Writings and observations

Northwest bailout bucks

Sterling Bank

Sterling Bank

Wondering where exactly that mass of financial bailout money is going? The online journalists at ProPublica have some answers, and Northwesterners may be surprised, maybe troubled, by some of them.

Their research finds that as of midday today, $242.02 billion has been designated to 129 financial institutions around the country, to buy senior preferred shares of the various companies. Eight of them are based in the Northwest, six in Washington state, one each in Oregon and Idaho. They are (in order of size): Sterling Financial Corp in Spokane (WA), $303 million; Umpqua in Portland (OR), $214.2 million; Washington Federal in Seattle (WA), $200 million; Banner Corp in Walla Walla (WA), $124 million; Columbia Banking System in Tacoma (WA), $76.9 million; Cascade Financial Corp in Everett (WA), $39 million; Intermountain Community Bancorp in Sandpoint (ID), $27 million; Heritage Financial in Olympia (WA), $24 million.

Unlike the federal bank takeovers, this is a voluntary program, and banks (or banking companies) apply to participate – to sell shares of stock.

Another that should be of regional interest is Wells Fargo – one of the top banking operations in the Northwest – in San Francisco, getting $25 billion. It is in fact one of the biggest dollar recipients, tied for third place overall; first and second go to Citigroup and AIG, respectively. Wells seems on its face a puzzler, since it was praised (and rightly) for avoiding much of the bad-mortgage financial garbage that sank so many others. But Wells is buying Wachovia Corporation, which did make a mass of bad loans, so at least some of that funding is understandable.

But what of the others? Some curious questions start to arise, including the question of how many of these federal stock buys are really needed. At least one Northwest bank CEO says explicitly, in a press release, that his bank didn’t need it at all.

The money is going to purchase certain types of stock, and the intent seems to be that the infusion of money will boost the companies’ risk-based capital ratio – that is, the amount of solid assets compared to the money at risk (as in certain types of loans). The regulatory standard number for a reasonably well-positioned bank is 10%; if you’re a bank, you don’t want to fall below that. Evidently, from the records we’ve reviewed, the Northwest banks generally have been able to maintain themselves above that mark.

Here’s some of what we know about some of the Northwest financial operations – but please, don’t stop till you get to the end, and even skip to there if need be:

bullet Sterling Bank, Spokane, $303 million. A bit of a surprise, this bank that does much of its business in small and rural locations around the Northwest. (Our small town, population about 1,800, has two small banks, of which Sterling is one.) From the press release on this: “The shares are callable by Sterling at par after three years and may be replaced if Sterling were to choose to repurchase them with newly raised equity capital at any time. In addition to the preferred shares, the U.S. Treasury will receive 10-year warrants entitling the Treasury to purchase shares of Sterling common stock with an approximate aggregate value equal to $45 million or 15% of the senior preferred investment.”

The usefulness of this being? “The investment is anticipated to increase Sterling’s total risk-based capital ratio to 13.8%, on a pro forma basis, from 11.0% at September 30, 2008. The fortification of Sterling’s capital position through attractively priced capital from the U.S. Treasury enhances Sterling’s financial flexibility to make additional loans to the businesses and consumers in the communities in which we serve.” In other words, the money being paid for the stock is supposed to be entered into Sterling’s books so as to reduce the overall risk of making loans.

bullet Umpqua Bank, Portland (OR), $214.2 million. Umqua has a very good reputation around the region too, particularly as an employer (it has placed first in a number of regional surveys) and for community involvement as well. Nor had it seemed to be at particular risk. Its press release on participating in the federal capital program said that “Umpqua’s total risk-based capital ratio of 11.2% as of September 30, 2008 is already well above the regulatory requirements of 10.0% for a ‘well capitalized’ institution. With this new capital, Umpqua’s total risk-based capital ratio would increase to approximately 14.0%.”

Still. When “Umpqua plans to issue $214 million in senior preferred shares, with warrants to purchase approximately $32 million in common stock, to the Treasury,” you have to ask: Why, if it doesn’t need to? Wouldn’t the issuance of the new stock tend to weaken the existing stock? And wouldn’t the federal infusion amount to a one-time assist that might have to be repeated later? Of course, we might be missing something here . . .

bullet Washington Federal, Seattle (WA), $200 million. A savings and loan rather than a bank, Washington Federal has also had a fairly solid reputation, but they’re in this too for a couple hundred mil. From its November 14 press release: “it has successfully completed the sale to the U.S. Department of the Treasury of 200,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and a warrant to purchase 1,707,456 shares of the Company’s common stock for an aggregate purchase price of $200 million in cash. . . . The preferred securities pay a cumulative dividend of 5% per annum for the first five years and 9% per annum thereafter. Redemption is precluded in the first three years, except with the proceeds of a “qualified equity offering”. After three years, the preferred securities can be redeemed at their liquidation preference, plus all accrued and unpaid dividends. The preferred securities are generally non-voting. The warrant has a ten year term and an exercise price of $17.57 per share. If the Company receives aggregate gross cash proceeds of not less than $200 million from qualified equity offerings on or prior to December 31, 2009, the number of shares of common stock issuable pursuant to Treasury’s exercise of the warrant will be reduced by one half of the original number of shares underlying the warrant. Treasury has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrant. If the warrant is exercised in full, Washington Federal will receive proceeds totaling $30 million.”

