Before larger institutions vacuumed up Seafirst Bank and Rainier National Bank in the frenzied industry consolidation several years ago, the two banks commanded two-thirds of the lucrative mid- to upper-market commercial-banking business in Washington state.


Seafirst and Rainier operated as true regional institutions, with strong asset bases, large staffs, and names that had become household words, says Harold Gilkey, chairman and CEO of Spokane-based Sterling Savings Bank.


Now, Sterling and Washington Trust Bank, both of Spokane, are among a handful of Pacific Northwest institutions that are striving to become regional players, even though theyre still much smaller than Seafirst and Rainier were when they were snapped up.


A third bank that could climb to the top of the heap is Seattle-based Pacific Northwest Bank, which has been built up to 59 branches by former Old National Bank President Pat Fahey. Another former staff member of Spokane-based ONB, D. Michael Jones, heads Walla Walla-based Banner Bank, also an entrant in the regional sweepstakes.


Theres more than just boasting rights involved. Much as Seafirst and Rainier once had a Solomons treasure of loans in Washington state, two Oregon institutions, U.S. Bank of Oregon and First Interstate Bank of Oregon, had a hammerlock on 70 percent of the market in that state before they were swallowed up, Gilkey says. In Idaho, Boise-based West One Bank had corralled half of the mid- to upper-level market before it was acquired.


All of these have been rolled up into what I call the big-box banks, Gilkey says. Its kind of like Wal-Mart, Kmart, Penneys, or Sears. That left a void in what I call the great middle market.


That market is for loans of $500,000 to $25 million, to businesses with annual sales of $1 million to $150 million, and theres a huge chunk of such business up for grabs, Gilkey says. He says there are no regional banks headquartered in the Northwest now.


Bank of America still has a significant market share, and U.S. Bank still has a significant market share. I wouldnt imply that theyre losing their dominance, but theyre losing a part of their portfolios, Gilkey asserts. Whether its by design, I dont know.


Fahey also says Bank of America has exited complete segments of the market, but John Wagner, Bank of Americas Eastern Washington area president, rejects that notion. What part of our portfolio are we choosing not to bank? he says.


Wagner says the financial industry has segmented itself, with large and small players offering more specialized products than once were available. In every market, all kinds of customers are going to have a variety of products and services. Larger companies certainly have a full product gallery and a full service gallery for all clients. Also, Wagner says, Bank of America sees itself a a major regional bank, because a national bank would be in all 50 states.


When bigger banks buy other institutions and consolidate the operations of those banks into their own, they must cut costs someplace, and those cuts often are made in staffing, including trimming well-compensated veteran bankers, Gilkey says.


Yet, winningand keepinghigh-quality mid- to upper-level commercial clients is an expensive, hands-on business that must be handled by experienced bankers, Gilkey says. He contends that as the Northwests regional banks have been rolled into larger institutions, the trimming of experienced commercial bankers has created opportunity for growing banks like Sterling, Pacific Northwest Bank, and the others.


The opportunity in the Portland area is probably somewhere in the neighborhood of $4 billion to $10 billion, and Seattle is probably three times that, Gilkey estimates. Even if Im wrong by 50 percent, theres still plenty of room to grow.


Fahey makes no bones about Pacific Northwest Banks desire to pry business away from the national banks and claw its way to regional status.


We have a goal, or a vision if you will, to become the regions premier commercial bank, Fahey says. I dont mean to knock the big banks, but as their consolidation has occurred, sometimes into offices on the other side of the country, theres been a change in the way they do business. Were increasingly taking business away from the bigger banks.


While Pacific Northwest Bank has offices in Yakima, Wenatchee, the Tri-Cities, and Okanogan County, The one place were not currently is Spokane, Fahey says. We would like to be there, if the right opportunity presents itself.


Jay Tejera, a banking analyst with Ragen MacKenzie, of Seattle, says banks serve three types of customers in the mid- to upper-level market.


Fortune 1,000 companies, such as Boeing Co. and Weyerhaeuser Co., of which there are only about a dozen in the Northwest.


Middle-market businesses, with sales of up to $100 million.


Small businesses, with sales of $10 million or less.


Seafirst, which had $15 billion in assets when it was acquired by Bank of America, had some Fortune 1,000 accounts, while Rainier, with $7 billion in assets, was especially big in the middle market, Tejera says.


Once Seafirst, Rainier, West One, U.S. Bank, and the other regional banks became part of national institutions, the Northwest banking industry was left with a real donut hole between the national banks on one side and community banks on the other, says Tejera. He says Sterling, Washington Trust, and the other contenders for regional status hope to fill that hole by making business loans, such as working-capital loans, inventory-financing loans, and other types of commercial loans, while also handling their commercial-banking customers deposits. Also, Tejera says, they hope to supply their commercial customers with cash-management services, merchant processing of credit-card transactions, payroll services, checking accounts, and other lucrative services.


Sterling tops in assets


Among the institutions that are eyeing regional status, Sterling led the pack, as of the end of the third quarter last year, with $3.33 billion in assets, while Pacific Northwests assets totaled $3.25 billion in November after it had completed an acquisition. Banners as-sets were $2.23 billion on Sept. 30, and Washington Trusts were $2 billion.


