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U. S. SECURITIES AND EXCHANGE COMMISSION
...............................................................................
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM _______________ TO ________________
Commission file number: 000-25128
FIRST STERLING BANKS, INC.
-------------------------
(Name of Small Business Issuer in Its Charter)
Georgia 58-2104977
- ---------------------------- ---------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1200 Barrett Parkway, Kennesaw, GA 30144
- ----------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
770-499-2265
- ------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 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
-- --
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. (X)
State issuer's revenues for the most recent fiscal year. $11,191,981
As of March 14, 1997, registrant had outstanding 1,289,581 shares of common
stock. The aggregate market value of the voting stock held by nonaffiliates
of the registrant is approximately $23,212,458.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
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PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
First Sterling Banks, Inc. (the "Company") is a two-bank holding company
which engages through its subsidiaries, The Westside Bank & Trust Company and
The Eastside Bank and Trust Company (the "Banks"), in providing full banking
services to customers of the Banks. The Company's executive offices are
located at 1200 Barrett Parkway, Kennesaw, Georgia 30144, and its telephone
number is 770/499-2265.
The Company was incorporated on March 16, 1994 as a Georgia business
corporation. On August 31, 1994, the Company purchased all of the shares of
common stock of The Westside Bank & Trust Company.
On December 21, 1995, the Boards of Directors of Eastside Holding
Corporation, the only shareholder of The Eastside Bank & Trust Company, and
Westside Financial Corporation, the only shareholder of The Westside Bank &
Trust Company, executed a definitive agreement to merge the two holding
companies, with Westside Financial Corporation surviving. The merger was
consummated on July 31, 1996, at which time Westside Financial Corporation
changed its name to First Sterling Banks, Inc. Each bank retained its Board
of Directors, management and trade name. The merger was accounted for as a
pooling of interests and was subject to approval by federal and state bank
holding company regulators and a majority of the shareholders of Eastside
Holding Corporation. The merger was approved by Eastside shareholders on July
16, 1996. Eastside Financial Services Inc. (EFS), commenced operations in
1994 as a wholly owned subsidiary of Eastside Bank. The purpose and business
of EFS is to provide assistance to the Bank and other community banks in the
closing, sale on the secondary market, and servicing of loans guaranteed by
the Small Business Administration.
Because of its ownership of all of the issued and outstanding shares of
the capital stock of The Westside Bank & Trust Company and The Eastside Bank
and Trust Company, the Company is a "Bank Holding Company" as that term is
defined under Federal law in the Bank Holding Company Act of 1956 (the
"Act"), as amended, and under the Bank Holding Company laws of the State of
Georgia (the "Georgia Act"). As a "Bank Holding Company", the Company is
subject to the applicable provisions of the Act and the Georgia Act, as well
as to supervision by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and the State of Georgia Department of Banking and
Finance (the "Department"). The Company's subsidiary banks provide a full
range of commercial banking services to its customers, except for trust
services. The Banks are organized under the laws of the State of Georgia.
MARKET AREA AND COMPETITION
The Banks encounter vigorous competition from other commercial banks,
savings and loan associations and other financial institutions and
intermediaries in the Bank's primary service area--North Cobb County, Georgia
and South Gwinnett County, Georgia.
The Banks compete with other banks in their primary service area in
obtaining new deposits and accounts, making loans, obtaining branch banking
locations and providing other banking services. The Banks also compete with
savings and loan associations and credit unions for savings and transaction
deposits, certificates of deposit and various types of loans.
Competition for loans is also offered by other financial intermediaries,
including savings and loan associations, mortgage banking firms and real estate
2
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investment trusts, small loan and finance companies, insurance companies,
credit unions, leasing companies, and certain government agencies.
Competition for time deposits and, to a more limited extent, demand and
transaction deposits is also offered by a number of other financial
intermediaries and investment alternatives, including "money market" mutual
funds, brokerage firms, government and corporate bonds and other securities.
Competition for banking services in the State of Georgia is not limited
to institutions headquartered in the State. A number of large out-of-state
banks, bank holding companies, and other financial institutions and
intermediaries have established, or announced plans to establish, loan
production offices, small loan companies, and other offices and affiliates in
the State of Georgia. Many of these out-of-state financial organizations that
compete in the Georgia market engage in regional, national or international
operations and have greater assets and personnel than the Banks.
Since July 1, 1985, numerous interstate acquisitions involving Georgia
based financial institutions have been announced or consummated. Though
interstate banking has resulted in significant changes in the structure of
financial institutions in the southeastern region, including the Bank's
primary service area, management does not feel that such changes have had or
will have a significant impact upon its operations or the results therefrom.
Each Bank's marketing strategy emphasizes its local nature and
involvement in the communities located in its' primary service area.
Management expects that competition will remain intense in the future due
to state and Federal laws and regulations, and the entry of additional bank
and nonbank competitors.
PROPERTIES
The Company and Westside Bank's main office are located at 1200 Barrett
Parkway, Kennesaw, Georgia. In 1989, Westside Bank purchased an approximate
1.156 acre tract of land in North Cobb County, Georgia (the "Property"). The
purchase price of the property was approximately $485,000. Improvements
consist of a one-story brick building of approximately 6,000 square feet. The
total cost of the offices, including all furnishings, site preparation,
landscaping, paving, security equipment and automatic teller machine, was
approximately $2,103,895.
In January 1996, Westside purchased a parcel of land and branch office in
Marietta, Georgia from another financial institution for $325,000. The
building was constructed in 1974 and contains approximately 2,600 square
feet. Improvements including, a new roof, new furnishings, landscaping,
paving, security equipment and automatic teller machine totaled approximately
$550,000.
Eastside Bank is located at 2019 Scenic Highway, Snellville, Georgia,
30278. In 1989, Eastside purchased an approximately 1.76 acre tract of land
in Snellville, Georgia. The purchase price of the property was approximately
$800,000.
Eastside's principal offices are located in a building of approximately
17,200 square feet. The total cost of the facility, including all
furnishings, site preparation, landscaping, paving, security equipment and
automatic teller machine, was approximately $2,700,000.
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Patents, trademarks, etc.
Westside Bank holds a registration for a service mark issued by the State
of Georgia on September 4, 1990 for the mark "Westside Bank" (and its design
logo). Eastside Bank holds a registration for a service mark issued by the
State of Georgia on September 4, 1990 for the mark "Eastside Bank" (and its
design logo). Both service marks are good for an initial period of ten years
and application may be made for a renewal period of ten years. The Banks do
not hold a federal registration for its service mark. Other than their
Georgia service mark, the banks hold no patents, trademarks, licenses (other
than licenses required to be obtained from appropriate banking regulatory
agencies), franchises, or concessions.
EMPLOYEES
As of March 1, 1997, the Westside Bank had a total of 23 full-time and 14
part-time employees. Eastside Bank had a total of 23 full-time and 11
part-time employees. These employees are provided with fringe benefits in
varying combinations, including health, accident, disability and life
insurance plans. In the opinion of management, the Banks enjoy excellent
relations with their employees.
SUPERVISION AND REGULATION
THE COMPANY
As a bank holding company, the Company is required to file with the
Federal Reserve an annual report and such additional information as the
Federal Reserve may require pursuant to the Federal Bank Holding Company Act.
The Federal Reserve may also conduct examinations of the Company and each of
its subsidiaries.
The Georgia Financial Institutions Code requires annual registration with
the Georgia Department of Banking and Finance by all Georgia bank holding
companies. Such registration includes information with respect to the
financial condition, operations, management of intercompany relationships of
the bank and such other information as is necessary to keep itself informed
as to whether the institution is in compliance with the provisions of Georgia
law and the regulations and orders issued thereunder by The Department.
THE BANKS
The Banks operate as banks organized under the laws of the State of
Georgia subject to examination by The Department. The Department regulates
all areas of each Bank's commercial banking operations including reserves,
loans, mergers, payment of dividends, interest rates, establishment of
branches and other aspects of operations.
The Banks are also insured and regulated by the FDIC. The major
functions of the FDIC with respect to insured banks include paying depositors
to the extent provided by law in the event an insured bank is closed without
adequately providing for payment of the claims of depositors, acting as a
receiver of state banks placed in receivership when so appointed by state
authorities, and preventing the continuance or development of unsound and
unsafe banking practices. In addition, the FDIC is authorized to examine
insured banks which are not members of the Federal Reserve to determine the
condition of such banks for insurance purposes. The FDIC also approves
conversions,
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mergers, consolidations and assumption of deposit liability transactions
between insured banks and noninsured banks or institutions to prevent capital
or surplus diminution in such transactions where the resulting, continued or
assumed bank is an insured nonmember state bank.
Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Bank Holding Company Act on any extension
of credit to the bank holding company or any of its subsidiaries, on
investment in the stock or other securities thereof and on the taking of such
stock or securities as collateral for loans to any borrower. In addition, a
bank holding company and its subsidiaries are prohibited from engaging in
certain tie-in-arrangements in connection with any extension of credit or
provision of any property or services.
CAPITAL REQUIREMENTS
Regulatory agencies measure capital adequacy with a framework that makes
capital requirements sensitive to the risk profile of the individual banking
institutions. The guidelines define capital as either Tier 1 (primarily
shareholder equity) or Tier 2 (certain debt instruments and a portion of the
allowance for loan losses). There are two measures of capital adequacy for
bank holding companies and their subsidiary banks, the leverage ratio and the
risk-based capital requirements. Bank holding companies and their subsidiary
banks must maintain a minimum Tier 1 leverage ratio of 4%. In addition, Tier
1 capital must equal 4% of risk-weighted assets and total capital (Tier 1
plus Tier 2) must equal 8% of risk-weighted assets. These are minimum
requirements, however, and institutions experiencing internal growth or
making acquisitions as well as institutions with supervisory or operational
weakness will be expected to maintain capital positions well above these
minimum levels.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business.
The following table reflects the Company and the banks' compliance with
regulatory capital requirements at December 31, 1996:
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
----------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT % AMOUNT % AMOUNT %
------------ --------- ---------- --------- ------------ --------
Leverage capital
Consolidated.......................................... 14,705,000 10.03% 5,864,000 4.00% 8,841,000 6.03%
Westside Bank......................................... 7,879,000 8.77 3,594,000 4.00 4,285,000 4.77
Eastside Bank......................................... 6,628,000 11.68 2,270,000 4.00 4,358,000 7.68
Risk-based core capital:
Consolidated.......................................... 14,705,000 14.42% 4,079,000 4.00% 10,626,000 10.42%
Westside Bank......................................... 7,879,000 14.20 2,219,000 4.00 5,660,000 10.20
Eastside Bank......................................... 6,628,000 14.26 1,859,000 4.00 4,769,000 10.26
Risk-based total capital:
Consolidated.......................................... 15,800,000 15.50% 8,155,000 8.00% 7,645,000 7.50%
Westside Bank......................................... 8,527,000 15.37 4,438,000 8.00 4,089,000 7.37
Eastside Bank......................................... 7,075,000 15.22 3,719,000 8.00 3,356,000 7.22
</TABLE>
5
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MONETARY POLICY
Banking is a business that depends on interest rate differentials. In
general, the difference between the interest rates paid by the Banks on its
deposits and other borrowings and the interest rate received on loans
extended to customers and on securities held in its portfolio comprises the
major portion of the Bank's earnings.
The earnings and growth of the Banks and the Company are affected not
only by general economic conditions, both domestic and foreign, but also by
the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve can and does implement
national monetary policy, such as seeking to curb inflation or combat
recession, by its open market operations in United States government
securities, limitations upon savings and time deposit interest rates,
adjustment in the amount of industry reserves that banks and other financial
institutions are required to maintain and adjustments to the discount rates
applicable to borrowings by banks from the Federal Reserve System. The
actions of the Federal Reserve in these areas influence the growth of bank
loans, investments and deposits and also affect interest rates charged and
paid on deposits. The nature and impact of any future changes in monetary
policies cannot be predicted with certainty.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system
for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The new system, which went into effect on January 1, 1994,
assigns an institution to one of three capital categories: (a) well
capitalized; (b) adequately capitalized; and (c) undercapitalized. An
institution is also assigned by the FDIC to one of three supervisory
subgroups within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
FDIC by the institution's primary federal regulator and information which the
FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if
applicable, information provided by the institution's state supervisor). An
institution's insurance assessment rate is then determined based on the
capital category and supervisory category to which it is assigned. Under the
final risk-based assessment system, as well as the prior transitional system,
there are nine assessment risk classifications (i.e., combinations of capital
groups and supervisory subgroups) to which different assessment rates are
applied. Assessment rates for members of both the Bank Insurance Fund ("BIF")
and the Savings Association Insurance Fund ("SAIF") for the first half of
1995, as they had during 1994, ranged from 23 basis points (0.23% of deposits
for an institution in the highest category (i.e., "well capitalized" and
"healthy") to 31 basis points (0.32% of deposits) for an institution in the
lowest category (i.e., "undercapitalized" and "substantial supervisory
concern"). These rates were established for both funds to achieve a
designated ratio of reserves to insured deposits (i.d., 1.25%) within a
specified period of time.
Once the designated ratio for the BIF was reached in May 1995, the FDIC
reduced the assessment rate applicable to BIF deposits in two stages, so
that, beginning 1996, the deposit insurance premiums for 92% of all BIF
members in the highest capital and supervisory categories were set at $2,000
per year, regardless of deposit size. The FDIC elected to retain the existing
assessment rate range of 23 to 31 basis points for
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SAIF members for the foreseeable future given the undercapitalized nature of
that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to
raise funds in capital markets and to attract deposits, on July 28, 1995, the
FDIC, the Treasury Department, and the Office of Thrift Supervision released
statements outlining a proposed plan to recapitalize the SAIF, the principal
feature of which was a special one-time assessment on depository institutions
holding SAIF-insured deposits, which was intended to recapitalize the SAIF at
a reserve ratio of 1.25%. This proposal contemplated elimination of the
disparity between the assessment rates on BIF and SAIF deposits following
recapitalization of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act
of 1996 (the "Funds Act") was enacted by Congress as part of the omnibus
budget legislation and signed into law on September 30, 1996. As directed by
the Funds Act, the FDIC implemented a special one-time assessment of
approximately 65.7 basis points (0.657%) on a depository institution's
SAIF-insured deposits held as of March 31, 1995 (or approximately 52.6 basis
points on SAIF deposits acquired by banks in certain qualifying transactions).
In addition, the FDIC proposed a revision in the SAIF assessment rate
schedule that effected, as of October 1, 1996 (a) a widening in the
assessment rate spread among institutions in the different capital and risk
assessment categories, (b) an overall reduction of the assessment rate range
assessable on SAIF deposits of from 0 to 27 basis points, and (c)a special
interim assessment rate range for the last quarter of 1996 of from 18 to 27
basis points on institutions subject to FICO assessments. Effective January
1, 1997, FICO assessments will be imposed on both BIF and SAIF insured
deposits in annual amounts presently estimated at 1.29 basis points and 6.44
basis points, respectively. Beginning in January 2000 BIF and SAIF insured
institutions will share the FICO interest costs at equal rates currently
estimated 2.43 basis points. The Funds Act further provides that BIF and SAIF
are to be merged, creating the "Deposit Insurance Fund," on January 1, 1999,
provided that bank and savings association charters are combined on that date.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon
a finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe or unsound condition to continue operations, or has violated
any applicable law, regulation, rule, order, or condition imposed by the FDIC.
