Good morning, everyone, and thank you for joining us today to discuss Sterling Bancorp's Financial Results for the First Quarter March 31 of 2021. .

Joining us today from Sterling's management team are Tom O'Brien, Chairman and CEO and President; and Steve Huber, Chief Financial Officer and Treasurer. .

Tom will discuss the first quarter's results, and then we'll open the call to discuss questions. .

Before we begin, I'd like to remind everyone that this conference 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 differ materially from any future results expressed or implied by such forward-looking statements. These 2 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 this call. .

Additionally, management may refer to non-GAAP measures, which are intended to supplement, but not substitute for the most directly compared GAAP measures. The press release available on the website contains the financial and quantitative information to be discussed today as well as a reconciliation of the GAAP to non-GAAP measures. .

At this time, I'd like to turn the call over to Tom O'Brien. Tom, please go ahead. .

Great. Thank you, and good morning, everyone. Sterling released its first quarter of 2021 financial results today. And just the highlights, we reported $0.05 per share of net income. Generally, the margin continues to be pressured.

It was 2.45% and predominantly due to the ultra-low interest rates we're all experiencing and then the additional liquidity we keep on the balance sheet. .

Almost half of our reported expenses in the quarter were related to the multiple reviews and investigations that are -- have been going on at the bank since long before I joined, but certainly during my tenure. .

Credit remained essentially flat in the quarter. The numbers didn't change too much. We're still dealing with the factors that I outlined in the press release. On the capital levels, I'd note the bank-only capital levels continue to be pretty healthy.

But just keep in mind that the holding company, we do have $65 million of debt, which is now callable and losing its capital treatment over the next 5 years until its maturity. So at some point, we need to begin to consider additional liquidity at the holding company since we are precluded at this time from dividend up from the bank.

And obviously, there're holding company costs that need to be considered. So that's something that'll get our attention -- our focused attention in the next quarter or so. .

Going back to credit. As I continue to note, the concern from my perspective remains centered in the commercial real estate and the construction portfolios.

We continue to manage these portfolios very aggressively to try to get down to the proper risk rating and understanding what the exposures are, the quality of the guarantors, the quality of the property or the project. So -- and we've made an awful lot of progress in that. .

To some extent, the past due loans are inflated because we've had loans that come up for maturity and -- but we basically have, just on the commercial and construction side, we basically have to re-underwrite each and every one of them and reappraise them, and that just takes a long time.

So there are several in that category that have gone past maturity by 90 days, and we list those as nonaccrual and an abundance of caution and conservatism. But understanding that, as I said earlier, that's where I think the risk is for the bank, too. .

On the positive side, we did analysis. I'm sure you saw the securities class action settlement has been submitted, too, and I think at this point, approved by the courts. And it should begin to wind down to absolute closure in the next 2 or so months. .

Other matters, including the look back required under our formal agreement with the OCC, are nearing completion, and that's been an expensive proposition for the bank and the company also. Notwithstanding that, there are still a lot of moving parts, but we are working diligently to get past as much and as expeditiously as possible.

Keep in mind, though, that the OCC and DOJ investigations are basically out of our control. We have and continue to cooperate fully with all of those. And as you probably noticed, the justice department has begun to take action against certain individuals, and we anticipate that effort will continue.

But as I said, both that and the OCC item are out of our control, and we hear about it pretty much at the same time that you do. .

So with that, probably always best to take questions and see what's on everybody's mind. So operator, if you'd open the line up for any questions. .

[Operator Instructions].

And the first question will come from Ben Gerling with Hovde Group. .

I was wondering if you could just kind of give some rough guidance. I completely understand the expense level for legal is pretty much out of your control.

But based on the last call, I think you guys said that 2021 expenses will be near 2/3 or so of 20 -- 2020 levels, which would kind of -- it would definitely imply a ramp down in the back half of the year.

I was wondering if you had any updated thoughts on that?.

No. I think, yes, what we said last time was we expected in the second half of the year for expenses not to ratchet down dramatically, but start to step down as this look back completed -- is completed and as the he securities class action is completed and then hopefully, some of the other matters start to wind down.

So it's still our expectation that the second half will start to see the gradual diminution of these extraordinary expenses. And nothing's really changed in that respect at this point. .

Got you. Okay. Well, that's helpful. And then do you have any line of sight into -- opportunities to repurchase more advantage loans? I get that they're somewhat out of your control and the timing and windows of opportunity are pretty narrow.

I'm just curious of if you see any kind of inconcrete moments over the next 6 months so you could repurchase more?.

Yes, yes. We are -- we finished one repurchase during the quarter. And you're right, they do take some time and documentation. It's kind of a complex operation. We have one more we're expecting in this quarter that is a somewhat larger than the one we completed in the first quarter. I think that was about $88 million or $89 million.

