It's not often a $6 million penalty is the light at the end of the tunnel. But for Sterling Bancorp in Southfield, Michigan, it marks the conclusion to years of headaches stemming from a scandal that saw three employees plead guilty to loan fraud.
The penalty, part of a settlement with the Office of the Comptroller of the Currency, was quickly followed by a preliminary approval for settlement of a derivative lawsuit brought by shareholders who accused a group of current and former directors of misconduct. Both matters were connected to Sterling's ill-fated Advantage Loan program.
The OCC terminated a formal agreement originally implemented in June 2019, after an investigation revealed irregularities within Advantage Loan.
"Without a doubt, this was one of the best weeks for me personally, one of the best board meetings we've ever had, you name it," said Thomas O'Brien, the bank's chairman and CEO. "I think we're in the right space."
The OCC settlement and civil penalty moved the $2.5 billion-asset company a big step closer to repairing the damage wrought by Advantage Loan, which operated from 2011 to 2019 and resulted in at least $5 billion of originations, according to the Department of Justice, which claimed the program was riven with loan fraud and Bank Secrecy Act violations. The former managing director of residential lending was among the three Sterling lenders who pleaded guilty to loan fraud.
Sterling is still the subject of related investigations by the Department of Justice and the Securities and Exchange Commission. O'Brien said he has "no visibility" into the timing of a resolution for either probe, though he remains hopeful they can be wrapped up this year.
"We continue to have meetings and conversations with the Department of Justice," O'Brien said. "I try to impress on everybody the importance of getting us through the process as quickly as can be done."
Even with these lingering concerns, O'Brien said he and his management team can shift their focus back to banking and can weigh strategic options as they begin to chart a way forward for Sterling, the holding company for Sterling Bank & Trust.
O'Brien, who led four different banks before joining Sterling, has earned a reputation as a
Sterling has been the biggest challenge of his career, O'Brien said.
"I've previously had dealings with U.S. attorneys in New York and Boston" but "this, in all candor, is a step above in its severity and depth. It's a big deal," O'Brien said. "The one thing you don't want to see any time in your life is a lawsuit or action where the United States of America is the plaintiff, and your name is on the second line."
Ben Gerlinger, who covers Sterling for Hovde, wrote Wednesday in a research note that the Justice Department settlement could come "within weeks." Whatever the timing, it is seen as the "last piece of Sterling's legal puzzle" and once resolved, is likely to trigger a sharp rise in the company's share price, which closed at $6.03 Thursday, Gerlinger wrote.
Once free of the Justice Department and SEC probes, Sterling's "path of least resistance" would be to seek a sale to a larger partner willing to trade cash for capital, something the Michigan company has in ample supply, Gerlinger wrote. Sterling's Common Equity Tier 1 capital ratio stood at 23.65% on June 30.
Indeed, Sterling appears to be in good shape for a bank that has weathered a seemingly endless chain of legal and regulatory challenges over the past three years. Though it has shrunk in size as mortgage loans have rolled off the books without any new products to replace them, Sterling posted a $3.1 million profit for the first six months of 2022. Nonperforming assets are elevated, at 2.20% of total assets, but Sterling is comfortably reserved, with an allowance for credit losses amounting to 2.91% of total loans.
The OCC settlement, which O'Brien, who was
"I've always viewed that as job one," O'Brien said. "If [regulators] can't rely on your commitment to do the right thing and do it expeditiously, you really don't have much to go on."
Founded in 1984, Sterling created the Advantage Loan Program in 2011 to provide home loans to the Chinese American community. According to the Justice Department, Sterling loan officers routinely committed loan fraud by falsifying borrowers' debt-to-income ratios and their employment histories, in a bid to increase volume. The Justice Department claimed Sterling loan officers also concealed negative information from underwriters and knowingly extended credit to borrowers involved in money laundering and tax evasion.
Sterling suspended the Advantage Loan program in December 2019 and discontinued it permanently the following March.
One of the first big decisions O'Brien made after joining Sterling was to offer to repurchase all Advantage Loans that had been sold on the secondary market. Pursuant to that offer, Sterling repurchased loans totaling $173.8 million in 2020 and $69.6 million in 2021. Through the first six months of 2022, Advantage Loan repurchases totaled $30.4 million. Sterling held $992.5 million of Advantage loans on its books on June 30, down from $1.185 billion on Dec. 31.
The derivative lawsuit, which received preliminary approval from the United States District Court for the Eastern District of Michigan, Southern Division, was filed in July 2020 by a group of shareholders who were eager to see Sterling pursue litigation against directors and officers who had greenlighted the Advantage Loan program. As part of the settlement, Sterling agreed to consider recouping salary paid to certain employees and the withholding of payment for any legal costs they might incur. Sterling also agreed to make a series of corporate governance reforms.
Last year, Sterling agreed to pay $12.5 million to
Now, with Sterling's regulatory issues settled and its legal issues inching closer to conclusion, O'Brien can begin thinking about the next chapter for the bank — and for himself.
For Sterling, a critical task will be designing a more diversified business model to replace the thrift strategy that has characterized the company's operations to date.
"The challenge for us was Sterling was basically a monoline," O'Brien said. "It just did old-line, thrift-institution single-family residential lending. Arguably, as a single line of business, that would be a disfavored model. When the single business you did was fraudulent, that makes it even worse."
For himself, O'Brien said he plans to steer Sterling through the remaining investigations.
"I'll certainly see the bank through to getting everything done that needs to get done and getting on with its life, whatever that life may be," he said. "There'll be some strategic decisions to be made."
