Good morning, and welcome to the Sterling Bancorp, Inc. First Quarter 2020 and Management Update Conference Call. My name is Rocco, and I will be your operator today.

[Operator Instructions] This call is being recorded and will be available for replay through June 15, 2020, starting this afternoon at approximately 1 hour after the completion of this call. .

I would now like to turn the conference over to Mr. Larry Clark, Investor Relations for the company. Please go ahead, Mr. Clark. .

Thank you, Rocco, and good morning, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial highlights for the first quarter of 2020. Joining us today from the company are Tom O'Brien, incoming Chairman, CEO and President; and Steve Huber, Interim CEO, Chief Financial Officer and Treasurer.

Tom will begin the call with a brief discussion of recent developments at the company and provide an overview of the financial highlights for the quarter. And then we'll open the call to your questions. However, management will not be answering any questions related to the ongoing internal review and investigations. .

Before we begin, I'd like to remind you that this conference call contains forward-looking statements with respect to the future performance and financial condition of Sterling Bancorp that involve risks and uncertainties.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors are discussed in the company's SEC filings, which are available on the company's website.

The company disclaims any obligation to update any forward-looking statements made during the call. .

At this time, I'd like to turn the call over to Tom O'Brien.

Tom?.

Thanks, Larry, and good morning. Thank you for your interest in Sterling and for calling in today. As you probably know, Sterling issued 2 announcements this morning. One on my appointment, pending regulatory non-objection as CEO and the other on, what we are calling, financial highlights for the first quarter of 2020.

I'm not sure who on the call might know me from my prior banking experiences, but the earlier press release gives some personal history. .

While every bank I have ever joined as CEO has had its share of financial and compliance challenges, each story is different in its evolution. Sterling is no different. And my assignment here, as directed by the company's Board of Directors is to right the ship and bring the bank into regulatory compliance and investor confidence.

There is much to accomplish here to successfully reach those objectives. While I am confident in our ability to achieve those goals, I caution anyone from exercising irrational exuberance with respect to the speed or cost associated with that success.

The financial highlights reported today reflect several factors that should help provide some insight into the performance of the company in the first quarter. .

Sterling has not yet filed its 2019 10-K, nor it's first quarter 2020 10-Q. Unfortunately, these have been significantly delayed by the need to thoroughly conduct the internal reviews and investigations, which have been previously reported.

Today, I cannot say more than what is in the release, so I will be forced to avoid answering any questions with respect to those topics. .

On the financial front, there are some items of note. The net interest margin remains relatively healthy, and credit metrics are okay, but the virus impact and forbearance situation bears careful management attention. .

My economist crystal ball is pretty cloudy. But my instincts are that at the end of a record long expansion, stunning employment gains and heady market performance, we turned on a dime in March.

Job shutting, enormous government support programs, businesses hibernating for months and our people being sheltered at home for week after week, have all conspired to create a very deep hole from which the climb out will be slow and painful for many. .

Now with the violent social unrest following the tragic and senseless death of a man in police custody, we have all the ingredients necessary for some fundamental realignment in the way our country and its citizens live, work, play and for our social interaction. We will come out of this turmoil, but many things will change as a consequence.

And hopefully, we each become better individuals, employers, employees and engaged citizens. .

So more to the point with Sterling, the immediate future is going to be focused on finishing the groundwork on these investigatory reviews and getting out our financial statements as soon as possible. I suspect questions from investors may focus on the time, cost and issues with respect to capital.

I have seen too many banks to count, tell the market that their regulatory and compliance problems, especially BSA-related issues are going to be over soon and that the costs are almost over only to be saying the same thing a year and more later.

I'm going to do my best to move this as comprehensively as possible, but there is a time element that includes sustained performance and the regulator demands that I cannot control. I don't want to mislead anyone in that regard. I will never sacrifice quality for expediency. .

