<PAGE>
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, 1996
[ ] 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.)
9860 HIGHWAY 92
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
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[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, 1996
were $8,540,956.
The aggregate market value of the voting stock held by nonaffiliates
of the Registrant at March 3, 1997, was $5,719,215, based on an estimated market
price of $15.00 per share. 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 3, 1997, was 582,304 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference into Parts I and II of this
report.
Portions of the Proxy Statement for the 1997 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the Registrant's 1996 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.
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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 with
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.
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, 1999. 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. At
December 31, 1996, assets of the Bank were $14 million or 16% less than
projected by the Plan. Net earnings after taxes in 1996 were $523,336 or 56%
less than projected by the Plan. The primary reasons for variances from the Plan
in 1996 were slower loan growth than projected, increased costs relative to
problem assets, and an unanticipated one-time assessment by the Federal Deposit
Insurance Corporation ("FDIC") of approximately $84,000. The updated Plan
projects assets of the Bank to reach $95 million by the end of 1997. Net
earnings after taxes are projected to be approximately $1,078,000, representing
a Return on Average Assets of 1.23%. The foregoing statement is a forward-
looking statement which reflects significant assumptions and subjective
judgments believed by management to be reasonable as of the date of this Report.
It does not constitute a forecast or prediction of actual results, and actual
performance and financial results may differ materially from those anticipated
due to a variety of factors, including but not limited to (i) increased
competition with other financial institutions, (ii) lack of sustained growth in
the local economy, (iii) rapid fluctuations in interest rates, and (iv) changes
in the legislative and regulatory environment. The foregoing list should not be
construed as exhaustive and the Company disclaims any obligation to subsequently
update or revise any forward-looking statements after the date of this Report.
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MARKET AREA
-----------
The Company and the Bank conduct business from offices located at 9860 Highway
92, P. O. Box 1238, Woodstock, Georgia. The Bank also has a branch location at
1185 North Cobb Parkway, Marietta, 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, 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
certain areas of its banking business, the Bank also competes with credit
unions, consumer finance companies, insurance companies, money market mutual
funds, non-bank lenders 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
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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 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 1996, the Bank's loan portfolio consisted of approximately 7%
Consumer Loans, 21% Commercial Loans, 23% U.S. Small Business Administration
("SBA") - Unguaranteed portion of Loans, and 49% Commercial and Residential Real
Estate and Construction Loans. The Bank's net loan-to-deposit ratio was
approximately 89% as of December 31, 1996.
Total net loans as of December 31, 1996 were $61,853,335, with the percentage of
30 days or greater delinquent loans at year end at 2.93%. The percentage of
substandard rated loans was 4.37% of total outstanding loans, which represented
40.68% of risk-based capital. Portions of three loans were classified as
doubtful totaling $149,880 and specific reserves were allocated for this amount.
No loans were classified as loss. As of December 31, 1996, the Bank had eight
borrowers in non-accrual status which totaled $1,444,709. During 1996, the loan
loss provision was $373,510, and charge-offs totaled $328,253; recoveries during
1996 amounted to $127,308. The balance in the loan loss reserve account was
$858,271, or 1.37% of loans, as of December 31, 1996.
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,
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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 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.
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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 quarterly 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."
EMPLOYEES
---------
At December 31, 1996, the Bank employed 40 full-time employees and 6 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, 1996 and December 31, 1995. 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,
1996 and 1995.
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<TABLE>
<CAPTION>
TABLE 1
1996 1995
----------------------------------------------------------------------------
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) $55,373,204 $6,473,525 11.69% $51,902,061 $6,265,591 12.07%
Investment Securities(2) 1,608,227 84,357 5.25% 3,027,979 195,914 6.47%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments 12,279,168 696,622 5.67% 10,391,629 611,841 5.89%
----------- ---------- -------- ----------- ---------- -------
Total Interest-Earning Assets 69,260,599 $7,254,504 10.47% 65,321,669 $7,073,346 10.83%
Non-Earning Assets 11,605,219 9,435,517
----------- -----------
Total Average Assets $80,865,818 $74,757,186
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
NOW Accounts $ 4,891,026 122,738 2.51% $ 4,090,159 $ 115,034 2.81%
Money Market Accouts 5,241,153 188,132 3.59% 6,056,074 226,210 3.74%
Savings 2,477,314 65,073 2.63% 2,467,441 72,729 2.95%
Time, $100,000 and Over 13,992,042 875,902 6.26% 12,463,685 798,922 6.41%
Other Time 38,630,867 2,491,916 6.45% 36,500,465 2,309,792 6.33%
----------- ---------- -------- ----------- ---------- -------
Total Interest-Bearing Liabilities 65,232,402 $3,743,761 5.74% 61,577,824 $3,522,687 5.72%
Non Interest-Bearing Demand
Deposits 8,480,285 6,420,676
Other Liabilities 681,630 1,126,140
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Total Liabilities 74,394,317 69,124,640
Stockholders' Equity 6,471,501 5,632,546
----------- -----------
Total Average Liabilities and
Stockholders' Equity $80,865,818 $74,757,186
=========== ===========
Net Earning Assets $ 4,028,197 $ 3,743,845
Net Yield on Interest Earning Assets 5.06% 5.43%
Net Interest Rate Spread 4.73% 5.11%
Net Interest Margin $ 3,510,743 $ 3,550,659
</TABLE>
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(1) When computing yields on interest earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $187,432 and
$350,011 are included in interest income for the periods ending December 31,
1996 and 1995, 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
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31,
1996 vs. 1995 1995 vs. 1994
---------------------------------- ------------------------------------
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 $207,934 $(211,033) $418,967 $2,179,488 $ 475,071 $1,704,417
Interest on investment
securities (111,557) (19,699) (91,858) (22,161) (20,344) (1,817)
Interest on federal funds sold,
interest-bearing deposits,
and other investments 84,781 (26,395) 111,176 395,404 147,284 248,120
--------- --------- -------- ---------- --------- ----------
Total interest income $181,158 $(257,127) $438,285 $2,552,731 $ 602,011 $1,950,720
--------- --------- -------- ---------- --------- ----------
Expense from interest-bearing liabilities:
Interest on now accounts $7,704 ($14,800) $22,504 $4,192 $11,372 ($7,180)
Interest on money market accounts (38,078) (7,600) (30,478) 51,502 9,388 42,114
Interest on savings accounts (7,656) (7,947) 291 (3,320) 4,716 (8,036)
Interest on time deposits, $100,000 & over 76,980 (20,988) 97,968 490,261 272,895 217,366
Interest on other time deposits 182,124 47,270 134,854 1,178,434 434,176 744,258
--------- --------- -------- ---------- --------- ----------
Total interest expense $221,074 $ (4,065) $225,139 $1,721,069 $ 732,547 $ 988,522
--------- --------- -------- ---------- --------- ----------
Net interest income $(39,916) $(253,062) $213,146 $ 831,662 $(130,536) $ 962,198
========= ========= ======== ========== ========= ==========
</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, 1996.
TABLE 3
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
ONE YEAR GREATER THAN 1 YEAR
OR LESS TO FIVE YEARS GREATER THAN 5 YEARS
-------- -------------------- ---------------------------
Fixed Adjustable Fixed Adjustable
Rate Rate Rate Rate TOTAL
------- ---------- ------ ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 8,619 $ 4,215 $1,883 $ 0 $ 764 $15,481
Real Estate-Construction 9,518 637 844 0 0 10,999
All Other Loans 6,426 6,221 6,526 1,189 15,870 36,232
------- ------- ------ ------ ------- -------
Total $24,563 $11,073 $9,253 $1,189 $16,634 $62,712
======= ======= ====== ====== ======= =======
</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, 1996 and 1995.
<TABLE>
<CAPTION>
TABLE 4
1996 1995
------------------------ ------------------------
% OF TOTAL % OF TOTAL
TOTAL LOAN TOTAL LOAN
LOANS PORTFOLIO LOANS PORTFOLIO
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Real Estate Construction $ 9,606,039 15.32% $ 9,570,279 17.43%
Real Estate Mortgage 20,872,411 33.28% 19,311,092 35.16%
SBA -- Unguaranteed 14,672,519 23.40% 12,923,486 23.53%
Commercial 13,101,300 20.89% 8,644,335 15.74%
Consumer 4,459,337 7.11% 4,473,027 8.14%
----------- ------ ----------- ------
Total Loans $62,711,606 100.00% $54,922,219 100.00%
=========== ====== =========== ======
</TABLE>
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NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
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." The adoption of these standards did not have a
material effect on the consolidated financial statements. For a further
description of SFAS 114 and SFAS 118, see Footnote 1 in the financial section of
the Registrant's 1996 Annual Report to Shareholders which is incorporated herein
by reference.
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, 1996 the Bank had eight borrowers on nonaccrual status in the
amount of $1,444,709 or 2.30% of total loans. Two borrowers account for
$1,251,844 or 87% of total nonaccrual loans. The largest nonaccrual loan, in the
amount of $736,439, is collaterized by commercial real estate and a convenience
store valued at $600,000. A specific reserve has been allocated to adjust the
asset value to the appraised value. The Bank foreclosed on the property in
February 1997. While the property is not yet under contract, management is
currently negotiating with several interested parties. It is anticipated that
the property will be sold in the near future at no loss to the Bank. The second
largest nonaccrual loan, with a balance of $515,405, is collaterized by property
valued at $1,421,100. The borrower is currently making payments in accordance
with an approved bankruptcy plan and the loan was transferred back to accrual
status in 1997. Management anticipates full recovery of all principal and
interest established by the original loan agreement. No material 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, 1996 is
approximately $127,000. The amount of interest income on these loans that was
included in net earnings for the year ended December 31, 1996 was approximately
$139,000. There were no loans past due greater than 90 days and still accruing
as of December 31, 1996. Loans past due greater than 30 days but less than 90
days amounted to $1,823,981, or 2.93% of total loans at the end of 1996. There
were no restructured loans as of December 31, 1996.
As of December 31, 1995, nine borrowers were classified as nonaccrual totaling
$1,774,778 or 3.23% of total loans. 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. 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. Loans past due greater than 30 days but less than
90 days amounted to $992,619, or 1.82%, of total loans and there were no
restructured loans as of December 31, 1995.
