Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the third quarter, September 30, 2021. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO and President; and Karen Knott, Chief Financial Officer and Treasurer.

Tom will discuss the third quarter results, and then 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. 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 the financial and other quantitative information to be discussed today as well as the reconciliation of the GAAP to non-GAAP measures. .

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

Tom?.

Great. Thank you. Good morning, everyone, and welcome to our third quarter earnings call..

I'm joined this morning by our newly appointed CFO, Karen Knott. Karen brings a long experience with Sterling to us, and I look forward to working together. .

So today, we reported earnings per share of $0.19, which was comprised largely of a $6.5 million credit that we received under the CARES Act for employee retention.

Sterling is eligible for this credit because we've maintained our employee base without furloughs or layoffs and met the criteria for eligibility, which was revenues down year-over-year by 20% and fewer than 500 employees. So we expect also to be eligible for a similar credit in the fourth quarter, which we think will amount to about $2.2 million.

These are employee tax credits and not income tax credits or refunds. .

So -- but more importantly, we had some improvement in NIM in the quarter, reached 2.83%. We had a decline in operating expenses, excluding the employee retention credit to about $17.6 million. We had been hoping to see some modest decline in OpEx as certain of our remedial projects neared conclusion.

Notably, the look back required by the OCC under the formal agreement is now just about complete and that represented about a $10 million effort over several quarters. We are also near finality on the securities litigation matters, and that also helps to bring some expenses down..

So while the risk of volatile expenses remains elevated, we are working tirelessly to move things along as best we can. The various investigations and supervisory issues confronting Sterling continue to be significant, and we continue to cooperate fully and address those issues under our control as quickly and comprehensively as we can.

I believe we have made substantial progress on the matters found in our formal agreement. The system conversion was a huge step in that direction since multiple remedial steps required that successful transition. .

On the DOJ side, we have less insight into criminal investigations of various individuals. Again, we continue to fully cooperate and be as transparent as we can whenever requested. I continue to believe we'll have some greater insight into these matters as year-end approaches.

But resolution from the bank's perspective will not be forthcoming, at least in my opinion, until well into 2022. .

The credit story in the bank remains, I'd say, pretty much unchanged. We continue to work the commercial criticized and classified list aggressively. NPAs are pretty much unchanged from prior quarter. But as you can see from the tables in our release, the split between the residential and commercial is roughly $40 million each.

We have not experienced significant credit losses to date on the residential side, notwithstanding the, obviously, the horrendous costs that we've incurred to remediate the origination fraud that occurred in the past. Also included in the residential NPAs are several loans that are paying but have yet to return to accrual status. .

As I've noted over the last several quarters, my concern from the credit loss perspective remains centered in the commercial portfolio. We have not seen much in the way of migration into classified territory. And I think we -- at this point now, we've properly risk-rated the vast majority of the commercial portfolio.

So Again, that's where I think we retained some element of risk in the credit loss side, but we're looking at various alternatives. .

We've had some success in moving loans out of the bank without incident. We've -- we'd probably look at some individual or bulk loan sales in the quarter ahead and beyond. And our goal is to get the number down as efficiently and as quickly as we can with a minimal loss.

But as I've said over -- probably since I've been at the bank, the exposure to loss, really, in my view, continues to be heavily centered in that commercial portfolio. .

So that's kind of the story with the bank for the quarter. We've made a lot of progress, probably some of it below the water line that you don't see or as appreciate as much as those of us who are on the inside cannot see every day. But fixing the supervisory issues that are found in the formal agreement are -- really are [ one through infinity ].

It's -- we're focused really on nothing else other than clearing those things away as quickly as we can and trying to bring some finality to the supervisory efforts of the difficulties that the bank has. .

So with that, operator, I'm through with anything I wanted to say and maybe Karen and I can take some questions from those on the phone. .

[Operator Instructions] Our first question comes from Ben Gerlinger with the Hovde Group. .

If I actually, I think, start with Karen. If you look at the deposit and the cost of deposits, there's a pretty good reduction linked quarter, both in time balances and the yield.

