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Edited Transcript of STL earnings conference call or presentation 25-Jul-18 5:00pm GMT

Q2 2018 Sterling Bancorp Earnings Call

Aug 1, 2018 (Thomson StreetEvents) -- Edited Transcript of Sterling Bancorp earnings conference call or presentation Wednesday, July 25, 2018 at 5:00:00pm 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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* 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

* Jacob F. Civiello

RBC Capital Markets, LLC, Research Division - Analyst

* Matthew M. Breese

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

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Presentation

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Operator [1]

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

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

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Good afternoon, everyone, and thanks for joining us to present our results for the second quarter of 2018. Joining me on the call is Luis Massiani, our Chief Financial Officer.

We have a presentation outlining our results for the quarter on our website, which, along with the press release, provides detailed information.

We continue to be very pleased with how the company's financial performance has progressed. The financial metrics are strong and positions us to continue to evolve this high-performing model.

In the second quarter, we continue to transition the loan mix to a more optimal mix, expanded the core NIM, grew core deposits and effectively managed expenses within our forecast. For the second quarter of 2018, our adjusted earnings of $113 million were 154% greater than second quarter 2017 and 12% higher than first quarter 2018.

Adjusted earnings per share of $0.50 were 52% higher than the same period last year and 11% higher than our linked quarter. Operating metrics were strong in the quarter as adjusted return on average assets was 155 basis points and adjusted return on average tangible common equity was 18.8%. The operating efficiency ratio of 38% continues to result from the strong positive operating leverage demonstrated by our organic performance model and M&A activities. Revenues increased $146 million and expenses increased by $51 million over second quarter of 2017, representing an operating leverage ratio of 2.9x.

We anticipate our operating metrics will continue to improve throughout the year, demonstrating the value of our core operating model, our business diversification and the opportunistic M&A activities that complement our growth strategy. Now let me highlight a number of balance sheet and income statement categories and the associated activities that will drive continued high levels of performance.

First, the taxable equivalent net interest margin for the second quarter was 362 basis points, in line with our expectations. Excluding the impact of accretion income and adjusting for the changes in the tax law, the core net interest margin was 321 basis points, which was an improvement of 6 basis points relative to the linked quarter and in line with our forecast. We have benefited from rate increases and the continued repositioning of the balance sheet.

We expect the overall NIM to be approximately 355 to 360 basis point range and core NIM to be in the 315 to 320 basis point range for the full year 2018.

Secondly, commercial loan growth was strong in the second quarter. On Slide 7 in the presentation, you will note C&I loans, inclusive of our commercial finance businesses, grew $982 million or 37% annualized since the beginning of the year and total commercial loans have grown at an annualized 15.2% rate.

We are growing higher yielding C&I loans and running off lower yielding multifamily and residential mortgage loans. During the quarter, traditional C&I, mortgage warehouse lending and equivalent finance were the areas with the highest growth in outstanding balances. Total loan yields increased 16 basis points over prior quarter.

Overall, we continue to be confident in generating 8% to 10% annual net loan growth as we accelerate organic commercial loan growth and supplement this with acquisitions of commercial loan portfolios in the second half of the year.

Third, core deposits grew 1.7% over the linked quarter for an annualized growth rate of 6.8%. We continue to maintain a strong core lower cost base of deposits. We are experiencing strong retention of commercial and consumer clients and have grown select segments of deposit portfolios. The market has become more aggressive for pricing certain types of deposits. High balance money market, high balance interest-bearing commercial demand deposits and CD products have been priced aggressively, especially for banks that have high loan-to-deposit ratios.

The core deposit pricing and demand deposits, now savings and base levels of money market and CDs, have not changed, which points to building a deposit base that reflects a strong mix of core deposits.

Our deposit mix continues to be strong with approximately 40% demand deposits, 13% savings, 34% money market and 12% CDs at a cost of 55 basis points. The cost of deposits increased 8 basis points over the linked quarter and the loan-to-deposit ratios was 98.5%. The year-to-date deposit beta was 20%.

However, given our growth expectations and the competitive environment, we anticipate betas will increase to a range of 25% to 35% year-over-year -- over the year.

We continue to be confident in our ability to match net loan growth with deposit growth in 2018 and maintain a loan-to-deposit ratio between 95% to 100%.

Fourth, operating expense levels continue to be better than planned as we have carefully executed our integration program. We have completed the integration of all personnel with the exception of branch consolidations, which will occur on a steady pace through 2019. We consolidated 6 financial centers in the second quarter, for a total of 7 year-to-date. We anticipate consolidating 10 financial centers in the second half of the year.