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The Bank had two properties classified as Other Real Estate Owned totaling
$625,638 as of December 31, 1996. The largest of these properties has a balance
of $510,047, an appraised value of $515,000, and consists of 95 acres of land in
Cherokee County. The property has been under various contracts, none of which
would have resulted in a loss to the Bank. The most recent contract expired
December 15, 1996. For miscellaneous reasons, a sale has not been consummated.
Currently, two separate developers are actively evaluating a contract and
management still believes this property will be sold with no loss. No material
loss is anticipated on the resolution of the other property either. As of
December 31, 1996, the Bank had repossessed six vehicles with a fair value
totaling $37,472. 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 1996 Annual Report to
Shareholders.
Table 5 below presents the activity in the allowance for loan losses for each of
the periods ended December 31, 1996 and 1995. 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, 1996, three loans were considered impaired requiring
specific reserves totaling $149,880. For allocation purposes, the specific
reserves are appropriated directly to the category the individual loan is in.
Effective 1996, the remaining allowance, less any surplus in the allowance based
on an internal analysis, is attributed to the loan categories based on the
relative percentage of the particular category to total loans. Any surplus is
considered unallocated. At December 31, 1995, the Bank had no loans that
required specific allocations and 100% of the allowance was unallocated.
-12-
<PAGE>
TABLE 5
1996 1995
-------- --------
Balance at the Beginning of Year $685,706 $461,030
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 0 0
Commercial 182,161 31,008
Consumer 146,092 33,086
-------- --------
Total Charge-offs 328,253 64,094
Recoveries:
Real Estate Construction 41 0
Real Estate Mortgage 0 15,236
SBA - Unguaranteed 0 0
Commercial 104,999 11,497
Consumer 22,268 6,566
-------- --------
Total Recoveries 127,308 33,299
Net Chargeoffs 200,945 30,795
Provision for Loan Losses 373,510 255,471
-------- --------
Balance at the End of Year $858,271 $685,706
======== ========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.37% 1.25%
Ratio of Net Charge-offs to Average
Loans Outstanding During the Year 0.36% 0.06%
===== ====
TABLE 6
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
% of % of
Loss Loss
Amount Allocated Amount Allocated
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $ 93,192 10.86% $0 0.00%
Real Estate Mortgage 202,492 23.59% 0 0.00%
SBA - Unguaranteed 174,092 20.28% 0 0.00%
Commercial 245,233 28.58% 0 0.00%
Consumer 43,262 5.04% 0 0.00%
Unallocated 100,000 11.65% 685,706 100.00%
-------- ------- -------- -------
Total Allowance for Loan Losses $858,271 100.00% $685,706 100.00%
======== ======= ======== =======
</TABLE>
-13-
<PAGE>
INVESTMENT PORTFOLIO
Table 7 below sets forth the fair value of investment securities at December 31,
1996 and 1995.
<TABLE>
<CAPTION>
TABLE 7
1996 1995
-------- --------
<S> <C> <C>
U.S. Government Agencies $500,000 $495,409
Mortgage-backed Securities 293,735 489,174
-------- --------
Total Investment Securities $793,735 $984,583
======== ========
</TABLE>
The fair value at December 31, 1996 includes a $7,330 market value increase for
net unrealized gains while the fair value at December 31, 1995 includes a
$10,517 market value increase for net unrealized gains 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 1996 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, 1996.
TABLE 8
<TABLE>
<CAPTION>
AFTER AFTER
ONE YEAR FIVE YEARS
ONE YEAR THROUGH THROUGH AFTER
OR 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> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government Agencies $ 0 0.00% $500,000 6.62% $0 0.00% $0 0.00% $500,000 6.62%
Mortgage-backed
Securities 220,248 7.00% 73,487 9.19% 0 0.00% 0 0.00% 293,735 7.55%
-------- ---- -------- ---- -- ---- -- ---- -------- ----
Total Investment
Securities $220,248 7.00% $573,487 6.95% $0 0.00% $0 0.00% $793,735 6.96%
======== ==== ======== ==== == ==== == ==== ======== ====
</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
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1996 1995
----------------------- -----------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- -------- ----------- --------
<S> <C> <C> <C> <C>
Non Interest-bearing demand deposits $ 8,480,285 N/A $ 6,420,676 N/A
Interest-bearing demand deposits 10,132,179 3.06% 10,146,233 3.36%
Savings deposits 2,477,314 2.63% 2,467,441 2.95%
Time deposits 52,622,909 6.39% 48,964,150 6.35%
----------- -----------
Total Deposits $73,712,687 $67,998,500
=========== ===========
</TABLE>
The amounts of time certificates of deposit issued in amounts greater than or
equal to $100,000 or more as of December 31, 1996, 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.
<TABLE>
<CAPTION>
(Dollars in
Thousands)
------------
<S> <C>
Three months or less $ 3,889
Over three through six months 2,400
Over six through twelve months 2,052
Over twelve months 3,135
-------
Total $11,476
-------
</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 1996 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, 1996 and
1995. The Company did not pay cash dividends to shareholders during 1996 and
1995.
-15-
<PAGE>
TABLE 10
<TABLE>
<CAPTION>
1996 1995
---- -----
<S> <C> <C>
Return on Assets .52% 1.44%
Return on Equity 6.46% 19.12%
Stockholders' Equity to Assets 8.69% 7.43%
</TABLE>
SUPERVISION AND REGULATION
--------------------------
The following discussion sets forth the material elements of the regulatory
framework applicable to banks and bank holding companies and provides certain
specific information related to the Company.
GENERAL
The Company is a bank holding company registered with the Board of Governors of
the Federal Reserve System (the "Federal Reserve") under the Bank Holding
Company Act of 1956, as amended (the "BHC Act"). As such, the Company and its
non-bank subsidiaries are subject to the supervision, examination, and reporting
requirements of the BHC Act and the regulations of the Federal Reserve.
The BHC Act requires every bank holding company to obtain the prior approval of
the Federal Reserve before: (a) it may acquire direct or indirect ownership or
control of any voting shares of any bank if, after such acquisition, the bank
holding company will directly or indirectly own or control more than 5% of the
voting shares of the bank; (b) it or any of its subsidiaries, other than a bank,
may acquire all or substantially all of the assets of any bank; or (c) it may
merge or consolidate with any other bank holding company.
The BHC Act further provides that the Federal Reserve may not approve any
transaction that would result in a monopoly or would be in furtherance of any
combination or conspiracy to monopolize or attempt to monopolize the business of
banking in any section of the United States, or the effect of which may be
substantially to lessen competition or to tend to create a monopoly in any
section of the country, or that in any other manner would be in restraint of
trade, unless the anticompetitive effects of the proposed transaction are
clearly outweighed by the public interest in meeting the convenience and needs
of the community to be served. The Federal Reserve is also required to consider
the financial and managerial resources and future prospects of the bank holding
companies and banks concerned and the convenience and needs of the community to
be served. Consideration of financial resources generally focuses on capital
adequacy, which is discussed below.
The BHC Act, as amended by the interstate banking provisions of the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"), which became effective on September 29, 1995, repealed the prior
statutory restrictions on interstate acquisitions of banks by bank holding
companies, such that the Company, and any other bank holding company located in
Georgia may now acquire a bank located in any other state, and any bank holding
company located outside Georgia may lawfully acquire any Georgia-based bank,
regardless of state law to the contrary, in either case subject to certain
deposit-percentage, aging requirements, and other restrictions. The Interstate
Banking Act also
-16-
<PAGE>
generally provides that, after June 1, 1997, national and state-chartered banks
may branch interstate through acquisitions of banks in other states. By adopting
legislation prior to that date, a state has the ability either to "opt in" and
accelerate the date after which interstate branching is permissible or "opt out"
and prohibit interstate branching altogether.
In February 1996, the Georgia Legislature adopted the "Georgia Interstate
Branching Act" effective June 1, 1997. The Georgia Interstate Branching Act
will permit Georgia-based banks and bank holding companies owning or acquiring
banks outside of Georgia and all non-Georgia banks and bank holding companies
owning or acquiring banks in Georgia to merge any lawfully acquired bank into an
interstate branch network. The Georgia Interstate Branching Act also allows
banks to establish de novo branches on a limited basis beginning July 1, 1996.
Beginning July 1, 1998, the number of de novo branches which may be established
will no longer be limited.
The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity
is permissible, the Federal Reserve must consider whether the performance of
such an activity reasonably can be expected to produce benefits to the public,
such as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve has the power to order a
holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), and as such, its deposits are insured by the FDIC to
the maximum extent provided by law. Such subsidiary is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The Office of the Comptroller of the Currency (the "OCC") regularly examines the
operations of the Bank and is given authority to approve or disapprove mergers,
consolidations, the establishment of branches, and similar corporate actions.
The OCC also has the power to prevent the continuance or development of unsafe
or unsound banking practices or other violations of law.
PAYMENT OF DIVIDENDS
The Company is a legal entity separate and distinct from its banking subsidiary.
The principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends by the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Company as well as by the Company to its shareholders.
-17-
<PAGE>
If, in the opinion of the federal banking regulator, a depository institution
under its jurisdiction is engaged in or is about to engage in an unsafe or
unsound practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), such authority may
require, after notice and hearing, that such institution cease and desist from
such practice. The federal banking agencies have indicated that paying
dividends that deplete a depository institution's capital base to an inadequate
level would be an unsafe and unsound banking practice. Under the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See "-- Prompt
Corrective Action." Moreover, the federal agencies have issued policy
statements that provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
At December 31, 1996, under dividend restrictions imposed under federal and
state laws, the Bank, without obtaining governmental approvals, could declare
aggregate dividends to the Company of approximately $1,061,000.
The payment of dividends by the Company and the Bank may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
CAPITAL ADEQUACY
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the appropriate federal banking
regulator in the case of Bank. There are two basic measures of capital adequacy
for bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards
must be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio") of
total capital ("Total Capital") to risk-weighted assets (including certain off-
balance-sheet items, such as standby letters of credit) is 8%. At least half of
Total Capital must comprise common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist
of subordinated debt, other preferred stock, and a limited amount of loan loss
reserves ("Tier 2 Capital"). At December 31, 1996, the Company's consolidated
Total Risk-Based Capital Ratio and its Tier 1 Risk-Based Capital Ratio (i.e.,
the ratio of Tier 1 Capital to risk-weighted assets) were 10.56% and 9.33%,
respectively.
