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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the fiscal year Commission file number
ended December 31, 1998 000-25128
FIRST STERLING BANKS, INC.
(Name of small business issuer in its Charter)
Georgia 58-2104977
(State of Incorporation) (I.R.S. Employer
Identification No.)
1200 Barrett Parkway, Kennesaw, GA 30144
(Address of principal executive offices) (Zip Code)
770-499-2265
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
State issuer's revenues for the most recent fiscal year. $16,239,225
As of March 1, 1999, registrant had outstanding 2,635,144 shares of common
stock. The aggregate market value of the voting stock held by nonaffiliates of
the registrant is approximately $37,550,802.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
First Sterling Banks, Inc. (the "Company") is a two-bank holding company
which engages through its subsidiaries, The Westside Bank & Trust Company and
The Eastside Bank and Trust Company (the "Banks"), in providing full banking
services to customers of the Banks. The Company's executive offices are located
at 1200 Barrett Parkway, Kennesaw, Georgia 30144, and its telephone number is
770-499-2265.
The Company was incorporated on March 16, 1994 as a Georgia business
corporation. On August 31, 1994, the Company purchased all of the shares of
common stock of The Westside Bank & Trust Company.
On December 21, 1995, the Boards of Directors of Eastside Holding
Corporation, the only shareholder of The Eastside Bank & Trust Company, and
Westside Financial Corporation, the only shareholder of The Westside Bank &
Trust Company, executed a definitive agreement to merge the two holding
companies, with Westside Financial Corporation surviving. The merger was
consummated on July 31, 1996, at which time Westside Financial Corporation
changed its name to First Sterling Banks, Inc. Each bank retained its Board of
Directors, management and trade name. The merger was accounted for as a pooling
of interests and was subject to approval by federal and state bank holding
company regulators and a majority of the shareholders of Eastside Holding
Corporation. The merger was approved by Eastside shareholders on July 16, 1996.
Eastside Financial Services Inc. (EFS), commenced operations in 1994 as a wholly
owned subsidiary of Eastside Bank. The purpose and business of EFS is to provide
assistance to the Bank and other community banks in the closing, sale on the
secondary market, and servicing of loans guaranteed by the Small Business
Administration.
Because of its ownership of all of the issued and outstanding shares of
the capital stock of The Westside Bank & Trust Company and The Eastside Bank and
Trust Company, the Company is a "Bank Holding Company" as that term is defined
under Federal law in the Bank Holding Company Act of 1956 (the "Act"), as
amended, and under the Bank Holding Company laws of the State of Georgia (the
"Georgia Act"). As a "Bank Holding Company", the Company is subject to the
applicable provisions of the Act and the Georgia Act, as well as to supervision
by the Board of Governors of the Federal Reserve System (the "Federal Reserve")
and the State of Georgia Department of Banking and Finance (the "Department").
The Company's subsidiary banks provide a full range of commercial banking
services to its customers, except for trust services. The Banks are organized
under the laws of the State of Georgia.
Market Area and Competition
The Banks encounter vigorous competition from other commercial banks,
savings and loan associations and other financial institutions and
intermediaries in the Bank's primary service area - North Cobb County, Georgia
and South Gwinnett County, Georgia.
The Banks compete with other banks in their primary service area in
obtaining new deposits and accounts, making loans, obtaining branch banking
locations and providing other banking services. The
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Banks also compete with savings and loan associations and credit unions for
savings and transaction deposits, certificates of deposit and various types of
loans.
Competition for loans is also offered by other financial intermediaries,
including savings and loan associations, mortgage banking firms and real estate
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
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accommodate a branch facility and the 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.
In February 1999 Eastside Bank made application to open a branch office in
Lawrenceville, Georgia. The branch will be located at 185 Gwinnett Drive in the
Heritage Center Office Complex. The building, which has been a branch bank for
several previous institutions will be leased for an initial period of five
years, with several renewal options. The facility contains approximately 2,800
square feet of space, will offer drive-up service and an ATM. Pending final
regulatory approval the branch is expected to open in mid-April.
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 15, 1999 the Westside Bank had a total of 25 full-time and 14
part-time employees. Eastside Bank had a total of 30 full-time and 15 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.
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Supervision and Regulation
The Company
As a bank holding company, the Company is required to file with the
Federal Reserve an annual report and such additional information as the Federal
Reserve may require pursuant to the Federal Bank Holding Company Act. The
Federal Reserve may also conduct examinations of the Company and each of its
subsidiaries.
The Georgia Financial Institutions Code requires annual registration with
the Georgia Department of Banking and Finance by all Georgia bank holding
companies. Such registration includes information with respect to the financial
condition, operations, management of intercompany relationships of the bank and
such other information as is necessary to keep itself informed as to whether the
institution is in compliance with the provisions of Georgia law and the
regulations and orders issued thereunder by The Department.
The Banks
The Banks operate as banks organized under the laws of the State of
Georgia subject to examination by The Department. The Department regulates all
areas of each Bank's commercial banking operations including reserves, loans,
mergers, payment of dividends, interest rates, establishment of branches and
other aspects of operations.
The Banks are also insured and regulated by the FDIC. The major functions
of the FDIC with respect to insured banks include paying depositors to the
extent provided by law in the event an insured bank is closed without adequately
providing for payment of the claims of depositors, acting as a receiver of state
banks placed in receivership when so appointed by state authorities, and
preventing the continuance or development of unsound and unsafe banking
practices. In addition, the FDIC is authorized to examine insured banks which
are not members of the Federal Reserve to determine the condition of such banks
for insurance purposes. The FDIC also approves conversions, 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.
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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. Although the stated minimum ratio is 3%, all
but the most highly rated bank holding companies and their subsidiary banks must
maintain a minimum Tier 1 leverage ratio of 4% to 5%. The Department requires a
minimum Tier I capital to adjusted total assets ratio of 4%. In addition, Tier 1
capital must equal 4% of risk-weighted assets and total capital (Tier 1 plus
Tier 2) must equal 8% of risk-weighted assets. These are minimum requirements,
however, and institutions experiencing internal growth or making acquisitions as
well as institutions with supervisory or operational weakness will be expected
to maintain capital positions well above these minimum levels.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business.
The following table reflects the Company and the banks' compliance with
regulatory capital requirements at December 31, 1998:
<TABLE>
<CAPTION>
Actual Required Excess
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
Leverage capital
Consolidated 18,037,000 11.18% 6,454,000 4.00% 11,583,000 6.42%
Westside Bank 9,911,000 12.34 3,214,000 4.00 6,697,000 6.76
Eastside Bank 7,858,000 9.69 3,244,000 4.00 4,112,000 5.87
Risk-based core capital:
Consolidated 18,037,000 9.01% 8,012,000 4.00% 10,025,000 5.56%
Westside Bank 9,911,000 8.75 4,529,000 4.00 5,382,000 5.43
Eastside Bank 7,858,000 9.02 3,483,000 4.00 4,375,000 5.57
Risk-based total capital:
Consolidated 19,663,000 12.19% 12,908,000 8.00% 6,755,000 3.44%
Westside Bank 10,727,000 13.35 6,428,000 8.00 4,299,000 4.08
Eastside Bank 8,668,000 10.69 6,488,000 8.00 2,180,000 2.52
</TABLE>
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Prompt Corrective Action
The Federal Deposit Insurance Act ("FDIA"), among other things, requires
the federal regulatory agencies to take "prompt corrective action" if a
depository institution does not meet minimum capital requirements. The FDIA
establishes five capital tiers: "well capitalized;" "adequately capitalized;"
"undercapitalized;" "significantly undercapitalized;" and "critically
undercapitalized." A depository institution's capital tier will depend upon how
its capital levels compare to various relevant capital measures and certain
other factors, as established by regulation.
The federal bank regulatory agencies have adopted regulations establishing
relevant capital measures and relevant capital levels applicable to FDIC-insured
banks. The relevant capital measures are the total capital ratio, tier I capital
ratio and the leverage ratio. Under the regulations, a FDIC-insured bank will
be:
o "well capitalized" if it has a total capital ratio of ten percent or
greater, a tier I capital ratio of six percent or greater and a
leverage ratio of five percent or greater and is not subject to any
order or written directive by the appropriate regulatory authority
to meet and maintain a specific capital level for any capital
measure;
o "adequately capitalized" if it has a total capital ratio of eight
percent or greater, a tier I capital ratio of four percent or
greater and a leverage ratio of four percent or greater (three
percent in certain circumstances) and is not "well capitalized;"
o "under capitalized" if it has a total capital ratio of less than
eight percent, a tier I capital ratio of less than four percent or a
leverage ratio of less than four percent (three percent in certain
circumstances);
o "significantly undercapitalized" if it has a total capital ratio of
less than six percent, a tier I capital ratio of less than three
percent or a leverage ratio of less than three percent; and
o "critically undercapitalized' if its tangible equity is equal to or
less than two percent of average quarterly tangible assets.
An institution may be downgraded to, or deemed to be in, a capital
category that is lower than is indicated by its capital ratios if it is
determined to be in an unsafe or unsound condition or if it receives an
unsatisfactory examination rating with respect to certain matters. As of
December 31, 1998, the Company and the Banks each had capital levels that
qualify each as being "well capitalized" under such regulations.
The FDIA generally prohibits a FDIC-insured bank from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the bank would thereafter be "undercapitalized."
"Undercapitalized" banks are subject to growth limitations and are required to
submit a capital restoration plan. The federal regulators may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the bank's capital.
In addition, for a capital restoration plan to be acceptable, the bank's parent
holding company must guarantee that the institution will comply with such
capital restoration plan. The aggregate liability of the parent holding company
is limited to the lesser of: (i) an amount equal to five percent of the bank's
total
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assets at the time it became "undercapitalized;" and (ii) the amount which is
necessary (or would have been necessary) to bring the institution into
compliance with all capital standards applicable with respect to such
institution as of the time it fails to comply with the plan. If a bank fails to
submit an acceptable plan, it is treated as if it is "significantly
undercapitalized."
"Significantly undercapitalized" insured banks may be subject to a number
of requirements and restrictions, including orders to sell sufficient voting
stock to become "adequately capitalized," requirements to reduce total assets,
and cessation of receipt of deposits from correspondent banks. "Critically
undercapitalized" institutions are subject to the appointment of a receiver or
conservator. A bank that is not "well capitalized" is subject to certain
limitations relating to so-called "brokered" deposits.
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
Deposits of the Bank are insured by the FDIC to a maximum of $100,000 for
each insured depositor through the Bank Insurance Fund ("BIF"). The FDIC adopted
a 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 system assigns an institution to one of three
capital categories: (a) well capitalized; (b) adequately capitalized; and (c)
undercapitalized. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation provided
to the FDIC by the institution's primary federal regulator and information which
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance funds (which may include, if applicable,
information provided by the institution's state supervisor). An institution's
insurance assessment rate is then determined based on the capital category and
supervisory category to which it is assigned.
Depending upon a BIF member's risk classification and subgroup, applicable
regulations provide that its deposit insurance premium may be as low as 0% of
insured deposits or as high as .27 % of insured
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deposits. The Bank has been notified that, based on its risk classification and
supervisory subgroup, its BIF assessment rate is 0 percent of insured deposits
for the period from January 1, to June 30, 1999. This is the most favorable
assessment rate applicable to any insured institution. However, the Deposit
Insurance Funds Act of 1996 (DIFA) requires that a Financing Corporation (FICO)
assessment be paid by the Bank in 1999. The annual FICO assessment rate for
banks is not tied to the FDIC risk classification and is determined quarterly.
The annual rate for the period ending December 31, 1998 was 1.176% of deposits.
The Bank paid $17,733 in assessments, which was the minimum set by the FDIC for
the period ending December 31, 1998.
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.
Other Legislation
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.
