Business Overview and History Sterling Bancorp, Inc. (NASDAQ:SBT) is a unitary thrift holding company headquartered in Southfield, Michigan. Through its wholly-owned subsidiary, Sterling Bank and Trust, F.S.B., the company operates a network of 27 branches, primarily located in the San Francisco and Los Angeles metropolitan areas, as well as in New York City and Southfield, Michigan. With a history dating back to 1984, Sterling Bancorp has evolved from a community bank into an acquisition target, recently announcing a definitive agreement to be acquired by EverBank Financial Corp.
Sterling Bancorp was incorporated in 1989 as the holding company for Sterling Bank and Trust, F.S.B., which was formed in 1984. The company's primary business is the operation of its wholly-owned subsidiary, Sterling Bank, which 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.
Historically, the company's largest asset class has been residential mortgage loans. However, in 2023, the Bank suspended all residential loan originations following an internal review of its former Advantage Loan Program. This review revealed that certain employees had engaged in misconduct in connection with the origination of a significant number of such loans, including issues with income verification, the amount of income reported for borrowers, reliance on third parties, and related documentation.
In 2023, the Bank elected to operate as a covered savings association, allowing it to function as a commercial bank without the constraints applicable to a thrift institution. Prior to this election, the Bank was subject to the Qualified Thrift Lender test, which required it to maintain at least 65% of its portfolio assets in certain qualified thrift investments, primarily residential mortgages and related investments.
The company has faced several challenges over the years. In 2019, the U.S. Department of Justice initiated an investigation focused on the Bank's Advantage Loan Program and related issues, including residential lending practices and public disclosures about that program. This investigation was subsequently resolved in 2023 when the company pleaded guilty to one count of securities fraud primarily relating to disclosures with respect to the Advantage Loan Program.
Over the years, Sterling Bancorp's loan portfolio has been dominated by residential real estate loans, which accounted for 73% of the company's total gross loans as of December 31, 2024. This concentration in residential lending, particularly the company's former Advantage Loan Program, has been a source of both growth and challenges for the organization.
The Advantage Loan Program, which offered one-, three-, five-, or seven-year adjustable-rate mortgages with a minimum 35% down payment, was the largest portion of Sterling Bancorp's residential loan portfolio, comprising 52% of gross residential loans as of December 31, 2024. However, an internal review and investigations by the U.S. Department of Justice and the Office of the Comptroller of the Currency revealed that certain employees had engaged in misconduct related to the origination of these loans, including the falsification of income verification and reliance on third parties.
In response to these issues, Sterling Bancorp discontinued the Advantage Loan Program at the end of 2019 and has since focused on originating more traditional residential mortgage products, as well as expanding its commercial lending activities. The company's residential loan portfolio has declined from $1.1 billion as of December 31, 2023, to $849 million as of December 31, 2024, as existing loans have been paid off and the Bank has suspended new residential loan originations.
Financial Performance and Ratios Sterling Bancorp's financial performance has been mixed in recent years, with the company reporting net income of $2.1 million, or $0.04 per diluted share, for the full year 2024, compared to net income of $7.4 million, or $0.15 per diluted share, in 2023. The decline in net income was primarily attributable to a decrease in net interest income, which fell from $65.0 million in 2023 to $56.5 million in 2024, as the company's net interest margin compressed from 2.68% to 2.37% over the same period.
The company's asset quality metrics have shown some improvement, with nonperforming loans decreasing from $8.9 million, or 0.66% of total loans, as of December 31, 2023, to $14.6 million, or 1.26% of total loans, as of December 31, 2024. The allowance for credit losses stood at $20.8 million, or 1.80% of total loans, at the end of 2024, down from $29.4 million, or 2.18% of total loans, a year earlier.
Sterling Bancorp's capital ratios remain strong, with the company and its bank subsidiary both exceeding the well-capitalized thresholds under the CBLR framework adopted in 2023. As of December 31, 2024, the company's consolidated Tier 1 leverage ratio was 14.07%, while the Bank's ratio was 13.76%, well above the 9.00% minimum requirement.
For the most recent quarter (Q4 2024), Sterling Bancorp reported revenue of $33.7 million and net income of $1.2 million. Year-over-year, revenue increased due to higher net interest income, while net income decreased due to higher non-interest expense. The company's annual net income for 2024 was $2.1 million.
Sterling Bancorp's liquidity position remains strong, with a debt-to-equity ratio of 0.035 and cash reserves of $878.18 million as of December 31, 2024. The company has an available $20 million overdraft line of credit with the Federal Home Loan Bank (FHLB) and $60 million in unsecured federal funds credit lines. The current ratio and quick ratio both stand at 23.18, indicating a strong ability to meet short-term obligations.
Lending and Deposit Activities Sterling Bank's loan portfolio primarily consists of residential real estate loans and commercial real estate loans, which accounted for 73% and 26% of total gross loans as of December 31, 2024, respectively. The residential real estate loan portfolio includes one- to four-family residential mortgages, many of which were originated under the Bank's former Advantage Loan Program. The commercial real estate loan portfolio is diversified across property types such as retail, multifamily, office, hotel, industrial, and mixed-use properties.