I was curious if you had any insight over what could be coming up for renewal? And then what is the new rate that is coming on over the next quarter or 2?.

Sure. So in the next quarter, we have about $150 million CDs maturing. The rate on those is about 1%. Our highest operating rate -- base rate now is about 55 basis points. So we do expect to see some more reduction in our cost of funds in the next quarter. .

Good to hear. And then, Tom, just thinking big picture, I know that you can't answer it with the [ signs ] to come. But if you look at the professional and legal fees reduction in the linked quarter, so there's a lot of heavy lifting being done behind the scenes, which I think we can all agree that is important.

So -- but there's not a lot of clarity in terms of total costs forward going.

So if you had any thoughts to what professional fees might be for the fourth quarter, even in the first quarter? And then kind of juxtapose against that, like what would theoretically are a core run rate be for that line item?.

Well, let me, I guess, start at the back end of the question. So I think Karen can fine-tune this one off. But I think our core runway rate would be something in the around the $12 million range.

Does that sound right, Karen?.

Yes, I would say with the current level of services that we are using third party for. .

So the -- yes, so the excess over that in this case for the quarter, so we kind of adjusted it to $17.6 million. That's down from $19 million, $20 million, $21 million in prior quarters over the last year.

So the, I guess, what we call the extraordinary cost with predominantly legal and professional or advisory type work would run anywhere from almost a double of our regular OpEx, $10 million, $11 million a quarter. .

As I've said before, I think they'll drift down a little more as we get into the fourth quarter and as we get into the first quarter. The risk of volatility, though, remains something high comes out of one of these investigations. It requires us to do another deep dive into something. I'm not aware of it at the moment.

That's been going on for a year predating my arrival, so 2-plus years. .

So I think the trend that we've talked about, which is slowly declining rates with the risk of some volatility is intact. But it's really, really hard to put a number on it because month-to-month, it can vary at a level beyond what we might expect or something gets delayed, an expense that we might have incurred gets pushed off to the next quarter. .

The secret really is just get these things past us and resolve all of the issues in the formal agreement quickly. And then, now as best as we can, push for resolution of the bank's exposure with the regulatory and the Justice Department side, and with the SEC. It's like an alphabet soup sometimes of agencies. .

But I'd just -- I'd be uncomfortable trying to give you a hard and fast quarter-to-quarter estimate because a lot of it's out of our control. But as we kick off things like the securities litigation, then they no more -- no longer contribute to the risk of higher expenses. So that's the best I can give you. .

Got you. Okay. That's fair. I mean just thinking -- just from an optics perspective, there's no like looming lump sum that could cause it to increase outside of an unforeseen investigation, right? So the trend is lower, it's just the pace is unknown. .

Yes, yes. .

Okay. Fair enough. .

The trend continues to be better just -- as I said, we're not going to have any more expenses probably as we get into 2022 with this litigation because it's over. We're not going to have any more expenses with a look back because it's over. So it's fewer kids eating at the table. .

Fair enough. Okay. It was good to see the tangible book value growth. .

Yes. Yes, that's a nice benefit. Thanks. .

Our next question comes from Nick Cucharale with Piper Sandler. .

So I wanted to start on the loan balances. While the residential portfolio continues to run off, you had strong commercial real estate growth this quarter. Do you anticipate this becoming a trend? And just some color there on the sequential increase would be great. .

We did actually originate a loan or 2 on the commercial side in the context of new credit to the bank.

And then some of the loan growth in the commercial side is we've had matured construction loans that moved into, I guess, a sales period, you'd call it and we put those down as bridge loans just to more properly identify what's really construction risk and what's now, I guess, you'd call it, marketing your sales time and sales risk.

So that's the bulk of it. Nothing dramatic next. .

But the -- but I would say that would not be something I'd be uncomfortable with to the extent we can find some good commercial product in and around our various markets and with people that we've known before that I have no problem. But the residential side is -- it's -- in my view, as you probably know, it's for community banks.