We have also executed our strategy of streamlining our real estate holdings by selling the Lake Success headquarters and closing an additional back-office location. We are on track to reduce our real estate footprint by 35%.

From an investment standpoint, we continue to add growth from new relationship managers, risk-oriented support staff and analytical capability to our company, refining many high-quality professionals that are attracted to this model. We are also investing in client-facing technology and technologies like robotics that improve internal productivity and efficiencies.

We expect expenses will be at or below the $425 million guidance, excluding amortization of intangibles for 2018.

Fifth, credit ratios and capital levels remained strong. We have low levels of charge-offs, strong loan loss reserves and higher capital ratios. Finally, we expect to continue to improve the financial metrics as the year unfolds. We continue to see meaningful opportunities to grow organically using the team-based model in select commercial and consumer segments. We've also seen a significant increase on opportunities to acquire commercial finance portfolios and companies.

From a macro standpoint, we expect to consistently deliver 10% or greater earnings and earnings per share growth, return on average tangible assets of 150 basis points or higher, return on average tangible common equity at 17% or greater, and efficiency ratios of less than 40% on an annual basis.

Our core focus remains on building a company that creates positive operating leverage where revenues grow 2 to 3x that of the expenses. Over the past 6 years, we have met or exceeded high levels of performance metrics consistently, and we look to continue to incrementally improve each quarter and each year as we drive improved operating leverage. Look, I know everybody can read, but I want to highlight our progression in adjusted EPS and earnings over the last several quarters.

In June 30, the quarter ended June 30, 2017, EPS was $0.33, income was $44 million. September '17, $0.35 in EPS, $48 million in income. At year-end 2017, our EPS was $0.39 and income earnings were $87 million. In our first quarter ending March of 2018, adjusted EPS was $0.45 and earnings were $101 million. And as you can see from the day, our EPS was $0.50 and $113 million in earnings.

So now let's open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Casey Haire with Jefferies.

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

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I wanted to start on the deposit outlook. You guys had a nice uptick this quarter and -- but to get to -- to keep your loan-to-deposit ratio where you want it and to hit your loan growth guide, you're going to need to see a step up in the deposit gathering capability in the back half here. Just wondering, does your deposit beta guide of 25% to 35% assume that and a dollar-for-dollar funding of loan growth, be it organic or deals?

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

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Yes and yes. So we assume that there's going to be some pricing pressure, but we also assume this level of growth. Remember in the third quarter, we naturally have an uptick also in municipal deposits given the model that we have and the type of business we have in the market. But we're pretty comfortable that there are deposit opportunities out there and we can find deposit opportunities priced at appropriate levels. That said, this is a competitive environment. Rates, this is the first time in 10 or so years that rates have gone up. Different competitive dynamics work around this. So we're going to be thoughtful and cautious along the way, but we expect our ability to kind of fund our loan growth with deposits, with core -- I should say, with core deposits along the way.

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

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Okay, great. And on the other side of the NIM equation with the loan pricing. Given that there could be a portfolio lift out here, is there a target loan yield that you guys need to hit that 315 to 320? And so where is the new money yield on loan pricing today from an organic perspective?

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

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Yes, generally, we're trying to do 2 things. We're trying to variable-ize the rates as we acquire new commercial loans. So we want to become more asset sensitive, so -- which means we want more loans, and these are mostly C&I loans that are more variable rate or at least short-term rate loans. And then secondly, basically, it's anything over 5%. So we're trying to look at loan yields in excess of 5% to support increases in NIM and the type of mix that we want in the future. And again, most of that comes from the general C&I category. And again, as you know, one of the advantages of this balance sheet is we have good diversification to be able to look at higher -- different mixes of loan yields by different product categories.

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [6]

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That's one of the reasons -- [started from up there], that's one of the reasons as to why we continue to be so selective on everything that we're doing on the fixed rate commercial real estate and multifamily side. It's because we're not seeing the commensurate increase in pricing that you should be seeing because of the move in rates. And so to Jack's point before, the ability to diversify -- and one of the reasons -- we have a couple of slides during the presentation demonstrating where the growth has been coming from is that the ability to allocate capital reserves and funding to the various business line depending on where you can find the best risk-adjusted return, it's what gets you to a place where you can support the increasing cost of funds with the diversified loan portfolio that has attractive risk-adjusted return and yield dynamics to it.

