Good afternoon, everyone, and welcome to the Sterling Bancorp, Inc. Third Quarter 2020 Conference Call. My name is Jamie, and I will be your operator today. [Operator Instructions] This call is being recorded, and will be available for replay through November 12, 2020, starting this afternoon at approximately 1 hour after completion of this call. .

At this time, I'd like to turn the conference call over to Mr. Larry Clark of Financial Profiles, Inc. Please go ahead, Mr. Clark. .

Thank you, Jamie, and good day, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial results for the third quarter of 2020. .

Joining us today from the company are Tom O'Brien, Chairman, CEO and President; and Steve Huber, Chief Financial Officer and Treasurer. Tom will begin the call with an overview of the financial results for the quarter, and then, afterwards, we'll open the call to your questions. .

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?.

Great. Thank you, Larry, and thanks, everyone, for being on the call today. I hope you and your families have all remained healthy through the impact of this virus. .

Today, I will not be making any comments, and I won't answer any questions with respect to the litigation and the investigation issues, but I can refer you to the recently filed 10-K for a very timely and fulsome disclosure of these issues as of that date. I will be discussing the third quarter results and our outlook. .

My initial time here at Sterling has been taken up by our ultimately successful effort to get our past due SEC filings for year-end 2019 and the first 2 quarters of 2020, completed and filed. That was a major undertaking in a very short period of time, and we've successfully completed all of those just a week or so ago. .

Simultaneously, the bank underwent its annual safety and soundness exam with the OCC. And of course, there's been a lot of remedial efforts here at the bank in terms of all the fixes we're trying to do. So there hasn't been a lot of time to come up for air. We've all been really busy. .

In the quarter -- third quarter, we're reporting a loss of $111,000, which is basically breakeven. From my perspective, the 2 biggest issues to spend some time on are probably OpEx and credit. Margin declined to 274 basis points, basically a combination of low interest rates and some nonperforming loans.

The NPA had about 24 basis points drag on margin. .

If you followed the company over the recent couple of years, you've probably noticed an increase in commercial real estate lending and construction lending. That is where we are finding the most credit risk from structure and valuation. .

Secondarily, the COVID-19 virus has put pressure on a few of our commercial borrowers, but not too many. The Advantage loan product, while having all of the disclosed origination defects, continues to perform on the credit side quite well. Additionally, paydowns in that Advantage portfolio remain fairly robust. .

As you can see from the chart in the press release, the COVID-related loan forbearance cases are predominantly in the residential portfolio, and they've declined pretty substantially from the second quarter highs, down in that linked quarter by almost 60%.

Nonetheless, the -- in the residential portfolio, where there is forbearance, Sterling is committed to remain supportive of families negatively impacted. .

In the nonperforming category, we have several loans that are past due maturity, 90 days or more. Each of these are being reevaluated, with an eye towards better documenting or securing the bank's position. I think it's probably safe to say that the bulk of these are construction loans. .

There are some emerging favorable economic signs among all of the noise around election and virus and so on. My crystal ball on the future is as cloudy as anybody's, but I am a strong believer that no country is better positioned than ours, and that we will, ultimately, weather this calamity. .

We, at Sterling, are not heavily exposed to hotel, airlines, restaurants and retail, and I think that will serve us well. But I do think Sterling, and many banks, will struggle, to some degree, with credit pressures over the next few quarters. My opinion, this is not a time for denial. .

Deposit flows here have been strong as we prepare to build liquidity to buy back previously sold Advantage loans. So far, we have brought back -- bought back just under $100 million, and that remains about $400 million where we are in discussions with investors. .

In terms of our operating expenses, obviously, the cost of the remedial work, including consultants and experts, is substantial and addition to the cost of the shareholder litigation. Our goal is, first and foremost, to get Sterling into strong regulatory compliance as firmly and as expeditiously as possible. .

Our regulatory challenges are not inconsequential, and they will take time to properly remediate, but we will succeed. In terms of litigation, the only thing I can say to you is that it is, obviously, expensive.

But you should know that your Board and your executive management team will always act in the best long-term interest of the bank and the company. .

Speaking of the Board, we've announced some changes there. Peter Sinatra has left our Board, concurrent with our announcement of the agreement to sell our registered investment adviser, Quantum. We, certainly, wish Peter well in the future. .

Additionally, we announced the appointment of Denny Kim and Steve Gallotta to our Boards. Denny has long experience in capital markets and community bank investing analytics. He worked for several years at WL Ross & Co. And in that capacity, served as a Director at Talmer, and he was also a Board observer at Sun. .

Steve had a long career as a partner at KPMG, where he had extensive leadership experience in financial services audits, from the largest companies and down into the community bank space. .

We are fortunate to have the benefit of their combined experience in our boardroom. .

So we are in transition mode here. It's kind of like moving into a new house. You have to get out of the old one, which takes time, and get settled in the new one. In the middle is transition, and that's basically where we are right now. Good progress is being made, but it isn't time for any victory laps here, or else, we risk be crippling..

We have a very strong and experienced group of management and advisers working with me every day, with the sole goal of identifying and fixing problems here. Everything else is secondary. .