It gets tougher and tougher to be a residential lender of any substance. It's a high risk from the compliance side. It's very, very costly. The risk of doing something wrong on the compliance side is always high. And when I say that, I don't mean the things that Sterling went through, but I'm just -- good faith mistakes.

And the market multiples aren't so great for revenues from gain on sale and residential loan business in general. So it's not one of my favorites. .

In your prepared remarks, you referred to some bulk loan sales.

Is that solely on the commercial side?.

At this point, it's on the commercial side. The residential I'm honestly up for that. We did move that group of loans that I referenced in the press release to held for sale. But we can't do much until the Justice Department investigation is over. So we're kind of stymied on that.

But once -- and as it pertains to the bank, once that's over, then I'd be more inclined to sell those as quickly as I could. And we had some good interest in those, but there's just this issue with the DOJ part of it that we've got to retain those until they finish with the bank. So another reason to encourage them to move along. .

Yes, completely understandable.

We've discussed this on past calls, but can you update us on your scheduled loan repurchases over the course of future periods?.

Yes. We're pretty much through everything. There's about -- so when I joined the bank, there was about $800 million worth of at loans risk of repurchase, $750 million maybe. And that's now down to about $160 million, and the -- and they do continue to pay off pretty quickly as you saw.

But the scheduled committed repurchases, I think we have -- and Karen can correct me again, but I think we have one in March of '22 and one in July of '22. And that is it. And that amounts to about I think $75 million, $80 million, $90 million maybe in the aggregate. And then we'll have, what is today, almost half of that $160 million.

And then the rest of the investors who bought those didn't take on our offer, so I assume they remain outstanding. We've had no interest from them putting them back. .

Okay. And then the other part of that is just the excess liquidity that you're holding, you are part for the potential repurchases.

When do you anticipate more normalized levels of liquidity?.

I think we got down some in the quarter. I would -- I'd go back and say I'd feel a little better when the -- when we reach some finality with the governmental investigations because you're -- you just always have to be cautious with issues that could surround that. And potential publicity or like something that, that causes a problem.

So we're more cautious on the various needs for liquidity. But the big need at the point in time when I joined the bank for loan repurchases is pretty well extinguished. .

Okay. And then lastly, as you pointed in the press release, a lower tax rate relative to the prior quarter.

Just what's your expectation for the go-forward tax rate?.

That's why we have a new CFO on the call. .

Yes. Yes, I mean, I think typically, we're around the 30% range, maybe slightly less, and I anticipate that's where we'll be for the whole year at the end of the year. .

And this is -- I'll say also, Nick, the tax rate -- from a guy who spent his life working in New Jersey and New York banks, the tax rate in the of state of Michigan consolidated is substantially more attractive than it is in New York or New Jersey or most of the Northeast states that I've worked in. .

I can confirm that as well. .

Go Michigan. Or go Michigan State, I should say. That was it. .

[Operator Instructions] Our next question comes from Ross Haberman with RLH Investments. .

I just wanted to focus in a little bit on the nonperformers, both the residential and the commercial. I guess the commercial was down a little bit. Residential was up.

Could you give us a sense of what's in there? And how comfortable you are with your carrying values? And what you're doing to readily get rid of them, work them down? And could we see any significant drop off in the fourth quarter?.

Sure. So let me start with the residential side. And that's actually why we broke them out in tables for this quarter. So the residential, as I said and -- I think I said in my remarks, there's a number of those that are -- I guess you'd call them either erratically performing or where they made catch-up payments with some regularity.

And there's also some that were substantially delinquent and then brought current. And so that -- and Karen may know the exact breakdown or a rough breakdown of those 2 differentials on the residential side.

We've not experienced losses either in short sales or liquidations or anything like that on the residential side, notwithstanding the compliance remedial costs we've incurred. .

But the credit side of it has been fairly benign. No reason I have to think that, that won't continue. That group of about $22 million or so that we'd marked held for sale at year-end is pegged down to around $11 million at this point. And that's just from loan satisfactions and repayments, prepayments, things like that without any credit loss in them.

So that -- whether or not that continue is hard to see. But it's certainly not indicative of loans with -- residential loans with the big losses embedded in them. So I'm not at all uncomfortable with where we are on the residential side.

And Karen, do you know the breakdown between the kind of rough awkwardly performing and nonperforming?.

Yes. So I would say just -- yes. Just slightly less than half of the nonperforming residential loans are not even 90 days delinquent or either current or maybe 30 days. But like you said, they just really haven't established a regular repayment pattern since they went on to nonaccrual.

And so if they achieve those goals, then according to our policy, we can flip them back, we're just monitoring them. .

So that's a residential, Ross. Commercial is -- I think I've said every call I've been on, it's the one that troubles me the most from a credit risk perspective. it's a combination of what gets banks into trouble all the time is too aggressive on commercial originations.

And I'd say probably, the last, lack of expertise or talent in certain areas that creates credit exposures that get difficult to manage. .

So we've got these SRO loans, single room occupancy loans predominantly in the city of San Francisco. I think we're overlent on several of those. And we've had some success at encouraging the owners to refinance elsewhere as the loans came due.

We've had some where we could improve the credit by restructuring it, improving the amortization schedule, getting additional collateral, things like that. And we've got a couple of others that are just stinker sort of way, where we're going to lose money on. .

And then on the construction side, again, my experience at a lot of different banks has always been banks get into construction lending because they get seduced by the terms and the rates and things like that. But it's a whole different game. And the expertise to manage a sophisticated construction portfolio is hard to come by and we did not have it.

So we've had -- again, we've had some success with those loans that are completed, and we're looking at marketing periods, and we've had 1 or 2 of those pay down significantly or pay off as the property got sold. And there's a couple of others that are ill-conceived and problematic. And I think we'll end up experiencing some losses on those. .

But we talk about them every day almost, or at least those that are on the agenda for that day. We look to reduce the risk to the bank in the most efficient way we can. And efficiency is measured in both dollars but also in time on the books. So that's why I said earlier, I wouldn't hesitate to look at a handful of bulk sales in the period ahead.

I'm just -- in all candid, I've got to manage the -- I've got to manage carefully here the things that I put into the bank for us to do. So the project management is important. .

And I just can't -- we've got a lot of priorities, I can't overload the system here. So we had a lot to do with the IT conversion. We had a regulatory exam in August and September.

So I kind of have to look out in the calendar and do these things in a way that is best for the [ acquisition ] but also for the institution and the [ bank's ] ability to handle all of the moving parts. .

No. I was just curious -- I've got -- I was looking at the allowance, you put in about $400,000 for the quarter.

I've got to assume, at least from what you know today after you've gone through all your summary, is that I guess you're fairly comfortable, I guess, with what you're carrying all that -- the commercial, let's just talk about the commercial, what you're carrying at now.

Otherwise, I guess we would have seen a much bigger provision in the September quarter, would that be a good summary?.

I think you know me well enough by now. If I weren't comfortable, it would reflect the number that I think it should be. That's why it went up in 2020. I mean... .

And last question, I know you sold the Washington office. Any other offices you see as, I shouldn't say superfluous, but extraneous or not fitting in well, which if you got a bid you would sell it? That's my last question. .

Sure, sure. Well, I could probably say yes to that in any particular location if somebody were that interested in it. But as a general rule, I think we have to look at the markets that are, let's call them, noncore and evaluate those. And we are doing that. I mean we look at every location.

And even in the core markets, we're looking at individual branches to see if it makes more sense to either consolidate or if we've been there for a while and the branch hasn't really achieved what we thought it should, is there a reason to stay.

So again, I've got to be careful with what I load into the system here because we're all working a lot, but branch locations are high on the on the priority list. .

This concludes our question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks. .

Well, thank you again. I appreciate the questions and your interest in the bank. And while it's hard to believe the next call will be into 2022. So time is moving along quickly here. I hope you'll all enjoy a delightful fall, and we look forward to talking to you in January with our year-end commentary. Thank you very much. .

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