Good day, and welcome to the Sterling Bancorp, Inc. Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions].

Please note, this event is being recorded. I would now like to turn the conference over to Stephen Huber, Chief Finance Officer and Treasurer. Please go ahead, sir. .

Thank you, Chad, and good afternoon, everyone. Thanks for joining us today to discuss Sterling Bancorp's financial results for the fourth quarter and year ended December 31, 2020. Joining us today from Sterling's management team are Tom O'Brien, Chairman, President and CEO; and myself, Stephen Huber, Chief Financial Officer and Treasurer. .

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. Further information is contained within the press release, which we encourage you to review.

Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. .

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

Tom?.

Thanks, Steve, and good afternoon, everyone. Thanks for joining us. Sterling had -- as you probably know, 2 press releases today. The first one was about the pending settlement of the class action lawsuit. And that went out first thing this morning, but we're very pleased to announce that as you can probably imagine those things are a distraction.

They consume an awful lot of time. And of course, they are expensive. So the -- as noted in the press release, the resolution is subject to approval of the court. But we're optimistic that, that will all come through accordingly and without too much delay, although it certainly takes a couple of months to get through this entire process.

But, we're very pleased about that and the resulting outcome is the press release also notes the cost of the settlement is borne by the bank's insurers. And so as a consequence, we had to set up some reserves in the -- earlier in 2020. And $10 million of those were released in the fourth quarter. .

The second release, of course, was our kind of normal fourth quarter and full year 2020 financial results. I think they're pretty self-explanatory. The quarter remained noisy. I apologize for that, but still a lot to do here at the bank, but underlying all of the noise in the quarter, I think you'll probably see a fair amount of progress being made.

We still have a fair amount of remedial compliance and technology will work ahead of us in 2021, but the groundwork that we've done so far in 2020 has certainly paid some benefits. And we just don't underestimate the work to be done. But as I said, progress is meaningful and measurable at this point. We're pleased with that. .

Financially, margins under pressure, primarily due to the level of liquidity we have on the balance sheet coupled with the very low interest rates. Expenses, even though they were down in the quarter if we take account for the $10 million recovery, but expenses are still running high with legal and consulting work being done in the fourth quarter.

We're optimistic that as the class action comes to full resolution and the costs with it disappear. But as we get into the second half of 2021, the OpEx line will start to find its way lower. .

I guess the most noticeable thing in the quarter is the loan loss provision. We made a provision of $27.6 million, increasing the allowance to just about 2.9% of total loans.

And as I've mentioned on the previous few calls, the allowance reflects our concern with the credit risk profile in various different components of the legacy bank loan portfolio. Of concern are the SRO loans in the San Francisco area. And of course, to some extent, the advantage loans and the bank's construction loans.

Those remain our focus and reflects some degree of concern as to how they will work out. So we just thought it, frankly, it was more prudent to get as much of this done as circumstance would allow in the fourth quarter and also give us the flexibility going forward in 2021 to move it aggressively as circumstances permit. .

Nonperforming loans remain stubbornly high. There are some PDRs in there which help out. And of course, as you probably read in the press release, we moved about $23 million, $24 million worth of loans into held for sale and took a write-down on those. Our goal is to liquidate those loans in the -- either late this quarter or the very early part of Q2.

.

And then on the governance side, we accepted the resignation of Barry Allen, who has been a longtime Director of Sterling, Longtime Chairman of the Audit Committee. And I think Barry had a total of 22 years on the Board. So we were sorry to see him leave, but understand his desire to have some time for himself. .

And with that, we did announce, subject to some regulatory approvals, the appointment of Tracey Dedrick to the Board. And Tracey will join us as soon as we receive the nonobjections from our regulator.

And all of that is our efforts moving forward in terms of providing the governance level that the company and the bank need and the oversight that we and management require. So we're pleased to announce that. .

And with that, it's probably going to be most of beneficial if I just take some questions here, operator, so maybe open it up, and we'll just see what's on everybody's mind. .

[Operator Instructions].

And the first question will be from Ben Gerlinger with Hovde Group. .

So the 27% reduction in professional fees from the third quarter to the fourth quarter is a pretty sizable step down. And now that since you have that pending settlement as announced today, I was wondering if you could give a little guidance to kind of what we should project going forward. .

I get that all of January could be included in those elevated professional fees. I was just kind of curious, since you do have that pending settlement now, should we continue to assume a ramp down? Shall we hold steady to your current levels? Or just kind of baked into that elevated 12, then this really doesn't apply? So that's my first question. .

