D.A. Davidson & Co. has downgraded the shares of Sterling Financial Corp., of Spokane, and Walla Walla, Wash.-based Banner Corp., which operates bank branches here, partly on the belief that rising interest rates could hurt bank stocks generally.


D.A. Davidson, a Great Falls, Mont.-based regional stock brokerage, dropped its rating on Sterlings shares to neutral from buy and downgraded Banners stock to underperform from neutral.


The lower rating on Sterling Financial, which operates Sterling Savings Bank, was based certainly not on performance, says Jeff Rulis, a research analyst in D.A. Davidsons Lake Oswego, Ore., office.


The valuations for these banks are getting to peak levels, Rulis says. In a rising interest-rate environment and because of other factors, we no longer think banks should have these valuations.


Sterling Financial Chairman and CEO Harold Gilkey says D.A. Davidsons action was almost mechanical because Sterlings shares, which closed at $40.68 on Dec. 1, the day D.A. Davidson acted, had climbed close to the $42-per-share target price the brokerage firm had set for Sterling.


If a stock is within 10 percent of their target price, typically they have to look at their position, Gilkey says. Also, he says, All financials have had a substantial move in price.


Sterling expects that the Federal Reserve next year will adjust its fed funds rate, which it charges member banks for loans, as many as a half-dozen times, resulting in a total increase of 1 percent to 1.5 percent in that key rate, Gilkey says.


Yet, he says, We are well-positioned for a rise in interest rates. Were comfortable. Our assets will reprice faster than our liabilities.


On a recent tour, he met with about 40 of Sterlings best customers, and they said the businesses they lead have had a better year this year than in 2003 and expect 2005 to be better than 2004, with rising long-term interest rates the biggest variable they see, Gilkey says.


Rulis says D.A. Davidsons neutral rating on Sterlings stock still allows for a zero to 15 percent upgrade in the Spokane companys share price over the next 12 to 18 months.


We do not see a negative catalyst to suggest the share price will decline in the near term, but view the upside (potential) as limited, the brokerage said.


Banner


Banner Corp. President and CEO D. Michael Jones, who had a long career in banking in Spokane, declines to comment directly on D.A. Davidsons downgrade of the Walla Walla companys stock, other than to say he isnt surprised.


Jones says Banners shares have climbed by close to 40 percent since the start of the year, and the price-to-earnings ratio of its stock is higher than everybody elses. Generally, high price-to-earnings ratio is taken as a sign that a stock price is high.


Banners stock closed at $34.11 a share on Dec. 1, the day D.A. Davidson downgraded that stock to underperform. The brokerage set a price target of $28 a share for Banner, in essence predicting that its stock will fall.


The brokerage said that Banners performance metrics, or measurements, while improved, remain well below those of its peer-group banks. Banner is posting nice EPS (earnings-per-share) growth in 2004 and 2005, but this improvement will not drive metrics to the average of the group, the brokerage said.