- our team -- some teams do loans. Some teams do deposit. So the way that you're thinking about it which is each team, what it represents. That's not how we think about it. That's not how we manage the business. So you're -- specifically to loan growth, if you look at the various line items and you look at the progression of our earnings release, which you're going to see in 2019, what we anticipate seeing is we're going to have about $400 million to $500 million with the gross that comes from the public sector side. You're going to see about $500 million to $750 million that growth that comes on the broad commercial real estate side, including all of our CRE category unit, categories in multifamily. And then the remaining commercial businesses, the remaining C&I and commercial finance business lines would represent about $500 million to $750 million of growth, excluding the Woodforest acquisition. You add up the Woodforest acquisition plus those 3 items on the public sector, CRE and broad commercial side, you get to about to $2 billion to $2.5 billion worth of commercial loan growth, and that's going to be offset by the $500 million to $600 million of runoff that we're going to see in residential. That gets you to that range that we're putting there of $1.5 billion to $2 billion. Hopefully, that's quantitative enough for you.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [71]

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Nailed it. Jack, you still had quite a bit of confidence in the portfolio deal outlook. In prior quarters, you talked about how many bids you have outstanding or NDAs. Could you give us some color there and confidence level on -- in terms of outstanding bids to pull through?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [72]

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Yes. So how can I answer this question without going too far?

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

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I would answer it this way. I think that we have been very consistent over the course of 2018 in highlighting the 3 or 4 different things that an acquisition had to have for us, the key criteria that we look at. First and foremost, our #1 priority or filter when we look at these things is that we very much like -- to Jack's point before, we very much like businesses that are part of the regulated entity. And if you're part of it, an OCC-regulated bank like this one is even better. Now that gives us the confidence that it is a bank eligible portfolio, the structuring requirements of the portfolio, the underwriting or requirements of the portfolio are very similar to what we do whenever you focus on those types of businesses. When you start straying out into unregulated into that specialty finco, you -- we always find that the quality and the credit box that those portfolios are underwritten are just different than what we do. So first and foremost, division of the bank. Second, we don't pay big premiums for these deals. We're not disclosing the premium publicly, but this is very much in line with deals that we have done in the past. It requires no capital or no equity raise. So you can be confident in that this meets the criteria from a perspective of being a premium that we considered to be very attractive to us. Third, it has to be in business lines in which we're already in. We're in ABL. We're in commercial financial business. We have an established infrastructure of risk management with credit personnel, collateral management personnel that can go in there and reunderwrite the portfolio and know what they are looking at. So these are asset classes that we know very well. There are asset classes that we can reunderwrite and that we can get very confident and comfortable regarding the mark and the fair value and the carrying balance of what these loans are going to be once we owned them. And the third thing is, as Jack mentioned, these have to be transactions that have an IRR dynamic to us of more than 20%. So that's why Woodforest is -- that's why we passed on so many things, is because we have a pretty good selection criteria. Deals like Woodforest meet all of those, and that those are the type of deals that we focus on. We have ongoing a number of different opportunities that we're taking a look at that vary between asset classes and size. But the filter are those 4 components that we talked about, and we're going to be patient. If we do a deal, that's great. And if we don't, we will use our capital. And we'll buy back more shares, and we'll do something else. It's -- we don't have a gun to her head when it comes to how we think about these M&A opportunities. I think that we demonstrated that we were quite patient in 2018. And I think we've done and we're announcing a deal that we are very confident in and that we like a lot and that meets all of our criteria -- it's consistent with all of the criteria that we've been laying out for quite some time now. Our M&A criteria is not going to change. We're going to continue to explore opportunities under that -- those 4 or 5 different filters. And when we find one that works, great. And if not, that's fine, too.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [74]

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Right. Okay, I appreciate that. And that's on the portfolio deal M&A front. Do you have any updated color on whether a whole bank M&A is on the radar and how activity in your marketplace is trending?

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

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Well, there's a lots of opportunity right now. So I've said this to a lot of people. I've never seen more times when there is more banks to -- that want our interest in selling and so few banks that are interested in buying. So -- and again, everything's related to price and timing on that. All that said, we put that on the back burner for a period of time. There'll be a time that it is appropriate for us, and it's like Luis mentioned on the portfolio deals. It has to come together in the right price and bank's case, the right culture, the right situation. And so we're always going to look, and we're always going to have conversations. But right now, that's a little bit more on the back burner than it is on the front burner right now.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [76]

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Great. Okay. And then my last couple, just looking at Woodford (sic) [Woodforest], they happen to be located in Texas. And so...

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [77]

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Woodforest, not Woodford.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [78]

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Yes.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [79]

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Understood. They're located in Texas. And so I was curious if the acquisition exposes you to the energy sector at all and in what ways?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [80]

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Yes. So actually, there -- the team that we're acquiring is actually in Detroit. So Woodforest equipment and ABL team is actually in Detroit. And they cover generally the Midwest and the Southwest, which are areas where we are interested in adding capacity. So one of the other side benefits to Woodforest, it balances out some of the areas that we didn't have as deep a coverage as we had previously. It does have some energy-related credits involved in it. But the energy-related are not spec energy. They're kind of fundamental equipment that relates to the operating of energy types of companies. So again, that's part of the underwriting, and we're very comfortable with the mix of businesses.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [81]

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Matt, energy is not a significant component of the portfolio, and you can assume when we talk about credit marks being conservative, those are the areas that we absolutely focus on. So there's -- but it's not a significant component of what they did. It's not -- as Jack said, it's a Texas-based bank, but this was not a Texas-based business. It's not an energy-based business.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [82]

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Got it. Okay. And then that leads to my last one, which is I know there were portions of the Advantage portfolio that weren't asset classes you necessarily wanted to be in. Is there anything like that here? And when we look at the $504 million, would that be netted by anything that you don't necessarily want?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [83]

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10% of it, and you can assume that it's the energy-related tech stuff, but it's not even that high. But it's -- certainly, it's the same thing that we talked about with Advantage, the same thing that we talked about when we did NewStar. Every time that you acquire these businesses, as long as the business and the origination platform focuses on 90 percent-plus of what it does in business lines that fit our credit box, then we are very confident that we can work out the rest. And we've done that with NewStar. We've done that with Advantage already. And we will do the same thing here. So it's not a significant component of the book, and it's not -- again, we're going to have this mark in a place where we don't have to take a drastic action on that component of the book. There's -- we're not concerned from that perspective.

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Operator [84]

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There are no further questions in queue. I'd like to turn it back over to the speakers for any additional or closing remarks.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [85]

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Yes. Great. Great questions, everybody. Thank you so much for your time. Have a great day.

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Operator [86]

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That concludes today's conference. Thank you for your participation. You may now disconnect.