<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Mark One
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-------------
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _________________ to ______________
Commission File Number: 000-25128
First Sterling Banks, Inc.
--------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Georgia 58-2104977
--------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
Post Office Box 2147
Marietta, Georgia 30061
--------------------------------------------------------------------------------
(Address of principal executive officers)
770-499-2265
--------------------------------------------------------------------------------
(Issuer's Telephone Number)
Westside Financial Corporation
P. O. Box 2147
Marietta, GA 30061
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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
-- --
The number of shares outstanding of each of the issuer's only class of common
stock, as of July 31, 2000 13,869,552
----------
1
<PAGE>
FIRST STERLING BANKS, INC.
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
Part I. Financial Information
Item I. Condensed Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Income
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2000 and 1999 and
Six Months Ended June 30, 2000 and 1999 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-14
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
FIRST STERLING BANKS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 46,766,298 $ 35,822,324
Interest-bearing deposit in banks 979,080 1,733,612
Investment securities available for
sale, at estimated market value 102,181,337 96,643,976
Investment securities held to maturity
(Fair Value of $15,058,168 and $15,182,297) 15,460,780 15,541,492
Other investments 2,612,500 2,391,756
Federal funds sold and securities purchased
under agreement to resell 37,920,000 35,620,000
Mortgage loans held for sale 1,354,477 1,356,664
Loans 680,321,435 630,990,126
Less allowance for loan losses 10,190,966 9,317,788
----------------- ------------------
Loans, net 670,130,469 621,672,338
Premises and equipment, net 26,175,181 26,666,959
Other real estate owned 1,015,009 899,400
Accrued interest receivable 5,842,914 5,690,222
Goodwill and other intangible assets 1,164,917 1,384,300
Other assets 3,447,723 6,342,498
----------------- ------------------
Total assets $ 915,050,685 $ 851,765,541
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 154,169,827 $ 124,932,088
Interest-bearing demand 161,781,322 178,966,344
Savings 42,264,152 41,481,575
Time deposits greater than $100,000 95,733,616 91,625,058
Time deposits less than $100,000 309,587,625 269,223,566
----------------- ------------------
Total deposits 763,536,542 706,228,631
Federal funds purchased and securities sold
under agreement to repurchase 13,627,822 18,872,722
Accrued interest payable 3,635,965 3,025,862
Federal Home Loan Bank advances 54,135,000 49,142,500
Other liabilities 1,691,328 1,161,874
----------------- ------------------
Total liabilities 836,626,657 778,431,589
----------------- ------------------
STOCKHOLDERS' EQUITY
Common stock, no par value, 50,000,000 shares authorized;
13,869,552 shares outstanding 21,029,970 20,866,512
Retained earnings 60,781,878 56,300,373
Treasury stock, at cost (169,082 shares) (1,033,875) (1,033,875)
Accumulated other comprehensive income (loss) (2,353,945) (2,799,058)
----------------- -------------------
Total stockholders' equity 78,424,028 73,333,952
----------------- ------------------
Total liabilities and stockholders equity $ 915,050,685 $ 851,765,541
================= ==================
</TABLE>
3
<PAGE>
FIRST STERLING BANKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June June
2000 1999 2000 1999
------------------------------- -------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and fees on loans $ 17,096,054 $ 13,696,199 $ 32,970,746 $ 26,519,434
Interest on investment securities:
Taxable 1,496,887 1,217,868 2,980,714 2,583,641
Nontaxable 262,243 321,166 518,227 542,566
Federal funds sold 329,238 127,587 566,944 289,105
Interest on other securities 52,612 24,719 92,842 64,595
Interest on securities purchased under
agreement to resell 79,745 172 209,410 1,899
Interest on interest-bearing deposits 13,314 5,251 36,044 7,535