So Steve and I are here, and we're happy to take questions at this point. .

[Operator Instructions] Our first question today comes from Vince Staunton from TCW. .

It's Vince. I have a question regarding the construction loans, specifically, the $46.1 million of nonperforming construction loans. .

Right. .

Could you provide some color on what type of projects these are? And just basically some additional color would be helpful. .

Sure. Yes, there's some single-family construction in there. There's some multifamily construction. I would say that's the bulk of it. There's not a lot of retail, or office space, or anything like that. Vast bulk of it is in there. And I think it's about -- about 15 million of them are just matured, and we're going through them.

I don't exactly see where we are. And we've also had a couple actually payoff in the last week or 2. .

I'm trying to assess what my level of concern is about them. I'm concerned about everything because it's -- everything is kind of new to me here. So we're watching them carefully. Some will probably exit out of. And others, I think, will be okay. But if the loan has matured, we're not just extending it lively.

And going forward, we're taking a very good look at what the project is.

What our collateral value is as it stands relative to what the ultimate value is?.

The one charge-off you saw during the quarter was really a construction loan, where the cost to finish was pretty much equal to the appraisal. So we wrote off the difference between that and our loan. We're just trying to be careful with them. .

Beyond that, it's a little bit dependent on what happens in the general economy. But for the most part, whether it's single-family residential homes or in desirable areas, where values have been at least good, if not strong, but they have to get finished. .

Given they're in -- given it's in the single-family industry, or at least some of them are, why are they nonperforming?.

Because they're past due maturity. So they're 90 days past maturity, which is under the classic definition of nonperforming. .

Okay.

I'm just wondering why they, themselves, are struggling, given prices of single-family have gone up?.

Well, no, they just have to finish. The projects, if it was done, it would be a lot easier to tell you where we are. But if it's 20% done, or 40% done, we've just got to make sure that there's enough time and money there to finish the project as advertised. That the budget is going where we expect it to go.

That the ultimate value is what we anticipated or somewhere pretty close to that. .

And what the capacity of the developer is to finish the deal. .

Okay. .

They're not in that NPA category because they're pristine. But I would also say they're not dead in the water, there's just the heightened concern. .

Okay. And in terms of noninterest expenses, how long do you expect it to stay elevated at this level? It was up significantly even quarter-over-quarter. .

It's -- yes. This was a tough quarter. Very hard to predict. But I would say -- I'd like to say this was more towards a peak quarter. Certain things will start to come down. But litigation is expensive. I just kind of have to get through it. It's very hard to predict. .

But I would say they're, certainly, going to be elevated, this current quarter and probably the first quarter. I'm hoping they're nowhere near as high as they were in this third quarter, but it's really tough to predict that. .

And our next question comes from Anthony Polini from American Capital Partners. .

Just a follow-up here. I'm looking at the expense side, and I guess that was probably what drew me the most this quarter.

When you look at these problem assets built, are you thinking about things like a workout reserve built into any of that expense you took this quarter? Do you think a bulk sale is something that you're considering more and more now? What do you think the ultimate, I guess, workout? What type of shape do you think that will take?.

Well, I've got, generally, 2 visions on that. I would just say, from a residential owner-occupied house, I've never, in my life, put a family on the street. And I won't do it again. That's just not something that is of anybody's interest. So I don't know how those play out. As I said, the credit performance has been really quite good there.

But we'll, certainly, have some. .

On the commercial side, too early to say. I mean, there's nothing that I don't think we would consider. I've done bulk sales. I've done workouts. I've done dig and lose. I've done foreclosures. Pretty hard to predict right now where that will go. .

I think, as I said, some of them I would describe -- when I say structure and things like that, I would prefer, in some cases, to see stronger guarantors or more definitive and achievable things like rent rolls and stuff like that.

So It's not -- as I said earlier, it's not that the properties are dogs necessarily, it's just -- we've got to work with that around what we have and what's there today. .

But I wouldn't -- if the best thing to do is to do an individual or a bulk sale and stuff, I mean, that's -- goodness, I can't begin to tell you how many of those I sold at Sun. A lot. Probably a couple of hundred million. And there's just -- really, at the end of the day, Anthony, it's an analysis you do financially.

What's the best use of your capital? And how much time is it going to take to realize how much money?.

Given that surge in NPAs, should we take comfort in the fact that the provision came down about half?.

Well, it went up a whole bunch in the -- I guess, that was the March -- yes, the March quarter. Yes, the March quarter. That anticipated some concerns. As I said, some -- the absolute number here, in terms of the allowance and then the provision to support, is what we calculated based on everything we know.

But like any provision, any quarter -- every quarter, you take a good look and go through the analysis and your procedures and you come up with the right number. I would take some comfort, I guess. .

I mean, I guess the direct question is more, do you feel comfortable that you can assess the loss content in the nonperforming portfolio at this point? Or is it really a moving target?.

I think for where we stand at the moment, I think it's pretty well assessed. We -- as I said, there's certainly signs in the economy that things, especially outside of city centers, are doing reasonably well. But I just think we're going to have to get through this -- the uncertainty of this time period. There's not a lot of liquidity in the market. .

