And the second to follow?

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 that post).

Now, it seems as if a Montana chartered community bank, Treasure State Bank, is on the same path. On December 29th they announced they would agree to a regulator contract to maintain a Tier 1 leverage capital ratio of 12%. The average for all FDIC insured commercial banks in Montana as of September 30, 2009 was 10.43%.

As the Missoula Independent reports, the “consent order,” aims to address losses to the bank resulting from loans gone bad. Basically, the have to set aside a chunk more cash to cover the dodgy loans that they made in the past. And since Treasure State Bank is relatively young bank, founded in January 2007, they don’t have those reserves.

So, they went out to raise some more capital. Perhaps the problem is that investors don’t think Treasure State is such a good deal. The bank had to extend the stock offering another month.

Back in July, you’ll remember Treasure State Bank had the second worst Troubled Asset Ratio of the banks in Missoula (after Stirling Savings Bank). Now admittedly that Troubled Asset Ratio was a little bit better by September (down to 49%, from 54%), but of the 38 banks the FDIC has closed since Sept. 30, 32 had a troubled asset ratio of greater than 100.

Oh, and you’ve got to wonder why they needed a new President and CEO back in October? Maybe because a few days earlier the bank had announced they had lost $74,000 in the previous quarter. In the year to Sept 30, they’d managed to lose over a $1 million.   Not bad for a bank with less than 20 employees!

How is, exactly, that a bank loses money when they borrow from you and I at exceedingly low rates (our savings accounts) and lend that money to folks to buy cars and stuff at a much higher rate? Yep, management probably made some bad decisions, so management had to go.

Now, who is supervising the management? On the Board of Directors of Treasure State Bank, you’ll find:

Howard C. Chandler, a neurosurgeon
Mark S. Hawkins, president of InterWest Health
Stanley Earl Jenne, formerly Chair of Accounting at UM
Raymond Joseph Round, director of Davidson Investment Advisors
Mark C. Staples, an attorney based in Helena
William R. Weaver, a real estate developer
James A. Salisbury, the new CEO

If Treasure State is your bank, or if your business is relying on a loan from Treasure State, now might be a good time to get to know these folks.

If you’re an investor, then this graph tells your story:

Treasure State Bank currently trades on the Over the Counter Bulletin Board (OTCBB) under the ticker symbol “TRSU”.

There’s trouble a foot ..

Interesting … the nation’s banks have just been given a stress test by the Investigative Reporting Workshop, a project of the School of Communication at American University. Using June 2009 figures, they calculated a troubled asset ratio for every bank and credit union in the country.

According to MSNBC:

“While it is not an official FDIC statistic, nor is it intended as a definitive predictor of the likelihood of bank failure, the troubled asset ratio apparently is a strong indicator of severe stress inside a bank because it shows the bank’s ability to withstand loan losses. Of the 92 banks that have failed so far this year, 84 had troubled asset ratios of 100 percent or greater in the final quarter they reported data before they closed.”

Here’s a look at here’s some of the local figures:

Troubled asset ratio, June 2009

56.7 Stirling Savings Bank (of Spokane)
54.5 Treasure State Bank of Missoula
38.5 Farmers State Bank (of Victor)
29.9 First Security Bank of Missoula

25.9 First Interstate Bank (of Billings)
24.1 US Bank (National)
19.7 Wells Fargo (National)
17.4 Community Bank – Missoula

16.8 Montana First Credit Union
15.6 Mountain West Bank (of Kalispell)
14.3 First Citizens (of Rhode Island)
10.1 Missoula Federal Credit Union

For banks, they calculated a “troubled asset ratio,” which compares the sum of troubled assets with the sum of Tier 1 Capital plus Loan Loss Reserves. Generally speaking, higher values in this ratio indicate that a bank is under more stress caused by loans that are not paying as scheduled.

For credit unions, they combined Capital and Loan Loss Reserves to calculate the amount of cushion the credit union has to protect against loan losses. We combined the delinquent loans and other real estate owned to calculate the “Total Troubled Assets.”

They then divided the amount of Total Troubled Assets by the amount of Capital and Loan Loss Reserves to derive the “Troubled Asset Ratio.” Generally speaking, higher values in this ratio indicate that a credit union is under more stress caused by loans that are not paying as scheduled.

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.

Big Banks. Fail.

Starting today four on the nation’s biggest banks stopped accepting IOUs from the cash-strapped state of California.

Check the list:

• Bank of America,

• JPMorgan Chase & Co.,

• Wells Fargo & Co., and

• Union Bank of California.

Recognize some of the names? Yep, they’re many of the same ones that you and I bailed out with federal loans, guarantees, and forgiveness.

Now I don’t much like seeing states issuing IOUs while they sort out their political goings on. And Professor Natelson ponders whether they might even be unconstitutional.

But watching big banks penalize small business and consumer recipients of IOUs not only seems like playing politics with the helpless citizens caught in the crosshairs, but it strikes me as exceedingly bad business. Watch all those customers head over to the local credit union or community bank. And never come back.