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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, 1997
-----------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission file number: 000-25128
FIRST STERLING BANKS, INC.
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(Name of Small Business Issuer in Its Charter)
Georgia 58-2104977
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1200 Barrett Parkway, Kennesaw, GA 30144
- ---------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
770-499-2265
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(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
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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. / /
State issuer's revenues for the most recent fiscal year. $14,346,052
------------
As of March 1, 1998, registrant had outstanding 2,625,830 shares of common
stock. The aggregate market value of the voting stock held by nonaffiliates of
the registrant is approximately $44,474,995.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
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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.
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Competition for loans is also offered by other financial
intermediaries, including savings and loan associations, mortgage banking firms
and real estate 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.
In December 1997, Westside Bank signed a contract to purchase a tract
of land containing approximately 1.3542 acres at the intersection of Chastain
Road and Town Green Boulevard in North Cobb County. The bank will construct a
two story facility containing approximately 12,000 square feet to accommodate a
branch facility and the
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company's corporate headquarters. It is anticipated that only half of the space
will be built out initially, with the remaining space to be used for future
growth.
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.
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, 1998, the Westside Bank had a total of 22 full-time and
16 part-time employees. Eastside Bank had a total of 26 full-time and 12
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
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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, 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.
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The following table reflects the Company and the banks' compliance with
regulatory capital requirements at December 31, 1997:
<TABLE>
<CAPTION>
Actual Required Excess
Amount % Amount % Amount %
---------- ---- --------- --- --------- ----
<S> <C> <C> <C> <C> <C> <C>
Leverage capital
Consolidated 16,013,000 6.52% 9,824,000 4.00% 6,189,000 3.86%
Westside Bank 8,684,000 5.03 6,903,000 4.00 1,781,000 3.20
Eastside Bank 7,033,000 9.63 2,921,000 4.00 4,112,000 5.85
Risk-based core capital:
Consolidated 16,013,000 12.80% 5,005,000 4.00% 11,008,000 6.87%
Westside Bank 8,684,000 12.73 2,730,000 4.00 5,954,000 6.86
Eastside Bank 7,033,000 12.38 2,273,000 4.00 4,760,000 6.77
Risk-based total capital:
Consolidated 17,393,000 13.90% 10,009,000 8.00% 7,384,000 4.25%
Westside Bank 9,501,000 13.92 5,460,000 8.00 4,041,000 4.25
Eastside Bank 7,596,000 13.37 4,546,000 8.00 3,050,000 4.02
</TABLE>
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
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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.e., 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 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 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,
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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 institutions to purchase an existing bank or branch in the State
rather than starting a de novo bank.
The Interstate Banking Act was amended on July 3, 1997, for the purpose
of ensuring that state banks are competitive with national banks under the new
interstate banking laws. The amendment provides that state law of the host state
applies to an out-of-state, state-chartered bank that branches in the host state
to the same extent that it applies to a national bank operating a branch in the
host state. The law also provides that bank branches operating in the host state
and chartered in another state may exercise powers they have under their
home-state charters if host state-chartered banks or national banks may exercise
those powers.
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.
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Year 2000 Project
First Sterling Banks and its subsidiaries rely heavily upon computers
for the daily conduct of their business. First Sterling will commit all
resources necessary to achieve a satisfactory and timely solution to computer
based problems related to the year 2000 and beyond. The project is receiving
full support and attention from senior management of both Eastside Bank and
Westside Bank. A comprehensive plan which addresses all aspects of the project
is in place and work on the project is well underway. The project is on schedule
and the timetable will allow for an adequate period of thorough testing well in
advance of the year change. With the inventory and assessment phase of the
project completed management has determined that the total expense is not
expected to have a material effect on earnings in any one year.
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
(53)
Barbara J. Bond Secretary 1994
(49)
</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 1997.
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
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the principal market maker for the Company's common stock. Sterne, Agee & Leach
and Knox Wall are also market makers for the Company's common stock. The
Company's common stock is traded on the Nasdaq National Market under the symbol
FSLB. The following table lists the high and low stock price for each quarter in
1997:
<TABLE>
<CAPTION>
High Low
- ------------------------------------------------------------------
<S> <C> <C>
Fiscal year 1997
First quarter $ 9.00 $ 8.125
Second quarter 9.00 7.75
Third quarter 9.625 8.50
Fourth quarter 12.50 9.3125
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</TABLE>
(b) As of March 16, 1998, there were approximately 921 shareholders of record
of the registrant's common stock.
(c) During 1997 dividends of $ 0.0375 per share were paid in the first fiscal
quarter and dividends of $ 0.045 per share were paid in the second, third and
fourth fiscal quarters. The Company currently intends to continue paying regular
cash dividends on a quarterly basis.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
<TABLE>
<CAPTION>
For the Year Ended December 31
-----------------------------------------------------------
Selected Income Statement Data 1997 1996 1995 1994 1993
------- -------- -------- ------- ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total interest income $13,307 $10,432 $ 9,705 $ 7,491 $ 6,007
Total interest expense 5,562 4,393 4,087 2,916 2,678
Net interest income 7,745 6,039 5,618 4,575 3,329
Provision for loan losses 444 137 256 257 134
Net interest income after
provision for loan losses 7,301 5,902 5,362 4,318 3,195
Other operating income 1,040 760 571 513 538
Net income 2,167 1,509 1,616 1,209 854
Net income per share (basic) .83 .57 .59 .50 .36
Dividends per share .17 0.13 .075 .05 --
Selected Balance Sheet Data
Total loans $106,730 $ 83,726 $ 73,148 $ 63,897 $52,333
Total assets 169,041 136,706 121,172 100,860 92,937
Total deposits 151,323 120,540 106,466 88,172 81,410
Shareholders' equity 16,120 14,742 13,591 12,160 11,246
</TABLE>
All share and per share data have been adjusted to reflect a two for one stock
split announced on February 25, 1998.
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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, 1997 was $7,744,983
an increase of $1,705,600 or 28.24% compared to December 31, 1996. The increase
in net interest income is primarily attributable to an increase in average
earning assets over 1996.
The Banks' average cost of funds was 4.27% in 1997 as compared to 4.71%
in 1996. Average earning assets increased $38,131,004 or 33.50% over 1996.
Average interest bearing liabilities increased $36,914,368 or 39.56% over 1996.
As in previous years, the increase in interest bearing liabilities and average
earning assets was significantly affected by fourth quarter 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 $2,542,614 or 14.67% over 1996.
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 $444,342
in 1997 an increase of $306,842 over 1996. The banks continue to experience only
minimal losses, net chargeoffs in 1997 were of .17% of average loans compared
to .07% in 1996.
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The increase in provision is a reflection of the strong growth in the loan
portfolio experienced by both banks in 1997, along with an increase of $102,000
in net chargeoffs over 1996. The allowance for loan losses as a percentage of
total loans outstanding at December 31, 1997 and 1996 amounted to 1.29% and
1.31% respectively.
Bank management closely monitors the loan portfolio and the
underwriting of loans 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 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Service charges on deposit
accounts $ 389,948 $371,211
Gain on sale of loans 279,002 237,247
Other income 371,157 155,353
Net realized losses on securities (600) (4,157)
---------- ---------
$1,039,507 $759,654
---------- ---------
---------- ---------
</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, fees on participation loans, mortgage origination fees,
customer service fees, gains (losses) on investment securities transactions and
miscellaneous other income. Other income is up $215,804 over 1996. This increase
is largely the result of increased, fees on participation loans and mortgage
origination fees.
Following is an analysis of non-interest expense for 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Salaries and employee benefits $2,993,762 $ 2,250,272
Occupancy and equipment expense 628,523 525,897
Deposit insurance premiums 13,909 4,000
Data processing fees 212,179 197,125
Directors Fees 182,400 140,225
Merger expenses -- 131,632
Other expense 1,022,514 1,031,323
------------ -----------
$5,053,287 $ 4,280,474
------------ -----------
------------ -----------
</TABLE>
Non-interest expense increased $772,813 or 18.05% over 1996.
Non-interest expense consists primarily of salaries and other employee benefits,
occupancy expense, and other operating costs. In the fourth quarter of 1996,
management salaries, bonuses and directors fees were reviewed by an independent
third party consultant and adjustments made where appropriate. Directors of
Eastside and Westside are paid for each board meeting attended and outside
directors are paid for each committee meeting attended. Directors on the First
Sterling board are paid a quarterly fee for all services. Directors fees
increased $42,175 or 30% over 1996. Personnel expense
12
<PAGE>
increased $743,490 over 1996. This increase is primarily attributable to the
addition of staff at both banks and the first full year of operation for
Westside's Whitlock branch. At December 31, 1997, the company employed 46
full-time employees and 25 part-time employees. It is the intention of
management and the boards to attract and maintain quality people by offering
salaries and other benefits competitive in the marketplace, and to reward
individuals based on the performance of the Bank. Occupancy expense increased $
102,626 or 19.51% over 1996. This increase can also be attributed primarily to
Westside's first full year of operating the Whitlock branch.
Net income after tax increased $657,689 or 43.59% from 1996. While the
average rate on earning assets declined 4.47% the increase in average earning
assets resulted in an increase in interest income of $2,874,218 or 27.55% over
1996. Although average interest bearing liabilities increased 39.56%, the
effective rate declined 9.34% and total interest expense increased only 26.60%.
While all deposit categories increased over 1996 the majority of the increase
was in lower rate interest bearing demand deposits.
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 1997 and 1996:
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,
1997 1996
<S> <C> <C>
ASSETS
Cash and due from banks $ 7,648,021 $ 5,952,464
Interest-bearing deposits in banks 100,000 48,361
Taxable Securities 19,097,717 19,872,073
Nontaxable Securities 4,138,479 2,229,505
Federal funds sold 12,403,296 10,200,182
Securities purchased under agreement to resell 21,578,817 2,333,880
Loans (1) 94,627,687 79,130,991
Reserve for loan losses (1,147,135) (1,064 977)
Other assets 7,730,105 6,884,343
------------- -------------
Total Assets $ 166,176,987 $ 125,586,822
------------- -------------
------------- -------------
Total earning assets $ 151,945,996 $ 113,814,992
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 19,870,565 $ 17,327,951
Interest-bearing demand and savings 64,243,825 35,704,589
Time 65,623,174 57,398,208
------------- -------------
Total deposits 149,737,564 110,430,748
Federal funds purchased and securities
sold under agreement to repurchase 360,150 209,984
Other liabilities 1,107,972 956,068
------------- -------------
Total liabilities $ 151,205,686 111,596,800
------------- -------------
Stockholders' equity $ 14,971,301 $ 13,990,022
------------- -------------
Total Liabilities and
Stockholders' equity $ 166,176,987 125,586,822
------------- -------------
------------- -------------
Total interest-bearing liabilities $ 130,227,149 $ 93,312,781
------------- -------------
------------- -------------
</TABLE>
(1) Average loans include non-accrual loans, if any.
