Sterling Savings Bank first to go?

In a little-noticed AP article in Friday’s Missoulian (10.15.09), a major controversy with one of the regional banks was brought to our attention. Sterling Savings Bank, headquartered in Spokane and the largest Washington-based bank, also has branches in Missoula, Billings, Bozeman, Hamilton, Livingston and Big Timber.

It may be the first bank operating in Montana to fail in the current economic cycle.

To a bank with $12.4 billion in assets, being asked to raise $300 million within 60 days might not seem like much. But, with the stock price (Nasdaq: STSA) having plummeted from $12 a year ago to $1.20 at last trade on Friday, it is unlikely investors will be rushing to open their wallets. One analyst said that investors can choose among several Northwest banks in need of capital and that Sterling may not be the most attractive proposition. Fitch Ratings has cut its credit rating down into junk bond territory.

Furthermore, the bank has been found to have “engaged in unsafe or unsound banking practices and violations of law and/or regulations“. That’s extremely stern stuff, by regulator standards. The FDIC (Federal Deposit Insurance Corporation) cites Sterling for “operating with inadequate board of directors oversight; operating with inadequate capital in relation to the kind and quality of assets held by the Bank; operating with a large volume of poor quality loans; and operating in such a manner as to produce operating losses.” That the FDIC has given Sterling 4 months to develop a new strategic plan to improve profitability also doesn’t bode well. The Chairman of Sterling Financial Corp, Harold Gilkey, as well as Heidi Stanley, chairwoman of the subsidiary Sterling Savings Bank, both submitted their resignations effective immediately. The new Chairman, William L. Eisenhart, has been a director on the board since 2004 and was chairman of the company’s audit committee.

Oh, and Sterling had borrowed $303 million through the Troubled Asset Relief Program, which it still has to pay back.   By missing its Aug. 17 TARP dividend payment, it is now on the TARP deadbeat list.

Nov. 19 update: The bank’s quarterly report (Oct. 22) shows that Sterling lost $463.7 million or $8.93 per common share in the first three quarters of 2009. Share prices plummeted on the announcement, to the 50 to 75 cent range.

Says Eckhart, President of Sterling Savings Bank, of the requirement to raise $300 million in new capital: “It may not happen by Dec. 15, but I’m not concerned that the government will come in and shut us down by that date. We’ve shown a great deal of focus and I think they will give us the flexibility to meet our goals.”

Dec. 17 update: No word on the FDIC deadline.

In other news, Hagens Berman Sobol Shapiro (a Seattle-based law firm devoted to protecting the rights of investors, consumers, workers and the environment) is investigating Sterling Financial Corp for potential violations of the Employee Retirement Income Security Act of 1974 (“ERISA”). And Californian shareholder rights firm Robbins Umeda LLP has begun an investigation into possible mismanagement at Sterling Financial Corporation. Lastly, Kendall Law Group, founded by a former federal judge, began an investigation on behalf of shareholders of Sterling Financial Corporation. Are the vultures circling?

Jan. 5 update: In an agreement announced the day before New Years, but signed a week earlier, the Federal Reserve bank toughens oversight and gave Stirling Financial 60 days to draw up plans to strengthen risk management, maintain sufficient capital and identify contingent sources of liquidity. Stirling Financial also cannot pay dividends or increase the bank’s debt without approval. Stock value barely moves around 0.62 range.

Feb. 5 update: Stirling limps along. Barely. Stirling Financial announced on Monday a fourth-quarter loss attributable to common shareholders of $333.1 million, or a loss of $6.41 per share. That translates into a net loss in 2009 of $855.5 million, or $16.48 per share. On Tuesday, shares fell 18 cents to close at 57 cents.

Sterling’s nonperforming assets ballooned more than 16 percent in its fourth quarter to finish 2009 at $952 million. That’s more than 8.5 percent of Sterling’s total assets.

This week, Sterling offered 20 cents on the dollar for 10 separate sets of trust preferred securities initially valued at $238 million. As that WSJ article explains, trust preferred securities are at the front of the line in bankruptcy proceedings. It is very hard to raise new capital when new investors would likely recover little if the bank collapsed. Thus, the efforts to buy back the trust preferred securities.

March 17 update. It would appear that Sterling needs another break from the Feds in order to stay in business. The Treasury would accept a steep markdown on the $303 million invested in Sterling only 15 months ago if the company can raise an additional $650 million in capital from new investors. The deal essentially wipes out all current shareholder equity.

It looks like the bank will be sold to private equity firms. Whether the Sterling franchise brand will survive is unclear, nor is it known what assets (including branches) will need to be sold.

April 2 update. Remember that update from February? The one where Sterling was offering a steep discount on the repurchase of $238 million in securities. Apparently, it is critical to Sterling’s efforts to raise $650 million in capital that would bring the bank back into compliance with regulatory capital requirements.

Well, they had to extend the deadline for two more weeks.

May 4 update. Thomas H. Lee Partners, a Boston private equity firm, will invest $134.7 million in struggling Sterling Financial Corp.

Sounds good, doesn’t it? Except that, as part of the ‘deal’, Sterling also announced it will execute a separate stock exchange deal with the U.S. Treasury to convert about $303 million in preferred shares to common stock worth about $76 million. Why did taxpayers have to lose $237 million of equity, when the private investment is only for $135 million?

Oh, and Sterling still has to raise an additional $585 million to meet the required capitalization to keep the company independent. Because they’ve lost a cumulative $1.28 billion since the fourth quarter of 2008 ($85 million in the first 3 months of 2010), you’ve really got to wonder.