------------- ------------- ------------- -------------
Total interest income 19,330,093 15,392,962 37,374,927 30,008,775
------------- ------------- ------------- -------------
INTEREST EXPENSE
Interest on demand & money market 1,173,901 912,684 2,246,518 1,807,753
Interest on savings 261,914 272,457 496,201 542,967
Interest on time deposits over 100,000 1,476,514 825,371 2,698,964 2,100,943
Interest on time deposits under 100,000 4,144,539 3,348,090 7,928,602 6,252,740
Interest on federal funds purchased and
securities sold under agreement to
repurchase 177,588 119,042 245,912 153,885
Other interest expense 7,103 6,538 11,039 13,076
Interest on FHLB advances 755,514 324,891 1,495,313 579,426
------------- ------------- ------------- -------------
Total interest expense 7,997,073 5,809,073 15,122,549 11,450,790
------------- ------------- ------------- -------------
NET INTEREST INCOME 11,333,020 9,583,889 22,252,378 18,557,985
PROVISION FOR LOAN LOSSES 454,000 520,000 1,004,000 955,000
------------- ------------- ------------- -------------
Net interest income after
provision for loan losses 10,879,020 9,063,889 21,248,378 17,602,985
------------- ------------- ------------- -------------
OTHER OPERATING INCOME
Service charges on deposit accounts 1,147,723 923,080 2,286,741 1,892,021
Gain on sale of loans 10,252 17,801 37,054 24,915
Loss on investment transactions (512,837) (650) (512,837) (3,982)
Gain (loss) on sale of premises &
equipment 25,004 (2,315) 27,771 345,958
Other income 798,875 836,271 1,633,862 1,617,449
------------- ------------- ------------- -------------
Total other income 1,469,017 1,774,187 3,472,591 3,876,361
------------- ------------- ------------- -------------
OTHER OPERATING EXPENSES
Salaries and other compensation 3,595,763 3,377,248 6,992,716 6,640,686
Employee benefits 525,367 524,458 1,141,455 1,076,394
Occupancy and equipment 1,076,700 1,022,103 2,169,125 1,952,962
Directors fees 104,400 113,365 197,350 215,297
Merger expenses 973,457 136,744 973,457 265,519
Amortization of intangibles 109,692 109,691 219,383 219,383
Other operating expense 1,908,943 2,033,035 3,913,530 3,830,367
------------- ------------- ------------- -------------
Total operating expenses 8,294,322 7,316,644 15,607,016 14,200,608
------------- ------------- ------------- -------------
Income before income taxes 4,053,715 3,521,432 9,113,953 7,278,738
APPLICABLE INCOME TAXES 1,765,701 1,165,525 3,534,905 2,447,922
------------- ------------- ------------- -------------
NET INCOME $ 2,288,014 $ 2,355,907 $ 5,579,048 $ 4,830,816
============= ============= ============= =============
Basic earnings per common share- $ .17 $ .17 $ .40 $ .35
============= ============= ============= =============
Diluted earnings per common share $ .16 $ .17 $ .40 $ .34
============= ============= ============= =============
Cash dividends per share
of common stock $ .04 $ .04 $ .08 $ .08
============= ============= ============= =============
</TABLE>
4
<PAGE>
FIRST STERLING BANKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June June
2000 1999 2000 1999
---------------------------- -------------------------------
<S> <C> <C> <C> <C>
NET INCOME $ 2,288,014 $ 2,355,907 $ 5,579,048 $ 4,830,816
OTHER COMPREHENSIVE INCOME, NET OF TAX
Unrealized gains (losses) on securities
available for sale 774,631 (1,302,955) 445,112 (1,793,293)
------------ ------------- ------------- --------------
COMPREHENSIVE INCOME $ 3,062,645 $ 1,052,952 $ 6,024,160 $ 3,037,523
============ ============ ============= =============
</TABLE>
5
<PAGE>
FIRST STERLING BANKS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,579,048 $ 4,830,816
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 954,912 884,578
Provision for loan losses 1,004,000 955,000
Amortization of intangible assets 219,383 219,383
Gain on sale of loans 37,054 (119,528)
Gain on sale of other real estate -- (23,512)
Net accretion of loans purchased (41,766) (57,731)
Loss (gain) on sale of premises and equipment 27,771 (348,273)
Net decrease in mortgage loans held for sale 2,187 626,168
Vesting in restricted stock award plan 291,630 244,644
Increase in interest receivable (152,692) (363,885)
Increase in interest payable 610,103 235,480
Other prepaids, deferrals and accruals, net 3,842,273 (701,921)
--------------- -----------------
