Sterling Bancorp's (STL) CEO Jack Kopnisky on Q1 2016 Results - Earnings Call Transcript

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Sterling Bancorp (NYSE:STL)

Q1 2016 Earnings Conference Call

April 27, 2016 10:30 AM ET

Executives

Jack Kopnisky - President and Chief Executive Officer

Luis Massiani - Chief Financial Officer

Analysts

Casey Haire - Jefferies

Mathew Kelley - Piper Jaffray

Collyn Gilbert - KBW

Operator

Welcome to the Sterling Bancorp 2016 First Quarter Conference Call. I’ll now like to turn the conference over to Jack Kopnisky, Chief Executive Officer and President.

Jack Kopnisky

Thank you. Good morning, everyone and thanks for joining us to present and discuss our results for the first quarter of 2016. Joining me on the call is Luis Massiani, our Chief Financial Officer.

We’ve had a strong start to the year with solid earnings growth and performance metrics. Additionally, we completed five strategic actions in the quarter that will continue to position us well for the future.

For the quarter, core net income was $32.2 million and core diluted earnings per share was $0.25, representing a growth rate of 74% and 19% respectively over the same period a year ago. Our financial metrics continue to be solid and on track to meet our objectives.

Return on core average tangible assets was 115 basis points and core return on average tangible equity was 13.78%. The core efficiency ratio was 48.9% and the credit metrics and capital ratios continue to be solid.

We continue to experience strong organic and acquired loan growth across mutable asset classes. During the quarter including the acquisition of NewStar’s asset based business, our loan balances grew $427 million, which represented an annualized growth up 22% over the linked quarter.

Our deposit growth in the quarter was exceptional. Total deposits grew $749 million were 35% on an annualized basis. Approximately, one-fifth of the growth was driven by seasonal mutable balances, but the majority of the increased balances were driven by core deposit growth from our commercial clients and prospect.

As I mentioned previously, we took five strategic actions to position the company for the future. First, we announced the sale of our trust group to Midland States Bank. The trust business that we acquired in the Hudson Valley merger was a breakeven proposition that was not scalable or part of our strategy moving forward.

Secondly, we raised a $110 million in capital to support our growth and the M&A opportunities. Third, we acquired the asset-based loan business of NewStar Business Credit LLC to combine with our current ABL business. Fourth, with our excess liquidity, we paid off $220 million in federal home loan bank borrowings, enhancing our run-rate earnings.

Finally, with strong commercial deposit growth, we exhibited in the quarter we continue to downsize our branch network. We consolidated four financial centers in the quarter, bringing our total branch count to 48 and we anticipate we will consolidate five additional financial centers in the second quarter bringing the financial center count to 43 as of June 30th, 2016.

Each of these actions and others we are undertaking are consistent with our strategy and objective of being a highly efficient top earning organization. We expect the actions outlined above will be fully phased in by the fourth quarter of 2016 and will result in an annual run rate increase in EPS of $0.05 to $0.06 beginning in 2017.

Now, let me turn the call over to Luis to detail the financials.

Luis Massiani

Thank you, Jack and good morning. Turning to Slide 4, let's review summary of our quarterly performance including key balance sheet and income statement metrics for the linked quarter and the same quarter a year ago.

Performance for the quarter was strong. As of March 31st, 2016, our total assets reached 12.9 billion, which represents a growth of approximately 5.2 billion over the past 12 months and includes almost 4 billion in total assets acquired from Hudson Valley and NewStar Business Credit.

At March 31st, our total loans increased to 8.3 billion. Our total deposits increased to 9.3 billion, and our core deposits increased to 8.5 billion. We successfully completed the NewStar acquisition on March 31st, which doubled our asset-based lending business.

We also accelerated our commercial deposit gathering platforms, which were reflected by over 700 million in core deposit growth during the quarter. Please note this figure includes growth in our core deposits as well.

Net interest income for the quarter was 94 million, increasing 35 million over the same period a year ago and declining 1.9 million from the linked quarter. The decrease relative to the lined quarter was mainly the result of lower accretable yield, higher average borrowing balances, and excess liquidity we held in the quarter, which increased our interest expense.

