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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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<C> <S>
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE YEAR ENDED DECEMBER 31, 1999
OR
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<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-20800
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STERLING FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
WASHINGTON 91-1572822
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
111 NORTH WALL STREET, SPOKANE, WASHINGTON 99201
(Address of principal executive offices) (Zip code)
</TABLE>
Registrant's telephone number, including area code: (509) 458-2711
Securities registered pursuant to Section 12(b) of the Act:
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<S> <C>
NONE NONE
(Title of class) (Name of each exchange on which registered)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
Common Stock ($1.00 par value)
9.50% Cumulative Capital Securities
(Title of class)
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
As of February 29, 2000, the aggregate market value of the common equity
held by non-affiliates of the registrant, computed by reference to the average
of the bid and asked prices on such date as reported by the Nasdaq National
Market, was $84,286,202.
The number of shares outstanding of the Registrant's Common Stock, par value
$1.00 per share, as of February 29, 2000 was 8,099,028.
DOCUMENTS INCORPORATED BY REFERENCE
Specific portions of the Registrant's Proxy Statement dated March 24, 2000
are incorporated by reference into Part III hereof.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
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STERLING FINANCIAL CORPORATION
DECEMBER 31, 1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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<S> <C> <C> <C>
PART I...................................................................... 1
ITEM 1. BUSINESS.................................................... 1
General..................................................... 1
Growth and Acquisition Strategies........................... 1
Lending Activities.......................................... 2
Investments and Mortgage-Backed Securities.................. 12
Sources of Funds............................................ 13
Subsidiaries................................................ 19
Competition................................................. 19
Personnel................................................... 20
Regulation.................................................. 20
ITEM 2. PROPERTIES.................................................. 29
ITEM 3. LEGAL PROCEEDINGS........................................... 29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 29
PART II..................................................................... 30
ITEM 5. MARKET FOR THE REGISTRANT'S STOCK AND RELATED SHAREHOLDER
MATTERS..................................................... 30
ITEM 6. SELECTED FINANCIAL DATA..................................... 31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 33
General..................................................... 33
Net Interest Income......................................... 33
Asset and Liability Management.............................. 35
Financial Position.......................................... 39
Results of Operations for the Years Ended December 31, 1999
and 1998.................................................... 40
Results of Operations for the Years Ended December 31, 1998
and 1997.................................................... 43
Liquidity and Sources of Funds.............................. 46
Capital Resources........................................... 47
New Accounting Standards.................................... 48
Year 2000 Issues............................................ 49
Effects of Inflation and Changing Prices.................... 49
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 50
PART III.................................................................... 50
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 50
ITEM 11. EXECUTIVE COMPENSATION...................................... 50
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 50
PART IV..................................................................... 50
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K......................................................... 50
SIGNATURES.................................................................................... 52
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<PAGE>
ANY TREND OR FORWARD-LOOKING INFORMATION DISCUSSED IN THIS REPORT IS SUBJECT
TO NUMEROUS POSSIBLE RISKS AND UNCERTAINTIES. THESE INCLUDE BUT ARE NOT LIMITED
TO: THE POSSIBILITY OF ADVERSE ECONOMIC DEVELOPMENTS WHICH MAY, AMONG OTHER
THINGS, INCREASE DEFAULT AND DELINQUENCY RISKS IN STERLING'S LOAN PORTFOLIOS;
SHIFTS IN INTEREST RATES WHICH MAY RESULT IN LOWER INTEREST RATE MARGINS; SHIFTS
IN THE DEMAND FOR STERLING'S LOAN AND OTHER PRODUCTS; LOWER THAN EXPECTED
REVENUE OR COST SAVINGS IN CONNECTION WITH ACQUISITIONS; CHANGES IN ACCOUNTING
POLICIES; CHANGES IN THE MONETARY AND FISCAL POLICIES OF THE FEDERAL GOVERNMENT;
CHANGES IN LAWS, REGULATIONS AND THE COMPETITIVE ENVIRONMENT. STERLING'S FUTURE
RESULTS MAY DIFFER MATERIALLY FROM HISTORICAL RESULTS AS WELL AS FROM ANY TREND
OR FORWARD-LOOKING INFORMATION INCLUDED IN THIS REPORT.
PART I
ITEM 1. BUSINESS
GENERAL
Sterling Financial Corporation ("Sterling") is a unitary savings and loan
holding company, the significant operating subsidiary of which is Sterling
Savings Bank ("Sterling Savings Bank"), formerly Sterling Savings Association.
The significant operating subsidiaries of Sterling Savings Bank are Action
Mortgage Company ("Action Mortgage"), INTERVEST-Mortgage Investment Company
("INTERVEST") and Harbor Financial Services, Inc. ("Harbor Financial"). Sterling
Savings Bank commenced operations in 1983 as a Washington State-chartered,
federally insured stock savings and loan association headquartered in Spokane,
Washington.
Sterling endeavors to provide personalized, quality financial services to
its customers as exemplified by its "Hometown Helpful" philosophy. Sterling
believes that this dedication to personalized service has enabled it to maintain
a stable retail deposit base. Sterling, with $2.55 billion in total assets at
December 31, 1999, attracts Federal Deposit Insurance Corporation ("FDIC")
insured deposits from the general public through 77 retail branches located
primarily in rural and suburban communities in Washington, Oregon, Idaho and
Montana. Sterling originates loans through its branch offices, as well as Action
Mortgage residential loan production offices in the metropolitan areas of
Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho, and
INTERVEST commercial real estate lending offices located in the metropolitan
areas of Spokane and Seattle, Washington; and Portland, Oregon. Sterling also
markets tax-deferred annuities, mutual funds and other financial products
through Harbor Financial.
Sterling continues to enhance its presence as a community bank by increasing
its commercial real estate, business banking, consumer and construction lending
while increasing its retail deposits, particularly transaction accounts.
Commercial real estate, business banking, consumer and construction loans
generally produce higher yields than residential loans. Such loans, however,
generally involve a higher degree of risk than financing residential real
estate. Sterling's revenues are derived primarily from interest earned on loans,
investments and mortgage-backed securities ("MBS"), from fees and service
charges and from mortgage banking operations. The operations of Sterling Savings
Bank, and savings institutions generally, are influenced significantly by
general economic conditions and by policies of its primary regulatory
authorities, the Office of Thrift Supervision ("OTS"), the FDIC and the State of
Washington Department of Financial Institutions ("Washington Supervisor"). See
"Regulation."
GROWTH AND ACQUISITION STRATEGIES
Management believes that by changing the mix of assets and liabilities to be
more like a community bank, its net interest income (the difference between the
interest earned on loans and investments and the interest paid on liabilities)
and other fee income will increase, although there can be no assurance in this
regard. Sterling intends to continue to pursue an aggressive growth strategy,
which may include acquiring other financial institutions or branches thereof or
other substantial assets or deposit liabilities. Sterling may not be successful
in identifying further acquisition candidates, integrating acquired institutions
or preventing deposit erosion or loan quality deterioration at acquired
institutions. There is significant competition
1
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for acquisitions in Sterling's market area, and Sterling may not be able to
acquire other institutions on attractive terms. Furthermore, the success of
Sterling's growth strategy will depend on increasing and maintaining sufficient
levels of regulatory capital, obtaining necessary regulatory approvals,
generating appropriate growth, and favorable economic and market conditions.
There can be no assurance that Sterling will be successful in implementing its
growth strategy.
LENDING ACTIVITIES
FOCUS ON COMMUNITY LENDING. In recent years, Sterling has focused its
efforts on becoming more like a community retail bank. Accordingly, Sterling is
increasing its commercial real estate (including multifamily residential real
estate), business banking, consumer and construction lending. Commercial real
estate, business banking, consumer and construction loans generally produce
higher yields than residential mortgage loans. Such loans, however, generally
involve a higher degree of risk than the financing of residential real estate.
BUSINESS BANKING LENDING. Sterling has a Business Banking Group which
provides a full range of credit products to small- and medium-sized businesses,
including consumer, private banking and agriculture loans. Credit products
include lines of credit, receivables and inventory financing, equipment loans
and permanent and construction real restate financing. Loans may be made on an
unsecured, partially-secured or fully-secured basis. The credit product line for
both businesses and individuals includes standardized products as well as
customized, individual accommodations.
Sterling's Private Banking Group provides services to higher-net-worth and
higher-income borrowers by originating a variety of consumer and business
banking loans. Such loans generally, but do not always, meet the same
underwriting requirements as general consumer loans of the same type. Private
banking loans typically involve larger balances and may have nonstandard terms.
Sterling's Agriculture Lending Group offers agriculture loans to a variety
of agricultural producers. In connection with such loans, Sterling evaluates the
borrowers' financial, production, marketing and management abilities. Such loans
may include annual operating loans and term loans to finance the purchase of
machinery, equipment, production livestock and real estate. Such loans also may
be made to cover interim operating and family living expenses.
Sterling has established minimum underwriting standards which delineate
criteria for sources of repayment, financial strength and credit enhancements
such as guarantees. Typically, the primary source of repayment is recurring cash
flow of the borrower or cash flow from the business or project being financed.
Depending on the type of loan, underwriting standards include minimum financial
requirements, maximum loan-to-collateral value ratios, minimum cash flow
coverage of debt service, debt-to-income ratios and minimum liquidity
requirements. Exceptions to the minimum underwriting standards may be made
depending upon the type of loan and financial strength of the borrower. All
exceptions are reported to the Sterling Senior Loan Committee and in some cases
are reported to Sterling's Board of Directors. Common forms of collateral
pledged to secure business banking loans include real estate, accounts
receivable, inventory, equipment, agricultural crops or livestock and marketable
securities. Most loans have maximum terms of one to seven years and
loan-to-value ratios in the range of 65% to 80%, based on an analysis of the
collateral pledged.
Business banking loans generally involve a higher degree of risk than the
financing of real estate, primarily because collateral is more difficult to
appraise, security interests in the collateral are more difficult to perfect,
the collateral may be difficult to obtain or liquidate following an uncured
default and it is difficult to accurately predict the borrower's ability to
generate future cash flows. Business banking loans, however, typically offer
relatively higher yields and variable interest rates. The availability of such
loans enables potential depositors to establish full-service banking
relationships with Sterling. Sterling is permitted to hold 20% of its assets in
certain business banking loans. At December 31, 1999, certain
2
<PAGE>
business banking loans subject to this limit were approximately 12.0% of total
assets. At December 31, 1999, all business banking loans were 19.3% of
Sterling's total loan portfolio.
CONSUMER LENDING. Sterling's Consumer Lending Group provides loans for home
improvements, automobiles, personal lines of credit, boats and certain other
purposes. Generally, consumer loans are originated for terms ranging from six
months to ten years. Interest rates are either fixed or adjustable monthly,
quarterly or semiannually, based on a contractual formula at a margin over an
established external index. Sterling also makes loans collateralized by savings
accounts and second mortgage loans collateralized by real estate. Fixed-rate
secured financing is available with amortization terms of up to 15 years.
Sterling actively participates in the transportation finance market,
primarily through consumer indirect auto loans (sales finance contracts).
Sterling also makes direct (branch originated) auto loans and marine and
recreational vehicle loans. Most applicants for these credit products are
assigned a credit score, which is designed to indicate the relative probability
of repayment. The credit scoring models are validated as to their predictive
power on a periodic basis. The Consumer Lending Group includes in its credit
criteria other judgmental factors, such as the advance rate and debt-to-income
ratio, which are used to augment this credit score. However, all credit
decisions made contrary to an established cut-off score are required to be
supported and documented by a credit officer with the appropriate approval
authority. Consumer loans, especially those originated through dealers,
generally have greater inherent risks than other types of loans. At
December 31, 1999, consumer direct and indirect loans were 12.4% and 5.2%,
respectively, of Sterling's total loan portfolio.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. Sterling originates fixed-rate and
adjustable rate mortgages ("ARMs"), which have interest rates that adjust
annually or every three, five and seven years and are indexed to a variety of
market indices. Sterling also originates one- to four-family residential
construction loans.
Sterling continues to originate conventional and government-insured
residential loans for sale into the secondary mortgage market. Within the
secondary mortgage market for conventional loans, Sterling sells its residential
loans primarily on a servicing-released basis to others. Sterling also sells
loans to the Federal Home Loan Mortgage Corporation ("FHLMC") and the Federal
National Mortgage Association ("FNMA"). Sterling endeavors to underwrite
residential loans in compliance with FHLMC and FNMA underwriting standards.
Loans sold into the secondary market are all sold without recourse to Sterling,
except that Sterling may be obligated to repurchase any loans which are not
underwritten in accordance with FHLMC and FNMA or applicable investor
underwriting guidelines. At December 31, 1999, 22.0% of Sterling's total loan
portfolio consisted of conventional one- to four-family residential loans.
Conventional residential mortgage loans are originated for up to 97% of the
appraised value or selling price of the mortgaged property, whichever is less.
Borrowers must purchase private mortgage insurance from approved third parties
so that Sterling's risk is limited to approximately 80% of the appraised value
on all loans with loan-to-value ratios in excess of 80%. Sterling's residential
lending programs are designed to comply with all applicable regulatory
requirements. For a discussion of Sterling's management of interest rate risk
("IRR") on conventional loans, see "--SECONDARY MARKET ACTIVITIES."
Sterling makes residential construction loans on custom homes, presold homes
and homes that are built for sale. Construction financing is generally
considered to involve a higher degree of risk than long-term financing on
improved, occupied real estate. Sterling's risk of loss on construction loans
depends largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. If the estimate of construction costs
proves to be inaccurate, Sterling might have to advance funds beyond the amount
originally committed to permit completion of the development and to protect its
security position. Sterling also might be confronted, at or prior to maturity of
the loan, with a project with insufficient value to ensure full repayment.
Sterling's underwriting, monitoring and disbursement practices with respect to
construction
3
<PAGE>
financing are intended to ensure that sufficient funds are available to complete
construction projects. Sterling endeavors to limit its risk through its
underwriting procedures by using only approved, qualified appraisers and by
dealing only with qualified builders/borrowers.
At December 31, 1999, 10.2% of Sterling's total loan portfolio consisted of
one- to four-family residential construction loans, approximately 84.3% of which
were for properties that were built for sale. Further, approximately 58.9% of
Sterling's one- to four-family residential construction loan portfolio was
concentrated in the Portland, Oregon market which is served by one loan
production office. A reduction in market values or in the demand for residential
housing, particularly in that market, could have a negative impact on Sterling.
MULTIFAMILY RESIDENTIAL AND COMMERCIAL PROPERTY LENDING. Sterling offers
multifamily residential and commercial real estate loans as both construction
and permanent loans collateralized by real property primarily in the Pacific
Northwest. Construction loans on such properties typically have terms of 12 to
18 months and provide for variable interest rates. Permanent loans on existing
properties typically have maturities of three to ten years. Multifamily
residential and commercial property loans generally involve a higher degree of
risk than the financing of one- to four-family residential real estate because
they typically involve large loan balances to single borrowers or groups of
related borrowers. The payment experience on such loans typically is dependent
on the successful operation of the real estate project and is subject to certain
risks not present in one- to four-family residential mortgage lending. These
risks include excessive vacancy rates or inadequate operating cash flows.
Construction lending is subject to risks such as construction delays, cost
overruns, insufficient values and an inability to obtain permanent financing in
a timely manner. Sterling attempts to reduce its exposure to these risks,
typically by investigating the borrowers' finances and, depending on the
circumstances, requiring annual financial statements from the borrowers,
requiring operating statements on the properties or acquiring personal
guarantees from the borrowers. At December 31, 1999, 5.7% of Sterling's total
loan portfolio consisted of multifamily residential construction and commercial
property construction loans.
The following table sets forth information on loan origination and sale
activities for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
---------- -------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage--permanent:
One- to four-family residential.............. $ 172,115 14.4 $ 241,725 24.0 $179,297 22.2
Multifamily residential...................... 58,319 4.9 83,904 8.3 29,015 3.6
Commercial property.......................... 108,216 9.0 34,735 3.5 36,410 4.5
Mortgage--construction:
One- to four-family residential.............. 320,136 26.6 226,025 22.5 217,973 26.9
Multifamily residential...................... 66,520 5.5 47,809 4.8 62,356 7.7
Commercial property.......................... 31,651 2.6 42,301 4.2 10,825 1.3
Non-mortgage:
Consumer--direct............................. 97,047 8.1 99,449 9.8 79,448 9.8
Consumer--indirect........................... 51,956 4.3 51,958 5.2 20,955 2.6
Business banking............................. 295,915 24.6 178,209 17.7 173,014 21.4
---------- ----- ---------- ----- -------- -----
Total loans originated....................... $1,201,875 100.0 $1,006,115 100.0 $809,293 100.0
========== ===== ========== ===== ======== =====
One- to four-family residential mortgage
loans sold................................. $ 72,676 $ 110,151 $108,004
========== ========== ========
</TABLE>
4
<PAGE>
LOAN PORTFOLIO ANALYSIS. The following table sets forth the composition of
Sterling's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------
1999 1998 1997
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
---------- -------- ---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage--permanent:
One- to four-family residential......... $ 396,565 22.0 $ 342,757 23.1 $ 313,792 28.1
Multifamily residential................. 137,835 7.6 124,656 8.4 68,697 6.2
Commercial property..................... 317,565 17.6 177,912 12.0 120,068 10.8
Land and other.......................... 0 0.0 0 0.0 434 0.0
---------- ----- ---------- ----- ---------- -----
851,965 47.2 645,325 43.5 502,991 45.1
---------- ----- ---------- ----- ---------- -----
Mortgage--construction:
One- to four-family residential......... 184,081 10.2 141,288 9.5 131,701 11.8
Multifamily residential................. 71,024 3.9 45,794 3.1 59,212 5.3
Commercial property..................... 32,018 1.8 46,485 3.1 20,979 1.9
---------- ----- ---------- ----- ---------- -----
287,123 15.9 233,567 15.7 211,892 19.0
---------- ----- ---------- ----- ---------- -----
Total mortgage loans.................... 1,139,088 63.1 878,892 59.2 714,883 64.1
Consumer--direct........................ 223,286 12.4 224,651 15.1 139,666 12.5
Consumer--indirect...................... 94,420 5.2 64,764 4.4 19,016 1.7
Business banking........................ 348,941 19.3 315,614 21.3 241,808 21.7
---------- ----- ---------- ----- ---------- -----
Total loans receivable.................. 1,805,735 100.0 1,483,921 100.0 1,115,373 100.0
---------- ===== ---------- ===== ---------- =====
Deferred loan origination (fees) and
costs................................. (4,338) (2,309) 232
Premium (discount) on loans acquired
pursuant to purchase transactions..... 1,977 1,545 (380)
Allowance for loan losses............... (15,603) (14,623) (9,486)
---------- ---------- ----------
Loans receivable, net................... $1,787,771 $1,468,534 $1,105,739
========== ========== ==========
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- -------------------------------------------
1996 1996 1995
------------------- ------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage--permanent:
One- to four-family residential......... $304,216 31.1 $332,819 35.8 $ 632,062 57.4
Multifamily residential................. 73,455 7.5 68,154 7.3 63,977 5.8
Commercial property..................... 104,372 10.7 103,480 11.1 88,554 8.1
Land and other.......................... 385 0.0 398 0.0 2,301 0.2
-------- ----- -------- ----- ---------- -----
482,428 49.3 504,851 54.2 786,894 71.5
-------- ----- -------- ----- ---------- -----
Mortgage--construction:
One- to four-family residential......... 100,694 10.3 79,452 8.5 75,320 6.8
Multifamily residential................. 39,191 4.0 31,872 3.4 11,253 1.0
Commercial property..................... 32,368 3.3 33,264 3.6 18,215 1.7
-------- ----- -------- ----- ---------- -----
172,253 17.6 144,588 15.5 104,788 9.5
-------- ----- -------- ----- ---------- -----
Total mortgage loans.................... 654,681 66.9 649,439 69.7 891,682 81.0
Consumer--direct........................ 124,529 12.7 112,811 12.1 109,373 10.0
Consumer--indirect...................... 0 0.0 0 0.0 0 0.0
Business banking........................ 199,848 20.4 169,830 18.2 99,528 9.0
-------- ----- -------- ----- ---------- -----
Total loans receivable.................. 979,058 100.0 932,080 100.0 1,100,583 100.0
-------- ===== -------- ===== ---------- =====
Deferred loan origination (fees) and
costs................................. 156 556 2,803
Premium (discount) on loans acquired
pursuant to purchase transactions..... (629) (776) (1,122)
Allowance for loan losses............... (8,389) (8,366) (7,796)
-------- -------- ----------
Loans receivable, net................... $970,196 $923,494 $1,094,468
======== ======== ==========
</TABLE>
5
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CONTRACTUAL PRINCIPAL PAYMENTS. The following table sets forth the
scheduled contractual principal repayments for Sterling's loan portfolio at
December 31, 1999. Demand loans, loans having no stated repayment schedule and
no stated maturity, and overdrafts are reported as due in one year or less. Loan
balances do not include undisbursed loan proceeds, unearned discounts and
premiums, deferred loan origination costs and fees, or allowances for loan
losses.
<TABLE>
<CAPTION>
PRINCIPAL PAYMENTS
BALANCE CONTRACTUALLY DUE IN FISCAL YEARS
OUTSTANDING AT ----------------------------------
DECEMBER 31, 1999 2000 2001-2004 THEREAFTER
----------------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage--permanent:
Fixed rate.................................. $ 537,904 $ 12,625 $ 62,126 $463,153
Variable rate............................... 314,061 15,971 59,155 238,935
Mortgage--construction........................ 287,123 218,211 61,590 7,322
Consumer--direct.............................. 223,286 58,330 63,647 101,309
Consumer--indirect............................ 94,420 17,262 68,921 8,237
Business banking.............................. 348,941 117,043 92,428 139,470
---------- -------- -------- --------
$1,805,735 $439,442 $407,867 $958,426
========== ======== ======== ========
</TABLE>
LOAN SERVICING. Sterling services its own loans as well as loans owned by
others. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for the payment of
real estate taxes and insurance premiums, contacting delinquent borrowers and
supervising foreclosures in the event of unremedied defaults.
For residential mortgage loans serviced for other investors, Sterling
receives a fee, generally ranging from 0.25% to 0.375% of the unpaid principal
balance of each loan, to compensate for the costs of performing the servicing
function. At December 31, 1999 and 1998, Sterling serviced for itself and for
other investors residential mortgage loans totaling $751.7 million and
$985.6 million, respectively. Of such mortgage loans, Sterling serviced
$140.5 million and $193.2 million, respectively, at these dates for FHLMC and
FNMA. Sterling's ability to continue as a seller/servicer for FHLMC and FNMA is
dependent upon meeting the qualifications of these agencies. Sterling currently
meets all applicable requirements.
Sterling receives a fee for servicing commercial real estate loans for other
investors. This fee generally ranges from 0.10% to 0.25% of the unpaid balance
of each loan to compensate for the costs of performing the servicing function.
At December 31, 1999 and 1998, Sterling serviced for itself and other investors
commercial real estate loans totaling $402.9 million and $231.4 million,
respectively.
From time to time, Sterling sells portfolios of servicing rights primarily
to improve earnings and to increase its regulatory capital ratios. During the
years ended December 31, 1999 and 1998, Sterling sold, in bulk, rights to
service conventional loans for others of approximately $0 million and
$117.6 million, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (hereafter referred to as
"Management's Discussion and Analysis")--Results of Operations--OTHER INCOME."
SECONDARY MARKET ACTIVITIES. Sterling has developed correspondent
relationships with a number of mortgage companies and financial institutions to
facilitate the origination or purchase and sale of mortgage loans in the
secondary market on either a participation or whole loan basis. Substantially
all of such purchased loans or participations are secured by real estate. Those
agents who present loans to Sterling for purchase are required to provide a
processed loan package prior to commitment. Sterling then underwrites the loan
in accordance with its established lending standards.
6
<PAGE>
Recently, Sterling began to sell participations in certain commercial real
estate loans to investors on a servicing-retained basis. During the year ended
December 31, 1999, Sterling sold approximately $32.0 million in loans under
participation agreements, resulting in net gains of $209,000.
In originating one- to four-family residential mortgage loans for sale in
the secondary market, Sterling incurs market risk from the time of the loan
commitments until such time as the loans are sold. To help minimize this risk,
Sterling typically obtains simultaneous commitments from investors to purchase
such loans at specified yields.
In recent years, the majority of conventional, Federal Housing
Administration ("FHA") and Veteran's Administration ("VA") insured loans have
been sold into the secondary market on a loan-by-loan servicing-released basis.
Sterling generally receives a fee of approximately 1.0% to 2.0% of the principal
balance of such loans for releasing the servicing.
LOAN COMMITMENTS. Sterling uses written commitments to individual borrowers
and mortgage brokers for the purposes of originating and purchasing loans. These
commitments establish the terms and conditions under which Sterling will fund
the loans. Sterling had outstanding commitments to originate or purchase loans
aggregating $285.8 million at December 31, 1999. Sterling also had secured and
unsecured commercial and personal lines of credit totaling approximately
$317.1 million, of which the undisbursed portion was approximately
$171.4 million at December 31, 1999. See Note 17 of "Notes to Consolidated
Financial Statements."
CLASSIFIED ASSETS, REAL ESTATE OWNED AND DELINQUENT LOANS. To measure the
quality of assets, including loans and real estate owned ("REO"), Sterling has
established guidelines for classifying assets and determining provisions for
anticipated loan and REO losses. Under these guidelines, an allowance for
anticipated loan and REO losses is established when certain conditions exist.
This system for classifying and reserving for loans and REO is administered by
Sterling's Special Assets Department, which is responsible for minimizing loan
deficiencies and losses therefrom. An oversight committee, comprised of senior
management, monitors the activities of the Special Assets Department and reports
results to Sterling's Board of Directors.
Under this system, Sterling classifies loans and other assets it considers
of questionable quality. Sterling's system employs the classification categories
of "substandard," "doubtful" and "loss." Substandard assets have deficiencies
which give rise to the distinct possibility that Sterling will sustain some loss
if the deficiencies are not corrected. Doubtful assets have the weaknesses of
substandard assets, and on the basis of currently existing facts, there is a
high probability of loss. An asset classified as loss is considered
uncollectible and of such little value that it should not be included as an
asset of Sterling. Total classified assets increased to $19.9 million at
December 31, 1999 from $17.7 million at December 31, 1998. As a percentage of
total assets, classified assets were 0.8% for both periods. See "--MAJOR
CLASSIFIED LOANS."
Assets classified as substandard or doubtful require the establishment of
general valuation allowances in amounts considered by management to be adequate
under generally accepted accounting principles ("GAAP"). Assets classified as
loss require either a specific valuation allowance of 100% of the amount
classified or a write-off of such amount. At December 31, 1999, Sterling's
assets classified as loss totaled $701,000. Judgments regarding the adequacy of
a general valuation allowance are based on on-going evaluations of the nature,
volume and quality of the loan portfolio, REO and other assets, specific problem
assets and current economic conditions that may affect the recoverability of
recorded amounts.
REO is recorded at the lower of estimated fair value, less estimated selling
expenses, or carrying value at foreclosure. Fair value is defined as the amount
in cash or other consideration that a real estate asset would yield in a current
sale between a willing buyer and a willing seller. Development and improvement
costs relating to the property are capitalized to the extent they are deemed to
be recoverable upon
7
<PAGE>
disposal. The carrying value of REO is continuously evaluated and, if necessary,
an allowance is established to reduce the carrying value to net realizable value
(which considers, among other things, estimated direct holding costs and selling
expenses).
The following table sets forth the activity in Sterling's REO for the
periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period.................... $ 6,232 $ 8,817 $ 3,974
Loan foreclosures and other additions............. 4,875 2,394 6,865
Capitalized expenses.............................. 208 202 627
Sales and other reductions........................ (3,811) (5,110) (2,476)
Provisions for losses............................. (205) (71) (173)
------- ------- -------
Balance at end of period.......................... $ 7,299 $ 6,232 $ 8,817
======= ======= =======
</TABLE>
MAJOR CLASSIFIED LOANS. Each of Sterling's classified loans with a net
carrying value at December 31, 1999 of more than $1.0 million is described
below.
Sterling holds several loans to a business located in Snohomish, Washington.
These loans are secured by a first deed of trust on a commercial property, a
residential rental property and a security interest in equipment. These loans
were classified as substandard as a result of recent operating losses. The
aggregate carrying value on these loans at December 31, 1999 was $1.2 million.
No specific allowance has been established for these loans.
Sterling holds a commercial loan secured by a first deed of trust on three
warehouses located in Warden, Washington. Sterling's guarantor has filed for
Chapter 11 bankruptcy protection, thereby causing a default. Sterling is
proceeding against the borrower to foreclose on this property. The carrying
value on this loan at December 31, 1999 was $1.7 million. No specific allowance
has been established for this loan.
Sterling holds a commercial agricultural loan secured by a first mortgage on
farmland located in the Tri-Cities, Washington area. The loan was classified as
substandard due to operating losses, and the borrower has recently filed for
Chapter 11 bankruptcy protection. Sterling is proceeding with a judicial action
against the borrower to recover the amounts owed. The carrying value of this
loan at December 31, 1999 was $1.3 million. No specific allowance has been
established for this loan.
Sterling holds a commercial property loan secured by a first deed of trust
on a 28-unit apartment complex located in Hayden, Idaho. Sterling is proceeding
against the borrower to foreclose on this property with a foreclosure sale
scheduled early in 2000. The carrying value of this loan at December 31, 1999
was $1.2 million. No specific allowance has been established for this loan.
MAJOR REAL ESTATE OWNED. Each of Sterling's REO properties with a net
carrying value at December 31, 1999 of more than $1.0 million is described
below.
Sterling is a 99.5% partner in a partnership which owns a commercial office
building in Renton, Washington. The carrying value at December 31, 1999 was
$3.1 million, net of a specific loss allowance of $392,000. The property
consists of a five-story office building with 30,373 square feet of rentable
area and adjoining undeveloped property. The office building is currently
substantially fully leased. Efforts to sell the property are on-going.
Sterling acquired through foreclosure in August and November 1999 various
real estate owned by a Spokane developer. The carrying value of this property at
December 31, 1999 was $1.2 million, net of a specific loss allowance of $68,000.
Sterling is currently marketing these properties.
8
<PAGE>
DELINQUENT LOAN PROCEDURES. Delinquent and problem loans are part of any
lending business. If a borrower fails to make a required payment when due,
Sterling institutes internal collection procedures. For residential mortgage and
consumer loans, Sterling's collection procedures generally require that an
initial request for payment be mailed to the borrower when the loan is 15 days
past due. At 25 days past due, the borrower is contacted by telephone and
payment is requested orally. In most cases, deficiencies are cured promptly. At
30 days past due, Sterling records the loan as a delinquency. In the case of
delinquent residential mortgage loans, a notice of intent to foreclose is mailed
at 45 days past due. If the loan is still delinquent 30 days following the
mailing of the notice of intent to foreclose, Sterling generally initiates
foreclosure proceedings.
For consumer loans, a demand letter is sent when the account becomes
delinquent for two payments. Additional collection work or repossession may
follow. In certain instances, Sterling may modify the loan or grant a limited
moratorium on loan payments to enable the borrower to reorganize his or her
financial affairs. Similar collection procedures to those for consumer and
mortgage loans are followed for business loans with the exception that these
accounts are generally handled as a joint effort between the originating loan
officer and the collection department during initial stages of delinquency. On
or before 75 days of delinquency, the collection effort is shifted from the
originating loan officer to the collection department with legal action to
follow.
The following table summarizes the principal balances of nonperforming
assets at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------- -------------------
1999 1998 1997 1996 1996 1995
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans...................... $ 9,259 $ 3,050 $ 4,755 $ 2,329 $ 3,352 $ 3,395
Restructured loans.................... 66 87 150 215 240 254
------- ------- ------- ------- ------- -------
Total nonperforming loans............. 9,325 3,137 4,905 2,544 3,592 3,649
Real estate owned(1).................. 7,299 6,232 8,817 3,974 4,874 5,298
------- ------- ------- ------- ------- -------
Total nonperforming assets............ $16,624 $ 9,369 $13,722 $ 6,518 $ 8,466 $ 8,947
======= ======= ======= ======= ======= =======
Ratio of total nonperforming assets to
total assets........................ 0.65% 0.40% 0.71% 0.41% 0.55% 0.56%
Ratio of total nonperforming loans to
total loans......................... 0.52% 0.21% 0.44% 0.26% 0.39% 0.33%
Ratio of allowance for estimated
losses on loans to total
nonperforming loans(2).............. 164.38% 462.51% 193.82% 325.21% 238.04% 218.10%
</TABLE>
- ------------------------
(1) Amount is net of the allowance for REO losses.
(2) Excludes loans classified as loss. Loans classified as loss that are
excluded from allowance for loan losses were $275,000, $114,000, $47,000,
$262,000, $213,000 and $145,000 at December 31, 1999, 1998, 1997 and 1996
and at June 30, 1996 and 1995, respectively. Loans classified as loss that
are excluded from total nonperforming loans were $0, $0, $35,000, $45,000,
$167,000 and $141,000 at December 31, 1999, 1998, 1997 and 1996 and at
June 30, 1996 and 1995, respectively.
Sterling regularly reviews the collectibility of accrued interest and
generally ceases to accrue interest on a loan when either principal or interest
is past due by 90 days or more. Any accrued and uncollected interest is
eliminated from income at that time. Loans may be placed in nonaccrual status
earlier if, in management's judgment, the loan may be uncollectible. Interest on
such a loan is then recognized as income only if collected or if the loan is
restored to performing status. Additional interest income of $485,000, $159,000
and $258,000 would have been recorded during the years ended December 31, 1999,
1998 and 1997, respectively, if nonaccrual and restructured loans had been
current in accordance with their original contractual terms. Interest income of
$442,000, $194,000 and $311,000 was recorded on these
9
<PAGE>
loans during the years ended December 31, 1999, 1998 and 1997, respectively.
Sterling's quality control staff also reviews various aspects of loans
originated and acquired by Sterling in an effort to ensure compliance with
appropriate underwriting criteria. These reviews assist Sterling in monitoring
the performance of its personnel and independent appraisers. Sterling's mortgage
loan quality control function is intended to conform to guidelines and standards
established by FNMA, FHLMC, and, as applicable, other private investors.
ALLOWANCE FOR LOAN AND REAL ESTATE OWNED LOSSES. Generally, Sterling
establishes specific allowances for the difference between the anticipated fair
value (market value less selling costs, foreclosure costs and projected holding
costs), adjusted for other possible sources of repayment, and the book balance
(loan principal and accrued interest or carrying value of REO) of its loans
classified as loss and REO. Each classified loan and REO property is reviewed at
least monthly. Allowances are established or periodically increased, if
necessary, based on the review of information obtained through on-site
inspections, market analysis, appraisals and purchase offers. Management
believes that allowances for loan and REO losses are adequate, although there
can be no assurance in this regard. See Note 6 of "Notes to Consolidated
Financial Statements."
Management believes that the allowance for loan losses is adequate given the
composition and risks of the loan portfolio, although there can be no assurance
that the allowance will be adequate to cover all contingencies. The following
table sets forth information regarding changes in Sterling's allowance for
estimated losses on loans for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED FISCAL YEARS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
------------------------------ ---------------- -------------------
1999 1998 1997 1996 1996 1995
-------- -------- -------- ---------------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period.......... $14,623 $ 9,486 $ 8,389 $ 8,366 $ 7,796 $ 6,133
Charge-offs:
Mortgage--permanent................. (483) (252) (219) (767) (752) (795)
Mortgage--construction.............. (227) (28) (202) (7) 0 0
Consumer--direct.................... (1,434) (1,048) (999) (384) (412) (220)
Consumer--indirect.................. (925) (738) (29) 0 0 0
Business banking.................... (103) (325) (119) (19) (5) (9)
------- ------- ------- ------- ------- -------
Total charge-offs....................... (3,172) (2,391) (1,568) (1,177) (1,169) (1,024)
------- ------- ------- ------- ------- -------
Recoveries:
Mortgage--permanent................. 16 34 58 30 23 61
Consumer--direct.................... 76 106 96 41 49 27
Consumer--indirect.................. 152 42 6 0 0 0
Business banking.................... 8 21 23 8 24 5
------- ------- ------- ------- ------- -------
Total recoveries........................ 252 203 183 79 96 93
------- ------- ------- ------- ------- -------
Net charge-offs......................... (2,920) (2,188) (1,385) (1,098) (1,073) (931)
Provisions for loan losses.............. 3,900 5,325 2,482 1,121 1,643 1,642
Allowance for losses on assets
acquired.............................. 0 2,000 0 0 0 952
------- ------- ------- ------- ------- -------
Balance at end of period................ $15,603 $14,623 $ 9,486 $ 8,389 $ 8,366 $ 7,796
======= ======= ======= ======= ======= =======
Allowances allocated to loans classified
as loss............................... $ 275 $ 114 $ 47 $ 262 $ 213 $ 145
Ratio of net charge-offs to average
loans outstanding during the period... 0.17% 0.17% 0.13% 0.11% 0.10% 0.09%
</TABLE>
10
<PAGE>
Allowances are provided for individual loans when management considers
ultimate collection to be questionable. Such allowances are based, among other
factors, upon the estimated net realizable value of the collateral of the loan
or guarantees, if applicable. The following table sets forth the allowances for
estimated losses on loans by loan category and summarizes the percentage of
gross loans in each category to total gross loans.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------
1999 1998 1997 1996
--------------------- --------------------- --------------------- ---------------------
LOANS IN LOANS IN LOANS IN LOANS IN
CATEGORY CATEGORY CATEGORY CATEGORY
AS A AS A AS A AS A
PERCENTAGE PERCENTAGE PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL OF TOTAL OF TOTAL
GROSS GROSS GROSS GROSS
AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT LOANS
-------- ---------- -------- ---------- -------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage--permanent............... $ 4,837 47.2% $ 4,535 43.5% $3,800 45.1% $3,589 49.3%
Mortgage--construction............ 3,336 15.9 3,199 15.7 3,108 19.0 2,380 17.6
Consumer--direct.................. 2,397 12.4 3,113 15.1 400 12.5 399 12.7
Consumer--indirect................ 938 5.2 650 4.4 153 1.7 0 0.0
Business banking.................. 3,595 19.3 2,626 21.3 1,200 21.7 1,196 20.4
Unallocated....................... 500 N/A 500 N/A 825 N/A 825 N/A
------- ----- ------- ----- ------ ----- ------ -----
$15,603 100.0% $14,623 100.0% $9,486 100.0% $8,389 100.0%
======= ===== ======= ===== ====== ===== ====== =====
<CAPTION>
JUNE 30,
---------------------------------------------
1996 1995
--------------------- ---------------------
LOANS IN LOANS IN
CATEGORY CATEGORY
AS A AS A
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
GROSS GROSS
AMOUNT LOANS AMOUNT LOANS
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Mortgage--permanent............... $3,462 54.2% $3,754 71.5%
Mortgage--construction............ 1,969 15.5 1,369 9.5
Consumer--direct.................. 465 12.1 422 10.0
Consumer--indirect................ 0 0.0 0 0.0
Business banking.................. 1,075 18.2 856 9.0
Unallocated....................... 1,395 N/A 1,395 N/A
------ ----- ------ -----
$8,366 100.0% $7,796 100.0%
====== ===== ====== =====
</TABLE>
11
<PAGE>
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Investments and MBS that management has the positive intent and ability to
hold to maturity are classified as held to maturity and carried at amortized
cost. Unrealized gains and losses on such investments and MBS are not reported
in the Consolidated Financial Statements, as these investments and MBS are held
for investment purposes. See "Management's Discussion and Analysis--Results of
Operations--OTHER INCOME" and Note 2 of "Notes to Consolidated Financial
Statements."
Sterling classifies specific investments and MBS as available for sale.
Investments classified as available for sale are carried at fair value.
Unrealized gains and losses are excluded from earnings and are reported net of
deferred income tax as a separate component of accumulated comprehensive income
(loss) in shareholders' equity until such investments and MBS mature or are
actually sold. These investments and MBS may be sold in response to changes in
market interest rates and related changes in prepayment risk, needs for
liquidity, changes in the availability of and the yield on alternative
investments and changes in funding sources and terms.
At December 31, 1999 and 1998, investments and MBS classified as available
for sale were $494.5 million and $566.4 million, respectively. The carrying
value of these investments and MBS at December 31, 1999 and 1998 includes an
unrealized loss of $13.6 million (net of a $7.3 million related income tax
benefit) and an unrealized gain of $788,000 (net of a $424,000 related income
tax provision), respectively. The decrease in fair value since December 31, 1998
is primarily due to an increase in long-term interest rates.
Sterling invests primarily in MBS issued by FHLMC and FNMA and other agency
obligations. Such investments provide Sterling with a relatively liquid source
of interest income and collateral which can be used to secure borrowings.
Sterling invests primarily in investment-grade investments and MBS.
The following table provides the carrying values, contractual maturities and
weighted average yields of Sterling's investment and MBS portfolio at
December 31, 1999.
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------------------
LESS THAN ONE TO FIVE TO OVER TEN
ONE YEAR FIVE YEARS TEN YEARS YEARS TOTAL
--------- ---------- --------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MBS
Balance................................... $ 275 $ 5,823 $27,286 $309,927 $343,311
Weighted average yield.................... 6.99% 7.12% 6.19% 6.72% 6.68%
U.S. government and agency obligations
Balance................................... $ 0 $ 90,735 $ 95 $ 0 $ 90,830
Weighted average yield.................... 0.00% 6.07% 6.00% 0.00% 6.07%
FHLB Seattle stock
Balance................................... $ 0 $ 0 $ 0 $ 34,767 $ 34,767
Weighted average yield(1)................. 0.00% 0.00% 0.00% 7.25% 7.25%
Municipal bonds(2)
Balance................................... $1,741 $ 7,688 $ 1,444 $ 0 $ 10,873
Weighted average yield.................... 4.19% 4.65% 4.45% 0.00% 4.55%
Other(3)
Balance................................... $ 0 $ 0 $ 0 $ 25,949 $ 25,949
Weighted average yield.................... 0.00% 0.00% 0.00% 7.60% 7.60%
Total carrying value........................ $2,016 $104,246 $28,825 $370,643 $505,730
Weighted average yield...................... 4.57% 6.03% 6.10% 6.83% 6.61%
</TABLE>
- ------------------------
(1) The weighted average yield on Federal Home Loan Bank of Seattle ("FHLB
Seattle") stock is based upon the dividends received for the year ended
December 31, 1999.
12
<PAGE>
(2) The weighted average yields on municipal bonds reflect the actual yields on
the bonds and are not presented on a tax-equivalent basis.
(3) Other investments relate primarily to trust-preferred securities.
The following table sets forth the carrying values and classifications for
financial statement reporting purposes of Sterling's investment and MBS
portfolio at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
MBS........................................... $343,311 $405,725 $477,513
U.S. government and agency obligations........ 90,830 112,906 169,749
FHLB Seattle stock............................ 34,767 32,318 29,949
Municipal bonds............................... 10,873 13,047 13,033
Other......................................... 25,949 22,409 695
-------- -------- --------
Total..................................... $505,730 $586,405 $690,939
======== ======== ========
Available for sale............................ 494,483 $566,372 $666,476
Held to maturity.............................. 11,247 20,033 24,463
-------- -------- --------
Total..................................... $505,730 $586,405 $690,939
======== ======== ========
Weighted average yield........................ 6.61% 6.16% 6.55%
</TABLE>
SOURCES OF FUNDS
GENERAL. Sterling's primary sources of funds for use in lending and for
other general business purposes are deposits, loan repayments, FHLB Seattle
advances, secured lines of credit and other borrowings, proceeds from sales of
investments and MBS and proceeds from sales of loans. Scheduled loan repayments
are a relatively stable source of funds, while other sources of funds are
influenced significantly by prevailing interest rates, interest rates available
on other borrowings and other economic conditions. Borrowings also may be used
on a short-term basis to compensate for reductions in other sources of funds
(such as deposit inflows at less than projected levels). Borrowings may also be
used on a longer-term basis to support expanded lending activities and to match
repricing intervals of assets. See "Lending Activities" and "Investments and
Mortgage-Backed Securities."
DEPOSIT ACTIVITIES. Sterling offers a variety of accounts for depositors
designed to attract both short-term and long-term deposits from the general
public. These accounts include money market demand accounts ("MMDA") and
checking accounts in addition to more traditional savings accounts and
certificates of deposit ("CDs") accounts. Sterling offers both interest- and
noninterest-bearing checking accounts. The interest-bearing checking accounts
are subject to monthly service charges, unless a minimum balance is maintained.
MMDA, CDs and savings accounts earn interest at rates established by management
and are based on a competitive market analysis. The method of compounding varies
from simple interest credited at maturity to daily compounding, depending on the
type of account.
With the exception of certain promotional CDs and variable-rate 18-month
Individual Retirement Account ("IRA") certificates, all CDs carry a fixed rate
of interest for a defined term from the opening date of the account. Substantial
penalties are imposed if principal is withdrawn from most CDs prior to maturity.
Sterling supplements its retail deposit gathering by soliciting funds from
public entities. Public funds were 8.2% and 6.4% of deposits at December 31,
1999 and 1998, respectively. Public funds are generally obtained by competitive
bidding among qualifying financial institutions. Sterling had no brokered
deposits at December 31, 1999 or 1998.
