FIRST CHEROKEE BANCSHARES INC, 10KSB, 1996-04-01

FIRST CHEROKEE BANCSHARES INC
10KSB, 1996-04-01
NATIONAL COMMERCIAL BANKS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]

/ / FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from __________ to __________

COMMISSION FILE NUMBER 0-18488

FIRST CHEROKEE BANCSHARES, INC.
(Exact name of Registrant as specified in its Charter)

GEORGIA 58-1807887
(State of Incorporation) (I.R.S. Employer Identification No.)

6395 E. ALABAMA ROAD
P. O. BOX 1238
WOODSTOCK, GEORGIA 30188
(Address of principal executive office, including zip code)

(770) 591-9000
(Registrant's telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act: NONE
Securities Registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $1.00

Check whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
----- -----

[Cover page continued on next page]

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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]

The registrant's revenues for the fiscal year ended December 31, 1995 were
$8,514,774.

The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at March 7, 1996, was $3,725,381, based on an estimated market price
of $11.00 per share, without adjustment for the Company's 10% stock dividend
declared January 17, 1996 and payable April 1, 1996. Market price was
estimated based on the most recent sales price of the Common Stock.

APPLICABLE ONLY TO CORPORATE REGISTRANTS

State the number of shares outstanding of each of issuer's classes of
common equity, as of the last practicable date:

The number of shares of the Registrant's Common Stock outstanding at March
7, 1996, was 551,804 shares. The number of shares has been adjusted to reflect
a 10% stock split declared on January 17, 1996, and payable on April 1, 1996,
effected in the form of a dividend.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Annual Report to Shareholders for the year ended
December 31, 1995 are incorporated by reference into Parts I and II of this
report.

Portions of the Proxy Statement for the 1996 Annual Meeting of Shareholders
to be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 1995 fiscal year-end are incorporated by reference into Part III of
this report.

Transitional Small Business Disclosure Format (check one):
Yes No X
----- -----

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PART I

ITEM 1. DESCRIPTION OF BUSINESS.

GENERAL INFORMATION

First Cherokee Bancshares, Inc. (the "Company") was incorporated as a Georgia
business corporation on July 26, 1988, for the purpose of becoming a bank
holding company by acquiring all of the common stock of First National Bank of
Cherokee, Woodstock, Georgia (the "Bank"). The Company filed applications to
the Board of Governors of the Federal Reserve System (the "Federal Reserve") and
the Georgia Department of Banking and Finance (the "Georgia Department") for
prior approval to become a bank holding company. The Company received Federal
Reserve approval on December 27, 1988, and Georgia Department approval on
December 20, 1988. The Company became a bank holding company within the meaning
of the federal Bank Holding Company Act of 1956, as amended (the "Federal Bank
Holding Company Act") and the Georgia Bank Holding Company Act (the "Georgia
Bank Holding Company Act") upon the Company's acquisition of all of the common
stock of the Bank on November 27, 1989. The Bank is currently the sole
operating subsidiary of the Company.

In 1992, the Bank acquired the deposits, land, building and certain other assets
of a branch of United Savings Bank in Smyrna, Georgia (the "Branch"). The
property and equipment are located at 1185 North Cobb Parkway, Marietta,
Georgia.

The Bank's principal sources of income are interest and fees collected on loans,
interest and dividends collected on investments, premiums on the sale of loans,
and service fees on deposit accounts. The Bank's principal expenses are
interest paid on savings, time, NOW and money market deposits, loan loss
provision, employee compensation, office expenses, and other overhead expenses.

The Bank operates under the guidance of a three-year Capital Plan, which is
updated annually. The Plan represents management's best estimate of the future
financial condition of the Bank given achievable loan and other earning asset
production. The current Capital Plan projects the Bank's estimated assets,
liabilities, net worth, revenues, and expenses throughout the period ending
December 31, 1998. Management uses the Capital Plan as a tool to analyze
various operating strategies. Most importantly, the Capital Plan gives
management of the Bank and the Board of Directors of the Company a measure of
the relative success of their strategies on the Bank's profitability. During
1995, the Bank grew $8 million or 10% more than projected by the Plan. Net
earnings after taxes in 1995 were $195,789 or 22% more than projected by the
Plan. The updated Plan projects assets of the Bank to reach $90 million by the
end of 1996. Net earnings after taxes were conservatively projected to be
approximately $941,000, representing a Return on Average Assets of 1.11%.

MARKET AREA

The Company and the Bank conduct business from offices located at 6395 East
Alabama Road, P. O. Box 1238, Woodstock, Georgia. The Company is authorized to
engage in any activity permitted by law to a corporation, subject to applicable
federal regulatory restrictions on the activities of bank holding companies.
The Bank conducts a general commercial banking business (accepts deposits from
the public and makes loans and other investments) in its primary service area,
which has expanded slightly with the

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addition of the Branch, emphasizing the banking needs of individuals and small-
to-medium-sized businesses. The Bank's primary service area is all of Cherokee
County, Georgia and the northern parts of Cobb and Fulton Counties.

The Bank emphasizes personalized client service to meet each customer's banking
needs. The business nature of the Bank's market area is a local economy
oriented toward land development and residential construction. Located
approximately 20 miles north of Atlanta, Georgia, the Bank's market area has
become a suburban residential community with a growing volume of related retail,
commercial and small business development.

COMPETITION

The banking business is highly competitive. The Bank competes with other
commercial banks and savings and loan associations in its primary service area.
Recent legislation, together with other regulatory changes by the primary
regulators of the various financial institutions and competition from
unregulated entities, has resulted in the elimination of many traditional
distinctions between commercial banks, thrift institutions and other providers
of financial services. Consequently, competition among financial institutions
of all types is virtually unlimited with respect to legal ability and authority
to provide most financial services.

Banks generally compete with other financial institutions through the banking
products and services offered, the pricing of services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and the personal manner in which services are offered. Management
anticipates that the Bank will continue to encounter strong competition from
most of the financial institutions in the Bank's primary service area. In the
conduct of certain areas of its banking business, the Bank also competes with
credit unions, consumer finance companies, insurance companies, money market
mutual funds and other financial institutions, some of which are not subject to
the same degree of regulation and restrictions imposed upon the Bank. Many of
these competitors have substantially greater resources and lending limits than
the Bank has and offer certain services, such as international banking services
and trust services, that the Bank does not provide. Management believes that
competitive pricing, a hometown atmosphere and personalized service provide the
Bank with a method to compete effectively in the primary service area.

DEPOSITS

The Bank offers a full range of deposit services typically available from
financial institutions, including demand, savings and other time deposits
ranging from money market accounts to longer term certificates of deposit and
individual retirement accounts. The Bank provides its customers with business,
personal and overdraft lines of credit. It also provides merchants with Visa
and MasterCard acceptance capabilities and customers with Visa and MasterCard
credit cards. All deposit accounts are insured by the Federal Deposit Insurance
Corporation (the "FDIC") up to the maximum amount currently permitted by law.

LENDING ACTIVITIES

The Bank's lending philosophy is to make loans, taking into consideration the
interest of its shareholders, safety of the depositors' funds, preservation of
Bank liquidity, welfare of the community and adherence to

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federal regulations. Income from loans will always be the major contributor to
the Bank's income. Normal risk is associated with each category of loan offered
by the Bank. The economy plays an important part in the risks associated with
lending and these risks may be greater at times of economic downturns.

As of the end of 1995, the Bank's loan portfolio consisted of approximately 8%
Consumer Loans, 16% Commercial Loans, 23% U.S. Small Business Administration
("SBA") - Unguaranteed portion of Loans, and 53% Commercial and Residential Real
Estate and Construction Loans. The Bank's net loan-to-deposit ratio was
approximately 71% as of December 31, 1995.

Total net loans as of December 31, 1995 were $54,236,513, with the percentage of
30 days or greater delinquent loans at year end at 1.82%. The percentage of
substandard rated loans was 6.77% of total outstanding loans, which represented
63.08% of risk-based capital; no loans were classified as doubtful or loss. As
of December 31, 1995, the Bank had nine non-accrual loans which totaled
$1,774,778. During 1995, the loan loss provision was $255,471, and charge-offs
totaled $64,094; recoveries during 1995 amounted to $33,299. The balance in the
loan loss reserve account was $685,706 as of December 31, 1995.

REAL ESTATE LOANS. The Bank makes single-family residential construction loans
for one- to four-unit structures. The Bank requires a first lien position on
the land associated with the construction projects and offers these loans only
to qualified residential building contractors. Loan disbursements require on-
site inspections to assure the project is on budget and that the loan proceeds
are being used in accordance with the plans, specifications and survey for the
construction project and not being diverted to another project. The loan-to-
value ratio for such loans is predominately 75% of the lower of the as-built
appraised value or project cost, and is a maximum of 80% if the loan is
amortized. Loans for construction can present a high degree of risk to the
lender, depending on, among other things, whether the builder can sell the home
to a buyer, whether the buyer can obtain permanent financing, whether the
transaction produces income in the interim, and the nature of changing economic
conditions.

The Bank also makes acquisition and development loans to Bank-approved
developers for the purpose of developing acreage into single family lots on
which houses will be built. Loan disbursements require on-site inspections to
assure the project is on budget and that the loan proceeds are being used for
the development project and not being diverted to another project. The loan-to-
value ratio for such loans does not exceed 75% of the discounted value, as
defined in the appraisal report. Loans for acquisition and development can
present a high degree of risk to the lender, depending upon, among other things,
whether the developer can find builders to buy the lots, whether the builder can
obtain financing, whether the transaction produces income in the interim and the
nature of changing economic conditions.

Additionally, the Bank offers first mortgage loans on commercial real estate for
owner-occupied or investment real estate. Almost all conventional first
mortgage loans originated by the Bank have a loan-to- value ratio that does not
exceed 85% with a maximum term of 25 years and call provisions every three to
five years. Such loans typically carry adjustable interest rates. Risks
involved with commercial mortgage lending include, but are not limited to, title
defects, fraud, general real estate market deterioration, inaccurate appraisals,
violation of banking protection laws, interest rate fluctuations and financial
deterioration of borrower.

COMMERCIAL LOANS. Commercial lending is directed principally towards businesses
whose demand for funds falls within the Bank's legal lending limits and are
existing or potential deposit customers of the

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Bank. This category includes loans made to individual, partnership or corporate
borrowers and obtained for a variety of purposes. Risks associated with these
loans can be significant. Risks include, but are not limited to, fraud,
bankruptcy, economic downturn, deteriorated or non-existing collateral and
changes in interest rates.

The Bank also makes commercial loans to small businesses with respect to which
the SBA generally guarantees repayment of up to 75% of the loan amount, subject
to certain other limitations. The Bank may sell the guaranteed portion of these
loans to institutional investors in the secondary markets. On such loans, the
Bank retains servicing rights and obligations on all the guaranteed portions
sold. Risks associated with these loans include, but are not limited to, credit
risk, e.g., fraud, bankruptcy, economic downturn, deteriorated or non-existing
collateral and changes in interest rates, and operational risk, e.g., failure of
the Bank to adhere to SBA funding and servicing requirements in order to secure
and maintain the SBA guarantees and servicing rights.

CONSUMER LOANS. The Bank makes consumer loans, consisting primarily of
installment loans to individuals for personal, family and household purposes
including loans for automobiles and investments. Risks associated with these
loans include, but are not limited to, fraud, deteriorated or non-existing
collateral, general economic downturn and customer financial problems.

INVESTMENT ACTIVITIES

After establishing necessary cash reserves and funding loans, the Bank invests
its remaining liquid assets in investments allowed under banking laws and
regulations. The Bank invests primarily in obligations of the United States or
obligations guaranteed as to principal and interest by the United States, and
other taxable securities and in certain obligations of states and
municipalities. The Bank also engages in Federal funds transactions with its
principal correspondent banks and primarily acts as a net seller of such funds.
The sale of Federal funds amounts to a short-term loan from the Bank to another
bank. Risks associated with these investments include, but are not limited to,
mismanagement in terms of interest rate, maturity and concentration.
Traditionally, losses associated with the investment portfolio have been
minimal.

ASSET/LIABILITY MANAGEMENT

It is the objective of the Bank to manage its assets and liabilities to provide
a satisfactory, consistent level of profitability within the framework of
established cash, loan, investment, borrowing and capital policies. Certain
officers of the Bank are charged with the responsibility for developing and
monitoring policies and procedures that are designed to insure acceptable
composition of the asset/liability mix. It is the overall philosophy of
management to support asset growth primarily through growth of core deposits,
which include deposits of all categories made by individuals, partnerships and
corporations. Management of the Bank seeks to invest the largest portion of the
Bank's assets in commercial and real estate related loans. The Bank's
asset/liability mix is monitored on a timely basis with a report reflecting
interest-sensitive assets and interest-sensitive liabilities being prepared and
presented to the Bank's Board of Directors on a monthly basis. The objective of
this policy is to manage interest-sensitive assets and liabilities so as to
minimize the impact of substantial movements and interest rates on the Bank's
earnings. See "Item 6 - Management's Discussion and Analysis of Financial
Condition and Results of Operations -Liquidity and Interest Rate Sensitivity."

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EMPLOYEES

At December 31, 1995, the Bank employed 43 full-time employees and 3 part-time
employees. Certain executive officers of the Bank also serve as the officers of
the Company. The Company does not have compensated employees. Neither the
Company nor the Bank is a party to a collective bargaining agreement, and, in
the opinion of management, the Bank enjoys satisfactory relations with its
employees.

SELECTED STATISTICAL INFORMATION OF THE COMPANY

The following statistical information is provided for the Company for the years
ended December 31, 1995 and December 31, 1994. This data should be read in
conjunction with the information presented under the heading "Item 6 -
Management's Discussion and Analysis of Financial Condition" and "Item 7 -
Financial Statements" appearing elsewhere in this Report and incorporated herein
by reference.

DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS'
EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

AVERAGE BALANCES AND NET INCOME ANALYSIS

Table 1 below presents average balances of the Company on a consolidated basis
and the interest earned and paid thereon during the years ended December 31,
1995 and 1994.

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TABLE 1

<TABLE>
<CAPTION>
1995 1994
---------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loan Portfolio (1) . . . . . . . . . . $ 51,902,061 $ 6,265,591 12.07% $ 36,629,503 $ 4,086,103 11.16%
Investment Securities (2). . . . . . . 3,027,979 195,914 6.47% 3,337,176 218,075 6.53%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments . . . 10,391,629 611,841 5.89% 4,840,851 216,437 4.47%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest-Earning Assets. . . 65,321,669 $ 7,073,346 10.83% 44,807,530 $ 4,520,615 10.09%
Non-Earning Assets . . . . . . . . . . . 9,435,517 6,534,266
------------ ------------
Total Average Assets . . . . . . . $ 74,757,186 $ 51,341,796
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Interest-Bearing Liabilities
NOW Accounts . . . . . . . . . . . . . $ 4,090,159 $ 115,034 2.81% $ 4,373,965 $ 110,842 2.53%
Money Market Accounts. . . . . . . . . 6,056,074 226,210 3.74% 4,879,697 174,708 3.58%
Savings. . . . . . . . . . . . . . . . 2,467,441 72,729 2.95% 2,759,672 76,049 2.75%
Time, $100,000 and Over. . . . . . . . 12,463,685 798,922 6.41% 7,312,843 308,661 4.22%
Other Time . . . . . . . . . . . . . . 36,500,465 2,309,792 6.33% 22,020,737 1,131,358 5.14%
------------ ------------ ------------ ------------ ------------ ------------
Total Interest-Bearing Liabilities 61,577,824 $ 3,522,687 5.72% 41,346,914 $ 1,801,618 4.35%
Non Interest-Bearing Demand
Deposits . . . . . . . . . . . . . . . 6,420,676 4,676,307
Other Liabilities. . . . . . . . . . . . 1,126,140 608,935
------------ ------------
Total Liabilities. . . . . . . . . 69,124,640 46,632,156
Stockholders' Equity . . . . . . . . . . 5,632,546 4,709,640
------------ ------------
Total Average Liabilities and
Stockholders' Equity . . . . . . . . . $ 74,757,186 $ 51,341,796
------------ ------------
------------ ------------

Net Earnings Assets. . . . . . . . . . . $ 3,743,845 $ 3,460,616
Net Yield on Interest
Earning Assets . . . . . . . . . . . . 5.43% 6.06%
Net Interest Rate Spread . . . . . . . . 5.11% 5.74%
Net Interest Margin. . . . . . . . . . . $ 3,550,659 $ 2,718,997
</TABLE>

(1) When computing yields on interest earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $350,011 and
$350,908 are included in interest income for the periods ending
December 31, 1995 and 1994, respectively.
(2) All investment securities are taxable.

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RATE AND VOLUME ANALYSIS

Table 2 below reflects the changes in net interest income resulting from changes
in interest rates and from asset and liability volume. Federally tax-exempt
interest is presented on a taxable-equivalent basis assuming a 34% Federal tax
rate. 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. As a result, changes that are not solely due to
volume have been consistently attributed to rate.

TABLE 2

YEAR ENDED DECEMBER 31, YEAR ENDED DECEMBER 31,
1995 VS. 1994 1994 VS. 1993
-------------------------------------- ---------------------------------------
INCREASE CHANGES DUE TO INCREASE CHANGES DUE TO
(DECREASE) RATE VOLUME (DECREASE) RATE VOLUME
---------- ---- ------ ---------- ---- ------

<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in:
Income from earning assets:
Interest and fees on loans $2,179,488 $475,071 $1,704,417 $1,210,636 $294,328 $916,308
Interest on investment
securities (22,161) (20,344) (1,817) (149,681) 15,076 (164,757)
Interest on Federal funds sold,
interest-bearing deposits,
and other investments 395,404 147,284 248,120 90,282 91,682 (1,400)
---------- -------- ---------- ---------- -------- --------
Total interest income $2,552,731 $602,011 $1,950,720 $1,151,237 $401,086 $750,151
---------- -------- ---------- ---------- -------- --------

Expense from interest-bearing liabilities:
Interest on now accounts $4,192 $11,372 $(7,180) $(4,875) $7,985 $(12,860)
Interest on money market accounts 51,502 9,388 42,114 46,637 23,986 22,651
Interest on savings accounts (3,320) 4,716 (8,036) (4,779) (12,092) 7,313
Interest on time deposits,
$100,000 and over 490,261 272,895 217,366 70,700 (35,168) 105,868
Interest on other time deposits 1,178,434 434,176 744,258 247,687 57,763 189,924
---------- -------- ---------- ---------- -------- --------
Total interest expense $1,721,069 $ 732,547 $988,522 $355,370 $42,474 $312,896
---------- -------- ---------- ---------- -------- --------

Net interest income $ 831,662 $(130,536) $962,198 $795,867 $358,612 $437,255
--------- --------- -------- -------- -------- --------
--------- --------- -------- -------- -------- --------
</TABLE>

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LOAN PORTFOLIO

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

Table 3 below presents the maturity date distribution of the loans at December
31, 1995.

TABLE 3

AS OF DECEMBER 31, 1995
(IN THOUSANDS)

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
ONE YEAR >1 YEAR
OR LESS TO FIVE YEARS > 5 YEARS
------- ------------- ---------

Fixed Adjustable Fixed Adjustable
Rate Rate Rate Rate TOTAL
---- ---- ---- ---- -----

<S> <C> <C> <C> <C> <C> <C>
Commercial $3,802 $2,471 $2,225 0 $146 $8,644

Real Estate-
Construction 9,570 0 0 0 0 9,570

All Other
Loans 8,010 6,601 7,496 455 14,146 36,708
----- ----- ----- --- ------ ------

Total $21,382 $9,072 $9,721 $455 $14,292 $54,922
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

TYPES OF LOANS

Table 4 below presents the loan portfolio stratified by type and the
corresponding percentage of total loans as of December 31, 1995 and 1994.

TABLE 4

<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------------------------------
-------------------------------------------------------------------------

% OF TOTAL % OF TOTAL
TOTAL LOAN TOTAL LOAN
LOANS PORTFOLIO LOANS PORTFOLIO
----- --------- ----- ---------

<S> <C> <C> <C> <C>
Real Estate $ 9,570,279 17.43% $11,791,651 25.35%
Construction

Real Estate Mortgage 19,311,092 35.16% 18,476,621 39.72%

SBA -- Unguaranteed 12,923,486 23.53% 5,938,750 12.77%

Commercial 8,644,335 15.74% 6,537,937 14.05%

Consumer 4,473,027 8.14% 3,774,520 8.11%
--------- ----- --------- -----

Total Loans 54,922,219 100.00% $46,519,479 100.00%
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>

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NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

A loan is placed on nonaccrual status when it has become 90 days delinquent,
unless such loan is adequately capitalized and in the process of collection.
Additionally, a loan may be placed on nonaccrual status before it becomes 90
days delinquent if management determines, after considering economic and
business conditions and collection efforts, that the collection of interest from
the borrower is doubtful. Interest previously accrued but not collected is
reversed against current period interest income when such loans are placed on
nonaccrual status. Interest on loans that are classified as nonaccrual is
recognized when received. In some cases, where borrowers are experiencing
financial difficulties, loans may be restructured to provide terms significantly
different from the original contractual agreement.

As of December 31, 1995 the Bank had nine borrowers on nonaccrual status in the
amount of $1,774,778 or 3.23% of total loans. Three borrowers account for
$1,567,562 or 88% of total nonaccrual loans. The largest nonaccrual loan, in the
amount of $736,685, is collaterized by commercial real estate and a convenience
store valued at $875,000. The current owner of the property is in bankruptcy and
has filed a plan to bring the note current and continue with the payments as set
forth in the note. The second largest nonaccrual loan, with a balance of
$535,926, is collaterized by property valued at $676,350. Management anticipates
full recovery of all principal and interest established by the original loan
agreement. The third borrower has three speculative construction loans
classified as nonaccrual totaling $294,951 with collateral supporting the loans
valued at $517,000. These loans are expected to be resolved during the first
quarter of 1996 with no loss to the Bank. In addition, no loss is anticipated on
the resolution of the other six borrowers classified as nonaccrual. Had the
loans been current in accordance with their original terms, the gross interest
that would have been recorded as of December 31, 1995 is approximately $95,000.
The amount of interest income on these loans that was included in net earnings
for the year ended December 31, 1995 was approximately $18,000.

Two loans, totaling $20,310, were past due greater than 90 days and still
accruing interest at December 31, 1995. One loan was pending renewal at that
date, has since been renewed, and is now current. The borrower on the other
loan had declared bankruptcy as of December 31, 1995, but management had not
received the bankruptcy plan at that date. Since December 31, 1995, the
borrower has met the terms of the bankruptcy plan.

As of December 31, 1994, two loans were classified as nonaccrual totaling
$504,403 or 1.09% of total loans. There were no loans past due greater than 90
days that were on accrual status as of December 31, 1994. Loans past due
greater than 30 days but less than 90 days amounted to $992,619, or 1.82%, of
total loans at the end of 1995 and $899,661, or 1.95%, of total loans at the end
of 1994. There were no restructured loans as of December 31, 1995 or December
31, 1994.

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The Bank had four properties classified as Other Real Estate Owned totaling
$1,020,861 as of December 31, 1995. The largest of these properties has a
balance of $500,050, an appraised value of $621,000, and consists of 92 acres of
land in Cherokee County. As of March 25, 1996, a contract was under negotiation
to sell the land with no loss to the Bank. No material loss is anticipated on
the resolution of the other properties.

As of December 31, 1995, the Bank had repossessed eight vehicles with a fair
value totaling $57,214. No material loss is anticipated on the sale of these
vehicles.

ALLOWANCE FOR LOAN LOSSES

The adequacy of the allowance for loan losses is continuously reviewed based on
management's evaluation of current risk characteristics of the loan portfolio as
well as the impact of prevailing and expected economic conditions. Management
has monitored the loan portfolio and the loan underwriting process and considers
the allowance for loan losses adequate to provide for credit risk inherent in
the loan portfolio.

Management reviews all loans in the portfolio to identify potential loan
problems. Loans are evaluated on an individual basis, and after considering the
financial strength of the borrower, appraisals and other estimates of collateral
value, specific reserves are provided where appropriate. Additionally, general
reserves are provided for all other loans not identified as potential problem
loans to provide for risk of loss inherent in the remaining loan portfolio.
Changing economic conditions affecting the Company's market or borrowers may
result in changes to management's periodic estimates, appraisals, and evaluation
of loans and the allowance for loan losses. For additional information
regarding this topic, see "Item 6 - Management's Discussion and Analysis of
Financial Condition - Allowance for Loan Losses," which is incorporated by
reference to the section of the same heading in the Company's 1995 Annual Report
to Shareholders.

Table 5 below presents the activity in the allowance for loan losses for each of
the periods ended December 31, 1995 and 1994. The allowance for loan losses as
of December 31, 1995 and 1994 is allocated as indicated in Table 6 below. With
respect to the information presented in Table 6, the Bank provides specific
allocations as a precautionary measure if it is anticipated that a particular
loan may deteriorate or on a group of loans that have a significant risk level
or have suffered a notable level of losses in the past. As a matter of policy,
potential problem loans are individually reviewed to determine the appropriate
level of specific reserve, if any. At December 31, 1995, the Bank had no loans
that required specific allocations.

-12-

<PAGE>

TABLE 5
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Balance at the Beginning of Year . . . . . . . . . . . . . . $461,030 $348,084
Charge-offs:
Real Estate Construction. . . . . . . . . . . . . . . . . 0 0
Real Estate Mortgage. . . . . . . . . . . . . . . . . . . 0 0
SBA - Unguaranteed. . . . . . . . . . . . . . . . . . . . 0 20,674
Commercial. . . . . . . . . . . . . . . . . . . . . . . . 31,008 9,821
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . 33,086 8,723
---------- ----------
Total Charge-Offs. . . . . . . . . . . . . . . . . . . . . . 64,094 39,218
Recoveries:
Real Estate Construction. . . . . . . . . . . . . . . . . 0 0
Real Estate Mortgage. . . . . . . . . . . . . . . . . . . 15,236 69,811
SBA - Unguaranteed. . . . . . . . . . . . . . . . . . . . 0 12,979
Commercial. . . . . . . . . . . . . . . . . . . . . . . . 11,497 874
Consumer. . . . . . . . . . . . . . . . . . . . . . . . . 6,566 3,500
---------- ----------
Total Recoveries . . . . . . . . . . . . . . . . . . . . . . 33,299 87,164
Net Recoveries. . . . . . . . . . . . . . . . . . . . . . 30,795 (47,949)
Provision for Loan Losses. . . . . . . . . . . . . . . . . . 255,471 65,000
---------- ----------
Balance at the End of Year . . . . . . . . . . . . . . . . . $685,706 $461,030
---------- ----------
---------- ----------
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End. . . . . . . . . . . . . . . . 1.25% 1.00%
Ratio of Net Charge-offs (Recoveries) to Average
Loans Outstanding During the Year . . . . . . . . . . . . 0.06% (.13%)
---------- ----------
---------- ----------
</TABLE>

TABLE 6

<TABLE>
<CAPTION>
1995 1994
------------------------------------------------------------------------
% OF % LOAN % OF
LOSS OF TOTAL LOSS
AMOUNT ALLOCATED LOANS AMOUNT ALLOCATED
-------- ---------- ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Real Estate Construction. . . . . . . . . . . . . . 0 0.00% 17.43% $ 0 0.00%
Real Estate Mortgage . . . . . . . . . . . . . . . 0 0.00% 35.16% 0 0.00%
SBA - Unguaranteed . . . . . . . . . . . . . . . . 0 0.00% 23.53% 0 0.00%
Commercial . . . . . . . . . . . . . . . . . . . . 0 0.00% 15.74% 0 0.00%
Consumer . . . . . . . . . . . . . . . . . . . . . 0 0.00% 8.14% 0 0.00%
-------
Unallocated. . . . . . . . . . . . . . . . . . . . 685,706 100.00% 461,030 100.00%
-------- ------- --------- -------
Total Allowance for Loan Losses. . . . . . . . . 685,706 100.00% 100.00% $ 461,030 100.00%
-------- ------- ------- --------- -------
-------- ------- ------- --------- -------
</TABLE>

-13-

<PAGE>

INVESTMENT PORTFOLIO

Table 7 below sets forth the fair value of investment securities at December 31,
1995 and 1994.

TABLE 7
1995 1994
================================================
<S> <C> <C>
U.S. Government Agencies $495,409 $2,402,343

Mortgage-backed Securities 489,174 706,370
-------- ----------

Total Investment Securities $984,583 $3,108,713
================================================

</TABLE>

The fair value at December 31, 1995 includes a $10,517 market value increase
for net unrealized gains while the fair value at December 31, 1994 includes a
$125,355 market value reduction for net unrealized losses in the investment
portfolio as required by Statement of Financial Accounting Standards ("SFAS")
No. 115 "Accounting for Certain Investments in Debt and Equity Securities".
For a further description of SFAS 115 and the impact on the Bank, see
Footnote 1 in the financial section of the Registrant's 1995 Annual Report to
Shareholders which is incorporated herein by reference. Table 8 below
presents the maturities, weighted average yields and total carrying value of
the Bank's investments as of December 31, 1995.

TABLE 8

<TABLE>
<CAPTION>
=====================================================================================================
AFTER AFTER
ONE YEAR FIVE YEARS
ONE YEAR OR THROUGH THROUGH AFTER
LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
---- ---------- --------- --------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C>
U.S.
Government
Agencies $495,409 5.33% $0 0.00% $0 0.00% $0 0.00% $495,409 5.33%
Mortgage-
backed
Securities 186,476 7.00% 200,499 7.50% 35,409 8.00% 66,790 9.50% 489,174 7.62%
-------- ----- ------- ----- ------ ----- ------ ----- ------- -----
Total
Investment
Securities $681,885 5.79% $200,499 7.50% $35,409 8.00% $66,790 9.50% $984,583 6.47%
=====================================================================================================

</TABLE>

-14-

<PAGE>

DEPOSITS

Table 9 below presents the average amounts of deposits and average rates paid
thereon, classified as to noninterest-bearing demand deposits,
interest-bearing demand and savings deposits, and time deposits, for the
periods indicated.

TABLE 9

Year Ended December 31,
-----------------------------------------------------------
1995 1994
---- ----
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non Interest-bearing demand deposits $ 6,420,676 N/A $ 4,676,307 N/A
Interest-bearing demand deposits 10,146,233 3.36% 9,253,662 3.09%
Savings deposits 2,467,441 2.95% 2,759,672 2.75%
Time deposits 48,964,150 6.35% 29,333,580 4.91%
----------- -----------

Total Deposits $67,998,500 $46,023,221
=========== ===========

</TABLE>

The amounts of time certificates of deposit issued in amounts greater than or
equal to $100,000 or more as of December 31, 1995, are shown below by
category, which is based on time remaining until maturity of (a) three months
or less, (b) over three through six months, (c) over six through twelve
months, and (d) over twelve months.

(Dollars in
Thousands)
-----------
<S> <C>
Three months or less $ 1,597
Over three through six months 2,296
Over six through twelve months 5,718
Over twelve months 3,945
-------
Total $13,556
=======

</TABLE>

For a further description of the average amount of and the average rate paid
on various deposit categories which are in excess of 10% of average total
deposits, see "Item 6 - Management's Discussion and Analysis of Financial
Condition -Deposits," which is incorporated by reference to the section of
the same heading in the Company's 1995 Annual Report to Shareholders.

RETURN ON ASSETS AND EQUITY

Table 10 below illustrates return on assets (net earnings divided by average
total assets), return on equity (net earnings divided by average
stockholders' equity) and stockholders' equity to assets ratio (average
stockholders' equity divided by average total assets) for the periods ended
December 31, 1995 and 1994. The Company did not pay cash dividends to
shareholders during 1995 and 1994.

TABLE 10

1995 1994
=============================
<S> <C> <C>
Return on Assets 1.44% 1.54%
Return on Equity 19.13% 16.82%
Stockholders' Equity to Assets 7.53% 9.17%
=============================

</TABLE>

-15-

<PAGE>

SUPERVISION AND REGULATION

Bank holding companies and banks are extensively regulated under both Federal
and state law. The following is a brief summary of certain statutes and
rules and regulations affecting the Company and the Bank. This summary is
qualified in its entirety by reference to the particular statute and
regulatory provision referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to the
business of the Company and the Bank. Supervision, regulation and examination
of the Company and the Bank by the bank regulatory agencies are intended
primarily for the protection of depositors rather than shareholders of the
Company.

BANK HOLDING COMPANY REGULATION

The Company is a registered holding company under the Bank Holding Company
Act of 1956, as amended (the "Federal Bank Holding Company Act"), and the
Georgia Bank Holding Company Act (the "Georgia Bank Holding Company Act") and
is regulated under such acts by the Board of Governors of the Federal Reserve
System (the "Federal Reserve") and by the Georgia Department of Banking and
Finance (the "Georgia Department"), respectively.

As a bank holding company, the Company is required to file annual reports
with the Federal Reserve and the Georgia Department and such additional
information as the applicable regulator may require pursuant to the Federal
and Georgia Bank Holding Company Acts. The Federal Reserve and the Georgia
Department may also conduct examinations of the Company to determine whether
the institution is in compliance with both Bank Holding Company Acts and the
regulations promulgated thereunder.

The Federal Bank Holding Company Act also requires every bank holding company
to obtain prior approval from the Federal Reserve before acquiring direct or
indirect ownership or control of more than 5% of the voting shares of any
bank which is not already majority owned or controlled by that bank holding
company. Acquisitions of any additional banks would also require prior
approval from the Georgia Department.

On September 29, 1994, the President of the United States signed the
"Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994" (the
"Interstate Branching Act"). The Interstate Branching Act amends Federal law
to permit bank holding companies to acquire existing banks in any state
effective September 29, 1995, subject to certain deposit - percentage, aging
requirements and other restrictions. In addition, the Interstate Branching
Act provides that any interstate bank holding company is permitted to merge
its various bank subsidiaries into a single bank with interstate branches
effective June 1, 1997. By adopting legislation prior to that date, a state
has the authority either to "opt in" and accelerate the date after which
interstate branching is permissible or to "opt out" and prohibit interstate
branching altogether.

In response to the Interstate Branching Act, the Georgia legislature adopted
the "Georgia Interstate Banking Act," effective July 1, 1995, which provides
that (1) interstate acquisitions by institutions located in Georgia will be
permitted in states which also allow national interstate acquisitions, and
(2) interstate acquisitions of institutions located in Georgia will be
permitted by institutions located in states which also allow national
interstate acquisitions; provided, however, that if the board of directors of
a Georgia bank or bank holding company adopts a resolution to except such
bank or bank holding company from being acquired pursuant to the provisions
of the Georgia Interstate Banking Act and properly files a certified copy of
such resolution with the Georgia Department, such bank or bank holding
company may not be acquired by an institution located outside of the State of
Georgia.

-16-

<PAGE>

Additionally, in February 1996, the Georgia legislature adopted the "Georgia
Interstate Branching Act," which when signed by the Governor, will permit
Georgia-based banks and bank holding companies owning or acquiring banks
outside of Georgia and all non-Georgia banks and bank holding companies
owning or acquiring banks in Georgia the right to merge any lawfully acquired
bank into an interstate branch network. The Georgia Interstate Branching Act
also allows banks to establish de novo branch banks on a limited basis
beginning July 1, 1996. Beginning July 1, 1998, the number of de novo bank
branches which may be established will no longer be limited.

In addition to having the right to acquire ownership or control of other
banks, the Company is authorized to acquire ownership or control of
nonbanking companies, provided the activities of such companies are so
closely related to banking or managing or controlling banks that the Federal
Reserve considers such activities to be proper to the operation and control
of banks. Regulation Y, promulgated by the Federal Reserve, sets forth those
activities which are regarded as closely related to banking or managing or
controlling banks and, thus, are permissible activities for bank holding
companies, subject to approval by the Federal Reserve in individual cases.

Federal Reserve policy requires a bank holding company to act as a source of
financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank
may not be warranted. Under these provisions, a bank holding company may be
required to loan money to its subsidiaries in the form of capital notes or
other instruments which qualify for capital under regulatory rules. Any
loans by the holding company to such subsidiary banks are likely to be
unsecured and subordinated to such bank's depositors and perhaps to its other
creditors.

The Company is also subject to various federal securities laws, including the
Securities Act of 1933 (the "1933 Act") and the Securities Exchange Act of
1934 (the "1934 Act"). The 1933 Act regulates the distribution or public
offering of securities, while the 1934 Act regulates trading in securities
that are already issued and outstanding. Both Acts provide civil and
criminal penalties for misrepresentations and omissions in connection with
the sale of securities, and the 1934 Act also prohibits market manipulation
and insider trading. Pursuant to the 1934 Act, the Company files annual,
quarterly and current reports with the Securities and Exchange Commission.
In addition, the Company and its directors, executive officers and 5%
shareholders are subject to certain additional reporting requirements,
including requirements governing the submission of proxy statements and
reports of beneficial ownership of the Company's securities.

BANK REGULATION

As a national banking association, the Bank is supervised, regulated and
regularly examined by the Office of the Comptroller of the Currency (the
"OCC"). The Bank also is a member of the Federal Deposit Insurance
Corporation (the "FDIC") and, as such, deposits in the Bank are insured by
the FDIC. The operation of the Bank is subject to state and Federal statutes
applicable to national banks and the regulations of the OCC, the Federal
Reserve and the FDIC. Such statutes and regulations relate to required
reserves, investments, loans, mergers and consolidations, issuances of
securities, payment of dividends, establishment of branches and other aspects
of the Bank's operations.

Subsidiary banks of a bank holding company are subject to certain
restrictions imposed by the Federal Bank Holding Company Act on any extension
of credit to the bank holding company or any of its subsidiaries, on
investment in the stock or other securities of the bank holding company or
its subsidiaries, and on the taking of such stock or securities as collateral
for loans to any borrower. In addition, a bank holding company and its
subsidiaries are prohibited from engaging in certain tying arrangements in
connection with any extension of credit or provision of any property or
services.

-17-

<PAGE>

The prior approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the bank's net
profits, as defined, for that year combined with its retained net profits for
the preceding two calendar years, less any required transfers to surplus or a
fund for the retirement of any preferred stock.

The Bank is also subject to the provisions of the Community Reinvestment Act
of 1977, which requires the OCC, in connection with its regular examination
of a bank, to assess the Bank's record in meeting the credit needs of the
communities served by the Bank, including low- and moderate-income
neighborhoods.

CAPITAL REQUIREMENTS

GENERAL

Regulatory agencies measure capital adequacy within a framework that makes
capital requirements sensitive to the risk profile of the individual banking
institutions. The guidelines define capital as either Tier 1 capital
(primarily shareholders equity) or Tier 2 capital (certain debt instruments
and a portion of the reserve for loan losses). There are two measures of
capital adequacy for bank holding companies and their subsidiary banks: the
Tier 1 leverage ratio and the risk-based capital requirements. Bank holding
companies and their subsidiary banks must maintain a minimum Tier 1 leverage
ratio of 4%. In addition, Tier 1 capital must equal 4% of risk-weighted
assets, and total capital (Tier 1 plus Tier 2) must equal 8% of risk-weighted
assets. These are minimum requirements, however, and institutions
experiencing internal growth or making acquisitions, as well as institutions
with supervisory or operational weaknesses, will be expected to maintain
capital positions well above these minimum levels.

At December 31, 1995, the Bank had a Tier 1 leverage ratio of 6.62%, a Tier 1
risk-based ratio of 9.26%, and a Total risk-based ratio of 10.42%.

PROMPT CORRECTIVE ACTION

The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Act") imposes a regulatory matrix which requires the Federal banking agencies
to take prompt corrective action to deal with depository institutions that
fail to meet their minimum capital requirements or are otherwise in a
troubled condition. The prompt corrective action provisions require
undercapitalized institutions to become subject to an increasingly stringent
array of restrictions, requirements and prohibitions, as their capital levels
deteriorate and supervisory problems mount. Should these corrective measures
prove unsuccessful in recapitalizing the institution and correcting its
problems, the FDIC Act mandates that the institution be placed in
receivership.

Pursuant to regulations promulgated under the FDIC Act, the corrective
actions that the banking agencies either must or may take are tied primarily
to an institution's capital levels. In accordance with the framework adopted
by the FDIC Act, the banking agencies have developed a classification system,
pursuant to which all banks and thrifts will be placed into one of five
categories: well-capitalized institutions, adequately capitalized
institutions, undercapitalized institutions, significantly undercapitalized
institutions and critically undercapitalized institutions. The capital
thresholds established for each of the categories are as follows:

-18-

<PAGE>

=====================================================================================================================
RISK-BASED TIER 1 RISK-
CAPITAL CATEGORY TIER 1 CAPITAL CAPITAL BASED CAPITAL OTHER
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Well-Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
- ---------------------------------------------------------------------------------------------------------------------
Adequately Capitalized 4% or more 8% or more 4% or more ---
- ---------------------------------------------------------------------------------------------------------------------
Undercapitalized less than 4% less than 8% less than 4% ---
- ---------------------------------------------------------------------------------------------------------------------
Significantly less than 3% less than 6% less than 3% ---
Undercapitalized
- ---------------------------------------------------------------------------------------------------------------------
Critically 2% or less --- --- ---
Undercapitalized tangible equity
=====================================================================================================================

</TABLE>

The undercapitalized, significantly undercapitalized and critically
undercapitalized categories overlap; therefore, a critically undercapitalized
institution would also be an undercapitalized institution and a significantly
undercapitalized institution. This overlap ensures that the remedies and
restrictions prescribed for undercapitalized institutions will also apply to
institutions in the lowest two categories.

The down-grading of an institution's category is automatic in two situations:
(1) whenever an otherwise well-capitalized institution is subject to any
written capital order or directive, and (2) where an undercapitalized
institution fails to submit or implement a capital restoration plan or has
its plan disapproved. The Federal banking agencies may treat institutions in
the well-capitalized, adequately capitalized and undercapitalized categories
as if they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels.

All insured institutions regardless of their level of capitalization are
prohibited by the FDIC Act from paying any dividend or making any other kind
of capital distribution or paying any management fee to any controlling
person if following the payment or distribution the institution would be
undercapitalized. While the prompt corrective action provisions of the FDIC
Act contain no requirements or restrictions aimed specifically at adequately
capitalized institutions, other provisions of the FDIC Act and the agencies'
regulations relating to deposit insurance assessments, brokered deposits and
interbank liabilities treat adequately capitalized institutions less
favorably than those that are well-capitalized.

At December 31, 1995, the Company and the Bank had the requisite capital
levels to qualify as well-capitalized.

The FDIC has adopted or currently proposes to adopt other rules pursuant to
the FDIC Act that include: (1) real estate lending standards for banks,
which would provide guidelines concerning loan-to-value ratios for various
types of real estate loans; (2) revision to the risk-based capital rules to
account for interest rate risk, concentration of credit risk and the risks
proposed by "non-traditional activities"; (3) rules requiring depository
institutions to develop and implement internal procedures to evaluate and
control credit and settlement exposure to their correspondent banks; (4) a
rule restricting the ability of depository institutions that are not well
capitalized from accepting brokered deposits; (5) rules addressing various
"safety and soundness" issues, including operations and managerial standards
for asset quality, earnings and stock valuations, and compensation standards
for the officers, directors, employees and principal shareholders of the
depository institutions; (6) rules mandating enhanced financial reporting and
audit requirements; and

-19-

<PAGE>

(7) rules restricting the ability of a state bank, or a subsidiary thereof,
to engage as principal in activities not permissible for a national bank or
make any investment not permissible for a national bank.

FDIC INSURANCE ASSESSMENTS

In July 1993, the FDIC adopted a new risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The new
system, which went into effect on January 1, 1994, and replaced a
transitional system that the FDIC had used for the 1993 calendar year,
assigns an institution to one of three capital categories: (1)
well-capitalized; (2) adequately capitalized; and (3) undercapitalized.
These three categories are substantially similar to the prompt corrective
action categories described above, with the undercapitalized category
including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective
action purposes. An institution is also assigned by the FDIC to one of three
supervisory subgroups within each capital group. The supervisory subgroup to
which an institution is assigned is based on a supervisory evaluation
provided to the FDIC by the institution's primary federal regulator and
information which the FDIC determines to be relevant to the institution's
financial condition and the risk posed to the deposit insurance funds (which
may include, if applicable, information provided by the institution's state
supervisor). An institution's insurance assessment rate is then determined
based on the capital category and supervisory category to which it is
assigned. Under the final risk-based assessment system, as well as the prior
transitional system, there are nine assessment risk classifications (i.e.,
combinations of capital groups and supervisory subgroups) to which different
assessment rates are applied. Assessment rates for members of both the Bank
Insurance Fund ("BIF") and the Savings Association Insurance Fund ("SAIF")
for the first half of 1995, as they had during 1994, ranged from 23 basis
points (0.23% of deposits) for an institution in the highest category (i.e.,
"well capitalized" and "healthy") to 31 basis points (0.31% of deposits) for
an institution in the lowest category (i.e., "undercapitalized" and
"substantial supervisory concern"). These rates were established for both
funds to achieve a designated ratio of reserves to insured deposits (i.e.,
1.25%) within a specified period of time.

Once the designated ratio for the BIF was reached, which appears to have
occurred some time during May 1995, the FDIC was authorized to reduce the
minimum assessment rate below 23 basis points and to set future assessment
rates at such levels that would maintain a fund's reserve ratio at the
designated level. In August 1995, the FDIC adopted final regulations
reducing the assessment rates for BIF-member banks. Under the revised
schedule, BIF-member banks, starting with the second half of 1995, will now
pay assessments ranging from 4 basis points to 31 basis points, with an
average assessment rate of 4.5 basis points. Refunds, with interest, were
paid for assessments for the month(s) after the month in which the designated
reserve ratio for the BIF was reached, as well as for the quarterly payment
made on September 30, 1995, assuming that the designated reserve ratio was
achieved prior to June 30, 1995. At the same time, the FDIC elected to retain
the existing assessment rate of 23 to 31 basis points for SAIF members for
the foreseeable future given the undercapitalized nature of that insurance
fund. More recently, on November 14, 1995, the FDIC announced that,
beginning in 1996, it would further reduce the deposit insurance premiums for
92% of all BIF members that are in the highest capital and supervisory
categories to $2,000 per year, regardless of deposit size.

On July 28, 1995, the FDIC, the Treasury Department, and the OTS released
statements outlining a proposed plan to recapitalize the SAIF, certain
features of which were subsequently agreed upon by members of the Banking
Committees of the U.S. House of Representatives and the Senate on November 7,
1995 in negotiations to reconcile differences in bills on the issue that had
been introduced or partially adopted by each body. Under the agreement, all
SAIF-member institutions would pay a special assessment to the SAIF of
approximately 80 basis points, the amount that would enable the SAIF to
attain its

-20-

<PAGE>

designated reserve ratio of 1.25%. The special assessment would be payable
on January 1, 1996, based on the amount of deposits held as of March 31,
1995. BIF-insured institutions holding SAIF-assessed deposits would receive a
20% reduction in the assessment rate and would pay a one-time assessment of
64 basis points. The agreement also provides that the assessment base for
the bonds issued in the late 1980s by the Financing Corporation to
recapitalize the now defunct Federal Savings and Loan Insurance Corporation
would be expanded to include deposits of both BIF- and SAIF-insured
institutions, with BIF members paying approximately 75% of the interest on
such obligations. The committee members further agreed that the BIF and SAIF
should be merged on January 1, 1998, with such merger being conditioned upon
the prior elimination of the thrift charter. At this time, the Company is
not able to predict if the recapitalization will take place, the timing or
exact amount of any SAIF special assessment that might be required. As of
December 31, 1995, the Bank held no SAIF-assessed deposits.

Under the Federal Deposit Insurance Act, 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.

CRA

On April 19, 1995, the Federal bank regulatory agencies adopted revisions to
the regulations promulgated pursuant to the Community Reinvestment Act (the
"CRA"), which are intended to set distinct assessment standards for financial
institutions. The revised regulation contains three evaluation tests: (1) a
lending test which will compare the institutions's market share of loans in
low-and moderate-income areas to its market share of loans in its entire
service area and the percentage of a bank's outstanding loans to low- and
moderate-income areas or individuals, (2) a services test which will evaluate
the provision of services that promote the availability of credit to low- and
moderate-income areas, and (3) an investment test, which will evaluate an
institution's record of investments in organizations designed to foster
community development, small- and minority-owned businesses and affordable
housing lending, including state and local government housing or revenue
bonds. The regulation is designed to reduce the paperwork requirements of the
current regulations and provide regulators, institutions and community groups
with a more objective and predictable manner with which to evaluate the CRA
performance of financial institutions. The rule became effective on January
1, 1996, at which time evaluation under streamlined procedures began for
institutions with assets of less than $250 million that are owned by a
holding company with total assets of less than $1 billion.

FAIR LENDING

Congress and various Federal agencies (including, in addition to the bank
regulatory agencies, the Department of Housing and Urban Development, the
Federal Trade Commission and the Department of Justice) (collectively the
"Federal Agencies") responsible for implementing the nation's fair lending
laws have been increasingly concerned that prospective home buyers and other
borrowers are experiencing discrimination in their efforts to obtain loans.
In recent years, the Department of Justice has filed suit against financial
institutions which it determined had discriminated, seeking fines and
restitution for borrowers who allegedly suffered from discriminatory
practices. Most, if not all, of these suits have been settled (some for
substantial sums) without a full adjudication on the merits.

On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies
will consider in determining if lending discrimination exits, announced a
joint policy statement detailing specific discriminatory practices prohibited
under the Equal Credit Opportunity Act and the Fair Housing Act. In the
policy statement, three methods of proving lending

-21-

<PAGE>

discrimination were identified: (1) overt evidence of discrimination, when a
lender blatantly discriminates on a prohibited basis, (2) evidence of
disparate treatment, when a lender treats applicants differently based on a
prohibited factor even where there is no showing that the treatment was
motivated by prejudice or a conscious intention to discriminate against a
person, and (3) evidence of disparate impact, when a lender applies a
practice uniformly to all applicants, but the practice has a discriminatory
effect, even where such practices are neutral on their face and are applied
equally, unless the practice can be justified on the basis of business
necessity.

FUTURE REQUIREMENTS

Statutes and regulations are regularly introduced which 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 statute or regulation will be adopted or
the extent to which the business of the Company and the Bank may be affected
by such statute or regulation.

MONETARY POLICY

The earnings of the Company are affected by domestic and foreign economic
conditions, particularly by the monetary and fiscal policies of the United
States government and its agencies.

The Federal Reserve has had, and will continue to have, an important impact
on the operating results of commercial banks through its power to implement
national monetary policy in order, among other things, to mitigate
recessionary and inflationary pressures by regulating the national money
supply. The techniques used by the Federal Reserve include setting the
reserve requirements of member banks and establishing the discount rate on
member bank borrowings. The Federal Reserve also conducts open market
transactions in United States government securities.

ITEM 2. DESCRIPTION OF PROPERTY

The operations of the Company and the Bank's main office operations are
conducted from a facility located north of the intersection of Interstate 575
and East Alabama Road (U.S. Highway 92), Woodstock, Georgia.

The main office building was completed in November, 1990. The building
consists of three floors with a total of 16,000 square feet and is fully
occupied. Previously unoccupied space of 4,000 square feet was finished
during 1994 at a cost of approximately $100,000. Management believes that
the expansion space available over the drive-in facility will be sufficient
for the expected growth over the next five-year period.

The original cost of construction of the main office building was
approximately $1,310,000. The cost of furnishing this building, including
teller facilities, vault door, safe deposit boxes and other necessary
furniture, fixtures and equipment was originally $350,000. An elevator was
installed during 1995 at a cost of approximately $53,000. The net book
values of the building and equipment as of December 31, 1995, were $1,267,226
and $198,569 respectively.

-22-

<PAGE>

The main office building has two fully equipped drive-in lanes. The drive-in
teller station is inside the building and serves four outside lanes.

The main office building is located on leased property owned by a member of
the Board of Directors of the Company and the Bank. The ground lease was
submitted as a part of the Bank's charter application, and was approved by
the OCC, the Bank's primary federal supervisory authority. The initial term
of the lease is for twenty years with four five-year extension periods.
Monthly rentals were $3,856 per month through September 1993, $4,214 during
the fourth year, and will increase 3% per year thereafter. The lease also
provides a purchase option that may be exercised periodically at five-year
intervals during the period from 1999 to 2029. The Bank paid $55,123 in
total rentals under the ground lease during 1995. Management believes the
lease agreement is fair and in the best interest of the Company.

The Branch land and the building, which was originally constructed in 1974,
were purchased in 1992. The building is a one-story block building with a
total of 2,400 square feet which is fully occupied by Branch operations. The
site is considered typical of branch banks constructed in the early 1970s and
is located in a semi-urban area. Extensive remodeling was done to the
interior and exterior of the building in 1993. The net book values of the
land, building, and equipment as of December 31, 1995 were $185,201, $296,768
and $71,783, respectively.

Management believes all properties owned or leased by the Bank or the Company
are adequately covered by insurance. Neither the Bank nor the Company
invests in real estate, interests in real estate, securities of or interests
in persons primarily engaged in real estate activities. As part of its
business, the Bank regularly makes construction loans for residential real
estate properties. The Bank occasionally originates residential mortgage
loans. See "Part I - Item 1 -Description of Business - Lending Activities."

ITEM 3. LEGAL PROCEEDINGS.

Neither the Company nor the Bank is a party to any pending legal proceedings,
other than routine litigation incidental to the Bank's business, which
management believes would not have a material effect upon the operations or
financial condition of the Company or the Bank.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

-23-

<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The response to this item is incorporated herein by reference to information
appearing under the heading "Market Price and Dividend Information" in the
Registrant's 1995 Annual Report to Shareholders.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS.

The response to this item is incorporated herein by reference to information
appearing under the heading "Management's Discussion and Analysis" in the
Registrant's 1995 Annual Report to Shareholders.

ITEM 7. FINANCIAL STATEMENTS.

The following report and statements are included in the financial section of
the Registrant's 1995 Annual Report to Shareholders and are incorporated
herein by reference:

(i) Report of Evans, Porter, Bryan & Co.

(ii) Consolidated Balance Sheets as of December 31, 1995 and 1994.

(iii) Consolidated Statements of Earnings for Years Ended December 31,
1995 and 1994.

(iv) Consolidated Statements of Stockholders' Equity for Years Ended
December 31, 1995 and 1994.

(v) Consolidated Statements of Cash Flows for the Years Ended December
31, 1995 and 1994.

(vi) Notes to Consolidated Financial Statements.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

-24-

<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The response to this item is included in the information set forth under the
captions "Election of Directors" and "Principal Shareholders" in the Proxy
Statement to be used in connection with the Company's 1996 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 10. EXECUTIVE COMPENSATION.

The response to this item is included in the information contained under the
caption "Director and Executive Compensation" in the Proxy Statement to be
used in connection with the Company's 1996 Annual Meeting of Shareholders'
and is incorporated herein by reference.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The response to this item is included in the information contained under the
caption "Principal Shareholders" in the Proxy Statement to be used in
connection with the Company's 1996 Annual Meeting of Shareholders and is
incorporated herein by reference.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The response to this item is included in the information contained under the
caption "Certain Relationships and Related Transactions" in the Proxy
Statement to be used in connection with the Company's 1996 Annual Meeting of
Shareholders and is incorporated herein by reference.

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.

(A) EXHIBITS

Exhibit
Number Description
------ -----------

3.1(1) Articles of Incorporation
3.2(2) Bylaws, as amended through March 29, 1994
10.1(3)(4) Employment Agreement (Carl Hames) dated May 11, 1995
10.2(1) Form of Organizers' Stock Warrant Agreement
10.3(1) Agreement for Lease/Purchase of Real Property for Bank
Premises
10.4(1) Form of Escrow Agreement
10.5(1)(3) Form of Key Employee Stock Option Plan
13.1 Annual Report to Shareholders for the fiscal year ended
December 31, 1995. Only those portions of the 1995 Annual
Report to Shareholders that are specifically incorporated
by reference into this report on Form 10-KSB shall be
deemed filed as an exhibit hereto. The consolidated
financial

-25-

<PAGE>

statements, notes thereto and the independent certified
public accountants' report thereon that are incorporated
by reference in Item 7 hereof are included as part of
Exhibit 13.1.

21 Subsidiary of First Cherokee Bancshares, Inc.
24 Power of attorney (see signature page to this Annual
Report on Form 10-KSB).
27 Financial Data Schedule
99 Registrant's Proxy Statement for the 1996 Annual Meeting
of Shareholders to be held April 17, 1996. Only those
portions of the Proxy Statement that are specifically
incorporated by reference into this report on Form 10-KSB
shall be deemed filed with the Commission.

________________________

(1) Incorporated herein by reference to Exhibit of the same number in
the Company's Registration Statement No. 33-25075-A.

(2) Incorporated herein by reference to Exhibit of the same number in
the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1994.

(3) The indicated exhibits are management contracts or compensatory
plans or arrangements required to be filed or incorporated by
reference herein.

(4) Incorporated herein by reference to Exhibit of the same number in
the Company's Form 10QSB for the period ended June 30, 1995.

(B) REPORTS ON FORM 8-K

None.

-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.

FIRST CHEROKEE BANCSHARES, INC.

By: /S/ Carl C. Hames, Jr. Date: March 29, 1996
----------------------------------
Carl C. Hames, Jr., President

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Report constitutes and appoints Carl C. Hames,
Jr. and Thomas D. Hopkins, Jr., and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the
same, with all exhibits hereto, and other documents in connection herewith
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.

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:

<PAGE>

SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ Alan D. Bobo Director March 29, 1996
- -----------------------------
Alan D. Bobo

/S/ Elwin K. Bobo Director March 29, 1996
- -----------------------------
Elwin K. Bobo

/S/ Michael A. Edwards Director March 29, 1996
- -----------------------------
Michael A. Edwards

/S/ Stanley Fitts Director March 29, 1996
- -----------------------------
Stanley Fitts

/S/ Russell L. Flynn Director March 29, 1996
- -----------------------------
Russell L. Flynn

/S/ Carl C. Hames, Jr. President, Principal, March 29, 1996
- ----------------------------- Executive Officer
Carl C. Hames, Jr. and Director

/S/ C. Garry Haygood Director March 29, 1996
- -----------------------------
C. Garry Haygood

/S/ Thomas D. Hopkins, Jr. Director and March 29, 1996
- ----------------------------- Secretary
Thomas D. Hopkins, Jr.

/S/ Bobby R. Hubbard Director March 29, 1996
- -----------------------------
Bobby R. Hubbard

/S/ Dennis W. Lord Director March 29, 1996
- -----------------------------
Dennis W. Lord

/S/ Larry R. Lusk Director March 29, 1996
- -----------------------------
Larry R. Lusk

/S/ Dr. Stuart R. Tasman Director March 29, 1996
- -----------------------------
Dr. Stuart R. Tasman

/S/ Kitty A. Kendrick Principal, March 29, 1996
- ----------------------------- Accounting,
Kitty A. Kendrick and Financial Officer

</TABLE>

<PAGE>

EXHIBIT INDEX

Exhibit Page
Number Description Number
- ------ ----------- ------
<C> <S> <C>
3.1(1) Articles of Incorporation .................................. N/A
3.2(2) Bylaws, as amended through March 29, 1994 .................. N/A
10.1(3)(4) Employment Agreement (Carl Hames) dated May 11,
1995 ....................................................... N/A
10.2(1) Form of Organizers' Stock Warrant Agreement ................ N/A
10.3(1) Agreement for Lease/Purchase of Real Property for
Bank Premises .............................................. N/A
10.4(1) Form of Escrow Agreement ................................... N/A
10.5(1)(3) Form of Key Employee Stock Option Plan ..................... N/A
13.1 Annual Report to Shareholders for the fiscal year ended
December 31, 1995. Only those portions of the 1995
Annual Report to Shareholders that are specifically
incorporated by reference into this report on Form
10-KSB shall be deemed filed as an exhibit hereto. The
consolidated financial statements, notes thereto and the
independent certified public accountants' report thereon
that are incorporated by reference in Item 7 hereof are
included as part of Exhibit 13.1 ........................... ___
21 Subsidiary of First Cherokee Bancshares, Inc. .............. ___
24 Power of attorney (See signature page to this Annual
Report on Form 10-KSB) ..................................... ___
27 Financial Data Schedule
99 Registrant's Proxy Statement for the 1996 Annual
Meeting of Shareholders to be held April 17, 1996.
Only those portions of the Proxy Statement that are
specifically incorporated by reference into this report on
Form 10-KSB shall be deemed filed with the
Commission. ................................................ ___

</TABLE>
___________________

(1) Incorporated herein by reference to Exhibit of the same number in the
Company's Registration Statement No. 33-25075-A.

(2) Incorporated herein by reference to Exhibit of the same number in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1994.

(3) The indicated exhibits are management contracts or compensatory plans
or arrangements required to be filed or incorporated by reference herein.

(4) Incorporated herein by reference to Exhibit of the same number in the
Company's Form 10QSB for the period ended June 30, 1995.

<PAGE>
[LOGO]

FIRST CHEROKEE BANCSHARES, INC.
1995 ANNUAL REPORT
TO SHAREHOLDERS

P.O. BOX 1238 - WOODSTOCK, GEORGIA 30188 - (770) 591-9000
<PAGE>

MARCH 29, 1996

TO OUR SHAREHOLDERS AND FRIENDS:

I AM PLEASED TO PROVIDE YOU WITH THE 1995 ANNUAL REPORT FOR FIRST CHEROKEE
BANCSHARES, INC. THE REPORT COVERS THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION AS OF DECEMBER 31, 1995 AND 1994 AND RESULTS OF OPERATIONS FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1995.

THE COMPANY'S SOLE SUBSIDIARY, FIRST NATIONAL BANK OF CHEROKEE, HAS NOW
COMPLETED ITS SIXTH FULL YEAR OF OPERATION. WE ARE EXCITED TO REPORT THAT THE
COMPANY ACHIEVED EXCEPTIONAL EARNINGS OF $1,077,466 FOR THE YEAR ENDED DECEMBER
31, 1995. THESE EARNINGS REPRESENT A 1.44% RETURN ON AVERAGE ASSETS. THE BANK'S
THREE YEAR AVERAGE RETURN ON AVERAGE ASSETS IS 1.72%, AND THE THREE YEAR AVERAGE
RETURN ON AVERAGE STOCKHOLDERS' EQUITY IS 20.62%. THE BANK'S EXCEPTIONAL
FINANCIAL SUCCESS CAN BE DIRECTLY ATTRIBUTED TO OUR DEDICATION TO QUALITY
SERVICE FOR CUSTOMERS AND SHAREHOLDERS IN OUR COMMUNITY.

THE BANK CONTINUED TO EXPERIENCE SUBSTANTIAL GROWTH DURING 1995. TOTAL ASSETS
INCREASED 32%, FROM $62.7 MILLION AS OF DECEMBER 31, 1994, TO $82.9 MILLION AS
OF DECEMBER 31, 1995. THE BANK'S GROWTH IN LOANS AND DEPOSITS WAS ACHIEVED BY
ONGOING DEVELOPMENT OF THE BANK'S SHARE OF ITS LOCAL MARKET.

OUR PERFORMANCE IN SMALL BUSINESS ADMINISTRATION ("SBA") LENDING MADE OUR BANK
THE 2ND LARGEST SBA LENDER IN THE STATE OF GEORGIA IN TERMS OF DOLLAR VOLUME
PRODUCED IN 1995. OUR "PREFERRED LENDER" STATUS FOR SBA LENDING, WHICH IS THE
HIGHEST LENDER LEVEL SBA AUTHORIZES, AS WELL AS OVER A CENTURY OF COMBINED SBA
EXPERIENCE ON THE PART OF OUR STAFF, CONTRIBUTE TO OUR STATUS AS A LEADER IN
SBA LENDING IN THE SOUTHEAST.

WE REMAIN FOCUSED ON OUR GOALS AND ARE COMMITTED TO MAKING FIRST CHEROKEE
BANCSHARES, INC. AND FIRST NATIONAL BANK OF CHEROKEE A SOUNDLY OPERATED, HIGHLY
CAPITALIZED AND PROFITABLE COMMUNITY BANK. IN ORDER TO SHARE OUR SUCCESS WITH
YOU, OUR STOCKHOLDER, IN JANUARY OF 1996, THE BOARD OF DIRECTORS DECLARED A 10%
STOCK SPLIT, EFFECTED IN THE FORM OF A DIVIDEND, PAYABLE APRIL 1, 1996. WE LOOK
FORWARD TO 1996, OPPORTUNITIES AHEAD AND CONTINUED SUCCESS. WE ARE PROUD OF OUR
COMMUNITY AND YOUR COMMUNITY BANK.

VERY TRULY YOURS,

CARL C. HAMES, JR.
PRESIDENT & CHIEF EXECUTIVE OFFICER

P.O. Box 1238 - Woodstock, Georgia 30188 - (770) 591-9000

<PAGE>

FINANCIAL HIGHLIGHTS

FIRST CHEROKEE BANCSHARES, INC.

SELECTED FINANCIAL DATA

FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C>
SELECTED INCOME STATEMENT DATA

Total Interest Income. . . . . . . . . $7,073,346 $4,520,615 $3,369,378
Net Interest Income. . . . . . . . . . 3,550,659 2,718,997 1,923,130
Provision for Loan Losses . . . . . . 255,471 65,000 128,212
Net Earnings . . . . . . . . . . . . . 1,077,466 792,619 947,526
Primary Net Earnings per Share*. . . . 1.68 1.44 1.72
Fully Diluted Net Earnings per Share*. 1.67 1.44 1.72
Cash Dividends per Share . . . . . . . 0 0 0

SELECTED BALANCE SHEET DATA

Average Balances:
Total Assets . . . . . . . . . . . . $74,757,186 $51,341,796 $43,239,532
Total Deposits . . . . . . . . . . . 67,998,500 46,023,221 39,021,894
Stockholders' Equity . . . . . . . . 5,632,546 4,709,640 3,659,225
End of Period Balances:
Total Assets . . . . . . . . . . . . 82,856,287 62,719,148 46,497,523
Total Deposits . . . . . . . . . . . 76,121,001 57,011,540 41,973,202
Stockholders' Equity . . . . . . . . 6,152,760 4,985,619 4,275,734
Book Value per Share** . . . . . . . $11.15 $9.94 $8.52
Stockholders' Equity as a Percent
of Total Assets . . . . . . . . . . 7.43% 7.95% 9.20%

FINANCIAL RATIOS

Return on Average Assets . . . . . . . 1.44% 1.54% 2.19%
Return on Average Shareholders' Equity 19.12% 16.82% 25.91%
Net Interest Rate Spread . . . . . . . 5.11% 5.74% 4.56%
Primary Capital/Assets
Including Intangibles. . . . . . . . 7.43% 7.95% 9.20%
Excluding Intangibles. . . . . . . . 7.16% 7.55% 8.55%
Loan Loss Reserve/Loans. . . . . . . . 1.25% 1.00% 1.11%

ASSET QUALITY

Nonaccrual Loans as a percentage
of total loans. . . . . . . . . . . . 3.23% 1.09% 0.35%
Loans Past Due 90 Days or More
as a Percent of Net Loans . . . . . . 0.04% 0.00% 0.00%
Loan Chargeoffs as a Percent
of Net Average Loans. . . . . . . . . 0.12% 0.11% 0.55%
</TABLE>

* Primary and Fully Diluted Earnings per Share for each of the periods presented
have been restated to reflect the 10% stock dividend declared January 17,
1996 and payable April 1, 1996.
**1995 Book Value per Share has been adjusted for the 10% stock dividend
declared January 17, 1996 and payable April 1, 1996.

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS

First Cherokee Bancshares, Inc. (the "Company") is a one-bank holding company
whose sole, wholly-owned subsidiary is First National Bank of Cherokee (the
"Bank"). The Company was incorporated July 26, 1988 and became a bank holding
company on December 27, 1988. The Company acquired 100% of the common stock of
the Bank and commenced banking operations on November 27, 1989.

The Bank is located at 6395 E. Alabama Road in Woodstock, Georgia. The Bank's
primary mission is to provide quality service to depositing and borrowing
customers while maintaining adequate security for depositors' funds and
shareholders' investments.

The Company's goal for 1995 was to sustain profitability while maintaining
prudent banking practices and maximizing its contributions to its community.
The Company achieved these goals with a year of exceptional earnings. Net
earnings for the Company for the year ended December 31, 1995 were $1,077,466,
representing a 1.44% return on average assets.

The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, which are included
elsewhere in this report.

RESULTS OF OPERATIONS

The Company sustained its level of operating profitability in 1995. Maintaining
profitability is essential to the Bank's long-term viability because a strong
equity position is vital to take advantage of future opportunities available to
the Bank.

NET INTEREST INCOME NET INTEREST INCOME 1993-1995

Net interest income for the year ended
December 31, 1995 was $3,550,659, a 31% [Graph]
increase compared to $2,718,997 for
the year ended December 31, 1994.
The increase in net interest income
is primarily attributable to a 46%
increase in average earning assets.

Total interest income for the year ended December 31, 1995 was $7,073,346
(including $350,011 resulting from the amortization of deferred loan fees), a
56% increase compared to $4,520,615 for the year ended December 31, 1994.
Interest expense for the year ended December 31, 1995 was $3,522,687, a 96%
increase compared to $1,801,618 for the year ended December 31, 1994. The
increase is primarily attributable to a 49% increase in average interest-bearing
deposits as well as increased cost of funds due to the highly competitive local
market. The net interest rate margin averaged 5.11% during 1995, compared to
5.74% in 1994. The average yield on earning assets was 10.83% in 1995, compared
to 10.09% in 1994.

The Bank's average cost of funds was 5.72% in 1995, an increase of 1.37%
compared to 4.35% in 1994. The Bank's interest-bearing liabilities for the year
ended December 31, 1995 averaged $61,577,824, a 49% increase compared to
$41,346,914 for the year ended December 31, 1994. The Bank achieved this
deposit growth through normal growth within its market area as well as expanding
its market for certificates of deposit.

<PAGE>

The Bank's interest rate spread and interest rate margin are sensitive to
changes in interest rates paid on deposits and earned on loans and other earning
assets. Interest rate sensitivity, as discussed later in this report, is an
important consideration for the Bank. While the majority of loans are
adjustable immediately, monthly or quarterly to changes in the Bank's prime
lending rate, the Bank maintains interest rate floors on approximately half of
the loan portfolio to protect the interest margin should rates begin to
decrease.

The following table presents average balances of the Company on a consolidated
basis and the interest earned and paid thereon during the years ended December
31, 1995 and 1994.

<TABLE>
<CAPTION>
1995 1994
---------------------------------------------------------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE COST BALANCE EXPENSE COST
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets
Loan Portfolio (1). . . . . . . . . . $ 51,902,061 $ 6,265,591 12.07% $ 36,629,503 $ 4,086,103 11.16%
Investment Securities (2) . . . . . . 3,027,979 195,914 6.47% 3,337,176 218,075 6.53%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments. . . 10,391,629 611,841 5.89% 4,840,851 216,437 4.47%
------------ ------------ ------- ------------ ------------ -------
Total Interest-Earning Assets 65,321,669 $ 7,073,346 10.83% 44,807,530 $ 4,520,615 10.09%
Non-Earning Assets . . . . . . . . . .. 9,435,517 6,534,266
------------ ------------
Total Average Assets. . . . . . . $ 74,757,186 $ 51,341,796
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
NOW Accounts. . . . . . . . . . . . . $ 4,090,159 $ 115,034 2.81% $ 4,373,965 $ 110,842 2.53%
Money Market Accounts . . . . . . . . 6,056,074 226,210 3.74% 4,879,697 174,708 3.58%
Savings . . . . . . . . . . . . . . . 2,467,441 72,729 2.95% 2,759,672 76,049 2.75%
Time, $100,000 and Over . . . . . . . 12,463,685 798,922 6.41% 7,312,843 308,661 4.22%
Other Time. . . . . . . . . . . . . . 36,500,465 2,309,792 6.33% 22,020,737 1,131,358 5.14%
------------ ------------ ------- ------------ ------------ -------
Total Interest-Bearing Liabilities 61,577,824 $ 3,522,687 5.72% 41,346,914 $ 1,801,618 4.35%
Non Interest-Bearing Demand
Deposits 6,420,676 4,676,307
Other Liabilities. . . . . . . . . . . 1,126,140 608,935
------------ ------------
Total Liabilities . . . . . . . . 69,124,640 46,632,156
Stockholders' Equity . . . . . . . . . 5,632,546 4,709,640
------------ ------------
Total Average Liabilities and
Stockholders' Equity. . . . . . . . . $ 74,757,186 $ 51,341,796
------------ ------------
------------ ------------
Net Earning Assets . . . . . . . . . . $ 3,743,845 $ 3,460,616
Net Yield on Interest
Earning Assets. . . . . . . . . . . . 5.43% 6.06%
Net Interest Rate Spread . . . . . . . 5.11% 5.74%
Net Interest Margin. . . . . . . . . . $ 3,550,659 $ 2,718,997
</TABLE>

(1) When computing yields on interest earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $350,011 and
$350,908 are included in interest income for the periods ending December 31,
1995 and 1994, respectively.
(2) All investment securities are taxable.

<PAGE>

ALLOWANCE FOR LOAN LOSSES

The loan loss provision for the year ended December 31, 1995 was $255,471
compared to $65,000 for the year ended December 31, 1994. Charge-offs during
1995 amounted to $64,094, and recoveries amounted to $33,299. This compares to
1994 charge-offs of $39,218 and $87,164 in recoveries. The allowance for loan
loss at December 31, 1995 was $685,706, or 1.25% of total loans, compared to
$461,030, or 1.00% of total loans, at the end of 1994. Management increased the
allowance for loan loss during 1995 in an effort to increase the percentage of
loan loss provision to total loans and in order to keep up with the growth in
the loan portfolio. Additionally, the Bank experienced an increase in
nonperforming assets during 1995.

Management believes the allowance for loan losses is sufficient to provide for
losses inherent in the loan portfolio after considering current appraisals,
comparable sales values, discounted cash flows and other evidence of current
value. While management uses available information to recognize losses on
loans, future additions to the allowance may be necessary based on changes in
economic conditions. For example, the Bank's loan portfolio remains dependent
in part on real estate collateral values for repayment. If real estate values
decrease, management may reevaluate the allowance for loan losses. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.

Provided below is an analysis of the activity in the allowance for loan losses
for each of the periods ended December 31, 1995 and 1994.

ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

1995 1994
---------------- ----------------
<S> <C> <C>
Balance at the Beginning of Year . . . . . . $461,030 $348,084
Charge-offs:
Real Estate Construction . . . . . . . 0 0
Real Estate Mortgage. . . . . . . . . . 0 0
SBA - Unguaranteed. . . . . . . . . . . 0 20,674
Commercial. . . . . . . . . . . . . . . 31,008 9,821
Consumer. . . . . . . . . . . . . . . . 33,086 8,723
---------------- ----------------
Total Charge-offs. . . . . . . . . . . . . . 64,094 39,218
Recoveries:
Real Estate Construction . . . . . . . 0 0
Real Estate Mortgage. . . . . . . . . . 15,236 69,811
SBA - Unguaranteed. . . . . . . . . . . 0 12,979
Commercial. . . . . . . . . . . . . . . 11,497 874
Consumer. . . . . . . . . . . . . . . . 6,566 3,500
---------------- ----------------
Total Recoveries . . . . . . . . . . . . . . 33,299 87,164
Net Recoveries. . . . . . . . . . . . . 30,795 (47,949)
Provision for Loan Losses . . . . . . . . . 255,471 65,000
---------------- ----------------
Balance at the End of Year . . . . . . . . . $685,706 $461,030
---------------- ----------------
---------------- ----------------
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End . . . . . . 1.25% 1.00%
Ratio of Net Charge-offs (Recoveries) to Average
Loans Outstanding During the Year . . . 0.06% (.13%)

---------------- ----------------
---------------- ----------------
</TABLE>

<PAGE>

One hundred percent of the allowance at December 31, 1995 and December 31, 1994
was unallocated. The Bank provides specific allocations as a precautionary
measure if it is anticipated that a particular loan may deteriorate or on a
group of loans that have a significant risk level or have suffered a notable
level of losses in the past. As a matter of policy, potential problem loans are
individually reviewed to determine the appropriate level of specific reserve, if
any. At December 31, 1995, the Bank had no loans that required specific
allocations.

The following table presents the allocation of the Allowance for Loan Losses as
of December 3, 1995 and 1994.

<TABLE>
<CAPTION>
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

1995 1994
--------------------------- -----------------
% OF % LOANS % OF
LOSS TO TOTAL LOSS
AMOUNT ALLOCATED LOANS AMOUNT ALLOCATED
------ --------- -------- ------ ---------
<S> <C> <C> <C> <C> <C>
Real Estate Construction . . 0 0.00% 17.43% $ 0 0.00%
Real Estate Mortgage . . . . 0 0.00% 35.16% 0 0.00%
SBA - Unguaranteed . . . . . 0 0.00% 23.53% 0 0.00%
Commercial . . . . . . . . . 0 0.00% 15.74% 0 0.00%
Consumer . . . . . . . . . . 0 0.00% 8.14% 0 0.00%
-------
Unallocated. . . . . . . . . 685,706 100.00% 461,030 100.00%
------- ------- ------- -------
Total Allowance for Loan
Losses. . . . . . . . . . 685,706 100.00% 100.00% $461,030 100.00%
------- ------- ------- -------- -------
------- ------- ------- -------- -------
</TABLE>

The Bank had four properties classified as Other Real Estate Owned totaling
$1,020,861 as of December 31, 1995. The largest of these properties has a
balance of $500,050, an appraised value of $621,000, and consists of 92 acres
of land in Cherokee County. As of March 1996, a contract was under negotiation
to sell the land with no loss to the Bank. No material loss is anticipated on
the resolution of the other properties as well. Additionally, as of December 31,
1995, the Bank had repossessed eight vehicles with fair value totaling $57,214.
No material loss is anticipated on the sale of these vehicles.

At December 31, 1995, the Bank had nine borrowers on nonaccrual status in the
amount of $1,774,778 or 3.23% of total loans compared to $504,403 or 1.09% of
total loans at December 31, 1994. Three borrowers account for $1,567,562 or 88%
of total nonaccrual loans. The largest nonaccrual loan, in the amount of
$736,685, is collateralized by commercial real estate and a convenience store
valued at $875,000. The current owner of the property is in bankruptcy and has
filed a plan to bring the note current and continue with the payments as set
forth in the note. The second largest nonaccrual loan, with a balance of
$535,926, is collateralized by property valued at $676,350. Management
anticipates full recovery of all principal and interest established by the
original loan agreement. The third borrower has three speculative construction
loans classified as nonaccrual totaling $294,951 with collateral supporting the
loans valued at $517,000. These loans are expected to be resolved during the
first quarter of 1996 with no loss to the Bank. In addition, no loss is
anticipated on the resolution of the other six borrowers classified as
nonaccrual. Two loans, totaling $20,310, were past due greater than 90 days and
still accruing interest as of December 31, 1995. One loan was pending renewal at
that date, has since been renewed, and is now current. The borrower on the other
loan had declared bankruptcy as of December 31, 1995, but management had not
received the bankruptcy plan at that date. Since December 31, 1995, the borrower
has met the terms of the bankruptcy plan. There were no loans past due greater
than 90 days as of December 31, 1994. The Bank has not suffered significant
losses on loan problems in the past and does not anticipate material losses in
the foreseeable future.

<PAGE>

OTHER INCOME

Other income was $1,441,428 for the year ended December 31, 1995, compared to
$1,122,395 for the year ended December 31, 1994. Other income for 1995 consisted
primarily of gains on sales of SBA loans of $1,062,554 and service charges on
deposit accounts of $214,724. Other income for 1994 consisted primarily of gains
on sales of loans of $783,722, service charges on deposit accounts of $186,095,
and mortgage origination fees of $111,085.

In the past, mortgage origination fees have represented a recurring source of
income based on the Bank's ability to broker single-family residential
mortgages. As a result of the rising rate environment over the past two years,
mortgage activity slowed significantly. Income from this source was $45,495 for
the year ended December 31, 1995, a 59% decrease compared to $111,085 for the
year ended December 31, 1994. During 1996, the Bank anticipates referring
customer demand for single-family mortgage loans to outside mortgage companies.
Therefore, the level of income from mortgage origination fees during 1996 is
expected to decrease substantially.

Effective January 1, 1994, the Bank adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain
Investments in Debt and Equity Securities". Because the Bank may sell securities
from time to time as the result of liquidity needs, capital standards, tax
planning or other business reasons, the entire investment portfolio was
classified as "Available for Sale". According to SFAS No. 115, unrealized
holding gains or losses, net of the related tax effect, on securities available
for sale are excluded from earnings and are reported as a separate component of
stockholder's equity until realized. Realized gains and losses would be included
in earnings. The Bank did not sell any investment securities in 1995 or 1994.

Gains on the sales of loans represent a recurring source of income for the Bank.
Gains on the sales of loans are dependent upon the Bank's ability to originate
SBA guaranteed loans, as well as the market price for such loans. Beginning in
1994, the Bank began recognizing excess servicing fees from the sale of the
guaranteed portion of certain SBA loans. In these instances, the Bank sold the
loans for reduced premiums, and in turn received higher than normal servicing
rates. Total income from this source was $1,062,554 during 1995 and $783,722
during 1994, including $595,146 and $322,047 recognized related to excess
servicing fees in 1995 and 1994 respectively. During 1995, the Bank changed its
method of accounting for excess servicing fees to comply with consensus No. 94-9
of the Emerging Issues Task Force. The change, effective for loan sales
subsequent to January 19, 1995, resulted in approximately $169,000 of additional
earnings, net of tax. The Bank began originating SBA loans in June of 1992 and
plans to continue for the foreseeable future. The Bank anticipates approximately
the same level of income from the sale of SBA loans in 1996.

During 1995, service charges on deposit accounts increased due to the increase
of accounts that are assessed service charges. Service charge income for the
year ended December 31, 1995 was $214,724, a 15% increase compared to $186,095
for the year ended December 31, 1994. Management believes service charges on
deposit accounts will continue to increase in 1996 as a result of marketing
efforts towards increasing demand deposit and savings accounts.

OTHER EXPENSE

Other expense for the year ended December 31, 1995 was $3,106,374, a 15%
increase compared to $2,709,960 for the year ended December 31, 1994. Other
expense is primarily composed of salaries and other personnel expenses,
occupancy and other miscellaneous operating expenses.

<PAGE>

Salary expense and employee benefits was $1,608,589 for the year ended December
31, 1995, a 22% increase compared to $1,315,880 for the year ended December 31,
1994. At December 31, 1995, the Bank employed 43 full-time employees and 3
part-time employees, compared to 36 full-time employees, 2 part-time employees,
and 3 commission-based employees at December 31, 1994. The increase in
personnel, as well as routine performance-based raises, accounted for the
increase. Personnel expense is anticipated to increase commensurate with asset
growth in 1996.

Occupancy and equipment expense was $501,061 for the year ended December 31,
1995, a 7% increase compared to $469,962 for the year ended December 31, 1994.
Occupancy expense is not expected to increase significantly in 1996.

Other operating expense was $996,724 for the year ended December 31, 1995, an 8%
increase compared to $924,118 for the year ended December 31, 1994. The primary
reason for the increase was increased costs, such as legal fees, relative to the
increase in problem assets. Other operating expense as it relates to variable
expense is expected to increase in future periods commensurate with applicable
transaction volume. Non-variable expense is not expected to increase
significantly in 1995.

Footnote 1 in the attached consolidated financial statements of the Company
provides more detailed explanation of the various income tax accounts. During
1995, the Company used all of its remaining loss carryforwards and state tax
credits, resulting in total income tax expense of $552,776 and an effective tax
rate of 34%. During 1994, the Company used all net loss carryforwards for
Federal income tax purposes, resulting in an income tax expense of $273,813 and
an effective tax rate of 25%.

FINANCIAL CONDITION

ASSETS

Total assets as of December 31, 1995 were $82,856,287, compared to $62,719,148
as of December 31, 1994. This represents an annual growth rate in total assets
of 32% for 1995. Total average assets for the year ended December 31, 1995 were
$74,757,186, an increase of 46% compared to $51,341,796 at December 31, 1994.
Investment securities, federal funds sold, interest-bearing deposits and other
investments accounted for 19% of total assets at December 31, 1995, compared to
18% of total assets as of December 31, 1994. Non-earning assets accounted for
15% of total assets as of December 31, 1995, compared to 9% as of the end of
1994. Management emphasized the investment of funds predominantly into loans
during 1995.

The Bank's net loan portfolio for the year ended December 31, 1995 was
$54,236,513, an 18% increase compared to $46,058,449 for the year ended December
31, 1994. Outstanding loans for the year ended December 31, 1995 averaged
$51,902,061, a 42% increase compared to $36,629,503 for the year ended December
31, 1994. The growth is attributable to the continued loan demand the Bank has
experienced in the last few years. The loan portfolio carried an average yield
of 12.07% during 1995 and 11.16% during 1994. The majority of the Bank's loans
reprice immediately, monthly, or quarterly with changes in the prime rate.

GROWTH IN AVERAGE ASSETS
1993-1995
[GRAPH]
AVERAGE LOANS OUTSTANDING
1993-1995
[GRAPH]

<PAGE>

DEPOSITS

Total deposits as of December 31, 1995 were $76,121,001, a 34% increase
compared to $57,011,540 as of December 31, 1994. Average outstanding
interest-bearing liabilities were $61,577,824 for 1995, a 49% increase
compared to $41,346,914 for 1994. The growth in deposits is directly
attributable to loan growth since deposits are the Bank's primary source of
funding the loan demand. Interest-bearing liabilities cost the Bank an average
of 5.72% during 1995, compared to 4.35% for 1994. The increase in cost of funds
is due to the highly competitive local market. Average noninterest-bearing
demand deposit liabilities were $6,420,676 in 1995, a 37% increase compared to
$4,676,307 for 1994.

GROWTH IN AVERAGE DEPOSITS
1993-1995
[graph]

Total time deposits represented 68% of total deposits at December 31, 1995,
compared to 70% at the end of 1994. Time deposits averaged 72% of total
average deposits for 1995, compared to 64% during 1994. The average cost of
time deposits increased to 6.35% during 1995 from 4.91% during 1994, while the
cost of other funds increased to 3.28% during 1994 as compared to 3.01% during
1994.

LIQUIDITY

Liquidity management involves the matching of the cash flow requirements of
customers, who may be either depositors wanting to withdraw funds or borrowers
needing assurance that sufficient funds will be available to meet their credit
needs, and the Bank's ability to meet those needs. The Bank seeks to meet
liquidity requirements primarily through management of short-term,
interest-bearing deposits with correspondent banks, overnight investments and
amortizing loans. During 1995, federal funds sold, interest-bearing and other
investments averaged $10,391,629 compared to average overnight investments of
$4,840,851 in 1994. More than sufficient funds were provided to meet immediate
needs. Another source of liquidity is the repayment of maturing loans. Also,
the Bank maintains relationships with several correspondent banks which could
provide funds on short notice. Management intends to monitor closely and
maintain appropriate levels of interest-bearing assets and liabilities so that
maturities of assets are such that adequate funds are provided to meet customer
withdrawals and loan requests while net interest margins are maximized. The
Company believes that its liquidity will continue to remain adequate to meet
its expected business needs.

INTEREST RATE SENSITIVITY

The objective of interest rate sensitivity management is to minimize the effect
of interest rate changes on the net interest margin while maintaining net
interest income at acceptable levels. The major factors used to manage
interest rate risk include the mix of fixed and floating interest rates, and
pricing and maturity patterns for all asset and liability accounts. Repricing
periods are determined as the next period that the interest rate on an asset or
liability can change. Fixed rate instruments, such as certificates of deposit
and fixed rate loans, are categorized by maturity dates. Variable rate
instruments are placed in the period of their next possible adjustment date.

<PAGE>

At December 31, 1995, the interest rate sensitivity analysis was as follows:

<TABLE>
<CAPTION> REPRICING WITHIN
---------------------------------------------------------------
0-90 91-180 180-365 >1 Yr.-
Days Days Days 5 Yrs. > 5 Yrs. Total
---------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities . . . . . $ 495 $ - $ 188 $ 200 $ 102 $ 985
Federal Funds Sold, Interest-Bearing
Deposits and other Investments. . 14,348 - - - - 14,348
Loans . . . . . . . . . . . . . . . 34,568 7,327 970 5,493 6,564 54,922
-------- -------- -------- -------- -------- ------
Total Earning Assets . . . . . . . $ 49,411 $ 7,327 $ 1,158 $ 5,693 $ 6,666 $70,255
-------- -------- --------- -------- -------- -------
-------- -------- --------- -------- -------- -------

Interest Bearing demand
Deposits . . . . . . . . . . . . $ 11,164 $ - $ - $ - $ - $11,164
Savings Deposits . . . . . . . . . 2,439 - - - - 2,439
Certificates of Deposits . . . . . 9,308 7,877 14,743 19,948 - 51,876
-------- -------- --------- -------- -------- -------

Total Interest Bearing
Liabilities . . . . . . . . . . . $ 22,911 $ 7,877 $ 14,743 $ 19,948 $ - $65,479
-------- -------- --------- -------- -------- -------
-------- -------- --------- -------- -------- -------

Interest Sensitivity GAP. . . . . . 26,500 (550) (13,585) (14,255) 6,666 4,776

Cumulative GAP. . . . . . . . . . . 26,500 25,950 12,366 (1,890) 4,776

% of Interest Sensitive Assets
to Interest Sensitive
Liabilities. . . . . . . . . . . 215.66% 93.02% 7.86% 28.53% 6,666.00%

Cumulative % of Interest
Sensitive Assets to Interest
Sensitive Liabilities . . . . . 215.66% 184.29% 127.16% 97.11% 107.29%

% of Cumulative GAP to Total
Earning Assets . . . . . . . . . 37.78% 37.00% 17.63% (2.69%) 6.80%
</TABLE>

Based on this gap analysis and assuming no change in the mix of earning assets
or interest bearing liabilities, rising interest rates generally would increase
the net interest margin. While falling interest rates would generally decrease
the net interest margin, interest rate floors on approximately half of the
Bank's loan portfolio would minimize the effect of lower rates on the Bank's
margin. The present gap position is within the range acceptable to management.
Management monitors the effect of potential interest rate changes and
prepayments on its entire portfolio on a monthly basis.

<PAGE>

Capital Resources

Capital, as measured by stockholders' equity to total assets, was 7.43% at
December 31, 1995, as compared to 7.95% at December 31, 1994. The Company's
common stock had a book value per share of $11.15 at December 31, 1995
(adjusted for the 10% stock dividend declared on January 17, 1996 and payable
on April 1, 1996), compared to $9.94 at December 31, 1994. (The book value per
share as of December 31, 1995 without adjustment for the stock dividend was
$12.27).

There are two federal measures of capital adequacy for national banks and their
bank holding companies: risk-based capital guidelines and the leverage ratio.
The risk-based capital guidelines developed by regulatory authorities assign
weighted levels of risk to asset categories to measure capital adequacy. These
guidelines established a minimum requirement of 8.00% of total capital to
risk-adjusted assets by December 31, 1992. One-half of 8.00%, or 4.00%, must
consist of qualifying capital which includes common stockholders' equity and
qualifying perpetual preferred stock (subject to certain limitations). In
addition, banks and bank holding companies must meet a minimum leverage ratio
of 4% of Tier 1 capital to total assets. Tier 1 capital generally consists of
qualifying capital, less intangible assets, and the minimum Tier 1 capital only
applies to banks which have received the highest supervisory rating from their
regulators. Institutions which have not received the highest rating, as well
as institutions with supervisory, financial or operational weaknesses, and
institutions anticipating significant growth, are expected to operate well
above minimum capital standards. For example, most such banks generally have
operated at capital levels ranging from 1% to 2% above the stated minimums.

Generally accepted accounting principles ("GAAP") recognize premiums from the
sale of SBA loans at the time of sale. As a result of an examination by the
Office of the Comptroller of the Currency ("OCC") during the first quarter of
1995, the Bank has been instructed to defer premiums from the sale of SBA loans
for 90 days for regulatory accounting purposes ("RAP") due to a clause in the
sales contracts reflecting a 90-day recourse period effective December 31,
1994. Additionally, certain RAP/GAAP differences exist regarding the
recognition of excess servicing fees. (The OCC has agreed to the elimination
of these RAP/GAAP differences no later than March 31, 1997.) The following
table sets forth information with respect to the risk-based and leverage ratios
for the Bank at December 31, 1995, when compared to minimum ratios required by
regulation, and indicates the effect of the RAP/GAAP differences. The
Company's capital ratios are similar to those of the Bank and exceed the minimum
risk-weighted requirements of the Federal Reserve Bank.

<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
AMOUNT RATIO
------ -----
(In Thousands)
<S> <C> <C>

RISKED-BASED CAPITAL RATIOS:
Tier 1 Capital . . . . . . . . . . . . . . $5,920
Less RAP/GAAP differences, net of tax . . . (431)
------
Adjusted Tier 1 Capital . . . . . . . . . . 5,489 9.26%
Minimum Requirement per regulations . . . . 2,379 4.00%
------ ------
Excess . . . . . . . . . . . . . . . . . . $3,110 5.26%
------ ------
------ ------
Adjusted Tier 1 and Tier 2 Capital . . . . $6,175 10.42%
Total Capital Minimum Requirement . . . . . 4,759 8.00%
------ ------
Excess . . . . . . . . . . . . . . . . . . $1,416 2.42%
------ ------
------ ------
LEVERAGE RATIOS:
Adjusted Tier 1 Capital . . . . . . . . . . $5,489 6.62%
Minimum Requirement per regulations . . . . 3,315 4.00%
------ ------
Excess . . . . . . . . . . . . . . . . . . $2,174 2.62%
------ ------
------ ------
</TABLE>
9
<PAGE>

MARKET PRICE AND DIVIDEND INFORMATION

As of December 31, 1995, there were approximately 650 shareholders of record and
551,804 shares of the Company's common stock outstanding, as adjusted for the
10% stock dividend declared on January 17, 1996 and payable on April 1, 1996.
During the first quarter of 1996, the Company announced that the investment
banking firm of J.C. Bradford and Co. will act as principal market-maker for the
common stock of First Cherokee Bancshares, Inc.

The Company's common stock, $1 par value, has not been traded on an established
trading market, so there has been limited trading. The following table sets
forth high and low sales price information for the common stock for each of the
quarters in which trading has occurred since January 1, 1994. The prices set
forth below have been volunteered by shareholders and reflect only information
that has come to management's attention.

<TABLE>
<CAPTION>
Sales Price Sales Price
---------------------- ------------------

Calendar Period High Low Calendar Period High Low
- ---------------- ------ ----- --------------- ------ -----
1995 1994
- ---- ----
<S> <C> <C> <C> <C> <C>
First Quarter $10.00 $10.00 First Quarter -- --
Second Quarter $10.00 $10.00 Second Quarter $9.00 $9.00
Third Quarter $10.29 $10.00 Third Quarter $10.00 $9.50
Fourth Quarter $11.00 $10.00 Fourth Quarter $10.00 $8.80

</TABLE>

Management believes that all of the above sales were between individuals or
entities who had differing reasons and degrees of motivation for their purchases
and sales. Further, there may have been sales between private individuals who
have not presented the shares for transfer on the Company's transfer books.

The Company has not paid cash dividends to shareholders since its inception. At
present, the only source of funds available for the payment of cash dividends by
the Company would be dividends paid to the Company by the Bank. Certain
regulatory requirements restrict the amount of dividends that the Bank can pay
the Company. At December 31, 1994, regulations of the OCC restricted the Bank's
payment of dividends without prior regulatory approval. At December 31, 1995,
the Bank could pay approximately $1,008,000 to the Company in dividends without
obtaining prior approval. The Company does not anticipate paying dividends in
the immediate future. No assurance can be given that any dividends will be
declared by the Company, or if declared, what the amount of the dividends will
be or whether such dividends, once declared, would continue.

<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Stockholders
First Cherokee Bancshares, Inc.
Woodstock, Georgia

We have audited the accompanying consolidated balance sheets of First Cherokee
Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Cherokee
Bancshares, Inc. and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995, in conformity with generally accepted
accounting principles.

As discussed in note 1, the Company changed its method of accounting for excess
servicing fees.

Atlanta, Georgia
February 1, 1996

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 1995 AND 1994

Assets
------
1995 1994
---- ----

<S> <C> <C>
Cash and due from banks, including reserve requirements
of $130,000 in 1995 $ 5,556,557 841,720
Interest bearing deposits with banks 13,648,003 6,573,245
Federal funds sold 700,000 670,000
---------- ----------

Cash and cash equivalents 19,904,560 8,084,965

Securities available for sale (note 2) 984,583 3,108,713

Other investments 592,300 403,800

Loans, net (note 3) 54,236,513 46,058,449

Premises and equipment, net (note 4) 2,019,547 2,034,669

Accrued interest receivable and other assets 5,118,784 3,028,552
---------- ----------

$ 82,856,287 62,719,148
---------- ----------
---------- ----------

Liabilities and Stockholders' Equity
------------------------------------

Deposits:
Demand $ 10,641,503 4,942,763
Interest-bearing demand 11,164,290 9,328,273
Savings 2,439,247 2,588,911
Time 44,619,422 35,194,792
Time, in excess of $100,000 7,256,539 4,956,801
---------- ----------

Total deposits 76,121,001 57,011,540

Accrued interest payable and other liabilities 582,526 721,989
---------- ----------

Total liabilities 76,703,527 57,733,529
---------- ----------

Commitments (note 9)
Stockholders' equity (notes 6, 7 and 10):
Common stock, par value $1, authorized 10,000,000 shares,
issued 561,044 shares, outstanding 551,804 shares 561,044 510,040
Additional paid-in capital 5,026,457 4,516,417
Retained earnings 642,318 125,896
Unrealized gain (loss) on securities available for sale,
net of tax 6,941 (82,734)
---------- ----------
6,236,760 5,069,619

Less treasury stock at cost, 9,240 shares (84,000) (84,000)
---------- ----------

Total stockholders' equity 6,152,760 4,985,619
---------- ----------

$ 82,856,287 62,719,148
---------- ----------
---------- ----------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

1995 1994 1993
---- ---- ----

<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 6,265,591 4,086,103 2,875,467
Interest on federal funds sold 37,254 26,814 23,860
Interest on deposits with other banks 543,420 167,460 94,795
Interest and dividends on investments:
U.S. Treasury - - 19,948
U.S. Government agencies and mortgage-backed 195,914 218,075 347,808
Other 31,167 22,163 7,500
--------- --------- ---------

Total interest income 7,073,346 4,520,615 3,369,378
--------- --------- ---------

Interest expense on deposits:
Demand 341,244 285,550 243,788
Savings 72,729 76,049 80,828
Time 3,108,714 1,440,019 1,121,632
--------- --------- ---------

Total interest expense 3,522,687 1,801,618 1,446,248
--------- --------- ---------

Net interest income 3,550,659 2,718,997 1,923,130

Provision for loan losses (note 3) 255,471 65,000 128,212
--------- --------- ---------

Net interest income after provision
for loan losses 3,295,188 2,653,997 1,794,918
--------- --------- ---------

Other income:
Mortgage origination fees 45,495 111,085 276,164
Service charges on deposit accounts 214,724 186,095 213,027
Gain on sales of loans, net 1,062,554 783,722 735,941
Securities gains - - 167,643
Miscellaneous 118,655 41,493 39,669
--------- --------- ---------

Total other income 1,441,428 1,122,395 1,432,444
--------- --------- ---------

Other expenses:
Salaries and employee benefits 1,608,589 1,315,880 1,243,019
Occupancy 501,061 469,962 420,007
Other operating (note 11) 996,724 924,118 876,923
--------- --------- ---------

Total other expenses $ 3,106,374 2,709,960 2,539,949
--------- --------- ---------

</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS, CONTINUED

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

1995 1994 1993
---- ---- ----

<S> <C> <C> <C>
Earnings before income taxes and
cumulative effect of accounting change $1,630,242 1,066,432 687,413

Income tax (expense) benefit (note 5) (552,776) (273,813) 130,913
--------- --------- -------

Earnings before cumulative effect of
accounting change 1,077,466 792,619 818,326

Cumulative effect on prior years for change in accounting
principle for income taxes (note 1) - - 129,200
--------- --------- -------

Net earnings $1,077,466 792,619 947,526
--------- --------- -------
--------- --------- -------

Net earnings per share (note 1):

Primary:
Earnings before cumulative effect of a
change in accounting principle $1.68 1.44 1.48
Cumulative effect of accounting change
for income taxes on years prior
to 1993 - - .24
--------- --------- -------

Net earnings $ 1.68 1.44 1.72
--------- --------- -------
--------- --------- -------

Fully diluted:
Earnings before cumulative effect of a
change in accounting principle $ 1.67 1.44 1.48
Cumulative effect of accounting change
for income taxes on years prior
to 1993 - - .24
--------- --------- -------

Net earnings $ 1.67 1.44 1.72
--------- --------- -------
--------- --------- -------

Weighted average number of shares outstanding:
Primary 662,324 551,804 551,804
--------- --------- -------
--------- --------- -------
Fully diluted 662,324 551,804 551,804
--------- --------- -------
--------- --------- -------

</TABLE>

See accompanying notes to consolidated financial statements.

