NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders (the "Meeting") of Sterling
Financial Corporation ("Sterling") will be held in the Conference
Theater of the Agricultural Trade Center (located in the Convention
Center), 334 West Spokane Falls Boulevard, Spokane, Washington, on
Tuesday, April 22, 1997, at 10:00 a.m., local time, for the following
purposes:
1. To elect three Directors of Sterling for terms ending in the year
2000;
2. To ratify the appointment of Coopers & Lybrand L.L.P. as the
independent public accountants for Sterling for 1997; and
3. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
All of these proposals are more fully described in the Proxy Statement
which follows. Only holders of shares of Sterling's Common Stock of
record at the close of business on February 28, 1997 are entitled to
vote at the Meeting. As of February 28, 1997, there were 5,543,007
shares of Common Stock outstanding.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES YOU OWN OR
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. EVEN IF YOU EXPECT TO
ATTEND THE MEETING, WE URGE YOU TO COMPLETE, SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE POSTAGE-PREPAID ENVELOPE.
By Order of the Board of Directors,
/s/NED M. BARNES
----------------
Ned M. Barnes
Secretary
Spokane, Washington
March 21, 1997
<PAGE>
PROXY STATEMENT
Annual Meeting of Shareholders
To be held April 22, 1997
GENERAL
-------
In November 1996, the Board of Directors voted to change the
fiscal year-end of Sterling Financial Corporation from June 30 to
December 31. Accordingly, Annual Meetings of Shareholders will be
held in April.
This Proxy Statement is being furnished to Shareholders in connection
with the solicitation by the Board of Directors of Proxies to be used
at the Annual Meeting of Shareholders to be held on April 22, 1997
(and any adjournments thereof). This Proxy Statement and the
accompanying form of proxy (the "Proxy"), the Notice of Annual Meeting
of Shareholders (the "Notice") and the Annual Report to Shareholders
for the six-month transition period ended December 31, 1996 (the
"transition period"), are being mailed to Shareholders on or about
March 21, 1997. Unless the context clearly suggests otherwise,
references in this Proxy Statement to Sterling include its
subsidiaries.
HOLDERS OF COMMON STOCK OF STERLING ARE REQUESTED TO COMPLETE, SIGN
AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED
POSTAGE-PREPAID ENVELOPE.
TIME AND PLACE OF MEETING
-------------------------
The Meeting will be held on Tuesday, April 22, 1997 at 10:00 a.m. in
the Conference Theater of the Agricultural Trade Center (located in
the Convention Center), 334 West Spokane Falls Boulevard, Spokane,
Washington.
RECORD DATE
-----------
The Board of Directors of Sterling has fixed February 28, 1997 as the
record date (the "Record Date") for the determination of Shareholders
of Sterling who are entitled to receive notice of and to vote at the
Meeting.
VOTING AND REVOCABILITY OF PROXIES
----------------------------------
Proxies properly signed and returned in time for the Meeting, unless
subsequently revoked, will be voted in accordance with the
instructions thereon. Persons named in the Proxy to represent
Shareholders at the Meeting are Harold B. Gilkey and William W. Zuppe.
If a Proxy is signed and returned without indicating any voting
instructions, the Proxy will be voted "FOR" the proposals listed in
the Notice. Any Proxy given pursuant to this solicitation may be
revoked by the person giving it at any time prior to the commencement
of the Meeting by the filing of a written notice of revocation or of a
duly executed Proxy bearing a later date with the Secretary of
Sterling. All such notices of revocation or Proxies should be
addressed to the Secretary of Sterling in care of Sterling Financial
Corporation, 111 North Wall Street, Spokane, Washington 99201, not
<PAGE>
less than four business days prior to the Meeting. After this time,
all such notices of revocation or Proxies should be personally
delivered to the Secretary or the Assistant Secretary of Sterling in
the meeting room prior to the commencement of the Meeting on the day
of the Meeting. Attendance or voting at the Meeting will not, in and
of itself, constitute revocation of a Proxy.
VOTING SHARES AND REQUIREMENTS
------------------------------
As of the Record Date, there were 5,543,007 shares of Common Stock of
Sterling, par value $1.00 per share (the "Common Stock") outstanding.
Each share of Sterling's Common Stock outstanding on the Record Date
is entitled to one vote on each matter properly submitted at the
Meeting. Shares of Common Stock can be voted only if the owner of
record is present to vote or is represented by Proxy at the Meeting.
The holders of a majority of the shares of Common Stock outstanding on
the Record Date, present in person or represented by Proxy, shall
constitute a quorum. The nominees for election as Directors receiving
the largest number of votes cast at the Meeting will be elected
Directors. The proposal to ratify the appointment of independent
public accountants requires the affirmative vote of more shares
favoring the action than opposing the action.
SOLICITATION OF PROXIES
-----------------------
The cost of the solicitation of Proxies will be borne by Sterling.
Sterling will, upon request, reimburse persons holding stock for
others for their reasonable expenses in sending proxy materials to
their principals and obtaining their Proxies. In addition to
solicitation by mail, Proxies may be solicited in person, or by
telephone, telefax or other types of communications, by Directors,
Officers, and Employees of Sterling or others, without additional
compensation.
RECOMMENDATION OF THE BOARD OF DIRECTORS
----------------------------------------
The Board of Directors of Sterling believes the proposals described
herein are in the best interests of Sterling and its Shareholders and,
accordingly, recommends that the Shareholders vote "FOR" each of the
proposals listed in the Notice.
PROPOSAL 1: ELECTION OF DIRECTORS
The Board of Directors currently consists of eight Directors who are
divided into three classes. The members of each class serve three-
year terms, with one class elected annually. The Board of Directors
has nominated the three individuals listed below for election as
Directors to serve terms of three years ending at the Annual Meeting
of Shareholders of Sterling in the year 2000 or when their respective
successors have been duly elected and qualified. The nominees are:
William W. Zuppe
Rodney W. Barnett
David O. Wallace
<PAGE>
Sterling has no reason to believe that any of the nominees will be
unable to serve; however, should any nominee become unable to serve as
a Director for any reason, the Board of Directors shall designate a
substitute nominee. Unless instructions to the contrary are specified
in the Proxy, it is intended that the Proxies will be voted in favor
of the three persons who have been nominated by the Board of
Directors.
The Board of Directors recommends that Shareholders
vote "FOR" the nominees
BOARD OF DIRECTORS OF STERLING FINANCIAL CORPORATION
Harold B. Gilkey:
-----------------
Mr. Gilkey, 57, has served as Chairman of the Board and Chief
Executive Officer of Sterling since its inception and as Chairman of
the Board and Chief Executive Officer of Sterling Savings Association
("Sterling Savings") since 1981. Mr. Gilkey co-founded Sterling
Savings in 1981. Additionally, he is Chairman of the Board of
INTERVEST-Mortgage Investment Company ("INTERVEST"), Action Mortgage
Company ("Action Mortgage") and Harbor Financial Services, Inc.
("Harbor Financial"), subsidiaries of Sterling Savings. Mr. Gilkey
brought to Sterling Savings over 19 years of commercial and mortgage
banking experience. He served as President of Bancshares Mortgage
Company of Spokane, Washington, an institution servicing $500 million
in mortgage loans and Senior Vice President of Old National Bank of
Spokane, Washington, a $1.6 billion commercial bank. Prior to this,
Mr. Gilkey was employed by Bank of America for twelve years, holding
various management positions with responsibilities for equipment
finance and leasing, personnel and training, and branch operations.
Mr. Gilkey is a past Director of the Washington Savings League and a
member of the Savings Association Insurance Fund Industry Advisory
Committee, an advisory committee of the FDIC. Mr. Gilkey received his
degree in Business Administration from the University of Montana in
1962 and his Master of Business Administration degree from the
University of Southern California in 1970. His term expires in 1999.
William W. Zuppe:
-----------------
Mr. Zuppe, 55, has served as Director, President and Chief Operating
Officer of Sterling since its inception and as Director, President and
Chief Operating Officer of Sterling Savings since 1981. Mr. Zuppe co-
founded Sterling Savings in 1981. Mr. Zuppe is also Vice President
and serves as a Director of INTERVEST, Action Mortgage and Harbor
Financial. Mr. Zuppe brought to Sterling Savings 18 years of mortgage
lending experience as Vice President of Bancshares Mortgage Company
and Manager of Loan Administration of Sherwood & Roberts, Inc. of
Walla Walla, Washington, a mortgage-banking company which serviced in
excess of $500 million in mortgage loans. Mr. Zuppe is a member of
the Washington Savings League Board of Directors and its
Legislative/Regulatory Committee. If elected, his term will expire in
the year 2000.
<PAGE>
Ned M. Barnes:
--------------
Mr. Barnes, 60, has served as Secretary and a Director of Sterling
since its inception and as Secretary of Sterling Savings since 1981
and a Director since 1983. Mr. Barnes is also Secretary and serves as
a Director of INTERVEST and Action Mortgage and serves as a Director
of Harbor Financial. Mr. Barnes is a Principal in the law firm of
Witherspoon, Kelley, Davenport & Toole, P.S. of Spokane, Washington,
which he joined in 1965. Mr. Barnes' law practice emphasizes the
areas of real estate and corporate law. Mr. Barnes graduated from the
University of Minnesota in 1958, earning a degree in Business
Administration. He received his Juris Doctorate degree from the
University of Washington in 1961. His term expires in 1998.
Rodney W. Barnett:
------------------
Mr. Barnett, 53, has served as a Director of Sterling since its
inception and as a Director of Sterling Savings since 1981. He is a
Principal and General Manager of Carr Sales Company, an electrical
supply firm in Spokane, Washington. Mr. Barnett is also a past
Director of the National Association of Electrical Distributors and is
a past Chairman of the Inland Empire Chapter of that Association. If
elected, his term will expire in the year 2000.
James P. Fugate:
----------------
Mr. Fugate, 63, has served as a Director of Sterling since its
inception and as a Director of Sterling Savings since 1989. He is the
Superintendent of Auburn School District No. 408 and a member of the
Auburn Economic Development Council. Mr. Fugate is a former Director
of Central Evergreen Savings & Loan Association. His term expires in
1998.
Robert D. Larrabee:
-------------------
Mr. Larrabee, 61, has served as a Director of Sterling since its
inception and as a Director of Sterling Savings since 1983. Mr.
Larrabee is the former owner of Merchant Funeral Home in Clarkston,
Washington. He is also a former Director of Laurentian Capital
Corporation, a former Director of Lewis and Clark Savings & Loan
Association and a past President of the Board of Regents of the
University of Washington. His term expires in 1998.