THE RIEGLE-NEAL INTERSTATE BANKING AND BRANCHING EFFICIENCY ACT
In September 1994, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Interstate Banking Act") became law. The
Interstate Banking Act has two major provisions regarding the merger,
acquisition and operation of banks across state lines. First it provides that
effective September 29, 1995, adequately capitalized and managed bank holding
companies will be permitted to acquire banks in any state. In addition, the
Interstate Banking Act provides that as of June 1, 1997, adequately
capitalized and managed banks will be able to engage in interstate branching
by merging banks in different states. The State of Georgia has enacted
legislation in connection with the Interstate Banking Act which requires that
a bank located within the State must be in existence for a period of five (5)
years before it may be acquired by an out-of-State institution. This State
legislation also requires out-of-State
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institutions to purchase an existing bank or branch in the State rather than
starting a de novo bank.
GEORGIA INTERSTATE BRANCHING ACT
In February 1996, the Georgia Legislature adopted the "Georgia Interstate
Branching Act" effective June 1, 1997. The Georgia Interstate Branching Act
will permit Georgia-based banks and bank holding companies owning or
acquiring banks outside of Georgia and all non-Georgia banks and bank holding
companies owning or acquiring banks in Georgia to merge any lawfully acquired
bank into an Interstate branch network. The Georgia Interstate Branching Act
also allows banks to establish de novo branches on a limited basis beginning
July 1, 1996. Beginning July 1, 1998, the number of de novo branches which
may be established will no longer be limited.
PROPOSED LEGISLATION
Bills are regularly introduced in the United States Congress that contain
wide-ranging proposals for altering the structures, regulations and
competitive relationships of the nation's financial institutions. It cannot
be predicted whether or what form any proposed legislation will be adopted or
the extent to which the business of the Company and the Bank may be affected
thereby.
OFFICERS
The following table sets forth certain information with respect to the
officers of the Registrant:
<TABLE>
<CAPTION>
NAME OFFICER
(AGE) POSITION WITH THE REGISTRANT SINCE
- ----- -------------------------------- -----------
<S> <C> <C>
Edward C. Milligan Chairman, President & CEO 1994
(52)
Barbara J. Bond Secretary 1994
(48)
</TABLE>
ITEM 2. DESCRIPTION OF PROPERTY
The principal properties of the Registrant consist of the properties of
the Banks. For a description of the properties , see "Item 1 - Description of
Business" included elsewhere in this Annual Report.
ITEM 3. LEGAL PROCEEDINGS
Neither the registrant nor its subsidiary banks are a party to, nor is
any of their property the subject of, any material pending legal proceedings,
other than ordinary routine proceedings incidental to the business of the
Banks, nor to the knowledge of the management of the registrant are any such
proceedings contemplated or threatened against it or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the registrant's shareholders
during the fourth quarter of 1996.
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PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Prior to August 1995, there was no public market for the registrants
common stock.
In 1995, the Board of Directors voted to allow J. C. Bradford & Company
to be the principal market maker for the Company's common stock. The stock is
traded in the over-the-counter market and is quoted on the NASDAQ Bulletin
Board under the symbol FSLB. The following table sets forth the high and low
bid prices for the period indicated:
<TABLE>
<CAPTION>
MARKET PRICE PER FOURTH THIRD
COMMON SHARE QUARTER QUARTER
------------------------ ---------- ---------
<S> <C> <C>
1996
----
High........................................... $ 17.00 $ 15.375
Low............................................ $ 14.00 $ 13.75
</TABLE>
(b) As of March 14, 1997, there were approximately 857 shareholders of
record of the registrant's common stock.
(c) During 1996, the company paid cash dividends on its common stock of
$0.26 per share.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA 1996 1995 1994 1993 1992
- ----------------------------------------------------------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Total interest income...................................... $ 10,432 $ 9,705 $ 7,491 $ 6,007 $ 5,909
Total interest expense..................................... 4,393 4,087 2,916 2,678 2,970
Net interest income........................................ 6,039 5,618 4,575 3,329 2,939
Provision for loan losses.................................. 137 256 257 134 318
Net interest income after provision for loan losses........ 5,902 5,362 4,318 3,195 2,621
Other operating income..................................... 760 571 513 538 449
Net income................................................. 1,509 1,616 1,209 854 310
Net income per share....................................... 1.09 1.17 1.00 .71 .26
Dividends per share........................................ .26 0.07 .06 -- --
Selected Balance Sheet Data
Total loans................................................ $ 83,726 $ 73,148 $ 63,897 $ 52,333 $ 46,316
Total assets............................................... 136,706 121,172 100,860 92,937 73,740
Total deposits............................................. 120,540 106,465 88,172 81,410 64,240
Shareholders' equity....................................... 14,742 13,591 12,160 11,246 10,284
</TABLE>
9
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GENERAL
On December 21, 1995, the Boards of Directors of Eastside Holding
Corporation, the only shareholder of The Eastside Bank & Trust Company, and
Westside Financial Corporation, the only shareholder of The Westside Bank &
Trust Company, executed a definitive agreement to merge the two holding
companies, with Westside Financial Corporation surviving. The merger was
consummated on July 31, 1996, at which time Westside Financial Corporation
changed its name to First Sterling Banks, Inc. Each bank retained its Board
of Directors, management and trade name. The proposed merger was approved by
federal and state bank holding company regulators and a majority of the
shareholders of Eastside Holding Corporation. Eastside Bank began operations
on January 22, 1990, Westside Bank began operations on May 14, 1990.
RESULTS OF OPERATIONS
The Company's results of operations are determined by its ability to
effectively manage interest income and expense, to minimize loan and
securities losses, to generate non-interest income and to control
non-interest expense. Interest rates are determined by general economic
conditions and competition. Net interest income is determined by the Bank's
ability to obtain an adequate spread between the rate earned on earning
assets and the rate paid on interest-bearing liabilities.
The major component of consolidated earnings is net interest income, or
the difference between interest income on earning assets and interest paid on
interest bearing liabilities. The key performance measure for net interest
income is the net interest margin. Net interest margin is net interest income
expressed as a percentage of average earning assets.
Net interest income for the year ended December 31, 1996 was $6,039,383
an increase of $421,568 or 7.5% compared to December 31, 1995. The increase
in net interest income is largely attributable to a $6,586,000 or 6.14%
increase in average earning assets and an improved net interest margin. The
average yield on earning assets was 9.17% compared to 9.05% in 1995.
The Banks' average cost of funds was 4.71% in 1996 as compared to 4.57%
in 1995. Average interest bearing liabilities increased $3,825,000 or 4.27%
over 1995. As in previous years, the increase in interest bearing liabilities
and average earning assets was significantly affected by seasonal deposits at
Westside Bank. Seasonal deposits have been maintained at the bank since its
opening in 1990, and the bank has no reason to believe that this will change.
However, it would be impossible to project the future balances of seasonal
deposits as they have fluctuated significantly in the past. Average
non-interest bearing deposits increased $3,124,000 or 22% over 1995.
The allowance for loan losses represents a reserve for potential losses
in the loan portfolio. The provision for loan losses is a charge to earnings
in the current period to replenish the allowance and maintain it at a level
management has determined to be adequate based upon the growth of the loan
portfolio and management's desire to provide adequately for inherent risk in
the loan portfolio. The provision for loan losses charged to earnings
amounted to $137,500 in 1996 and $256,000 in 1995.
The banks had net charge-offs of $57,938 in 1996 compared to net
charge-offs of $145,142 in 1995. The allowance for loan losses as a
percentage of total loans outstanding at December 31, 1996 and 1995 amounted
to 1.31% and 1.39% respectively.
Bank management closely monitors the loan portfolio and the underwriting
of loans
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and considers the allowance for loan losses to be conservative yet reasonable
given the nature of each Bank's loan portfolio. An independent third party
performs periodic reviews of the loan portfolio, at least semi-annually.
Management intends to continue maintaining an adequate allowance for loan
losses in relation to loans outstanding in the future based on management's
evaluation of the loan portfolio under prevailing economic conditions,
underlying collateral value securing loans and such other factors as
management deems appropriate.
Following is a comparison of non-interest income for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Service charges on deposit accounts................................... $ 371,211 $ 342,477
Gain on sale of loans................................................. 237,247 141,141
Other income.......................................................... 155,353 87,741
Net realized losses on securities..................................... (4,157) --
---------- ----------
$ 759,654 $ 571,359
---------- ----------
---------- ----------
</TABLE>
Non-interest income consists primarily of service charges on deposit
accounts, gains on the sale of SBA (Small Business Administration) loans into
the secondary market, customer service fees, gains (losses) on investment
securities transactions and miscellaneous other income.
Following is an analysis of non-interest expense for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Salaries and employee benefits.................................... $ 2,250,272 $ 1,871,564
Occupancy and equipment expense................................... 525,897 447,887
Deposit insurance premiums........................................ 4,000 104,156
Data processing fees.............................................. 197,125 192,963
Directors Fees.................................................... 140,225 81,050
Merger expenses................................................... 131,632 --
Other expense..................................................... 1,031,323 925,806
------------ ------------
$ 4,280,474 $ 3,623,426
------------ ------------
------------ ------------
</TABLE>
Non-interest expense increased $657,048 or 18% over 1995. Non-recurring
merger expenses account for $131,323 or 20% of the increase. Non-interest
expense consists primarily of salaries and other employee benefits, occupancy
expense, and other operating costs. Personnel expense increased $378,708 over
1995. This increase is primarily attributable to Westside Bank opening a
fully staffed branch office, and Eastside Bank paying bonuses in 1996
significantly higher than 1995. At December 31, 1996, the company employed 46
full-time employees and 25 part-time employees. Bonus expense increased
$68,335 over 1995. Directors fees increased $49,175 over 1995. Management
salaries, bonuses and directors fees were reviewed by an independent third
party consultant and adjustments made where appropriate. Directors are paid
for each board meeting attended, and outside directors are paid for each
committee meeting attended. It is the intention of management and the board
to continue to offer salaries and other benefits competitive with other
banks, and reward individuals based on the performance of the Bank. Other
expense increased $105,517 or 11.40% over 1995. Net income after tax
decreased $106,816 or 6.61% from 1995. Tax expense in 1996 was $872,085 as
compared to $693,954 in 1995, an increase of 25.67%. Much of this increase is
attributable to the fact that Eastside Bank did not begin accruing tax until
mid 1995,
11
<PAGE>
when it had used all available net operating loss carrryforwards. Net income
before taxes increased $71,315. or 3.09% over 1995.
The following tables set forth the amount of the Company's average
earning assets and interest-bearing liabilities, together with related
interest income and expense and average rates for 1996 and 1995:
AVERAGE BALANCES AND NET INCOME ANALYSIS
The condensed average balance sheets for the period indicated are presented
below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
<S> <C> <C>
1996 1995
-------------- --------------
ASSETS
Cash and due from banks...................................... $ 5,953,000 $ 5,195,000
Interest-bearing deposits in banks........................... 48,000 --
Taxable Securities........................................... 19,872,000 19,825,000
Nontaxable Securities........................................ 2,230,000 1,099,000
Federal funds sold........................................... 10,200,000 12,066,000
Securities purchased under agreement to resell............... 2,334,000 6,556,000
Loans (1).................................................... 79,131,000 67,683,000
Reserve for loan losses...................................... (1,065,000) (908,000)
Other assets................................................. 6,884,000 5,859,000
-------------- --------------
Total Assets............................................ $ 125,587,000 $ 117,375,000
-------------- --------------
-------------- --------------
Total earning assets......................................... $ 113,815,000 $ 107,229,000
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $ 17,328,000 $ 14,204,000
Interest-bearing demand and savings.......................... 35,705,000 37,410,000
Time...................................................... 57,398,000 52,078,000
-------------- --------------
Total deposits.......................................... 110,431,000 103,692,000
Federal funds purchased and securities sold under agreement
to repurchase.............................................. 210,000 --
Other liabilities............................................ 956,000 735,000
-------------- --------------
Total liabilities....................................... $ 111,597,000 104,427,000
-------------- --------------
Stockholders' equity......................................... $ 13,990,000 $ 12,948,000
-------------- --------------
Total Liabilities and Stockholders' equity.............. $ 125,587,000 117,375,000
-------------- --------------
-------------- --------------
Total interest-bearing liabilities........................... $ 93,313,000 $ 89,488,000
-------------- --------------
-------------- --------------
</TABLE>
- ------------------------
(1) Average loans include non-accrual loans, if any.
12
<PAGE>
INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
---------------------- ----------------------
<CAPTION>
AVERAGE AVERAGE
INTEREST RATE INTEREST RATE
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1)......................................... $ 8,439 10.66% $ 7,349 10.86%
Interest on investment securities:
Taxable Securities................................................... 1,229 6.18 1,240 6.25
Nontaxable Securities................................................ 108 4.84 52 4.73
Interest on Federal funds sold....................................... 538 5.27 699 5.79
Interest on securities purchased under agreement to resell........... 115 4.93 365 5.57
Interest on deposits in banks........................................ 3 6.25 -- --
--------- --------- -------- -------
Total interest income................................................ $ 10,432 9.17 $ 9,705 9.05
--------- --------- -------- -------
INTEREST EXPENSE:
Interest on savings and interest-bearing demand deposits............. $ 1,031 2.89% $ 1,060 2.83
Interest on time deposits............................................ 3,352 5.84 3,027 5.81
Interest on Federal funds purchased and securities sold under
agreement to repurchase.............................................. 10 4.76 -- --
--------- --------- --------- -------
Total interest expense............................................... $ 4,393 4.71 $ 4,087 4.57
--------- --------- --------- -------
NET INTEREST INCOME....................................................... $ 6,039 $ 5,618
--------- ---------
--------- ---------
Net interest spread.................................................. 4.46% 4.48%
--------- -------
--------- -------
Net yield on average interest-earning assets......................... 5.31% 5.24%
--------- -------
--------- -------
</TABLE>
(1) In computing yields on earning assets, the average balances of non-accruing
loans are included in the average balances, and loan fees of $728,761 and
$486,535 for the years ended December 31, 1996 and 1995, respectively, are
included in interest income.
RATE AND VOLUME ANALYSIS
The following table reflects the changes in net interest income resulting
from changes in interest rates and from asset and liability volume. The
change in interest attributable to rate has been determined by applying the
change in rate between years to average balances outstanding in the later
year. The change in interest due to volume has been determined by applying
the rate from the earlier year to the change in average balances outstanding
between years. Thus, changes that are not solely due to volume have been
consistently attributable to rate. Changes reflected herein may differ slightly
from actual changes due to rounding.
