Days after a tide of negative news buffeted Sterling Financial Corp., its new top executives said last week the Spokane bank-holding company has a recovery plan in place, has been working under it for a year, and is making headway.

Acting President and CEO Greg Seibly says that while the vigor with which banking regulators have taken enforcement actions against Sterling and other banks is surprising, the regulatory change is not unexpected. Those actions are consistent with a change in banking, which is moving away from highly leveraged banks and toward more well-capitalized institutions, he says.

"The standards were below what they will be going forward," Seibly says. For example, Sterling's Tier 1 capital ratio, or its core capital to risk-weighted assets, is 7 percent, or high enough for it to remain a well-capitalized institution under the customary standard. Yet, regulators now are requiring its Sterling Savings Bank subsidiary to have a Tier 1 capital ratio of 10 percent.

"That's a sea change," Seibly says.

Ezra Eckhardt, Sterling's acting chief operating officer, says that Brad Williamson, the Washington state Department of Financial Institutions' top banking regulator, said during a recent presentation in Spokane that 25 percent of the banks in Washington state will be under some kind of enforcement action when regulators complete a first round of scrutinizing banks. Sterling says Sterling Savings Bank, which agreed on Oct. 9 to be placed under a cease-and-desist order by the Federal Deposit Insurance Corp. and the state, was the 14th bank in Washington state to come under an enforcement order since March 3.

Seibly and Eckhardt say they weren't involved in discussions that led to the departure, announced Oct. 14, of Sterling co-founder Harold Gilkey, 70, who was chairman, president, and CEO of Sterling Financial, and Heidi Stanley, 53, chairwoman and CEO of Sterling Savings Bank.

"It came through discussions at the board level," says Eckhardt. He adds that nationwide, "a large number of institutions have changed out their leadership." Neither Gilkey nor Stanley could be reached for comment.

Because Sterling had accepted $303 million in capital from the U.S. government under the Troubled Asset Relief Program, neither Gilkey nor Stanley will receive severance payments provided under their employment agreements, Sterling says. Gilkey's employment agreement called for him to be paid $1.9 million if he were terminated without cause or $3.45 million if he were terminated after a change in control of the company. Stanley's employment agreement called for her to be paid $1.25 million or $1.02 million, respectively, under those two scenarios.

Under the regulations of TARP's Capital Purchase Plan, Eckhardt says, "We are prohibited from making any payment under golden parachutes."

Says Seibly, "There was no payment to them" of that nature.

Nor can an agreement be made to pay severance later, such as when TARP funds are repaid, Sterling Executive Vice President David Brukardt, says. Still, any other benefits that Gilkey and Stanley earned and vested prior to their departure are payable, "and Sterling will be paying these benefits in accordance with the terms of the benefit programs under which those benefits were earned," says Brukardt.

Seibly and Eckhardt say that Gilkey and Stanley were made aware of the board's decision to replace them the day before their departure was announced.

"That news was delivered by the board of directors to Harold and Heidi," by certain board representatives, says Eckhardt, 39, a West Point graduate who also has worked for Microsoft Corp. and joined Sterling in 2004.

"We were officially informed after that," says Seibly, 46, who joined Sterling in 2007 and is former president of U.S. Bank-California.

The regulators did not require the change in management, Seibly says. "That did not happen," or the cease-and-desist order would have read differently, he says.

In Sterling's announcement of management changes, it described William L. Eisenhart, an independent Seattle investment banking consultant and member of Sterling's board since 2004, as its new "non-executive chairman." Says Seibly, "That would represent a better practice in current corporate governance" than to select a chairman who's part of the company's day-to-day executive team.

Gilkey had been part of Sterling's executive team since he and Bill Zuppe founded the company here. Eisenhart is a former vice president of corporate finance at Goldman Sachs & Co., in New York City.

In an announcement on Oct. 15, Sterling said Sterling Savings had agreed with state and federal regulators to carry out a sweeping range of actions, including to "have and retain qualified management," and added that its board "shall assure its ongoing participation in Sterling Savings Bank's affairs, including full responsibility for approving policies and objectives, and supervising activities."

Sterling also said Sterling Savings had agreed to raise $300 million in equity capital by Dec. 15.

Gilkey had spelled out months earlier the steps Sterling already was taking in its recovery plan. Seibly, asked what has changed since then, says, "The supplemental capital piece probably was the linkage to some of the changes" in management.

Eckhardt says that while the Dec. 15 deadline for Sterling to raise the $300 million "is meaningful, there are a number of organizations that have demonstrated sufficient progress" toward raising capital that regulators have allowed such deadlines to come and go. Sterling needs to show that it's making progress, he says, and adds, "I don't lose any sleep about what transpires before Dec. 16. We have a lot of good options before the end of that time, and after that."

