Sterling Bancorp, Inc. (NASDAQ:SBT) is a unitary thrift holding company headquartered in Southfield, Michigan. The company’s primary business is the operation of its wholly-owned subsidiary, Sterling Bank and Trust, F.S.B., which was formed in 1984. Through Sterling Bank, the company originates commercial real estate loans, commercial and industrial loans, and provides deposit products, consisting primarily of checking, savings, and term certificate accounts. The bank also engages in mortgage banking activities, acquiring, selling, and servicing residential mortgage loans.
Company Background
Sterling Bancorp, Inc. was incorporated in 1989 as the parent company of Sterling Bank and Trust, F.S.B. The Bank operated through a network of 27 branches, with 25 located in the San Francisco and Los Angeles, California metropolitan areas, and the remaining branches in New York, New York and Southfield, Michigan. In 2019, the Bank faced significant challenges when it terminated a former loan product due to misconduct by certain employees, including falsification of information related to income verification and documentation. This led to regulatory issues, culminating in a fine imposed by the Office of the Comptroller of the Currency (OCC) on the Bank’s founder and former CEO in 2023, citing deficiencies in the Bank’s Advantage Loan Program that posed high risks for fraud, money laundering, and lending misconduct.
Despite these setbacks, Sterling Bancorp showed signs of recovery in 2023, reporting net income of $7.41 million, a significant improvement from a net loss of $14.19 million in 2022. The company’s balance sheet remained strong, with total assets of $2.42 billion and shareholders’ equity of $327.72 million as of December 31, 2023.
Strategic Shifts
The company’s journey has been marked by both challenges and opportunities. In 2023, the bank discontinued originating residential mortgage loans, reflecting a strategic shift in its operations. This decision was likely driven by the company’s desire to focus on its commercial lending and deposit-gathering activities, which have historically been its core strengths.
In February 2024, the Company closed one of its branches in San Francisco and consolidated the operations into a nearby branch office, further streamlining its operations.
Financials
Sterling Bancorp’s financial performance has been mixed in recent years. In 2022, the company reported a net loss of $14.19 million, a significant decline from the $23.39 million in net income it generated in 2021. This downturn was primarily attributable to increased non-interest expenses, including professional fees and other operating costs. However, the company’s net interest income remained relatively stable, declining only slightly from $91.18 million in 2021 to $78.80 million in 2022.
As of the most recent quarter ending September 30, 2024, Sterling Bancorp reported a net loss of $0.10 million, or $0.00 per diluted share. This compares to net income of $0.30 million, or $0.01 per diluted share, in the same period of the prior year. The decline in profitability was largely driven by a $2.40 million, or 15%, decrease in net interest income, which fell from $16.00 million in the third quarter of 2023 to $13.60 million in the third quarter of 2024. This was due to the rising interest rate environment, which led to a significant increase in the company’s deposit costs that outpaced the increase in yields on its interest-earning assets.
For the most recent quarter, Sterling Bancorp reported revenue of $13.997 million, with a net loss of $143,000. The company’s operating cash flow (OCF) and free cash flow (FCF) both stood at $2.702 million for the quarter. The decline in net income compared to the prior year quarter was primarily due to the decrease in net interest income as the increase in interest expense outpaced the increase in interest income in the higher interest rate environment.
Liquidity and Capital Position
Despite the recent financial challenges, Sterling Bancorp maintains a strong capital position. As of September 30, 2024, the company’s Tier 1 capital to average total assets leverage ratio was 14.18%, well above the 9.00% requirement to be considered well-capitalized under the CBLR framework. The Bank’s leverage ratio was 13.72%, also exceeding the well-capitalized threshold.
The company’s asset quality has remained relatively stable, with nonperforming assets, consisting entirely of residential real estate loans, totaling $13.20 million, or 0.54% of total assets, as of September 30, 2024. This compared to $9.00 million, or 0.37% of total assets, at the end of 2023. The allowance for credit losses as a percentage of total loans declined from 2.18% at December 31, 2023, to 2.04% at September 30, 2024, reflecting the continued strong credit quality of the company’s loan portfolio.
Sterling Bancorp’s liquidity position remains robust, with $710.37 million in cash as of September 30, 2024. The company had a borrowing capacity of $409.29 million with the Federal Home Loan Bank (FHLB), which included an available line of credit of $20 million. Additionally, Sterling Bancorp has available credit lines with other banks totaling $60 million. The company’s current ratio and quick ratio both stand at 36.98, indicating a strong ability to meet short-term obligations.
Loan Portfolio Composition
Sterling Bancorp’s loan portfolio consists primarily of residential real estate loans, which accounted for 74% of total gross loans held for investment as of September 30, 2024. These residential real estate loans include the former Advantage Loan Program, which was terminated in 2019. This program, consisting of adjustable-rate mortgages with down payments of at least 35%, continued to be the largest portion of the residential loan portfolio, totaling $486 million or 54% of gross residential loans at September 30, 2024, down from $628.2 million or 58% at December 31, 2023.