In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Ratio") of Tier 1 Capital to average assets, less goodwill
and certain other intangible assets, of 3% for bank holding companies that meet
certain specified criteria, including having the highest regulatory rating. All
other bank holding companies generally are required to maintain a Leverage Ratio
of at least 3%, plus an additional cushion of 100 to 200 basis points. The
Company's Leverage Ratio at December 31, 1996 was 7.29%. The
-18-
<PAGE>
guidelines also provide that bank holding companies experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels without significant reliance
on intangible assets. Furthermore, the Federal Reserve has indicated that it
will consider a "tangible Tier 1 Capital Leverage Ratio" (deducting all
intangibles) and other indicia of capital strength in evaluating proposals for
expansion or new activities.
The Bank is subject to risk-based and leverage capital requirements adopted by
the OCC, which are substantially similar to those adopted by the Federal Reserve
for bank holding companies.
The Bank was in compliance with applicable minimum capital requirements as of
December 31, 1996. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or its
subsidiary depository institution.
Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the termination
of deposit insurance by the FDIC, a prohibition on the taking of brokered
deposits, and certain other restrictions on its business. As described below,
substantial additional restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements. See "-- Prompt
Corrective Action."
The federal bank regulators continue to indicate their desire to raise capital
requirements applicable to banking organizations beyond their current levels.
In this regard, the Federal Reserve and the FDIC have, pursuant to FDICIA,
recently adopted final regulations, which will become mandatory on January 1,
1998, requiring regulators to consider interest rate risk (when the interest
rate sensitivity of an institution's assets does not match the sensitivity of
its liabilities or its off-balance-sheet position) in the evaluation of a
bank's capital adequacy. The bank regulatory agencies have concurrently
proposed a methodology for evaluating interest rate risk which would require
banks with excessive interest rate risk exposure to hold additional amounts of
capital against such exposures. The market risk rules will apply to any bank or
bank holding company whose trading activity equals 10% or more of its total
assets, or whose trading activity equals $1 billion or more.
SUPPORT OF SUBSIDIARY INSTITUTIONS
Under Federal Reserve policy, the Company is expected to act as a source of
financial strength for, and to commit resources to support, each of its banking
subsidiaries. This support may be required at times when, absent such Federal
Reserve policy, the Company may not be inclined to provide it. In addition, any
capital loans by a bank holding company to any of its banking subsidiaries are
subordinate in right of payment to deposits and to certain other indebtedness of
such banks. In the event of a bank holding company's bankruptcy, any commitment
by the bank holding company to a federal bank regulatory agency to maintain the
capital of a banking subsidiary will be assumed by the bankruptcy trustee and
entitled to a priority of payment.
Under the Federal Deposit Insurance Act ("FDIA"), a depository institution
insured by the FDIC can be held liable for any loss incurred by, or reasonably
expected to be incurred by, the FDIC after August 9, 1989, in connection with
(a) the default of a commonly controlled FDIC-insured depository institution or
(b) any assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution "in danger of default." "Default" is defined generally
as the appointment of a conservator or receiver, and "in danger of default" is
defined generally as the existence of certain conditions indicating that a
default is likely to occur in the absence of regulatory assistance. The FDIC's
claim for damages is superior to claims of shareholders of the insured
depository institution or its holding company, but is subordinate to claims of
depositors, secured creditors, and holders of subordinated debt (other than
-19-
<PAGE>
affiliates) of the commonly controlled insured depository institution. The
subsidiary depository institutions of the Company are subject to these cross-
guarantee provisions. As a result, any loss suffered by the FDIC in respect of
these subsidiaries would likely result in assertion of the cross-guarantee
provisions, the assessment of such estimated losses against the depository
institution's banking affiliates, and a potential loss of the Company's
investment in such other subsidiary depository institutions.
PROMPT CORRECTIVE ACTION
FDICIA establishes a system of prompt corrective action to resolve the problems
of undercapitalized institutions. Under this system, which became effective in
December 1992, the federal banking regulators are required to establish five
capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and to take
certain mandatory supervisory actions, and are authorized to take other
discretionary actions, with respect to institutions in the three
undercapitalized categories, the severity of which will depend upon the capital
category in which the institution is placed. Generally, subject to a narrow
exception, FDICIA requires the banking regulator to appoint a receiver or
conservator for an institution that is critically undercapitalized. The federal
banking agencies have specified by regulation the relevant capital level for
each category.
The capital levels established for each of the categories are as follows:
<TABLE>
<CAPTION>
Tier 1
Total Risk-
Tier 1 Risk-Based Based
Capital Category Capital Capital 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
Undercapitalized less than 3% less than 6% less than 3% --
Critically
Undercapitalized 2% or less -- -- --
tangible equity
</TABLE>
For purposes of the regulation, the term "tangible equity" includes core capital
elements counted as Tier 1 Capital for purposes of the risk-based capital
standards, plus the amount of outstanding cumulative perpetual preferred stock
(including related surplus), minus all intangible assets with certain
exceptions. A depository institution may be deemed to be in a capitalization
category that is lower than is indicated by its actual capital position if it
receives an unsatisfactory examination rating.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
Under FDICIA, a bank holding company must guarantee that a subsidiary depository
institution meets its capital restoration plan, subject to certain limitations.
The obligation of a controlling holding company under FDICIA to fund a capital
restoration plan is limited to the lesser of 5% of an
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<PAGE>
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. An undercapitalized institution is also generally
prohibited from increasing its average total assets, making acquisitions,
establishing any branches, or engaging in any new line of business, except in
accordance with an accepted capital restoration plan or with the approval of the
FDIC. In addition, the appropriate federal banking agency is given authority
with respect to any undercapitalized depository institution to take any of the
actions it is required to or may take with respect to a significantly
undercapitalized institution as described below if it determines "that those
actions are necessary to carry out the purpose" of FDICIA.
At December 31, 1996, the Bank had the requisite capital levels to qualify as
well capitalized.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a new risk-based assessment system for
insured depository institutions that takes into account the risks attributable
to different categories and concentrations of assets and liabilities. The new
system, which went into effect on January 1, 1994, assigns an institution to one
of three capital categories: (a) well capitalized; (b) adequately capitalized;
and (c) undercapitalized. 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 in May 1995, the FDIC reduced
the assessment rate applicable to BIF deposits in two stages, so that, beginning
1996, the deposit insurance premiums for 92% of all BIF members in the highest
capital and supervisory categories were set at $2,000 per year, regardless of
deposit size. The FDIC elected to retain the existing assessment rate range of
23 to 31 basis points for SAIF members for the foreseeable future given the
undercapitalized nature of that insurance fund.
Recognizing that the disparity between the SAIF and BIF premium rates had
adverse consequences for SAIF-insured institutions and other banks with SAIF
assessed deposits, including reduced earnings and an impaired ability to raise
funds in capital markets and to attract deposits, on July 28, 1995, the FDIC,
the Treasury Department, and the Office of Thrift Supervision released
statements outlining a proposed plan to recapitalize the SAIF, the principal
feature of which was a special one-time assessment on depository institutions
holding SAIF-insured deposits, which was intended to recapitalize the SAIF at a
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<PAGE>
reserve ratio of 1.25%. This proposal contemplated elimination of the disparity
between the assessment rates on BIF and SAIF deposits following recapitalization
of the SAIF.
A variation of this proposal designated the Deposit Insurance Funds Act of 1996
(the "Funds Act") was enacted by Congress as part of the omnibus budget
legislation and signed into law on September 30, 1996. As directed by the Funds
Act, the FDIC implemented a special one-time assessment of approximately 65.7
basis points (0.657%) on a depository institution's SAIF-insured deposits held
as of March 31, 1995 (or approximately 52.6 basis points on SAIF deposits
acquired by banks in certain qualifying transactions). The Company recorded a
charge against earnings for the special assessment in the quarter ended
September 30, 1996 in the pre-tax amount of approximately $84,000.
In addition, the FDIC proposed a revision in the SAIF assessment rate schedule
that effected, as of October 1, 1996 (a) a widening in the assessment rate
spread among institutions in the different capital and risk assessment
categories, (b) an overall reduction of the assessment rate range assessable on
SAIF deposits of from 0 to 27 basis points, and (c) a special interim assessment
rate range for the last quarter of 1996 of from 18 to 27 basis points on
institutions subject to FICO assessments. Effective January 1, 1997, FICO
assessments will be imposed on both BIF- and SAIF-insured deposits in annual
amounts presently estimated at 1.29 basis points and 6.44 basis points,
respectively. Beginning in January, 2000, BIF- and SAIF- insured institutions
will share the FICO interest costs at equal rates currently estimated 2.43 basis
points. The Company anticipates that the net effect of the decrease in the
premium assessment rate on SAIF deposits will result in a reduction in its total
deposit insurance premium assessments for the years 1997 through 1999, assuming
no further changes in announced premium assessment rates. The Funds Act further
provides that BIF and SAIF are to be merged, creating the "Deposit Insurance
Fund," on January 1, 1999, provided that bank and savings association charters
are combined by that date.
Under the FDIA, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe and unsound practices, is in
an unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, rule, order, or condition imposed by the FDIC.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed 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 regulation or statute will be adopted or the extent to which
the business of the Company may be affected by such regulation or statute.
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 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 20,000 square feet and is fully occupied. An
addition of approximately 1,800 square feet is being added over the drive-in
facility during 1997 at a cost of approximately $150,000. Management believes
this expansion 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
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<PAGE>
cost of approximately $53,000. The net book values of the building and
equipment as of December 31, 1996, were $1,216,545 and $230,959 respectively.
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
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 $55,393 in total rentals under the ground lease during
1996. 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, 1996 were $185,201, $286,342, and $83,284,
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
which management believes would 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 1996 Annual Report to Shareholders. The Registrant did not have
any unregistered sales of equity securities during 1996, 1995 or 1994.
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 1996 Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS.