And -- but I'll say, the other thing, at least in my experience over the years, when there is troubled bank loans around, the market gets very competitive. There's a lot of demand for that. So we'll see. .

I think -- as I said earlier, I think Sterling, to some degree, is going to experience -- would, ultimately, many things are going to experience, and that is credit pressures and some charge-offs. I think anybody who doesn't admit that is in denial. .

You did have some originations this quarter, about 66 million, 67 million?.

We did. .

What was that in?.

There was some residential, and then some of these predominantly in the Northern California market and a little bit in Southern California. These, what we generally call FICC loans, tenants in common, kind of like a -- I guess, I would liken it to a New York City co-op loan, joint ownership of a multiple residence building. They've been pretty good.

I think we're generally pretty happy with those. .

Okay.

Have you had conversations with NASDAQ recently?.

Just good ones. .

Okay.

So that is the least of your regulatory/legal issues?.

Yes. No, I think NASDAQ -- and they were very understanding because we just had such a tight window to do a year-end and then 2 quarters. And now we got to get the third quarter out. .

So they were understanding, and I was highly confident we would get there. But there's just a lot to ask from people within the bank to kind of go through 2019 and then half of 2020. A lot to ask of our legal advisers, and not the least at which a lot to ask of our accounting firm. So everybody was all hands on deck.

And I can't underestimate to you how much work it was and the time pressures, but that was good. And we're fine with NASDAQ. .

Good. I'm a big fan of anyone named Sinatra.

But I'm wondering if the Quantum sale makes it easier for the regulators to assess the risk at your company?.

It certainly doesn't hurt. .

Good answer. .

No problem. .

I know you're knee-deep in survival mode, we'll call it, for lack of a better word.

But have you given any thought to the new business model?.

I have. We actually had a healthy discussion about that at the Board meeting on Tuesday this week. So it's -- we've got to be careful here because as I try to explain, I think, to everybody, but the bank had essentially the bulk of its business in one product, and that product, we can no longer do. .

The -- we can't go -- we can't fall back, say, on the C&I department and say, "Okay. We can look to them for some growth or a leasing department or whatever else you might say in a more diversified business mix." So we had one product. .

And to -- given where we stand in the regulatory world, it's typical that if you're going to start a brand-new product that you have to go through, as you should, a full risk assessment and understanding the credit and economic impact and the talent and the systems you have and run that by your regulator for some -- to build some comfort with them. .

To be honest, this is not the time for me to go to the regulator to ask for anything other than what we're doing to fix the bank. That's why I kind of said at the end of my remarks, our job really is the repairs here.

We've got to get past that and build the regulatory compliance here, so that we have the opportunity to look at some of the other business lines that are out there that we can and should consider. .

Okay. You have about $918 million in the cash balance now. .

Yes. .

What do you think -- does it make sense to shrink? Does it make sense to reinvest? What are your thoughts there?.

Well, we've got 400-some million dollars of loans previously sold that are still out there that we've offered to buy back. And so I've got to keep the liquidity for that. .

So on a $3.9 billion balance sheet, if you net that amount of money, out of the liquidity, then you're looking at 400-and-some million of liquidity, which is not -- I wouldn't put that in the excessive category. So it's kind of the 2 stories there. .

If, in fact, we're not going to end up buying the -- some of the loans back, then we can adjust accordingly. And I have no problem shrinking the balance sheet a couple of hundred million dollars either. .

Okay.

I guess the one consistent thing is that the bank still appears to be very well capitalized?.

Yes. Capital is good. That's -- so one of the things that I went through with the Board when we talked about things that are working well and things that we have to work on. But bank level capital is strong. Liquidity at the holding company is reasonably okay.

You try to think strategically and plan for various contingencies that where things don't go well. But at this point, even with the small loss in the quarter, I mean, I'm not in the short run here worried about capital. .

Our next question comes from Ross Haberman from RLH. .

I'm sorry, most of my questions have been answered. Just one question about the margin or the spread.

If we continue to see these low rates for the next, I don't know, 2, 3, 4 quarters or so, how do you see that affecting the margin going forward? And is there much room for you to further lower CD or deposit rates?.

Yes, sure. Good to hear from you. There's always room to lower. We -- early in my tenure here, we built liquidity because of the returns I had about the Advantage loan buybacks. I think margins are going to be difficult because rates are -- you don't -- like the fed, they said, rate going to be low for 2 years. So that's what I take as the window here. .

So I think you'll see margins under pressure. Credit spreads may widen, and that would be helpful. But I think Sterling, and most banks like us, are going to struggle with the NIM and lending margins for a while here. .

[Operator Instructions] And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the conference call back over to Mr. O'Brien for any closing remarks. .

Well, that's great, and diligently on everything that we've laid out in the filings and in the press release. We plan to have the third quarter 10-Q filed on time. And then before you know it, we're at year-end. But I do appreciate your interest, your investment and we will continue to work hard to fix things here and get it straight away. Thank you. .

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines..