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U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
December 31, 1999 000-25128
</TABLE>
FIRST STERLING BANKS, INC.
(Name of small business issuer in its Charter)
<TABLE>
<S> <C>
GEORGIA 58-2104977
(State of Incorporation) (I.R.S. Employer Identification No.)
676 CHASTAIN ROAD, KENNESAW, GA 30144
(Address of principal executive offices) (Zip Code)
770-422-2888
(Issuer's telephone number)
</TABLE>
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. / /
State issuer's revenues for the most recent fiscal year. $27,091,832
As of March 1, 2000, registrant had outstanding 4,882,349 shares of common
stock. As of March 1, 2000, the aggregate market value of the voting stock held
by nonaffiliates of the registrant was approximately $46,382,316.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format Yes / / No /X/
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FORWARD-LOOKING STATEMENTS
This form 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 1999.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
First Sterling Banks, Inc. (the "Company") is a three-bank holding company
which engages through its subsidiaries, The Westside Bank & Trust Company, The
Eastside Bank and Trust Company and Community Bank of Georgia (the "Banks"), in
providing full banking services to customers of the Banks. The Company's
executive offices are located at 676 Chastain Road, Kennesaw, Georgia 30144, and
its telephone number is 770-422-2888.
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.
On April 23,1999, the Company effected a business combination and merger
with Georgia Bancshares, Inc., by exchanging 1,461,632 shares of its common
stock for all of the common stock of Georgia Bancshares, Inc. The combination
was accounted for as a pooling of interests and, accordingly, all prior
financial statements have been restated to include Georgia Bancshares, Inc. and
Community Bank of Georgia.
On December 1, 1999 the Company signed a definitive agreement with Main
Street Banks Incorporated to merge the two companies. Under the proposed terms
of the transaction, First Sterling will issue 1.01 shares of its stock for every
one share of Main Street. The merger will be accounted for as a pooling of
interests and is subject to all regulatory approvals.
2
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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 Banks' primary service areas of Cobb, Gwinnett and Dekalb
counties in Georgia.
The Banks compete with other banks in their primary service area in
obtaining new deposits and accounts, making loans, obtaining branch banking
locations and providing other banking services. The Banks also compete with
savings and loan associations and credit unions for savings and transaction
deposits, certificates of deposit and various types of loans.
Competition for loans is also offered by other financial intermediaries,
including savings and loan associations, mortgage banking firms and real estate
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, 1995, 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 Banks' primary service
areas, 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.
PATENTS, TRADEMARKS, ETC.
Westside 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 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 service marks. Other than the Georgia service marks discussed
above, the banks hold no patents, trademarks, licenses (other than licenses
required to be obtained from appropriate banking regulatory agencies),
franchises, or concessions.
EMPLOYEES
As of March 1, 2000, Westside Bank had a total of 28 full-time and 19
part-time employees. Eastside Bank had a total of 31 full-time and 15 part-time
employees and Community Bank had a total of 30 full
3
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time and 6 part-time employees. These employees are provided with fringe
benefits in varying combinations, including health, accident, disability and
life insurance plans. In the opinion of management, the Banks enjoy excellent
relations with their employees.
SUPERVISION AND REGULATION
GENERAL
First Sterling is a bank holding company registered with the Federal Reserve
and the Georgia Department of Banking and Finance under the Federal Bank Holding
Company Act and the Georgia Bank Holding Company Act, respectively. As a result,
it is subject to the supervision, examination and reporting requirements of
these acts and the regulations of the Federal Reserve and the Georgia Department
of Banking and Finance Company issued under these acts. The subsidiary banks are
Georgia chartered commercial banks and are subject to the supervision,
examination and reporting requirements of the Georgia Department of Banking and
Finance and the FDIC.
The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Federal Reserve before:
- it may acquire direct or indirect ownership or control of any voting
shares of any bank if, after the acquisition, the bank holding company
will directly or indirectly own or control more than five (5%) percent of
the voting shares of the bank;
- it or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of any bank; or
- it may merge or consolidate with any other bank holding company.
The Bank Holding Company Act generally prohibits a bank holding company from
engaging in activities other than:
- banking;
- managing or controlling banks or other permissible subsidiaries; and
- acquiring or retaining direct or indirect control of any company engaged
in any activities other than activities closely related to banking or
managing or controlling banks.
However, the activities permissible to bank holding companies and their
affiliates were substantiallyexpanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. The BHC
Act was amended to permit a financial holding company to engage in any activity
and acquire and retain any company that the Federal Reserve determine to be
(a) financial in nature or incidental to such financial activity or
(b) complementary to a financial activity and does not pose a substantial risk
to the safety and soundness of depository institutions or the financial system
generally.
The subsidiary banks are subject to regulation, supervision, and examination
by the FDIC and the Georgia Department of Banking and Finance. The FDIC and the
Georgia Department of Banking and Finance regularly examine the operations of
the banks and are given the authority to approve or disapprove mergers,
consolidations, the establishment of branches and similar corporate actions. The
FDIC and the Georgia Department of Banking and Finance also have the power to
prevent the continuance or development of unsafe or unsound banking practices or
other violations of law.
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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, 1999.
<TABLE>
<CAPTION>
ACTUAL REQUIRED EXCESS
--------------------- --------------------- ---------------------
AMOUNT % AMOUNT % AMOUNT %
---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Leverage capital
Consolidated.............................. 28,830,000 7.66% 15,055,000 4.00% 13,775,000 3.66%
Westside Bank............................. 11,408,000 6.99 6,533,000 4.00 4,875,000 2.99
Eastside Bank............................. 8,854,000 7.49 4,726,000 4.00 4,128,000 3.49
Community Bank............................ 8,429,000 8.88 3,799,000 4.00 4,630,000 4.88
Risk-based core capital:
Consolidated.............................. 28,830,000 9.99% 11,544,000 4.00% 17,286,000 5.99%
Westside Bank............................. 11,408,000 10.41 4,385,000 4.00 7,023,000 6.41
Eastside Bank............................. 8,854,000 8.83 4,009,000 4.00 4,845,000 4.83
Community Bank............................ 8,429,000 10.35 3,259,000 4.00 5,170,000 6.35
Risk-based total capital:
Consolidated.............................. 31,903,000 11.06% 23,087,000 8.00% 8,816,000 3.06%
Westside Bank............................. 12,463,000 11.37 8,770,000 8.00 3,693,000 3.37
Eastside Bank............................. 9,937,000 9.92 8,019,000 8.00 1,918,000 1.92
Community Bank............................ 9,364,000 11.50 6,517,000 8.00 2,847,000 3.50
</TABLE>
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.
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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:
- "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;
- "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;"
- "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);
- "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
- "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, 1999, the
Company, Westside Bank and Community Bank each had capital levels that qualify
as being "well capitalized" under such regulations. Eastside Bank had capital
levels that qualify as being "adequately capitalized".
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 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.
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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 subsidiary Banks 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 deposits. In addition to the
deposit insurance premium the Deposit Insurance Funds Act of 1996 (DIFA)
requires that a Financing Corporation (FICO) assessment be paid. 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, 1999
was 1.636% of deposits. The Banks paid $28,778 in assessments for the period
ending December 31, 1999.
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
LEGISLATIVE AND REGULATORY CHANGES
On November 12, 1999, the President signed the Gramm-Leach-Bliley Act into
law. The Act:
- allows bank holding companies meeting management, capital and CRA
standards to engage in a substantially broader range of nonbanking
activities than currently is permissible, including insurance underwriting
and making merchant banking investments in commercial and financial
companies;
- allows insurers and other financial services companies to acquire banks;
- removes various restrictions that currently apply to bank holding company
ownership of securities firms and mutual fund advisory companies; and
- establishes the overall regulatory structure applicable to bank holding
companies that also engage in insurance and securities operations.
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This part of the Act became effective on March 11, 2000.
The Act also modifies current law relating to financial privacy and
community reinvestment. The new financial privacy provisions will generally
prohibit financial institutions, including us, from disclosing nonpublic
personal financial information to third parties unless customers have the
opportunity to "opt out" of the disclosure.
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.
ITEM 2. DESCRIPTION OF PROPERTY
PROPERTIES
Westside's main office is located at 1200 Barrett Parkway, Kennesaw,
Georgia, on a 1.156 acre tract of land. The purchase price of this 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 $2,104,000.
In January 1996, Westside purchased a parcel of land and branch office
located at 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 signed a contract to purchase a tract of land
containing approximately 1.3542 acres at the intersection of Chastain Road and
George Busbee Parkway in North Cobb County. The bank constructed a two story
facility containing approximately 12,000 square feet to accommodate a branch
facility and First Sterling's corporate headquarters. Only half of the space is
being used initially, with the remaining space to be used for future growth. The
office opened for business in September 1999. The total cost of the facility,
including land, was approximately $2,866,000.
Eastside's main office is located at 2019 Scenic Highway, Snellville,
Georgia, on a 1.76 acre tract of land. 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 April 1999 Eastside opened a branch office in Lawrenceville, Georgia. The
branch is located at 185 Gwinnett Drive in the Heritage Center Office Complex.
The building, which has been a branch bank for several previous institutions was
leased for an initial period of five years, with several renewal options. The
facility contains approximately 2,800 square feet of space and offers drive-up
service and an ATM.
Community's main office is located at 3333 Lawrenceville Highway, Tucker,
Georgia on a 1.75 acre site. The purchase price was approximately $863,000. The
cost of the building constructed on the property, including all furnishings,
site preparation, landscaping, paving, security equipment and automatic teller
machine was approximately $965,000.
In October 1997, Community Bank opened a branch located at 4794 Highway 29
in Lilburn, Georgia. The facility is located on a site of approximately 1.4
acres. The facility contains approximately 2,800 square feet. Total cost of the
facility, including furniture, fixtures and equipment was approximately
$685,000.
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In July 1999, Community Bank leased 2,400 square feet in a commercial center
located at 2740 Highway 124, Dacula, Georgia. The total cost of the leasehold
improvements, furniture, fixtures and equipment was approximately $341,500. The
facility opened for business in January 2000.