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

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So I'll be more blunt as we go along here. So things like the big deal in metropolitan New York is always the broker originating multifamily loans. We are not getting anywhere close to the yields that we would need out of that category, so we don't do that. There are some good relationship-oriented multifamily lending opportunities that may relate to the right levels of risk-adjusted yields. But again, we have the ability on certain categories that -- to be able to say no to because they just don't give us the yield. And to Luis' good point, they also term out that price, which makes it a little bit less asset-sensitive than we want. So we're trying to be selective and smart about what is out there. And frankly, saying no when we need to say no and looking at opportunities when -- that we can realize.

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

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Understood. And just last for me on the portfolio lift out opportunity. Is that still a robust opportunity -- I mean, are there a lot of opportunities out there? And what is sort of your sweet spot from a size perspective?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [9]

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The -- it surprisingly continues to be very high opportunity. There are many portfolios that we continue to see. And we've generally looked in the kind of $0.5 billion to $2 billion range out there. So again, if we can find the right portfolio, it allows us to add that portfolio and run down some of the lower yielding assets that we have in this transition. That means accelerating the earnings and the -- and net interest margin that comes from it. So again, the biggest thing, there are plenty of opportunities out there. They have to be the right opportunities from a return standpoint, and most importantly, they have to be the right opportunities from a credit risk standpoint. We are not going to compromise the credit risk, especially in this environment. So -- but there are plenty of opportunities to take a look at and -- within the context of the conditions that we have.

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Operator [10]

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We'll next move to Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [11]

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Yes, can you guys hear me?

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

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We can. We thought you bailed on us...

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

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We can, Matt.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [14]

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Sorry about that. I don't know, I suppose it's on my end, but I'm sorry. Just thinking about where we are midyear. So period-end loans were $20.7 billion considering guidance growing 8% to 10% for the year, that leaves about $1 billion between now and year-end to kind of hit the low end. Just curious, the composition of that growth, do you expect it to be organic? Or is that going to include any other portfolio deals?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [15]

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The opportunity -- it's really hard to prescribe a percentage of that. We said at the kind of the beginning of the year that our expectation was about 1/3 of the portfolio growth would come from M&A and about 2/3 of -- would come from organic. But there are kind of toggles, right? So you can toggle back and forth as to where you're, frankly, going to get the yield and the quality of the assets you want. So we don't have an exact answer to that. We feel comfortable. If we need to do this generally organically, but there are potential opportunities to do this through M&A activities also.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [16]

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Okay. Thinking about the NIM guidance, obviously, the portfolio of deals come with higher loan yields than what's typically originated. Just thinking about the NIM guide, it's 315 to 320. If you do get another portfolio acquisition, would that push you outside of that range?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [17]

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Yes, it would. Yes, it would, Matt. Yes. Depending, of course. A lot of variables go into that equation. It would depend on the size, the nature of the asset class, fixed versus -- floating rate versus short duration fixed rate, are there -- another sizable acquisition would have the similar type of impact that Advantage had, which is -- that the acquisition of Advantage Funding had, which is that you'd see a meaningful pickup in net interest margin. So that -- another sizable deal, would take us to a higher end of that range and slightly above it.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [18]

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Got it. And then excluding a deal, I mean, the balance sheet is still modestly asset sensitive. Can we hold the NIM here or see some slight expansion?

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

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I think we can hold it. I think that we can hold it. I think that the expansion on a stand -- the expansion on a standalone basis, we wouldn't rule it out. But at the same time, I think that the -- it just depends on how quickly the transition of the lower yielding assets or the runoff of the lower yielding assets happen and then is replaced by other stuff. Because it's a -- so it's a twofold equation, right? The fact that you're adding assets that -- a lot better yield than what we have on the books today, but we continue to have between the residential mortgage and the multifamily portfolios that we inherited, we still have over $8.5 billion of assets that are fixed rate and we're originated in the kind of low end of the -- in the lower part of the interest rate cycle. So in and of itself, I think this creates a great runway to being able to continue to drive net interest margin growth over time. But the transition itself, depending on how quickly it happens, it might take 1 or 2 quarters more than we would want. But it's -- but the ability to continue to drive net interest margin longer-term with that transition is absolutely there.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [20]

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Okay. And then just one other one. It's fairly easy to see the bank with the profitability metrics you have versus the growth profile getting into an overcapitalized type of position. So could you give us a range of where you want to manage capital to? And if we do find ourselves where capital is growing, what you might do with it in terms of a leverage strategy, be it buybacks or adding to the securities portfolio, how would that work out?