The Georgia legislature enacted legislation which, effective July 1, 1996,
allowed Georgia-based banks to branch into up to three counties in addition to
the county in which their main office is located. This same legislation
eliminated all branching restrictions, thereby permitting unrestricted
state-wide branching, effective July 1, 1998.
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
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Major system failures
or miscalculations could result from programs having time sensitive software
that recognize a date using "00" as the year 1900 rather than the year 2000.
First Sterling 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. Year 2000 committees consisting of both management and
staff personnel have been established and 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.
Under the direction and supervision of senior management the banks have
completed their assessment and awareness phase, having reviewed all computer
hardware, computer software, third party providers and vendors for year 2000
readiness.
Once the assessment and renovation phase was complete management began the
task of replacing or upgrading those systems that were found to be
non-compliant. Management believes that all mission critical hardware, operating
systems and third party providers found to be non-compliant have been upgraded
or replaced.
Testing of all internal mission critical systems is performed in the banks
in a test environment that has been established to mirror the banks internal
operating systems. Testing of mission critical third party provides is
accomplished through the use of proxy testing. All proxy testing from mission
critical third party providers is reviewed by bank personnel to determine tests
have been performed using the appropriate dates and environment. The testing
phase of the project is nearly completed.
Contingency and business resumption plans are being developed to ensure
any interruption in daily operations caused by uncontrollable events will be
minimal. The banks are developing plans that will allow them to perform all
mission critical functions using alternative equipment or manually. Contingency
and business resumption plans will also be fully tested to ensure successful
operations.
The company has contacted all major borrowers to determine their potential
risk to Y2K problems and assigned a risk code to each borrower, based on risk
and underlying collateral. Having completed this process the adequacy of the
loss reserve was reviewed and found to be adequate at this time. New borrowers
are evaluated, as appropriate, for Y2K risk during the initial credit review
process. Management will continue to monitor those borrowers considered high
risk and the adequacy of the loss reserve.
The company is in the process of determining the potential liquidity risk
with its deposit customers and reviewing the adequacy of available facilities to
cover short-term liquidity needs. Additional facilities will be established to
cover possible short-term liquidity needs, as appropriate.
The Company has budgeted approximately $250,000 for Year 2000
expenditures, including computer system replacements and upgrades. To date, the
Company has spent approximately $100,000
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The Year 2000 Project will continue to receive the full support and
attention from senior management of both Eastside Bank and Westside Bank. The
project is on schedule and the timetable will allow for an adequate period of
thorough testing well in advance of the year change.
Forward-Looking Statements
This review contains certain forward-looking statements including
statements relating to present or future trends or factors generally affecting
the banking industry and specifically affecting First Sterling's operations,
markets and products. Without limiting the foregoing, the words
"believes""anticipates", "intends", expects" or similar expressions are intended
to identify forward-looking statements. These forward-looking statements involve
certain risks and uncertainties. Actual results could differ materially from
those projected for many reasons including, without limitation, changing events
and trends that have influenced First Sterling's assumptions. These trends and
events include (i) changes in the interest rate environment which may reduce
margins, (ii)non-achievement of expected growth (iii) less favorable than
anticipated changes in national and local business environment and securities
markets (iv) adverse changes in the regulatory requirements affecting First
Sterling (v) greater competitive pressures among financial institutions in First
Sterling's market (vi) Delay and or increase in costs in achieving year 2000
compliance and (vii) greater than expected loan losses. Additional information
and other factors that could affect future financial results are included in
First Sterling's filings with the Securities and Exchange Commission, including
the Annual Report on Form 10-KSB for 1998.
Officers
The following table sets forth certain information with respect to the
officers of the Registrant:
Name Officer
(Age) Position with the Registrant Since
----- ---------------------------- -----
Edward C. Milligan Chairman, President & CEO 1994
(54)
Barbara J. Bond Secretary 1994
(50)
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.
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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 1998.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Prior to August 1995, there was no public market for the registrants
common stock.
In 1995, the Board of Directors voted to allow J. C. Bradford & Company to
be the principal market maker for the Company's common stock. Morgan Keegan &
Company and Sterne, Agee & Leach 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.
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The following table lists the high and low stock price for each quarter in
1998 and 1997:
Fiscal year 1998 Fiscal year 1997
High Low High Low
- --------------------------------------------------------------------------------
First quarter $16.375 $12.00 $9.00 $8.125
Second quarter 16.50 14.625 9.00 7.75
Third quarter 15.00 13.00 9.625 8.50
Fourth quarter 14.50 12.875 12.50 9.3125
- --------------------------------------------------------------------------------
(b) As of March 15, 1999, there were approximately 778 shareholders of
record of the registrant's common stock.
(c) During 1998 dividends of $ 0.045 per share were paid in the first
fiscal quarter and dividends of $ 0.05 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
For the Year Ended December 31
-------------------------------------------
Selected Income Statement Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
Total interest income $15,188 $13,307 $10,432 $ 9,705 $ 7,491
Total interest expense 6,574 5,562 4,393 4,087 2,916
Net interest income 8,614 7,745 6,039 5,618 4,575
Provision for loan losses 298 444 137 256 257
Net interest income after
rovision for loan losses 8,316 7,301 5,902 5,362 4,318
Other operating income 1,051 1,040 760 571 513
Net income 2,471 2,167 1,509 1,616 1,209
Net income per share (basic) .94 .83 .57 .59 .50
Dividends per share .195 .17 .13 .075 .05
All share and per share data have been adjusted to reflect a two for one
stock split on March 30, 1998.
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For the Year Ended December 31
----------------------------------------------
Selected Balance Sheet Data 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
Total loans $135,625 $106,730 $ 83,726 $ 73,148 $ 63,897
Total assets 201,127 169,041 136,706 121,172 100,860
Total deposits 181,428 151,323 120,540 106,466 88,172
Shareholders' equity 18,177 16,120 14,742 13,591 12,160
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.
On September 29, 1998, following several discussions, the boards of
directors of First Sterling and Georgia Bancshares executed a non-binding letter
of intent to merge the two bank holding companies. After negotiations and due
diligence investigations, the First Sterling board of directors and the Georgia
Bancshares board of directors unanimously approved the Merger Agreement in
December 1998 The merger was unanimously approved by the shareholders of First
Sterling and Georgia Bancshares at separate meetings on March 16, 1999. All
regulatory approvals have been received and the merger is expected to be
consummated in late April.
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, 1998 was $8,614,106 an
increase of $869,123 or 11.22% compared to December 31, 1997. The increase in
net interest income is primarily attributable to an increase in average earning
assets over 1997. Average earning assets increased $20,463,596 or 13.47% over
1997. Average loans increased $23,731,450 or 25.08% over 1997. The yield on
earning assets was 8.81% up slightly from 1997. Average interest bearing
liabilities increased $14,153,255 or 10.87% over 1997. The bank's average
cost of funds was 4.55% in 1998 as compared to 4.27% in 1997. The increase in
the cost of funds is the result of a lower level of seasonal deposits, as
compared to 1997 and the highly competitive nature of the metro Atlanta
market. Average non-interest bearing deposits increased $5,274,351 or 26.54%
over 1997. The banks are located in thriving markets and continue to enjoy
excellent growth in loans and deposits. Total assets increased $32,085,899 or
18.98% over December 31, 1997.
14
<PAGE>
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 maintain the allowance 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 $298,000 in
1998 a decrease from 1997. The banks continue to experience only minimal losses,
net chargeoffs in 1998 were of .04% of average loans compared to .17% in 1997.
The allowance for loan losses as a percentage of total loans outstanding at
December 31, 1998 and 1997 amounted to 1.20% and 1.29%, 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, Year 2000 risk and such other factors as
management deems appropriate.
Following is a comparison of non-interest income for 1998 and 1997:
1998 1997
---- ----
Service charges on deposit accounts $ 434,282 $ 389,948
Gain on sale of loans 159,448 279,002
Other income 457,040 371,157
Net realized losses on securities -- (600)
---------- ---------
$1,050,770 $1,039,507
========== ==========
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. Total other income is up $11,263 over 1997. Gains on
the sale of SBA loans is down $119,554 or 42.85% from 1997. The reduction in
gains on the sale of SBA loans is a direct result
15
<PAGE>
of the increased focus on growth in the banks core loan portfolio rather than
SBA loans to be sold in the secondary market.
Following is an analysis of non-interest expense for 1998 and 1997:
1998 1997
---- ----
Salaries and employee benefits $3,241,764 $2,993,762
Occupancy and equipment expense 560,334 628,523
Data processing fees 254,754 212,179
Directors fees 253,450 182,400
Supplies 115,156 101,779
Deposit insurance premiums 17,733 13,909
Security losses -- 600
Merger expenses 27,697 --
Other expense 1,196,018 920,135
---------- ----------
$5,666,906 $5,053,287
========== ==========
Non-interest expense increased $613,619 or 12.14% over 1997. Non-interest
expense consists primarily of salaries and other employee benefits, occupancy
expense, and other operating costs. Directors fees increased $71,050 or 38.95%
over 1997. Fees were increased in 1998 based on a competitive market survey of
other community banks. 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. Personnel expense increased $248,002 or 8.28% over 1997. The increase
is primarily the result of salary increases and the rising costs associated with
employee benefit plans. At December 31, 1998, the company employed 49 full-time
employees and 29 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. Increases in data processing, audit, postage and
delivery, supplies, stationary and business development are directly related to
growth and the increased cost of doing business in a highly competitive market.
Pre-tax income for the twelve months ending December 31, 1998 increased
$413,109 or 12.57% over the same period in 1997. Net income for the period
ending December 31, 1998 increased $304,527 or 14.06%. 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 1998 and 1997:
16
<PAGE>
Average Balances and Net Income Analysis
The condensed average balance sheets for the period indicated are presented
below:
For the year ended December 31,
1998 1997
---- ----
ASSETS
Cash and due from banks $ 8,681,083 $ 7,648,021
Interest-bearing deposits in banks 53,699 100,000
Taxable securities 20,984,997 19,097,717
Nontaxable securities 4,801,873 4,138,479
Federal funds sold 18,566,324 12,403,296
Securities purchased under agreement to resell 9,643,562 21,578,817
Loans (1) 118,359,137 94,627,687
Reserve for loan losses (1,480,684) (1,147,135)
Other assets 8,183,450 7,912,821
------------- -------------
Total Assets $ 187,793,441 $ 166,359,703
============= =============
Total earning assets $ 172,409,592 $ 151,945,996
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand $ 25,144,916 $ 19,870,565
Interest-bearing demand and savings 65,024,714 64,243,825
Time deposits 78,847,990 65,623,174
------------- -------------
Total deposits 169,017,620 149,737,564
Federal funds purchased and securities
sold under agreement to repurchase 507,700 360,150
Other liabilities 1,073,716 1,107,970
------------- -------------
Total liabilities $ 170,599,036 $ 151,205,684
------------- -------------
Stockholders' equity $ 17,194,405 $ 15,154,019
------------- -------------
Total Liabilities and
Stockholders' equity $ 187,793,441 $ 166,359,703
============= =============
Total interest-bearing liabilities $ 144,380,404 $ 130,227,149
============= =============
(1) Average loans include non-accrual loans, if any.