13
<PAGE>
The primary retail deposit vehicles being utilized by Sterling's customers
are CDs with terms of one year or less, regular savings accounts, money market
accounts and negotiable order of withdrawal ("NOW") accounts. The following
table presents the average balance outstanding and weighted average interest
rate paid for each major category of deposits for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1999 1998 1997
--------------------- ----------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
BALANCE RATE BALANCE RATE BALANCE RATE
---------- -------- ----------- --------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Certificates of deposit............... $ 866,461 5.14% $ 791,311 5.46% $ 655,120 5.70%
Regular savings accounts and money
market accounts..................... 428,710 3.38 351,759 3.62 246,218 3.89
Checking accounts:
NOW accounts........................ 189,207 1.02 145,335 1.14 81,985 1.38
Noninterest-bearing demand accounts... 111,017 0.00 72,828 0.00 29,569 0.00
---------- ---------- ----------
$1,595,395 3.82% $1,361,233 4.23% $1,012,892 4.74%
========== ========== ==========
</TABLE>
The following table shows the amounts and maturities of CDs that had
balances of $100,000 or more at December 31, 1999.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Remaining maturity:
Less than three months............................ $131,717
Three to six months............................... 64,234
Six to 12 months.................................. 80,568
Over 12 months.................................... 41,248
--------
$317,767
========
</TABLE>
14
<PAGE>
The following table presents the types of deposit accounts offered by
Sterling Savings Bank and the balance in such accounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------------------------------
PERCENTAGE
MINIMUM MINIMUM OF TOTAL INTEREST RATE
TERM CATEGORY BALANCES AMOUNT DEPOSITS OFFERED
- ------------------------ ------------------------------------- -------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS, EXCEPT MINIMUM AMOUNTS)
<S> <C> <C> <C> <C> <C>
Transaction Accounts:
None NOW checking......................... $ 100 $ 186,012 11.5 1.24%
None Commercial checking.................. 100 104,005 6.4 0.00
None Regular savings...................... 100 84,526 5.2 1.50
None Money market demand.................. 2,500 326,133 20.2 1.24
---------- -----
700,676 43.3
---------- -----
Certificates of Deposit:
3 months Fixed term, fixed rate............... 500 4,712 0.3 4.59
6 months Fixed term, fixed rate............... 500 46,945 2.9 4.87
9 months Fixed term, adjustable rate.......... 5,000 13,215 0.8 4.46
12 months Fixed term, fixed rate............... 500 279,720 17.3 5.22
12 months Fixed term, fixed rate(1)............ 5,000 155 0.0 N/A
12 months Fixed term, adjustable rate(1)....... 500 4 0.0 N/A
12 months Fixed term, adjustable rate(1)....... 5,000 1,530 0.1 N/A
15 months Fixed term, adjustable rate.......... 5,000 98,901 6.1 5.60
18 months Fixed term, fixed rate............... 500 43,324 2.7 5.22
24 months Fixed term, fixed rate............... 500 101,293 6.3 5.51
36 months Fixed term, fixed rate............... N/A 61,421 3.8 5.84
36 months Zero coupon, fixed term(1)........... N/A 5 0.0 N/A
18 months Variable rate, IRA................... 100 8,255 0.5 6.26
18 months Fixed rate, IRA...................... 500 2,132 0.1 5.13
36 months Variable rate, IRA................... 2,000 13,503 0.8 5.13
7 days Fixed term, fixed rate............... 5,000 2,259 0.1 3.54
7 days Mini-jumbos.......................... 80,000 18,677 1.2 5.45
7 days Jumbos............................... 100,000 220,641 13.7 5.55
---------- -----
916,692 56.7
---------- -----
Total deposits................................................. $1,617,368 100.0
========== =====
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
PERCENTAGE
MINIMUM MINIMUM OF TOTAL INTEREST RATE
TERM BALANCES AMOUNT DEPOSITS OFFERED
- ------------------------ -------- ---------- ---------- -------------
(DOLLARS IN THOUSANDS, EXCEPT MINIMUM AMOUNTS)
<S> <C> <C> <C> <C>
Transaction Accounts:
None $ 100 $ 193,114 12.5 1.39%
None 100 104,176 6.7 0.00
None 100 102,927 6.7 1.50
None 2,500 330,251 21.4 1.00
---------- -----
730,468 47.3
---------- -----
Certificates of Deposit:
3 months 500 5,783 0.4 3.97
6 months 500 87,086 5.6 4.35
9 months 5,000 38,725 2.5 4.41
12 months 500 260,444 16.8 4.65
12 months 5,000 257 0.0 2.75
12 months 500 3 0.0 N/A
12 months 5,000 2,426 0.2 4.27
15 months 5,000 35,575 2.3 4.31
18 months 500 67,239 4.3 4.51
24 months 500 116,739 7.5 4.41
36 months N/A 21,352 1.4 4.41
36 months N/A 19 0.0 N/A
18 months 100 7,454 0.5 5.20
18 months 500 2,949 0.2 4.51
36 months 2,000 13,701 0.9 4.31
7 days 5,000 1,841 0.1 3.15
7 days 80,000 5,369 0.4 4.60
7 days 100,000 147,995 9.6 4.70
---------- -----
814,957 52.7
---------- -----
Total deposits.......... $1,545,425 100.0
========== =====
</TABLE>
- ------------------------------
(1) Not currently offered.
15
<PAGE>
The following table sets forth the composition of Sterling's deposit
accounts at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
PERCENTAGE PERCENTAGE
OF TOTAL OF TOTAL
AMOUNT DEPOSITS AMOUNT DEPOSITS
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
NOW checking..................................... $ 186,012 11.5 $ 193,114 12.5
Commercial checking.............................. 104,005 6.4 104,176 6.7
Regular savings.................................. 84,526 5.2 102,927 6.7
Money market demand.............................. 326,133 20.2 330,251 21.4
Variable-rate certificates:
9-36 months...................................... 135,408 8.4 97,884 6.3
Fixed-rate certificates:
1-11 months...................................... 293,234 18.1 248,074 16.1
12-35 months..................................... 426,624 26.4 447,628 28.9
36-240 months.................................... 61,426 3.8 21,371 1.4
---------- ----- ---------- -----
Total deposits................................... $1,617,368 100.0 $1,545,425 100.0
========== ===== ========== =====
</TABLE>
Substantially all of Sterling's depositors are residents of the states of
Washington, Idaho, Montana and Oregon. Sterling is a member of The Exchange, an
automated teller machine ("ATM") system that allows participating customers to
deposit or withdraw funds from NOW accounts, money market demand accounts and
savings accounts throughout the United States and Canada. Sterling is also a
member of the Plus System ATM network, with numerous locations in the United
States and internationally. Sterling has 56 ATMs to better serve customers in
those markets. Customers also can access the system through ATMs operated by
other financial institutions.
BORROWINGS. Deposit accounts are Sterling's primary source of funds.
Sterling does, however, rely upon advances from the FHLB Seattle and reverse
repurchase agreements to supplement its funding and to meet deposit withdrawal
requirements. See "Management's Discussion and Analysis--Liquidity and Sources
of Funds."
The FHLB Seattle is part of a system, which consists of 12 regional Federal
Home Loan Banks (the "FHL Banks") each subject to Federal Housing Finance Board
supervision and regulation, that functions as a central reserve bank providing
credit to savings institutions. As a member, Sterling is required to own stock
of the FHLB Seattle in an amount determined by a formula based upon Sterling's
loans outstanding and advances from the FHLB Seattle. At December 31, 1999,
Sterling exceeded its FHLB Seattle stock ownership requirement. The stock of the
FHLB Seattle always has been redeemable at par value, but there can be no
assurance that this always will be the case.
As a member of the FHLB Seattle, Sterling is authorized to apply for
advances on the security of its FHLB Seattle stock and certain of its mortgage
loans and other assets (principally securities which are obligations of, or
guaranteed by, the United States or its agencies), provided certain standards
related to creditworthiness are met. Each credit program has its own interest
rate and range of maturities. At December 31, 1999, Sterling had advances
totaling $490.5 million from the FHLB Seattle which mature from 2000 through
2015 at interest rates ranging from 4.42% to 8.40%. See "Management's Discussion
and Analysis--Liquidity and Sources of Funds" and Note 9 of "Notes to
Consolidated Financial Statements."
Sterling also borrows funds under reverse repurchase agreements pursuant to
which it sells investments (generally U.S. agency and MBS) under an agreement to
buy them back at a specified price at a
16
<PAGE>
later date. These agreements to repurchase are deemed to be borrowings
collateralized by the investments and MBS sold. Sterling uses these borrowings
to supplement deposit gathering for funding the origination of loans. Sterling
had $179.5 million and $195.1 million in reverse repurchase agreements
outstanding at December 31, 1999 and 1998, respectively. Sterling enters into
short-term repurchase agreements with selected retail customers. The balance of
such short-term repurchase agreements was $6.2 million at December 31, 1999. The
use of reverse repurchase agreements may expose Sterling to certain risks not
associated with other borrowings, including IRR and the possibility that
additional collateral may have to be provided if the market value of the pledged
collateral declines. For additional information regarding reverse repurchase
agreements, see "Management's Discussion and Analysis--Asset and Liability
Management," "Management's Discussion and Analysis--Liquidity and Sources of
Funds" and Note 10 of "Notes to Consolidated Financial Statements."
On June 4, 1997, Sterling issued $41.2 million of 9.50% junior subordinated
deferrable interest debentures (The "Junior Subordinated Debentures") to
Sterling Capital Trust I (the "Trust"), a Delaware business trust, of which
Sterling owns all of the common equity. The sole asset of the Trust is the
Junior Subordinated Debentures. The Trust issued $40.0 million of 9.50%
Cumulative Capital Securities (the "Trust Preferred Securities") to investors.
The indenture governing the Junior Subordinated Debentures limits the ability of
Sterling under certain circumstances to pay dividends or make other capital
distributions. The Trust Preferred Securities are treated as debt of Sterling.
The Trust Preferred Securities mature on June 30, 2027 and are redeemable at the
option of Sterling on June 30, 2002, or earlier in the event the deduction of
related interest for federal income taxes is prohibited, treatment as Tier 1
capital is no longer permitted, or certain other contingencies arise.
In May 1999, Sterling issued $30.0 million of Floating Rate Notes Due 2006.
Interest accrues at the 90-day London Interbank Offering Rate ("LIBOR") Index
plus 2.50% (7.95% until March 15, 2000) and is adjustable and payable quarterly.
The notes mature on June 15, 2006 and may be redeemed under certain conditions
after June 15, 2002.
In June 1999, Sterling redeemed the outstanding balance of its 8.75%
Subordinated Notes Due 2000, including accrued interest thereon, in the
aggregate amount of $17.4 million. Sterling incurred a charge of approximately
$97,000 upon early extinguishment of these notes.
In addition to the borrowings described above, at December 31, 1999 Sterling
had a $50.0 million non-revolving variable-rate line of credit from KeyBank
National Association ("KeyBank"), of which $40.0 million was outstanding at
December 31, 1999. This line of credit matures on May 31, 2001. Interest accrues
at the 30-day LIBOR plus 2.00% (7.63% at December 31, 1999) and is payable
monthly. Sterling also has a $5.0 million revolving line-of-credit agreement
with KeyBank which matures on June 1, 2000. The interest rate is adjustable
monthly at KeyBank's prime interest rate (8.50% at December 31, 1999). These
lines of credit are secured by all of the stock of Sterling Savings Bank.
Sterling Savings Bank has an unsecured $10.0 million line-of-credit
agreement from KeyBank. Advances under the line of credit accrue interest at
KeyBank's federal funds rate plus an incremental negotiated rate (4.88% at
December 31, 1999) and the line matures in April 2000. Management expects that
the line of credit will be renewed at that time on substantially the same terms,
although there can be no assurance in this regard. No amounts were outstanding
on this line of credit at December 31, 1999 and 1998.
17
<PAGE>
The following table sets forth certain information regarding Sterling's
short-term borrowings as of and for the periods indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Maximum amount outstanding at any month-end during the
period:
Short-term reverse repurchase agreements.................. $ 52,060 $336,734 $273,573
Short-term advances....................................... 158,900 353,879 353,847
Average amount outstanding during the period:
Short-term reverse repurchase agreements.................. 43,574 123,659 185,698
Short-term advances....................................... 96,669 198,042 207,931
Weighted average interest rate paid during the period:
Short-term reverse repurchase agreements.................. 5.14% 5.56% 5.68%
Short-term advances....................................... 5.92% 6.08% 5.90%
Weighted average interest rate paid at end of period:
Short-term reverse repurchase agreements.................. 5.07% 5.58% 5.71%
Short-term advances....................................... 6.03% 5.96% 5.99%
</TABLE>
The following table sets forth certain information concerning Sterling's
outstanding borrowings.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
FHLB Seattle advances:
Short-term............................. $158,900 20.4 $ 95,000 15.6 $353,847 49.7
Long-term.............................. 331,603 42.5 224,540 36.7 106,238 14.9
Securities sold subject to reverse
repurchase agreements:
Short-term............................. 33,715 4.3 49,274 8.1 180,077 25.3
Long-term.............................. 145,800 18.7 145,800 23.8 0 0.0
8.75% Subordinated Notes................. 0 0.0 17,240 2.8 17,240 2.4
Floating Rate Note....................... 30,000 3.9 0 0.0 0 0.0
Advances under line of credit............ 40,000 5.1 40,000 6.5 0 0.0
Trust Preferred Securities............... 40,000 5.1 40,000 6.5 40,000 5.6
Term note payable........................ 0 0.0 0 0.0 15,000 2.1
-------- ----- -------- ----- -------- -----
Total borrowings......................... $780,018 100.0 $611,854 100.0 $712,402 100.0
======== ===== ======== ===== ======== =====
Weighted average interest rate........... 5.82% 5.71% 6.25%
</TABLE>
18
<PAGE>
SUBSIDIARIES
Sterling's principal subsidiary is Sterling Savings Bank. Sterling Savings
Bank has three principal subsidiaries which have been previously described:
Action Mortgage, Harbor Financial and INTERVEST. Additionally, Sterling and
Sterling Savings Bank have the following wholly owned subsidiaries that are
either inactive or exist solely for the purpose of holding and owning specific
assets or properties:
STERLING FINANCIAL CORPORATION
(1) Tri-Cities Mortgage Corporation was obtained as part of an
acquisition in April 1988. The corporation's principal asset is a
99.5% partnership interest in Renton Plaza Investors (a partnership
which owns a five-story office building in Renton, Washington). See
"Lending Activities--MAJOR REAL ESTATE OWNED."
(2) Sterling Capital Trust I was organized in May 1997 as a Delaware
business trust. Sterling owns all the common equity of the Trust. The
sole asset of the Trust is the Junior Subordinated Debentures issued
by Sterling.
STERLING SAVINGS BANK
(1) Fidelity Service Corporation was organized in 1983 to acquire and
sell real and personal property in eastern Washington and Idaho. The
corporation's assets consist principally of land and equipment used
by Sterling Savings Bank.
(2) Evergreen Environmental Development Corporation was organized to
engage in real estate development and was obtained as part of an
acquisition in December 1988. This corporation's assets include a 33%
interest in the Grapetree Partnership, which owns a parcel of raw
land in Spokane, Washington that it intends to develop into
single-family residential lots. Sterling Savings Bank's investment in
the Grapetree Partnership has been deemed by its primary federal
regulators to be an impermissible investment. Accordingly, Sterling
Savings Bank's investment has been deducted from core and risk-based
capital.
(3) Tri-West Mortgage, Inc. was obtained as part of an acquisition in
1988 and was originally engaged in mortgage banking. The
corporation's sole asset consists of commercial property in Spokane,
Washington acquired through foreclosure.
(4) Evergreen First Service Corporation was obtained as part of an
acquisition in 1988 and owns all of the outstanding capital stock of
Harbor Financial, through which Sterling offers tax-deferred
annuities, mutual funds and other financial products.
COMPETITION
Sterling faces strong competition, both in attracting deposits and in
originating, purchasing and selling real estate and other loans, from savings
and loan associations, mutual savings banks, credit unions, commercial banks and
other institutions, many of which have greater resources than Sterling. Sterling
also faces strong competition in marketing financial products such as annuities,
mutual funds and other financial products and in pursuing acquisition
opportunities. Some or all of these competitive institutions operate in
Sterling's market areas.
The Gramm-Leach-Bliley Act (the "GLBA"), enacted in November 1999, allows
securities firms and insurance companies to enter the financial services market
for the first time since the depression era. The GLBA permits the creation of
financial holding companies which may act as financial "supermarkets" allowing
customers "one stop shopping" for financial services. The entry of securities
and insurance firms into Sterling's industry will likely increase pricing
pressures and competition for market share.
19
<PAGE>
Adequately capitalized and well-managed bank holding companies are allowed
by law to acquire banks in any state, subject to certain conditions, regardless
of whether such acquisitions would be prohibited by applicable state law.
Interstate merger transactions are allowed except in certain states which have
opted not to participate in interstate merger transactions. Sterling's
competitors may be able to conduct extensive interstate banking operations and
thereby gain competitive advantages over Sterling.
PERSONNEL
As of December 31, 1999, Sterling, including its subsidiaries, had 817
full-time equivalent employees. Employees are not represented by a collective
bargaining unit. Sterling believes its relationship with its employees is
excellent.
REGULATION
INTRODUCTION. THE FOLLOWING IS NOT INTENDED TO BE A COMPLETE DISCUSSION BUT
IS INTENDED TO BE A SUMMARY OF SOME OF THE MOST SIGNIFICANT PROVISIONS OF LAWS
APPLICABLE TO STERLING AND ITS SUBSIDIARIES.
Sterling is a savings and loan holding company and as such is subject to OTS
regulations, examinations and reporting requirements. Sterling Savings Bank is
chartered by the State of Washington and its savings deposits are insured by the
FDIC. Sterling Savings Bank is subject to comprehensive regulation, examination
and supervision by the OTS, the FDIC and the Washington Supervisor. Furthermore,
certain transactions and savings deposits are subject to regulations and
controls promulgated by the Federal Reserve Board (the "Fed").
SAVINGS AND LOAN HOLDING COMPANY REGULATION. Sterling is registered as a
savings and loan holding company under the Home Owners' Loan Act (the "HOLA").
The HOLA generally permits a savings and loan holding company to engage in
activities which are unrelated to the operation of a savings and loan
association, provided the holding company controls only one savings and loan
association and such savings and loan association meets the Qualified Thrift
Lender Test (the "QTL Test"). Sterling presently controls only one savings and
loan association, Sterling Savings Bank, which at December 31, 1999 met the QTL
Test.
If Sterling Savings Bank fails to meet the QTL Test in the future, Sterling
will become subject to restrictions on the activities in which it may engage.
Such activities would generally be limited to any activity that the Fed by
regulation has determined is permissible for bank holding companies pursuant to
Section 4(c) of the Bank Holding Company Act of 1956, as amended (unless limited
or prohibited by the OTS by regulation), and certain other limited services and
activities. Sterling currently has no plans to engage in any new activity that
would be restricted if Sterling Savings Bank were to fail to meet the QTL Test
in the future. Although Sterling Savings Bank expects to remain in compliance
with the QTL Test in the future, there can be no assurance in this regard.
Under the HOLA, no person may acquire control of a savings association or a
savings and loan holding company without the prior approval of the OTS. As a
savings and loan holding company, Sterling is prohibited from acquiring
(i) control of another savings association or a savings and loan holding company
without the prior approval of the OTS; (ii) the assets of another savings
association or savings and loan holding company by merger, consolidation or
purchase, without the prior approval of the OTS; (iii) more than 5% of the
voting shares of a savings association or a savings and loan holding company
which is not a subsidiary of Sterling or (iv) control of a depository
institution, the accounts of which are not insured by the FDIC.
The HOLA authorizes the OTS to issue a directive to a savings and loan
holding company and any of its subsidiaries if the OTS determines that there is
reasonable cause to believe that the continuation by the holding company of any
activity constitutes a serious risk to the financial safety, soundness or
stability of the holding company's subsidiary savings association. The OTS may
impose restrictions through such
20
<PAGE>
directive to limit such risk, including limiting (i) the payment of dividends by
the savings association, (ii) transactions between the savings association, the
holding company and the subsidiaries or affiliates of either and (iii) any
activities of the savings association that might create a serious risk that the
liabilities of the holding company and its other affiliates may be imposed on
the savings association. Such a directive has the same effect as a final cease
and desist order. The issuance of the directive can be appealed to the Director
of the OTS.
THE GRAMM-LEACH-BLILEY ACT. In November 1999, the United States Congress
passed and the President signed the Gramm-Leach-Bliley Act (the "GLBA"). The
GLBA is also known as the Financial Services Modernization Act due to its
sweeping overhaul of the financial services industry. Enactment of the GLBA
allows banks, securities firms and insurance companies to affiliate. Now
financial institutions can act as financial "supermarkets" offering customers
"one stop shopping" for bank accounts, insurance policies and securities
transactions. This sweeping legislation is divided into seven titles:
Title I--Financial Affiliations. Title I permits affiliations between banks,
securities firms and insurance companies. Financial organizations are,
subject to certain conditions, able to create new financial affiliations via
a holding company structure or financial subsidiaries. A bank holding
company can now qualify as a financial holding company and expand the
variety of its services, provided that its subsidiary depository
institutions are well-managed, well-capitalized and have received a
"satisfactory" rating on its last Community Reinvestment Act ("CRA")
examination.
Title II--Functional Regulation. Title II outlines the securities industry
reform. Prior to the GLBA, the Securities and Exchange Commission ("SEC")
regulations provided broad exceptions for the securities activities of
banks. Under the GLBA, these broad exceptions have been replaced with more
limited exceptions. Therefore, under GLBA, banks may now be required to
register with the SEC in order to provide securities-like services. For
example, banks that advise mutual funds must register with the SEC as
investment advisers. Additionally, banks that sell mutual funds must clearly
advise customers that the funds are not FDIC insured. The GLBA directs the
SEC and the Fed to work together to establish rules for future hybrid
financial products. The GLBA also creates a new organization, the investment
bank holding company, that is to be supervised by the SEC.
Title III--Insurance. Title III maintains current state regulation of
insurance activities, including those activities engaged in by
federally-chartered banks. The GLBA offers reform in that: (a) states may
not prohibit banks and their affiliates from engaging in insurance
activities; (b) a mutual insurance company may move to another state and
reorganize into a mutual holding company or stock company; (c) states are
encouraged to work together in creating uniform or reciprocal licensing
requirements for insurance agent licensing.
Title IV--Unitary Thrifts. Title IV provides that commercial enterprises are
prohibited from acquiring or creating new unitary thrift holding companies
like Sterling.
Title V--Privacy. Title V provides customers with greater financial privacy
by requiring financial institutions to safeguard their nonpublic personal
information. Financial institutions must advise customers of their policies
regarding the sharing of nonpublic personal information with non-affiliated
third parties and allow customers to "opt-out" of such sharing (subject to
several exceptions related largely to processing customer-initiated
transactions and compliance with current law.) While draft regulations have
been published, interim regulations have not yet been promulgated. Such
regulations are expected by May 2000. Sterling is reviewing its policies and
procedures in light of the GLBA and continues to await the promulgation of
implementing regulations.
Title VI--FHLB System Modernization. Title VI provides the Federal Home Loan
Bank ("FHLB") system with increased access to funds for small business and
agricultural lending, while improving the capital structure for the FHLB
system.
21
<PAGE>
Title VII--ATM Reform and Community Investment Act. Title VII makes reforms
in two areas. First, it is now required that automated teller machine
operators who impose a fee for the use of an ATM by a non-customer disclose
the surcharge both on a sign placed on the ATM machine and as part of a
on-screen display or by providing paper notice to the customer. The customer
must be able to terminate the transaction rather than incur the surcharge.
Second, agreements relating to "fulfillment" of the CRA requirements between
an insured depository institution and a nongovernmental entity must be
disclosed to the public and the governing federal banking agencies.
Additionally, community groups that receive funds from banks in excess of
certain thresholds now must disclose how those funds are used.
THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. The
Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
provides for expanded regulation of depository institutions and their
affiliates, including parent holding companies. FDICIA further provides the OTS
with broad powers to take "prompt corrective action" to resolve problems of
insured depository institutions. The extent of these powers depends upon whether
the institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized."
Under OTS regulations which implement the "prompt corrective action" system
mandated by FDICIA, an institution is "well capitalized" if its total risk-based
capital ratio (the ratio of qualifying total capital to risk-weighted assets) is
10% or more, its Tier 1 risked-based capital ratio (the ratio of Tier 1 core
capital to risk-weighted assets) is 6% or more, its leverage ratio (the ratio of
core capital to total assets) is 5% or more and it is not subject to any written
agreement, order or directive to meet a specified capital level. At
December 31, 1999, Sterling Savings Bank met the standards for a "well
capitalized" institution.
An institution which is "undercapitalized" must submit a capital restoration
plan to the OTS. The plan may be approved only if the OTS determines it is
likely to succeed in restoring the institution's capital and will not
appreciably increase the risks to which the institution is exposed. The
institution's performance under the plan must be guaranteed by any company which
controls the institution, up to a maximum of 5% of the institution's assets. The
OTS also may require an undercapitalized institution to take various actions
deemed appropriate to minimize the potential losses to the deposit insurance
fund. Institutions that are "significantly undercapitalized" or "critically
undercapitalized" are subject to additional sanctions.
FDICIA directs each bank regulatory agency and the OTS to review its capital
standards every two years to determine whether those standards require
sufficient capital to facilitate prompt corrective action to prevent or minimize
loss to the deposit insurance funds. FDICIA, as amended, also requires the OTS
to prescribe minimum operational and managerial standards and standards for
asset quality, earnings and stock valuation for savings institutions. Any
savings institution which fails to meet the standards may be required to submit
a plan for corrective action. If a savings institution fails to submit or
implement an acceptable plan, the OTS may require the institution to take any
action the OTS determines will best carry out the purpose of prompt corrective
action.
Under FDICIA, only a "well capitalized" depository institution may accept
brokered deposits without prior regulatory approval. FDICIA also requires annual
examinations of all insured depository institutions by the appropriate federal
banking agency, with some exceptions for small, well capitalized institutions
and state-chartered institutions examined by state regulators. The federal
banking agencies are required to set compensation standards for insured
depository institutions that prohibit excessive compensation, fees or benefits
to officers, directors, employees and principal shareholders. FDICIA also
contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to deposit
accounts. FDICIA also greatly expanded the range of merger, purchase and
assumption, and deposit transfer transactions involving banks and savings
associations that are exempt from payment of exit and entry fees as transfers of
deposits between the FDIC's Bank Insurance Fund
22
<PAGE>
("BIF") and its Savings Association Insurance Fund ("SAIF"). Many of the
provisions of FDICIA have been implemented through the adoption of regulations
by the federal banking agencies.
REGULATORY CAPITAL REQUIREMENTS. Pursuant to the Financial Institutions
Reform, Recovery and Enforcement Act of 1989 ("FIRREA"), the OTS adopted
regulations implementing new capital standards applicable to all savings
associations, including Sterling Savings Bank. Such capital standards require
that savings associations maintain (i) tangible capital of not less than 1.5% of
adjusted total assets, (ii) core capital of not less than 3.0% of adjusted total
assets and (iii) risk-based capital of not less than 8.0% of risk-weighted
assets. As of December 31, 1999, Sterling Savings Bank met all regulatory
capital requirements. For additional information, see "Management's Discussion
and Analysis--Liquidity and Sources of Funds" and "Management's Discussion and
Analysis--Capital Resources."
TANGIBLE CAPITAL. Tangible capital consists of common shareholders' equity,
including retained earnings; non-cumulative perpetual preferred stock; certain
non-withdrawable and pledged deposits; and minority interests in equity accounts
of fully consolidated subsidiaries. In calculating tangible capital, certain
items must be deducted. These items are goodwill and other intangible assets,
nonqualifying purchased mortgage servicing rights and investments (whether debt
or equity) in subsidiaries engaged as of April 1989 in activities which were
permissible for national banks. With respect to purchased mortgage servicing
rights, the amount that qualifies to be included in tangible capital is the
lower of (a) 90% of fair market value if determinable, (b) 90% of original cost
or (c) the current amortized book value. See "Lending Activities--CLASSIFIED
ASSETS, REAL ESTATE OWNED AND DELINQUENT LOANS," "--MAJOR REAL ESTATE OWNED" and
"Subsidiaries."
LEVERAGE (OR CORE) CAPITAL. Core capital generally consists of tangible
capital plus certain other qualifying intangible assets (which may comprise up
to 25% of core capital).
RISK-BASED CAPITAL. The risk-based capital requirement is an amount equal
to 8% of risk-adjusted assets. A risk weight is assigned to both the on-balance
sheet assets and off-balance sheet commitments of a savings association. Risk
weights range from zero to 100% depending on the type of asset.
Both core capital and "supplementary capital" may be used to meet the
risk-based capital requirement, although supplementary capital cannot be used in
an amount greater than 100% of core capital. For purposes of the risk-based
capital requirement, supplementary capital includes permanent capital
instruments such as cumulative perpetual preferred stock, perpetual or mandatory
convertible subordinated debt, maturing capital instruments such as subordinated
debt, intermediate-term preferred stock, commitment notes and certain
grandfathered mandatory redeemable preferred stock (although the amount included
declines as the instrument approaches maturity), and general valuation loan and
lease loss allowances up to a maximum of 1.25% of risk-weighted assets. The
risk-based capital requirement was equal to 8.0% of risk-weighted assets at
December 31, 1999.
23
<PAGE>
The following tables set forth Sterling Savings Bank's core, Tier
1-risk-based and total risk-based capital positions as reported on the quarterly
Thrift Financial Report at December 31, 1999 and 1998. See "Management's
Discussion and Analysis--Capital Resources."
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
CORE CAPITAL RATIO
-----------------------------------------
DOLLARS RATIO(1) DOLLARS RATIO(1)
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total shareholders' equity.............................. $211,184 8.47% $206,008 9.17%
Adjustment:
Unrealized losses (gains) on securities............... 13,553 0.54 (788) (0.04)
Less:
Intangibles........................................... 55,488 2.23 61,180 2.72
Excess qualifying purchased mortgage loan servicing... 7 0.00 18 0.00
Investment in non-includable subsidiaries............. 353 0.01 353 0.02
-------- ---- -------- -----
Total core capital...................................... 168,889 6.77 143,669 6.39
Core capital requirement................................ 99,738 4.00 89,900 4.00
-------- ---- -------- -----
Core capital excess..................................... $ 69,151 2.77% $ 53,769 2.39%
======== ==== ======== =====
</TABLE>
<TABLE>
<CAPTION>
CORE (TIER 1) RISK-BASED CAPITAL RATIO
-----------------------------------------
DOLLARS RATIO(1) DOLLARS RATIO(1)
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total core (Tier 1) capital............................. $168,889 9.50% $143,669 9.40%
Core (Tier 1) risk-based capital requirement............ 71,099 4.00 61,127 4.00
-------- ---- -------- ----
Core (Tier 1) risk-based capital excess................. $ 97,790 5.50% $ 82,542 5.40%
======== ==== ======== ====
</TABLE>
<TABLE>
<CAPTION>
TOTAL RISK-BASED CAPITAL
-----------------------------------------
DOLLARS RATIO(1) DOLLARS RATIO(1)
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total core (Tier 1) capital............................. $168,889 9.50% $143,669 9.40%
General valuation allowances............................ 15,329 0.86 14,508 0.95
Assets required to be deducted.......................... 0 0.00 (804) (0.05)
-------- ----- -------- -----
Total risk-based capital................................ 184,218 10.36 157,373 10.30
Risk-based capital requirement.......................... 142,199 8.00 122,254 8.00
-------- ----- -------- -----
Risk-based capital excess............................... $ 42,019 2.36% $ 35,119 2.30%
======== ===== ======== =====
</TABLE>
- ------------------------
(1) Ratio of core capital to adjusted total assets for core capital ratio and
ratio of core and total capital to risk-weighted assets for Tier 1
risk-based and total risk-based capital.
The OTS has adopted a regulation that adds an IRR component to the
risk-based capital requirement for savings institutions like Sterling Savings
Bank. The OTS may waive or defer inclusion of the IRR component on a
case-by-case basis. Under the rule, institutions meeting or exceeding a base
level of interest rate exposure must deduct an IRR component from the total
capital available to meet their risk-based capital requirement. That deduction
is equal to one-half of the difference between the institution's actual measured
exposure and the base level of exposure. The institution's actual measured IRR
is expressed as the change that occurs in its net present value ("NPV") as a
result of a hypothetical 200 basis point increase or decrease in interest rates
(whichever leads to the lower NPV) divided by the estimated economic value of
its assets. The base level of IRR, which would require inclusion of a capital
component, is defined as a decline in NPV which exceeds 2.0% of an institution's
assets expressed in terms
24
<PAGE>
of economic value. Using a computer model, the OTS will calculate changes in
each institution's NPV based on financial data the institution submits on its
Thrift Financial Report. The OTS then will advise each institution of its
required IRR deduction. The OTS, using December 31, 1999 financial information,
has calculated that no IRR component deduction is required to be added to
Sterling Savings Bank's risk-based capital.
Savings associations that fail to meet the tangible, core or risk-based
capital requirements are subject to a number of sanctions or restrictions. Under
FIRREA, the OTS must prohibit any asset growth, except that the OTS may permit
growth in an amount not in excess of net interest credited to the savings
association's deposit liabilities, if (i) the savings association obtains the
prior approval of the OTS; (ii) any increase in assets is accompanied by an
increase in tangible capital in an amount not less than 3.0% of the increase in
assets; (iii) any increase in assets is accompanied by an increase in capital
not less in percentage amount than required under the risk-based capital
standards then applicable; (iv) any increase in assets is invested in low-risk
assets and (v) the savings association's ratio of core capital to total assets
is not less than the ratio existing on January 1, 1991.
The OTS also may require any savings association not in compliance with
capital standards (including any individual minimum capital requirement) to
comply with a capital directive issued by the OTS. Such a capital directive may
order the savings association to (a) achieve its minimum capital requirements by
a specified date; (b) adhere to a compliance schedule for achieving its minimum
capital requirements; (c) submit and adhere to a capital plan acceptable to the
OTS and/or (d) take other actions, including reducing its assets or rate of
liability growth and/or restricting its payment of dividends in order to reach
the required capital levels. The OTS, by such capital directive, enforcement
proceedings or otherwise, may require an association not in compliance with the
capital requirements to (i) increase the amount of its regulatory capital to a
specified level; (ii) convene a meeting with the OTS supervision staff for the
purpose of accomplishing the objectives of the regulations; (iii) reduce or
limit the rate of interest that may be paid on savings accounts; (iv) limit the
receipt of deposits to those made to existing accounts; (v) cease or limit
lending or the making of a particular loan or category of loan; (vi) cease or
limit the purchase of loans or the making of specified other investments;
(vii) limit operational expenditures to specific levels; (viii) increase liquid
assets and maintain such increased liquidity at specified levels or (ix) take
such other action or actions as the OTS may deem necessary or appropriate for
the safety and soundness of the savings association or the protection of its
depositors. The material failure of a savings association to comply with any
plan, regulation, written agreement, order or directive issued will be treated
as an unsafe or unsound practice which could result in the imposition of certain
penalties or sanctions, including but not limited to the assessment of civil
monetary penalties, the issuance of a cease and desist order or the appointment
of a conservator or receiver.
Any savings association which does not meet its regulatory capital
requirements may not accept, without a written waiver from the OTS, brokered
deposits if such deposits, together with any existing brokered deposits
outstanding, would exceed 5.0% of the association's total deposits. In addition,
the FDIC prohibits, with certain exceptions, an "insolvent institution" from
accepting any brokered deposits. An insolvent institution is defined as any
insured depository institution which does not meet the minimum capital
requirements applicable with respect to such institution. This prohibition
includes any renewal of an account in any insolvent institution and any rollover
of any amount on deposit. The FDIC may waive this restriction upon application
by an insured depository institution and a finding that the acceptance of such
deposits does not constitute an unsafe or unsound practice with respect to such
institution. Sterling had no brokered deposits at December 31, 1999 or 1998.
A savings association which is not in compliance with its capital
requirements may apply to the OTS for an exemption from the sanctions and
penalties imposed upon a savings association for failure to comply with its
minimum capital standards. Pursuant to FIRREA, the OTS may approve an
application for a capital exemption if such exemption would pose no significant
risk to the affected insurance fund, the savings association's management is
competent, the savings association is in compliance with all applicable
25
<PAGE>
statutes, regulations, orders and supervisory agreements and directives and the
savings association's management has not engaged in insider dealing, speculative
practices or any other activities that could have jeopardized the association's
safety and soundness or contributed to impairing the association's capital. Any
application for a capital exemption must be accompanied by an acceptable capital
plan. If a savings association receives approval of capital exemption and
operates in accordance with an acceptable capital plan, it will be deemed to be
in compliance with its capital standards for purposes of OTS capital regulation
only. The savings association must request and receive approval of specific,
express exemptions from the provisions of other rules, regulations and policy
statements as part of the accepted capital plan to be deemed in capital
compliance for purposes of such other rules, regulations and policy statements.
FEDERAL DEPOSIT INSURANCE CORPORATION. Sterling's deposits are insured up
to $100,000 per insured depositor (as defined by law and regulations) by the
FDIC through the SAIF. The SAIF is administered and managed by the FDIC. The
FDIC is authorized to conduct examinations of and to require reporting by SAIF
member institutions. The FDIC may prohibit any SAIF member institution from
engaging in any activity the FDIC determines by regulation or order poses a
serious threat to the SAIF. The FDIC also has the authority to initiate
enforcement actions against savings associations.
Deposits insured by SAIF are currently assessed at the rate of zero for
well-capitalized institutions displaying little risk to the SAIF to $0.27 per
$100 of domestic deposits for undercapitalized institutions displaying high
risk. The SAIF assessment rate may increase or decrease as is necessary to
maintain the designated SAIF reserve ratio of 1.25% of insured deposits.
The Financing Corporation ("FICO"), established by the Competitive Equality
Banking Act of 1987, is a mixed-ownership government corporation whose sole
purpose was to function as a financing vehicle for the Federal Savings & Loan
Insurance Corporation. Outstanding FICO bonds, which are 30-year noncallable
bonds with a principal amount of approximately $8.1 billion, mature in 2017
through 2019. The FICO has assessment authority separate from the FDIC's
authority to assess risk-based premiums for deposit insurance, to collect funds
from FDIC-insured institutions sufficient to pay interest on FICO bonds. The
FDIC acts as collection agent for the FICO. The FICO assessment rate, currently
$0.02 per $100 of deposits, is adjusted quarterly.
The FDIC is empowered to initiate a termination of insurance proceeding in
cases where the FDIC determines that an insured depository institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated an applicable law, regulation, order or
condition imposed by the FDIC. The FDIC may deem failure to comply with
applicable regulatory capital requirements an unsafe and unsound practice. If
the FDIC terminates a savings association's deposit insurance, funds then on
deposit continue to be insured for at least six months and up to two years after
notice of such termination is provided to the account holders. Furthermore, if
the FDIC initiates an insurance termination proceeding against a savings
association that has no tangible capital, the FDIC may issue a temporary order
immediately suspending deposit insurance on all deposits received by such
savings association.
LOANS TO AFFILIATES. FIRREA amended the statutory provisions governing
transactions between a savings association and its affiliates. Such transactions
are subject to the restrictions of Sections 23A and 23B of the Federal Reserve
Act (the "FRA") in the same manner and to the same extent as if the savings
association were a member bank as defined in the FRA, except that a savings
association may not (i) extend credit to any affiliate engaged in activities
that are impermissible for a bank holding company or (ii) purchase or invest in
any securities of an affiliate other than shares of a subsidiary.
Section 23A of the FRA limits the aggregate amount of "covered transactions"
with any one affiliate to 10% of the capital stock and surplus of the member
bank. "Covered transactions" are defined in Section 23A to include extending
credit to, purchasing the assets of, issuing a guarantee, acceptance or letter
of credit on behalf of, or investing in the stock or securities of, any
affiliate. Section 23A also requires a bank to obtain specified levels of
collateral for any extension of credit to an affiliate. Section 23B, in
26
<PAGE>
general, requires that any transaction with an affiliate be on terms and
conditions no less favorable to the member bank than those applicable to
transactions with unaffiliated entities. The OTS has recently adopted
regulations further defining and clarifying the applicability of Section 23A and
23B to savings associations. The OTS has the authority to impose any additional
restrictions on any transaction between a savings association and an affiliate
that it determines are necessary to protect the safety and soundness of the
association.
In addition, FIRREA provides that extensions of credit to executive
officers, directors and principal shareholders of a savings association are
governed by the FRA. The FRA requires prior approval by the board of directors
of the bank before a loan can be made to an executive officer, director or 10%
shareholder. In addition, such loan or extension of credit must be made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with unaffiliated persons and
may not involve more than the normal risk of repayment or present other
unfavorable features. The FRA also prohibits any loan or extension of credit to
an executive officer or a controlling shareholder if such loan or extension of
credit (when aggregated with the amount of all other loans or extensions of
credit then outstanding to such individual) would exceed the limits on loans to
a single borrower applicable to national banks. The OTS may impose additional
restrictions for safety and soundness reasons.
LIQUIDITY. All savings associations, including Sterling Savings Bank, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of average daily balances of net withdrawable
deposit accounts and borrowings payable in one year or less. The liquidity
requirement may vary from time to time (between 4% and 10%) depending upon
economic conditions and savings flows of all savings associations. At the
present time, the required liquid asset ratio is 4.0%. In addition to meeting
the required liquid asset ratio, savings associations, including Sterling
Savings Bank, must maintain sufficient liquidity to ensure safe and sound
operations. Sterling Savings Bank's liquidity ratios at December 31, 1999 and
1998 were 9.1% and 11.5%, respectively.
LOANS-TO-ONE-BORROWER. Under FIRREA, the permissible amount of
loans-to-one-borrower follows the national bank standard for all loans made by
savings associations (except that loans-to-one-borrower not in excess of
$500,000 may be made in any event). OTS regulations generally do not permit
loans-to-one-borrower to exceed 15% of unimpaired capital and unimpaired
surplus. Loans in an amount equal to an additional 10% of unimpaired capital and
unimpaired surplus also may be made to a borrower if the loans are fully secured
by readily marketable collateral. In addition, institutions which meet
applicable capital requirements may make domestic residential housing
development loans in an amount up to the lesser of $30.0 million or 30% of the
institution's unimpaired capital and unimpaired surplus, subject to certain
conditions. At December 31, 1999, Sterling's loans-to-one-borrower limit was
$27.6 million, which management believes is adequate to allow for loan
originations.
QUALIFIED THRIFT LENDER. Under the QTL Test, as revised by FDICIA, an
institution generally is required to invest at least 65% of its portfolio assets
(as defined in the OTS regulations) in "qualified thrift investments" on a
monthly average basis in nine out of every twelve months. Qualified thrift
investments include, in general, loans, securities and other investments that
are related to housing. At December 31, 1999, Sterling's qualified thrift
investments were 69.9% of portfolio assets. An institution's failure to remain a
qualified thrift lender ("QTL") may result in: (1) limitations on new
investments and activities; (2) imposition of branching restrictions; (3) loss
of borrowing privileges at the FHLB Seattle and (4) limitations on the payment
of dividends.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act ("CRA"), as
implemented by the OTS regulations, a savings institution has a continuing and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and
27
<PAGE>
services that it believes are best suited to its particular community,
consistent with the CRA. The CRA requires the OTS, in connection with its
examination of a financial institution, to assess the institution's record of
meeting the credit needs of its community and to take such record into account
in its evaluation of certain applications by such institutions. The CRA requires
public disclosure of an institution's CRA rating and requires the OTS to provide
a written evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system of "outstanding," "satisfactory," "needs to improve"
or "substantial noncompliance." Sterling's current CRA rating is "satisfactory."
CHANGE OF CONTROL. Under applicable statutes and regulations, a person may
not acquire control of a savings association without the prior approval of the
OTS and the Washington Supervisor. Control is conclusively deemed to be acquired
when, among other things, a person, either alone or acting in concert with
others, acquires more than 25% of any class of voting stock of a savings
association. Under federal statutes and regulations, a rebuttable presumption of
control arises if a person acquires, either alone or acting in concert with
others, more than ten percent of any class of voting stock of a savings
association and is subject to a "control factor," or acquires more than 25% of
any class of stock, and is subject to a "control factor." A person is subject to
a control factor as a result of specified ownership levels of the savings
association's debt or equity or as a result of certain relationships with the
savings association.
As indicated above, if a person's ownership of the savings association stock
is below the threshold levels for control, such person may nevertheless be
deemed to be "acting in concert" with one or more other persons who own stock in
the savings association, in which case all of the stock ownership of each person
acting in concert will be aggregated and attributed to each member of the group,
thereby putting each one over the control threshold. Under certain
circumstances, acquirers will be presumed to be acting in concert. For example:
(i) a company will be presumed to be acting in concert with a controlling
shareholder or management official; (ii) a company controlling or controlled by
another company and companies under common control will be presumed to be acting
in concert and (iii) persons will be presumed to be acting in concert where they
constitute a group under Section 13 or the proxy rules under Section 14 of the
Securities Exchange Act of 1934, as amended.
RESTRICTIONS ON ACTIVITIES OF STATE-CHARTERED ASSOCIATIONS. FIRREA
prohibits a state-chartered savings association from engaging in any type of
activity or any activity in an amount that is not permissible for a federal
savings association unless (i) the FDIC has determined that such activity poses
no threat to the insurance fund and (ii) the savings association continues to be
in compliance with applicable capital requirements. If the FDIC determines that
the amount of such activity does not pose a significant threat to the insurance
fund, an association which is in compliance with applicable capital requirements
may engage in activities in an amount greater than that permissible for a
federal savings association. FIRREA also prohibits a state-chartered savings
association from acquiring or retaining any equity investment (other than shares
in certain service corporations) of a type or in an amount not permissible for a
federal savings association. A savings association must divest any such equity
investment as quickly as can be prudently done. Pursuant to applicable equity
investment rules, Sterling has excluded its investment in assets totaling
$353,000 from its calculation of risk-based capital as of December 31, 1999.
Sterling is actively marketing these properties. See "Subsidiaries."
RESTRICTIONS ON CAPITAL DISTRIBUTIONS BY SAVINGS ASSOCIATIONS. The OTS has
adopted a capital distribution regulation which limits the ability of savings
institutions to make capital distributions. Certain factors are considered by
the OTS in determining whether to permit a savings institution to pay dividends,
including, among other things, whether an institution meets applicable capital
requirements. Those savings institutions which meet the applicable capital
requirements have discretion in making capital distributions, while those with
lower capitalization have less discretion in this regard and, in some cases, are
required to seek the approval of the OTS.
Sterling's income is derived primarily from dividends to the extent they are
declared and paid by Sterling Savings Bank. Current OTS regulations require
Sterling Savings Bank to give the OTS 30 days
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<PAGE>
advance notice of any proposed declaration of dividends to Sterling, as its
holding company. The OTS has approved all of Sterling Savings Bank Preferred
Stock dividend payments to Sterling, but there can be no assurance as to the
approval of future dividends.
FEDERAL RESERVE SYSTEM. Sterling Savings Bank is subject to various
regulations promulgated by the Fed, including, among others, Regulation B (Equal
Credit Opportunity), Regulation D (Reserves), Regulation E (Electronic Fund
Transfers), Regulation Z (Truth in Lending), Regulation CC (Availability of
Funds) and Regulation DD (Truth in Savings). Regulation D requires
noninterest-bearing reserve maintenance in the form of either vault cash or
funds on deposit at the Federal Reserve Bank of San Francisco or another
designated depository institution in an amount calculated by formula. The
balances maintained to meet the reserve requirements imposed by the Fed may be
used to satisfy liquidity requirements.
