Good afternoon, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the first quarter ended March 31, 2022. 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 first 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. Thanks very much, and good afternoon, everyone. Welcome to our first quarter call. As you saw this morning, we announced earnings of $5.3 million or $0.10 a share. There was kind of the typical noise within the quarter that you've seen in the last 4 or 5 quarters anyhow.

But the trends continue to be in the right direction, and I think we're feeling better about that. The margin got a nice boost as rates moved up a little bit. And we continue to shed some high-cost funding. So that's a big surprise for us and a big change from where it was a year ago.

So 3.03%, I think last year, at 1 point, we were like in the high 2.50%. So it's a good improvement in what we were hoping for with higher rates..

We did have a recovery in the loan loss provision basically improved credit quality continues to drive that. Capital continues to be quite strong.

Loans and deposits moving more towards where we want them to in terms of the deposits to more transaction, lower cost deposits, less of the heavy reliance on CDs that the bank had historically had and loans in the Advantage portfolio, but also in the commercial portfolio continue to pay down.

So the -- I'd say the concern I expressed in 2021, especially with respect to the commercial portfolio and the credit risk inherent in that has been significantly reduced in the last several quarters, predominantly by the great work in our credit department and by the sale of $62 million of what were the toughest loans in there, the single room occupancy hotel loans, I guess, I'd call them in San Francisco.

So -- and that was, at least in my view, a very successful sale and done quickly and efficiently..

The nonperforming loans now are down to $46 million. And as I mentioned in my quote in the press release, $16 million or so of that includes advantage loans that are at some point in the coming year likely to be restored to performing status. So again, I think we're all feeling a little bit better about the credit risk.

And a lot of that -- the market in -- especially in residential real estate for some of the construction projects we've had has, frankly, bailed out a couple of deals that were pretty thin. So we'll take that help where we can get it. And as I mentioned just a minute ago, the sale..

The quarter also saw some continued and, I think, pretty significant improvements in a lot of the regulatory milestones that we had set out last year.

Most notably, I think most of the regulatory items are moved into a position where we've got to just show sustained performance and competency, but we've accomplished the foundational work of addressing the multiple issues that were in the formal agreement in which we've been working on pretty dramatically over the last 6 months. So that is good..

I also mentioned in the report that we've begun some -- the preliminary conversations with the regulatory enforcement side and with the DOJ criminal side. There's not much more I can say about that, other than that we'll continue to move that as much as we can in an expeditious manner.

Our conversations to date have really just been kind laying the groundwork for what the issues are, how long they went on, what the magnitude was. And there's really no economics that I can speak to other than what is in the 10-K and what will be in the 10-Q.

But I'm hopeful by the time we have the third quarter call that we'll be a lot more definitive on where we all stand..

And as I've mentioned, I think, several times in the past, there's kind of 2 competing interests in this conversation as it respects Sterling institutionally.

One is that we have provided an enormous amount of effort and work and expense to remediate the issues, but also to investigate and identify the issues and the individuals who created the problem and who led the bank down the wrong path and that has been dramatic and I think anybody's estimation.

We provided full cooperation, and I think that will certainly work in our favor. And the negative, as you all know, is that this went on for a fairly long period of time and the volumes were fairly substantial. So those are, I guess, what I'd call the competing interests, and we'll have conversations about those in the weeks ahead.

But that's kind of what I see at the moment..

The rest of the story within the bank, again, things like asset quality and margin and all that are just going the way we had hoped.

The continued increase in rates will likely have a further beneficial impact on us, although we'll -- I guess, as most banks will get some write-down on the securities portfolio as rates move higher, but we're invested in a relatively short-term manner. So it really isn't going to be dramatic and gets recovered with maturities.

So not a big concern there..

You should also note, we added 2 new directors at the bank. And we're at the holding company, I'm sorry, not at the bank and at the bank, that will be subject to the OCC's nonobjection, which we should have, hopefully, in -- no, they have up to 90 days, and I hope it's not that long.

But they are seated on the bank board now, and they will be up for election at the shareholder meeting, which is upcoming in a couple of weeks..

And I'll just note with respect to the shareholder meeting, there are several governance improvement items on there that I recommend to everybody. They are things we would, in the normal course, consider to be contemporary good governance measures and actions. Several of those are related to the derivative settlement.