13
<PAGE>
Interest Income and Interest Expense
<TABLE>
<CAPTION>
For the year ended December 31,
1997 1996
Average Average
Interest Rate Interest Rate
(Dollars in thousands)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1) $10,027 10.60% $ 8,439 10.66%
Interest on investment securities:
Taxable Securities 1,234 6.46 1,229 6.18
Nontaxable Securities 184 4.45 108 4.84
Interest on Federal funds sold 676 5.45 538 5.27
Interest on securities purchased
under agreement to resell 1,180 5.46 115 4.93
Interest on deposits in banks 6 5.90 3 6.25
------- ---- ------- ----
Total interest income $13,307 8.76 $10,432 9.17
------- ---- ------- ----
INTEREST EXPENSE:
Interest on savings and interest-
bearing demand deposits $ 1,734 2.70% $ 1,031 2.89
Interest on time deposits 3,810 5.80% 3,352 5.84
Interest on Federal funds purchased
and securities sold under
agreement to repurchase 18 5.09 10 4.76
------- ---- ------- ----
Total interest expense $ 5,562 4.27 $ 4,393 4.71
------- ---- ------- ----
NET INTEREST INCOME $ 7,745 $ 6,039
------- -------
------- -------
Net interest spread 4.49% 4.46%
---- ----
---- ----
Net yield on average interest-
earning assets 5.10% 5.31%
---- ----
---- ----
</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 $749,210 and $728,761 for the years ended December 31, 1997 and
1996, 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.
14
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
1997 V.s. 1996
Increase Changes Due to
(Decrease) Rate Volume
(Dollars in Thousands)
<S> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans $ 1,588 $ (65) $ 1,653
Interest on investment securities:
Taxable 5 53 (48)
Nontaxable 76 (16) 92
Interest on Federal funds sold 138 22 116
Interest on securities purchased
under agreement to resell 1,065 114 951
Interest on deposits in other banks 3 -- 3
------- ------- -------
Total interest income $ 2,875 $ 108 $ 2,767
------- ------- -------
Expense from interest-bearing liabilities
Interest on interest-bearing
demand and savings deposits $ 703 $ (121) $ 824
Interest on time deposits 458 (22) 480
Interest on Federal funds purchased
and securities sold under agreement
to repurchase 8 1 7
------- ------- -------
Total interest expense $ 1,169 $ (142) $ 1,311
Net interest income $ 1,706 $ 250 $ 1,456
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
Year ended December 31,
1996 v.s. 1995
Increase Changes Due to
(Decrease) Rate Volume
(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 deposits in other banks 3 -- 3
Interest on Federal funds sold (161) (53) (108)
Interest on securities purchased under
agreement to resell (250) (15) (235)
------- ------- -------
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>
15
<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, 1997 were considered satisfactory. At
December 31, 1997, investment securities with a book value of $2,572,246 were
scheduled to mature within one year. These investments, along with federal funds
sold and securities purchased under agreement to resell of $27,485,000 as of
December 31, 1997, will provide a ready source of funds. At December 31, 1997,
the Company's and the Bank's capital asset ratios were considered adequate based
on guidelines established by the regulatory authorities. During 1997, the
Company increased its capital by retaining net earnings of $1,718,745 after
dividend payments of $447,922. At December 31, 1997, total capital of the
Company amounted to $16,120,410.
On September 20, 1995, the Board of Directors of Westside Financial
unanimously approved a stock redemption plan to redeem up to 120,000 shares of
its common stock. A total of 50,000 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 70,000 shares of its common stock at a price not to exceed
$9.00 per share. A total of 70,000 shares were repurchased for $618,875, an
average price of $8.84 per share.
On February 25, 1998, the Board of Directors unanimously approved a two
for one stock split, payable March 30, 1998 to shareholders of record March 16,
1998.
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.
16
<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, 1997
<TABLE>
<CAPTION>
Available for sale Held to Maturity Weighted
Amortized Fair Amortized Fair Average
Cost Value Cost Value Yield
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Due in one year or less $ 2,572 $ 2,575 $ 2,249 $ 2,238 5.443%
Due from one year to five years 5,658 5,704 -- -- 5.926
Due from five to ten years 2,143 2,209 -- -- 5.555
Due after ten years 623 654 -- -- 5.097
Mortgage-backed securities 7,492 7,505 -- -- 6.218
Equity securities 313 313 -- -- 5.097
------- ------- --------- ----------------
$18,801 $18,963 $ 2,249 $ 2,238 5.889%
------- ------- --------- ----------------
------- ------- --------- ----------------
</TABLE>
Securities with a carrying value of $15,437,000 and $12,027,000 at December 31,
1997 and 1996, 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,
1997 1996
<S> <C> <C>
Commercial, financial and agricultural $ 24,768,799 $ 19,853,352
Real estate--construction and land
development 35,840,760 21,791,259
Real estate--mortgage 39,560,475 34,224,333
Installment and other consumer 6,946,810 8,223,197
------------- -------------
107,116,844 84,092,141
Net deferred loan fees (387,074) (366,402)
------------- -------------
106,729,770 83,725,739
------------- -------------
Less reserve for possible loan losses (1,379,678) (1,094,621)
------------- -------------
Net loans $ 105,350,092 $ 82,631,118
------------- -------------
------------- -------------
</TABLE>
17
<PAGE>
SUPPLEMENTAL MATURITY SCHEDULE OF LOANS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Over One
One Year Through Over
or Less Five Years Five Years Total
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial and
industrial $10,796,624 $ 6,535,136 $ 7,437,039 $24,768,799
Real estate--
construction and
land development 30,385,616 3,722,768 1,732,376 35,840,760
Real estate--mortgage 9,483,109 16,314,420 13,762,946 39,560,475
Installment and other
consumer 2,492,475 4,023,886 430,449 6,946,810
</TABLE>
Non-performing Loans
There were $41,501 in non-accrual loans at December 31, 1997 and
$322,992 at December 31, 1996. 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.
DEPOSITS
The following table represents the composition of the Bank's deposit
accounts, for the periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Average Average Average Average
Amount Rate Amount Rate
(Dollars in Thousands)
<S> <C> <C>
Noninterest-bearing deposits $19,871 --% $17,328 --%
Interest-bearing demand and
savings deposits 64,244 2.70 35,705 2.89
Time deposits 65,623 5.80 57,398 5.84
</TABLE>
18
<PAGE>
MATURITY SCHEDULE OF TIME DEPOSITS OVER $100,000
December 31, 1997
<TABLE>
<S> <C>
Three months or less $ 6,962,922
Three months to six months 4,221,425
Six months to twelve months 6,733,828
Over twelve months 3,603,325
-----------
Total $21,521,500
-----------
-----------
</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 $444,342 during
the year ended December 31, 1997, compared to $137,500 in 1996. During 1997, the
Bank had net charge-offs of $159,285. There were net charge-offs of $57,938 in
1996. An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
<S> <C> <C>
Average amount of loans outstanding $94,627,687 $79,130,991
----------- -----------
----------- -----------
Balance of reserve for possible loan
losses at beginning of period $ 1,094,621 $ 1,015,059
Provision charged to operating expense 444,342 137,500
Recoveries:
Commercial, financial and agricultural -- 2,825
Real estate--construction and
land development 9,817 13,737
Real estate--mortgage -- --
Installment and other consumer 19,018 5,798
----------- -----------
Total recoveries $ 28,835 $ 22,360
----------- -----------
Less chargeoffs:
Commercial, financial and agricultural 16,296 24,709
Real estate--construction and
land development 52,130 5,722
Real estate--mortgage -- --
Installment and other consumer 119,694 49,867
----------- -----------
Total chargeoffs $ 188,120 $ 80,298
----------- -----------
Net chargeoffs $ 159,285 $ 57,938
----------- -----------
Balance of reserve for possible loan losses
at end of period $ 1,379,678 $ 1,094,621
----------- -----------
----------- -----------
Ratio of net loan chargeoffs to average loans .17% .07%
----------- -----------
----------- -----------
</TABLE>
19
<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, 1997, as follows:
<TABLE>
<S> <C>
Commercial, financial and agricultural $ 7,277,748
Real estate--construction and land
development 20,674,676
Real estate--mortgage 4,681,550
Installment and other consumer 2,383,078
Standby letters of credit 384,298
-----------
$35,401,350
-----------
-----------
</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, 1997,
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.
20
<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 $ 31 $ 100 $ -- $ -- $ 131
Federal funds sold 27,485 -- -- -- 27,485
Securities 823 3,155 8,444 8,790 21,212
Loans 70,875 10,040 22,708 3,106 106,729
-------- -------- -------- -------- --------
Total rate sensitive assets $ 99,214 $ 13,295 $ 31,152 $ 11,896 $155,557
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand
deposits $ 49,227 $ -- $ -- $ -- $ 49,227
Savings accounts 7,320 -- -- -- 7,320
Time deposits 28,980 36,977 7,790 -- 73,747
Other interest bearing
liabilities 354 -- -- -- 354
-------- -------- -------- -------- --------
Total Rate sensitive
liabilities $ 85,881 $ 36,977 $ 7,790 $ -- $130,648
-------- -------- -------- -------- --------
Interest rate sensitivity
GAP $ 13,333 $(23,682) $ 23,362 $ 11,896
-------- -------- -------- --------
-------- -------- -------- --------
Cumulative interest rate
sensitivity GAP $ 13,333 $(10,349) $ 13,013 $ 24,909
-------- -------- -------- --------
-------- -------- -------- --------
GAP as % of assets 7.89% (14.01%) 13.82% 7.04%
Cumulative GAP as a % of assets 7.89% (6.12%) 7.70% 14.74%
Interest Rate Sensitivity
GAP ratio 115.52% 35.95% 399.90% --
Cumulative interest rate
sensitivity GAP ratio 115.52% 91.58% 109.96% 119.07%
</TABLE>
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,
1997 1996
<S> <C> <C>
Return on assets (1) 1.30% 1.20%
Return on equity (2) 14.47% 10.79%
Dividend payout ratio (3) 20.48% 22.81%
Equity to assets ratio (4) 9.01% 11.14%
</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
(basic).
(4) Average equity divided by average total assets.
21
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiary are included on page 1 through 32 of this Annual Report on Form
10-KSB.
Consolidated Balance Sheets--December 31, 1997 and 1996
Consolidated Statements of Income--Years Ended
December 31, 1997 and 1996
Consolidated Statements of Stockholders' Equity--Years Ended
December 31, 1997 and 1996
Consolidated Statements of Cash Flows--Years Ended
December 31, 1997 and 1996
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
During 1997, 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.
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 49 Executive V.P. Ms. Bond serves as Executive Vice
Westside Bank President and Senior Operations Officer
Secretary of of Westside Bank and has served in such
Company and capacities since the organization of
Westside Bank Westside. Ms. Bond has served as
Secretary of the Bank and the Company
since September 1991 and March 1994,
respectively.
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C>
Harry L. Hudson, Jr. 54 Director of Mr. Hudson is currently serving as
Company and Chairman of the Board of Directors of
Chairman of Eastside Bank, an office he has held
Eastside Bank 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 54 Director of Judge Hines has served as chairman of
P. Harris Hines Company and the Board of Directors of Westside Bank
Chairman of since April 1992. From January 1, 1983
Westside Bank 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.
Edward C. Milligan 53 Chairman, Mr. Milligan has served as President and
President and Chief Executive Officer of Westside
CEO of Company; since its organization. Mr. Milligan has
President, CEO served as President and CEO of the
and Director of Company since its organization in March
Westside Bank; 1994. Mr. Milligan has served as a
Director of Director of Eastside Bank since August
Eastside Bank 1996.
