Third-quarter earnings reports from Inland Northwest banks are providing insights into the region's economy.

One of the most-watched numbers in bank earnings reports for the third quarter, which ended Sept. 30, will be nonperforming assets—and how they've grown amid the nation's financial and economic crises.

"Certainly, the level of nonperforming assets is going to be a key indicator in this type of environment," says Dan Byrne, executive vice president and chief financial officer of Sterling Financial Corp.

Sterling's nonperforming assets—loans that are at least 30 days delinquent, loans on which an institution has stopped accruing interest, and real estate and equipment on which a bank has foreclosed—grew by $133 million in the third quarter, to $437 million. Sterling had just $57.7 million in nonperforming assets on Sept. 30, 2007, so the figure has ballooned by more than 650 percent since then.

Peter Stanton, chairman and CEO of Washington Trust Bank, says that banks' financial results "absolutely" reflect what has happened in the economy, and growth in their nonperforming assets "certainly reflect recessionary-type issues."

Byrne says, "In our case, our nonperforming assets are very heavily weighted toward residential construction loans." With home sales down sharply in the region, that's no surprise, especially with Sterling having reported for months that such loans were problematical.

Sterling says its nonperforming assets related to residential construction jumped by 31.5 percent, or $75.9 million, between the end of the second quarter and Sept. 30—and the increase "primarily was a result of one large relationship based in Portland." Excluding that single borrower, nonperforming assets involving residential construction would have risen by just 14 percent, Sterling says.

Byrne, asked by a securities analyst in a Oct. 21 conference call whether the Portland relationship "is that related to Renaissance Homes bankruptcy," said, "Yes it is." Asked by another analyst to talk about "the expected resolution to that," Byrne said, "Typically we don't get into individual credits (or customers) in terms of those discussions."

Sterling's nonperforming asset numbers are hardly atypical, nor are its problems in residential construction lending, judging by the quarterly earnings reports of other bank holding companies.

•Inland Northwest Bank's parent, Northwest Bancorporation Inc., of Spokane, reported $8.3 million in nonperforming assets as of Sept. 30, up from just $841,000 a year earlier. The company has said it's not interested in making any more land acquisition and development loans for now.

•Intermountain Community Bancorp, of Sandpoint, reported nonperforming assets at its banks, which are in Idaho and Washington, of $22.7 million as of Sept. 30, compared with $2.6 million a year earlier. It said residential land and construction loans make up most of its nonperforming assets.

•Idaho Independent Bank, of Coeur d'Alene, reported nonperforming assets of $13.3 million, up from $2.8 million a year earlier. It blamed its diminished results on "continued deterioration of the real estate markets within the communities it serves."

•AmericanWest Bank, of Spokane, posted nonperforming assets of $88.7 million, up from $20 million a year ago. It has been beset by a number of problems and reported last week a loss of $96.9 million, or $5.63 a share, in the third quarter, compared with net income of $5.3 million, or 31 cents a share, in the year-earlier period.

To be sure, all delinquent loans in an institution's nonperforming assets don't end up resulting in losses, and banks often have other options to collect on such loans if a borrower doesn't repay them. For example, Northwest Bancorporation says that while its nonperforming assets are at a historically high level, "most of those loans are backed by collateral that provides us with an alternative repayment source."

Other publicly traded banks will be reporting their earnings shortly, and of course, one number from the voluminous figures in a bank's earnings report doesn't tell the full story of its financial condition.

For instance, Byrne says, "People should look to see whether there's been an increase in nonperforming assets in other asset classes, such as consumer loans and commercial loans. Knock on wood. We haven't seen those kinds of increases in other asset classes."

Also, he adds, "I think there's a lot of focus on capital." Sterling says its capital ratios exceed regulatory requirements for "well-capitalized" institutions.

Stanton says it's important to look at a bank's business results as well as its asset picture to get a true reflection of how it's doing.

"You've got to look at both the balance sheet and the income statement," he says.

For example, in the conference call Oct. 21, Byrne told securities analysts he wanted to "highlight" Sterling's 4 percent growth in deposits, to $8.07 billion, since Sept. 30, 2007.

Northwest Bancorporation CEO and President Randall L. Fewel says that Northwest Bancorporation has had "healthy growth in deposits, loans, and assets," even though its nonperforming assets have grown.

Intermountain logged a slight growth in assets, to $1.05 billion, even though deposits fell by 1 percent, and it increased its risk-based capital, liquidity, and reserve positions. Risk-based capital, a regulatory term, is tangible equity plus adjusted allowance for loan losses divided by risk-weighted assets.

Like Stanton, Fewel says Federal Reserve interest-rate cuts, such as one The Fed made last week, reduce the income a bank receives from its loans faster than they reduce its expenses in paying interest on its deposits. The time lag hurts banks' net interest margin, which is the difference between interest income and interest expense, usually expressed as a percentage of average earning assets.

Stanton sees pressure on net interest margin as a bigger issue for Washington Trust than nonperforming assets, saying "our nonperforming assets are relatively low." He adds, "We're going to be very profitable this year, but not as profitable as in the last two years, which were record years."

Says Fewel, "Once the interest rate environment normalizes and rates begin to increase, we expect to see a significant increase in net interest income. In a cyclical business like banking, the top of the cycle is always more enjoyable than the bottom of the cycle."

Fewel adds that he's pleased with Northwest Bancorporation's performance year-to-date—in part because the company didn't invest in the securities of now-nationalized Freddie Mac and Fannie Mae, has a conservative investment portfolio of bonds that has held its value well, and doesn't have to write off assets from acquisitions that haven't gone well. Also, he says, Northwest Bancorporation made no subprime mortgage loans, including so-called "Ninja loans," or loans to borrowers with "no income, no job, or assets."

In upcoming ads, Northwest Bancorporation's subsidiary, Inland Northwest Bank, will promote the company's careful nature to reassure customers during these tumultuous times, Fewel says.

"We're going to run some ads on our safety and soundness," he says. "We're going to say, 'Our boring conservatism has served us well.' We need to get that message out there."

Like most banking companies, Northwest Bancorporation endured a steep drop in profits in the third quarter, to $203,000, or 9 cents a share, compared with $748,000, or 31 cents a share, in the year-earlier period.

Profits also have plunged at Intermountain Community Bancorp, where they dropped to $226,000, or 3 cents a share, in the quarter, from $2.4 million, or 38 cents a share, in the year-earlier period.

Idaho Independent Bank has remained profitable, earning $1.6 million, or 27 cents a diluted share, in the third quarter, compared with $2.7 million, or 43 cents a share, in the year-earlier period.

Doug Wright, executive vice president and CFO of Intermountain, says, "The banks in this region are seeing fairly significant hits on earnings, but not anywhere like what they're experiencing in other areas of the country," including in California, Arizona, Florida, Ohio, and other rust belt states.