Good morning, everyone. Thank you for joining us today to discuss Sterling Bancorp's Financial Results for the Second Quarter June 30, 2021. Joining us today from Sterling's management team are Tom O'Brien, Chairman, CEO and President; and Steve Huber, Chief Financial Officer and Treasurer.

Tom will discuss the second quarter results and then we'll open the call to your questions. .

Please note, this event is being recorded. Before we begin, I'd like to remind you that the conference call contains forward-looking statements with respect to the future performance and final -- financial conditions of Sterling Bancorp that involve risks and uncertainties.

Various factors could cause actual results to differ materially different 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 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?.

Great. Good morning. Thank you, Fudan. The company released its second quarter results today, and we're going to spend a little time going through those and then take your questions. .

The results were -- we earned $2.6 million or $0.05 a share. Margin expanded a little bit, certainly off the lows that it had driven primarily by deposit repricing during the quarter and then the late in the quarter acquisition of some repurchased advantage loans. So that helped bring the margin up to 2.70%..

Expenses continue to run high, a little better than they have been, but still quite elevated. And capital continues to be okay at the bank, although at the company, as I've mentioned in the last couple of calls, we, at some point, have to address the subordinated debt issue that upon us.

The debt is into the variable stage of the 10-year -- initial 10-year maturity. So we're in the second 5 years. .

Following the quarter, we completed the sale of the Bellevue, Washington branch, and that was done on July 23. So good transaction for both buyer and seller, and we're happy about that.

And deposits, we -- I think, as we've mentioned earlier in the first quarter call, the -- with greater definition to the needs to repurchase the advantage loans, both the timing and the dollar amounts we had built up liquidity and had let that run down in the quarter as we got a little more definition to that. .

So the -- also that benefited the margin because liquidity is really quite expensive. It's kind of typical with us, the second quarter included a lot of moving parts. The bank is going through IT system conversion, and that probably added $600,000 in cost during the quarter.

Professional costs were down net predominantly because we got around $2.5 million back from the insurance company. And there's been some -- as we expected, some gradual reduction and other professional and consulting type fees. .

I think we're still pretty comfortable that costs will drift down in the third and fourth quarter.

It's not going to be dramatic, but it's going to be, I think, noticeable primarily because things like the -- the look back that we had to do for AML purposes is nearing its conclusion, the securities class action is nearing its final action and there's several other things that are at least beginning to kind of finish up from where they were and the cost that go with it, will start to dissipate.

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We still have not insignificant legal costs as until these investigations, at least from the Bank's perspective, start to wind down some. The asset quality is modestly better. The allowance was basically unchanged quarter-to-quarter, just about $72 million.

We did take a $600,000 benefit there, but that was basically dollar for dollar, for recoveries we had on loans that were nonperforming that paid off in full. And those were, I think, it was 5 or 6 advantaged loans in that category. .

So -- and that has been, I would say, probably the most typical outcome with these advantaged loans as -- for those that go bad, which statistically is probably not too inconsistent with the general residential portfolios in the banking world.

The credit aspects are not as dramatic as the compliance and the different activities in the original underwriting that led to the investigations and the problems that the bank faces. That's not to minimize those at all. They've been painful. But they were just from the pure credit perspective, did give us $600,000 back in the quarter. .

Nonperforming loans hedged down a little bit at $92.6 million. And as, I think, again, as I've said the last couple of calls, the -- in that total, there's about, say, $50 million of commercial credits and maybe mid-$30s or $40 million of advantaged loans.

I think as you all know, the ones I'm most concerned about from the credit side or the commercial products we have a lot to deal with there. And in terms of the criticized classified loans and all that, it's the ones where we expect to have some difficulty working out of those.

So they will occupy more of our resources and our time and probably the allowance than anything else. I'm not expecting the advantage loans, again, purely from the credit side to behave much differently than they have to date. .

Other than that, the -- as I said, the look back is nearing its completion, and that was certainly a long time coming. It's been very labor-intensive and expensive, and the litigations appear to be at the tail end, I think, at this point on the class action, we're looking at September for conclusion there.

And then the income tax expense was up in the quarter in all candor predominantly because certain persons' executive compensation is not deductible for income tax purposes under 162(m). .

So that -- with a lower dollar amount and earnings and nondeductibility that drives up the effective tax rate. And as the government has changed the -- I guess, clarified or modified the 162(m) regulations, we have to deal with that. And other than that, things continue.

Progress at the bank is -- it's moving directionally, I think, where we anticipated. It is not something we can speed up or control because it's really in the hand of some government agencies, but time has moved us along and I think we continue to be optimistic that we're much near to the end of these things then than anything else. .

And I will say I did make a trip out to San Francisco in July, I think, it was. Spent some time at our branches out there and got to know the people, that was my first opportunity to make that trip. And there'll be further opportunities to do that for me in the near future. .

