Sterling's Struggles

It’s been about two months since Sterling Financial Corp., the parent/holding company of Sterling Savings Bank (which has a branch here in Pt. Roberts) received its ‘Cease and Desist’ order from the FDIC.  Sterling’s most important job during this period was to increase its capital by about $300 million.  In order to do this, the corporation could sell stock, sell bonds, or get a line of credit from some other financial outfit.  I guess they could sell assets, as well, including real estate they had foreclosed.  And there might be other things I don’t know about; I’m not an expert in this field—I just follow the news.

Selling stock isn’t very useful because Sterling stock sank on the FDIC order’s news.  The stock price has  bounced around over the last 8 weeks, but mostly it’s bounced down, and is now in the high 60 cent area.  Sterling did set up a web page where they were arranging to sell their foreclosed properties, but that’s not likely to be something that happens fast given the housing market.  Does private equity wish to rescue Sterling?  Would you think it was a good investment to buy Sterling bonds at this point?  No, nor would I. 

Poor Sterling!  It’s even been removed from the NASDAQ Mid-Cap listing because its stock fell below $1.00.  This delisting is a slow process, however, and what this amounts to is NASDAQ saying that they will really, really do it if Sterling's stock stays below a dollar/share over the next six months.  In addition, Sterling still owes interest on the TARP funds that it got from the U.S. Treasury, including the last payment that it missed.

Last week, there were stories in the financial press that Sterling was likely to miss its due date for that capital increase ordered by the FDIC.  That date would be this Tuesday.  Of course, the FDIC doesn’t have to do anything right away, and usually doesn’t.  There are many, many over 500 banks on the ‘Troubled Bank List,’ many more than are about to fail.  Banks that fail are usually on the Troubled Bank List, but it is possible to stay on that list for a long time, and it is even possible to get off that list by rectifying one’s financial problems.

From my vantage, Sterling looks like a pleasure boat surrounded by sharks, though.  This week, two law firms announced that they were looking for people to be members of a class action lawsuit against Sterling for federal securities law violations, relating to allegations that Sterling failed to accurately present its financial status last year.  These two (one, two) law firms are looking for people who bought Sterling stock from July '08 to January '09. 

A third law firm is looking for Sterling employees, whose retirement account funds were used to purchase Sterling stock during that period, as part of an investigation into whether Sterling failed to act prudentially under ERISA, the federal law that deals with retirement fund programs, and thus should be subject to another class action suit.

The company has traded out several of its highest officers.  But the sharks keep swimming closer. 

A few more banks fail almost every Friday.  And for almost all those banks, some other bank takes over the operation immediately.  On Friday, you have an account at Greenstreet Bank; on Saturday, that account is now held by Redstreet Bank, right in the same building it was on Friday.  The customers are safe; even the tellers and other day-to-day employees are usually safe.  It’s the shareholders, bondholders, and the executives who take the hit.  And in this case, it could also be the taxpayers, since there is a TARP investment at stake.  We live in interesting times, where it is possible to learn about things you never thought to learn about previously, including about your own little bank..