Net cash provided by operating activities 12,373,903 6,381,219
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of securities available for sale 2,252,041 27,767,390
Proceeds from maturities of securities held to maturity 1,371,788 427,790
Proceeds from sales of securities available for sale 14,605,975 --
Proceeds from sale of loans 886,364 282,157
Purchase of investment securities available for sale (22,421,127) (22,481,598)
Purchase of investment securities held to maturity (1,283,940) (3,722,280)
Purchase of other investments (220,744) (268,200)
Net increase (decrease) in federal funds sold (2,300,000) 10,159,000
Net increase (decrease) in interest-bearing deposits 754,532 (665,380)
Net increase in loans (50,617,500) (70,083,549)
Proceeds from sale of premises and equipment -- 943,722
Acquisitions (dispositions) of other real estate (115,609) 259,808
Capital expenditures (463,134) (2,722,218)
--------------- ----------------
Net cash used in investing activities (57,551,354) (60,103,358)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 57,307,911 34,420,345
Net increase in Federal Home Loan Bank advances 4,992,500 13,150,000
Net increase (decrease) in securities sold under agreement
to repurchase (5,244,900) 11,389,195
Dividend payments (1,097,544) (1,811,345)
Proceeds from exercise of stock options 163,458 82,099
--------------- ----------------
Net cash provided by financing activities 56,121,425 57,230,294
--------------- ----------------
Net increase in cash and due from banks 10,943,974 3,508,155
Cash and due from banks at beginning of year 35,822,324 31,362,821
--------------- ----------------
Cash and due from banks at end of period $ 46,766,298 $ 34,870,976
=============== ================
</TABLE>
6
<PAGE>
FIRST STERLING BANKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
Note 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of First Sterling Banks, Inc. have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statement presentation. In the
opinion of management, all adjustments (consisting solely of normal
recurring adjustments) considered necessary for a fair presentation
have been included.
The results of operations for the six-month period ended June 30,
2000 are not necessarily indicative of the results to be expected for
the year ending December 31, 2000.
Note 2. BUSINESS COMBINATION
On May 24, 2000, the Company effected a business combination and
merger with Main Street Banks Incorporated ("Main Street"). Under the
terms of the transaction, Main Street shareholders received 1.01
shares of First Sterling common stock for each share of Main Street
stock owned prior to the merger. The combination was accounted for as
a pooling of interests and, accordingly, all prior financial
statements have been restated to include the financial results of
Main Street.
The following table illustrates the Company's net interest income and
net income on a consolidated basis for period prior to the business
combinations discussed above:
<TABLE>
<CAPTION>
Six months ended
June 30,
2000 1999
---- ----
(dollars in thousands)
<S> <C> <C>
Net interest income:
First Sterling Banks, Inc., exclusive of pre-acquisition amounts $ 11,852 $ 6,962
Main Street Banks Incorporated (1) 10,400 11,596
---------- ---------
Total $ 22,252 $ 18,558
========== =========
Net income:
First Sterling Banks, Inc., exclusive of pre-acquisition amounts $ 1,981 $ 1,679
Main Street Banks Incorporated 3,598 3,152
---------- ---------
Total $ 5,579 $ 4,831
========== =========
</TABLE>
(1) 2000 amounts reflect the results of operations from January 1,
2000 through the effective merger date of May 24, 2000. Results
of operations for the period from May 25, 2000 through June 30,
2000 are included in First Sterling Banks, Inc. amounts.
7
<PAGE>
Note 3. CURRENT ACCOUNTING DEVELOPMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The effective date of this statement has been deferred
by SFAS No. 137 until fiscal years beginning after June 15, 2000.
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, 2001. 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 and qualifying as hedges, the gain or loss on the
derivatives must be recognized in earnings in the period of change.
For derivatives that are designated and qualify 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.