I have 1 more follow-up after. .

What I've generally said, Ben, is that I think in the second half of the year, the legal and professional fees will start to trend down. Not at this point, I would not be able to say gap down because it's just too hard to predict. .

But as we get things resolved, and there's a little more clarity, then they should start to reduce.

And I don't know, Steve, do you have any specific numbers you want to throw in there?.

Well, for next year, we're expecting on the maybe come down by as much as 1/3 and compared to year 2020. But again, not real material, probably in the first, second quarter of 2021, more would be a second half event, as Tom has mentioned. .

Yes. Okay.

So full year '21 is about 1/3 less than full year '20, if I get that right?.

Yes, correct. .

Year-to-year. .

Okay. And then my other question had to do with the time deposits. I saw from second quarter into third, you guys reduced that by about 33 bps in the yield. And then third quarter into fourth, it was just 10.

I was curious if you could talk about kind of how some of the time deposits are coming off over the next few quarters in terms of percentage of the total amount? And then what's the kind of the spot rate relative to that $158 million where you guys are reissuing those CDs?.

Yes. Stephen, why don't you talk about securities. .

Sure. Our spot rate at year-end is just under 1%, so hovering around 1%. We continue to decrease deposit rates, particularly in time deposits and money markets. So we're expecting those to reprice and take effect as we move forward here.

We do have a lot of time deposit's coming due to reprice beginning materially in the first quarter and basically through the third quarter. .

Probably about anywhere from 16% to 25% of our deposits are going to reprice. So we're expecting to take the opportunity of the lower rates that we've just set recently to bring that cost down a little bit. It will remain to be seen on how many of those still stick with us as they renew in a new time deposit or move to a money market.

But we're expecting some of those deposits to leave the bank altogether as well. .

Got you. And you said 16% to 25%, I was just making sure I got it right.

That's basically a quarter of the time deposits per quarter or is that in totality?.

It might be a little more clear if I give -- put it in dollar terms. We have about $253 million repricing in the first quarter. $432 million approximately in the second quarter and $352 million in the third quarter. .

And the next question will be from Nick Cucharale with Piper Sandler. .

So I wanted to start with liquidity position, which continues to grow.

Given the optimism for mortgage repurchases in early 2021, do you feel that once that process concludes, liquidity will come down in a meaningful way?.

Yes, absolutely. It's obviously a big drag on margin and we don't see any signs of that changing anytime soon. So as Steve mentioned, we've got some significant CDs maturing. So our goal, frankly, would be to bring the balance sheet down and size somewhat and then get these repurchase loans funded probably very late this quarter or early April. .

Okay.

And then in terms of the loan originations, a similar amount to last quarter, are the originations predominantly in that active product that you guys offer?.

They've been predominantly there. And we continue to fund commitments on construction loans. And then we've done some residential loans, but the tenants and common product has been the bulk of it. .

And the next question will come from Anthony Polini with American Capital Partners. .

You actually beat our revenue projections by $500,000. .

All right. .

I don't know if we were depressed that you actually had a good quarter. But obviously, credit quality is the key issue here. And I know, Tom, you have a hell of a lot of experience with this.

And whether you want to use a baseball analogy or a garbage truck analogy, are we in the early innings as far as -- is that garbage truck full, and now it's just a cleanup process, dumping it? Or is that front-end still having a little more activity than you'd like at this point?.

It is a fair question. I mean, it's hard to predict. I mean, I'll speak to Sterling, but I do think in the community bank space kind of generally, between the level and kind of the aggressiveness of originations over the last few years, coupled with the impact of the coronavirus.

I just think there's going to be some reckoning throughout 2021 that will not be insignificant. And that philosophy has kind of guided where we are at Sterling. I have my concerns, as I've mentioned on a few prior calls with the commercial construction portfolio. And I don't want to be caught short.

So I would say we've got almost 3% of total loans reserved. I'm feeling okay about that. It gives us a lot of flexibility to work with the loans that come into a problem status and those that we've identified. .

And I will tell you, we have been very, very thorough and aggressive in terms of risk rating and identifying loans through the last few months. There was an awful large backlog of loans to review when I joined the bank. We've got a very good team in there now going through it. We're being deliberate about it.

As you saw in the press release, there's I think about $35 million, if I've got the number correct, of loans that are just past due maturity by 90 days, but we're reviewing them and looking carefully at them as to whether or not we're going to extend or find another strategy..

