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Spokane, Washington  Est. May 19, 1883

Bert Caldwell: Sterling loses a little bit of its merger luster

Bert Caldwell The Spokesman-Review

Sterling Financial Corp. lost one to the regulators last week.

After rolling up more than 20 other financial institutions in a 22-year-long growth spurt, officials at the Spokane bank announced Monday that a merger agreement with North Valley Bancorporation had been terminated. At the Nov. 30 deadline for closing the transaction, Redding, Calif.-based North Valley invoked its right to call the marriage off.

The Federal Deposit Insurance Corp. had not yet approved the deal, and could give no date certain when it might do so. With the merger twisting in the regulatory whim, North Valley employees uncertain of their futures were leaving. The California bank had to act.

“They felt like they had to have more control of their destiny,” says Dan Byrne, Sterling executive vice president.

He says Sterling executives became uneasy about the slow pace of FDIC review in mid-August. The agency’s main concern, he says, was Sterling internal regulatory compliance systems that were not keeping up with bank expansion. Although Sterling had the plans and funds committed to address those problems, the FDIC was unmoved.

Bryne says the lack, until recently, of a regional director at the FDIC’s San Francisco office might have impeded communications with the agency.

A spokesman says the FDIC does not comment on merger applications that were withdrawn, as that for the Sterling/North Valley deal was.

Meanwhile, what was moving — in the wrong direction — was the price of Sterling shares.

On April 11, the day the deal with North Valley was announced, Sterling stock closed at $30.05. The transaction, which called for an exchange of North Valley stock for Sterling stock, was valued at $196.2 million at that price. But Sterling shares were worth only $17.93 at the close of business Nov. 30. The plunge would have required Sterling to adjust the formula for exchanging shares with North Valley.

Although the change would have increased the merger’s cost, Bryne says Sterling officials were willing to step up because the match with North Valley was so good in terms of corporate cultures and geography. North Valley branches would have filled out a network Sterling has established in Northern California by way of earlier acquisitions, including one completed in February.

But the mortgage crisis and credit woes have brought a sea change in the regulatory environment since then.

D.A. Davidson analyst Jim Bradshaw was caught off guard by the Sterling announcement. He had to go back more than seven years to find a precedent; the failed merger between Zions Bancorporation and First Security Bancorporation.

“I could not remember the last time a deal fell through,” Bradshaw says.

But Sterling’s is not the only deal snarled in the spasm of regulatory anxiety.

Bradshaw notes that a merger announced in July between two Western Washington thrifts, Washington Federal and First Mutual, has also stalled. Industry contacts tell him examiners are poring over documents with a fine-toothed comb.

“The regulators are really nervous about market conditions,” he says, even in the case of an institution like Washington Federal, regarded by many as the paragon of conservative management.

Sterling had leveraged its capital more than some other banks in the region, Bradshaw says. That’s good during growth periods, a concern when the economy slows. And Sterling’s stock price reflected almost uninterrupted expansion since it was founded.

Now, he says, “We’re less sure this company is going to be able to grow rapidly.”

Bryne says Sterling officials will use the unexpected — and for Sterling almost unprecedented — interruption in merger activity to work on better integrating its California branches, improving internal efficiency, and drying its powder. It may be late 2008 before Sterling is positioned to resume expansion, with regrets for the lost opportunity with North Valley.

“This was a deal that could have and should have been done,” Bryne says.

Business columnist Bert Caldwell can be reached at (509) 459-5450, or at bertc@spokesman.com.