8
<PAGE>
Note 4. EARNINGS PER COMMON SHARE
The following is a reconciliation of net income (the numerator) and
weighted-average shares outstanding (the denominator) used in
determining basic and diluted earnings per common share (EPS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------------------------------
Net Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 2,288,014 13,815,955 $ 0.17
---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
Stock Options 257,340
---------------------------------------------------------------------------------------------------
Diluted EPS $ 2,288,014 14,073,295 $ 0.16
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------------------------------
Net Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 2,355,907 13,766,752 $ 0.17
---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
Stock Options 351,304
---------------------------------------------------------------------------------------------------
Diluted EPS $ 2,355,907 14,118,056 $ 0.17
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000
---------------------------------------------------------------------------------------------------
Net Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 5,579,048 13,807,776 $ 0.40
---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
Stock Options 281,433
---------------------------------------------------------------------------------------------------
Diluted EPS $ 5,579,048 14,089,209 $ 0.40
---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------------------------------------------------
Net Weighted
Income Average Shares Per Share
(Numerator) (Denominator) Amount
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS $ 4,830,816 13,766,029 $ 0.35
---------------------------------------------------------------------------------------------------
Effect of Dilutive Securities
Stock Options 344,095
---------------------------------------------------------------------------------------------------
Diluted EPS $ 4,830,816 14,110,124 $ 0.34
---------------------------------------------------------------------------------------------------
</TABLE>
Basic and diluted earnings per share for the three and six months ended June 30,
1999 have been restated for the merger with Main Street. Basic and diluted
earnings per share increased $0.00 and $0.01, respectively, for the three months
ended June 30, 1999 and $0.00 and $0.02, respectively, for the six months ended
June 30, 1999.
9
<PAGE>
Note 5. SECURITIES AVAILABLE-FOR SALE
Securities available-for-sale are securities which management
believes may be sold prior to maturity for liquidity or other reasons
and are reported at fair value, with unrealized gains and losses, net
of related income taxes, reported as a separate component of other
comprehensive income.
Note 6. LOANS
Loans are stated at unpaid principal balances, net of unearned income
and deferred loan fees. Interest is accrued only if deemed
collectible.
The following table represents the composition of the Banks' loan
portfolio according to the purpose of the loan and/or repayment
terms:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------------- ------------------
<S> <C> <C>
Commercial, financial and agricultural $ 174,925,770 $ 157,612,891
Real estate - construction and land
development 98,431,535 117,047,523
Real estate - mortgage 257,536,894 235,424,723
Real estate-other 70,137,378 67,563,792
Installment and other consumer 81,296,941 55,199,206
------------------- ------------------
682,328,518 632,848,135
------------------- ------------------
Net deferred loan fees (2,007,083) (1,858,009)
680,321,435 630,990,126
------------------- ------------------
Less allowance for loan losses (10,190,966) (9,317,788)
-------------------- -------------------
Net loans $ 670,130,469 $ 621,672,338
=================== ==================
</TABLE>
10
<PAGE>
FIRST STERLING BANKS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial position and
operating results of the Company and its bank subsidiaries, Westside Bank &
Trust Company, Eastside Bank & Trust Company, Community Bank of Georgia, and
Main Street Bank (collectively, "the Banks") during the periods included in the
accompanying consolidated financial statements.
FORWARD-LOOKING STATEMENTS
This discussion 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 and (vi) 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 1999.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's total assets have increased $63,285,144 or 7.43% since
December 1999. Total loans have increased 7.82% or $49,331,309 since December
1999. Total deposits have increased by 8.11% or $57,307,911.
Return on average equity (core earnings, excluding one time charges)
for the three months and six months ended June 30, 2000 was 19.43% and 18.94% on
average equity of $74,528,420 and $73,151,072 respectively. This compares to
14.61% and 15.14% on average equity of $68,422,899 and $67,910,693 respectively,
for the same periods in 1999.
Return on average assets (core earnings) for the three months and six
months ended June 30, 2000 was 1.65% and 1.60% on average assets of $879,325,085
and $866,706,440 respectively. This compares to 1.33% and 1.39% on average
assets of $753,414,913 and $738,263,172, respectively, for the same periods in
1999.
LIQUIDITY AND MARKET RISK SENSITIVITY
As of June 30, 2000, the liquidity ratios of the banks, as determined
under guidelines established by regulatory authorities, were satisfactory. The
Banks' primary sources of funds are increases in deposits, loan repayments,
sales and maturities of investment securities and net income. Several
alternative sources of funds are available, including the Federal Home Loan
Bank, the Federal Reserve Bank, other correspondent bank relationships and
membership in a national rate line service.
Market risk is defined as the risk of loss arising from adverse changes in
market interest rates and prices. In order to maintain acceptable net interest
income levels, interest rates, liquidity and maturities of the Company's assets
and liabilities need to be managed. In a decreasing rate environment earnings
are typically
11
<PAGE>
negatively impacted as the Company's rate sensitive assets generally reprice
faster than its rate sensitive liabilities thus an increase in interest rates
will typically have a positive impact on earnings. There have been no
significant changes in the Company's market risk exposure since December 31,
1999.