And we'll move things like the annual election of directors. And as you also know, previously, like last year around this time, we had already established a separate risk committee and an ethics and compliance committee and things that, at least in my view, the institution was in need of to meet today's governance expectations of our investors..

So that's, I think, enough for me to say on this. As always, it's probably easier just to take questions and hear what's on your mind. So operator, if you can open it up for questions, I'll be happy to answer and what I can't, Karen can pick up. .

[Operator Instructions] The first question comes from Nick Cucharale with Piper Sandler. .

So I wanted to start with expenses. It certainly relates to the difficulty in predicting a close of the outstanding issues.

But as it stands today, can you update us on your expectations for professional fees and the broader expense base?.

Well, I'll speak kind of generically and then maybe Karen can get into some specifics. But generically, it's expected that as these major issues get unwound that -- and what are predominantly legal and consulting fees at this point, those specific items should diminish.

The additional or the kind of the unknown cost that we would face would be to the extent that qualified former employees, and I emphasize qualified, will be entitled to some indemnification of legal expenses as they are questioned..

And I just say that it's certainly not everybody, but there are some people who have had some experience and some knowledge that will be of interest in the individual part of the prosecutions. So to the extent they're qualified, we'll honor those.

And it's a little hard to take a guess as to what they'll be, but that could continue for, I don't know, a couple of quarters or longer. It's a little hard to predict. My expectation is that things will start to move pretty quickly over the course of the next few months..

And Karen, just specifically, like in the quarter, what were the extraordinary expenses related to the Advantage Loan Program and the investigations?.

So I would say they've been running pretty typical. Legal was about the same amount it's been in the past, just shy of $3 million. But we did see a decline in other professional fees of about $1.3 million, and that with the resolution of some of those regulatory matters that you spoke of earlier. .

Yes, Nick, they're kind of doing what I referred to last year. As I said, I think they'll drift down late '21 and early '22 and the real benefit will start to come when the resolutions are finalized. .

Okay. That's helpful.

Have you started to see a slowing of pay downs in the loan book? I mean, relatively, it's always tough to forecast, but are you expecting a lower rate of decline this year relative to 2021 in the loan book?.

Well, we haven't seen it yet. And to some of the decline, obviously, is encouraged on our part, riskier. I'll speak to the commercial side first, riskier deals that were able to get refinanced elsewhere.

We continue to be happy to see those go because we're just not set up and not qualified or confident in many respects to handle some of the more esoteric credits that were on the books. So -- and that's not a rate-sensitive thing rate yet or at least it hasn't been. And then on the loans we sold, obviously, that was a big bucket..

On the Advantage Loan side, which is the bulk of our residential, in my experience at the bank, it has been reasonably consistent quarter-to-quarter. Some of that is due to the nature in which the loans were originated. They were very high down payment loans. And so that's why the absolute credit performance has been pretty darn good.

It was the -- I think as everybody knows the compliance issues and the AML issues that drove the big issues there..

But they continue, in my view, to pay down pretty quickly. And frankly, given what they are, and I'm pretty happy with that. We do model them, but over the -- if you look at the models over the next several years, they continue to drop pretty dramatically. So just one example I can give you, Nick, by the way.

So when I joined the bank, the loans that were sold in the market and serviced by us were something like $750 million. And now they're down to, I think, about 160-ish or so. which includes some loans that we bought back, obviously. But we're -- the risk we had on the sold loan portfolio is just down dramatically. .

Yes.

In that same vein, can you share with us any scheduled Advantage repurchases and when you might be able to recapture the remainder of that mortgage repurchase liability?.

It's a little hard to guess because they were all securitized. So we had dates, which I think one of them was already passed and we didn't get the loans back. And I think the next one was initially beginning in July. But again, they were securitized.

And if they break the securities, which is what we anticipated, then we would have the commitment, I guess I should call it, to buy the loans back, although we haven't had any further discussions on at least the first call..

Is that right, Karen? Am I on track there?.

Yes, that's correct. They're just -- with the movement in the market in the first quarter, they're just trying to figure out what to do with the rest of the allowance. So it's a little bit less certain than it was prior. .

Okay.

Can you remind us how much is left in that allowance at March 31?.

Sure. There's $2.7 million left in that allowance. .

Okay.

And then just lastly, can you help us think about the excess liquidity? Should we expect to see some incremental securities purchases in the coming quarters to utilize the large cash position?.