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1996 V.S. 1995
INCREASE CHANGES DUE TO
(DECREASE) RATE VOLUME
----------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans.................................................. $ 1,090 $ (153) $ 1,243
Interest on investment securities:
Taxable..................................................................... (11) (14) 3
Nontaxable.................................................................. 56 2 54
Interest on Federal funds sold.............................................. (161) (53) (108)
Interest on securities purchased under agreement to resell.................. (250) (15) (235)
Interest on deposits in other banks......................................... 3 -- 3
----------- ----- ---------
Total interest income.................................................... $ 727 $ (233) $ 960
----------- ----- ---------
----------- ----- ---------
Expense from interest-bearing liabilities
Interest on interest-bearing demand and savings deposits.................... $ (29) $ 19 $ (48)
Interest on time deposits................................................... 325 16 309
Interest on Federal funds purchased and securities sold under
agreement to repurchase.................................................... 10 -- 10
----------- ----- ---------
Total interest expense................................................... $ 306 $ 35 $ 271
Net interest income...................................................... $ 421 $ (268) $ 689
----------- ----- ---------
----------- ----- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1995 V.S. 1994
INCREASE CHANGES DUE TO
(DECREASE) RATE VOLUME
----------- ----------- ---------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans.................................................. $ 1,299 $ 586 $ 713
Interest on investment securities:
Taxable..................................................................... 217 97 120
Nontaxable.................................................................. 37 12 25
Interest on Federal funds sold.............................................. 334 178 156
Interest on securities purchased under agreement to resell.................. 326 63 263
----------- ----- ---------
Total interest income.................................................... $ 2,213 $ 936 $ 1,277
----------- ----- ---------
----------- ----- ---------
Expense from interest-bearing liabilities
Interest on interest-bearing demand and savings deposits.................... $ 261 $ 81 $ 180
Interest on time deposits................................................... 914 516 398
Interest on Federal funds purchased and securities sold under
agreement to repurchase.................................................... (4) -- (4)
----------- ----- ---------
Total interest expense................................................... $ 1,171 $ 597 $ 574
----------- ----- ---------
Net interest income...................................................... $ 1,042 $ 339 $ 703
----------- ----- ---------
----------- ----- ---------
</TABLE>
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of the company to meet the cash flow
requirements of customers and fund its commitments. The Company's primary
sources of funds are increases in deposits, loan repayments, sales and
maturities of investments and net income. The Company actively manages its
liquidity position by matching maturities and interest rate sensitivity in
asset and liability portfolios. Further, the Banks maintain relationships
with correspondent banks which could provide funds to them on short notice,
if needed. In January 1996, Westside Bank joined the Federal Home Loan Bank
of Atlanta which will also provide an alternative source of funding.
The liquidity and capital resources of the Company and the Bank are
monitored on a periodic basis by state and federal regulatory authorities. As
determined under guidelines established by those regulatory authorities, the
Bank's liquidity ratios at December 31, 1996 were considered satisfactory. At
December 31, 1996, investment securities with a book value of $1,620,880 were
scheduled to mature within one year. These investments, along with federal
funds sold and securities purchased under agreement to resell of $18,780,000
as of December 31, 1996, will provide a ready source of funds. At December
31, 1996, the Company's and the Bank's capital asset ratios were considered
adequate based on guidelines established by the regulatory authorities.
During 1996, the Company increased its capital by retaining net earnings of
$1,168,194 after dividend payments of $340,784. At December 31, 1996,
total capital of the Company amounted to $14,742,369.
On September 20, 1995, the Board of Directors of Westside Financial
unanimously approved a stock redemption plan to redeem up to 60,000 shares of
its common stock. A total of 25,000 shares were repurchased for $415,000
prior to the termination of the repurchase plan which occurred before the
execution of a letter of intent in regard to the proposed merger. On February
26, 1997 the Board of Directors of First Sterling Banks, Inc. approved a
stock redemption plan to redeem up to 35,000 shares of its common stock at a
price not to exceed $18.00 per share. As of March 7, 1997, 35,000 shares had
been repurchased for $618,875, an average price of $17.6821 per share.
Management is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have a material
effect on the Company's liquidity, capital resources or operations.
15
<PAGE>
MATURITIES
The following table sets forth the maturity distribution by amortized cost,
of securities according to type of security and contractual maturity:
MATURITY DISTRIBUTION OF SECURITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less................................ $ 1,620,880 $ 1,626,567 $ 1,250,711 $ 1,250,672
Due from one year to five years........................ 8,123,631 8,140,110 2,247,628 2,210,804
Due from five to ten years............................. 2,667,989 2,693,973 -- --
Due after ten years.................................... 1,193,570 1,208,586 -- --
Mortgage-backed securities............................. 5,207,151 5,202,283 -- --
Equity securities...................................... 269,200 269,200 --
------------- ------------- ------------ ------------
$ 19,082,421 $ 19,140,719 $ 3,498,339 $ 3,461,476
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Securities with a carrying value of $12,027,000 and $13,469,000 at December
31, 1996 and 1995, respectively, were pledged to secure public deposits and for
other purposes.
The following table represents the composition of the Bank's loan portfolio
according to the purpose of the loan and/or repayment terms:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1995
------------- -------------
<S> <C> <C>
Commercial, financial and agricultural......................... $ 19,853,352 $ 14,349,228
Real estate--construction and land development................. 21,791,259 20,694,525
Real estate--Mortgage.......................................... 34,224,333 29,385,856
Installment and other consumer................................. 8,223,197 9,039,439
------------- -------------
84,092,141 73,469,048
Net deferred loan fees......................................... (366,402) (321,415)
------------- -------------
83,725,739 73,147,633
------------- -------------
Less reserve for possible loan losses.......................... (1,094,621) (1,015,059)
------------- -------------
Net loans...................................................... $ 82,631,118 $ 72,132,574
------------- -------------
------------- -------------
16
<PAGE>
</TABLE>
SUPPLEMENTAL MATURITY SCHEDULE OF LOANS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
OVER ONE
ONE YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Commercial and industrial............................... $ 9,815,151 $ 4,985,075 $ 5,053,126 $ 19,853,352
Real estate - construction and land development.......... 20,708,032 482,566 600,661 21,791,259
Real estate - mortgage................................... 5,801,793 16,191,788 12,230,752 34,224,333
Installment and other consumer.......................... 3,051,432 4,655,673 516,092 8,223,197
</TABLE>
NON-PERFORMING LOANS
There were $322,992 non-accrual loans at December 31, 1996 and $86,781 at
December 31, 1995. Accrual of interest is discontinued when management believes
after considering economic and business conditions and collection efforts, that
the ultimate collection of interest is doubtful.
Effective January 1, 1995 the Company adopted Statement of Financial
Accounting Standards No. 114 and, as amended, No. 118, "Accounting by Creditors
for Impairment of a Loan". The statement prescribes that impaired loans be
measured on the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. The statement had no material effect on the financial
statements of the Company as of December 31, 1996.
DEPOSITS
The following table represents the composition of the Bank's deposit
accounts, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
--------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing deposits............................................. $ 17,328 --% $ 14,204 --%
Interest-bearing demand and savings deposits............................. 35,705 2.89 37,410 2.83
Time deposits............................................................ 57,398 5.84 52,078 5.81
</TABLE>
MATURITY SCHEDULE OF TIME DEPOSITS OVER $100,000
December 31, 1996
<TABLE>
<S> <C>
Three months or less........................................... $5,783,606
Three months to six months..................................... 3,324,299
Six months to twelve months.................................... 2,923,372
Over twelve months............................................. 2,948,685
Total.......................................................... $14,979,962
----------
----------
17
<PAGE>
</TABLE>
SUMMARY OF LOAN LOSS EXPERIENCE
The provision for possible loan losses is based upon the growth of the loan
portfolio and management's desire to provide adequately for inherent risk in the
loan portfolio.
Both banks have an internal rating system used for calculating the required
reserve based on the type of loan and the assigned risk code. For loans which
are classified "sub-standard" or lower, a portion of the Allowance for Loan
Losses is allocated to them dependent upon the amount of estimated exposure.
The provision for loan losses charged to operations was $137,500 during the
year ended December 31, 1996, compared to $256,000 in 1995. During 1996, the
Bank had net charge-offs of $57,938. There were net charge-offs of $145,142 in
1995.
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Average amount of loans outstanding............................ $ 79,130,991 $ 67,683,000
------------- -------------
------------- -------------
Balance of reserve for possible loan losses at beginning of
period....................................................... $ 1,015,059 $ 904,201
Provision charged to operating expense......................... 137,500 256,000
Recoveries:
Commercial, financial and agricultural......................... 2,825 11,000
Real estate--construction and land development................. 13,737
Real estate--mortgage.......................................... -- 13,000
Installment and other consumer................................. 5,798 6,582
------------- -------------
Total recoveries............................................... $ 22,360 $ 30,582
------------- -------------
Less chargeoffs:
Commercial, financial and agricultural......................... 24,709 84,775
Real estate--construction and land development................. 5,722 --
Real estate--mortgage.......................................... -- 65,000
Installment and other consumer................................. 49,867 25,949
------------- -------------
Total chargeoffs............................................... $ 80,298 $ 175,724
------------- -------------
Net chargeoffs................................................. $ 57,938 145,142
------------- -------------
Balance of reserve for possible loan losses at end of period... $ 1,094,621 $ 1,015,059
------------- -------------
------------- -------------
Ratio of net loan chargeoffs to average loans.................. .07% .21%
------------- -------------
------------- -------------
</TABLE>
18
<PAGE>
COMMITMENTS AND LINES OF CREDIT
In the ordinary course of business, the Bank has granted commitments to
extend credit to approved customers. Generally, these commitments to extend
credit have been granted on a temporary basis for seasonal or inventory
requirements and have been approved by the Bank's Board of Directors. The Bank
has also granted commitments to approved customers for standby letters of
credit. These commitments are recorded in the financial statements when funds
are disbursed or the financial instruments become payable. The Bank adheres to
the same credit and collateral policies for these off balance sheet commitments
as they do for financial instruments that are recorded in the financial
statements. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitment amounts expire without being drawn upon, the total commitment amounts
do not necessarily represent future cash requirements.
The Banks had outstanding unfunded commitments at December 31, 1996, as
follows:
<TABLE>
<S> <C>
Commercial, financial and agricultural......................... $ 7,575,809
Real estate--construction and land development................. 10,575,952
Real estate--mortgage.......................................... 4,527,250
Installment and other consumer................................. 1,539,135
Standby letters of credit...................................... 298,000
----------
$24,516,146
-----------
-----------
</TABLE>
ASSET/LIABILITY MANAGEMENT
The following table sets forth the distribution of the repricing of the
Banks' earning assets and interest-bearing liabilities as of December 31, 1995,
the interest rate sensitivity gap (i.e., interest rate sensitive assets less
interest rate sensitive liabilities), the cumulative interest rate sensitivity
gap, the interest rate sensitivity gap ratio (i.e., interest rate sensitive
assets divided by interest rate sensitive liabilities) and the cumulative
sensitivity gap ratio. The table also sets forth the time periods in which
earning assets and liabilities will mature or may reprice in accordance with
their contractual terms. However, the table does not necessarily indicate the
impact of general interest rate movements on the net interest margin since the
repricing of various categories of assets and liabilities is subject to
competitive pressures and the needs of the Banks' customers. In addition,
various assets and liabilities indicated as repricing within the same period may
in fact reprice at different times within such period and at different rates.
The objective of interest rate sensitivity management is to minimize the
effect of interest rate changes on net interest margins while maintaining net
interest income at acceptable levels. The major factors that are used to manage
interest rate risk include the mix of fixed and floating interest rates, pricing
and maturity patterns for all asset and liability accounts.
19
<PAGE>
<TABLE>
<CAPTION>
AFTER THREE AFTER ONE
MONTHS BUT YEAR BUT
WITHIN WITHIN WITHIN AFTER
THREE MONTHS ONE YEAR FIVE YEARS FIVE YEARS TOTAL
------------- ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Earning assets:
Interest-bearing deposits in banks............... $ 13 $ 100 $ -- $ -- $ 113
Federal funds sold............................... 18,780 -- -- -- 18,780
Securities....................................... 770 3,360 12,428 6,081 22,639
Loans............................................ 52,970 6,929 19,819 4,008 83,726
------------- ----------- ----------- ---------- ----------
Total rate sensitive assets ..................... $ 72,533 $ 10,389 $ 32,247 $10,089 $ 125,258
------------- ----------- ----------- ---------- ----------
Interest-bearing liabilities:
Interest-bearing demand deposits................. $ 40,005 $ -- $ -- $ -- $ 40,005
Savings accounts................................. 3,795 -- -- -- 3,795
Time deposits.................................... 22,093 24,037 11,902 -- 58,032
Other interest bearing liabilities............... 606 -- -- -- 606
------------- ----------- ----------- ---------- ----------
Total Rate sensitive liabilities................. $ 66,499 $ 24,037 $ 11,902 $ -- $ 102,438
------------- ----------- ----------- ---------- ----------
Interest rate sensitivity GAP.................... $ 6,034 $ (13,648) $ 20,345 $ 10,089
------------- ----------- ----------- ----------
------------- ----------- ----------- ----------
Cumulative interest rate sensitivity GAP......... $ 6,034 $ (7,614) $ 12,731 $ 22,820
------------- ----------- ----------- ----------
------------- ----------- ----------- ----------
GAP as % of assets............................... 4.41% (9.98%) 14.88% 7.38%
Cumulative GAP as a % of assets.................. 4.41% (5.57%) 9.31% 16.69%
Interest Rate Sensitivity GAP ratio.............. 109.07% 43.22% 270.94% --
Cumulative interest rate sensitivity GAP ratio... 109.07% 91.59% 112.43% 122.28%
</TABLE>
20
<PAGE>
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
The following rate of return information for the periods indicated is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
<S> <C> <C>
1996 1995
--------- ---------
Return on assets (1)......................................................... 1.20% 1.38%
Return on equity (2)......................................................... 10.79% 12.48%
Dividend payout ratio (3).................................................... 23.85% 5.98%
Equity to assets ratio (4)................................................... 11.14% 11.03%
</TABLE>
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share.
(4) Average equity divided by average total assets.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are included on page 1 through 29 of this Annual Report on
Form 10-KSB.
Consolidated Balance Sheets--December 31, 1996 and 1995
Consolidated Statements of Income--Years Ended December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1996 and 1995
Consolidated Statements of Cash Flows--Years Ended December 31, 1996 and
1995
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During 1996, the Company did not change its accountants and there was no
disagreement on any matter of accounting principles or practices for financial
statement disclosure that would have required the filing of a current report on
Form 8-K.
21
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The following table sets forth the respective names, ages and positions with
the Company and the Bank, other directorships and principal occupations of the
members of the Board of Directors and the executive officers of the Company and
the Banks.
<TABLE>
<CAPTION>
POSITION(S)
WITH THE COM- PRINCIPAL OCCUPATION
NAME AGE PANY AND BANK DURING THE PAST FIVE YEARS
- ---------------------------------- --- ---------------------------------- ----------------------------------
<S> <C> <C> <C>
Barbara J. Bond 48 Senior V.P. of Westside Bank Ms. Bond serves as Senior Vice
Secretary of Company and President and Senior Operations
Westside Bank Officer of Westside Bank and has
served in such capacities since the
organization of Westside. Ms. Bond
has served as Secretary of the
Bank and the Company since
September 1991 and March 1994,
respectively.
Harry L. Hudson, Jr. 53 Director of Company and Chairman Mr. Hudson is currently serving as
of Eastside Bank Chairman of the Board of Directors
of Eastside Bank, an office he has
held since February 1993. Mr.