ITEM 3. LEGAL PROCEEDINGS
Neither the registrant nor its subsidiary banks are a party to, nor is any
of their property the subject of, any material pending legal proceedings, other
than ordinary routine proceedings incidental to the business of the Banks, nor
to the knowledge of the management of the registrant are any such proceedings
contemplated or threatened against it or its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the registrant's shareholders during
the fourth quarter of 1999.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) The Company's common stock is traded on the Nasdaq National Market under the
symbol FSLB.
The following table lists the high and low stock price for each quarter in
1999 and 1998:
<TABLE>
<CAPTION>
FISCAL YEAR 1999 FISCAL YEAR 1998
------------------- -----------------------
HIGH LOW HIGH LOW
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
First quarter................................... $11.8125 $10.6875 $13.171875 $ 9.234375
Second quarter.................................. 12.50 10.4375 13.03125 11.375
Third quarter................................... 12.25 9.25 12.0625 10.50
Fourth quarter.................................. 14.50 9.25 11.28125 9.921875
</TABLE>
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(b) As of March 1, 2000, there were approximately 1,392 shareholders of record
of the registrant's common stock.
(c) During 1999 dividends of $0.04 per share were paid per quarter. The Company
currently intends to continue paying regular cash dividends on a quarterly
basis.
Neither the Company's articles of incorporation nor the bylaws set forth any
restriction on the ability of the Company to issue dividends to its
shareholders. The Georgia Business Corporation Code, though, forbids any
distribution which, after being given effect, would leave the Company unable to
pay its debts as they become due in the usual course of business. Additionally,
the Georgia Business Corporation Code provides that no distribution shall be
made if, after giving it effect, the corporation's total assets would be less
than the sum of its total liabilities plus the amount that would be needed to
satisfy any preferential dissolution rights.
The Company is a legal entity separate and distinct from its bank
subsidiaries. Substantially all of the Company's revenues result from amounts
paid as dividends to the Company by its subsidiary banks. The banking
subsidiaries are subject to statutory and regulatory limitations on the payment
of dividends to the Company and the Company is subject to statutory and
regulatory limitations on dividend payments to its shareholders.
If in the opinion of the Federal banking regulators, a depository
institution under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice, the regulatory authority may require, after notice
and hearing, that the institution cease and desist from the practice. The
Federal banking agencies have indicated that paying dividends that deplete a
depository institution's capital base to an inadequate level would be an unsafe
and unsound banking practice. Under the Federal Deposit Insurance
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Corporation Improvement Act of 1991, a depository institution may not pay any
dividend if payment would cause it to become undercapitalized or if it already
is undercapitalized. The Federal agencies have also issued policy statements
that provide that bank holding companies and insured banks should generally only
pay dividends out of current operating earnings.
The Georgia Financial Institutions Code and the Georgia Banking Department's
regulations provide:
- that dividends of cash or property may be paid only out of the bank's
retained earnings;
- that dividends may not be paid if the banks' paid-in capital and retained
earnings which are set aside for dividend payment and other distributions
do not, in combination, equal at lease 20% of the bank's capital stock;
and
- that dividends may not be paid without prior approval of the Georgia
Banking Department if:
- the bank's total classified assets at its most recent examination
exceed 80% of its equity capital;
- the aggregate amount of dividends to be declared exceeds 50% of the
bank's net profits after taxes but before dividends for the previous
calendar year; or
- the ratio of equity capital total adjusted assets is less than 6%.
The payment of dividends by the Company may also be affected or limited by
other factors, such as a requirement by the Federal Reserve to maintain adequate
capital above regulatory guidelines.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA
Total interest income.......................... $25,727 $21,467 $18,675 $14,552 $13,259
Total interest expense......................... 10,639 9,311 7,990 6,221 5,637
Net interest income............................ 15,088 12,156 10,685 8,331 7,622
Provision for loan losses...................... 795 561 680 227 383
Net interest income after
provision for loan losses...................... 14,293 11,595 10,005 8,104 7,239
Other operating income......................... 1,365 1,581 1,494 1,133 872
Net income..................................... 3,850 3,315 2,789 2,044 2,571
Net income per share (basic)................... .79 .68 .58 .42 .52
Net income per share (diluted)................. .74 .64 .55 .41 .52
Dividends per share............................ .16 .15 .13 .10 .05
</TABLE>
ALL SHARE AND PER SHARE DATA HAVE BEEN ADJUSTED TO REFLECT A TWO FOR ONE
STOCK SPLIT ON MARCH 30, 1998 AND THE .2858 STOCK DIVIDEND ON APRIL 22, 1999.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
SELECTED BALANCE SHEET DATA
Total loans................................ $249,582 $190,530 $152,076 $115,366 $98,770
Total assets............................... 348,251 283,699 248,397 195,056 168,561
Total deposits............................. 303,633 253,280 223,737 172,583 147,932
Shareholders' equity....................... 26,863 25,554 22,771 20,838 19,321
</TABLE>
10
<PAGE>
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 were received and the merger was consummated
April 23,1999.
On December 1, 1999, First Sterling Banks, Inc. and Main Street Banks Inc.
executed a Definitive Agreement to merge the two suburban Atlanta, Georgia bank
holding companies. Under the proposed terms of the agreement, First Sterling
will issue 1.01 shares of its stock for every one share of Main Street. Main
Street Banks Inc. is the parent of Main Street Bank, a state chartered bank with
over $500 million is assets and thirteen banking offices. The proposed merger is
subject to the approval of federal and state regulatory authorities,
shareholders of both companies, and other customary conditions of closing.
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 each subsidiary 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, 1999 was $15,088,422 an
increase of $2,932,601 or 24.13% compared to December 31, 1998. The increase in
net interest income is primarily attributable to an increase in average earning
assets over 1998. Average earning assets increased $53,675,718 or 22.13% over
1998. Average loans increased $57,883,860 or 34.43% over 1998. Average interest
bearing liabilities increased $49,466.700 or 24.58% over 1998. Average cost of
funds for the subsidiary banks was 4.24% in 1999 as compared to 4.59% in 1998.
The decrease in the cost of funds is the result of a lower level of interest
rates paid on deposits, as compared to 1998 as the Banks were able take
advantage of opportunities to reprice deposits during the first half of 1999
before rates began to rise. Average non-interest bearing deposits increased
$6,570,781 or 17.57% over 1998. The Banks are located in thriving markets and
continue to enjoy excellent growth in loans and deposits. Total assets increased
$64,551,494 or 22.75% over December 31, 1998.
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
11
<PAGE>
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 $795,000 in
1999 an increase of $234,000 from 1998. This increase is directly related to the
increase in loans (30%) and management's desire to maintain an adequate reserve.
The Banks continue to experience only minimal losses. Net chargeoffs in 1999
were of .04% of average loans compared to .16% in 1998. The allowance for loan
losses as a percentage of total loans outstanding at December 31, 1999 and 1998
amounted to 1.23% and 1.24%, 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 Banks' loan portfolio. An independent third
party performs periodic reviews of the loan portfolio, at least semi-annually.
Management intends to continue maintaining an adequate allowance for loan losses
in relation to loans outstanding in the future based on management's evaluation
of the loan portfolio under prevailing economic conditions, underlying
collateral value securing loans and such other factors as management deems
appropriate.
Following is a comparison of non-interest income for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Service charges on deposit accounts......................... $ 833,098 $ 738,981
Gain on sale of loans....................................... 30,346 159,448
Other income................................................ 506,230 658,835
Net realized gains (losses) on securities................... (4,913) 23,912
---------- ----------
$1,364,761 $1,581,176
========== ==========
</TABLE>
Non-interest income consists primarily of service charges on deposit
accounts, gains on the sale of SBA (Small Business Administration) loans into
the secondary market, fees on participation loans, mortgage origination fees,
customer service fees, gains (losses) on investment securities transactions and
miscellaneous other income. Total other income is down $216,415 or 13.69% from
1998. Gains on the sale of SBA loans are down $129,102 or 80.97% from 1998. This
reduction is partially attributable to the loss of key personnel handling SBA
lending at EFS and the reduction in SBA premiums. In addition, the interest rate
environment and competitive market found many potential SBA borrowers obtaining
conventional loans. Management continues to concentrate on increasing core
earnings, while at the same time exploring other fee income services.
Following is an analysis of non-interest expense for 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Salaries and employee benefits.............................. $5,220,849 $4,492,009
Occupancy and equipment expense............................. 1,116,743 920,608
Data processing fees........................................ 476,528 361,332
Directors fees.............................................. 328,375 312,900
Supplies.................................................... 208,436 191,012
Deposit insurance premiums.................................. 28,778 25,995
Merger expenses............................................. 308,908 105,531
Other expense............................................... 1,923,555 1,866,447
---------- ----------
$9,612,172 $8,275,834
========== ==========
</TABLE>
Non-interest expense increased $1,336,338 or 16.15% over 1998. Non-interest
expense consists primarily of salaries and other employee benefits, occupancy
expense and other operating costs. Merger
12
<PAGE>
expenses of $308,908 related to the merger of Georgia Bancshares into First
Sterling accounted for 15% of the increase. Personnel expense increased $728,840
or 16.22% over 1998. The increase is primarily the result of salary increases,
and the rising costs associated with hiring and keeping quality people. In
addition, Eastside Bank and Westside Bank opened new branches in 1999. At
March 1, 2000, the company employed 89 full-time employees and 40 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
Banks. Increases in data processing, postage and delivery, supplies, stationary,
business development and advertising are related to the continuing growth in
customer base, the ever increasing cost of doing business in a very competitive
market and opening two new facilities in 1999. Occupancy expense increased
$196,135 or 21.30% over 1998, this increase is directly attributable to the
opening of two new facilities.
Pre-tax income for the twelve months ending December 31, 1999 increased
$1,415,848 or 23.38% over the same period in 1998. Pre tax income excluding
merger expenses increased 26.95%. Net income for the period ending December 31,
1999 increased $534,601 or 16.12%.
13
<PAGE>
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 1999 and 1998:
AVERAGE BALANCES AND NET INCOME ANALYSIS
The condensed average balance sheets for the period indicated are presented
below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 13,434,831 $ 11,244,308
Interest-bearing deposits in banks.......................... 565,076 53,699
Taxable securities.......................................... 40,795,321 34,608,904
Nontaxable securities....................................... 9,306,125 7,268,873
Federal funds sold.......................................... 10,777,682 22,827,719
Securities purchased under agreement to resell.............. 8,750,411 9,643,562
Loans (1)................................................... 226,024,644 168,140,784
Reserve for loan losses..................................... (2,711,992) (2,210,108)
Other assets................................................ 15,663,278 13,404,304
------------ ------------
Total assets................................................ $322,605,376 $264,982,045
============ ============
Total earning assets........................................ $296,219,259 $242,543,541
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand.................................. $ 43,963,678 $ 37,392,897
Interest-bearing demand and savings......................... 98,974,368 84,160,718
Time deposits............................................... 143,317,073 115,989,659
------------ ------------
Total deposits.............................................. 286,255,119 237,543,274
Federal Home Loan Bank Advances............................. 4,125,291 608,219
Federal funds purchased and securities sold under agreement
to repurchase............................................. 4,316,759 508,195
Other liabilities........................................... 1,689,549 1,749,661
------------ ------------
Total liabilities........................................... $296,386,718 $240,409,349
------------ ------------
Stockholders' equity........................................ $ 26,218,658 $ 24,572,696
------------ ------------
Total liabilities and stockholders' equity.................. $322,605,376 $264,982,045
============ ============
Total interest-bearing liabilities.......................... $250,733,491 $201,266,791
============ ============
</TABLE>
- ------------------------
(1) Average loans include non-accrual loans, if any.
14
<PAGE>
INTEREST INCOME AND INTEREST EXPENSE
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
AVERAGE AVERAGE
INTEREST RATE INTEREST RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans (1)............................ $21,721 9.61% $17,339 10.31%
Interest on investment securities:
Taxable securities........................................ 2,552 6.26 2,102 6.07
Nontaxable securities..................................... 444 4.77 348 4.79
Interest on Federal funds sold............................ 544 5.05 1,198 5.25
Interest on securities purchased under agreement to
resell.................................................. 441 5.04 477 4.95
Interest on deposits in banks............................. 25 4.42 3 5.56
------- ---- ------- -----
Total interest income................................... $25,727 8.69% $21,467 8.85%
------- ---- ------- -----
INTEREST EXPENSE:
Interest on savings and interest-bearing demand
deposits................................................ $ 2,536 2.56% $ 2,500 2.97%
Interest on time deposits................................. 7,722 5.39 6,758 5.83
Interest on FHLB Advances................................. 193 4.68 28 4.61
Interest on Federal funds purchased and securities sold
under agreement to repurchase........................... 188 4.35 25 4.92
------- ---- ------- -----
Total interest expense.................................. $10,639 4.24% $ 9,311 4.59%
======= ---- ======= -----
NET INTEREST INCOME....................................... $15,088 $12,156
======= =======
Net interest spread....................................... 4.45% 4.26%
==== =====
Net yield on average interest earning assets.............. 5.09% 5.01%
==== =====
</TABLE>
- ------------------------
(1) In computing yields on earning assets, the average balances of non-accruing
loans are included in the average balances, and loan fees of $1,472,778 and
$1,324,370 for the years ended December 31, 1999 and 1998, 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
15
<PAGE>
consistently attributable to rate. Changes reflected herein may differ slightly
from actual changes due to rounding.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998
--------------------------------
CHANGES DUE TO
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans................................ $4,382 $(1,582) $5,964
Interest on investment securities:
Taxable................................................. 450 76 374
Nontaxable.............................................. 96 98 (2)
Interest on Federal funds sold............................ (654) (22) (632)
Interest on securities purchased under agreement to
resell.................................................. (36) 8 (44)
Interest on deposits in other banks....................... 22 (6) 28
------ ------- ------
Total interest income....................................... $4,260 $(1,428) $5,688
------ ------- ------
Expense from interest-bearing liabilities
Interest on interest-bearing demand and savings
deposits................................................ $ 36 $ (404) $ 440
Interest on time deposits................................. 964 (633) 1,597
Interest on other borrowings.............................. 165 3 162
Interest on Federal funds purchased and securities sold
under agreement to repurchase........................... 163 (24) 187
------ ------- ------
Total interest expense...................................... $1,328 $(1,058) $2,386
------ ------- ------
Net interest income......................................... $2,932 $ (370) $3,302
====== ======= ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997
--------------------------------
CHANGES DUE TO
INCREASE -------------------
(DECREASE) RATE VOLUME
---------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans................................ $3,204 $(358) $3,562
Interest on investment securities:
Taxable................................................. (129) (145) 16
Nontaxable.............................................. 156 10 146
Interest on federal funds sold............................ 266 (30) 296
Interest on securities purchased under agreement to
resell.................................................. (703) (49) (654)
Interest on deposits in other banks....................... (3) -- (3)
------ ----- ------
Total interest income....................................... $2,791 $(572) $3,363
------ ----- ------
Expense from interest-bearing liabilities
Interest on interest-bearing demand and savings
deposits................................................ $ 305 $(184) $ 121
Interest on time deposits................................. 984 (64) 920
Interest on other borrowings.............................. 25 2 27
Interest on Federal funds purchased and securities sold
under agreement to repurchase........................... 7 -- 7
------ ----- ------
Total interest expense...................................... $1,321 $(246) $1,075
------ ----- ------
Net interest income......................................... $1,470 $(818) $2,288
====== ===== ======
</TABLE>
16
<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 Banks are
monitored on a periodic basis by state and federal regulatory authorities. As
determined under guidelines established by those regulatory authorities, the
Banks' liquidity ratios at December 31, 1999 were considered satisfactory. At
December 31, 1999, investment securities with a book value of $693,000 were
scheduled to mature within one year. These investments, along with Federal funds
sold and securities purchased under agreement to resell of $20,200,000 as of
December 31, 1999, will provide a ready source of funds. At December 31, 1999,
the Company's and the Banks' capital to asset ratios were considered adequate
based on guidelines established by the regulatory authorities. During 1999, the
Company increased its capital by retaining net earnings of $3,057,209 after
dividend payments of $792,892. At December 31, 1999, total capital of the
Company amounted to $26,863,199.
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 and
this plan was terminated on March 8, 1997.
In 1999 the Company and the Banks adopted a capital plan to provide for
additional capital, as needed.
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.
17
<PAGE>
MATURITIES
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, 1999:
U. S. Government and agency securities..... $22,497,224 $ -- $(1,255,605) $21,241,619
State and municipal securities............. 9,733,328 22,228 (664,043) 9,091,513
Mortgage-backed securities................. 20,041,279 1,385 (995,281) 19,047,383
Equity securities.......................... 983,000 -- -- 983,000
----------- -------- ----------- -----------
$53,254,831 $ 23,613 $(2,914,929) $50,363,515
=========== ======== =========== ===========
December 31, 1998:
U. S. Government and agency securities..... $19,104,633 $ 36,062 $ (56,688) $19,084,007
State and municipal securities............. 10,437,572 249,819 (33,865) 10,653,526
Mortgage-backed securities................. 21,578,182 64,501 (79,159) 21,563,524
Equity securities.......................... 806,900 -- -- 806,900
----------- -------- ----------- -----------
$51,927,287 $350,382 $ (169,712) $52,107,957
=========== ======== =========== ===========
</TABLE>
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, 1999
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
----------------------------- WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Due in one year or less.................................. $ 695 $ 693 5.769%
Due from one year to five years.......................... 7,414 7,146 5.614
Due from five years to ten years......................... 16,333 15,479 5.318
Due after ten years...................................... 7,789 7,016 5.189
Mortgage-backed securities............................... 20,041 19,047 6.026
Equity securities........................................ 983 983 7.750
------- ------- -----
$53,255 $50,364 6.407%
======= ======= =====
</TABLE>
Securities with a carrying value of $26,441,000 and $32,512,000 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes.
18
<PAGE>
The following table represents the composition of the Banks' loan portfolio
according to the purpose of the loan and/or repayment terms:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial and agricultural...................... $ 51,059,000 $ 40,129,000
Real estate--construction and land development.............. 53,687,000 41,672,000
Real estate--mortgage....................................... 133,320,000 98,176,000
Installment and other consumer.............................. 12,030,888 10,964,749
------------ ------------
250,096,888 190,941,749
------------ ------------
Net deferred loan fees...................................... (514,837) (411,493)
249,582,051 190,530,256
============ ============
Less reserve for possible loan losses....................... (3,073,506) (2,367,316)
------------ ------------
Net loans................................................... $246,508,545 $188,162,940
============ ============
</TABLE>
SUPPLEMENTAL MATURITY SCHEDULE OF LOANS
DECEMBER 31, 1999
<TABLE>
<CAPTION>
OVER ONE
ONE YEAR THROUGH OVER
OR LESS FIVE YEARS FIVE YEARS TOTAL
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Commercial and industrial................ $27,982,926 $21,426,500 $ 1,649,574 $ 51,059,000
Real estate--construction and land
development............................ 49,768,859 2,779,141 1,139,000 53,687,000
Real estate--mortgage.................... 46,411,298 56,093,014 30,815,688 133,320,000
Installment and other Consumer........... 5,245,735 6,725,688 59,465 12,030,888
</TABLE>
INTEREST RATE SENSITIVITY
<TABLE>
<S> <C> <C> <C> <C>
Loans with:
Predetermined interest rates.............. 108,597,418 26,521,092 -- 135,118,510
Floating or adjustable interest rates..... 20,811,400 60,503,251 33,663,727 114,978,378
</TABLE>
NON-PERFORMING LOANS
There were $268,926 in non-accrual loans at December 31, 1999 and $119,971
at December 31, 1998. 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.
