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UPDATED 2:45 P.M. SPOKANE, Wash. -- Sterling Financial Corp., owner of Sonoma Bank in Santa Rosa, today announced that its subsidiary, Sterling Savings Bank, has entered into agreements with the Federal Deposit Insurance Corp. requiring it to strengthen its financial position.

William Eisenhart, chairman of Sterling’s board of directors, stated, "Sterling has been working closely with its regulators since the start of this economic cycle to ensure that we are maintaining safe and sound banking practices. Our agreement formalizes steps that already are underway and that we and our regulators feel are necessary to maintain Sterling's financial health and its ability to provide high levels of service to our customers and the communities we serve throughout the Pacific Northwest."

The cease and desist agreement commits Sterling’s principal banking subsidiary, Sterling Savings Bank, to continue taking actions relating to its capital position, asset quality, liquidity and management oversight.

It is known as a Stipulation and Consent to the Issuance of an Order to Cease and Desist and was entered into with the FDIC and Washington Department of Financial Institutions.

The bank also announced the departure of Harold Gilkey and Heidi Stanley. Mr. Gilkey co-founded Sterling in 1983, was chairman of the board, president and chief executive officer of Sterling Financial Corporation and a director of Sterling Savings Bank. Ms. Stanley, was chairman of the board and CEO of Sterling Savings Bank and was on the board of Sterling Savings Bank.

Mr. Eisenhart was appointed as non-executive chairman of its board of directors. "Harold did what many banking executives strive to do but few accomplish. He created a successful, customer-focused regional banking franchise," said Mr. Eisenhart. "Heidi played a central role in the growth of Sterling and was responsible for developing a core of highly experienced bankers who today are providing superior service in communities across the bank's five-state footprint," Mr. Eisenhart added.

The bank also announced the promotion of J. Gregory Seibly to acting president and CEO of Sterling Financial Corporation and the promotion of Ezra Eckhardt to acting chief operating officer.

Mr. Seibly and Mr. Eckhardt have assumed the full responsibilities of their roles, effective immediately. They will serve as acting executives until their appointments receive final approval from Sterling's regulators, who have been informed of the appointments.

"The board is committed to taking the actions necessary to respond to the challenges that face Sterling and many other banks in the Pacific Northwest. As a crucial next step, the board is bringing in a new generation of management to lead the efforts to strengthen Sterling's capital and liquidity positions, work through our problem loans and put into place processes to improve credit quality going forward," said Mr. Eisenhart.

Customer deposit accounts and non-classified loans are unaffected by the agreement with regulators. Deposits remain fully covered by FDIC insurance to at least $250,000 per depositor. In addition, non-interest bearing transaction accounts and qualified NOW Checking accounts are fully guaranteed by the FDIC for an unlimited amount of coverage under the FDIC’s Transaction Account Guarantee program, in which Sterling is a participant.

"Our core deposits have been growing in response to our relationship-driven deposit strategy. This is helping us to maintain a strong liquidity position," said Mr. Seibly. "As the Pacific Northwest’s largest community bank, Sterling is committed to ensuring that it has the financial strength and resources to serve our customers over the long term."

The Consent Agreement will remain in effect until modified or terminated by the FDIC and the WDFI.

Sterling’s stock today traded at $1.29. Its 52-week high was $12.77.

 

Among other things, under the terms of the Consent Agreement, the Bank has agreed to:

 

Have and retain qualified management, and notify the FDIC and the WDFI of any changes in Sterling Savings Bank's Board of Directors or senior executive officers at least 30 days before the change is intended to be effective.

 

Sterling Savings Bank's Board of Directors shall assure its on-going participation in Sterling Savings Bank's affairs, including full responsibility for approving Sterling Savings Bank's policies and objectives, and supervising Sterling Savings Bank's activities.

 

By December 15, 2009, Sterling Savings Bank shall increase Sterling Savings Bank's Tier 1 capital by at least $300 million and thereafter maintain a Tier 1 leverage ratio of not less than 10 percent.

 

Within 60 days of the Consent Agreement, Sterling Savings Bank shall present to the FDIC and the WDFI a written capital plan to meet and maintain the capital requirements of the Consent Agreement, which shall include a contingency plan in the event Sterling Savings Bank fails to comply with the capital requirements of the Consent Agreement, fails to submit a capital plan acceptable to the FDIC and WDFI or fails to implement or comply with the capital plan.

 

Not pay cash dividends without the prior written consent of the FDIC and the WDFI;

Within 60 days of the Consent Agreement, review, and revise if necessary, the appropriateness of Sterling Savings Bank's allowance for loan and lease losses and its a comprehensive policy for determining the appropriate level of the allowance for loan and lease losses.

 

Remedy any deficiency in the allowance for loan and lease losses in the calendar quarter and thereafter maintain an adequate allowance for loan and lease losses at all time.

 

Within 60 days of the Consent Agreement, develop a written plan to systematically reduce the number of nonperforming assets and assets listed on Sterling Savings Bank's watchlist to an acceptable level.

 

Within 60 days of the Consent Agreement, develop a plan to systematically reduce the number of commercial real estate and acquisition, land development and construction loans.

 

Within 60 days of the Consent Agreement, develop a written plan prohibiting extensions of additional credit to borrowers with existing credits classified as "Loss," "Doubtful' or "Substandard" except in limited circumstances.

 

Within 120 days of the Consent Agreement, develop a written three-year strategic plan to improve Sterling Savings Bank's profitability and risk profile.

 

Within 60 days of the Consent Agreement, develop, or revise and implement, a written liquidity and funds management policy that addresses liquidity needs and contingency funding and reduces reliance on non-core funding sources.

 

Comply with the interest rate limitations on solicitation and acceptance of brokered deposits under the FDIC's rules and regulations and submit to the FDIC and the WDFI within 60 days of the Consent Agreement, a written plan to eliminate its reliance on brokered deposits.

 Within 35 days of the end of each quarter after the Consent Agreement, provide quarterly written progress reports to the FDIC and the WDFI.