Under the provisions of the Depository Institutions Deregulation and
Monetary Control Act of 1980, savings and loan associations, like Sterling
Savings Bank, also have authority to borrow from the Federal Reserve Bank
"discount window," but Federal Reserve regulations require associations to
exhaust all FHL Bank sources before borrowing from the Fed.
FEDERAL TAXATION. Sterling is subject to federal income taxation under the
Internal Revenue Code of 1986 as amended, in the same manner as other
corporations. Sterling files consolidated federal income tax returns on the
accrual basis. See Note 12 of "Notes to Consolidated Financial Statements."
STATE LAW AND REGULATION. Sterling Savings Bank is a Washington
State-chartered institution and is subject to regulation by the Washington
Supervisor, which conducts regular examinations to ensure that Sterling Savings
Bank's operations and policies conform with sound industry practice. The
liquidity and other requirements set by the Washington Supervisor are generally
no stricter than the liquidity and other requirements set by the OTS. State law
regulates the amount of credit that can be extended to any one person or marital
community and the amount of money that can be invested in any one property.
Without the Washington Supervisor's approval, Sterling Savings Bank currently
cannot extend credit to any one person or marital community in an amount greater
than 2.5% of Sterling Savings Bank's total assets. State law also regulates the
types of loans Sterling Savings Bank can make. Without the Washington
Supervisor's approval, Sterling Savings Bank cannot currently invest more than
10% of its total assets in other corporations. Sterling Savings Bank also
operates branches within the states of Oregon, Idaho and Montana and therefore
is also subject to the supervision of the Oregon Department of Consumer and
Business Services, the Idaho Department of Finance and the Montana Department of
Finance.
ITEM 2. PROPERTIES
Sterling Savings Bank owns 44 branches and leases 14 branches in Washington,
owns 5 branches in Oregon, owns 9 branches and leases 2 branches in Idaho and
owns 3 branches in Montana. Action Mortgage leases four residential loan
production branches (one in Washington, one in Oregon and two in Idaho).
INTERVEST leases one office in Washington and leases one office in Oregon. These
branches and offices range in size from 500 to 105,000 square feet and have a
total net book value, including leasehold improvements and furniture and
fixtures, of $52.6 million at December 31, 1999. Leases on these properties
expire between January 1, 2000 and December 31, 2014. Sterling believes it will
be able to renew the leases or obtain comparable leases.
ITEM 3. LEGAL PROCEEDINGS
Periodically, various claims and lawsuits are brought against issues
incident to Sterling's business. In addition, Sterling succeeded to several
claims as a result of past acquisitions by Sterling and its subsidiaries, such
as claims to enforce liens, condemnation proceedings involving properties on
which Sterling holds security interests and claims involving the making and
servicing of loans. No material loss is expected from any of such pending claims
or lawsuits, although there can be no assurance in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1999.
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<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S STOCK AND RELATED SHAREHOLDER MATTERS
Sterling has outstanding one class of Common Stock. As of February 29, 2000,
there were 8,099,028 shares of Common Stock outstanding. As of February 29,
2000, the Common Stock was owned by 825 Shareholders of record. The Common Stock
is quoted on the Nasdaq National Market under the symbol "STSA." For information
concerning the payment of dividends, see "Business--Regulation--REGULATORY
CAPITAL REQUIREMENTS," "Management's Discussion and Analysis--Liquidity and
Sources of Funds" and Note 25 of "Notes to Consolidated Financial Statements."
The following table sets forth the high and low bid prices per share for the
Common Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
Year ended December 31, 1999:
Fourth quarter............................................ $13.38 $11.00
Third quarter............................................. 16.38 13.00
Second quarter............................................ 16.88 13.25
First quarter............................................. 17.50 15.00
Year ended December 31, 1998:
Fourth quarter............................................ $18.88 $13.50
Third quarter............................................. 23.63 14.25
Second quarter............................................ 28.25 21.88
First quarter............................................. 26.50 19.75
</TABLE>
30
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA(1)
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED FISCAL YEARS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
--------------------------------- --------------------- ---------------------
1999 1998 1997 1996 1995 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income...................... $ 177,374 $ 155,763 $ 135,885 $ 59,916 $ 59,874 $ 117,799 $ 111,815
Interest expense..................... (102,004) (96,558) (88,077) (38,626) (41,785) (80,172) (74,108)
--------- --------- --------- --------- --------- --------- ---------
Net interest income.................. 75,370 59,205 47,808 21,290 18,089 37,627 37,707
Provision for loan losses............ (3,900) (5,325) (2,482) (1,121) (822) (1,643) (1,642)
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses.................... 71,470 53,880 45,326 20,169 17,267 35,984 36,065
Other income......................... 13,297 12,313 9,474 4,775 5,062 9,533 11,640
Merger, acquisition and conversion
costs.............................. 0 (5,464) 0 0 0 0 0
Other operating expenses............. (64,478) (50,827) (38,429) (25,807) (16,231) (33,109) (32,793)
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes.... 20,289 9,902 16,371 (863) 6,098 12,408 14,912
Income tax provision................. (7,470) (3,679) (6,152) (162) (2,252) (4,667) (5,039)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).................... 12,819 6,223 10,219 (1,025) 3,846 7,741 9,873
Preferred stock dividends declared... 0 0 (940) (942) (942) (1,885) (1,885)
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) applicable to
common shares...................... $ 12,819 $ 6,223 $ 9,279 $ (1,967) $ 2,904 $ 5,856 $ 7,988
========= ========= ========= ========= ========= ========= =========
Income (loss) per common share:
Basic.............................. $ 1.59 $ 0.78 $ 1.40 $ (0.33) $ 0.50 $ 1.00 $ 1.41
Diluted............................ $ 1.57 $ 0.76 $ 1.25 $ (0.33) $ 0.48 $ 0.97 $ 1.27
Weighted average common shares
outstanding:
Basic.............................. 8,083,026 8,027,537 6,634,599 5,955,387 5,830,804 5,840,359 5,682,650
Diluted............................ 8,147,020 8,217,067 8,170,675 8,074,600 7,974,257 8,000,454 7,793,233
Ratios:
Return on average assets............. 0.52% 0.30% 0.58% (0.13)% 0.48% 0.49% 0.62%
Return on average common
shareholders' equity............... 10.68 5.42 11.06 (5.67) 7.95 8.07 12.75
Shareholders' equity to total assets
at end of period................... 4.62 5.14 5.71 6.04 6.29 6.03 5.98
Book value per common share at end of
period............................. $ 14.54 $ 14.77 $ 13.80 $ 11.78 $ 12.44 $ 11.39 $ 11.90
Net interest margin.................. 3.35% 3.05% 2.84% 2.83% 2.35% 2.51% 2.49%
Nonperforming assets to total assets
at end of period................... 0.65 0.40 0.71 0.41 0.55 0.55 0.56
Operating Cash Performance Ratios:(2)
Operating cash earnings.............. $ 16,415 $ 13,929 $ 11,618 $ 4,371 $ 4,899 $ 9,820 $ 12,182
Operating cash earnings per common
share--diluted..................... $ 2.01 $ 1.70 $ 1.31 $ 0.42 $ 0.50 $ 0.99 $ 1.32
Operating cash return on average
common shareholders' equity........ 13.68% 12.13% 12.72% 9.89% 10.83% 10.93% 16.44%
Operating cash return on average
assets............................. 0.67 0.66 0.66 0.55 0.61 0.62 0.77
Operating efficiency................. 66.30 64.99 63.17 69.33 62.90 63.14 59.39
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------- -----------------------
1999 1998 1997 1996 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Financial Position Data:
Total assets.................. $2,546,925 $2,314,587 $1,938,353 $1,594,430 $1,537,813 $1,600,849
Loans receivable.............. 1,787,771 1,468,534 1,105,739 970,196 923,494 1,094,468
Mortgage-backed securities.... 343,310 405,725 477,513 379,965 403,109 284,424
Investments................... 162,420 180,680 213,426 118,005 86,775 87,146
Deposits...................... 1,617,368 1,545,425 1,084,445 952,379 950,317 942,118
FHLB Seattle advances......... 490,503 319,540 460,085 259,626 259,410 352,073
Other borrowings.............. 110,000 97,240 72,240 32,240 17,240 17,240
Shareholders' equity.......... 117,639 119,017 110,617 96,269 92,686 95,798
Statistical Data:
Number of:
Employees (full-time
equivalents)................ 817 746 525 512 507 517
Offices:
Full service................ 77 77 44 44 44 44
Loan production............. 8 10 8 10 10 11
Real estate loans............. 6,472 6,877 8,338 10,233 12,306 15,825
Deposit accounts.............. 156,197 156,362 88,969 89,350 91,053 90,623
</TABLE>
- ------------------------
(1) Prior periods have been restated to reflect the acquisition of Big Sky
Bancorp, Inc. ("Big Sky") on November 13, 1998, which was accounted for as
a pooling of interests.
Sterling changed its fiscal year end from June 30 to December 31, effective
December 31, 1996. The selected financial data (except the ratios and
statistical data) of Sterling for each of the periods has been derived from
Sterling's consolidated financial statements. Such consolidated financial
statements for the years ended December 31, 1999, 1998 and 1997, the six
months ended December 31, 1996 and the fiscal year ended June 30, 1996 have
been audited by PricewaterhouseCoopers LLP. The selected financial data as
of and for all other periods presented are derived from unaudited financial
statements and reflect the adjustments, all of which are of a normal and
recurring nature, which in the opinion of management are considered
necessary for a fair presentation of the financial position and results of
operations for such periods.
(2) Amounts and ratios exclude intangible amortization and other non-recurring
items, including acquisition-related costs and adjustments and one-time
SAIF assessments, net of related income taxes. Intangible amortization, net
of income tax effect, was $3,596, $2,512, $1,399, $1,011, $1,043, $2,079 and
$2,309 for the years ended December 31, 1999, 1998 and 1997, six months
ended December 31, 1996 and 1995 and for the fiscal years ended June 30,
1996 and 1995, respectively. Acquisition-related costs and other
adjustments, net of income tax effect, were $5.2 million for the year ended
December 31, 1998. One-time SAIF assessments, net of income tax effect, were
$4,385 for the six months ended December 31, 1996.
For the operating efficiency ratios, intangible amortization excluded from
operating expenses was $5,692, $3,971, $2,242, $1,590, $1,669, $3,332 and
$3,487 for the years ended December 31, 1999, 1998 and 1997, six months
ended December 31, 1996 and 1995 and for the fiscal years ended June 30,
1996 and 1995, respectively. Acquisition-related costs excluded from
operating expenses were $5,464 for the year ended December 31, 1998.
One-time SAIF assessments, excluded from operating expenses were $6,145 for
the six months ended December 31, 1996. Acquisition-related adjustments
included in other income were $581,000 for the year ended December 31, 1998.
32
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Sterling is a unitary savings and loan holding company, the significant
operating subsidiary of which is Sterling Savings Bank. The significant
operating subsidiaries of Sterling Savings Bank are Action Mortgage, INTERVEST
and Harbor Financial. Sterling Savings Bank commenced operations in 1983 as a
Washington State-chartered, federally insured stock savings and loan association
headquartered in Spokane, Washington.
Sterling, with $2.55 billion in total assets at December 31, 1999, attracts
FDIC-insured deposits from the general public through 77 retail branches located
primarily in rural and suburban communities in Washington, Oregon, Idaho and
Montana. Sterling endeavors to provide personalized, quality financial services
to its customers as exemplified by its "Hometown Helpful" philosophy. Sterling
believes that this dedication to personalized service has enabled it to maintain
a stable retail deposit base. Sterling originates loans through its branch
offices, as well as Action Mortgage residential loan production offices in the
metropolitan areas of Spokane and Seattle, Washington; Portland, Oregon; and
Boise, Idaho, and INTERVEST commercial real estate lending offices located in
the metropolitan areas of Spokane and Seattle, Washington; and Portland, Oregon.
Sterling also markets tax-deferred annuities, mutual funds and other financial
products through Harbor Financial.
Sterling continues to enhance its presence as a community bank by increasing
its commercial real estate, business banking, consumer and construction lending
while increasing its retail deposits, particularly transaction accounts.
Commercial real estate, business banking, consumer and construction loans
generally produce higher yields than residential loans. Such loans, however,
generally involve a higher degree of risk than financing residential real
estate. Sterling's revenues are derived primarily from interest earned on loans
and MBS, from fees and service charges and from mortgage banking operations. The
operations of Sterling Savings Bank, and savings institutions generally, are
influenced significantly by general economic conditions and by policies of its
primary regulatory authorities, the OTS, the FDIC and the Washington Supervisor.
See "Regulation."
Sterling intends to continue to pursue an aggressive growth strategy, which
may include acquiring other financial institutions or branches thereof or other
substantial assets or deposit liabilities. Sterling may not be successful in
identifying further acquisition candidates, integrating acquired institutions or
preventing deposit erosion or loan quality deterioration at acquired
institutions. There is significant competition for acquisitions in Sterling's
market area, and Sterling may not be able to acquire other institutions on
attractive terms. Furthermore, the success of Sterling's growth strategy will
depend on increasing and maintaining sufficient levels of regulatory capital,
obtaining necessary regulatory approvals, generating appropriate growth and
favorable economic and market conditions. There can be no assurance that
Sterling will be successful in implementing its growth strategy.
NET INTEREST INCOME
The most significant component of earnings for a financial institution
typically is net interest income ("NII"), which is the difference between
interest income, primarily from loan, MBS and investment portfolios, and
interest expense, primarily on deposits and borrowings. Changes in NII result
from changes in volume, net interest spread and net interest margin. Volume
refers to the dollar level of interest-earning assets and interest-bearing
liabilities. Net interest spread refers to the difference between the yield on
interest-earning assets and the rate paid on interest-bearing liabilities. Net
interest margin refers to NII divided by total interest-earning assets and is
influenced by the level and relative mix of interest-earning assets and
interest-bearing liabilities. During the years ended December 31, 1999, 1998 and
1997, the increase in NII was primarily due to an increase in the interest
earned on loans coupled with a decrease in the cost of deposits and FHLB Seattle
advances.
33
<PAGE>
The following table sets forth, for the periods indicated, information with
regard to the average balances of interest-earning assets and interest-bearing
liabilities, the total dollar amounts of interest income from interest-earning
assets and interest expense on interest-bearing liabilities, resultant yields or
costs, NII, net interest spread, net interest margin and the ratio of average
interest-earning assets to average interest-bearing liabilities.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998
--------------------------------- ---------------------------------
INTEREST AVERAGE INTEREST AVERAGE
EARNED YIELD EARNED YIELD
AVERAGE OR OR AVERAGE OR OR
BALANCE(1) PAID COST(2) BALANCE(1) PAID COST(2)
----------- -------- -------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans.............................. $1,716,279 $143,800 8.38% $1,282,668 $113,813 8.87%
Mortgage-backed securities......... 364,266 22,828 6.27 428,220 26,938 6.29
Investments and cash equivalents... 171,565 10,746 6.26 233,264 15,012 6.44
---------- -------- ----- ---------- -------- ----
Total interest-earning assets...... $2,252,110 $177,374 7.88% $1,944,152 $155,763 8.01%
========== ======== ===== ========== ======== ====
Interest-bearing liabilities:
Certificates of deposit............ $ 866,461 $ 44,507 5.14% $ 791,311 $ 43,188 5.46%
Regular savings accounts and money
market accounts.................. 428,710 14,493 3.38 351,759 12,745 3.62
Interest-bearing demand accounts... 189,207 1,921 1.02 145,335 1,662 1.14
---------- -------- ----- ---------- -------- ----
Total deposits and checking........ 1,484,378 60,921 4.10 1,288,405 57,595 4.47
FHLB Seattle advances.............. 383,939 21,079 5.49 336,809 20,837 6.19
All other borrowings............... 211,781 10,776 5.09 196,484 10,844 5.52
Trust Preferred Securities......... 40,000 3,860 9.65 40,000 3,800 9.50
8.75% Subordinated Notes........... 8,572 927 10.81 17,240 1,509 8.75
Floating Rate Notes................ 17,823 1,485 8.33 0 0 0.00
Advances under line of credit...... 38,591 2,956 7.66 21,667 1,973 9.11
---------- -------- ----- ---------- -------- ----
Total interest-bearing
liabilities...................... $2,185,084 $102,004 4.67% $1,900,605 $ 96,558 5.08%
========== ======== ===== ========== ======== ====
Net interest income................ $ 75,370 $ 59,205
======== ========
Net interest spread................ 3.21% 2.93%
===== ====
Net interest margin................ 3.35% 3.05%
===== ====
Ratio of average interest-earning
assets to average
interest-bearing liabilities..... 103.1% 102.3%
========== ==========
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1997
---------------------------------
INTEREST AVERAGE
EARNED YIELD
AVERAGE OR OR
BALANCE(1) PAID COST(2)
----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest-earning assets:
Loans.............................. $1,039,167 $ 94,963 9.14%
Mortgage-backed securities......... 444,110 29,031 6.54
Investments and cash equivalents... 200,350 11,891 5.94
---------- -------- -----
Total interest-earning assets...... $1,683,627 $135,885 8.07%
========== ======== =====
Interest-bearing liabilities:
Certificates of deposit............ $ 655,121 $ 37,316 5.70%
Regular savings accounts and money
market accounts.................. 246,218 9,578 3.89
Interest-bearing demand accounts... 81,985 1,133 1.38
---------- -------- -----
Total deposits and checking........ 983,324 48,027 4.88
FHLB Seattle advances.............. 341,836 22,179 6.49
All other borrowings............... 243,757 13,985 5.74
Trust Preferred Securities......... 21,128 2,220 10.51
8.75% Subordinated Notes........... 17,242 1,666 9.66
Floating Rate Notes................ 0 0 0.00
Advances under line of credit...... 0 0 0.00
---------- -------- -----
Total interest-bearing
liabilities...................... $1,607,287 $ 88,077 5.48%
========== ======== =====
Net interest income................ $ 47,808
========
Net interest spread................ 2.59%
=====
Net interest margin................ 2.84%
=====
Ratio of average interest-earning
assets to average
interest-bearing liabilities..... 104.7%
==========
</TABLE>
- ------------------------------
(1) Average balances are computed on a monthly basis.
(2) The yield information for the available-for-sale portfolio does not give
effect to changes in fair value that are reflected as a component of
shareholders' equity.
34
<PAGE>
The following table illustrates the changes in Sterling's NII due to changes
in volume (change in volume multiplied by initial rate), changes in interest
rate (change in rate multiplied by initial volume) and changes in rate/volume
(change in rate multiplied by change in average volume) for the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
VERSUS VERSUS
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
INCREASE (DECREASE) DUE TO: INCREASE (DECREASE) DUE TO:
----------------------------------------- -----------------------------------------
RATE/ RATE/
VOLUME RATE VOLUME TOTAL VOLUME RATE VOLUME TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income on:
Loans.......................... $38,475 $(6,343) $(2,145) $29,987 $22,252 $(2,756) $ (646) $18,850
Mortgage-backed securities..... (4,023) (102) 15 (4,110) (1,039) (1,093) 39 (2,093)
Investments and cash
equivalents.................. (3,971) (401) 106 (4,266) 1,953 1,003 165 3,121
------- ------- ------- ------- ------- ------- ------- -------
Total interest income.......... 30,481 (6,846) (2,024) 21,611 23,166 (2,846) (442) 19,878
------- ------- ------- ------- ------- ------- ------- -------
Deposits and checking accounts:
Certificates of deposit........ 4,102 (2,541) (242) 1,319 7,757 (1,561) (324) 5,872
Regular savings accounts and
money market accounts........ 2,788 (853) (187) 1,748 4,106 (657) (282) 3,167
Interest-bearing demand
accounts..................... 502 (186) (57) 259 875 (195) (151) 529
------- ------- ------- ------- ------- ------- ------- -------
Total deposits and checking
accounts..................... 7,392 (3,580) (486) 3,326 12,738 (2,413) (757) 9,568
FHLB Seattle advances.......... 2,916 (2,346) (328) 242 (326) (1,031) 15 (1,342)
All other borrowings........... 844 (846) (66) (68) (2,712) (532) 103 (3,141)
Trust Preferred Securities..... 0 60 0 60 1,983 (213) (190) 1,580
8.75% Subordinated Notes....... (759) 355 (178) (582) 0 (157) 0 (157)
Floating Rate Notes............ 0 0 1,485 1,485 0 0 0 0
Advances under line of
credit....................... 1,541 (313) (245) 983 0 0 1,973 1,973
------- ------- ------- ------- ------- ------- ------- -------
Total interest expense......... 11,934 (6,670) 182 5,446 11,683 (4,346) 1,144 8,481
------- ------- ------- ------- ------- ------- ------- -------
Net interest income............ $18,547 $ (176) $(2,206) $16,165 $11,483 $ 1,500 $(1,586) $11,397
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
ASSET AND LIABILITY MANAGEMENT
The results of operations for savings institutions may be materially and
adversely affected by changes in prevailing economic conditions, including rapid
changes in interest rates, declines in real estate market values and the
monetary and fiscal policies of the federal government. Like all financial
institutions, Sterling's NII and the NPV, or estimated fair value, are subject
to fluctuations in interest rates. For example, some of Sterling's ARMs are
indexed to the weekly average yield on one-year U.S. Treasury securities. When
interest-earning assets such as loans are funded by interest-bearing liabilities
such as deposits, FHLB Seattle advances and other borrowings, a changing
interest rate environment may have a dramatic effect on Sterling's results of
operations. Currently, Sterling's interest-bearing liabilities, consisting
primarily of savings deposits, FHLB Seattle advances and other borrowings,
mature or reprice more rapidly, or on different terms, than do its
interest-earning assets. The fact that liabilities mature or reprice more
frequently on average than assets may be beneficial in times of declining
interest rates; however, such an asset/liability structure may result in
declining NII during periods of rising interest rates. See "Business--Lending
Activities."
Additionally, the extent to which borrowers prepay loans is affected by
prevailing interest rates. When interest rates increase, borrowers are less
likely to prepay loans; whereas when interest rates decrease,
35
<PAGE>
borrowers are more likely to prepay loans. Prepayments may affect the levels of
loans retained in an institution's portfolio as well as its NII.
Sterling maintains an asset and liability management program intended to
manage NII through interest rate cycles and to protect its NPV by controlling
its exposure to changing interest rates. Sterling uses a simulation model
designed to measure the sensitivity of NII and NPV to changes in interest rates.
This simulation model is designed to enable Sterling to generate a forecast of
NII and NPV given various interest rate forecasts and alternative strategies.
The model is also designed to measure the anticipated impact that prepayment
risk, basis risk, customer maturity preferences, volumes of new business and
changes in the relationship between long- and short-term interest rates have on
the performance of Sterling. The model calculates the present value of assets,
liabilities, off-balance sheet financial instruments, and equity at current
interest rates and at hypothetical higher and lower interest rates at various
intervals. The present value of each major category of financial instruments is
calculated using estimated cash flows based on weighted-average contractual
rates and terms, then discounted at the estimated current market interest rate
for similar financial instruments. The present value of longer term fixed-rate
financial instruments is more difficult to estimate because such instruments are
susceptible to changes in market interest rates. Present value estimates of
adjustable-rate financial instruments are more reliable since they represent the
difference between the contractual and discounted rates until the next interest
rate repricing date.
The calculations of present value have certain shortcomings. The discount
rates utilized for loans, investments and MBS are based on estimated nationwide
market interest rate levels for similar loans and securities, with prepayment
assumptions based on historical experience and market forecasts. The unique
characteristics of Sterling's loans and MBS may not necessarily parallel those
in the model. The discount rates utilized for deposits and borrowings are based
upon available alternative types and sources of funds which are not necessarily
indicative of the market value of deposits and FHLB Seattle advances since such
deposits and advances are unique to and have certain price and customer
relationship advantages for depository institutions. The present values are
determined based on the discounted cash flows over the remaining estimated lives
of the financial instruments on the assumption that the resulting cash flows are
reinvested in financial instruments with virtually identical terms.
The total measurement of Sterling's exposure to IRR as presented in the
following table may not be representative of the actual values which might
result from a higher or lower interest rate environment. A higher or lower
interest rate environment most likely will result in different investment and
borrowing strategies by Sterling designed to further mitigate the effect on the
value of and the net earnings generated from Sterling's net assets from any
change in interest rates.
Sterling is continuing to pursue strategies to manage the level of its IRR
while increasing its NII and NPV through the origination and retention of
variable-rate consumer, business banking, construction and commercial real
estate loans, which generally have higher yields than residential permanent
loans, and by increasing the level of its core deposits, which are generally a
lower-cost funding source than borrowings. There can be no assurance that
Sterling will be successful implementing any of these strategies or that, if
these strategies are implemented, they will have the intended effect of reducing
IRR or increasing NII.
The following table presents Sterling's estimates of changes in NPV for the
periods indicated. The results indicate the potential effects of instantaneous,
parallel shifts in the market yield curve. These
36
<PAGE>
calculations are highly subjective and technical and are relative measurements
of IRR which do not necessarily reflect any expected rate movement.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999 AT DECEMBER 31, 1998
------------------------------------ ------------------------------------
RATIO OF NPV RATIO OF NPV
CHANGE IN INTEREST RATE TO THE PRESENT % TO THE PRESENT %
IN BASIS POINTS VALUE OF CHANGE VALUE OF CHANGE
(RATE SHOCK) NPV TOTAL ASSETS IN NPV NPV TOTAL ASSETS IN NPV
- ----------------------- -------- -------------- -------- -------- -------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+300 $ 2,712 0.12% (97.2) $11,384 0.53% (86.5)
+200 36,369 1.51 (62.5) 37,950 1.72 (55.1)
+100 63,177 2.57 (34.8) 59,814 2.66 (29.3)
Static 96,899 3.86 N/A 84,568 3.70 N/A
-100 112,812 4.43 16.4 71,197 3.10 (15.8)
-200 103,314 4.03 6.6 50,677 2.20 (40.1)
-300 73,835 2.89 (23.8) 40,966 1.77 (51.6)
</TABLE>
At December 31, 1999, Sterling calculated that its NPV was $96.9 million and
that its NPV would decrease by 62.5% and 97.2% if interest rate levels generally
were to increase by 2% and 3%, respectively. This compares with an NPV of
$84.6 million at December 31, 1998, where its NPV would decrease by 55.1% and
86.5% if interest rate levels generally were to increase by 2% and 3%,
respectively. The increase in NPV at December 31, 1999 from December 31, 1998
was primarily due to growth in total assets despite a rising interest rate
environment.
Sterling also uses gap analysis, a traditional analytical tool designed to
measure the difference between the amount of interest-earning assets and the
amount of interest-bearing liabilities expected to mature or reprice in a given
period. Sterling calculated its one-year cumulative gap position to be a
negative 12.3% and a negative 5.7% at December 31, 1999 and 1998, respectively.
Sterling calculated its three-year gap position to be a negative 20.8% and a
negative 9.8% at December 31, 1999 and 1998, respectively. The increase in the
one-year and three-year gap positions is attributable to a combination of an
increase in fixed-rate loan originations funded with shorter-term borrowings and
rising interest rates, which were a large factor as borrower preferences moved
to fixed-rate loans in the rising rate environment. Management attempts to
maintain Sterling's gap position between positive 10% and negative 25%. At
December 31, 1999, Sterling's gap positions were within limits established by
its Board of Directors. Management is pursuing strategies to increase its NII
without significantly increasing its cumulative gap positions in future periods.
There can be no assurance that Sterling will be successful implementing these
strategies or that, if these strategies are implemented, they will have the
intended effect of increasing its NII. See "Results of Operations--NET INTEREST
INCOME" and "Capital Resources."
The following table sets forth the estimated maturity/repricing and the
resulting gap between Sterling's interest-earning assets and interest-bearing
liabilities at December 31, 1999. Other than loans which are in the
available-for-sale portfolio, all of the financial instruments of Sterling are
intended to be held to maturity. The estimated maturity/repricing amounts
reflect contractual maturities and amortizations, assumed loan prepayments based
upon Sterling's historical experience, estimates from secondary market sources
such as FHLMC and estimated passbook deposit decay rates (the rate of
withdrawals or transfers to higher-yielding CDs). Management believes these
assumptions and estimates are reasonable, but there can be no assurance in this
regard. The classification of mortgage loans, investments and MBS is
37
<PAGE>
based upon regulatory reporting formats and, therefore, may not be consistent
with the financial information reported in accordance with GAAP and contained
elsewhere in this Report on Form 10-K.
<TABLE>
<CAPTION>
MATURITY OR REPRICING
----------------------------------------------------------------------
OVER
3 OVER OVER
0 TO 3 MONTHS 1 YEAR 3 YEARS OVER
MONTHS TO 1 YEAR TO 3 YEARS TO 5 YEARS 5 YEARS TOTAL
-------- --------- ---------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Mortgage loans, investments and MBS:
ARM and balloon mortgage loans................. $372,259 $ 132,646 $ 81,985 $ 57,713 $ 216 $ 644,819
Fixed-rate mortgage loans...................... 25,285 71,917 173,052 134,004 430,222 834,480
Loans held for sale............................ 985 0 0 0 0 985
-------- --------- --------- --------- -------- ----------
Total mortgage loans, investments and MBS...... 398,529 204,563 255,037 191,717 430,438 1,480,284
Nonmortgage loans:
Consumer....................................... 65,519 73,536 105,891 45,068 27,693 317,707
Commercial..................................... 172,115 63,645 78,257 21,947 12,977 348,941
-------- --------- --------- --------- -------- ----------
Total loans, investments and MBS............... 636,163 341,744 439,185 258,732 471,108 2,146,932
Cash, investments and MBS...................... 73,186 1,741 5,777 94,802 11,018 186,524
-------- --------- --------- --------- -------- ----------
Total rate-sensitive assets.................... 709,349 343,485 444,962 353,534 482,126 2,333,456
Cash on hand and in banks...................... 0 0 0 0 73,239 73,239
Other noninterest-earning assets............... 0 0 0 0 140,230 140,230
-------- --------- --------- --------- -------- ----------
Total assets................................... $709,349 $ 343,485 $ 444,962 $ 353,534 $695,595 $2,546,925
======== ========= ========= ========= ======== ==========
Interest-bearing liabilities:
Deposits:
Certificates of deposit........................ $280,664 $ 406,680 $ 192,481 $ 22,212 $ 14,655 $ 916,692
Checking accounts.............................. 5,948 17,845 47,588 47,588 171,048 290,017
Money market accounts.......................... 326,133 0 0 0 0 326,133
Passbook accounts.............................. 3,381 10,143 27,048 27,048 16,906 84,526
-------- --------- --------- --------- -------- ----------
Total deposits................................. 616,126 434,668 267,117 96,848 202,609 1,617,368
FHLB Seattle advances.......................... 70,000 142,233 247,439 25,000 5,831 490,503
Repurchase agreements.......................... 33,715 0 145,800 0 0 179,515
Other borrowings............................... 70,000 0 0 0 40,000 110,000
-------- --------- --------- --------- -------- ----------
Total interest-bearing liabilities............. $789,841 $ 576,901 $ 660,356 $ 121,848 248,440 2,397,386
======== ========= ========= =========
Other noninterest-bearing liabilities.......... 31,900 31,900
Shareholders' equity........................... 117,639 117,639
-------- ----------
Total liabilities and shareholders' equity..... 397,979 2,546,925
-------- ----------
Net gap........................................ $(80,492) $(233,416) $(215,394) $ 231,686 $297,616 $ 0
======== ========= ========= ========= ======== ==========
Cumulative gap................................. $(80,492) $(313,908) $(529,302) $(297,616) $ 0 $ 0
======== ========= ========= ========= ======== ==========
Cumulative gap to total assets................. (3.16)% (12.32)% (20.78)% (11.69)% 0.00% 0.00%
</TABLE>
38
<PAGE>
FINANCIAL POSITION
ASSETS. At December 31, 1999, Sterling's assets were $2.55 billion, up
10.0% from $2.31 billion at December 31, 1998. The increase was primarily due to
generation of loans.
INVESTMENTS AND MBS. Sterling's investment and MBS portfolio at
December 31, 1999 was $505.7 million, down $80.7 million from the December 31,
1998 balance of $586.4 million. The decrease was primarily due to principal
payments of MBS during the period.
LOANS RECEIVABLE. At December 31, 1999, net loans receivable were
$1.79 billion, up $319.2 million from $1.47 billion at December 31, 1998. Loan
originations in 1999 increased $195.8 million from 1998 levels. The most
significant areas of increase in loan originations for the year ended
December 31, 1999 were in commercial real estate and business banking. See the
loan origination table below.
The following table sets forth the composition of Sterling's loan portfolio
at the dates indicated. Loan balances do not include unearned discounts,
deferred loan origination costs and fees or allowances for loan losses.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
AMOUNT % AMOUNT %
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Residential............................ $ 396,565 22.0 $ 342,757 23.1
Multifamily............................ 137,835 7.6 124,656 8.4
Commercial real estate................. 317,565 17.6 177,912 12.0
Construction........................... 287,123 15.9 233,567 15.7
Consumer--direct....................... 223,286 12.4 224,651 15.1
Consumer--indirect..................... 94,420 5.2 64,764 4.4
Business banking....................... 348,941 19.3 315,614 21.3
---------- ----- ---------- -----
Total loans receivable................. $1,805,735 100.0 $1,483,921 100.0
========== ===== ========== =====
Weighted average yield................. 8.32% 8.29%
</TABLE>
The following table sets forth Sterling's loan originations for the periods
indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1999 1998 % CHANGE
---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Residential................................ $ 172,115 $ 241,725 (28.8)
Multifamily................................ 58,319 83,904 (30.5)
Commercial real estate..................... 108,216 34,735 211.5
Construction............................... 418,307 316,135 32.3
Consumer--direct........................... 97,047 99,449 (2.4)
Consumer--indirect......................... 51,956 51,958 0.0
Business banking........................... 295,915 178,209 66.0
---------- ----------
Total loans originated..................... $1,201,875 $1,006,115 19.5
========== ==========
</TABLE>
39
<PAGE>
DEPOSITS. Total deposits increased $71.9 million to $1.62 billion at
December 31, 1999 from $1.55 billion at December 31, 1998. The following table
sets forth the composition of Sterling's deposits at the dates indicated.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- ---------------------
AMOUNT % AMOUNT %
---------- -------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Certificates of deposit................ $ 916,692 56.7 $ 814,957 52.7
Checking............................... 290,017 17.9 297,290 19.2
Savings and money market............... 410,659 25.4 433,178 28.1
---------- ----- ---------- -----
Total deposits......................... $1,617,368 100.0 $1,545,425 100.0
========== ===== ========== =====
</TABLE>
BORROWINGS. Sterling's primary sources of borrowing are the FHLB Seattle
advances, securities sold under agreements to repurchase and other borrowings.
At December 31, 1999, total borrowings were $780.0 million, compared with
$611.9 million at December 31, 1998, an increase of $168.2 million. The increase
reflects an increase in wholesale funding to offset lower deposit growth. FHLB
Seattle advances outstanding have increased by $171.0 million since
December 31, 1998. See "Liquidity and Sources of Funds."
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
OVERVIEW. Sterling reported net income of $12.8 million, or $1.57 per
diluted share, for the year ended December 31, 1999. Core earnings, which are
defined as total earnings before acquisition and conversion costs, associated
with two acquisitions and certain other charges (collectively, "non-core
charges"), for the year ended December 31, 1998 were $11.4 million, or $1.39 per
diluted share. After the non-core charges, Sterling recorded net income of
$6.2 million, or $0.76 per diluted share for the year ended December 31, 1998.
The increase in net income for the year ended December 31, 1999 reflected an
increase in net interest income and other income.
On June 15, 1998, Sterling acquired 33 branch offices in Washington, Idaho
and Oregon from KeyBank. The purchase included approximately $518 million of
deposit balances and approximately $125 million of loan balances. Upon
acquisition, the weighted average interest rate on deposits assumed was
approximately 3.42%. Sterling recorded an approximate $57 million intangible
asset associated with the acquisition. Sterling is amortizing the intangible
asset over a period of 15 years using the straight-line method. With the net
cash received from the branch acquisition, Sterling repaid approximately
$322 million of certain reverse repurchase borrowings and FHLB Seattle advances.
In 1999, Sterling began processing checks for its customers in-house rather
than out-sourcing this function. This change has increased staffing and
occupancy expenses, but management believes that this change will improve its
float management. This should result in increased net interest income and
enhanced service to deposit customers in future periods, although there can be
no assurance in this regard.
Sterling completed its merger with Big Sky on November 13, 1998. This
transaction was accounted for as a pooling of interests; and accordingly, all
historical amounts have been restated to include the results of Big Sky. The
after-tax non-core charges associated with the Big Sky acquisition were
approximately $1.5 million. During the second quarter of 1998, Sterling
completed the acquisition of 33 Northwest KeyBank branches. After-tax non-core
charges associated with the KeyBank branch acquisition were approximately
$2.0 million. See "OPERATING EXPENSES."
The returns on average assets were 0.52% and 0.30% for the years ended
December 31, 1999 and 1998, respectively. The returns on average common
shareholders' equity were 10.7% and 5.4% for the years ended December 31, 1999
and 1998, respectively. These increases were primarily due to an increase
40
<PAGE>
in net income. The returns on average assets and average common shareholders'
equity during 1998 were negatively impacted by the non-core charges.
NET INTEREST INCOME. Net interest income for the years ended December 31,
1999 and 1998 was $75.4 million and $59.2 million, respectively. During these
same periods, the net interest margins were 3.35% and 3.05%, respectively, and
the volumes of interest-earning assets were $2.25 billion and $1.94 billion,
respectively. The increase in NII was primarily due to an increase in the volume
of average interest-earning assets which were primarily loans and an increase in
the net interest margin. The increase in the net interest margin was primarily
due to an increase in the volume of loans and a decrease in the cost of
deposits.
PROVISION FOR LOAN LOSSES. Management's policy is to establish valuation
allowances for estimated losses by charging corresponding provisions against
income. The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process. Sterling recorded provisions for loan losses
of $3.9 million and $5.3 million for the years ended December 31, 1999 and 1998,
respectively. Sterling increased its provision for loan losses in 1998 in
anticipation of higher levels of loss from its expanded construction, business
banking and consumer lending activities. Additionally, during the quarter ended
June 30, 1998, Sterling provided approximately $2.9 million for loan losses,
reflecting a more conservative view of the factors used to determine such
reserves, including impacts on Pacific Northwest economy resulting from a
slowdown of trade with Asia. Management anticipates that its provisions for loan
losses will continue to increase in the future as Sterling originates more
construction, business banking and consumer loans.
At December 31, 1999, Sterling's loan delinquency rate as a percentage of
total loans was 0.52%, compared with 0.43% at December 31, 1998. Total
nonperforming loans were $9.3 million at December 31, 1999, compared with
$3.1 million at December 31, 1998. As a percentage of total loans, nonperforming
loans were 0.52% at December 31, 1999, compared with 0.21% at December 31, 1998.
Management believes the loan loss provisions represent appropriate
allowances for loan losses based upon its evaluation of factors affecting the
adequacy of valuation allowances, although there can be no assurance in this
regard. Such factors include concentrations of the types of loans and associated
risks within the loan portfolio and economic factors affecting the Pacific
Northwest economy.
OTHER INCOME. The following table summarizes the components of other income
for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Fees and service charges.................................. $10,720 $ 7,858
Mortgage banking operations............................... 1,082 1,848
Loan servicing fees....................................... 798 791
Net gain on sales of securities........................... 593 2,038
Net loss on sales and operations of real estate owned
("REO")................................................. 104 (222)
------- -------
$13,297 $12,313
======= =======
</TABLE>
Fees and service charges consist primarily of service charges on deposit
accounts, fees for certain customer services, commissions on sales of credit
life insurance, commissions on sales of mutual funds and annuity products and
late charges on loans. The increase for the year ended December 31, 1999,
compared with the year ended December 31, 1998, was primarily due to an increase
in service charges on deposit accounts, fees for certain customer services and
commissions on sales of mutual funds and annuity
41
<PAGE>
products. The increase in service charges on deposit accounts and fees for
certain customer services was primarily due to a full year's effect of fee
income from accounts associated with the KeyBank branch acquisition.
The following table summarizes loan originations and sales of loans for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Originations of one- to four-family permanent mortgage
loans..................................................... $172.1 $241.7
Sales of residential loans.................................. 72.7 110.2
Principal balances at end of period of mortgage loans
serviced for others....................................... 205.5 211.0
</TABLE>
During the years ended December 31, 1999 and 1998, Sterling sold in bulk
rights to service conventional loans for others with principal balances of $0
and $117.6 million, respectively. Sterling's average loan servicing portfolios
for the years ended December 31, 1999 and 1998 were approximately
$203.6 million and $283.3 million, respectively.
During the year ended December 31, 1999, Sterling sold approximately
$29.1 million of investments and MBS, resulting in a net gain of $593,000. In
the same period in 1998, Sterling sold $394.8 million in investments and MBS,
resulting in a net gain of $2.0 million.
OPERATING EXPENSES. Operating expenses were $64.5 million for the year
ended December 31, 1999. Operating expenses before non-core charges were
$50.8 million for the year ended December 31, 1998. Including non-core charges,
total operating expenses were $56.3 million in 1998. Non-core charges include
acquisition and conversion costs, the buyout of certain management contracts and
the costs associated with mailing customer notices, issuing new checks and ATM
cards, training new employees, related travel expenses, equipping branches with
office supplies, implementing a targeted marketing campaign and converting
computer systems.
Employee compensation and benefits were $29.1 million and $22.4 million for
the years ended December 31, 1999 and 1998, respectively. The increase was
primarily due to additional staff for the new check-processing centers and
additional lending staff related to Sterling's efforts to increase its
commercial real estate, business banking and consumer lending areas. The
increase was also primarily due to a full year's effect of additional staffing
for the acquired KeyBank branches.
Occupancy and equipment expenses were $10.1 million and $7.5 million for the
years ended December 31, 1999 and 1998, respectively. Amortization of
intangibles was $5.7 million and $4.0 million for the years ended December 31,
1999 and 1998, respectively. These increases were primarily due to a full year's
effect of increased expenses and amortization related to the KeyBank
acquisition.
Data processing expenses were $5.2 million and $3.8 million for the years
ended December 31, 1999 and 1998, respectively. The increase was primarily due
to costs associated with the new check-processing centers and internal computer
network upgrades that were added in 1999.
Advertising expenses were $2.7 million and $2.1 million for the years ended
December 31, 1999 and 1998, respectively. The increase was primarily due to an
enhanced advertising campaign.
Other expenses were $3.4 million and $3.7 million for the years ended
December 31, 1999 and 1998, respectively. The decrease was primarily due to
refunds of prior period excise taxes. See Note 19 of "Notes to Consolidated
Financial Statements."
Sterling measures the efficiency of its operations by its operating
efficiency ratio (the ratio of total operating expenses to total revenues, which
includes NII and total other income but excludes intangible
42
<PAGE>
amortization expense). Sterling's operating efficiency ratios were 66.3% and
73.2% for the years ended December 31, 1999 and 1998, respectively. Management
is striving to reduce its operating efficiency ratio below 65%, but there can be
no assurance that it will be able to achieve this goal. Sterling also measures
the efficiency of its operations by its cash operating efficiency ratio (the
ratio of total operating expenses to total revenues, which includes NII and
total other income but excludes non-core charges and intangible amortization
expense). Sterling's cash operating efficiency ratios were 66.3% and 65.0% for
the years ended December 31, 1999 and 1998, respectively.
INCOME TAX PROVISION. For the year ended December 31, 1999, Sterling's
federal and state income tax provision of $7.5 million represented 36.8% of
income before income taxes. For the year ended December 31, 1998, Sterling's
federal and state income tax provision of $3.7 million represented 37.2% of
income before income taxes. The effective income tax rates during these periods
approximated the applicable statutory federal state income tax rates.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
OVERVIEW. Core earnings, which are defined as total earnings before
acquisition and conversion costs, associated with two acquisitions and certain
other charges (collectively, "non-core charges"), for the year ended
December 31, 1998 were $11.4 million, or $1.39 per diluted share. After the
non-core charges, Sterling recorded net income of $6.2 million, or $0.76 per
diluted share for the year ended December 31, 1998. This compares with net
income of $10.2 million, or $1.25 per diluted share, for the year ended
December 31, 1997. The increases in core earnings for the twelve-month period
reflected an increase in net interest income and other income.
Sterling completed its merger with Big Sky on November 13, 1998. This
transaction was accounted for as a pooling of interests; and accordingly, all
historical amounts have been restated to include the results of Big Sky. The
after-tax non-core charges associated with the Big Sky acquisition were
approximately $1.5 million. During the second quarter of 1998, Sterling
completed the acquisition of 33 Northwest KeyBank branches. After-tax non-core
charges associated with the KeyBank branch acquisition were approximately
$2.0 million. See "OPERATING EXPENSES."
During the second quarter of 1998, Sterling added approximately
$2.9 million for loan losses to its reserves. In addition, to improve asset and
liability management associated with the effects of the acquisition of the
KeyBank branches, a loss of approximately $581,000 was incurred on the sale of
MBS during the second quarter of 1998. See "PROVISION FOR LOAN LOSSES."
The returns on average assets were 0.30% and 0.58% for the years ended
December 31, 1998 and 1997, respectively. The returns on average common
shareholders' equity were 5.4% and 11.1% for the years ended December 31, 1998
and 1997, respectively. The returns on average assets and average common
shareholders' equity were negatively impacted by the non-core charges and higher
operating expenses during 1998.
NET INTEREST INCOME. Net interest income for the years ended December 31,
1998 and 1997 was $59.2 million and $47.8 million, respectively. During these
same periods, the net interest margins were 3.05% and 2.84%, respectively, and
the volumes of interest-earning assets were $1.94 billion and $1.68 billion,
respectively. The increase in NII was primarily due to an increase in the volume
of average interest-earning assets which were primarily loans and an increase in
the net interest margin. The increase in the net interest margin was primarily
due to a decrease in the cost of deposits.