Second, in terms of capital ratios, you can see that the bank level capital ratios, even after today's charges remain very comfortable. There is some double leverage of the bank holding company with sub debt. But we are -- we've always been -- I'm sorry, we appear to have sufficient liquidity for that debt service.

Nonetheless, healthy tangible common equity levels have always been of vital importance to me. In my past lives, I've had to issue capital for a variety of reasons. And if the need should arise here, I would not hesitate to do so. I'm a shareholder-focused executive, but I never play capital levels close to the edge..

In the short run, I have some key C-suite jobs to fill, and I need to get into the operations of the bank to understand more about its business and its opportunities.

I can tell you, working with the Board of Directors for the past 2 months has given me total confidence that their full commitment and the needed resources will always be there for our ultimate success. Once we have been able to issue our 10-K and 10-Qs, I will certainly undertake to be more visible to our investor base.

Until that time, please understand that this quiet period as anything -- don't take this as anything more than the company focusing its energy on the important tasks at hand. .

So with that, I'm happy to take some questions to the extent that I can answer them. I'm ready to do so. .

[Operator Instructions] And today's first question comes from Anthony Polini with American Capital Partners. .

I mean I followed Norflok and New York Community on the first day of their IPOs. .

I know that. .

That was back a while. Thanks for underplaying the word, highlight, in your planned remarks. .

You're welcome. .

How -- I guess what I'm trying to get a handle on, I mean, the COVID thing obviously doesn't even help the regulatory side, I'm assuming, right? That slows that down as well. .

That's an overlay for Sterling and every other bank and every other business in the country, it's -- it complicates everything you do and everything you can try to plan on. .

I mean, I can't help but believe that at these levels, there's a distressed value play at least that we're in the middle of here. It's so hard.

Now we have to overlay CECL on this at some point, right?.

We do. .

And I know there's not much you can say about it, but I'm assuming a big part of the provision here also goes into CECL as well as the COVID, it kind of goes hand-in-hand, I'm assuming.

Is there a high percentage of your loans that previously would have been dramatically impacted by CECL? Is there any way to comment on the pre-COVID outlook for CECL?.

No. I don't feel qualified to do that right now. .

I sure don't either. .

I'm too new. .

All right. What do you think -- and you're -- I mean, I think it's outstanding that you've stepped up to this role, by the way, and I view that as a huge positive for the shareholders and for this management team here.

What do you think the biggest challenge will be?.

Well, there's -- as you know, with all of the items we've previously released, there's a fair number of challenges. But in any of these cases, the first thing we have to do is look at the culture of the institution and the -- in this case, as I mentioned earlier, I've got to do some key hires. And those are going to be important.

But strategically, I think we have to build the confidence with our regulators and frankly, with our investors, too, that we get what we're here for. We understand it.

We're here to fix things that need to be fixing and take them on aggressively and forthrightly and get to the point where we are no longer designated in troubled condition because that limits virtually everything that we might want to do longer-term and strategically. So it really is job one.

You can't do too much as a banking company with heightened regulatory oversight. And frankly, we owe it to our regulators to show them, we know what we're doing and that we can get this done transparently and forthrightly. And that's our big job. .

Are you familiar with people at [ Kroll or Harbor ]?.

Sure. Actually, I -- they worked with prior banks that I was at and we're the auditors for -- when I was at State Bank of Long Island. So I know several of them from that time period and I always had a good relationship with them. .

Okay. I mean, I've been going under the assumption that this isn't a battle between auditors and management.

It's a regulatory battle, right?.

Yes. I mean, to be honest, what you read today in the highlights helps us advance that cause.

But no, there's no dispute between the company and its auditor, but there are certain things we had to do to give them transparency into our financial statements and into our ability to sign representations and so some of the changes that you've seen in some of the disclosures today advance that process. .

And are you local now? Is this where you ended up?.

I will be. .

Okay. All right. .