17
<PAGE>
Interest Income and Interest Expense
For the year ended December 31,
1998 1997
------------------------------------
Average Average
Interest Rate Interest Rate
(Dollars in thousands)
INTEREST INCOME:
Interest and fees on loans (1) $12,215 10.32% $10,027 10.60%
Interest on investment securities:
Taxable Securities 1,277 6.09 1,234 6.46
Nontaxable Securities 224 4.66 184 4.45
Interest on Federal funds sold 992 5.34 676 5.45
Interest on securities purchased
under agreement to resell 477 4.95 1,180 5.46
Interest on deposits in banks 3 5.56 6 5.90
------- ----- ------- -----
Total interest income $15,188 8.81% $13,307 8.76
------- ----- ------- -----
INTEREST EXPENSE:
Interest on savings and interest-
bearing demand deposits $ 1,931 2.97% $ 1,734 2.70%
Interest on time deposits 4,618 5.86 3,810 5.80
Interest on Federal funds purchased
and securities sold under
agreement to repurchase 25 4.92 18 5.00
------- ----- ------- -----
Total interest expense $ 6,574 4.55 $ 5,562 4.27
------- ----- ------- -----
NET INTEREST INCOME $ 8,614 $ 7,745
======= =======
Net interest spread 4.26% 4.49%
===== =====
Net yield on average interest
earning assets 5.00% 5.10%
===== =====
(1) In computing yields on earning assets, the average balances of
non-accruing loans are included in the average balances, and loan fees of
$939,560 and $749,210 for the years ended December 31, 1998 and 1997,
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.
18
<PAGE>
Year ended December 31,
1998 Vs. 1997
--------------------------------
Increase Changes Due to
(Decrease) Rate Volume
(Dollars in Thousands)
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans $ 2,188 $ (331) $ 2,519
Interest on investment securities:
Taxable 43 (78) 121
Nontaxable 40 10 30
Interest on Federal funds sold 316 (20) 336
Interest on securities purchased
under agreement to resell (703) (49) (654)
Interest on deposits in other banks (3) -- (3)
------- ------- -------
Total interest income $ 1,881 $ (468) $ 2,349
------- ------- -------
Expense from interest-bearing liabilities
Interest on interest-bearing
demand and savings deposits $ 197 $ (176) $ 21
Interest on time deposits 808 (47) 761
Interest on Federal funds purchased
and securities sold under agreement
to repurchase 7 -- 7
------- ------- -------
Total interest expense $ 1,012 $ (223) $ 789
Net interest income $ 869 $ (690) $ 1,560
======= ======= =======
Year ended December 31,
1997 Vs. 1996
--------------------------------
Increase Changes Due to
(Decrease) Rate Volume
(Dollars in Thousands)
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans $ 1,588 $ (65) $ 1,653
Interest on investment securities:
Taxable 76 (16) 92
Nontaxable 5 53 (48)
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
======= ======= =======
19
<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. The Banks have 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, 1998 were considered satisfactory. At
December 31, 1998, investment securities with a book value of $1,201,232 were
scheduled to mature within one year. These investments, along with federal funds
sold and securities purchased under agreement to resell of $17,563,000 as of
December 31, 1998, will provide a ready source of funds. At December 31, 1998,
the Company's and the Bank's capital asset ratios were considered adequate based
on guidelines established by the regulatory authorities. During 1998, the
Company increased its capital by retaining net earnings of $1,958,456 after
dividend payments of $512,738. At December 31, 1998, total capital of the
Company amounted to $18,177,379.
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 with Eastside Holding
Corporation. 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.
20
<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, 1998
Available for sale Weighted
Amortized Fair Average
Cost Value Yield
(Dollars in Thousands)
Due in one year or less $ 1,201 $ 1,205 5.842%
Due from one year to five years 7,706 7,763 5.648
Due from five to ten years 8,958 9,068 5.758
Due after ten years 2,856 2,862 5.606
Mortgage-backed securities 13,166 13,202 5.946
Equity securities 579 579 7.500
------- ------- -------
$34,466 $34,679 5.825%
======= ======= =======
Securities with a carrying value of $26,731,000 and $15,437,000 at
December 31, 1998 and 1997, 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:
December 31, December 31,
1998 1997
-------------------------------
Commercial, financial and agricultural $ 28,124,000 $ 24,768,799
Real estate - construction and land
development 33,576,000 35,840,760
Real estate - mortgage 66,740,000 39,560,475
Installment and other consumer 7,478,169 6,946,810
------------- -------------
135,918,169 107,116,844
------------- -------------
Net deferred loan fees (293,160) (387,074)
135,625,009 106,729,770
------------- -------------
Less reserve for possible loan losses (1,626,699) (1,379,678)
------------- -------------
Net loans $ 133,998,310 $ 105,350,092
============= =============
21
<PAGE>
SUPPLEMENTAL MATURITY SCHEDULE OF LOANS
DECEMBER 31, 1998
Over One
One Year Through Over
or Less Five Years Five Years Total
------- ---------- ---------- -----
Commercial and
industrial $10,890,207 $11,750,921 $ 5,482,872 $28,124,000
Real estate -
construction and
land development 36,249,540 11,531,766 18,958,694 66,740,000
Real estate - mortgage 13,080,576 11,169,656 9,325,768 33,576,000
Installment and other
Consumer 3,879,338 3,479,013 119,818 7,478,169
Non-performing Loans
There were $39,971 in non-accrual loans at December 31, 1998 and $41,501
at December 31, 1997. 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:
Year Ended December 31,
1998 1997
------------------------------------------------
Average Average Average Average
Amount Rate Amount Rate
(Dollars in Thousands)
Noninterest-bearing deposits $25,145 -- % $19,871 -- %
Interest-bearing demand and
savings deposits 65,025 2.97 64,244 2.70
Time deposits 78,848 5.86 65,623 5.80
MATURITY SCHEDULE OF TIME DEPOSITS OVER $100,000
December 31, 1998
Three months or less $10,119,219
Three months to six months 3,998,446
Six months to twelve months 7,499,258
Over twelve months 3,277,656
-----------
Total $24,894,579
===========
22
<PAGE>
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 $298,000 during
the year ended December 31, 1998, compared to $444,342 in 1997. During 1998, the
Bank had net charge-offs of $50,979. There were net charge-offs of $159,285 in
1997. An analysis of the allowance for loan losses follows:
Year Ended December 31,
1998 1997
----------------------------
Average amount of loans outstanding $118,359,137 $ 94,627,687
============ ============
Balance of reserve for possible loan
losses at beginning of period $ 1,379,678 $ 1,094,621
Provision charged to operating expense 298,000 444,342
Recoveries:
Commercial, financial and agricultural 1,480 --
Real estate - construction and
land development -- 9,817
Real estate - mortgage 13,445 --
Installment and other consumer 2,763 19,018
------------ ------------
Total recoveries $ 17,688 $ 28,835
------------ ------------
Less chargeoffs:
Commercial, financial and agricultural 50,100 16,296
Real estate - construction and
land development -- 52,130
Real estate - mortgage 14,628 --
Installment and other consumer 3,939 119,694
------------ ------------
Total chargeoffs $ 68,667 $ 118,120
------------ ------------
Net chargeoffs $ 50,979 $ 159,285
------------ ------------
Balance of reserve for possible loan losses
at end of period $ 1,626,699 $ 1,379,678
============ ============
Ratio of net loan chargeoffs to average loans .04% .17%
============ ============
23
<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, 1998, as
follows:
Commercial, financial and agricultural $11,977,421
Real estate - construction and land
development 20,086,228
Real estate - mortgage 7,753,700
Installment and other consumer 1,134,384
Standby letters of credit 436,139
-----------
$43,387,872
===========
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, 1998,
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.
24
<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 $ -- $ -- $ -- $ 31
Federal funds sold 17,563 -- -- -- 17,563
Securities 868 6,767 9,288 17,756 34,679
Loans $ 70,013 12,905 37,057 15,650 135,625
-------- -------- -------- -------- --------
Total rate sensitive assets $ 88,475 $ 19,672 $ 46,345 $ 33,406 $187,898
-------- -------- -------- -------- --------
Interest-bearing liabilities:
Interest-bearing demand deposits $ 50,639 $ -- $ -- $ -- $ 50,639
Savings accounts 10,030 -- -- -- 10,030
Time deposits 28,764 44,432 19,823 -- 93,019
Other interest bearing
liabilities 594 -- -- -- $ 594
-------- -------- -------- -------- --------
Total rate sensitive liabilities $ 90,027 $ 44,432 $ 19,823 $ -- $154,282
-------- -------- -------- -------- --------
Interest rate sensitivity
GAP $ (1,552) $(24,760) $ 26,522 $ 33,406
======== ======== ======== ========
Cumulative interest rate
sensitivity GAP $ (1,552) $(26,312) $ 210 $ 33,616
======== ======== ======== ========
GAP as % of assets (.77)% (12.31%) 13.19% 16.61%
Cumulative GAP as a % of assets (.77)% (13.08%) .10% 16.71%
Interest rate sensitivity
GAP ratio 98.28% 44.27% 233.79% --
Cumulative interest rate
sensitivity GAP ratio 98.28% 80.43% 100.14% 121.79%
</TABLE>
25
<PAGE>
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
The following rate of return information for the periods indicated is
presented below:
Year Ended December 31,
1998 1997
-----------------------
Return on assets (1) 1.32% 1.30%
Return on equity (2) 14.37% 14.30%
Dividend payout ratio (3) 20.74% 20.48%
Equity to assets ratio (4) 9.16% 9.11%
(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.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiary are included on page F-1 through F-35 of this Annual Report on Form
10-KSB.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - Years Ended December 31, 1998 and 1997
Consolidated Statements of Comprehensive Income - Years Ended December 31,
1998 and 1997
Consolidated Statements of Stockholders' Equity - Years Ended December 31,
1998 and 1997
Consolidated Statements of Cash Flows - Years Ended December 31, 1998 and
1997
Notes to Consolidated Financial Statements
26
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During 1998, 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 50 Executive V.P. Ms. Bond serves as
Westside Bank Executive Vice President
Secretary of and Senior Operations Officer of Westside
Company and Bank and has served in such capacities since
Westside Bank the organization of Westside. Ms. Bond has
served as Secretary of Westside Bank and the
Company since September 1991 and March
1994, respectively.
Harry L. Hudson, Jr. 55 Director of Mr. Hudson is currently serving as Chairman
Company and of the Board of Directors of Eastside Bank, an
Chairman of office he has held since February 1993. Mr.
Eastside Bank 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 55 Director of Justice Hines has served as chairman of the Board
P. Harris Hines Company and of Directors of Westside Bank since April 1992.
Chairman of From January 1, 1983 until July 26, 1995, Justice
Westside Bank Hines served as a Judge of the Superior Court of
Cobb County. Since July 26, 1995, Justice Hines
has served as a Justice of the Supreme Court of the
State of Georgia. Justice Hines is a Trustee of the
Kennesaw State College Foundation and is a past
member of the Judicial Council of Georgia.
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C> <C>
Edward C. Milligan 54 Chairman, Mr. Milligan has served as President and
President and Chief Executive Officer of Westside since
CEO of Company; its organization. Mr. Milligan has served
President, CEO as President, Chairman and CEO of the
and Director of Company since its organization in March
Westside Bank; 1994. Mr. Milligan has served as a Director
Director of of Eastside Bank since August 1996.
Eastside Bank
John S. Thibadeau, Jr. 51 Director of Since 1973, Mr. Thibadeau has been
Company and president of Deauton Corporation, a
Eastside Bank real estate construction and development
firm. As a licensed real estate broker,
Mr. Thibadeau is an officer and principal
in Thibadeau Burton Realty and serves as
Vice President of University Inn Operating
Co., a hotel motel management firm.
Benjamin Wofford,M.D. 60 Director of Dr. Wofford served as Chairman of the
Company and Board of Directors of Westside Bank
Westside Bank from its organization until April, 1991.
From 1970 until his retirement in 1997
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>
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
28
<PAGE>
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.
In January 1998 Eastside Bank entered into an employment agreement with
Christopher H. Burnett, president and chief executive officer of Eastside Bank.
The term of the agreement is a continuing term of one year which is
automatically extended each day for an additional day so that the remaining term
shall continue to be one year. In the event that Mr. Burnett's employment is
involuntarily terminated prior to a "change in control," of the Company Mr.
