On the surface Sterling Bancorp seems to be doing everything right in the past year. The company paid back its Tarp borrowings last March and earnings are solid and loan loss had been minimal for 2011. This usually makes me nervous and I wonder what can possible go wrong?
I read through the 10-Q financials ending 9/30/2011 to see what I might find which would make me question a bank stock trading near an annual high $10.65.
Are investors presented with accurate loan risk ratings?
I discovered this in the notes to financial statements "The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans under $100,000 are not risk rated. Loans are graded on a scale of 1 to 9". A full description of risk grades along with its Federal Reserve Classifications is listed on pg 25 and on pg 26 is a table which presents weighted average risk grades and classified loans by loan type. These risk ratings are required by federal regulators. Loans are rated at origination and annually thereafter.
What stood out was the fact that $154.7 million of $156.3 million in residential loans were graded above the Federal Reserve Risk Classification of watch list as of 9/30/2011. The bank grades its own loans and shows that only $1.6 million or about 1% of their loans are less than perfect.
So I started researching Sterling Bancorp mortgages online and in less than a half hour, I found a loan that should be rated less than perfect. The loan was originated in 2008 for a single family home in a less than desirable town in Morris County, NJ. The Sterling mortgage was $309,000 at the time and currently no assignment of mortgage or satisfaction had been filed on the property. Did I find $300,000 of the $1.6 Million rated at below watch list classification? Maybe, but the odds of that would be very slim.
A quick look at Zillow.com's black box valuation indicates a recent value of $186,000. Additionally, the tax assessment is at $205,000 vs. $230,000 in 2008. Using these basic estimates it would indicate that the loan to value has deteriorated considerably putting it over 100% and justifying a risk rating change to at or below watch list classification vs. a perfect rating.
My point is not that it is a surprise that a residential mortgage loan is underwater, rather are investors presented with the accurate risk rating of the company's loan quality? One misclassified loan does not weaken a company but is does make you question the risk rating of all its loans.
If you own Sterling Bancorp or are a banking analyst, I encourage you to do some research on the quality of its loans.
About the author:
• Realized average annualized returns on self managed IRA account of 14% from January 2004 to December 2012 (total return 150+).
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