Bankers here expect solid loan demand during 2006, which Sterling Financial Corp. is particularly glad about.


At the end of the third quarter last year, Spokane-based Sterling warned investors that loan balances were growing more slowly than expected, and earnings could suffer. Then, in January, when Sterling announced strong fourth-quarter and annual results, Chairman and CEO Harold Gilkey said, We are particularly proud of our fourth quarter after a soft third quarter.


Now, Gilkey says, judging by what hes seen in the past six months and expects to see in the next half-year, I think well be in reasonable shape.


He expects a topping off and a leveling out in the residential construction and lending markets, but adds that businesspeople who have put off projects in the third and fourth quarters are dusting them off and going ahead, which is a good indicator for commercial lending. In another good sign, Sterlings subsidiary, Sterling Savings Bank, started off 2006 with $1 billion in loan applications in the pipeline, Gilkey says.


Pete Stanton, chairman and CEO of Washington Trust Bank, which like Sterling has offices in Seattle, Portland, and Idaho as well as Spokane, says hes optimistic about loan demand in 2006.


Were still fairly bullish, says Stanton, who adds that Washington Trusts total loans grew by roughly 18 percent last year. This year, the Spokane bank has budgeted for percentage growth in loans in the high teens, Stanton says, explaining, Anything above 15 percent is awfully strong.


Inland Northwest Bank, of Spokane, which has seven branches in the Spokane area, two in North Idaho, and one in Walla Walla, covers a smaller area than Sterling or Washington Trust, but has seen strong results in the Spokane-Coeur dAlene area thus far in 2006, says Randy Fewel, its president and CEO.


So far, Ive been extremely surprised at how robust loan demand was in Spokane and North Idaho in January, Fewel says. I think the weather has got a lot to do with it. It was by far the best January weve ever had. Were halfway through February, and the first six weeks were good.


Hes more optimistic about 2006 than he was a couple of months ago, Fewel says. I didnt think 06 was going to be as good as 05, he says.


While Fewel believes that residential construction and home mortgages will slow this year after strong years in 2004 and 2005, he says that commercial real estate, commercial equipment loans, and lines of credit all have been strong so far. Even though the prime rate is at 7.5 percent, its highest level in five years or so, thats still a pretty desirable rate for business borrowers, Fewel says. He adds that he and other bankers here believe that new Federal Reserve Chairman Ben Bernanke will raise interest rates just one more time this year, and thus rising rates wont put a damper on things.


Fewel cautions, though, that its impossible to foresee whether inflation might rise unacceptably or whether the national economy might begin to grow too fast, both of which could prompt the Fed to take stringent action on rates.


The trade deficit and the general budget deficit are very concerning, Fewel says. The U.S. government, after having reined in its budget deficit several years ago, had stopped offering 30-year bonds, but once again began offering them just recently, Fewel says.


He says of the heavy federal spending, At some point, that could have an effect on inflation.


Still, Fewel says, the strong demand for business loans here is the bread and butter of the local economy. When businesses are making good profits and are investing in their growth, thats what makes the jobs, he adds.


Susan Horton, chairwoman, president, and CEO of Wheatland Bank, of Spokane, says, Were aggressively budgeting for loan demand and loan growth for 2006.


Wheatland projects that its loans will grow by 18 percent this year, and it expects that demand for commercial loans, such as for equipment financing and operating lines of credit, will be strong, Horton says. She says Wheatland is seeing lots of demand for financing for small office buildings, such as owner-occupied medical office structures.


New regulatory standards will limit commercial real estate loans as a percentage of capital, but Wheatland, which has its roots in the rural area around Davenport, Wash., west of Spokane, is well-positioned for that change, Horton says.


Because of our agricultural diversification, we have more room to grow in (commercial real estate) than I would suspect most other banks in Spokane would have, she says. Weve been very watchful of this whole regulation coming down.


Stanton, like Gilkey and Fewel, expects some softening in the housing market.


In Boise, youll see a softening in residential demand, although housing prices are still strong so far and so is market activity, Stanton adds. Real estate has fueled banks growth and profits the last few years, he says. Commercial real estate has been good, too.


In commercial and other types of nonresidential real estate lending, were expecting good growth in all markets, Stanton says. Still, he adds, At some point, its got to slow down. Were not kidding ourselves and thinking this is going to go on forever.


As Gilkey sizes up 2006, he notes that the U.S. economy improved last year, and says that the Pacific Northwest, much of which Sterling serves, generally lags the national market and is highly dependent on what happens with Boeing (Co.). Boeing has picked up very well as the economy elsewhere has improved and demand for airliners has improved.


Gilkey says the national economy is continuing to improve, and the Pacific Northwest should follow suit, although he believes the housing market is evening out after being very robust.


In a couple of markets, prices have actually fallen off a little bit, he says. For example, he says, the markets in Seattle and Portland for homes that cost more than $2 million have crested.


The first buyers who leave the market are the high-priced buyers, although average home prices still are rising, he says.


When Sterling issued its warning to investors near the end of the third quarter of last year, builders were selling homes so fast they werent taking advances on construction loans to the normal extent they do while theyre building the structures, Gilkey says.


Because the single-family home market was so hot, they were pre-selling homes and paying them off before their construction was done, Gilkey says. Our customers were doing so well they didnt need our money. Since then, builder advances against construction loans have returned to normal, he says.


Also during the quarter, insurance companies offered to refinance bank-held real estate loans at very attractive interest rates, leading to an unusually high payoff rate of real estate loans in our portfolio, he says.


At the end of the second quarter, as Sterling had gotten ready to convert its asset mix from that of a savings and loan association to that of a commercial bank, it sold off $500 million in adjustable-rate, single-family home mortgages, Gilkey says.


We took what I would call poor earning assets and sold them, Gilkey says. The reason I felt comfortable in selling them was that we had a pipeline of $1.2 billion in loans when we started the third quarter, and we closed $1.1 billion in loans in the quarter.


When Sterling put out its warning, Gilkey went on the road to talk with the companys biggest shareholders, other investors, and stock analysts.


We told them we saw the third quarter as an aberration, Gilkey says. We saw it as a short-term issue.


Things improved in the fourth quarter, and Sterling reported loan originations of $1.2 billion, up 51 percent, for the period. For full-year 2005, the bank reported a record $3.88 million in loan originations, up 33 percent, and also reported record earnings of $61.2 million.


Overall, considering that we had the stumble in the third quarter, we had a pretty good year, Gilkey says.


Contact Richard Ripley at (509) 344-1261 or via e-mail at editor@spokanejournal.com.