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

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Luis, you want to take that one?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [22]

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Yes, I'll take that one. So then -- it's a good question, Matt. There's -- it's a good place to be in the sense that we have a lot of optionality and flexibility. The dividend payout ratio. So the dividend in the third quarter was $0.07. The dividend payout ratio was under 15%. So we're generating internal capital. And we anticipate that we're going to continue to do that. The short part of that -- the short answer is that to the extent that we can continue to find acquisition opportunities and organic loan growth opportunities, that we can -- that we -- that meet our risk-adjusted return criteria that are hurdles, we're going to continue allocating the capital to doing exactly that. The Advantage Funding acquisition is a great example. We ended up buying that business for a 4% premium and an implied price-to-earnings multiple on the business of under 7x. If we can continue to find opportunities like that, and to the question that Jack answered before, we're seeing as many opportunities today, if not more than what we have seen in the last couple of years. We think that retaining the capital and redeploying it into these growth businesses that generate substantially greater kind of compounding of EPS growth going forward is the right thing to do. So that said, we've always -- we sound like a broken record at times. We are pragmatic about the world. We're not going to force the growth issue if we don't find opportunities that we like. We have the flexibility to being able to buy back shares. We have flexibility to be able to increase securities portfolio if we decided. But at the moment, the strategy continues to be identifying growth opportunities and taking advantage of all of the various opportunities that we're seeing and continue to grow that way. Fortunately, we have more than enough capital to being able to execute on these opportunities.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [23]

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Understood. And that kind of ties into my last one, which is, you certainly seem confident that another portfolio deal can be done by the end of the year. The balance sheet seems liquid enough to handle it But I just wanted to get your sense for if another sizeable deal, call it, $1 billion were to come about, how you would think about funding that type of acquisition?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [24]

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$1 billion would be on the lower end of the -- we think would be at the high end of the range of what we would be able to do without having to execute some form of sales of the assets that we're trying to run off. We have plenty of capacity to do that. We'd have the ability to do the same thing that we did with Advantage, which is run down a portion of the securities book to be able to create the liquidity for it. So -- about $750 million to $1 billion, we are still confident that we could do that, let's call it, organically. If we were to buy something that would be meaningfully over that $1 billion, I think that we'd have to -- we'd have the ability of being able to run off some of the residential mortgage and multifamily assets. And could -- we have plenty of assets to be able to run off in that regard. So there's the ability to fund something sizable, not a concern that we would have as they govern on our ability to do it.

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Operator [25]

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We'll next move to Austin Nicholas with Stephens.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [26]

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Maybe just on the deposit growth and maybe looking at the borrowings. Can you maybe just give us a little more color on the deposit strategy from here? And if there's an ability to pay down borrowings with incremental fund -- retail funding. And if that, an accretive trade, as you kind of call it, look out over the next few quarters.

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

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That would be an accretive trade. So anything -- any dollar that we are originating on the deposit side will be at a meaningfully lower number than what we're doing on -- in both the borrowing that we took in the second quarter where (inaudible) will be borrowing. So the weighted average cost and how that weighted average cost to deposits will change over time, we'll see anticipated increases that will have a fed funding, so forth, yes. Replacing -- every dollar that we replace with deposits will be accretive from an interest expense perspective and from a net interest margin perspective. And on the strategy for growth, it's a little bit of a function of the geography in which we operate in. And I don't think that that's a secret to anybody that it's a -- New York market is a super competitive market. The Boroughs, Long Island, the places where we're generating the vast majority of our deposit growth are as competitive as it gets in the country. And so one of the reasons that's why we are guiding up on the beta relative to where we've been in the past is that in order to generate the type of deposit growth that we want to, we are going to have to do a portion of that with a mix of product and rate. But rate is obviously an important component of the discussion with clients, especially with larger balance, kind of higher balance commercial account. It is front and center. The rate discussion is front and center at this point. With that said, we think that every dollar that -- the ability to continue to transition the balance sheet and the new origination yields that we're seeing give us the confidence that even on -- even if you have to increase the pricing on deposits, we're still able to maintain and increase NIM as we continue to grow. So there's -- the flexibility of the balance sheet that we have on the asset side is what gives us the comfort that we can continue to generate deposit growth even at slightly higher rates and still maintain the type of profitability and return profile that we want.

