Sterling Bancorp overcomes its mortgage issues

Sterling Bancorp in Southfield, Michigan is closer to resolving itself from persistent problems associated with a defunct mortgage program.

The company, with $ 3.7 billion in net worth, which looked at the aftermath of suspected fraud in its once largest business, made $ 2.3 million in the first quarter after trading around 27 in the past five quarters Had lost millions of dollars.

Sterling also announced some store sales and the settlement of a class action lawsuit under CEO Thomas O’Brien that followed the abrupt termination of its troubled Advantage Loan program.

Developments have given optimism to those who cover the company.

"After a few quarters [losses], the positive first quarter results were a welcome sight," wrote Ben Gerlinger, analyst at Hovde Group, in a customer announcement on Monday.

"We believe Sterling is on its starting blocks for what is expected to be a 12-month period of improved investor returns," added Gerlinger.

O'Brien, who joined Sterling last June, said the company was making progress on several fronts. It should be able to cut its legal fees and reduce the increased liquidity on its balance sheet in the second half of the year.

The settlement of the shareholders' lawsuit "puts another obstacle in the rearview mirror," O & # 39; Brien said during a conference call on Monday. He said a review of past transaction activity ordered under a formal agreement with the Office of the Currency Auditor was nearing completion.

"That was an expensive proposition for the bank and the company," said O & # 39; Brien.

Sterling's legal and professional expenses for the first quarter were $ 8.8 million, or 41% of noninterest expenses. These fees were $ 32.6 million last year.

"We expect that in the second half of the year [from 2021] these extraordinary expenses will gradually decrease," said O & # 39; Brien.

Sterling, which had around $ 1.1 billion in cash on its balance sheet as of March 31, should have more chances of reinstalling deposits. The company built the liquidity to support buybacks of Advantage Loan mortgages from outside investors.

The company suspended the low-documentation mortgage program in late 2019 after uncovering suspected fraud and laying off several employees.

Sterling expects to buy back a block of advantage loans valued at $ 150 million to $ 160 million this quarter and a smaller portfolio of $ 30 million next year. The company repurchased $ 88 million in mortgages last year.

"Those who alerted us to our [buy-back] offer pretty much got their hands up," said O'Brien.

Repurchased Advantage Loans have performed in line with Sterling's other mortgages, O'Brien said.

"There might be some slow payments and obviously there might only be regular performing loans," said O & # 39; Brien. "For the most part, the off-accrual percentages were no worse than what we saw at the bank."

With the outlook for the defunct mortgage program improving, O’Brien is focusing more on Sterling's $ 448 million in construction and commercial real estate loans. He said increased write-downs on that portfolio were "undoubtedly" although the company's $ 72 million write-down should be enough to cover any losses.

The legal focus of the Advantage Loan program also appears to be shifting away from the company and more towards former executives and employees.

The Justice Department recently charged the former Sterling Home Loans executive with conspiracy to commit bank and wire transfer fraud. The Justice Department claims that Yihou Han accepted forged documents and financial reports that resulted in mortgages for people involved in money laundering and tax evasion programs.

Han made nearly 1,300 Benefit Loans totaling $ 684 million between 2011 and 2019, generating commissions of $ 3.4 million, according to the indictment. In total, Sterling has granted approximately $ 5 billion in benefit loans, according to court documents.

Han's lawyer did not respond to a request for comment.

Although Han is the only Sterling employee identified in the indictment, the Justice Department implicated several former executives, including allegations that the bank's "founder and majority shareholder … oversaw the administration of [Sterling], including its home loan programs."

The indictment alleges that Han worked closely with other executives to develop and expand the Advantage Loan program. She became the chief executive officer of lending in 2018, and at about the same time she participated in sales pitches "discussing the performance of the Advantage Loan program," the indictment stated.

Scott Seligman founded the Sterling Savings and Loan Association, a predecessor bank, in 1984. Family businesses affiliated with the Seligman family still own more than half of Sterling's shares, even after selling $ 115 million worth of shares in its 2017 IPO on regulatory filings.

While refusing to discuss the Justice Department's investigation, Seligman said the Advantage Loan program was created to provide funding opportunities to the Sino-US community.

"We built a culture of trust and service with a minority community that had a language barrier and a cultural approach to debt. This made it difficult for them to get credit," he wrote in an email on Thursday. “This is a culture that generally loathes debt. The Advantage program allowed borrowers to compete with cash offers on terms that recognized cultural preferences. "

Seligman said it was "no surprise" to him that Advantage Loans continued to perform well.

"When I was an advisor to the bank, default settings were virtually unknown," he wrote in the email. "I believe the foreclosure rate is literally zero."

O & # 39; Brien, who said Sterling is cooperating with investigators, added in an interview that Han's indictment "speaks for itself". During the conference call, he said that the Justice Department "has started cracking down on certain individuals and we expect efforts will continue".

Hans's indictment can be seen as a sign that "the formal investigation has gone beyond the bank and directly to the bad actors," wrote Gerlinger in his note.

"While it's still pretty early, we still believe Sterling is likely to see a significant update on its government investigation," added Gerlinger in the second half of 2021.

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