CAPITAL
At June 30, 2000, the capital ratios of the Company and the Banks were
adequate based on regulatory minimum capital requirements. The minimum capital
requirements for banks and bank holding companies require a leverage capital to
total assets ratio of at least 4%, core capital to risk-weighted assets ratio of
at least 4% and total capital to risk-weighted assets of 8%. The following table
reflects the Banks compliance with regulatory capital requirements at June 30,
2000:
<TABLE>
<CAPTION>
Bank Main Street Westside Bank Eastside Bank Community Bank
---- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Leverage capital ratio: 9.13% 9.05% 7.71% 8.76%
Risk based capital ratios:
Core capital 11.42% 11.13% 7.96% 9.62%
Total capital 12.67% 12.19% 8.99% 10.70%
</TABLE>
In order to support continued growth and expansion activities the
Company intends to maintain a strong capital position through active management.
ALLOWANCE FOR LOAN LOSS
The allowance for loan losses totaled $10,190,966 at June 30, 2000, an
increase of $873,178 from December 31, 1999. A provision for loan losses is
charged to operations based upon management's desire to provide adequately for
inherent risk in the loan portfolio. Management intends to continue maintaining
an adequate allowance for loan losses in relation to loans outstanding, based on
management's evaluation of the loan portfolio under prevailing economic
conditions, underlying collateral value securing loans, and such other factors
as management deems appropriate.
Activity in the allowance for loan losses for the six-month periods ended June
30, 2000 and June 30, 1999 follows:
<TABLE>
<CAPTION>
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Balance of reserve for loan losses at beginning of period $ 9,317,788 $ 8,217,313
Provision charged to operating expense 1,004,000 955,000
Recoveries:
Commercial, financial and agricultural 8,908 8,561
Real estate - construction and land development 13,000 --
Real estate - mortgage 75,400 46,569
Installment and other consumer 158,369 134,804
--------------- ----------------
Total recoveries $ 255,677 $ 189,934
--------------- ----------------
Charge offs:
Commercial, financial and agricultural 88,066 19,481
Real estate - construction and land development -- 5,000
Real estate - mortgage 19,497 73,185
Installment and other consumer 278,936 288,630
--------------- ----------------
Total charge offs 386,499 $ 386,296
--------------- ----------------
Net charge offs $ 130,822 $ 196,362
--------------- ----------------
Balance of reserve for loan losses at end of period $ 10,190,966 $ 8,975,951
=============== ================
</TABLE>
12
<PAGE>
Non accrual loans at June 30, 2000 totaled $1,189,526 or .17% of total
loans; this compares to $1,799,295 or .31% at June 30, 1999. The company owned
five foreclosed properties at June 30, 2000 carried on the books in other real
estate, totaling $1,015,009. The Company does not anticipate any material losses
associated with the disposal of these properties.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999
Net income for the quarter ended June 30, 2000 showed a slight decrease
of $67,983 or 2.88% compared to the same period in 1999. Recurring net operating
income, excluding onetime charges of $1,311,929, for the quarter ending June 30,
2000 was $3,599,943 an increase of $1,106,863 or 44.4% over recurring net income
of $2,493,080 for the same period in 1999. Onetime charges consisted of $973,457
in expenses related to the Main Street merger and $338,472 in after tax losses
on the sale of investment securities. Average earning assets for the quarter
ended June 30, 2000 increased $126,485,976 as compared to the same period in
1999, which coupled with the prime rate increase resulted in an increase of
$3,937,131or 25.58% in interest income. Average interest bearing liabilities
increased $104,526,798 or 18.9%, resulting in an increase in interest expense of
$2,187,999 or 37.7%. Net interest income increased $1,749,131 or 18.3%. The net
interest margin for the three months ending June 30, 2000 was 5.66% compared to
5.68% for the same period in 1999. Non interest income, excluding $512,837 and
$650 in losses on the sale of investment securities in 2000 and 1999,
respectively, increased $207,017 or 11.7% over the same period in 1999. Non
interest expense, excluding $973,457 and $136,744 in merger related expenses in
2000 and 1999, respectively, increased $140,965 or 2.0% over the same period in
1999.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999.