John S. Thibadeau, Jr. 50 Director of Since 1973, Mr. Thibadeau has been
Company and president of Deauton Corporation, a real
Eastside Bank 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 Wofford, M.D. 59 Director of Dr. Wofford served as Chairman of the
Company and Board of Directors of Westside Bank from
Westside Bank its organization until April, 1991.
From 1970 until his retirement in 1977
Dr. Wofford was 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>
23
<PAGE>
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 1997, the Directors received $182,400 for their service as
Directors of the Company and the banks.
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 the year ended December 31, 1997, and all executive officers of the
Company and the Banks as a group.
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Securities
Underlying
Deferred Other Options/
Position Year Salary Bonus Compensation Compensation SAR(#)
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Edward C. Milligan 1997 $131,672 $46,200 $48,383 $19,325 34,000
President & CEO 1996 122,136 42,000 -- 7,882 --
Westside Bank 1995 117,425 34,800 -- 5,348 14,760
Barbara J. Bond 1997 77,750 18,565 9,893 4,281 --
Executive V P 1996 73,583 17,390 -- 2,637 --
Westside Bank 1995 70,750 14,300 -- 2,423 11,070
Michael Henderson 1997 88,095 20,093 9,180 9,808 --
Executive V P 1996 81,500 19,270 -- 8,445 --
Westside Bank 1995 78,333 15,800 -- 8,150 11,070
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Long-Term
Compensation
------------
Securities
Underlying
Deferred Other Options/
Position Year Salary Bonus Compensation Compensation SAR(#)
- -------- ----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
All Executive 1997 $361,781 $ 94,498 $67,456 (1)$33,414 34,000
Officers as 1996 338,424 86,660 -- (2) 18,963 --
a Group 1995 325,358 65,900 -- (3) 15,921 36,900
</TABLE>
(1) Includes Bank's contribution to the 401(k) Plan, directors fees ($12,200)
paid to Mr. Milligan, and an auto allowance ($6,000) paid to Mr. Henderson.
(2) Includes Bank's contribution to the 401(k) Plan, directors fees ($5,500)
paid to Mr. Milligan, and an auto allowance ($6,000) paid to Mr. Henderson.
(3) Includes Bank's contribution to the 401(k) Plan and directors fees ($3,000)
paid to Mr. Milligan, an auto allowance ($6,000) paid to Mr. Henderson.
Stock Option Plan
In September 1997 by unanimous written consent of the Board of
Directors of First Sterling Banks, Inc. the 1997 First Sterling Banks, Inc.
Incentive Stock Option Plan was adopted, subject to approval of the Company's
shareholders at the 1998 Annual Shareholders Meeting. Under the plan 200,000
shares of Common Stock may be granted by the Company to key employees of the
Company or a subsidiary.
The following table reflects options currently outstanding under the
above described plan:
<TABLE>
<CAPTION>
Price Per
Date Granted Share Exercised Terminated *Outstanding
---- ------- ----- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
09-24-1997 44,900 $ 9.25 -- -- 44,900
01-04-1998 22,200 12.50 -- -- 22,200
</TABLE>
* Unless otherwise noted all outstanding shares are immediately exercisable.
(1) 10,800 shares exercisable immediately
16,250 shares exercisable 1st anniversary of 09-24-1997
16,250 shares exercisable 2nd anniversary of 09-24-1997
1,600 shares exercisable 3rd anniversary of 09-24-1997
(2) 4,440 shares exercisable per year for five years beginning
on January 5, 1999
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".
25
<PAGE>
Under the 1994 Incentive Stock Option Plan 123,000 shares of Common
Stock may be granted by the Company to key employees of the Company and its
subsidiary, The Westside Bank & Trust Company.
Under the 1995 Directors Stock Option Plan 147,600 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 table reflects options currently outstanding under the
above described plans:
<TABLE>
<CAPTION>
Price Per
Date Granted Share Exercised Terminated *Outstanding
- --------------- ------ ------ ------ ---------- ------------
<S> <C> <C> <C> <C> <C>
02-20-1991 61,500 $ 4.065 -- -- 61,500
04-19-1995 86,830 4.56 1,500 -- 85,330
08-16-1995 51,660 5.285 -- -- 51,660
09-20-1995 54,120 6.20 -- -- 54,120
11-15-1995 4,920 6.91 -- 4,920
</TABLE>
* Unless otherwise noted all outstanding shares are immediately exercisable.
During 1996 the Company adopted the 1996 Substitute Incentive Stock
Option Plan replacing the former plan as amended February 17, 1993. Under the
plan 100,000 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 1997 the Company adopted the 1997 Directors Stock Option Plan. Under
the plan 90,000 shares of Common Stock may be granted by the Company to voting
members of the Board of Directors of either the Eastside Bank & Trust Company or
First Sterling Banks, Inc.
The following table reflects options currently outstanding under the
above described plans:
<TABLE>
<CAPTION>
Price Per
Date Granted Share Exercised Terminated *Outstanding
- ------------------ ------ ------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
02-15-1993 10,000 $ 4.09 10,000 -- --
02-17-1993 35,000 3.95 20,000 -- 15,000
01-19-1994 4,000 4.20 4,000 -- --
12-14-1994 17,000 4.515 12,000 -- 5,000
02-21-1996 34,000 6.50 7,668 11,666 16,666(1)
03-27-1997 90,000 9.00 -- -- 90,000
</TABLE>
Unless otherwise noted all outstanding shares are immediately exercisable.
(1) 10,334 shares exercisable; remaining 6,332 shares exercisable 02-21-99
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.
26
<PAGE>
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
at FY-End(#) at FY-End(S)
Shares
Acquired on Value Exercisable/ Exercisable/
Name Exercise # Realized($) Unexercisable Unexercisable
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edward C. Milligan -0- -0- 50,160/23,200 $324,014/$63,800
</TABLE>
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 $36,287.83 during the
1997 fiscal year pursuant to the Retirement Plan, including the following
amounts to the accounts of persons named: Edward C. Milligan-- $7,125.00;
Michael J. Henderson--$3,808.13; Barbara J. Bond--$4,281.30; and all executive
officers as a group--$15,214.43. Eastside Bank contributed a total of $10,756
during the 1997 fiscal year.
In December 1997 the directors of Westside Bank unanimously approved a
Deferred Compensation Plan for the benefit of key executives of the bank who
could be added to the Plan from time to time. Initial participants in the plan
are: Edward C. Milligan, Barbara J. Bond and Michael J. Henderson. The Plan
shall adopt certain retirement goals for each participant, which goals shall be
adjusted from time to time and the Bank shall make regular annual contributions
to the Plan in amounts needed to reach the retirement goal for each executive,
but any such contributions shall be at the discretion of the Board of Directors.
The following contributions totaling $ 67,456, were made for 1997; Edward C.
Milligan--$48,383; Barbara J. Bond--$ 9,893.00 and Michael J. Henderson--$
9,180.00.
27
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 1,
1998, 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 Number of Shares% # of Class (l)
- --------------------------- ----------------- --------------
<S> <C> <C>
Barbara J. Bond 34,520 (2) 1.30%
P. Harris Hines 17,896 (3) .68
Harry L. Hudson, Jr 42,300 (4) 1.60
Edward C. Milligan 111,320 (5) 4.12
John S. Thibadeau, Jr 20,000 (6) .76
Benjamin H. Wofford, Jr 66,058 (7) 2.50
SouthTrust of Georgia, Inc. 128,794 4.90
-------
443,888 (8)
-------
-------
</TABLE>
(1) Based on total outstanding shares of 2,625,830 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 29,520 shares of Common Stock obtainable upon the exercise of
options.
(3) Includes 12,300 shares of Common Stock obtainable upon the exercise of
options
(4) Includes 10,000 shares of Common Stock obtainable upon the exercise of
options and 20,000 shares held as joint tenant with spouse.
(5) Includes 73,360 shares of Common Stock obtainable upon the exercise of
options and 1,230 shares held by Mr. Milligan's minor children.
(6) Includes 10,000 shares of Common Stock obtainable upon the exercise of
options.
(7) Includes 12,300 shares of Common Stock obtainable upon the exercise of
options and 12,300 shares held as joint tenant with spouse.
(8) Includes 147,480 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.
28
<PAGE>
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,
1997 and 1996
(ii) Consolidated Statements of Income--Years
ended December 31, 1997 and 1996
(iii) Consolidated Statements of Stockholders'
Equity Years ended December 31, 1997 and
1996
(iv) Consolidated Statements of Cash Flows--
Years ended December 31, 1997 and 1996
(v) Notes to Consolidated Financial Statements
(b) First Sterling Banks, Inc. (Parent Company Only):
Parent Company only financial information has been included in
Note 15 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:
Number Description
------ -----------
Exhibit 3.1 Articles of Incorporation 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 (incorporated by
reference to Exhibit 3.1 of the December 31, 1996, 10K-SB)
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.
29
<PAGE>
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)
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 10.9 First Sterling Banks, Inc. 1997 Directors Stock Option
Plan, attached as Exhibit 10.9
Exhibit 10.10 Form of First Sterling Banks, Inc. 1997 Directors Stock
Option Plan, Stock Option Agreement, attached as
Exhibit 10.10
Exhibit 10.11 First Sterling Banks, Inc. 1997 Incentive Stock Option
Plan, attached as Exhibit 10.11
Exhibit 10.12 Form of First Sterling Banks, Inc. 1997 Incentive Stock
Option Plan, Incentive Stock Option Agreement, attached
as Exhibit 10.12
30
<PAGE>
Exhibit 22.1 Subsidiaries of First Sterling Banks, Inc., include: The
Westside Bank & Trust Company, Kennesaw, Georgia, and The
Eastside Bank & Trust Company, Snellville, Georgia
(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.
31
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1997
- ---------------------------------------------------------------------------
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.................... 7-32
</TABLE>
<PAGE>
[letterhead]
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, 1997 and 1996, 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, 1997 and 1996, 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 6, 1998, except for Note 16 as to
which the date is February 25, 1998
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
TO PRINT: CLICK ON ACTIONS IN THE TOP MENU BAR. MAKE SELECTION.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1997 1996
--------------------- ---------------------
<S> <C> <C>
Cash and due from banks $ 7,651,995 $ 5,574,568
Interest-bearing deposits in banks 130,815 113,277
Federal funds sold and securities purchased
under resell agreements 27,485,000 18,780,000
Securities available-for-sale 18,963,075 19,140,719
Securities held-to-maturity, fair value
of $2,238,285 and $3,461,476 2,248,974 3,498,339
Loans 106,729,770 83,725,739
Less allowance for loan losses 1,379,678 1,094,621
--------------------- ---------------------
Loans, net 105,350,092 82,631,118
--------------------- ---------------------
Premises and equipment 5,106,983 5,335,670
Other assets 2,104,301 1,632,385
--------------------- ---------------------
Total assets $ 169,041,235 $ 136,706,076
--------------------- ---------------------
--------------------- ---------------------
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 21,028,926 $ 18,707,503
Interest-bearing demand 49,227,141 40,005,223
Savings 7,320,138 3,795,476
Time, $100,000 and over 21,521,500 14,979,962
Other time 52,224,917 43,052,253
--------------------- ---------------------
Total deposits 151,322,622 120,540,417
Securities sold under repurchase agreements 354,061 605,895
Other liabilities 1,244,142 817,395
--------------------- ---------------------
Total liabilities 152,920,825 121,963,707
--------------------- ---------------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 10,000,000 shares
authorized; 2,757,330 and 2,710,662 issued
at amount paid in, respectively 12,350,404 12,142,205
Retained earnings 4,696,598 2,977,853
Unrealized gain on securities available-for-sale, net of tax 107,283 37,311
Treasury stock, 131,500 and 61,500 shares, respectively (1,033,875) (415,000)
--------------------- ---------------------
Total stockholders' equity 16,120,410 14,742,369
--------------------- ---------------------
Total liabilities and stockholders' equity $ 169,041,235 $ 136,706,076
--------------------- ---------------------
--------------------- ---------------------
See Notes to Consolidated Financial Statements.