Burnett shall be paid his base salary and fringe benefits up through the date of
termination. In addition, he shall be paid at least the following amounts: a
lump sum amount equal to fifty percent (50%) of the annual base salary paid to
him over the previous twelve (12) month period, plus a lump sum amount equal to
fifty percent (50%) of the annual incentive cash bonus paid to him over the
previous twelve (12) month period. In the event Mr. Burnett is terminated
without cause after a change in control he shall be paid his base salary and
fringe benefits up through the date of termination. In addition he shall be paid
the following amounts, a lump sum equal to his annual base salary paid to him
over the previous twelve (12) month period, plus a lump sum amount equal to his
annual incentive cash bonus paid to him over the twelve (12) month period. In
addition, in both cases Mr. Burnett shall be entitled to participate for the
shorter of a period of six (6) months or twelve (12) 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 1998, the Directors received $253,450 for their service as
Directors of the Company and the banks.
29
<PAGE>
The following information is furnished with respect to the Chief Executive
Officer and each executive officer of the Company and the Banks who had cash and
cash equivalent forms of remuneration from the Bank which exceeded $100,000 for
the year ended December 31, 1998, 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 1998 $142,922 $ 56,000 $ 17,213 $ 21,200 $ --
President & CEO 1997 131,672 46,200 48,383 19,325 34,000
Westside Bank 1996 122,136 42,000 -- 7,882 --
Barbara J. Bond 1998 86,000 21,500 3,521 4,078 --
Executive V P 1997 77,750 18,565 9,893 4,281 --
Westside Bank 1996 73,583 17,390 -- 2,637 --
Michael J. Henderson 1998 92,500 23,125 3,266 9,607 --
Executive V P 1997 88,095 20,093 9,180 9,808 --
Westside Bank 1996 81,500 19,270 -- 8,445 --
Christopher H. Burnett 1998 109,601 38,000 -- 15,600 22,200
President & CEO
Eastside Bank
</TABLE>
<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 1998 $475,417 $145,647 $ 24,000 (1) $ 52,285 22,200
Officers as 1997 361,781 94,498 67,456 (2) 33,414 34,000
a Group 1996 338,424 86,660 -- (3) 18,963 --
</TABLE>
(1) Includes Bank's contribution to the 401(k) Plan, directors fees ($14,700)
paid to Mr. Milligan, directors fees ($8,400) and an auto allowance
($7,200) paid to Mr. Burnett, and an auto allowance ($6,000) paid to Mr.
Henderson.
(2) 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.
(3) Includes Bank's contribution to the 401(k) Plan and directors fees
($5,500) paid to Mr. Milligan, an auto allowance ($6,000) paid to Mr.
Henderson.
30
<PAGE>
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:
Price Per
Date Granted Share Exercised Terminated Outstanding
---- ------- ----- --------- ---------- -----------
09-24-1997 44,900 $ 9.25 1,850 -- 43,050 (1)
01-04-1998 22,200 12.50 -- -- 22,200 (2)
04-30-1998 10,000 16.50 -- -- 10,000 (3)
06-11-1998 6,250 15.00 -- -- 6,250 (4)
* Unless otherwise noted all outstanding shares are immediately
exercisable.
(1) 10,800 shares exercisable immediately
14,400 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
(3) 2,000 shares exercisable per year for five years beginning on April
30, 1999.
(4) 1,250 shares exercisable per year for five years beginning on June
11, 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".
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
31
<PAGE>
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:
Price Per
Date Granted Share Exercised Terminated Outstanding
---- ------- ----- --------- ---------- -----------
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
* 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:
Price Per
Date Granted Share Exercised Terminated Outstanding
---- ------- ----- --------- ---------- -----------
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 6,868 (1)
03-27-1997 90,000 9.00 -- -- 90,000
Unless otherwise noted all outstanding shares are immediately exercisable.
(1) 2,866 shares exercisable; remaining 4,002 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.
32
<PAGE>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SAR
Shares at FY-End(#) at FY-End(S)
Acquired on Value Exercisable/ Exercisable/
Name Exercise # Realized($) Unexercisable Unexercisable
- --------------------------------------------------------------------------------
Christopher H.Burnett -0- -0- 0/22,200 $-0-/$33,300
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 $37,902.12 during the
1998 fiscal year pursuant to the Retirement Plan, including the following
amounts to the accounts of persons named: Edward C. Milligan - $6,500.00;
Michael J. Henderson - $3,607.50; Barbara J. Bond - $4,078.04; and all executive
officers as a group - $14,185.54. Eastside Bank contributed a total of $15,049
during the 1998 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 $ 24,000, were made for 1998; Edward C.
Milligan - $17,212.80, Barbara J. Bond - $ 3,520.80, and Michael J.Henderson - $
3,266.40.
33
<PAGE>
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of March 1, 1999,
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:
Name Number of Shares % of Class (l)
---- ---------------- --------------
Barbara J. Bond 35,020. (2) 1.25%
P. Harris Hines 17,977.2605 (3) .65
Harry L. Hudson, Jr. 44,006.0329 (4) 1.58
Edward C. Milligan 114,840.9932 (5) 4.04
John S. Thibadeau, Jr. 20,000. (6) .72
Benjamin H. Wofford, Jr. 66,534.9927 (7) 2.39
------------
298,379.2793 (8)
============
(1) Based on total outstanding shares of 2,766,644 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
34
<PAGE>
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Such banking transactions are not expected to involve more
that the normal risk of collectibility nor present other unfavorable features to
the Company and the Bank.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
Item 13(a) 1., 2. and 3. and Item 13(b).
(a) The following documents are filed as part of this report:
1. Financial statements:
(a) First Sterling Banks, Inc. and subsidiaries:
(i) Consolidated Balance Sheets - December 31,
1998 and 1997
(ii) Consolidated Statements of Income - Years
ended December 31, 1998 and 1997
(iii) Consolidated Statements of Comprehensive
Income - Years ended December 31, 1998
and 1997
(iv) Consolidated Statements of Stockholders'
Equity Years ended December 31, 1998 and 1997
(v) Consolidated Statements of Cash Flows - Years
ended December 31, 1998 and 1997
(vi) Notes to Consolidated Financial Statements
(b) First Sterling Banks, Inc. (Parent Company Only):
Parent Company only financial information has been included in Note 16 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.
35
<PAGE>
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.
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
36
<PAGE>
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, filed as Exhibit 10.9 to Form 10-KSB (File No.
000-25128)
Exhibit 10.10 Form of First Sterling Banks, Inc. 1997 Directors Stock
Option Plan, Stock Option Agreement, filed as Exhibit
10.10 to Form 10-KSB (File No. 000-25128)
Exhibit 10.11 First Sterling Banks, Inc. 1997 Incentive Stock Option
Plan, filed as Exhibit 10.11 to Form 10-KSB (File No.
000-25128)
Exhibit 10.12 Form of First Sterling Banks, Inc. 1997 Incentive Stock
Option Plan, Incentive Stock Option Agreement, filed as
Exhibit 10.12 to Form 10-KSB (File No. 000-25128)
Exhibit 10.13 Merger Agreement between First Sterling Banks, Inc. and
Georgia Bancshares, Inc., dated December 30, 1998,
(incorporated by reference to Appendix A to the Joint
Proxy Statement/Prospectus filed as part of Registration
Statement on Form S-4 (File No. 333-70623)
Exhibit 10.14 Employment Agreement dated January 5, 1998, between The
Eastside Bank & Trust Company and Christopher H.
Burnett, attached as Exhibit 10.14
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
The Company filed a Form 8-K, on October 6, 1998 announcing the
signing of a non-binding letter of intent to merge Georgia
Bancshares into First Sterling Banks, Inc.
37
<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, 1999
----------------------------------- -----------------------
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:
By: /s/ Barbara J. Bond Date: March 30, 1999
----------------------------------- -----------------------
Barbara J. Bond, Secretary/Treasurer,
Principal Financial and Accounting Officer
By: /s/ P. Harris Hines Date: March 30, 1999
----------------------------------- -----------------------
P. Harris Hines, Director
By: /s/ Harry L. Hudson, Jr. Date: March 30, 1999
----------------------------------- -----------------------
Harry L. Hudson, Jr., Director
By: /s/ John S. Thibadeau, Jr. Date: March 30, 1999
----------------------------------- -----------------------
John S. Thibadeau, Jr., Director
By: /s/ Benjamin H. Wofford Date: March 30, 1999
----------------------------------- -----------------------
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.