Hudson has been employed by State
Farm Insurance since January 1,
1970. He has served as Agent,
Agency Manager, and Agency Field
Executive.
The Honorable P. Harris Hines 53 Director of Company and Chairman Judge Hines has served as chairman
of Westside Bank of the Board of Directors of
Westside Bank since April 1992.
From January 1, 1983 until July
26, 1995, Judge Hines served as a
Judge of the Superior Court of
Cobb County. Since July 26, 1995,
Judge Hines has served as a
Justice of the Supreme Court of
the State of Georgia. Judge Hines
is a Trustee of the Kennesaw State
College Foundation and is a past
member of the Judicial Council of
Georgia.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
POSITION(S)
WITH THE COM- PRINCIPAL OCCUPATION
NAME AGE PANY AND BANK DURING THE PAST FIVE YEARS
- ---------------------------------- --- ---------------------------------- ----------------------------------
<S> <C> <C>
Edward C. Milligan 52 Chairman, President and CEO Mr. Milligan has served as
of Company; President, CEO and President and Chief Executive
Director of Westside Bank; Director Officer of Westside since its
of Eastside Bank organization. Mr. Milligan has
served as President and CEO of the
Company since its organization in
March 1994. Mr. Milligan has
served as a Director of Eastside
Bank since August 1996.
John S. Thibadeau, Jr. 49 Director of Company and Eastside Since 1973, Mr. Thibadeau has been
Bank president of Deauton Corporation,
a real estate Construction and
development firm. As a licensed
real estate broker, Mr. Thibadeau
is an officer and principal in
Thibadeau Burton Realty and serves
as Vice-President of University
Inn Operating Co., a hotel motel
management firm.
Benjamin H. Wofford, M.D. 58 Director of Company and Westside Dr. Wofford served as Chairman of
Bank the Board of Directors of Westside
Bank from its organization until
April, 1991. Since 1970, Dr.
Wofford has been a physician
specializing in plastic and
cosmetic surgery in Marietta,
Georgia. Dr. Wofford is a member
of the Medical Association of
Georgia, Georgia Society of
Plastic Surgeons, Southeastern
Society of Plastic &
Reconstructive Surgeons, and
American Society of Plastic and
Reconstructive Surgeons.
</TABLE>
No director of the Company or the Bank is related to any other director or
executive officer. No director of the Company or the Bank is an active director
or executive officer of another bank, savings and loan association, credit union
or bank or savings and loan holding company.
ITEM 10. EXECUTIVE COMPENSATION
In August 1995, the Company and Westside Bank jointly entered into an
employment agreement with Edward C. Milligan. The term of the Agreement is a
continuing term of two years which is automatically extended each day for an
additional day so that the remaining term shall continue to be two years. In
the event Mr. Milligan's employment is involuntarily terminated prior to a
"Change in Control," Mr. Milligan shall be paid a lump sum equal to one (1)
times the annual base salary paid to him over the previous twelve month
period, plus a lump sum amount equal to one (1) times the annual incentive cash
bonus paid to him over the previous twelve (12) month period. In the event
Mr. Milligan is terminated without cause after a Change in Control or
voluntarily terminates his employment for good reason, he shall be paid the
following amounts: a lump sum equal to two (2) times the annual base salary
and the annual incentive cash bonus paid to him over the previous twelve (12)
month period. In addition, Mr. Milligan shall be entitled to participate for
the shorter of a period of twelve (12) months or twenty-four (24) months
respectively, from the date of such termination or until such time as the
officer is employed by another employer in all welfare benefit plans
practices, policies and programs at least as favorable as the most favorable
of such plan, practices, policies and programs in effect at any time during
the ninety (90) day period preceding his termination.
During 1996, the Directors received $140,225 for their service as Directors
of the Banks.
23
<PAGE>
The following information is furnished with respect to the Chief Executive
Officer and each executive officer of the Company and the Banks who had cash and
cash equivalent forms of remuneration from the Bank which exceeded $100,000 for
each of the three years ended December 31, 1996, and all executive officers of
the Company and the Banks as a group.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
SECURITIES
UNDERLYING
OTHER OPTIONS/
POSITION YEAR SALARY BONUS COMPENSATION SAR (#)
- ---------------------------------------------------- --------- ---------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Edward C. Milligan 1996 $ 122,136 $ 42,000 $ 7,882 0
President & CEO 1995 117,425 34,800 5,348 7,380
Westside Bank 1994 110,005 22,000 4,445 0
Reggie D. Cox, 1996 100,000 16,500 10,050 5,000
President & CEO 1995 96,000 1,000 7,400
Eastside Bank 1994 85,000 -- 6,000 4,000
All Executive Officers 1996 438,423 103,160 2,014 8,500
as a Group 1995 421,358 66,900 2,321 18,450
1994 390,514 43,000 1,660 6,000
</TABLE>
(1) Includes Bank's contribution to the 401(k) Plan, directors fees ($5,500)
paid to Mr. Milligan, directors fees ($4,505) and an auto allowance ($6,000)
paid to Mr. Cox and an auto allowance ($6,000) paid to other executive
officer.
(2) Includes Bank's contribution to the 401(k) Plan, directors fees ($3,000)
paid to Mr. Milligan, directors fees ($1,400) and an auto allowance ($6,000)
paid to Mr. Cox and an auto allowance ($5,800) paid to other executive
officer.
(3) Includes Bank's contribution to the 401(k) Plan and directors fees ($2,200)
paid to Mr. Milligan, an auto allowance ($6,000) paid to Mr. Cox and an auto
allowance ($4,000) paid to other executive officer.
STOCK OPTION PLAN
In September 1996 by unanimous written consent of the Board of Directors of
First Sterling Banks, Inc. in accordance with the Company's 1994 Substitute
Incentive Stock Option Plan (the "1994 Plan") and the 1995 Directors Stock
Option Plan , as a result of the merger agreement and a stock dividend to
shareholders of record immediately prior to the merger, the number of shares
under option and the exercise price were adjusted so that there would be no
change in the aggregate purchase price payable upon the exercise of any such
options. In addition, the plans were amended to change the name to "First
Sterling Banks, Inc. 1994 Incentive Stock Option Plan" and "First Sterling
Banks, Inc. 1995 Directors Stock Option Plan".
Under the 1994 Incentive Stock Option Plan 61,500 shares of Common
Stock may be granted by the Company to key employees of the Company and its
subsidiary, The Westside Bank & Trust Company. The following options are
currently outstanding under the First Sterling Banks, Inc. 1994 Incentive
Stock Option Plan, 30,750 options were issued at
24
<PAGE>
an exercise price of $8.13 in February 1991, and 25,830 options were issued
at an exercise price of $10.57 in August 1995. There are currently 4,920
shares unissued under the plan.
Under the 1995 Directors Stock Option Plan 73,685 shares of Common
Stock may be granted by the Company to all directors who are not employees of
the Company or Westside Bank; and any Emeritus Director who was a voting
member of the Board of Directors within the 12 months preceding the date of
any grant of options to such Emeritus Director. The following options are
currently outstanding under the plan, 43,665 options were issued at an
exercise price of $9.12 in April 1995, 27,060 options were issued at an
exercise price of $12.40 in September 1995 and 2,460 options were issued at
an exercise price of $13.82 in November 1995. In 1995 options to purchase 500
shares were exercised at $11.22 per share. There are no remaining options to
be issued under this plan.
During 1996 the Company adopted the 1996 Substitute Incentive Stock
Option Plan replacing the former plan as amended February 17, 1993. Under the
plan 50,000 shares of Common Stock may be granted by the Company to key
employees of the Company and its subsidiary, The Eastside Bank & Trust
Company. In February 1993 17,500 options were issued at an exercise price of
$7.90 per share and 5,000 options were issued at an exercise price of $8.17.
In January 1994 an additional 2,000 options were issued at an exercise
price of $8.40 and in December 1994, 8,500 options were issued at an exercise
price of $9.03. In February 1996 options for 17,000 shares were issued at an
exercise price of $13.00. All options are for a period of ten years. Options
granted in February 1996 (17,000 shares) vest at the rate of 1/3 per year
commencing on the first anniversary of the date granted. There are 2,500
options available to be issued under this plan. In 1996 3,500 options were
exercised at a price of $8.17 per share and 2,500 options at $13.00 per share
were terminated.
The price at which a stock option is exercisable cannot be less than
the fair market value of the Common Stock on the date of the grant as
determined by the Board of Directors.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SAR
SHARES AT FY-END(#) AT FY-END(S)
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE # REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ----------------------------------------------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C>
Edward C. Milligan................................... -0- -0- 19,680 * $151,634
Reggie D. Cox........................................ -0- -0- 14,000/5,000 119,380/18,750
</TABLE>
* All options owned by Mr. Milligan are exercisable.
25
<PAGE>
RETIREMENT PLAN
The Banks participate in a 401(k) Retirement Plan ("Retirement Plan")
which is a defined contribution plan designed to meet the requirements of
Section 401(k) of the Internal Revenue Code of 1986, as amended ("Code") and
the Employee Retirement Income Security Act of 1974, as amended. All
employees of the Banks who have attained the age of 21 years and have
completed one year of service are eligible to participate in the Retirement
Plan. Pursuant to the Retirement Plan, the Bank may, in its discretion,
contribute for each Plan Year an amount equal to a matching percentage, as
determined annually by the Board of Directors of the Bank, of the employee's
contributions for the Plan Year, up to the maximum limit established by the
Code. The matching contributions are subject to limits established by the
Code and a vesting schedule which provides that matching contributions become
20% vested after more than 2 years and less than 3 years of service, and
vested in increments of 20% for each year of service thereafter, becoming
100% vested after 6 years of service. The matching contributions also become
100% vested upon death or disability. Each participant under the Retirement
Plan is always vested 100% in his or her 401(k) contributions. The trustee of
the Retirement Plan is Regions Bank of Gainesville, Georgia. Westside Bank
contributed a total of $19,685.70 during the 1996 fiscal year pursuant to the
Retirement Plan, including the following amounts to the accounts of persons
named: Edward C. Milligan -$2,381.80; Michael J. Henderson--$2,445.00;
Barbara J. Bond--$2,636.50; and all executive officers as a group-- $7,463.30.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 7, 1997,
with respect to: (i) each person who is known by the Company to own
beneficially more than 5% of the outstanding shares of the Company's common
stock; (ii) the beneficial ownership of Common Stock by each of the directors
and executive officer; and (iii) the beneficial ownership by all directors
and executive officers as a group. Except as noted below, all shares are
owned directly, and the owner has sole voting and investment power with
respect to such shares:
<TABLE>
<CAPTION>
NAME NO. SHARES % OF CLASS (1)
- ----------------------------------------------------------------- ------------ ---------------
<S> <C> <C>
Barbara J. Bond.................................................. 17,260 (2) 1.32%
P. Harris Hines.................................................. 8,948 (3) .69
Harry L. Hudson, Jr.............................................. 16,150 (4) 1.25
Edward C. Milligan............................................... 38,660 (5) 2.95
John S. Thibadeau, Jr............................................ 5,000 .39
Benjamin H. Wofford, Jr.......................................... 33,029 (6) 2.55
SouthTrust of Georgia, Inc....................................... 65,897 5.11
------------
184,944 (7)
------------
------------
</TABLE>
(1) Based on total outstanding shares of 1,289,581 if no options are held by the
named owner, or based on a pro forma calculation of the total outstanding
shares including shares issued upon exercise of options held by the named
owner or by member of the named group.
(2) Includes 14,760 shares of Common Stock obtainable upon the exercise of
options.
(3) Includes 6,150 shares of Common Stock obtainable upon the exercise of
options
26
<PAGE>
(4) Includes 10,000 shares held as joint tenant with spouse.
(5) Includes 19,680 shares obtainable upon the exercise of options and 615
shares held by Mr. Milligan's minor children.
(6) Includes 6,150 shares obtainable upon the exercise of options and 6,150
shares held as joint tenant with spouse.
(7) Includes 46,740 shares of Common Stock obtainable upon the exercise of
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and the Bank have had and expect to have banking transactions
in the ordinary course of business with organizers, directors and officers of
the Company and Bank and their affiliates, including members of their
families or corporations, partnerships or other organizations in which such
officers or directors have a controlling interest, on substantially the same
terms (including price, or interest rates and collateral) as those prevailing
at the time for comparable transactions with unrelated parties. Such banking
transactions are not expected to involve more that the normal risk of
collectibility nor present other unfavorable features to the Company and the
Bank.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Item 13(a) 1., 2. and 3. and Item 13(b).
(a) The following documents are filed as part of this report:
1. Financial statements:
(a) First Sterling Banks, Inc. and subsidiaries:
(i) Consolidated Balance Sheets--December 31, 1996 and 1995
(ii) Consolidated Statements of Income--Years ended
December 31, 1996 and 1995
(iii) Consolidated Statements of Stockholders' Equity -
Years ended December 31, 1996 and 1995
(iv) Consolidated Statements of Cash Flows--Years ended
December 31, 1996 and 1995
(v) Notes to Consolidated Financial Statements
27
<PAGE>
(b) First Sterling Banks, Inc. (Parent Company Only):
Parent Company only financial information has been included
in Note 14 of Notes to Consolidated financial statements.
2. Financial statement schedules:
All schedules are omitted as the required information
is inapplicable or the information is presented in the
financial statements or related notes.
3. Exhibits required by Item 601 of Regulation S-K:
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------
<S> <C>
Exhibit 3.1 Articles of lncorporation of First Sterling Banks, Inc.
(incorporated by reference to Exhibit 3.1 to
Registration Statement No. 33-78046 on Form S-4) as
amended by Certificate of Merger and Name Change as
attached as Exhibit 3.1
Exhibit 3.2 Bylaws of First Sterling Banks, Inc. (incorporated
by reference to Exhibit 3.2 to Registration Statement
No.33-78046 on Form S-4)
Exhibit 4.1 The rights of security holders are defined in the
articles of Incorporation and Bylaws of First Sterling
Banks, Inc., provided in Exhibits 3.1 and 3.2
respectively.
Exhibit 10.1 First Sterling Banks, Inc. 1994 Substitute Incentive
Stock Option Plan for The Westside Bank & Trust
Company's Incentive Stock Option Plan filed as Exhibit 4.4
to Form S-8 (File No. 33-97300)
Exhibit 10.2 Form of First Sterling Banks, Inc. 1994 Incentive Stock
Option Agreement filed as Exhibit 4.5 to Form S-8 (File
No. 33-97300)
Exhibit 10.3 First Sterling Banks, Inc. 1995 Director Stock Option
Plan filed as Exhibit 4.4 to Form S-8 (File No.