One investor researcher had this to say: “Washington Federal’s diluted operating earnings for 4Q08 (ended September 30), came in at $0.19 per share, substantially short of estimates. The miss stemmed from a huge increase in provision for loan losses in response to a deteriorating housing market, though the expansion in the interest margin was impressive, owing to WFSL’s liability sensitivity.”

bullet Banner Corp, Walla Walla (WA), $124 million. Banner has been expanding a lot in the last few years, but it appears to have been caught up in the mortgage troubles: “The company reported a loss of $1 million in the third quarter of 2008, which Banner’s CEO blamed largely on losses on investments in Fannie Mae and Freddie Mac.”

From the Banner release on the federal infusion: “As a participant, Banner plans to issue $124 million in senior preferred stock, with related warrants to purchase up to $18.6 million in common stock, to the U.S. Treasury. . . . At September 30, 2008, Banner Corporation, Banner Bank and Islanders Bank were each ‘well-capitalized’ under all regulatory guidelines. At that date, Banner Corporation’s Tier 1 Leverage Capital Ratio was 8.86% and its Total Risk Based Capital Ratio was 11.00%. The addition of new capital through the Treasury program will increase Banner Corporation’s Tier 1 Leverage Capital Ratio to approximately 11.25% and Total Risk Based Capital Ratio to approximately 13.90%.” Again, then, wherein the necessity for issuing the new stock?

bullet Columbia Banking System, Tacoma (WA), $76.9 million. The federal purchase involves 76,898 shares of Series A preferred stock and “a warrant to purchase 796,046 shares of Columbia common stock at an initial exercise price of $14.49 per share; the warrant will expire in 10 years. Columbia’s total risk-based capital ratio of 11.24% at September 30, 2008 is well above regulatory requirements for a well-capitalized financial institution. The addition of the new capital will raise Columbia’s capital ratio to over 14%.”

bullet Cascade Financial Corp, Everett (WA), $39 million. The parent firm of Cascade Bank, it tells a similar story: “Cascade’s total risk-based capital ratio of 10.40% as of September 30, 2008, which is above the regulatory requirements of 10.0% for well-capitalized banks, would increase to approximately 13.40% with the inclusion of this new capital.”

bullet Intermountain Community Bancorp, Sandpoint (ID), $27 million. This is the holding company for Panhandle State Bank, which though smallish is the largest state-chartered in the Idaho. In September, it reported that “it does not hold any common or preferred equity securities of the Federal National Mortgage Association (FNMA or “Fannie Mae”) or the Federal Home Loan Mortgage Corporation (FHMLC or “Freddie Mac”). As a result, it has no exposure to these securities. Many financial institutions have announced anticipated charges to earnings to reflect the other-than-temporary impairment of
investments in these securities.” Nonetheless, it’s opting in for $27 million.

bullet Heritage Financial, Olympia (WA), $24 million. It has sold “24,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, with a related Warrant to purchase 276,074 shares of the Company’s common stock.”

Of considerable interest, there’s this, from CEO Brian Vance: “We are fortunate in that we had the opportunity to consider this capital injection from a position of strength. We did not need nor require this capital [emphasis added]. The primary reasons we felt this was a good strategic decision were to: Increase our capacity to lend, Improve our ability to proactively work with our borrowers in difficult times, Enhance our ability to support economic activity in the local communities we serve, and Provide our depositors with the security of more capital and liquidity even though both Heritage Bank and Central Valley Bank are already designated by our regulators as being ‘well-capitalized.’ ”

Hmm. Think on that a moment. “We did not need nor require this capital.” Here’s the CEO of the bank saying the money isn’t needed – but since it’s being proferred and it could make financial life a little smoother, well, okay. Fine. But what are the taxpayers getting out of it? And assuming he’s telling the truth (we have no reason to believe otherwise), there’s this: How many other banks are similarly situated? How many of the Northwest 8?

These banks generally maintain that they’re in solid shape. If they are, then why are taxpayers spending hundreds of billions of dollars to beef up their books?

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One Comment

  1. mark said:

    great post and one I hope is picked up and attributed in other media outlets.

    December 2, 2008

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