Losses climb at City Bank, Frontier

Two of Washington's most distressed community banks disclosed Tuesday that their troubles were even deeper than first reported, while a third bank said it had a tentative plan to recapitalize itself.

City Bank of Lynnwood revised its 2009 loss upward to $119.5 million, or $7.58 a share, from the $104.6 million, or $6.64 a share, first reported, and said the Federal Deposit Insurance Corp. had given it until April 10 to either raise new capital or sell itself to another bank.

Also, Everett-based Frontier Financial, parent of Frontier Bank, said it lost $295.1 million in 2009, or $62.61 a share, versus the $258.8 million, or $54.91 a share, initially reported. Frontier Bank now is so short of capital that it is officially considered "critically undercapitalized."

Meanwhile, Sterling Financial of Spokane, parent of Sterling Savings Bank, said it is in "active negotiations" with private equity investors, creditors and regulators on a plan to pump more cash into the struggling institution.

As part of the deal, the U.S. Treasury, which invested $303 million in Sterling more than a year ago in the Troubled Asset Relief Program, has agreed in principle to exchange the preferred shares it received for common stock.

Tuesday's rapid-fire announcements underscore the wobbly state of Washington's banking industry. While most of the state's 90-odd banks and thrifts are at least reasonably healthy, more than two dozen are operating under some degree of enhanced regulatory oversight.

City Bank's new instructions from the FDIC are contained in a "corrective action directive," considered the most stringent level of regulatory oversight. Should a troubled bank fail to either recapitalize or find a buyer — and both have been extremely hard to do in the current environment — it is liable to be taken over by regulators.

Of the four Washington-based banks that have been closed so far this year, all had previously received corrective action directives.

The directive has prompted City Bank to ditch its strategy of building starter homes on repossessed building lots, rather than selling the empty lots at what it considers bargain-basement prices.

Now, CEO Martin Heimbigner said, the focus is on selling lots in bulk to outside investors for quick cash.

He said the bank is negotiating with several large national and regional homebuilders, who would as part of any deal buy big chunks of new City Bank stock.

"The regulators want capital and they want nonperforming assets off our books," Heimbigner said in an interview. "We believe the way to get the highest value is to have a completed home built on the lot, but we need to move those assets faster than we could do ourselves."

The bank sold 1,180 houses last year and has 180 closed or pending sales so far in the first quarter, Heimbigner said. It still has around 800 houses in inventory, which it will still try to sell.

Given City Bank's plans to shrink itself by repaying high-interest brokered deposits, Heimbigner said, it needs to raise at least $30 million in new capital to comply with the FDIC directive.

The bank's announcement came before the start of trading. Shares fell 24 cents Tuesday, or 16 percent, to $1.25.

Frontier Financial said its higher 2009 loss occurred mainly because the FDIC ordered Frontier Bank to put aside an additional $30 million to cover the expected future cost of bad loans.

The order was issued after Frontier's year-end financial report.

The FDIC also told the bank that its stockpile of foreclosed real estate was worth nearly $3.5 million less than initially reported. Frontier also took a $4.3 million loss on a securities sale.

All together, the revisions lowered Frontier Bank's core capital from $93.3 million to $59.8 million, making it "critically undercapitalized" under FDIC rules.

That designation raises the prospect that Frontier Bank could be taken over and either closed or forcibly sold.

Sterling Financial said it has received several nonbinding proposals from private equity firms to put more money into the company, and it has entered into a nonbinding letter of intent with one firm.

The Treasury's agreement to trade its preferred shares for common stock is conditioned on the rest of the recapitalization plan coming together, including the repurchase of other outstanding preferred securities and the raising of at least $650 million in new capital.

Last month, Sterling began offering to buy back its "trust preferred securities," with a face value of $238 million, for 20 cents on the dollar. The company wouldn't say how many, if any, of the holders of those securities have accepted the offer, which expires later this month.

Unlike preferred securities, which typically carry mandatory dividends unless redeemed, common stock doesn't have to pay shareholders anything and need never be repurchased.

Swapping the preferred for common would strengthen Sterling's balance sheet and plug a sizable cash drain, but it would make the Treasury's investment less secure.

However, the Treasury presumably would rather take the chance Sterling's plan will work, and that it eventually will recoup at least some of its TARP investment, rather than run the risk of the bank failing.

Both Frontier and Sterling issued their announcements after the close of regular trading.

In after-hours trading, Frontier shares fell as much as 24 cents to $4. Sterling gained as much as 6.5 cents to 83.5 cents.

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