</TABLE>
2
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
--------------------- ---------------------
<S> <C> <C>
Interest income
Loans $ 10,026,825 $ 8,439,303
Taxable securities 1,234,173 1,228,815
Nontaxable securities 184,001 107,780
Deposits in banks 5,900 2,893
Federal funds sold and securities purchased
under resell agreements 1,855,646 653,536
--------------------- ---------------------
Total interest income 13,306,545 10,432,327
--------------------- ---------------------
Interest expense
Deposits 5,543,230 4,382,921
Federal funds purchased and securities sold
under repurchase agreements 18,332 10,023
--------------------- ---------------------
Total interest expense 5,561,562 4,392,944
--------------------- ---------------------
Net interest income 7,744,983 6,039,383
Provision for loan losses 444,342 137,500
--------------------- ---------------------
Net interest income after provision for loan losses 7,300,641 5,901,883
--------------------- ---------------------
Other income
Service charges on deposit accounts 389,948 371,211
Net realized losses on sales of securities available-for-sale (600) (4,157)
Gains on sale of loans 279,002 237,247
Other operating income 371,157 155,353
--------------------- ---------------------
Total other income 1,039,507 759,654
--------------------- ---------------------
Other expense
Salaries and employee benefits 2,993,762 2,250,272
Equipment expenses 316,728 258,614
Occupancy expenses 311,795 267,283
Other operating expenses 1,431,002 1,504,305
--------------------- ---------------------
Total other expenses 5,053,287 4,280,474
--------------------- ---------------------
Income before income taxes 3,286,861 2,381,063
Income tax expense 1,120,194 872,085
--------------------- ---------------------
Net income $ 2,166,667 $ 1,508,978
--------------------- ---------------------
--------------------- ---------------------
Basic earnings per common share $ 0.83 $ 0.57
--------------------- ---------------------
--------------------- ---------------------
Diluted earnings per common share $ 0.78 $ 0.55
--------------------- ---------------------
--------------------- ---------------------
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Gains
on
Common Stock Securities
----------------------------------- Available- Treasury Stock Total
Amount Retained for-Sale, ------------------ Stockholders'
Shares Paid In Earnings Net of Tax Shares Cost Equity
------ ------- -------- ---------- ------ ---- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
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,
$.13 per share .................. -- (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 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
Net income .......................... -- -- 2,166,667 -- -- -- 2,166,667
Cash dividends declared,
$.17 per share .................. -- (447,922) -- -- -- (447,922)
Exercise of stock options ........... 23,334 208,199 -- -- -- -- 208,199
Purchase of treasury stock .......... -- -- -- 35,000 (618,875) (618,875)
Net change in unrealized gains on
securities available-for-sale,
net of tax ...................... -- -- -- 69,972 -- -- 69,972
--------- ----------- ----------- ---------- --------- ----------- -----------
Balance, December 31, 1997 .............. $ 1,378,665 $12,350,404 $4,696,598 $ 107,283 65,750 $(1,033,875) $16,120,410
----------- ----------- ---------- --------- -------- ----------- -----------
----------- ----------- ---------- --------- -------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ............................................... $ 2,166,667 $ 1,508,978
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................ 352,364 290,983
Provision for loan losses ............................... 444,342 137,500
Deferred income taxes ................................... (67,390) (25,393)
Net realized losses on sales of securities
available-for-sale .................................. 600 4,157
Gains on sale of loans .................................. (279,002) (237,247)
Proceeds from sale of loans ............................. 2,655,972 3,078,914
Loans originated for sale ............................... (4,070,000) (4,035,245)
Increase in interest receivable ......................... (73,628) (4,029)
Increase in interest payable ............................ 220,843 1,896
Other operating activities .............................. 136,866 (208,135)
----------- -----------
Net cash provided by operating activities ......... 1,487,634 512,379
----------- -----------
INVESTING ACTIVITIES
Purchases of securities available-for-sale .................. (10,050,881) (5,529,234)
Proceeds from sales of securities available-for-sale ........ 119,400 1,270,143
Proceeds from maturities of securities available-for-sale ... 10,212,584 4,591,337
Proceeds from maturities of securities held-to-maturity ..... 1,249,365 502,839
Net increase in Federal funds sold and securities
purchased under resell agreements ....................... (8,705,000) (5,280,000)
Net increase in interest-bearing deposits in banks .......... (17,538) (113,277)
Net increase in loans ....................................... (21,797,756) (9,442,466)
Purchase of premises and equipment .......................... (92,154) (971,680)
----------- -----------
Net cash used in investing activities ............. (29,081,980) (14,972,338)
----------- -----------
FINANCING ACTIVITIES
Net increase in deposits .................................... 30,782,205 14,074,918
Net increase (decrease) in securities sold under
repurchase agreements ................................... (251,834) 605,895
Dividends paid .............................................. (447,922) (390,784)
Proceeds from exercise of stock options ..................... 208,199 28,595
Purchase of treasury stock .................................. (618,875) --
----------- -----------
Net cash provided by financing activities ......... 29,671,773 14,318,624
----------- -----------
</TABLE>
5
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Net increase (decrease) in cash and due from banks ............ $ 2,077,427 $ (141,335)
Cash and due from banks at beginning of year .................... 5,574,568 5,715,903
----------- -----------
Cash and due from banks at end of year ......................... $ 7,651,995 $ 5,574,568
----------- -----------
----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest ................................................ $ 5,340,719 $ 4,391,048
Income taxes ............................................ $ 1,257,059 $ 1,275,906
NONCASH TRANSACTION
Unrealized (gains) losses on securities available-for-sale $ (104,059) $ 73,187
</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 The 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. The 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
(SBA) 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 and disclosures 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 $21,759,000 and $2,334,000 during 1997 and
1996, respectively, and the maximum amounts outstanding at
any month-end during 1997 and 1996 was $232,000,000 and
$25,000,000, respectively.
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 gain that is
materially in excess of or less than the net premium
received 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 would be
recorded for those deferred tax items for which it is more
likely than not that realization would 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
Basic earnings per common share are computed by dividing
net income by the weighted-average number of shares of
common stock outstanding. Diluted earnings per share are
computed by dividing net income by the sum of the
weighted-average number of shares of common stock
outstanding and potential common shares. Potential common
shares consist of stock options.
10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has issued,
and the Company has adopted, Statement of Financial
Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". SFAS No. 125 was amended
by SFAS No. 127, which defers the effective date of certain
provisions of SFAS No. 125 until January 1, 1998. This
statement provides accounting and reporting standards for
transfers and servicing of financial assets and
extinguishments of liabilities based on consistent
application of a financial-components approach that focuses
on control. It distinguishes transfers of financial assets
that are sales from transfers that are secured borrowings.
The adoption of this statement did not have a material
effect on the Company's financial statements.
The FASB has issued, and the Company has adopted, SFAS No.
128, "Earnings Per Share". SFAS No. 128 supersedes
Accounting Principles Board Opinion No. 15 "Earnings Per
Share" and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for
entities with publicly held common stock or potential
issuable common stock. SFAS No. 128 replaces the
presentation of primary EPS with a presentation of basic
EPS and fully diluted EPS with diluted EPS. It also
requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex
capital structures and requires a reconciliation of the
numerator and denominator for the basic EPS computation to
the numerator and denominator of the diluted EPS
computation. SFAS No. 128 is effective for financial
statements for both interim and annual periods ending after
December 15, 1997. The adoption of this statement did not
have a material effect on the Company's financial
statements.
The FASB has issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting
and display of comprehensive income and its components in
the financial statements. SFAS No. 130 requires all items
that are required to be recognized under accounting
standards as components of comprehensive income to be
reported in a financial statement that is displayed in
equal prominence with the other financial statements. The
term "comprehensive income" is used in the SFAS to describe
the total of all components of comprehensive income
including net income. "Other comprehensive income" refers
to revenues, expenses, gains and losses that are included
in comprehensive income but excluded from earnings under
current accounting standards. Currently, "other
comprehensive income" for the Company consists of items
previously recorded directly in equity under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities". SFAS No. 130 is effective for periods
beginning after December 15, 1997.
11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. SECURITIES
The amortized cost and fair value of securities are summarized
as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Securities Available-for-Sale
December 31, 1997:
U. S. Government and agency
securities $ 6,230,971 $ 23,622 $ (3,050) $ 6,251,543
State and municipal securities 4,765,041 128,926 (1,101) 4,892,866
Mortgage-backed securities 7,491,706 27,781 (13,821) 7,505,666
Equity securities 313,000 - - 313,000
---------------- -------------- --------------- ---------------
$ 18,800,718 $ 180,329 $ (17,972) $ 18,963,075
---------------- -------------- --------------- ---------------
---------------- -------------- --------------- ---------------
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
---------------- -------------- --------------- ---------------
---------------- -------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Securities Held-to-Maturity
December 31, 1997:
U. S. Government and agency
securities $ 2,248,974 $ - $ (10,689) $ 2,238,285
---------------- --------------- -------------- ---------------
---------------- --------------- -------------- ---------------
December 31, 1996:
U. S. Government and agency
securities $ 3,498,339 $ 599 $ (37,462) $ 3,461,476
---------------- --------------- -------------- ---------------
---------------- --------------- -------------- ---------------
</TABLE>
12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2. SECURITIES (Continued)
The amortized cost and fair value of securities as of December
31, 1997 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 summary.
<TABLE>
<CAPTION>
Securities Available-for-Sale Securities Held-to-Maturity
---------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,572,246 $ 2,575,821 $ 2,248,974 $ 2,238,285
Due from one year to five years 5,657,809 5,704,242 - -
Due from five to ten years 2,143,324 2,209,861 - -
Due after ten years 622,633 654,485 - -
Mortgage-backed securities 7,491,706 7,505,666 - -
Equity securities 313,000 313,000 - -
--------------- ---------------- ---------------- ---------------
$ 18,800,718 $ 18,963,075 $ 2,248,974 $ 2,238,285
----------------- ----------------- ---------------- ---------------
----------------- ----------------- ---------------- ---------------
</TABLE>
Securities with a carrying value of $15,437,000 and
$12,027,000 at December 31, 1997 and 1996, 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,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Gross gains $ - $ -
Gross losses (600) (4,157)
----------------- -----------------
Net realized losses $ (600) $ (4,157)
----------------- -----------------
----------------- -----------------
</TABLE>
13
<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,
-------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Commercial, financial, and agricultural $ 24,768,799 $ 19,853,352
Real estate - construction 35,840,760 21,791,259
Real estate - mortgage 39,560,475 34,224,333
Consumer instalment and other 6,946,810 8,223,197
----------------- ----------------
107,116,844 84,092,141
Deferred loan fees and costs (387,074) (366,402)
Allowance for loan losses (1,379,678) (1,094,621)
----------------- ----------------
Loans, net $ 105,350,092 $ 82,631,118
----------------- ----------------
----------------- ----------------
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
----------------- ----------------
<S> <C> <C>
Balance, beginning of year $ 1,094,621 $ 1,015,059
Provision for loan losses 444,342 137,500
Loans charged off (188,120) (80,298)
Recoveries of loans previously charged off 28,835 22,360
----------------- ----------------
Balance, end of year $ 1,379,678 $ 1,094,621
----------------- ----------------
----------------- ----------------
</TABLE>
14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total recorded investment in impaired loans was $41,501
and $322,992 at December 31, 1997 and 1996, 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, 1997 and
1996. The average recorded investment in impaired loans for
1997 and 1996 was $191,133 and $177,432, respectively.