PROVISION FOR LOAN LOSSES. Management's policy is to establish valuation
allowances for estimated losses by charging corresponding provisions against
income. The evaluation of the adequacy of specific and general valuation
allowances is an ongoing process. Sterling recorded provisions for loan losses
of $5.3 million and $2.5 million for the years ended December 31, 1998 and 1997,
respectively. Sterling increased its provision for loan losses in anticipation
of potentially higher levels of loss from its expanded
43
<PAGE>
construction, business banking and consumer lending activities. Additionally,
during the quarter ended June 30, 1998, Sterling provided approximately
$2.9 million for loan losses, reflecting a more conservative view of the factors
used to determine such reserves, including impacts on Pacific Northwest economy
resulting from a slowdown of trade with Asia. Management anticipates that its
provisions for loan losses will increase in the future as Sterling continues to
expand into higher-yielding, higher-risk loans.
At December 31, 1998, Sterling's loan delinquency rate as a percentage of
total loans was 0.43%, compared with 0.69% at December 31, 1997. Total
nonperforming loans were $3.1 million at December 31, 1998, compared with
$4.9 million at December 31, 1997. As a percentage of total loans, nonperforming
loans were 0.19% at December 31, 1998, compared with 0.41% at December 31, 1997.
Management believes the loan loss provisions represent appropriate
allowances for loan losses based upon its evaluation of factors affecting the
adequacy of valuation allowances, although there can be no assurance in this
regard. Such factors include concentrations of the types of loans and associated
risks within the loan portfolio and economic factors affecting the Pacific
Northwest economy.
OTHER INCOME. The following table summarizes the components of other income
for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Fees and service charges................................... $ 7,858 $5,140
Mortgage banking operations................................ 1,848 1,922
Loan servicing fees........................................ 791 1,299
Net gain on sales of securities............................ 2,038 1,197
Net loss on sales and operations of real estate owned
("REO").................................................. (222) (84)
------- ------
$12,313 $9,474
======= ======
</TABLE>
Fees and service charges consist primarily of service charges on deposit
accounts, fees for certain customer services, commissions on sales of credit
life insurance, commissions on sales of mutual funds and annuity products and
late charges on loans. The increase for the year ended December 31, 1998,
compared with the year ended December 31, 1997, was primarily due to an increase
in service charges on deposit accounts, fees for certain customer services and
commissions on sales of credit life insurance. The increase in service charges
on deposit accounts and fees for certain customer services was primarily due to
an increase in the number of accounts associated with the KeyBank branch
acquisition.
The following table summarizes loan originations and sales of loans for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Originations of one- to four-family permanent mortgage
loans..................................................... $241.7 $179.3
Sales of residential loans.................................. 110.2 108.0
Principal balances at end of period of mortgage loans
serviced for others....................................... 211.0 454.3
</TABLE>
The decrease in loan servicing fees for the year ended December 31, 1998,
compared with the year ended December 31, 1997, was primarily due to a decrease
in the balance of loans serviced. During the year ended December 31, 1998,
Sterling sold in bulk rights to service conventional loans for others with
principal balances of $117.6 million. There were no such sales in the year ended
December 31, 1997.
44
<PAGE>
Sterling's average loan servicing portfolios for the years ended December 31,
1998 and 1997 were approximately $283.3 million and $506.8 million,
respectively.
During the year ended December 31, 1998, Sterling sold approximately
$394.8 million of investments and MBS, resulting in a net gain of $2.0 million.
In the same period in 1997, Sterling sold $263.3 million in investments and MBS,
resulting in a net gain of $1.2 million.
OPERATING EXPENSES. Operating expenses before non-core charges were
$50.8 million for the year ended December 31, 1998. Including non-core charges,
total operating expenses were $56.3 million, compared with $38.4 million for the
year ended December 31, 1997. Non-core charges included acquisition and
conversion costs, the buyout of certain management contracts and the costs
associated with mailing customer notices, issuing new checks and ATM cards,
training new employees, related travel expenses, equipping branches with office
supplies, implementing a targeted marketing campaign and converting computer
systems.
Employee compensation and benefits were $22.4 million and $16.6 million for
the years ended December 31, 1998 and 1997, respectively. The increase was
primarily due to an increase in staffing for the new branches and in lending
staff related to Sterling's efforts to increase its commercial real estate,
business banking and consumer lending areas. Amortization of intangibles was
$4.0 million and $2.2 million for the years ended December 31, 1998 and 1997,
respectively. The increase was primarily due to the KeyBank branch acquisition.
Occupancy and equipment expenses were $7.5 million and $6.2 million for the
years ended December 31, 1998 and 1997, respectively. This increase resulted
from increased branches. Insurance expenses were $1.1 million and $1.2 million
for the years ended December 31, 1998 and 1997, respectively. The decrease was
primarily due to a reduction in property and casualty insurance premiums. Legal
and accounting expenses were $1.6 million and $1.5 million during the years
ended December 31, 1998 and 1997, respectively. The increase was primarily due
to an increase in accounting expenses. Other expenses were $3.7 million and
$2.3 million for the years ended December 31, 1998 and 1997, respectively. The
increase in other expenses was primarily due to a reduction in the deferral of
loan origination costs, as well as an increase in loan processing expense. See
"General," "Capital Resources," "Year 2000 Issues" and Note 19 of "Notes to
Consolidated Financial Statements."
Sterling measures the efficiency of its operations by its operating
efficiency ratio (the ratio of total operating expenses to total revenues, which
includes NII and total other income but excludes intangible amortization
expense). Sterling's operating efficiency ratios were 73.2% and 63.2% for the
years ended December 31, 1998 and 1997, respectively. Management is striving to
reduce its operating efficiency ratio below 65%, but there can be no assurance
that it will be able to achieve this goal. Sterling also measures the efficiency
of its operations by its cash operating efficiency ratio (the ratio of total
operating expenses to total revenues, which includes NII and total other income
but excludes non-core charges and intangible amortization expense). Sterling's
cash operating efficiency ratios were 65.0% and 63.2% for the years ended
December 31, 1998 and 1997, respectively.
INCOME TAX PROVISION. For the year ended December 31, 1998, Sterling's
federal and state income tax provision of $3.7 million represented 37.2% of
income before income taxes. The effective income tax rates are higher than the
statutory federal rate due to higher sources of income being derived from states
with income taxes. For the year ended December 31, 1997, Sterling's income tax
provision of $6.2 million consisted of the provision on the operating income
which approximates the statutory tax rates plus a provision related to a change
in the estimate of prior period income taxes.
45
<PAGE>
LIQUIDITY AND SOURCES OF FUNDS
As a financial institution, Sterling's primary sources of funds are
investing and financing activities, including the collection of loan principal
and interest payments. Financing activities consist primarily of customer
deposits, advances from the FHLB Seattle and other borrowings. Deposits
increased to $1.62 billion at December 31, 1999, from $1.55 billion at
December 31, 1998. Retail deposits, which exclude public funds, increased to
$1.49 billion at December 31, 1999, from $1.45 billion at December 31, 1998. At
December 31, 1999, approximately $132.1 million of deposits consisted of public
funds that generally had maturities of 60 days or less. Advances from the FHLB
Seattle increased to $490.5 million at December 31, 1999 from $319.5 million at
December 31, 1998. See "Business--Sources of Funds--BORROWINGS."
Sterling also borrows funds under reverse repurchase agreements pursuant to
which it sells investments (generally U.S. agency and MBS) under an agreement to
buy them back at a specified price at a later date. These agreements to
repurchase are deemed to be borrowings collateralized by the investments and MBS
sold. Sterling uses these borrowings to supplement deposit gathering for funding
the origination of loans. Sterling had $179.5 million and $195.1 million in
reverse repurchase agreements outstanding at December 31, 1999 and 1998,
respectively. Sterling enters into short-term repurchase agreements with
selected retail customers. The balances of such short-term repurchase agreements
were $6.2 million and $6.8 million at December 31, 1999 and 1998, respectively.
The use of reverse repurchase agreements may expose Sterling to certain risks
not associated with other borrowings, including IRR and the possibility that
additional collateral may have to be provided if the market value of the pledged
collateral declines. For additional information regarding reverse repurchase
agreements, see "Asset and Liability Management" and Note 10 of "Notes to
Consolidated Financial Statements."
Cash provided by or used in investing activities consisted primarily of
principal and interest payments on loans and MBS and sales of MBS. The levels of
these payments and sales increase or decrease depending on the size of the loan
and MBS portfolios and the general trend and level of interest rates, which
influences the level of refinancing and mortgage prepayments. During the year
ended December 31, 1999, net cash was used in investing activities primarily to
purchase $99.0 million in investments and MBS and to fund loans.
Cash provided or used by operating activities is determined largely by
changes in the level of loan sales. Proceeds from sales of loans decreased in
the year ended December 31, 1999, primarily due to a decrease in residential
loan sales. The level of loans held for sale depends on the level of loan
originations and the time within which investors fund the purchase of loans from
Sterling. A majority of conventional loans held for sale are sold within
10 days of the closing while the sale of FHA- and VA-insured loans may take up
to 60 days. Sterling typically offsets fluctuations in the level of loans held
for sale by changing the level of advances from the FHLB Seattle, using reverse
repurchase agreements or cash. Management believes that proceeds from loans
sold, advances from the FHLB Seattle and reverse repurchase agreements will be
sufficient to fund loan commitments in the future.
Sterling Savings Bank's credit line with the FHLB Seattle provides for
borrowings up to 30% of its total assets. At December 31, 1999, this credit line
represented a total borrowing capacity of $770.1 million, of which
$279.6 million was available. Sterling Savings Bank also borrows on a secured
basis from major broker/dealers and financial entities by selling securities
subject to repurchase agreements. At December 31, 1999, Sterling Savings Bank
had $179.5 million in outstanding borrowings under reverse repurchase agreements
and investments and MBS available for additional secured borrowings of
$156.2 million. Sterling Savings Bank also had a secured line-of-credit
agreement from a commercial bank of $10.0 million as of December 31, 1999. At
December 31, 1999, Sterling Savings Bank had no funds drawn on this line of
credit.
In May 1999, Sterling issued $30.0 million of Floating Rate Notes Due 2006.
Interest accrues at the 90-day LIBOR plus 2.50% (7.95% until March 15, 2000) and
is adjustable and payable quarterly. The notes mature on June 15, 2006 and may
be redeemed under certain conditions after June 15, 2002. Sterling
46
<PAGE>
used the net proceeds from the sale of the notes (i) to prepay Sterling's 8.75%
Subordinated Notes Due 2000 plus accrued and unpaid interest thereon for a total
of $17.4 million, (ii) to contribute $5.0 million to Sterling Savings Bank to
further improve Sterling Savings Bank's regulatory capital ratios, (iii) to
repay an existing line of credit of $5.0 million, and (iv) for general corporate
purposes.
Sterling, on a parent company-only basis, had cash and other resources of
approximately $3.2 million and a revolving line of credit from KeyBank of
$5.0 million at December 31, 1999 with no funds drawn on this line of credit. At
December 31, 1999, Sterling had $40.0 million outstanding on a $50.0 million
non-revolving variable-rate line of credit from KeyBank. All of the proceeds of
this loan were contributed to Sterling Savings Bank to enhance its regulatory
capital ratios and to substantially offset the intangible asset incurred in
connection with the KeyBank branch acquisition. See "Sources of
Funds--BORROWINGS."
At December 31, 1999, Sterling had an investment of $95.1 million in the
Preferred Stock of Sterling Savings Bank, compared with $88.6 million at
December 31, 1998. Sterling received cash dividends on Sterling Savings Bank
Preferred Stock of $9.6 million during the year ended December 31, 1999. These
resources were sufficient to meet the operating needs of Sterling, including
interest expense on the Floating Rate Notes Due 2006, the 8.75% Subordinated
Notes Due 2000 and other borrowings. Sterling Savings Bank's ability to pay
dividends is limited by its earnings, financial condition and capital
requirements, as well as rules and regulations imposed by the OTS.
OTS regulations require savings institutions such as Sterling Savings Bank
to maintain an average daily balance of liquid assets equal to or greater than a
specific percentage (currently 4%) of the average daily balance of net
withdrawable accounts and borrowings payable on demand in one year or less
during the preceding calendar month. At December 31, 1999 and 1998, Sterling
Savings Bank's liquidity ratio was 9.1% and 11.5%, respectively. The lower level
of liquidity at December 31, 1999 was primarily due to a decrease in the balance
of eligible securities. Sterling Savings Bank's strategy generally is to
maintain its liquidity ratio at or near the level necessary to support expected
and potential loan fundings and deposit withdrawals. Sterling Savings Bank tries
to minimize liquidity levels in order to maximize its yield on alternative
investments. The regulatory liquidity ratio does not take into account certain
other sources of liquidity, such as funds invested through Sterling Savings Bank
subsidiaries, potential borrowings against investments and MBS and other
potential financing alternatives. The required minimum liquidity ratio may vary
from time to time, depending on economic conditions, savings flows and loan
funding needs. See "Business--Regulation."
CAPITAL RESOURCES
Sterling's total shareholders' equity was $117.6 million at December 31,
1999, compared with $119.0 million at December 31, 1998. At December 31, 1999
and 1998, shareholders' equity was 4.6% and 5.1% of total assets, respectively.
The decrease in total shareholders' equity was primarily due to a decrease in
the value of available-for-sale investments and MBS. See "General."
At December 31, 1999, Sterling had an unrealized loss of $13.6 million, net
of related income taxes, on investments and MBS classified as available for
sale. The decrease from December 31, 1998, which reflected an unrealized gain of
$788,000, was primarily due to a decrease in the market valuation of
investments, MBS and U.S. Treasury securities due to the increase in long-term
interest rates in 1999. Fluctuations in prevailing interest rates could continue
to cause volatility in this component of accumulated comprehensive income (loss)
in shareholders' equity in future periods. See "Business--Investments and
Mortgage-Backed Securities."
Sterling has issued and outstanding $40.0 million of Trust Preferred
Securities. The indenture governing the Trust Preferred Securities limits the
ability of Sterling under certain circumstances to pay dividends or make other
capital distributions. The Trust Preferred Securities are treated as debt of
Sterling. The Trust Preferred Securities mature on June 30, 2027 and are
redeemable at the option of Sterling on
47
<PAGE>
June 30, 2002, or earlier in the event the deduction of related interest for
federal income taxes is prohibited, treatment as Tier 1 capital is no longer
permitted or certain other contingencies arise.
On June 30, 1999, Sterling redeemed the outstanding balance of its 8.75%
Subordinated Notes Due 2000, including accrued interest thereon in the aggregate
amount of $17.4 million.
Sterling anticipates total capital expenditures of approximately
$2.6 million for the year ended December 31, 2000. Sterling anticipates
continuing to fund these expenditures from various sources, including retained
earnings and borrowings with various maturities. Sterling is exploring
opportunities to sell certain developed properties and enter into lease
arrangements. There can be no assurance that Sterling's estimates of capital or
the funding thereof are accurate.
Sterling Savings Bank is required by applicable regulations to maintain
certain minimum capital levels with respect to tangible capital, core leverage
capital and risk-based capital. Sterling Savings Bank anticipates that it will
continue to enhance its capital resources and the regulatory capital ratios of
Sterling Savings Bank through the retention of earnings, the amortization of
intangible assets and the management of the level and mix of assets, although
there can be no assurance in this regard. At December 31, 1999, Sterling Savings
Bank exceeded all such regulatory capital requirements. See Note 16 of "Notes to
Consolidated Financial Statements."
In connection with Sterling Savings Bank's acquisition of three insolvent
savings institutions between 1985 and 1988, the U.S. government agreed that
Sterling could utilize $13.5 million of cash assistance and $38.0 million of
supervisory goodwill associated with the acquisitions to help meet its
regulatory capital and liquidity requirements. In 1989, Congress enacted FIRREA
which provided, among other things, that savings institutions such as Sterling
Savings Bank were no longer permitted to include supervisory goodwill in their
regulatory capital. Consequently, Sterling Savings Bank was required to
write-off its supervisory goodwill, which resulted in Sterling Savings Bank's
failing to comply with its minimum regulatory capital requirements from 1989
through 1991.
In May 1990, Sterling sued the U.S. Government with respect to the loss of
the goodwill treatment and other matters in a lawsuit entitled STERLING SAVINGS
ASSOCIATION AND STERLING FINANCIAL CORPORATION V. THE UNITED STATES, No. 95 829
C (the "Goodwill Litigation"). In the Goodwill Litigation, Sterling seeks
damages for, among other things, breach of contract and for deprivation of
property without just compensation and without due process of the law.
In 1996, the U.S. Supreme Court ruled in three cases similar to the Goodwill
Litigation that the U.S. government was liable for having breached its
acquisition contracts with certain savings associations. Sterling is encouraged
by the Supreme Court's decision, although it is uncertain when a trial to
determine Sterling's damages will be held or when a judgment, if any, will be
paid.
Sterling's Goodwill Litigation has been stayed for almost ten years; and in
November 1999, Sterling was finally authorized to begin taking discovery related
to its claim. Although it is impossible to accurately predict when this effort
will be concluded, it is anticipated that the discovery stage will take most or
all of 2000 and that Sterling's case will be scheduled for trial by late 2001.
Because of the increased level of effort required to bring the case to
conclusion, Sterling likely will see an increase in legal expenses over the next
few years.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. SFAS No. 133, as amended
by
48
<PAGE>
SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133," is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000;
however, earlier application of all of the provisions of this Statement is
encouraged as of the beginning of any fiscal quarter. Sterling has not yet
determined the effect, if any, of implementing SFAS No. 133 on its consolidated
financial statements.
YEAR 2000 ISSUES
The Year 2000 problem concerned the inability of information systems to
recognize properly and to process date-sensitive information beginning on
January 1, 2000. Systems that did not properly recognize such information could
have generated erroneous data or failed. The potential failure on January 1,
2000 of computer systems that use two-digit calendar notations developed into a
major concern for financial institutions and other entities.
To address this concern, Sterling created a Year 2000 Action plan that
focused on identifying, testing and implementing solutions for Year 2000
processing. All phases of Sterling's Year 2000 Action Plan were completed by
September 30, 1999.
Sterling's Year 2000 Event Plan was implemented in December 1999. As part of
the Event Plan, each branch and department was required to perform "wellness
checks" and to report their results to Sterling's year 2000 coordinator. The
wellness checks were tools used to determine the status of Year 2000 readiness
at each location and provided a means of detecting and resolving any Year
2000-related disruptions should they occur. Management closely monitored the
results of the wellness checks, and no Year-2000-related problems were
experienced. Sterling's Year 2000 Contingency Plan is in place but has not been
implemented.
Sterling will continue to monitor its financial data and security systems
for the remainder of 2000. Modified wellness checks are planned for specific
dates in 2000.
The aggregate costs of Sterling's Year 2000 Action plan and Year 2000
Contingency Plan were approximately $775,000, including approximately $200,000
in costs associated with the replacement of computer hardware and equipment.
These costs were expensed as incurred.
Although Sterling identified and resolved all Year 2000 issues that could
materially adversely affect its business operations, it is not possible to
determine with complete certainty that all Year 2000 issues affecting Sterling
were identified or corrected. In addition, no one can accurately predict the
number of year 2000-related disruptions that could occur generally or
specifically with respect to Sterling and its customers and suppliers in 2000.
Nor can anyone accurately predict the severity, duration or financial
consequences of these potential disruptions. Sterling believes that, with
continued oversight and monitoring, the possibility of material Year 2000
problems is unlikely. There can, however, be no assurance in this regard.
EFFECTS OF INFLATION AND CHANGING PRICES
A savings institution has an asset and liability structure that is
interest-rate sensitive. As a holder of monetary assets and liabilities, a
savings institution's performance may be significantly influenced by changes in
interest rates. Although changes in the prices of goods and services do not
necessarily move in the same direction as interest rates, increases in inflation
generally have resulted in increased interest rates, which may have an adverse
effect on Sterling's business.
ITEM 7.A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For a discussion of Sterling's market risk, see "Management's Discussion and
Analysis--Asset and Liability Management."
49
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required information is contained on pages F-1 through F-39 of this
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the year ended December 31, 1999, Sterling neither changed nor had
any disagreements with its independent accountants on accounting and financial
disclosures.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The required information is contained under the captions "Board of Directors
of Sterling Financial Corporation" and "Executive Officers" in Sterling's Proxy
Statement dated March 24, 2000, for the Annual Meeting of Shareholders on
April 25, 2000, and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The required information is contained under the captions "Personnel
Committee Report on Executive Compensation" and "Executive Compensation" in
Sterling's Proxy Statement dated March 24, 2000, for the Annual Meeting of
Shareholders on April 25, 2000, and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The required information is contained under the caption "Security Ownership
of Certain Beneficial Owners and Management" in Sterling's Proxy Statement dated
March 24, 2000, for the Annual Meeting of Shareholders on April 25, 2000, and is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The required information is contained under the caption "Interest of
Directors, Officers and Others in Certain Transactions" in Sterling's Proxy
Statement dated March 24, 2000, for the Annual Meeting of Shareholders on
April 25, 2000, and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents which are filed as a part of this report:
1. FINANCIAL STATEMENTS: The required financial statements are contained in
pages F-1 through F-39 of this Form 10-K.
2. FINANCIAL STATEMENT SCHEDULES: Financial statement schedules have been
omitted as they are not applicable or the information is included in the
Consolidated Financial Statements.
50
<PAGE>
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
- ----------- -------
<C> <S>
3.1 Restated Articles of Incorporation of Sterling. Filed as
Exhibit 3.1 to Sterling's Form S-4 dated November 7, 1994
and incorporated by reference herein.
3.2 Articles of Amendment of Restated Articles of Incorporation
of Sterling. Filed as Exhibit 3.2 to Sterling's Form S-4
dated November 7, 1994 and incorporated by reference herein.
3.3 Amended and Restated Bylaws of Sterling. Filed herewith.
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Sterling has outstanding certain long-term debt. None of
such debt exceeds ten percent of Sterling's total assets;
therefore, copies of the constituent instruments defining
the rights of the holders of such debt are not included as
exhibits. Copies of instruments with respect to such
long-term debt will be furnished to the Securities and
Exchange Commission upon request.
10.1 Sterling Financial Corporation 1998 Long-term Incentive
Plan, filed as Exhibit A to Sterling's Proxy Statement in
connection with the Annual Meeting of Shareholders held on
April 28, 1998 and incorporated by reference herein.
10.2 First Federal Savings and Loan Association of Montana 1992
Stock Option and Incentive Plan, incorporated by reference
from the Registration Statement on Form 10 filed by the
Association with the Office of Thrift Supervision on May 15,
1992.
10.3 Sterling Savings Bank Incentive Stock Option Plan dated July
25, 1984, including a copy of Form of Incentive Stock Option
Plan Letter Agreement. Filed as Exhibit 10.1 to Sterling's
Form S-4 dated August 28, 1992 and incorporated by reference
herein.
10.4 Sterling Savings Bank 1992 Incentive Stock Option Plan.
Filed as Exhibit 10.2 to Sterling's Form S-4 dated August
28, 1992 and incorporated by reference herein.
10.5 Sterling Financial Corporation Amended and Restated Deferred
Compensation Plan, effective July 1, 1999. Filed herewith.
10.6 Sterling Savings Bank Employment Savings and Incentive Plan
and Trust dated September 21, 1990. Filed as Exhibit 10.4
to Sterling's Form S-4 dated August 28, 1992 and
incorporated by reference herein.
10.7 Employment Agreement, dated July 1, 1999, between Sterling
Financial Corporation and Harold B. Gilkey. Filed herewith.
10.8 Employment Agreement, dated July 1, 1999, between Sterling
Financial Corporation and William W. Zuppe. Filed herewith.
10.9 Form of Employment Agreement for Executive Officers. Filed
herewith.
12.1 Statement regarding Computation of Return on Average Common
Shareholders' Equity. Filed herewith.
12.2 Statement regarding Computation of Return on Average Assets.
Filed herewith.
12.3 Statement regarding Computation of Operating Cash
Performance Ratios. Filed herewith.
21.1 List of Subsidiaries of Sterling. Filed herewith.
23.1 Consent of PricewaterhouseCoopers LLP. Filed herewith.
27.1 Financial Data Schedule. Filed herewith.
</TABLE>
(b) Reports on Form 8-K. Four reports on Form 8-K were filed during the period
covered by this report.
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
February 22, 2000 STERLING FINANCIAL CORPORATION
By /s/ HAROLD B. GILKEY
---------------------------------------------------
HAROLD B. GILKEY
Chairman of the Board, Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
February 22, 2000 By /s/ HAROLD B. GILKEY
----------------------------------------------------
HAROLD B. GILKEY
Chairman of the Board, Chief Executive Officer,
Principal Executive Officer
February 22, 2000 By /s/ WILLIAM W. ZUPPE
----------------------------------------------------
WILLIAM W. ZUPPE
President, Chief Operating Officer, Director
February 22, 2000 By /s/ DANIEL G. BYRNE
----------------------------------------------------
DANIEL G. BYRNE
Senior Vice President, Chief Financial Officer,
Principal Financial Officer, Principal Accounting
Officer
February 22, 2000 By /s/ NED M. BARNES
----------------------------------------------------
NED M. BARNES, Secretary, Director
February 22, 2000 By /s/ RODNEY W. BARNETT
----------------------------------------------------
RODNEY W. BARNETT, Director
February 22, 2000 By /s/ THOMAS H. BOONE
----------------------------------------------------
THOMAS H. BOONE, Director
February 22, 2000 By /s/ JAMES P. FUGATE
----------------------------------------------------
JAMES P. FUGATE, Director
</TABLE>
52
<PAGE>
<TABLE>
<S> <C> <C>
February 22, 2000 By /s/ ROBERT D. LARRABEE
----------------------------------------------------
ROBERT D. LARRABEE, Director
February 22, 2000 By /s/ ROBERT E. MEYERS
----------------------------------------------------
ROBERT E. MEYERS, Director
February 22, 2000 By /s/ DAVID O. WALLACE
----------------------------------------------------
DAVID O. WALLACE, Director
</TABLE>
53
<PAGE>
STERLING FINANCIAL CORPORATION
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Sterling Financial Corporation
Spokane, Washington
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, comprehensive income (loss), changes in
shareholders' equity and of cash flows present fairly, in all material respects,
the financial position of Sterling Financial Corporation and its subsidiaries
("Sterling") as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of
Sterling's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
February 23, 2000
Spokane, Washington
F-1
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents:
Interest bearing........................................ $ 23,365 $ 26,977
Non-interest bearing and vault.......................... 72,221 61,354
Restricted.............................................. 1,018 8,775
Investments and mortgage-backed securities:
Available for sale...................................... 494,483 566,372
Held to maturity........................................ 11,247 20,033
Loans receivable, net..................................... 1,787,771 1,468,534
Loans held for sale....................................... 985 15,881
Accrued interest receivable............................... 16,720 14,938
Real estate owned, net.................................... 7,299 6,232
Office properties and equipment, net...................... 52,649 51,771
Other intangibles, net.................................... 55,488 61,180
Mortgage servicing rights, net............................ 222 18
Prepaid expenses and other assets, net.................... 23,457 12,522
---------- ----------
Total assets.......................................... $2,546,925 $2,314,587
========== ==========
LIABILITIES:
Deposits.................................................. $1,617,368 $1,545,425
Advances from Federal Home Loan Bank of Seattle........... 490,503 319,540
Securities sold subject to repurchase agreements.......... 179,515 195,074
Other borrowings.......................................... 110,000 97,240
Cashiers checks issued and payable........................ 11,967 17,512
Borrowers' reserves for taxes and insurance............... 1,369 1,826
Accrued interest payable.................................. 7,539 5,639
Accrued expenses and other liabilities.................... 11,025 13,314
---------- ----------
Total liabilities..................................... 2,429,286 2,195,570
---------- ----------
Commitments and contingencies (Notes 9, 10, 11 and 17)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value; 10,000,000 shares
authorized; no shares issued and outstanding............ -- --
Common stock, $1 par value; 20,000,000 shares authorized;
8,089,844 and 8,056,072 shares issued and outstanding... 8,090 8,056
Additional paid-in capital................................ 70,339 70,229
Accumulated other comprehensive income (loss):
Unrealized gains (losses) on investments and
mortgage-backed securities available for sale, net of
deferred income tax provision (benefit) of $(7,298)
and $424.............................................. (13,553) 788
Retained earnings......................................... 52,763 39,944
---------- ----------
Total shareholders' equity............................ 117,639 119,017
---------- ----------
Total liabilities and shareholders' equity............ $2,546,925 $2,314,587
========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans.................................................. $ 143,800 $ 113,813 $ 94,963
Mortgage-backed securities............................. 22,828 26,938 29,031
Investments and cash equivalents....................... 10,746 15,012 11,891
---------- ---------- ----------
Total interest income................................ 177,374 155,763 135,885
---------- ---------- ----------
INTEREST EXPENSE:
Deposits............................................... 60,921 57,595 48,027
Short-term borrowings.................................. 11,013 26,005 26,976
Long-term borrowings................................... 30,070 12,958 13,074
---------- ---------- ----------
Total interest expense............................... 102,004 96,558 88,077
---------- ---------- ----------
Net interest income.................................. 75,370 59,205 47,808
PROVISION FOR LOSSES ON LOANS............................ (3,900) (5,325) (2,482)
---------- ---------- ----------
Net interest income after provision for losses on
loans.............................................. 71,470 53,880 45,326
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Fees and service charges............................... 10,720 7,858 5,140
Mortgage banking operations............................ 1,082 1,848 1,922
Loan servicing fees.................................... 798 791 1,299
Net gains on sales of securities....................... 593 2,038 1,197
Real estate owned operations........................... 104 (222) (84)
---------- ---------- ----------
Total other income................................... 13,297 12,313 9,474
---------- ---------- ----------
OPERATING EXPENSES (Note 19)............................. 64,478 56,291 38,429
---------- ---------- ----------
Income before income taxes........................... 20,289 9,902 16,371
---------- ---------- ----------
INCOME TAX BENEFIT (provision):
Current................................................ (6,915) (7,392) (6,150)
Deferred............................................... (555) 3,713 (2)
---------- ---------- ----------
Total income tax provision........................... (7,470) (3,679) (6,152)
---------- ---------- ----------
NET INCOME............................................... 12,819 6,223 10,219
Less preferred stock dividends declared.................. -- -- (940)
---------- ---------- ----------
Income available to common shares........................ $ 12,819 $ 6,223 $ 9,279
========== ========== ==========
Income per common share--basic........................... $ 1.59 $ 0.78 $ 1.40
========== ========== ==========
Income per common share--diluted......................... $ 1.57 $ 0.76 $ 1.25
========== ========== ==========
Weighted average common shares outstanding--basic........ 8,083,026 8,027,537 6,634,599
========== ========== ==========
Weighted average common shares outstanding--diluted...... 8,147,020 8,217,067 8,170,675
========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net income.................................................. $12,819 $6,223 $10,219
------- ------ -------
Other comprehensive income (loss):
Change in unrealized gains or losses on investments and
mortgage-backed securities available for sale........... (22,063) 2,269 7,892
Less deferred income tax provision (benefit).............. (7,722) 775 2,760
------- ------ -------
Net other comprehensive income (loss)..................... (14,341) 1,494 5,132
------- ------ -------
Comprehensive income (loss)................................. $(1,522) $7,717 $15,351
======= ====== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
<PAGE>
STERLING FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL OTHER UNEARNED
--------------------- --------------------- PAID-IN COMPREHENSIVE STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME (LOSS) COMPENSATION
---------- -------- ---------- -------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996......... 1,040,000 $1,040 5,966,448 $5,966 $70,649 $ (5,838) $ --
Shares issued upon exercise of
stock options.................. 14,632 15 130
Shares acquired and retired upon
exercise of stock options...... (5,209) (5) (84)
Preferred shares converted to
common stock................... (1,035,700) (1,036) 2,021,190 2,021 (998)
Preferred shares redeemed........ (4,300) (4) (99)
Dividends declared and paid on
preferred stock ($0.45 per
share).........................
Change in unrealized loss on
investments and mortgage-
backed securities available for
sale, net of income taxes...... 5,132
Shares issued under stock
compensation plan.............. 20,760 21 291
Unearned stock compensation...... (305)
Net income.......................
---------- ------ ---------- ------ ------- -------- -------
BALANCE, DECEMBER 31, 1997......... -- -- 8,017,821 8,018 69,889 (706) (305)
Shares issued upon exercise of
stock options.................. 39,301 39 428
Shares acquired and retired upon
exercise of stock options...... (969) (1) (84)
Cash paid for fractional
shares......................... (81) (4)
Change in unrealized loss on
investments and mortgage-
backed securities available for
sale, net of income taxes...... 1,494
Vesting of unearned stock
compensation................... 305
Net income.......................
---------- ------ ---------- ------ ------- -------- -------
BALANCE, DECEMBER 31, 1998......... -- -- 8,056,072 8,056 70,229 788 --
Shares issued upon exercise of
stock options.................. 38,592 39 185
Shares acquired and retired upon
exercise of stock options...... (4,820) (5) (75)
Change in unrealized gain on
investments and mortgage-
backed securities available for
sale, net of income taxes...... (14,341)
Net income.......................
---------- ------ ---------- ------ ------- -------- -------
BALANCE, DECEMBER 31, 1999......... -- $ -- 8,089,844 $8,090 $70,339 $(13,553) $ --
========== ====== ========== ====== ======= ======== =======
<CAPTION>
TOTAL
RETAINED SHAREHOLDERS'
EARNINGS EQUITY
-------- -------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996......... $24,452 $ 96,269
Shares issued upon exercise of
stock options.................. 145
Shares acquired and retired upon
exercise of stock options...... (89)
Preferred shares converted to
common stock................... (13)
Preferred shares redeemed........ (10) (113)
Dividends declared and paid on
preferred stock ($0.45 per
share)......................... (940) (940)
Change in unrealized loss on
investments and mortgage-
backed securities available for
sale, net of income taxes...... 5,132
Shares issued under stock
compensation plan.............. 312
Unearned stock compensation...... (305)
Net income....................... 10,219 10,219
-------- --------
BALANCE, DECEMBER 31, 1997......... 33,721 110,617
Shares issued upon exercise of
stock options.................. 467
Shares acquired and retired upon
exercise of stock options...... (85)
Cash paid for fractional
shares......................... (4)
Change in unrealized loss on
investments and mortgage-
backed securities available for
sale, net of income taxes...... 1,494
Vesting of unearned stock
compensation................... 305
Net income....................... 6,223 6,223
-------- --------
BALANCE, DECEMBER 31, 1998......... 39,944 119,017
Shares issued upon exercise of
stock options.................. 224
Shares acquired and retired upon
exercise of stock options...... (80)
Change in unrealized gain on
investments and mortgage-
backed securities available for
sale, net of income taxes...... (14,341)
Net income....................... 12,819 12,819
-------- --------
BALANCE, DECEMBER 31, 1999......... $52,763 $117,639
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-5
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................. $ 12,819 $ 6,223 $ 10,219
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for losses on loans and real estate
owned............................................ 4,105 5,396 2,655
Stock dividends on Federal Home Loan Bank of
Seattle stock.................................... (2,449) (2,370) (2,197)
Net gain on sales of loans, investments and
mortgage-backed securities and mortgage servicing
rights........................................... (1,561) (3,578) (2,690)
Net loss on sales of office properties and
equipment........................................ -- -- 6
Net gain on sales of real estate owned............. (456) (133) (218)
Depreciation and amortization...................... 11,228 8,820 7,791
Deferred income tax (provision) benefit............ (555) 3,713 (2)
Compensation expense associated with stock
grants........................................... -- 305 --
Change in:
Accrued interest receivable.................... (1,782) 246 (3,370)
Prepaid expenses and other assets.............. (2,102) (2,467) 948
Cashiers checks issued and payable............. (5,545) 6,252 5,537
Accrued interest payable....................... 1,900 (976) 760
Accrued expenses and other liabilities......... (2,289) (2,627) 200
Proceeds from sales of loans....................... 72,994 111,591 109,497
Loans originated for sale.......................... (72,661) (110,162) (107,113)
----------- ----------- ---------
Net cash provided by operating activities...... 13,646 20,233 22,023
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in restricted cash.............................. 7,757 (5,787) 242
Loans disbursed........................................ (1,304,940) (1,211,678) (952,453)
Loan principal received................................ 993,493 952,479 807,808
Purchase of investments................................ (36,680) (350,111) (182,228)
Proceeds from maturities of investments................ 52,766 374,648 91,239
Proceeds from sales of available-for-sale
investments.......................................... 542 10,825 --
Purchase of mortgage-backed securities................. (62,274) (401,897) (421,900)
Principal payments on mortgage-backed securities....... 77,463 90,965 67,314
Proceeds from sales of mortgage-backed securities...... 29,104 385,979 264,543
Purchase of office properties and equipment............ (5,119) (4,896) (1,222)
Proceeds from sales of office properties and
equipment............................................ -- -- 12
Improvements and other changes to real estate owned.... (360) 126 (294)
Proceeds from sales and liquidation of real estate
owned................................................ 3,385 4,525 2,011
Proceeds from sales of mortgage servicing rights....... -- 1,123 --
Net cash received from branch acquisitions............. -- 327,183 --
----------- ----------- ---------
Net cash provided by (used in) investing
activities................................... (244,863) 173,484 (324,928)
----------- ----------- ---------
</TABLE>
F-6
<PAGE>
STERLING FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in checking, passbook and money market
deposits............................................. $ (46,681) $ 52,054 $ 46,840
Proceeds from issuance of certificates of deposit...... 824,261 725,755 444,026
Payments for maturing certificates of deposit.......... (765,485) (892,557) (406,969)
Interest credited to deposits.......................... 59,848 58,228 48,169
Advances from Federal Home Loan Bank of Seattle........ 330,877 238,192 605,000
Repayment of Federal Home Loan Bank of Seattle
advances............................................. (160,123) (379,084) (405,081)
Net change in securities sold subject to repurchase
agreements and funds purchased....................... (15,559) 14,997 (49,720)
Proceeds from other borrowings......................... 35,000 40,000 40,000
Repayment of other borrowings.......................... (22,240) (15,000) --
Payments to redeem preferred stock and fractional
shares............................................... -- (4) (126)
Proceeds from exercise of stock options and warrants,
net of repurchases................................... 144 382 56
Cash dividends on preferred stock...................... -- -- (940)
Deferred financing costs............................... (1,113) -- (1,810)
Other.................................................. (457) 58 160
----------- ----------- ---------
Net cash provided by (used in) financing
activities................................... 238,472 (156,979) 319,605
----------- ----------- ---------
Net change in cash and cash equivalents.................. 7,255 36,738 16,700
Cash and cash equivalents, beginning of year............. 88,331 51,593 34,893
----------- ----------- ---------
Cash and cash equivalents, end of year................... $ 95,586 $ 88,331 $ 51,593
=========== =========== =========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for:
Interest........................................... $ 100,104 $ 96,798 $ 84,729
Income taxes....................................... 7,468 5,873 6,708
Noncash financing and investing activities:
Loans converted into real estate owned............. $ 3,841 $ 2,004 $ 6,515
Preferred stock converted to common stock.......... -- -- 24,523
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Sterling Financial Corporation ("Sterling") is a unitary savings and loan
holding company, the significant operating subsidiary of which is Sterling
Savings Bank. Sterling Savings Bank is a Washington State-chartered savings
association headquartered in Spokane, Washington, that conducts business from 77
offices located throughout Washington, Oregon, Idaho and Montana. Sterling
Savings Bank provides full-service banking, including attracting deposits
insured by the Federal Deposit Insurance Corporation ("FDIC") and originating
consumer, business banking, residential and commercial real estate and
residential construction loans. Action Mortgage Company ("Action Mortgage"), a
wholly owned subsidiary of Sterling Savings Bank, operates residential loan
production offices in the metropolitan areas of Spokane and Seattle, Washington;
Portland, Oregon; and Boise, Idaho. INTERVEST-Mortgage Investment Company
("INTERVEST"), also a wholly owned subsidiary of Sterling Savings Bank, provides
commercial real estate lending through its offices in the metropolitan areas of
Portland, Oregon; Spokane, Washington; and the Puget Sound region. Sterling
Savings Bank also owns Harbor Financial Services, Inc. ("Harbor Financial"),
which markets tax-deferred annuities, mutual funds and other financial products
through regional representatives.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Sterling and its directly and indirectly wholly owned subsidiaries. Results of
operations of all business combinations required to use the purchase accounting
method are consolidated for all periods after the date of acquisition. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On June 15, 1998, Sterling assumed approximately $518.0 million in deposit
liabilities and acquired certain branch assets from 33 branch offices of KeyBank
National Association ("KeyBank"). The following shows the allocation of the
purchase price for the KeyBank transaction (in thousands):
<TABLE>
<S> <C>
Liabilities assumed:
Certificates of deposit................................... $233,864
NOW accounts.............................................. 79,887
Non-interest bearing demand accounts...................... 76,419
Savings and money market accounts......................... 127,330
--------
517,500
Accrued interest payable.................................. 736
--------
Total liabilities assumed............................... 518,236
--------
Less assets acquired:
Loans receivable, net..................................... 121,569
Office properties and equipment........................... 10,996
Accrued interest on loans................................. 1,126
Intangible asset.......................................... 57,362
--------
Total assets acquired................................... 191,053
--------
Net cash received from branch acquisitions.................. $327,183
========
</TABLE>
F-8
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
The intangible asset includes both the identifiable value of existing
depositor relationships and the remaining unidentified intangible asset. As it
was not practical to separately value the existing depositor relationships,
Sterling is amortizing the entire intangible asset over 15 years using the
straight-line method.
On November 13, 1998, Sterling completed a business combination with Big Sky
Bancorp, Inc. ("Big Sky"), whereby Big Sky was merged with Sterling. In
connection with the merger, Sterling issued 448,030 shares of its common stock
for all of the outstanding common shares of Big Sky based on an exchange ratio
of 1.384 Sterling shares for each Big Sky share. The merger has been accounted
for as a pooling of interests. Accordingly, Sterling's consolidated financial
statements have been restated to present the combination of Sterling and Big Sky
as if the merger had occurred at the beginning of the earliest period presented.
The following table presents a reconciliation of interest income and net
income previously reported by Sterling and Big Sky individually, prior to the
merger, to the combined amounts included in the consolidated statements of
income (in thousands).
<TABLE>
<CAPTION>
NINE
MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Interest income:
Sterling......................................... $110,537 $131,149
Big Sky.......................................... 3,554 4,736
-------- --------
$114,091 $135,885
======== ========
Net income:
Sterling......................................... $ 4,466 $ 9,636
Big Sky.......................................... 333 583
-------- --------
$ 4,799 $ 10,219
======== ========
</TABLE>
CASH AND CASH EQUIVALENTS
Cash equivalents are any highly liquid instrument with a remaining maturity
of three months or less at the date of purchase. Cash and cash equivalents are
on deposit with other banks and financial institutions in amounts that
periodically exceed the federal insurance limit. Sterling evaluates the credit
quality of these banks and financial institutions to mitigate its credit risk.
At December 31, 1999 and 1998, Sterling had approximately $20.3 million and
$48.9 million, respectively, of uninsured non-interest bearing deposits.
Restricted cash consisted primarily of non-interest bearing deposits maintained
as a reserve at the Federal Reserve Bank.
Sterling has purchased approximately $22.0 million and $18.0 million of
securities under an agreement to resell substantially identical securities with
another institution at December 31, 1999 and 1998, respectively. The amounts
advanced under this agreement represent short-term loans and are reflected as
interest-bearing cash equivalents in the consolidated balance sheet. The
securities underlying the
F-9
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
agreements are comprised of shares of a mutual fund, which trades primarily in
U.S. government securities.
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
Sterling classifies debt and equity investments and mortgage-backed
securities ("MBS") as follows:
- AVAILABLE FOR SALE. Except for Federal Home Loan Bank of Seattle ("FHLB
Seattle") stock, debt and equity investments and MBS that will be held for
indefinite periods of time are classified as available for sale and are
carried at market value. Market value is determined using published quotes
or other indicators of value as of the close of business on December 31,
1999 and 1998. Unrealized gains and losses are reported, net of deferred
income taxes, as a component of accumulated other comprehensive income or
loss in shareholders' equity until realized. FHLB Seattle stock may only
be sold to FHLB Seattle or to another member institution at par.
Therefore, this investment is restricted and is carried at cost.
- HELD TO MATURITY. Investments in debt securities that management of
Sterling has the intent and ability to hold until maturity are classified
as held to maturity and are carried at their remaining unpaid principal
balance, net of unamortized premiums or unaccreted discounts. Premiums are
amortized and discounts are accreted using the level interest yield method
over the estimated remaining term of the underlying security.
Realized gains and losses on sales of investments and MBS are recognized in
the statement of income in the period sold using the specific identification
method.
LOANS RECEIVABLE
Loans receivable that management of Sterling has the intent and ability to
hold for the foreseeable future or until maturity or pay-off are reported at
their outstanding principal balance less any origination and commitment fees,
net of direct loan origination costs and an associated allowance for losses on
loans.
Interest income is recognized over the term of the loans receivable on a
level yield basis. The accrual of interest on impaired loans is discontinued
when, in management's opinion, the borrower may be unable to make payments as
they become due. When interest accrual is discontinued, all unpaid accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
ALLOWANCE FOR LOSSES ON LOANS
Management of Sterling provides an allowance for losses on loans based upon
estimates of the cash flows to be received from the loans or the fair value of
the underlying collateral, net of selling costs. These estimates are affected by
factors including changes in the economic environment in the Pacific Northwest
region and the resultant effect on collateral values. As a result of changing
economic conditions, it is reasonably possible that the amount of the allowance
for losses on loans could change in the near term. A provision for losses on
loans is charged to income based on management's evaluation of the probable
losses that have occurred or may occur in the loan portfolio.
F-10
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
LOANS HELD FOR SALE
Loans held for sale are reported at the lower of amortized cost or market
value as determined on an aggregate basis. Any loan that management determines
will not be held to maturity is classified as held for sale. Market value is
determined for loan pools of common interest rates using published quotes as of
the close of business. Unrealized losses on loans held for sale are included in
the consolidated statements of income in the period that the unrealized loss is
identified.
LOAN ORIGINATION AND COMMITMENT FEES
Loan origination fees, net of direct origination costs, are deferred and
recognized as interest income using the level interest yield method over the
contractual term of each loan adjusted for actual loan prepayment experience. If
the related loan is sold, the remaining net amount deferred, which is part of
the basis of the loan, is considered in determining the gain or loss on sale.