So that's a long way of saying, Anthony. I'd like to think at least from the Sterling specific perspective, we're heading into the stretch. .

It sounds like we might have a lower provision in the next quarter. .

Well, I hope it's not higher. .

All right, guys. I think you're doing a great job, by the way. I know you're very familiar with the process, but it doesn't make it any more fun. And congrats. Good job. .

No. The fun comes much later in the game. .

[Operator Instructions].

The next question is from [ Jeremy Chu ] with ECW [indiscernible]. .

Just curious, I read level of criticized and classified loans is stubbornly high.

What is that level of criticized and classified?.

Steve, I'm going to -- I've got so many numbers in my head. I'll get it wrong. .

Yes. I mean it's really -- it's a combination of commercial and residential, but significantly, commercial, Tom mentioned, concern with the construction and SRO portfolio. .

Yes.

Do you have a rough idea of what levels?.

I think it's about 150, Jeremy. .

150. Okay. .

And if that's not right, we'll get back to you. .

Okay. I appreciate it. So you also said that you classified nonperforming mortgage loans with a cost base of $19 million as held for sale.

What is write-down associated with those loans?.

$3.5 million. It was about $24 million, I think. And value $23.5 million, something like that. .

Yes, that's correct. And then we wrote it down approximately a 15% discount by -- which was $3.5 million. .

Got it.

Presumably, you're looking to sell these loans, I guess?.

We are indeed. .

These are 1-4 family mortgage?.

Exactly. .

Given that overall, the 1-4 family value has gone up and loans you made are fairly low LTV compared to the value of the property.

Why can they be sold at par, I guess? Can you just walk us through what the rationale behind that?.

If that's a bid, I'll take it. .

I mean, are these loans still -- the value of these loans above the home price?.

Yes. Let me tell you my thinking, and it's not entirely financial. These are all those advantaged loans. Basically, all of the advantage loans that are nonaccrual. And I felt it would be important for a lot of reasons if you look at this portfolio and say, okay, this is the bottom of the barrel of the advantage loan. .

It would be very helpful to have some price discovery because I think that gives all of us investors, regulators, bankers, some degree of comfort as to what these are. They are by all factors that we know well-secured. The collateral coverage is very good. The appraisals have plenty of room in them.

And so in the normal course, you might say, it might be more financially beneficial to spend a period of time and go through the foreclosure process and get paid out whole. .

And I wouldn't argue with that. It's just really an opinion. But I just felt like it might be wiser to go through this process for the reasons I outlined and do it on a more expedited basis. It's a little bit of a test.

And as I said, I think it provides some nonfinancial benefits and from an investor perspective, you look at, okay, they're going to put up their money. They've got to spend time and resources, and they need to get a pretty healthy return. So we'll see how it plays out, but that's my thinking on these. .

Got it. Okay.

And then going forward, I guess, do you have any thinking in terms of areas of focus for bank to continue making loans? What's the new areas of business that you're thinking about?.

Yes, that's kind of the question we all struggle with. But at the moment, our commitment, both internally to the Board and to our regulator is, we have to focus on the remedial actions necessary to address the formal agreement and the requirements of that, and they are going to take a lot of time and energy.

So we're going to have to -- buying back these loans in this quarter will help the balance sheet from an income statement perspective. But it's just premature for us to be sitting here spending time developing loan products when we've just got a fairly healthy list. If you read the formal agreement, it's a public document, there's a lot to do there.

There is an awful lot. So that's kind of what I said at the beginning of this, there's been a lot of underlying progress, but we don't kid ourselves that there's a fair amount to do going forward.

And yes, if you look at the time line of the formal agreement when it was announced in 2019, there's not an insignificant amount of time that we lost just getting to the point where we got a strong focus on it this past summer. So we've got to make up for that.

So that's, again, a long way of saying our priority is to fix the broken parts before we get back into more strategic businesses. .

[Operator Instructions].

Ladies and gentlemen, this concludes our question-and-answer session. I will turn the conference back over to Tom O'Brien for any closing remarks. .

Thank you. And no, just like to express the Board and my appreciation, all of management to those of us who follow the company and invest in it. We certainly appreciate your interest and your commitment. We ask for some patience, but our goal is to under promise and over deliver. So that is what we're trying to do. But thank you for participating today.

I'll look forward to opportunities to talk in the near future. Thank you. Thanks, operator. .

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