Interest income recognized on impaired loans for cash payments
received was not material for the years ended December 31,
1997 and 1996.
The Company has granted loans to certain directors, executive
officers, and their related entities. 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, 1997 are as follows:
<TABLE>
<S> <C>
Balance, beginning of year $ 3,816,082
Advances 5,075,666
Repayments (3,222,024)
-----------------
Balance, end of year $ 5,669,724
-----------------
-----------------
</TABLE>
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Land $ 1,470,790 $ 1,470,790
Buildings 3,887,711 3,906,025
Equipment 1,354,770 1,281,582
----------------- -----------------
6,713,271 6,658,397
Accumulated depreciation (1,606,288) (1,322,727)
----------------- -----------------
$ 5,106,983 $ 5,335,670
----------------- -----------------
----------------- -----------------
</TABLE>
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 1997 and 1996 amounted to $47,044 and
$19,685, respectively.
The Company implemented deferred compensation agreements in
1997 for certain of its key officers. Amounts accrued under
these agreements totaled $67,456 at December 31, 1997.
NOTE 6. STOCK OPTIONS
The Company has two incentive stock option plans with 423,000
shares of common stock reserved for options to key employees.
At December 31, 1997, 153,806 common stock options were
available to grant under these plans.
The Company also reserved 237,370 shares of common stock for
options to directors. At December 31, 1997, there were no
options available to grant under this plan.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6. STOCK OPTIONS (Continued)
Option prices under these 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,
----------------------------------------------------------
1997 1996
---------------------------- ---------------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
----------- -------------- ----------- -------------
<S> <C> <C> <C> <C>
Under option, beginning of year 347,530 $ 4.96 325,530 $ 5.04
Granted 157,900 9.11 34,000 6.50
Exercised (46,668) 4.46 (7,000) 4.09
Terminated (6,666) 6.50 (5,000) 6.50
----------- -----------
Under option, end of year 452,096 6.44 347,530 4.96
----------- -----------
----------- -----------
Exercisable, end of year 371,530 5.92 318,530 4.82
----------- -----------
----------- -----------
Weighted-average fair value of
options granted during the year 2.51 1.21
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
Under Option, End of Year
-------------------------
Weighted-
Weighted- Average
Average Remaining
Range of Exercise Contractual
Number Prices Price Life in Years
------------- ---------------------- -------------- ----------------
<S> <C> <C> <C>
218,490 $ 3.95 - 5.29 $ 4.55 7
233,606 6.20 - 9.25 8.20 9
-------------
-------------
452,096
-------------
-------------
</TABLE>
Options Exercisable, End of Year
<TABLE>
<S> <C> <C> <C>
218,490 $ 3.95 - 5.29 $ 4.55 7
153,040 6.20 - 9.00 7.88 9
-------------
371,530
-------------
</TABLE>
17
<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, 1997 and 1996. 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, 1997
-----------------------------------------------------
Basic Diluted
Earnings Earnings
Net Income Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 2,166,667 $ 0.83 $ 0.78
Stock-based compensation,
net of related tax effect (162,391) (0.06) (0.06)
--------------- --------------- ----------------
As adjusted $ 2,004,276 $ 0.77 $ 0.72
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------
Basic Diluted
Earnings Earnings
Net Income Per Share Per Share
--------------- --------------- ----------------
<S> <C> <C> <C>
As reported $ 1,508,978 $ 0.57 $ 0.55
Stock-based compensation,
net of related tax effect - - -
--------------- --------------- ----------------
As adjusted $ 1,508,978 $ 0.57 $ 0.55
--------------- --------------- ----------------
--------------- --------------- ----------------
</TABLE>
The fair value of the options granted during the year was
based upon the discounted value of future cash flows of the
options using the following weighted-average assumptions:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Risk-free interest rate 5.97% 6.13%
Expected life of the options 7 years 7 years
Expected dividends (as a percent of the fair value of the stock) 1.98% 2.51%
Volatility 18.5% N/A
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Current $ 1,187,584 $ 897,478
Deferred (67,390) (25,393)
----------------- -----------------
Income tax expense $ 1,120,194 $ 872,085
----------------- -----------------
----------------- -----------------
</TABLE>
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,
-----------------------------------------------------------
1997 1996
---------------------------- ----------------------------
Amount Percent Amount Percent
--------------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Income taxes at statutory rate $ 1,117,531 34 % $ 809,595 34 %
Tax-exempt interest (61,943) (2) (36,612) (2)
State income taxes 52,663 1 34,680 1
Merger expenses - - 44,755 2
Other items, net 11,943 - 19,667 -
--------------- ----------- --------------- ----------
Income tax expense $ 1,120,194 33 % $ 872,085 35 %
--------------- ----------- --------------- ----------
--------------- ----------- --------------- ----------
</TABLE>
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 7. INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves $ 359,239 $ 277,871
Deferred loan fees and costs 127,776 137,605
----------------- -----------------
487,015 415,476
----------------- -----------------
Deferred tax liabilities:
Depreciation 78,260 74,685
Securities available-for-sale 58,828 20,988
Other 55,074 58,255
----------------- -----------------
192,162 153,928
----------------- -----------------
Net deferred tax assets $ 294,853 $ 261,548
----------------- -----------------
----------------- -----------------
</TABLE>
NOTE 8. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income (the
numerator) and weighted-average shares outstanding (the
denominator) used in determining basic and diluted earnings
per common share (EPS):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------
Net Weighted-Average
Income Shares Per share
(Numerator) (Denominator) Amount
----------------- --------- -----------
<S> <C> <C> <C>
Basic EPS $ 2,166,667 2,608,212 $ 0.83
----------
----------
Effect of Dilutive Securities
Stock options -- 165,234
-------------- --------
Diluted EPS $ 2,166,667 2,773,446 $ 0.78
-------------- --------- ----------
-------------- --------- ----------
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 8. EARNINGS PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1996
---------------------------------------------------------
Net Weighted-Average
Income Shares Per share
(Numerator) (Denominator) Amount
---------------- -------------------- ----------------
<S> <C> <C> <C>
Basic EPS $ 1,508,978 2,643,036 $ 0.57
---------------
---------------
Effect of Dilutive Securities
Stock options - 126,110
---------------- -------------------
Diluted EPS $ 1,508,978 2,769,146 $ 0.55
---------------- -------------------- ---------------
---------------- -------------------- ---------------
</TABLE>
NOTE 9. 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:
December 31,
--------------------------------------
1997 1996
----------------- -----------------
Commitments to extend credit $ 35,017,000 $ 24,219,000
Standby letters of credit 384,000 298,000
----------------- -----------------
$ 35,401,000 $ 24,517,000
----------------- -----------------
----------------- -----------------
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 9. COMMITMENTS AND CONTINGENT LIABILITIES (Continued)
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.
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 loans 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 10. 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.
Seventy-one percent 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 The Eastside Bank & Trust Company.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. 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, 1997, approximately $1,150,000 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, 1997, the Company and
the Banks meet all capital adequacy requirements to which they
are subject.
As of December 31, 1997, the most recent 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 are
presented in the following table.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. 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>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets):
Consolidated $ 17,393 13.90% $ 10,009 8.00% $ 12,511 10.00%
Westside $ 9,501 13.92% $ 5,460 8.00% $ 6,825 10.00%
Eastside $ 7,596 13.37% $ 4,546 8.00% $ 5,683 10.00%
Tier I Capital
(to Risk Weighted Assets):
Consolidated $ 16,013 12.80% $ 5,005 4.00% $ 7,507 6.00%
Westside $ 8,684 12.73% $ 2,730 4.00% $ 4,095 6.00%
Eastside $ 7,033 12.38% $ 2,273 4.00% $ 3,410 6.00%
Tier I Capital
(to Average Assets):
Consolidated $ 16,013 6.52% $ 9,824 4.00% $ 12,280 5.00%
Westside $ 8,684 5.03% $ 6,903 4.00% $ 8,629 5.00%
Eastside $ 7,033 9.63% $ 2,921 4.00% $ 3,651 5.00%
</TABLE>
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 11. 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>
As of December 31, 1996:
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>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. 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, 1997 and 1996. 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.
Cash, Due From Banks, Interest-Bearing Deposits in Banks,
Federal Funds Sold, and Securities Purchased Under Resell
Agreements:
The carrying amounts of cash, due from banks,
interest-bearing deposits in banks, 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.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. 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.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 12. FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial
instruments were as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------------------------------
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 $ 35,267,810 $ 35,267,810 $ 24,467,845 $ 24,467,845
Securities available-for-sale 18,963,075 18,963,075 19,140,719 19,140,719
Securities held-to-maturity 2,248,974 2,238,285 3,498,339 3,461,476
Loans 105,350,092 106,584,761 82,631,118 82,343,000
Accrued interest receivable 927,091 927,091 853,463 853,463
Financial liabilities:
Deposits 151,322,622 151,548,714 120,540,417 121,117,670
Securities sold under
repurchase agreements 354,061 354,061 605,895 605,895
Accrued interest payable 602,097 602,097 381,254 381,254
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 13. 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 14. SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of
1% of total revenue are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
SBA commission income $ 171,465 $ 152,861
Data processing 212,179 197,125
Directors fees 182,400 140,225
Merger expenses - 131,632
</TABLE>
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. 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, 1997
and 1996:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Assets
Cash $ 274,125 $ 79,675
Investment in subsidiaries 15,824,662 14,625,083
Other assets 46,623 37,611
----------------- -----------------
Total assets $ 16,145,410 $ 14,742,369
----------------- -----------------
----------------- -----------------
Liabilities $ 25,000 $ --
Stockholders' equity 16,120,410 14,742,369
----------------- -----------------
Total liabilities and stockholders' equity $ 16,145,410 $ 14,742,369
----------------- -----------------
----------------- -----------------
</TABLE>
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
Income, dividends from subsidiaries $ 1,171,695 $ 486,132
----------------- -----------------
Expenses
Merger expenses - 131,632
Legal and professional 24,338 40,581
Other expense 180,663 86,310
----------------- -----------------
Total expenses 205,001 258,523
----------------- -----------------
Income before income tax benefits and
equity in undistributed income of subsidiaries 966,694 227,609
Income tax benefits (70,366) (48,589)
----------------- -----------------
Income before equity in undistributed income
of subsidiaries 1,037,060 276,198
Equity in undistributed income of subsidiaries 1,129,607 1,232,780
----------------- -----------------
Net income $ 2,166,667 $ 1,508,978
----------------- -----------------
----------------- -----------------
</TABLE>
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 15. PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,166,667 $ 1,508,978
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (1,129,607) (1,232,780)
Other operating activities 15,988 75,924
----------------- -----------------
Net cash provided by operating activities 1,053,048 352,122
----------------- -----------------
FINANCING ACTIVITIES
Dividends paid (447,922) (340,784)
Proceeds from exercise of stock options 208,199 28,595
Purchase of treasury stock (618,875) -
----------------- -----------------
Net cash used in financing activities (858,598) (312,189)
----------------- -----------------
Net increase in cash 194,450 39,933
Cash at beginning of year 79,675 39,742
----------------- -----------------
Cash at end of year $ 274,125 $ 79,675
----------------- -----------------
----------------- -----------------
</TABLE>
NOTE 16. COMMON STOCK SPLIT
On February 25, 1998, the Company declared a two-for-one
common stock split payable on March 30, 1998 to stockholders
of record on March 16, 1998. The number of shares issued after
the split is 2,757,330, which is reflected in the number of
issued shares of common stock on the balance sheet. The basic
and diluted earnings per common share for the years ended
December 31, 1997 and 1996 have been retroactively adjusted
for the increased number of shares of common stock after
giving effect to the stock split.