On Monday, May 3rd, Sterling announced their plan for recapitalization – sell 221.9 million shares of common stock at 20 cents a share. Add in 5.5 million shares of convertible preferred stock being offered at $92 a share and the deal with Thomas H. Lee Partners mentioned above, and they get the $725 million they need.

Not bad, except that common stock was priced at 87 cents before the announcement. The question is whether shareholders will approve taking such a big hit and the further dilution of their holdings.

May 24 update. Warburg Pincus Private Equity X, L.P. has agreed to bail out part of Sterling. Upon the completion of the deal, Warburg Pincus would own approximately 20.5% of Sterling Financial. As part of the deal, Thomas H. Lee Partners, L.P. will adjust the size of its proposed investment to be equal to Warburg Pincus. Terms of the deal require Sterling to raise an additional $442 million from other investors.

The Warburg deal requires U.S. Treasury and other regulatory approvals. (Treasury granted approval May 26, which is not surprising given that it was at regulators behest that Warburg help the otherwise struggling deal with THL Partners.)

July 16 update. Sterling is described as one of today’s worst performing penny stocks. Describing a 30-day average volume of 1.7 million shares, Smartrend suggests that, high volume often signals a change in trends. Shares of Sterling Financial are currently trading below their 50-day moving average (MA) of $0.73 and below their 200-day MA of $0.79.

August 21 update. Fitch Ratings has downgraded the Individual Rating of Sterling Savings Bank to ‘F’ from ‘E’ indicating Fitch’s opinion that STSA would have defaulted if it had not received some form of external support.

Thursday, it was announced Thomas H. Lee Partners, L.P. (“THL”) and Warburg Pincus Private Equity X, L.P. (“WP”) have amended their agreements to increase their investments in Sterling. Upon closing, THL and WP would each own an aggregate of 22.6 percent of Sterling’s pro forma common stock.

Sterling also reached agreement with about 30 investors for a private placement of about 155.3 million shares of common stock and 3.9 million shares of preferred stock for gross proceeds of about $388 million.

Shares closed Friday at 64 cents. The stock has lost nearly three quarters of its value in the past year.

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9 Responses

  1. interesting. i noticed this too a few days ago when npr covered it. wonder who else is sitting on bad paper around here?
    someone told me that farmers state bank is possibly a little shaky but it’s just a rumor.

  2. They will survive

  3. [...] the second to follow? Posted on January 7, 2010 by Binky Back in October I wondered if Sterling Savings Bank would be the first bank in Missoula to go under. Well, that story seems to drag on and on (see updates at the end of [...]

  4. You’re about to see another shake up. Stock price for STSA was up yesterday because its rumored that Washington Federal is going to pick up Sterling. Today, Friday the 22nd, I BET you Nancy McD will leave (or be asked to leave) her post.

    Plus, it IS FDIC Friday….

  5. Sterling will survive…it is one of the biggest most profitable banks on th West Coast. Even after all of the controversy with the Cease and Desist Order it continues to grow its deposits, and focus on building lasting relationships with its customers. Many banks have had to have the same type of agreement with the FDIC and they pulled through. Sterling will pull through, and be a better company for it.

    • [...] also may I add that with 175 retail branches in 5 states, there are not many big banks that would be in the position to buy out Sterling. And the FDIC def. does not want a bank of that size to fail…

      • Thanks for your comments, Jennifer. Do you work for Sterling?

      • Jennifer, Washington Federal is in prime position to pick up Sterling. And we’re not talking about a buy out, we’re talking about a Fed closure and handing the keys to WA Fed. Sterling might be growing in deposits, but if you do work for Sterling, you know the real reason why.

        American West is/was in a similar position to Sterling, but they realized their problem about 18 months before Sterling did. I don’t doubt Sterling is trying to rectify the problem, it just may be too late. They should have started writing off those contra assets and provisions for loan losses well before they did. They took a gamble and hoped that property value would rebound so that they would at least break even.

        Sterling is still short on capital. They haven’t done anything with the shelf filing because they can’t find anybody willing to buy that much shares to make a difference, plus talk about diluting existing shares… Seibly wouldn’t comment on it in the earnings call but I am willing to bet Action will be chopped and sold off, portfolio and all. They’ll take a hit but at least they’ll have the capital. Its a short term solution and they can rebuild their lending side in the future.

  6. Per the Spokane Journal of Business, an executive VP at Sterling is quoted as saying that Sterling must now raise $600 million, not the $300 million previously quoted publicly. “The amount of equity capital Sterling will need to raise is subject to change, and as of Dec. 31, it was at about $600 million, says Dan Byrne, executive vice president and chief financial officer of Sterling Financial Corp.” Source: http://www.spokanejournal.com/article.php?id=5618

    Transaction account balances did go up but total deposits went down. “While the deposits declined 7% from last year, Sterling successfully reduced its reliance on brokered deposits by 27% from last year. “See
    http://www.sec.gov/Archives/edgar/data/891106/000115752310000517/a6162778-ex991.htm

    On Sep 30th, 2009, deposits stood at $8,277,107 (x1000). On Dec 31st, 2009, deposits stood at $7,775,190 (x1000). You can verify this yourself in the SEC 8-k filing at
    http://www.sec.gov/Archives/edgar/data/891106/000115752310000517/a6162778-ex992.htm

    Non-performing assets also increased in the quarter per the 1st SEC filing linked above.

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