Net income for the six-month period ended June 30, 2000 increased
$748,231 or 15.5% over the same period in 1999. Recurring net operating
income, excluding onetime charges was $6,890,977 and increase of $1,792,013
or 35.1% over the same period in 1999. Net interest income for the six month
period ended June 30, 2000 was $22,252,378, a 19.9% increase over the same
period in 1999. Total average assets have increased $128,443,268 or 17.4%
over the same period in 1999. Average earning assets increased $130,791,711
or 19.4%, related interest income increased by $7,366,152 or 24.5%. Average
interest bearing liabilities increased $107,293,869 or 19.8%, resulting in an
increase in interest expense of $3,671,759 or 32.1% over the same period in
1999. Average borrowings from the Federal Home Loan Bank increased
$29,876,953 or 140.2%, the related increase in interest expense amounted to
$915,887. While the banks do offer deposit promotions from time to time,
management has found the Federal Home Loan Bank to be a cost-effective means
of funding. The net interest margin for the six months ending June 30, 2000
was 5.64% compared to 5.65% for the same period in 1999.
Non-interest income, excluding losses on the sale of investment
securities and gains on the sale of assets, increased $424,272 or 12.0% over the
same period in 1999. Service charge income increased $394,720 or 20.9%, this
increase is attributable to continued strong growth in deposit accounts, and
Main Street Bank instituted an automatic overdraft program in 1999 which
resulted in increased NSF fees.
The provision for loan losses increased $49,000 over the same period in
1999. Management feels the provision is adequate, given the loan growth the
company has experienced, as well as the history of loan losses the company has
experienced. The allowance for loan losses as a percentage of total loans
outstanding at June 30, 2000 and December 31, 1999 amounted to 1.50% and 1.48%,
respectively.
Although Eastside Bank, Westside Bank and Community Bank all opened a
branch between the period of March 1999 and January 2000, total operating
expenses for the six month period, excluding merger expenses only increased
$698,471 or 5.0% over the same period in 1999. While management is committed to
hiring and keeping quality people and providing competitive products and
services, they are equally committed to controlling expenses.
13
<PAGE>
Short-term borrowings at June 30, 2000 were $13,627,822 compared to
$18,872,722 at December 31, 1999. Short-term borrowings consist of federal funds
purchased and securities sold under agreement to repurchase. Other borrowings at
June 30, 2000 were $54,135,000 compared to $49,142,500 at December 31, 1999.
14
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Shareholders held on May 23, 2000,
the following individuals were elected to serve as Class III Directors for three
year terms expiring at the 2003 Annual Meeting of Shareholders:
<TABLE>
<CAPTION>
Votes For Votes Withheld
--------- --------------
<S> <C> <C>
P. Harris Hines 3,730,687 6,594
Harry L. Hudson, Jr. 3,730,687 6,594
Edward C. Milligan 3,730,687 6,594
</TABLE>
The following proposals were approved at the Company's Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative Votes
Votes Votes Withheld
----------- -------- --------
<S> <C> <C> <C> <C>
1. Approve merger agreement by and
between First Sterling Banks, Inc. and
Main Street Banks Incorporated. 2,893,309 522 4,108
2. Approve restated Articles of Incorporation
of First Sterling Banks, Inc. to increase
the number of shares that First Sterling
is authorized to issue from 10,000,000 to
50,000,000 shares of common stock and
provides that a director must be elected
by a majority of the outstanding shares. 3,713,712 8,769 14,800
3. Approve the 1999 Directors Stock Option
Plan. 3,624,794 65,662 46,825
</TABLE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K, on June 1, 2000 announcing a decision to
change accountants.
The Company filed a Form 8-K, on June 7, announcing consummation of the
merger of Main Street Banks Incorporated with and into First Sterling
Banks, Inc. on May 24, 2000.
The Company filed a Form 8-K/A on August 8, 2000 containing pro forma
financial statements, in connection with the merger consummated on May
24, 2000.
15
<PAGE>
SIGNATURES
In accordance with the requirements 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.
<TABLE>
<S> <C>
Date: August, 11, 2000 By: /s/ Edward C. Milligan
------------------------ ---------------------------------------
Edward C. Milligan, President
Date: August 11, 2000 By: /s/ Barbara J. Bond
------------------------ ---------------------------------------
Barbara J. Bond, Senior Vice President
</TABLE>
16
