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spk01: Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's financial results for the third quarter, September 30th, 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 risk 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?
spk07: 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 long experience with Sterling to us, and I look forward to working together. So today we reported earnings per share of 19 cents, which was comprised largely of a $6.5 million credit that we received under the CARES Act for employee retention. Sterling's 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. But more importantly, we had some improvement in NIM in the quarter, reached 283. 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 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 retain 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 would probably look at some you know, individual or bulk loan sales in the quarter ahead and beyond. And, you know, 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 made a lot of progress, probably some of it below the waterline that you don't see or as appreciate as much as those of us who are on the inside can see every day. But fixing the supervisory issues that are found in the formal agreement are really are, you know, one through infinity. 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, you know, Karen and I can take some – questions from those on the phone.
spk01: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to require your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Ben Gerlinger with the hubby group. You may go ahead. Hey, good morning. Good morning, Ben.
spk04: Uh, how's everyone doing? We're doing fine. You getting any sleep? Yeah. I haven't had any sleep at all. Uh, two little, two little ones and Halloween candy make for not much sleep for anybody, but, um, I appreciate it. I've actually actually start with, um, 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 two?
spk00: Sure. So in the next quarter, we have about 150 million CDs maturing. The rate on those is about 1%. Our highest offering rate base right now is about 65 basis points. So we do expect to see some more reduction in our cost of funds in the next quarter.
spk04: Okay. Good to hear. And then, Tom, just thinking, big picture i know that you can't answer with a fine-tooth comb but if you look at the professional and legal fees reduction length quarter and so there's a lot of heavy lifting being done behind the scenes which i think we can all agree that is important um so but there's not a lot of clarity in terms of total costs going forward so if you had any thoughts to what professional fees might be for the fourth quarter even the first quarter and then kind of juxtapose against that like What would theoretically a core run rate be for that line item?
spk07: Well, I guess I'll start at the back end of the question. So I think, and Karen can fine tune this if I'm off, but I think our core run rate would be something around the $12 million range. Does that sound right, Karen?
spk00: Yeah, I would say with the current level of services that we're using third parties for.
spk07: So the, yeah, so the, you know, 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, 20, 21 in, you know, prior quarters over the last year or so. So the, you know, 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, 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 high. If something 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. It's been going on for a year, predating my arrival, so two-plus years. I think the trend that we've talked about, which is slowly declining rates with the risk of some volatility, you know, is intact. But it's really, really hard to put a number on it because month to month, you know, it can vary at a level beyond what we might expect or something gets delayed, you know, an expense that we might have incurred gets pushed off to the next quarter. You know, the secret really is just to you know, get these things past us and, you know, resolve all of the issues in a formal agreement quickly and then, you know, as best as we can, you know, push for resolution of, you know, the bank's exposure with the, you know, the regulatory and the Justice Department side and with the SEC. You know, it's just, it's, It's like an alphabet soup sometimes of agencies. But I just, you know, 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 tick off things like the securities litigation, then, you know, they no longer contribute to, you know, the risk of higher expenses. So that's the best I can give you.
spk04: Okay, that's fair. I mean, just thinking just from an optics perspective, there's no looming lump sum that could cause it to increase outside of an unforeseen investigation, right? The trend is lower. It's just the pace is unknown.
spk07: Yep, yep. 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.
spk04: Fair enough. Okay, well, I appreciate it. It was good to see the tangible books on your growth. I'll step back. Yeah, that's a nice benefit. Thanks.
spk01: Our next question comes from Nick Cucciarelli with Piper Sandler. You may go ahead.
spk03: Good morning, everyone. How are you? I'm doing very well, thank you. 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.
spk07: We did actually originate a loan or two on the commercial side in the context of New credit to the bank. And then, you know, 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 or sales time and sales risk. So that's the bulk of it. Nothing dramatic. 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 with. The residential side is In my view, as you probably know, 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, you know, 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.
spk03: In your prepared remarks, you referred to some bulk loan sales. Is that solely on the commercial side?
spk07: At this point, it's on the commercial side. The residential, I'm honestly all for that. You know, 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, you know, and as it pertains to the bank, once that's over, then I'd be more inclined to sell those, you know, 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 for me to encourage them to move along.
spk03: Yeah, 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?
spk07: Yeah, we're pretty much through everything. There's about, so when I joined the bank, there was about $800 million worth of loans at risk of repurchase, 750 maybe. And that's now down to about 160. 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, $80 million, $90 million 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 in putting them back.
spk03: Okay, and then the other part of that is just the excess liquidity that you're holding. You are part for the potential for purchases. When do you anticipate more normalized levels of liquidity?