Loan commitment fees are deferred until the expiration of the commitment
period unless management believes there is a remote likelihood that the
underlying commitment will be exercised, in which case the fees are amortized to
fee income using the straight-line method over the commitment period. If a loan
commitment is exercised, the deferred commitment fee is accounted for in the
same manner as a loan origination fee. Deferred commitment fees associated with
expired commitments are recognized as fee income.
OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are carried at cost less accumulated
depreciation and amortization. Depreciation and amortization are computed using
the straight-line method over the lesser of the estimated useful lives or the
related lease terms of the assets. Expenditures for new properties and equipment
and major renewals or betterments are capitalized. Expenditures for repairs and
maintenance are charged to expense as incurred. Upon sale or retirement, the
cost and related accumulated depreciation are removed from the respective
property or equipment accounts, and the resulting gains or losses are reflected
in operations.
REAL ESTATE OWNED
Property acquired in satisfaction of defaulted mortgage loans is carried at
the lower of cost or fair value less estimated costs to sell. Development and
improvement costs relating to the property are capitalized to the extent they
are deemed to be recoverable.
An allowance for losses on real estate owned is established to include
amounts for estimated losses as a result of an impairment in value of the real
property. Sterling reviews its real estate owned for impairment in value
whenever events or circumstances indicate that the carrying value of the
property may not be recoverable. In performing the review, if expected future
undiscounted cash flow from the use of the property or the fair value, less
selling costs, from the disposition of the property is less than its carrying
value, an impairment loss is recognized. As a result of changes in the real
estate markets in which these properties are located, it is reasonably possible
that the carrying values could be reduced in the near term.
F-11
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INTANGIBLE ASSETS
Sterling records identifiable and unidentifiable intangibles in connection
with the acquisition of certain assets or subsidiaries. Where separately
identifiable, the value of depositor relationships that existed at the date of
an acquisition are amortized over the estimated life of the depositor
relationships acquired (generally 8 to 10 years). Unidentified intangible assets
are amortized on a straight-line basis over periods ranging from 8 to 20 years.
Accumulated amortization of intangible assets was approximately $35.2 million
and $29.5 million at December 31, 1999 and 1998, respectively.
Sterling performs a review for impairment of intangible assets whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable.
MORTGAGE BANKING OPERATIONS
Sterling, through Action Mortgage and INTERVEST, originates and sells loans
and participating interests in loans to provide additional funds for general
corporate purposes. Loans and participating interests therein are held for sale
and are carried at the lower of cost or market value. Sterling recognizes a gain
or loss on these loan sale transactions which includes a component reflecting
the differential between the contractual interest rate of the loan and the
interest rate which will be received by the investor. The present value of the
estimated future profit for servicing the loans, together with the normal
servicing fee rate, is taken into account in determining the amount of gain or
loss on the sale of loans.
Sterling adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities" ("SFAS No. 125"), which applies to transactions involving sales
or securitizations of financial assets, such as mortgage loans, and the
liquidation of financial liabilities on January 1, 1997. SFAS No. 125 provides
accounting and reporting standards based on a consistent application of a
FINANCIAL-COMPONENTS APPROACH that focuses on control. Under this approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered and derecognizes liabilities
when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. This
statement also requires that servicing assets and liabilities be accounted for
by (a) amortization in proportion to and over the period of estimated net
servicing income or loss, and (b) assessment for asset impairment or increased
obligation based on their fair values. The application of the provisions of SFAS
No. 125 did not have a material effect on Sterling's financial condition,
results of operations or cash flows.
At December 31, 1999 and 1998, mortgage servicing rights were approximately
$222,000 and $18,000, respectively, which are net of accumulated amortization of
approximately $380,000 and $357,000, respectively. The cost of mortgage
servicing rights is amortized in proportion to, and over the period of,
estimated net servicing revenues. Impairment of mortgage servicing rights is
assessed based on the fair value of those rights. Fair values are estimated
using discounted cash flows based on a current market interest rate. For
purposes of measuring impairment, the rights are stratified based primarily on
prepayment and interest rate risks. The amount of impairment recognized is the
amount by which the capitalized mortgage servicing rights for a stratum exceed
their fair value.
F-12
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Sterling accounts for income taxes using the liability method, which
requires that deferred tax assets and liabilities be determined based on the
temporary differences between the financial statement carrying amounts and tax
bases of assets and liabilities and tax attributes using enacted tax rates in
effect in the years in which the temporary differences are expected to reverse.
Sterling files a consolidated federal income tax return with its
subsidiaries.
INCOME PER SHARE
Income per share--basic is computed by dividing income available to common
shares by the weighted average number of common shares outstanding during the
period. Income per share--diluted is computed by dividing net income by the
weighted average number of common shares outstanding increased by the additional
common shares that would have been outstanding if the potentially dilutive
common shares had been issued.
COMPREHENSIVE INCOME
During the year ended December 31, 1998, Sterling adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This Statement requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires the change in unrealized gains or losses on marketable securities to be
included in comprehensive income. Financial statements of prior periods have
been reclassified to conform to this Statement.
Reclassification adjustments, representing the net (gains) losses on
available-for-sale securities that were realized during the period, net of
related deferred income taxes, were as follows (in thousands):
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Year ended December 31, 1999................................ $(440)
Year ended December 31, 1998................................ 25
Year ended December 31, 1997................................ 133
</TABLE>
These (gains) losses had previously been included in other comprehensive
income as unrealized (gains) losses on investments and MBS available for sale.
HEDGING ACTIVITIES
Sterling is authorized by its Board of Directors, subject to certain
limitations, to use financial futures and other contractual instruments for the
purpose of hedging interest rate risk relative to the investment and MBS
portfolio and in anticipation of sales of mortgage loans into the secondary
market.
F-13
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Sterling invests in MBS for its investment portfolio. Such purchases have
been limited to tranches that perform in concert with the underlying mortgages
or assets; i.e., improving in value with falling interest rates and declining in
value with rising interest rates. Sterling has not invested in "derivative
products" that have been structured to perform in a way that magnifies the
normal impact of changes in interest rates or in a way dissimilar to the
movement in value of the underlying securities.
Sterling uses forward sales contracts to hedge against interest rate risk
arising from mortgage loans held for sale. Gains and losses on interest rate
forward sales are deferred and included in the carrying value of the related
hedged assets. The unrealized gains and losses are amortized over the estimated
lives of the related assets as a yield adjustment. Upon settlement of the assets
being hedged, deferral accounting is discontinued and the resultant gain or loss
is realized in operations.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"), was issued. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair value. In June 1999, Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of Effective Date of SFAS 133" ("SFAS No. 137"), was issued. SFAS No. 137 amends
SFAS No. 133 to become effective for all quarters of fiscal years beginning
after June 15, 2000; however, earlier application is encouraged as of the
beginning of any fiscal quarter. Sterling has not yet determined the effect of
the implementation of SFAS No. 133 on its financial statements.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain amounts in the 1998 and 1997 financial statements have been
reclassified to conform with the current year's presentation. These
reclassifications had no effect in retained earnings or net income as previously
reported.
F-14
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES:
The carrying and fair values of investments and MBS are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
HELD TO MATURITY AVAILABLE FOR SALE
---------------------------------------------- -----------------------------------------------
AMORTIZED
COST/ GROSS GROSS GROSS GROSS CARRYING/
CARRYING UNREALIZED UNREALIZED FAIR AMORTIZED UNREALIZED UNREALIZED FAIR
VALUE GAINS LOSSES VALUE COST GAINS LOSSES VALUE
--------- ---------- ---------- -------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
U.S. government and
agency
obligations........ $ 95 $ -- $ (4) $ 91 $ 93,344 $ -- $ (2,609) $ 90,735
FHLB Seattle stock
(restricted)....... -- -- -- -- 34,767 -- -- 34,767
Municipal bonds...... 10,873 37 (59) 10,851 -- -- -- --
Mortgage-backed
securities......... 279 9 -- 288 359,987 48 (17,003) 343,032
Other................ -- -- -- -- 27,236 7 (1,294) 25,949
------- ---- ---- ------- -------- ------ -------- --------
$11,247 $ 46 $(63) $11,230 $515,334 $ 55 $(20,906) $494,483
======= ==== ==== ======= ======== ====== ======== ========
DECEMBER 31, 1998
U.S. government and
agency
obligations........ $ 6,345 $ 10 $ -- $ 6,355 $105,661 $ 900 $ -- $106,561
FHLB Seattle stock
(restricted)....... -- -- -- -- 32,318 -- -- 32,318
Municipal bonds...... 13,047 293 -- 13,340 -- -- -- --
Mortgage-backed
securities......... 355 15 -- 370 404,927 1,420 (977) 405,370
Other................ 286 4 -- 290 22,254 608 (739) 22,123
------- ---- ---- ------- -------- ------ -------- --------
$20,033 $322 $ -- $20,355 $565,160 $2,928 $ (1,716) $566,372
======= ==== ==== ======= ======== ====== ======== ========
</TABLE>
At December 31, 1999 and 1998, accrued interest on investments and MBS was
$4.3 million and $5.0 million, respectively.
During the years ended December 31, 1999, 1998 and 1997, Sterling sold
available-for-sale investments and MBS which resulted in the following (in
thousands):
<TABLE>
<CAPTION>
PROCEEDS GROSS GROSS
FROM REALIZED REALIZED
SALES GAINS LOSSES
-------- -------- --------
<S> <C> <C> <C>
Year ended December 31, 1999..................... $ 29,646 $ 593 $ --
Year ended December 31, 1998..................... 396,804 2,669 631
Year ended December 31, 1997..................... 264,543 1,325 128
</TABLE>
At December 31, 1999, the amortized cost and fair value of
available-for-sale and held-to-maturity debt securities, by contractual maturity
(in thousands), are shown below. Expected maturities may differ
F-15
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
2. INVESTMENTS AND MORTGAGE-BACKED SECURITIES: (CONTINUED)
from contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Available for sale:
U.S. government and agency obligations:
After one year through five years....................... $ 93,344 $ 90,735
======== ========
Mortgage-backed securities:
Under one year............................................ $ 285 $ 275
After one year through five years......................... 5,834 5,823
After five years through ten years........................ 28,763 27,286
After ten years........................................... 325,105 309,648
-------- --------
$359,987 $343,032
======== ========
Other:
After ten years........................................... $ 27,236 $ 25,949
======== ========
Held to maturity:
U.S. government and agency obligations:
After five years through ten years...................... $ 95 $ 91
======== ========
Municipal bonds:
Under one year.......................................... $ 1,741 $ 1,742
After one year through five years....................... 7,688 7,705
After five years through ten years...................... 1,444 1,404
-------- --------
$ 10,873 $ 10,851
======== ========
Mortgage-backed securities:
After ten years......................................... $ 279 $ 288
======== ========
</TABLE>
At December 31, 1999 and 1998, U.S. government and agency obligations and
MBS with an aggregate fair value of $26.1 million and $31.8 million,
respectively, were pledged as collateral for the treasury tax and loan account
in accordance with Federal Reserve Board regulations or for wholesale public
funds deposits in accordance with Washington and Oregon Public Deposit
Protection Commission regulations. Additionally, Sterling periodically utilizes
MBS as collateral for reverse repurchase agreements and other borrowing
transactions (see Notes 10 and 11).
F-16
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. LOANS RECEIVABLE:
The components of loans receivable are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Real estate loans:
Variable rate:
1-4 unit residential.................................... $ 33,852 $ 56,299
5 or more unit residential.............................. 82,825 75,866
Commercial.............................................. 196,710 157,551
Land and other.......................................... 674 1,001
Fixed rate:
Conventional 1-4 unit residential......................... 319,079 242,801
5- and 7-year balloon or reset 1-4 unit residential....... 24,136 18,210
1-4 unit residential, insured by FHA/VA................... 19,320 25,324
5 or more unit residential................................ 67,024 50,998
Commercial................................................ 108,119 17,101
Land and other............................................ 226 174
Construction:
1-4 unit residential...................................... 184,081 141,288
5 or more unit residential................................ 71,024 45,794
Commercial................................................ 32,018 46,485
---------- ----------
1,139,088 878,892
---------- ----------
Other loans:
Commercial loans.......................................... 245,428 243,410
Commercial and personal lines of credit................... 139,427 102,374
Consumer loans............................................ 276,657 253,987
Loans secured by deposits................................. 5,135 5,258
---------- ----------
666,647 605,029
---------- ----------
Total loans receivable...................................... 1,805,735 1,483,921
Deferred loan fees, net of direct origination costs......... (4,338) (2,309)
Premium on loans acquired pursuant to purchase
transactions.............................................. 1,977 1,545
Allowance for losses........................................ (15,603) (14,623)
---------- ----------
Loans receivable, net....................................... $1,787,771 $1,468,534
========== ==========
Weighted average interest rate.............................. 8.32% 8.29%
========== ==========
</TABLE>
Accrued interest on loans receivable was approximately $4.9 million and
$3.7 million at December 31, 1999 and 1998, respectively.
Sterling originates residential, commercial real estate, consumer and
commercial loans throughout the Pacific Northwest region. Loans originated
outside this area are primarily for immediate sale into the secondary market. At
December 31, 1999 and 1998, approximately 71%, 19%, 7% and 3% and 55%, 36%,
F-17
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
3. LOANS RECEIVABLE: (CONTINUED)
6%, and 3% of real estate loans were collateralized by property located in
Washington, Oregon, Idaho and Montana, respectively. The value of real estate
properties in these geographic regions will be affected by changes in the
economic environment of that region. It is reasonably possible that these values
could change in the near term, which would affect Sterling's estimate of its
allowance for losses on loans associated with these loans receivable.
Sterling originates both variable- and fixed-rate loans. The variable-rate
loans have interest rate adjustment limitations and are generally indexed to
various indices. Variable-rate real estate loans are typically indexed to prime
rate, one-year treasury bonds or five-year treasury bonds. Future market factors
may affect the correlation of the interest rates Sterling pays on the short-term
deposits that have been primarily utilized to fund these loans.
At December 31, 1999, the contractual principal payments due on outstanding
loans receivable (in thousands) are shown below. Actual payments may differ from
expected payments because borrowers have the right to prepay loans, with or
without prepayment penalties.
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ----------
<S> <C>
2000........................................................ $ 439,790
2001........................................................ 126,664
2002........................................................ 110,654
2003........................................................ 73,583
2004........................................................ 97,891
Thereafter.................................................. 957,153
----------
$1,805,735
==========
</TABLE>
4. LOAN SERVICING:
Loans serviced for others are not included in the consolidated balance
sheets. The unpaid principal balances of these loans as of the dates indicated
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Loan portfolios serviced for:
FHLMC..................................................... $122,558 $167,541 $317,679
FNMA...................................................... 17,892 25,682 61,702
Others.................................................... 65,050 17,767 74,932
-------- -------- --------
$205,500 $210,990 $454,313
======== ======== ========
</TABLE>
Custodial escrow balances maintained in connection with the loans serviced
for others were approximately $960,000 and $1.1 million at December 31, 1999 and
1998, respectively.
F-18
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
4. LOAN SERVICING: (CONTINUED)
The following is an analysis of the changes in mortgage servicing rights (in
thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED
SERVICING SERVICING TOTAL
--------- ---------- --------
<S> <C> <C> <C>
Balance, December 31, 1996...................... $1,474 $ -- $1,474
Amortization.................................. (304) -- (304)
------ ---- ------
Balance, December 31, 1997...................... 1,170 -- 1,170
Sale of servicing portfolio................... (1,023) -- (1,023)
Amortization.................................. (129) -- (129)
------ ---- ------
Balance, December 31, 1998...................... 18 -- 18
Additions..................................... -- 227 227
Amortization.................................. (11) (12) (23)
------ ---- ------
Balance, December 31, 1999...................... $ 7 $215 $ 222
====== ==== ======
</TABLE>
Sterling has sold participations in certain commercial real estate loans to
investors on a servicing-retained basis. During the year ended December 31,
1999, Sterling sold approximately $32.0 million in loans under participation
agreements, resulting in net gains of $209,000.
During the year ended December 31, 1998, Sterling sold, in bulk, the rights
to service conventional loans for others with an outstanding balance of
approximately $117.6 million and recognized a gain of approximately $100,000 on
the sale.
5. REAL ESTATE OWNED:
The components of real estate owned are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Commercial.................................................. $3,471 $4,537
Residential................................................. 1,737 301
Construction................................................ 779 34
Other....................................................... 2,373 2,311
------ ------
8,360 7,183
Allowance for losses........................................ (1,061) (951)
------ ------
Real estate owned, net...................................... $7,299 $6,232
====== ======
</TABLE>
F-19
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE OWNED:
The following is an analysis of the changes in the allowances for losses on
loans and real estate owned (in thousands):
<TABLE>
<CAPTION>
REAL
ESTATE
LOANS OWNED TOTAL
-------- -------- --------
<S> <C> <C> <C>
Balance, December 31, 1996........................ $ 8,389 $ 788 $ 9,177
Provision....................................... 2,482 173 2,655
Amounts written off............................. (1,568) (77) (1,645)
Recoveries...................................... 183 -- 183
------- ------ -------
Balance, December 31, 1997........................ 9,486 884 10,370
Provision....................................... 5,325 71 5,396
Amounts written off............................. (2,391) (4) (2,395)
Recoveries...................................... 203 -- 203
Loss allowances acquired........................ 2,000 -- 2,000
------- ------ -------
Balance, December 31, 1998........................ 14,623 951 15,574
Provision....................................... 3,900 205 4,105
Amounts written off............................. (3,172) (95) (3,267)
Recoveries...................................... 252 -- 252
------- ------ -------
Balance, December 31, 1999........................ $15,603 $1,061 $16,664
======= ====== =======
</TABLE>
The following is a summary of loans that are not performing in accordance
with their original contractual terms (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Nonaccrual loans (1)........................................ $9,259 $3,050
Restructured loans (2)...................................... 66 87
------ ------
Total nonperforming loans................................... $9,325 $3,137
====== ======
</TABLE>
- ------------------------
(1) The total allowance for losses on loans related to these loans was $201,000
and $63,000 at December 31, 1999 and 1998, respectively. For loans on
nonaccrual status at period end, additional gross interest income of
$485,000, $159,000 and $258,000, would have been recorded during the years
ended December 31, 1999, 1998 and 1997, respectively, if nonaccrual and
restructured loans had been current in accordance with their original
contractual terms. Interest income of $442,000, $194,000 and $311,000 was
recorded during the years ended December 31, 1999, 1998 and 1997,
respectively, in connection with such loans.
The average recorded investment in impaired loans during the years ended
December 31, 1999, 1998 and 1997, was $7.3 million, $4.5 million and
$4.2 million, respectively.
(2) Restructured loans occur when Sterling has agreed to compromise the
contractual loan terms to provide a reduction in the rate of interest and,
in most instances, an extension of payments of
F-20
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
6. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE OWNED: (CONTINUED)
principal or interest, or both, because of a deterioration in the financial
position of the borrower. Restructured loans performing in accordance with
their new terms are not included in nonaccrual loans unless there is
uncertainty as to the ultimate collection of principal or interest.
7. OFFICE PROPERTIES AND EQUIPMENT:
The components of office properties and equipment are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- ESTIMATED
1999 1998 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Buildings and improvements.................... $40,143 $39,523 20-40 years
Furniture, fixtures, equipment and computer
software.................................... 24,005 20,101 3-10 years
Leasehold improvements........................ 3,539 3,202 5-20 years
Automobiles................................... 62 62 3-5 years
------- -------
67,749 62,888
Less accumulated depreciation and
amortization................................ (23,245) (18,791)
------- -------
44,504 44,097
Land.......................................... 8,145 7,674
------- -------
Total office properties and equipment......... $52,649 $51,771
======= =======
</TABLE>
F-21
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. DEPOSITS:
The components of deposits and applicable yields are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Commerial checking accounts (non-interest bearing)... $ 104,005 $ 104,176
Checking accounts, 1.25% to 3.65%.................... 186,012 193,114
Passbook accounts, 1.53%............................. 84,526 102,927
Money market demand accounts, 1.00% to 4.35%......... 326,133 330,251
---------- ----------
700,676 730,468
---------- ----------
Certificate of deposit accounts:
Up to 3.99%........................................ 6,463 8,548
4.00 to 4.99%...................................... 219,694 267,080
5.00 to 5.99%...................................... 486,830 473,287
6.00 to 6.99%...................................... 185,330 43,592
7.00 to 7.99%...................................... 13,177 13,741
8.00 to 8.99%...................................... 3,815 6,738
9.00 to 9.99%...................................... 909 1,355
10.00% and over.................................... 474 616
---------- ----------
916,692 814,957
---------- ----------
Total deposits....................................... $1,617,368 $1,545,425
========== ==========
</TABLE>
The weighted average interest rate paid on deposit accounts was 4.04% and
3.85% at December 31, 1999 and 1998, respectively.
At December 31, 1999, the scheduled maturities of certificate of deposit
accounts are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING WEIGHTED AVERAGE
DECEMBER 31, INTEREST RATE AMOUNT
- ------------ ---------------- --------
<S> <C> <C>
2000............................................... 5.22% $684,127
2001............................................... 5.80 127,403
2002............................................... 6.19 68,172
2003............................................... 5.95 15,239
2004............................................... 5.90 7,096
Thereafter......................................... 6.43 14,655
--------
$916,692
========
</TABLE>
F-22
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
8. DEPOSITS: (CONTINUED)
At December 31, 1999, the remaining maturities of certificate of deposit
accounts with a minimum balance of $100,000 were as follows (in thousands):
<TABLE>
<S> <C>
Less than three months...................................... $131,717
Three to six months......................................... 64,234
Six to twelve months........................................ 80,568
Over twelve months.......................................... 41,248
--------
$317,767
========
</TABLE>
The components of interest expense associated with deposits are as follows
(in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Checking accounts................................ $ 1,921 $ 1,662 $ 1,133
Passbook accounts................................ 1,499 1,552 1,987
Money market demand accounts..................... 12,994 11,193 7,591
Certificate of deposit accounts.................. 44,507 43,188 37,316
------- ------- -------
$60,921 $57,595 $48,027
======= ======= =======
</TABLE>
9. ADVANCES FROM FEDERAL HOME LOAN BANK OF SEATTLE:
Advances from FHLB Seattle are collateralized by certain investments and MBS
and qualifying loans with a carrying value of approximately $498.5 million at
December 31, 1999. Sterling Savings Bank's credit line with FHLB Seattle is
limited to 30% of its total assets. At December 31, 1999, Sterling Savings Bank
had the ability to borrow an additional $279.6 million from FHLB Seattle.
The advances from FHLB Seattle at December 31, 1999 are repayable as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING WEIGHTED AVERAGE
DECEMBER 31, INTEREST RATE AMOUNT
- ------------ ---------------- --------
<S> <C> <C>
2000............................................... 6.03% $158,900
2001............................................... 5.65 55,000
2002............................................... 5.05 115,672
2003............................................... 4.85 45,000
2004............................................... 6.05 85,000
Thereafter......................................... 5.88 30,931
--------
$490,503
========
</TABLE>
10. SECURITIES SOLD SUBJECT TO REPURCHASE AGREEMENTS:
Sterling enters into sales of securities under agreements to repurchase the
same or similar securities ("reverse repurchase agreements"). Fixed-coupon
reverse repurchase agreements are treated as financings, and the obligations to
repurchase securities sold are reflected as a liability in the consolidated
F-23
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
10. SECURITIES SOLD SUBJECT TO REPURCHASE AGREEMENTS: (CONTINUED)
balance sheet. The dollar amount of securities underlying the agreements remains
in the applicable asset accounts. These agreements had a weighted average
interest rate of 4.80% at December 31, 1999. The reverse repurchase agreements
mature at various dates through October 2003. Substantially all of Sterling's
reverse repurchase agreements are transacted with Morgan Stanley (MS), Merrill
Lynch (ML) and Salomon (SAL). The MBS underlying these agreements were held by
MS, ML and SAL. The risk of default under such agreements is limited by the
financial strength of these broker-dealers and the level of borrowings relative
to the market value of pledged securities. At December 31, 1999, under the
reverse repurchase agreements, Sterling has pledged as collateral investments
and MBS with aggregate amortized costs and market values of $228.0 million and
$217.7 million, respectively.
The average balances of securities sold subject to reverse repurchase
agreements were $189.4 million, $123.7 million and $185.7 million during the
years ended December 31, 1999, 1998 and 1997, respectively. The maximum amount
outstanding at any month end during these same periods was $196.6 million,
$366.7 million and $273.6 million, respectively.
At December 31, 1999, securities sold subject to repurchase agreements are
repayable as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING WEIGHTED AVERAGE
DECEMBER 31, INTEREST RATE AMOUNT
- ------------ ---------------- --------
<S> <C> <C>
2000............................................... 5.09% $ 33,715
2001............................................... 5.75 30,000
2003............................................... 4.48 115,800
--------
$179,515
========
</TABLE>
11. OTHER BORROWINGS:
The components of other borrowings are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Advances on non-revolving line of credit (1)............. $ 40,000 $40,000
8.75% Subordinated Notes Due 2000 (2).................... -- 17,240
Sterling obligated mandatorily redeemable preferred
capital securities of subsidiary trust holding solely
junior subordinated deferrable interest debentures of
Sterling (3)........................................... 40,000 40,000
Floating Rate Notes Due 2006 (4)......................... 30,000 --
-------- -------
$110,000 $97,240
======== =======
</TABLE>
- ------------------------
(1) In May 1999, Sterling entered into a $50.0 million non-revolving,
variable-rate line-of-credit agreement with KeyBank, of which $40.0 million
was outstanding at December 31, 1999. This line of credit matures on
May 31, 2001. Interest accrues at the 30-day London Interbank Offering Rate
F-24
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
11. OTHER BORROWINGS: (CONTINUED)
("LIBOR") plus 2.00% (7.63% at December 31, 1999) and is payable monthly.
This line of credit is collateralized by all of the stock of Sterling
Savings Bank.
(2) On June 30, 1999, Sterling redeemed the outstanding balance of its 8.75%
Subordinated Notes Due 2000, including accrued interest thereon in the
aggregate amount of $17.4 million. Sterling incurred a charge of
approximately $97,000 upon early extinguishment of these notes.
(3) On June 4, 1997, Sterling issued $41.2 million of 9.50% junior subordinated
deferrable interest debentures (the "Junior Subordinated Debentures") to
Sterling Capital Trust I (the "Trust"), a Delaware business trust, in which
Sterling owns all of the common equity. The sole asset of the Trust is the
Junior Subordinated Debentures. The Trust issued $40.0 million of 9.50%
Cumulative Capital Securities (the "Trust Preferred Securities") to
investors. Sterling's obligations under the Junior Subordinated Debentures
and related documents, taken together, constitute a full and unconditional
guarantee by Sterling of the Trust's obligations under the Trust Preferred
Securities. The Trust Preferred Securities are treated as debt of Sterling.
Although Sterling, as a savings and loan holding company, is not subject to
the Federal Reserve capital requirements for bank holding companies, the
Trust Preferred Securities have been structured to qualify as Tier 1
capital, subject to certain limitations, if Sterling were to become
regulated as a bank holding company. The Junior Subordinated Debentures and
related Trust Preferred Securities mature on June 30, 2027 and are
redeemable at the option of Sterling in the event the deduction of related
interest for federal income taxes is prohibited, treatment as Tier 1 capital
is no longer permitted, or certain other contingencies arise. The Trust
Preferred Securities must be redeemed upon maturity of the Junior
Subordinated Debentures in 2027.
(4) In May 1999, Sterling issued $30.0 million of Floating Rate Notes Due 2006.
These notes are unsecured general obligations of Sterling and are
subordinated to certain other existing and future indebtedness. Under the
terms of the notes, Sterling is limited in the amount of certain long-term
debt that it may incur; and the notes restrict Sterling, under certain
circumstances, as to the amount of cash dividends on its preferred or common
stock and capital distributions which can be made. At December 31, 1999,
Sterling could incur approximately $34.3 million of additional long-term
debt, and Sterling would have been limited to the payment of up to
approximately $4.3 million in additional dividends. Interest accrues at the
90-day LIBOR plus 2.50% (7.95% until March 15, 2000) and is adjustable and
payable quarterly. The notes mature on June 15, 2006 and may be redeemed
under certain conditions after June 15, 2002.
Sterling has a $5.0 million revolving line-of-credit agreement with KeyBank.
The revolving line of credit matures in June 2000. The interest rate is
adjustable monthly at KeyBank's prime interest rate (8.50% at
December 31,1999). At December 31, 1999 and 1998, no amounts were outstanding
under this line-of-credit agreement.
Sterling Savings Bank has an unsecured $10.0 million line-of-credit
agreement with KeyBank. Advances under this line of credit accrue interest at
KeyBank's Federal Funds rate plus an incremental negotiated rate (4.88% at
December 31, 1999) and matures in April 2000. At December 31, 1999 and 1998, no
amounts were outstanding under this line-of-credit agreement.
F-25
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
12. INCOME TAXES:
The tax effects of the principal temporary differences giving rise to
deferred tax assets and liabilities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1999 1998
---------------------- ----------------------
ASSETS LIABILITIES ASSETS LIABILITIES
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Allowance for losses on loans........................... $ 5,764 $ -- $5,390 $ --
Unrealized losses on available-for-sale securities...... 7,298 -- -- 424
Net operating loss carryforward......................... 5 -- 105 --
Purchase accounting discount or premium................. 1,447 579 1,220 464
FHLB Seattle dividends.................................. -- 6,393 -- 4,863
Deferred loan fees...................................... -- 2,643 -- 2,434
Office properties and equipment......................... -- 441 -- 415
Equity in losses of partnerships........................ -- 204 -- 502
Other................................................... 1,290 -- 764 --
------- ------- ------ ------
Total deferred income taxes............................. $15,804 $10,260 $7,479 $9,102
======= ======= ====== ======
</TABLE>
A valuation allowance against deferred tax assets has not been established
as it is more likely than not that these assets will be realized.
A reconciliation of the income tax provision and the amount of income taxes
computed by applying the statutory federal corporate income tax rate to income
before income taxes follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income tax provision at federal statutory rate......... $7,101 35.0% $3,466 35.0% $5,720 35.0%
Tax effect of:
State taxes, net of federal benefit.................. 203 1.0 (20) (0.2) 277 1.7
Amortization of goodwill............................. 117 0.6 217 2.2 255 1.6
Tax-exempt interest.................................. (216) (1.1) (160) (1.6) (157) (1.0)
Other, net........................................... 265 1.4 176 1.8 57 0.2
------ ---- ------ ---- ------ ----
$7,470 36.9% $3,679 37.2% $6,152 37.5%
====== ==== ====== ==== ====== ====
</TABLE>
13. STOCK OPTIONS AND WARRANTS:
Sterling has granted options to purchase shares of its common stock at
exercise prices equal to the fair market value of the stock at the date of
grant. The options vest over 1 to 4 years and are exercisable from 4 to
10 years from the date of grant. Sterling is authorized to grant 1,100,000
options under various stock option incentive plans. At December 31, 1999, there
were 184,995 options available for grant.
Sterling has chosen not to record compensation expense using fair value
measurement provisions in the statement of income. Had compensation cost for
Sterling's plans been determined based on the fair
F-26
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. STOCK OPTIONS AND WARRANTS: (CONTINUED)
value at the grant dates for awards under the plans, Sterling's reported net
income and income per common share would have been changed to the pro forma
amounts indicated below (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
1999 1998 1997
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net income.......................... $12,819 $11,786 $6,223 $5,119 $10,219 $9,802
======= ======= ====== ====== ======= ======
Income per common share--basic...... $ 1.59 $ 1.46 $ 0.78 $ 0.64 $ 1.40 $ 1.34
======= ======= ====== ====== ======= ======
Income per common share--diluted.... $ 1.57 $ 1.45 $ 0.76 $ 0.62 $ 1.25 $ 1.20
======= ======= ====== ====== ======= ======
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the periods above: dividend yield of 0% in each
period, expected stock price volatility of 80%-85% each period, risk-free
interest rates of 4.46% to 6.97% and expected lives of 2 to 10 years,
respectively.
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
EXERCISE
NUMBER WEIGHTED AVERAGE PRICE EXPIRATION
OF SHARES EXERCISE PRICE PER SHARE DATE
--------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1996................. 471,933 $11.25 $3.65-$14.13 2002-2007
Options granted.......................... 75,352 21.08 $14.18-$21.31 1998-2007
Options exercised........................ (14,632) 9.37 $3.61-$14.13 1997-2006
Options canceled......................... (2,352) 14.13 $14.13 2006
-------
Balance, December 31, 1997................. 530,301 13.37 $3.61-$21.31 1998-2007
Options granted.......................... 110,744 16.47 $16.38-$21.13 1999-2008
Options exercised........................ (39,301) 11.89 $7.22-$14.13 1998-2007
Options canceled......................... (7,250) 8.77 $14.00-$21.13 2002-2007
-------
Balance, December 31, 1998................. 594,494 13.39 $3.61-$21.31 1999-2008
Options granted.......................... 217,500 12.76 $11.69-$16.38 2004-2009
Options exercised........................ (38,592) 5.79 $3.61-$14.18 1999-2007
Options canceled......................... (43,500) 16.20 $16.38-$21.31 2002-2004
-------
Balance, December 31, 1999................. 729,902 $13.44
======= ======
Exercisable, December 31, 1999............. 496,302 $13.36
======= ======
</TABLE>
The weighted average fair value of options granted during the years ended
December 31, 1999, 1998 and 1997 was $11.95, $16.47 and $21.25, respectively.
All share and dollar amounts have been restated to reflect the conversion of
each Big Sky stock option into a Sterling stock option at the exchange ratio.
F-27
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
13. STOCK OPTIONS AND WARRANTS: (CONTINUED)
The following table summarizes information about Sterling's plans at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$3.61-$3.65 6,869 1.9 years $ 3.62 6,869 $ 3.62
$6.01-$6.93 4,250 1.7 years 6.23 4,250 6.23
$7.22-$7.38 30,000 2.8 years 7.38 30,000 7.38
$9.29-$11.69 248,455 6.0 years 11.09 84,955 9.94
$11.85-$15.00 262,828 4.2 years 13.42 247,828 13.32
$16.38-$19.62 108,500 6.5 years 16.42 81,900 16.44
$21.13-$21.31 69,000 5.8 years 21.31 40,500 21.31
</TABLE>
Big Sky had adopted a Management Recognition and Development Plan whereby
stock was granted to the board of directors and management. In accordance with
the vesting provisions of Big Sky's plan, all participants became fully vested
upon consummation of the merger. Accordingly, the compensation expense
associated with Big Sky's plan was recorded in Sterling's operations during the
year ended December 31, 1998.
14. PREFERRED STOCK:
During the year ended December 31, 1997, the $1.8125 Series A Cumulative
Convertible Preferred Stock (the "Preferred Stock") was called for redemption at
$26.07 per share plus accrued but unpaid dividends. As a result of the call for
redemption, the holders of 1,035,700 shares of Preferred Stock elected to
convert their interests into 2,021,190 shares of Sterling Common Stock. The
remaining 4,300 shares of Preferred Stock were redeemed for $113,000 during the
year ended December 31, 1997.
15. EARNINGS PER SHARE:
The following table (dollars in thousands, except per share amounts)
presents a reconciliation of the numerators and denominators used in the basic
and diluted income per share computations, which includes the number of
antidilutive securities (if any) that were not included in the dilutive income
per share computation. These antidilutive securities occur when options
outstanding held an option price
F-28
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
15. EARNINGS PER SHARE: (CONTINUED)
greater than the average market price for the period. Also shown is the effect
that has been given to preferred dividends in computing basic income per share.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------
WEIGHTED
AVERAGE
NET INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Income per common share--basic............................ $12,819 8,083,026 $1.59
Effect of dilutive securities:
Common stock options.................................... -- 63,994
------- ---------
Income per common share--diluted.......................... $12,819 8,147,020 $1.57
======= =========
Antidilutive options not included in diluted income per
share................................................... 354,078
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------
<S> <C> <C> <C>
Income per common share--basic............................ $ 6,223 8,027,537 $0.78
Effect of dilutive securities:
Common stock options.................................... -- 189,530
------- ---------
Income per common share--diluted.......................... $ 6,223 8,217,067 $0.76
======= =========
Antidilutive options not included in diluted income per
share................................................... 71,500
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
-------------------------------------
<S> <C> <C> <C>
Net income................................................ $10,219
Less preferred stock dividends............................ (940)
-------
Income per common share--basic............................ 9,279 6,634,599 $1.40
Effect of dilutive securities:
Convertible preferred stock............................. 940 1,363,935
Common stock options.................................... -- 172,141
------- ---------
Income per common share--diluted.......................... $10,219 8,170,675 $1.25
======= =========
Antidilutive options not included in diluted income per
share................................................... 74,000
</TABLE>
16. REGULATORY MATTERS:
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation ("FDIC") and general regulatory oversight by the Office of
Thrift Supervision ("OTS"), Sterling Savings Bank is required to maintain
minimum levels of regulatory capital, including core Tier 1 risk-based and total
risk-based capital. At December 31, 1999, Sterling Savings Bank was in
compliance with all regulatory capital requirements. The OTS is empowered to
take "prompt, corrective action" to resolve problems of insured depository
institutions. The extent of these powers depends on whether an institution is
classified as "well capitalized," "adequately capitalized," "undercapitalized,"
"significantly under capitalized," or "critically undercapitalized." At
December 31, 1999 and 1998, Sterling Savings Bank was considered "well
capitalized."
F-29
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
16. REGULATORY MATTERS: (CONTINUED)
The following table sets forth the amounts and ratios regarding actual and
minimum core Tier 1 risk-based and total risk-based capital requirements,
together with the amounts and ratios required in order to meet the definition of
a "well-capitalized" institution, without giving effect to forbearance or
capital provisions contained in certain acquisition agreements (dollars in
thousands).
<TABLE>
<CAPTION>
MINIMUM
CAPITAL WELL-CAPITALIZED
REQUIREMENTS REQUIREMENTS ACTUAL
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk-Weighted Assets).................. $142,199 8.00% $177,748 10.00% $184,218 10.36%
Core (Tier I) Capital
(to Risk-Weighted Assets).................. 71,099 4.00 106,649 6.00 168,889 9.50
Core (Tier I) Capital
(to Adjusted Assets)....................... 99,738 4.00 124,673 5.00 168,889 6.77
As of December 31, 1998:
Total Capital
(to Risk-Weighted Assets).................. $122,254 8.00% $152,818 10.00% $157,373 10.30%
Core (Tier I) Capital
(to Risk-Weighted Assets).................. 61,127 4.00 91,691 6.00 143,669 9.40
Core (Tier I) Capital
(to Adjusted Assets)....................... 89,900 4.00 112,375 5.00 143,669 6.39
</TABLE>
17. COMMITMENTS AND CONTINGENT LIABILITIES:
At December 31, 1999, Sterling had loan commitments to borrowers and brokers
totaling $285.8 million, including $17.8 million for fixed-rate loans and
$268.0 million for variable-rate loans. At December 31, 1999, commitments to
secondary market institutions to sell fixed-rate loans totaled $16.5 million.
Commitments, which are disbursed subject to certain limitations, extend over
various periods of time, with the majority of funds being disbursed within a
twelve-month period. Substantially all of the commitments are for loans that
have credit risk similar to Sterling's existing portfolio.
At December 31, 1999, Sterling had made available to borrowers various
secured and unsecured commercial and personal lines of credit totaling
approximately $317.1 million, of which the undisbursed portion is approximately
$171.4 million. These lines of credit provide for periodic adjustment to market
rates of interest and have credit risk similar to Sterling's existing portfolio.
Sterling historically has not realized credit losses due to these
off-balance sheet credits. Based on this fact and Sterling's analysis of the
undisbursed portion of these lines of credit, no specific valuation allowances
were recorded for these off-balance sheet credits at December 31, 1999 and 1998.
Rent expense for office properties under operating leases was approximately
$1.2 million, $1.3 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively.
F-30
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
17. COMMITMENTS AND CONTINGENT LIABILITIES: (CONTINUED)
Future minimum rental commitments as of December 31, 1999, under
noncancelable operating leases with initial or remaining terms of more than one
year, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ --------
<S> <C>
2000........................................................ $ 1,542
2001........................................................ 1,377
2002........................................................ 1,205
2003........................................................ 1,061
2004........................................................ 844
Thereafter.................................................. 5,339
-------
$11,368
=======
</TABLE>
18. EMPLOYEE SAVINGS PLAN:
Sterling maintains an employee savings plan under Section 401(k) of the
Internal Revenue Code. Substantially all employees are eligible to participate
in the plan subject to certain requirements. Under the plan, employees may elect
to contribute up to 8% of their salary, and Sterling will make a matching
contribution equal to 35% of the employee's contribution. All matching
contributions are made exclusively in the form of Sterling Common Stock. Each
employee may make a supplemental contribution of an additional 7% of their
salary. All contributions vest immediately. Employees have the option of
investing their contributions among six selected mutual funds, certificates of
deposit with Sterling Savings Bank and Sterling Common Stock. During the years
ended December 31, 1999, 1998 and 1997, Sterling contributed approximately
$427,500, $373,000 and $210,000, respectively, to the employee savings plan.
19. OPERATING EXPENSES:
The components of total operating expenses are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Employee compensation and benefits............... $29,112 $22,430 $16,571
Occupancy and equipment.......................... 10,087 7,499 6,179
Amortization of intangibles...................... 5,692 3,971 2,242
Data processing.................................. 5,159 3,777 2,457
Depreciation..................................... 4,241 3,352 3,171
Advertising...................................... 2,656 2,076 1,707
Travel and entertainment......................... 1,572 1,318 1,102
Legal and accounting............................. 1,561 1,597 1,494
Insurance........................................ 986 1,116 1,217
Acquisition and conversion costs................. -- 5,464 --
Other............................................ 3,412 3,691 2,289
------- ------- -------
$64,478 $56,291 $38,429
======= ======= =======
</TABLE>
F-31
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
20. BUSINESS SEGMENTS:
Sterling operates residential loan production offices primarily in the
Spokane and Seattle, Washington; Portland, Oregon; and Boise, Idaho metropolitan
areas through its subsidiary Action Mortgage. Residential mortgage banking
operations include revenues from servicing-released and servicing-retained sales
of originated residential loans, bulk sales of loan servicing rights and other
fees.
The following table summarizes information related to Sterling's residential
mortgage banking operations (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gains on sales of originated residential loans... $ 759 $1,440 $1,494
Other fees and income............................ 5,255 4,629 2,530
------- ------ ------
Total revenues..................................... 6,014 6,069 4,024
Identifiable expenses.............................. (3,369) (2,414) (2,933)
------- ------ ------
Income before income taxes......................... $ 2,645 $3,655 $1,091
======= ====== ======
Identifiable assets................................ $11,315 $8,833 $5,153
======= ====== ======
Depreciation and amortization expense.............. $ 123 $ 141 $ 177
======= ====== ======
Capital expenditures for office properties and
equipment........................................ $ 111 $ 232 $ 13
======= ====== ======
</TABLE>
Sterling also operates commercial real estate loan production offices
primarily in the Spokane and Seattle, Washington and Portland, Oregon
metropolitan areas through its subsidiary INTERVEST. Commercial real estate
lending operations include revenues from sales of commercial real estate loans
and participation interests in commercial real estate loans, loan fees and
servicing fees.
The following table summarizes information related to Sterling's commercial
real estate lending operations (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Gains on sales of originated commercial real
estate loans.................................. $ 209 $ -- $ --
Other fees and income........................... 3,612 3,573 3,464
------- ------- ------
Total revenues.................................... 3,821 3,573 3,464
Identifiable expenses............................. (1,204) (970) (622)
------- ------- ------
Income before income taxes........................ $ 2,617 $ 2,603 $2,842
======= ======= ======
Identifiable assets............................... $16,281 $13,270 $9,569
======= ======= ======
Depreciation and amortization expense............. $ 14 $ 14 $ 18
======= ======= ======
Capital expenditures for office properties and
equipment....................................... $ 21 $ 12 $ 3
======= ======= ======
</TABLE>
Sterling has determined that its reportable business segments are those that
are based on its method of disaggregated internal reporting.
F-32
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
20. BUSINESS SEGMENTS: (CONTINUED)
The following is a reconciliation of certain mortgage banking operations to
the amounts reported in the consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
MORTGAGE BANKING
OPERATIONS
-------------------------
BANKING COMMERCIAL
OPERATIONS RESIDENTIAL REAL ESTATE TOTAL
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
As of and for the year ended
December 31, 1999:
Other income................................ $ 12,215 $ 873 $ 209 $ 13,297
Income before income taxes.................. 15,027 2,645 2,617 20,289
Total assets................................ 2,519,329 11,315 16,281 2,546,925
As of and for the year ended
December 31, 1998:
Other income.................................. $ 10,465 $ 1,848 $ -- $ 12,313
Income before income taxes.................... 3,644 3,655 2,603 9,902
Total assets.................................. 2,292,484 8,833 13,270 2,314,587
As of and for the year ended
December 31, 1997:
Other income.................................. $ 7,552 $ 1,922 $ -- $ 9,474
Income before income taxes.................... 12,438 1,091 2,842 16,371
Total assets.................................. 1,923,631 5,153 9,569 1,938,353
</TABLE>
21. INTEREST RATE RISK:
The results of operations for savings institutions may be materially and
adversely affected by changes in prevailing economic conditions, including rapid
changes in interest rates, declines in real estate market values and the
monetary and fiscal policies of the federal government. Like all financial
institutions, Sterling's net interest income and its NPV (the net present value
of financial assets, liabilities and off-balance sheet contracts) are subject to
fluctuations in interest rates. Currently, Sterling's interest-bearing
liabilities, consisting primarily of savings deposits, FHLB Seattle advances and
other borrowings, mature or reprice more rapidly, or on different terms, than do
its interest-earning assets, consisting primarily of loans receivable and
investments and MBS. The fact that liabilities mature or reprice more frequently
on average than assets may be beneficial in times of declining interest rates;
however, such an asset/liability structure may result in declining net interest
income during periods of rising interest rates.
Additionally, the extent to which borrowers prepay loans is affected by
prevailing interest rates. When interest rates increase, borrowers are less
likely to prepay loans; whereas when interest rates decrease, borrowers are more
likely to prepay loans. Prepayments may affect the levels of loans retained in
an institution's portfolio, as well as its net interest income. Sterling
maintains an asset and liability management program intended to manage net
interest income through interest rate cycles and to protect its NPV by
controlling its exposure to changing interest rates.
