Good morning, and welcome to the Sterling Bancorp, Inc. Second Quarter 2020 Conference Call. My name is Brandon and I will be your operator today. [Operator Instructions] This call is being recorded and will be available for replay through August 17, 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, Brandon, and good morning, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial highlights for the second quarter of 2020. .

Joining us today from the company are Tom O'Brien, Chairman and CEO and President; and Steve Huber, Chief Financial Officer and Treasurer. Tom will begin the call with 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, everyone, and thank you for joining Sterling Bancorp's second quarter call. As you saw this morning, we announced net income of $3.6 million, about $0.07 a share. Once again, we are reporting what we are calling financial highlights as contrasted with the more traditional earnings release. .

We are working our way through the 2019 audit and then the past due 10-K and 10-Q. All of the relevant parties are actively engaged and working towards the goal of having the audits and these reports completed as quickly as possible. .

I began in my role as CEO of Sterling in the last month of the second quarter. In that time, we have worked to identify critical needs and begin the process of building a strong and compliant foundation from which the company can operate.

To that end, every single area and department will receive close attention and any remedial actions required to bring it to the operating standard that we demand. In that context, I can also report that the Board of Directors remains fully supportive and actively committed to this course of action. .

The financial results, I guess, are what I would say in a word, okay. As you can see, we're saddled with extraordinarily high cost related to the previously disclosed investigatory matters, the margin at 308 basis points reflects a very high liquidity level in a very low rate environment.

The provision for loan losses came in at $4.3 million, which brings the allowance to just under $47 million. Capital levels at both the bank and the holding company remain robust. Deposit flows are likewise strong. Credit metrics are somewhat weaker due in part to how we measure delinquencies today versus prior management.

Forbearance levels are predominantly complies with residential property loans. .

We remain diligent in evaluating the impact of the COVID-19 virus on both our business and our employees. We have a substantial number of employees working from home, as you might expect, and I expect that to continue for the next few months, at least. We remain productive in this environment. .

The quarter results, as you can kind of see in the bullet points, predominantly driven by these higher expenses that I referred to earlier and the liquidity level.

The attention of the management team is on -- the focus is almost exclusively on identifying the areas that need attention, the staffing needs, the executive needs of the bank and looking critically at commercial loan portfolio, the residential loan portfolio and any deviations from what we might expect there.

It's a little difficult with the virus and the forbearance request to get a handle on exactly what's happening in the underlying markets.

But generally, I think, like most banks, we see cash flows impacted on commercial properties, construction projects delayed by the inability to complete the projects during the general time allotted because of the shutdown with the virus. .

And so we are trying to be cautious, diligent. The residential loans were the only originations we had in the quarter at $83 million. We've not originated anything on the commercial or construction side in that time period. So I would say an awful lot to do. The challenges are not insignificant, but also not insurmountable.

It's just a lot will keep us busy over the next couple of quarters, all of the things that you can see impacting us during the release.

But our goal is to get through this, get these expenses down as quickly as possible and come out the other side with a stronger business model as transparent as we possibly can be and certainly as compliant as everyone expects us to be. .

So that's in a short sense where we're situated today. Probably the best thing for me to do is just take some questions from those on the phone and see where it takes us.

But as Larry mentioned, and like the first call I had with the first quarter results, there's really nothing I can say with respect to the investigations or anything related to those at this time, but that will be what it will be and will come out at the time when everything is completed and done. .

So with that, let's go to some Q&A. .

[Operator Instructions] Our first question comes from Anthony Polini with American Capital Partners. .

When I was looking at your net interest margin and looking at your net interest income, it implies that you had some balance sheet growth during the quarter.

Is there any -- I know you don't have total assets or total earning assets on the highlight sheet, but could you share some of that detail with us?.

Yes, we had good deposit flows, which built liquidity. I mean liquidity -- primary liquidity comes in a little over $630 million, so that's really where you see the growth. I mean we had a little bit of, as I mentioned, a little bit of residential loan originations at $83 million.

But this was really a deposit flow increase and the -- I guess, a lot of banks are experiencing the same thing. So -- but I thought -- the reason I said that I thought the quarter was okay is that a margin north of 3% today is pretty darn good. And given that level of liquidity, I'd say, even better than the stated number.

But that was it with the flows. .

If we had to kind of look at the next quarter from a balance sheet perspective compared to this quarter, should we see the trends continue or perhaps slow? The liquidity continue to build but at a slower pace, et cetera?.