19
<PAGE>
DEPOSITS
The following table represents the composition of the Banks' deposit
accounts, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998
------------------- -------------------
AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT RATE AMOUNT RATE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Noninterest-bearing deposits............................ $ 43,964 --% $ 37,393 --%
Interest-bearing demand and savings deposits............ 98,974 2.56 84,161 2.97
Time deposits........................................... 143,317 5.39 115,990 5.83
</TABLE>
MATURITY SCHEDULE OF TIME DEPOSITS OVER $100,000
DECEMBER 31, 1999
<TABLE>
<S> <C>
Three months or less........................................ $10,794,363
Three months to six months.................................. 8,919,826
Six months to twelve months................................. 20,607,416
Over twelve months.......................................... 4,069,385
-----------
Total....................................................... $44,390,990
===========
</TABLE>
20
<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.
The 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 $795,000 during the
year ended December 31, 1999, compared to $561,000 in 1998. During 1999, the
Banks had net charge-offs of $88,810. There were net charge-offs of $270,041 in
1998. An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Average amount of loans outstanding......................... $226,024,644 $168,140,784
============ ============
Balance of reserve for possible loan losses at beginning of
period.................................................... $ 2,367,316 $ 2,076,357
Provision charged to operating expense...................... 795,000 561,000
Recoveries:
Commercial, financial and agricultural.................... 9,788 4,202
Real estate--construction and land development............ -- --
Real estate--mortgage..................................... 6,095 13,445
Installment and other consumer............................ 22,216 14,034
------------ ------------
Total recoveries........................................ $ 38,099 $ 31,681
------------ ------------
Less chargeoffs:
Commercial, financial and agricultural.................... 64,309 175,176
Real estate--construction and land development............ -- --
Real estate--mortgage....................................... -- 111,526
Installment and other consumer.............................. 62,600 15,020
------------ ------------
Total chargeoffs........................................ $ 126,909 $ 301,722
------------ ------------
Net chargeoffs.............................................. $ 88,810 $ 270,041
------------ ------------
Balance of reserve for possible loan losses at end of
period.................................................... $ 3,073,506 $ 2,367,316
============ ============
Ratio of net loan chargeoffs to average loans............... .04% .16%
============ ============
</TABLE>
COMMITMENTS AND LINES OF CREDIT
In the ordinary course of business, the Banks have 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 Banks' Boards of Directors. The Banks
have 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 Banks adhere 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.
21
<PAGE>
The Banks had outstanding unfunded commitments at December 31, 1999, as
follows:
<TABLE>
<S> <C>
Commercial, financial and agricultural...................... $16,310,000
Real estate--construction and land development.............. 34,911,000
Real estate--mortgage....................................... 15,234,000
Installment and other consumer.............................. 1,700,000
Standby letters of credit................................... 1,012,000
-----------
$69,167,000
===========
</TABLE>
ASSET/LIABILITY MANAGEMENT
The following table sets forth the distribution of the repricing of the
Banks' earning assets and interest-bearing liabilities as of December 31, 1999,
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.
<TABLE>
<CAPTION>
AFTER THREE
MONTHS AFTER ONE
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..... $ 1,225 $ -- $ -- $ -- $ 1,225
Federal funds sold..................... 20,200 -- -- -- 20,200
Securities............................. 693 5,737 1,409 42,525 50,364
Loans.................................. 121,509 16,431 89,370 22,272 249,582
-------- -------- -------- --------- --------
Total rate sensitive assets............ $143,627 $ 22,168 $ 90,779 $ 64,797 $321,371
-------- -------- -------- --------- --------
INTEREST-BEARING LIABILITIES:
Interest-bearing demand deposits....... $ 79,225 $ -- $ -- $ -- $ 79,225
Savings accounts....................... 17,487 -- -- -- 17,487
Time deposits.......................... 35,027 71,349 54,890 190 161,456
Other interest bearing liabilities..... 8,873 -- 7,143 -- $ 16,016
-------- -------- -------- --------- --------
Total rate sensitive liabilities....... $140,612 $ 71,349 $ 62,033 $ 190 $274,184
-------- -------- -------- --------- --------
Interest rate sensitivity GAP.......... $ 3,015 $(49,181) $ 28,746 $ 64,607
======== ======== ======== =========
Cumulative interest rate sensitivity
GAP.................................. $ 3,015 $(46,166) $(17,420) $ 47,187
======== ======== ======== =========
GAP as % of assets..................... .87% (14.12%) 8.25% 18.55%
Cumulative GAP as a % of assets........ .87% (13.26%) (5.00%) 13.55%
Interest rate sensitivity GAP ratio.... 102.14% 31.07% 146.34% 34,103.68%
Cumulative interest rate sensitivity
GAP ratio............................ 102.14% 78.22% 93.64% 117.21%
</TABLE>
22
<PAGE>
RETURN ON ASSETS AND SHAREHOLDERS' EQUITY
The following rate of return information for the periods indicated is
presented below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Return on assets (1)........................................ 1.19% 1.25%
Return on equity (2)........................................ 14.68% 13.49%
Dividend payout ratio (3)................................... 20.25% 22.05%
Equity to assets ratio (4).................................. 8.13% 9.27%
</TABLE>
- ------------------------
(1) Net income divided by average total assets.
(2) Net income divided by average equity.
(3) Dividends declared per share divided by net income per share (basic).
(4) Average equity divided by average total assets.
ITEM 7. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company and its
subsidiaries are included on page F-1 through F-28 of this Annual Report on
Form 10-KSB.
Consolidated Balance Sheets--December 31, 1999 and 1998
Consolidated Statements of Income--Years Ended December 31, 1999 and 1998
Consolidated Statements of Comprehensive Income--Years Ended December 31,
1999 and 1998
Consolidated Statements of Stockholders' Equity--Years Ended December 31,
1999 and 1998
Consolidated Statements of Cash Flows--Years Ended December 31, 1999 and
1998
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During 1999, 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 information set forth under the caption "Information about First
Sterling--Board of Directors", "Information about First Sterling--Officers" and
"Information about First Sterling--Reports required by Section 16(a) of the
Securities Exchange Act of 1934" of the Joint Proxy Statement of the Company
included in the registration statement on Form S-4 for the 2000 Annual Meeting
incorporated by reference herein.
ITEM 10. EXECUTIVE COMPENSATION
The information set forth under the caption "Information about First
Sterling--Executive Compensation", "Information about First Sterling--Stock
Options" and "Information about First Sterling--Director
23
<PAGE>
Compensation" of the Joint Proxy Statement of the Company included in the
registration Statement on Form S-4 for the 2000 Annual Meeting is incorporated
by reference herein.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the caption "Information about First
Sterling--First Sterling Security Ownership" of the Joint Proxy Statement of the
Company included in the registration Statement on Form S-4 for the 2000 Annual
Meeting is incorporated by reference herein.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Information about First
Sterling--Certain Transactions" and "Information about First Sterling--Officers"
of the Joint Proxy Statement of the Company included in the registration
Statement on Form S-4 for the 2000 Annual Meeting is incorporated by reference
herein.
24
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following are filed with or incorporated by reference into this
report.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
2 Merger Agreement dated December 1, 1999, between the
Registrant and Main Street Banks Incorporated (incorporated
by reference as Appendix A to the Joint Proxy Statement/
Prospectus set forth in Part I of the Registration Statement
on Form S-4 for the 2000 Annual Meeting)
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, 10-KSB)
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)
10.1 Registrant's 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)
(incorporated by reference)
10.2 Form of Registrant's 1994 Incentive Stock Option Agreement
filed as Exhibit 4.5 to Form S-8 (File No. 33-97300)
(incorporated by reference)
10.3 Registrant's 1995 Directors Stock Option Plan filed as
Exhibit 4.4 to Form S-8 (File No. 33-81053) (incorporated by
reference)
10.4 Form of Registrant's 1995 Directors Stock Option Agreement
filed as Exhibit 4.5 to Form S-8 (File No. 33-81053)
(incorporated by reference)
10.5 Registrant's 1996 Substitute Incentive Stock Option Plan
filed as Exhibit 4.1 to Form S-8 (File No. 333-15069)
(incorporated by reference)
10.6 Form of Registrant's 1996 Substitute Incentive Stock Option
Agreement filed as Exhibit 4.2 to Form S-8 (File No.
333-15069) (incorporated by reference)
10.7 Registrant's 1997 Directors Stock Option Plan filed as
Exhibit 4.1 to Form S-8 (File No. 333-56473) (incorporated
by reference)
10.8 Form of Registrant's 1997 Directors Stock Option Agreement
filed as Exhibit 4.2 to Form S-8 (File No. 333-56473)
(incorporated by reference)
10.9 Registrant's 1997 Incentive Stock Option Plan filed as
Exhibit 4.1 to Form S-8 (File No. 333-74555) (incorporated
by reference)
10.10 Form of Registrant's 1997 Incentive Stock Option Agreement
filed as Exhibit 4.2 to Form S-8 (File No. 333-74555)
(incorporated by reference)
10.11 Registrant's 1999 Directors Stock Option Plan included as
Appendix B to the Joint Proxy Statement/Prospectus set forth
in Part I of the Registration Statement
10.12 Form of Registrant's 1999 Directors Stock Option Agreement
filed as Exhibit 4.2 to Form S-8 (File No. 333-88645)
(incorporated by reference)
10.13 Employment Agreement dated August 16, 1995, between
Registrant, The Westside Bank & Trust Company and Edward C.
Milligan filed as Exhibit 10.5 to Form S-4 (File No.
333-03116) (incorporated by reference)
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --------------------- -----------
<C> <S>
10.14 Employment Agreement dated January 5, 1998, between The
Eastside Bank & Trust Company and Christopher H. Burnett
filed as Exhibit 10.14 to Registrant's Form 10-KSB for the
year ended December 31, 1998 (incorporated by reference,
File No. 000-25128)
10.15 Employment Agreement dated January 1, 1998 between Community
Bank of Georgia and Ted A. Murphy (incorporated by reference
as EXHIBIT B to APPENDIX A to the Joint Proxy
Statement/Prospectus set forth in Part I of the Registration
Statement on Form S-4 for the 2000 Annual Meeting)
21 Subsidiaries of First Sterling Banks, Inc. include: The
Westside Bank & Trust Company, Kennesaw, Georgia, The
Eastside Bank & Trust Company, Snellville, Georgia and
Community Bank of Georgia, Tucker, Georgia.