38
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
INDEPENDENT AUDITOR'S REPORT .................................... F-2
FINANCIAL STATEMENTS
Consolidated balance sheets .................................. F-3
Consolidated statements of income ............................ F-4
Consolidated statements of comprehensive income .............. F-5
Consolidated statements of stockholders' equity .............. F-6 and F-7
Consolidated statements of cash flows ........................ F-8 and F-9
Notes to consolidated financial statements ................... F-10 - F-35
F-1
<PAGE>
[LETTERHEAD OF MAULDIN & JENKINS]
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, 1998 and 1997,
and the related consolidated statements of income, comprehensive 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, 1998 and 1997, 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 4, 1999
F-2
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets 1998 1997
------------- -------------
<S> <C> <C>
Cash and due from banks $ 6,996,921 $ 7,651,995
Interest-bearing deposits in banks 31,283 130,815
Federal funds sold and securities purchased
under resell agreements 17,563,000 27,485,000
Securities available-for-sale 34,679,055 18,963,075
Securities held-to-maturity, fair value
of $-- and $2,238,285 -- 2,248,974
Loans 135,625,009 106,729,770
Less allowance for loan losses 1,626,699 1,379,678
------------- -------------
Loans, net 133,998,310 105,350,092
------------- -------------
Premises and equipment 5,838,761 5,106,983
Other assets 2,019,804 2,104,301
------------- -------------
Total assets $ 201,127,134 $ 169,041,235
============= =============
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing demand $ 27,740,577 $ 21,028,926
Interest-bearing demand 50,639,152 49,227,141
Savings 10,030,091 7,320,138
Time, $100,000 and over 24,894,579 21,521,500
Other time 68,123,529 52,224,917
------------- -------------
Total deposits 181,427,928 151,322,622
Securities sold under repurchase agreements 593,962 354,061
Other liabilities 927,865 1,244,142
------------- -------------
Total liabilities 182,949,755 152,920,825
------------- -------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 10,000,000 shares
authorized; 2,766,644 and 2,757,330 issued
at amount paid in, respectively 12,416,033 12,350,404
Retained earnings 6,655,054 4,696,598
Accumulated other comprehensive income 140,167 107,283
Treasury stock, 131,500 shares (1,033,875) (1,033,875)
------------- -------------
Total stockholders' equity 18,177,379 16,120,410
------------- -------------
Total liabilities and stockholders' equity $ 201,127,134 $ 169,041,235
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Interest income
Loans $ 12,215,217 $ 10,026,825
Taxable securities 1,277,044 1,234,173
Nontaxable securities 224,366 184,001
Deposits in banks 2,963 5,900
Federal funds sold and securities purchased
under resell agreements 1,468,865 1,855,646
------------- -------------
Total interest income 15,188,455 13,306,545
------------- -------------
Interest expense
Deposits 6,548,954 5,543,230
Federal funds purchased and securities sold
under repurchase agreements 25,395 18,332
------------- -------------
Total interest expense 6,574,349 5,561,562
------------- -------------
Net interest income 8,614,106 7,744,983
Provision for loan losses 298,000 444,342
------------- -------------
Net interest income after provision
for loan losses 8,316,106 7,300,641
------------- -------------
Other income
Service charges on deposit accounts 434,282 389,948
Net realized losses on sales of securities
available-for-sale -- (600)
Gains on sale of loans 159,448 279,002
Other operating income 457,040 371,157
------------- -------------
Total other income 1,050,770 1,039,507
------------- -------------
Other expense
Salaries and employee benefits 3,241,764 2,993,762
Equipment expenses 290,785 316,728
Occupancy expenses 269,549 311,795
Other operating expenses 1,864,808 1,431,002
------------- -------------
Total other expenses 5,666,906 5,053,287
------------- -------------
Income before income taxes 3,699,970 3,286,861
Income tax expense 1,228,776 1,120,194
------------- -------------
Net income $ 2,471,194 $ 2,166,667
============= =============
Basic earnings per common share $ 0.94 $ 0.83
============= =============
Diluted earnings per common share $ 0.86 $ 0.78
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net income $2,471,194 $2,166,667
---------- ----------
Other comprehensive income :
Unrealized gains on securities available-for-sale:
Unrealized holding gains arising during period,
net of tax of $16,473 and $33,882, respectively 32,884 69,576
Reclassification adjustment for losses realized
in net income, net of tax (benefits) of $-- and $(204),
respectively -- 396
---------- ----------
Other comprehensive income 32,884 69,972
---------- ----------
Comprehensive income $2,504,078 $2,236,639
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK
-----------------------------
AMOUNT
SHARES PAID IN
------------ -------------
<S> <C> <C>
BALANCE, DECEMBER 31, 1996 1,355,331 $ 12,142,205
Net income -- --
Cash dividends declared, $.17 per share -- --
Exercise of stock options 23,334 208,199
Purchase of treasury stock -- --
Other comprehensive income -- --
------------ -------------
BALANCE, DECEMBER 31, 1997 1,378,665 12,350,404
Net income -- --
Cash dividends declared, $.195 per share -- --
Stock split 1,378,665 --
Exercise of stock options 9,314 65,629
Other comprehensive income -- --
------------ -------------
BALANCE, DECEMBER 31, 1998 2,766,644 $ 12,416,033
------------ -------------
------------ -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Other Treasury Stock Total
Retained Comprehensive ----------------------------- Stockholders'
Earnings Income Shares Cost Equity
- --------------- ------------- ----------- --------------- ---------------
<S> <C> <C> <C> <C>
$ 2,977,853 $ 37,311 30,750 $ (415,000) $ 14,742,369
2,166,667 -- -- -- 2,166,667
(447,922) -- -- -- (447,922)
-- -- -- -- 208,199
-- -- 35,000 (618,875) (618,875)
-- 69,972 -- -- 69,972
- --------------- ------------- ----------- --------------- ---------------
4,696,598 107,283 65,750 (1,033,875) 16,120,410
2,471,194 -- -- -- 2,471,194
(512,738) -- -- -- (512,738)
-- -- 65,750 -- --
-- -- -- -- 65,629
-- 32,884 -- -- 32,884
- --------------- ------------- ----------- --------------- ---------------
$ 6,655,054 $ 140,167 131,500 $ (1,033,875) $ 18,177,379
=============== ============= =========== =============== ===============
</TABLE>
F-7
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,471,194 $ 2,166,667
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 289,399 352,364
Provision for loan losses 298,000 444,342
Deferred income taxes (41,072) (67,390)
Net realized losses on sales of securities
available-for-sale -- 600
Gains on sale of loans (159,448) (279,002)
Proceeds from sale of loans 1,245,743 2,655,972
Loans originated for sale (1,132,494) (4,070,000)
Increase in interest receivable (132,458) (73,628)
Increase (decrease) in interest payable (24,646) 220,843
Other operating activities (51,156) 136,866
------------ ------------
Net cash provided by operating activities 2,763,062 1,487,634
------------ ------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale (25,116,544) (10,050,881)
Proceeds from sales of securities available-for-sale -- 119,400
Proceeds from maturities of securities available-for-sale 9,451,000 10,212,584
Proceeds from maturities of securities held-to-maturity 2,248,974 1,249,365
Net (increase) decrease in Federal funds sold and
securities purchased under resell agreements 9,922,000 (8,705,000)
Net (increase) decrease in interest-bearing
deposits in banks 99,532 (17,538)
Net increase in loans (28,900,019) (21,797,756)
Purchase of premises and equipment (1,021,177) (92,154)
------------ ------------
Net cash used in investing activities (33,316,234) (29,081,980)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 30,105,306 30,782,205
Net increase (decrease) in securities sold under
repurchase agreements 239,901 (251,834)
Dividends paid (512,738) (447,922)
Proceeds from exercise of stock options 65,629 208,199
Purchase of treasury stock -- (618,875)
------------ ------------
Net cash provided by financing activities 29,898,098 29,671,773
------------ ------------
Net increase (decrease) in cash and due from banks (655,074) 2,077,427
Cash and due from banks at beginning of year 7,651,995 5,574,568
------------ ------------
Cash and due from banks at end of year $ 6,996,921 $ 7,651,995
============ ============
</TABLE>
F-8
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
----------- -----------
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest $6,598,995 $5,340,719
Income taxes $1,464,454 $1,257,059
NONCASH TRANSACTION
Unrealized gains on securities available-for-sale $ (50,436) $ (104,059)
See Notes to Consolidated Financial Statements.
F-9
<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, respectively. 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 preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of
revenues and expenses during the reporting 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.
F-10
<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 $9,644,000 and
$21,759,000 during 1998 and 1997, respectively, and the
maximum amounts outstanding at any month-end during 1998 and
1997 was $86,500,000 and $232,000,000, 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 would be 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
included in securities available-for-sale and 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 sale of
securities are determined using the specific identification
method.
Loans
Loans are carried at their principal amounts outstanding less
net 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.
F-11
<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. This evaluation is
inherently subjective as it requires material estimates that
are susceptible to significant change including the amounts
and timing of future cash flows expected to be received on
impaired loans. 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 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 considered to be 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. Losses are recognized at
the time the loan is identified as held for sale and the
loan's carrying value exceeds its fair value.
F-12
<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 income tax assets
and liabilities are determined using the balance sheet method.
Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the differences between
the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax
rates and laws.
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.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
In 1998, the Company adopted Statement of Financial Standards
("SFAS") No. 130, "Reporting Comprehensive Income". This
statement establishes standards for reporting and display of
comprehensive income and its components in the financial
statements. This statement requires that all items that are
required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed in equal prominence with the other
financial statements. The Company has elected to report
comprehensive income in a separate financial statement titled
"Consolidated Statements of Comprehensive Income". SFAS No.
130 describes comprehensive income as the total of all
components of comprehensive income including net income. This
statement uses other comprehensive income to refer to
revenues, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive
income but excluded from net income. Currently, the Company's
other comprehensive income consists of items previously
reported directly in equity under SFAS No. 115, "Accounting
for Certain Investments in Debt and Equity Securities". As
required by SFAS No. 130, the financial statements for the
prior year have been reclassified to reflect application of
the provisions of this statement. The adoption of this
statement did not affect the Company's financial position,
results of operations or cash flows.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement is required to be adopted
for fiscal years beginning after June 15, 1999. However, the
statement permits early adoption as of the beginning of any
fiscal quarter after its issuance. The Company expects to
adopt this statement effective January 1, 2000. SFAS No. 133
requires the Company to recognize all derivatives as either
assets or liabilities in the balance sheet at fair value. For
derivatives that are not designated as hedges, the gain or
loss must be recognized in earnings in the period of change.
For derivatives that are designated as hedges, changes in the
fair value of the hedged assets, liabilities, or firm
commitments must be recognized in earnings or recognized in
other comprehensive income until the hedged item is recognized
in earnings, depending on the nature of the hedge. The
ineffective portion of a derivative's change in fair value
must be recognized in earnings immediately. Management has not
yet determined what effect the adoption of SFAS No. 133 will
have on the Company's earnings or financial position.
F-14
<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, 1998:
U. S. Government and
agency securities $ 14,242,351 $ 28,549 $ (50,343) $ 14,220,557
State and municipal
securities 6,479,273 203,134 (4,888) 6,677,519
Mortgage-backed
securities 13,166,038 55,640 (19,299) 13,202,37
Equity securities 578,600 -- -- 578,600
------------ ------------ ------------ ------------
$ 34,466,262 $ 287,323 $ (74,530) $ 34,679,055
============ ============ ============ ============
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
============ ============ ============ ============
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ------------ ------------
Securities Held-to-Maturity
December 31, 1997:
U. S. Government and
agency securities $ 2,248,974 $ -- $ (10,689) $ 2,238,285
============ ============ ============ ============
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2 SECURITIES (Continued)
The amortized cost and fair value of securities as of December 31,
1998 by contractual maturity are shown below. Maturities may differ
from contractual maturities of 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.
Securities
Available-for-Sale
--------------------------
Amortized Fair
Cost Value
------------- ------------
Due in one year or less $ 1,201,232 $ 1,204,988
Due from one year to five years 7,705,705 7,763,533
Due from five to ten years 8,958,108 9,067,598
Due after ten years 2,856,579 2,861,957
Mortgage-backed securities 13,166,038 13,202,379
Equity securities 578,600 578,600
------------ -----------
$ 34,466,262 $34,679,055
============ ===========
Securities with a carrying value of $26,731,000 and $15,437,000 at
December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and for other purposes.
Gross gains and losses on sales of securities available-for-sale
consist of the following:
December 31,
------------------------
1998 1997
------------ ----------
Gross gains $ -- $ --
Gross losses -- (600)
------------ ----------
Net realized losses $ -- $ (600)
============ ==========
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
December 31,
------------------------------
1998 1997
------------- -------------
Commercial, financial, and agricultural $ 28,124,000 $ 24,768,799
Real estate - construction 33,576,000 35,840,760
Real estate - mortgage 66,740,000 39,560,475
Consumer instalment and other 7,478,169 6,946,810
------------- -------------
135,918,169 107,116,844
Deferred loan fees and costs (293,160) (387,074)
Allowance for loan losses (1,626,699) (1,379,678)
------------- -------------
Loans, net $133,998,310 $105,350,092
============= =============
Changes in the allowance for loan losses are as follows:
December 31,
-----------------------------
1998 1997
----------- -----------
Balance, beginning of year $ 1,379,678 $ 1,094,621
Provision for loan losses 298,000 444,342
Loans charged off (68,566) (188,120)
Recoveries of loans previously
charged off 17,587 28,835
----------- -----------
Balance, end of year $ 1,626,699 $ 1,379,678
=========== ===========
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3 LOANS AND ALLOWANCE FOR LOAN LOSSES (Continued)
The total recorded investment in impaired loans was $39,971 and
$41,501 at December 31, 1998 and 1997, respectively. There were no
impaired loans that had related allowances for loan losses
determined in accordance with SFAS No. 114 ("Accounting by Creditors
for Impairment of a Loan") at December 31, 1998 and 1997. The
average recorded investment in impaired loans for 1998 and 1997 was
$97,177 and $191,133, respectively. Interest income recognized on
impaired loans for cash payments received was not material for the
years ended December 31, 1998 and 1997.
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, 1998 are as follows:
Balance, beginning of year $5,669,724
Advances 1,570,804
Repayments (1,312,528)
-----------
Balance, end of year $5,928,000
===========
NOTE 4 PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31,
-------------------------
1998 1997
----------- -----------
Land $ 2,184,995 $ 1,470,790
Buildings 3,887,711 3,887,711
Equipment 1,588,765 1,354,770
Construction in progress, estimated
cost to complete $1,500,000 73,415 --
----------- -----------
7,734,886 6,713,271
Accumulated depreciation (1,896,125) (1,606,288)
----------- -----------
$ 5,838,761 $ 5,106,983
=========== ===========
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5 DEPOSITS
At December 31, 1998, the scheduled maturities of time deposits are
as follows:
1999 $ 69,455,690
2000 14,586,483
2001 6,237,037
2002 765,535
2003 1,854,049
Thereafter 119,314
------------
$ 93,018,108
============
NOTE 6 EMPLOYEE BENEFIT PLANS
The Company has a 401(k) retirement plan covering substantially all
employees. Contributions to the plan charged to expense during 1998
and 1997 amounted to $52,951 and $47,044, respectively.