The Bank discontinued originating new residential real estate loans in early 2023, and no new residential real estate loans were added to the portfolio during the nine months ended September 30, 2024. The residential real estate loan portfolio decreased by $181.3 million, or 17%, to $904.4 million at September 30, 2024 from $1.09 billion at December 31, 2023, primarily due to loan payoffs prior to maturity of $132.6 million. Nonaccrual residential real estate loans increased to $13.2 million at September 30, 2024, up from $8.9 million at December 31, 2023, contributing to a higher ratio of nonaccrual loans to total loans of 1.08% compared to 0.66% at the prior year-end.
In addition to residential real estate loans, Sterling Bancorp offers a variety of commercial loan products. Commercial loan categories totaled $319.3 million at September 30, 2024, an increase of $56.1 million from December 31, 2023. During the three and nine months ended September 30, 2024, the Bank originated commercial loans with an aggregate principal balance of $59.3 million and $125.0 million, respectively, at the time of origination.
Commercial real estate loans represented the largest portion of the commercial loan portfolio, totaling $306.9 million at September 30, 2024, of which the largest segment, 39%, was secured by multifamily properties. Construction loans decreased to $5.2 million at September 30, 2024 from $10.4 million at December 31, 2023, while commercial and industrial loans declined to $7.2 million from $15.8 million over the same period.
Geographic Concentration
Sterling Bancorp’s operations are primarily concentrated in the San Francisco and Los Angeles, California metropolitan areas, with some additional locations in New York, New York and Southfield, Michigan. Approximately 76% of the Company’s gross loans were originated with respect to properties or businesses located in the state of California as of September 30, 2024. This geographic concentration exposes the company to regional economic risks and real estate market conditions in California.
Sale of Banking Subsidiary and Company Dissolution
On September 15, 2024, Sterling Bancorp announced that it had entered into a definitive agreement to sell its wholly-owned subsidiary, Sterling Bank and Trust, F.S.B., to EverBank Financial Corp. for a purchase price of $261 million in cash. The transaction is subject to customary closing conditions, including the approval of Sterling’s shareholders and the receipt of necessary regulatory approvals.
Simultaneously with the execution of the sale agreement, Sterling Bank entered into a separate agreement to sell its portfolio of residential tenant-in-common loans to Bayview Acquisitions LLC. This sale is also subject to certain conditions, including the receipt of the required approvals for the sale of the Bank.
Upon completion of the sale of the Bank, Sterling Bancorp’s board of directors has approved a plan of dissolution, which will provide for the distribution of the company’s remaining assets, expected to be primarily cash, to its shareholders. The timing and amount of any such distributions, however, remain uncertain and will depend on the completion of the wind-down process and the resolution of any outstanding liabilities or claims against the company.
Regulatory and Legal Matters
Sterling Bancorp has previously disclosed regulatory and legal investigations related to its Advantage Loan Program, a former residential mortgage loan product that was discontinued in 2019. As of the latest update, these investigations have been resolved, marking a significant milestone in addressing the company’s legacy issues.
Implications and Outlook
The proposed sale of the Bank and the subsequent dissolution of Sterling Bancorp represent a significant turning point for the company. While the transaction will provide shareholders with a liquidity event, the loss of the company’s primary operating subsidiary raises questions about its long-term viability and the potential challenges it may face during the wind-down process.
The shift in Sterling Bancorp’s loan portfolio composition, moving away from residential real estate loans towards a higher concentration of commercial real estate and other commercial loan products, exposes the company to different risks. These include increased sensitivity to economic conditions impacting commercial real estate and businesses. The company’s ability to effectively manage the credit risk in its commercial loan portfolio will be critical going forward.
Investors should closely monitor the progress of the sale and dissolution, as well as any developments that may arise during the transition period. Factors such as the timing and amount of any shareholder distributions, the company’s ability to effectively manage its remaining obligations and liabilities, and the potential for any unforeseen challenges or legal disputes will be crucial in determining the ultimate outcome for Sterling Bancorp’s shareholders.
Conclusion
In conclusion, Sterling Bancorp’s story is one of navigating uncertainty and adapting to changing market conditions. While the company’s recent financial performance has been mixed, its strong capital position and the proposed sale of its banking subsidiary provide a potential path forward. However, the road ahead is not without challenges, and investors will need to carefully consider the risks and uncertainties that lie ahead for the company and its shareholders. The resolution of legacy issues, coupled with the strategic decision to sell its primary operating subsidiary, marks a significant transition for Sterling Bancorp as it moves towards dissolution and the distribution of assets to shareholders.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.