23 Consent of Mauldin & Jenkins, LLC concerning the financial
statements of First Sterling Banks, Inc.
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed a Form 8-K, on December 3, 1999 announcing the signing of
a definitive agreement to merge Main Street Banks, Inc. with and into First
Sterling Banks, Inc.
26
<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.
<TABLE>
<S> <C> <C>
FIRST STERLING BANKS, INC.
(REGISTRANT)
BY: /S/ EDWARD C. MILLIGAN
-----------------------------------------
Edward C. Milligan, President
Chief Executive Officer and Chairman
</TABLE>
Date: March 28, 2000
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:
<TABLE>
<S> <C> <C>
By: /s/ BARBARA J. BOND Date: March 28, 2000
-------------------------------------------
Barbara J. Bond, Secretary/Treasurer, Principal
Financial and Accounting Officer
By: /s/ EUGENE L. ARGO Date: March 28, 2000
-------------------------------------------
Eugene L. Argo, Director
By: /s/ JAMES L. ARMSTRONG, JR. Date: March 28, 2000
-------------------------------------------
James L. Armstrong, Director
By: /s/ CHRISTOPHER H. BURNETT Date: March 28, 2000
-------------------------------------------
Christopher H. Burnett, Director
By: /s/ P. HARRIS HINES Date: March 28, 2000
-------------------------------------------
P. Harris Hines, Director
By: /s/ HARRY L. HUDSON, JR. Date: March 28, 2000
-------------------------------------------
Harry L. Hudson, Jr., Director
By: /s/ TED A. MURPHY Date: March 28, 2000
-------------------------------------------
Ted A. Murphy, Director
By: /s/ JOHN S. THIBADEAU, JR. Date: March 28, 2000
-------------------------------------------
John S. Thibadeau, Jr., Director
By: /s/ BENJAMIN H. WOFFORD Date: March 28, 2000
-------------------------------------------
Benjamin H. Wofford, Director
</TABLE>
27
<PAGE>
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.
28
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
F-1
<PAGE>
FIRST STERLING BANKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL REPORT
DECEMBER 31, 1999
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITOR'S REPORT................................ F-3
FINANCIAL STATEMENTS
Consolidated balance sheets............................... F-4
Consolidated statements of income......................... F-5
Consolidated statements of comprehensive income........... F-6
Consolidated statements of stockholders' equity........... F-7
Consolidated statements of cash flows..................... F-8
Notes to consolidated financial statements................ F-9-28
</TABLE>
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Sterling Banks, Inc. and Subsidiaries
Kennesaw, Georgia
We have audited the accompanying consolidated balance sheets of FIRST
STERLING BANKS, INC. AND SUBSIDIARIES as of December 31, 1999 and 1998, 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 did not audit
the financial statements for Georgia Bancshares, Inc. which statements reflect
total assets of $82,572,113 as of December 31, 1998 and net interest income of
$3,541,715 for the year ended December 31, 1998. Those statements were audited
by other auditors whose report has been furnished to us, and our opinion,
insofar as it relates to data included for Georgia Bancshares, Inc., is based
solely on the report of other auditors.
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, 1999 and 1998, 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
January 27, 2000
F-3
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks..................................... $ 13,477,155 $ 10,131,534
Interest-bearing deposits in banks.......................... 1,224,671 205,696
Federal funds sold and securities purchased under resell
agreements................................................ 20,200,000 20,339,000
Securities available-for-sale............................... 50,363,515 52,107,957
Loans....................................................... 249,582,051 190,530,256
Less allowance for loan losses.............................. 3,073,506 2,367,316
------------ ------------
Loans, net.............................................. 246,508,545 188,162,940
------------ ------------
Premises and equipment...................................... 10,815,720 8,628,149
Other assets................................................ 5,661,135 4,123,971
------------ ------------
Total assets............................................ $348,250,741 $283,699,247
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Noninterest-bearing demand................................ $ 45,464,673 $ 39,389,101
Interest-bearing demand................................... 79,225,406 67,153,844
Savings................................................... 17,487,249 16,414,024
Time, $100,000 and over................................... 44,390,990 34,276,579
Other time................................................ 117,064,524 96,046,018
------------ ------------
Total deposits.......................................... 303,632,842 253,279,566
Federal funds purchased and securities sold under repurchase
agreements................................................ 8,872,722 593,962
Other borrowings............................................ 7,142,500 3,000,000
Other liabilities........................................... 1,739,478 1,271,216
------------ ------------
Total liabilities....................................... 321,387,542 258,144,744
------------ ------------
Commitments and contingent liabilities
Stockholders' equity
Common stock, no par value; 50,000,000 shares authorized;
5,051,431 and 4,228,276 issued at amount paid in,
respectively............................................ 18,483,342 18,309,914
Retained earnings......................................... 11,380,823 8,264,147
Accumulated other comprehensive income (loss)............. (1,967,091) 14,317
Treasury stock, 169,082 and 131,500 shares,
respectively............................................ (1,033,875) (1,033,875)
------------ ------------
Total stockholders' equity.............................. 26,863,199 25,554,503
------------ ------------
Total liabilities and stockholders' equity.............. $348,250,741 $283,699,247
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Interest income
Loans..................................................... $21,720,973 $17,338,808
Taxable securities........................................ 2,552,207 2,101,634
Nontaxable securities..................................... 444,358 348,488
Deposits in banks......................................... 24,874 2,963
Federal funds sold and securities purchased under resell
agreements.............................................. 984,659 1,675,397
----------- -----------
Total interest income................................... 25,727,071 21,467,290
----------- -----------
Interest expense
Deposits.................................................. 10,257,306 9,257,810
Federal funds purchased and securities sold under
repurchase agreements................................... 188,666 25,395
Other borrowings.......................................... 192,677 28,264
----------- -----------
Total interest expense.................................. 10,638,649 9,311,469
----------- -----------
Net interest income..................................... 15,088,422 12,155,821
Provision for loan losses................................... 795,000 561,000
----------- -----------
Net interest income after provision for loan losses..... 14,293,422 11,594,821
----------- -----------
Other income
Service charges on deposit accounts....................... 833,098 738,981
Net realized gains (losses) on sales of securities
available-for-sale...................................... (4,913) 23,912
Gains on sale of loans.................................... 30,346 159,448
Other operating income.................................... 506,230 658,835
----------- -----------
Total other income...................................... 1,364,761 1,581,176
----------- -----------
Other expense
Salaries and employee benefits............................ 5,220,849 4,492,009
Equipment and occupancy expenses.......................... 1,116,743 920,608
Other operating expenses.................................. 3,274,580 2,863,217
----------- -----------
Total other expenses.................................... 9,612,172 8,275,834
----------- -----------
Income before income taxes.............................. 6,046,011 4,900,163
Income tax expense.......................................... 2,195,910 1,584,663
----------- -----------
Net income.............................................. $ 3,850,101 $ 3,315,500
=========== ===========
Basic earnings per common share............................. $ 0.79 $ 0.68
=========== ===========
Diluted earnings per common share........................... $ 0.74 $ 0.64
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Net income.................................................. $ 3,850,101 $3,315,500
----------- ----------
Other comprehensive income (loss):
Unrealized gains (losses) on securities
available-for-sale:
Unrealized holding gains (losses) arising during period,
net of tax (benefits) of $(1,092,433) and $21,413,
respectively.......................................... (1,984,466) 40,944
Reclassification adjustment for (gains) losses realized
in net income, net of tax (benefits) of ($1,855) and
$9,087, respectively.................................. 3,058 (14,825)
----------- ----------
Other comprehensive income (loss)........................... (1,981,408) 26,119
----------- ----------
Comprehensive income........................................ $ 1,868,693 $3,341,619
=========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
----------------------- OTHER TREASURY STOCK TOTAL
AMOUNT RETAINED COMPREHENSIVE ---------------------- STOCKHOLDERS'
SHARES PAID IN EARNINGS INCOME (LOSS) SHARES COST EQUITY
--------- ----------- ----------- -------------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997...... 2,839,235 $18,223,975 $ 5,592,889 $ (11,802) 65,750 $(1,033,875) $22,771,187
Net income.................... 0 0 3,315,500 0 0 0 3,315,500
Cash dividends declared, $.15
per share................... 0 0 (644,242) 0 0 0 (644,242)
Stock split................... 1,378,665 0 0 0 65,750 0 0
Exercise of stock options..... 10,376 70,939 0 0 0 0 70,939
Stock option compensation
expense..................... 0 15,000 0 0 0 0 15,000
Other comprehensive income.... 0 0 0 26,119 0 0 26,119
--------- ----------- ----------- ----------- ------- ----------- -----------
BALANCE, DECEMBER 31, 1998...... 4,228,276 18,309,914 8,264,147 14,317 131,500 (1,033,875) 25,554,503
Net income.................... 0 0 3,850,101 0 0 0 3,850,101
Cash dividends declared, $.16
per share................... 0 0 (792,892) 0 0 0 (792,892)
28.58% stock dividend......... 790,269 0 0 0 37,582 0 0
Exercise of stock options..... 32,886 173,428 0 0 0 0 173,428
Tax benefit from exercise of
stock options............... 0 0 59,467 0 0 0 59,467
Other comprehensive loss...... 0 0 0 (1,981,408) 0 0 (1,981,408)
--------- ----------- ----------- ----------- ------- ----------- -----------
BALANCE, DECEMBER 31, 1999...... 5,051,431 $18,483,342 $11,380,823 $(1,967,091) 169,082 $(1,033,875) $26,863,199
========= =========== =========== =========== ======= =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 3,850,101 $ 3,315,500
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................ 537,933 502,399
Provision for loan losses............................... 795,000 561,000
Deferred income taxes................................... (397,281) (109,100)
Net realized (gains) losses on sales of securities
available-for-sale..................................... 4,913 (23,912)
Gains on sales of loans................................. (30,346) (159,448)
Losses on sales of other real estate.................... 25,112 101,456
Increase in interest receivable......................... (335,638) (253,846)
Increase in interest payable............................ 317,743 27,662
Other operating activities.............................. 249,501 (285,370)
------------ ------------
Net cash provided by operating activities............. 5,017,038 3,676,341
------------ ------------
INVESTING ACTIVITIES
Purchases of securities available-for-sale................ (19,443,426) (42,418,649)
Proceeds from sales of securities available-for-sale...... 4,420,285 10,294,738
Proceeds from maturities of securities
available-for-sale...................................... 13,690,684 17,890,680
Proceeds from maturities of securities held-to-maturity... 0 2,248,974
Net decrease in Federal funds sold and securities