- -----------------------------
The following report and statements are included in the financial section of the
Registrant's 1996 Annual Report to Shareholders and are incorporated herein by
reference:
(i) Report of Porter, Keadle, Moore, LLP.
(ii) Consolidated Balance Sheets as of December 31, 1996 and 1995.
(iii) Consolidated Statements of Earnings for Years Ended December 31,
1996, 1995, and 1994.
(iv) Consolidated Statements of Stockholders' Equity for Years Ended
December 31, 1996, 1995, and 1994.
(v) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995, and 1994.
(vi) Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE.
--------------------
None.
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 1997 Annual Meeting of
Shareholders and is incorporated herein by reference.
-24-
<PAGE>
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 1997 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 1997 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 1997 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, 1996. Only those portions of the 1996 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
-25-
<PAGE>
________________________
(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 24, 1997
-----------------------------
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/ Alan D. Bobo Director March 24, 1997
- ----------------------------
Alan D. Bobo
/S/ Elwin K. Bobo Director March 24, 1997
- ----------------------------
Elwin K. Bobo
/S/ Michael A. Edwards Director March 24, 1997
- ----------------------------
Michael A. Edwards
/S/ Stanley Fitts Director March 24, 1997
- ----------------------------
Stanley Fitts
/S/ Russell L. Flynn Director March 24, 1997
- ----------------------------
Russell L. Flynn
/S/ Carl C. Hames, Jr. President, Principal March 24, 1997
- ---------------------------- Executive Officer,
Carl C. Hames, Jr. and Director
/S/ C. Garry Haygood Director March 24, 1997
- ----------------------------
C. Garry Haygood
/S/ Thomas D. Hopkins, Jr. Director and March 24, 1997
- ---------------------------- Secretary
Thomas D. Hopkins, Jr.
/S/ Bobby R. Hubbard Director March 24, 1997
- ----------------------------
Bobby R. Hubbard
/S/ Dennis W. Lord Director March 24, 1997
- ----------------------------
Dennis W. Lord
/S/ Larry R. Lusk Director March 24, 1997
- ----------------------------
Larry R. Lusk
/S/ Dr. Stuart R. Tasman Director March 24, 1997
- ----------------------------
Dr. Stuart R. Tasman
/S/ Kitty A. Kendrick Principal March 24, 1997
- ---------------------------- Accounting
Kitty A. Kendrick and Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
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, 1996. Only those portions of the 1996
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......................................................... ___
</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>
[FIRST NATIONAL BANK OF CHEROKEE LOGO]
FIRST CHEROKEE BANCSHARES, INC.
1996 ANNUAL REPORT
TO SHAREHOLDERS
P.O. BOX 1238 . WOODSTOCK, GEORGIA 30188 . (770) 591-9000
<PAGE>
MARCH 24, 1997
TO OUR SHAREHOLDERS AND FRIENDS:
I AM PLEASED TO PROVIDE YOU WITH THE 1996 ANNUAL REPORT FOR FIRST CHEROKEE
BANCSHARES, INC. THE REPORT COVERS THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION AS OF DECEMBER 31, 1996 AND 1995 AND RESULTS OF OPERATIONS FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996.
NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1996 OF $418,220, REPRESENTING A
.52% RETURN ON AVERAGE ASSETS, DID NOT MEET EXPECTATIONS. THE LEVEL OF
NONPERFORMING ASSETS SIGNIFICANTLY AFFECTED EARNINGS THROUGH LOST INTEREST
INCOME AS WELL AS INCREASED COLLECTION COSTS. WE'VE TAKEN PROACTIVE MEASURES BY
INCREASING THE ALLOWANCE FOR LOAN LOSSES TO 1.37% OF TOTAL LOANS. WHILE EARNINGS
FOR 1996 WERE NOT AT THE EXCEPTIONAL LEVEL ACHIEVED BY THE BANK DURING RECENT
YEARS, THE THREE YEAR AVERAGE RETURN ON AVERAGE ASSETS IS 1.17%, AND THE THREE
YEAR AVERAGE RETURN ON AVERAGE STOCKHOLDERS' EQUITY IS 14.13%, REFLECTING
RESPECTABLE RETURNS. MANAGEMENT OF THE BANK IS FOCUSED ON RETURNING THE BANK TO
AN ACCEPTABLE EARNINGS LEVEL.
1996 WAS ALSO A YEAR OF ADJUSTMENT FOR THE BALANCE SHEET OF THE COMPANY. WHILE
TOTAL ASSETS DECREASED 9%, FROM $82.9 MILLION AS OF DECEMBER 31, 1995, TO $75.6
MILLION AS OF DECEMBER 31, 1996, AVERAGE ASSETS INCREASED 8% DURING 1996 AS
COMPARED TO 1995. IN AN EFFORT TO IMPROVE THE BANK'S COST OF FUNDS, CERTAIN
INSTITUTIONAL CERTIFICATES OF DEPOSIT WERE ALLOWED TO MATURE AND ROLL-OFF DURING
THE YEAR. NEW LOAN AND DEPOSIT GROWTH WAS ACHIEVED BY ONGOING DEVELOPMENT OF
THE BANK'S SHARE OF ITS LOCAL MARKET.
WE ARE PROUD OF SEVERAL SENIOR ADDITIONS TO OUR STAFF. RICK KONONEN, A CHEROKEE
COUNTY NATIVE, FORMERLY WITH A COMMUNITY BANK IN CANTON, JOINED US AS PRESIDENT
OF THE BANK DURING JANUARY 1997. RICK BRINGS WITH HIM TWENTY-FIVE YEARS OF
BANKING EXPERIENCE AS WELL AS FAMILIARITY WITH OUR COMMUNITY. IN AN EFFORT TO
PREVENT FUTURE NONPERFORMING ASSET PROBLEMS, WE'VE ALSO ADDED NEAL DAVIES AS
EXECUTIVE VICE PRESIDENT OF ASSET QUALITY. A VETERAN BANKER IN THE METROPOLITAN
AREA, NEAL HAS OVER TWENTY-FIVE YEARS OF BANKING EXPERIENCE.
WITH THESE ADDITIONS, THE BANK HAS THE MANAGEMENT IN PLACE TO EXPAND ITS MARKET
SHARE. THE BANK IS PURSUING ADDITIONAL LOCATIONS IN BOTH COBB AND CHEROKEE
COUNTIES, AND IN PARTICULAR, IN CANTON. WE'VE INVESTED IN STATE OF THE ART
TECHNOLOGIES FOR OUR EMPLOYEES AND CUSTOMERS IN ORDER TO PROVIDE SUPERIOR
QUALITY SERVICE. DURING 1996, BANK STATEMENTS WERE CONVERTED TO IMAGE STATEMENTS
AND TELEPHONE BANKING WAS IMPLEMENTED. DURING 1997, DEBIT CARDS AND INTERNET
BANKING WILL BE AVAILABLE TO CREDIT-WORTHY CUSTOMERS.
WHILE OUR EARNINGS DID NOT MEET EXPECTATIONS, I AM PLEASED TO REPORT THAT THE
MARKET VALUE OF YOUR STOCK INCREASED 36% DURING THE YEAR. 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. WE ARE EXCITED ABOUT THE OPPORTUNITIES AHEAD IN 1997. WE ARE
PROUD OF OUR COMMUNITY AND YOUR COMMUNITY BANK.
VERY TRULY YOURS,
/s/ Carl C. Hames, Jr.
CARL C. HAMES, JR.
CHIEF EXECUTIVE OFFICER
<PAGE>
FIRST CHEROKEE BANCSHARES, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
SELECTED STATEMENT OF EARNINGS DATA
Total Interest Income $ 7,254,504 $ 7,073,346 $ 4,520,615
Net Interest Income 3,510,743 3,550,659 2,718,997
Provision for Loan Losses 373,510 255,471 65,000
Net Earnings 418,220 1,077,466 792,619
Primary Net Earnings per Share* 0.66 1.68 1.44
Fully Diluted Net Earnings per Share* 0.65 1.67 1.44
Cash Dividends per Share 0 0 0
SELECTED BALANCE SHEET DATA
Average Balances:
Total Assets $80,865,818 $74,757,186 $51,341,796
Total Deposits 73,712,687 67,998,500 46,023,221
Stockholders' Equity 6,471,501 5,632,546 4,709,640
End of Period Balances:
Total Assets 75,612,198 82,856,287 62,719,148
Total Deposits 68,397,118 76,121,001 57,011,540
Stockholders' Equity 6,568,583 6,152,760 4,985,619
Book Value per Share* $11.90 $11.15 $9.94
FINANCIAL RATIOS
Return on Average Assets 0.52% 1.44% 1.54%
Return on Average Shareholders' Equity 6.46% 19.12% 16.82%
Stockholders' Equity as a Percent
of Total Assets 8.69% 7.43% 7.95%
Net Interest Rate Spread 4.73% 5.11% 5.74%
Loan Loss Reserve/Loans 1.37% 1.25% 1.00%
ASSET QUALITY
Nonaccrual Loans as a Percentage
of Total Loans 2.30% 3.23% 1.09%
Loans Past Due 90 Days or More
as a Percent of Net Loans 0.00% 0.04% 0.00%
Loan Chargeoffs as a Percent
of Net Average Loans 0.59% 0.12% 0.11%
</TABLE>
- ------------
*Per share calculations for 1994 are based on the number of shares (501,640)
outstanding as of December 31, 1994. Per share calculations for 1995 and 1996
are based on the number of shares outstanding resulting from a 10% stock
dividend declared January 17, 1996 which was paid on April 1, 1996 (551,804).
<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 9860 Highway 92 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 1996 was to sustain profitability while maintaining
prudent banking practices and maximizing its contributions to its community.
The Company achieved these goals with earnings for the year of $418,220,
representing a .52% 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
---------------------
While the Company had a profitable year, earnings were less than expectations.
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 for the year ended December 31, 1996 was $3,510,743, a 1.12%
decrease compared to $3,550,659 for the year ended December 31, 1995. The
decrease in net interest income is primarily attributable to a .36% decrease in
average yield on earning assets. This in turn is due to an increase in average
nonperforming assets in 1996 as compared to 1995.
