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| 11/19/2009 11:36:00 AM | Email this article • Print this article
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Kathleen Ellyn/Chieftain
A customer pauses at the drive-up window at Sterling Savings Bank’s Enterprise branch. |
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Tough time at Sterling Bank
FDIC orders more capital, lower risk
By Kathleen Ellyn
Wallowa County Chieftain
Sterling Savings Bank's local account holders have been voicing concern to Enterprise bankers as the deadline approaches for Sterling Financial Corp., the bank's parent, to submit new plans and prove that it is nearing solvency.
Sterling Financial received a "cease-and-desist" order from state and federal regulators in October.
The Washington Department of Financial Institutions and the Federal Deposit Insurance Corporation required the company to raise $300 million in new capital, develop a new strategy to lower risk, maintain capital, reduce its commercial real estate loans and cut off loans to delinquent borrowers - all by Dec. 15.
Sterling, which reported $12.5 billion in assets this year, has suffered significant losses in recent years, largely from real estate loans gone bad. None, however, were risky subprime loans, according to Ezra A. Eckhardt, Sterling's new chief operating officer. He and the balance of Sterling's new management team announced that those losses, while significant, were not an indication of overall health and that the bank's financial progress in other areas continues.
Harold Gilky, 70, Sterling co-founder and former chairman, corporate CEO and president, stepped down following the order as did CEO and board chairwoman Heidi Stanley. William Eisenhart is now chairman of the board, J. Gregory Seibly acting president and acting CEO and Eckhardt COO of the corporation and president of Sterling Savings Bank.
A cease-and-desist order is an example of the actions taken to bring all financial institutions under new guidelines, Eckhardt said, and was issued in response to the wholesale failure of housing loans across the country, not a vote of "no confidence" in Sterling.
"About a thousand banks across the nation will receive these orders," Eckhardt said. "Currently, there are about 15 banks in the state of Washington alone who have received the order, and more are expected."
The FDIC has required all banks to increase their Tier 1 leverage capital ratio to 10 percent. That means the ratio at which banks may lend money is no longer at the historical rate of 5 percent.
In other words, banks may no longer lend $20 for every dollar of capital they have. Now they must maintain a rate of 10 percent - they may lend out $10 for every $1 they have.
"A cease-and-desist order is not an indication that a bank will fail," Eckhardt said, pointing out that several banks in Washington have been working with the FDIC to meet similar requirements and deadlines have been extended up to three times in recognition of those bank's progress toward goals set by the FDIC.
Furthermore, he said, Sterling was in fairly good shape to begin with.
"Our current Tier 1 is at 7 percent," he said. "The government has asked us to increase it to 10 percent. We're currently better than we were supposed to be, but they want us to be better than that."
"We've never made subprime loans," he said. "The problem with our portfolio is that we made construction loans to builders and developers across the Northwest, building slowed nationwide, and these accounts became non-performing."
Numerous developers financed by the bank declared bankruptcy when the housing market failed, Eckhardt said. However, even those losses should be taken in perspective, he said.
"Thirty percent of our loans are construction loans. Approximately 9 percent are non-performing. The vast majority of our loans don't have problems," he said.
Furthermore, the bank's quarterly report shows that most of their portfolio is performing acceptably and some assets are performing exceptionally.
"For instance," Eckchardt said, "in residential and consumer lending we have a delinquency rate of less than 1 percent, which is exceptional. We pride ourselves on being a good stable institution and it's our object to get back on track and continue serving our communities."
Sterling is the largest banking corporation in the Northwest with assets of $12.4 billion and more than 175 depository branches in five states. Its stated focus is on customer relationships, a focus Eckhardt said is responsible for his bank's continued profitability and his belief that it will survive the current financial shakeup.
"The branches are performing very, very well," he said. "We've seen increased growth in departments for all of our branches, 11 percent for retail deposits and 16 percent for commercial deposits (over the last nine months, annualized)."
One of the ways in which the bank can increase its capital as required is by selling more common stock, and the bank received shareholder approval to do just that in September.
The bank expects to find buyers for the stock, despite the fact that it has suffered a precipitous fall in the last 18 months. "We recognize our stock is very low. Sterling has been one of the most highly shorted stocks for 18 months," Eckhardt said.
Matters went from bad to worse when the company traded below a dollar, he said. "When we traded below a dollar, we dropped off some of the index funds that had been carrying us," he noted.
The online market advisory service MarketWatch said the value of the stock has fallen from a 2008 high of $9.18 a share to current low of 52 cents.
Bad predictions also hurt the company. MarketWatch gave the company poor reviews, stating in a performance summation that "there is no assurance that Sterling will be successful in completing any acquisitions, achieving additional growth or adequately managing capital."
The bank's quarterly report shows that Sterling lost $463.7 million or $8.93 per common share in the first three quarters of 2009. Losses have continued since then, dropping by approximately 30 cents per share in the last week.
Safety and soundness independent rating company Bankrate.com gave Sterling its lowest possible rating, one star, in June, citing "substantially below average" performance in return on equity and level of non-interest income.
Overhead was also termed "significantly higher than average," and non-performing asset ratio "substantially higher than average." The conclusion of analysts with Bankrate.com was that "careful monitoring and additional inquiry are warranted."
Eckhardt acknowledged the bank's current situation reflects "tough times ahead." But he remains optimistic about the bank's ability to regain its footing and present the FDIC with a "real alternative" that will raise the $300 million required.
"We're working aggressively to make sure we have the right proposal for the FDIC to meet that," he said. "The FDIC wants to make sure the bank finds the right sort of capital and we will find a good source of funding."
"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."
In the meantime, Enterprise branch manager Annette Aschenbrenner is fielding a lot of questions, she said. "People are understandably concerned and they need to be informed," she said. "What customers need to know is that Sterling Savings branches are extremely profitable and most accounts are not in jeopardy."
Aschenbrenner advises customers to come into the bank and reassure themselves that their deposits are adequately protected by insurance. Most are, she said.
"Regular checking accounts have unlimited coverage," she explained. "CDs and other time certificates are protected up to $250,000. If a depositor has more money than that in accounts, coverage can be structured so that the depositor has all the coverage needed."
Many large account holders, like Enterprise School District, have already double-checked their insurance. District Superintendent Brad Royce said the school's account is well insured.
"It's all protected, " he said. "Nevertheless, we've pulled out a lot of the school district money in the last three or four days. I think Sterling will survive, but being the one responsible for the district funds I just didn't think I could take a risk. I diversified and put most of the money in the other two local banks."
That arrangement will be adjusted again in upcoming months due to an unrelated changed in banking sought by the Education Service District along with Joseph, Wallowa and Enterprise School districts. The four districts, and possibly Troy School District, are shopping for the best business banking plan and have sought sealed bids for their custom according to Ed Jensen, superintendent of Region 18 ESD.
Aschenbrenner acknowledged that customers may be alarmed by the cease-and-desist order and the looming Dec. 15 deadline.
However, even in a worst-case scenario, the sale of Sterling to another bank - a scenario she does not feel will occur - customers would not be significantly affected, she said. "The transition would probably be fairly seamless - it would be a lot like a merger."
Customers would have to open new accounts in such a case.
Eckhardt does not believe it will come to that, and she remains convinced that the FDIC will both approve the plan the bank is preparing and that the bank will continue to be "the premier bank representing Pacific Northwest customers."
"We're committed to having knowledgeable bankers who deliver great service. We feel like Sterling really epitomizes what people in the Northwest look for in a bank," he said.
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