purchased under resell agreements....................... 139,000 14,582,000
Net increase in interest-bearing deposits in banks........ (1,018,975) (74,881)
Proceeds from sale of loans............................... 178,922 1,245,743
Net increase in loans..................................... (59,440,926) (40,284,329)
Purchases of premises and equipment....................... (2,725,504) (1,170,511)
Proceeds from sales of other real estate.................. 373,451 871,904
Improvements to and first lien payoffs on other real
estate.................................................. 0 (119,079)
------------ ------------
Net cash used in investing activities................. (63,826,489) (36,933,410)
------------ ------------
FINANCING ACTIVITIES
Net increase in deposits.................................. 50,353,276 29,542,445
Net increase in securities sold under repurchase
agreements.............................................. 8,278,760 239,901
Dividends paid............................................ (792,892) (644,242)
Net increase in other borrowings.......................... 4,142,500 3,000,000
Proceeds from exercise of stock options................... 173,428 70,939
------------ ------------
Net cash provided by financing activities............. 62,155,072 32,209,043
------------ ------------
Net increase (decrease) in cash and due from banks.......... 3,345,621 (1,048,026)
Cash and due from banks at beginning of year................ 10,131,534 11,179,560
------------ ------------
Cash and due from banks at end of year...................... $ 13,477,155 $ 10,131,534
============ ============
SUPPLEMENTAL DISCLOSURES
Cash paid for:
Interest................................................ $ 10,320,906 $ 9,308,259
Income taxes............................................ $ 2,440,100 $ 1,914,454
NONCASH TRANSACTIONS
Unrealized (gains) losses on securities
available-for-sale...................................... $ 3,071,986 $ (39,532)
Transfers of loans to other real estate................... $ 151,745 $ 639,520
Sales of other real estate financed....................... $ 0 $ 166,429
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<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, The Eastside Bank & Trust Company, and Community Bank of
Georgia (the "Banks"). The Banks are commercial banks located in Cobb, Gwinnett,
and DeKalb Counties, Georgia, respectively. The Banks provide a full range of
banking services in their primary market areas of Cobb, Gwinnett, DeKalb, 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 as of the balance sheet date
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of foreclosed real
estate, and deferred tax assets.
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.
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
$8,750,000 and $9,644,000 during 1999 and 1998, respectively, and the maximum
amounts outstanding at any month-end during 1999 and 1998 was $109,500,000 and
$86,500,000, respectively.
F-9
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 recorded at amortized cost.
All other debt securities are classified as available-for-sale and recorded at
fair value with net unrealized gains and losses reported in other comprehensive
income, net of tax. Equity securities without a readily determinable fair value
are classified as securities available-for-sale and recorded 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 reported at their outstanding principal balances less net deferred
loan fees and costs and the allowance for loan losses. Interest income is
accrued based on the principal amount outstanding.
Nonrefundable loan fees and certain direct loan origination costs are
deferred with the net amount recognized in income over the life of the loans.
The allowance for loan losses is maintained at a level that management
believes to be adequate to absorb potential losses in the loan portfolio. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan is confirmed. Subsequent recoveries are credited to
the allowance. 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 impaired when it is probable the Company will be unable to collect
all principal and interest payments due in accordance with the contractual 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.
F-10
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
PREMISES AND EQUIPMENT
Land is carried at cost. Premises and equipment are carried 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. The carrying amount of other real estate owned at December 31,
1999 and 1998 was $214,400 and $457,964, respectively.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements which are classified as secured
borrowings, generally mature within one to four days from the transaction date.
Securities sold under repurchase agreements are reflected at the amount of cash
received in connection with the transaction. The Company monitors the fair value
of the underlying securities on a daily basis.
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 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.
F-11
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 common share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents outstanding. The
number of common shares was increased by the number of shares issuable upon the
exercise of the stock options described in Note 8. This theoretical increase in
the number of common shares was reduced by the number of common shares which are
assumed to have been repurchased for the treasury with the proceeds from the
exercise of the options; these purchases were assumed to have been made at the
price per share that approximates average market price. The treasury stock
method for determining the amount of dilution of stock options is based on the
concept that common shares which could have been purchased with the proceeds of
the exercise of common stock options at market price are not actually
outstanding common shares.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, ("Reporting
Comprehensive Income"), describes comprehensive income as the total of all
components of comprehensive income, including net income. Other comprehensive
income refers 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
unrealized gains and losses on available-for-sale securities.
RECENT ACCOUNTING PRONOUNCEMENTS
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 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.
There are no other recent accounting pronouncements that have had, or are
expected to have, a material effect on the Company's financial statements.
F-12
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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, 1999:
U. S. Government and agency securities..... $22,497,224 $ -- $(1,255,605) $21,241,619
State and municipal securities............. 9,733,328 22,228 (664,043) 9,091,513
Mortgage-backed securities................. 20,041,279 1,385 (995,281) 19,047,383
Equity securities.......................... 983,000 -- -- 983,000
----------- -------- ----------- -----------
$53,254,831 $ 23,613 $(2,914,929) $50,363,515
=========== ======== =========== ===========
DECEMBER 31, 1998:
U. S. Government and agency securities..... $19,104,633 $ 36,062 $ (56,688) $19,084,007
State and municipal securities............. 10,437,572 249,819 (33,865) 10,653,526
Mortgage-backed securities................. 21,578,182 64,501 (79,159) 21,563,524
Equity securities.......................... 806,900 -- -- 806,900
----------- -------- ----------- -----------
$51,927,287 $350,382 $ (169,712) $52,107,957
=========== ======== =========== ===========
</TABLE>
The amortized cost and fair value of securities as of December 31, 1999 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.
<TABLE>
<CAPTION>
SECURITIES AVAILABLE-FOR-SALE
-----------------------------
AMORTIZED FAIR
COST VALUE
------------- -------------
<S> <C> <C>
Due in one year or less............................ $ 695,000 $ 692,620
Due from one year to five years.................... 7,413,317 7,146,325
Due from five to ten years......................... 16,332,942 15,478,490
Due after ten years................................ 7,789,293 7,015,697
Mortgage-backed securities......................... 20,041,279 19,047,383
Equity securities.................................. 983,000 983,000
----------- -----------
$53,254,831 $50,363,515
=========== ===========
</TABLE>
Securities with a carrying value of $26,441,000 and $32,512,000 at
December 31, 1999 and 1998, respectively, were pledged to secure public deposits
and for other purposes.
F-13
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SECURITIES (CONTINUED)
Gross gains and losses on sales of securities available-for-sale consist of
the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Gross gains............................................... $16,929 $48,987
Gross losses.............................................. (21,842) (25,075)
------- -------
Net realized gains (losses)............................... $(4,913) $23,912
======= =======
</TABLE>
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of loans is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Commercial, financial, and agricultural.......... $ 51,059,000 $ 40,129,000
Real estate--construction........................ 53,687,000 41,672,000
Real estate--mortgage............................ 133,320,000 98,176,000
Consumer instalment and other.................... 12,030,888 10,964,749
------------ ------------
250,096,888 190,941,749
Deferred loan fees and costs..................... (514,837) (411,493)
Allowance for loan losses........................ (3,073,506) (2,367,316)
------------ ------------
Loans, net....................................... $246,508,545 $188,162,940
============ ============
</TABLE>
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
BALANCE, BEGINNING OF YEAR........................... $2,367,316 $2,076,357
Provision for loan losses.......................... 795,000 561,000
Loans charged off.................................. (126,909) (301,722)
Recoveries of loans previously charged off......... 38,099 31,681
---------- ----------
BALANCE, END OF YEAR................................. $3,073,506 $2,367,316
========== ==========
</TABLE>
The total recorded investment in impaired loans was $268,926 and $119,971 at
December 31, 1999 and 1998, 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, 1999 and
1998. The average recorded investment in impaired loans for 1999 and 1998 was
$140,134 and $244,177, respectively. Interest income recognized on impaired
loans for cash payments received was not material for the years ended
December 31, 1999 and 1998.
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
F-14
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. LOANS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
and repayment terms are customary for the type of loan involved. Changes in
related party loans for the year ended December 31, 1999 are as follows:
<TABLE>
<S> <C>
BALANCE, BEGINNING OF YEAR.................................. $6,277,290
Advances.................................................. 4,136,964
Repayments................................................ (1,041,902)
----------
BALANCE, END OF YEAR........................................ $9,372,352
==========
</TABLE>
NOTE 4. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
----------- ----------
<S> <C> <C>
Land................................................ $ 3,520,103 $3,519,909
Buildings........................................... 6,826,270 5,066,875
Equipment........................................... 3,844,299 2,761,287
Construction in progress............................ -- 73,415
----------- ----------
14,190,672 11,421,486
Accumulated depreciation............................ (3,374,952) (2,793,337)
----------- ----------
$10,815,720 $8,628,149
=========== ==========
</TABLE>
LEASES:
The Banks lease certain of their branch facilities under various
noncancelable operating leases. Future minimum lease payments on noncancelable
operating leases are summarized as follows:
<TABLE>
<S> <C>
2000........................................................ $115,111
2001........................................................ 117,908
2002........................................................ 100,810
2003........................................................ 87,783
2004........................................................ 55,116
--------
$476,728
========
</TABLE>
Rental expense under all operating leases amounted to $57,518 and $11,009
for the years ended December 31, 1999 and 1998, respectively.