Our loans to average earnings assets was 71% in the first quarter compared to 73% in the linked quarter and our cash and securities comprised 29% of our average earning assets, which was up from 27% in the linked quarter. We expect to see a pickup in net interest income in the second quarter as we benefit from the NSBC acquisition, organic loan growth and seasonality in our commercial lending business.

On the bottom of the page, we detail our key performance metrics, which show continued strong operating momentum. Net interest margin was 353 basis points, which represented a 15 basis point decline from a year ago. Included in the net interest income was 5.6 million of the accretion of the credit mark on prior acquisitions, which compares to $7 million in the linked quarter. Excluding the impact of accretion, net interest margin was 333 basis points compared to 341 basis points in the linked quarter.

Our net interest margin was impacted by an increase of 128 million in average cash balances and a greater proportion of securities versus loans relative to the linked quarter. This reduced NIM by approximately 7 basis points. We also incurred a higher average balance of borrowings and deposits as we prefunded the acquisition of the NSBC portfolio and repayment of FHLB debt early in the quarter. Given the strategic actions we completed, we anticipate we will be at the high end of our range on prior guidance of 250 to 260 basis points of NIM and we may exceed it for the full year.

Turning to Slide 5, let's review the reconciliation of GAAP to core EPS. Our GAAP reported earnings were 23.8 million or $0.18 per share for the first quarter. There were three main items to highlight that negatively impacted our results. First, we recorded a loss on the extinguishment of FHLB borrowings, incurring a prepayment penalty of 8.7 million. Our decision to prepay these advances was driven by objective of reducing asset sensitivity which has continued to increase for the organic growth in our shorter term commercial asset classes and M&A activity including the NSBC acquisition.

The second item, we incurred a 1.5 million charge for merger related expenses and other restructuring charges on the NSBC acquisition. And lastly, we also recorded a restructuring charge of 1.3 million related to the continued consolidation of our financial centers in other locations.

Our core earnings for the quarter were 32.2 million diluted earnings per share were $0.25, which compares to 18.5 million and $0.21 a year earlier. Core diluted EPS increased 19% over the same quarter a year ago.

Turning to Slide 6, let me walk you through strategic actions and the anticipated impact on our financials. We completed the issuance of 110 million of subordinated notes at the bank in late March. The subordinated notes qualify tier-2 capital and will support M&A and organic growth. We anticipate this will cost approximately 0.03 on an annualized basis. We repaid the 220 million of FHLB advances with average cost of 4.2%. We anticipate an annualized run rate savings of $0.03 beginning in the second quarter.

The sale of our trust business will be neutral to our results as lost fee income will be offset by a reduction in operating expenses. We expect this transaction will close in the third quarter of this year. The acquisition of NSBC, which closed on March 31st, gives us 330 million of loans that we expect will yield over 5%, all of which at variable rate. We anticipate incremental annual run rate OpEx initially of approximately 5 million for this business and $0.03 to $0.04 of positive impact to EPS once our combined ABL businesses are fully integrated.

Lastly our strength in attracting commercial deposits allows us to be more aggressive in the consolidation of our financial centers. We estimate a savings of approximately $0.02 on an annualized basis beginning in Q3 2016 after we consolidate five additional financial centers in the second quarter.

On Slide 7, let’s take a look at our loans. Total commercial loans grew 25% on an annualized basis inclusive of the NSBC acquisition compared to the linked quarter. Total portfolio loans reached 8.3 billion. With the NSBC acquisition, over 41% of our total loan portfolio consists of C&I loans and nearly 47% is comprised of CRE loans. We believe we are well positioned for a raising rate environment if it does occur as the majority of our specialty loans are short duration floating rate assets.

Yield on loans was 4.62% and excluding the impact of purchase accounting accretion the yield on loans was approximately 4.33% in the quarter. This compares to 4.65% and 4.28% in the linked quarter. The 5 basis points increase in core loan yield was due in part for the increase in short-term interest rates during the first quarter, which allowed us to repurchase a substantial portion of our short-term loan asset.

Turning to the next slide, our mix of business continues to be diverse across C&I, CRE, especially finance and consumer asset classes, on an organic basis, which exclude the loans acquired in the Hudson Valley and NSBC transactions, we grew loans 1.2 billion since March of last year, which is equal to 26% organic growth rate.