The Company implemented deferred compensation agreements in 1997 for
certain of its key officers. Amounts charged to expense under these
agreements totaled $24,000 and $67,456 for the years ended at
December 31, 1998 and 1997, respectively.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 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, 1998, 140,690 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, 1998, there were no options available
to grant under this plan.
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,
---------------------------------------
1998 1997
------------------- ------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Number Price Number Price
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Under option, beginning of year 452,096 $ 6.44 347,530 $ 4.96
Granted 43,010 13.98 157,900 9.11
Exercised (9,314) 7.05 (46,668) 4.46
Terminated (29,894) 9.80 (6,666) 6.50
-------- --------
Under option, end of year 455,898 6.92 452,096 6.44
======== ========
Exercisable, end of year 395,599 6.13 371,530 5.92
======== ========
Weighted-average fair value of
options granted during the year 5.65 5.02
======== ========
</TABLE>
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 STOCK OPTIONS (Continued)
Under Option, End of Year
-------------------------------------------------------------
Weighted-
Average
Weighted- Remaining
Average Contractual
Range of Exercise Life in
Number Prices Price Years
---------- ---------------- ---------- -----------
218,490 $ 3.95 - 5.29 $ 4.55 6
198,958 $ 6.20 - 9.25 $ 8.15 8
38,450 $ 12.50 - 16.50 $ 13.95 10
---------
455,898
=========
Options Exercisable, End of Year
-------------------------------------------------------------
218,490 $ 3.95 - 5.29 $ 4.55 6
177,109 $ 6.20 - 9.25 8.08 8
---------
395,599
=========
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, 1998 and 1997.
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:
December 31, 1998
-----------------------------------
Basic
Earnings Diluted
Net Per Earnings
Income Share Per Share
---------- --------- ----------
As reported $2,471,194 $ 0.94 $ 0.86
Stock-based compensation,
net of related tax effect (28,846) (0.01) (0.01)
---------- --------- ----------
As adjusted $2,442,348 $ 0.93 $ 0.85
========== ========= ==========
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7 STOCK OPTIONS (Continued)
December 31, 1997
-----------------------------------
Basic
Earnings Diluted
Net Per Earnings
Income Share Per Share
---------- --------- ----------
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
========== ========= ==========
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:
December 31,
-----------------
1998 1997
-------- -------
Risk-free interest rate 5.12% 5.97%
Expected life of the options 7 years 7 years
Expected dividends (as a percent of
the fair value of the stock) 1.71% 1.98%
Volatility 37.79% 18.50%
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 INCOME TAXES
Income tax expense consists of the following:
December 31,
-------------------------
1998 1997
----------- -----------
Current $1,269,848 $1,187,584
Deferred (41,072) (67,390)
----------- -----------
Income tax expense $1,228,776 $1,120,194
=========== ===========
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,
---------------------------------------------------------
1998 1997
-------------------------- --------------------------
Amount Percent Amount Percent
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income taxes at statutory
rate $ 1,257,990 34% $ 1,117,531 34%
Tax-exempt interest (75,555) (2) (61,943) (2)
State income taxes 86,780 3 52,663 1
Other items, net (40,439) (2) 11,943 --
----------- ----------- ----------- -----------
Income tax expense $ 1,228,776 33% $ 1,120,194 33%
=========== =========== =========== ===========
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8 INCOME TAXES (Continued)
The components of deferred income taxes are as follows:
December 31,
------------------------
1998 1997
---------- -----------
Deferred tax assets:
Loan loss reserves $ 396,103 $ 359,239
Deferred loan fees and costs 90,770 127,776
---------- -----------
486,873 487,015
---------- -----------
Deferred tax liabilities:
Depreciation 60,558 78,260
Securities available-for-sale 71,547 55,074
Other 35,316 58,828
---------- -----------
167,421 192,162
---------- -----------
Net deferred tax assets $ 319,452 $ 294,853
========== ===========
NOTE 9 EARNINGS PER COMMON SHARE
The following is a reconciliation of net income and weighted-average
shares outstanding used in determining basic and diluted earnings
per common share (EPS):
Year Ended December 31, 1998
----------------------------------------
Net Weighted-Average Per share
Income Shares Amount
----------- ------------- ----------
Basic EPS $ 2,471,194 2,628,868 $ 0.94
==========
Effect of Dilutive
Securities
Stock options - 247,016
----------- ------------
Diluted EPS $ 2,471,194 2,875,884 $ 0.86
=========== ============ ==========
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9 EARNINGS PER COMMON SHARE (Continued)
Year Ended December 31, 1997
---------------------------------------
Net Weighted-Average Per share
Income Shares Amount
----------- ------------- ---------
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
=========== ============ =========
NOTE 10 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,
--------------------------
1998 1997
----------- ------------
Commitments to extend credit $42,951,000 $ 35,017,000
Standby letters of credit 436,000 384,000
----------- ------------
$43,387,000 $ 35,401,000
=========== ============
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 10 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.
Year 2000 Disclosures
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year.
Systems that do not properly recognize the year "2000" could
generate erroneous data or cause systems to fail. The Company is
heavily dependent on computer processing and telecommunication
systems in the daily conduct of business activities. In addition,
the Company must rely on intermediaries, vendors and customers to
appropriately modify their systems in order that all may continue
normal operations and operate without significant disruptions. The
Company has conducted a review of its computer systems to identify
the systems that could be affected by the Year 2000 issue. The
Company presently believes that, with modifications to its computer
systems and conversions to new systems, the Year 2000 issue will not
pose significant operational problems for the Company or have a
material adverse effect on future operating results. However,
absolute assurance cannot be given that; (1) the modifications and
conversions will remedy all deficiencies, (2) failure of any of the
Company's systems will not have a material impact on operations, or
(3) failure of any other companies' systems with whom the Company
conducts business will not have a material impact on operations.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. 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-four 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 $2,000,000 for
The Westside Bank & Trust Company and $1,700,000 for The Eastside
Bank & Trust Company.
NOTE 12 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, 1998, approximately $1,307,000 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, 1998, the Company and the Banks meet all capital
adequacy requirements to which they are subject.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 REGULATORY MATTERS (Continued)
As of December 31, 1998, 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.
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes Provisions
----------------- ----------------- ---------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- -------- ------- ------
(Dollars in Thousands)
----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31,
1998:
Total Capital
(to Risk Weighted
Assets):
Consolidated $ 19,663 12.19% $12,908 8.00% $16,135 10.00%
Westside $ 10,727 13.35% $ 6,428 8.00% $ 8,035 10.00%
Eastside $ 8,668 10.69% $ 6,488 8.00% $ 8,110 10.00%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated $ 18,037 11.18% $ 6,454 4.00% $ 9,681 6.00%
Westside $ 9,911 12.34% $ 3,214 4.00% $ 4,821 6.00%
Eastside $ 7,858 9.69% $ 3,244 4.00% $ 4,866 6.00%
Tier I Capital
(to Average
Assets):
Consolidated $ 18,037 9.01% $ 8,012 4.00% $10,015 5.00%
Westside $ 9,911 8.75% $ 4,529 4.00% $ 5,661 5.00%
Eastside $ 7,858 9.02% $ 3,483 4.00% $ 4,354 5.00%
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12 REGULATORY MATTERS (Continued)
<TABLE>
<CAPTION>
To Be Well
Capitalized
Under
Prompt
For Capital Corrective
Adequacy Action
Actual Purposes 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>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 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 models. Those models
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, 1998 and 1997. 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 Resale 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 available quoted market
prices. The carrying values of equity securities with no readily
determinable fair value approximate 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 models, using current market interest rates
offered for loans with similar terms to borrowers of similar credit
quality. Fair values for impaired loans are estimated using
discounted cash flow models or based on the fair value of the
underlying collateral.
F-30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 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 models, using current market interest
rates offered on certificates with similar remaining maturities.
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.
F-31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The estimated fair values of the Company's financial instruments
were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from
banks,
interest-bearing
deposits in
banks , Federal
funds sold
and securities
purchased
under resell
agreements $ 24,591,204 $ 24,591,204 $ 35,267,810 $ 35,267,810
Securities
available-for-sale 34,679,055 34,679,055 18,963,075 18,963,075
Securities
held-to-maturity -- -- 2,248,974 2,238,285
Loans 133,998,310 135,630,724 105,350,092 106,584,761
Accrued interest
receivable 1,059,549 1,059,549 927,091 927,091
Financial liabilities:
Deposits 181,427,928 182,515,590 151,322,622 151,548,714
Securities sold under
repurchase
agreements 593,962 593,962 354,061 354,061
Accrued interest
payable 577,451 577,451 602,097 602,097
</TABLE>
NOTE 14 BUSINESS COMBINATION
On December 30, 1998, the Company entered into a Merger Agreement
with Georgia Bancshares, Inc. ("GBI") of Tucker, Georgia. Under this
agreement, GBI will merge with and into the Company. Immediately
prior to the consummation of the merger, the Company intends to
declare a 28.58% stock dividend payable to Company stockholders.
Upon consummation of the merger, each share of GBI stock will be
converted into and exchanged for the right to receive one share of
Company common stock. Consummation is subject to certain conditions,
including regulatory and stockholder approval.
F-32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 15 SUPPLEMENTAL FINANCIAL DATA
Components of other operating income and expenses in excess of 1% of
total revenue are as follows:
December 31,
------------------------
1998 1997
---------- ----------
Other income:
SBA commission income $ 159,625 $ 171,465
Mortgage origination fee income 216,880 69,366
Other expense:
Data processing 254,754 212,179
Directors fees 253,450 182,400
NOTE 16 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, 1998 and 1997:
CONDENSED BALANCE SHEETS
1998 1997
------------ -----------
Assets
Cash $ 195,139 $ 274,125
Investment in subsidiaries 17,959,940 15,824,662
Other assets 22,300 46,623
----------- -----------
Total assets $18,177,379 $16,145,410
=========== ===========
Liabilities $ - $ 25,000
Stockholders' equity 18,177,379 16,120,410
----------- -----------
Total liabilities and stockholders' equity $18,177,379 $16,145,410
=========== ===========
F-33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF INCOME
1998 1997
----------- -----------
Income, dividends from subsidiaries $ 512,738 $ 1,171,695
----------- -----------
Expenses
Merger expenses 27,697 --
Legal and professional 22,381 24,338
Other expense 180,946 180,663
----------- -----------
Total expenses 231,024 205,001
----------- -----------
Income before income tax benefits
and equity in undistributed
income of subsidiaries 281,714 966,694
Income tax benefits (87,188) (70,366)
----------- -----------
Income before equity in
undistributed income
of subsidiaries 368,902 1,037,060
Equity in undistributed income of
subsidiaries 2,102,292 1,129,607
----------- -----------
Net income $ 2,471,194 $ 2,166,667
=========== ===========
F-34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 16 PARENT COMPANY FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
1998 1997
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,471,194 $ 2,166,667
Adjustments to reconcile net income to net
cash provided by operating activities:
Undistributed income of subsidiaries (2,102,292) (1,129,607)
Other operating activities (779) 15,988
----------- -----------
Net cash provided by operating
activities 368,123 1,053,048
----------- -----------
FINANCING ACTIVITIES
Dividends paid (512,738) (447,922)
Proceeds from exercise of stock options 65,629 208,199
Purchase of treasury stock -- (618,875)
----------- -----------
Net cash used in financing
activities (447,109) (858,598)
----------- -----------
Net increase (decrease) in cash (78,986) 194,450
Cash at beginning of year 274,125 79,675
----------- -----------
Cash at end of year $ 195,139 $ 274,125
=========== ===========
NOTE 17 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 year ended December 31, 1997 has been
adjusted for the increased number of shares of common stock after
giving effect to the stock split.