F-15
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. DEPOSITS
The scheduled maturities of time deposits at December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000........................................................ $134,557,131
2001........................................................ 18,580,711
2002........................................................ 3,717,786
2003........................................................ 3,803,506
2004........................................................ 726,269
Thereafter.................................................. 70,111
------------
$161,455,514
============
</TABLE>
NOTE 6. OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Advance from the Federal Home Loan Bank, due in
monthly instalments of $1,250 plus interest at
6.70%, matures June 16, 2009, collateralized by
mortgage loans..................................... $ 142,500 $ --
Advance from the Federal Home Loan Bank with interest
payable quarterly at 5.36% until September 29, 2000
when the rate may be converted to the three month
LIBOR, due September 29, 2004, collateralized by
mortgage loans and securities...................... 4,000,000 --
Advance from the Federal Home Loan Bank with interest
payable quarterly at 4.41%, due October 16, 2003,
collateralized by securities....................... 3,000,000 3,000,000
---------- ----------
$7,142,500 $3,000,000
========== ==========
</TABLE>
Aggregate maturities required on other borrowings at December 31, 1999 are
as follows:
<TABLE>
<S> <C>
2000........................................................ $ 15,000
2001........................................................ 15,000
2002........................................................ 15,000
2003........................................................ 3,015,000
2004........................................................ 4,015,000
Thereafter.................................................. 67,500
----------
$7,142,500
==========
</TABLE>
F-16
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. EMPLOYEE AND DIRECTOR BENEFIT PLANS
The Company has a 401(k) retirement plan covering substantially all
employees. Contributions to the plan charged to expense during 1999 and 1998
amounted to $78,853 and $52,951, respectively.
The Company has deferred compensation agreements for certain of its key
officers and directors which provide for death and retirement benefits. The
estimated amounts to be paid under these agreements have been funded through the
purchase of life insurance policies and other investment accounts. The balance
of the deferred compensation included in other liabilities amounted to $272,119
and $131,394 at December 31, 1999 and 1998, respectively. Deferred compensation
expense recognized under these agreements amounted to $149,808 and $48,748 for
the years ended December 31, 1999 and 1998, respectively. The balance of the
policy cash surrender value and other investment accounts included in other
assets was $1,023,745 and $957,493 at December 31, 1999 and 1998, respectively.
Income recognized on the policies and accounts amounted to $42,252 and $31,461
for the years ended December 31, 1999 and 1998, respectively.
NOTE 8. STOCK OPTIONS
The Company has various stock option plans with common stock reserved for
key employees and directors. At December 31, 1999, the Company had 212,357
shares of its authorized but unissued common stock reserved for future grants
under the stock option plans. 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
vest over time periods
F-17
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTIONS (CONTINUED)
determined by the Compensation Committee of the Board of Directors and expire
ten years from date of grant. Other pertinent information related to the options
is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1999 1998
-------------------- --------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Under option, beginning of year...... 634,596 $ 5.32 612,543 $4.96
Granted............................ 72,809 11.46 74,568 9.43
Exercised.......................... (32,886) 5.27 (13,037) 5.44
Terminated......................... (4,773) 6.24 (39,478) 7.58
-------- --------
Under option, end of year............ 669,746 5.98 634,596 5.32
======== ========
Exercisable, end of year............. 608,911 5.49 557,072 4.80
======== ========
Weighted-average fair value of
options granted during the year.... $ 5.01 $ 3.82
======== ========
</TABLE>
<TABLE>
<CAPTION>
UNDER OPTION, END OF YEAR
- -----------------------------------------------------------------------------
WEIGHTED-AVERAGE
REMAINING
WEIGHTED-AVERAGE CONTRACTUAL LIFE
NUMBER RANGE OF PRICES EXERCISE PRICE IN YEARS
- --------------------- --------------- ---------------- ----------------
<S> <C> <C> <C>
309,200 $ 3.07- 4.55 $ 3.62 5
234,574 $ 4.82- 7.19 $ 6.34 7
32,269 $ 7.40- 9.72 $ 9.45 9
93,703 $11.08-12.83 $11.67 10
------------
669,746 7
============
</TABLE>
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE, END OF YEAR
- --------------------------------------------------------------------
<S> <C> <C> <C>
309,200 $3.07- 4.55 $ 3.62 5
232,517 $4.82- 7.19 $ 6.33 7
9,434 $7.40- 9.72 $ 8.80 9
57,760 $11.08-12.83 $11.56 10
-------------------
608,911 7
===================
</TABLE>
F-18
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8. STOCK OPTIONS (CONTINUED)
As permitted by SFAS No. 123 ("Accounting for Stock-Based Compensation"),
the Company recognizes compensation cost for stock-based employee compensation
awards in accordance with APB Opinion No. 25, ("Accounting for Stock Issued to
Employees"). The Company recognized $-- and $15,000 of compensation cost for
stock-based employee compensation awards for the years ended December 31, 1999
and 1998, respectively. If the Company had recognized compensation cost in
accordance with SFAS No. 123, net income and earnings per share would have been
reduced as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------
BASIC DILUTED
EARNINGS EARNINGS
NET INCOME PER SHARE PER SHARE
---------- --------- ---------
<S> <C> <C> <C>
As reported................................... $3,850,101 $0.79 $0.74
Stock-based compensation, net of related tax
effect...................................... (215,923) (0.04) (0.04)
---------- ----- -----
As adjusted................................... $3,634,178 $0.75 $0.70
========== ===== =====
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
----------------------------------
AS REPORTED. $3,315,500 $ 0.68 $ 0.64
<S> <C> <C> <C>
Stock-based compensation, net of related tax
effect...................................... (40,536) (0.01) (0.01)
---------- ----- -----
As adjusted................................... $3,274,964 $0.67 $0.63
========== ===== =====
</TABLE>
The fair value of the options granted during the year was based upon the
discounted value of future cash flows of the options using the following
weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Risk-free interest rate................................... 6.47% 5.12%
Expected life of the options.............................. 7 YEARS 7 years
Expected dividends (as a percent of the fair value of the
stock).................................................. 1.27% 1.71%
Volatility................................................ 35.59% 37.79%
</TABLE>
NOTE 9. INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Current.............................................. $2,593,191 $1,693,763
Deferred............................................. (397,281) (109,100)
---------- ----------
Income tax expense............................. $2,195,910 $1,584,663
========== ==========
</TABLE>
F-19
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. INCOME TAXES (CONTINUED)
The Company's income tax expense differs from the amounts computed by
applying the Federal income tax statutory rates to income before income taxes. A
reconciliation of the differences is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1999 1998
--------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Income taxes at statutory rate............ $2,055,644 34% $1,666,056 34%
Tax-exempt interest..................... (150,756) (2) (117,655) (3)
State income taxes...................... 142,801 2 86,780 2
Merger expenses......................... 91,331 2 -- --
Other items, net........................ 56,890 -- (50,518) (1)
---------- -- ---------- --
Income tax expense........................ $2,195,910 36% $1,584,663 32%
========== == ========== ==
</TABLE>
The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---------- --------
<S> <C> <C>
Deferred tax assets:
Loan loss reserves.................................. $ 993,644 $644,964
Deferred loan fees and costs........................ 125,666 90,770
Deferred compensation............................... 139,184 41,578
Other real estate writedowns........................ 5,963 18,980
Securities available-for-sale....................... 1,030,147 --
Other............................................... -- 59,241
---------- --------
2,294,604 855,533
---------- --------
Deferred tax liabilities:
Depreciation........................................ 144,788 97,829
Securities available-for-sale....................... -- 59,353
Other............................................... -- 35,316
---------- --------
144,788 192,498
---------- --------
Net deferred tax assets............................... $2,149,816 $663,035
========== ========
</TABLE>
F-20
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. 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):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
NET WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------- ---------------- ---------
<S> <C> <C> <C>
Basic EPS................................ $3,850,101 4,861,826 $0.79
=====
Effect of Dilutive Securities Stock
options................................ -- 323,166
---------- ---------
Diluted EPS.............................. $3,850,101 5,184,992 $0.74
========== ========= =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
NET WEIGHTED-AVERAGE PER SHARE
INCOME SHARES AMOUNT
---------- ---------------- ---------
<S> <C> <C> <C>
Basic EPS................................ $3,315,500 4,841,394 $0.68
=====
Effect of Dilutive Securities Stock
options................................ -- 342,453
---------- ---------
Diluted EPS.............................. $3,315,500 5,183,847 $0.64
========== ========= =====
</TABLE>
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, the Company has entered into off-balance
sheet financial instruments which are not reflected in the financial statements.
These financial instruments include commitments to extend credit and standby
letters of credit. Such financial instruments are included in the financial
statements when funds are disbursed or the instruments become payable. These
instruments involve, to varying degrees, elements of credit risk in excess of
the amount recognized in the balance sheet.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. A summary of the Company's commitments is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Commitments to extend credit....................... $68,155,000 $59,219,000
Standby letters of credit.......................... 1,012,000 1,043,000
----------- -----------
$69,167,000 $60,262,000
=========== ===========
</TABLE>
Commitments to extend credit generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
credit risk involved in issuing these financial instruments is essentially the
same as that involved in extending loans to customers. The Company evaluates
each customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on
F-21
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11. COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)
management's credit evaluation of the customer. Collateral held varies but may
include real estate and improvements, marketable securities, accounts
receivable, inventory, equipment, and personal property.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loans to customers. Collateral held varies as
specified above and is required in instances which the Company deems necessary.
In the normal course of business, the Company is involved in various legal
proceedings. In the opinion of management of the Company, any liability
resulting from such proceedings would not have a material effect on the
Company's financial statements.