Robert E. Meyers:
-----------------
Dr. Meyers, 71, has served as a Director of Sterling since its
inception and as a Director of Sterling Savings since 1983. He is a
retired dentist from Clarkston, Washington. Dr. Meyers is a former
Director of Lewis and Clark Savings & Loan Association. His term
expires in 1999.
David O. Wallace:
-----------------
Mr. Wallace, 59, has served as a Director of Sterling since its
inception and as a Director of Sterling Savings since 1981. He is the
owner of Startup Business Planning. Mr. Wallace is a Past Chairman of
the Citizens Advisory Council for School District No. 81 in Spokane,
Washington. If elected, his term will expire in the year 2000.
<PAGE>
COMPENSATION OF DIRECTORS
-------------------------
Directors of Sterling are not paid an annual fee but receive a fee,
which is currently $500, for every meeting attended. Each of the
Directors of Sterling also serves as a Director of Sterling Savings
for the same term. Directors of Sterling Savings are paid an annual
fee of $2,000 plus a fee, which is currently $500, for every meeting
attended. Additionally, Directors who also serve as Directors of the
subsidiaries of Sterling Savings receive a fee, which is currently
$100, for each meeting attended. Directors receive reimbursement for
travel and other expenses incurred in connection with Board business.
Nonemployee Directors of Sterling also receive grants of nonstatutory
stock options pursuant to the 1992 Stock Option Plan (the "Plan").
Under the Plan: (a) each nonemployee Director serving at the adoption
of the Plan received options to purchase 5,000 shares of Common Stock;
(b) each nonemployee Director subsequently elected will receive
options to purchase 2,000 shares of Common Stock; and (c) at each
Annual Meeting of Shareholders, nonemployee Directors who have served
as Directors for a period of at least one year and who will continue
to serve as Directors immediately following such Annual Meeting will
receive options to purchase 1,000 shares of Common Stock. Such
options have an exercise price equal to the fair market value of the
Common Stock on the date of grant, become exercisable in 25 percent
cumulative annual installments beginning on the first anniversary of
the date of grant and generally expire ten years from the date of
grant. In the event that a Director is removed from office, all
options granted to such Director pursuant to the automatic grants of
nonstatutory stock options described above will expire immediately
upon such removal. No automatic grants of nonstatutory stock options
will be made in a given year if Sterling's Return on Equity and Return
on Average Assets for the preceding year do not equal or exceed 12.0%
and 0.70%, respectively.
ATTENDANCE AT MEETINGS. The Board of Directors of Sterling held four
meetings during the transition period. The Board of Directors of
Sterling Savings held six meetings during the transition period. The
Boards of Directors for all Sterling Savings subsidiaries held an
aggregate of twenty meetings during the transition period.
Aggregating for each incumbent Director (i) the total number of
meetings of the Board of Directors and (ii) the total number of
meetings held by all committees of the Board on which each Director
served, each member of Sterling's Board of Directors attended more
than 75% of such meetings. The total combined attendance at all
meetings by the incumbent Directors was 95.83%.
COMMITTEES OF THE BOARD OF DIRECTORS
------------------------------------
The Board of Directors of Sterling has established standing Personnel
and Audit Committees. The Board of Directors of Sterling Savings has
established standing Personnel, Audit and Planning Committees.
Neither Board has established a standing Nominating Committee.
<PAGE>
The Personnel Committees review and make recommendations to the Boards
of Directors with respect to personnel policies which include, but are
not limited to, officer and employee salaries and benefits. The
Committees currently consist of Directors Larrabee (Chairman), Fugate
and Meyers.
The Audit Committees oversee Sterling's financial reporting process
and internal controls. The Committees consult with the internal
auditor, Sterling's independent auditors and management regarding
internal accounting controls, the annual audit and regulatory
examinations. The Committees currently consist of Directors Barnett
(Chairman), Barnes, Meyers and Wallace.
The Planning Committee identifies and monitors broad political, social
and environmental trends which may affect Sterling Savings' activities
and performance. The Committee consults with management on long-range
plans and programs, and assists the Board of Directors in policy-
making functions. The Committee currently consists of Directors
Gilkey (Chairman), Barnes, Barnett, Larrabee, Wallace and Zuppe.
EXECUTIVE OFFICERS
------------------
In addition to Messrs. Gilkey, Zuppe and Barnes, the Executive
Officers of Sterling and its subsidiaries are David P. Bobbitt, Daniel
G. Byrne, Stephen L. Page, Heidi B. Stanley, John M. Harlow, Stanton
C. Parrish and Thomas F. Sackmann. Each Executive Officer has held
his or her present position for the past five years unless otherwise
stated.
David P. Bobbitt:
-----------------
Mr. Bobbitt, 49, serves as Senior Vice President-Community Banking of
Sterling Savings. He joined Sterling Savings in March of 1996. Before
joining Sterling Savings, Mr. Bobbitt was with West One Bank for 26
years. He is Past President of the Idaho Bankers Association, and
serves as a Director of the Pacific Coast Banking School and of the
Idaho Association of Commerce and Industry. He is an Advisory
Director of the College of Business & Economics at the University of
Idaho. He is a member of the Idaho Bankers Association Executive
Council and the American Bankers Association Government Relations
Council. Mr. Bobbitt is a graduate of North Idaho College, the
Pacific Coast Banking School and Harvard University's Advanced
Management Program.
Daniel G. Byrne:
----------------
Mr. Byrne, 42, has served as Chief Financial Officer, Senior Vice
President-Finance, Treasurer and Assistant Secretary of Sterling since
its inception and joined Sterling Savings in 1983. Mr. Byrne is also
the Assistant Secretary and Treasurer of INTERVEST and Action Mortgage
and the Secretary and Treasurer of Harbor Financial. Before joining
Sterling, Mr. Byrne was on the staff of the accounting firm of Coopers
& Lybrand in Spokane, Washington. Mr. Byrne is a certified public
accountant and graduated from Gonzaga University in 1977.
<PAGE>
Stephen L. Page:
----------------
Mr. Page, 48, serves as Senior Vice President-Credit Management of
Sterling Savings. He joined Sterling Savings in 1983. Prior to 1983,
Mr. Page was employed by Kiemle and Hagood Company of Spokane,
Washington as a Property Management Leasing Officer. Mr. Page
graduated from the University of Utah in 1970 and received a Master of
Business Administration degree from the University of New Mexico in
1973.
Heidi B. Stanley:
-----------------
Ms. Stanley, 40, serves as Senior Vice President-Corporate
Administration of Sterling Savings. She joined Sterling Savings in
1985. Ms. Stanley was formerly employed as a national college
recruiter by IBM in San Francisco, California, and Tucson, Arizona.
Ms. Stanley graduated from Washington State University in 1979 with a
degree in Business Administration.
John M. Harlow:
---------------
Mr. Harlow, 54, serves as Vice President of Sterling Savings and
President and Director of INTERVEST. He joined Sterling Savings in
1987. Mr. Harlow was formerly the President of the Mortgage Banking
Division of Moore Financial Services of Portland, Oregon, a mortgage-
banking subsidiary of West One Bancorp, and Senior Vice President of
Income Property Lending for Bancshares Mortgage Company of Spokane,
Washington. Mr. Harlow was also a Vice President/Regional Manager for
I.D.S. Mortgage Company in Northern California. He graduated from the
University of Illinois in 1965 and is a Certified Mortgage Banker.
Stanton C. Parrish:
-------------------
Mr. Parrish, 46, serves as Vice President of Sterling Savings and
President and Director of Harbor Financial. He joined Sterling
Savings in 1983. Prior to 1983, Mr. Parrish was employed by Western
Savings Association of Portland, Oregon. Mr. Parrish is a 1972
graduate of Washington State University.
Thomas F. Sackmann:
-------------------
Mr. Sackmann, 44, serves as Vice President of Sterling Savings and
President and Director of Action Mortgage. He joined Sterling Savings
in 1988. Mr. Sackmann was formerly Executive Vice President and Chief
Operating Officer of Moore Financial Services of Boise, Idaho, a
mortgage-banking subsidiary of West One Bancorp, and was responsible
for residential lending. Mr. Sackmann is a 1973 graduate of Linfield
College and a 1976 graduate of the University of Washington School of
Law.
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth, as of December 31, 1996, information
about the only known beneficial owners of more than five percent of
Sterling's Common Stock.
Name and Address Amount and Nature of Percent
of Beneficial Owner Beneficial Ownership of Class
---------------------------------- -------------------- --------
Heartland Advisors, Inc.(1) 381,500 6.89
790 North Milwaukee Street
Milwaukee, WI 53202
Westport Asset Management, Inc.(2) 500,500 9.04
253 Riverside Avenue
Westport, CT 06880-4816
Footnotes:
----------
(1) Based on information provided by Heartland Advisors, Inc., which
states that it has sole dispositive power as to 381,500 shares
and sole voting power as to 380,400 shares.
(2) Based on information provided by Westport Asset Management, Inc.,
which states that it has shared dispositive power as to 500,500
shares and shared voting power as to 500,500 shares.
The following table sets forth, as of January 31, 1997, information
concerning the beneficial ownership of Sterling Common Stock by each
Director and Executive Officer named in the Summary Compensation
Table, and by all Directors and Executive Officers as a group.
Amount and Nature Percent
Name of Beneficial Owner of Beneficial Ownership of Class
------------------------ ----------------------- --------
Ned M. Barnes 24,656 (1) *
Rodney W. Barnett 21,239 (2) *
James P. Fugate 9,998 (3) *
Harold B. Gilkey 138,438 (4) 2.58
John M. Harlow 22,499 (5) *
Robert D. Larrabee 17,280 (3) *
Robert E. Meyers 32,535 (3) *
Thomas F. Sackmann 16,750 (6) *
David O. Wallace 11,791 (7) *
William W. Zuppe 69,984 (8) 1.30
All Directors and
Executive Officers as a
group (15 persons) 473,686 (9) 8.55
-------
*Less than 1%
<PAGE>
Footnotes:
----------
(1) Includes 987 shares as to which Mr. Barnes has shared voting and
investment power, 14,726 shares held in a self-directed profit-
sharing plan and 6,250 shares issuable pursuant to stock options
exercisable within 60 days. Excludes 1,331 shares owned by the
law firm of which Mr. Barnes is a principal, as to which shares
Mr. Barnes disclaims beneficial ownership.
(2) Includes 5,898 shares owned by a profit-sharing plan, of which
Mr. Barnett is the principal administrator and as to which shares
he disclaims beneficial ownership, and 6,250 shares issuable
pursuant to stock options exercisable within 60 days.
(3) Includes 6,250 shares issuable to this Director pursuant to stock
options exercisable within 60 days. Excludes 217,142 shares held
by Sterling's Deferred Compensation Plan, which is administered
by Sterling's Personnel Committee of which this Director is a
member. This Director disclaims beneficial ownership of these
shares.
(4) Includes 42,000 shares issuable pursuant to stock options
exercisable within 60 days and 5,347 shares held for Mr. Gilkey's
individual account under the Sterling Savings Association
Employee Savings Plan (the "Savings Plan"). Excludes 93,361
shares held by Sterling's Deferred Compensation Plan and 2,930
shares (as of December 31, 1996) held by the Savings Plan for the
benefit of Mr. Gilkey, as to which shares Mr. Gilkey disclaims
beneficial ownership.
(5) Includes 18,000 shares issuable pursuant to stock options
exercisable within 60 days. Excludes 13,216 shares held by
Sterling's Deferred Compensation Plan and 1,407 shares (as of
December 31, 1996) held by the Savings Plan for the benefit of
Mr. Harlow, as to which shares Mr. Harlow disclaims beneficial
ownership.
(6) Includes 13,000 shares issuable pursuant to stock options
exercisable within 60 days. Excludes 12,922 shares held by
Sterling's Deferred Compensation Plan and 999 shares (as of
December 31, 1996) held by the Savings Plan for the benefit of
Mr. Sackmann, as to which shares Mr. Sackmann disclaims
beneficial ownership.
(7) Includes 6,250 shares issuable pursuant to stock options
exercisable within 60 days.
(8) Includes 48,922 shares issuable pursuant to stock options
exercisable within 60 days and 3,058 shares held for Mr. Zuppe's
individual account under the Savings Plan. Excludes 64,083
shares held by Sterling's Deferred Compensation Plan and 2,673
shares (as of December 31, 1996) held by the Savings Plan for the
benefit of Mr. Zuppe, as to which shares Mr. Zuppe disclaims
beneficial ownership.
<PAGE>
(9) Includes 220,422 shares issuable pursuant to stock options
exercisable within 60 days and 17,400 shares held in individual
accounts under the Savings Plan. Excludes 215,025 shares held by
Sterling's Deferred Compensation Plan and 12,835 shares (as of
December 31, 1996) held by the Savings Plan for the benefit of
members of the group, as to which shares such members disclaim
beneficial ownership.
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
-----------------------
Sterling seeks to promote a strong pay-for-performance culture by
aligning compensation with Sterling's performance. Sterling's Board
of Directors believes that compensation should:
- relate to the value created for Shareholders by being directly
tied to the financial performance and condition of Sterling and
each Executive Officer's contribution thereto;
- reward individuals who help Sterling achieve its short-term and
long-term objectives and thereby contribute significantly to the
success of Sterling;
- help to attract and retain the most qualified individuals
available by being competitive in terms of compensation paid to
persons having similar responsibilities and duties in other
companies in the same and closely-related industries; and
- reflect the qualifications, skills, experience and
responsibilities of each Executive Officer.
The Personnel Committee, which is composed of three nonemployee
Directors, administers the compensation of the Chief Executive Officer
(the "CEO") and the other Executive Officers of Sterling and its
subsidiaries ("Executive Officers"), subject to review and appropriate
approval of Sterling's Board of Directors.
In determining executive compensation, Sterling uses peer group
comparisons as part of its overall analysis. The Personnel Committee
believes that companies operating in the banking and financial
services industries are appropriate to include in its compensation
analysis. Additionally, the Personnel Committee is advised from time
to time by outside compensation consultants on its compensation
policies.
Several factors are used to measure the performance of Sterling and
its Executive Officers. In order to measure corporate financial and
operating results, the Personnel Committee examines Sterling's (1)
return on equity and (2) reported earnings per share as compared to
the performance of peers. Individual performance measures are both
quantifiable and non-quantifiable and are designed to be reasonably
attainable, under the immediate influence of the executive and related
to the success of the individual.
<PAGE>
COMPONENTS OF COMPENSATION
--------------------------
At present, the executive compensation program is comprised of base
salary, annual cash incentive compensation, long-term compensation in
the form of deferred compensation and stock options and benefits
typically offered to executives of similar corporations.
BASE SALARY. In establishing the base salaries of the CEO and the
other Executive Officers, the Personnel Committee examines competitive
peer group surveys and data in order to determine whether compensation
is competitive with that offered by other companies in the banking and
financial services industries. The Personnel Committee looks
primarily at companies which are similar in terms of their size and
the complexity of their operations. The Personnel Committee also
takes into account Sterling's financial and operating performance as
compared with the industry as a whole and considers the diverse skills
required of its executive management to expand its operations while
maintaining good performance. In addition, the Personnel Committee
considers the particular executive's performance, responsibilities,
qualifications and experience in the banking industry.
ANNUAL CASH INCENTIVE COMPENSATION. Sterling maintains an Annual Cash
Incentive Compensation Program. The annual component of this plan is
intended to encourage and reward the achievement of (1) growth in
Sterling's reported earnings, and (2) targeted returns on equity.
These criteria are deemed by the Personnel Committee to be critical to
increasing Shareholder value. The plan is also designed to assist in
the attraction and retention of qualified employees, to further link
the financial interests and objectives of employees with those of
Sterling, and to foster accountability and teamwork throughout
Sterling.
DEFERRED COMPENSATION PLAN. The Deferred Compensation Plan component
of the overall compensation plan is intended to link compensation to
the long-term performance of Sterling and to provide a strong
incentive for increasing Shareholder value. Since July 1, 1984,
Sterling has maintained a nonqualified Deferred Compensation Plan.
The Personnel Committee may, as it has done in the past, choose
additional participants from a group of management employees. As of
January 31, 1997, there were ten participants in the Deferred
Compensation Plan. Contributions to the Plan for each given year are
determined by the Board following recommendations by the Personnel
Committee. Contributions to the accounts maintained for Mr. Gilkey
and Mr. Zuppe are allocated in accordance with their respective
employment agreements, unless such contributions are waived. Accounts
are credited with interest each year at the applicable rate for that
year. Participants vest in an additional 10% of their benefit under
the Plan for each year of service with Sterling, with full vesting
after ten years of service and upon death or disability or retirement
at or after age 60. Payment of an account may be in a lump sum or in
installments as determined by the Personnel Committee and installments
may be accelerated by the Committee. Payment must be commenced within
one year of the termination of the participant's employment with
Sterling.
<PAGE>
STOCK OPTION PLANS. The Personnel Committee believes that the Stock
Option Plans provide a link between the achievement of challenging
financial goals and a competitive incentive opportunity. The purpose
of the Plans is to encourage the ownership of Common Stock by
employees, attract and retain qualified employees, develop and
maintain strong management and employee loyalty and to give suitable
recognition to employees' material contributions to Sterling's
success.
COMPENSATION OF CEO
-------------------
During the transition period, the compensation of the CEO was based on
the general principles of the executive compensation program and on
the CEO's Employment Agreement. In determining the salary and other
forms of compensation for the Chairman of the Board and CEO, Mr.
Gilkey, the Personnel Committee took into consideration Mr. Gilkey's
substantial experience and standing in the industry in general and
with Sterling in particular. The Personnel Committee also considered
the increased responsibilities for Mr. Gilkey as a result of
Sterling's diversification and growth in recent years. The Personnel
Committee believes that Mr. Gilkey's transition period compensation as
Chief Executive Officer appropriately reflects Sterling's performance
during the transition period and his contributions to that
performance.
PERSONNEL COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
--------------------------------------------------------
During the transition period, there were no "interlocking" or cross-
board memberships, which are required to be disclosed under SEC rules.
For a general description of transactions and relationships Directors
and Executive Officers and their associates may have had with Sterling
and its affiliates during the year, see "Interest of Directors and
Executive Officers in Certain Transactions."
Submitted on behalf of the Personnel Committee:
-----------------------------------------------
Robert D. Larrabee, Chairman
James P. Fugate
Robert Meyers
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation
received from Sterling by each of the named Executive Officers for
services in all capacities to Sterling and its subsidiaries for the
last three years and the transition period.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------------- ---------------------
Fiscal Other Annual Securities Underlying All Other
Name and Principal Position Year (1) Salary ($) Bonus ($) Comp. ($) (2) Options (#) Comp. ($) (3)
-------------------------------- -------- ---------- --------- ------------- --------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey, Chairman and 1996.5 120,000 0 15,934 7,000 42,952
CEO of Sterling 1996 240,000 0 54,774 36,000 86,789
1995 228,000 0 27,747 6,000 78,816
1994 192,000 58,000 25,078 10,000 63,712
William W. Zuppe, President and 1996.5 90,000 0 15,106 6,000 31,284
COO of Sterling 1996 180,000 0 60,258 31,000 37,478
1995 168,000 0 24,567 6,000 48,522
1994 144,000 72,000 22,000 10,000 39,155
John M. Harlow, Vice President 1996.5 78,000 25,000 N/A 5,000 7,845
of Sterling Savings; President 1996 144,000 25,000 N/A 23,000 13,903
of INTERVEST 1995 132,000 40,000 N/A 5,000 15,450
1994 108,000 20,000 N/A 5,000 12,060
Thomas F. Sackmann, Vice 1996.5 69,000 0 N/A 2,500 7,755
President of Sterling Savings; 1996 132,000 0 N/A 13,000 14,310
President of Action Mortgage 1995 132,000 0 N/A 5,000 13,320
1994 120,000 60,000 N/A 5,000 13,310
</TABLE>
<PAGE>
Footnotes:
----------
(1) The transition period is identified as Fiscal Year 1996.5 for
purposes of this Table.
(2) No compensation amounts are provided where the aggregate amounts
of perquisites and other personal benefits do not exceed the
lesser of either $50,000 or 10% of the total of such officer's
annual salary and bonus. Amounts shown for 1996.5 include
Director's fees of $9,000 and auto allowances of $4,200 each for
Messrs. Gilkey and Zuppe, and club dues of $2,734 and $1,906 for
Messrs. Gilkey and Zuppe, respectively.
(3) Includes transition period vesting of amounts in the Deferred
Compensation Plan, matching contributions under Sterling Savings'
Employee Savings Plan and the value (as projected on an actuarial
basis pursuant to I.R.C. Rev. Rul. 55-747 ("PS 58")) of the
premium for life insurance coverage provided for Messrs. Gilkey
and Zuppe. Aggregate contributions to the Deferred Compensation
Plan during the transition period and fiscal years 1996, 1995 and
1994 for the named officers were $72,000, $280,000, $290,000 and
$241,000 respectively.
EMPLOYMENT AGREEMENTS AND ARRANGEMENTS
--------------------------------------
Sterling has entered into employment agreements (the "Agreements")
with Messrs. Gilkey and Zuppe, which provide for an annual fixed
minimum salary of $240,000 to Mr. Gilkey and $180,000 to Mr. Zuppe.
Additionally, the Agreements provide for incentive bonuses, non-
qualified deferred compensation, stock options, certain perquisites,
split-dollar life insurance policies and rights to participate in
other benefit programs offered or maintained by Sterling. On July 1,
1995, the effective date of the Agreements, Sterling granted to
Messrs. Gilkey and Zuppe, respectively, 20,000 and 15,000 nonstatutory
options under Sterling's 1992 Stock Option Plan. The Agreements expire
on June 30, 2000 and will then be automatically extended to Mr.
Gilkey's 65th birthday and for an additional 5 years for Mr. Zuppe,
unless Sterling gives written notice of non-renewal prior to
December 31, 1999.
The Agreements provide for the payment of certain severance benefits
to Messrs. Gilkey and Zuppe upon termination of their employment by
Sterling without cause or following a constructive discharge, a notice
of non-renewal or their permanent disability. Pursuant to these
provisions, Mr. Gilkey and Mr. Zuppe would be entitled to receive
their base salary in effect at the time of termination until the
expiration of their Agreements or for a three-year period, whichever
period were longer. In the event Messrs. Gilkey or Zuppe were
discharged within eighteen months following a change in control of
Sterling, they would be entitled to their base salaries and incentive
bonuses, at the highest annual rates during their employment, for a
three-year period. In addition, earned but unpaid base salary and
incentive bonus amounts and amounts held for Messrs. Gilkey and Zuppe
in the Deferred Compensation Plan as of the date of termination would
<PAGE>
be paid in full. Group hospitalization, health, dental care, life or
other insurance, including travel, accident and disability insurance
and the perquisites set forth in the Agreements would continue through
the end of the applicable period. The options granted pursuant to the
Agreements would become fully exercisable during the applicable
period. In the event any payments received by Messrs. Gilkey and
Zuppe in connection with a change in control were subject to the
excise tax imposed upon certain change in control payments under
Federal tax laws, the Agreements provide for an additional payment
sufficient to restore each executive to the same after-tax position
the executive would have been in if the excise tax had not been
imposed.
Sterling is the plaintiff in a lawsuit which is pending in the United
States Court of Federal Claims (the "Lawsuit"). The Lawsuit is an
action for damages arising out of the government's breach of its
contracts with Sterling in connection with Sterling's past
acquisitions of certain troubled thrift associations. In the event
that a settlement or judgment amount is received by Sterling as a
result of the Lawsuit, Messrs. Gilkey and Zuppe are entitled by the
terms of the Agreements to receive three percent and two percent,
respectively, of the gross amount received, in recognition of their
substantial contribution in bringing about the settlement or judgment.
This provision is intended to survive the termination of the
Agreements.
<PAGE>
The following tables set forth information with respect to stock
options ("options") granted to and exercised by the Chief Executive
Officer of Sterling and the next four most highly compensated
Executive Officers during the transition period.
OPTION GRANTS IN TRANSITION PERIOD
<TABLE>
<CAPTION>
Potential Realizable
Individual Grants Value at Assumed
------------------------------------------------------------------- Annual Rates of Stock
Number of % of Total Price Appreciation
of Securities Options Granted Exercise for Option Term
Underlying to Employees in or Base Price Expiration ---------------------
Name Options Granted Transition Period ($/Sh) (1) Date (2) 5% ($) 10% ($)
------------------ --------------- ----------------- ------------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey 7,000 14.58 14.00 12/16/06 61,630 156,186
William W. Zuppe 6,000 12.50 14.00 12/16/06 52,825 133,873
John M. Harlow 4,000 8.33 14.00 2/28/05 30,874 76,044
1,000 2.08 14.00 2/28/06 8,804 22,312
Thomas F. Sackmann 2,500 5.21 14.00 2/28/04 16,710 40,025
</TABLE>
Footnotes:
(1) The Exercise or Base Price is the fair market value of the Common
Stock on the date of grant as listed on the Nasdaq National
Market, as adjusted for Stock Dividends declared and/or paid.
(2) Due to the change in fiscal year from June 30 to December 31, the
expiration dates for Messrs. Harlow and Sackmann were extended
from 8/30 to 2/28, by resolution of the Board of Directors.
<PAGE>
AGGREGATED OPTION EXERCISES IN TRANSITION PERIOD AND
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at Year End Options at Year End ($) (1)
Shares Acquired Value ----------------------------- -----------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
------------------- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harold B. Gilkey 0 0 42,000 17,000 119,114 0
William W. Zuppe 0 0 48,922 16,000 201,710 0
John M. Harlow 1,000 6,945 18,000 20,000 56,334 0
Thomas F. Sackmann 0 0 13,000 12,500 46,296 0
</TABLE>
Footnotes:
(1) Values are adjusted for Stock Dividends declared and/or paid.
SHAREHOLDER RETURN COMPARISON
The following table sets forth a five-year comparison of total
Shareholder return on the Common Stock of Sterling to the Nasdaq
National Stock Index (US Companies) and Nasdaq Financial Stock Index
consisting of all financial companies listed under SIC codes 60
through 67. The table assumes an investment of $100 on December 31,
1991 and the reinvestment of all dividends.
THE STOCK PRICE PERFORMANCE SHOWN ON THE FOLLOWING TABLE IS PROVIDED
AS OF YEAR-END AND MAY NOT BE INDICATIVE OF CURRENT STOCK PRICE LEVELS
OR FUTURE STOCK PRICE PERFORMANCE.
<PAGE>
COMPARISON OF CUMULATIVE TOTAL SHAREHOLDER RETURNS (1)
<TABLE>
<CAPTION>
Index Value at December 31,
--------------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Sterling Stock $233 $217 $162 $179 $137 $100
NASDAQ Financial Stock Index 311 243 167 166 143 100
NASDAQ Stock Market (U.S.) Index 223 179 138 132 110 100
</TABLE>
Footnote:
---------
(1) Total returns assume reinvestment of all dividends.
PROPOSAL 2: RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
The Board of Directors has appointed Coopers & Lybrand L.L.P. to serve
as independent auditors for Sterling and its subsidiaries for the year
ending December 31, 1997, and any interim periods, subject to
ratification by the Shareholders at the Meeting. Coopers & Lybrand
L.L.P. has advised Sterling that it will have in attendance at the
Meeting one or more representatives who will be available to respond
to appropriate questions presented at the Meeting. Such
representatives will be given an opportunity to make a statement at
the Meeting if they desire to do so. If the appointment of Coopers &
Lybrand L.L.P. is not ratified by the required number of votes, the
Board will reconsider its selection of independent auditors for 1997.
The Board of Directors recommends that Shareholders
vote "FOR" Proposal 2
OTHER MATTERS
Sterling knows of no other business that will be presented for
consideration at the Meeting other than those items set forth herein.
The enclosed Proxy, however, confers discretionary authority to the
Proxy agents to vote with respect to matters which may be presented at
the Meeting, including the election of any person as a Director in the
event a nominee of the Board of Directors of Sterling is unable to
serve. If any such matters come before the Meeting, the Proxy agents
will vote according to their own judgment.
<PAGE>
INTEREST OF DIRECTORS, OFFICERS AND OTHERS
IN CERTAIN TRANSACTIONS
Certain of the Directors and Executive Officers of Sterling and its
subsidiaries were customers of, and had transactions with Sterling
Savings during the transition period. In addition, certain Directors
and Executive Officers are officers, directors or Shareholders of
corporations or members of partnerships which were customers of or had
transactions with Sterling Savings during the transition period. All
such transactions were in the ordinary course of business, on
substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other
persons, and did not involve more than the normal risk of
collectability or present other unfavorable features. The law firm of
Witherspoon, Kelley, Davenport & Toole, P.S., of which Ned M. Barnes
is a principal, received $389,191 during the transition period for
legal services rendered to Sterling and its subsidiaries, exclusive of
amounts paid by customers.
INDEPENDENT AUDITORS
Sterling's independent public accountant for the recently completed
transition period, Coopers & Lybrand L.L.P., has advised Sterling that
it will have a representative at the Meeting. The representative will
have an opportunity to make a statement, if so desired, and will be
available to respond to appropriate questions. As described under
"Proposal 2: Ratification of Appointment of Independent Auditors," the
Audit Committee has recommended and the Board of Directors has
approved, subject to ratification at the Meeting, appointment of
Coopers & Lybrand L.L.P. as the independent public accountants for the
year ending December 31, 1997 and any interim periods.
SHAREHOLDER PROPOSALS
It is presently anticipated that the next Annual Meeting of
Shareholders of Sterling will be held on Tuesday, April 28, 1998. In
order for any Shareholder proposal to be considered for inclusion in
the proxy materials of Sterling for the 1998 Annual Meeting of
Shareholders, such proposal must be submitted, in accordance with the
rules and regulations of the SEC, in writing to the Secretary of
Sterling at Sterling's corporate offices by November 18, 1997.
SECTION 16 OF THE SECURITIES EXCHANGE ACT
Under Section 16(a) of the Securities Exchange Act of 1934, as
amended, and the regulations thereunder, Sterling's Directors,
Executive Officers and beneficial owners of more than 10% of any
registered class of Sterling equity securities are required to file
reports of their ownership of Sterling's securities, and any changes
in that ownership, to the SEC. Based solely upon written
representations from certain reporting persons, Sterling believes that
during the transition period, such filing requirements were complied
with.
<PAGE>
ANNUAL REPORTS
Shareholders are being sent a copy of Sterling's Annual Report to
Shareholders for the transition period, July 1, 1996 through
December 31, 1996, which includes Sterling's Annual Report on Form
10-K, as filed with the SEC for the transition period ended
December 31, 1996. A copy of the Annual Report will be furnished
without charge to Shareholders upon written request to Daniel G.
Byrne, Senior Vice President and Chief Financial Officer, 111 North
Wall Street, Spokane, Washington, 99201.
<PAGE>
