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Sterling’s loss near half-billion

Quarterly report follows executive shake-up

Sterling Financial Corp. on Thursday reported a huge third-quarter loss of $463.7 million as it closes out the books on almost a decade of acquisitions that made the Spokane institution the largest commercial bank based in Washington.

The loss, $8.93 per common share, contrasts with a profit of $5 million, or 10 cents per share, reported for the third quarter of 2008.

The report follows by little more than a week the departures of Sterling co-founder and longtime Chairman Harold Gilkey, and Sterling Savings Bank Chairwoman Heidi Stanley.

Almost half the loss, $227.6 million, is a noncash write-down of goodwill booked between 1998 and 2007, a period when Sterling grew from a savings and loan association with less than $2 billion in assets to a $12 billion bank by buying other banks or bank branches in Washington, Idaho, Montana, Oregon and California.

Goodwill, in accounting terms, reflects an entity’s ability to make a higher profit than it would from selling its tangible assets. The potential earnings power of Sterling’s goodwill, once valued at more than $451 million, evaporated with the crash in real estate and construction loan values.

The other components of the quarterly loss were a $143 million noncash allowance for tax losses Sterling might not be able to use unless it returns soon to profitability, and a $195.5 million provision for loan losses.

The adjustments reduced Sterling assets to $11.9 billion from $12.4 billion as of June 30.

The loss, reported after markets closed, sent Sterling shares tumbling by as much as 14 cents, to 98 cents, in after-hours trading.

Four consecutive quarters of losses totaling $879 million, mostly noncash, prompted the Federal Deposit Insurance Corp. and Washington Department of Financial Institutions on Oct. 9 to issue a cease-and-desist order that led to the management shake-up. The regulators also ordered Sterling to raise $300 million by Dec. 15 because the bank does not meet federal capital requirements.

But Sterling deposits, at $8.3 billion, have improved in quality, and the deterioration in loan quality is slowing.

“Nonperforming residential construction assets decreased for the first time since the start of this cycle and shrank by more than 5 percent over the previous quarter,” Acting Sterling Financial Chief Executive Officer Greg Seibly said in the earnings release.

About 60 percent of those loans are concentrated in the Seattle and Portland areas, where Sterling is also experiencing significant losses in commercial construction, including multifamily housing.

Sterling executives will hold a conference call with analysts and investors this morning.

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