[Chart Appears Here]
Total interest income for the year ended December 31, 1996 was $7,254,504
(including $187,432 resulting from the amortization of deferred loan fees), a
2.56% increase compared to $7,073,346 for the year ended December 31, 1995.
Interest expense for the year ended December 31, 1996 was $3,743,761, a 6.28%
increase compared to $3,522,687 for the year ended December 31, 1995. The
increase is primarily attributable to a 5.93% 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 4.73% during
1996, compared to 5.11% in 1995. The average yield on earning assets was 10.47%
in 1996, compared to 10.83% in 1995.
The Bank's average cost of funds was 5.74% in 1996, an increase of .02%
compared to 5.72% in 1995. The Bank's interest-bearing liabilities for the year
ended December 31, 1996 averaged $65,232,402, a 5.93% increase compared to
$61,577,824 for the year ended December 31, 1995. The Bank achieved
1
<PAGE>
this deposit growth through normal growth within its market area as well as
expanding its market for certificates of deposit.
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 establishes interest rate floors within individual loan agreements 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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ----------------------------------
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) $55,373,204 $6,473,525 11.69% $51,902,061 $6,265,591 12.07%
Investment Securities (2) 1,608,227 84,357 5.25% 3,027,979 195,914 6.47%
Federal Funds Sold, Interest-
Bearing Deposits and
Other Investments 12,279,168 696,622 5.67% 10,391,629 611,841 5.89%
----------- ---------- ----- ----------- ---------- -----
Total Interest-Earning
Assets 69,260,599 $7,254,504 10.47% 65,321,669 $7,073,346 10.83%
Non-Earning Assets 11,605,219 9,435,517
----------- -----------
Total Average Assets $80,865,818 $74,757,186
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
NOW Accounts $ 4,891,026 $ 122,738 2.51% $ 4,090,159 $ 115,034 2.81%
Money Market Accounts 5,241,153 188,132 3.59% 6,056,074 226,210 3.74%
Savings 2,477,314 65,073 2.63% 2,467,441 72,729 2.95%
Time, $100,000 and Over 13,992,042 875,902 6.26% 12,463,685 798,922 6.41%
Other Time 38,630,867 2,491,916 6.45% 36,500,465 2,309,792 6.33%
----------- ---------- ----- ----------- ---------- -----
Total Interest-Bearing
Liabilities 65,232,402 $3,743,761 5.74% 61,577,824 $3,522,687 5.72%
Non Interest-Bearing Demand
Deposits 8,480,285 6,420,676
Other Liabilities 681,630 1,126,140
----------- -----------
Total Liabilities 74,394,317 69,124,640
Stockholders' Equity 6,471,501 5,632,546
----------- -----------
Total Average Liabilities and
Stockholders' Equity $80,865,818 $74,757,186
=========== ===========
Net Earning Assets $ 4,028,197 $ 3,743,845
Net Yield on Interest
Earning Assets 5.06% 5.43%
Net Interest Rate Spread 4.73% 5.11%
Net Interest Margin $ 3,510,743 $ 3,550,659
</TABLE>
- ------------
(1) When computing yields on interest earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $187,432 and
$350,011 are included in interest income for the periods ending December 31,
1996 and 1995, respectively.
(2) All investment securities are taxable.
2
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The loan loss provision for the year ended December 31, 1996 was $373,510
compared to $255,471 for the year ended December 31, 1995. Charge-offs during
1996 amounted to $328,253, and recoveries amounted to $127,308. This compares to
1995 charge-offs of $64,094 and $33,299 in recoveries. One commercial loan
relationship accounted for approximately 41% of commercial loan chargeoffs. The
increase in consumer loan chargeoffs was primarily due to losses associated with
increased automobile lending. The allowance for loan loss at December 31, 1996
was $858,271, or 1.37% of total loans, compared to $685,706, or 1.25% of total
loans, at the end of 1995. Management increased the allowance for loan loss
during 1996 in an effort to keep up with the growth in the loan portfolio.
Additionally, the Bank experienced an increase in average nonperforming assets
and chargeoffs during 1996.
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, 1996 and 1995.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Balance at the Beginning of Year $685,706 $461,030
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 0 0
Commercial 182,161 31,008
Consumer 146,092 33,086
-------- --------
Total Charge-offs 328,253 64,094
Recoveries:
Real Estate Construction 41 0
Real Estate Mortgage 0 15,236
SBA - Unguaranteed 0 0
Commercial 104,999 11,497
Consumer 22,268 6,566
-------- --------
Total Recoveries 127,308 33,299
Net Chargeoffs 200,945 30,795
Provision for Loan Losses 373,510 255,471
-------- --------
Balance at the End of Year $858,271 $685,706
======== ========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.37% 1.25%
Ratio of Net Charge-offs to Average
Loans Outstanding During the Year 0.36% 0.06%
==== ====
</TABLE>
3
<PAGE>
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,
1996, three loans were considered impaired requiring specific reserves totaling
$149,880. For allocation purposes, the specific reserves are appropriated
directly to the category the individual loan is in. Effective 1996, the
remaining allowance, less any surplus in the allowance based on an internal
analysis, is attributed to the loan categories based on the relative percentage
of the particular category to total loans. Any surplus is considered
unallocated. At December 31, 1996, management calculated the surplus to be
$100,000. At December 31, 1995, the Bank had no loans that required specific
allocations and 100% of the allowance was unallocated.
The following table presents the allocation of the Allowance for Loan Losses as
of December 31, 1996 and 1995.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1996 1995
-------------------- -------------------
% of % of
Loss Loss
Amount Allocated Amount Allocated
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $ 93,192 10.86% $ 0 0.00%
Real Estate Mortgage 202,492 23.59% 0 0.00%
SBA - Unguaranteed 174,092 20.28% 0 0.00%
Commercial 245,233 28.58% 0 0.00%
Consumer 43,262 5.04% 0 0.00%
Unallocated 100,000 11.65% 685,706 100.00%
-------- ------ -------- ------
Total Allowance for Loan Losses $858,271 100.00% $685,706 100.00%
======== ====== ======== ======
</TABLE>
The Bank had two properties classified as Other Real Estate Owned totaling
$625,638 as of December 31, 1996. The largest of these properties has a balance
of $510,047, an appraised value of $515,000, and consists of 95 acres of land
in Cherokee County. The property has been under various contracts, none of
which would have resulted in a loss to the Bank. The most recent contract
expired December 15, 1996. For miscellaneous reasons, a sale has not been
consummated. Currently, two separate developers are actively evaluating a
contract and management still believes this property will be sold with no loss.
No material loss is anticipated on the resolution of the other property either.
Additionally, as of December 31, 1996, the Bank had repossessed six vehicles
with fair value totaling $37,472. No material loss is anticipated on the sale of
these vehicles.
At December 31, 1996, the Bank had eight borrowers on nonaccrual status in the
amount of $1,444,709 or 2.30% of total loans compared to $1,774,778 or 3.23% of
total loans at December 31, 1995. Two borrowers account for $1,251,844 or 87% of
total nonaccrual loans. The largest nonaccrual loan, in the amount of $736,439,
is collateralized by commercial real estate and a convenience store valued at
$600,000. A specific reserve has been allocated to adjust the asset value to the
appraised value. The Bank foreclosed on the property in February 1997. While the
property is not yet under contract, management is currently negotiating with
several interested parties. It is anticipated that the property will be sold in
the
4
<PAGE>
near future at no loss to the Bank. The second largest nonaccrual loan, with
a balance of $515,405, is collateralized by property valued at $1,421,100. The
borrower is currently making payments under an approved bankruptcy plan, and the
loan was transferred back to accrual status in 1997. Management anticipates full
recovery of all principal and interest established by the original loan
agreement. In addition, no material loss is anticipated on the resolution of the
other six borrowers classified as nonaccrual. There were no loans past due
greater than 90 days and still accruing as of December 31, 1996. Two loans,
totaling $20,310, were past due greater than 90 days and still accruing interest
as of December 31, 1995. While the Bank had increased losses on loan problems
during 1996, the trend is not expected to continue in the foreseeable future.
OTHER INCOME
Other income was $1,286,452 for the year ended December 31, 1996, compared to
$1,441,428 for the year ended December 31, 1995. Other income for 1996 consisted
primarily of gains on sales of SBA loans of $791,793 and service charges on
deposit accounts of $276,305. 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.
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. During 1996, the mortgage operation of the Bank was discontinued.
Income from this source was $5,026 for the year ended December 31, 1996, an 89%
decrease compared to $45,495 for the year ended December 31, 1995.
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 $791,793 during 1996 and $1,062,554
during 1995, including $381,253 and $595,146 recognized related to excess
servicing fees in 1996 and 1995 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 $111,000 and $169,000
of additional earnings, net of tax, in 1996 and 1995 respectively. 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 1997.
During 1996, 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, 1996 was $276,305, a 29% increase compared to $214,724
for the year ended December 31, 1995. Management believes service charges on
deposit accounts will continue to increase in 1997 as a result of marketing
efforts towards increasing demand deposit and savings accounts.
OTHER EXPENSE
Other expense for the year ended December 31, 1996 was $3,839,716, a 24%
increase compared to $3,106,374 for the year ended December 31, 1995. Other
expense is primarily composed of salaries and other personnel expenses,
occupancy and other miscellaneous operating expenses.
5
<PAGE>
Salary expense and employee benefits was $1,950,415 for the year ended December
31, 1996, a 21% increase compared to $1,608,589 for the year ended December 31,
1995. At December 31, 1996, the Bank employed 40 full-time employees and 6
part-time employees, compared to 43 full-time employees and 3 part-time
employees at December 31, 1995. At various times during 1996, the Bank employed
as many as 50 employees. 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 1997.
Occupancy and equipment expense was $537,810 for the year ended December 31,
1996, a 7% increase compared to $501,061 for the year ended December 31, 1995.
The Bank is adding approximately 1,800 square feet to its main office during
1997 and occupancy expense will increase accordingly.
Other operating expense was $1,351,491 for the year ended December 31, 1996, a
36% increase compared to $996,724 for the year ended December 31, 1995. The
primary reason for the increase was increased costs, such as legal fees,
relative to the increase in problem assets. Additionally, the Bank was assessed
a special one-time premium of approximately $84,000 by the Federal Deposit
Insurance Corporation ("FDIC") as a result of SAIF insured deposits previously
acquired by the Bank. 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 1997.
