Banking on Market Share

After brush with financial disaster, Sterling works to close deal with First Independent

By Gordon Oliver, Columbian business editor

Published:

 

Sterling Financial Corp.

Parent of Sterling Savings Bank.

FOUNDING: 1983.

HEADQUARTERS: Spokane.

ASSETS (as of 9/30/11): $9.18 billion.

EARNINGS, 3RD QUARTER 2011: $11.3 million.

BRANCHES: 177 in Washington, Oregon, Idaho, Montana and California; one each in Clark and Skamania counties.

EMPLOYEES: 2,500.

INFORMATION:Sterling Financial Corporation.

First Independent Financial Group

Parent of First Independent Bank.

FOUNDING: 1910 (as Ridgefield State Bank) .

HEADQUARTERS: Vancouver.

ASSETS (as of 9/30/11): $792 million.

EARNINGS, 3RD QUARTER 2011: $2.2 million.

BRANCHES: 14 in Clark and Skamania counties; two offices in Oregon.

EMPLOYEES: 245.

INFORMATION:First Independent.

In the waning summer days of 2010, Sterling Financial Corp. was fighting for its very survival. The corporate parent of Sterling Savings Bank, based in Spokane and operating in five states, had lost $1 billion in the previous 18 months, and almost 14 percent of its loans were in trouble. Its stock had steadily declined since early 2008 and was hovering at around 65 cents per share. In those dark days for the nation’s financial institutions, Sterling stood a good chance of joining Washington Mutual and the Bank of Clark County on the industry’s trash heap.

The bank had been propped up by a $303 million infusion of federal bailout money in December 2008, but government regulators demanded that it raise another $725 million from private investors.

“They were on the verge of destruction,” said Tom Hayes, a principal in investment banking firm D.A. Davidson & Co. based in Great Falls, Mont.

Less than 18 months later, Sterling’s deal to purchase the banking assets of Vancouver-based First Independent Bank signaled its return as an aggressive player in the banking industry’s fight for market share. The deal, announced in November and expected to close before April 1, will put an end to one of the nation’s last family-owned banks. It will make Sterling, which now has a small local presence with just one Clark County branch, into one of Southwest Washington’s largest banks and signal its larger role in the Portland metropolitan area market.

The Firstenburg family, owners of 101-year-old First Independent and major philanthropists for community charities, will not disappear from the local scene. First Independent President Jeanne Firstenburg will become Sterling’s Southwest Washington market president. The Firstenburg family will hold on to some of their bank’s assets, through a private company managing a portfolio of loans not included in the deal, as well as the First Independent headquarters building in downtown Vancouver. Sterling says it will keep all of First Independent’s branches and move forward on First Independent’s project of opening a downtown Portland branch.

Hayes, who keeps tabs on Northwest banks for financial services firm D.A. Davidson, admitted to some surprise that Sterling moved into expansion mode so soon after its close brush with disaster. “Not only did they come back, but now they are able to go on the offensive,” Hayes says. “I don’t think anybody thought they would be able to do this so quickly.”

Back from the abyss

By the end of 2010, Sterling had pulled itself back from the abyss by drawing in big-name private equity investors and aggressively whacking away at a mountain of bad real estate loans. But its survival came at a cost to taxpayers who had pitched in the $303 million through the Troubled Assets Relief Program, or TARP. It found major investors willing to buy stock at 20 cents a share, then orchestrated what is called

a reverse stock split to drive up its per-share price so its stock could remain listed on the New York stock exchange.

When the dust settled, the U.S. Treasury, which owns about 10 percent of the bank’s stock, was among the investors suffering large losses. The government-owned stock is valued at around $90 million, said Greg Seibly, Sterling Financial Corp. president and chief financial officer. Seibly doesn’t know when the Treasury will cash out its shares, but acknowledged that the government is unlikely to get a full return on its investment in Sterling.

“The goal of (Sterling’s) management and board was to salvage the organization,” said Seibly, noting that he was not involved in the bank’s decision to seek government funding. “Had Sterling failed, the cost would have been far greater.”

Sterling’s survival strategy stands in contrast to First Independent’s playbook during the financial crisis. First Independent reported nearly $32 million in losses in 2009. The bleeding would have continued had not the Firstenburg family purchased some loans to manage through a family-owned company, reducing ongoing losses and allowing the bank to shrink the size of its troubled loan portfolio. The family also contributed some $28 million in cash and real estate to get their bank through the crisis. First Independent took no TARP funding.

Under the deal, still subject to state and federal regulatory approval, Sterling will initially pay $8 million. It will make an additional $17 million payment after eight months, based on the bank’s financial performance and its ability to retain customers. The Firstenburg family keeps $49 million of existing loans and $34 million of real estate and other assets.

Sterling’s acquisition of First Independent also gives it the legal authority in Washington to administer trust accounts, a service that will help it attract customers with high net worth. First Independent has $450 million in assets under management in its trust and wealth management business.

