A day after Sterling Financial Corp.’s longtime leaders were ousted, the company’s new executives say they’re confident subsidiary Sterling Savings Bank can raise $300 million and meet other demands contained in a government cease-and-desist order disclosed Thursday.
The order from the Federal Deposit Insurance Corp. and Washington Department of Financial Institutions capped a series of recent damaging Sterling reports of mounting loan losses, dividend suspensions, and steps towards issuing new stock that would further depress shares once worth more than $34. The bank has 60 days to raise the $300 million.
Shares closed Thursday at $1.29 on heavy trading volume.
Greg Seibly, acting chief executive officer of Sterling Financial and Sterling Savings, said turnaround plans are in place. Ongoing Sterling operations are healthy, he said; the challenge is working through loans made before 2007 on now severely depressed real estate and construction projects, he said.
“This is a situation that is manageable,” Seibly said.
Sterling and its financial adviser, Sandler O’Neill, have received positive feedback from potential investors, he said.
But Matthew Clark, an analyst with Keefe Bruyette & Woods in New York City, said investors can choose among several Northwest banks also in need of capital. Sterling may not be the most attractive proposition, he said.
As of June 30, Sterling reported $787.5 million in non-performing assets. Total assets were $12.4 billion, making Sterling the largest commercial bank based in Washington.
“It’s very difficult to manage down the magnitude of problems that exist at Sterling,” Clark said, adding that he had estimated the company might need as much as $400 million in new capital.
Besides imposing several conditions for the raising and maintenance of capital, the agreement cites Sterling directors for their inadequate oversight of bank operations, and orders them to more actively supervise bank affairs.
Late Wednesday, the board announced the appointment of a new acting executive team lead by Seibly and Chairman William Eisenhart, and the departures of co-founder and long-time Chairman Harold Gilkey, as well as Heidi Stanley, chairman and CEO of Sterling Savings Bank.
In filings made Monday with the U.S. Securities and Exchange Commission, Gilkey reported he had surrendered 125,000 of Sterling stock options. He owns almost 380,000 shares.
Stanley surrendered 75,000 options. She owns 86,000 shares.
Neither Seibly or Ezra Eckhardt, bank president and Sterling chief financial officer, are members of the board. They said they had no personal knowledge of the negotiations that produced the agreement with regulators.
“We acknowledge the criticisms we received,” Eckhardt said. “It’s not unique.”
Seibly said terms of agreement are much like those the FDIC has imposed on struggling banks all over the United States.
“The Pacific Northwest was late to the downsizing of the economy, but when it came, it came sharply,” Seibly said.
Fourteen Washington banks have received cease and desist orders this year, including another Spokane bank, AmericanWest Bancorporation. The FDIC has taken over three banks, all in Western Washington.
Clark said terms of the Sterling order were among the harshest he had seen, particularly the deadlines, but he noted that the FDIC has been flexible where officials see a good-faith effort to comply.
He said new investors would be taking on the risk with the potential to double, even triple, their money if Sterling officials turn the bank around in a few years.
Eckhardt, whom Clark called “a rock star,” said Sterling has moved away from an asset-based business plan focused on real estate and construction lending, to one that will rely more on traditional banking relationships and selling customers more financial products.
There are no plans to trim the bank’s 175-branch, five-state network, or its 2,050 employees, he said.
Sterling has a major presence in downtown Spokane, with 228,500 square feet of office space and more than 600 employees.
Deposit growth will be a more important fundamental in the future, Eckhardt said.
He said growth so far in 2009 has been good — up 4 percent year-over-year as of June 30 — which will allow the bank to offset the departure of brokered deposits that earned higher interest rates, and regulator condemnation.
“We’re really focused on being a back-to-basics community bank,” Seibly said. “Our goal is to be the best that we can be where we are.”
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