Mar. 18, 2010 (Business Wire) -- Fitch Ratings has downgraded Sterling Financial Corporation's (STSA) long-term Issuer Default Rating (IDR) to 'C' from 'CCC' and Sterling Savings Bank's long-term and short-term IDRs to 'C' and 'C', respectively. A complete list of rating actions follows at the end of this release.
Today's downgrade reflects Fitch's view that STSA's ability to raise capital will be difficult under many of the conditions set forth by the U.S. Treasury under its conditional approval for the conversion of preferred stock, issued under its Capital Purchase Program (CPP) in late 2008, to common equity. In order to successfully consummate the conversion of the preferred stock issued under CPP, the company must obtain consent for the repurchase of its trust preferred securities from a substantial portion of holders (at a substantial discount to par). Additionally, STSA must raise an additional $650 million of common equity. If the transactions were successfully consummated, Fitch anticipates that STSA's long-term IDR would be downgraded to restricted default (RD), to reflect that the transactions are viewed as a coercive exchange by the holders of the trust preferred securities in accordance with Fitch's criteria for coercive debt exchanges. The company noted it has entered into a non-binding letter of intent to provide additional capital from a private equity firm.
Separately, in October 2009, Sterling Savings Bank entered into an order to cease and desist with the Federal Deposit Insurance Corporation (FDIC). In this agreement, the company was required to raise an additional $300 million of Tier 1 capital and achieve and maintain a Tier 1 leverage ratio not less than 10% by Dec. 15, 2009. The additional capital needed to achieve this requirement has yet to come to fruition. Fitch estimates that at Dec. 31, 2009, the company would need over $600 million of Tier 1 capital to meet the FDIC's minimum leverage capital ratio outlined in the October 2009 cease and desist. This estimate does not consider any further losses that may occur in 2010.
STSA has been under tremendous pressure from a severe escalation of nonperforming loans, largely emanating from its construction loan book. At Dec. 31, 2009, the ratio of nonperforming assets (NPAs) to loans and other real estate owned climbed to 12.7% from 6.7% at Dec. 31, 2008. Net charge-offs totaled $555.7 million in 2009, a 151% increase over 2008. This has placed extreme pressure on capital. At year-end 2009, the ratio of tangible common equity to tangible assets was 0.27%. At Sterling Savings Bank, leverage, tier 1 and total capital ratios at YE09 were 4.2%, 5.9% and 7.3%, each falling significantly in 2009. Sterling Savings Bank is no longer considered 'well capitalized' under regulatory standards.
STSA is a $10.8 billion financial institution headquartered in Spokane, Washington with a footprint primarily in the Pacific Northwest of the U.S.
Fitch has downgraded the following ratings:
Sterling Financial Corporation
--Long-term IDR to 'C' from 'CCC'.
Fitch has downgraded and removed the following ratings from Rating Watch Negative:
Sterling Savings Bank
--Long-term IDR to 'C' from 'B';
--Short-term IDR to 'C' from 'B';
--Long-term Deposits to 'CC/RR3' from 'B+/RR3';
--Short-term Deposits to 'C' from 'B';
--Individual Rating to 'E' from 'D/E'.
Fitch has affirmed the following ratings:
Sterling Financial Corporation:
--Short-term IDR at 'C';
--Individual at 'E';
--Support at '5';
--Support Floor at 'NF';
--Preferred Stock at 'C/RR6'.
Sterling Savings Bank
--Support at '5';
--Support Floor at 'NF'.
These rating actions reflect the application of Fitch's current criteria which is available on Fitch's web site at 'www.fitchratings.com' and specifically include:
--'Global Financial Institutions Rating Criteria' (Dec. 29, 2009);
--'Rating Hybrid Securities' (Dec. 29, 2009);
--'Equity Credit for Hybrid & Other Capital Securities' (Dec. 29, 2009);
--'Bank Holding Companies' (Dec. 30, 2009);
--'Coercive Debt Exchange Criteria' (March 3, 2009).
Additional information is available at 'www.fitchratings.com'.
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