Rich Bank, Poor Bank

While a bank like Sterling Savings is struggling in the wake of the economic downturn, Spokane Teachers Credit Union is thriving. What’s the difference?

Dave Brukardt, executive vice-president of the largest bank in Washington, is quite familiar with Steve Dahlstrom, president of the largest credit union in the Inland Northwest. They’re both Museum of Arts & Culture board members. They say hello to each other; they catch up. They don’t talk about banking.

But if they did, they would have dramatically different stories to tell.

As it was for banks across the nation, last year was an awful year for Sterling Savings; it was pummeled by massive financial losses and plummeting stock prices.

But for Spokane Teachers Credit Union? Best. Year. Ever. Try 13 percent higher net income, a 14 percent bigger loan portfolio, a 22 percent bigger deposit amount, and an 11 percent bump in membership. In fact, in the third quarter of 2009, STCU had its biggest increase in membership ever.

There’s a big difference between credit unions and regional banks. And right about now, that difference matters a lot.

“Credit unions always seemed like Dullsville to me,” economics professor Nancy Folbre wrote on the New York Times Economix blog. “But in the wake of the financial crisis, they began to look more like Clark Kent, who turned out to be Superman.”

“Now more than ever, you need a bank that’s responsible,” the Sterling ad read in October 2008. “So safe, it’s almost boring….”

But in that next year, Sterling was anything but “boring.” In 2009, Sterling lost $855 million. Nonperforming assets — loans that weren’t being repaid — shot up to $952 million, 90 times the amount they had been in 2005.

Some loans (or parts of loans) became write-offs, never to be repaid. The money to write those loans off came straight out of Sterling’s reserve fund — chip-chipping reserves ever lower, precisely when regulators began demanding that they be higher than ever. It was a year when the government sent in $330 million to bolster those reserves, when Sterling missed a regulator-imposed deadline to raise an additional $300 million in reserves, and when the founder and 27-year CEO of Sterling resigned.

In less than a year, Sterling stock fell from $5 per share to 75 cents. Now, Sterling’s striking a deal with the Treasury to recapitalize. It’s attempting to raise $650 million worth by selling new stock at 20 cents each.

“The shareholders have taken the brunt of the pain along with us,” Brukardt says.

There are glimmers of good news — deposits and transaction accounts are up — but overall, Sterling has had two rough years and is in for a third.

This is despite caution.

“A bank like Sterling never did subprime lending,” Brukardt says. “I remember analysts saying in some of those conference calls, ‘If you take more risks, you could grow this bank faster.’ We thought we were being conservative.”

But just as there was a housing craze, there was a banking craze. In only four years — 2004 to 2008 — the number of Sterling branches more than doubled, and Sterling’s size quadrupled. In 2005, the Sterling bank charter expanded activities from mostly deposits, home mortgages and real estate loans and began loaning businesses lines-of-credit. But large amounts of its assets remained tied up in real estate. Which was just fine — in 2005.

STCU didn’t expand nearly as fast as Sterling. It couldn’t. Credit unions are nonprofit. They answer to their members, not shareholders. They have no stock to sell to make extra capital. And without shareholders, they don’t have that big pool of investment money to grow. There are advantages to that.

“We don’t have that outside stockholder we have to satisfy,” Dahlstrom says. And — banks think this is unfair — they don’t have to pay federal income taxes.

While many investments in corporate credit unions (a bank for the bank, essentially) were wiped out — STCU lost $4.5 million worth — for the most part, credit unions weren’t ever aboard the ships that sank the fastest and deepest in the financial crisis.

STCU remained focused on the small loans — the auto loans, the home loans, the boat loans. They would never, say, loan money for Greenstone Homes to develop Kendall Yards. They may loan money for a member to buy a house in Kendall Yards, but they’d never finance a large land purchase.

“We don’t make a lot of big loans. We don’t make a lot of long-term loans,” Dahlstrom says.

When the commercial real estate market tanked, and new housing developments wouldn’t sell, Sterling caught the brunt of it. Trouble with a housing loan is one thing. But an entire development? You can’t exactly take out a second mortgage on that. Losing that revenue stream is a massive blow to the bank — and an ongoing, compounding problem that continues to plague Sterling.

“The pain around commercial real estate goes on,” Brukardt says. “What’s been coming in the pipeline hasn’t been abating. For banks in general, it’s not over.”

Sheila Bair, chair of the Federal Deposit Insurance Corporation, says she expects even more bank failures in 2010 than the 140 in 2009.

But STCU? Well, if nobody wants to buy houses in the failed development, it means that nobody asks STCU for a housing loan. STCU doesn’t make money from the lack of sale — but they also don’t lose any.

So when the economy began to dive, STCU did, well, pretty much nothing. They suspended manager bonuses, froze hiring and delayed opening a new branch, but otherwise, it was business as usual.

“We’ve had our best loan year ever,” Dahlstrom says. “People are still buying stuff — buying houses, buying cars.”

As for Sterling?  “We’ve started to move away from commercial real estate,” Brukardt says. On a sheet of paper, he scribbles a rectangle inside a larger rectangle. The surrounding rectangle, he says, represents the whole big mess of nonperforming assets.

But this here, he says, pointing to the inner rectangle, the core, is still a strong bank. 

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About The Author

Daniel Walters

A lifelong Spokane native, staff writer Daniel Walters is the Inlander's City Hall reporter. But he also reports on a wide swath of other topics, including business, education, real estate development, land use, and other stories throughout North Idaho and Spokane County.He's reported on deep flaws in the Washington...