For the years ended December 31, 1996 and 1995, the Company's effective tax rate
was 28% and 34%, respectively. The decrease in the effective tax rate during
1996 was primarily due to the utilization of state income tax credits which
reduced income tax expense by approximately $15,000. See note 7 of the notes to
the consolidated financial statements.
FINANCIAL CONDITION
-------------------
ASSETS
Total assets as of December 31, 1996 were $75,612,198, compared to $82,856,287
as of December 31, 1995. This represents a decrease in total assets of 9% for
1996. Total average assets for the year ended December 31, 1996 were
$80,865,818, an increase of 8% compared to $74,757,186 at December 31, 1995.
Investment securities, federal funds sold, interest-bearing deposits and other
investments accounted for 7% of total assets at December 31, 1996, compared to
19% of total assets as of December 31, 1995. Non-earning assets accounted for
11% of total assets as of December 31, 1996, compared to 15% as of the end of
1995. Management emphasized the investment of funds predominantly into loans
during 1996.
[ Chart appears here ]
The Bank's net loan portfolio for the year ended December 31, 1996 was
$61,853,335, a 14% increase compared to $54,236,513 for the year ended December
31, 1995. Outstanding loans for the year ended December 31, 1996 averaged
$55,373,204, a 7% increase compared to $51,902,061 for the year ended December
31, 1995. The growth is attributable to the continued loan demand the Bank has
experienced in
[ Chart appears here ]
6
<PAGE>
the last few years. The loan portfolio carried an average yield of 11.69% during
1996 and 12.07% during 1995. The majority of the Bank's loans reprice
immediately, monthly, or quarterly with changes in the prime rate. The
following table presents the loan portfolio stratified by type and the
corresponding percentage of total loans as of December 31, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
---------------------- --------------------
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $ 9,606,039 15.32% $ 9,570,279 17.43%
Real Estate Mortgage 20,872,411 33.28% 19,311,092 35.16%
SBA - Unguaranteed 14,672,519 23.40% 12,923,486 23.53%
Commercial 13,101,300 20.89% 8,644,335 15.74%
Consumer 4,459,337 7.11% 4,473,027 8.14%
----------- ------ ----------- ------
Total Loans $62,711,606 100.00% $54,922,219 100.00%
=========== ====== =========== ======
</TABLE>
DEPOSITS
Total deposits as of December 31, 1996 were $68,397,118, a 10% decrease compared
to $76,121,001 as of December 31, 1995. Average outstanding interest-bearing
liabilities were $65,232,402 for 1996, a 6% increase compared to $61,577,824 for
1995. In an effort to improve cost of funds, certain institutional certificates
of deposit were allowed to mature and roll-off during the year. Interest-bearing
liabilities cost the Bank an average of 5.74% during 1996, compared to 5.72% for
1995. The increase in cost of funds is due to the highly competitive local
market. Average noninterest-bearing demand deposit liabilities were $8,480,285
in 1996, a 32% increase compared to $6,420,676 for 1995.
[ Chart appears here ]
Total time deposits represented 69% of total deposits at December 31, 1996,
compared to 68% at the end of 1995. Time deposits averaged 71% of total average
deposits for 1996, compared to 72% during 1995. The average cost of time
deposits increased to 6.39% during 1996 from 6.35% during 1995, while the cost
of other funds decreased to 2.98% during 1996 as compared to 3.28% during 1995.
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 1996, federal funds sold, interest-bearing and other investments
averaged $12,279,168 compared to average overnight investments of $10,391,629 in
1995. More than sufficient funds were provided to meet immediate needs.
7
<PAGE>
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.
At December 31, 1996, the interest rate sensitivity analysis was as follows:
<TABLE>
<CAPTION>
Repricing Within
-----------------------------------------------------------------------------
180-365 Greater than Greater than
0-90 Days 91-180 Days Days 1 Yr. - 5 Yrs. 5 Yrs. Total
--------- ----------- ------- -------------- ------------ ---------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities $ 220 $ 0 $ 0 $ 0 $ 0 $ 794
Federal Funds Sold, Interest-Bearing
Deposits and other Investments 3,866 0 0 0 0 3,866
Loans 47,502 797 486 6,065 7,862 62,712
------- -------- ------- ------- ------ -------
Total Earning Assets $51,588 $ 797 $ 486 $ 6,639 $7,862 $67,372
======= ======== ======= ======= ====== =======
Interest Bearing demand
Deposits $10,752 $ 0 $ 0 $ 0 $ 0 $10,752
Savings Deposits 2,299 0 0 0 0 2,299
Certificates of Deposits 14,129 15,214 9,538 8,430 0 47,311
------- -------- ------- ------- ------ -------
Total Interest Bearing
Liabilities $27,180 $ 15,214 $ 9,538 $ 8,430 $ 0 $60,362
======= ======== ======= ======= ====== =======
Interest Sensitivity GAP $24,408 $(14,417) $(9,052) $(1,791) $7,862 $ 7,010
Cumulative GAP $24,408 $ 9,991 $ 939 $ (852) $7,010
% of Interest Sensitive Assets
to Interest Sensitive
Liabilities 189.80% 5.24% 5.10% 78.75% 7,862.00%
Cumulative % of Interest
Sensitive Assets to Interest
Sensitive Liabilities 189.80% 123.57% 101.81% 98.59% 111.61%
% of Cumulative GAP to Total
Earning Assets 36.23% 14.83% 1.39% (1.26)% 10.40%
</TABLE>
8
<PAGE>
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.
CAPITAL RESOURCES
Capital, as measured by stockholders' equity to total assets, was 8.69% at
December 31, 1996, as compared to 7.43% at December 31, 1995. The Company's
common stock had a book value per share of $11.90 at December 31, 1996 compared
to $11.15 at December 31, 1995.
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 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. 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, 1996, 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.
9
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
------------------
Amount Ratio
------ -----
(In Thousands)
<S> <C> <C>
RISKED-BASED CAPITAL RATIOS:
Tier 1 Capital $6,373
Less RAP/GAAP differences, net
of tax (474)
------
Adjusted Tier 1 Capital 5,899 9.33%
Minimum Requirement per Regulations 2,528 4.00%
------ -----
Excess $3,371 5.33%
====== =====
Adjusted Tier 1 and Tier 2 Capital $6,691 10.56%
Total Capital Minimum Requirement 5,056 8.00%
------ -----
Excess $1,635 2.56%
====== =====
LEVERAGE RATIOS:
Adjusted Tier 1 Capital $5,899 7.29%
Minimum Requirement per Regulations 3,235 4.00%
------ -----
Excess $2,664 3.29%
====== =====
</TABLE>
MARKET PRICE AND DIVIDEND INFORMATION
As of December 31, 1996, there were approximately 650 shareholders of record and
551,804 shares of the Company's common stock outstanding. During the first
quarter of 1996, the Company announced that the investment banking firm of J.C.
Bradford and Co. would act as principal market-maker for the common stock of
First Cherokee Bancshares, Inc. Prior thereto, the Company's common stock, $1
par value, had not been traded on an established trading market, so there had
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, 1995.
<TABLE>
<CAPTION>
Sales Price Sales Price
--------------- ---------------
Calendar Period High Low Calendar Period High Low
- --------------- ------ ------ --------------- ------ ------
1996 1995
- ---- ----
<S> <C> <C> <S> <C> <C>
First Quarter $15.00 $11.00 First Quarter $10.00 $10.00
Second Quarter $18.25 $14.50 Second Quarter $10.00 $10.00
Third Quarter $18.37 $17.00 Third Quarter $10.29 $10.00
Fourth Quarter $17.00 $14.00 Fourth Quarter $11.00 $10.00
</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.
10
<PAGE>
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, 1996, the Bank could pay approximately $1,061,000
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.
11
<PAGE>
[LETTERHEAD OF PORTER KEADLE MOORE, LLP APPEARS HERE]
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, 1996 and 1995, 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, 1996.
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, 1996 and 1995, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
PORTER KEADLE MOORE, LLP
/s/ Porter Keadle Moore, LLP
Successor to the practice of
Evans, Porter, Bryan & Co.