32
<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 30, 1998
--------------------------------- ----------------
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 30, 1998
- ------------------------------------ ----------------
Barbara J. Bond, Secretary/Treasurer,
Principal Financial and Accounting Officer
/s/ P. Harris Hines Date: March 30, 1998
- ------------------------------------ ----------------
P. Harris Hines, Director
/s/ Harry L. Hudson, Jr. Date: March 30, 1998
- ------------------------------------ ----------------
Harry L. Hudson, Jr., Director
/s/ John S. Thibadeau, Jr. Date: March 30, 1998
- ------------------------------------ -----------------
John S. Thibadeau, Jr., Director
/S/ Benjamin H. Wofford Date: March 30, 1998
- ----------------------------------- ----------------
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.
32
<PAGE>
Exhibit 10.9
FIRST STERLING BANKS, INC.
1997 DIRECTORS STOCK OPTION PLAN
1. DEFINITIONS
a. "Bank"--The Eastside Bank & Trust Company.
b. "Code"--IRS Code Section 83.
c. "Committee"--a committee named specifically to administer this Plan.
d. "Common Stock"--common voting stock of the Corporation.
e. "Corporation"--FIRST STERLING BANKS, INC.
f. "Directors"--voting members of the Board of directors of either The
Eastside Bank & Trust Company or First Sterling Banks, Inc.
g. "Emeritus Director"--non-voting advisory member of the Emeritus Board
of Directors of The Eastside Bank & Trust Company.
h. "Fair Market Value"--determined in good faith by the Board of
Directors if shares are not listed on any exchange or quoted in the
NASDAQ National Market System or over-the-counter market.
i. "Option"--right to purchase shares of Common Stock.
j. "Option Agreement"--formal agreement for each grant with specific
terms and conditions not inconsistent with this Plan.
k. "Optionee"--an eligible person under Section 5 below who has been
granted options under Plan.
2. PURPOSE
To advance the interests of the Bank and the Corporation and its
shareholders by providing Bank Directors who are not employees a sense
of proprietorship and personal involvement and to encourage Bank
Directors to remain with and devote their best efforts to the Bank or
the Corporation.
3. SHARES SUBJECT TO THE PLAN
There shall be authorized and reserved for issuance upon the exercise of
Options to be granted under the Plan, 45,000 shares of Common Stock, or
3.5% of current outstanding shares.
4. ADMINISTRATION
A Committee appointed by the Board of directors with not less than three
members who are not participants in the Plan will have complete
authority to interpret the Plan, make grants, and determine terms and
conditions within the context of the Plan.
33
<PAGE>
5. ELIGIBILITY
The following persons are eligible to receive options under the Plan:
All Bank Directors who are not employees of the Corporation or the Bank.
To the extent that shares are available, Directors who take office
subsequent to the effective date of the Plan shall be eligible to
receive Options.
6. GRANTING OF OPTIONS; OPTION EXERCISE PRICE
All Options granted under the Plan will be Non-Qualified Options as
evidenced by a Non-Qualified Option Agreement. Each eligible Director in
office on the effective date of the Plan will receive an Option to
purchase shares of Common Stock at a price per share equal to
the Fair Market Value of a share on that date. The Committee may make
additional grants of options as desirable. Any Option granted hereunder
shall have a per share option exercise price at least equal to the
Fair Market Value of a share on the date of the grant as determined in
good faith by the Board of Directors.
7. TERM OF OPTION
Options granted hereunder shall be exercisable in whole or in part, from
time to time, during the ten year period subsequent to the date of the
grant. Except as provided in Section 11, no Option granted under the
Plan may be exercised prior to six months after the date it is granted.
8. MANNER OF EXERCISE
The Options shall be exercised by written notice, delivered to the
Corporation and signed by the Director or his successors stating the
number of shares with respect to which the Option is being exercised.
Payment in full of the Option price of the said shares must be made at
the time of exercise, and payment may be made in cash or shares of the
Common Stock previously held by the Optionee or a combination. Payment
in shares may be made with shares received upon the exercise or partial
exercise of an Option, whether or not involving a series of exercises or
partial exercises and whether or not share certificates for such shares
surrendered have been delivered to the Optionee. Shares surrendered in
payment of the Option Price shall be valued at the Fair Market Value as
of the date of the exercise.
Except as otherwise provided herein at the time of the exercise of an
Option, the Optionee must be a Director or an Emeritus Director.
9. NON-TRANSFERABILITY
Options can only be transferred by will or by the laws of descent and
distribution.
10. TERMINATION OF SERVICE AS A DIRECTOR
At the later of the time that an Optionee ceases to be a Director or an
Emeritus Director other than by his or her death or disability, all
Options held by him or her at the time of such termination shall be
exercisable
34
<PAGE>
by such Optionee but only:
a. if and to the extent the same were exercisable at the time such
Optionee ceases to be a Director or Emeritus Director, and
b. prior to the earlier of (1) the expiration dates of such Options
or (2) that date which is twelve (12) months from the date such
Optionee ceases to be a Director or an Emeritus Director, such
twelve (12) month period to include the date on which such
termination occurs, provided that the Board may in its discretion
extend such date for an additional twelve (12) months.
If an Optionee ceases to be a Director or an Emeritus Director as a
result of such Optionee's death or disability, then all Options held by
such Optionee on the date of such termination shall be exercisable in
full, whether or not exercisable on the date of such termination, at any
time prior to the earlier of (1) the expiration dates of such Options or
(2) that date which is two years from the date such Optionee ceases to
be a Director or Emeritus Director. In the event of the death of an
Optionee, then such Optionee's Options shall be exercisable to the
extent herein otherwise provided by the executor or personal
representative of the Optionee's estate or by any person who acquired
the right to exercise such Options by bequest under the Optionee's will
or by inheritance.
If any Optionee ceases to be a Director and immediately is appointed to
the Emeritus Board of Directors, then the provisions of this Paragraph
10 shall not apply until he or she ceases to be an Emeritus Director.
11. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION; ACCELERATION
OF EXERCISE RIGHTS
The total number of shares on which Options may be granted under the
Plan and Option rights (both as to the number of shares and the option
price) shall be appropriately adjusted for any increase or decrease in
the number of outstanding shares of Common Stock of the Corporation
resulting from payment of a stock dividend on the Common Stock, a
subdivision or combination of shares of the Common Stock, or a
reclassification of the Common Stock, and in the event of a merger or
consolidation in accordance with the following paragraph.
After any merger, consolidation or reorganization of any form involving
the Corporation as a party thereto involving any exchange, conversion,
adjustment or other modification of the outstanding shares of the
Corporation's Common Stock, each Optionee at the time of such
reorganization shall, at no additional cost, be entitled, upon any
exercise of his Option, to receive, in lieu of the number of shares as
to which such Option shall then be so exercised, the number and class
of shares of stock or other securities or such other property to which
such Optionee would have been entitled pursuant to the terms of the
agreement of merger or consolidation, if at the time of such merger or
consolidation, such Optionee had been a holder of record of a number of
shares of the Common Stock of the Corporation equal to the number of
shares as to which such Option shall then be so exercised. Comparable
rights shall accrue to each Optionee in the event of successive mergers
or consolidations of the character described above.
35
<PAGE>
The foregoing adjustments and the manner of their application will be in
the sole discretion of the Committee to determine.
In the event of (1) the adoption of a plan of merger or consolidation in
which the Corporation's shareholders as a group would receive less than
5 0% of the voting capital stock ofthe surviving entity; (2) the
approval by the Board of directors ofthe Corporation of an agreement
providing for the sale or transfer (other than as security for
obligations of the Corporation) of substantially all the assets of the
Corporation; or (3) the acquisition of more than 20% of the
Corporation's voting capital stock by any person as defined by Section
13(d)(3) ofthe Securities and Exchange Act of 1934, other than a person,
or group including a person who beneficially owned, as of the effective
date of the Plan, more than 3% of the Corporation's securities, in the
absence of a prior expression of approval of the Board Of Directors of
the Corporation, any Option granted hereunder shall become immediately
exercisable in full, subject to any appropriate adjustments in the
number of shares subject to Option and the Option Price, and shall
remain exercisable for the remaining term of such Option, regardless of
whether such option has been outstanding for six months or of any
provision contained in the Stock Option Agreement with respect to
limitations of the exercisability of the Option or any portion thereof
for any length of time.
Anything contained herein to the contrary notwithstanding, upon the
dissolution or liquidation of the Corporation each Option granted under
the Plan shall terminate.
The grant of an Option pursuant to this Plan shall not in any way affect
the right or power of the Corporation to make adjustments,
reclassifications, or changes of its capital or business structure, or
to merge or consolidate, or to dissolve, liquidate or sell, or transfer
all or any part of its business or assets.
12. EFFECTIVENESS OF THE PLAN
The effective date of the Plan shall be March 26, 1997, the date of the
approval of the Plan by the Board of directors of the Corporation,
subject to the approval of the Plan by the shareholders of the
Corporation within one (1) year following such date. No Option granted
hereunder may be exercised prior to the approval of the Plan by the
shareholders of the Corporation, and in the event that the shareholders
fail to approve the Plan within one year of any Option grants made
pursuant to the Plan, then all such Options shall be void.
No Options may be granted under the Plan after the expiration of ten
years from and including the effective date of the Plan.
13. AMENDMENT AND TERMINATION
The Plan may be amended or terminated by the Board of Directors at any
time as deemed in the best interests of the Corporation; provided,
however, no amendments shall be made in the Plan without the approval of
the shareholders of the Corporation which:
36
<PAGE>
a. Increase the total number of shares for which options may be
granted under the Plan except as provided in Section 11.
b. Change the minimum purchase price for the optioned shares except
as provided in Section 11.
c. Affect any outstanding option or any unexercised right
thereunder except as provided in Section 11.
d. Extend the option period provided in Section 7.
e. Extend the termination date of the Plan.