This one is probably, by the time we repurchase it, it might be in the $150 million, $160 million category. And then we've got one more that is much smaller in the 30s or so. But just given the securitization that it's in and the call opportunities, the sponsor -- really can't free those up until, I think it's July next year.

Steve can correct if I'm wrong on that date. .

Yes, that's correct. The remaining smaller piece in the $30 million range will be July 2022. .

Got you. Okay. And then just kind of thinking bigger picture, the selling of the Bellevue, Washington branch, I was kind of curious -- I get that it's not really your "footprint,' and that it was a little bit more of a one-off.

I'm just curious how that process went or anything you're open to talking about in sort of like a bid ask? Or was it completely sold to 1 person -- or the one entity Washington first? Were they the target specifically? Or did they approach you? Or just any kind of color you might be able to provide on that as well?.

Well, there's 2 parts of it. First is the motivation. And really, it is exactly as you said, the Bellevue, Washington branch had been fairly successful, but it was a single branch in a very, very remote market for our core business. We had some good business there, some very good employees. And so that's why we look to exit the way we did.

And the terms of the process, we spoke to a fair number of banks. There was some reasonable interest. And First Federal was frankly the most interested and the -- had the best chances of success on an application to do this transaction with their regulators.

And attractive for all of our stakeholders, our employees, our customers and for Sterling itself. .

The next question will come from Nick Cucharale with Piper Sandler. .

On the liability side, can you remind us how much of the CD portfolio is expected to mature in the second quarter and your current offering rates there?.

Steve, why don't you handle that?.

Yes, I can speak to that. Yes, we have CDs maturing in the second quarter of $474 million approximately, which is about 1/3 of the CD portfolio. We're expecting those to reprice down pretty substantially, assuming that they choose to remain with the bank.

A significant piece of that $474 million are our 12-month CDs, which are currently at rates of around $1.35% to $1.45%. We're expecting those to reprice down into the 25 basis point category if they, again choose to stay with the bank. .

That's great color. And then on the origination front, pretty stable from quarter-to-quarter.

Do you anticipate loan demand ramping up in the coming periods? Or is it pretty likely to be consistent in the near term?.

I think in the near term, it's going to look like the past -- the recent past. We spend an awful lot of time on going through the portfolios that we have and with the regulatory overhang, it's not exactly easy to ramp up. So we'll continue to meet the credit demand in the communities that we're in, but I wouldn't look for anything to explosive. .

[Operator Instructions].

Our next question will come from Jeremy Zhu with PW. .

It's as TCW, obviously. So... .

Yes, TCW. All right. .

A quick question on the cash balance, you still have a pretty elevated cash balance. I know that you have some CDs coming due and a purchase of advantage loan portfolio.

Are there any other ways you're thinking about using the cash?.

No. We had to build cash, Jeremy, because we weren't really -- there was no way to determine the level of advantage loans that we ultimately would repurchase. So we had to be prepared for all of that.

And then whatever deposit flows happen to be, given some of the news that was coming out last year with the delayed quarterly and 10-K filings and things like that. So we've built up liquidity and an abundance of caution.

And those who were taking us up on our offer to repurchase the advantage loans, have raised their hands, and we're in that process, and the others have declined. So we pretty much know what our needs are in that context at this point. .

And that's why you'll see -- you saw in the first quarter that we let deposits run off a little bit through both pricing and then as we discussed a minute ago, the sale of the state of Washington branch will take up some of that liquidity also. .

So we hope to get down to a more normal level of liquidity, which should help margin and stabilize things better now that we pretty much know who's going to give us back the advantage loan or who not.

And then you're always worried in these situations with banks, like I've been in with the risk of reputational damage and we haven't seen that, and that's really a credit to the people that we have working in our system and in our branches. And I think in the way we've tried to communicate to clients and investors alike. .

Yes. So in other words, you think you have a pretty good visibility of the cash needs at this point.

You're just sort of slowly working that down through letting them run off and other things?.

Yes. Much better than we much better than we did when I joined the bank. I mean... .

And we -- so when you buy back the advantaged loans, are you buying them back at par? Are these performing loans or nonperforming loans?.

Well, we buy back the portfolios with the -- with those who're interested in taking us up on it. And the mortgage loan purchase agreement that we entered into at the time sets forth the formula for the repurchase. But it's basically such that we pay on the reduced principal balance, the premium that we were paid on the original sale.

So for instance, if we sold $100 million of loans at 1.02% and that $100 million is now $40 million, we would buy the $40 million back at 1.02%. And the and the -- last year, if you recall, we set up what we called the repurchase reserve to account for that cost. So in this case, we hit 2% of $40 million comes out of that reserve.