Sterling officials say they’re on track to meet with First Independent employees this month about their professional futures. Seibly said last week that no decisions have been made about staffing needs once Sterling takes control, although executive and back-office employees are likely to be most affected by the change in ownership. Staff reductions will create vacancies in the Firstenburg-owned First Independent Plaza at a time when downtown Vancouver’s office market is glutted with empty space.

Not a big surprise

The November announcement that Sterling would purchase the core pieces of First Independent wasn’t entirely a surprise to business community leaders or observers of the Firstenburg family. Although Scott and Jeff Firstenburg, grandsons of the bank’s founder, worked for First Independent, there were no signs that they were being groomed to run the bank. Jeanne Firstenburg, daughter-in-law of bank founder E.W. “Ed” Firstenburg and stepmother to Scott and Jeff, had been tossing broad public hints that a sale was one of the options being considered by the family. A business broker had been putting out feelers to other banks about their possible interest in First Independent.

Those close to the family say the sale would have been unimaginable during E.W. Firstenburg’s lifetime. He purchased the Ridgefield State Bank in 1936 and turned in into First Independent, and didn’t finally retire until 69 years later, in 2005. His died in 2010 at age 97.

First Independent’s sale raises questions about its purchaser’s philanthropic role. Sterling enjoys a strong reputation in Spokane for public involvement and civic contributions, and Clark County’s charities are hoping the bank will continue the strong traditions of First Independent and the Firstenburg family.

“We’re obviously in kind of wait-and-see mode,” said Richard Melching, president of the Community Foundation of Southwest Washington, an organization that the late E.W. Firstenburg, the family scion, helped launch in 1984. “Any time you change the status quo, it’s bound to raise some questions. All the right things have been said.”

Certainly, Sterling’s decision to retain Jeanne Firstenburg in a top position was in part a recognition of the strong bonds between the family and Clark County’s civic leadership.

Bank officials say the job description is still under discussion, but Sterling took a similar approach when it purchased Sonoma Bank in Northern California in 2007 and hired its president to serve as a market president for that region. Said Seibly: “We will be very active and engaged in Vancouver.”

Both Seibly and Jeanne Firstenburg say that the two banks share a community-oriented focus that should appeal to First Independent customers. But Sterling is vastly larger, with $9.18 billion in assets and 177 depository branches in five states, to First Independent’s $792 million in assets and 14 branches in Oregon and Washington. In Clark County, where First Independent is second in deposits only to JP Morgan Chase, Sterling will move immediately to a dominant market position — if it holds onto most of its customers.

Riverview Community Bank, the county’s last locally owned bank, is marketing aggressively for First Independent customers, as are newly resurgent credit unions feeding off anti-Wall Street sentiment.

Kim Capeloto, Riverview’s executive vice president for marketing and operations, said Riverview welcomes the competition from Sterling.

“Having said that, we are headquartered and located in Vancouver, Washington, and as a result, money deposited by our clients stays local,” he said. “Your money stays local, helping your neighbors.”

Seibly defines “local” more broadly. “Vancouver and Spokane are located in the same state,” he said. “This isn’t as if an institution from New York is coming in.

“What Vancouver needs is strong financial institutions. Washington needs strong financial institutions.”

Just a few years back, “strong” was not a word many would have associated with Sterling. Seibly, who joined Sterling in 2007, became CEO of Sterling Financial Corporation during an October 2009 management shake-up. Sterling had accepted the government’s TARP money in December 2008, but it was still bleeding cash. It’s losses for 2009 reached $855 million, with most of that coming in the year’s last two quarters.

The bank missed a December 2009 deadline set by federal and state regulators to raise $300 million in new capital. But then the pieces started falling into place. By the following August, Sterling had secured the required $725 million in private financing, including $171 million each from the Thomas H. Lee Partners and Warburg Pincus Private Equity X investment firms. Those investments took the form of stock purchased at 20 cents per share, well below the sale price at that time. With those stock investments, each firm secured 22.6 percent ownership in the bank.

Before long, Sterling faced another critical deadline. If its stock didn’t climb to more than $1 per share by Dec. 7, 2010, it would be de-listed on Wall Street. For investors, the 1-for-66 reverse stock split Nov. 18, 2010, drove up the value of a single share while drastically reducing the number of shares an investor owned. Sterling’s shares have climbed steadily since the split. The two equity firms each now own 24.9 percent of stock, the maximum allowed without additional regulatory hurdles.

Hayes, of D.A. Davidson, said Sterling is positioning itself well for competing against both regional and national banks once the economy finally improves.

“When the market turns, there are going to be a lot of people competing for the same acquisitions and same customers, he said. “They’ll tell you they’re competing against the big banks, but as they get larger they’ll be competing against each other as well.”

Ashley Swanson provided research for this story.