Loan growth in the first quarter was impacted by the typical seasonality that we see in some of our commercial finance business lines. At period end, the balance of warehouse lending and payroll finance receivables decreased in aggregate by approximately $70 million relative to the prior quarter. We expect that balances in both of these business lines will pick up through the rest of the year.

Turning to our deposits on Slide 9, total deposits grew to 9.3 billion for the quarter, which represented growth of 35% on an annualized basis, compared to the linked quarter. A substantial portion of the growth was driven by our commercial relationships and teams, as we are seeing the benefits of several of our recent commercial banking hires being more deposit focused. Our core deposits increased 712 million during the period, which represented an annualized growth rate of 37%.

Our deposit mix is attractive with almost 52% of our average deposits for the quarter consisting of demand accounts. At March 31, 92% of our deposits were core deposits and our cost of deposits was 29 basis points. Our total cost of deposits increased 3 basis points over the linked quarter, as commercial accounts tend to have a higher interest expense, but they also have a substantially lower all-in cost operate relative to lower balance consumer and retail deposits.

Accelerating commercial deposit growth gives us confidence. We can continue to generate operating expense savings in our financial network. Our loans to deposit ratio was 89%, we intend to continue using our deposit gathering to fund high quality of loan growth and opportunistic acquisitions. Our long-term loans to deposit ratio target remains target remains unchanged at 95%.

On Slide 10, let’s look at our fee income. Excluding the impact of securities losses, which were 283,000, total fee income was 15.7 million, which represents a growth of 26% over the same quarter a year ago. We have diversified the income mix as our fee-based specialty finance businesses are growing both organically and through acquisitions. Accounts receivable on factoring commissions, which includes our factoring and payroll finance businesses grew by 900,000 or 28% over the first quarter of 2015.

Our public finance sector team has also had success originating loans and deposits. As of March 31, 2016, our tax-exempt loan balances were approximately 200 million with a robust and diverse pipeline of new opportunities. This team also became a fee income contributor in the first quarter as we closed our first municipal finance loans of transaction generating gain on sale income.

We did see a bit of a slowdown in our mortgage banking business as origination volumes were approximately 25% over the linked quarter, which resulted in a decrease of 700,000 in mortgage banking revenue, which was mostly due to seasonality as applications and pipelines were strong late in the quarter, which would translate into higher volumes in Q2.

On Slide 11, you can see continued momentum in our core operating efficiency. We achieved a 48.9% core efficiency ratio for the first quarter of 2016, which represents an improvement of 750 basis points over the same period a year ago. On a linked quarter basis, we had a modest decline in revenues attributed mostly to lower purchase accounting accretion between the period and a modest increase in expenses we continue to invest in people, systems, and technology. We anticipate strategic actions we reviewed previously will allow us to meet our objectives of growing revenues twice as fast as expenses.

Our current core non-interest expense run rate is in line with our full-year target. We are maintaining our guidance on operating expenses for 2016 of 220 million to $225 million. We have continued investing for future growth as demonstrated with the NSBC acquisition and are looking to add capabilities in earning assets in several existing businesses. We’ll continue to invest in personnel, systems, and risk management infrastructure as we are now over $10 billion in assets.

Let’s review asset quality in Slide 12. This quarter's performance shows continued strong asset quality. Charge-offs against the allowance was 1.1 million or 6 basis points of average loans, which compares to 3 million and 15 basis points in the linked quarter. We continue to add to our allowance for loan losses. Our provision expense was 4 million driven by the need to provide for organic loan growth as well as the Hudson Valley loans that are now part of our allowance calculation. The allowance of total loans and the allowance NPLs were 64 basis points and 62%. Please remember that these ratios do not include the impact of the remaining fair value mark of 44.2 million recorded in previous acquisitions.

We experienced an increase in non-performing loans of 19 million during the quarter. This increase was mainly due to one of our taxi medallion exposures, which was placed on non-accrual and had a balance of approximately 24 million. We have discussed this relationship on prior calls, as this loan was already rated as substandard at December 31. Outside of the sector and relationship, our credit trends remain positive across the board. The balance of loans 30 to 89 days delinquent decreased substantially and was $19 million at March 31st. Approximately 31 million of the 33 million increase in special mentioned loans was due to NSBC. However, all of these loans are performing. Our substandard loans remained stable at approximately 130 million. Jack?