So with that, operator, we can go into the Q&A. .

[Operator Instructions] Our first question will come from Ben Gerlinger with Hovde Group. .

I was wondering if you guys could just take a second to kind of walk through the mechanics of the funding aspect of the balance sheet. I know that the time deposit balances have come down $250 million linked quarter and then also the yield. I know last quarter -- I think, it was last quarter, I believe, you guys gave the repricing aspects per quarter.

I think that might have been in a vacuum now if you didn't lose any deposits. I wonder if you could just kind of refresh us in terms of what is repricing, when and then kind of that new spot rate in terms of time deposit yields. .

Yes.

Steve, why don't you handle that?.

Yes, the deposits will continue to reprice most materially that has occurred in Q1 and Q2, but we expect that to continue into Q3. We expect another $384 million to reprice, again, mainly our certificates of deposits, mainly in the 12-month category. A lot of those are still at over 1%.

So they'll continue to reprice down certainly to something lower if they continue to remain with the bank. Our total borrowing spot costs at the end of the quarter is 0.70%. So we would expect to have continued improvement on the deposit side. Certainly, for Q3 probably less material on the Q4 as Q4, the repricing volume is about $152 million. .

Okay. That is helpful. And then if we can move to the expense base. I get that professional fees are a little out of your control. And then based on kind of the guidance that you gave -- for the explanation for the $5.7 million this quarter, $2.4 million was a reimbursement and then also, $600,000 approximately for IT expenses.

So it's back-of-the-envelope math, I'm netting around $7.5 million. .

Previously, you guys had indicated that FY '21 would be about 2/3 of the level of '22. Is that still -- or excuse me, FY '21 will be 2/3 level of '20.

Is that still kind of the guidance? Or is there anything more material that you might want to include?.

No, I mean the time line supports that. The -- but as you know, we can't accelerate the government's conclusion on any of these things. So the longer it takes, just the more it costs, and that gets a little bit hard to predict. But on the schedule we're on, it does seem like that's where we're going.

And just like the look back had a -- its own shelf life, but we're basically at the final drafting stages of the report now. And that is, again, not entirely in our control, but the end is pretty predictable. .

And that was -- I can't even venture the cost from start to finish, but it was significant for us. And the legal costs are wide-ranging, but they are heavily centered around the DOJ and the OCC investigatory activities. .

So as they -- at least with respect to the bank or the company, as those come to conclusion, there's the obvious benefit from that. So again, the time line would suggest that as we get into the second half of fiscal '21, they will inevitably moderate some and then certainly, hopefully, more significantly as we get into '22. .

Okay. That's helpful. And then just kind of touching base on the IT expense. I know you guys have the conversion or the upgrade in August, so this month.

Can you get any sort of dollar amount you can tag to it that might be in 3Q numbers? Or is there anything that's changing from a go-forward perspective so on and so forth of the expense base?.

Well, I guess, 2 things with the IT conversion. One, it's not optional. And it is a total system conversion.

The bank was operating on a homegrown system with a couple of programmers in-house and it just was really problematic from both the regulatory and management perspective in terms of getting reports and -- so we wouldn't -- I'll say this, we wouldn't get out of the regulatory handcuffs over and head without a conversion and frankly, we couldn't operate the bank without a conversion to a more contemporary system.

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So we were spending next to nothing historically, which is what kept the bank's efficiency ratio pretty low as low as I've ever seen, frankly, over the years past. But it was low to a level that strains your ability to believe, just too low. And not enough resources put into things like that.

And that's where the -- at the end of the game, that's where the cost comes. .

So I don't expect any efficiencies from the IT conversion. I think there's probably going to be some net cost to that, as we complete the conversion and roll out. And that might be -- over the historical record, it might be $1 million more a year.

But as I said, the cost of the regulatory difficulty and all that is significantly greater and the absence of kind of comprehensive management information is a real block for us. So it's not one of those things that you would say is optional..

But no efficiencies, Ben. Unlike other ones I've done, where you get some efficiencies as a cost. And I should have added to actually, just to sidetrack for a moment. On the advantage loan repurchases, we repurchased $90 million. We were expecting more but the sellers have called it difficulties.

So we will be repurchasing the balance of those over the course of this year and then I think 2 more in 2022. They are coming back, but it's just a different time perspective. And the $90 million I closed, I don't want to say at the last day of the quarter, but pretty close to the last day of the quarter. .

[Operator Instructions] Our next question will come from Nick Cucharale with Piper Sandler. .

In the press release, you mentioned the commitment to repurchase another $100 million of advantaged loans.

Can you provide some color on the timing of those repurchases? Or is that yet to be determined?.

It's pretty well set based on the call dates that I mentioned.

I think -- I don't know, what -- Steve, March next year was one and July next year was the other big piece?.

Yes. On that share, basically beginning in March and then throughout the next 2 quarters. We have a piece for $59 million and a piece for around $35 million at this point. .

