Sterling Bancorp Inc. could look to sell after it wraps up an ongoing regulatory investigation, analysts and investment bankers told S&P Global Market Intelligence.
The Southfield, Mich.-based bank came under regulatory scrutiny for its advantage loan program, which was suspended in 2019 and has been the focus of investigations by the Office of the Comptroller of the Currency and the Justice Department. The OCC entered into a formal agreement with the bank regarding the program in June 2019 and later terminated the agreement in September 2022 after the agency determined the bank complied with all articles of the enforcement action.
However, the DOJ investigation remains outstanding, and the timing of when it will conclude is cloudy, but experts believe Sterling will pursue a sale once it is over.
"There's no long-term story here for Sterling," Hovde analyst Ben Gerlinger said in an interview. "It's going to be sold."
Sterling Chairman, President and CEO Thomas O'Brien declined an interview request for this story but said Sterling remains focused on total cooperation with government agencies in a statement to Market Intelligence.
"Until these issues are finally resolved, there are no other priorities," he said.
Cross-country prospects
Sterling brought O'Brien on in 2020, shortly after the company found itself facing the OCC and DOJ investigations. Gerlinger believes the addition of O'Brien is notable given his history of joining banks and eventually selling them.
The analyst pointed to the sale of Sun Bancorp Inc. to OceanFirst Financial Corp. as an example. O'Brien joined Sun Bancorp in 2014, with a goal of "comprehensively addressing" the company's regulatory matters. It then announced a sale to OceanFirst in 2017.
"He basically goes in, fixes the bank and then sells," Gerlinger said.
Sterling's lack of recent hiring and the sale of its Bellevue, Wash., branch are further indications it will look to sell following the conclusion of the DOJ investigation, the analyst said.
Investment bankers were split on where a potential buyer would be located. Sterling is headquartered in Michigan, but the bank's branches are mostly concentrated in Los Angeles and San Francisco.
Therefore, it is more likely a bank with a current presence in California would be interested in Sterling, said Andrew Christians, a managing director at the investment banking firm Donnelly Penman & Partners.
On the other hand, Sterling's presence in Michigan could make it an attractive prospect for banks in the state looking for an opportunity to expand into new markets, a Michigan-based investment banker with more than 40 years of experience told Market Intelligence.
"The folks that know Sterling and probably know them best, at least from a people perspective, are other Midwest bankers," the investment banker said.
But no matter the location of a potential acquirer, they would likely have $5 billion or more in assets, Christians said. Sterling could serve as an attractive target for banks with close to $10 billion in assets, as it would add enough scale to combat the increased regulatory expenses and interchange fee cap of the Durbin amendment, he added. Sterling reported $2.44 billion in assets at Dec. 31, 2022.
As for pricing, the average price to book value for bank M&A is about 1.5x in a normalized environment, Christians said, but the ultimate sale price could be higher or lower depending on the buyer, he added. Sterling is trading at 0.97x book value as of Feb. 8.
Gerlinger estimated a sale price between $7.50 to $8.00 per share, relative to the company's Feb. 8 close price of $6.26 per share.
"I'd be shocked if this sells under tangible," Gerlinger said. "I think the high 7s, low 8s is a realistic win-win for both investors today and whoever the buyer is."
Waiting on the DOJ
But before the bank can pursue a sale, it has one major hurdle: the pending DOJ investigation centered around its former Advantage loan program.
The program targeted direct immigrants and first-generation immigrants, helping them to buy homes, according to Hovde's Gerlinger. The DOJ described the program as "a yearslong scheme to originate fraudulent residential-mortgage loans" with low documentation in its 2021 announcement that the bank's former managing director and two former loan officers pleaded guilty for their role in the program.
Thanks to the program, Sterling had an efficiency ratio of about 40%, which was "incredible" for the bank's size, until the program came under regulatory scrutiny for Bank Secrecy Act violations, Gerlinger said. The company's efficiency ratio as of the fourth quarter of 2022 was 100.77%, up from 37.08% in the fourth quarter of 2018 prior to shutting down the program in 2019.
"The advantage loan was their one-trick pony and they had incredible profitability off of it," Gerlinger said.
Under O'Brien's leadership, the company "has really cleaned up," Gerlinger said. But the DOJ investigation remains unresolved, and it is unclear when it will conclude.
Gerlinger believes the investigation will be settled by the end of the first quarter, he wrote in a Jan. 31 note.
"[Sterling's] light at the end of the legal tunnel should be measured in days/weeks rather than quarters. We recommend owning the shares at current levels as the resolution of each looming catalyst/event likely drives the price higher in an abrupt manner," he wrote.
On the company's fourth-quarter 2022 earnings call, O'Brien said he believes it could be resolved this quarter as well, but "we don't have a lot of visibility into it."
"We do think collectively that it's going to be resolved or at least [at] the beginnings of a resolution sometime this quarter, but again, it's very hard to predict," he said. "It would appear to us that the investigation focus at their end is heavily on individuals. And I think with respect to the bank, we believe they have all the information they need."