In addition to real estate loans, the Bank offers commercial and industrial loans, which made up 1% of the total loan portfolio at the end of 2024. These loans are primarily secured by business assets such as inventory, equipment, and accounts receivable. The Bank has also originated some construction loans, which accounted for less than 1% of total loans.
On the deposit side, Sterling Bank offers a range of products including checking, savings, money market, and time deposit accounts. Total deposits grew 3% year-over-year to $2.07 billion as of December 31, 2024, with time deposits comprising the largest portion at 46% of total deposits. The Bank's noninterest-bearing demand deposits made up 2% of the deposit base.
Geographic Concentration Sterling Bancorp's operations are heavily concentrated in California, with approximately 75% of its loan portfolio based in the state, primarily in the San Francisco and Los Angeles metropolitan areas. The company also maintains a presence in New York City, reflecting its strategic focus on major urban markets.
Pending Acquisition by EverBank Financial Corp On September 15, 2024, Sterling Bancorp announced that it had entered into a definitive stock purchase agreement with EverBank Financial Corp, a Delaware corporation, to sell all of the issued and outstanding shares of Sterling Bank and Trust, F.S.B. to EverBank for a fixed cash consideration of $261 million. The transaction is subject to customary closing conditions, including regulatory approvals and approval by Sterling's shareholders.
Concurrent with the sale agreement, Sterling Bancorp's board of directors approved a plan of dissolution, which provides for the dissolution of the company under Michigan law following the closing of the transaction with EverBank. The company intends to distribute the remaining cash to its shareholders, after completing the wind-down of its operations and paying or providing for its creditors and existing obligations.
The sale of Sterling Bank and Trust and the subsequent dissolution of Sterling Bancorp represent a significant milestone for the company, which has navigated a challenging period marked by the fallout from the Advantage Loan Program and the resulting governmental investigations. The transaction with EverBank, if approved, will provide Sterling's shareholders with liquidity and allow the company to wind down its operations in an orderly manner.
Risks and Uncertainties As with any financial institution, Sterling Bancorp faces a variety of risks and uncertainties that could impact its future performance and the success of the pending acquisition. These include:
1. Credit Risk: The company's concentration in residential real estate loans, particularly the legacy Advantage Loan Program, exposes it to risks related to changes in the local and regional real estate markets, as well as the overall economic conditions in its primary markets of California and New York.
2. Interest Rate Risk: Sterling Bancorp's net interest margin and net interest income are susceptible to fluctuations in market interest rates, which could negatively impact the company's profitability.
3. Regulatory and Compliance Risks: The highly regulated nature of the banking industry means that Sterling Bancorp must navigate a complex web of laws and regulations, including those related to the Plea Agreement it entered into with the Department of Justice in 2023. Failure to comply with these requirements could result in significant penalties and reputational damage.
4. Execution Risks: The successful completion of the sale transaction with EverBank and the subsequent dissolution of Sterling Bancorp will depend on the company's ability to effectively manage the wind-down process and satisfy all outstanding obligations and claims.
Despite these challenges, the pending acquisition by EverBank and the orderly dissolution of Sterling Bancorp represent a potential path forward for the company and its shareholders, allowing them to realize value from the company's assets and operations.
Industry Trends The banking industry has faced challenges in 2023 and 2024 due to the economic impact of high inflation and rising interest rates. However, the industry has shown resilience, with the four largest U.S. banks on track to capture their largest share of industry profits since 2015. This trend highlights the increasing concentration of power among the largest financial institutions and the ongoing challenges faced by smaller regional banks like Sterling Bancorp.
Legal and Regulatory Issues In July 2023, Sterling Bancorp pleaded guilty to one count of securities fraud related to disclosures in its 2017 IPO registration statement and subsequent filings. As part of a plea agreement with the Department of Justice, the company paid $27.24 million in restitution. This resolution released the company from further prosecution for the issues related to its former Advantage Loan Program, providing some closure to a significant legal challenge.
Conclusion Sterling Bancorp, Inc. has navigated a complex and challenging period in its history, marked by issues related to its former Advantage Loan Program and the resulting governmental investigations. While the company's financial performance has been mixed in recent years, the pending sale of its bank subsidiary to EverBank Financial Corp and the subsequent dissolution of the holding company represent a potential resolution to these challenges.
The transaction with EverBank, if approved, will provide Sterling's shareholders with liquidity and allow the company to wind down its operations in an orderly manner. However, the company continues to face risks related to its credit concentrations, interest rate sensitivity, and regulatory compliance, which will need to be effectively managed during the wind-down process.
Overall, Sterling Bancorp's transition from a community bank to an acquisition target highlights the evolving nature of the financial services industry and the importance of adapting to changing market conditions and regulatory environments. As the company moves towards the conclusion of its corporate life, it will be important for shareholders to closely monitor the progress of the sale and dissolution to ensure the best possible outcome.