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

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Okay, if you look at it a little bit different way, to slice a different way. About 75% to 80% of the deposits we have and the mix we have is generally not interest rate sensitive. So in this kind of core base, and as you look at all kinds of banks' balance sheets you have, a certain part of their base is very core, very low cost, isn't interest sensitive. What everybody fights over on the growth and the rate side is that kind of 20% to 25%, in our case, of, generally, money market types of balances, some CDs, some higher balance, commercial, NOW accounts, that's where it plays out. So the key is to make sure that you have this core, low cost base that is a foundational element and then appropriately look at segments where you go after. There are very -- we have specific segment strategies relative to deposit origination where we're just not paying a rate, but we're creating the relationship and adding value to that relationship. So each bank has a different composition. We think we have a very stable, relatively low cost, especially for this market base. But there are plenty of opportunities to grow and be smart about how you're spending the money in terms of rates.

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Austin Lincoln Nicholas, Stephens Inc., Research Division - VP and Research Analyst [29]

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And then maybe just on expenses. I think you mentioned getting to that $425 million, call it, ex amortization number for 2018. As we look out to '19, is it possible to be around that $425 million level ex amortization for '19 as well or maybe even a bit below given the branch cuts and the real estate kind of rundown that has been announced and executed on this year?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [30]

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Yes, that's what our expectation is, is for 2019 to be at a similar expense level as we are, that kind of -- around that $425 million level now. Remind you, too, even the $425 million, we just added Advantage as a cost and we're still guiding at $425 million and under along the way. So even with the last acquisition we made that came with x amount of expenses, we're still guiding down. But the answer is yes.

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Operator [31]

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Our next question comes from Collyn Gilbert with KBW.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [32]

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I have a whole slew of questions. I'm going to try to be as efficient as possible. Okay. Let me start with just wanted to get some clarity around the loan movement this quarter. What were the actual Advantage balances that came over? Because I know you guys have talked about unwinding, say, 10% of that portfolio, and I just didn't know the speed at which you're going to do that. Or just because I think if we back out the addition of Advantage, it looks like organic C&I only grew 10%, if I have that right. So just trying to reconcile the lower organic growth rate with some of your more optimistic views on C&I growth.

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

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Yes. So the Advantage balances were $457 million. And approximately -- so approximately 10% of that portfolio, we will be running off over time, but that has not happened in a meaningful fashion yet. So the Advantage balances throughout the course of the quarter and towards the end of the period were still right around $450 million. So there was -- remember that we closed that deal on April 2. So we did get the full benefit of the Advantage, of the $450 million of the Advantage balances over the course of the quarter. So now when you say on the C&I side, that's only growing 10%, I think that there's -- the bid -- we have a slide there in the slide deck that shows where the growth came from, right? So on an end of period basis and since the beginning of the year, the growth has been mostly driven by the public sector finance business; the equipment finance business, with the acquisition of Advantage; the warehouse funding business; and then traditional C&I, which also had some nice growth. So again, we are always thinking about growing the balance sheet and the flexibility that we were talking about of allocating to a bunch of different asset classes. We are going to continue doing that. Into the back half of the year, where you have to remember that we have some seasonality in our balances as well and in some of our business lines, public sector in the third and fourth quarter always has a better quarter than in the beginning of the year. Warehouse lending in the third quarter is going to have -- also from a seasonal perspective, will experience a benefit. Factoring in payroll finance do the same. So all those -- the traditional C&I and the commercial business lines always have a better second half of the year than the first. And so we're going to continue to see a similar type of growth dynamic across the board in all the business lines and we anticipate that the second half should be better than the first.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [34]

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Okay. Okay, that's helpful. And then just in terms of runoff for Astoria, has your outlook changed at all for the pace of that portfolio runoff?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [35]

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We were anticipating that we -- that given rising rates, we were going to see a little bit of a slowdown, especially on the residential mortgage side in pay-down activity. But we have not -- I guess, it's been a little bit of a function of a lot of where those assets priced and a part of the curve will be priced really hasn't really experienced much of a change so we have actually seen the portfolio continue to cash flow at the exact same rate as we thought before. So we've been guiding to $750 million to $1 billion of runoff over the course of the first 12 months. This quarter, we had, from an end of period perspective in the residential mortgage asset class, we had a rundown of $225 million. So right in the middle of that number. So we still feel that $1 billion of runoff in residential mortgage for this year is a good number and we're seeing similar type of -- the multifamily runoff has been slower, but we were anticipating that it was going to be. So it's also performing as we had previously anticipating.