NOTE 12. CONCENTRATIONS OF CREDIT
The Company originates primarily commercial, residential, and consumer loans
to customers in Cobb, Gwinnett, and DeKalb 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-five 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 $2,136,000 for The Westside Bank & Trust
Company, $1,903,000 for The Eastside Bank & Trust Company, and $1,543,000 for
Community Bank of Georgia.
NOTE 13. 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, 1999,
approximately $2,201,000 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 capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Prompt corrective
provisions are not applicable to bank holding companies.
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
F-22
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. REGULATORY MATTERS (CONTINUED)
of Tier I capital to average assets. Management believes, as of December 31,
1999, the Company and the Banks meet all capital adequacy requirements to which
they are subject.
As of December 31, 1999, the most recent notification from the Federal
Deposit Insurance Corporation categorized the Banks, except for The Eastside
Bank & Trust Company, 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
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk Weighted Assets:
Consolidated................................. $31,903 11.06% $23,087 8.00% $ N/A N/A
Westside..................................... $12,463 11.37% $ 8,770 8.00% $10,962 10.00%
Eastside..................................... $ 9,937 9.92% $ 8,019 8.00% $10,022 10.00%
Community.................................... $ 9,364 11.50% $ 6,517 8.00% $ 8,146 10.00%
Tier I Capita to Risk Weighted Assets:
Consolidated................................. $28,830 9.99% $11,544 4.00% $ N/A N/A
Westside..................................... $11,408 10.41% $ 4,385 4.00% $ 6,577 6.00%
Eastside..................................... $ 8,854 8.83% $ 4,009 4.00% $ 6,014 6.00%
Community.................................... $ 8,429 10.35% $ 3,259 4.00% $ 4,888 6.00%
Tier I Capital to Average Asset:
Consolidated................................. $28,830 7.66% $15,055 4.00% $ N/A N/A
Westside..................................... $11,408 6.99% $ 6,533 4.00% $ 8,166 5.00%
Eastside..................................... $ 8,854 7.49% $ 4,726 4.00% $ 5,908 5.00%
Community.................................... $ 8,429 8.88% $ 3,799 4.00% $ 4,748 5.00%
</TABLE>
F-23
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE WELL
FOR CAPITAL CAPITALIZED UNDER
ADEQUACY PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital to Risk Weighted Assets:
Consolidated................................ $27,907 12.33% $18,112 8.00% $ N/A N/A
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%
Community................................... $ 8,198 12.60% $ 5,219 8.00% $ 6,524 10.00%
Tier I Capita to Risk Weighted Assets:
Consolidated................................ $25,540 11.28% $ 9,056 4.00% $ N/A N/A
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%
Community................................... $ 7,457 11.40% $ 2,610 4.00% $ 3,914 6.00%
Tier I Capital to Average Assets:
Consolidated................................ $25,540 9.21% $11,088 4.00% $ N/A N/A
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%
Community................................... $ 7,457 9.70% $ 3,071 4.00% $ 3,838 5.00%
</TABLE>
NOTE 14. 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, 1999 and 1998. 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.
F-24
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
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.
OTHER BORROWINGS:
For other borrowings, fair values are estimated using discounted cash flow
models based on the current incremental borrowing rates for similar types of
borrowing arrangements.
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-25
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------------- ---------------------------
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........................ $ 34,901,826 $ 34,901,826 $ 30,676,230 $ 30,676,230
Securities available-for-sale....... 50,363,515 50,363,515 52,107,957 52,107,957
Loans............................... 246,508,545 248,418,212 188,162,940 190,042,706
Accrued interest receivable......... 1,933,643 1,933,643 1,598,005 1,598,005
Financial liabilities:
Deposits............................ 303,632,842 303,868,954 253,279,566 254,624,588
Securities sold under repurchase
agreements........................ 8,872,722 8,872,722 593,962 593,962
Accrued interest payable............ 1,091,159 1,091,159 773,416 773,416
Other borrowings.................... 7,142,500 6,523,672 3,000,000 2,909,732
</TABLE>
NOTE 15. BUSINESS COMBINATIONS
On April 23, 1999, the Company effected a business combination and merger
with Georgia Bancshares, Inc. by exchanging 1,461,632 shares of its common stock
for all of the common stock of Georgia Bancshares, Inc. The combination was
accounted for as a pooling of interests and, accordingly, all prior financial
statements have been restated to include Georgia Bancshares, Inc. Prior to the
consummation of the merger, the Company declared a 28.58% stock dividend payable
to Company stockholders. All per share and stock option data has been restated
to reflect the effects of the business combination and stock dividend. The
results of operations on the separate companies for periods prior to the
combination are summarized as follows:
<TABLE>
<CAPTION>
NET INCOME
----------
<S> <C>
For the period from January 1, 1999 through April 23, 1999:
First Sterling Banks, Inc................................. $ 770,464
Georgia Bancshares, Inc................................... 313,921
----------
$1,084,385
==========
</TABLE>
On December 1, 1999, the Company entered into a Merger Agreement with Main
Street Banks, Inc. ("MBI") of Covington, Georgia. Under this agreement, MBI will
merge with and into the Company. Upon consummation of the merger, each share of
MBI stock will be converted into and exchanged for the right to receive 1.01
shares of Company common stock. Consummation is subject to certain conditions,
including regulatory and stockholder approval.
F-26
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total revenue are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Data processing......................................... $476,528 $361,332
Directors fees.......................................... 328,375 312,900
Merger expenses......................................... 308,908 105,531
</TABLE>
NOTE 17. 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, 1999 and 1998:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash............................................. $ 191,903 $ 229,614
Investment in subsidiaries....................... 26,723,619 25,291,025
Other assets..................................... 30,310 73,864
----------- -----------
Total assets................................. $26,945,832 $25,594,503
=========== ===========
Liabilities........................................ $ 82,633 $ 40,000
Stockholders' equity............................... 26,863,199 25,554,503
----------- -----------
Total liabilities and stockholders' equity......... $26,945,832 $25,594,503
=========== ===========
</TABLE>
F-27
<PAGE>
FIRST STERLING BANKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Income, dividends from subsidiaries.................. $1,047,131 $ 738,454
---------- ----------
Expenses
Salaries and employee benefits..................... 81,667 --
Merger expenses.................................... 308,908 105,531
Legal and professional............................. 81,133 22,381
Other expense...................................... 248,448 269,768
---------- ----------
Total expenses................................. 720,156 397,680
---------- ----------
Income before income tax benefits and equity in
undistributed income of subsidiaries......... 326,975 340,774
Income tax benefits.................................. (168,590) (143,851)
---------- ----------
Income before equity in undistributed income of
subsidiaries..................................... 495,565 484,625
Equity in undistributed income of subsidiaries....... 3,354,536 2,830,875
---------- ----------
Net income......................................... $3,850,101 $3,315,500
========== ==========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $ 3,850,101 $ 3,315,500
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of subsidiaries........... (3,354,536) (2,830,875)
Other operating activities..................... 86,188 32,652
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES.... 581,753 517,277
FINANCING ACTIVITIES
Dividends paid................................... (792,892) (644,242)
Proceeds from exercise of stock options.......... 173,428 70,939
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES........ (619,464) (573,303)
----------- -----------
Net decrease in cash............................... (37,711) (56,026)
Cash at beginning of year.......................... 229,614 285,640
----------- -----------
Cash at end of year................................ $ 191,903 $ 229,614
=========== ===========
</TABLE>
F-28
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
of First Sterling Banks, Inc. listed below of our report dated January 27, 2000
relating to the financial statements of First Sterling Banks, Inc. and
subsidiaries, Kennesaw, Georgia, included and/or incorporated by reference in
this Annual Report (Form 10-KSB) for the year ended December 31, 1999.
- Registration Statement No. 333-15069 on Form S-8, dated October 30, 1996
and related Prospectus
- Registration Statement No. 333-56473 on Form S-8, dated June 10, 1998 and
related Prospectus
- Registration Statement No. 333-74555 on Form S-8, dated March 17, 1999 and
related Prospectus
- Registration Statement No. 333-79457 on Form S-8, dated May 27, 1999 and
related Prospectus
- Registration Statement No. 333-79463 on Form S-8, dated May 27, 1999 and
related Prospectus
- Registration Statement No. 333-88645 on Form S-8, dated October 8, 1999
and related Prospectus
/s/ MAULDIN & JENKINS, LLC
Atlanta, Georgia
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS FOR PERIOD ENDING DECOMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,477,155
<INT-BEARING-DEPOSITS> 1,224,671
<FED-FUNDS-SOLD> 20,200,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 50,363,515
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 249,582,051
<ALLOWANCE> 3,073,506
<TOTAL-ASSETS> 348,250,741
<DEPOSITS> 303,632,842
<SHORT-TERM> 8,872,722
<LIABILITIES-OTHER> 1,739,478
<LONG-TERM> 7,142,500
0
0
<COMMON> 18,483,342
<OTHER-SE> 8,379,857
<TOTAL-LIABILITIES-AND-EQUITY> 348,250,741
<INTEREST-LOAN> 21,720,973
<INTEREST-INVEST> 2,996,565
<INTEREST-OTHER> 1,009,533
<INTEREST-TOTAL> 25,727,071
<INTEREST-DEPOSIT> 10,257,306
<INTEREST-EXPENSE> 10,638,649
<INTEREST-INCOME-NET> 15,088,422
<LOAN-LOSSES> 795,000
<SECURITIES-GAINS> (4,913)
<EXPENSE-OTHER> 9,612,172
<INCOME-PRETAX> 6,046,011
<INCOME-PRE-EXTRAORDINARY> 3,850,101
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,850,101
<EPS-BASIC> .79
<EPS-DILUTED> .74
<YIELD-ACTUAL> 5.09
<LOANS-NON> 268,926
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,367,316
<CHARGE-OFFS> 126,909
<RECOVERIES> 38,099
<ALLOWANCE-CLOSE> 3,073,506
<ALLOWANCE-DOMESTIC> 3,073,506
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