The virus challenges everybody. So we have, obviously, a lot of people working from home. But no, my plan would be to be there. .

Okay.

So you -- are you still on the East Coast?.

Yes. What do you call Detroit? I guess that's Midwest. This is another one of those cases where -- in all candor, I don't know the market at all. I've had a chance to learn the bank some. But I don't know the Detroit market. But... .

So I'm in Texas. So I moved to Texas 5 years ago. .

You did? Good for you. Another low-tax state. .

Yes. Yes. No red, thank God. All right. No politics on this call, right? And that's about all I had for you. I know this is going to be a tough fall. I wish you the best. Is there any news on Tom? Is Tom doing all right? I mean, to me, that was the biggest concern when all these announcements hit the tape, was his health.

Is he doing all right?.

I really don't -- I can't answer that. We had the opportunity to meet during my consultant period, but as of kind of the last 2, 2.5 weeks, I haven't heard. So -- I think so, but... .

[Operator Instructions] Today's next question comes from Brad Ness with Choral Capital Management. .

Gentlemen, can you hear me?.

I sure can. .

Great. Thanks.

Can you just mention kind of where you are in that internal review process in the Advantage Loan Program? Like is it 50% done? 80% done? Give us a little color there?.

Well, I can tell you that it is well underway and awful lot has been accomplished. But as with any of these investigations, sometimes it's like peeling an onion back. There's another layer to look at or something that you learn requires further investigation. So it's -- that's -- it's hard to project, but I would say that it's certainly well along. .

Okay.

And how many employees were let go in association with this program?.

I don't have the exact number, but it's -- the last I heard, I think it was just short of 30. .

30. Okay. And I saw you... .

And I should qualify that, I just want to say -- when you say let go, there are people who resigned rather than be interviewed and there were people who were released. So that number includes both of those categories. .

Got you. Okay.

And do you have the dollar amount that was originated under this Advantage Loan Program?.

From the beginnings of the program and?.

Yes. I mean, they're probably all kind of at risk, right? I mean, that's why... .

Well, there were -- over the life, there were several billion that were originated, but an awful lot of them have paid off. .

Okay.

So what's outstanding that have not paid off?.

I would say the total between what the bank has on its balance sheet and what is outside and sold to investors is probably mid $2.5 billion, $2.6 billion, something like that. .

Okay.

And out of that $2.6 million, what's on the bank's balance sheet then?.

Well, there's under $600 million that's sold to investors and there's a couple of billion on the bank's balance sheet. .

Okay.

And I mean, without getting into kind of the $7.8 million reserves allocated to this program, am I just to assume that the risk here is on kind of what you sold to the other investors and to the extent that there is some documentation errors or any errors in the underwriting that the buyers expected, you may need to buy back? Is that basically the kind of -- the way this would play out is you can get put back, worst-case scenario, the $600 million in loans?.

Yes, the -- these are what you would call underwriting errors. And there is a disclosure that we will give to the investors. And when these were sold to the investors, there was a premium paid and the repurchase procedures require a kind of amortized premium -- if we had to buy them back, an amortized premium price paid.

So that accounts for what we calculated with respect to that. And I can't tell you if and when any of that will occur, but that's kind of what that addresses. .

Right. Right. Okay. Got it.

And when I look at the increase in reserves for the quarter, and is it my understanding that you guys have not adopted CECL?.

That is correct. .

Okay. Can you just give us some color? I was somewhat under the impression with 85% or 86%, 1-4 family exposure. Now you should be -- have a fairly protected balance sheet as far as relative balance sheet loan portfolios go.

Can you just give us some color as far as what necessitated that significant increase and where you see risks in the area? And actually maybe even average loan to values in some of your portfolios?.

Well, I think the big challenge with the COVID virus is what is that loan-to-value. From what I've seen at the bank, there are some -- on the residential side, some fairly conservative loan to values in the kind of the 60% range. On the commercial side, we've got a little under $200 million, I think, in construction loans.