33-81053)
Exhibit 10.4 Form of First Sterling Banks, Inc. 1995 Directors Stock
Option Agreement filed as Exhibit 4.5 to Form S-8(File
No. 33-81053)
Exhibit 10.5 First Sterling Banks, Inc. 1996 Substitute Incentive
Stock Option Plan filed as Exhibit 4.1 to Form S-8 (File
No. 333-15069)
Exhibit 10.6 Form of First Sterling Banks, Inc. 1996 Substitute
Incentive Stock Option Plan Incentive Stock Option
Agreement for options granted by Eastside Holding
Corporation prior to February 21, 1996 filed as Exhibit
4.2 to Form S-8 (File No.333-15069)
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
- ------- ----------------------------------------------------------
<S> <C>
Exhibit 10.7 Form of First Sterling Banks, Inc. 1996 Substitute
Incentive Stock Option Plan Incentive Stock Option
Agreement for options granted by Eastside Holding
Corporation on February 21, 1996 filed as Exhibit 4.3 to
Form S-8 (File No. 333-15069)
Exhibit 10.8 Employment Agreement dated August 16, 1995, between
Westside Financial Corporation, The Westside Bank &
Trust Company and Edward C. Milligan filed as Exhibit
10.5 to Form S-4 (File No. 333-3116)
Exhibit 22.1 Subsidiaries of First Sterling Banks, Inc., include: The
Westside Bank & Trust Company, Kennesaw, Georgia, and
The Eastside Bank & Trust, Snellville, Georgia.
</TABLE>
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST STERLING BANKS, INC.
- -----------------------------------------------------------------------------
(REGISTRANT)
BY: /s/Edward C. Milligan Date: March 26, 1997
- ------------------------------------------------ --------------------
EDWARD C. MILLIGAN, PRESIDENT
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated:
/s/ BARBARA J. BOND Date: March 26, 1997
- ------------------------------------------------ ---------------------
Barbara J. Bond Secretary/Treasurer,
Principal Financial and Accounting Officer
/s/ P. HARRIS HINES Date: March 26, 1997
- ------------------------------------------------ ---------------------
P. Harris Hines , Director
/s/ HARRY L. HUDSON, JR. Date: March 26, 1997
- ------------------------------------------------ ----------------------
Harry L. Hudson, Jr., Director
/s/ JOHN S. THIBADEAU, JR. Date: March 26, 1997
- ------------------------------------------------- ---------------------
John S. Thibadeau, Jr., Director
Date: March 26, 1997
- ------------------------------------------------- ---------------------
Benjamin H. Wofford, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS.
The registrant will furnish proxy material to security holders subsequent
to the filing of this Form 10-KSB and will submit four copies of such
materials to the Securities and Exchange Commission when they are provided to
the security holders.
30
<PAGE>
INDEPENDENT AUDITOR'S REPORT
- ------------------------------------------------------------------------------
To the Board of Directors
First Sterling Banks, Inc. and Subsidiaries
Kennesaw, Georgia
We have audited the accompanying consolidated balance sheets of First
Sterling Banks, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Sterling Banks, Inc. and Subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/MAULDIN & JENKINS, LLC
Atlanta, Georgia
February 7, 1997
<PAGE>
<TABLE>
<CAPTION>
Assets 1996 1995
-------- ----------- -----------
<S> <C> <C>
Cash and due from banks...................................... $ 5,574,568 $ 5,715,903
Interest-bearing deposits in banks........................... 113,277 --
Federal funds sold and securities purchased under resell
agreements................................................. 18,780,000 13,500,000
Securities available-for-sale................................ 19,140,719 19,550,309
Securities held-to-maturity, fair value of $3,461,476 and
$3,959,702................................................. 3,498,339 4,001,178
Loans........................................................ 83,725,739 73,147,633
Less allowance for loan losses............................... 1,094,621 1,015,059
-------------- --------------
Loans, net.............................................. 82,631,118 72,132,574
-------------- --------------
Premises and equipment....................................... 5,335,670 4,654,973
Other assets................................................. 1,632,385 1,616,945
-------------- --------------
Total assets......................................... $ 136,706,076 $ 121,171,882
-------------- --------------
-------------- --------------
Liabilities and Stockholders' Equity
-------------------------------------
Deposits
Noninterest-bearing demand................................. $ 18,707,503 $ 16,908,574
Interest-bearing demand.................................... 40,005,223 31,285,182
Savings.................................................... 3,795,476 4,043,323
Time, $100,000 and over.................................... 14,979,962 11,625,480
Other time................................................. 43,052,253 42,602,940
-------------- --------------
Total deposits........................................ 120,540,417 106,465,499
Securities sold under repurchase agreements.................. 605,895 --
Other liabilities............................................ 817,395 1,115,092
-------------- --------------
Total liabilities..................................... 121,963,707 107,580,591
-------------- --------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
1,355,331 and 1,211,300 issued at amount paid in....... 12,142,205 12,113,610
Retained earnings......................................... 2,977,853 1,809,659
Unrealized gain on securities available for sale, net of
tax.................................................... 37,311 83,022
Treasury stock, 30,750 shares............................. (415,000) (415,000)
-------------- --------------
Total stockholders' equity............................. 14,742,369 13,591,291
-------------- --------------
Total liabilities and stockholders' equity............. $ 136,706,076 $ 121,171,882
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Interest Income
Loans................................................... $ 8,439,303 $ 7,348,570
Taxabke securities...................................... 1,228,615 1,240,176
Nontaxable securities................................... 107,790 51,943
Deposits in banks....................................... 2,893 -
Federal funds sold and securities purchased............. 653,536 1,063,925
under resell agreements ------------- -------------
Total Interest Income................................ 10,432,327 9,704,614
------------- -------------
Interest expense
Deposits................................................ 4,382,921 4,086,689
Federal funds purchased and securities sold
under repurchase agreements........................... 10,023 110
------------- -------------
Total Interest expense.............................. 4,392,644 4,086,799
------------- -------------
Net Interest income................................. 6,039,383 5,617,815
Provision for loan losses.................................. 137,500 256,000
------------- -------------
Net Interest Income after provision for loan losses. 5,901,883 6,361,815
------------- -------------
Other income
Service charges on deposit accounts...................... 371,211 342,477
Net realized losses on securities available-for-sale..... (4,157) -
Gains on sale of loans................................... 237,247 141,141
Other operating income................................... 155,353 87,741
------------- -------------
Total other Income.................................... 759,654 571,359
------------- -------------
Other expense
Salaries and employee benefits........................... 2,250,272 1,871,564
Equipment expenses....................................... 258,614 215,644
Occupancy expenses....................................... 267,263 232,243
Other operating expenses................................. 1,504,305 1,303,975
------------- -------------
Total other expenses.................................. 4,280,474 3,623,426
------------- -------------
Income before income taxes............................ 2,361,063 2,309,748
Income tax expense......................................... 872,085 693,954
------------- -------------
Net Income............................................ $ 1,508,976 $ 1,615,794
------------- -------------
------------- -------------
Net income per share of common stock....................... $ 1.09 $ 1.17
------------- -------------
------------- -------------
Weighted average shares outstanding........................ 1,380,828 1,386,862
------------- -------------
------------- -------------
See Notes To Consolidated Financial Statements.
</TABLE>
3
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK SECURITIES
------------------------- AVAILABLE- TREASURY STOCK
AMOUNT RETAINED FOR-SALE, ----------------------
SHARES PAID IN EARNINGS NET OF TAX SHARES COST TOTAL
---------- ------------- ------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994...................... 1,210,800 $ 12,108,000 $ 285,485 $ (234,362) -- $ $ 12,159,123
Net income................ -- -- 1,615,794 -- -- 1,615,794
Cash dividends declared... -- -- (91,620) -- -- (91,620)
Exercise of stock options. 500 5,610 -- -- -- -- 5,610
Purchase of treasury
stock................... -- -- -- -- 25,000 (415,000) (415,000)
Net change in unrealized
gains (losses) on
securities available-for-
sale, net of tax........ -- -- -- 317,384 -- -- 317,384
---------- ------------- ------------ ----------- ---------- ---------- -------------
Balance, December 31,
1995...................... 1,211,300 12,113,610 1,809,659 83,022 25,000 (415,000) 13,591,291
Net income................ -- -- 1,508,978 -- -- -- 1,508,978
Cash dividends declared... -- -- (340,784) -- (340,784)
Stock dividend............ 140,531 -- -- -- 5,750 -- --
Exercise of stock options. 3,500 28,595 -- -- -- -- 28,595
Net change in unrealized
gains (losses) on
securities available-for-
sale, net of tax......... -- -- -- (45,711) -- -- (45,711)
---------- ------------- ------------ ----------- ---------- ---------- -------------
Balance, December 31,
1996...................... 1,355,331 $ 12,142,205 $ 2,977,853 $ 37,311 30,750 $ (415,000) $ 14,742,369
---------- ------------- ------------ ----------- ---------- ---------- -------------
---------- ------------- ------------ ----------- ---------- ---------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 1,508,978 $ 1,615,794
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 290,983 246,662
Provision for loan losses..................................... 137,500 256,000
Deferred income taxes......................................... (25,393) (157,180)
Net realized losses on securities available-for-sale.......... 4,157 --
Gains on sale of loans........................................ (237,247) (141,141)
Proceeds from sale of loans................................... 3,078,914 1,428,564
Loans originated for sale..................................... (4,035,245) (1,287,423)
Increase in interest receivable............................... (4,029) (275,636)
Increase in interest payable.................................. 1,896 165,426
Other operating activities.................................... (208,135) 190,327
------------- -------------
Net cash provided by operating activities.................. 512,379 2,041,393
------------- -------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale.................... (5,529,234) (12,859,096)
Proceeds from sales of securities available-for-sale.......... 1,270,143 --
Proceeds from maturities of securities available-for-sale..... 4,591,337 9,873,584
Purchases of securities held-to-maturity...................... -- (3,099,265)
Proceeds from maturities of securities held-to-maturity....... 502,839 708,065
Net increase in Federal funds sold and securities purchased
under resell agreements..................................... (5,280,000) (4,650,000)
Net increase in interest-bearing deposits in banks............ (113,277) --
Net increase in loans......................................... (9,442,466) (9,395,548)
Purchase of premises and equipment............................ (971,680) (276,663)
------------- -------------
Net cash used in investing activities.................... (14,972,338) (19,698,923)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits...................................... 14,074,918 18,293,988
Net increase in securities sold under repurchase agreements... 605,895 --
Dividends paid................................................ (390,784) (91,620)
Proceeds from exercise of stock options....................... 28,595 5,610
Purchase of treasury stock.................................... -- (415,000)
------------- -------------
Net cash provided by financing activities................ 14,318,624 17,792,978
------------- -------------
</TABLE>
5
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net increase (decrease) in cash and due from banks................ $ (141,335) $ 135,448
Cash and due from banks at beginning of year...................... 5,715,903 5,580,455
------------ ------------
Cash and due from banks at end of year............................ $ 5,574,568 $ 5,715,903
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest....................................................... $ 4,391,048 $ 3,921,373
Income taxes................................................... $ 1,275,906 $ 487,552
NONCASH TRANSACTION
Unrealized (gains) losses on securities available-for-sale...... $ 73,187 $ (410,988)
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
First Sterling Banks, Inc. (the Company) is a multi-bank holding
company whose business is conducted by its wholly-owned
subsidiaries, The Westside Bank & Trust Company and Eastside Bank &
Trust Company, (the Banks). The Banks are commercial banks located
in Cobb and Gwinnett Counties, Georgia. The Banks provide a full
range of banking services in their primary market areas of Cobb,
Gwinnett and surrounding counties. Eastside Bank & Trust Company has
a wholly-owned subsidiary, Eastside Financial Services, Inc., which
originates, sells and services loans made under the Small Business
Administration Program.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and accounts are eliminated in consolidation.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and general practices
within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Purchased Under Resell Agreements
Securities purchased under resell agreements are recorded at the
amounts at which the securities are acquired plus accrued interest.
The Company enters into purchases of U. S. Government and agency
securities under resell agreements to resell substantially identical
securities.
The amounts advanced under resell agreements represent short-term
loans and are combined with Federal funds sold in the balance sheet.
The securities underlying the resell agreements are delivered by
appropriate entry into a third-party custodian's account designated
by the Company under a written custodial agreement that explicitly
recognizes the Company's interest in the securities. Securities
purchased under resell agreements averaged approximately $2,334,000
during 1996 and the maximum amounts outstanding at any month-end
during 1996 was $25,000,000.
Securities
Securities are classified based on management's intention on the
date of purchase. Securities which management has the intent and
ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost. All other debt securities are classified
as available-for-sale and carried at fair value with net unrealized
gains and losses included in stockholders' equity net of tax. Equity
securities without a readily determinable fair value are carried at
cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sales of securities are
determined using the specific identification method.
Loans
Loans are carried at their principal amounts outstanding less
deferred loan fees and costs and the allowance for loan losses.
Interest income on loans is credited to income based on the
principal amount outstanding.
Nonrefundable loan fees and certain direct loan origination costs
are deferred with the net amount recognized into income over the
life of the loans as a yield adjustment.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current economic conditions, volume, growth, composition
of the loan portfolio, and other risks inherent in the portfolio. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses, and may require the Company to record additions to the
allowance based on their judgment about information available to
them at the time of their examinations.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the terms of the loan agreement. Individually identified impaired
loans are measured based on the present value of payments expected
to be received, using the contractual loan rate as the discount
rate. Alternatively, measurement may be based on observable market
prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds
the measure of fair value, a valuation allowance is established as a
component of the allowance for loan losses. Changes to the valuation
allowance are recorded as a component of the provision for loan
losses.
Sale of Loans
The Company originates and sells participations in certain loans.
Gains are recognized at the time the sale is consummated. The amount
of gain recognized on the sale of a specific loan is equal to the
percentage resulting from determining the fair value of the portion
sold as compared to the fair value of the entire loan. Any material
unrecognized gain is deferred and amortized into income over the
term of the loan. Losses are recognized at the time the loan is
identified as held for sale and the loan's carrying value exceeds
its fair value.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is
carried at the lower of the recorded amount of the loan or fair
value of the properties less estimated selling costs. Any write-
down to fair value at the time of transfer to other real estate
owned is charged to the allowance for loan losses. Subsequent gains
or losses on sale and any subsequent adjustment to the value are
recorded as other expenses.
Income Taxes
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred tax assets and liabilities are
recognized for the temporary differences between the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. Deferred tax expense or benefit is then
recognized for the change in deferred tax assets or liabilities
between periods.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences, tax operating
loss carryforwards and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur.
The Company and the Banks file a consolidated income tax return.
Each entity provides for income taxes based on its contribution to
income taxes (benefits) of the consolidated group.
Earnings Per Common Share
Earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding. In 1996, the Company declared a stock
dividend. Earnings per common share have been adjusted to reflect
the stock dividend for all periods presented.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Securities Available-for-Sale December 31, 1996:
U. S. Government and agency securities..................... $ 9,646,750 $ 29,120 $ (39,290) $ 9,636,580
State and municipal securities............................. 3,959,320 77,659 (4,323) 4,032,656
Mortgage-backed securities................................. 5,207,151 25,611 (30,479) 5,202,283
Equity securities.......................................... 269,200 -- -- 269,200
------------- ----------- ----------- -------------
$ 19,082,421 $ 132,390 $ (74,092) $ 19,140,719
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
December 31, 1995:
U. S. Government and agency securities..................... $ 11,471,143 $ 85,204 $ (14,892) $ 11,541,455
State and municipal securities............................. 1,980,601 48,039 (10,286) 2,018,354
Mortgage-backed securities................................. 5,967,080 40,489 (17,069) 5,990,500
------------- ----------- ----------- -------------
$ 19,418,824 $ 173,732 $ (42,247) $ 19,550,309
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Securities Held-to-Maturity
December 31, 1996:
U. S. Government and agency
securities................ $ 3,498,339 $ 599 $ (37,462) $ 3,461,476
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
December 31, 1995:
U. S. Government and agency
securities $ 4,001,178 $ 2,899 $ (44,375) $ 3,959,702
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1996 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid with or
without penalty. Therefore, these securities and equity securities are
not included in the maturity categories in the following maturity
summary.
