Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Third Quarter ended September 30, 2023. 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 conditions of Sterling Bancorp that involve risks and uncertainties.

In particular, forward-looking statements may be made on this conference call regarding the economy and financial markets, government investigations, credit quality, the regulatory scheme governing the company's industry, competition in the company's industry, interest rates, the company's liquidity, the company's business and the company's governance.

Any forward-looking statement made during this conference call are based primarily on the company's current expectations and projections about future events and trends that the company believes may affect its business, financial conditions, results of operations, prospects, business strategy and financial needs.

Various factors could cause actual results to be materially different from any future results expressed or implied by such forward-looking statements. These factors as well as examples of forward-looking statements are discussed in the company's SEC filings, which are available on the company's website. These are not exhaustive.

New risks and uncertainties emerge from time to time, and it is not possible for the company to predict all risks and entities. These could have an impact on the forward-looking statements made during this conference call. The company disclaims any obligation to update any forcing statements made during this 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.

Please note, this call is being recorded. At this time, I'd like to turn the call over to Tom O'Brien.

Tom?.

Thank you. Good morning, everyone. Welcome to our third quarter earnings call. I'll run through some of the highlights as I see them here, and then we'll take some questions. Just generally, I'd say the quarter was relatively quiet.

We had accomplished the redemption of the subordinated debt in mid-July, and finished up the settlement with the Department of Justice and also in July. So those accomplishments kind of over and done, the quarter had a very, very modest profit of $300,000; margin flattish at 262.

I think we're still seeing both here and in the industry pressures from higher interest rates and competition on deposit accounts. And that doesn't show any sign of letting up in the immediate future. So I think trying to be careful in terms of liability pricing and balances.

But it's a difficult time of both high interest rates after an extended period of -- ultra-low interest rates and high inflation, combined probably not seen since -- probably since I started in banking, which was 100 years ago. So we're navigating that both at the bank and I think in the industry in general.

We had a recovery in quarter as we've had in the last few and the allowance for credit losses, the ratio maintained basically the same at 2.42%. I would also tell you that deposits have been relatively flat.

The balance sheet was relatively flat, too, except for the payment that went out of the company to redeem the subordinated debt and the settlement with the Justice Department that is in the form of return to certain shareholders. So that combined with about $90 million, I think, in the quarter. But other than that, things were relatively flat here.

The credit levels continue to be about the same. Our capital remains very strong. Our liquidity is strong. As I said, I think, is pretty strong. It's a very uncertain time just in terms of what's available for us to do. We're trying to preserve our capital. We're trying to maintain the strengths that we have.

I think we've been timely with respect to addressing and disposing of a lot of the nonaccrual and low-grade loans that the bank had, especially on the commercial side. As I mentioned in the press release, I think in selected markets, but I'd say predominantly coastal markets.

There continues to be an awful lot of pressure in the office and hospitality space. And I think more in the Northeast, you're going to see problems emerging with multifamily property loans just based on higher cap rates, interest rates. If you're lucky, flat rents and revenues and expenses like taxes and oil going up.

So I just anticipate that area is going to have a fair amount of pressure in the time ahead.

And again, I think that's probably just highlights the timeliness of our disposition of -- I don't remember the total is now, but well over $100 million of loans that both on the commercial and then in the second quarter on the residential side that we're just long-term debt way for us. And other than that, it's relatively quiet here at Sterling.

Even as we get into the fourth quarter, it doesn't seem like an awful lot is changing. I think, as I said, the pressures that have been brought to bear mostly in terms of liability pricing and what the Fed may or may not do in terms of increased interest rates.

I think my own sense is that they'll be a little cautious and patient, but that the bias is still towards another one or two increases until there is a sense that inflation is more under control, and it remains stubbornly high and high inflation is a very difficult road to navigate in the -- in most all industries, but certainly in financial services.

So with that, I said, not an awful lot to spend time talking about here. So operator, probably best to take some questions..

The first question today comes from Ross Haberman with RLH Investments. Please go ahead..

Good morning, Tom. Tom, how are you? Could you address some of the expenses this quarter? What do you think is onetime? What's -- and you referred to, I guess, some of your coverage of some of the people and your inference, which is run out.

Could you just sort of touch upon that? And can we continue to see this level? Or were just some bunch of bills came in this quarter. And I don't know what similar stuff coming in next quarter? Just give us an overall sense of expense level.

And could we see them coming down over the next quarter or two from the level this September quarter?.

Yes. Sure, Ross. The cost in the quarter for indemnified individuals was $1.7 million. And then I would say some of the cost that the bank itself incurred on related matters was probably a couple of hundred thousand. So let's say, $2 million in legal expenses.

It is, as I mentioned in the release and as you noted, it's four individuals who are either witnesses or individuals with facts that the government is interested in learning about. And obviously, they're represented by counsel and we are obligated to pay their expenses.

And this has been going on pretty much since I've been here, although this quarter was unusually high, and it reflects, I think, what we could safely say is the coming culmination of some efforts on behalf of the government with respect to individuals. We are indemnifying people who we are obligated to, as I mentioned.

And obviously, we're not indemnifying any individual who behavior and conduct is subject to our resisting those claims. The insurance -- the D&O insurance for the company, we did exhaust it during this quarter.

I think we're expecting a payment from the insurer in the next couple of weeks of somewhere between $3 million and $4 million, but that will be the last of it. I don't expect that the future quarters will have this kind of expense for individuals, primarily because of the intensity of the government inquiries.

But it's a little hard for us to project that. But just based on the volume of people that were interviewed, that's kind of our current expectation..

Just two further questions.

The $3 million or $4 million, do you pick that up as income when that comes in when those checks come in, those reimbursement checks come in?.

Yes..

Okay.

And if there's an adverse opinion or adverse claim against any of those individuals, is that your liability or you would testify them?.

No..

And you don't know if both of those that -- I guess, inquiry against them is -- are we in the ninth inning with that stuff with them with the -- or I guess when you deal with the government, you have to.

If I look at a crystal ball, we obviously, there's the civil and the criminal part of it. So civil part of it, which is the OCC, I would -- my guess is we're eighth or ninth. And with the criminal part of the DOJ, I just don't have a lot of visibility into that other than kind of reading with inquiries we get.

But I think that's more likely going to be in 2024, I'm going to guess and say first half of the year..

Okay. And just one final question. Let's say rates stay up at existing levels for the next year. They don't -- you're wrong, they don't raise them more. They just keep them at these high levels through the next year.

How does that scenario affect your margin or your spread? And when will it bottom out with that scenario?.

I think there's still some pressure to come in the current quarter and maybe the quarter after. But then we have some roll-off in loans that get reinvested at higher rates. We have some roll-off in securities that get reinvested in higher rates.

But I would say there's still some potential downward pressure in a scenario where rates stay pretty much as they are..

[Operator Instructions] We have no further questions at this time, and this concludes our question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks..

Okay. Thank you. Thank you all for participating, and I hope you're enjoying the tail end of the nice weather wherever you are. But the next opportunity we have to be together will be for the year-end call in January, and I will look forward to spending time with you then. So thank you all, and have a nice rest of your day..

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