So that is a level of concern. And frankly, the number represents more of a qualitative concern with what the economy is going to look like and what the credit markets are going to do and some concerns with that, that are, in a sense, outside of Sterling specific issues. But I would say it's hard to project.

I mean, the demand for forbearance from loans is going on. How that plays out when people start and businesses start to reopen and cash flow gets better, how fast will it occur? Will it affect ultimate valuations on property? Will it affect cap rates? I think all of those things are going to be in play.

And it's a level I think that we all got to be very comfortable with as kind of bankers conservative prudence with all of these unknowns out there. .

Right.

Did I hear you correctly that you said that 1-4 family resi portfolio is in the 60s loan-to-value?.

That's correct. Yes, it is. Yes. .

Okay.

And can you remind me if you had any nuance to that portfolio? Are these conforming loans? Are these jumbos? Or any -- how -- what these loans look like?.

I think there's a mix and a match in there. There are some that are certainly jumbos. Steve Huber is on the call. Steve, can you give me a little bit of help on that one? I mean, I've seen balances in the several hundred thousand to over $1 million, but I don't know what the typical portfolio looks like. .

Certainly. There's a mix in there. The majority is the Advantage Loan Program at about $1.8 billion. But then the remainder is probably the jumbo category. We typically just retain ARM loans on our portfolio. We don't retain fixed rate loans, we sell those off into the secondary market.

So like I said, the 2 primary categories is the Advantage Loan product and then jumbo loan product beyond that within the residential portfolio. .

Thanks. .

Okay. Got you. Thank you. The net interest margin compression we saw in the first quarter was a little more than I was expecting, kind of given what I thought was -- in one of your filings, I found a 100 basis point decrease in rates would maybe yield 1.8% decline in net interest income.

And I know the first -- I was expecting more of a decline maybe in second quarter rather than what we saw in the first quarter.

Can you just give us some color what we should -- why the compression was -- what it was and what we should expect in the future?.

No, absolutely. Absolutely. We had -- as I began consulting with the company too and looking at the, the potential for loan repurchases, we -- on conversations with the Board of Directors, we really determined that we needed to build liquidity in the bank.

So should that eventuality arise, we want to be able to fund the repurchases so the liquidity level within the bank grew pretty dramatically during the quarter and subsequently, too. And we don't earn a lot, as you know. Liquidity doesn't pay a lot, but it's the easiest way to fund a repurchase if we have to do it. .

And I would also like to add, this is Steve again. I'd like to add within the residential portfolio, we also have a significant piece of what we call a tenant-in-common program. So we have a portion of that, about $445 million is also contained within the residential portfolio. .

Okay. Got it. Appreciate it. In this kind of period where you let go -- seized this Advantage Loan Program and have a lot of operational priorities.

Should we expect any type of loan growth in this environment?.

Net loan growth?.

Yes. .

I would caution you not to expect that. And I think while any bank is going through what Sterling is going through and based on all of my prior experiences, this is, as I said earlier, job 1 is to straighten out the regulatory challenges and restore the bank's regulatory standing. So it's frankly not the time to develop new programs.

It's the time to fix what we have and convince people that we actually do know what we're doing. And then we can be a little more strategic. So we'll continue to make some loans, but the speed with which loans pay off, could certainly overwhelm what we're able to originate. And I expect... .

Absolutely. Okay. Got it. And given that you guys don't seem like you're really a small business focused bank.

Were you engaged in the PPP program at all?.

We were not. .

[Operator Instructions] Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Mr. O'Brien for any final remarks. .

Okay. Good. Thank you, and I do appreciate everybody calling in and the questions and look forward to future opportunities where we can begin to tell the Sterling story and our -- and how we're succeeding at the challenges that we laid out today. But I do appreciate all the investor interest and the market interest in what we're trying to accomplish.

And thank you for that. And that's it. .

Thank you, sir. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day..