14
<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

Unrealized
Gain (Loss)
Retained on Securities
Additional Earnings Available
Common Paid-In (Accumulated for Sale, Treasury
Stock Capital Deficit) Net of Tax Stock Total
<S> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1992 $ 510,040 4,516,417 (1,614,249) - (84,000) 3,328,208
Net earnings - - 947,526 - - 947,526
------- --------- --------- ------ ------ ---------
Balance, December 31,
1993 510,040 4,516,417 (666,723) - (84,000) 4,275,734
Cumulative effect of
accounting change
for investments in
debt securities, net
of tax of $35,429
(note 1) - - - 68,774 - 68,774

Change in unrealized
gain (loss) on
securities available
for sale, net of tax - - - (151,508) - (151,508)

Net earnings - - 792,619 - - 792,619
------- --------- --------- ------ ------ ---------
Balance, December 31,
1994 510,040 4,516,417 125,896 (82,734) (84,000) 4,985,619

Retroactive restatement
for 10% stock dividend
declared on January
17, 1996 51,004 510,040 (561,044) - - -

Change in unrealized
gain (loss) on securities
available for sale, net
of tax - - - 89,675 - 89,675

Net earnings - - 1,077,466 - - 1,077,466
------- --------- --------- ------ ------ ---------
Balance, December 31,
1995 $ 561,044 5,026,457 642,318 6,941 (84,000) 6,152,760
------- --------- --------- ------ ------ ---------
------- --------- --------- ------ ------ ---------

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,077,466 792,619 947,526
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation, amortization and accretion 189,344 181,513 161,924
Provision for loan losses 255,471 65,000 128,212
Gains on sale of securities - - (167,643)
Provision for deferred income tax benefit (74,789) (30,016) (130,913)
Cumulative effect of accounting change - - (129,200)
Change in:
Interest receivable (128,745) (186,938) 127,661
Other assets (1,174,416) (1,101,138) (534,973)
Interest payable 120 (223) (384,977)
Other liabilities (139,583) 473,625 160,101
---------- ---------- ---------

Net cash provided by operating activities 4,868 194,442 177,718
---------- ---------- ---------

Cash flows from investing activities:
Proceeds from sales of investment securities - - 3,695,249
Proceeds from maturities and calls of investment
securities - - 1,663,779
Proceeds from maturities and calls of securities
available for sale 2,735,402 355,527 -
Purchases of investment securities (495,441) - (1,003,800)
Purchases of other investments (188,500) (250,000) -
Net increase in loans (9,234,992) (15,234,036) (5,016,521)
Purchases of premises and equipment (119,930) (269,665) (270,915)
Proceeds from sales of repossessed assets 13,027 - -
Improvements to other real estate (4,300) - -
---------- ---------- ---------

Net cash used by investing activities (7,294,734) (15,398,174) (932,208)
---------- ---------- ---------

Cash flows from financing activities:
Net change in demand and savings deposits 7,385,093 (1,998,074) 2,612,693
Net change in time deposits 11,724,368 17,036,412 1,872,806
---------- ---------- ---------

Net cash provided by financing activities 19,109,461 15,038,338 4,485,499
---------- ---------- ---------

Net change in cash and cash equivalents 11,819,595 (165,394) 3,731,009

Cash and cash equivalents at beginning of year 8,084,965 8,250,359 4,519,350
---------- ---------- ---------

Cash and cash equivalents at end of year $ 19,904,560 8,084,965 8,250,359
---------- ---------- ---------
---------- ---------- ---------

</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993

1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,522,567 1,801,841 1,831,225
Income taxes, net of refunds received $ 963,000 2,318 13,000

Noncash investing activities:
Transfer of investment securities to securities
available for sale upon adoption of SFAS 115 $ - 3,610,378 -
Change in unrealized gain (loss) on securities
available for sale, net of tax $ 89,675 82,734 -
Transfer of loans to other real estate $ 934,219 245,248 -
Transfer of loans to repossessions $ 70,241 - -
Financed sales of other real estate $ 203,003 - -

</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION
First Cherokee Bancshares, Inc. (the "Company") is a bank holding company
whose business is conducted by its wholly-owned bank subsidiary, First
National Bank of Cherokee (the "Bank"). The Company is subject to
regulation under the Bank Holding Company Act of 1956.

The Bank is a commercial bank that serves Woodstock, Georgia, a community
located approximately 20 miles north of metropolitan Atlanta, and
surrounding Cherokee and Cobb counties. The Bank is chartered and regulated
by the Comptroller of the Currency, is insured and subject to regulation by
the Federal Deposit Insurance Corporation, and is a member of the Federal
Reserve System.

BASIS OF PRESENTATION AND RECLASSIFICATION
The consolidated financial statements include the accounts of the Company
and the Bank. All intercompany accounts and transactions have been
eliminated in consolidation. Certain 1994 and 1993 amounts have been
reclassified to conform to the 1995 presentation.

The accounting principles followed by First Cherokee Bancshares, Inc. and
its subsidiary, and the methods of applying these principles, conform with
generally accepted accounting principles ("GAAP") and with general
practices within the banking industry. In preparing financial statements in
conformity with GAAP, management is required to make estimates and
assumptions that affect the reported amounts in the financial statements.
Actual results could differ significantly from those estimates. Material
estimates common to the banking industry that are particularly susceptible
to significant change in the near term include, but are not limited to, the
determination of the allowance for loan losses and the valuation of real
estate acquired in connection with or in lieu of foreclosure on loans.

CASH AND CASH EQUIVALENTS
For presentation purposes in the consolidated statements of cash flows,
cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits with banks and federal funds sold.

INVESTMENT SECURITIES AVAILABLE FOR SALE
Effective January 1, 1994 the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". Under SFAS No. 115, the Company
classifies its securities in one of three categories: trading, available
for sale, or held to maturity. At December 31, 1995 and 1994, all
investment securities were classified as available for sale.

Available for sale securities consist of investment securities not
classified as trading securities or held to maturity securities and are
recorded at fair value. Unrealized holding gains and losses, net of the
related tax effect, on securities available for sale are excluded from
earnings and are reported as a separate component of stockholders' equity
until realized.

A decline in the market value of any available for sale or held to maturity
investment below cost that is deemed other than temporary is charged to
earnings and establishes a new cost basis for the security.

Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to the yield. Realized gains and losses
for securities classified as available for sale and held to maturity are
included in earnings and are derived using the specific identification
method for determining the cost of securities sold.

OTHER INVESTMENTS
Other investments include equity securities with no readily determinable
fair value. These investment securities are carried at cost.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

LOANS, LOAN FEES AND INTEREST INCOME
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity are reported at the principal amount
outstanding, net of the allowance for loan losses and any deferred fees or
costs on originated loans. Interest on all loans is calculated principally
by using the simple interest method on the daily balance of the principal
amount outstanding.

Effective January 1, 1995, the Bank accounts for impaired loans in
accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan" as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosure." A loan is impaired when,
based on current information and events, it is probable that all amounts
due according to the contractual terms of the loan agreement will not be
collected. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest
rate, or at the loan's observable market price, or at the fair value of the
collateral of the loan if the loan is collateral dependent. The adoption of
these standards did not have a material effect on the consolidated
financial statements.

When the Bank sells the portion of a loan guaranteed by the U.S. Small
Business Administration (SBA), a portion of the premiums associated with
the sale is deferred and is amortized into interest income over the
estimated life of the respective loan as an adjustment to the yield of the
remaining unguaranteed portion. The investment in the entire loan is
allocated between the guaranteed and unguaranteed portions of the loan.
Gains on sales of loans are presented in the statements of earnings net of
brokerage and commission expenses.

Excess servicing fee receivables are recognized from sales of the portion
of loans guaranteed by the SBA with retention of the loan servicing. Excess
servicing fee receivables are carried at the present value of the estimated
future excess net servicing fee income over the estimated lives of the
related SBA loans, less amounts amortized. Amortization of the excess
servicing fee receivables is computed using a level yield method over the
estimated remaining lives of the related SBA loans taking into
consideration assumed prepayment patterns. The carrying values of the
excess servicing fee receivables are evaluated and adjusted periodically
based on actual prepayments and estimates of anticipated prepayments, so
that recorded amounts do not exceed the value of future net servicing
income.

During 1995, the Bank changed its method of accounting for excess servicing
fees to comply with consensus No. 94-9 of the Emerging Issues Task Force.
The change, effective for loan sales subsequent to January 19, 1995,
resulted in approximately $169,000 of additional earnings, net of tax, or
$.26 per share.

MORTGAGE LOAN ORIGINATION FEES
The Bank operates a mortgage department for the purpose of brokering
mortgage loans to independent investors. Mortgage loan origination fees are
recognized at the time the related mortgage loan is closed.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

ALLOWANCE FOR LOAN LOSSES
The Bank's provision for loan losses is based upon management's continuing
review and evaluation of the loan portfolio and is intended to create an
allowance adequate to absorb losses on loans outstanding as of the end of
each reporting period. For individually significant loans, management's
review consists of evaluations of the financial strength of the borrowers
and the related collateral. The review of groups of loans, which are
individually insignificant, is based upon delinquency status of the group,
lending policies, and collection experience.

Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgments of information available to them at the
time of their examination.

PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Major additions and improvements are charged to the asset accounts while
maintenance and repairs that do not improve or extend the useful lives of
the assets are expensed currently. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation are removed from
the accounts, and any gain or loss is reflected in earnings for the period.

Depreciation expense is computed using the straight-line method over the
following estimated useful lives:

Buildings 15-40 years
Furniture, fixtures and equipment 5-10 years

OTHER REAL ESTATE
Properties acquired through foreclosure are carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs
to dispose. Accounting literature defines fair value as the amount that is
expected to be received in a current sale between a willing buyer and
seller other than in a forced or liquidation sale. Fair values at
foreclosure are based on appraisals. Losses arising from the acquisition of
foreclosed properties are charged against the allowance for loan losses.
Subsequent writedowns are provided by a charge to income through the
allowance for losses on other real estate in the period in which the need
arises.

TREASURY STOCK
Treasury stock is accounted for by the cost method. Subsequent reissuances
are on a first-in, first-out basis.

INCOME TAXES
The Company changed its method of accounting for income taxes effective
January 1, 1993. The adoption of SFAS No. 109 resulted in a cumulative
effect that increased net earnings by $129,200, or $.24 per common share
for the year ended December 31, 1993.

Deferred tax assets and liabilities are recorded for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases. Future tax benefits, such as net operating loss carryforwards,
are recognized to the extent that realization of such benefits is more
likely than not. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
the assets and liabilities are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income tax expense in the period that includes the enactment
date.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED

INCOME TAXES, continued
In the event the future tax consequences of differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities results in deferred tax assets, an evaluation of the
probability of being able to realize the future benefits indicated by such
asset is required. A valuation allowance is provided for the portion of the
deferred tax asset when it is more likely than not that some portion or all
of the deferred tax asset will not be realized. In assessing the
realizability of the deferred tax assets, management considers the
scheduled reversals of deferred tax liabilities, projected future taxable
income, and tax planning strategies.

NET EARNINGS PER SHARE
Net earnings per share are based on the weighted average number of shares
outstanding during each year including consideration of stock options and
stock warrants, which represent common stock equivalents. It is assumed
that all dilutive common stock equivalents are exercised at the beginning
of the year and that the proceeds are used to purchase shares of the
Company's common stock. The average market price during each year is used
to compute equivalent shares assumed to be acquired for primary earnings
per share, whereas year end prices are used for fully diluted per share
amounts. The resulting difference in the calculation of primary and fully
diluted earnings per share is due to the application of the modified
treasury stock method, which is applied in instances in which dilutive
common stock equivalents exceed 20% of the outstanding common stock. As
discussed in note 10, all per share amounts have been retroactively
adjusted to reflect the 10% stock dividend declared on January 17, 1996.

RECENT ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation." This new standard will become
effective for the Company January 1, 1996 and will require the Company to
disclose the fair value of employee stock options granted in 1995 and
subsequent years. Since the Company will not be required to record the
options at fair value, management does not expect this new standard to have
a material impact on the consolidated financial statements.

(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995 and 1994 are presented below:

Gross Gross Estimated
Amortized Unrealized Unrealized Fair
1995 Cost Gains Losses Value
---- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. Government agencies $ 495,442 - (33) 495,409
Mortgage-backed securities 478,624 10,550 - 489,174
---------- ------ ------- ---------

$ 974,066 10,550 (33) 984,583
---------- ------ ------- ---------
---------- ------ ------- ---------

1994
----
U.S. Government agencies $2,519,215 - (116,872) 2,402,343
Mortgage-backed securities 714,853 3,007 (11,490) 706,370
---------- ------ ------- ---------

$3,234,068 3,007 (128,362) 3,108,713
---------- ------ ------- ---------
---------- ------ ------- ---------

</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(2) SECURITIES AVAILABLE FOR SALE, CONTINUED
The amortized cost and estimated fair value of securities available for
sale at December 31, 1995, by contractual maturity, are shown below.
Expected maturities of certain securities will differ from contractual
maturities because borrowers may have the right to call or prepay certain
obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
Estimated
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>

Less than one year $ 495,442 495,409
Mortgage-backed securities 478,624 489,174
------- -------

$ 974,066 984,583
------- -------
------- -------
</TABLE>

There were no sales of securities available for sale during 1995 and 1994.
Proceeds from sales of investment securities during 1993 totalled
$3,695,249, and gross gains of $167,643 were realized on those sales.

Securities with a carrying value of approximately $767,000 and $1,879,000
at December 31, 1995 and 1994, respectively, were pledged to secure public
deposits as required by law.

(3) LOANS
Major classifications of loans at December 31, 1995 and 1994 are presented
below:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Commercial 8,644,335 6,537,937
SBA - unguaranteed 12,923,486 5,938,750
Real estate - mortgage 19,311,092 18,476,621
Real estate - construction 9,570,279 11,791,651
Installment and other consumer 4,473,027 3,774,520
--------- ---------

Total loans 54,922,219 46,519,479

Less: Allowance for
loan losses 685,706 461,030
------- -------

Total net loans $ 54,236,513 46,058,449
----------- ----------
----------- ----------
</TABLE>

The Bank grants loans and extensions of credit to individuals and a variety
of firms and corporations located primarily in Cherokee and Cobb County,
Georgia. Although the Bank has a diversified loan portfolio, a substantial
portion of the loan portfolio is collateralized by improved and unimproved
real estate and is dependent upon the real estate market.

The Bank services SBA loans for others that are not included in the
accompanying consolidated balance sheets with unpaid principal balances at
December 31, 1995 and 1994 of approximately $25,000,000 and $21,000,000.

A substantial portion of the Company's revenues are generated from the
origination of loans guaranteed by the SBA and the sale of the guaranteed
portions of these loans. Funding for the various SBA loan programs depends
upon annual appropriations by the U.S. Congress.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(3) LOANS, CONTINUED
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1995, 1994 and 1993 is presented below:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance at beginning
of year $ 461,030 348,084 347,718
Provision charged
to operations 255,471 65,000 128,212
Loans charged off (64,094) (39,218) (151,809)
Recoveries 33,299 87,164 23,963
------- ------- -------

Balance at end of year $ 685,706 461,030 348,084
------- ------- -------
------- ------- -------
</TABLE>

(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1995 and 1994 are summarized as
follows:

Land and buildings $ 2,017,447 2,002,553
Furniture, fixtures
and equipment 449,091 344,054
--------- ---------

2,466,538 2,346,607
Less: accumulated
depreciation 446,991 311,938
--------- ---------

$ 2,019,547 2,034,669
--------- ---------
--------- ---------

</TABLE>

Depreciation expense was $135,053, $110,255 and $77,171 for the years ended
December 31, 1995, 1994 and 1993, respectively.

