Banking Law

A year ago, Sterling Savings Bank of Spokane, Washington was in dire straights. According to a recent Bank Safety and Soundness Reporter article (paid subscription required), in October 2009, it was hit "with a harsh 11-page Cease and Desist order, which gave the bank about two months to raise $300 million in capital."

Regulators also demanded increased board oversight, a fully-funded ALLL, a decrease in nonperforming assets, a 3-year strategic plan and a plan to merge or sell if the capital raise couldn?t go through.

[...]

The situation became so dire that Sterling?s independent public accounting firm expressed ?substantial doubt? about the company?s ability to continue as a going concern.

Yet, by August of this year, the bank had raised $730 million in new capital and in September, the FDIC lifted the C&D. With so many other community banks in a similar situation failing to exit the death spiral, how did Sterling resurrect itself in less than twelve months?

According to Greg Sielby, the CEO of the bank and its holding company, the bank's board and senior management proved to be "good listeners." They "listened carefully to what the regulators from the state, the FDIC and the Federal Reserve all had to say.  'Understand the pressures on them. Do your best to establish a spirit of collaboration and cooperation. Had we not done that, I think our situation might have ended quite differently,' he notes." Sielby states that the bank held regular meetings or conference calls with all three regulators, keeping them apprised of the bank's progress. I assume that bank management also sought verbal and visual clues as to how their regulators were reacting to the bank's presentations. Head-nodding: "good." Eye-rolling: "bad."

I don't think any experienced bank advisor wouldn't emphasize the critical importance of reacting quickly to an enforcement action. Too often, boards and management facing these situations act as deer caught in the headlights. If they do, they'll go down just as certainly as do the deer.

Fast action on changing senior management also can be especially important for independent board members who might not be getting "the straight skinny" from the same senior management that guided the ship into the iceberg. It's not often that such management officials quickly offer to fall their swords, yet because time deadlines set in enforcement ordfers are usually quite short, every day wasted is a day closer to the edge of the cliff. This is why many board members insist on separate legal representation for the independent board members when the bad stuff hits the fan. Hard decisions may have to be made, and made quickly, that are in the best interests of the insitution but not in the best interests of current senior management.

Although not discussed in the article, I assume that Mr. Sielby, who joined the bank in 2007, came into the bank after the problem assets were already booked, or was in area of the bank that was not responsible for the bank's problems. He was elevated to the CEO's role after the C&D was issued. Therefore, he (and other senior management he brought in) must have possessed two important qualities: (1) regulatory credibility and (2) turnaround skills. Both new investors and regulators have to have confidence in the new management team or it will never get off the ground.

Some of the other salient points raised by Mr. Sielby:

• New management was "honest," "critical," and "transparent" in analyzing the assets and financial condition of the bank. With no vested intertest in covering their own backsides, they concentrated on trying to determine the "depth of the hole" the bank had dug itself into. Investors aren't going to dump in capital unless they know what their downside risk and that the management team in place is both honest as to the current financial condition and capable of working the bank out of the hole.
• Prioritize the problems. Sielby's team "identified four critical areas to focus on: liquidity, de-risking the balance sheet, raising capital and making sure that the regulators 'had a view that we would find a partner.' " In other words, "do first things first." Rearranging the deck chairs is  an endemic problem at many banks that ultimately sink.
• Be realistic, yet optimistic. You need to rally the troops and instill confidence in capital sources and regulators. Of course, honesty and competence are important in this respect, but never underestimate the importance of essential leadership qualities.
• Be "patient and persistent," even in the face of daunting challenges. The bank adopted a Churchill quote ("Never, Never Quit") as its moto, and it appears to have worked.

Good observations.

With so many sad endings to these stories (seven more last Friday bringing the 2010 total to 138), it's nice to read happy one.