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Collyn Bement Gilbert, Keefe, Bruyette, & Woods, Inc., Research Division - MD and Analyst [36]

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Okay. Okay, that's helpful. And then on -- so you added some leverage this quarter. Liquidity -- I mean, securities were up, borrowings were up, I think beyond certainly what I was looking for. What was sort of driving that? And how should we think about that liquidity build going forward?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [37]

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Yes, on the securities side, it was more of just taking advantage of diversifying the securities portfolio into other asset classes, mainly corporate securities where we determined there's just a better relative value and kind of risk-adjusted return to some of the other asset classes. So we built out a larger corporate portfolio than what we've had in the past. But that's not going to continue going forward. So the size of the securities portfolio both in the perspective of absolute dollars as well as percentage of asset is pretty much where it's going to be. So you're not going to see meaningful increases there. The larger component of the increase in the borrowing is the fact that we had to pay -- we had funded about 50% of the acquisition of Advantage with the sell down on securities that we did in the first quarter. The other half, so about $300 million, $250 million to $300 million or so, of the acquisition of Advantage was funded with borrowings. And so what you'll see in the second half of this year is that you're going to see a meaningful pick up and increase in deposits, and the overall strategy is to replace -- at least maintain to potentially replacing rundown some of those borrowings with incremental deposits to be gathered and generated in the second half of the year.

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

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Okay. Okay, that's helpful. And then just on the NIM. So the reported guide, this looks like it's coming down about 5 bps, but your core NIM guide is holding steady, which would indicate that the accretion expectation, I guess, is coming in a little bit lighter. Is that right?

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

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Yes. So that's exactly it. There's -- we've been guiding to about $100 million for 2018 in accretable yield. In the first quarter, we saw 30 -- just over $30 million. This quarter, we saw $28 million. You should see about a $2 million to $3 million decrease in that accretable yield number quarter-over-quarter through the end of the year. So we're still going to be around $25 million or so. But the accretion -- yes, it is coming in at a slightly slower pace than what we had originally anticipated.

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

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Okay. Okay. Okay, that's helpful. And then just on the -- while we're just still on that kind of balance sheet discussion. What are the -- obviously, we see the pricing dynamics and the deposit pricing dynamics going on in the market. Are you seeing any behavioral differences between Astoria's franchise and then legacy Sterling franchise? Or how you're seeing those latest trend, I think I asked that question last time, but just generally...

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

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It depends. So yes, so from a consumer-to-consumer retail base, so if you compare the Astoria consumer base and retail banking base to what -- to the legacy Provident retail banking base, we have not seen a whole lot of difference from the perspective of how consumers are behaving. So we are seeing some migration of products from the perspective of account holders that were in a savings or in a money market account that have now started to take advantage of higher CD products and higher rates on the CD side. So you've seen some transition of deposits. But the overall behavior and the overall cost to deposits on the consumer side for both the legacy Provident/Sterling and the Astoria side have been pretty darn similar. What we have seen, the vast majority of the rate sensitivity has been in 2 places. First and foremost has been in the municipal book. The municipal book typically kind of performs or behaves with plateaus, where specific inflection points or until an inflection point is reached from a rate perspective, you don't see that portfolio reprice in a meaningful manner. But then you do reach an inflection point where it plateau -- kind of a plateau is reached where every -- not every, but a substantial portion of the municipal accounts then reprice. So we have not seen a whole lot of -- one of the reasons we're having such a low beta in the last -- second half of last year and into the first quarter of this year was the fact that the municipal book had repriced at a slower rate than what we had or a slower beta than what we had originally anticipated. We saw that beta pickup in the second quarter. Now with that said, we think that there's also -- again, there's runway from the perspective of 2 or 3 quarters for there to be another inflection point that's reached for that part of the book. The second component of the book that has been rate sensitive, as Jack mentioned in his comments and I mentioned before, has been the high balance money market and mostly the high balance commercial money market accounts. We always like to say, when you have a client that has a treasurer and has somebody on his staff that is getting paid to manage cash, not surprisingly, those are the types of clients that when a fed funds rate happen, yes, they're calling the next day to make sure that they get paid on their deposits. So that is where the rate sensitivity has come. And with -- as rate sensitive as that portfolio has been, it has still not been as rate sensitive as we had originally anticipated it was and we've started to see -- the great thing about that portfolio and how we manage that portfolio through our single point of contact model is that you have negotiated transactions with individual clients. And so you have a nice range. You have a nice wag from the perspective of how that portfolio reprices because you have the ability to manage that separately. We're not moving to RAC rates. We're not moving deposit for product pricing, we're essentially negotiating rates with individual clients. So it works from that perspective.

