New capital means bank can now focus on its core business

NORTH BAY -- Sterling Financial Corp., parent company of Sonoma Bank in Santa Rosa and Sterling Savings Bank, last week completed a transaction raising $730 million, bringing the bank to the required capital ratios set by regulators and leading the institution on the road to recovery.

President and Chief Executive Officer Greg Seibly said, “The successful completion of this capital raise helps position Sterling as a premier community banking franchise in the Pacific Northwest. Our investors have shown confidence in Sterling’s value proposition and our ability to execute our strategic plan to create a strong, relationship-oriented bank. On behalf of all Sterling’s employees, we extend heartfelt thanks to our customers and our communities for their loyalty and support.”

It was last October that Sterling Financial announced that Sterling Savings Bank had entered into agreements with the Federal Deposit Insurance Corp. requiring it to strengthen its financial position.

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

Thomas H. Lee Partners and Warburg Pincus Private Equity, which had previously agreed to invest a total of $278 million, amended their previous agreements to increase their investments.

Under the terms of the amendments, both companies would purchase 68,366,000 shares of common stock and 1,709,150 shares of Series B preferred stock, for an aggregate purchase price of approximately $171 million each. They both also would receive warrants.

Upon closing, the two companies will each own an aggregate of 22.6 percent of Sterling’s pro forma common stock on an as-converted basis and after giving effect to the exercise of warrants.

Sterling has also entered into agreements with approximately 30 accredited investors for private placement of 155,268,000 shares of common stock and 3,881,700 shares of Series D preferred stock in exchange for aggregate gross proceeds of approximately $388 million in cash.

In addition, as previously announced, the U.S. Treasury will convert its $303 million investment of preferred stock in Sterling into common shares.

Fred Ptucha, a financial adviser with Financial West Group in Santa Rosa, noted that while Sterling did find a way out of the situation it was in, the two lead investors will collectively own 45 percent of the bank and the other 30 will own 44 percent. He pointed out that coupled with the amount the Treasury owns, all the individual bank investors will own is in the 2 percent range.

“It is the most dilutive deal I have seen in my 39-year career,” he said. “Sterling is going to survive, and this is good. But to see the stock so unbelievably diluted is pretty devastating.

 “But they did get something, which is not true of the banks that get shutdown by the FDIC,” he said.

[caption id="attachment_24433" align="alignright" width="235" caption="Ezra Eckhardt"][/caption]

Ezra Eckhardt, president and chief operating officer of Sterling Savings Bank, was brought into his position at the time of the cease-and-desist order.

He said that while they are excited about getting the capital, they know there will be higher levels of non-performing loans and assets to deal with. But with larger amounts set aside for loan losses, he feels the bank can shift its focus away from its problems and onto the customers.

“We can focus on the value proposition and facilitate trust with our customers,” he said. “We can provide them with the sources of funding to finance their dreams.”

He said one of the things he thought helped Sterling get to where it is, unlike other banks under a cease-and-desist, is its size.

“We are a $10 billion institution,” he said. “At that level, we have the depth and breadth to plan for the future, which is what we have done.