37
<PAGE>
Exhibit 10.10
FIRST STERLING BANKS, INC.
1997 Directors Stock Option Plan
Stock Option Agreement
----------------------
THIS STOCK OPTION AGREEMENT (the "Option Agreement") is made and entered
into effective as of the day of , by and between FIRST STERLING BANKS,
INC. (the "Company") and , a resident of the State of Georgia
(the "Grantee"). This Option Agreement is entered into by the Company and
the Grantee pursuant to First Sterling Banks, Inc. 1997 Directors Stock Option
Plan (the "Plan"). The Plan is incorporated herein by reference and made a part
of this Option Agreement. Defined terms in the Plan shall have the same
definition herein.
1. Stock Option
The Company hereby grants to Grantee the option (the "Option") to
purchase shares (the "Shares") of the Common Stock (the "Common Stock")
of the Company in accordance with the terms and subject to the restrictions
hereinafter set forth.
The Option has been granted on the date of this Option Agreement and
shall terminate on unless sooner terminated in whole or in part as
follows:
(a) The Option shall terminate on the date which is twelve (12) months
from the date on which the Grantee ceases to be a Director unless he is
immediately appointed an Emeritus Director, in which case the Option shall
terminate on the date which is twelve (12) months from the date on which the
Optionee ceases to be an Emeritus Director; provided that the Board may, in its
discretion, extend either such date for an additional twelve (12) months.
(b) The Option shall terminate on the date which is two (2) years from
the date that the Grantee ceases to be a Director or an Emeritus Director by
reason of his death or disability.
2. Exercise of Option.
The Option may be exercised in whole or in part at any time prior to its
termination, provided that the Option may not be exercised prior to six (6)
months following the date hereof unless the Optionee ceases to be a Director or
Emeritus Director by reason of his death or disability (the "Exercise Period").
The Option shall be exercised by written notice directed to the
Secretary of the Company at P.O. Box 2147, Marietta, Georgia 30061. Such written
notice shall be accompanied by payment in full in cash or by check of the Option
Price for the number of Shares specified in such written notice.
38
<PAGE>
3. Option Price
The price per share at which Shares may be purchased pursuant to
exercise of the Option (the "Option Price") shall be (which amount
has been determined by the Board to be the fair market value per share of
the Common Stock on the date that this Option is granted).
4. Nontransferability.
The Option is not transferable except by will or by the laws of descent
and distribution.
5. Limitation of Rights.
The Grantee or the personal representative of the Grantee shall have no
rights as a stockholder with respect to the Shares covered by the Option until
the Grantee or the personal representative of the Grantee shall become the
holder of record of such Shares.
6. Stock Reserve.
The Company shall at all times during the Exercise Period under this
Option Agreement reserve and keep available such number of Shares of Common
Stock as will be sufficient to satisfy the requirements of this Option Agreement
and shall pay all original issue taxes (if any) on the exercise of the Option
and all other fees and expenses necessarily incurred by the Company in
connection therewith.
7. Restrictions on Transfer and Pledge.
Except as provided in Section 4 hereof, the Option and all rights and
privileges granted hereunder shall not be transferred, assigned pledged or
hypothecated in any way, whether by operation of law or otherwise, and shall not
be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of the Option or any
right or privilege granted hereunder, except as provided herein, or upon the
levy or any attachment or similar process upon the rights and privileges herein
conferred, the Option and the rights and privileges hereunder shall become
immediately null and void.
8. Restrictions on Issuance of Shares.
If at any time the Board shall determine, in its discretion, that
listing, registration or qualification of the Shares covered by the
Option upon any securities exchange or under any state or federal law,
or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the
Option may not be exercised in whole or in part unless and until such
listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the
Board.
39
<PAGE>
9. Plan Controls.
In the event of any actual or alleged conflict between the provisions of
the Plan and the provisions of this Option Agreement, the provisions of
the Plan shall be controlling and determinative.
10. Successors.
This Agreement shall be binding upon any successor of the Company in
accordance with the terms of this Option Agreement and the Plan.
IN WITNESS WHEREOF, the Company, acting by and through its duly
authorized officers, has caused this Option Agreement to be executed and
the Grantee has executed this Option Agreement, all as of the day and
year first above written.
FIRST STERLING BANKS, INC.
[SEAL]
Attest:
By:
--------------------------
Edward C. Milligan
By: President
------------------------------------
Secretary
GRANTEE:
---------------------------
40
<PAGE>
Exhibit 10.11
FIRST STERLING BANKS, INC.
1997 INCENTIVE STOCK OPTION PLAN
1. DEFINITIONS
a. "Code"--Internal Revenue Code of 1986, as amended.
b. "Committee"--the Compensation Committee of the Board of directors.
c. "Common Stock'--common voting stock of the Company.
d. "Company"--FIRST STERLING BANKS, INC.
e. "Board"--voting members of the Board of directors of the Company.
f. "Option "--right to purchase shares of Common Stock.
g. "Option Agreement"--formal agreement for each grant with specific terms
and conditions not inconsistent with this Plan.
h. "Optionee"--an eligible person under Section 5 below who has been granted
options under Plan.
i. "Plan "--First Sterling Banks, Inc. 1997 Incentive Stock Option Plan.
j. "Subsidiary"--a subsidiary of the Company or a subsidiary of a
subsidiary.
2. PURPOSE
The purposes of the First Sterling Banks, Inc. 1997 Incentive Stock Option Plan
are: (I) to assist the Company and the Subsidiaries in securing and retaining
key employees of outstanding ability by making it possible to offer them an
increased incentive to join or continue in the service of the Company and/or the
Subsidiaries; and (ii) to increase the key employees' efforts for the Company's
and or the Subsidiaries' welfare by participating in the ownership and growth of
the Company. The Options granted under the Plan are intended to be "Incentive
Stock Options" within the meaning of Section 422 of the Code.
3. SHARES SUBJECT TO THE PLAN
Subject to adjustments pursuant to the provisions of Section 14, there shall be
authorized and reserved for issuance upon the exercise of Options to be granted
under the Plan, 100,000 shares of common Stock.
4. ADMINISTRATION
The Committee whose members are not participants in the Plan will have complete
authority to interpret the Plan, make grants, and determine terms and conditions
within the context of the Plan.
41
<PAGE>
5. ELIGIBILITY
The following persons are eligible to receive Options under the Plan: Full-time
key employees of the Company or a Subsidiary who are selected by the Committee
from time to time and who, in the opinion of the Committee, have contributed in
the past or who may be expected to contribute materially in the future to the
successful performance of the Company and/or the Subsidiaries.
6. GRANTING OF OPTIONS; OPTION EXERCISE PRICE
All Options granted under the Plan are intended to be "Incentive Stock Options"
within the meaning of Section 422 of the Code and shall be evidenced by an
Option Agreement. The Board, upon recommendation of the Committee, may grant
Options to fun-time key employees of the Company or a Subsidiary as desirable.
Any Option granted hereunder shall have a per share option exercise price at
least equal to the fair market value of a share of the Common Stock on the date
of the grant. The Option exercise price shall be subject to adjustments in
accordance with the provisions of Section 14 herein.
7. TERM OF OPTION
Subject to the provisions of Section 9 herein, the period during which each
Option may be exercised shall be fixed by the Committee at the time such Option
is granted, but such period shall expire not later than ten years from the date
the Option is granted. Except in the case of any merger, consolidation or
reorganization as described in Section 14, no Option granted under the Plan may
be exercised prior to six months after the date it is granted.
8. MANNER OF EXERCISE
The Options shall be exercised by written notice, delivered to the Secretary of
the Company and signed by the Optionee or his or her successors stating the
number of shares with respect to which the Option is being exercised. Payment in
full of the Option price of the said shares must be made at the time of
exercise, and payment may be made in cash or shares of the Common Stock
previously held by the Optionee or a combination. Payment in shares may be made
with shares received upon the exercise or partial exercise of an Option, whether
or not involving a series of exercises or partial exercises and whether or not
share certificates for such shares surrendered have been delivered to the
Optionee. Shares surrendered in payment of the Option price shall be valued at
the fair market value as of the date of the exercise.
9. TERMINATION OF OPTIONS
All unexercised Options will terminate upon (I) the lapse by their terms, (ii)
immediately upon the termination of the Optionee's employment with the Company
and the Subsidiaries, except by reason of death, retirement or disability, or
(iii) ninety (90) days after the termination of the Optionee's employment with
the Company and the Subsidiaries because of death, disability or retirement.
During such 90-day period, all unexercised Options may be exercised by the
Optionee
42
<PAGE>
or his legal representative in the event of death or mental disability.
10. LIMITATIONS
Options shall not be granted to any individual pursuant to this Plan, the effect
of which would be to permit such person to first exercise Options, in any
calendar year, for the purchase of shares having a fair market value in excess
of $100,000 (determined at the time of the grant of the Options). Optionee may
exercise options for the purchase of shares valued in excess of $100,000
(determined at the time of grant of the Options) in a calendar year, but only if
the right to exercise such Options shall have first become available in prior
calendar years.
No Optionee owning more than ten percent (10%) of the combined voting power of
all classes of stock of the Company then outstanding may purchase Common Stock
under this Plan for less than one hundred ten percent (110%) of its fair market
value on the date of grant nor may any Option granted to such a person be
exercisable on a date later than five (5) years from the date of grant.
11. NON-TRANSFERABILITY OF OPTIONS; RESTRICTIONS ON ISSUANCE OF COMMON STOCK
Options granted under this Plan are nontransferable except by will or by the
laws of descent and distribution. No shares shall be delivered pursuant to any
exercise of an Option until the requirements of such laws and regulations, as
may be deemed by the Board to be applicable to them, are satisfied and until
payment in full as described in Section 6 of the Option price is received by the
Company.
12. RIGHTS OF OPTIONEE
An Optionee will have no rights as a shareholder until a stock certificate for
the Common Stock is issued. Nothing in the Plan, in any Option Agreement or
resulting stock ownership, will give to an Optionee any right to continuation of
employment.
13. OTHER TERMS AND CONDITIONS
Any Option granted hereunder shall contain additional terms which are not
inconsistent with the terms of this Plan, as the Board or the Committee deems
necessary or desirable, provided that any such Option shall qualify as an
"Incentive Stock Option" within the meaning of Section 422 of the Code.
14. CAPITAL ADJUSTMENTS AFFECTING STOCK
In the event of a capital adjustment resulting from a stock dividend, stock
split, reorganization, merger, consolidation, or a combination or exchange of
shares, the number of shares of stock subject to this Plan and the number of
shares under any Option granted hereunder
43
<PAGE>
shall be adjusted consistent with such capital adjustment. The price of any
share under Option shall be adjusted so that there will be no change in the
aggregate purchase price payable upon the exercise of any such Option. The
granting of an Option pursuant to this Plan shall not affect in any way the
right or power of the Company to make adjustments, reorganizations,
reclassifications, or changes of its capital or business structure or to merge,
consolidate, dissolve, liquidate or sell or transfer all or any part of its
business or assets.