F-35
<PAGE>
Exhibit 10.14
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated as of January 5, 1998, by and between THE
EASTSIDE BANK & TRUST COMPANY, a Georgia bank (the "Employer"), and CHRISTOPHER
H. BURNETT a resident of Fulton County, Georgia (the "Officer").
WITNESSETH
WHEREAS, the Employer desires to employ the Officer as its President and
Chief Executive Officer and the Officer desires to be so employed on the terms
and conditions hereinafter set out.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the parties hereby agree as follows:
1. Employment . The Employer hereby employs the Officer and the Officer
hereby accepts such employment, upon the terms and conditions stated herein, as
the President and Chief Executive Officer of the Employer. The Officer shall
render such administrative and management services to the Employer as are
customarily performed by persons situated in a similar executive capacity. As
long as the Officer is President of the Employer he shall be elected to serve as
a member of its Board of Directors.
The Officer shall use his best efforts to carry out the responsibilities
associated with such positions and shall promote the business of the Employer
and perform such other duties as shall from time to time be reasonably
prescribed by the Directors of the Employer and First Sterling Banks, Inc., a
Georgia corporation, which is the parent corporation of the Employer (the
"Corporation").
2. Base Salary. The Employer shall pay the Officer during the term of this
Agreement as compensation for all services rendered by him to the Employer a
base salary in such amounts and at such intervals as shall be commensurate with
his duties and responsibilities hereunder. The Officer's initial base salary
will be $110,000 per annum. The Officer's base salary may be increased from time
to time to reflect the duties required of the Officer. In reviewing the
Officer's base salary the Boards of Directors of the Employer shall consider the
overall performance of the Officer and the service of the Officer rendered to
the Employer as well as increases in the cost of living, and may also provide
for performance or merit increases. Participation in the Employer's cash
incentive, deferred compensation, stock option, stock purchase, discretionary
bonus, pension, life insurance and other employee benefit plans and
participation in any fringe benefits shall not cause a reduction of the base
salary payable to the Officer. The Officer will be entitled to such customary
fringe benefits; vacation and sick leave as are consistent with the normal
practices and established policies of the Employer.
3. Management Incentives and Discretionary Bonuses. During the term of
this Agreement, the Officer shall be entitled, in an equitable manner based on
the terms of any bonus and incentive plans that have been approved, or may from
time to time be approved, by the Board of Directors, with all other key
management personnel of the Employer, to such incentives and discretionary
bonuses as may be authorized, declared and paid by the Board of Directors to the
Employer's key management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Officer's right to such
incentives and discretionary bonuses when and as declared by the Board.
4. Director Fees The Officer shall be compensated as a Director of
Employer at a rate established for meetings of the Board of Directors but he
shall not be eligible for additional compensation tied to attendance at meetings
of committees of the Board.
5. Participation in Retirement and Employee Benefit Plans: Fringe
Benefits. The Officer shall be entitled to participate in any plan relating to
incentive and deferred compensation, stock options, stock purchase, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other
<PAGE>
retirement or employee benefits that the Employer has adopted, or may from time
to time adopt, for the benefit of its executive employees and for employees
generally, subject to the eligibility rules of such plans.
The Officer shall also be entitled to participate in any other fringe benefits
which are now or may be or may become applicable to Employer's executive
employees, including the payment of reasonable expenses for attending annual and
periodic meetings of trade associations, and any other benefits which are
commensurate with the duties and responsibilities to be performed by the Officer
under this Agreement. Additionally, the Officer shall be entitled to such
vacation and sick leave as shall be established under uniform employee policies
promulgated by the Board of Directors. The Employer shall reimburse the Officer
for all out-of-pocket reasonable and necessary business expenses which the
Officer may incur in connection with his service on behalf of the Employer. The
Officer shall be paid an automobile allowance of $600 per month as long as he is
employed as President of the Employer.
6. Term and Termination.
(a) Tern. Unless earlier terminated as provided herein, the Officers
employment under this Agreement shall be for a continuing term (the
"Term") of one (1) year which shall be extended automatically (without
further action of the Employer or the Officer) each day for an additional
day so that the remaining term shall continue to be one (1) year- provided
that either party may at any time, by written notice to the other, fix the
Term to a finite term of one (1) year, without further automatic
extension, commencing with the date of such notice.
(b) Termination by Death or Disability. The Officer's employment under
this Agreement shall be terminated upon the death of the Officer, in which
event the Officer's estate shall be entitled to receive the compensation,
including incentive bonuses, due the Officer through the last day of the
calendar month in which the Officers death shall have occurred.
The Employer may terminate this Agreement upon the Officer's "Total
Disability." As used in this Agreement, "Total Disability" means any physical or
mental disorder that renders the Officer incapable of performing his normal
duties and services under this Agreement for a period of one hundred twenty
(120) days in any consecutive twelve (12) month period, as determined by a
licensed physician selected by mutual agreement of the Employer and the Officer
or the Officer's legal representative; provided that the Officer shall not be
considered totally disabled hereunder unless he is also determined to be totally
disabled under any long-term disability insurance coverage maintained by the
Employer. If this Agreement is terminated as a result of the Officer's "Total
Disability," the Officer's compensation hereunder shall terminate; provided that
compensation shall be paid in full up through the date when the Officer shall
start receiving payment under the Employer's long-term disability plan, and the
Officer shall then be paid in accordance with such long-term disability plans of
the Employer as may be in effect. The Officer's compensation, including
incentive bonuses, title and status shall continue during any such period of
disability until the date of termination except that the Employer may provide
disability insurance to cover the Officer during any part of such disability
period and the Employer's obligation for the Officer's compensation for any such
period shall be reduced by the amount of any such insurance proceeds which the
Officer receives.
(c) Termination by Officer. The Officers employment under this Agreement
may be terminated at any time by the Officer upon ninety (90) days prior
written notice to the Employer. Upon such termination, the Officer shall
be entitled to receive the base salary compensation and fringe benefits
payable to the Officer under this Agreement through the effective date of
such termination, and if the termination is a retirement of Officer from
the Employer with the consent of the Board, he shall be entitled to
receive any incentive bonus to which he is otherwise entitled.
(d) Termination for Cause. This Agreement may be terminated by the Board
of Directors of the Employer for "cause" for any of the following reasons:
2
<PAGE>
i) Willful failure of Officer to follow reasonable written
instructions or policies of the Board of Directors of the
Employer or the Corporation if such conduct is materially
damaging to the business of the Employer or the Corporation;
ii) gross negligence or willful misconduct of the Officer
materially damaging to the business of the Employer or the
Corporation;
iii) conviction of the Officer of a crime involving breach of
trust, moral turpitude, theft or fraud;
iv) the willful failure by the Officer to perform substantially
his duties other than any failure resulting from incapacity
due to physical or mental illness;
v) willful commission of (A) acts involving dishonesty or fraud
with respect to the Employer or the Corporation or (B) acts
causing substantial harm to the Employer or the Corporation;
vi) a willful misrepresentation by the Officer to the stockholders
of the Corporation or the Board of Directors of the Employer
or the Corporation which causes substantial injury to the
Employer, the Corporation or to the stockholders of the
Corporation; or
vii) a requirement by any state or federal authority regulating the
Employer or the Corporation that the Officer be removed from
his office as President of the Employer or Corporation.
For purposes of this Agreement, no act, or failure to act, on the part of the
Officer shall be considered "willful" unless done, or omitted to be done, by him
not in good faith and without reasonable belief that his action or omission was
in the best interest of the Employer, the Corporation and the stockholders of
the Corporation. The Employer shall notify the Officer in writing of the
specific reasons for the termination for "Cause" and the Officer will be allowed
thirty (30) days to reply in writing to the accusation before any termination
for "Cause". A vote of at least two-thirds (2/3) of the members of the Board of
the Employer or the Board of the Corporation shall be required to terminate the
Officer for cause. If the Employee is terminated for "Cause," he shall receive
only his salary and any other amounts due to him from the Employer (whether
pursuant to benefit plans or otherwise) through the date of termination and he
shall not be entitled to any incentive bonus for the year in question.
(e) Termination by Employer before Change in Control. Notwithstanding the
foregoing provisions of this Section 6, before a Change in Control (as
defined in Section 7 below) has occurred, the Employer may terminate the
employment of the Officer hereunder at any time during the term of this
Agreement upon ninety (90) days written notice to the Officer; provided,
however, that in the event of involuntary termination of the Officer's
employment under this Agreement before any Change in Control, the Officer
shall be paid his base salary and fringe benefits up through the date of
termination. In addition, the Employer shall pay, and the Officer shall
accept, in full settlement of all claims which the Officer shall have
against the Employer for contractual damages for breach of this Agreement,
the greater of (i) the severance payment offered by the Employer in such
notice of termination, or (ii) the following amounts:
A. a lump sum amount equal to fifty percent of the annual base
salary paid to the Officer over the previous twelve (12) month
period, plus
B. a lump sum amount equal to fifty percent of the annual
incentive cash bonus paid to the Officer over the previous twelve
(12) month period.
In addition, in the event of any such termination of the Officer's
employment under this Agreement, the Officer shall be entitled to participate
for the shorter of a period of six (6) months 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 and with the costs
of such benefits paid in the same manner as prior to this termination for a
period of ninety (90) days; provided, that in the event the Officer is employed
by another employer before the end of such six-month period and
3
<PAGE>
the new employer does not provide the same level of welfare benefits that the
Officer is entitled to under this paragraph, then the Employer shall provide
such supplemental benefits as necessary to ensure that the Officer has the same
level of welfare benefit coverage that he is entitled to under this paragraph
for such six-month period.
7. Change in Control.
(a) The Officer's employment with the Employer may be terminated
by the Officer for "Good Reason" (as defined below), upon
delivery of a written notice of termination to the Employer
within a ninety (90) day period beginning on the thirtieth
(30th) day after any occurrence of a "Change in Control" (as
defined below) or within a ninety (90) day period beginning on
the one (1) year anniversary of the occurrence of a Change in
Control. In such event, the Officer shall be entitled to
receive his base compensation, incentive bonus and fringe
benefits and participate in all welfare benefit plans up
through the date of termination. In addition, the Officer
shall receive the following amounts:
A. a lump sum amount equal to the annual base salary paid
to the Officer over the previous twelve (12) month
period, plus
B. a lump sum amount equal to the annual incentive cash
bonus paid to the Officer over the previous twelve (12)
month period.