Jack Kopnisky

Thanks, Luis. Let me summarize the quarter. We continued to have strong momentum in core earnings and profitability. Core earnings per share were up 19% and core earnings were up 74% over the same time last year. Operating metrics we talked about continue to be consistent with our objectives. The core return on average assets was 115 basis points. Core return on average tangible equity was 13.78%. The core efficiency ratio was a little bit less than 49%. Charge-offs were 6 basis points and all-in allowance for loan losses was 117 basis points. Capital ratios are strong and have been enhanced. Core deposit growth for the quarter was very strong and in essence prefunded, as Luis said, the NewStar portfolio acquisition. Core deposits grew by $730 million in the quarter or nearly 37% on an annualized basis. Our commercial loan growth was diversified with acquired volume of approximately 330 million and organic growth of a little bit less than $100 million. We continue to focus on originating mix of short-term floating rate assets and longer term fixed rate assets to maintain optimal balance sheet flexibility. We continue to evaluate opportunities to acquire loan portfolios and businesses. We have many levers that we are pulling as we look at the future of this company.

Finally, we took five strategic actions to continue to position us for further earnings, earnings per share growth, and performance metric expansion. We announced the sale of our trust group the Midland States Bank. We raised $110 million in capital through a sub-debt offering, paid off $220 million of our term federal home loan borrowings, acquired NewStar’s asset-based lending group, and consolidated four additional branches bringing our total to 48 as of the end of this quarter. The result of these actions, add an incremental $0.05 to $0.06, as I said in annual run rate earnings upon full phase-in in integration. We are very well positioned to continue to improve profitability and drive growth in this challenging rate environment. To continue to be successful we must constantly reinvent our company. In essence, we challenge everything we do to create an organization that delivers results regardless of the environment. Throughout the year, we are confident in our ability to deliver core return on average assets of 120 basis points or above, core return on average tangible equity of 14% or higher, efficiency ratios in the mid to high 40% range and strong EPS and earnings growth. We will accomplish this by delivering mid teen commercial loan growth funded by core deposit growth with stronger expense control and solid levels of capital and credit metrics.

Now, let's open the lines up for questions.

Question-and-Answer Session

Operator

Thank you. Today's question-and-answer session will be conducted electronically. [Operator Instructions] It appears our first question comes from Casey Haire with Jefferies.

Casey Haire

Hey, good morning, guys.

Luis Massiani

Hi, Casey.

Casey Haire

So starting off on the NIM outlook, Luis, just to clarify, I think you said you expect to hit your guide of GAAP NIM of 360 or maybe even a little better, I'm assuming core NIM is still good at 340 to 350, yeah, just starting there.

Luis Massiani

Yeah, that's right. So both of those numbers are right, Casey.

Jack Kopnisky

Okay. And then just to extrapolate - just to try and figure out what was going on in the quarter, obviously a great deposit growth result for you guys, but the funding costs did go up pretty noticeably. How much - like what was the deposit beta as you see it in the quarter and how much of that increase was you guys just paying up for the deposit growth? And if you have that color, what was the deposit rate on the deposit gathering in the quarter?

Jack Kopnisky

Yeah, maybe to break it up in the group, so about a fifth of the deposit growth was muni [ph] balances and those muni balances cost us generally 30 basis points. About three-fifths, about the balance of the other side, two-fifths of it was frankly core low DDA cost cash management oriented deposit growth that would have been in the kind of 20 to 30 basis points range. And then about two-fifths of that would be higher price deposit rate, 1031 exchange types of money in the 75 to 100 basis point range.

Luis Massiani

But, Casey, you can’t just look at the - you can't just look at the interest expense cost in a vacuum, right. The more - as we continued to execute the strategy and we are pursuing the commercial deposit gathering side and that becomes a greater proportion of the book of business relative to retail, you're always going to see a little bit of pressure on the interest expense component, but that's what allows you to then be substantially more aggressive on reducing expenses, operating expenses in particular on the financial network side. So, once you factor in the all-in cost of deposits and you take into account that we are going to cut out $2 million to $3 million of expense with just these branches that we're talking about here, we’re essentially replacing the lower cost interest expense on one side with higher cost interest expense. But at the same time, you're sort of transforming into a much more efficient business model, because your OpEx over time is going to go down. So what happens is that interest expense may be going up and you're going to see an increase in the cost of funds. But at the same time, this is accretive, the efficiency ratio, and over time we continue to move to the more of the branch like [ph] model to see a substantial decrease in efficiency ratio that's driven from the strategy.