Atlanta, Georgia
January 31, 1997
12
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1996 and 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
----------- -----------
<S> <C> <C>
Cash and due from banks, including reserve
requirements of $190,000 and $130,000 $ 2,518,342 $ 5,556,557
Interest-bearing deposits with banks 3,865,532 13,648,003
Federal funds sold - 700,000
----------- -----------
Cash and cash equivalents 6,383,874 19,904,560
Securities available for sale 793,735 984,583
Other investments 650,800 592,300
Loans, net 61,853,335 54,236,513
Premises and equipment, net 2,017,236 2,019,547
Accrued interest receivable and other assets 3,913,218 5,118,784
----------- -----------
$75,612,198 $82,856,287
=========== ===========
LIABILTIES AND STOCKHOLDERS' EQUITY
Deposits:
Demand $ 8,034,616 $10,641,503
Interest-bearing demand 10,751,941 11,164,290
Savings 2,299,246 2,439,247
Time 40,635,475 44,619,422
Time, in excess of $100,000 6,675,840 7,256,539
----------- -----------
Total deposits 68,397,118 76,121,001
Accrued interest payable and other liabilities 646,497 582,526
----------- -----------
Total liabilities 69,043,615 76,703,527
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $1, authorized
10,000,000 shares, issued 561,044 shares,
outstanding 551,804 shares 561,044 561,044
Additional paid-in capital 5,026,457 5,026,457
Retained earnings 1,060,538 642,318
Unrealized gain on securities available
for sale, net of tax 4,544 6,941
----------- -----------
6,652,583 6,236,760
-----------
Less treasury stock at cost, 9,240 shares (84,000) (84,000)
----------- -----------
Total stockholders' equity 6,568,583 6,152,760
----------- -----------
$75,612,198 $82,856,287
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
13
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6,473,525 $6,265,591 $4,086,103
Interest on federal funds sold 26,941 37,254 26,814
Interest on deposits with other banks 633,184 543,420 167,460
Interest and dividends on investments:
U.S. Government agencies and mortgage-backed 84,357 195,914 218,075
Other 36,497 31,167 22,163
---------- ---------- ----------
Total interest income 7,254,504 7,073,346 4,520,615
---------- ---------- ----------
Interest expense on deposits:
Demand 310,870 341,244 285,550
Savings 65,073 72,729 76,049
Time 3,367,818 3,108,714 1,440,019
---------- ---------- ----------
Total interest expense 3,743,761 3,522,687 1,801,618
---------- ---------- ----------
Net interest income 3,510,743 3,550,659 2,718,997
Provision for loan losses 373,510 255,471 65,000
---------- ---------- ----------
Net interest income after
provision for loan losses 3,137,233 3,295,188 2,653,997
---------- ---------- ----------
Other income:
Mortgage origination fees 5,026 45,495 111,085
Service charges on deposit accounts 276,305 214,724 186,095
Gains on sales of loans, net 791,793 1,062,554 783,722
Miscellaneous 213,328 118,655 41,493
---------- ---------- ----------
Total other income 1,286,452 1,441,428 1,122,395
---------- ---------- ----------
Other expenses:
Salaries and employee benefits 1,950,415 1,608,589 1,315,880
Occupancy 537,810 501,061 469,962
Other operating 1,351,491 996,724 929,238
---------- ---------- ----------
Total other expenses 3,839,716 3,106,374 2,715,080
---------- ---------- ----------
Earnings before income taxes 583,969 1,630,242 1,061,312
Income tax expense 165,749 552,776 268,693
---------- ---------- ----------
Net earnings $ 418,220 $1,077,466 $ 792,619
========== ========== ==========
Net earnings per share:
Primary $ 0.66 $ 1.68 $ 1.44
========== ========== ==========
Fully diluted $ 0.65 $ 1.67 $ 1.44
========== ========== ==========
Weighted average number of shares outstanding:
Primary 662,324 662,324 551,804
========== ========== ==========
Fully diluted 662,324 662,324 551,804
========== ========== ==========
</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, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on Securities
Additional Available
Common Paid-In Retained for Sale, Treasury
Stock Capital Earnings Net of Tax Stock Total
-------- ---------- ---------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
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 - - - 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
10% stock dividend 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
Change in unrealized gain
(loss) on securities available
for sale, net of tax - - - (2,397) - (2,397)
Net earnings - - 418,220 - - 418,220
-------- ---------- ---------- --------- -------- ----------
Balance, December 31, 1996 $561,044 $5,026,457 $1,060,538 $ 4,544 $(84,000) $6,568,583
======== ========== ========== ========= ======== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 418,220 $ 1,077,466 $ 792,619
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 128,716 189,344 181,513
Provision for loan losses 373,510 255,471 65,000
Gains on sales of loans, net (791,793) (1,062,554) (783,722)
Provision for deferred income tax benefit (120,718) (74,789) (30,016)
Change in:
Interest receivable (17,526) (128,745) (186,938)
Other assets 888,235 (1,231,630) (1,101,138)
Interest payable (590) 120 (223)
Other liabilities 64,562 (139,583) 473,625
------------ ------------ ------------
Net cash provided (used) by operating activities 942,616 (1,114,900) (589,280)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
available for sale 5,694,188 2,735,402 355,527
Purchases of securities available for sale (5,450,344) (495,441) -
Purchases of other investments (58,500) (188,500) (250,000)
Net increase in loans (6,778,321) (8,102,197) (14,450,314)
Purchases of premises and equipment (150,024) (119,930) (269,665)
Proceeds from sales of other real estate 79,277 - -
Improvements to other real estate (75,695) (4,300) -
------------ ------------ ------------
Net cash used by investing activities (6,739,419) (6,174,966) (14,614,452)
------------ ------------ ------------
Cash flows from financing activities:
Net change in demand and savings deposits (3,159,237) 7,385,093 (1,998,074)
Net change in time deposits (4,564,646) 11,724,368 17,036,412
------------ ------------ ------------
Net cash provided (used) by financing activities (7,723,883) 19,109,461 15,038,338
------------ ------------ ------------
Net change in cash and cash equivalents (13,520,686) (11,819,595) (165,394)
Cash and cash equivalents at beginning of year 19,904,560 8,084,965 8,250,349
------------ ------------ ------------
Cash and cash equivalents at end of year $ 6,383,874 $ 19,904,560 $ 8,084,965
============ ============ ============
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,744,351 $ 3,522,567 $ 1,801,841
Income taxes, net of refunds received $ 275,000 $ 963,000 $ 2,318
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 $ (2,397) $ 89,675 $ (82,734)
Transfer of loans to other real estate $ 1,092,545 $ 934,219 $ 245,248
Financed sales of other real estate $ 1,512,764 $ 203,003 $ -
</TABLE>
See accompanying notes to consolidated financial statements.
16
<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 1995 and 1994 amounts have been
reclassified to conform to the 1996 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, prepayment speeds of the SBA loan portfolio 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.
Securities Available for Sale
The Company classifies its securities in one of three categories:
trading, available for sale, or held to maturity. At December 31, 1996 and 1995,
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.
17
<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.
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. Interest income
from impaired loans is recognized using a cash basis method of accounting during
the time within that period in which the loans were impaired.
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. There were no SBA loans held for sale at December 31, 1996 and 1995.
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 $111,000 and $169,000 of additional earnings, net of
tax in 1996 and 1995 respectively, or $.17 and $.26 per share, respectively.
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.
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.
18
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
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. Fair value is defined 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
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.
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 8, all per share amounts have been retroactively
adjusted to reflect the 10% stock dividend declared on January 17, 1996.
19
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements
During 1996, the Financial Accounting Standards Board issued SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This new standard, which becomes effective for
the Company on January 1, 1997, will require the Company to make certain
disclosures regarding its servicing assets and liabilities, and may also affect
the classification of certain servicing assets and liabilities. 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, 1996 and 1995 are presented below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
1996
U.S. Government agencies $500,000 $ - $ - $500,000
Mortgage-backed securities 286,405 7,330 - 293,735
-------- ------- ---- --------
$786,405 $ 7,330 $ - $793,735
======== ======= ==== ========
1995
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
======== ======= ==== ========
</TABLE>
The amortized cost and estimated fair value of securities available for
sale at December 31, 1996, 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>
1 to 5 years $500,000 $500,000
Mortgage-backed securities 286,405 293,735
-------- -------
$786,405 $793,735
======== ========
</TABLE>
There were no sales of securities available for sale during 1996, 1995
and 1994.
Securities with a carrying value of approximately $608,000 and $767,000
at December 31, 1996 and 1995, respectively, were pledged to secure public
deposits as required by law.
20
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(3) Loans
Major classifications of loans at December 31, 1996 and 1995 are
presented below:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Commercial $13,101,300 $ 8,644,335
SBA - unguaranteed 14,672,519 12,923,486
Real estate - mortgage 20,872,411 19,311,092
Real estate - construction 9,606,039 9,570,279
Installment and other consumer 4,459,337 4,473,027
----------- -----------
Total loans 62,711,606 54,922,219
Less: Allowance for loan losses 858,271 685,706
----------- -----------
Total net loans $61,853,335 $54,236,513
=========== ===========
</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, 1996 and 1995 of approximately $28,000,000 and $25,000,000.
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.
An analysis of the activity in the allowance for loan losses for the
years ended December 31, 1996, 1995 and 1994 is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 685,706 $461,030 $348,084
Provision charged to operations 373,510 255,471 65,000
Loans charged off (328,253) (64,094) (39,218)
Recoveries 127,308 33,299 87,164
--------- -------- --------
Balance at end of year $ 858,271 $685,706 $461,030
========= ======== ========
</TABLE>
21
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(4) Premises and Equipment
Premises and equipment at December 31, 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995
---------- -----------
<S> <C> <C>
Land $ 185,202 $ 185,202
Buildings and improvements 1,834,311 1,832,245
Furniture, fixtures and equipment 569,267 449,091
Construction in progress 14,904 -
---------- -----------
2,603,684 2,466,538
Less: Accumulated depreciation 586,448 446,991
---------- -----------
$2,017,236 $2,019,547
========== ==========
</TABLE>
Depreciation expense was approximately $152,000, $135,000 and $110,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
(5) Time Deposits
At December 31, 1996 the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C>
1997 $33,612,870
1998 5,785,784
1999 1,666,066
2000 4,169,941
2001 and thereafter 2,076,654
-----------
$47,311,315
===========
</TABLE>
(6) Federal Home Loan Bank Advances
During 1996, the Bank entered into an agreement with the Federal Home
Loan Bank (FHLB) to provide the Bank credit facilities. Any amounts advanced by
the FHLB are secured under a blanket floating lien covered by all of the Bank's
1-4 family first mortgage loans. The Bank may draw advances up to 75% of the
outstanding balance of these loans based on the agreement with the FHLB. The
Bank has no borrowings from the FHLB outstanding as of December 31, 1996.
(7) Income Taxes
The following is an analysis of the income tax expense for the years
ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current $ 286,467 $ 627,565 $ 298,709
Deferred (120,718) (74,789) 105,168
Change in valuation allowance - - (135,184)
--------- --------- ---------
$ 165,749 $ 552,776 $ 268,693
========= ========= =========
</TABLE>
22
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(7) 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, 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Pretax income at statutory rates $198,549 $554,282 $360,846
Add (deduct):
Utilization of net operating
loss carryforward - - (49,442)
Adjustment to valuation allowance - - (46,594)
Increase in cash surrender value
of life insurance (14,208) (14,634) -
State taxes, net of federal tax effect (14,918) 4,376 -
Other (3,674) 8,752 3,883
-------- -------- --------
$165,749 $552,776 $268,693
======== ======== ========
</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, 1996 and 1995.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $277,305 $192,446
Deferred gains on SBA loans 149,223 144,237
State tax credits 14,918 -
Deferred gains on sales of other real estate 19,681 -
Nonaccrual loan interest 19,334 36,055
Deferred compensation 18,742 9,161
Core deposit intangible 20,498 16,000
-------- --------
Gross deferred tax asset 519,701 397,899
-------- --------
Deferred tax liabilities:
Accelerated depreciation (34,065) (32,981)
Unrealized gain on securities
available for sale (2,785) (3,576)
-------- --------
Gross deferred tax liability (36,850) (36,557)
-------- --------
Net deferred tax asset $482,851 $361,342
======== ========
</TABLE>
(8) 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, 1996, the Bank could pay approximately $1,061,000 to the
Company in dividends without obtaining prior regulatory approval.