All of these loans were into securitizations that have call-date features. So it just preference of the securitizer to do it that way. .

Okay. That's helpful.

And then certainly a fluid situation, but given the changing risk profile of the bank and the substantial build since the beginning of last year, do you sense that the allowance to loans ratio has peaked here?.

Yes, I would -- that's my own opinion, we haven't -- the last 2 quarters, it's been steady. We haven't seen significant migration into the criticized and classified category. We've spent an awful lot of time trying to identify the weaknesses and from the credit perspective.

And as I said, it's -- the credit loss perspective, I think, is going to be in the commercial portfolio.

And the -- identifying the level of classified loans the way we have, I think, we've taken a more appropriate look at risk rating and trying to be in front of any potential problems or weaknesses with either the property or the project or the guarantor. .

So -- and we've had a couple of -- I think, in the last quarter, towards the end of the quarter, we had a couple of loans that were nonaccrual, that paid off [indiscernible] and we got a couple more coming where there's some net recoveries to some previous charged-off loans, but that's not to say there won't be some realized losses in the period ahead.

But that's why I was saying the $50 million of roughly nonaccrual commercial loans versus the $40 million of nonaccrual advantage loans. On the credit side, I would say that a predominant source of risk is going to be in the $50 million, not the $40 million. .

Okay. And then just a follow-up on funding. Borrowings have remained pretty consistent over the past several quarters.

Is there an opportunity to prepay some borrowings over the next several periods? Or is that not part of the strategy at this point?.

Not part of the strategy. There's -- it's pretty expensive and to -- we'll probably look at it a little bit later. But I think at the moment, we're really just looking at letting them run off it because they're basically yield maintenance payoffs. And I don't know if that helps anything in the long run. .

Our next question will come from Ross Haberman with RLH Investments. .

Just a follow-up question on some of the deposits.

Is there much more room to keep on lowering deposit rates on your CDs, money markets or basically, have we hit sort of the floor here?.

I think we've hit the floor, Ross. The Sterling funded predominantly in the manner of -- more of an old line thrift. So not a big demand deposit base, not a big transaction base. It was basically money market savings and CDs. So I think -- and we've been careful lowering rates because of that propensity of the savers that we did have to rates.

So we didn't [ shot ], we kind of gradually drift it down closer to the market. But unless there's some change in the market in general for interest rates, I'd say we're probably pretty close to the best we can do. .

And just one last question on the litigation.

What was the -- could you go over the nongovernment litigation, you're -- I guess, you're being brought in on, I guess, what the ex-employees litigation, where does that stand? And when is there going to be some sort of resolution there?.

While we have -- there've been similar complaints and plead deals with a couple of former employees. Again, that's -- other than supplying information that might be requested by the Justice Department, we don't really have a role in that other than being cooperative. That's ongoing.

And I usually, when I refer to trying to get things done, I try to be careful to say with respect to the bank or the company because that's about the only thing I can really care about at this point in time, and individual issues are what they are and they're not our concern.

But the -- and then the securities actions were the class action and reported derivative and they're hopefully kind of at the tail end. .

And you're hypothetically reserve for all of that?.

That's hard to say. We are reserved to the level that is our very best approximation of the likelihood of the bank not getting -- I mean, as the Justice Department said in their own press release, the bank's been a victim. .

That's not to say there's not some accounting from the bank for -- especially in the BSA space. So based on nothing other than our best estimate, we have set aside a reserve for potential fines and penalties, but I don't -- I can negotiate those, but I can't stop them. .

Got you. No, no. I just wanted to know if you could be dragged in on some of the other nongovernmental suits.

They can drag you in and you might have some liability, which you really didn't anticipate because for whatever it is, they're going to go for the deep pockets and they're going to make life -- your life hell until, I don't know, you need to throw them a bone possibly, I don't know, or not.

You get involved with lawyers, they're going to drag in every -- any and everybody. .

Okay. No, I've seen that movie a couple of times. .

Yes, you asked. So I didn't -- yes. .

I mean you can't control what happens in these kind of messy situations. The foundations for the problems were laid over many years. And the consequences and the number of people involved is significant, and the time and cost involved in kind of unwinding these Gordian knots or just -- that's painful. Painful, I mean, I -- it hurts. .

I know you can't control it, but what do you think is the timing on settle all these things sort of wrapping up? I mean is it going to be the next quarter or 2? Or it's going to go into '22?.

Well, this is purely aspirational on my part for a comment. I'm hoping that only, again, as respect to the bank or the company that we have our reconciliation with the agencies by year-end. I think that's right, and I think that's fair. And it's very hard to run the bank strategically until these things are resolved as it respects us. .

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

No, anything. I hope everybody is enjoying a nice summer. And through the conclusion, in Labor Day, we'll look forward to our third quarter call. And again, thank you for your interest and participation today. .

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