Jack Kopnisky

Maybe the net result of this is that we do believe that we can get to kind of a 45%, 46% efficiency ratio.

Luis Massiani

And continue to move that down over time.

Jack Kopnisky

That's right.

Casey Haire

Okay. So, you still see it as a positive, like your deposit rates are not - or you’re not paying a rate that is elusive too

Jack Kopnisky

So we are not seeing from a deposit data. From a deposit data perspective we are not seeing any pressure on the existing book of business, but capturing the proportion of the book of business and the composition of it has changed substantially, right. So the more commercial that we get you’re going to see some pressure on the interest expense side at the same time it is going to be more than offset by cuts in operating expense going forward.

Casey Haire

Got you, okay, understood. And then just switching loan growth outlook Louis, you obviously see some seasonal pressures this quarter on the commercial side in payroll, finance and warehouse what - I mean you guys talked about mid-teens commercial growth guide brand, is that - do you expect to hit that organically going forward?

Jack Kopnisky

I think the way we would answer that is we were expect to hit the commercial loan growth overall. So what we see now is one of the great things about this company is that we have lots of levers to pull. So we have different product lines that we have on the C&I and the commercial real estate side and we have external opportunities to acquire portfolios and we look at the net returns to the organization, so NewStar as an example, very opportunistic acquisition at a reasonable price with appropriate marks that assets yield 5.5% to 6%. So we chose that as compared to doing extreme multifamily loans that are broker originated, that are yielding three and quarter percent. So one of the things we deliberately and aggressively manage the mix of the balances on the commercial loan volume that comes in. So that’s why it’s always frustrating frankly the deal with the organic versus acquired we look at all those opportunities to pull the right triggers at the right returns for us and we have the ability to say no to lots of things that either or in our view miss price or miss approved in terms of credit criteria. So the long way to answer your question is we’re sticking with the mid-teens commercial loan growth and it will grow come from both acquired and organic growth.

Casey Haire

I understood thank you.

Luis Massiani

Yet thank you.

Operator

Our next question comes from Mathew Kelley with Piper Jaffray.

Mathew Kelley

Yeah, hi guys, just to follow-up on that point - just a follow-up on that point on the outlook for organic commercial loan growth if you have to break it down into how much will come from just the organic growth rate of the existing portfolio versus additional acquisition of portfolios what might that look like.

Jack Kopnisky

You to be honest, I wouldn’t break it down that way. I think you have to depend upon us to be able to together the mix of those businesses that yield the right returns with the right credit on this and the acquired portfolios, come up and we see many, many opportunities to buy acquired portfolios we pass on the vast majority of them unless they have the very specific metrics that we look at and then we contrast that to what we can do organically. So we have not put a metric around that because just be supposition from our standpoint. We do believe that there this we have seen a lot of great opportunities our pipelines are still strong, but our pipelines also include deals that may not hit our price target or credit criteria target. So it’s really the mix between the two Matt.

Mathew Kelley

Okay, got you and then going back to the margin, you had 332 this quarter you outlined basically seven basis points of kind of transitional or one time type of items that reduce the Q1 margin, add those back get to 339 what would take you from there towards the middle part of your 340 to 350 range on core margin. What are the dynamics driving that higher?

Luis Massiani

So the repayment of the - FHOP advances Matt is a portion of that that does not include in the seven basis points that I mentioned before. And so even though we issued the 110 million of the sub notes, we still repay 220 million of the higher cost, so there’s about 3 to 4 basis points pick up on that trade so that get you to that kind of low 340s. And then the composition of the portfolio going forward once you add $330 million of the 5% plus yield loans that we are bringing on with the acquisition of NewStar and you factor in the proportion of earning assets the securities gets to a lower number in your - so we have eliminated the excess cash but and the portion of the securities versus loan get to more of right size gives you a couple of basis points more so that is how we get to the mid 340 number.

Mathew Kelley

Okay and from a $2.8 billion based on the securities book, where do you see that going over the next year. Is that kind of continue to the drift higher maybe up 8% this quarter, I assume that liquidity where is that going to 2.8 billion.