And then we have a process for fair valuing the loans that we repurchased at the time of purchase. And that has been as much as a 2-point discount to closer to par, and it really depends on the market interest rates at the time of the repurchase, and that we flow through the income statement. .

And are these... .

And does it -- I'm sorry, I was going to say it does include -- so in this case, if we buy back $40 million of a portfolio from a seller to us, then that would be the entire portfolio. So there might be some nonaccruals in there. There might be some slow pays and there might be, obviously just regular performing loans.

For the most part, the nonaccrual percentages have been no worse than what we've seen at the bank. For our own portfolio, and that's been relatively modest. I'd say 2% to 3%. .

Hopefully that's just answers my second part of the question. And then you were also looking at unload it to small portion of the resi portfolio. Has there been a lot of interest on that? And do you think you'll unload that a par at -- or I mean at your mark rather than any sort of discount? Or... .

We -- yes we marked them down. We marked about $22 million or $23 million of nonperforming advantaged loans to held for sale at year-end. And at the time, what I was saying is that, we intend to sell them -- we just had so many things going on in the first quarter that I just didn't want to overload the system.

So we had them marked, and I think we marked them down to $0.85 on the dollar. And we're now going to begin the process of actively marketing it as soon as we're -- or at [indiscernible] as soon as we get the 10-Q filed. And hopefully, there will be done this quarter. And my expectation is that the sale price will be no worse than where the mark is. .

[Operator Instructions].

This concludes our question-and-answer session. Excuse me, it seems that we just had a question to come in. .

And that next question will come from Anthony Polini with American Capital Partners. .

So guys, how hard did you try to find charge-offs this quarter?.

We always try to make sure we're careful with that. But this one is a little bit more of a benign quarter than one might expect. But that's why I said in the press release, Anthony. We're going to have some. It's undoubtable. What other institutions may or may not face, who knows.

But I think just given, especially the focus we had on construction, I just -- I think we're going to -- we'll see some charge-offs. .

So from the reserve perspective, I think we're okay. Because, as I mentioned, there's a -- among the nonperforming loans that the level is elevated, but you kind of have to break it down between the content of the different loan portfolios.

And in that, there's, I don't know, I'd say, $60 million to $70 million of commercial and construction that I would say I worry about. And the balance, not the balance of the nonaccrual, not so worried about. .

Now that $72 odd million in allowance that you have, I assume a high percentage of that is allocated towards that worrisome portfolio.

And if we had an increase in charge-offs, we wouldn't necessarily have a like increase in provision in the quarter?.

Yes. No, as I mentioned, the credit quality has been pretty stable, which is -- and we had some recoveries in the allowance during the quarter. So that's why that really didn't move so much.

I think that's a fair assessment, Anthony, that if we have deterioration or actually realized losses on some of the commercial and construction, it's pretty well accounted for in the allowance.

But the -- some of the product like we have these loans in San Francisco that are what I generically referred to as SROs, but single room occupancy, that's, in my view, kind of akin to a hotel type loan. And those are slower to recover in terms of occupancy and valuation and cash flows. So it remains to be seen.

But yes, it's an elevated concern for us as we look at that portfolio. .

Do you have a good handle now? Oh, I'm sorry. .

Yes. No, I was going to say the construction stuff, I mean, my general feel with construction is, I feel okay if the project has never started or if it's completed. But in the middle, that's where I worry.

So we've got some that are completed, and they're in the marketing period, and I think we feel pretty good about the chances of success for marketing those.

Those in the Middle, you just -- you have to monitor them closely, but you're not really in control of the process until they're -- they get nearer completion, and they can start marketing it as originally intended. .

But there's some elevated concern there with the valuations at the original underwriting and the structure. .

Okay.

How big was the Bellevue branch?.

$70 million, Steve? $70 million. .

Yes. I'd say $78 million in deposits. .

Do you have a pretty good handle now? A good idea of where the -- what size this company will be by the end of the year? Or is that still a pretty moving target?.

By the end of the year, that's probably a little harder to guess. Ideally, if you look at the structure of the retail distribution, in California, the number of branches, the product mix and all that it's -- and the capital levels, you'd say, ideally, this is a low $3 billion balance sheet in my opinion. .

Okay. Well, I think you're doing a great job, and I know it's tough, but I congratulate you guys. .

This concludes the question-and-answer session. I would like to turn the conference back over to Tom O'Brien for any closing remarks. Please go ahead, sir. .

Okay. Just always happy to have these calls and a chance to catch up with our investors, and we certainly appreciate your interest in our efforts.

And in the process we're going through here, it's -- at times, it's challenging, but we wouldn't have this opportunity were not for the public investors we have in Sterling Bancorp, and we all appreciate for that and for your interest, and I look forward to the next quarter. Thank you. .

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