Meanwhile, Roseburg, Ore.-based Umpqua Bank, which has 68 branches and $2.56 billion in assets, is trying to ascend to the regional throne as is Glacier Bancorp Inc., of Kalispell, Mont., with $2.1 billion in assets and 51 offices in Montana, Idaho, and Utah, including offices in Coeur dAlene, Post Falls, and Hayden through its Mountain West Bank subsidiary, Tejera says.


Other banks with regional possibilities include Frontier Bank, of Everett, Wash., which has 38 branches in northwest Washington and assets of $1.9 billion, and Columbia Bank, of Tacoma, with 21 branches in four counties and assets of $1.6 billion. Another contender is Klamath First Bancorp Inc., of Klamath Falls, Ore., with 57 Klamath First Federal Savings & Loan Associa-tion offices in Oregon and Washington and $1.5 billion in assets.


In recent years, Washington Trust has broadened its reach by opening branches in new markets, rather than by buying other institutions. Says Tejera, I was really pleased to see Washington Trust pursue the Seattle and Boise markets.


Peter Stanton, Washington Trusts chairman and CEO, worked for both Seafirst and Rainier while he cut his teeth in banking and says because the two institutions were well known, it made it easier to attract new business.


Gilkey thinks that only one or two institutions will become regional in size because theres only so much room at the top. Tejera believes that Pacific Northwest Bank and Umpqua have the inside track to be those banks because their stocks found ready acceptance when they made acquisitions in November. In those transactions, Pacific Northwests parent bought Portland-based Bank of the Northwest, giving Pacific Northwest a foothold in Portland, and Umpquas parent acquired Centennial Bancorp., of Port-land, giving it a beachhead in Wash-ington state, in Vancouver.


Tejera points out that because Washington Trust is closely held, it doesnt have a publicly traded stock to use as a currency to make acquisitions. Yet, Stanton says that being closely held has allowed Washington Trust to control its own destiny, which a bank cant necessarily do if it becomes publicly traded.


Nostalgic speculation


Stanton also says that talk about which of todays banks might become regional in size probably is far more interesting to bankers than to others.


Is there any need for a regional bank? Stanton asks. Is the public clamoring for it? Is it just bankers talking among themselves? I dont know if people arent just longing for nostalgia. He adds, I dont see many places that are underbanked.


When Banner Bank released its third-quarter earnings last October, it said it was intent on raising the visibility of Banner Bank throughout the Pacific Northwest with increased investment in advertising and marketing and was investigating additional locations. Yet, Jones, Ban-ners CEO and president, doesnt fully buy the talk about which institutions might be-come regional banks.


When people say they want their institution to become a regional bank, I say, Well, God bless, but I think that what you really need to do is to take care of your business and your customers, Jones says. He, too, believes that Pacific Northwest Bank and Umpqua Bank have the best shot at becoming regional institutions, partly because theyre headquartered in Seattle and Portland. Umpqua Bancorp, which owns Umpqua Bank, has its offices in Portland.


The rest of us, all of us, were not headquartered in a major city, Jones says. Were carrying around too much baggage. Were too small, or have a thrift charter, or something like that.


In September, Sterling agreed to buy Empire Federal Bancorp Inc., of Livingston, Mont., where Gilkey grew up. Yet, Tejera is unsure that Sterlings pending acquisition, which is expected to close soon, has the same imprimatur inherent in Pacific Northwests and Umpquas acquisitions.


Washington Trust and Sterling are endeavoring to become regional banks in different ways, Tejera says Washing-ton Trust has a surprisingly large share of the commercial-banking business in Spokane and the Inland Northwest and dominates the Spokane market. Stanton says that Washington Trust sees itself as a full-service, very high-quality, commercial bank.


Sterling, launched as a savings and loan in the early 80s, has a broad geographic footprint, but a smaller presence in major marketswhere Fortune 1,000 and middle-market customers tend to bethan Pacific Northwest and Umpqua, Tejera says. Also, he says, that while Sterling deserves recognition for the progress its made in transitioning from a thrift to a commercial bank, theyre not quite there when theyre compared with an Umpqua or a Washington Trust when it comes to commercial banking.


Says Gilkey, Weve made great progress, but were not up to the Washington Trust model yet. Weve been at it for three years, but theyve been at it for 100.


Gilkey adds, Our strategy of small-town deposit gathering is working for us. He says that 31 percent of Sterlings accounts now are checking accounts and money-market accounts, compared with a savings-and-loan-industry average of just 6 percent, and only 15 percent of Sterlings loans are single-family home loans, compared with an S&L-industry average of 90 percent.


Tejera says Sterling has built its asset base with real estate and real estate-backed loans, which is a quick way for a bank to build a base, but such loans usually pay a spread of only 2.75 percentage points above the cost of the funds the bank lends. Commercial loans usually pay a 6-point spread, and making such loans often enables a bank to land other lucrative business from a commercial customer, Tejera says.


Pacific Northwest Bank and Washington Trust would prefer to enter a relationship with a C-and-I approachby making a commercial or industrial loanwhich makes it much more likely youll get the deposit relationship, Tejera says.


Gilkey says that by seeking real estate-backed loans and small-town deposits, Sterling has positioned itself well to grow as a commercial bank.


We found a particular niche, he says. The second part of that is to then turn on the C-and-I loans. We have had substantial growth in that portion of our portfolio. As of Sept. 30, Sterlings business-banking loan portfolio had grown to $600 million, up from $225 million five years earlier, Gilkey says.