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spk04: Good afternoon, everyone, and welcome to the Sterling Bancorp Incorporated third quarter 2020 conference call. My name is Jamie, and I will be your operator today. At this time, all participants are in a listen-only mode. This call is being recorded and will be available for replay through November 12, 2020, starting this afternoon at approximately one 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.
spk00: 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? Tom O' Great.
spk05: Thank you, Larry, and thanks, everyone, for being on the call today. I hope you and your families, as well, remain 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 in 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 two quarters of 2020 completed and filed. That was a major undertaking in a very short period of time, and we 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 break even. From my perspective, the two 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 non-performing loans. The NPAs had about a 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 and 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 remaining supportive of families negatively impacted. In the non-performing category, we have several loans that are past due maturity, 90 days or more. Each of these are being re-evaluated 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'll serve us well. But I do think Sterling and many banks will struggle to some degree with credit pressures over the next few quarters. In my opinion, this is not a time for denial. Deposit flows here have been strong as we've prepared to build liquidity to buy back previously sold advantage loans. So far, we have bought back just under $100 million. There 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 in 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 interests 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 advisor, Quantum. We certainly wish Peter well in the future. Additionally, we announced the appointment of Denny Kim and Steve Gulotta to our boards. Denny has long experience in capital markets and community bank investing analytics. He worked for several years at W.L. Ross & Company, and in that capacity served as a director at Tolmer, 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 and 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 cripping. We have a very strong and experienced group of management and advisors 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.
spk04: Ladies and gentlemen, at this point, we will take questions. In order to ask a question, please press star and then 1 using a touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up the handset in order to ensure the best sound quality. Once again, in order to ask a question, please press star and 1. We'll pause momentarily to assemble the roster. Our first question today comes from Vince Staunton from TCW. Please go ahead with your question. Hi, guys.
spk05: Hey, Nick. How are you? It's Vince. Yep. Vince, I'm sorry.
spk01: Sorry. I have a question regarding the construction loans, specifically the $46.1 million of non-performing construction loans.
spk03: Right.
spk01: Could you provide some color on what type of projects these are and... Just basically some additional color would be helpful.
spk05: Sure, yeah, 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. The vast bulk of it's in there, and I think it's about 15 million of them are just matured and we're going through them. to exactly see where we are. And we've also had a couple actually pay off in the last week or two. I'm trying to assess what my level of concern is about them. I'm concerned about everything because everything is kind of new to me here. So we're watching them carefully. Some will probably exit out of And, you know, others I think will be okay. But, you know, if the loan is matured, we're not just extending it blindly and going forward. We're, you know, 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 you know we're just trying to be careful with them but beyond that it's a little bit you know dependent on what happens in the general economy but for the most part where there's you know single-family residential homes are in desirable areas where values have been, you know, at least, you know, good if not strong, but they have to get finished.
spk01: Given they're in, given it's in the single family industry, or at least some of them are, why are they non-performing?
spk05: Because they're past due maturity. So they're 90 days past maturity, which is kind of the classic definition of non-performing.
spk01: Okay, I'm just wondering why they themselves are struggling given, you know, prices of single-family have gone up.
spk05: Well, no, they just have to finish. You know, the projects, if it was done, it would be a lot easier to tell you where we are. But if it's, you know, 20% done or 40% done, you know, 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. 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.
spk01: Okay. In terms of non-interest expenses, how long do you expect it to stay elevated at this level? It was up significantly even quarter over quarter.
spk05: Yeah, this is a tough quarter. Very hard to predict. But I would say, you know, I'd like to say this was more towards a peak quarter. You know, certain things will start to come down. But, you know, litigation is expensive. We just kind of have to get through it. It's very hard to predict. But I would say, you know, they're certainly going to be elevated, you know, 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.
spk01: Okay. Thanks, guys. Sure. Thank you.
spk04: Yeah, and our next question comes from Anthony Polini from American Capital Partners. Please go ahead with your question.
spk03: Hey, Tom. Hey, Steve.
spk05: Anthony, how are you?
spk03: Hey, welcome to the rat race, huh?
spk05: Yeah, thanks.
spk03: Man. You know, just as a follow-up here, I was looking at the expense side, and I guess that was probably what threw me the most this quarter. When you look at these problem assets billed, 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?
spk05: Well, I've got generally two visions on that. I would just say from a residential owner-occupied perspective, 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, you know, is in anybody's interest. So, you know, I don't know how those play out. As I said, the credit performance has been really quite good there, but, you know, we'll certainly have some. On the commercial side, too early to say. I mean, there's nothing... I don't think we would consider. I've done bulk sales. I've done workouts. I've done beat and lose. I've done foreclosures. It's 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 preferred you know in some cases to see stronger guarantors or you know more definitive and achievable things like rent rolls stuff like that so it's not you know as I said earlier it's not that the properties are dogs necessarily it's just you know we've got to work with that around what we have and what's there today but I wouldn't you know I If the best thing to do is to, you know, do an individual or a bulk sale on stuff, I mean, that's, you know, goodness, I can't begin to tell you how many of those I've sold at Sun. A lot. Probably a couple hundred million. You know, and there's just really, at the end of the day, Anthony, it's an analysis you do financially. You know, what's the best use of your capital and how much time is it going to take to realize how much money
spk03: Given that surge in NPAs, should we take comfort in the fact that the provision came down about half?
