With four of the Pacific Northwest's larger community players warning that they may not survive, the region is solidifying its reputation as a hub for problem banks and failures.
In the last week Frontier Financial Corp. in Everett, Wash., Sterling Financial Corp. in Spokane, and Cascade Bancorp in Bend, Ore., have disclosed in press releases and filings with the Securities and Exchange Commission that there is doubt about their ability to remain viable. City Bank in Lynnwood, Wash., warned that its bank unit could fail in the next 30 days.
Experts said that the disclosures are further proof of an increasingly troubled region that has produced 11 bank failures since the start of last year and is said to have a similar number of troubled banks in the pipeline.
"A lot of the banks in this region got over their skis with outsized concentrations of residential construction and inadequate capital," said Timothy Coffey, an analyst at FIG Partners LLC. They "are certainly not the only strugglers. There are at least a dozen others."
Though some of the smaller strugglers may find investors despite being less than well capitalized, Richard Levenson, the president of Western Financial Corp., an investment banking firm in San Diego, said it becomes more difficult when banks are larger than $1 billion.
"The big concern is nobody knows how deep the hole is and nobody wants to stick their neck out there to see," he said.
Of the three larger companies, the $3.6 billion-asset Frontier Financial has the lowest capital ratios and the fewest apparent options. The company announced late Tuesday that a January exam by the Federal Deposit Insurance Corp. drove it to build its allowance for loan losses by $30 million at Dec. 31. The change, along with a loss on the sale of securities, doubled the quarterly loss it reported at Dec. 31, to $70 million, leaving Frontier's bank unit critically undercapitalized, with a leverage ratio of 1.65%.
With that little capital, Frontier said in the release, the FDIC must by law fail the bank within 90 days, unless it finds more capital or regulators make an exception.
Patrick M. Fahey, Frontier's chairman and chief executive, said in an interview Wednesday that the company plans to appeal the FDIC's call for a bigger allowance, but that it has to revise its results to accurately reflect what the regulator wants. Fahey added that although having a "going concern" warning will likely deter some interested groups from investing, it could bring attention from those that would not qualify to buy it from the FDIC should it fail.
"Some investors could see our precarious position as an incentive to stop talking, stop studying and start talking turkey," Fahey said.
In August, the blank-check company SP Acquisition Holdings Inc. tried to buy Frontier, but the deal was called off by October because it could not get regulatory approval in time.
Sterling Financial said Tuesday that its bank was undercapitalized but that it has a nonbinding letter of intent from a private-equity investor. Also, the $10.4 billion-asset company said Wednesday that it asked the Treasury Department to convert the $303 million of preferred stock into common equity and has received conditional support to do so.
To convert the Treasury's investment, Sterling must obtain the consent to repurchase trust-preferred securities from a substantial portion of the securities holders and must raise $650 million of additional capital through new common equity.
Sterling missed its Dec. 15 deadline to add at least $300 million in capital under a regulatory order, the company's annual filing showed.
The $2.2 billion-asset Cascade has commitments from its largest investor to put $65 million into the company if it can raise an additional $85 million of capital from other investors.
Still, Patricia L. Moss, Cascade's president and CEO, said that, despite the warnings of its possible future, she feels Cascade will survive even if the company does not raise capital, because it has worked through and marked down its most problematic assets and real estate values have stabilized.
"Our expectation is that we think the company has sufficient capital and liquidity to continue in the normal course of business without raising capital," Moss said Wednesday.
Cascade's subsidiary bank was required to reach a 10% leverage ratio under a regulatory order. At Dec. 31 the bank was considered "under capitalized" by regulatory standards. The leverage ratio was 4.69%, the Tier 1 risk-based ratio was 6.20%, and a total risk-based ratio of 7.46%. According to data from Foresight Analytics, Cascade needs to add $119 million to meet the regulatory order.
The $1.2 billion-asset City Bank said Monday that had it received a 30-day corrective action order to accept an offer to sell itself or raise enough capital to be adequately capitalized. City Bank's leverage ratio was 1.8%, the Tier 1 risk-based was 2.32%, and the total risk-based capital was 3.57%. The company needed at least $41 million to be adequately capitalized. On Monday the company revised its 2009 loss, increasing it by $14.89 million, to $119.5 million, after the FDIC found a need for more provisioning.