Sterling Financial Corp., of Spokane, is proposing to merge its Golf Savings Bank mortgage subsidiary into Sterling Savings Bank, its Spokane-based banking arm, and take other steps as it works to complete its proposed $720 million recapitalization.

The company also expects to revamp its board of directors and make the acquisition of troubled banks a key part of its strategy for future growth, it says in a public filing made in conjunction with its planned recapitalization.

Last month, Sterling Financial's board approved the merger of Mountlake Terrace, Wash.-based Golf Savings Bank, which has 550 employees and about 30 locations, into Sterling Savings, which has 2,150 employees and 179 branches. Sterling Financial has applied to the Federal Deposit Insurance Corp. for regulatory approval of the merger.

"What we've said to the employees is that this provides opportunities for streamlining and efficiencies over time and for us to have a broader range of products," says David Brukardt, a Sterling executive vice president, who adds that Golf's board of directors also has approved the proposed merger. In a legal ad, Sterling says, "It is contemplated that all offices of the ... institutions will continue to be operated."

Meanwhile, Sterling's board is identifying new candidates to become directors after the company's recapitalization transactions close, the public filing says. On Monday, May 17, Sterling said it had approved the appointment of retired Wells Fargo & Co. Vice Chairman Leslie S. "Les" Biller as its chairman, subject to approval by regulators and the completion of the recapitalization.

In the public filing, Sterling says its board expects that after the recapitalization transactions close, "the board of directors will be reconstituted, and the number of directors will be reduced. The directors are expected to consist of the chief executive officer, a chairperson, a representative of THL, and a number of other current or new independent directors." THL is Thomas H. Lee Partners LP, a Boston-based private equity firm that would make a $170 million investment in Sterling in the recapitalization.

Sterling Financial, Sterling Savings, and Golf Savings all have their own boards, but if the recapitalization transactions and the Sterling Savings-Golf Savings merger are completed, just one board would remain, Brukardt says.

In perhaps the most striking of the changes discussed in the filing, Sterling said that it "expects to bid on failed banks as a key component of its strategy" in the future.

"If the proposed recapitalization transactions are completed, our strategy will be to acquire other banks in FDIC-assisted transactions or otherwise," the filing says. Yet, it adds, "We are not currently qualified to bid on these transactions."

Sterling is seeking to raise capital because regulatory agencies have said it is undercapitalized and have ordered it to do so. The public filing adds, however, "there can be no assurance that we will be successful in the near term or at all" in efforts to become qualified to bid on failed banks. "Prolonged or indefinite failures to achieve such qualification could cause us to miss the opportunity to bid on banks that we believe would be attractive acquisition candidates," it says.

Brukardt says that acquiring troubled institutions "would be a logical way to grow across our footprint, if we're allowed to do that by regulators." Such opportunities likely will arise. FDIC Chairwoman Sheila Bair has said more banks will fail this year than the 140 that failed in 2009.

Even if Sterling became eligible to bid for failed banks, the bidding process is competitive, and Sterling might have to bid aggressively by increasing the premium paid for the deposits that come with the acquisition of a troubled bank, which would make those deposits more expensive, the filing says.

Sterling announced April 27 that Thomas H. Lee Partners had agreed to invest $134.7 million in the company, for which the Boston company would receive common stock and a new series of convertible voting preferred stock. THL also would receive a seven-year warrant to buy 168.4 million shares of Sterling common stock at a price of 22 cents a share.

Later, Sterling entered into an agreement with the U.S. Treasury to exchange a new series of preferred stock for $303 million in Sterling preferred stock that Treasury obtained when it provided $303 million in capital to Sterling in December 2008 under TARP, the Troubled Asset Relief Program.

If Sterling's planned recapitalization transactions close, immediately before the closing of THL's proposed investment, the government's new preferred stock would convert at a discounted value of $75.8 million into 378.8 million shares of Sterling common stock at 20 cents a share, Sterling said. In addition, a warrant Treasury obtained in the TARP transaction to buy 6.44 million additional shares of Sterling common would be amended to have an exercise price of 20 cents a share for up to 10 years.

On May 3, Sterling announced that it intended to offer $555 million in securities in a private placement of some 221.9 million shares of common stock at 20 cents a share and about 5.5 million shares of voting preferred stock that would be convertible into 2.6 billion shares of common. It also said that Thomas H. Lee Partners had agreed to increase its investment in Sterling to $170 million, which with the $555 million placement would satisfy the government's order for Sterling to raise capital. If all of the planned transactions closed, and Thomas H. Lee Partners exercised its rights to buy Sterling stock fully, the Boston company would have 24.9 percent of Sterling's shares, and Treasury would have just under 10 percent, Sterling said. On May 6, Sterling said Treasury had approved the increase in THL's proposed investment.

Sterling warned in the public filing that if the recapitalization transactions are completed, its current shareholders, who own about 52 million shares, will have "no more than a minimal stake in Sterling," and as a result of the sale of large numbers of its shares in the recapitalization transactions, the market price of its common stock could fall.

Also, it said it could decide to raise additional funds later through public or private debt or equity financings, which could reduce further the percentage ownership of its current shareholders, which would be between 1 percent and 2 percent of the company if the recapitalization is completed. The filing adds that the warrants and preferred stock to be issued in the proposed recapitalization transactions include anti-dilution adjustments that would protect new shareholders, but current shareholders have no such protections.

The THL agreement might be terminated if the recapitalization transactions don't close on or before Sept. 1, the filing says.

It also says, "If we fail to consummate the proposed recapitalization transactions or otherwise fail to raise sufficient capital, our ongoing financial viability would be in doubt and we may file for bankruptcy and/or our banking subsidiaries may enter into FDIC receivership."