Sandler O'Neill + Partners LP, a New York investment adviser that arranges equity financing for financial institutions and is advising Sterling in its efforts to find the $300 million, already has presented Sterling's board with an array of "tangible options," Eckhardt says. Asked whether he could discuss those options, Eckhardt quips, "I can tell you if you give me $300 million." Seibly says he doesn't know whether the management change at Sterling occurred because Sandler O'Neill had told Sterling's board the step had to be taken in order to raise capital.

Sterling, the nation's 79th largest bank in terms of assets as of March 31, isn't ruling out the possibility that it could be acquired through a capital-raising effort, and if that occurred, the question could arise whether its corporate headquarters would be moved out of Spokane.

"We certainly would have no plans (to move), and I don't know what would drive that," says Brukardt. "It's not a conversation that we've had here."

He adds, "As a community bank, our roots are deep in the communities where we are, and they're deeper in Spokane than anywhere."

Asked whether Sterling will fail, Eckhardt says, "The short answer is 'no.'"

Of the nation's 8,000 banks, only about 120 will fail this year, he says. "That said, we're in the most difficult time that any of us will experience in our lives" economically, although Sterling has "a good, solid customer base," 175 branches, and "strong liquidity," he adds.

"I feel confident that Sterling has a path through this. We have the biggest rural (banking) franchise in the Pacific Northwest," and investors and regulators know the value of that, Seibly says. He adds, "The regulators do not want us to fail," customers have been supportive, and the bank has not had a run on its deposits despite the recent bad news.

Sterling announced on Oct. 22 a $463.7 million third-quarter net loss, and since a conference call with securities analysts the next day about that quarterly loss, "our (deposit) activity level has been normal," Seibly says.

In the conference call, he told analysts the company has focused on priorities the board outlined in Sterling's announcement of the cease-and-desist order.

"Those priorities are as follows: first, to strengthen our capital levels; second, to aggressively address our troubled credit issues; third, to maintain an improved bank liquidity; fourth, to refocus our business on (banking) relationships ; and finally to continue serving our customers," Seibly said.

Seibly, who was brought to Sterling as chief production officer to address cost-of-capital issues and asset problems, says Sterling has made headway under its recovery plan. Brokered deposits, which are placed by brokers rather than made by depositors with whom Sterling wants to build banking relationships, fell by $115 million in the third quarter. Meanwhile, "retail deposits," or deposits made in the conventional way, rose by $161 million in the quarter and are up $200 million in the past year.

As of Oct. 16, Sterling had available liquidity of $2.97 billion, and Seibly told the analysts Sterling believes it has the liquidity to meet its obligations and customer needs.

Sterling said it had set aside an additional $195.5 million in the third quarter in its allowance for loan losses and had taken a noncash charge of $227.6 million for the impairment of its remaining goodwill, related primarily to acquisitions it made between 1998 and 2007. Also, it said it had made a $143 million noncash valuation allowance against a deferred-tax asset. Through such measures, Seibly told the analysts, the company had "taken steps to clear the decks and to prepare Sterling for the future."

The company reported it had originated total net loans of $889.5 million in the third quarter, up 17 percent from the year-earlier period. Residential mortgage originations represented $705.7 million of total originations.

Sterling reported that through Sept. 30 it had charged off 3.2 percent of its average loans year-to-date, had reduced its residential construction loans by 41 percent in the last year to $988.8 million, and had dropped its total construction loans by 31 percent to $1.9 billion. Nonperforming assets had doubled in the previous year to $828.9 million.

Yet, nonperforming residential construction assets decreased in the third quarter for the first time since the downturn began and shrank by more than 5 percent from the previous quarter.

The bank has assigned nearly 15 percent of its staff of 2,060 people, or more than 300 staff members, to resolve Sterling's problem assets, Seibly says.

Sterling had been meeting with regulators for about three months before the cease-and-desist order was stipulated, Eckhardt and Seibly say. They say the important thing now for Sterling, after such a wrenching management change, is for its remaining managers and staff members to carry forward with the efforts of Gilkey, Zuppe, and Stanley.

"I've had that conversation with Harold and Heidi," Eckhardt says. "This isn't a situation that any of us wanted to be in, not Harold, Heidi, Greg, or myself."

Seibly, asked whether he and Eckhardt plan to be with Sterling for a long time or their efforts will be short term, says. "We're all in." He called Sterling "an amazing place with a great culture. We owe it to Bill and Harold" to carry on with that tradition, he says.