Luis Massiani

As Jack was saying we are - in many respects securities book replace we are going to continue deploying you know excess fund to the extent that we don’t or we don’t see longer duration loan assets that are attractive in that meter hurdles. We have other levers that we can pull securities book. So it is our intent to - our intention is to continue to maintain the securities and proportionate securities total loans where we had in the past, but at the same time that the risk return dynamics on the loan side don’t meet our criteria and we see favorable pricing on securities we will pull that lever and allocate greater growth there, but in the end we’re not really changing the strategy we are not looking to grow securities book materially, at the same time we are going to be open and flexible. We have - know how rates and the rate environment performs and what happens to the competitive environment in our various market but for now you shouldn’t see modeling in you shouldn’t be thinking about any major securities growth going forward.

Mathew Kelley

Got it and then taking a look at the accounts receivable factoring commission line-item 4.5 million bucks up a million dollars year-over-year. If you go back and look at all these smaller acquisitions in the commercial lending space, go back and look at the Damian, Green Campus, First Capital, I thought in aggregate that was supposed to add either 10 million bucks of fees as a result of those acquisition. See that as a lot of resources there, why we are not seeing that line-item grow commensurate to some of the balances.

Luis Massiani

To remember the 8 to 10 million was total revenue not just fees Matt. So remember that - so two things Green Campus partners actually doesn’t generate fees going into that line item in particular. Green Campus partners may municipal our public sector financing actually generates loan participation again on sale income which is recorded in other income on the fee side. So that line-item there only pertains to factoring into the favorable finance business. So Damian and FCC would be part of that, but the $10 million that you’re alluding to was totally total revenue remembers that when we have a factoring that favorable relationship actually split that up between the two. So between a net interest income component and a fee income component, so we’ve actually been very pleased with performance in both of those business lines. If you go back and look at historically what has happened in both of those - in that line-item in particular in both of those businesses, there’s always seasonality in the first quarter where you’ve typically seen a substantial drop-off in free and that fee income line-item between the first quarter and the fourth quarter. We actually see this year the fees actually held up very nicely, so we are actually anticipating and we maintain clients and actually grown in so those are that we expect to see some nice meaningful growth in that line-item going forward for the rest of the year.

Mathew Kelley

Okay yeah, it was up almost 30% year over year but type of growth rate that will expect is get the full impact of all those acquisitions in Q2 and Q3.

Luis Massiani

Well, so remember that first year it won’t be full 30% because remember that you know in some of the subsequent quarters we already had those, so we close Damian in February 2017, we close FCC in May. So part of that is baked into some of the subsequent quarters, but we expect to see strong double-digit growth in that line-item going forward.

Mathew Kelley

Okay got it and then last question, any change in the Outlook for the tax rate. We should be using I think you got it around 34% last quarter is that you’re holding?

Luis Massiani

Same 34 that’s right.

Mathew Kelley

Okay, thank you very much.

Jack Kopnisky

Thank you

Operator

[Operator Instructions] Our next question comes from Collyn Gilbert with KBW.

Collyn Gilbert

Thanks, good morning gentlemen

Jack Kopnisky

Good morning.

Luis Massiani

Good morning.

Collyn Gilbert

I just want to conform, Luis, so the FHR bill [ph] paid down in the first quarter you did not refinance those you just took them of the books.

Luis Massiani

That’s right that it was not we did not do the ITF 96 restructuring rate, we just paid them all.

Collyn Gilbert

Got it okay and then just to jump in OREO expense anything in particular there just you know is that hold I guess 2 million or so for the year which is a little bit higher than where you've been running, but just want to understand what's going on there.

Luis Massiani

A little bit of seasonality there. So you pay taxes on OREO in the first and third quarters of the year so you're going to see a substantial drop off in the second quarter and the fourth quarter relative to that. We're also going to be working through some of those OREO properties over the course of the year, so we should 500,000 in change that we had this quarter isn't should be representative of the run rate for the rest of the year. With that said. one of the things that we have to do a better job and we are working very hard with the credit folks is in being more aggressive in managing out of these OREO balances. So you're going to see substantial improvement in that going forward and that's an area that we are - that we know we need to get better at and we will.