<TABLE>
<CAPTION>
SECURITIES
SECURITIES AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less................................ $ 1,620,880 $ 1,626,567 $ 1,250,711 $ 1,250,672
Due from one year to five years........................ 8,123,631 8,140,110 2,247,628 2,210,804
Due from five to ten years............................. 2,667,989 2,693,973 -- --
Due after ten years.................................... 1,193,570 1,208,586 -- --
Mortgage-backed securities............................. 5,207,151 5,202,283 -- --
Equity securities...................................... 269,200 269,200 -- --
------------- ------------- ------------ ------------
$ 19,082,421 $ 19,140,719 $ 3,498,339 $ 3,461,476
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Securities with a carrying value of $12,027,000 and $13,469,000 at
December 31, 1996 and 1995, respectively, were pledged to secure
public deposits and for other purposes.
Gains and losses on sales of securities available-for-sale consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
--------- ---------
Gross gains.................................................................. $ -- $ --
Gross losses................................................................. (4,157) --
--------- ---------
Net realized losses.......................................................... $ (4,157) $ --
--------- ---------
--------- ---------
</TABLE>
Under special provisions adopted by the Financial Accounting Standards
Board in October 1995, the Company transferred $6,107,527 from
securities held-to-maturity to securities available-for-sale on
December 31, 1995, resulting in a net unrealized gain of $71,391 which
was included in stockholders' equity at $47,118 net of related taxes
of $24,273.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Commercial, financial, and agricultural........................ $19,853,352 $ 14,349,228
Real estate--construction...................................... 21,791,259 20,694,525
Real estate--mortgage.......................................... 34,224,333 29,385,856
Consumer instalment and other.................................. 8,223,197 9,039,439
------------- -------------
84,092,141 73,469,048
Deferred loan fees and costs................................... (366,402) (321,415)
Allowance for loan losses...................................... (1,094,621) (1,015,059)
------------- -------------
Loans, net..................................................... $ 82,631,118 $ 72,132,574
------------- -------------
------------- -------------
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
Balance, beginning of year........................................ $ 1,015,059 $ 904,201
Provision for loan losses......................................... 137,500 256,000
Loans charged off................................................. (80,298) (175,724)
Recoveries of loans previously charged off........................ 22,360 30,582
------------ ------------
Balance, end of year.............................................. $ 1,094,621 $ 1,015,059
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total recorded investment in impaired loans was $322,992 and
$86,781 at December 31, 1996 and 1995, respectively. There were no
impaired loans that had related allowances for loan losses determined
in accordance with Statement of Financial Accounting Standard No. 114
("Accounting by Creditors for Impairment of a Loan") at December 31,
1996 and 1995. The average recorded investment in impaired loans for
1996 and 1995 was $177,432 and $53,225, respectively. Interest income
recognized on impaired loans for cash payments received was not
material for the years ended December 31, 1996 and 1995.
The Company has granted loans to certain directors, executive
officers, and related entities of the Company and the Banks. The
interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party
loans for the year ended December 31, 1996 are as follows:
Balance, beginning of year...................................... $3,537,752
Advances........................................................ 572,181
Repayments...................................................... (796,992)
---------
Balance, end of year............................................ $3,312,941
---------
---------
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
Land $ 1,470,790 $ 1,320,789
Buildings.......................................... 3,906,025 3,383,819
Equipment.......................................... 1,281,582 1,082,972
------------ -----------
6,658,397 5,787,580
Accumulated depreciation.................... (1,322,727) (1,132,607)
------------ -----------
$ 5,335,670 $ 4,654,973
------------ -----------
------------ -----------
NOTE 5. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement plan covering substantially all
employees. Contributions to the plan charged to expense during 1996
and 1995 amounted to $19,685 and $16,364, respectively.
NOTE 6. STOCK OPTIONS
The Company has an incentive stock option plan with 111,500 shares of
common stock reserved for options to key employees. At December 31,
1996, 7,420 common stock options were available to grant under this
plan.
The Company also reserved 73,685 shares of common stock for options to
directors. At December 31, 1996, there were no options available to
grant under this plan.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6. STOCK OPTIONS (Continued)
Option prices under those plans are equal to the fair value of the
Company's common stock on the date of the grant. The options expire in
ten years from date of grant. Other pertinent information related to
the options is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
--------- ----------- --------- -----------
Under option, beginning of year...................................... 162,765 $ 10.07 63,635 $ 8.22
Granted.............................................................. 17,000 13.00 99,630 9.95
Exercised (3,500) 8.17 (500) 11.22
Terminated........................................................... (2,500) 13.00 -- --
--------- ---------
Under option, end of year............................................ 173,765 9.92 162,765 10.07
--------- ---------
--------- ---------
Exercisable, end of year............................................. 159,265 9.64 162,765 10.07
--------- ---------
--------- ---------
</TABLE>
UNDER OPTION, END OF YEAR
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
RANGE OF EXERCISE CONTRACTUAL
NUMBER PRICES PRICE LIFE IN YEARS
- ------ -------------- ----------- -----------------
<S> <C> <C> <C>
129,745 $ 7.90--10.57 $ 8.98 8
44,020 12.40--13.82 12.68 9
- ---------
173,765
- ---------
- ---------
</TABLE>
OPTIONS EXERCISABLE, END OF YEAR
<TABLE>
<S> <C> <C> <C>
129,745 $7.90--10.57 $ 8.98 8
29,520 12.40--13.82 12.52 9
- -----------
159,265
- -----------
- -----------
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6. STOCK OPTIONS(Continued)
As permitted by SFAS No. 123 ("Accounting for Stock-Based Compensation"),
the Company recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25, ("Accounting for
Stock Issued to Employees"). The Company recognized no compensation cost for
stock-based employee compensation awards for the years ended December 31,
1996 and 1995. If the Company had recognized compensation cost in accordance
with SFAS No. 123, net income and earnings per share would have been reduced
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
------------------------- -------------------------
NET EARNINGS NET EARNINGS
INCOME PER SHARE INCOME PER SHARE
------------ ----------- ------------ -----------
As reported.................................................... $ 1,508,978 $ 1.09 $ 1,615,794 $ 1.17
Stock-based compensation, net of related tax effect............ -- -- (151,314) (0.11)
------------ ----------- ------------- -----------
As adjusted.................................................... $ 1,508,978 $ 1.09 $ 1,464,480 $ 1.06
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
The fair value of the options was based upon the discounted value of
future cash flows of the options using the following assumptions:
Risk-free interest rate 6.50%
Expected life of the options 7 years
Expected dividends (as a percent of the fair value of the stock) 2.51%
Note 7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
----------------- -------------
<S> <C> <C>
Current $ 897,478 $ 851,134
Deffered (26,393) (48,429)
Change in valuation allowance -- (108,751)
----------------- -------------
Income tax expense $ 872,085 $ 693,954
----------------- -------------
----------------- -------------
</TABLE>
<PAGE>
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (Continued)
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income
taxes. A reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
1996 1995
------------------------- ----------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Income taxes at statutory rate....................................... $ 809,595 34% $ 785,314 34
Tax-exempt interest................................................. (36,612) (2) (17,661) (1)
State income taxes.................................................. 34,680 1 41,301 2
Merger expenses..................................................... 44,755 2 -- --
Change in valuation allowance....................................... -- -- (108,751) (5)
Other items, net.................................................... 19,667 -- (6,249) --
---------- ----------- ---------- ----------
Income tax expense................................................... $ 872,085 35% $ 693,954 30
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
---------- ----------
Deferred tax assets:
Loan loss reserves.................................................... $ 277,871 $ 238,420
Deferred loan fees and costs.......................................... 137,605 113,254
Other................................................................. -- 18,063
---------- ----------
415,476 369,737
---------- ----------
Deferred tax liabilities:
Depreciation.......................................................... 74,685 75,997
Securities available-for-sale......................................... 20,988 48,463
Other................................................................. 58,255 36,597
---------- ----------
153,928 161,057
---------- ----------
Net deferred tax assets............................................... $ 261,548 $ 208,680
---------- ----------
---------- ----------
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into
off-balance sheet financial instruments which are not reflected in the
financial statements. These financial instruments include commitments
to extend credit and standby letters of credit. Such financial
instruments are included in the financial statements when funds are
disbursed or the instruments become payable. These instruments involve,
to varying degrees, elements of credit risk in excess of the amount
recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit is represented by the contractual
amount of those instruments. A summary of the Company's commitments is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Commitments to extend credit................................... $ 24,219,000 $ 25,354,858
Standby letters of credit...................................... 298,000 267,084
------------- -------------
$ 24,517,000 $ 25,621,942
------------- -------------
------------- -------------
</TABLE>
Commitments to extend credit generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The credit risk involved in issuing these financial
instruments is essentially the same as that involved in extending loans
to customers. The Company evaluates each customer's creditworthiness on
a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies
but may include real estate and improvements, marketable securities,
accounts receivable, inventory, equipment, and personal property.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
Standby letters of credit are conditional commitments issued by the
Company to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan
facilities to customers. Collateral held varies as specified above and
is required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various
legal proceedings. In the opinion of management of the Company, any
liability resulting from such proceedings would not have a material
effect on the Company's financial statements.
NOTE 9. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer
loans to customers in Cobb and Gwinnett Counties and surrounding
counties. The ability of the majority of the Company's customers to
honor their contractual loan obligations is dependent on the economy
in these areas.
Sixty-seven percent (67%) of the Company's loan portfolio is
concentrated in loans secured by real estate, of which a substantial
portion is secured by real estate in the Company's primary market
areas. Accordingly, the ultimate collectibility of the loan portfolio
is susceptible to changes in market conditions in the Company's primary
market areas. The other significant concentrations of credit by type
of loan are set forth in Note 3.
The Banks, as a matter of policy, do not generally extend credit to any
single borrower or group of related borrowers in excess of 25% of the
Banks' statutory capital, which amounted to $1,527,000 for The Westside
Bank & Trust Company and $1,500,000 for Eastside Bank & Trust Company.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 10. REGULATORY MATTERS
The Banks are subject to certain restrictions on the amount of
dividends that may be declared without prior regulatory approval. At
December 31, 1996, approximately $859,000 of retained earnings were
available for dividend declaration without regulatory approval.
The Company and the Banks are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory--and
possibly additional discretionary--actions by regulators that, if
undertaken, could have a direct material effect on the financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and Banks must
meet specific capital guidelines that involve quantitative measures of
the assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Company and
Banks' capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Banks to maintain minimum amounts
and ratios of total and Tier I capital to risk-weighted assets and of
Tier I capital to average assets. Management believes, as of December
31, 1996, the Company and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996 and 1995, notification from the FDIC
categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, the Banks must maintain minimum total risk-based, Tier I
risk-based, and Tier I leverage ratios as set forth in the following
table. There are no conditions or events since that notification that
management believes have changed the Banks' category.
The Company and Banks' actual capital amounts and ratios as of December
31, 1996 are presented in the following table.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 10. REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
-------------------- ---------------------- ------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- ----- --------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to Risk Weighted Assets):
Consolidated......................................... $ 15,800 15.50% $ 8,155 8.00% $ 10,194 10.00%
Westside............................................. $ 8,527 15.37% $ 4,438 8.00% $ 5,548 10.00%
Eastside............................................. $ 7,075 15.22% $ 3,719 8.00% $ 4,648 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated......................................... $ 14,705 14.42% $ 4,079 4.00% $ 6,119 6.00%
Westside............................................. $ 7,879 14.20% $ 2,219 4.00% $ 3,329 6.00%
Eastside............................................. $ 6,628 14.26% $ 1,859 4.00% $ 2,789 6.00%
Tier I Capital
(to Average Assets):
Consolidated......................................... $ 14,705 10.03% $ 5,864 4.00% $ 7,331 5.00%
Westside............................................. $ 7,879 8.77% $ 3,594 4.00% $ 4,492 5.00%
Eastside............................................. $ 6,628 11.68% $ 2,270 4.00% $ 2,837 5.00%
</TABLE>
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments. In
cases where quoted market prices are not available, fair values are
based on estimates using discounted cash flow methods. Those methods
are significantly affected by the assumptions used, including the
discount rates and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison
to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. The use of different
methodologies may have a material effect on the estimated fair value
amounts. Also, the fair value estimates presented herein are based on
pertinent information available to management as of December 31, 1996
and 1995. Such amounts have not been revalued for purposes of these
financial statements since those dates and, therefore, current
estimates of fair value may differ significantly from the amounts
presented herein.
The following methods and assumptions were used by the Company in
estimating fair values of financial instruments as disclosed herein:
Cash, Due From Banks, and Federal Funds Sold and Securities Purchased
Under Resell Agreements:
The carrying amounts of cash, due from banks, and Federal funds sold
and securities purchased under resell agreements approximate their
fair value.
Securities:
Fair values for securities are based on quoted market prices. The
carrying values of equity securities with no readily determinable fair
value approximates fair value.
Loans:
For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying
values. For other loans, the fair values are estimated using
discounted cash flow methods, using interest rates currently being
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using discounted
cash flow methods or underlying collateral values.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits:
The carrying amounts of demand deposits, savings deposits, and
variable-rate certificates of deposit approximate their fair values.
Fair values for fixed-rate certificates of deposit are estimated using
discounted cash flow methods, using interest rates currently being
offered on certificates.
Securities Sold Under Repurchase Agreements:
The carrying amount of securities sold under repurchase agreements
approximates their fair value.
Accrued Interest:
The carrying amounts of accrued interest approximate their fair
values.
