Sterling Bancorp, Inc.

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.

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.

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.