spk07: I think we got down some in the quarter. I would go back and say I'd feel a little better when we reach some finality with the governmental investigations, because you just always have to be cautious with issues that could surround that and potential publicity or something like that that causes a problem. So we're more cautious on the various needs for liquidity, but the The big need at the point in time when I join the bank for loan repurchases is pretty well extinguished.
spk03: 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?
spk07: That's why we have a new CFO on the call.
spk00: Yes. Yeah, 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.
spk03: Thank you for taking my question.
spk07: And this is – I'll say also, Nick, the tax rate, you know, from a guy who spent his life working in New Jersey and New York banks, the tax rate in the state of Michigan consolidated as – substantially more attractive than it is in New York or New Jersey or most of the northeast states that I've worked in.
spk03: I can confirm that as well.
spk07: Go Michigan. Thanks again. Or go Michigan State, I should say.
spk01: Again, if you have a question, please press star, then 1 to be joined into the queue. Our next question comes from Ross Haberman with RLH Investments. You may go ahead.
spk06: Good morning, Tom. Tom, how are you? Yeah, I'm fine. How are you, Ross? Good. I just wanted to focus in a little bit on the non-performers, 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? Thanks. Sure.
spk07: So let me start with the residential side, and that's actually why we broke the mountain of tables for this quarter. So the residential, as I said in, I think I said in my remarks, there's a number of those that are, you know, I guess you'd call them, you know, either erratically performing, you know, where they make catch-up payments with some regularity, and there's also some that were, you know, substantially delinquent and then brought current. And Karen may know the exact breakdown or rough breakdown of those two 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 marked to held for sale at year end, you know, is paid down to around 11 million at this point. And that's just from loan satisfactions and, you know, repayments, prepayments, things like that, without any credit loss in them. So that... Whether or not that continues is hard to see, but it's certainly not indicative of 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?
spk00: Yeah, so I would say just slightly, yeah. Just slightly less than half of the non-performing residential loans are not even 90 days delinquent. They're either current or maybe 30 days. Like you said, they just really haven't established a regular repayment pattern since they went onto non-accrual. If they achieve those goals, then according to our policy, we can flip them back. We're just monitoring them.
spk07: So that's a residential risk. The commercial is, you know, I think I've said every call I've been on, it's the one that troubles me the most from the credit risk perspective. You know, it's a combination of, you know, what gets banks into trouble all the time is, you know, too aggressive on, you know, commercial originations and, you know, I'd say probably the lack of... expertise or talent in certain areas that, you know, creates credit exposures that get difficult to manage. So we've got these, you know, these SRO loans, single room occupancy loans, predominantly in the city of San Francisco. You know, I think we're over Lent on several of those. And, you know, 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 others that are just stinkers. We're going to lose money on them. And then in the construction side, again, you know, my experience at a lot of different banks has always been, you know, banks get into construction lending because they get seduced by the terms and the rates and things like that. But, you know, it's a whole different game. And, you know, the expertise to manage a sophisticated construction portfolio is tremendous. It was hard to come by, and we did not have it. So, you know, we've had, again, we've had some success with those loans that are completed. And, you know, we're looking at marketing periods. And we've had one or two of those pay down significantly or pay off as a property got sold. And there's a couple others that, you know, are ill-conceived. 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 you know, measured in both dollars but also in time on the books. So that's why I said earlier I wouldn't, you know, wouldn't hesitate to look at a handful of bulk sales in the period ahead. I'm just, you know, in an 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, you know, project management is important. And I just can't, you know, 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, you know. So, you know, I kind of have to look out on the calendar and do these things in a way that is best for the institution and the staff's ability to handle all of the moving parts.
spk06: No, no, I was just curious. 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 summaries, 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 it at now. Otherwise, I guess we would have seen a much bigger provision in the September quarter. Would that be a good summary?
spk07: I think you know me well enough by now. If I weren't comfortable, it would reflect the number that, you know, I think it should be. That's why it went up in 2020.
spk06: 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. Thank you. That's my last question. Thanks a lot.
spk07: Sure, sure. Well, I could probably say yes to that on 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 non-core markets. and, and, and evaluate those. And, and, and we are doing that. I mean, we look, we, we look at every location and, and even in the core markets, we're looking at individual branches to see if, you know, 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, you know, is there a reason to stay? So I, again, I, 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 priority list.
spk05: Okay. All right. The best of luck. Thanks a lot, and I'll stay in touch. Sure. Bye-bye. Good. I hope you do. Thanks.
spk01: This concludes our question and answer session. I'd like to turn the conference back over to Tom O'Brien. for any closing remarks.
spk07: Okay. Well, thank you again. 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's moving along quickly here. I hope you all enjoy a delightful fall, and we'll look forward to talking to you in January with our year-end commentary. Thanks so much.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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