Sterling uses a simulation model designed to measure the sensitivity of net
interest income and NPV to changes in interest rates. This simulation model is
designed to enable Sterling to generate a forecast of net interest income and
NPV given various interest rate forecasts and alternative strategies. The model
F-33
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
21. INTEREST RATE RISK: (CONTINUED)
also is designed to measure the anticipated impact that prepayment risk, basis
risk, customer maturity preferences, volumes of new business and changes in the
relationship between long- and short-term interest rates have on the performance
of Sterling. Another monitoring tool used by Sterling to assess interest rate
risk is "gap analysis." The matching of repricing characteristics of assets and
liabilities may be analyzed by examining the extent to which such assets and
liabilities are "interest sensitive" and by monitoring Sterling's interest
sensitivity "gap." Management is aware of the sources of interest rate risk and
endeavors to actively monitor and manage its interest rate risk although there
can be no assurance regarding the management of interest rate risk in future
periods.
22. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following tables present Sterling's condensed operations on a quarterly
basis for the years ended December 31, 1999 and 1998 (dollars in thousands,
except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income............................... $ 41,506 $ 43,483 $ 45,244 $ 47,141
Interest expense.............................. (23,763) (24,698) (25,931) (27,612)
Provision for losses on loans................. (900) (1,000) (1,000) (1,000)
---------- ---------- ---------- ----------
Net interest income after provision for losses
on loans.................................... 16,843 17,785 18,313 18,529
Net gain on sales of securities............... 593 -- -- --
Other income.................................. 2,926 3,063 3,323 3,392
Other operating expenses...................... (15,862) (15,714) (16,352) (16,550)
---------- ---------- ---------- ----------
Income before income taxes.................... 4,500 5,134 5,284 5,371
Income tax provision.......................... (1,662) (1,900) (1,955) (1,953)
---------- ---------- ---------- ----------
Net income.................................... $ 2,838 $ 3,234 $ 3,329 $ 3,418
========== ========== ========== ==========
Income per common share--basic................ $ 0.35 $ 0.40 $ 0.41 $ 0.42
========== ========== ========== ==========
Income per common share--diluted.............. $ 0.35 $ 0.40 $ 0.41 $ 0.42
========== ========== ========== ==========
Weighted average common shares outstanding--
basic....................................... 8,063,756 8,088,299 8,089,844 8,089,844
========== ========== ========== ==========
Weighted average common shares outstanding--
diluted..................................... 8,184,690 8,150,463 8,158,607 8,119,496
========== ========== ========== ==========
</TABLE>
F-34
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
22. QUARTERLY FINANCIAL DATA (UNAUDITED): (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Interest income............................... $ 35,955 $ 38,042 $ 40,094 $ 41,672
Interest expense.............................. (23,543) (24,462) (24,156) (24,397)
Provision for losses on loans................. (808) (2,907) (807) (803)
---------- ---------- ---------- ----------
Net interest income after provision for losses
on loans.................................... 11,604 10,673 15,131 16,472
Net gain (loss) on sales of securities........ 711 (133) 655 805
Other income.................................. 2,255 2,180 2,914 2,926
Merger and acquisition costs.................. -- (3,210) -- (2,254)
Other operating expenses...................... (10,164) (10,942) (14,182) (15,539)
---------- ---------- ---------- ----------
Income (loss) before income taxes............. 4,406 (1,432) 4,518 2,410
Income tax (provision) benefit................ (1,580) 559 (1,672) (986)
---------- ---------- ---------- ----------
Net income (loss)............................. $ 2,826 $ (873) $ 2,846 $ 1,424
========== ========== ========== ==========
Income (loss) per common share--basic......... $ 0.35 $ (0.11) $ 0.35 $ 0.18
========== ========== ========== ==========
Income (loss) per common share--diluted....... $ 0.34 $ (0.11) $ 0.35 $ 0.17
========== ========== ========== ==========
Weighted average common shares outstanding--
basic....................................... 8,004,135 8,029,425 8,032,882 8,043,217
========== ========== ========== ==========
Weighted average common shares outstanding--
diluted..................................... 8,207,691 8,029,425 8,188,326 8,168,718
========== ========== ========== ==========
</TABLE>
23. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Fair value estimates are determined as of a specific date in time utilizing
quoted market prices, where available, or various assumptions and estimates. As
the assumptions underlying these estimates change, the fair value of the
financial instruments will change. The use of assumptions and various valuation
techniques, as well as the absence of secondary markets for certain financial
instruments, will likely reduce the comparability of fair value disclosures
between financial institutions. Additionally, Sterling has not disclosed highly
subjective values of core deposit intangibles or other non-financial
instruments. Accordingly, the aggregate fair value amounts presented do not
represent and should not be construed to represent the full underlying value of
Sterling.
The methods and assumptions used to estimate the fair values of each class
of financial instruments are as follows:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value due
to the relatively short-term nature of these instruments.
F-35
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
23. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The fair value of investments and MBS is based on quoted market prices. If
quoted market prices are not available, fair values are based on quoted market
prices of comparable instruments.
LOANS HELD FOR SALE
The fair values are based on the estimated value at which the loans could be
sold in the secondary market considering the fair value of options and
commitments to sell or issue mortgage loans.
LOANS RECEIVABLE
The fair values of performing residential mortgage loans and home equity
loans are estimated using current market comparable information for
securitizable mortgages, adjusting for credit and other relevant
characteristics. The fair value of performing commercial real estate
construction, permanent financing, consumer and commercial loans is estimated by
discounting the cash flows using interest rates that consider the current credit
and interest rate risk inherent in the loans and current economic and lending
conditions.
The fair value of nonperforming loans is estimated by discounting
management's current estimate of future cash flows using a rate estimated to be
commensurate with the risks involved.
DEPOSITS
The fair values for deposits subject to immediate withdrawal such as
interest and non-interest bearing checking, passbook savings, and money market
deposit accounts, are equal to the amounts payable on demand at the reporting
date. The carrying amounts for variable-rate certificates of deposit and other
time deposits approximate their fair value at the reporting date. Fair values
for fixed-rate certificates of deposit are estimated by discounting future cash
flows using interest rates currently offered on time deposits with similar
remaining maturities.
BORROWINGS
The carrying amounts of short-term borrowings under repurchase agreements,
short-term FHLB Seattle advances and other short-term borrowings approximate
their fair values due to the relatively short period of time between the
origination of the instruments and their expected payment. The fair value of
advances under lines of credit approximates their carrying value because such
advances bear variable rates of interest. The fair value of long-term FHLB
Seattle advances and other long-term borrowings is
F-36
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
23. FAIR VALUES OF FINANCIAL INSTRUMENTS: (CONTINUED)
estimated using discounted cash flow analyses based on Sterling's current
incremental borrowing rates for similar types of borrowing arrangements with
similar remaining terms.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1999 1998
----------------------- -----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents................... $ 96,604 $ 96,604 $ 97,106 $ 97,106
Investments and MBS:
Available for sale........................ 494,483 494,483 566,372 566,372
Held to maturity.......................... 11,247 11,230 20,033 20,355
Loans held for sale......................... 985 985 15,581 15,581
Loans receivable, net....................... 1,787,771 1,766,193 1,468,534 1,465,298
Accrued interest receivable................. 16,720 16,720 14,938 14,938
Financial liabilities:
Non-maturity deposits....................... 700,676 700,676 730,468 730,468
Deposits with stated maturities............. 916,692 916,598 814,957 822,950
Borrowings.................................. 780,018 771,483 611,854 619,882
Accrued interest payable.................... 7,539 7,539 5,639 5,639
</TABLE>
The fair value estimates above do not include the value of residential
mortgage loan servicing rights on Sterling's residential loan servicing
portfolio which totaled approximately $205.5 million and $211.0 million at
December 31, 1999 and 1998, respectively. The gross fair value of these rights
is estimated to be approximately $2.6 million and $2.5 million at December 31,
1999 and 1998, respectively. The carrying amount of these servicing rights was
approximately $222,000 and $18,000 at December 31, 1999 and 1998, respectively.
24. RELATED-PARTY TRANSACTIONS:
One of Sterling's directors is a principal in the law firm that provides
legal services to Sterling. During the years ended December 31, 1999, 1998 and
1997, Sterling incurred legal fees of approximately $976,000, $766,000 and
$794,000, respectively, related to services provided by this firm.
25. PARENT COMPANY-ONLY FINANCIAL INFORMATION:
Sterling Financial Corporation became the holding company for Sterling
Savings Bank on November 1, 1992. The following Sterling Financial Corporation
parent company-only financial information should be read in conjunction with the
other notes to consolidated financial statements. The accounting policies for
the parent company-only financial statements are the same as those used in the
presentation of the consolidated financial statements other than the parent
company-only financial statements account for the parent company's investments
in its subsidiaries under the equity method.
F-37
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
25. PARENT COMPANY-ONLY FINANCIAL INFORMATION: (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................. $ 3,172 $ 1,626
Investments in subsidiaries:
Sterling Savings Bank................................... 211,184 206,008
Tri-Cities Mortgage Company............................. 1,847 1,246
Sterling Capital Trust I................................ 1,237 1,237
Income taxes receivable from subsidiaries................. 6,175 1,598
Federal income taxes receivable........................... 1,888 2,772
Other assets.............................................. 3,660 3,123
-------- --------
Total assets.......................................... $229,163 $217,610
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Accrued expenses payable.................................. $ 272 $ 23
Advances under line of credit............................. 40,000 40,000
8.75% Subordinated Notes Due 2000......................... -- 17,240
Floating Rate Notes Due 2006.............................. 30,000 --
Junior Subordinated Debentures of Sterling................ 41,237 41,237
Other liabilities......................................... 15 93
Shareholders' equity...................................... 117,639 119,017
-------- --------
Total liabilities and shareholders' equity............ $229,163 $217,610
======== ========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Interest income........................................... $ 150 $ 219 $ 975
Interest expense.......................................... (9,228) (7,281) (4,682)
------- ------- -------
Net interest expense................................ (9,078) (7,062) (3,707)
Equity in net earnings of subsidiary...................... 19,133 11,583 12,987
Miscellaneous income, net................................. -- 57 --
Provision for losses on real estate owned................. (200) -- --
Operating expenses........................................ (729) (1,319) (822)
------- ------- -------
Income before income taxes................................ 9,126 3,259 8,458
Deferred income tax benefit............................... 3,693 2,964 1,761
------- ------- -------
Net income.......................................... $12,819 $ 6,223 $10,219
======= ======= =======
</TABLE>
F-38
<PAGE>
STERLING FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
25. PARENT COMPANY-ONLY FINANCIAL INFORMATION: (CONTINUED)
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
1999 1998 1997
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $12,819 $ 6,223 $10,219
Adjustments to reconcile net income to net cash used in
operating activities.................................. (22,078) (14,413) (15,068)
------- ------- -------
Net cash used in operating activities................. (9,259) (8,190) (4,849)
------- ------- -------
Cash flows from investing activities:
Investments in subsidiaries, net........................ (10,566) (45,278) (30,076)
Dividends from subsidiary............................... 9,580 8,088 6,078
------- ------- -------
Net cash used in investing activities................... (986) (37,190) (23,998)
------- ------- -------
Cash flows from financing activities:
Repayment of note payable and other borrowings.......... (22,240) (15,000) --
Proceeds from line of credit and other borrowings....... 35,000 40,000 40,000
Proceeds from exercise of stock options, net of
repurchases........................................... 144 382 56
Payments to redeem preferred stock and fractional
shares................................................ -- (4) (126)
Cash dividends on preferred stock....................... -- -- (940)
Deferred financing costs................................ (1,113) -- (1,810)
Other, net.............................................. -- 58 --
------- ------- -------
Net cash provided by financing activities............. 11,791 25,436 37,180
------- ------- -------
Net change in cash and cash equivalents................... 1,546 (19,944) 8,333
Cash and cash equivalents, beginning of year.............. 1,626 21,570 13,237
------- ------- -------
Cash and cash equivalents, end of year.................... $ 3,172 $ 1,626 $21,570
======= ======= =======
</TABLE>
Federal law prohibits Sterling Financial Corporation from borrowing from its
subsidiary savings association unless the loans are collateralized by specified
assets and are generally limited to 10% of the subsidiary savings association's
capital and surplus.
During the years ended December 31, 1999 and 1998, Sterling purchased
$10.0 million and $45.0 million of Sterling Savings Bank common and preferred
stock, respectively.
Current income taxes are allocated to Sterling and its subsidiaries as if
they were separate taxpayers.
The payment of dividends to Sterling Financial Corporation by its savings
association subsidiary is subject to various federal and state regulatory
limitations. Under current regulations, at December 31, 1999, the savings
association subsidiary could have declared approximately $3.6 million of
aggregate dividends in addition to amounts previously paid.
F-39
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Exhibit 3.3
BYLAWS
OF
STERLING FINANCIAL CORPORATION
(Amended and Restated as of May 24, 1999)
ARTICLE I
Offices
The principal office of Sterling Financial Corporation (the
"Corporation") in the State of Washington shall be located at 111 North Wall
Street, Spokane, Washington 99201. The Corporation may have such other offices,
within or without the State of Washington, as the Board of Directors may
designate or as the business of the Corporation may require from time to time.
ARTICLE II
Shareholders
SECTION 2.1 ANNUAL MEETINGS. The annual meeting of the Shareholders
shall be held on the fourth Tuesday in the month of April each year beginning
with the year 1997, at the hour of 10:00 a.m., or at such other date or time as
may be determined by the Board of Directors. The meeting shall be for the
purpose of electing Directors and the transaction of such other business as may
come before the meeting. If the day fixed for the annual meeting falls on a
legal holiday in the State of Washington, and if the Board of Directors has not
designated some other day in the month of April for such meeting, such meeting
shall be held at the same hour and place on the next succeeding business day.
The failure to hold an annual meeting at the time stated in these Bylaws shall
not affect the validity of any corporate action. If the election of Directors is
not held on the day designated herein for any annual meeting of the
Shareholders, or at any adjournment thereof, the Board of Directors shall cause
the election to be held at a meeting of the Shareholders as soon thereafter as
may be convenient.
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SECTION 2.2 SPECIAL MEETINGS. Special meetings of the Shareholders may
be called by the Chairman or by the Board of Directors, and shall be called by
the Chairman at the request of holders of not less than ten percent of all
outstanding shares of the Corporation entitled to vote on any issue proposed to
be considered at the meeting, provided such meeting is requested and conducted
in accordance with these Bylaws and the Washington Business Corporation Act.
SECTION 2.3 PLACE OF MEETINGS. The Board of Directors may designate any
place, either within or without the State of Washington, as the place of meeting
for any annual meeting or for any special meeting of the Shareholders. If no
such designation is made, the place of meeting shall be the principal offices of
the Corporation in the State of Washington.
SECTION 2.4 NOTICE OF MEETINGS. Written notice of an annual or special
meeting of the Shareholders stating the place, day, and hour of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called, shall be given by the Secretary, or persons authorized to call the
meeting, to each Shareholder of record entitled to vote at the meeting, in
accordance with the Washington Business Corporation Act.
SECTION 2.5 WAIVER OF NOTICE. Notice of the time, place and purpose of
any meeting may be waived in writing (either before or after such meeting) and
will be waived by any Shareholder by attendance of the Shareholder in person or
by proxy, unless the Shareholder at the beginning of the meeting objects to
holding the meeting or transacting business at the meeting. Any Shareholder
waiving notice of a meeting shall be bound by the proceedings of the meeting in
all respects as if due notice thereof had been given.
SECTION 2.6 RECORD DATE. For the purpose of determining Shareholders
entitled to notice of or to vote at any meeting of Shareholders, or any
adjournment thereof, or Shareholders entitled to receive payment of any
dividend, or to make a determination of Shareholders for any other proper
purpose, the Board of Directors may fix in advance a record date for any such
determination of Shareholders, in accordance with the Washington Business
Corporation Act. If no record date is
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fixed for the determination of Shareholders entitled to notice of or to vote at
a meeting of Shareholders, or to receive payment of a dividend, the day before
the date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of Shareholders.
When a determination of Shareholders entitled to vote at any meeting of
Shareholders has been made as provided in this Section, the determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned more than one hundred
twenty (120) days after the date fixed for the original meeting.
SECTION 2.7 VOTING LISTS. After fixing a record date for a
Shareholders' meeting, the Corporation shall prepare an alphabetical list of the
names of all Shareholders as of the record date who are entitled to notice of
the Shareholders' meeting. The list shall be prepared and may be inspected in
accordance with the Washington Business Corporation Act.
SECTION 2.8 QUORUM AND ADJOURNED MEETINGS. Unless the Articles of
Incorporation or applicable law provide otherwise, a majority of the outstanding
shares of the Corporation entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of Shareholders. Once a share is
represented at a meeting, other than to object to holding the meeting or
transacting business, it is deemed to be present for the remainder of the
meeting and any adjournment thereof unless a new record date is set or is
required to be set for the adjourned meeting. A majority of the shares
represented at a meeting may adjourn the meeting from time to time without
further notice. At such reconvened meeting or meetings, any business may be
transacted which might have been transacted at the adjourned meeting.
SECTION 2.9 PROXIES. At all meetings of Shareholders, a Shareholder may
vote by proxy executed in writing by the Shareholder or by the Shareholder's
duly authorized attorney in fact. Such proxy shall be filed with the Secretary
of the Corporation before or at the commencement of meetings. No proxy shall be
valid after eleven (11) months from the date of its execution, unless
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otherwise provided in the proxy. No proxy may be effectively revoked until
written notice of such revocation has been given to the Secretary of the
Corporation.
SECTION 2.10 VOTING OF SHARES. Each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of Shareholders, except as may be otherwise provided by statute or in
the Articles of Incorporation of the Corporation.
SECTION 2.11 ACCEPTANCE OF VOTES. If the name signed on a vote,
consent, waiver or proxy appointment does not correspond to the name of a
Shareholder of the Corporation, the Corporation may accept the vote, consent,
waiver or proxy appointment and give effect to it as the act of the Shareholder
if: (i) the Shareholder is an entity and the name signed purports to be that of
an officer, partner or agent of the entity; (ii) the name signed purports to be
that of an administrator, executor, guardian or conservator representing the
Shareholder; (iii) the name signed purports to be that of a receiver or trustee
in bankruptcy of the Shareholder; (iv) the name signed purports to be that of a
pledgee, beneficial owner or attorney-in-fact of the Shareholder; or (v) two or
more persons are the Shareholder as co-tenants or fiduciaries and the name
signed purports to be the name of at least one of the co-owners and the person
signing appears to be acting on behalf of all co-owners.
ARTICLE III
Board of Directors
SECTION 3.1 GENERAL POWERS. The business and affairs of the Corporation
shall be managed by its Board of Directors.
SECTION 3.2 NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
of the Corporation shall consist of nine (9) Directors. The number of Directors
may be increased or decreased from time to time by amendment to, or in the
manner provided in these Bylaws. No decrease, however, shall have the effect of
shortening the term of any incumbent Director unless such Director resigns,
dies, or is removed in accordance with the provisions of these Bylaws. The
Directors shall be
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classified into three classes and the terms of Directors shall be staggered as
set forth in the Articles of Incorporation. In all cases, Directors shall serve
until their successors are duly elected and qualified or until their earlier
resignation, removal from office or death. Directors need not be residents of
the State of Washington or Shareholders of the Corporation.
SECTION 3.3 ANNUAL MEETINGS. Annual meetings of the Board of Directors
shall be held without other notice immediately after the annual meeting of
Shareholders or at such other date, time or place as may be fixed by the
Chairman. Regular meetings of the Board of Directors shall be held at such place
and on such day and hour as may from time to time be fixed by the Chairman or
the Board of Directors. No other notice of regular meetings of the Board of
Directors shall be necessary.
SECTION 3.4 SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman or any two Directors. The person or
persons authorized to call special meetings of the Board of Directors may fix
any place, either within or without the State of Washington, as the place for
holding any special meeting of the Board of Directors.
SECTION 3.5 NOTICE. Notice of any special meeting shall be given at
least three (3) days prior to the date set for such meeting by either oral or
written notice. Any Director may waive notice of any meeting. The attendance of
a Director at a meeting shall constitute a waiver of notice of such meeting,
except where a Director attends a meeting for the express purpose of objecting
to the transaction of any business because the meeting is not lawfully called or
convened. Unless otherwise required by law, neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the Board
of Directors need be specified in the notice or waiver of notice of such
meeting.
SECTION 3.6 QUORUM. A majority of the number of Directors shall
constitute a quorum for the transaction of business at any meeting of the Board
of Directors. If less than a majority shall attend a meeting, a majority of the
Directors present may adjourn the meeting from time to time without further
notice and a quorum present at such adjourned meeting may transact business.
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SECTION 3.7 MANNER OF ACTING. The act of the majority of the Directors
present at a meeting at which a quorum is present shall be the act of the Board
of Directors.
SECTION 3.8 VACANCIES. Any vacancy occurring in the Board of Directors
may be filled by the affirmative vote of a majority of the remaining Directors.
A Director elected to fill a vacancy shall be elected for the unexpired term of
his predecessor in office.
SECTION 3.9 COMPENSATION. By resolution of the Board of Directors, each
Director may be paid his expenses, if any, of attendance at each meeting of the
Board of Directors and at each meeting of a committee of the Board of Directors.
Each Director may, by resolution of the Board of Directors, participate in any
benefit plan established by the Corporation pursuant to the terms thereof, and
may be paid a stated salary as Director, a fixed sum for attendance at each such
meeting, or both. No such payment shall preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor.
SECTION 3.10 PRESUMPTION OF ASSENT. A Director of the Corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless his dissent shall be entered in the minutes of the meeting, or unless he
shall file his written dissent to such action with the person acting as the
secretary of the meeting before the adjournment thereof, or shall forward such
dissent by registered mail to the Secretary of the Corporation immediately after
the adjournment of the meeting. Such right to dissent shall not apply to a
Director who voted in favor of such action.
SECTION 3.11 ACTION OF THE BOARD WITHOUT A MEETING. Any action
permitted or required to be taken at a meeting of the Board of Directors may be
taken without a meeting if one or more written consents setting forth the action
so taken, shall be signed, either before or after the action taken, by all the
Directors. Action taken by written consent is effective when the last Director
signs the consent, unless the consent specifies a later effective date.
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SECTION 3.12 WAIVER OF NOTICE. Notice of the time, place and purpose of
any meeting may be waived in writing (either before or after such meeting) and
will be waived by any Director by attendance of the Director in person or by
proxy, unless the Director at the beginning of the meeting objects to holding
the meeting or transacting business at the meeting. Any Director waiving notice
of a meeting shall be bound by the proceedings of the meeting in all respects as
if due notice thereof had been given.
SECTION 3.13 AUDIT COMMITTEE. The Board of Directors shall elect an
Audit Committee of not less than three members, none of whom shall be employed
by the Corporation. The Audit Committee shall have such responsibilities as
required by law or regulation or as determined necessary or appropriate in the
judgment of the Board or the Chairperson of the Committee, including but not
limited to ensuring the independence of the Corporation's internal audit
functions.
SECTION 3.14 OTHER BOARD COMMITTEES. The Board of Directors may by
resolution designate from its members such other committees as the Board in its
discretion may determine, each of which must have two (2) or more members. All
committees of the Board shall be governed by the same rules regarding meetings,
action without meetings, notice, waiver of notice, and quorum and voting
requirements as those applied to the Board of Directors, except that unless
otherwise specified in the Bylaws or the resolution creating the committee,
notice of the date, time and place of the meeting may be given only one (1) day
prior to the date set for the meeting. To the extent provided in such
resolutions, each such committee shall have and may exercise the authority of
the Board of Directors, except as limited by applicable law.
SECTION 3.15 RESIGNATION. Any Director may resign at any time by
delivering written notice to the Chairman, the Secretary, or the registered
office of the Corporation, or by giving oral notice at any meeting of the
Directors or Shareholders. Any such resignation shall take effect at any
subsequent time specified therein, or if the time is not specified, upon
delivery thereof and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
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ARTICLE IV
Officers
SECTION 4.1 NUMBER. The Officers of the Corporation shall be a Chairman
of the Board and Chief Executive Officer, a President and Chief Operating
Officer, one or more Senior Vice Presidents, and such other Officers as may be
may be elected or appointed by the Board of Directors. Any two or more offices
may be held by the same persons.
SECTION 4.2 ELECTION AND TERM OF OFFICE. The Officers of the
Corporation shall be elected by the Board of Directors and shall serve until the
Officer's death, resignation, removal in the manner hereinafter provided, or
until the next annual meeting of the Board of Directors and until the
appointment and qualification of their successors.
SECTION 4.3 REMOVAL. Any Officer or agent may be removed by the Board
of Directors whenever in its judgment the best interests of the Corporation will
be served thereby, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an Officer
or agent shall not of itself create contract rights.
SECTION 4.4 CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER. The
Chairman of the Board and Chief Executive Officer (the "Chairman") subject to
the authority of the Board of Directors, shall preside at meetings of
Shareholders and Directors and, together with the President, shall have general
supervision and control over the business and affairs of the Corporation. The
Chairman may sign any and all documents, deeds, mortgages, bonds, contracts,
leases, or other instruments in the ordinary course of business, may sign
certificates representing shares of stock of the Corporation with the Secretary
or Assistant Secretary of the Corporation and may sign any documents which the
Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these Bylaws to some other Officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed; and in general
may perform all duties which are normally incident to the office of Chairman and
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such other duties, authority, and responsibilities as may be prescribed by the
Board of Directors from time to time. In the absence of the Chairman, the duties
specified herein shall be assumed by the President and in their absence such
duties shall be assumed by a person designated by the Chairman or the Board of
Directors.
SECTION 4.5 PRESIDENT AND CHIEF OPERATING OFFICER. The President and
Chief Operating Officer (the "President"), together with the Chairman, shall
have general supervision and control over the business and affairs of the
Corporation subject to the authority of the Chairman and the Board of Directors.
The President may sign any and all documents, mortgages, bonds, contracts,
leases, or other instruments in the ordinary course of business, may sign
certificates representing shares of stock of the Corporation with the Secretary
or Assistant Secretary of the Corporation, and may sign any documents which the
Board of Directors has authorized to be executed, except in cases where the
signing and execution thereof shall be expressly delegated by the Board of
Directors or by these Bylaws to some other Officer or agent of the Corporation,
or shall be required by law to be otherwise signed or executed; and in general
shall perform all duties incident to the office of President and such other
duties, authority, and responsibilities as may be prescribed by the Chairman or
the Board of Directors from time to time. In addition, the President shall
assume the duties of the Chairman to the extent specified in the foregoing
Section.
SECTION 4.6 THE SECRETARY. The Secretary shall: (a) keep the minutes of
the proceedings of the Shareholders and of the Board of Directors in one or more
books provided for that purpose; (b) see that all notices are duly given in
accordance with the provisions of these Bylaws or as required by law; (c) be
custodian of the corporate records and of the seal (if any) of the Corporation
and see that the seal, if any, of the Corporation is affixed to all documents
the execution of which on behalf of the Corporation under its seal is duly
authorized; (d) sign certificates representing shares of stock of the
Corporation, or contracts, deeds or mortgages the issuance or execution of which
shall have been authorized by of the Board of Directors; (e) have general charge
of the stock transfer books of the Corporation subject to the authority
delegated to a transfer agent or registrar if appointed; and (f) in general
perform all duties incident to the office of Secretary and such other duties as
from time
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to time may be assigned to the Secretary by the Chairman, the President or by
the Board of Directors. In the absence of the Secretary, the powers and duties
of the Secretary shall devolve upon an Assistant Secretary or such person as
shall be designated by the Secretary or the Chairman.
SECTION 4.7 SENIOR VICE PRESIDENTS AND OTHER OFFICERS. The Senior Vice
Presidents and other Officers shall perform such duties as may be assigned to
them by the Chairman or the President
SECTION 4.8 COMBINING OFFICES. An Officer whom the Board of Directors
elects or has previously elected to hold one office may be elected by the Board
of Directors to hold another office, with or without resigning from the previous
office, as the Board of Directors shall determine upon a recommendation of the
Chairman.
ARTICLE V
Certificates for Shares and Their Transfer
SECTION 5.1 ISSUANCE OF SHARES. Shares of the Corporation shall be
issued only when authorized by the Board of Directors, which authorization shall
include the consideration to be received for each share.
SECTION 5.2 CERTIFICATES FOR SHARES. Certificates representing shares
of the Corporation shall be in such form as shall be determined by the Board of
Directors. Such certificates shall be signed by the Chairman, the President and
by the Secretary or an Assistant Secretary, and may be sealed with the corporate
seal, if any, or a facsimile thereof. The signatures of such Officers upon a
certificate may be facsimiles if the certificate is manually countersigned by a
transfer agent, or registered by a registrar, other than the Corporation itself
or one of its employees. If any Officer who signed a certificate, either
manually or in facsimile, no longer holds such office when the certificate is
issued, the certificate is nevertheless valid. All certificates for shares shall
be consecutively numbered or otherwise identified. The name and address of the
person to whom the shares represented thereby are issued, with the number of
shares and date of issue, shall be entered on the
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stock transfer books of the Corporation. All certificates surrendered to the
Corporation for transfer shall be canceled and no new certificate shall be
issued until the former certificate for a like number of shares shall have been
surrendered and canceled, except that in case of a lost, destroyed or mutilated
certificate a new one may be issued therefor upon such terms and indemnity to
the Corporation as the Board of Directors may prescribe. All certificates shall
bear such legend or legends as prescribed by the Board of Directors or these
Bylaws.
SECTION 5.3 TRANSFER OF SHARES. Transfer of shares of the Corporation
shall be made only on the stock transfer books of the Corporation by the holder
of record thereof or by his legal representative who shall furnish proper
evidence of authority to transfer, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary of the Corporation,
or with its transfer agent, if any, on surrender for cancellation of the
certificate for such shares. The person in whose name shares stand on the books
of the Corporation shall be deemed by the Corporation to be the owner thereof
for all purposes.
ARTICLE VI
Fiscal Year
The fiscal year of the Corporation shall begin on the first day of
January and end on the 31st day of December in each year beginning with the year
1997.
ARTICLE VII
Dividends
The Board of Directors may from time to time declare and the
Corporation may pay dividends on its outstanding shares in the manner, and upon
the terms and conditions provided by law and the Articles of Incorporation of
the Corporation.
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ARTICLE VIII
Corporate Seal
This Corporation need not have a corporate seal. If the Board of
Directors adopts a corporate seal, it shall be circular in form and shall have
inscribed thereon the name of the Corporation, the state of incorporation and
the words "Corporate Seal."
ARTICLE IX
Director Liability
A Director of the Corporation shall not be personally liable to the
Corporation or its Shareholders for monetary damages arising from any conduct as
a Director, except for liability of the Director for (i) acts or omissions that
involve intentional misconduct or a knowing violation of law by the Director,
(ii) conduct which violates RCW 23B.08.310 of the Washington Business
Corporation Act, pertaining to unpermitted distributions to Shareholders, or
(iii) any transaction from which the Director will personally receive a benefit
in money, property or services to which the Director is not legally entitled.
Should the Washington Business Corporation Act be amended to authorize corporate
action further eliminating or limiting the personal liability of Directors, then
the liability of a Director of the Corporation shall be so amended. Any repeal
or modification of the foregoing paragraph by the Shareholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
ARTICLE X
Indemnification of Directors, Officers, and Others
To the fullest extent allowed by the Articles of Incorporation of the
Corporation and applicable laws existing from time to time, any person may, and
Directors and Officers shall, be indemnified or reimbursed by the Corporation
for reasonable expenses (including attorneys' fees) actually incurred in
connection with any threatened, pending or completed action, suit or proceeding,
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whether civil, criminal, administrative or investigative to which he/she or they
shall be made a party or threatened to be made a party by reason of his/her
being or having been a Director, Officer, employee or agent of the Corporation
or of any firm, corporation, employee benefit plan or other organization which
he/she served in any such capacity at the request of the Corporation; PROVIDED,
HOWEVER, that no such person shall be so indemnified or reimbursed (1) in
relation to any matter in such action, suit or proceeding as to which he/she
shall finally be adjudged to have been guilty or liable for gross negligence,
willful misconduct or criminal acts in the performance of his/her duties to the
Corporation; or (2) in relation to any matter in such action, suit or proceeding
which has been made the subject of a compromise settlement except with the
approval of (a) a court of competent jurisdiction; (b) the holders of record of
a majority of the outstanding shares of the Corporation, or (c) the Board of
Directors, acting by vote of a majority of Directors not parties to the same or
substantially the same action, suit or proceeding, whether or not such a
majority constitutes a quorum. The foregoing right of indemnification or
reimbursement shall not be exclusive of other rights to which such person,
his/her heirs, executors or administrators may be entitled as a matter of law.
Those persons indemnified hereunder shall be deemed to include the heirs, legal
representatives, executors and administrators of such person. The Corporation
shall pay the expenses (including attorneys' fees) incurred in defending a civil
or criminal action, suit or proceeding. The Director, Officer, employee or agent
must repay such amount, however, if it shall ultimately be determined that he is
not entitled to be indemnified by the Corporation as authorized in this section.
ARTICLE XI
Books and Records
The Corporation shall keep correct and complete books and records of
account, stock transfer books, minutes of the proceedings of its shareholders
and the Board of Directors and such other records as may be necessary or
advisable.
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ARTICLE XII
Voting of Shares of Another Corporation
Shares of another Corporation held by this Corporation may be voted by
the Chairman or by the President unless the Directors by resolution shall
designate some other person to vote the shares.
ARTICLE XIII
Amendment of Bylaws
These Bylaws may be amended, altered, or repealed and new Bylaws may be
adopted by the affirmative vote of a majority of the full Board of Directors,
subject to the Washington Business Corporation Act.
The undersigned, being the Secretary of the Corporation, hereby
certifies that these Bylaws are the Restated Bylaws of Sterling Financial
Corporation adopted by resolution of the Board of Directors on May 24, 1999.
DATED this 24th day of May, 1999.
/s/ NED M. BARNES
-------------------------------------
NED M. BARNES, Secretary
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Exhibit 10.5
STERLING FINANCIAL CORPORATION
AMENDED AND RESTATED
DEFERRED COMPENSATION PLAN
Sterling Financial Corporation, a Washington corporation ("Sterling"),
hereby adopts, amends and restates the Deferred Compensation Plan which was
initially adopted by Sterling Savings Bank effective July 1, 1984. This Amended
and Restated Plan is effective as of the 1st day of July, 1999.
I. PURPOSE
Sterling continues this unfunded deferred compensation plan to provide
retirement benefits to a select group of management personnel in order to
attract, retain, and encourage the efforts of the executives who have rendered
valuable services to Sterling. All rights hereunder shall be construed and
governed by the laws of the State of Washington. This Plan is intended to be a
"top hat" plan for purposes of ERISA and it limits participation to certain key
executives designated by Sterling, or any related entity adopting the Plan.
II. DEFINITIONS
2.01 ACCOUNT means the account maintained for each Participant under
Section 4.01.
2.02 BENEFICIARY means a person designated under Section 4.04 by a
Participant to receive plan benefits in the event of the Participant's death.
2.03 BOARD means the Board of Directors of Sterling.
2.04 CHANGE IN CONTROL. A change in control shall be deemed to have
occurred at such times as:
(a) any "person" (as that term is used in Section 13(d) and
14(d) of the Exchange Act) (other than Sterling or an affiliate of
Sterling) becomes, directly or indirectly, the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of securities
representing 25% or more of the then outstanding securities of
Sterling;
(b) during any period of two (2) consecutive years or less,
individuals who at the beginning of such period constituted the Board
of Sterling cease, for any reason, to constitute at least a majority of
the Board, unless the election or nomination for election of each new
member of the Board was approved by a vote of at least two-thirds of
the members of the Board then still in office who were members of the
Board at the beginning of the period;
(c) the Shareholders of Sterling approve (i) a plan of
complete liquidation of Sterling; or (ii) an agreement for the sale or
disposition of all or substantially all of Sterling's assets; or (iii)
a merger or consolidation of Sterling with any other corporation, other
than
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a merger or consolidation which would result in the voting securities
of Sterling outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity), at least 50% of the
combined voting power of the voting securities of Sterling (or such
surviving entity) outstanding immediately after such merger or
consolidation.
2.05 COMMITTEE means the Personnel Committee appointed by the Board,
which shall consist solely of outside directors who are not employees of
Sterling.
2.06 DEFERRED COMPENSATION POOL. The total annual dollar amount, if
any, to be credited to Participants' Accounts by Sterling as determined by the
Board, after recommendation by the Committee.
2.07 DISABILITY means disability as determined under Sterling's
long-term or permanent disability insurance policy then in effect.
2.08 FISCAL YEAR means Sterling's fiscal year which currently ends
December 31.
2.09 KEY EMPLOYEE means an employee of Sterling who is a member of a
select group of management or a highly compensated employee.
2.10 NORMAL RETIREMENT AGE means the last day of the calendar month in
which the Participant attains sixty years of age.
2.11 PARTICIPANT means an employee of Sterling who participates in the
benefits of the Plan, or a person who so participated at the time of his
retirement, death, disability or resignation and who retains or whose
Beneficiary obtains benefits under the Plan in accordance with its terms.
2.12 PLAN means this Deferred Compensation Plan of Sterling.
2.13 PLAN YEAR means the twelve-month period corresponding to the
Fiscal Year.
2.14 SUBSIDIARY means any corporation (whether now or hereafter
existing) which constitutes a "subsidiary" of Sterling within the meaning of
Section 424(f) of the Internal Revenue Code of 1986, as amended.
2.15 STERLING means Sterling Financial Corporation, a Washington
corporation, including its Subsidiaries which participate in the Plan (each a
"Participating Corporation"), and each of their successors.
2.16 YEAR OF SERVICE means each fiscal year in which the Participant
works at least one thousand hours for Sterling.
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III. PARTICIPATION AND METHOD OF ALLOCATION OF FUNDS
3.01 ELIGIBILITY. Pursuant to Section 7.02, the Committee shall specify
which Key Employees shall be entitled to participate in the Deferred
Compensation Pool for any given Plan Year. The Committee's selection shall be
based on objective criteria uniformly applied which may change from time to time
in the discretion of the Committee. The Committee's determination of eligibility
for any given Plan Year does not guarantee eligibility in subsequent Plan Years.
In the event any Key Employee is no longer designated as an active Participant
eligible for further allocations under the Plan, such Key Employee shall become
an inactive Participant and retain all other rights described under this Plan,
until the Key Employee again becomes an active Participant.
3.02 ALLOCATION. The method by which the Deferred Compensation Pool
shall be allocated or credited for the benefit of each Participant for the
following Plan Year shall be determined annually by the Committee, in its
absolute discretion.
IV. BENEFITS
4.01 PARTICIPANT ACCOUNTS. The Committee shall cause an Account to be
kept in the name of each Participant and each Beneficiary of a deceased
Participant, which shall reflect the value of the deferred benefit and the
vested amount thereof allocated to each Participant or Beneficiary under the
Plan. Effective as of the date the Board approves the Deferred Compensation Pool
for such Plan Year, or on such other date as the Committee may determine, each
Participant's Account shall be credited with that portion, if any, of the
Deferred Compensation Pool as has been allocated by the Committee pursuant to
Section 7.02. The balance of each Account shall be equal to the sum of all
contributions to the Account plus the net sum of all investment gains and losses
attributable to the Account (the "Balance"). Benefits payable from an Account
shall be determined by subtracting the sum of unvested contributions to the
Account from the Account Balance as of the date of determination. For example,
if on a date of determination contributions to a Participant's account equal
$10,000, the contributions are 10% vested and the net amount of investment gains
and losses is $1,200, an eligible Participant will be entitled to a benefit of
$2,200. Conversely, if the same Account has incurred net investment losses of
$2,000, no benefit will be payable as of the date of determination. In such an
event, however, no Participant shall be required to reimburse Sterling for net
investment losses.
4.02 NATURE OF PARTICIPANT'S INTEREST. Until and except to the extent
that funds from a Participant's Account are actually distributed to such
Participant (or Beneficiary), the interest therein of each Participant (or
Beneficiary) is contingent and subject to forfeiture. Title to and beneficial
ownership of all assets in the Plan, whether cash, certificates of deposit, or
other deposits (including certificates of or deposits in Sterling Savings Bank),
and whether in stocks (including Sterling stock), bonds, mutual funds, life
insurance, or other investments, shall, at all times, remain general assets of
Sterling subject to the claims of its general creditors. Neither Sterling nor
this Plan gives any ownership interest in any assets of Sterling to a
Participant or Beneficiary. The rights of each Participant, any Beneficiary, or
any person claiming through a Participant shall be solely those of an unsecured
general creditor of Sterling.
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4.03 NO TRUST. Sterling's obligation under this Plan shall be an
unfunded and unsecured promise to pay. Sterling shall not be obligated under any
circumstances to fund its financial obligations under this Plan prior to the
date any benefits become payable pursuant to the terms of the Plan, and neither
Sterling, members of the Board or Committee, nor any other person shall be
deemed to be a trustee of any amounts to be paid under the Plan. Benefits
payable under the Plan shall be reflected on the account records of Sterling but
shall not be construed to create or require the creation of a trust, custodial,
or escrow account. No Participant or Beneficiary shall have any right, title, or
interest whatever in or to any investment reserves, accounts, or funds that
Sterling may purchase, establish, or accumulate to aid in providing benefits
under the Plan. Nothing contained in the Plan, and no action taken pursuant to
its provisions, shall create a trust or fiduciary relationship of any kind
between the Employer and a Participant, Beneficiary, or any other person.
4.04 DESIGNATION OF BENEFICIARY. Each Participant shall have the right
to designate Beneficiaries who are to succeed to his contingent right to receive
future payments hereunder in the event of his death. In case of a failure to
designate, or in the case of the death of a designated Beneficiary without a
designated successor, distributions shall be made to a Participant's surviving
spouse or, if none, to his estate. No designation of Beneficiary or change
thereof shall be valid unless in writing, signed by the Participant, dated and
filed with the Committee.
V. DISTRIBUTIONS
5.01 FORM OF BENEFITS. The Committee, in its absolute discretion, will
determine the method of distribution, which may be a lump sum or otherwise, and
the manner of distribution of the Participant's Account, but in no event shall
installment distributions be made over a period of more than ten years.
Installment distributions shall be made in substantially equal monthly,
quarterly or annual installments and the Account shall receive its proportionate
share of net earnings until it has been fully paid. Such installments may be
accelerated at any time by the Committee. Upon the Request of a Participant or
Beneficiary, which Request the Committee may in its absolute discretion grant or
deny, payments to a Participant or Beneficiary may be made in whole or in part
through distributions in kind of Plan assets, if any, such as stock.
5.02 COMMENCEMENT OF PAYMENTS. Commencement of distribution in each
case may be deferred by the Committee, but not beyond one year after the
termination, retirement, disability or death of a Participant. In case of a
Participant's death before distributions are completed, the balance may be
distributed in a lump sum or on an installment basis, as the Committee may
determine. The Committee shall have the right, in its absolute discretion, to
accelerate any payments being made hereunder.
VI. AMENDMENT AND TERMINATION
6.01 AMENDMENT. Sterling reserves the right to amend the Plan at any
time by resolution of its Board of Directors. The Board of Directors will
determine the effective date of the amendment. The amendment may not deprive any
Participant or Beneficiary of any benefit or right he or she would have been
entitled to prior to the effective date of the amendment.
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6.02 TERMINATION. Sterling also may terminate the Plan at any time by
resolution of the Board of Directors. In the event of Plan termination, each
Participant's Account balance shall become 100% vested and nonforfeitable. A
Participant's Account will be distributed in accordance with the provisions of
Article V.
VII. COMMITTEE
7.01 DISCRETION. The Committee shall, with respect to the general
management of the Plan, have the final and absolute right to reconcile any
inconsistency in the Plan, to interpret and construe the provisions of the Plan
in all particulars in such manner and to such extent as it deems proper and to
take all action and make all decisions and determinations necessary under the
Plan or in connection with its administration, interpretation and application.
Any interpretation or construction placed upon any term or provision of the Plan
by the Committee, any decision of the Committee with regard to the rights of a
Participant, former Participant or Beneficiary or any other person, any
reconciliation of an inconsistency in the Plan made by the Committee and any
other action, determination or decision whatsoever taken by the Committee, shall
be final, conclusive and binding upon all persons or parties interested or
concerned in the Plan.
7.02 MEETINGS. The Committee shall meet no later than forty-five (45)
days following the end of each Plan Year. At such meeting the Committee, in
addition to addressing any other matters which may come to its attention, shall:
(a) Identify the Key Employees who will be eligible to participate in
the Plan during the current Plan Year;
(b) Arrive at a recommendation as to the amount of the Deferred
Compensation Pool for the current Plan Year, which recommendation shall be
communicated to the Board; and
(c) Determine the method by which the Deferred Compensation Pool shall
be allocated to the Participants for that Plan Year.
VIII. INVESTMENTS
8.01 ELECTION. Sterling participates in a retirement plan qualified
under Section 401 of the Internal Revenue Code of 1986, as amended (the "401(k)
Plan"). Participants under the 401(k) Plan have the conditional right to direct
the investment and re-investment of assets comprising such participants'
individual accounts. Subject to the conditions set forth herein and in the
401(k) Plan, Participants hereunder shall have the right to direct the
investment and re-investment of amounts in their individual Accounts at the
times and in the manner specified in the 401(k) Plan.
8.02 STATEMENT OF ACCOUNT. Within one hundred twenty (120) days after
the close of each Plan Year, a statement shall be given by the Committee to each
Participant setting forth, with regard to such Plan Year, the balance standing
to the credit of his or her Account, the net earnings and losses, and the vested
amount of the Account.
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8.03 NO LIABILITY. Neither Sterling, the Committee, the Board nor any
affiliate of any of them shall be liable for any investment or other losses or
damages arising out of or relating to a Participant's Account including a
Participant's election under Section 8.01.
