October 16, 2009 – 6:39 pm

Sterling financial Corp was rocked with a cease-and-desist order from FDIC, resulting in a shakeout of upper management.

The bank must now raise additional capital and shore up financial buffers against the rising tide of nonperforming loans.

Sterling Financial Corp., the parent company of Washington’s second largest bank, announced a management shakeup early Thursday morning on the heels of receiving a cease-and-desist order from state and federal regulators.

Sterling’s stock dropped more than 12 percent to $1.45 in early morning trading on the news. The Spokane-based bank ousted its chairman and chief executive Harold Gilkey, 70, who co-founded Sterling in 1983. It also ousted Heidi Stanley, the chief executive of Sterling Savings Bank.

Greg Seibly, formerly president of the bank, was named chief executive of the holding company in Gilkey’s place. Two other executives, Donn Costa and Ezra Eckhardt, were also given leadership roles at the bank.

In an interview Thursday following the announcement, Eckhardt, newly promoted to acting president of the bank, said he and other executives were surprised by the board of directors’ decision to shake up management.

“We definitely did not know about it in advance,” he said.

The bank (NASDAQ: STSA) is now operating under tighter regulatory oversight due to the cease-and-desist order and has until Dec. 15 to raise more capital to buffer against a pileup of bad commercial real estate loans. Sterling is the 14th bank statewide that is operating under a cease-and-desist order, an enforcement action that also requires it to come up with a turnaround plan to bolster the institution’s financial position.

Sterling Bank, with 170 branches in four states, has seen its bad loans increase steadily in the past couple of years. By the second quarter of this year, nonperforming assets — one measure of bad loans — had jumped to about $787 million, compared with about $300 million during the same quarter in 2008. Sterling posted a second quarter loss of $29.5 million.

The bank, with a commercial loan portfolio of more than $2.5 billion, is now only making commercial real estate loans to a “select” group of people, said Seibly in an interview following the announcement.

In an effort to raise capital, the bank is “looking at a range of options,” said Seibly, although he declined to specify whether it’s looking at private equity. The bank filed a shelf registration statement in July with the Securities and Exchange Commission, giving it the ability to raise up to $500 million in the next three years.

It’s also engaged in what Seibly called “passive reductions:” reducing its employee count by about 8 percent in the last year through attrition. The bank employs about 2,100 people, in addition to other employees at the holding company and at Golf Savings Bank, a subsidiary based in Lynnwood.

More than 15 percent of the bank’s employees are working on taking care of its bad loans, according to executives.

Sterling has also seen its total assets decline to $12.4 billion from $12.7 billion, a decrease that has caused the bank to fall from its position as the largest financial institution headquartered in Washington. Washington Federal Inc. (NASDAQ: WSFL) of Seattle now holds that title.


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