I think that's probably a fair assessment. We're trying to be judicious in that. Obviously, just an increase in liquidity rates will be beneficial to us because they were virtually nothing for certainly most of my tenure here.

And we'll selectively look at some securities if the incremental yield advantage is worth it, but we're not going to make any bets on rates that could come back to bite us substantially. And we continue to look at loan originations, and we've done several that have been really attractive, but obviously, it's not enough to keep up with the pay downs.

But we'll continue to do that also. .

[Operator Instructions] The next question comes from Ben Gerlinger with Hovde Group. .

I'd be kind of following on the same vein as the next question. So if you think about just the expense base overall, obviously, there's a bit of noise that kind of gets involved in those few line items. So a different way of kind of asking the question.

Let's say, everything is free and clear from the DOJ to OCC, what would be like a core run rate on expenses?.

I'll kick that to Karen. .

I didn't hear the last part of your question.

Core of what?.

Yes, just a run rate on like what would a normalized expense base fee?.

Yes. I would say we'd probably be down about maybe 20% from where it currently is. .

Got you. Okay. And then kind of switching gears here. When you think about the reserve relative to the overall loans, obviously, made a lot of progress by selling the hotel loans and credit overall is getting better. And then kind of juxtapose against that, you have loan portfolio kind of paying down holistically.

So when you think reserve relative to portfolio, is it -- should we be looking at kind of like dollar for dollar? Or is it a percentage basis? I'm just trying to get a sense of like is the reserve to total loans to kind of model that and assuming the portfolio continues to kind of shrink?.

Well, yes, I mean just as the portfolio continues to shrink, I mean, assuming it does, obviously, the reserve statistically becomes stronger on a percentage basis. There continues to be, I would call it, heightened risk on the commercial side.

And at least let's take the what's in the nonaccrual on the Advantage Loan side, kind of remains to be seen how those will play out. So I mean, I think we're at the right level. One of the things I never like to do is keep going back to tap earnings for additional provisions because you didn't do it right the first time.

So we -- I think we're pretty careful in identifying the entire risk profile of the bank's credit portfolio back 1.5 years ago or so. And it will -- each quarter, it will continue to reflect what we believe is a remaining risk plus or minus. And don't forget at the end of this year, we'll have CECL in place.

So I'm guessing by the third quarter, we'll have some sense of where that's going also. .

Sure. Okay. That's helpful. I'm going to give you an opportunity to kind of get up on [ so far period ], Tom. So you've been doing this whole banking thing for a couple of years.

And you just think macro-oriented, not necessarily Sterling specific, is there anything on the macro front from a banking industry do you think is a little out of bounds as maybe potentially pricing or recessionary risk? Or anything that might be keeping you up from just a banking perspective, not just Sterling that might not be accounted for or broadly speaking for the whole space?.

I think on the entire space, I mean, what continues to concern me is that -- I guess, I'll take the Fed Chairman's old line about irrational exuberance that happens on the loan side, especially as rates were down very low. There was a lot of aggressive lending and kind of esoteric businesses or very low cap rates, high LTVs.

So I do think there's going to be a price to pay for that..

The other side, it's been difficult for the industry to find bankable assets with the nonbank competition and with the -- and I'll speak just to the community bank space side now, not the majors, but the -- what I think in many cases is excessive regulation that has made a lot of lending markets unattractive to banks.

I mean it's -- for instance, it's really hard to have a good residential lending program giving all of the requirements and again, I'm not knocking them. It's just that they're there..

And to justify the cost, you need to have a very, very healthy origination platform, servicing platform, quality control and compliance. It's all needed, but it's also all very expensive and it kind of pushes banks into parts of the market, the credit markets that ultimately to problems.

I think the -- so my view has been for many years, the consolidation is healthy, warranted and that it's appropriate. The pace is ebbs and flows with consolidation, but the -- and I can't speak to the entire country.

But for the major regions, the major banking markets, it's going to continue to be very hard to be successful when you're under -- pick a number, but $8 billion to $10 billion. You cross $10 billion, you've got other issues. But I think to be longer-term successful and fair to shareholders, you're going to have to be able to spread those costs. .

Got you. No, that's fair. Great explanation. I'll let you sip of water. That's appreciated. .

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, perfect timing because my voice is going out. But thank you all. I'm delighted to have you here and look forward to the second quarter call. Have a good day. .

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