IX. VESTING
9.01 VESTING SCHEDULE. Notwithstanding any contrary provision in this
Plan, all amounts in an Account shall become 100% vested: (a) upon a Change of
Control; (b) when the related Participant attains Normal Retirement Age; (c)
when the employment of the related Participant terminates due to death or
disability; or (d) upon termination of the Plan. Prior to such an event, each
contribution to an Account shall vest in accordance with the schedule below:
<TABLE>
<CAPTION>
YEARS OF SERVICE WITH STERLING INCLUDING THE PLAN
YEAR IN WHICH SUCH CONTRIBUTION IS CREDITED TO PERCENT OF EACH CONTRIBUTION
PARTICIPANT'S ACCOUNT VESTED
--------------------------------------------------- ----------------------------
<S> <C>
1 Year of Service but less than 2 10%
2 Years of Service but less than 3 20%
3 Years of Service but less than 4 30%
4 Years of Service but less than 5 40%
5 Years of Service but less than 6 50%
6 Years of Service but less than 7 60%
7 Years of Service but less than 8 70%
8 Years of Service but less than 9 80%
9 Years of Service but less than 10 90%
10 Years of Service 100%
</TABLE>
9.02 ACCELERATION. As provided in Section 9.01(d) and notwithstanding
the foregoing schedule, after a Participant has reached the age of 51, the
vesting of all new contributions to the Participant's Account shall be
accelerated, pro rata, so that such vesting will reach 100% in the year the
Participant attains the age of 60. For example, if $1,000 is contributed to a
Participant's Account when the Participant is 55 years of age, such contribution
will vest at 20% per year so that it will be 100% vested in the year the
Participant attains the age of 60. After a Participant has attained the age of
60, all new contributions to the Participant's Account shall immediately vest at
100%.
X. MISCELLANEOUS
10.01 EMPLOYMENT NOT GUARANTEED. Nothing contained in the Plan nor any
action taken hereunder shall be construed as a contract of employment or as
giving any Participant any right to be retained in the employ of Sterling, or
any related entity.
10.02 NO LIABILITY. Neither Sterling, the Committee, the Board nor any
affiliate of any of them shall be liable for any action or determination made in
good faith with respect to this Plan.
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10.03 NO GUARANTEE OF TAX CONSEQUENCES. Neither Sterling nor the
Committee makes any commitment or guarantee that any federal or state tax
treatment will apply or be available to any Participant in the Plan.
10.04 SEVERABILITY. In the event any provision of this Plan shall be
held illegal, invalid or unenforceable for any reason, such provision shall be
fully severable, but shall not affect the remaining provisions of the Plan, and
the Plan shall be construed and enforced as if the illegal, invalid or
unenforceable provision had never been included herein.
10.05 BENEFITS NOT ASSIGNABLE. Neither the Participant nor Beneficiary
may assign, transfer, anticipate or pledge the benefits under this Agreement,
nor may they be subject to attachment or garnishment of creditors. Any attempt
to assign, transfer or pledge a Participant's benefits under this Agreement is
void.
10.06 BENEFIT. This Agreement is binding upon and inures to Sterling,
its successors and assigns and the Participant, his heirs and legal
representatives.
10.07 GENDER USAGE. The use of the masculine includes the feminine
gender for all purposes of this Agreement.
10.08 NOTICE. Any notices required or permitted to be given under this
Plan shall be sufficient if in writing and hand delivered or sent by certified
or registered mail, return receipt requested, to the following addresses:
To Sterling: Sterling Financial Corporation
111 North Wall Street
Spokane, WA 99201
To Participant: AT THE PARTICIPANT'S ADDRESS ON FILE WITH STERLING
or at such other addresses as Sterling or a Participant may designate, from time
to time, in writing.
STERLING FINANCIAL CORPORATION
By______________________________________
Title___________________________________
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<PAGE>
STERLING FINANCIAL CORPORATION
AMENDED AND RESTATED
DEFERRED COMPENSATION PLAN
PARTICIPATION AGREEMENT
FOR PARTICIPATION BY SUBSIDIARIES
(PLAN SECTION 2.15)
The undersigned Corporation, by executing this Participation Agreement,
elects to become or to continue as a Participating Corporation in the Plan as if
the Participating Corporation were a signatory to the Plan. The Participating
Corporation accepts, and agrees to be bound by, all of the provisions of the
Plan.
DATED this ____ day of _______________, 1999.
-----------------------------------------
NAME OF PARTICIPATING CORPORATION
-----------------------------------------
Signed:
---------------------------------
Participating Employer's EIN:
-----------
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<PAGE>
Exhibit 10.7
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of July 1, 1999, by and between
STERLING FINANCIAL CORPORATION ("Sterling") and HAROLD B. GILKEY (the
"Executive"),
W I T N E S S E T H :
WHEREAS, the Executive is Chairman of the Board and Chief Executive
Officer of Sterling and Sterling desires to retain the Executive and the
Executive is willing to continue to serve in such capacities on the terms and
conditions herein set forth; and
WHEREAS, the parties desire to enter into this Agreement, which is
intended to amend and supersede an existing Employment Agreement, as amended
(the "Prior Agreement");
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. EMPLOYMENT. Sterling agrees to continue to employ the Executive, and
the Executive agrees to continue to be employed by Sterling, upon the terms and
conditions hereinafter provided until June 30, 2004 (the "Term").
2. POSITION AND DUTIES. During the Term, Sterling agrees to employ the
Executive to serve as the Chairman of the Board and Chief Executive Officer of
Sterling and the Executive will have such powers and duties as are commensurate
with such position and as may be conferred upon him by the Board of Directors of
Sterling (the "Board"). During the Term, and except for illness or incapacity
and reasonable vacation periods of no more than four weeks in any fiscal year
(or such other period as shall be consistent with Sterling's policies for other
key executives), the Executive shall devote all of his business time, attention,
skill and efforts exclusively to the business and affairs of Sterling and its
subsidiaries and affiliates, provided, however, that the Executive may serve on
other boards as a director or trustee if such service does not interfere with
his ability to discharge his duties and responsibilities to Sterling.
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3. COMPENSATION. For all services rendered by the Executive in any
capacity required hereunder during the Term, including, without limitation,
services as an executive, officer, director, or member of any committee of
Sterling, or any subsidiary, affiliate or division thereof, the Executive shall
be compensated as follows:
(a) Base Salary. Sterling shall pay the Executive a fixed minimum
salary of $280,000 per annum (such amount or such higher annual amount
as is being paid from time to time pursuant to the terms hereof being
referred to as the "Base Salary"). The Base Salary shall be subject to
such periodic review (which shall occur at least annually) and such
periodic increases as the Board shall deem appropriate in accordance
with Sterling's customary procedures and practices regarding the
salaries of senior officers. The Base Salary shall be payable in
accordance with the customary payroll practices of Sterling, but in no
event less frequently than monthly.
(b) Bonus Awards. The Executive shall be entitled to receive an
incentive bonus (the "Incentive Bonus") for each fiscal year during
the Term. The Incentive Bonus shall be paid within thirty days of the
end of each fiscal year. The Incentive Bonus shall be a minimum of ten
percent of the Executive's Base Salary and the Executive shall be
awarded a minimum of 5,000 incentive stock options under Sterling's
stock option or incentive plan(s) then in effect. The Incentive Bonus
may be increased, upon the recommendation of the Personnel Committee
and the approval of the Board, to a maximum of one hundred percent of
the Executive's Base Salary depending, among other factors, upon the
attainment of performance goals set by the Board for the Executive and
for Sterling. At the Executive's sole election, made before the
beginning of each calendar year in which an Incentive Bonus is paid,
up to one hundred percent of such Incentive Bonus shall be paid into
Sterling's deferred compensation plan then in effect.
(c) Stock Options. The Executive shall be eligible to receive grants
under Sterling's stock option or incentive plan(s) then in effect
subject to the terms and conditions of such plan(s).
(d) Perquisites. Sterling also will furnish the Executive during each
fiscal year of the Term, without cost to him except any associated tax
liability, with reasonable (i) payment for
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tax preparation and financial planning; (ii) payment for an annual
physical examination of the Executive by a physician selected by the
Executive; (iii) reimbursement for club membership fees or dues; and
(iv) payment of an automobile allowance, it being understood that the
club membership fees or dues and the automobile allowance shall be
primarily to further the business of Sterling.
(e) Split Dollar Life Insurance Plan. Sterling shall continue in force,
for the benefit of the Executive, a split-dollar life insurance plan
which is, or is substantially similar to, the split dollar life
insurance plan which is currently in effect.
(f) Goodwill Lawsuit. Sterling is the plaintiff in a lawsuit in the
United States Court of Federal Claims (the "Goodwill Lawsuit").
Notwithstanding anything to the contrary herein, if and when a
settlement or judgment amount is received by Sterling or its
affiliates, successors or assigns, as a result of the Goodwill Lawsuit
or a related lawsuit, the Executive shall be paid three percent of the
gross amount received, in recognition of the Executive's substantial
contribution in bringing about the settlement or judgment. The parties
recognize and agree that any material decisions regarding the
management, settlement or dismissal of the Goodwill Lawsuit will be
made by the Board. This provision shall survive any termination of
this Agreement.
(g) Additional Benefits. Except as modified by this Agreement, the
Executive shall be entitled to participate in all compensation or
employee benefit plans or programs, and to receive all benefits,
perquisites and emoluments, for which any salaried employees of
Sterling are eligible under any plan or program now or hereafter
established and maintained by Sterling for senior officers, to the
fullest extent permissible under the general terms and provisions of
such plans or programs and in accordance with the provisions thereof,
including group hospitalization, health, dental care, life or other
insurance, tax-qualified pension, savings, thrift, 401(k) and
profit-sharing plans, termination pay programs, sick-leave plans,
travel or accident insurance, salary continuation plans, disability
insurance, automobile allowance or automobile lease plans, and
executive contingent compensation plans, including, without
limitation, stock option or incentive plan(s) then in effect. In
addition, the Executive shall be entitled to receive such fees as are
established and paid from time to
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<PAGE>
time to members of the Board generally for their attendance at
Sterling Board and Committee meetings.
4. BUSINESS EXPENSES. It is understood that for the Executive to
successfully perform his duties hereunder so as to produce the greatest economic
return to Sterling, it is necessary for the Executive to entertain persons
having an existing or prospective business relationship with Sterling and to
attend seminars, conventions and continuing education programs. Sterling,
therefore, shall pay directly or reimburse the Executive for all reasonable
travel, entertainment or other expenses incurred by the Executive (and his
spouse where there is a legitimate business reason for his spouse to accompany
him) in connection with the performance of his duties and obligations under this
Agreement, subject to the Executive's presentation of appropriate vouchers in
accordance with such procedures as Sterling may from time to time establish for
senior officers and to preserve any deductions for Federal income taxation
purposes to which Sterling may be entitled.
5. EFFECT OF TERMINATION OF EMPLOYMENT OTHER THAN IN CONNECTION WITH A
CHANGE IN CONTROL.
(a) Certain Terminations. In the event the Executive's employment
hereunder terminates due to either Permanent Disability, a Without
Cause Termination or a Constructive Discharge, Sterling shall, as
severance pay continue, subject to the provisions of Section 7 below,
to pay the Executive's Base Salary as in effect at the time of such
termination until (A) the expiration of the Term or (B) for a
three-year period beginning on the date of Termination of Employment,
whichever is longer (the "Severance Period"), provided, that in the
case of Permanent Disability, such payments shall be offset by any
amounts otherwise paid to the Executive under Sterling's disability
program generally available to other employees. In addition, earned but
unpaid Base Salary and Incentive Bonus amounts and amounts (whether
vested or not) held for the Executive's account in Sterling's deferred
compensation plan then in effect as of the date of Termination of
Employment shall be payable in full. Group hospitalization, health,
dental care, life or other insurance, including travel or accident
insurance, disability insurance and the perquisites set forth in
Section 3(d) shall continue through the end of the Severance Period.
All stock
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<PAGE>
options and other incentive awards held by the Executive shall become
fully exercisable during the Severance Period.
(b) Other Terminations. In the event that the Executive's employment
hereunder terminates due to a Termination for Cause or the Executive's
death, or the Executive voluntarily terminates employment with
Sterling for reasons other than a Constructive Discharge or Permanent
Disability, earned but unpaid Base Salary and Incentive Bonus amounts
as of the date of Termination of Employment shall be payable in full.
However, no other payments shall be made, or benefits provided, by
Sterling under this Agreement except for stock options and other
incentive awards held by the Executive pursuant to the terms of the
grant(s) thereof, vested benefits payable under the terms of the
deferred compensation plan then in effect, and any other benefits
which the Executive is entitled to receive under the terms of employee
benefit programs maintained by Sterling or its affiliates for its
employees.
(c) Definitions. For purposes of this Agreement, the following terms
have the following meanings:
(i) The term "Termination for Cause" means, to the maximum
extent permitted by applicable law, a termination of the
Executive's employment by Sterling because the Executive has
(A) breached this Agreement or, having received reasonable
notice of and an opportunity to cure any deficiency, failed to
perform his duties under applicable law or the Bylaws of
Sterling, and such breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness; (B) been
convicted of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent
jurisdiction, in effect after exhaustion or lapse of all right
of appeal; or (C) violated the provisions of Section 7 herein.
(ii) The term "Constructive Discharge" means a termination of
the Executive's employment by the Executive due to a failure
of Sterling or its successors, without the prior consent of
the Executive, to fulfill the obligations under this Agreement
in any material respect, including (A) any failure of the
shareholders of Sterling to elect or reelect, or of Sterling
to appoint or reappoint, the Executive as a member of the
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<PAGE>
Board, or to the offices of Chairman of the Board and Chief
Executive Officer of Sterling, or (B) any other material
adverse change by Sterling in the functions, duties or
responsibilities of the Executive's position with Sterling.
(iii) The term "Without Cause Termination" means a termination
of the Executive's employment by Sterling, for a reason other
than Permanent Disability, retirement, expiration of the Term,
or Termination for Cause. (iv) The term "Permanent Disability"
means the inability of the Executive to work for a period of
six full calendar months during any twelve consecutive
calendar months due to illness or injury of a physical or
mental nature. Any questions as to the existence of the
Disability of Executive as to which Executive and Sterling
cannot agree shall be determined in writing by a qualified
independent physician mutually acceptable to Executive and
Sterling. If Executive and Sterling cannot agree as to a
qualified independent physician, each shall appoint such a
physician and those two physicians shall select a third who
shall make such determination in writing. The determination of
Disability made in writing to Sterling and Executive shall be
final and conclusive for all purposes under this Agreement.
6. EFFECT OF TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE IN
CONTROL. (a) Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
(i) The term "Change in Control" means any of the
following events:
(A) the acquisition by any person, (as such term is
used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934) other than Sterling, its
affiliates or benefit plans sponsored by Sterling,
or its affiliates of ownership of stock possessing
twenty percent or more of the total voting power of
Sterling;
(B) the approval by the shareholders of Sterling of
(1) any consolidation, merger, or other similar type
of transaction involving Sterling in which the
holders of voting stock of Sterling immediately
before the consolidation, merger, or similar
transaction, will not own fifty percent or more of
the
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<PAGE>
voting shares of the continuing or surviving
corporation immediately after such consolidation,
merger, or similar transaction, or (2) any sale,
lease, exchange or other transfer (in one
transaction or a series of related transactions) of
all or substantially all of the assets of Sterling;
or
(C) a change of twenty-five percent (rounded to the
next whole person) in the membership of the Board of
Directors of Sterling or any successor within a
twelve-month period, unless the election or
nomination for election by shareholders of each new
director within such period is approved by the vote
of eighty-five percent (rounded to the next whole
person) of the directors then still in office who
were in office at the beginning of the said
twelve-month period.
(ii) "Separation Period" means the three-year period beginning
on the date of the Executive's Termination of Employment.
(iii) "Termination of Employment" shall mean the termination
of the Executive's actual employment with Sterling.
(iv) "Termination Upon a Change of Control" shall mean a
Termination of Employment upon or within eighteen months after
a Change of Control.
(b) Payments for Termination upon a Change of Control. Within twenty
days of the Executive's Termination upon a Change in Control, Sterling
shall pay to the Executive in a single payment in cash and/or provide
to the Executive, as applicable, the following:
(i) the Executive's earned but unpaid Base Salary and
Incentive Bonus amounts and amounts (whether vested or not)
held for the Executive's account in the deferred compensation
plan then in effect as of the date of Termination of
Employment;
(ii) the benefits, if any, to which the Executive is entitled
as a former employee under the employee benefit programs and
compensation plans and programs maintained for the benefit of
Sterling's officers and employees;
(iii) continued group hospitalization, health, dental care,
life or other insurance, including travel or accident
insurance and disability insurance, and the perquisites set
forth in Section 3(d) throughout the Separation Period, with
coverage equivalent to
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the coverage to which the Executive would have been entitled
had the Executive continued working for Sterling during the
Separation Period at the highest annual rate of Base Salary
achieved during the Executive's period of actual employment
with Sterling, provided, however, that the Executive may upon
written notice elect to receive the present value of such
coverage in cash in a lump sum, computed using a discount rate
of 6% per year compounded monthly.
(iv) an amount equal to the Base Salary and Incentive Bonus
amounts the Executive would have earned if the Executive had
continued working for Sterling during the Separation Period,
at the highest annual rate of Base Salary, and the highest
annual Incentive Bonus achieved during the Executive's period
of actual employment with Sterling; and
(v) an amount equal to Sterling's contributions to which the
Executive would have been entitled under Sterling's 401(k)
Plan if the Executive had continued working for Sterling
during the Separation Period at the highest annual rate of
Base Salary achieved during the Executive's period of actual
employment with Sterling, and the Executive making the maximum
amount of employee contributions as are permitted under such
plans.
(c) Options and Stock Appreciation Rights. All stock options and other
incentive awards held by the Executive shall become fully exercisable
during the Separation Period.
(d) Adjustment for Taxes. In the event that either Sterling's
independent public accountants or the Internal Revenue Service
determines that any payment, coverage, benefit or benefit acceleration
provided to Executive, whether specifically provided for in this
Agreement or otherwise, is subject to the excise tax imposed by Section
4999 (or any successor provision) ("Section 4999") of the Internal
Revenue Code of 1986, as amended (the "Code"), Sterling, within 30 days
thereafter, shall pay to Executive, in addition to any other payment,
coverage or benefit due and owing hereunder, an amount determined by
multiplying the rate of excise tax then imposed by Section 4999 by the
amount of the "excess parachute payment" received by Executive
(determined without regard to any payments made to the Executive
pursuant to this paragraph) and dividing the product so obtained by the
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amount obtained by subtracting the aggregate local, state and Federal
income tax rate applicable to the receipt by Executive of the "excess
parachute payment" (taking into account the deductibility for Federal
income tax purposes of the payment of state and local income taxes
thereon) from the amount obtained by subtracting from 1.00 the rate of
excise tax then imposed by Section 4999 of the Code, it being
Sterling's intention that the Executive's net after tax position be
identical to that which would have obtained had Sections 280G and 4999
not been part of the Code.
(e) In the event that, on or after the occurrence of a Change in
Control, Sterling fails to make any payment or provide any coverage to
Executive arising out of or relating in any way to this Agreement or to
the Executive's employment by Sterling (collectively, "Employment
Rights"), then Sterling shall pay to the Executive and reimburse the
Executive for the Executive's full costs (including, without
limitation, the fees and expenses of the Executive's attorneys and
court and related costs) of enforcing the Executive's Employment
Rights. In addition, if the enforceability of this Agreement or the
payment of any benefit to the Executive hereunder is disputed by
Sterling on or after the occurrence of a Change in Control, then the
Term of this Agreement shall be extended for the period of the dispute
in the event of a final judicial determination that the Executive is
entitled to at least fifty percent (in dollar amount) of the benefits
which he claimed from, and which were disputed by, Sterling.
7. OTHER DUTIES OF EXECUTIVE DURING AND AFTER TERM.
(a) Confidential Information. The Executive recognizes and acknowledges
that all information pertaining to the affairs, business, clients, or
customers of Sterling or any of its subsidiaries or affiliates (any or
all of such entities being hereinafter referred to as the "Business"),
as such information may exist from time to time, other than information
that Sterling has previously made publicly available or which is in the
public domain, is confidential information and is a unique and valuable
asset of the Business, access to and knowledge of which are essential
to the performance of the Executive's duties under this Agreement. The
Executive shall not, through the end of the Term, except to the extent
reasonably necessary in the performance of his duties under this
Agreement, divulge to any
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person, firm, association, corporation, or governmental agency, any
information concerning the affairs, business, clients, or customers of
the Business (except such information as is required by law to be
divulged to a government agency or pursuant to lawful process), or make
use of any such information for his own purposes or for the benefit of
any person, firm, association or corporation (except the Business) and
shall use his reasonable best efforts to prevent the disclosure of any
such information by others. All records, memoranda, letters, books,
papers, reports, accountings, experience or other data, and other
records and documents relating to the Business, whether made by the
Executive or otherwise coming into his possession, are confidential
information and are, shall be, and shall remain the property of the
Business. No copies thereof shall be made which are not retained by the
Business, and the Executive agrees, on termination of his employment or
on demand of Sterling, to deliver the same to Sterling.
(b) Non-Compete. Through the end of the Term, the Executive shall not
without express prior written approval of Sterling's Board, directly or
indirectly own or hold any proprietary interest in, or be employed by
or receive remuneration from, any corporation, partnership, sole
proprietorship or other entity engaged in competition with Sterling or
any of its affiliates (a "Competitor"), other than severance-type or
retirement-type benefits from entities constituting prior employers of
the Executive. The Executive also agrees that he will not solicit for
the account of any Competitor, any customer or client of Sterling or
its affiliates, or, in the event of the Executive's Termination of
Employment, any entity or individual that was such a customer or client
during the 12-month period immediately preceding the Executive's
Termination of Employment. The Executive also agrees not to act on
behalf of any Competitor to interfere with the relationship between
Sterling or its affiliates and their employees. In addition, if the
Executive obtains non-competitive employment during the Term, for such
period the Executive agrees not to solicit employees of Sterling or its
affiliates for new employment without the prior written consent of
Sterling. For purposes of this section, (i) the term "proprietary
interest" means legal or equitable ownership, whether through
stockholdings or otherwise, of greater than a 20% equity interest in a
business, firm or entity, and (ii) an entity shall be considered to be
"engaged in competition" if such entity
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is, or is a holding company for, a bank, savings and loan association
or other financial services business engaged in a business that
competes with Sterling in the States of Washington, Idaho, Montana or
Oregon.
(c) Remedies. Sterling's obligation to make payments, deliver shares of
stock or provide for any benefits under this Agreement (except to the
extent vested or exercisable) shall cease upon a violation of the
preceding provisions of this section. The Executive's Agreement as set
forth in this Section 7 shall: (a) survive the termination of this
Agreement, and continue throughout the duration of the Executive's
employment with Sterling, except as amended or modified by written
agreement of the parties; and (b) survive the Executive's Termination
of Employment with Sterling.
(d) Modification of Terms. If any restriction in this Section 7 is
finally adjudicated by a court of competent jurisdiction to exceed the
time, geographic, service or other limitations permitted by applicable
law in any jurisdiction, such restriction may be modified and narrowed
by a court to the maximum time, geographic, service or other
limitations permitted by applicable law so as to preserve and protect
Sterling's legitimate business interest, without negating or impairing
any other restrictions or undertaking set forth in the Agreement. (e)
Change in Control. The provisions of this Section 7 shall be
inapplicable if the Executive's Termination of Employment is a
"Termination upon a Change in Control" as defined in Section 6 of this
Agreement.
8. WITHHOLDING TAXES. Sterling may directly or indirectly withhold from
any payments made under this Agreement all Federal, state, city or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.
9. CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement
shall preclude Sterling from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertakings of Sterling
hereunder. Upon such a consolidation, merger or transfer of assets and
assumption, the term "Sterling" as used herein shall mean such other corporation
and this Agreement shall continue in full force and effect.
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10. NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be given in writing and shall be deemed to
have been duly given if delivered or mailed, postage prepaid, by same day or
overnight mail as follows:
(a) To Sterling:
111 Wall Street
Spokane, WA 99201
Attention: Chief Financial Officer
With a copy to:
Witherspoon, Kelley, Davenport & Toole, P.S.
422 West Riverside, Ste 1100
Spokane, WA 99201-0390
(b) To the Executive:
At his regular office and to
South 3924 Eastgate Court
Spokane, WA 99203
or to such other address as either party shall from time-to-time specify in
writing to the other.
11. NO ATTACHMENT. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect; provided, however, that nothing in this Section
11 shall preclude the assumption of such rights by executors, administrators or
other legal representatives of the Executive or his estate and their assigning
any rights hereunder to the person or persons entitled thereto.
12. NO MITIGATION. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by other employment
or otherwise, except as provided herein.
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13. SOURCE OF PAYMENT. All payments provided for under this Agreement
shall be paid in cash from the general funds of Sterling. To the extent that any
person acquires a right to receive payments from Sterling hereunder, such right,
without prejudice to rights which employees may have, shall be no greater than
the right of an unsecured creditor of Sterling.
14. FURTHER ACTION. Sterling shall perform all acts and execute all
documents as may be reasonably necessary to effect performance of this Agreement
by Sterling. In the event Sterling's Deferred Compensation Plan, the 1992 Stock
Option Plan and the 1998 Long-Term Incentive Plan or plans which are
substantially similar to such plans are not maintained, Sterling shall provide
the Executive with compensation which is substantially similar in financial
effect to the compensation which would otherwise have been provided through such
plans. References herein to deferred compensation, stock option or incentive
plan(s) and any other benefit plans shall be deemed to include all successor
plans. Nothing in this Agreement shall be deemed to be a modification of
Sterling's stock option or incentive plans.
15. SEVERABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances is finally adjudicated by a court
of competent jurisdiction to be invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall not affect any other provision or
application and shall not invalidate or render unenforceable such provision or
application in any other jurisdiction.
16. CONTENTS OF AGREEMENT. This Agreement supersedes all prior
agreements and sets forth the entire understanding among the parties hereto with
respect to the subject matter hereof and cannot be changed, modified, extended
or terminated except upon written amendment approved by the parties hereto.
17. GOVERNING LAW. The validity, interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the State of
Washington, and the Executive consents to the jurisdiction of the state and
federal courts of Washington in any dispute arising under this Agreement.
18. SURVIVAL OF BENEFITS. Any section of this Agreement which provides
a benefit to the Executive and which does not expressly provide for its
termination upon the expiration of the Term shall survive the expiration of the
Term and the obligation to provide benefits to the Executive as
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set forth in such Section shall remain binding upon Sterling until such time as
the Executive's employment relationship with Sterling is terminated and the
benefits provided under such Section are paid in full to the Executive. Anything
to the contrary herein notwithstanding, following any Termination of Employment
including retirement, Sterling shall continue to provide medical, dental,
disability and travel accident insurance coverages for the Executive and his
spouse to the same extent as if the Executive had continued in Sterling's
employ, provided that such coverages shall be offset by the receipt of any
alternate benefits under Medicare or similar programs.
19. REPRESENTATIONS. The Executive hereby represents and warrants that
he has the legal capacity to execute and perform this Agreement, that it is a
valid and binding agreement against him according to its terms, and that its
execution and performance by him does not and will not violate the terms of any
existing agreement or understanding to which the Executive is a party. In
addition, the Executive represents and warrants that he knows of no reason why
he is not physically capable of performing his obligations under this Agreement
in accordance with its terms.
20. MISCELLANEOUS. All section headings are for convenience only. This
Agreement may be executed in any number of counterparts, each of which when
executed shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
IN WITNESS WHEREOF, and intending to be legally bound, Sterling has
caused this Agreement to be executed by its duly authorized representatives and
the Executive has signed this Agreement, all as of the first date above written.
STERLING FINANCIAL CORPORATION
BY: /s/ Robert B. Larrabee
---------------------------
ROBERT B. LARRABEE
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ATTEST:
STERLING FINANCIAL CORPORATION
BY: /s/ Daniel G. Byrne
-----------------------------------
DANIEL G. BYRNE
Senior Vice President - Finance
/s/ Harold B. Gilkey
--------------------------------
HAROLD B. GILKEY
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Exhibit 10.8
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made effective as of July 1, 1999, by and between
STERLING FINANCIAL CORPORATION ("Sterling") and WILLIAM W. ZUPPE (the
"Executive"),
W I T N E S S E T H :
WHEREAS, the Executive is President and Chief Operating Officer of
Sterling and Sterling desires to retain the Executive and the Executive is
willing to continue to serve in such capacities on the terms and conditions
herein set forth; and
WHEREAS, the parties desire to enter into this Agreement, which is
intended to amend and supersede an existing Employment Agreement, as amended
(the "Prior Agreement");
NOW THEREFORE, in consideration of the mutual covenants herein
contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:
1. EMPLOYMENT. Sterling agrees to continue to employ the Executive, and
the Executive agrees to continue to be employed by Sterling, upon the terms and
conditions hereinafter provided until August 31, 2006 (the "Term").
2. POSITION AND DUTIES. During the Term, Sterling agrees to employ the
Executive to serve as the President and Chief Operating Officer of Sterling and
the Executive will have such powers and duties as are commensurate with such
position and as may be conferred upon him by the Board of Directors of Sterling
(the "Board"). During the Term, and except for illness or incapacity and
reasonable vacation periods of no more than four weeks in any fiscal year (or
such other period as shall be consistent with Sterling's policies for other key
executives), the Executive shall devote all of his business time, attention,
skill and efforts exclusively to the business and affairs of Sterling and its
subsidiaries and affiliates, provided, however, that the Executive may serve on
other boards as a director or trustee if such service does not interfere with
his ability to discharge his duties and responsibilities to Sterling.
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3. COMPENSATION. For all services rendered by the Executive in any
capacity required hereunder during the Term, including, without limitation,
services as an executive, officer, director, or member of any committee of
Sterling, or any subsidiary, affiliate or division thereof, the Executive shall
be compensated as follows:
(a) Base Salary. Sterling shall pay the Executive a fixed minimum
salary of $210,000 per annum (such amount or such higher annual amount
as is being paid from time to time pursuant to the terms hereof being
referred to as the "Base Salary"). The Base Salary shall be subject to
such periodic review (which shall occur at least annually) and such
periodic increases as the Board shall deem appropriate in accordance
with Sterling's customary procedures and practices regarding the
salaries of senior officers. The Base Salary shall be payable in
accordance with the customary payroll practices of Sterling, but in no
event less frequently than monthly.
(b) Bonus Awards. The Executive shall be entitled to receive an
incentive bonus (the "Incentive Bonus") for each fiscal year during the
Term. The Incentive Bonus shall be paid within thirty days of the end
of each fiscal year. The Incentive Bonus shall be a minimum of ten
percent of the Executive's Base Salary and the Executive shall be
awarded a minimum of 5,000 incentive stock options under Sterling's
stock option or incentive plan(s) then in effect. The Incentive Bonus
may be increased, upon the recommendation of the Personnel Committee
and the approval of the Board, to a maximum of one hundred percent of
the Executive's Base Salary depending, among other factors, upon the
attainment of performance goals set by the Board for the Executive and
for Sterling. At the Executive's sole election, made before the
beginning of each calendar year in which an Incentive Bonus is paid, up
to one hundred percent of such Incentive Bonus shall be paid into
Sterling's deferred compensation plan then in effect.
(c) Stock Options. The Executive shall be eligible to receive grants
under Sterling's stock option or incentive plan(s) then in effect
subject to the terms and conditions of such plan(s).
(d) Perquisites. Sterling also will furnish the Executive during each
fiscal year of the Term, without cost to him except any associated tax
liability, with reasonable (i) payment
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for tax preparation and financial planning; (ii) payment for an annual
physical examination of the Executive by a physician selected by the
Executive; (iii) reimbursement for club membership fees or dues; and
(iv) payment of an automobile allowance, it being understood that the
club membership fees or dues and the automobile allowance shall be
primarily to further the business of Sterling.
(e) Split Dollar Life Insurance Plan. Sterling shall continue in force,
for the benefit of the Executive, a split-dollar life insurance plan
which is, or is substantially similar to, the split dollar life
insurance plan which is currently in effect.
(f) Goodwill Lawsuit. Sterling is the plaintiff in a lawsuit in the
United States Court of Federal Claims (the "Goodwill Lawsuit").
Notwithstanding anything to the contrary herein, if and when a
settlement or judgment amount is received by Sterling or its
affiliates, successors or assigns, as a result of the Goodwill Lawsuit
or a related lawsuit, the Executive shall be paid two percent of the
gross amount received, in recognition of the Executive's substantial
contribution in bringing about the settlement or judgment. The parties
recognize and agree that any material decisions regarding the
management, settlement or dismissal of the Goodwill Lawsuit will be
made by the Board. This provision shall survive any termination of this
Agreement.
(g) Additional Benefits. Except as modified by this Agreement, the
Executive shall be entitled to participate in all compensation or
employee benefit plans or programs, and to receive all benefits,
perquisites and emoluments, for which any salaried employees of
Sterling are eligible under any plan or program now or hereafter
established and maintained by Sterling for senior officers, to the
fullest extent permissible under the general terms and provisions of
such plans or programs and in accordance with the provisions thereof,
including group hospitalization, health, dental care, life or other
insurance, tax-qualified pension, savings, thrift, 401(k) and
profit-sharing plans, termination pay programs, sick-leave plans,
travel or accident insurance, salary continuation plans, disability
insurance, automobile allowance or automobile lease plans, and
executive contingent compensation plans, including, without limitation,
stock option or incentive plan(s) then in effect. In addition, the
Executive shall be entitled to receive such fees as are established and
paid from
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time to time to members of the Board generally for their attendance at
Sterling Board and Committee meetings.
4. BUSINESS EXPENSES. It is understood that for the Executive to
successfully perform his duties hereunder so as to produce the greatest economic
return to Sterling, it is necessary for the Executive to entertain persons
having an existing or prospective business relationship with Sterling and to
attend seminars, conventions and continuing education programs. Sterling,
therefore, shall pay directly or reimburse the Executive for all reasonable
travel, entertainment or other expenses incurred by the Executive (and his
spouse where there is a legitimate business reason for his spouse to accompany
him) in connection with the performance of his duties and obligations under this
Agreement, subject to the Executive's presentation of appropriate vouchers in
accordance with such procedures as Sterling may from time to time establish for
senior officers and to preserve any deductions for Federal income taxation
purposes to which Sterling may be entitled.
5. EFFECT OF TERMINATION OF EMPLOYMENT OTHER THAN IN CONNECTION WITH A
CHANGE IN CONTROL.
(a) Certain Terminations. In the event the Executive's employment
hereunder terminates due to either Permanent Disability, a Without
Cause Termination or a Constructive Discharge, Sterling shall, as
severance pay continue, subject to the provisions of Section 7 below,
to pay the Executive's Base Salary as in effect at the time of such
termination until (A) the expiration of the Term or (B) for a
three-year period beginning on the date of Termination of Employment,
whichever is longer (the "Severance Period"), provided, that in the
case of Permanent Disability, such payments shall be offset by any
amounts otherwise paid to the Executive under Sterling's disability
program generally available to other employees. In addition, earned but
unpaid Base Salary and Incentive Bonus amounts and amounts (whether
vested or not) held for the Executive's account in Sterling's deferred
compensation plan then in effect as of the date of Termination of
Employment shall be payable in full. Group hospitalization, health,
dental care, life or other insurance, including travel or accident
insurance, disability insurance and the perquisites set forth in
Section 3(d) shall continue through the end of the Severance Period.
All stock options and other incentive awards held by the Executive
shall become fully exercisable during the Severance Period.
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(b) Other Terminations. In the event that the Executive's employment
hereunder terminates due to a Termination for Cause or the Executive's
death, or the Executive voluntarily terminates employment with Sterling
for reasons other than a Constructive Discharge or Permanent
Disability, earned but unpaid Base Salary and Incentive Bonus amounts
as of the date of Termination of Employment shall be payable in full.
However, no other payments shall be made, or benefits provided, by
Sterling under this Agreement except for stock options and other
incentive awards held by the Executive pursuant to the terms of the
grant(s) thereof, vested benefits payable under the terms of the
deferred compensation plan then in effect, and any other benefits which
the Executive is entitled to receive under the terms of employee
benefit programs maintained by Sterling or its affiliates for its
employees.
(c) Definitions. For purposes of this Agreement, the following terms
have the following meanings:
(i) The term "Termination for Cause" means, to the maximum
extent permitted by applicable law, a termination of the
Executive's employment by Sterling because the Executive has
(A) breached this Agreement or, having received reasonable
notice of and an opportunity to cure any deficiency, failed to
perform his duties under applicable law or the Bylaws of
Sterling, and such breach or failure to perform constitutes
self-dealing, willful misconduct or recklessness; (B) been
convicted of a felony, as evidenced by a binding and final
judgment, order or decree of a court of competent
jurisdiction, in effect after exhaustion or lapse of all right
of appeal; or (C) violated the provisions of Section 7 herein.
(ii) The term "Constructive Discharge" means a termination of
the Executive's employment by the Executive due to a failure
of Sterling or its successors, without the prior consent of
the Executive, to fulfill the obligations under this Agreement
in any material respect, including (A) any failure of the
shareholders of Sterling to elect or reelect, or of Sterling
to appoint or reappoint, the Executive as a member of the
Board, or to the offices of President and Chief Operating
Officer of Sterling, or (B)
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any other material adverse change by Sterling in the
functions, duties or responsibilities of the Executive's
position with Sterling.
(iii) The term "Without Cause Termination" means a
termination of the Executive's employment by Sterling,
for a reason other than Permanent Disability, retirement,
expiration of the Term, or Termination for Cause.
(iv) The term "Permanent Disability" means the inability of
the Executive to work for a period of six full calendar months
during any twelve consecutive calendar months due to illness
or injury of a physical or mental nature. Any questions as to
the existence of the Disability of Executive as to which
Executive and Sterling cannot agree shall be determined in
writing by a qualified independent physician mutually
acceptable to Executive and Sterling. If Executive and
Sterling cannot agree as to a qualified independent physician,
each shall appoint such a physician and those two physicians
shall select a third who shall make such determination in
writing. The determination of Disability made in writing to
Sterling and Executive shall be final and conclusive for all
purposes under this Agreement.
6. EFFECT OF TERMINATION OF EMPLOYMENT IN CONNECTION WITH A CHANGE IN
CONTROL.
(a) Definitions. For purposes of this Agreement, the following terms
shall have the following meanings:
(i) The term "Change in Control" means any of the following
events:
(A) the acquisition by any person, (as such term is
used in Section 13(d) and 14(d) of the Securities
Exchange Act of 1934) other than Sterling, its
affiliates or benefit plans sponsored by Sterling, or
its affiliates of ownership of stock possessing
twenty percent or more of the total voting power of
Sterling;
(B) the approval by the shareholders of Sterling of
(1) any consolidation, merger, or other similar type
of transaction involving Sterling in which the
holders of voting stock of Sterling immediately
before the consolidation, merger, or similar
transaction, will not own fifty percent or more of
the voting shares of the continuing or surviving
corporation immediately after
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such consolidation, merger, or similar transaction,
or (2) any sale, lease, exchange or other transfer
(in one transaction or a series of related
transactions) of all or substantially all of the
assets of Sterling; or
(C) a change of twenty-five percent (rounded to the
next whole person) in the membership of the Board of
Directors of Sterling or any successor within a
twelve-month period, unless the election or
nomination for election by shareholders of each new
director within such period is approved by the vote
of eighty-five percent (rounded to the next whole
person) of the directors then still in office who
were in office at the beginning of the said
twelve-month period.
(ii) "Separation Period" means the three-year period beginning
on the date of the Executive's Termination of Employment.
(iii) "Termination of Employment" shall mean the termination
of the Executive's actual employment with Sterling.
(iv) "Termination Upon a Change of Control" shall mean a
Termination of Employment upon or within eighteen months after
a Change of Control.
(b) Payments for Termination upon a Change of Control. Within twenty
days of the Executive's Termination upon a Change in Control, Sterling
shall pay to the Executive in a single payment in cash and/or provide
to the Executive, as applicable, the following:
(i) the Executive's earned but unpaid Base Salary and
Incentive Bonus amounts and amounts (whether vested or not)
held for the Executive's account in the deferred compensation
plan then in effect as of the date of Termination of
Employment;
(ii) the benefits, if any, to which the Executive is entitled
as a former employee under the employee benefit programs and
compensation plans and programs maintained for the benefit of
Sterling's officers and employees;
(iii) continued group hospitalization, health, dental care,
life or other insurance, including travel or accident
insurance and disability insurance, and the perquisites set
forth in Section 3(d) throughout the Separation Period, with
coverage equivalent to the coverage to which the Executive
would have been entitled had the Executive
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continued working for Sterling during the Separation Period at
the highest annual rate of Base Salary achieved during the
Executive's period of actual employment with Sterling,
provided, however, that the Executive may upon written notice
elect to receive the present value of such coverage in cash in
a lump sum, computed using a discount rate of 6% per year
compounded monthly.
(iv) an amount equal to the Base Salary and Incentive Bonus
amounts the Executive would have earned if the Executive had
continued working for Sterling during the Separation Period,
at the highest annual rate of Base Salary, and the highest
annual Incentive Bonus achieved during the Executive's period
of actual employment with Sterling; and
(v) an amount equal to Sterling's contributions to which the
Executive would have been entitled under Sterling's 401(k)
Plan if the Executive had continued working for Sterling
during the Separation Period at the highest annual rate of
Base Salary achieved during the Executive's period of actual
employment with Sterling, and the Executive making the maximum
amount of employee contributions as are permitted under such
plans.
(c) Options and Stock Appreciation Rights. All stock options and other
incentive awards held by the Executive shall become fully exercisable
during the Separation Period.
(d) Adjustment for Taxes. In the event that either Sterling's
independent public accountants or the Internal Revenue Service
determines that any payment, coverage, benefit or benefit acceleration
provided to Executive, whether specifically provided for in this
Agreement or otherwise, is subject to the excise tax imposed by Section
4999 (or any successor provision) ("Section 4999") of the Internal
Revenue Code of 1986, as amended (the "Code"), Sterling, within 30 days
thereafter, shall pay to Executive, in addition to any other payment,
coverage or benefit due and owing hereunder, an amount determined by
multiplying the rate of excise tax then imposed by Section 4999 by the
amount of the "excess parachute payment" received by Executive
(determined without regard to any payments made to the Executive
pursuant to this paragraph) and dividing the product so obtained by the
amount obtained by subtracting the aggregate local, state and Federal
income tax rate
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applicable to the receipt by Executive of the "excess parachute
payment" (taking into account the deductibility for Federal income tax
purposes of the payment of state and local income taxes thereon) from
the amount obtained by subtracting from 1.00 the rate of excise tax
then imposed by Section 4999 of the Code, it being Sterling's intention
that the Executive's net after tax position be identical to that which
would have obtained had Sections 280G and 4999 not been part of the
Code.
(e) In the event that, on or after the occurrence of a Change in
Control, Sterling fails to make any payment or provide any coverage to
Executive arising out of or relating in any way to this Agreement or to
the Executive's employment by Sterling (collectively, "Employment
Rights"), then Sterling shall pay to the Executive and reimburse the
Executive for the Executive's full costs (including, without
limitation, the fees and expenses of the Executive's attorneys and
court and related costs) of enforcing the Executive's Employment
Rights. In addition, if the enforceability of this Agreement or the
payment of any benefit to the Executive hereunder is disputed by
Sterling on or after the occurrence of a Change in Control, then the
Term of this Agreement shall be extended for the period of the dispute
in the event of a final judicial determination that the Executive is
entitled to at least fifty percent (in dollar amount) of the benefits
which he claimed from, and which were disputed by, Sterling.
7. OTHER DUTIES OF EXECUTIVE DURING AND AFTER TERM.
(a) Confidential Information. The Executive recognizes and acknowledges
that all information pertaining to the affairs, business, clients, or
customers of Sterling or any of its subsidiaries or affiliates (any or
all of such entities being hereinafter referred to as the "Business"),
as such information may exist from time to time, other than information
that Sterling has previously made publicly available or which is in the
public domain, is confidential information and is a unique and valuable
asset of the Business, access to and knowledge of which are essential
to the performance of the Executive's duties under this Agreement. The
Executive shall not, through the end of the Term, except to the extent
reasonably necessary in the performance of his duties under this
Agreement, divulge to any person, firm, association, corporation, or
governmental agency, any information concerning
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the affairs, business, clients, or customers of the Business (except
such information as is required by law to be divulged to a government
agency or pursuant to lawful process), or make use of any such
information for his own purposes or for the benefit of any person,
firm, association or corporation (except the Business) and shall use
his reasonable best efforts to prevent the disclosure of any such
information by others. All records, memoranda, letters, books, papers,
reports, accountings, experience or other data, and other records and
documents relating to the Business, whether made by the Executive or
otherwise coming into his possession, are confidential information and
are, shall be, and shall remain the property of the Business. No copies
thereof shall be made which are not retained by the Business, and the
Executive agrees, on termination of his employment or on demand of
Sterling, to deliver the same to Sterling.
(b) Non-Compete. Through the end of the Term, the Executive shall not
without express prior written approval of Sterling's Board, directly or
indirectly own or hold any proprietary interest in, or be employed by
or receive remuneration from, any corporation, partnership, sole
proprietorship or other entity engaged in competition with Sterling or
any of its affiliates (a "Competitor"), other than severance-type or
retirement-type benefits from entities constituting prior employers of
the Executive. The Executive also agrees that he will not solicit for
the account of any Competitor, any customer or client of Sterling or
its affiliates, or, in the event of the Executive's Termination of
Employment, any entity or individual that was such a customer or client
during the 12-month period immediately preceding the Executive's
Termination of Employment. The Executive also agrees not to act on
behalf of any Competitor to interfere with the relationship between
Sterling or its affiliates and their employees. In addition, if the
Executive obtains non-competitive employment during the Term, for such
period the Executive agrees not to solicit employees of Sterling or its
affiliates for new employment without the prior written consent of
Sterling. For purposes of this section, (i) the term "proprietary
interest" means legal or equitable ownership, whether through
stockholdings or otherwise, of greater than a 20% equity interest in a
business, firm or entity, and (ii) an entity shall be considered to be
"engaged in competition" if such entity is, or is a holding company
for, a bank, savings and loan association or other financial
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services business engaged in a business that competes with Sterling in
the States of Washington, Idaho, Montana or Oregon.
(c) Remedies. Sterling's obligation to make payments, deliver shares of
stock or provide for any benefits under this Agreement (except to the
extent vested or exercisable) shall cease upon a violation of the
preceding provisions of this section. The Executive's Agreement as set
forth in this Section 7 shall: (a) survive the termination of this
Agreement, and continue throughout the duration of the Executive's
employment with Sterling, except as amended or modified by written
agreement of the parties; and (b) survive the Executive's Termination
of Employment with Sterling.