Off-Balance Sheet Instruments:
Fair values of the Company's off-balance sheet financial instruments
are based on fees charged to enter into similar agreements. However,
commitments to extend credit and standby letters of credit do not
represent a significant value to the Company until such commitments
are funded. The Company has determined that these instruments do not
have a distinguishable fair value and no fair value has been assigned.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
---------------------------- ----------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks,
interest-bearing deposits
in banks , Federal funds sold
and securities purchased under
resell agreements................................ $ 24,467,844 $ 24,467,844 $ 19,215,903 $ 19,215,903
Securities available-for-sale...................... 19,140,719 19,140,719 19,550,309 19,550,309
Securities held-to-maturity........................ 3,498,339 3,461,476 4,001,178 3,959,702
Loans.............................................. 82,631,118 82,343,000 72,132,574 72,904,308
Accrued interest receivable........................ 853,463 853,463 849,434 849,434
Financial liabilities:
Deposits........................................... 120,540,417 121,117,670 106,465,499 106,835,487
Securities sold under repurchase agreements........ 605,895 605,895 -- --
Accrued interest payable........................... 381,254 381,254 379,358 379,358
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 12. BUSINESS COMBINATION AND NAME CHANGE
On July 31, 1996, the Company effected a business combination and
merger with Eastside Holding Corporation by exchanging 600,000 shares
of its common stock for all of the common stock of Eastside Holding
Corporation. The combination was accounted for as a pooling of
interests and, accordingly, all prior financial statements have been
restated to include Eastside Holding Corporation. In conjunction with
the combination. the Company changed its name from Westside Financial
Corporation to First Sterling Banks, Inc. The results of operations
of the separate companies for periods prior to the combination are
summarized as follows:
<TABLE>
<CAPTION>
NET INCOME
-----------
<S> <C>
For the period from January 1, 1996 through July 31, 1996:
First Sterling Banks, Inc........................................................ $ 529,049
Eastside Holding Corporation..................................................... 377,752
-----------
$ 906,801
-----------
-----------
</TABLE>
NOTE 13. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total
revenue are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Data processing....................................................... $ 197,125 $ 192,963
FDIC insurance........................................................ 4,000 104,156
Directors fees........................................................ 140,225 81,050
Merger expenses....................................................... 131,632 --
</TABLE>
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION
The following information presents the condensed balance sheets,
statements of income, and cash flows of First Sterling Banks, Inc. as
of and for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Assets
Cash $ 79,675 $ 39,742
Investment in subsidiaries..................................... 14,625,083 13,438,014
Other assets................................................... 37,611 113,535
------------- -------------
Total assets................................................... $ 14,742,369 $ 13,591,291
------------- -------------
------------- -------------
Stockholders' equity........................................... $ 14,742,369 $ 13,591,291
------------- -------------
------------- -------------
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ---------------------------------------------------------------------------------------------
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF
INCOME
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Income, dividends from subsidiaries............................... $ 486,132 $ 636,620
------------ ------------
Expenses
Merger expenses................................................... 131,632 --
Legal and professional............................................ 40,581 --
Other expense..................................................... 86,310 6,431
------------ ------------
Total expenses.................................................... 258,523 6,431
------------ ------------
Income before income tax benefits and equity in undistributed
income of subsidiaries.......................................... 227,609 630,189
Income tax benefits............................................... (48,589) (547)
------------ ------------
Income before equity in undistributed income of subsidiaries...... 276,198 630,736
Equity in undistributed income of subsidiaries.................... 1,232,780 985,058
------------ ------------
Net income........................................................ $ 1,508,978 $ 1,615,794
------------ ------------
------------ ------------
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 14. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income........................................................ $ 1,508,978 $ 1,615,794
Adjustments to reconcile net income to net cash provided by
operating activities:
Undistributed income of subsidiaries.............................. (1,232,780) (985,058)
Other operating activities........................................ 75,924 (93,235)
------------ ------------
Net cash provided by operating activities......................... 352,122 537,501
------------ ------------
FINANCING ACTIVITIES
Dividends paid................................................... (340,784) (91,620)
Proceeds from exercise of stock options.......................... 28,595 5,610
Purchase of treasury stock....................................... -- (415,000)
------------ ------------
Net cash used in financing activities............................. (312,189) (501,010)
------------ ------------
Net increase in cash.............................................. 39,933 36,491
Cash at beginning of year......................................... 39,742 3,251
------------ ------------
Cash at end of year............................................... $ 79,675 $ 39,742
------------ ------------
------------ ------------
</TABLE>
29
<PAGE> EXHIBIT 3.1
CERTIFICATE OF MERGER OF
EASTSIDE HOLDING CORPORATION
a Georgia corporation,
WITH AND INTO
WESTSIDE FINANCIAL CORPORATION
a Georgia corporation
Pursuant to the provisions of Section 14-2-1105(b) of the Georgia Business
Corporation Code, the undersigned corporation files this Certificate of Merger.
1. The names of the corporations merging and the name of the surviving
corporation are as follows:
(a) The merging corporations are EASTSIDE HOLDING CORPORATION, INC., a
Georgia corporation, ("Eastside") and WESTSIDE FINANCIAL CORPORATION, INC.,
a Georgia corporation ("Westside"); and
(b) Westside shall be the surviving corporation (the "Surviving
Corporation").
2. Effective as of the effective date of the Merger, Article I of the
Articles of Incorporation of the Surviving Corporation shall be amended to read
as follows:
"The name of the corporation is First Sterling Banks, Inc." All other
provisions of the Articles of Incorporation of the Surviving Corporation shall
remain in full force and effect.
3. An executed Merger Agreement which sets forth the plan of merger is on
file at the principal place of business of the Surviving Corporation, which is
1200 Barrett Parkway, Kennesaw, Georgia 30144.
4. A copy of the Merger Agreement will be furnished by the Surviving
Corporation upon request and without cost to any shareholder of any corporation
that is a party to the merger or whose shares are involved in the merger.
5. The shareholders of Eastside, upon recommendation of the Board of
Directors of Eastside, duly approved the Merger at a special shareholders'
meeting on July 16, 1996.
6. Approval by the shareholders of Westside was not required.
7. The Merger shall be effective on the 31st day of July, 1996.
IN WITNESS WHEREOF, the Surviving Corporation causes this Certificate of
Merger to be executed in its name by its President and attested to by its
Secretary this 17th day of July, 1996.
WESTSIDE FINANCLKL CORPORATION
[CORPORATE SEAL]
By: /s/ Edward C. Milligan
------------------------
Edward C. Milligan, President
ATTEST:
/s/ Barbara J. Bond
- --------------------
Barbara J. Bond, Secretary
<PAGE>
- -------------------------------------------------------------------------------
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1996
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
INDEPENDENT AUDITOR'S REPORT....................................................... 1
FINANCIAL STATEMENTS
Consolidated balance sheets...................................................... 2
Consolidated statements of income................................................ 3
Consolidated statements of stockholders' equity.................................. 4
Consolidated statements of cash flows............................................ 5 and 6
Notes to consolidated financial statements....................................... 7-29
</TABLE>
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
Assets 1996 1995
-------- ----------- -----------
<S> <C> <C>
Cash and due from banks...................................... $ 5,574,568 $ 5,715,903
Interest-bearing deposits in banks........................... 113,277 --
Federal funds sold and securities purchased under resell
agreements................................................. 18,780,000 13,500,000
Securities available-for-sale................................ 19,140,719 19,550,309
Securities held-to-maturity, fair value of $3,461,476 and
$3,959,702................................................. 3,498,339 4,001,178
Loans........................................................ 83,725,739 73,147,633
Less allowance for loan losses............................... 1,094,621 1,015,059
-------------- --------------
Loans, net.............................................. 82,631,118 72,132,574
-------------- --------------
Premises and equipment....................................... 5,335,670 4,654,973
Other assets................................................. 1,632,385 1,616,945
-------------- --------------
Total assets......................................... $ 136,706,076 $ 121,171,882
-------------- --------------
-------------- --------------
Liabilities and Stockholders' Equity
-------------------------------------
Deposits
Noninterest-bearing demand................................. $ 18,707,503 $ 16,908,574
Interest-bearing demand.................................... 40,005,223 31,285,182
Savings.................................................... 3,795,476 4,043,323
Time, $100,000 and over.................................... 14,979,962 11,625,480
Other time................................................. 43,052,253 42,602,940
-------------- --------------
Total deposits........................................ 120,540,417 106,465,499
Securities sold under repurchase agreements.................. 605,895 --
Other liabilities............................................ 817,395 1,115,092
-------------- --------------
Total liabilities..................................... 121,963,707 107,580,591
-------------- --------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
1,355,331 and 1,211,300 issued at amount paid in....... 12,142,205 12,113,610
Retained earnings......................................... 2,977,853 1,809,659
Unrealized gain on securities available for sale, net of
tax.................................................... 37,311 83,022
Treasury stock, 30,750 shares............................. (415,000) (415,000)
-------------- --------------
Total stockholders' equity............................. 14,742,369 13,591,291
-------------- --------------
Total liabilities and stockholders' equity............. $ 136,706,076 $ 121,171,882
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C>
Interest Income
Loans................................................... $ 8,439,303 $ 7,348,570
Taxabke securities...................................... 1,228,815 1,240,176
Nontaxable securities................................... 107,780 51,943
Deposits in banks....................................... 2,893 -
Federal funds sold and securities purchased............. 653,536 1,063,925
under resell agreements ------------- -------------
Total Interest Income................................ 10,432,327 9,704,614
------------- -------------
Interest expense
Deposits................................................ 4,382,921 4,086,689
Federal funds purchased and securities sold
under repurchase agreements........................... 10,023 110
------------- -------------
Total Interest expense.............................. 4,392,944 4,086,799
------------- -------------
Net Interest income................................. 6,039,383 5,617,815
Provision for loan losses.................................. 137,500 256,000
------------- -------------
Net Interest Income after provision for loan losses. 5,901,883 5,361,815
------------- -------------
Other income
Service charges on deposit accounts...................... 371,211 342,477
Net realized losses on securities available-for-sale..... (4,157) -
Gains on sale of loans................................... 237,247 141,141
Other operating income................................... 155,353 87,741
------------- -------------
Total other Income.................................... 759,654 571,359
------------- -------------
Other expense
Salaries and employee benefits........................... 2,250,272 1,871,564
Equipment expenses....................................... 258,614 215,644
Occupancy expenses....................................... 267,283 232,243
Other operating expenses................................. 1,504,305 1,303,975
------------- -------------
Total other expenses.................................. 4,280,474 3,623,426
------------- -------------
Income before income taxes............................ 2,381,063 2,309,748
Income tax expense......................................... 872,085 693,954
------------- -------------
Net Income............................................ $ 1,508,978 $ 1,615,794
------------- -------------
------------- -------------
Net income per share of common stock....................... $ 1.09 $ 1.17
------------- -------------
------------- -------------
Weighted average shares outstanding........................ 1,380,828 1,386,862
------------- -------------
------------- -------------
See Notes To Consolidated Financial Statements.
</TABLE>
3
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
UNREALIZED
GAINS
(LOSSES) ON
COMMON STOCK SECURITIES
------------------------- AVAILABLE- TREASURY STOCK
AMOUNT RETAINED FOR-SALE, ----------------------
SHARES PAID IN EARNINGS NET OF TAX SHARES COST TOTAL
---------- ------------- ------------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994...................... 1,210,800 $ 12,108,000 $ 285,485 $ (234,362) -- $ $ 12,159,123
Net income................ -- -- 1,615,794 -- -- 1,615,794
Cash dividends declared... -- -- (91,620) -- -- (91,620)
Exercise of stock options. 500 5,610 -- -- -- -- 5,610
Purchase of treasury
stock................... -- -- -- -- 25,000 (415,000) (415,000)
Net change in unrealized
gains (losses) on
securities available-for-
sale, net of tax........ -- -- -- 317,384 -- -- 317,384
---------- ------------- ------------ ----------- ---------- ---------- -------------
Balance, December 31,
1995...................... 1,211,300 12,113,610 1,809,659 83,022 25,000 (415,000) 13,591,291
Net income................ -- -- 1,508,978 -- -- -- 1,508,978
Cash dividends declared... -- -- (340,784) -- (340,784)
Stock dividend............ 140,531 -- -- -- 5,750 -- --
Exercise of stock options. 3,500 28,595 -- -- -- -- 28,595
Net change in unrealized
gains (losses) on
securities available-for-
sale, net of tax......... -- -- -- (45,711) -- -- (45,711)
---------- ------------- ------------ ----------- ---------- ---------- -------------
Balance, December 31,
1996...................... 1,355,331 $ 12,142,205 $ 2,977,853 $ 37,311 30,750 $ (415,000) $ 14,742,369
---------- ------------- ------------ ----------- ---------- ---------- -------------
---------- ------------- ------------ ----------- ---------- ---------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income...................................................... $ 1,508,978 $ 1,615,794
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.................................................. 290,983 246,662
Provision for loan losses..................................... 137,500 256,000
Deferred income taxes......................................... (25,393) (157,180)
Net realized losses on securities available-for-sale.......... 4,157 --
Gains on sale of loans........................................ (237,247) (141,141)
Proceeds from sale of loans................................... 3,078,914 1,428,564
Loans originated for sale..................................... (4,035,245) (1,287,423)
Increase in interest receivable............................... (4,029) (275,636)
Increase in interest payable.................................. 1,896 165,426
Other operating activities.................................... (208,135) 190,327
------------- -------------
Net cash provided by operating activities.................. 512,379 2,041,393
------------- -------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale.................... (5,529,234) (12,859,096)
Proceeds from sales of securities available-for-sale.......... 1,270,143 --
Proceeds from maturities of securities available-for-sale..... 4,591,337 9,873,584
Purchases of securities held-to-maturity...................... -- (3,099,265)
Proceeds from maturities of securities held-to-maturity....... 502,839 708,065
Net increase in Federal funds sold and securities purchased
under resell agreements..................................... (5,280,000) (4,650,000)
Net increase in interest-bearing deposits in banks............ (113,277) --
Net increase in loans......................................... (9,442,466) (9,395,548)
Purchase of premises and equipment............................ (971,680) (276,663)
------------- -------------
Net cash used in investing activities.................... (14,972,338) (19,698,923)
------------- -------------
FINANCING ACTIVITIES
Net increase in deposits...................................... 14,074,918 18,293,988
Net increase in securities sold under repurchase agreements... 605,895 --
Dividends paid................................................ (390,784) (91,620)
Proceeds from exercise of stock options....................... 28,595 5,610
Purchase of treasury stock.................................... -- (415,000)
------------- -------------
Net cash provided by financing activities................ 14,318,624 17,792,978
------------- -------------
</TABLE>
5
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Net increase (decrease) in cash and due from banks................ $ (141,335) $ 135,448
Cash and due from banks at beginning of year...................... 5,715,903 5,580,455
------------ ------------
Cash and due from banks at end of year............................ $ 5,574,568 $ 5,715,903
------------ ------------
------------ ------------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest....................................................... $ 4,391,048 $ 3,921,373
Income taxes................................................... $ 1,275,906 $ 487,552
NONCASH TRANSACTION
Unrealized (gains) losses on securities available-for-sale...... $ 73,187 $ (410,988)
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
First Sterling Banks, Inc. (the Company) is a multi-bank holding
company whose business is conducted by its wholly-owned
subsidiaries, The Westside Bank & Trust Company and Eastside Bank &
Trust Company, (the Banks). The Banks are commercial banks located
in Cobb and Gwinnett Counties, Georgia. The Banks provide a full
range of banking services in their primary market areas of Cobb,
Gwinnett and surrounding counties. Eastside Bank & Trust Company has
a wholly-owned subsidiary, Eastside Financial Services, Inc., which
originates, sells and services loans made under the Small Business
Administration Program.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the
Company and its subsidiaries. Significant intercompany transactions
and accounts are eliminated in consolidation.
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and general practices
within the financial services industry. In preparing the financial
statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the
date of the balance sheet and revenues and expenses for the period.
Actual results could differ from those estimates.
CASH AND DUE FROM BANKS
Cash on hand, cash items in process of collection, and amounts due
from banks are included in cash and due from banks.
The Company maintains amounts due from banks which, at times, may
exceed Federally insured limits. The Company has not experienced any
losses in such accounts.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Purchased Under Resell Agreements
Securities purchased under resell agreements are recorded at the
amounts at which the securities are acquired plus accrued interest.
The Company enters into purchases of U. S. Government and agency
securities under resell agreements to resell substantially identical
securities.
