A regional securities brokerage has slashed its estimates for Sterling Financial Corp.'s earnings in 2008 and 2009.

The Great Falls, Mont.-based brokerage, D.A. Davidson & Co., says that "subdued" loan growth, pressure on net interest margin, and a higher than expected provision for loan losses cut into Sterling's third-quarter net income.

"Maintaining these trends, we are revising our forward estimates and reducing our 2008 and 2009 estimates from 71 cents (per diluted share for 2008) and $1.20 (for 2009) to 50 cents and 80 cents, respectively," the brokerage firm says in a report by Jeff Rulis, a vice president and research analyst who's based in the company's Lake Oswego, Ore., office.

Net interest margin is the difference between an institution's interest income and interest expense, expressed as a percentage of average earning assets. Through its provision for loan losses, an institution sets aside funds to cover losses on loans that it believes might not be repaid. D.A. Davidson says that Sterling's $37 million third-quarter provision for loan losses was $7 million more than what the brokerage firm had expected.

On Oct. 21, Sterling, which is based here and owns Sterling Savings Bank, reported third-quarter net income of $5 million, or 10 cents a share, well below D.A. Davidson's estimate of 20 cents a share. Those results compared with net income of $26.5 million, or 51 cents a share, in the year-earlier quarter.

Sterling's nonperforming assets—loans that are at least 30 days delinquent, loans on which it has stopped accruing interest because they're at least 90 days delinquent, and real estate and equipment on which a bank has foreclosed—grew in the third quarter by $133 million to $437 million, D.A. Davidson says. As of Sept. 30, nonperforming loans totaled 3.46 percent of total assets, up dramatically from 0.49 percent a year earlier.

"Classified assets" which include nonperforming assets and are the broadest measure of problem accounts, "were up 35 percent from the previous quarter, which is not encouraging," D.A. Davidson's report says.

Dan Byrne, Sterling's executive vice president and chief financial officer, says Sterling's classified assets primarily are residential construction loans, some of which have been included in classified assets not because borrowers are delinquent, but because sales of such property are slow or appraised values for homes have fallen below loan amounts.

Byrne says that in a conference call after Sterling announced its earnings on Oct. 21, the Spokane company told securities analysts it expected the fourth quarter of 2008 to be similar to the third quarter. Byrne says the company also reminded analysts that its results could be affected by the economy, by legislation to address the nation's credit crunch, and by Federal Reserve interest-rate actions. The Fed cut rates on Tuesday, Oct. 28.

Sterling has given no so-called "guidance," or estimates on earnings, for 2009 and had said earlier that it expected its earnings to come in at 75 cents to $1 a share for 2008, Byrne says.

In the analyst's report, D.A. Davidson says it's lowering its price target for Sterling's stock to $11 a share from $13—Sterling sold for $10 a share the day the report came out—and continues to remain neutral on the question of whether investors should buy Sterling's shares.

Still, the report says Sterling is in better shape than many financial institutions.

"The credit news this quarter is disappointing, but there are certainly worse banks out there in terms of credit quality, with shares priced at much higher valuations," the report says. "Sterling has also remained consistently profitable on a quarterly basis over the last several years, not something that many peer banks can say. For these reasons, Sterling's stability should be remembered during these trying credit times."