(d) Modification of Terms. If any restriction in this Section 7 is
finally adjudicated by a court of competent jurisdiction to exceed the
time, geographic, service or other limitations permitted by applicable
law in any jurisdiction, such restriction may be modified and narrowed
by a court to the maximum time, geographic, service or other
limitations permitted by applicable law so as to preserve and protect
Sterling's legitimate business interest, without negating or impairing
any other restrictions or undertaking set forth in the Agreement.
(e) Change in Control. The provisions of this Section 7 shall be
inapplicable if the Executive's Termination of Employment is a
"Termination upon a Change in Control" as defined in Section 6 of this
Agreement.
8. WITHHOLDING TAXES. Sterling may directly or indirectly withhold from
any payments made under this Agreement all Federal, state, city or other taxes
as shall be required pursuant to any law or governmental regulation or ruling.
9. CONSOLIDATION, MERGER, OR SALE OF ASSETS. Nothing in this Agreement
shall preclude Sterling from consolidating or merging into or with, or
transferring all or substantially all of its assets to, another corporation
which assumes this Agreement and all obligations and undertakings of Sterling
hereunder. Upon such a consolidation, merger or transfer of assets and
assumption, the term "Sterling" as used herein shall mean such other corporation
and this Agreement shall continue in full force and effect.
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10. NOTICES. All notices, requests, demands and other communications
required or permitted hereunder shall be given in writing and shall be deemed to
have been duly given if delivered or mailed, postage prepaid, by same day or
overnight mail as follows:
(a) To Sterling:
111 Wall Street
Spokane, WA 99201
Attention: Chief Financial Officer
With a copy to:
Witherspoon, Kelley, Davenport & Toole, P.S.
422 West Riverside, Ste 1100
Spokane, WA 99201-0390
(b) To the Executive:
At his regular office and to
4404 South St. Andrews Lane
Spokane, WA 99223
or to such other address as either party shall from time-to-time specify in
writing to the other.
11. NO ATTACHMENT. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to execution, attachment, levy, or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect; provided, however, that nothing in this Section
11 shall preclude the assumption of such rights by executors, administrators or
other legal representatives of the Executive or his estate and their assigning
any rights hereunder to the person or persons entitled thereto.
12. NO MITIGATION. The Executive shall not be required to mitigate the
amount of any payment or benefit provided for in this Agreement by seeking other
employment or otherwise, nor shall the amount of any payment or benefit provided
for in this Agreement be reduced by any compensation earned by other employment
or otherwise, except as provided herein.
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13. SOURCE OF PAYMENT. All payments provided for under this Agreement
shall be paid in cash from the general funds of Sterling. To the extent that any
person acquires a right to receive payments from Sterling hereunder, such right,
without prejudice to rights which employees may have, shall be no greater than
the right of an unsecured creditor of Sterling.
14. FURTHER ACTION. Sterling shall perform all acts and execute all
documents as may be reasonably necessary to effect performance of this Agreement
by Sterling. In the event Sterling's Deferred Compensation Plan, the 1992 Stock
Option Plan and the 1998 Long-Term Incentive Plan or plans which are
substantially similar to such plans are not maintained, Sterling shall provide
the Executive with compensation which is substantially similar in financial
effect to the compensation which would otherwise have been provided through such
plans. References herein to deferred compensation, stock option or incentive
plan(s) and any other benefit plans shall be deemed to include all successor
plans. Nothing in this Agreement shall be deemed to be a modification of
Sterling's stock option or incentive plans.
15. SEVERABILITY. If any provision of this Agreement or application
thereof to anyone or under any circumstances is finally adjudicated by a court
of competent jurisdiction to be invalid or unenforceable in any jurisdiction,
such invalidity or unenforceability shall not affect any other provision or
application and shall not invalidate or render unenforceable such provision or
application in any other jurisdiction.
16. CONTENTS OF AGREEMENT. This Agreement supersedes all prior
agreements and sets forth the entire understanding among the parties hereto with
respect to the subject matter hereof and cannot be changed, modified, extended
or terminated except upon written amendment approved by the parties hereto.
17. GOVERNING LAW. The validity, interpretation, performance, and
enforcement of this Agreement shall be governed by the laws of the State of
Washington, and the Executive consents to the jurisdiction of the state and
federal courts of Washington in any dispute arising under this Agreement.
18. SURVIVAL OF BENEFITS. Any section of this Agreement which provides
a benefit to the Executive and which does not expressly provide for its
termination upon the expiration of the Term shall survive the expiration of the
Term and the obligation to provide benefits to the Executive as
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set forth in such Section shall remain binding upon Sterling until such time as
the Executive's employment relationship with Sterling is terminated and the
benefits provided under such Section are paid in full to the Executive. Anything
to the contrary herein notwithstanding, following any Termination of Employment
including retirement, Sterling shall continue to provide medical, dental,
disability and travel accident insurance coverages for the Executive and his
spouse to the same extent as if the Executive had continued in Sterling's
employ, provided that such coverages shall be offset by the receipt of any
alternate benefits under Medicare or similar programs.
19. REPRESENTATIONS. The Executive hereby represents and warrants that
he has the legal capacity to execute and perform this Agreement, that it is a
valid and binding agreement against him according to its terms, and that its
execution and performance by him does not and will not violate the terms of any
existing agreement or understanding to which the Executive is a party. In
addition, the Executive represents and warrants that he knows of no reason why
he is not physically capable of performing his obligations under this Agreement
in accordance with its terms.
20. MISCELLANEOUS. All section headings are for convenience only. This
Agreement may be executed in any number of counterparts, each of which when
executed shall be deemed to be an original and all of which together shall be
deemed to be one and the same instrument. It shall not be necessary in making
proof of this Agreement or any counterpart hereof to produce or account for any
of the other counterparts.
IN WITNESS WHEREOF, and intending to be legally bound, Sterling has
caused this Agreement to be executed by its duly authorized representatives and
the Executive has signed this Agreement, all as of the first date above written.
STERLING FINANCIAL CORPORATION
BY: /s/ Robert. B. Larrabee
---------------------------
ROBERT B. LARRABEE
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ATTEST:
STERLING FINANCIAL CORPORATION
BY: /s/ DANIEL G. BYRNE
------------------------------------
DANIEL G. BYRNE
Senior Vice President - Finance
/s/ WILLIAM W. ZUPPE
----------------------------------
WILLIAM W. ZUPPE
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Exhibit 10.9
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is between STERLING
FINANCIAL CORPORATION, a Washington corporation ("Sterling") and _______________
("Employee").
Employee has been employed as an officer of Sterling and/or an
affiliate. Because of Employee's importance to Sterling and the value to be
derived from Employee's continued employment, it is the desire of Sterling and
Employee to set forth certain terms and conditions relating to Employee's
employment as an inducement for Employee continuing his or her employment for so
long as Sterling desires to employ Employee.
Therefore, the parties agree as follows:
1. EMPLOYMENT. Sterling agrees to, and does hereby, employ Employee,
and Employee agrees to, and does hereby, accept such employment, on the terms in
this Agreement.
2. DUTIES. Employee shall perform such duties as the Chairman, the
President or the Board of Directors of Sterling (the "Board") may from time to
time direct. Employee shall initially have the title of Senior Vice President
with duties principally in the area of Finance but this may be changed from time
to time as the Chairman, the President or the Board may determine.
3. COMPENSATION. During Employee's employment under this Agreement,
Employee shall receive base salary compensation in the amount determined by the
Chairman and the President of Sterling, payable semi-monthly or in such manner
as is consistent with Sterling's policy relating to salaried employees. In
addition, Employee is eligible to participate in Sterling's stock option or
incentive plan(s) then in effect subject to the terms and conditions of such
plan(s). Employee's compensation shall be reviewed by the Chairman and the
President of Sterling annually and, in the sole discretion of the Chairman and
the President of Sterling, such compensation may be adjusted either upward or
downward.
4. OTHER BENEFITS. Subject to the respective eligibility requirements
and other terms and provisions of the applicable benefit or insurance plans
(including relevant waiting periods), Employee shall be enrolled as a
participant in all employee benefit plans (including retirement and insurance
plans) generally available to other officers of Sterling, as the same may from
time to time be adopted or amended. Employee shall also be entitled to receive
such other perquisites as the Chairman, the President or the Board may from time
to time deem appropriate.
5. PERFORMANCE OF DUTIES. Employee agrees that during his or her
employment with Sterling: (a) Employee will faithfully perform the duties of
such office or offices as he or she may occupy, which duties shall be such as
may be assigned to him or her by the Chairman, the President or the Board; (b)
Employee will devote to the performance of his or her duties all such time and
attention as the Chairman, the President or the Board shall reasonably require,
taking, however, from
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time to time such reasonable vacations as are consistent with his or her duties
and Sterling policy; and (c) Employee will do nothing inconsistent with his or
her duties to Sterling.
6. TERMINATION.
(a) Either Sterling or Employee may terminate Employee's
employment at any time in their sole discretion. Except as expressly
provided in this Agreement, upon termination of employment Sterling
shall have no liability to pay any further compensation or any other
benefit or sum whatsoever to Employee.
(b) Upon termination of employment, Employee's rights under
all employee pension plans, employee benefit plans, and stock option or
incentive plans shall be determined under the terms of the plans and
grants themselves except as otherwise specifically provided in this
Agreement.
(c) If (i) Employee's employment is terminated by Sterling for
any reason upon or within three years after a Change in Control (as
defined below) or (ii) Employee resigns for Good Cause (as defined
below) upon or within three years after a Change in Control, then (but
in no other circumstances) Employee shall be entitled to receive,
within five business days after the effective date of such termination
or resignation, from Sterling or its successor, an amount equal to
three times Employee's Annual Compensation (as defined below). In
addition, upon such an event: all stock options held by Employee shall
become immediately vested and exercisable notwithstanding any
provisions in the grant of such options regarding vesting, and the
lapse of the restrictions on Employee's restricted stock, if any, shall
automatically be accelerated; provided that the provision in this
Section 6(c) shall be effective only if the Board has taken action
approving the acceleration; and provided further that the Board may
exclude any particular grant(s) of restricted stock from the
acceleration provided for in this subsection (2), either at the time it
approves the acceleration or in connection with making any particular
grant of restricted stock.
(d) Employee's "Annual Compensation" shall include (i) the
greater of: (1) the total of Employee's salary and target bonus for the
calendar year in which the termination occurs (if established before
the termination) or (2) Employee's salary and actual bonus for the
prior calendar year (annualized if Employee was not employed by
Sterling for the entire previous calendar year); (ii) the amount of the
contributions made or anticipated to have been made on Employee's
behalf to Sterling's benefit plans for the calendar year in which the
termination occurs, including without limitation contributions to
pension plans and plans qualified under Section 125 of the Internal
Revenue Code of 1986 (cafeteria plans). Annual Compensation shall not
include the value of any stock options or restricted stock granted to
Employee.
(e) If Employee becomes entitled to the payments and equity
acceleration described in Section 6(c) (collectively, the "Severance
Payments"), and if any of the
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Severance Payments constitute a "parachute payment" under Section 280G
of the Internal Revenue Code of 1986 (the "Code"), as amended, or any
successor statute then in effect, then Sterling shall pay an additional
amount (the "Gross-Up Payment") to Employee at the time specified in
the following paragraph. The Gross-Up Payment shall be equal to the
amount necessary so that the net amount retained by Employee, after
subtracting the parachute excise tax imposed by Section 4999 of the
Code, as amended, or any successor statute then in effect (the "Excise
Tax"), and after also subtracting all federal, state or local income
tax, FICA tax and Excise Tax on the Gross-Up Payment, shall be equal to
the net amount Employee would have retained if no Excise Tax had been
imposed and no Gross-Up Payment had been paid. The amount of the
Gross-Up Payment shall be determined in good faith by independent
accountants or tax counsel selected by Sterling and acceptable to
Employee, who shall apply the following assumptions: (i) Employee shall
be treated as paying federal income taxes at the highest marginal rate
in the calendar year in which the Gross-Up Payment is made, and (ii)
Employee shall be treated as paying state and local income taxes at the
highest marginal rate(s) in the calendar year in which the Gross-Up
Payment is made in the locality of Employee's residence as of the
effective date of Employee's termination or resignation, net of the
maximum reduction in federal income taxes that could be obtained from
deducting those state and local taxes.
(f) The Gross-Up Payment shall be made within five business
days after the effective date of Employee's termination or resignation,
provided that if the Gross-Up Payment cannot be determined within that
time, Sterling shall pay Employee within that time an estimate,
determined in good faith by Sterling, of the minimum amount of the
Gross-Up Payment and shall pay the remainder (plus interest at the rate
provided in Section 1274(b)(2)(B) of the Code) as soon as the amount
can be determined but in no event later than the 30th day after the
effective date of Employee's termination or resignation. If the
estimated payment is more than the amount later determined to have been
due, the excess (plus interest at the rate provided in Section
1274(b)(2)(B) of the Code) shall be repaid by Employee within five
business days after written demand.
(g) If the actual Excise Tax imposed is less than the amount
that was taken into account in determining the amount of the Gross-Up
Payment, Employee shall repay at the time that the amount of the
reduced Excise Tax is finally determined the portion of the Gross-Up
Payment attributable to that reduction (plus the portion of the
Gross-Up Payment attributable to the Excise Tax, FICA tax and federal,
state and local income tax imposed on the portion of the Gross-Up
Payment being repaid by Employee, to the extent the repayment results
in a reduction in or refund of Excise Tax, FICA tax or federal, state
or local income tax), plus interest on the amount of the repayment at
the rate provided in Section 1274(b)(2)(B) of the Code. If the actual
Excise Tax imposed is more than the amount that was taken into account
in determining the amount of the Gross-Up Payment, Sterling shall make
an additional gross-up payment in respect of such excess (plus interest
at the rate provided in Section 1274(b)(2)(B) of the Code) at the time
that the amount of the excess is finally determined.
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7. CONTINUATION OF MEDICAL INSURANCE. If Employee's employment by
Sterling terminates for any reason (including early retirement) other than gross
misconduct, Employee shall be entitled to continue to participate in Sterling's
self-funded group medical plan, at Employee's expense, to the extent provided in
the plan and under the Consolidated Omnibus Budget Reconciliation Act of 1985
(COBRA).
8. DEATH OR DISABILITY. If Employee should die or become disabled at
any time during his or her employment hereunder this Agreement shall terminate
and neither Employee nor anyone claiming by, through or under him or her shall
be entitled to any further compensation or other sum under this Agreement (other
than payments made by insurers under policies of life and disability insurance
and any sums which may become available under any employee benefit plan).
9. CONFIDENTIALITY; NON-COMPETITION.
(a) Employee recognizes and acknowledges that all information
pertaining to the affairs, business, clients, or customers of Sterling
or any of its Subsidiaries or affiliates (any or all of such entities
being hereinafter referred to as the "Business"), including without
limitation all trade secrets, proprietary information, customer lists,
customer information, records, memoranda, letters, books, papers,
reports, accountings, experience or other data, as such information may
exist from time to time, other than information that Sterling has
previously made publicly available or which is in the public domain, is
"Confidential Information" and is a unique and valuable asset of the
Business, access to and knowledge of which are essential to the
performance of Employee's duties under this Agreement. Employee shall
not, except to the extent reasonably necessary in the performance of
his or her duties under this Agreement, divulge to any person, firm,
association, corporation, or governmental agency, any information
concerning the affairs, business, clients, or customers of the Business
(except such information as is required by law to be divulged to a
government agency or pursuant to lawful process), or make use of any
such information for his own purposes or for the benefit of any person,
firm, association or corporation (except the Business) and shall use
his or her reasonable best efforts to prevent the disclosure of any
such information by others. Confidential Information is and shall
remain the property of the Business. No copies thereof shall be made
which are not retained by the Business, and Employee agrees, on
termination of his or her employment or on demand of Sterling, to
deliver the same to Sterling.
(b) For a period of one year following termination of
employment, Employee shall not, without express prior written approval
of Sterling's Board, directly or indirectly own or hold any proprietary
interest in any corporation, partnership, sole proprietorship or other
entity engaged in competition with Sterling or any of its affiliates (a
"Competitor"). For a period of two years following termination of
employment, Employee shall not without the prior written consent of
Sterling: (a) solicit for the account of any Competitor, any customer
or client of Sterling, its Subsidiaries or affiliates; (b) act on
behalf of any Competitor to interfere with the relationship between
Sterling, its Subsidiaries or affiliates
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and their employees; or (c) solicit employees of Sterling, its
Subsidiaries or affiliates for new employment. For purposes of this
Section, (i) the term "proprietary interest" means legal or equitable
ownership, whether through stockholdings or otherwise, of greater than
a 20% equity interest in a business, firm or entity, and (ii) an entity
shall be considered to be "engaged in competition" if such entity is,
or is a holding company for, a bank, savings and loan association or
other financial services business engaged in a business that competes
with Sterling in the States of Washington, Idaho, Montana or Oregon.
This non-competition provision shall not be deemed to create rights for
Employee which rights are independent of those otherwise set forth in
this Agreement.
(c) Sterling's obligation to make payments, deliver shares of
stock or provide for any benefits under this Agreement (except to the
extent vested or exercisable) shall cease upon a violation of the
preceding provisions of this Section. This Section shall: (a) continue
throughout the duration of the Employee's employment with Sterling,
except as amended or modified by written agreement of the parties; and
(b) survive the termination of this Agreement and Employee's
termination of employment with Sterling.
(d) Employee acknowledges and agrees that Sterling has no
adequate remedy at law for a breach or threatened breach of any of the
provisions of this Section and, in recognition of this fact, Employee
agrees that, in the event of such a breach or threatened breach, in
addition to any remedies at law and notwithstanding the provisions of
Section 12 hereof, Sterling: (i) without posting any bond, shall be
entitled to obtain equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent
injunction or any other equitable remedy which may then be available
and (ii) shall have no further obligation to make any payments to
Employee.
10. ADDITIONAL DEFINITIONS. For purposes of this Agreement:
(a) "Change in Control" shall mean:
(i) The acquisition of ownership, directly or
indirectly, beneficially or of record, by any Person (within
the meaning of the Securities Exchange Act of 1934 and the
rules of the Securities and Exchange Commission thereunder as
in effect on the date of this Agreement), other than Sterling,
a Subsidiary or any employee benefit plan of Sterling or its
Subsidiaries, of shares representing more than 25% of the
aggregate voting power of Sterling's voting securities;
(ii) A change of twenty-five percent (rounded to the
next whole person) in the membership of the Board of Directors
of Sterling or any successor within a
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twelve-month period, unless the election or nomination for election by
shareholders of each new director within such period is approved by the vote of
eighty-five percent (rounded to the next whole person) of the directors then
still in office who were in office at the beginning of the said twelve-month
period;
(iii) The good-faith determination by the Board , in
its sole discretion, that any Person (other than a Subsidiary
or any employee benefit plan of Sterling or a Subsidiary) has
acquired direct or indirect possession of the power to direct
or cause to direct the management or policies of Sterling,
whether through the ability to exercise voting power, by
contract or otherwise;
(iv) The merger, consolidation, share exchange or
similar transaction between Sterling and another Person (other
than a Subsidiary) other than a merger in which Sterling is
the surviving corporation; or
(v) The sale or transfer (in one transaction or a
series of related transactions) of all or substantially all of
Sterling's assets to another Person (other than a Subsidiary)
whether assisted or unassisted, voluntary or involuntary.
(b) "Good Cause" for Employee to resign shall mean:
(i) A material adverse change, without the prior
written consent of Employee, in the duties of the Employee
following a Change in Control;
(ii) The removal of Employee from the position held
immediately prior to the Change in Control, except where such
removal is for Cause (as defined below) or by reason of
Employee's disability; or
(iii) A reduction in the overall level of Employee's
total compensation by more than 25% below the average
Compensation paid by Sterling to Employee for the 24 months
immediately preceding the Change in Control.
(c) The removal of Employee from his or her position will be
considered to be for "Cause" if, but only if, the removal is because
(i) Employee engages in abusive use of alcohol or other drugs on a
continuing or recurring basis, (ii) Employee is convicted of any felony
or of a misdemeanor involving moral turpitude (including forgery,
fraud, theft or embezzlement), or is convicted or enters into a
pretrial diversion or similar program in connection with the
prosecution for an offense involving dishonesty, breach of trust or
money laundering, or (iii) Employee has engaged in dishonesty, fraud,
destruction or theft of property of Sterling or a Subsidiary, physical
attack on another employee, willful nonfeasance, malfeasance or gross
negligence in the performance of his or her duties, or misconduct
materially injurious to Sterling or a Subsidiary.
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11. TITLE. Although it is the intention of the parties that during the
term of this Agreement Employee shall be an executive employee of Sterling with
the title and duties described here, it is specifically understood that, subject
to the provisions of Section 10, the employment and the nature and situs of
services to be rendered shall be subject to the authority of the Chairman, the
President or the Board to change the same from time to time and at any time and
to provide for the operation of Sterling as specified by applicable banking laws
and regulations.
12. RESOLUTION OF DISPUTES. Any dispute arising out of or relating to
this Agreement or Employee's employment (or termination of employment) shall be
submitted to and resolved by final and binding arbitration as provided in the
Binding Arbitration Agreement attached as Exhibit A, whether the claimant is
Employee or Sterling. In any dispute in arbitration or court arising out of or
relating to this Agreement, the losing party shall pay the prevailing party's
reasonable attorneys' fees, costs and expenses.
13. MISCELLANEOUS.
(a) This Agreement is the entire agreement between the parties
and may not be modified or abrogated orally or by course of dealing,
but only by another instrument in writing duly executed by the parties.
This Agreement replaces and supersedes all prior agreements that
Employee may have with Sterling, or any Subsidiary of Sterling.
Employee acknowledges that Employee shall be entitled to change in
control benefits, severance benefits or other employment separation
benefits only as specifically provided in this Agreement,
notwithstanding the terms of any other representation, policy, benefit
plan or agreement.
(b) This Agreement has been drafted in contemplation of and
shall be construed in accordance with and governed by Washington law.
Jurisdiction and venue of any court action in connection with this
Agreement shall be had exclusively in the Superior Court for Spokane
County, Washington or the U.S. District Court in Spokane.
(c) Employee acknowledges that this Agreement has been drafted
by counsel for Sterling, and that Employee has not relied upon such
counsel with respect to this Agreement.
(d) If a court or arbitrator of competent jurisdiction or
governmental authority declares any term or provision hereof invalid,
unenforceable or unacceptable, the remaining terms and provisions
hereof shall be unimpaired and the invalid, unenforceable or
unacceptable term or provision shall be replaced by a term or provision
that is valid, enforceable and acceptable and that comes closest to
expressing the intention of the invalid, unenforceable or unacceptable
term or provision.
(e) Employee may not assign Employee's rights or delegate
Employee's duties under this Agreement.
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DATED effective as of the 1st day of July, 1999.
STERLING FINANCIAL CORPORATION
By:
---------------------------------
NED M. BARNES
Secretary
EMPLOYEE:
---------------------------
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EXHIBIT A
BINDING ARBITRATION AGREEMENT
This Binding Arbitration Agreement is in consideration of, and
incorporated into, that certain Employment Agreement between the parties
effective as of July 1, 1999. I, the employee who is a party to the Employment
Agreement to which this Exhibit is attached, as well as Sterling, in
consideration of the Employment Agreement and the mutual provisions hereof,
agree as follows:
Any and all disputes which involve or relate in any way to my
employment (or termination of employment) with Sterling shall be submitted to
and resolved by final and binding arbitration.
Sterling and I understand that by entering into this Binding
Arbitration Agreement, we are each waiving any right we may have to file a
lawsuit or other civil action or proceeding relating to my employment with
Sterling, and are waiving any right we may have to resolve employment disputes
through trial by jury. We agree that arbitration shall be in lieu of any and all
lawsuits or other civil legal proceedings relating to my employment.
This Binding Arbitration Agreement is intended to cover all civil
claims which involve or relate in any way to my employment (or termination of
employment) with Sterling, including, but not limited to, claims of employment
discrimination or harassment on the basis of race, sex, age, religion, color,
national origin, sexual orientation, disability and veteran status (including
claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination
in Employment Act, the Americans with Disabilities Act, the Employee Retirement
Income Security Act ("ERISA"), the Fair Labor Standards Act, the Immigration
Reform and Control Act and any other local, state or federal law concerning
employment or employment discrimination), claims based on violation of public
policy or statute, and claims against individuals or entities employed by,
acting on behalf of, or affiliated with Sterling. However, ERISA plan benefit
issues and claims for workers compensation or for unemployment compensation
benefits are not covered by this Binding Arbitration Agreement. The statutes of
limitations otherwise applicable under law shall apply to all claims made in the
arbitration.
I understand and agree that despite anything in this Binding
Arbitration Agreement to the contrary, I am not waiving the right to file or
institute a complaint or charge with any government agency authorized to
investigate or resolve employment-related matters, including but not limited to
the United States Equal Employment Opportunity Commission, the Department of
Labor, the Occupational Safety and Health Commission, the National Labor
Relations Board, the Immigration and Naturalization Service, and any other
comparable local, state or federal agency. I also understand and agree that
despite anything in this Binding Arbitration Agreement to the contrary, either
party may request a court to issue such temporary or interim relief (including
temporary restraining orders and preliminary injunctions) as may be appropriate,
either before or after arbitration is commenced. The temporary or interim relief
may remain in effect pending the
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outcome of arbitration. No such request shall be a waiver of the right to submit
any dispute to arbitration.
This Binding Arbitration Agreement does not constitute an employment
contract, require discharge only for cause, or require any particular corrective
action or discharge procedures.
Arbitration under this Binding Arbitration Agreement shall be conducted
before a single arbitrator and shall take place within the state where I am
currently employed by Sterling, or where I was so employed at the time of
termination.
In order to initiate arbitration, Sterling or I must so notify the
other party in writing of their decision to initiate arbitration, either by
personal delivery or certified mail. The notification should include the
following information about the employee: name, home address, work address, work
and home phone number, and the following information about the occurrence: date,
location, nature of the claims or dispute, facts upon which the claims are made,
and remedy requested. Any notice of arbitration initiated by Sterling shall be
sent to my last known residence address as reflected in my personnel file at
Sterling. Notice of arbitration initiated by me shall be sent to Sterling c/o
the Chief Executive Officer.
Within thirty (30) days after receipt of notice of arbitration,
Sterling and I will attempt to agree upon a mutually acceptable arbitrator. If
Sterling and I are unable to agree upon an arbitrator, we will submit the
dispute to the American Arbitration Association ("AAA"). If AAA is, for some
reason, unable or unwilling to accept the matter, we will submit the matter to a
comparable arbitration service. The arbitration shall be conducted in accordance
with the laws of the state in which the arbitration is conducted and the rules
and requirements of the arbitration service being utilized, to the extent that
such rules and requirements do not conflict with the terms of this Binding
Arbitration Agreement.
At the request of either Sterling or myself, the arbitrator will
schedule a pre-hearing conference to, among other things, agree on procedural
matters, obtain stipulations, and attempt to narrow the issues.
During the arbitration process, Sterling and I may each make a written
demand on the other for a list of witnesses, including experts, to be called
and/or copies of documents to be introduced at the hearing. The demand must be
served at least thirty (30) days prior to the hearing. The list and copies of
documents must be delivered within twenty-five (25) days of service of the
demand.
Either party shall be entitled to conduct a limited amount of discovery
prior to the arbitration hearing. Either party may take a maximum of two (2)
depositions. Either party may apply to the arbitrator for further discovery.
Such further discovery may, in the discretion of the arbitrator, be awarded upon
a showing of sufficient cause. If any documents to be produced or requested for
production contain or refer to matters which are private, proprietary and/or
confidential, the arbitrator shall make an appropriate protective order
prohibiting or limiting use and disclosure of
10
<PAGE>
such documents and providing for return of documents produced after the
arbitration is concluded.
Either party may file a brief with the arbitrator. Each brief must be
served on the arbitrator and the other party at least five (5) working days
prior to the hearing, and if not timely served must be disregarded by the
arbitrator. The brief shall specify the facts the party intends to prove,
analyze the applicable law or policy, and specify the remedy sought. At the
close of the hearing, each party shall be given leave to file a post-hearing
brief. The time for filing the post-hearing brief shall be set by the
arbitrator.
I understand that, at my expense, I have the right to hire an attorney
to represent me in the arbitration, and Sterling has that same right. I also
understand that all parties shall have the right to present evidence at the
arbitration, through testimony and documents, and to cross-examine witnesses
called by another party. Each party agrees to pay the fees of any witnesses
testifying at that party's request. Each party also agrees to pay the cost of
any stenographic record of the arbitration hearing should that party request any
such record. The requesting party must notify the other of such arrangements at
least two (2) working days in advance of the hearing.
Any postponement or cancellation fee imposed by the arbitration service
will be paid by the party requesting the postponement or cancellation. During
the time the arbitration proceedings are ongoing, Sterling will advance any
required administrative or arbitrator's fees. Each party will pay its own
witness fees.
At the conclusion of the arbitration, each party agrees to promptly pay
any arbitration award against it.
We agree that the decision of the arbitrator shall be final and binding
on all parties and shall be the exclusive remedy of the parties. The arbitrator
shall issue a written and signed statement of the basis of his or her decision,
including findings of fact and conclusions of law. In making the decision and
award, if any, the arbitrator shall apply applicable substantive law. The
arbitrator may only award any remedy that would have been available in court.
The decision and award, if any, shall be consistent with the terms of this
Binding Arbitration Agreement and shall include an allocation of the costs of
the arbitration proceeding between the parties.
This Binding Arbitration Agreement may be enforced by a court of
competent jurisdiction through the filing of a petition to compel arbitration,
or otherwise. The decision and award of the arbitrator may also be judicially
enforced pursuant to applicable law.
Because of the interstate nature of Sterling's business, this Binding
Arbitration Agreement is governed by the Federal Arbitration Act, 9 U.S.C.
Section 1 et seq. (the "FAA"). The provisions of the FAA (and to the extent not
preempted by the FAA, the provisions of the law of the state of my principal
place of employment with Sterling that generally apply to commercial arbitration
agreements, such as provisions granting stays of court actions pending
arbitration) are incorporated
11
<PAGE>
into this Binding Arbitration Agreement to the extent not inconsistent with the
other terms of this Binding Arbitration Agreement.
We agree that if any provision of this Binding Arbitration Agreement is
found to be unenforceable to any extent or in violation of any statute, rule,
regulation or common law, it will not affect the enforceability of the remaining
provisions and the court shall enforce the affected provision and all remaining
provisions to the fullest extent permitted by law.
This Binding Arbitration Agreement shall remain in full force and
effect at all times during and subsequent to my employment with Sterling, or any
successor in interest to Sterling.
STERLING FINANCIAL CORPORATION
By
----------------------------------
NED M. BARNES
Secretary
EMPLOYEE:
---------------------------
12
<PAGE>
EXHIBIT 12.1
COMPUTATION OF RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY
FOR THE THREE AND TWELVE MONTHS ENDING DECEMBER 31, 1999
<TABLE>
<CAPTION>
THREE MONTHS DAILY
SHAREHOLDERS' EQUITY NUMBER WEIGHTED AVERAGE
-------------------------------- ---------------------------------------
TOTAL COMMON OF DAYS TOTAL COMMON
----- ------ ------- ----- ------
<S> <C> <C> <C> <C> <C>
January 1, 1999 119,017,358 119,017,358 14
January 15, 1999 120,111,306 120,111,306 11
January 26, 1999 120,113,939 120,113,939 9
February 4, 1999 120,113,951 120,113,951 7
February 11, 1999 120,119,216 120,119,216 4
February 15, 1999 120,912,741 120,912,741 1
February 16, 1999 120,957,715 120,957,715 2
February 18, 1999 120,968,267 120,968,267 25
March 15, 1999 121,918,979 121,918,979 16
March 31, 1999 119,788,216 119,788,216 1
April 1, 1999 119,788,216 119,788,216 14
April 15, 1999 120,667,554 120,667,554 1
April 16, 1999 120,748,225 120,748,225 29
May 15, 1999 121,750,633 121,750,633 31
June 15, 1999 123,103,138 123,103,138 15
June 30, 1999 116,976,246 116,976,246 1
July 1, 1999 116,976,246 116,976,246 14
July 15, 1999 117,984,815 117,984,815 31
August 15, 1999 118,815,233 118,815,233 31
September 15, 1999 120,305,100 120,305,100 15
September 30, 1999 118,132,270 118,132,270 1
October 1, 1999 118,132,270 118,132,270 14 1,653,851,780 1,653,851,780
October 15, 1999 119,062,887 119,062,887 31 3,690,949,497 3,690,949,497
November 15, 1999 120,189,039 120,189,039 30 3,605,671,170 3,605,671,170
December 15, 1999 121,549,992 121,549,992 16 1,944,799,872 1,944,799,872
December 31, 1999 117,638,751 117,638,751 1 117,638,751 117,638,751
Cumulative Total 11,012,911,070 11,012,911,070
Divide by Number of Days 92 92
---------------------------------------
Average 119,705,555 119,705,555
---------------------------------------
Net Income Available to Common Shares
3,418,000
Divide by Average Common Shareholders' Equity 119,705,555
-------------------
Return on Average Common Shareholders' Equity 11.33%
(Annualized)
===================
</TABLE>
<TABLE>
<CAPTION>
TWELVE MONTHS DAILY
WEIGHTED AVERAGE
----------------------------------------
TOTAL COMMON
----- ------
<S> <C> <C>
January 1, 1999 1,666,243,012 1,666,243,012
January 15, 1999 1,321,224,366 1,321,224,366
January 26, 1999 1,081,025,451 1,081,025,451
February 4, 1999 840,797,657 840,797,657
February 11, 1999 480,476,864 480,476,864
February 15, 1999 120,912,741 120,912,741
February 16, 1999 241,915,430 241,915,430
February 18, 1999 3,024,206,675 3,024,206,675
March 15, 1999 1,950,703,664 1,950,703,664
March 31, 1999 119,788,216 119,788,216
April 1, 1999 1,677,035,024 1,677,035,024
April 15, 1999 120,667,554 120,667,554
April 16, 1999 3,501,698,525 3,501,698,525
May 15, 1999 3,774,269,623 3,774,269,623
June 15, 1999 1,846,547,070 1,846,547,070
June 30, 1999 116,976,246 116,976,246
July 1, 1999 1,637,667,444 1,637,667,444
July 15, 1999 3,657,529,265 3,657,529,265
August 15, 1999 3,683,272,223 3,683,272,223
September 15, 1999 1,804,576,500 1,804,576,500
September 30, 1999 118,132,270 118,132,270
October 1, 1999 1,653,851,780 1,653,851,780
October 15, 1999 3,690,949,497 3,690,949,497
November 15, 1999 3,605,671,170 3,605,671,170
December 15, 1999 1,944,799,872 1,944,799,872
December 31, 1999 117,638,751 117,638,751
Cumulative Total 43,798,576,890 43,798,576,890
Divide by Number of Days 365 365
----------------------------------------
Average 119,996,101 119,996,101
----------------------------------------
Net Income Available to Common Shares
12,819,000
Divide by Average Common Shareholders' Equity 119,996,101
-------------------
Return on Average Common Shareholders' Equity
(Annualized) 10.68%
===================
</TABLE>
<PAGE>
EXHIBIT 12.2
COMPUTATION OF RETURN ON AVERAGE ASSETS
FOR THE THREE AND TWELVE MONTHS ENDING DECEMBER 31, 1999
<TABLE>
<CAPTION>
Total Assets
-----------------------------------------
Three Months Twelve Months
------------------- ---------------------
<S> <C> <C>
December 31, 1998 2,314,587,243
January 31, 1999 2,319,921,192
February 28, 1999 2,364,197,872
March 31, 1999 2,353,934,732
April 30, 1999 2,390,884,820
May 31, 1999 2,427,491,048
June 30, 1999 2,506,362,870
July 31, 1999 2,484,554,786
August 31, 1999 2,490,036,999
September 30, 1999 2,513,792,980 2,513,792,980
October 31, 1999 2,539,822,092 2,539,822,092
November 30, 1999 2,545,909,411 2,545,909,411
December 31, 1999 2,546,925,395 2,546,925,395
------------------- ---------------------
10,146,449,878 31,798,421,440
------------------- ---------------------
Divide by Number of Months 4 13
------------------- ---------------------
Average 2,536,612,470 2,446,032,418
=================== =====================
Net Income 3,418,000 12,819,000
Divide by Average Assets 2,536,612,470 2,446,032,418
------------------- ---------------------
Return on Average Assets 0.53% 0.52%
=================== =====================
</TABLE>
<PAGE>
EXHIBIT 12.3
COMPUTATION OF OPERATING CASH PERFORMANCE RATIOS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------
1999 1998
------------- -------------
OPERATING CASH EARNINGS:
- ------------------------
<S> <C> <C>
Income (loss) before income taxes $ 20,289,000 $ 9,902,000
Add acquisition and conversion costs -- 8,145,000
Add intangible amortization 5,692,000 3,971,000
Add one-time SAIF assessments -- --
------------- -------------
Operating cash earnings before income taxes 25,981,000 22,018,000
Less income tax provision (9,566,000) (8,089,000)
------------- -------------
Operating cash earnings $ 16,415,000 $ 13,929,000
============= =============
OPERATING CASH EARNINGS PER COMMON SHARE - DILUTED:
- ---------------------------------------------------
Operating cash earnings $ 16,415,000 $ 13,929,000
Preferred stock dividends declared -- --
------------- -------------
Operating cash earnings per common share $ 16,415,000 $ 13,929,000
============= =============
Weighted average common shares outstanding - diluted 8,147,020 8,217,067
Operating cash earnings per common share - diluted $ 2.01 $ 1.70
============= =============
RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY:
- ----------------------------------------------
Operating cash earnings $ 16,415,000 $ 13,929,000
Preferred stock dividends declared -- --
------------- -------------
Operating cash earnings per common share $ 16,415,000 $ 13,929,000
============= =============
Average common shareholders' equity $ 119,996,101 $ 114,847,698
Return on average common shareholders' equity (annualized) 13.68% 12.13%
============= =============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
OPERATING CASH EARNINGS:
- ------------------------
<S> <C> <C> <C>
Income (loss) before income taxes $ 16,371,000 $ (863,000) $ 6,098,000
Add acquisition and conversion costs -- -- --
Add intangible amortization 2,242,000 1,590,000 1,669,000
Add one-time SAIF assessments -- 6,145,000 --
------------ ------------ ------------
Operating cash earnings before income taxes 18,613,000 6,872,000 7,767,000
Less income tax provision (6,995,000) (2,501,000) (2,868,000)
------------ ------------ ------------
Operating cash earnings $ 11,618,000 $ 4,371,000 $ 4,899,000
============ ============ ============
OPERATING CASH EARNINGS PER COMMON SHARE - DILUTED:
- ---------------------------------------------------
Operating cash earnings $ 11,618,000 $ 4,371,000 $ 4,899,000
Preferred stock dividends declared (940,000) (942,000) (942,000)
------------ ------------ ------------
Operating cash earnings per common share $ 10,678,000 $ 3,429,000 $ 3,957,000
============ ============ ============
Weighted average common shares outstanding - diluted 8,170,675 8,074,600 7,974,257
Operating cash earnings per common share - diluted $ 1.31 $ 0.42 $ 0.50
============ ============ ============
RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY:
- ----------------------------------------------
Operating cash earnings $ 11,618,000 $ 4,371,000 $ 4,899,000
Preferred stock dividends declared (940,000) (942,000) (942,000)
------------ ------------ ------------
Operating cash earnings per common share $ 10,678,000 $ 3,429,000 $ 3,957,000
============ ============ ============
Average common shareholders' equity $ 83,925,475 $ 68,780,595 $ 72,475,708
Return on average common shareholders' equity (annualized) 12.72% 9.89% 10.83%
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Fiscal Years Ended June 30,
-----------------------------
1996 1995
------------ ------------
OPERATING CASH EARNINGS:
- ----------------------
<S> <C> <C>
Income (loss) before income taxes $ 12,408,000 $ 14,912,000
Add acquisition and conversion costs -- --
Add intangible amortization 3,332,000 3,487,000
Add one-time SAIF assessments -- --
------------ ------------
Operating cash earnings before income taxes 15,740,000 18,399,000
Less income tax provision (5,920,000) (6,217,000)
------------ ------------
Operating cash earnings $ 9,820,000 $ 12,182,000
============ ============
OPERATING CASH EARNINGS PER COMMON SHARE - DILUTED:
- ---------------------------------------------------
Operating cash earnings $ 9,820,000 $ 12,182,000
Preferred stock dividends declared (1,885,000) (1,885,000)
------------ ------------
Operating cash earnings per common share $ 7,935,000 $ 10,297,000
============ ============
Weighted average common shares outstanding - diluted 8,000,454 7,793,233
Operating cash earnings per common share - diluted $ 0.99 $ 1.32
============ ============
RETURN ON AVERAGE COMMON SHAREHOLDERS' EQUITY:
- ----------------------------------------------
Operating cash earnings $ 9,820,000 $ 12,182,000
Preferred stock dividends declared (1,885,000) (1,885,000)
------------ ------------
Operating cash earnings per common share $ 7,935,000 $ 10,297,000
============ ============
Average common shareholders' equity $ 72,607,676 $ 62,628,951
Return on average common shareholders' equity (annualized) 10.93% 16.44%
============ ============
</TABLE>
EXHIBIT 12.3
COMPUTATION OF OPERATING CASH PERFORMANCE RATIOS (continued)
<TABLE>
<CAPTION>
Years Ended December 31,
------------- -------------- --------------
1999 1998 1997
-------------- -------------- --------------
RETURN ON AVERAGE ASSETS:
- -------------------------
<S> <C> <C> <C>
Operating cash earnings $ 16,415,000 $ 13,929,000 $ 11,618,000
Average assets $2,446,032,418 $2,094,839,692 $1,768,990,087
Return on average assets (annualized) 0.67% 0.66% 0.66%
============== ============== ==============
OPERATING EFFICIENCY:
- ---------------------
Operating expenses $ 64,478,000 $ 56,291,000 $ 38,429,000
Less acquisition and conversion costs
-- 5,464,000 --
Less intangible amortization
5,692,000 3,971,000 2,242,000
Less one-time SAIF assessments
-- -- --
-------------- -------------- --------------
Operating expenses, adjusted $ 58,786,000 $ 46,856,000 $ 36,187,000
============== ============== ==============
Other income, excluding acquisition-related adjustments $ 13,297,000 $ 12,894,000 $ 9,474,000
Net interest income 75,370,000 59,205,000 47,808,000
-------------- -------------- --------------
Total revenue $ 88,667,000 $ 72,099,000 $ 57,282,000
============== ============== ==============
Operating efficiency 66.30% 64.99% 63.17%
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended December 31, Fiscal Years Ended June 30,
-------------- -------------- -------------- --------------
1996 1995 1996 1995
-------------- -------------- -------------- --------------
RETURN ON AVERAGE ASSETS:
- -------------------------
<S> <C> <C> <C> <C>
Operating cash earnings $ 4,371,000 $ 4,899,000 $ 9,820,000 $ 12,182,000
Average assets $1,575,878,692 $1,606,034,534 $1,582,535,703 $1,590,297,653
Return on average assets (annualized) 0.55% 0.61% 0.62% 0.77%
============== ============== ============== ==============
OPERATING EFFICIENCY:
- ---------------------
Operating expenses $ 25,807,000 $ 16,231,000 $ 33,109,000 $ 32,793,000
Less acquisition and conversion costs
-- -- -- --
Less intangible amortization
1,590,000 1,669,000 3,332,000 3,487,000
Less one-time SAIF assessments
6,145,000 -- -- --
-------------- -------------- -------------- --------------
Operating expenses, adjusted $ 18,072,000 $ 14,562,000 $ 29,777,000 $ 29,306,000
============== ============== ============== ==============
Other income, excluding acquisition-related adjustments $ 4,775,000 $ 5,062,000 $ 9,533,000 $ 11,640,000
Net interest income 21,290,000 18,089,000 37,627,000 37,707,000
-------------- -------------- -------------- --------------
Total revenue $ 26,065,000 $ 23,151,000 $ 47,160,000 $ 49,347,000
============== ============== ============== ==============
Operating efficiency 69.33% 62.90% 63.14% 59.39%
============== ============== ============== ==============
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
State of Percent
INCORPORATION OWNED
------------- -------
<S> <C> <C>
Sterling Savings Bank Washington 100%
Tri-Cities Mortgage Corporation Washington 100%
Sterling Capital Trust I Delaware 100%
Subsidiaries of Sterling Savings Bank:
Action Mortgage Company Washington 100%
Harbor Financial Services, Inc. Washington 100%
(a subsidiary of Evergreen First Service Corporation)
INTERVEST-Mortgage Investment Company Washington 100%
Evergreen Environmental Development Corporation Washington 100%
Evergreen First Service Corporation Washington 100%
Fidelity Service Corporation Washington 100%
Tri-West Mortgage Company Washington 100%
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 of our report dated February 23, 2000 relating to the
consolidated financial statements of Sterling Financial Corporation, which
appears in Sterling Financial Corporation's Annual Report on Form 10-K for the
year ended December 31, 1999.
PricewaterhouseCoopers LLP
March 24, 2000
Spokane, Washington
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 73,238
<INT-BEARING-DEPOSITS> 23,366
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 494,483
<INVESTMENTS-CARRYING> 11,247
<INVESTMENTS-MARKET> 11,230
<LOANS> 1,803,374
<ALLOWANCE> 15,603
<TOTAL-ASSETS> 2,546,925
<DEPOSITS> 1,617,368
<SHORT-TERM> 0
<LIABILITIES-OTHER> 710,918
<LONG-TERM> 110,000
0
0
<COMMON> 8,090
<OTHER-SE> 109,549
<TOTAL-LIABILITIES-AND-EQUITY> 2,546,925
<INTEREST-LOAN> 143,800
<INTEREST-INVEST> 33,574
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 177,374
<INTEREST-DEPOSIT> 60,921
<INTEREST-EXPENSE> 102,004
<INTEREST-INCOME-NET> 75,370
<LOAN-LOSSES> 3,900
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 64,478
<INCOME-PRETAX> 20,289
<INCOME-PRE-EXTRAORDINARY> 20,289
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,819
<EPS-BASIC> 1.59
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 3.35
<LOANS-NON> 9,259
<LOANS-PAST> 0
<LOANS-TROUBLED> 66
<LOANS-PROBLEM> 10,568
<ALLOWANCE-OPEN> 15,251
<CHARGE-OFFS> 728
<RECOVERIES> 80
<ALLOWANCE-CLOSE> 15,603
<ALLOWANCE-DOMESTIC> 15,603
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
