For the last several years, Sterling Savings Bank has reminded investors repeatedly that its transforming itself into a community bank and moving away from its roots as a savings and loan association.


Now, the big Spokane institution is upgrading its mantra.


We have the capacity of being the regional community bank, Harold B. Gilkey, chairman and chief executive officer of Sterlings parent, Sterling Financial Corp., told securities analysts Jan. 25, the day after the company announced its fourth-quarter and full-year 2001 financial results.


The refinement in meaning isnt as subtle as it might seem.


Sterling Financials 2001 results were so strong that, during a conference call, three securities analysts complimented Gilkey and Executive Vice President Dan Byrne with comments like, Great quarter, Keep it up, and Congratulations.


For 2001, Sterling reported per-share earnings of $1.59 a share, up from $1.39 in 2000, and Gilkey and Byrne projected that its earnings for 2002 will rise to as high as $2 to $2.10 a share. Total loan originations in 2001 shot up 43.6 percent, to $1.47 billion, with business-banking loan originations soaring 60.3 percent, to $389.5 million. Total assets climbed to $3.08 billion, up from $2.65 billion, for a 16.2 percent gain.


Thats the type of financial muscle Gilkey was talking about when he claimed that Sterling has the capacity to be a regional bank, with the strength to serve sizableif not Fortune 500clients. Currently, Sterling operates 76 locations in Washington, Idaho, Oregon, and Montana.


In an interview following the conference call, Gilkey said he believes that Sterling has a chance to be the kind of bank that Spokanes Old National Bank and Seattle-based Rainier National Bank, and Peoples Bank of Washington were 20 years ago. U.S. Bank, which since has been acquired by a Minneapolis bank-holding company, filled a similar role in Oregon, and so did WestOne Bank in Idaho, he says.


All of those companies are now gone, Gilkey says. They belong to somebody else. Its what I call the Wal-Mart Bank or the Costco Bankchains that offer customers one-size-fits-all banking services.


Gilkey believes that two regional players will emerge on the Northwest banking scene, but says its by no means certain that Sterling will be one of them. Both Gilkey and Jay Tejera, a banking analyst at Ragen MacKenzie, a Seattle-based regional securities brokerage owned by Wells Fargo, say that Pacific Northwest Bank also will compete for regional status. Pacific Northwest Bank, a Seattle institution thats headed by Pat Fahey, who, like Gilkey, is an ONB alum, has 55 branches in Western and Central Washington. Tejera says a handful of other institutions also are in the running to become household names.


Of Sterlings prospects, Tejera says, Theres nothing wrong with Harolds strategy; its a good strategy. Theres a vacuum in the market. Its going to be filled.


Yet, each of the institutions that aspire to regional status has hurdles to overcome, and for Sterling, one obstacle is to sweeten a business-loan portfolio thats weighted heavily toward real estate-backed loans, Tejera says. Inventory, receivable, and working-capital loans, more business loans by nature than real estate-backed loans, give lenders higher margins, he says.


Both Tejera and Gilkey say that to emerge as a regional institution, a bank must have systems and facilities to meet the needs of sizable customers across a broad area. Says Gilkey, Many of our customers have (business) facilities in all four of the states that were in. He asserts, We have a pretty good delivery system, broader than the other banks that are standing in line to become the regional community bank, and bigger credit standing.


Gilkey says Sterling will grow this year by adding to its network of bank branches. As Sterling plots that expansion, he says, it will pay particular attention to putting branches in the Portland area, because it has just five offices in Oregon now, which is too few.


He estimates that Sterling will add 100 employees this yearit has 950 employees nowwhile opening not more than a half-dozen locations.


Before long, but probably not in 2002, Sterling likely will open more business-banking centers similar to one it launched last fall in Portland, Gilkey says. That center is off to an excellent start, and Sterling would like to open others in Boise, Seattle, and maybe Spokane, he says. It has such a center in Bellevue, Wash., now.


During the conference call, one of the analysts expressed frustration that Sterlings strong results arent being reflected in its share price, and Gilkey said in the interview that Sterlings stock is trading at a lower value, in terms of its price-earnings ratio, than the shares of its peers.


Were trading at about 10 times earnings, Gilkey said. Our peer group is trading at about 13 times earnings. So, the market is discounting us at about $5 a share.


After Sterling announced its 2001 results, though We saw some more activity in our stock, Gilkey says.


As of the end of last week, Sterlings shares, which are listed on the Nasdaq automatic-quotation system, were trading at about $16. In the past 52 weeks, its stock had traded at between $10.80 and $17 a share.


Tejera says the lackluster performance of Sterlings shares could impede its efforts to grow. He says, however, that Gilkey recently told him Sterling hopes to achieve a 15 percent return on equity by the fourth quarter this year and maintain that level of return through 2003.


Sterling hasnt been able to achieve a 15 percent return on equity since mortgage markets were strong in the early 90s, while, in the banking industry, 15 percent is like hitting .300 in baseball, Tejera says. He adds that improved return on equity and a stronger share price would help Sterling grow because most acquisitions in the banking industry are paid for on a stock-for-stock basis, and in such transactions, a higher share price gives an acquirer more buying power. While Sterling has grown through acquisition in the past, Gilkey said in the conference call that Sterling isnt likely to be highly active in acquisitions until the stock market looks upon its shares more favorably.


Gilkey told the analysts that Sterling chose to remain a savings and loanand transition into a community bank while it grew by concentrating on business and consumer bankingrather than acquire a community bank and merge Sterling Savings into it. Sterling took the route it chose to avoid clashing cultures, and the chargeoffs from them, which are common after mergers, Gilkey said.


Some of our competitors who have tried to make the change from a thrift to a bank by acquisition have had chargeoffs, Gilkey said. We havent had any significant charges.