Sterling’s earnings hit by home-loan woes

Sterling Financial Corp. announced Thursday that its first-quarter earnings will fall far short of earlier projections largely because it set aside $35 million to $40 million to cover potential loan losses.

Instead of the 38 cents to 42 cents a share bank officials projected early this year, and the 36 cents a share anticipated by analysts, the Spokane bank will likely show returns of just 4 cents to 6 cents when it releases first-quarter numbers April 21, according to a statement released after markets closed.

Nonperforming assets – loans that are in arrears – have jumped from $126.5 million at the end of 2007 to more than $200 million. Chairman Harold Gilkey said Sterling and its clients are victims of subprime lending, even though the bank itself did not make such loans.

Contractors in markets such as Boise, Southern California and Bend, Ore., are tapping out their financial reserves because they cannot sell homes built when demand was much stronger, Gilkey said.

Sterling Chief Financial Officer Dan Byrne said speculators who expected to profit by “flipping” homes in markets where prices had climbed rapidly instead were backing out of the deals. Meanwhile, he said, the contractors kept building to meet artificially inflated demand.

“We have a number of contractor-borrowers that have been carrying a lot of inventory,” Byrne said.

Spokane, he noted, has been one of the stronger markets Sterling serves.

Byrne said Sterling is trying to give contractors more time to work off their backlog rather than claim the homes that are securing its loans.

Many are longtime builders who will remember Sterling stuck by them when the housing cycle rebounds, he said, adding that there are signs homebuyers are re-emerging after a harsh winter.

A Residential Construction Special Project Team of senior bank officials will help work through the builder-related credit problems.

Byrne said Sterling officials hope that a large allowance for bad loans will be enough to cover all potential risks. Sterling set aside just $13 million for that purpose in fourth-quarter 2007.

He said Sterling’s other loan portfolios, business and consumer, are performing well.

“We do expect to be profitable for the year,” he said.

Byrne and Gilkey said Sterling remains well-capitalized and has access to additional capital.

Sterling assets exceeded $12 billion at the end of 2007.

No layoffs or changes in operations are expected in response to the construction lending problems, Byrne said.

Sterling’s disclosure comes the same week Washington Mutual, by far the largest financial institution based in Washington, announced private investors will inject $7 billion in new capital into the thrift, which is struggling with bad loans in California, Florida and elsewhere.