Collyn Gilbert

Okay that’s helpful and then Jack back to the comments and I appreciate that the strategy in trying to sort of look at the mix and what's most appropriate to optimize earnings profitability and risk and all that, but if you can do you feel comfortable giving those mid-teen growth rates. Even in the wake of kind of current economic conditions I mean is there anything that would. That would happen that would cause you to change that growth outlook or do you feel pretty confident that no matter what happens kind of from a macro perspective you guys can still take share - get these portfolios in there, just trying to trying to understand that growth rate in the wake of maybe what could be a slowing economic environment or loan demand.

Jack Kopnisky

It’s a great question. So one we're sticking to the mid-teen through the mix, but secondly, the one thing that could continue to happen is if - what we see in the markets in certain sectors and especially in the real estate sectors is we still see the mispricing of assets and extended credit terms. So about a year ago, we actually contracted our credit terms to become much more conservative in things like loans of values and debt service coverage’s and covenant structures and looking at certain appraised values and discounting them. There are competitors that continue to go down that path and be more aggressive in each of those criteria. And price loans that have returns turns that we're not comfortable with. So in the real estate side of what we see that's really where we see the pressure on that and if continued miss pricing of assets and can you credit liberalization could affect that. But again we have enough levers to pull in other areas that get us the types of returns that we wanted to say. In the end we're still today comfortable with that mid-teen commercial loan growth.

Collyn Gilbert

Okay, that's helpful. And then just one final question on that the taxi loan this quarter and then just the portfolio in general. What's the reserve that you guys have against the one that went into NPL this quarter?

Luis Massiani

We don't have reserve figures are calling against going for a loans or against the medallion loan in particular. As an OCC rated bank we don't hold specific reserves against loan. So we run an impairment test. If the impairment test shows a lot of content we would charge up immediately. Based on where we are in the amount of collateral that we have on that relationship, we have not seen necessary to know to impair the loan just yet, but non-accrual we're still cash flowing. We're paying down the loan balance and we're going to actively manage out of it soon as we possibly can. So at this point we don't anticipate any near term charge off on this loan, we're going to manage out of it, nothing from a specific reserve perspective.

Jack Kopnisky

We would remind you too that we have a 117 basis points in total loan loss allowance. If you look at the allowance and the fair value mark, it comes to 117 basis points, which - we've - our objective is to keep that kind of over 100 basis points as we go along.

Collyn Gilbert

Okay that's helpful and then just the rest of the medallion portfolio any updates there on what you’re seeing and maybe what percentage portfolio -

Luis Massiani

Performing loan, performing under the terms and it is actually paying down pretty substantially so you are going to see in the next couple quarters you're going to see a substantial move down in the aggregate amount of medallion exposure, which was just over 60 million. It’s going to come down pretty significantly from there were to continue managing out of that industry sector.

Jack Kopnisky

Yeah, this could be used just over qualify significantly as kind of $3 to $5 million over the next several -

Luis Massiani

And we continue to move that down.

Jack Kopnisky

Yeah.

Collyn Gilbert

Okay that's great. Thank you.

Jack Kopnisky

Yeah thank you.

Luis Massiani

Thank you.

Operator

It appears we have a follow up question from Casey Haire with Jefferies.

Casey Haire

Hi guys thanks for taking the call.

Luis Massiani

Yeah, sure.

Casey Haire

Just wanted to touch on capital, the TC ratio slipping below 8%, are you guys comfortable here or are you looking to address just some updated thoughts on the capital spend.

Luis Massiani

No, the decrease was largely due to the acquisition of the NSBC business and over time we know we're going to build up the organic - we’ll grow that number organically. The only - to the perspective we're always as Jack was mentioning before looking at opportunities from a commercial finance acquisition perspective. Any equity capital raise that we would do would be in connection with something that allows us to put the capital to work very quickly and to have an EPS accretive type of capital raise. So nothing anticipated at the moment.

Casey Haire

Okay great. And just on the NSBC, the NewStar business. The earnings impact of $0.03 to $0.04, by my math I actually get something a little bit higher, but what I’m not seeing here is what you're assuming for a marginal funding cost.

Luis Massiani

So there is definitely the opportunity as we bring - at the moment we're going to be running two asset base funding businesses on a separate basis, but we are going to consolidate those over time. So once we get the we're being conservative in that number because it will take us slightly longer than what it typically does in the M&A transaction that we've done to combine the two businesses, but once we do that we know we anticipate that that we're going to be able to grow that book pretty substantially that we're going to be able to get some real efficiency similar to what we did with Damian and FCC over time. So three to four is conservative I think that in ‘17 we may have exceed those parameters pretty substantially.