(b) "Good Reason" shall mean the occurrence after a Change in
Control (as defined below) of any of the events or conditions
described in subsections (i) through (viii) hereof:
i) a change in the Officers status, title, position or
responsibilities (including reporting responsibilities) which,
in the Officer's reasonable judgment, represents an adverse
change from his status, title, position or responsibilities as
in effect at any time within ninety (90) days preceding the
date of a Change in Control or at any time thereafter; the
assignment to the Officer of any duties or responsibilities
which, in the Officer's reasonable judgment, are inconsistent
with his status, title, position or responsibilities as in
effect at any time within ninety (90) days preceding the date
of a Change in Control or at any time thereafter; any removal
of the Officer from or failure to reappoint or reelect him to
any of such offices or positions, except in connection with
the termination of his employment for Total Disability, Cause,
as a result of his death or by the Officer other than for Good
Reason, or any other change in condition or circumstances that
in the Officer's reasonable judgment makes it materially more
difficult for the Officer to carry out the duties and
responsibilities of his office then existing at any time
within ninety (90) days preceding the date of Change in
Control or at any time thereafter;
ii)a reduction in the Officer's base salary or any failure to
pay the Officer any compensation or benefits to which he is
entitled within five (5) days of the date due;
iii)the Corporation or the Employer requiring the Officer to
be based at any place outside a 30-mile radius from the
executive offices occupied by the Officer immediately prior to
the Change in Control, except for reasonably required travel
on the Employer's business which is not materially greater
than such travel requirements prior to the Change in Control;
iv)the failure by the Employer to (A) continue in effect
(without reduction in benefit level and/or reward
opportunities) any material compensation or employee benefit
plan in which the Officer was participating at any time within
ninety (90) days preceding the date of a Change in Control or
at any time thereafter, unless such plan is replaced with a
plan that provides substantially equivalent compensation or
benefits to the Officer or (B) provide the Officer with
compensation and benefits, in the aggregate, at least equal
(in terms of benefit levels and/or reward opportunities) to
those provided for under each other employee benefit plan,
program and practice in which the Officer was participating at
any time within ninety (90) days preceding the date of a
Change in Control or at any time thereafter;
4
<PAGE>
v)the insolvency or the filing (by any party, including he
Corporation or the Employer) of a petition for bankruptcy of
the Corporation or the Employer, which petition is not
dismissed within sixty (60) days;
vi)any material breach by the Employer of any provision of
this Agreement;
vii)any purported termination of the Officer's employment for
Cause by the Employer which does not comply with the terms of
this Agreement; or
viii)the failure of the Employer to obtain an agreement
satisfactory to the Officer from any successors and assigns to
assume and agree to perform this Agreement, as contemplated in
Section 10 hereof
Any event or condition described in clause (i) through (viii)above which occurs
prior to a Change in Control but which the Officer reasonably demonstrates (A)
was at the request of a "Third Party" (as defined below) or (B) otherwise arose
in connection with, or in anticipation of, a Change in Control which actually
occurs, shall constitute Good Reason for purposes of this Agreement,
notwithstanding that it occurred prior to the Change in Control. The Officer's
right to terminate his employment for Good Reason shall not be affected by his
incapacity due to physical or mental illness.
(c) A "Change in Control" shall mean the occurrence during the term
of this Agreement of any of the following events:
i) an acquisition (other than directly from the Corporation)
of any voting securities of the Corporation (the "Voting
Securities") by any "Person" (as the term is used for purposes of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934 (the "
1934 Act")) immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-2 promulgated under the
1934 Act) of 20% or more of the combined voting power of the
Corporation's then-outstanding Voting Securities; provided, however,
that in determining whether a Change in Control has occurred, Voting
Securities which are acquired in a "Non-Control Acquisition" (as
hereinafter defined) shall not constitute an acquisition which would
cause a Change in Control. A "Non-Control Acquisition" shall mean an
acquisition by (1) an employee benefit plan (or a trust forming a
part thereof) maintained by (x) the Corporation or the Employer or
(y) any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is owned
directly or indirectly by the Corporation or the Employer (a
"Subsidiary"), (2) the Corporation, Employer or any Subsidiary, or
(3) any Person in connection with a "Non-Control Transaction" (as
hereinafter defined).
ii) The individuals who, as of the date of this Agreement, are
members of the Board of Directors of the Corporation (the "Incumbent
Board") cease for any reason to constitute at least two-thirds of
such board, provided, however, that if the election, or nomination
for election by the Corporation's stockholders, of any new director
was approved by a vote of at least two-thirds of the Incumbent
Board, such new director shall, for purposes of this Agreement, be
considered as a member of the Incumbent Board; provided, further ,
however , that no individual shall be considered a member of the
Incumbent Board if such individual initially assumed office as a
result of either an actual or threatened "Election Contest" (as
described in Rule 14a- 11 promulgated under the 1934 Act) or other
actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Incumbent Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or
settle any Election Contest or Proxy Contest; or
iii) Approval by stockholders of the Corporation of:
A. A merger, consolidation or reorganization
involving the Corporation, unless
(1) the stockholders of the Corporation
immediately before such merger, consolidation or
reorganization, own, directly or indirectly, immediately
following such merger, consolidation or reorganization,
at least two-thirds of the combined voting power of the
outstanding voting securities of the corporation
resulting from such merger or
5
<PAGE>
consolidation or reorganization (the "Surviving
Corporation") in substantially the same proportion as
their ownership of the Voting Securities immediately
before such merger, consolidation on reorganization; and
(2) the individuals who were members of the
Incumbent Board immediately prior to the execution of
the agreement providing for such merger, consolidation
or reorganization constitute at least two-thirds of the
members of the board of directors of the Surviving
Corporation.
(A transaction described in clauses (1) and (2) shall
herein be referred to as a "Non-Control Transaction.")
B. A complete liquidation or dissolution of the
Corporation; or
C. An agreement for the sale or other disposition of
all or substantially all of the assets of the
Corporation to any Person (other than a transfer
to a Subsidiary).
iv) Notwithstanding anything contained in this Agreement to
the contrary, if the Officer's employment is terminated prior
to a Change in Control and the Officer reasonably demonstrates
that such termination (A) was at the request of a third party
who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control and who effectuates a
Change in Control (a "Third Party") or (B) otherwise occurred
in connection with, or in anticipation of, a Change in Control
which actually occurs, then for all purposes of this
Agreement, the date of a Change in Control with respect to the
Officer shall mean the date immediately prior to the date of
such termination of the Officer's employment.
(d) "Successors and Assigns" shall mean a corporation or other
entity acquiring all or substantially all of the assets and
business of the Corporation (including this Agreement),
whether by operation of law or otherwise.
(e) After a Change in Control has occurred, in the event that the
Officer is terminated without "cause" (as defined in paragraph
6(d) above), he shall be paid his base salary and fringe
benefits up through the date of termination. In addition, the
Employer shall pay, and the Officer shall accept, in full
settlement of all claims which the Officer shall have against
the Employer for contractual damages for breach of this
Agreement, the following amounts:
A. a lump sum amount equal to the annual base salary paid
to the Officer over the previous twelve (12) month
period, plus
B. a lump sum amount equal to the annual incentive cash
bonus paid to the Officer over the previous twelve (12)
month period.
In addition, in the event of any such termination of the Officer's employment,
the Officer shall be entitled to participate for the shorter of a period of
twelve (12) months 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 and with the costs of such benefits paid in
the same manner as prior to this termination for a period of ninety (90) days;
provided, that in the event the Officer is employed by another employer before
the end of such 12-month period and the new employer does not provide the same
level of welfare benefits that the Officer is entitled to under this paragraph,
then the Employer shall provide such supplemental benefits as necessary to
ensure that the Officer has the same level of welfare benefit coverage that he
is entitled to under this paragraph for such 12-month period.
6
<PAGE>
8. Loyalty, Noncompetition: Confidentiality.
(a) The Officer shall devote his full efforts and entire business
time to the performance of the Officer's duties and responsibilities under
this Agreement, except during periods of illness or periods of vacation
and leaves of absence consistent with Employer policy. The Officer may
devote reasonable periods to service as a director or advisor to other
organizations, to charitable and community activities, and to managing his
personal investments, provided that such activities to not materially
interfere with the performance of his duties hereunder and are not in
conflict or competitive with, or adverse to, the interests of the Employer
or the Corporation.
(b) In consideration of employment of the Officer by the Employer
hereunder during the term of this Agreement, and for a period of six (6)
months after termination of his employment for any reason, the Officer
agrees that he will not, within any county in which the Employer or
Corporation, any financial institution subsidiary of the Corporation, or
any subsidiary of any such financial institution subsidiary maintains
offices, or directly or indirectly own, manage, operate, join, control or
participate in the management, operation or control of or be employed as
an executive or manager by any business which competes with the Employer
or the Corporation or any of the other subsidiaries of the Employer or the
Corporation, without the prior written consent of the Employer and the
Corporation. Notwithstanding the foregoing, the Officer shall be free,
without such consent, to purchase or hold as an investment or otherwise up
to five percent (5%) of the outstanding stock or other securities of any
corporation which has its securities publicly traded on any national
securities exchange or through the over-the-counter market.
(c) The Officer will hold in strict confidence, during the term of
this Agreement and at all times thereafter, all knowledge or information
of a confidential nature with respect to the business of the Employer and
the Corporation and all subsidiaries of the Employer and the Corporation
received by the Officer during the term of this Agreement and will not
disclose or make use of such information without the prior written consent
of the Employer and the Corporation.
The Officer acknowledges that it would not be possible to ascertain the
amount of monetary damages in the event of a breach by the Officer under the
provisions of this Section 8. The Officer agrees that, in the event of a breach
of this Section, injunctive relief enforcing the terms of this Section is an
appropriate remedy.
9. Standards. The Officer shall perform his duties and responsibilities
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and the
Employees policies and procedures, and as may be established from time to time
by the Board. The Employer shall provide the working facilities and staff
necessary for the Officer to perform his duties.
10. Successors and Assigns
(a) This Agreement shall inure to the benefit of, and be binding
upon, any corporate or other successor or assign of the
Employer which shall acquire, directly or indirectly by
merger, share exchange, consolidation, purchase or otherwise,
all or substantially a of the assets of the Employer.
(b) Because the Employer is contracting for the unique and
personal skills of the Officer, the Officer shall be precluded
from assigning or delegating his rights or duties hereunder
without first obtaining the written consent of the Employer.
11. Modification, Waiver Amendments. No provision of this Agreement may be
modified, waived or discharged unless such waiver, modification or discharge is
agreed to in writing, signed by the Officer and on behalf of the Employer by
such Officer as may be specifically designated by the Board. No waiver by either
party hereto at any time of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No amendments or
additions to this Agreement shall be binding unless in writing and signed by
both parties, except as herein otherwise provided.
7
<PAGE>
12. Applicable Law This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise, by the
laws of the state of Georgia.
13. Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validly or enforceability of the other provisions hereof.
14. Fees and Expenses The Employer shall pay all legal fees and related
expenses (including but not limited to the costs of experts, accountants and
counsel) incurred by the Officer as they become due as a result of (a) the
Officer's termination of employment (including all such fees and expenses, if
any, incurred in contesting or disputing any such termination of employment) and
(b) the Officer seeking to obtain or enforce any right or benefit provided by
this Agreement-, provided, however , that the circumstances set forth in clauses
(a) and (b) occurred on or after a Change in Control.
IN WITNESS WHEREOF, the parties have executed this Agreement under seal as
of the day and year first above written.
EMPLOYER:
THE EASTSIDE BANK TRUST COMPANY
SEAL]
Attest:
BY:
Secretary
OFFICER
Christopher H. Burnett
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from financial
statements for period ending December 31,1998 and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,996,921
<INT-BEARING-DEPOSITS> 31,283
<FED-FUNDS-SOLD> 17,563,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,679,055
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 135,625,009
<ALLOWANCE> 1,626,699
<TOTAL-ASSETS> 201,127,134
<DEPOSITS> 181,427,928
<SHORT-TERM> 593,962
<LIABILITIES-OTHER> 927,865
<LONG-TERM> 0
0
0
<COMMON> 12,416,033
<OTHER-SE> 6,655,054
<TOTAL-LIABILITIES-AND-EQUITY> 201,127,134
<INTEREST-LOAN> 12,215,217
<INTEREST-INVEST> 1,501,410
<INTEREST-OTHER> 1,471,828
<INTEREST-TOTAL> 15,188,455
<INTEREST-DEPOSIT> 6,548,954
<INTEREST-EXPENSE> 6,574,349
<INTEREST-INCOME-NET> 8,614,106
<LOAN-LOSSES> 298,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,666,906
<INCOME-PRETAX> 3,699,970
<INCOME-PRE-EXTRAORDINARY> 3,699,970
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,471,194
<EPS-PRIMARY> .94
<EPS-DILUTED> .86
<YIELD-ACTUAL> 5.00
<LOANS-NON> 39,971
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,379,678
<CHARGE-OFFS> 68,667
<RECOVERIES> 17,688
<ALLOWANCE-CLOSE> 1,626,699
<ALLOWANCE-DOMESTIC> 1,626,699
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