(5) INCOME TAXES
The following is an analysis of the income tax expense (benefit) for the
years ended December 31, 1995, 1994 and 1993:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Current $ 627,565 298,709 -
Deferred (74,789) 105,168 -
Change in valuation
allowance - (135,184) (130,913)
--------- ------- -------

$ 552,776 268,693 (130,913)
------- ------- -------
------- ------- -------

</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(5) INCOME TAXES, CONTINUED
The differences between the provision for income taxes and the amount
computed by applying the statutory federal income tax rate to earnings
before taxes for the years ended December 31, 1995, 1994 and 1993 are as
follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Pretax income at
statutory rates $ 554,282 360,846 233,720
Add (deduct):
Utilization of net
operating loss carryforward - (49,442) (235,675)
Adjustment to
valuation allowance - (46,594) (130,913)
Increase in cash
surrender value of
life insurance (14,634) - -
State taxes, net of
federal tax effect 4,376 - -
Other 8,752 3,883 1,955
-------- ------- -------

$ 552,776 268,693 (130,913)
-------- ------- -------
-------- ------- -------
</TABLE>

The following summarizes the sources and expected tax consequences of
future taxable deductions (income) which comprise the net deferred tax
asset. The net deferred tax asset is included as a component of other
assets at December 31, 1995 and 1994.

Deferred tax assets:
Allowance for loan losses $ 192,446 85,510
Unearned loan fees - 65,539
Deferred gains on SBA loans 144,237 104,658
State net operating loss carryforward - 6,343
State tax credits - 24,409
Unrealized loss on
securities available for sale - 42,621
Nonaccrual loan interest 36,055 3,932
Deferred compensation 9,161 -
Other, net 16,000 27,852
------- -------

Gross deferred tax asset 397,899 360,864
------- -------

Deferred tax liabilities:
Accelerated depreciation (32,981) (28,114)
Unrealized gain on
securities available for sale (3,576) -

Gross deferred tax liability (36,557) (28,114)
------- -------

Net deferred tax asset $ 361,342 332,750
------- -------

</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(6) STOCKHOLDERS' EQUITY
Dividends paid by the Bank are the primary source of funds available to the
Company. Banking regulations limit the amount of dividends that may be paid
without prior approval of the regulatory authorities. These restrictions
are based on the level of regulatory capital and retained net earnings in
prior years. At December 31, 1995, the Bank could pay approximately
$1,008,000 to the Company in dividends without obtaining prior regulatory
approval.

(7) EMPLOYEE AND DIRECTOR BENEFIT PLANS
In connection with the Company's formation and initial offering, 196,350
non-transferable warrants were issued to the organizing stockholders. The
warrants allow each holder to purchase one additional share of common stock
for each share purchased in connection with the initial offering and are
exercisable for ten years from the date of opening of the Bank at the
initial offering price of $10 per share. At December 31, 1995 and 1994,
196,350 warrants were outstanding.

The Company also has an Employee Stock Plan whereby 66,000 shares of common
stock have been reserved for incentive stock options. These options will
allow employees to purchase shares of common stock at a price not less than
fair market value at the date of grant and are exercisable no later than
ten years from the date of grant. No stock options were exercised in 1995,
1994 or 1993.

The following is a summary of stock option transactions:

<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Outstanding, beginning of year 20,131 20,131
Options granted 6,600 -
Options cancelled (2,200) -
----- ------
Outstanding, end of year (at $10 per share) 24,531 20,131
------ ------
------ ------
</TABLE>

In December 1994, the Bank initiated a postretirement benefit plan to
provide retirement benefits to its President and Board of Directors and to
provide death benefits for their designated beneficiaries. Under the plan,
the Bank purchased split-dollar whole life insurance contracts on the lives
of the President and each Director. The increase in cash surrender value of
the contracts, less the Bank's cost of funds, constitutes the Bank's
contribution to the plan each year. In the event the insurance contracts
fail to produce positive returns, the Bank has no obligation to contribute
to the plan. At December 31, 1995 and 1994, the cash surrender value of the
insurance contracts was approximately $1,350,000 and $1,300,000, and is
included as a component of other assets. Expenses incurred for benefits
relating to this plan were $16,709 during 1995. No expenses were incurred
during 1994.

The Company adopted a 401(k) profit sharing plan, effective January 1,
1995, covering substantially all employees subject to certain minimum age
and service requirements. Contributions to the plan are determined annually
by the Board of Directors. The Company's contribution to the plan was
approximately $29,000 for the year ended December 31, 1995.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(8) RELATED PARTY TRANSACTIONS
The Bank conducts transactions with directors and executive officers,
including companies in which they have beneficial interest, in the normal
course of business. It is the policy of the Bank that loan transactions
with directors and executive officers be made on substantially the same
terms as those prevailing at the time for comparable loans to other
persons. The following is a summary of activity for related party loans for
1995:

<TABLE>
<CAPTION>
<S> <C>
Balance at December 31, 1994 $ 1,947,000
New loans 1,568,000
Repayments (2,092,000)
---------

Balance at December 31, 1995 $ 1,423,000
---------
---------
</TABLE>

(9) COMMITMENTS
The Bank entered into an agreement with a director to lease approximately
1.44 acres of land which is used as the site for the Bank's main office.
The lease term is 20 years. The lease has renewal and purchase options and
provides that the Bank pay the cost of property taxes, insurance and
maintenance. The Bank may renew the lease for four separate five-year terms
and may purchase the leased property during the tenth year of the lease
term or at each five-year interval thereafter through the end of the lease
term. The purchase price would be the lesser of appraised value at the
purchase date or $462,750 plus three percent on a non-compounded basis per
year from lease inception (1989) through the purchase date.

During the years ended December 31, 1995, 1994 and 1993, rental payments of
$55,123, $52,474 and $50,945 were made to the director. Additionally, the
Bank leases certain furniture, fixtures and equipment under operating
leases from unaffiliated lessors. Total rent expense for both affiliated
and unaffiliated lessors was $214,553, $218,598 and $202,430 for the years
ended December 31, 1995, 1994 and 1993, respectively.

Future minimum payments required for all operating leases with remaining
terms in excess of one year are presented below:

<TABLE>
<CAPTION>
Year Ending
December 31,
------------
<S> <C>
1996 (including unaffiliated lessors of $46,042) $ 102,819
1997 (including unaffiliated lessors of $9,866) 68,346
1998 60,234
1999 62,041
2000 63,902
Thereafter 530,334
-------

$ 887,676
-------
-------
</TABLE>

The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and
standby letters of credit. Those instruments involve, to varying degrees,
elements of credit risk in excess of the amount recognized on the balance
sheet. The contractual amounts of those instruments reflect the extent of
involvement the Bank has in particular classes of financial instruments.

The Bank's exposure to credit loss in the event of non-performance 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. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(9) COMMITMENTS, CONTINUED
In most cases, the Bank requires collateral or other security to support
financial instruments with credit risk.

<TABLE>
<CAPTION>
Approximate
Contract
Amount
-----------
1995 1994
---- ----
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $11,300,000 8,685,000
Standby letters of credit $ 346,000 131,000
</TABLE>

Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case by case basis. The amount of
collateral obtained, if deemed necessary by the Bank, upon extension of
credit is based on management's credit evaluation. Collateral held varies
but may include unimproved and improved real estate, certificates of
deposit or personal property.

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. A majority of the
standby letters of credit are secured by real estate, certificates of
deposit or other personal assets at December 31, 1995 and 1994.

(10) SUBSEQUENT EVENTS
On January 17, 1996, the Company declared a 10% stock dividend. All
references to shares outstanding and per share amounts in the accompanying
consolidated financial statements and related notes have been adjusted to
give effect to the dividend.

(11) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
and other income for the years ended December 31, 1995, 1994 and 1993 are
as follows:

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Legal and professional fees $ 56,658 85,504 82,552
Data processing $ 192,326 165,584 171,860
FDIC assessment $ 85,997 102,688 86,239
Amortization expense $ 62,975 68,899 59,939
Stationery and supplies $ 68,548 48,096 51,678
Directors' fees $ 59,230 59,065 15,985
</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(12) FIRST CHEROKEE BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION

Balance Sheets

December 31, 1995 and 1994

<TABLE>
<CAPTION>
ASSETS
1995 1994
---- ----
<S> <C> <C>
Cash $ 11,382 11,382
Investment in bank subsidiary 6,141,378 4,974,237
----------- ---------

$ 6,152,760 4,985,619
----------- ---------
----------- ---------

STOCKHOLDERS' EQUITY

Stockholders' equity $ 6,152,760 4,985,619
----------- ---------
----------- ---------

Statements of Earnings

For the Years Ended December 31, 1995, 1994 and 1993

<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income $ - 294 339
Operating expenses - (2,738) (3,973)

--------- ------- -------

Loss before equity in undistributed earnings
of bank subsidiary - (2,444) (3,634)

Equity in undistributed earnings of bank subsidiary 1,077,466 795,063 951,160
--------- ------- -------

Net earnings $ 1,077,466 792,619 947,526
--------- ------- -------
--------- ------- -------
</TABLE>

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(12) FIRST CHEROKEE BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION, CONTINUED

Statements of Cash Flows

For the Years Ended December 31, 1995, 1994 and 1993

<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $1,077,466 792,619 947,526
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary (1,077,466) (795,063) (951,160)
Amortization - 2,738 3,973
--------- -------- --------

Net cash provided by operating activities - 294 339
--------- -------- --------

Net change in cash - 294 339

Cash at beginning of the period 11,382 11,088 10,749
--------- -------- -------

Cash at end of the period $ 11,382 11,382 11,088
--------- -------- -------
--------- -------- -------

Noncash investing activities:
Change in unrealized gain (loss) of subsidiary's
securities available for sale, net of tax $ 89,675 (82,734) -
</TABLE>

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information about financial instruments,
whether or not recognized on the face of the balance sheet, for which it is
practicable to estimate that value. The assumptions used in the estimation
of the fair value of the Company's financial instruments are detailed
below. Where quoted prices are not available, fair values are based on
estimates using discounted cash flows and other valuation techniques. The
use of discounted cash flows can be significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. The following disclosures should not be considered a surrogate of
the liquidation value of the Company, but rather a good-faith estimate of
the increase or decrease in value of financial instruments held by the
Company since purchase, origination, or issuance.

CASH AND SHORT-TERM INVESTMENTS
For cash, due from banks, interest-bearing deposits with other banks
and federal funds sold, the carrying amount is a reasonable estimate
of fair value.

SECURITIES AVAILABLE FOR SALE
Fair values for securities available for sale are based on quoted
market prices.

OTHER INVESTMENTS
The carrying amount of other investments approximates fair value.

<PAGE>

FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED

LOANS
The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings. For variable rate
loans, the carrying amount is a reasonable estimate of fair value.

DEPOSITS
The fair value of demand deposits, savings accounts and certain money
market deposits is the amount payable on demand at the reporting date.
The fair value of fixed maturity certificates of deposit is estimated
by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.

COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
Because commitments to extend credit and standby letters of credit are
made using variable rates, the contract value is a reasonable estimate
of fair value.

LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's
entire holdings of a particular financial instrument. Because no
market exists for a significant portion of the Company's financial
instruments, fair value estimates are based on many judgments. These
estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.

Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets and
liabilities that are not considered financial instruments include
deferred income taxes and premises and equipment. In addition, the tax
ramifications related to the realization of the unrealized gains and
losses can have a significant effect on fair value estimates and have
not been considered in the estimates.

The carrying amount and estimated fair values of the Company's financial
instruments as of December 31, 1995 are as follows:

<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
<S> <C> <C>
Assets:
Cash and cash equivalents $ 19,904,560 19,904,560
Securities available for sale 984,583 984,583
Other investments 592,300 592,300
Loans, net 54,236,513 54,172,873

Liabilities:
Deposits 76,121,001 76,916,345

Unrecognized financial instruments:
Commitments to extend credit 11,300,000 11,300,000
Standby letters of credit 346,000 346,000
</TABLE>

<PAGE>

FIRST NATIONAL BANK OF CHEROKEE

GENERAL INFORMATION

----------------

GENERAL OFFICES BOARD OF DIRECTORS

6395 E. Alabama Road Alan D. Bobo --
Woodstock, Georgia 30188 Bobo Plumbing Company

MAILING ADDRESS Elwin K. Bobo --
Bobo Construction Company
P. O. Box 1238
Woodstock, Georgia 30188 Michael A. Edwards --
Edwards Tire Company

EXECUTIVE OFFICERS J. Stanley Fitts --
Reeves Floral Products, Inc.
Carl. C. Hames, Jr .--
President Russell L. Flynn --
Cherokee Realty Company
Terry A. Lee --
Executive Vice President Carl C. Hames, Jr. --
First National Bank of Cherokee
Kitty A. Kendrick --
Senior Vice President/ C. Garry Haygood --
Chief Financial Officer Haygood Hauling & Grading

Thomas D. Hopkins, Jr. --
Hopkins Auto Parts, Inc.

Bobby R. Hubbard --
Flight Equipment Instructor,
Lockheed Aeronautical System

Dennis M. Lord --
Bay, Lingerfelt & Lord, Inc.

Larry R. Lusk --
Lusk Construction Company

Stuart R. Tasman --
Doctor of Optometry

<PAGE>

FIRST CHEROKEE BANCSHARES, INC.

GENERAL INFORMATION

----------------

GENERAL OFFICES BOARD OF DIRECTORS
6395 E. Alabama Road
Woodstock, Georgia 30188 Alan D. Bobo --
Bobo Plumbing Company
MAILING ADDRESS Elwin K. Bobo --
P.O. Box 1238 Bobo Construction Company
Woodstock, Georgia 30188 Michael A. Edwards --
Edwards Tire Company
GENERAL COUNSEL J. Stanley Fitts --
Powell, Goldstein, Frazer & Murphy Reeves Floral Products, Inc.
Russell L. Flynn --
INDEPENDENT CERTIFIED Cherokee Realty Company
PUBLIC ACCOUNTANTS Carl C. Hames, Jr. --
Evans, Porter, Bryan & Co. First National Bank of Cherokee
C. Garry Haygood --
Haygood Hauling & Grading
EXECUTIVE OFFICERS Thomas D. Hopkins, Jr. --
Carl C. Hames, Jr. -- Hopkins Auto Parts, Inc.
President Bobby R. Hubbard --
Flight Equipment Instructor,
Kitty A. Kendrick -- Lockheed Aeronautical System
Senior Vice President/ Dennis M. Lord --
Chief Financial Officer Bay, Lingerfelt & Lord, Inc.
Larry R. Lusk --
Lusk Construction Company
Stuart R. Tasman --
Doctor of Optometry

ANNUAL MEETING

Date: April 17, 1996
Time: 4:00 PM Eastern Daylight Time
Place: Woodstock Public Library
510 North Main Street
Woodstock, GA 30188

SHAREHOLDER RELATIONS

FIRST CHEROKEE BANCSHARES, INC. PROVIDES CERTAIN REPORTS TO ITS SHAREHOLDERS
WITHOUT CHARGE. FOR ADDITIONAL COPIES OF THIS ANNUAL REPORT, INTERIM REPORTS
AND THE COMPANY'S ANNUAL REPORT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON FORM 10-KSB (WITHOUT EXHIBITS), CONTACT: CARL C. HAMES, JR., P.O.
BOX 1238, WOODSTOCK, GEORGIA 30188 OR (770) 591-9000.

<PAGE>
FIRST NATIONAL BANK
OF CHEROKEE
6395 EAST ALABAMA ROAD
WOODSTOCK, GEORGIA 30188

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

First National Bank of Cherokee, located at 6395 E. Alabama Road, P.O.
Box 1238, Woodstock, Georgia 30188.

<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1995 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 5,556,557
<INT-BEARING-DEPOSITS> 13,648,003
<FED-FUNDS-SOLD> 700,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 984,583
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 54,236,513
<ALLOWANCE> 685,706
<TOTAL-ASSETS> 82,856,287
<DEPOSITS> 76,121,001
<SHORT-TERM> 0
<LIABILITIES-OTHER> 582,526
<LONG-TERM> 0
0
0
<COMMON> 561,044
<OTHER-SE> 5,675,716
<TOTAL-LIABILITIES-AND-EQUITY> 82,856,287
<INTEREST-LOAN> 6,265,591
<INTEREST-INVEST> 227,081
<INTEREST-OTHER> 580,674
<INTEREST-TOTAL> 7,073,346
<INTEREST-DEPOSIT> 3,522,687
<INTEREST-EXPENSE> 3,522,687
<INTEREST-INCOME-NET> 3,550,659
<LOAN-LOSSES> 255,471
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,106,374
<INCOME-PRETAX> 1,630,242
<INCOME-PRE-EXTRAORDINARY> 1,630,242
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,077,466
<EPS-PRIMARY> 1.68
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> .108
<LOANS-NON> 1,774,778
<LOANS-PAST> 20,310
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 461,030
<CHARGE-OFFS> 64,094
<RECOVERIES> 33,299
<ALLOWANCE-CLOSE> 685,706
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 685,706

</TABLE>