Just three months after saying its problems had begun to level off, Sterling Financial Corp. in Spokane, Wash., unexpectedly ousted its longtime leader and was ordered by regulators to boost capital levels.

The $12.4 billion-asset company said Wednesday night that Harold B. Gilkey, its 70-year-old co-founder, chairman, president and chief executive, and Heidi B. Stanley, the chairman and CEO of its Sterling Savings Bank, had both left. The next morning, the company revealed the order from the Federal Deposit Insurance Corp. and Washington Department of Financial Institutions, which also directed the bank unit to "have and retain qualified management."

The double-whammy stunned observers who were under the impression that the company had begun to turn a corner.

"My first thought was, 'Oh, my God, it is worse than I thought,'" said Theodore Kovaleff, an analyst at Horowitz & Associates Inc., who owns shares in Sterling. "I had believed them when they said things were leveling off, but clearly the answer is 'no' now."

Attempts to reach Gilkey and Stanley for comment were unsuccessful Thursday.

J. Gregory Seibly, the bank unit's president, succeeded Gilkey as the company's acting president and CEO. William L. Eisenhart, an outside director, is taking Gilkey's role as chairman. Ezra A. Eckhardt was promoted to chief operating officer of the company, from executive vice president and chief operating officer of the bank.

In an interview, Seibly and Eckhardt said the issues regulators raised in their order are matters the company has been working on for two years as it repositioned itself away from a growth model to a relationship-driven one. This includes focusing on deposit gathering and realigning the portfolio with more business banking.

Seibly said that 15% of its 2,100 employees are somehow involved in resolving problem credits, including retraining lenders to deal with customers and beefing up the special assets group.

However, the executives acknowledged that problems persist despite the efforts. "The reality is that we have a portfolio of loans that is weighted toward commercial real estate and construction development," Eckhardt said. "The majority of these loans were generated between 2002 and 2007 during the heat of the marketplace, and it is going to take a lot of time and management and money to work through these issues."

The men both declined to comment on the departure of the former executives, saying it was a board discussion. Seibly said, though, that separation of control is another tenet of the company's restructuring. "We want to make sure that we have the proper governance and management in place," he said. "These changes go toward the issue of us being able to fix our ineffectiveness."

Eckhardt said that, though the company has spent nine months preserving capital through a series of internal steps, it will ultimately have to raise fresh capital in order to comply with the order. "We understand that we have to go out to the marketplace," he said.

Robert Kafafian, the president and CEO of Kafafian Group Inc., a community bank consulting firm, said Gilkey's ouster might be a harbinger of turmoil for other tenured CEOs at struggling companies.

"I think there are a number of banks that have longtime CEOs that have run their companies very well but have struggled to create a management team good enough to weather a storm," Kafafian said, adding that he is not familiar with the particulars of Gilkey's departure. "You just have these guys that spent their lives building something and are now just watching it crumble around them."

In their Oct. 9 order, the regulators gave the company until Dec. 15 to add $300 million of Tier 1 capital. After that, the bank must maintain a leverage ratio of 10%. At June 30, this ratio was 8.08%.

In July, when it reported second-quarter results, Sterling said its problems in residential construction were peaking. It said then it was having success in a recently launched program that gave homebuyers a low interest rate for buying in developments Sterling had financed. However, the company also said its problems were seeping into other areas, including commercial real estate and multifamily development.

Also in July, Sterling revised a previous shelf registration with the Securities and Exchange Commission, increasing the amount of capital it could raise to $500 million from $100 million.

The following month, the company deferred dividend payments on its $303 million investment from the Treasury Department's Troubled Asset Relief Program and its $245 million of trust-preferred securities, two moves that it said would save $22.3 million annually.

But even then Matthew T. Clark, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., pegged the company's capital needs at $400 million.

Gilkey co-founded Sterling in 1983. While he had remained at the helm for the last several years, analysts said he had taken a particularly active role in directing the company in the last year, following a loosening of the reins earlier this decade.

Analysts said that though the order was directed at the bank, the timing suggested regulators pushed for Gilkey's departure.

"If the person is responsible for the policy that led to the mess, then clearly that is where the buck stops," Kovaleff said. "Those are the guys that ran the joint, and what they did is the reason for the C&D and the massive erosion of shareholder value."

Still, Kovaleff said the replacement of Gilkey came as a shock.

"He put so much personal capital into the company, he invested his entire life into it and then this happens," Kovaleff said. "I am really amazed at how everything has soured there."

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