Casey Haire

Okay, so it's not an elevated marginal funding cost. So that 5 million of OpEx is more - is that the initial goal or is that something you can improve upon.

Luis Massiani

We're going to improve. We think we can do better than that.

Casey Haire

Okay, got you so I am not.

Jack Kopnisky

It is the initial goal and we ultimately think we can improve on that, but we don't want to go too far out on a limb on this. And by the way we've also been appropriate in marking the portfolio.

Luis Massiani

After the base lending is up, high kind touch business and you need to make sure that you transition that appropriately. So that's why even though take smaller transaction and we're very confident that we're going to be able to integrate it very efficiently. It's just you need to do it in the right way you need to do it in an orderly fashion. So it'll take a while, but from here to the end of the year we're going to have those two businesses combined and really new generating some nice earning assets and good profitability out of the ABL side.

Casey Haire

Got you, okay. And just a couple follow ups on the asset quality side. On the taxi medallion, can you guys give us what current LTV today and maybe the debt service coverage ratios?

Luis Massiani

So from a debt service coverage ratio it's slightly over one, but it is over one when you - these are mostly either very long amortization terms or in some cases interest only type of structures. So it is cash flow positive, but not by much. That’s obviously one of the reasons that’s why the industry is under stress. From an LTV perspective depending on who you believe on the value the medallions were somewhere between 85% or 90% LTV that 675,000, 700,000 for the medallion values, all of these are New York City medallions on the relationship that we have –that we've that we placed on non-accrued.

Jack Kopnisky

We also remind you to that half of there is, but the anywhere from five or six borrowers in the $60 million that we have. There are number of those that have other sources of cash flow. So and frankly additional collateral so while we're comfortable with the mark on this and the valuation is, there's additional non-related cash flows for some of these borrowers and there's additional collateral that's outside of taxi medallions in a number of these cases.

Casey Haire

Okay great and just last one for me as you guys kind of following up on Collyn's question about the economic environment, with the addition of NewStar, what’s a very diversified commercial bug, can you just give us a thought on what you view your normalized loss rate through the cycle.

Jack Kopnisky

A normalized loss rate would be in kind of the 25 to 30 basis point range. We obviously had an exceptional quarter this quarter, but again it all depends on what stress in the environment there is and what’s the actual economic factor is. But I think the book we’ve constructed as it exists today, that’s fairly normalized with more stress and obviously gets a little bit higher and as in today there’s less stress and it gets a little bit lower.

Luis Massiani

Yeah, Casey if you look at the history of the various banks probably Sterling and Hudson Valley, the commercial’s been inside of the house with the exception of low balance credit scored kind of automatic underwriting type of business on equipment finance side in small business, which is more of a consumer asset, the rest of the book performed extremely well through the downturn. So there is a benefit we think to being diversified, so we’re diversified in some cases from a geographic perspective because some of these business lines are more national and not just New York City focused. But most of them are very diversified from an industry perspective, so we think that from an overall credit quality performance. That level of diversification should help whenever we do return to more normalized charge-off environments being more diversified from an industry, from a business line and from a geographic perspective we think is going to help.

Jack Kopnisky

I’d just add to that by talking about this. We do allocate capital very specifically to very specific product categories and taken the consideration obviously the loss ratio, so part of what we always try to do is try to get the right mix in the right economic time, so even pretty specific around that type of capital allocation process in consideration where we see higher or lower losses in these portfolios.

Casey Haire

Okay great, thanks guys.

Jack Kopnisky

Thank you.

Operator

And it appears we have no further questions in the queue at this time. I’d like to turn the conference back over to Mr. Kopnisky for any additional closing remarks.

Jack Kopnisky

Yeah, great questions, thank you very much for taking your time. Thank you for following the company. As Luis and I said, we’re confident in our ability to deliver the returns, there’s many different ways to get there and I think we’ve demonstrated that in the past and I think in these five actions we’ve taken now and potential actions in the future that are incremental to our business will continue to deliver the results that you would expect. Thank you very much for your time.

Operator

That does conclude today's conference. Thank you for your participation.

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