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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 my last question for now is just on the provision and net charge-offs. I think, Luis, you had indicated maybe the provision range would kind be of in that $10 million to $12 million range this quarter, thinking it will be at the lower end. I guess, it's been a couple of quarters now where net charge-offs have been a little bit more elevated and the provisions kind of come in at that high end of the range. Do you think we should start to think that, that bar is now to be set higher on both provision and charge-offs?

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

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Not yet. I would not say -- I'd say not yet for 2 reasons. First and foremost, I think that if you look at -- yes, the charge-off activity has been higher. But when you actually look under the -- and look at the trends and delinquencies and formations, one of the reasons as to why you see an increase of 30 to 89 days delinquencies on NPLs is the fact that we -- when we acquired Advantage, we had to add in the delinquencies and the NPLs that we inherited from them. So when you actually look at stripping out acquisition activity, the underlying trends from both an NPL perspective, the 30 to 89-day delinquency perspective will actually continue to move in the right direction and we've actually started to see a fair amount of activity from a perspective of managing out of OREO properties and other assets that we've had, that we've been working out of for quite some time. So I don't think that we have seen more elevated charge-offs. We have taken slightly higher provision by about $1 million from the last 2 quarters relative to what we were doing in the past. But we -- again, we think that many of these or the higher charge-offs have been driven by episodic type of circumstances with specific clients. It's not been broad-based across the portfolio. And we are seeing improvement in working out some of our -- some of the issues that we've had in the credit types -- or some of the specific credit assets that we've had for -- that we've been working at for quite some time. So I think that we're still maintaining that $10 million to $12 million guidance and I mean, I feel good that we should be able to meet that in the second half of the year.

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Operator [44]

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

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [45]

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Hey, curious, Jack or Luis, you can chime in, on the commercial real estate side, or maybe as it pertains to the multifamily sector, obviously, people are very competitive on the deposit pricing side. Any sense that the spreads are poised to improve, any sense that, that could improve as pricing has to adjust, you would think would have to adjust just in terms of what's happening on the funding pressure side? Any semblance of rationality coming back to that market?

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [46]

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Yes. Bluntly, no. So -- and again, we're talking about broker-originated multifamily loans. We do have some -- see some benefit on the relationship-oriented multifamily loans where you price it on the broader relationship. But we have frankly been surprised about how irrational the pricing has been and that -- on the broker-originated multifamily side and how slow it has been for rate increases to come into the market and price effectively. And again, one of the big advantages we have is we don't have to go down that rabbit hole if we don't need to.

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David Jason Bishop, FIG Partners, LLC, Research Division - Senior VP & Research Analyst [47]

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Got it. And back to the expense side, a little bit of inflationary pressure on the FTE headcount this past quarter, I assume it's Advantage. And I know you added some personnel lately. Any sense for what that ultimately shapes out to in terms of some of the branch closures and the divestiture of the headquarters there? What are you thinking, ultimately, as we look out into 2019 and maybe it's either FTE or financial centers, where there's a target there in terms a number for those...

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

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In 2019 -- so by the end of 2019, the financial centers are going to be down to close to 100. So we're at 121 today then we've got -- we have some -- we added some details on this in the press release regarding the number of financial centers that we closed year-to-date, which is 7. And then we're anticipating closing another 10 in the second half of this year. So by the end of this year, we'll be down by 17 relative to what we started in Astoria. And in 2019, we still have another 13 or so financial centers to go. So we're going to be close to 100 financial centers by the end of -- again, by the fourth quarter of 2019. From an FTE perspective, there's a lot of assumptions that will go in to that, David, because the starting point today of just around 2,000 FTE, it will get lower because we -- as we consolidate financial centers, as we continue to execute the final stages of the integration, that's going to -- it will decrease. But at the same time, we're continuing to hire commercial bankers and risk management personnel, and we are -- we're kind of investing to continue to fund for -- investing to fund growth and diversity in the balance sheet. So the overall FTE headcount is not necessarily a number that we target specifically. What we target is having the right mix of folks that are going to get to the -- that are going to allow us to continue to invest in the business lines and then the asset classes that we want to invest in. And so target for FTE is not one that we've had publicly. And we really want -- we wouldn't put one out there. What we'll focus on is holistically putting out the target of $425 million in OpEx, excluding amortization of intangibles and being able to continue to manage through a flat to slightly decreasing operating expense base when you're still going to have revenues that are going up and that's the power of the positive operating leverage model that we talk about.