The amounts advanced under resell agreements represent short-term
loans and are combined with Federal funds sold in the balance sheet.
The securities underlying the resell agreements are delivered by
appropriate entry into a third-party custodian's account designated
by the Company under a written custodial agreement that explicitly
recognizes the Company's interest in the securities. Securities
purchased under resell agreements averaged approximately $2,334,000
during 1996 and the maximum amounts outstanding at any month-end
during 1996 was $25,000,000.
Securities
Securities are classified based on management's intention on the
date of purchase. Securities which management has the intent and
ability to hold to maturity are classified as held-to-maturity and
reported at amortized cost. All other debt securities are classified
as available-for-sale and carried at fair value with net unrealized
gains and losses included in stockholders' equity net of tax. Equity
securities without a readily determinable fair value are carried at
cost.
Interest and dividends on securities, including amortization of
premiums and accretion of discounts, are included in interest
income. Realized gains and losses from the sales of securities are
determined using the specific identification method.
Loans
Loans are carried at their principal amounts outstanding less
deferred loan fees and costs and the allowance for loan losses.
Interest income on loans is credited to income based on the
principal amount outstanding.
Nonrefundable loan fees and certain direct loan origination costs
are deferred with the net amount recognized into income over the
life of the loans as a yield adjustment.
8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans (Continued)
The allowance for loan losses is maintained at a level that
management believes to be adequate to absorb potential losses in the
loan portfolio. Management's determination of the adequacy of the
allowance is based on an evaluation of the portfolio, past loan loss
experience, current economic conditions, volume, growth, composition
of the loan portfolio, and other risks inherent in the portfolio. In
addition, regulatory agencies, as an integral part of their
examination process, periodically review the Company's allowance for
loan losses, and may require the Company to record additions to the
allowance based on their judgment about information available to
them at the time of their examinations.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. Interest income is subsequently recognized only to
the extent cash payments are received.
A loan is impaired when it is probable the Company will be unable to
collect all principal and interest payments due in accordance with
the terms of the loan agreement. Individually identified impaired
loans are measured based on the present value of payments expected
to be received, using the contractual loan rate as the discount
rate. Alternatively, measurement may be based on observable market
prices or, for loans that are solely dependent on the collateral for
repayment, measurement may be based on the fair value of the
collateral. If the recorded investment in the impaired loan exceeds
the measure of fair value, a valuation allowance is established as a
component of the allowance for loan losses. Changes to the valuation
allowance are recorded as a component of the provision for loan
losses.
Sale of Loans
The Company originates and sells participations in certain loans.
Gains are recognized at the time the sale is consummated. The amount
of gain recognized on the sale of a specific loan is equal to the
percentage resulting from determining the fair value of the portion
sold as compared to the fair value of the entire loan. Any material
unrecognized gain is deferred and amortized into income over the
term of the loan. Losses are recognized at the time the loan is
identified as held for sale and the loan's carrying value exceeds
its fair value.
9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally by the
straight-line method over the estimated useful lives of the assets.
Other Real Estate Owned
Other real estate owned represents properties acquired through
foreclosure. Other real estate owned is held for sale and is
carried at the lower of the recorded amount of the loan or fair
value of the properties less estimated selling costs. Any write-
down to fair value at the time of transfer to other real estate
owned is charged to the allowance for loan losses. Subsequent gains
or losses on sale and any subsequent adjustment to the value are
recorded as other expenses.
Income Taxes
Income tax expense consists of current and deferred taxes. Current
income tax provisions approximate taxes to be paid or refunded for
the applicable year. Deferred tax assets and liabilities are
recognized for the temporary differences between the bases of assets
and liabilities as measured by tax laws and their bases as reported
in the financial statements. Deferred tax expense or benefit is then
recognized for the change in deferred tax assets or liabilities
between periods.
Recognition of deferred tax balance sheet amounts is based on
management's belief that it is more likely than not that the tax
benefit associated with certain temporary differences, tax operating
loss carryforwards and tax credits will be realized. A valuation
allowance is recorded for those deferred tax items for which it is
more likely than not that realization will not occur.
The Company and the Banks file a consolidated income tax return.
Each entity provides for income taxes based on its contribution to
income taxes (benefits) of the consolidated group.
Earnings Per Common Share
Earnings per common share are computed by dividing net income by the
weighted average number of shares of common stock and common stock
equivalents outstanding. In 1996, the Company declared a stock
dividend. Earnings per common share have been adjusted to reflect
the stock dividend for all periods presented.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Securities Available-for-Sale December 31, 1996:
U. S. Government and agency securities..................... $ 9,646,750 $ 29,120 $ (39,290) $ 9,636,580
State and municipal securities............................. 3,959,320 77,659 (4,323) 4,032,656
Mortgage-backed securities................................. 5,207,151 25,611 (30,479) 5,202,283
Equity securities.......................................... 269,200 -- -- 269,200
------------- ----------- ----------- -------------
$ 19,082,421 $ 132,390 $ (74,092) $ 19,140,719
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
December 31, 1995:
U. S. Government and agency securities..................... $ 11,471,143 $ 85,204 $ (14,892) $ 11,541,455
State and municipal securities............................. 1,980,601 48,039 (10,286) 2,018,354
Mortgage-backed securities................................. 5,967,080 40,489 (17,069) 5,990,500
------------- ----------- ----------- -------------
$ 19,418,824 $ 173,732 $ (42,247) $ 19,550,309
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Securities Held-to-Maturity
December 31, 1996:
U. S. Government and agency
securities................ $ 3,498,339 $ 599 $ (37,462) $ 3,461,476
------------- ----------- ------------ -----------
------------- ----------- ------------ -----------
December 31, 1995:
U. S. Government and agency
securities $ 4,001,178 $ 2,899 $ (44,375) $ 3,959,702
------------ ----------- ------------ -----------
------------ ----------- ------------ -----------
</TABLE>
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1996 by contractual maturity are shown below. Maturities may differ
from contractual maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or prepaid with or
without penalty. Therefore, these securities and equity securities are
not included in the maturity categories in the following maturity
summary.
<TABLE>
<CAPTION>
SECURITIES
SECURITIES AVAILABLE-FOR-SALE HELD-TO-MATURITY
---------------------------- --------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Due in one year or less................................ $ 1,620,880 $ 1,626,567 $ 1,250,711 $ 1,250,672
Due from one year to five years........................ 8,123,631 8,140,110 2,247,628 2,210,804
Due from five to ten years............................. 2,667,989 2,693,973 -- --
Due after ten years.................................... 1,193,570 1,208,586 -- --
Mortgage-backed securities............................. 5,207,151 5,202,283 -- --
Equity securities...................................... 269,200 269,200 -- --
------------- ------------- ------------ ------------
$ 19,082,421 $ 19,140,719 $ 3,498,339 $ 3,461,476
------------- ------------- ------------ ------------
------------- ------------- ------------ ------------
</TABLE>
Securities with a carrying value of $12,027,000 and $13,469,000 at
December 31, 1996 and 1995, respectively, were pledged to secure
public deposits and for other purposes.
Gains and losses on sales of securities available-for-sale consist of
the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1996 1995
--------- ---------
Gross gains.................................................................. $ -- $ --
Gross losses................................................................. (4,157) --
--------- ---------
Net realized losses.......................................................... $ (4,157) $ --
--------- ---------
--------- ---------
</TABLE>
Under special provisions adopted by the Financial Accounting Standards
Board in October 1995, the Company transferred $6,107,527 from
securities held-to-maturity to securities available-for-sale on
December 31, 1995, resulting in a net unrealized gain of $71,391 which
was included in stockholders' equity at $47,118 net of related taxes
of $24,273.
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
<S> <C> <C>
1996 1995
------------- -------------
Commercial, financial, and agricultural........................ $19,853,352 $ 14,349,228
Real estate--construction...................................... 21,791,259 20,694,525
Real estate--mortgage.......................................... 34,224,333 29,385,856
Consumer instalment and other.................................. 8,223,197 9,039,439
------------- -------------
84,092,141 73,469,048
Deferred loan fees and costs................................... (366,402) (321,415)
Allowance for loan losses...................................... (1,094,621) (1,015,059)
------------- -------------
Loans, net..................................................... $ 82,631,118 $ 72,132,574
------------- -------------
------------- -------------
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
<S> <C> <C>
1996 1995
------------ ------------
Balance, beginning of year........................................ $ 1,015,059 $ 904,201
Provision for loan losses......................................... 137,500 256,000
Loans charged off................................................. (80,298) (175,724)
Recoveries of loans previously charged off........................ 22,360 30,582
------------ ------------
Balance, end of year.............................................. $ 1,094,621 $ 1,015,059
------------ ------------
------------ ------------
</TABLE>
13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total recorded investment in impaired loans was $322,992 and
$86,781 at December 31, 1996 and 1995, respectively. There were no
impaired loans that had related allowances for loan losses determined
in accordance with Statement of Financial Accounting Standard No. 114
("Accounting by Creditors for Impairment of a Loan") at December 31,
1996 and 1995. The average recorded investment in impaired loans for
1996 and 1995 was $177,432 and $53,225, respectively. Interest income
recognized on impaired loans for cash payments received was not
material for the years ended December 31, 1996 and 1995.
The Company has granted loans to certain directors, executive
officers, and related entities of the Company and the Banks. The
interest rates on these loans were substantially the same as rates
prevailing at the time of the transaction and repayment terms are
customary for the type of loan involved. Changes in related party
loans for the year ended December 31, 1996 are as follows:
Balance, beginning of year...................................... $3,537,752
Advances........................................................ 572,181
Repayments...................................................... (796,992)
----------
Balance, end of year............................................ $3,312,941
----------
----------
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
DECEMBER 31,
-------------------------
1996 1995
------------ -----------
Land $ 1,470,790 $ 1,320,789
Buildings.......................................... 3,906,025 3,383,819
Equipment.......................................... 1,281,582 1,082,972
------------ -----------
6,658,397 5,787,580
Accumulated depreciation.................... (1,322,727) (1,132,607)
------------ -----------
$ 5,335,670 $ 4,654,973
------------ -----------
------------ -----------
NOTE 5. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement plan covering substantially all
employees. Contributions to the plan charged to expense during 1996
and 1995 amounted to $19,685 and $16,364, respectively.
NOTE 6. STOCK OPTIONS
The Company has an incentive stock option plan with 111,500 shares of
common stock reserved for options to key employees. At December 31,
1996, 7,420 common stock options were available to grant under this
plan.
The Company also reserved 73,685 shares of common stock for options to
directors. At December 31, 1996, there were no options available to
grant under this plan.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6. STOCK OPTIONS (Continued)
Option prices under those plans are equal to the fair value of the
Company's common stock on the date of the grant. The options expire in
ten years from date of grant. Other pertinent information related to
the options is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
---------------------- ----------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
--------- ----------- --------- -----------
Under option, beginning of year...................................... 162,765 $ 10.07 63,635 $ 8.22
Granted.............................................................. 17,000 13.00 99,630 9.95
Exercised (3,500) 8.17 (500) 11.22
Terminated........................................................... (2,500) 13.00 -- --
--------- ---------
Under option, end of year............................................ 173,765 9.92 162,765 10.07
--------- ---------
--------- ---------
Exercisable, end of year............................................. 159,265 9.64 162,765 10.07
--------- ---------
--------- ---------
</TABLE>
UNDER OPTION, END OF YEAR
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
RANGE OF EXERCISE CONTRACTUAL
NUMBER PRICES PRICE LIFE IN YEARS
------ -------------- ----------- -----------------
<S> <C> <C> <C>
129,745 $ 7.90--10.57 $ 8.98 8
44,020 12.40--13.82 12.68 9
---------
173,765
---------
---------
</TABLE>
OPTIONS EXERCISABLE, END OF YEAR
<TABLE>
<S> <C> <C> <C>
129,745 $7.90--10.57 $ 8.98 8
29,520 12.40--13.82 12.52 9
--------
159,265
--------
--------
</TABLE>
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 6. STOCK OPTIONS(Continued)
As permitted by SFAS No. 123 ("Accounting for Stock-Based Compensation"),
the Company recognizes compensation cost for stock-based employee
compensation awards in accordance with APB Opinion No. 25, ("Accounting for
Stock Issued to Employees"). The Company recognized no compensation cost for
stock-based employee compensation awards for the years ended December 31,
1996 and 1995. If the Company had recognized compensation cost in accordance
with SFAS No. 123, net income and earnings per share would have been reduced
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
<S> <C> <C> <C> <C>
1996 1995
------------------------- -------------------------
NET EARNINGS NET EARNINGS
INCOME PER SHARE INCOME PER SHARE
------------ ----------- ------------ -----------
As reported.................................................... $ 1,508,978 $ 1.09 $ 1,615,794 $ 1.17
Stock-based compensation, net of related tax effect............ -- -- (151,314) (0.11)
------------ ----------- ------------- -----------
As adjusted.................................................... $ 1,508,978 $ 1.09 $ 1,464,480 $ 1.06
------------ ----------- ------------- -----------
------------ ----------- ------------- -----------
</TABLE>
The fair value of the options was based upon the discounted value of
future cash flows of the options using the following assumptions:
Risk-free interest rate 6.50%
Expected life of the options 7 years
Expected dividends (as a percent of the fair value of the stock) 2.51%
Note 7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1995
----------------- -------------
<S> <C> <C>
Current $ 897,478 $ 851,134
Deffered (25,393) (48,429)
Change in valuation allowance -- (108,751)
----------------- -------------
Income tax expense $ 872,085 $ 693,954
----------------- -------------
----------------- -------------
</TABLE>
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR PERIOD ENDING DECEMBER 11, 1996 AND IS QUALIFIED IN ITS ENTIRETY
BY SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,574,568
<INT-BEARING-DEPOSITS> 113,277
<FED-FUNDS-SOLD> 18,780,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,140,719
<INVESTMENTS-CARRYING> 3,498,339
<INVESTMENTS-MARKET> 3,461,476
<LOANS> 83,725,739
<ALLOWANCE> 1,094,621
<TOTAL-ASSETS> 136,706,076
<DEPOSITS> 120,540,417
<SHORT-TERM> 605,895
<LIABILITIES-OTHER> 817,395
<LONG-TERM> 0
0
0
<COMMON> 12,142,205
<OTHER-SE> 2,977,853
<TOTAL-LIABILITIES-AND-EQUITY> 136,706,076
<INTEREST-LOAN> 8,439,303
<INTEREST-INVEST> 1,336,595
<INTEREST-OTHER> 656,429
<INTEREST-TOTAL> 10,432,327
<INTEREST-DEPOSIT> 4,382,921
<INTEREST-EXPENSE> 4,392,944
<INTEREST-INCOME-NET> 6,039,383
<LOAN-LOSSES> 137,500
<SECURITIES-GAINS> (4,157)
<EXPENSE-OTHER> 4,280,474
<INCOME-PRETAX> 2,381,063
<INCOME-PRE-EXTRAORDINARY> 2,381,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,508,978
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 0
<YIELD-ACTUAL> 5.31
<LOANS-NON> 322,992
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,015,059
<CHARGE-OFFS> 80,298
<RECOVERIES> 22,360
<ALLOWANCE-CLOSE> 1,094,621
<ALLOWANCE-DOMESTIC> 1,094,621
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