spk05: Well, you know, it went up a whole bunch in the, I guess that was the March, yeah, the March quarter, right? Yeah, March quarter. That anticipated, you know, some concerns. As I said, some, you know, The absolute number here in terms of the allowance and then the provision to support it is what we calculated based on everything we know. But like any provision or 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.
spk03: I mean, I guess the direct question is more, do you feel comfortable that you can assess the lost content in the non-performing portfolio at this point, or is it really a moving target?
spk05: I think for where we stand at the moment, you know, I think it's pretty well assessed. You know, as I said, you know, there's certainly signs in the economy that, you know, things, especially outside of city centers, are doing reasonably well. But I just think we're going to have to get through the uncertainty of this time period. It's not a lot of liquidity in the market. 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. We'll see. But I think, as I said earlier, I think Sterling, to some degree, is going to experience what ultimately many banks are going to experience, and that is credit pressures and some charge-offs. I think anybody who doesn't admit that is in denial.
spk03: You did have some originations this quarter, about $67 million. We did. What was that in?
spk05: 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 TIC 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.
spk03: Okay, have you had conversations with NASDAQ recently?
spk05: Just good ones.
spk03: Okay. So that is the least of your regulatory slash legal issues?
spk05: Yeah, no, I think NASDAQ, and they were very understanding because we just had such a tight window to do a year end and then two quarters, and now we gotta get the third quarter out. 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 advisors, and not the least of which, a lot to ask of our accounting firm. So everybody was all hands on deck, and I can't underestimate how much work it was and the time pressures, but that was good, and we're fine with NASDAQ.
spk03: 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. 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?
spk05: I have. You know, we actually had a, you know, a healthy discussion about that at the board meeting on Tuesday this week. So, you know, it's... We've got to be careful here because, you know, as I've tried to explain, I think, to everybody, but, you know, the bank had essentially... the bulk of its business in one product. And that product we can no longer do. We can't fall back, say, on the CNI 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, you know, given, you know, where we stand in the regulatory world, it's typical that if you're going to start a, you know, a brand-new product that you, you know, have to go through a, you know, as you should, a full risk assessment and understanding the, you know, credit and economic impact and the talent and the systems you have and, you know, and run that by your regulator. you know, for some, you know, 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, you know, 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, you know, the repairs here. We've got to get, you know, past that and build, you know, build, you know, 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.
spk03: You have about $918 million in the cash balance now. Does it make sense to shrink? Does it make sense to reinvest? What are your thoughts there?
spk05: We've got $400 and some million dollars of loans previously sold that are still out there that, you know, we've offered to buy back. And so I've got to keep the liquidity for that. So, you know, on a $3.9 billion balance sheet, if you net that amount of money out of the liquidity, then you're looking at, you know, $400 and some million of liquidity, which is not, I would put that in the excessive category. So it's the kind of two stories there. If in fact we're not going to end up buying some of the loans back, then we can adjust accordingly. And I have no problem shrinking the balance sheet a couple hundred million dollars either.
spk03: Okay, I guess the one consistent thing is that the bank still appears to be very well capitalized.
spk05: Yeah, capital's good. Yeah, that's 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 where things don't go well. But at this point, Even with the small loss in the quarter, I'm not in the short run here worried about capital.
spk03: Okay. Well, that's all I have today. I just want to congratulate you guys. I think you're doing a great job. Thank you.
spk05: We are trying. Thank you. Appreciate it, Anthony.
spk04: Our next question comes from Ross Haberman from RLH. Please go ahead with your question.
spk02: Hi, Tom. 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, two, three, four 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? Thank you.
spk05: Yeah, sure. Good to hear from you. You know, there's always room to lower. We, you know, early in my tenure here, we built liquidity because of the concerns I had about the advantage loan buybacks. I think, you know, margins are going to be difficult because rates are, you know, you don't fight the Fed. They've said rates are going to be low for two years, so that's what I take as the window here. 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 NIM and lending margins for a while here.
spk02: Thank you. The best of luck. Yeah, thank you.
spk04: Once again, if you would like to ask a question, please press star and 1. To withdraw yourself from the question queue, you may press star and 2. Once again, that is star and then 1 to join the question queue. And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the conference call back over to Mr. O'Brien for any closing remarks.
spk05: Well, that's great, and thank you all, as I said in the beginning, for your interest in Sterling and for participating in the call today. We are working diligently on everything that we've laid out in the filings and in the press release. We plan to have the third quarter 10Q 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 straightened away. Thank you.
spk04: Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.
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