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Jack L. Kopnisky, Sterling Bancorp - President, CEO & Director [49]

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Another slice that you can look at this is, and you can look at this as just the operating expense decline with Astoria. We -- I think we said that we would reduce expenses by 35%. We will end up reducing expenses by around 45%. We will probably spend 5% of that reduction on the transition that Luis talked about, hiring new people in the right positions, the analytical capabilities, more risk managers. So we've actually done that throughout our stay here, where we've taken reductions and we've reset the base as we continue to grow. Because likely you'll need different types of competencies at a $30 billion or a $40 billion size company than you do, in some cases, at a $15 billion or a $10 billion or a $5 billion company. So our team has been particularly good about transitioning people out. That's why, to Luis' good point, it's tough to give you an actual FTE number even if we wanted to because it matters -- the mix matters as much as the pure number.

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Operator [50]

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(Operator Instructions) We'll next go to Jake Civiello with RBC.

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Jacob F. Civiello, RBC Capital Markets, LLC, Research Division - Analyst [51]

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Are you guys coming across any opportunities to accelerate the wind down of the resi mortgage book through loan sales?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [52]

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We could if we wanted to. The short answer to that is yes, we have -- we've explored that alternative and that is absolutely available to us whenever we want to execute on it. So what we're trying to do here is manage to an overall average earnings asset number. In and of itself, the loan portfolio is performing as we anticipated that it was going to. And so this isn't a -- it's not like we have to execute a full share or anything like that. We are perfectly fine continuing to manage the portfolio the way that we're doing it and we're perfectly fine having the portfolio run off by $1 billion or so year-over-year. Those 2 things work for us. Now to the extent -- I'd call the ability to accelerate that run-off, of the extent that we find an opportunity to execute on the acquisition side that would require the -- some gymnastics from the perspective of how we finance it and provide liquidity for it, that's where we would be most interested in executing one of those sales. But these are -- to Astoria's credit, these are very kind of middle of the fairway good residential mortgages and multifamily assets, we know that are underwritten the right way and have the right credit quality characteristics. So we're very confident that whenever we have to pull the trigger to being able -- we're very confident in our ability to execute if we have pull the trigger on one of those sales and we can do it very quickly if we have to.

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Jacob F. Civiello, RBC Capital Markets, LLC, Research Division - Analyst [53]

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Okay, great. And then just kind of feeds into my second question a little bit. But would you give stronger consideration to whole bank or depository M&A if the loan-to-deposit ratio consistently moves higher than the high end of the 95% to 100% target range?

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

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Well, on the whole bank M&A side of this, we've always acquired banks based on the deposit base. So if we can find that there are opportunities out there for -- if we can find low -- opportunities for low-cost, long-term sticky deposits, those are things that we would continue to look at. So that is the niche that we've always found. We're -- some of the M&A stuff that we're looking at were deposits and loans out there. So there are some good opportunities as we go forward. So the answer is yes. We would definitely look at opportunities like that.

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Operator [55]

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And we'll move next back to Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [56]

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Just had a couple of quick follow-ups. First, what is the balance of accretable yields, the lifetime equitable yield from here? And what is that lifetime? How long do you expect to stick around for?

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Luis Massiani, Sterling Bancorp - Senior Executive VP & CFO [57]

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It should be -- so this year is $100 million in total for 2018. That's going to decrease by about $25 million in 2019. So you have another $75 million or so that will come in, in 2019. And then you're going to have a step down of about $20 million or $30 million there after every year. So by -- given our size and where we are today, by the end of -- in 2020 -- by the end of the second half of 2020, the accretion income and the impact that it will have on net interest margin would be -- is going to be de minimis.

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

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Got it. Okay. And after that, the tax rate was a little bit lower than what I was expecting this quarter. Just, is there any changes there? Is 22%, 23% a good range still?

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

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22% to 23% is a good range. And if anything, I think that there's the ability -- one of the things about growing the public sector finance business and the -- our investments in municipal securities as well as low income housing tax credit that we invest in for CRE purposes is that the proportion of taxable income that is represented by tax free assets or the proportion of tax free income to the taxable income has actually increased a fair bit over the course of the last 12 to 18 months. So we, if anything, the 22% to 23% is good. And if anything, we think that there's a chance we'd be able to do a little bit better than that in 2018.

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Operator [60]

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We have no further questions at this time. I'd like to turn the conference back over to Mr. Kopnisky for any additional or closing remarks.

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

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So just thanks for following us and thanks for making the change in time. Appreciate it very much and look forward to more of the things from the company. Thanks a lot.

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Operator [62]

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And ladies and gentlemen, that does conclude today's call. We thank everyone for their participation. You may now disconnect.