Community assets

Two decades ago a group of professionals hired to open the first Sterling Savings Bank, then called Sterling Savings Association, posed a tough question to their new boss, Chairman Harold Gilkey.

What were his goals for total assets?

Gilkey thought about the question. At the time, there were widespread savings and loan failures and people within the industry were naturally apprehensive. So he gave his new hires a figure that was high enough to motivate but reasonable enough to reassure: $500 million.

Privately, however, Gilkey thought Sterling could and would reach more than $1 billion in assets.

Twenty-three years later, Sterling has about $8 billion in assets, several subsidiaries and 143 bank branches in four states.

After pending mergers are completed with FirstBank NW Corp. and Lynnwood Financial Group Inc., Sterling Financial Corp. will have 164 bank branches. Gilkey expects through normal growth that assets will reach around $10 billion by early 2007.

With both an emphasis on friendly service and a commercial charter that enables it to make loans up to $70 million, the financial institution started by Gilkey and his longtime friend and colleague, William Zuppe, has positioned itself as the region’s biggest small bank.

“I think up the projects and he gets them done,” quipped Gilkey, chairman and CEO of parent organization Sterling Financial Corp., of his partnership with Zuppe, who’s chairman and CEO of Sterling Savings Bank.

Sterling Savings now has about a 3 percent market share for deposits in Washington, Idaho, Montana and Oregon. The FirstBank deal will add 21 branches and bolster key markets in Coeur d’Alene and Boise. Sterling also has an eight-state network of mortgage-loan offices through its subsidiaries, Action Mortgage Co. and Intervest-Mortgage Investment Co.

The Spokane-based company’s stock traded at about $32 a share recently, a steep rise from about $5 a share five years ago. Last year, net income reached $61.2 million and Sterling Financial Corp. started paying stockholders a quarterly cash dividend (the bank had previously paid stock dividends).

Industry analysts following Sterling have given it strong marks for performance and believe the company will continue to have solid growth.

Mike McMahon, managing director of the San-Francisco-based Sandler O’Neill + Partners, LP, an investment banking firm that sometimes works for Sterling, said that Sterling is now the largest bank headquartered in the Northwest. Seattle-based competitor Washington Mutual is a thrift, a charter that Sterling itself held from its inception until a year ago.Part of the company’s success with mergers may involve being in the right place at the right time, McMahon said, but the larger picture is that the company has a depth and breadth of quality managers.

“They have a very good management team that has executed flawlessly for a long time and won the respect and favor of Wall Street,” McMahon said.

McMahon predicts that Sterling’s future role as a consolidator will continue as the company picks up other banks that lack the assets they need to compete and grow.

“I would expect them to do more deals over there, while ultimately being acquired at some point down the road,” said McMahon, adding that this observation is based on a consolidation trend in banking and not on any indicators that Sterling is positioning itself to be purchased.

But Sterling is also nearing a crossroads. As the company expands, will it continue to play a regional role or branch out? In growing, will Sterling retain the community focus that lends a hometown feel in the cities it serves?

Gilkey envisions the company continuing to grow, but at a slightly slower pace. It tripled in size in the past five years and he believes it will double in the next five years.

“We’re big enough to serve people but we recognize that our real strength is being in community banking,” Gilkey said.

In each community, employees and management serve on boards and volunteer their time to causes. Gilkey said, “We believe we can only be as good as the community we’re in.”

Longtime customer John Schreiner, 54, said Sterling provides the same friendly service that it did 15 years ago when he opened his first account there.

“They’ve never lost that local flavor,” Schreiner said.

Schreiner, an owner of Spokane County Title Co., praises his Sterling loan officer and said the bank has met all his business needs, including providing financing to purchase three buildings.

“He has just given us tremendous service, so I have been loyal to them,” Schreiner said.

Gilkey attributes the bulk of the company’s success to Sterling’s employees.

“I think the one thing that has made the company successful is our ability to recruit people who want to serve people,” he said.

Hometown Helpful, the company credo, isn’t just banking babble. Employees say it’s a corporate culture that defines Sterling.

The philosophy allows flexibility so employees can do things like reverse service charges without consulting their managers and managers can make decisions that best serve their particular communities.

“I think Sterling empowers their employees a lot more to make decisions that are right for the customers,” said Bev Hosek, a customer service manager in Spokane.

Sterling currently employs about 1,900. Because the bank is growing, workers have plenty of opportunities for advancement, Hosek said, adding, “I don’t lose people from the bank. I lose them to other departments in the bank.”

Although Sterling was chartered as a thrift, it has always served businesses. To broaden its commercial financing business, the bank converted to a commercial charter last July. The charter enables Sterling to make loans up to $70 million. Gilkey said, adding that so far the bank’s biggest loan has been for $50 million.

Loaning money is a risk that all banks take and occasionally it doesn’t work out. Recently, the owners of Larry’s Markets, a six-store specialty grocery chain in Seattle, filed for Chapter 11 bankruptcy protection while they try to find potential buyers. Sterling was one of the company’s lenders, and while the bank declined to provide information about the type or amount of the loan, Gilkey said Larry’s Markets filed for bankruptcy to prevent a disruption in deliveries. The bank won’t be taking over any store locations, he said, adding, “We feel very comfortable with our collateral position and the value of Larry’s Markets.”

The latest acquisition of FirstBank NW Corp. takes the company back to its roots. Before the initial charter for the first Sterling Savings Association was complete, Gilkey and Zuppe were approached by state regulators who asked them to consider acquiring Lewis and Clark Savings & Loan Association, based in Clarkston. Gilkey said the S&L was financially viable, but had “run out of management.”

They made the acquisition and in one year, Sterling Savings’ assets rose from $2 million to $90 million.

“That kind of set the stage for our early development,” he said.

Today, the bank is making its 16th merger. Gilkey said Sterling never goes to the table unless it can offer something significant and be offered something beneficial in return.

“What you’re trying to do is build shareholder value for both companies,” he said.

For example, FirstBank NW Corp. has high-quality people and a good delivery system, he said. Sterling can provide FirstBank with sizable assets and a broader array of products.

Gilkey and Zuppe are both in their 60s but have no plans to retire. But when retirement comes, Gilkey said, there are about 20 or 30 employees who are capable of assuming leadership roles, including Heidi Stanley, Sterling’s chief operating officer and vice chairwoman of its board of directors.

But for the moment, Gilkey says he plans to stick around.

“As I tell a lot of people, this is my hobby and this is my recreation and this is what I enjoy doing.”