Latest whammy for state's banks: commercial loans

The local housing market may have bottomed out and begun a slight recovery, but the bad news isn't nearly over for Washington's beleaguered community banks.

Banks that withstood the collapse of the housing bubble now have to deal with billions of dollars in troubled commercial-real-estate loans. Along with busted loans to residential developers, commercial mortgages and construction loans are weighing down several of the state's largest banks.

The latest sign of stress comes from Sterling Savings Bank of Spokane, which disclosed Thursday that its weakened financial condition prompted federal and state regulators to demand a slew of changes.

Sterling, the second-largest Washington-based bank with $11.8 billion in assets, must shrink its portfolio of problem loans and raise at least $300 million in new capital — a tall order for a bank the stock market values at less than $68 million.

Sterling and many other regional banks will report quarterly earnings the next two weeks, giving a better picture of which banks have been hit hardest by the slide in commercial real estate.

But it's already clear that loans to that sector have deteriorated rapidly in the Puget Sound region.

The Seattle-Bellevue-Everett metro area had the nation's highest delinquency rate for construction and land loans in the second quarter: 32.7 percent, four times the rate of a year earlier, according to Foresight Analytics, an Oakland, Calif.-based research firm. Tacoma, at 28.9 percent delinquent, was fourth highest.

"You had a full construction pipeline that hit a very much weakened economy," said Matthew Anderson, a partner at Foresight.

Along with the regulatory agreement announced Thursday, Sterling's parent company, Sterling Financial, said it has replaced its co-founder, chairman and CEO, Harold Gilkey, as well as the head of the savings bank, Heidi Stanley.

Though it's based on the other side of the state, 175-branch Sterling Financial does much of its lending in the Puget Sound region.

Besides Sterling Savings, the company also owns Mountlake Terrace-based Golf Savings Bank. Golf has not been placed under any new regulatory scrutiny.

Nearly two-thirds of Sterling's loan portfolio is in two categories under particular stress: commercial real estate, including multifamily buildings, offices and retail; and construction and land development.

You don't have to look far to see problems with that portfolio. At the corner of Terry Avenue and Jefferson Street in Seattle, developer Michael Mastro had planned to build a 288-unit apartment tower, Harbor Vista.

But Mastro was forced into bankruptcy this summer; among his $587 million in debts is $7.6 million owed to Sterling Savings for the Harbor Vista — a tract whose total value Mastro in September pegged at $5 million.

Community and regional banks generally are more exposed to construction loans and commercial mortgages than big Wall Street banks, which have many more lines of business and operate nationally and overseas.

Overall, 19 Washington-based banks are known to be operating under close regulatory oversight.

Foresight has 23 Washington banks on its "watch list" — more than all but five other states — and says half of them could fail by mid-2010.

J. Gregory Seibly, newly promoted to acting CEO of Sterling Financial pending regulators' approval, said the company has been working for nearly two years to get its financial house in order.

Real-estate loans on Sterling Savings' books, for instance, have fallen from $7.4 billion in June 2008 to $6.9 billion this past June, though they still make up nearly 60 percent of the bank's assets.

Last December, the U.S. Treasury invested $303 million in Sterling Financial under its Troubled Asset Relief Program; the money was split between Sterling Savings and Golf Savings.

Seibly acknowledged that raising a minimum of $300 million in core capital by Dec. 15, as the Federal Deposit Insurance Corp. and the Washington Department of Financial Institutions have ordered, will be a challenge.

"It is a large number," he said. "But our investment bankers are reviewing a range of options, and it's conceivable we could make a decision on a different number."

In July, Sterling filed with the Securities and Exchange Commission to raise as much as $500 million over the next three years, and last month shareholders voted to raise the cap on common shares outstanding from 100 million to 750 million.

But Sterling stock isn't exactly a hot commodity: The shares lost 37 cents Thursday to close at $1.29, near a 12-month low. At that price, the company would have to sell almost 233 million new shares (assuming such a large sale didn't drive the price down even further), drastically shrinking existing investors' stakes.

Everett-based Frontier Financial, facing a similar predicament, opted in July to sell itself to a New York hedge fund that planned to pump in more than $400 million. But that plan unraveled last week, leaving Frontier to search for a new way forward.

Some of the stronger local banks have had little trouble raising money recently. Seattle's Washington Federal, for instance, sold $350 million of new stock last month; Columbia Banking System of Tacoma raised almost $120 million in August.

But that window for community banks may have closed, Anderson said, as concerns grow over the impact of delinquent commercial and construction loans.

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com