Sterling recruits capital infusion
$730 million expected to avert bank’s failure
Sterling Financial Corp. has arranged $730 million in new investment that will bring the Spokane bank back into compliance with capital requirements 10 months after huge losses on construction and real estate loans brought it to the brink of failing.
The parent of Sterling Savings Bank on Friday said the complicated deal, which includes U.S. Treasury Department involvement, is expected to close by Thursday.
Terms call for Thomas H. Lee Partners LLC of Boston and Warburg Pincus Private Equity X LP of New York to inject $171 million apiece. The stock and warrants received in return will give each 22.6 percent ownership. They will also get seats on Sterling’s board of directors.
Another $388 million has been committed by 30 individual investors.
Greg Seibly, Sterling’s president and chief executive officer, said the new investment will provide a foundation for rebuilding the value of Sterling, which operates 178 branches in the four Northwest states and California and employs several hundred workers at its downtown Spokane headquarters.
“The focused energies of many at Sterling have helped us to preserve and grow our core banking franchise,” he said.
The Treasury Department, which owns $303 million in Sterling preferred stock obtained in December 2008 under the Troubled Asset Relief Program, had earlier agreed to swap those shares for $60 million in common stock to help Sterling attract private investment.
Sterling will have 4.2 billion shares of common stock outstanding after owners convert all their preferred shares and warrants, compared with 52 million today.
Executive Vice President Dave Brukardt said a reverse stock split this year will reduce that cumbersome number. Fewer shares will raise their individual value to more than $1, a requirement for listing on the Nasdaq exchange, he said.
Brukardt said existing shareholders, who will own less than 2 percent of Sterling after Thursday, will not get to vote on the deal.
Nasdaq rules allow listed companies to bypass shareholders when delay consummating a transaction might endanger their financial viability, he said, adding that a shareholder meeting will be held this fall.
Failure has been a threat since October 2009, when federal and state regulators imposed a cease-and-desist order on the bank that forced out senior management and required $300 million in new capital to be raised by mid-December.
But the Washington Department of Financial Institutions and Federal Deposit Insurance Corp. held off even as further markdowns on Sterling loans deepened the hole to be filled by new investment. A $12.7 billion institution in June 2008, two years later Sterling had assets of $9.7 billion.
In April, Lee announced it would participate in Sterling’s recapitalization. Warburg committed its support one month later. Both subsequently increased the amount they would invest.
Sterling also announced a change of chairmen contingent on completion of the refinancing.
Lee Biller, a former vice chairman and chief operating officer of Wells Fargo, will replace non-executive Chairman William “Ike” Eisenhart. Seibly will remain president and CEO.
Warburg Pincus Managing Director David Coulter, who will join Sterling’s board, said a recapitalized “Sterling will now be exceptionally positioned to benefit from the current displacement in the financial services sector.”
Ten Washington banks have been taken over by regulators in the last two years, with many of the assets going to other Northwest banks.
Lee’s Sterling board member, Scott Jaeckel, said he expects the bank will be a platform for expansion.