After any merger, consolidation or reorganization of any form involving the
Company as a party thereto involving any exchange, conversion, adjustment or
other modification of the outstanding shares of the Company's Common Stock, each
Optionee at the time of such reorganization shall, at no additional cost, be
entitled, upon any exercise of his or her Option, to receive, in lieu of the
number and class of shares of stock or other securities or such other property
to which such Optionee would have been entitled pursuant to the terms of the
agreement of merger or consolidation, if at the time of such merger or
consolidation, such Optionee had been a holder of record of a number of shares
of the Common Stock of the Company equal to the number of shares as to which
such Option shall then be so exercised. Comparable rights shall accrue to each
Optionee in the event of successive mergers or consolidations of the character
described above.
The foregoing adjustments and the manner of their application will be in the
sole discretion of the Committee to determine.
Anything contained herein to the contrary notwithstanding, upon the dissolution
or liquidation of the Company each Option granted under the Plan shall
terminate.
15. AMENDMENTS, SUSPENSION OR TERMINATION OF THE PLAN
The Board of the Company shall have the right, at any time, to amend, suspend or
terminate the Plan; provided, however, no amendments shall be made in the Plan
without the approval of the stockholders of the Company which:
(a) Increase the total number of shares for which Options may be granted under
this Plan for all key employees or for any one of them except as provided in
Section 14.
(b) Change the minimum purchase price for the optioned shares except as provided
in Section14.
(c) Affect outstanding Options or any unexercised rights thereunder except as
provided in Section 14.
(d) Extend the option period provided in Section 7.
(e) Extend the termination date of the Plan.
44
<PAGE>
16. EFFECTIVE DATE
The Plan shall take effect on September 24, 1997. Unless an earlier termination
date is specified under Section 9 above, this Plan shall terminate on September
23, 2007. No Options may be granted under the Plan after its termination date,
but any Option granted prior thereto may be exercised in accordance with its
terms. The Plan and all Options granted pursuant to it are subject to all laws,
approvals, requirements and regulations of any governmental authority which may
be applicable thereto and, notwithstanding any provisions of the Plan or Option
Agreement, the holder of an Option shall not be entitled to exercise his or her
Option nor shall the Company be obligated to issue any shares to the holder if
such exercise or issuance shall constitute a violation by the holder or the
Company of any provisions of any such approval requirements, law or regulations.
45
<PAGE>
Exhibit 10.12
FIRST STERLING BANKS, INC.
1997 INCENTIVE STOCK OPTION PLAN
INCENTIVE STOCK OPTION AGREEMENT
with
---------------------------------
THIS INCENTIVE STOCK OPTION AGREEMENT (the "Option Agreement") is
made and entered into effective as of the day of ,
by and between FIRST STERLING BANKS, INC. (the "Company") and
, a resident of the State of Georgia (the "Grantee") and an employee
of (the "Bank") a wholly-owned subsidiary of the
Company. This Option Agreement is entered into by the Company and the Grantee
pursuant to the First Sterling Banks, Inc. 1997 Incentive Stock Option Plan
(the "Plan"). The Plan is incorporated herein by reference and made a part of
this Option Agreement.
1. Stock Option.
The Company hereby grants to Grantee the option (the "Option") to
purchase ( ) shares (the "Shares") of
the common stock (the "Common Stock") of the Company in accordance
with the terms and subject to the restrictions hereinafter set forth.
The Option has been granted on the effective date of this Option
Agreement and shall terminate on , unless sooner
terminated in whole or in part as follows:
(a) The Option shall be fully terminated immediately upon the
termination of employment of the Grantee by the Bank and the Company, excluding
termination by reason of death, retirement or disability.
(b) The Option shall be fully terminated in the event the Grantee fails
to exercise the Option in accordance with Section 2 hereof within ninety (90)
days after the date of the termination of Grantee's employment with the Bank and
the Company due to death, retirement or disability. During such 90-day period
all unexercised options may be exercised by the Grantee or his legal
representative in the event of death or mental disability.
2. Exercise of Option.
The Option granted hereunder may be exercised only during the period
(the "Exercise Period") commencing on the effective date of this Option
Agreement and ending on the date that the Option is terminated under paragraph I
above; provided that the Option may be exercised only to the extent that this
Option has vested and is exercisable as provided hereinafter and in the Plan.
The Option may be exercised in lots of not less than one hundred (100) Shares
each unless the exercise for a lesser number of Shares would exhaust the number
of Shares available for purchase at the time of exercise.
The Option shall be exercised by written notice directed to the
Secretary of the Company. Such written notice shall be accompanied by payment in
full of the Option Price, in cash or by check or by shares of the
46
<PAGE>
Common Stock as described in Section 8 of the Plan, for the number of Shares
specified in such written notice.
3 . Option Price.
The price per share at which Shares may be purchased pursuant to
exercise of the Option (the "Option Price") shall be $ per Share.
4. Vesting of Option.
(a) Years of Service. The Option hereby granted shall vest only during
the Grantee's continuous employment with the Company and/or the Bank and/or any
subsidiary thereof, and shall be exercisable by Grantee only upon and after such
vesting and prior to its termination in accordance with the following schedule:
(b) Earlier Vesting.. Notwithstanding the provisions of subparagraph (a)
above, in the event of a Change in Control (as hereinafter defined) during the
Grantee's employment with the Company and/or the Bank and/or any subsidiary or
affiliate thereof, the Option hereby granted shall vest with respect to all of
the Shares immediately prior to such Change in Control.
The term "Change in Control" shall mean:
(i) The acquisition (other than from the Company) by any person, entity
or group within the meaning of Sections 13(d)(3) or 14(d)(2) of the
Securities Exchange Act of 1934 ("34 Act") (excluding, for this purpose, the
Company, the Bank, or any of their subsidiaries, or any employee benefit plan of
the Company, the Bank, or any of their subsidiaries) of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the 34 Act) of more than 50%
of either the then outstanding shares of Common Stock or of the combined voting
power of the Company's then outstanding voting securities entitled to vote
generally in the election of directors; or
(ii) Individuals who, as of the date hereof, constitute the board of
directors of the Company ("Incumbent Board") cease for any reason to constitute
at least a majority of the board of directors, provided that any individual
becoming a director subsequent to the date hereof whose election, or nomination
for election by the Company's shareholders, was approved by a vote of at least a
majority of the directors then comprising the Incumbent Board shall be
considered as though such individual is a member of the Incumbent Board; or
(iii) Approval by the shareholders of the Company of the sale of all or
substantially all of the assets of the Company or of a merger, consolidation or
other reorganization in each case, with respect to which persons who were the
shareholders of the Company and optionee immediately prior to such merger,
consolidation or other reorganization, immediately thereafter, do not own more
than 50% of the combined voting power entitled to vote generally in the
election of directors of the merged, consolidated or reorganized corporation's
then outstanding voting securities; provided, however, in such event the Change
in Control will be deemed to have occurred immediately prior to the merger,
consolidation or other reorganization.
47
<PAGE>
5. Nontransferability.
The Option is not transferable except by will or by the laws of descent
and distribution.
6. Limitation of Rights.
The Grantee or the personal representative of the Grantee shall have no
rights as a stockholder with respect to the Shares covered by the Option until
the Grantee or the personal representative of the Grantee shall become the
holder of record of such Shares. Neither the Plan, the granting of the Option,
nor this Option Agreement shall impose any obligation on the Bank or the Company
or any subsidiary thereof to continue the employment of the Grantee.
7. Stock Reserve.
The Company shall at all times during the Exercise Period under this
Option Agreement reserve and keep available such number of Shares of Common
Stock as will be sufficient to satisfy the requirements of this Option Agreement
and shall pay all original issue taxes (if any) on the exercise of the Option
and all other fees and expenses necessarily incurred by the Company in
connection therewith.
8. Grantee's Covenant.
The Grantee hereby agrees to use his best efforts to provide services to
the Bank or Company in a workmanlike manner and to promote the Bank's or
Company's interests.
9. Restrictions on Transfer and Pledge.
Except as provided in Section 5 hereof, the Option and all rights and
privileges granted hereunder shall not be transferred, assigned pledged or
hypothecated in any way, whether by operation of law or otherwise, and shall not
be subject to execution, attachment or similar process. Upon any attempt to
transfer, assign, pledge, hypothecate or otherwise dispose of the Option or any
right or privilege granted hereunder, except as provided herein, or upon the
levy or any attachment or similar process upon the rights and privileges herein
conferred, the Option and the rights and privileges hereunder shall become
immediately null and void.
10. Restrictions on lssuance of Shares.
If at any time the Board of Directors of the Company shall determine, in
its discretion, that listing, registration or qualification of the Shares
covered by the Option upon any securities exchange or under any state or federal
law, or the consent or approval of any governmental regulatory body, is
necessary or desirable as a condition to the exercise of the Option, the Option
may not be exercised in whole or in part unless and until such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of directors of the
Company.
48
<PAGE>
11. Plan Controls.
In the event of any actual or alleged conflict between the provisions of
the Plan and the provisions of this Option Agreement, the provisions of the Plan
shall be controlling and determinative.
12. Successors.
This Agreement shall be binding upon any successor of the Company in
accordance with the terms of this Option Agreement and the Plan.
13. Interpret
It is the intent of the parties hereto that the Option qualify for
incentive stock option treatment pursuant to, and to the extent permitted by,
Section 422 of the Internal Revenue Code of 1986. All provisions hereof are
intended to have, and shall be construed to have, such meanings as are set forth
in applicable provisions of the Code and Treasury Regulations to allow the
Option to so qualify.
IN WITNESS WHEREOF, the Company, acting by and through its duly authorized
officers, has caused this Option Agreement to be executed and the Grantee has
executed this Option Agreement, all as of the day and year first above written.
FIRST STERLING BANKS, INC.:
By:
-------------------------------------------
Edward C. Milligan, President
GRANTEE:
By:
-------------------------------------------
49
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR PERIOD ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,651,995
<INT-BEARING-DEPOSITS> 130,815
<FED-FUNDS-SOLD> 27,485,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 18,963,075
<INVESTMENTS-CARRYING> 2,248,974
<INVESTMENTS-MARKET> 2,238,285
<LOANS> 106,729,770
<ALLOWANCE> 1,379,678
<TOTAL-ASSETS> 169,041,235
<DEPOSITS> 151,322,622
<SHORT-TERM> 354,061
<LIABILITIES-OTHER> 1,244,142
<LONG-TERM> 0
0
0
<COMMON> 12,350,404
<OTHER-SE> 4,696,598
<TOTAL-LIABILITIES-AND-EQUITY> 169,041,235
<INTEREST-LOAN> 10,026,825
<INTEREST-INVEST> 1,418,174
<INTEREST-OTHER> 1,861,546
<INTEREST-TOTAL> 13,306,545
<INTEREST-DEPOSIT> 5,543,230
<INTEREST-EXPENSE> 5,561,562
<INTEREST-INCOME-NET> 7,744,983
<LOAN-LOSSES> 444,342
<SECURITIES-GAINS> (600)
<EXPENSE-OTHER> 5,053,287
<INCOME-PRETAX> 3,286,861
<INCOME-PRE-EXTRAORDINARY> 3,286,861
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,166,667
<EPS-PRIMARY> .83
<EPS-DILUTED> .78
<YIELD-ACTUAL> 5.10
<LOANS-NON> 41,501
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,094,621
<CHARGE-OFFS> 188,120
<RECOVERIES> 28,835
<ALLOWANCE-CLOSE> 1,379,678
<ALLOWANCE-DOMESTIC> 1,379,678
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