A little hard to predict that, but I think generally, what you're seeing in most -- all the markets in the country is that there's a preference for safety and yield and as modest as those yields are, and bank deposits continue to be pretty robust and bank opportunities to invest those deposits are pretty paltry. So I think it will continue.

I'd be surprised if it was at the same level as we had in the second quarter. But to be honest, I was surprised by the second quarter also, continues to be good. And for the liquidity, we have uses for the liquidity potentially over the next quarter or so, too. So... .

When I look at the provision and compare it to what I'll call our guesstimate for the quarter, it did come in lower.

And did you have any material charge-offs in the quarter?.

No. .

Okay. So this pretty much all went to the reserve. .

Yes. Yes, the allowance is just under $47 million. Actual charge-offs at the bank have been modest for quite a while. I mean the provision in the last 2 quarters and the profile of bank lending and particular commercial and construction stuff, it is a cause to be cautious.

So I think to the extent circumstances continue to be sideways or worse than the economy, we'll continue to build the allowance in anticipation of some ultimate charge-offs. But to date, the actual charge-offs have been nil. .

When I look at the forbearance portfolio, we'll call it, it's actually not that high given how big your loan portfolio is.

But what do you think the total balance for that's going to be next quarter? Is it higher or lower, maybe the same, hard to tell? And do you see material loss content in that portfolio?.

Very hard to predict where it goes. I mean we're now basically into August with events that began in March. So you would argue that from the -- at least the forbearance request time frame, you're pretty much through it. But a second round of virus-type lockdowns could change that.

I don't -- when you look at what's in the forbearance portfolio, just on a collateral basis, the collateral levels are high relative to the loan amounts. So I think we're okay there, but there's not a lot of ability for actual price discovery in a market that is where it is today.

But I think a lot of the residential loans, the average loan-to-value is probably no more than 60% today. And so people are taking advantage of the forbearance. At least in our portfolios, to some extent, it may be opportunistic.

It may be unemployment for a temporary period of time, all sorts of things, but it's hard for me to see where people would walk away from that much equity in their home. .

The commercial side of it has been really modest relative to what I've seen in some of the banks that I know and I follow. There's always more risk in the commercial side of the business and always more risk in the construction portfolio, too. But so far, it's -- from the pure forbearance in them, I'm not panicking, I guess I'd say. .

Okay.

How about the expenses? I mean, obviously, those are hard to predict also, but when do you think we start to see the workout/COVID/regulatory expenses start to peak or maybe moderate and start to come down?.

I think it's hard for me to see them going higher, but I think they'll continue at high levels for the next couple of quarters. So I -- at least my hope would be we'd see some relief as we get into 2021. Because that has really been the sea anchor that's dragging us for, I don't know, I guess, the last year plus. This was a high quarter.

I would expect the third quarter to be somewhere in this area. But then as we get into 2021, just by the fact of time passing and management taking a very proactive approach to getting -- as I said, the 10-Qs and the 10-K filed, to getting past a lot of these other issues. They should start to moderate and come down to more traditional levels.

But it's an expensive process when you get into trouble. That's the one lesson. It's very expensive. .

Have you had some good quality time with the regulators over the last couple of months?.

Oh indeed, plenty of good quality time. .

So you're already in the mix?.

Yes. No, I am. And I will say our relationship is much improved. There's a level of trust and confidence that's bilateral here.

We are just -- which has been typical of my career, but the annual safety and soundness exam began when I -- pretty much when I joined the bank, and they're just finishing that up now, which was an interesting experience to do it somewhat remotely and virtually for both of us. .

But we're in a good place from the trust and confidence level. I think they certainly appreciate the transparency that we've given them in the last 2 months or so. And we'll always work with them. And as I said, they've been very supportive of our efforts. So we all know there's a lot to do, and we'll just do it. .

Well, you're doing a great job so far. I still view this as a value play, distressed value play. And you certainly -- these results were better than we had expected, and I wish you continued luck. Thank you for the time. .

No, thank you. Glad to hear from you. .

[Operator Instructions] Seeing as there are no further questions, I would like to turn the conference back over to Mr. O'Brien for closing remarks. .

Okay. Thank you. Busy time today. I thank all of you for joining the call. And as I mentioned, we're focused on the remedial work that dictates our days and working aggressively towards getting these overdue filings completed and filed and kind of back to at least normal operating schedules, and we'll do that as quickly as we can. .

But with that, thank you all so much for your interest and for participating and look forward to another conversation. Thank you. .

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..