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.
23
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(9) 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 $9.10 per share. These warrants expire in November, 1999.
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.
A summary status of the Company's Employee Stock Plan as of December
31, 1996 and 1995, and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
1996 1995
----------------- -----------------
Wtd. Avg. Wtd. Avg.
Exercise Exercise
Shares Price Shares Price
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 24,531 $9.10 20,131 $9.10
Granted during the year - 6,600 $9.10
Canceled during the year - (2,200) $9.10
------ ------
Outstanding, end of year 24,531 $9.10 24,531 $9.10
====== ======
Options exercisable at year end 24,531 $9.10 24,531 $9.10
====== ======
Weighted average fair value
of options granted during the year $5.41
=====
</TABLE>
Both plans are accounted for under Accounting Principles Board Opinion
No. 25 and related Interpretations. No compensation cost has been recognized for
either of the plans. Had compensation cost for the plan been determined based
upon the fair value of the options at the grant dates consistent with the method
of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net
earnings and net earnings per share would have been reduced to the proforma
amounts indicated below. The proforma disclosures apply only to awards granted
in years subsequent to December 31, 1994. As there were no awards granted in
1996, only proforma effects of 1995 awards are presented below:
<TABLE>
<CAPTION>
1995
----------
<S> <C> <C>
Net earnings As reported $1,077,466
Proforma $1,041,760
Primary earnings per share As reported $ 1.68
Proforma $ 1.61
Fully diluted earnings per share As reported $ 1.67
Proforma $ 1.61
</TABLE>
The fair value of each option is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1995: volatility of .01%, no dividend yield, a
risk free interest rate of 5%, and an expected life of 10 years.
24
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(9) Employee and Director Benefit Plans, continued
The following information applies to all warrants and options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Warrants Options
-------- -------
<S> <C> <C>
Number outstanding 196,350 24,531
Range of exercise prices $ 9.10 $ 9.10
Weighted average exercise price $ 9.10 $ 9.10
Weighted average remaining
contractual life (years) 3.00 5.72
</TABLE>
The Bank provides retirement benefits to its Chief Executive Officer
and Board of Directors for purposes of providing death benefits for their
designated beneficiaries. Under the plan, the Bank purchases split-dollar whole
life insurance contracts on the lives of the Chief Executive Officer 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, 1996 and 1995, the cash
surrender value of the insurance contracts was approximately $1,385,000 and
$1,350,000, and is included as a component of other assets. Expenses incurred
for benefits were approximately $18,000 and $17,000 during 1996 and 1995,
respectively. 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
$26,000 and $29,000 for the years ended December 31, 1996 and 1995,
respectively.
(10) Related Party Transactions
At December 31, 1996, deposits from directors, executive officers and
their related interests aggregated approximately $2,137,000. These deposits were
taken in the normal course of business at market interest rates.
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 1996:
<TABLE>
<S> <C>
Balance at December 31, 1995 $1,423,000
New loans 656,000
Repayments (697,000)
----------
Balance at December 31, 1996 $1,382,000
==========
</TABLE>
(11) Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under certain adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of total and
Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 1996, that the Bank meets all capital
adequacy requirements to which it is subject.
25
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(11) Regulatory Matters, continued
As of December 31, 1996, the most recent notification from the Office
of the Comptroller of the Currency categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based, Tier 1 leverage ratios as set forth below. There are no conditions
or events since that notification that management believes have changed the
Bank's category.
The Bank's actual capital amounts and ratios are also presented below.
Consolidated amounts do not materially differ from Bank-only capital amounts and
ratios.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ----------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
--------- ----- --------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) 6,691,041 10.56% 5,055,886 8.00% 6,319,858 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 5,898,811 9.33% 2,527,943 4.00% 3,791,915 6.00%
Tier 1 Capital
(to Average Assets) 5,898,811 7.29% 3,234,633 4.00% 4,043,291 5.00%
As of December 31, 1995
Total Capital
(to Risk Weighted Assets) 6,175,094 10.38% 4,741,788 8.00% 5,927,235 10.00%
Tier 1 Capital
(to Risk Weighted Assets) 5,489,388 9.26% 2,370,894 4.00% 3,556,341 6.00%
Tier 1 Capital
(to Average Assets) 5,489,388 7.34% 2,990,287 4.00% 3,737,859 5.00%
</TABLE>
(12) 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, 1996, 1995 and 1994, rental
payments of $55,393, $55,123 and $52,474 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 $176,447, $214,553 and $218,598 for the
years ended December 31, 1996, 1995 and 1994, respectively.
26
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(12) Commitments, continued
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>
1997 (including unaffiliated lessors of $9,866) $ 68,346
1998 60,234
1999 62,041
2000 63,902
2001 65,819
Thereafter 464,515
--------
$784,857
========
</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.
In most cases, the Bank requires collateral or other security to
support financial instruments with credit risk.
<TABLE>
<CAPTION>
Approximate
Contract
Amount
-------------------------
1996 1995
----------- -----------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $14,704,000 $11,300,000
Standby letters of credit $ 242,000 $ 346,000
</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
creditworthiness 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, 1996 and 1995.
27
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(13) Supplemental Financial Data
Components of other operating expenses in excess of 1% of total
interest and other income for the years ended December 31, 1996, 1995 and 1994
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Legal and professional fees $123,558 $ 56,658 $ 85,504
Data processing $242,134 $192,326 $165,584
FDIC assessment $139,071 $ 85,997 $102,688
Amortization expense $ 67,526 $ 62,975 $ 68,899
Stationery and supplies $ 87,310 $ 68,548 $ 48,096
Directors' fees $ 71,600 $ 59,230 $ 59,065
Collection expense $ 87,714 $ 48,589 $ 28,423
</TABLE>
(14) First Cherokee Bancshares, Inc. (Parent Company Only)
Financial Information
<TABLE>
<CAPTION>
Balance Sheets
December 31, 1996 and 1995
Assets
1996 1995
---------- ----------
<S> <C> <C>
Cash $ 11,382 $ 11,382
Investment in bank subsidiary 6,557,201 6,141,378
---------- ----------
$6,568,583 $6,152,760
========== ==========
Stockholders' Equity
Stockholders' equity $6,568,583 $6,152,760
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Statements of Earnings
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
-------- ---------- --------
<S> <C> <C> <C>
Interest income $ - $ - $ 294
Operating expenses - - (2,738)
-------- ---------- --------
Loss before equity in undistributed
earnings of bank subsidiary - - (2,444)
Equity in undistributed earnings
of bank subsidiary 418,220 1,077,466 795,063
-------- ---------- --------
Net earnings $418,220 $1,077,466 $792,619
======== ========== ========
</TABLE>
28
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(14) First Cherokee Bancshares, Inc. (Parent Company Only)
Financial Information, continued
<TABLE>
<CAPTION>
Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
--------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 418,220 $ 1,077,466 $ 792,619
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings
of bank subsidiary (418,220) (1,077,466) (795,063)
Amortization - - 2,738
--------- ----------- ---------
Net cash provided
by operating activities - - 294
--------- ----------- ---------
Net change in cash - - 294
Cash at beginning of the period 11,382 11,382 11,088
--------- ----------- ---------
Cash at end of the period $ 11,382 $ 11,382 $ 11,382
========= =========== =========
Noncash investing activities:
Change in unrealized gain (loss)
of subsidiary's securities available
for sale, net of tax $ (2,397) $ 89,675 $ (82,734)
</TABLE>
(15) 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.
29
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(15) 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 6,383,874 $ 6,383,874 $19,904,560 $19,904,560
Securities available for sale 793,735 793,735 984,583 984,583
Other investments 650,800 650,800 592,300 592,300
Loans, net 61,853,335 61,788,292 54,236,513 54,172,873
Liabilities:
Deposits 68,397,118 68,815,359 76,121,001 76,916,345
Unrecognized financial instruments:
Commitments to extend credit 14,704,000 14,704,000 11,300,000 11,300,000
Standby letters of credit 242,000 242,000 346,000 346,000
</TABLE>
30
<PAGE>
FIRST NATIONAL BANK OF CHEROKEE
GENERAL INFORMATION
________________
GENERAL OFFICES BOARD OF DIRECTORS
9860 Highway 92 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 --
Carl. C. Hames, Jr .-- Reeves Floral Products, Inc.
Chief Executive Officer
Russell L. Flynn --
Rick Kononen -- Cherokee Realty Company
President
Carl C. Hames, Jr. --
Kitty A. Kendrick -- First National Bank of Cherokee
Executive Vice President/
Chief Financial Officer C. Garry Haygood --
Haygood Hauling & Grading
Neal Davies --
Executive Vice President/ Thomas D. Hopkins, Jr. --
Asset Quality 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
9860 Highway 92
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. --
Porter, Keadle, Moore, LLP 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.
Chief Executive Officer Bobby R. Hubbard --
Flight Equipment Instructor,
Kitty A. Kendrick -- Lockheed Aeronautical System
Executive 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 16, 1997
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
9860 HIGHWAY 92
WOODSTOCK, GEORGIA 30188
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
First National Bank of Cherokee, a bank chartered under the laws of the State
of Georgia, located at 9860 Highway 92, P.O. Box 1238, Woodstock, Georgia 30188.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> $2,518,342
<INT-BEARING-DEPOSITS> 3,865,532
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 793,735
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 61,853,335
<ALLOWANCE> 858,271
<TOTAL-ASSETS> 75,612,198
<DEPOSITS> 68,397,118
<SHORT-TERM> 0
<LIABILITIES-OTHER> 0
<LONG-TERM> 0
0
0
<COMMON> 561,044
<OTHER-SE> 6,007,539
<TOTAL-LIABILITIES-AND-EQUITY> 75,612,198
<INTEREST-LOAN> 6,473,525
<INTEREST-INVEST> 780,979
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,254,504
<INTEREST-DEPOSIT> 3,743,761
<INTEREST-EXPENSE> 3,743,761
<INTEREST-INCOME-NET> 3,510,743
<LOAN-LOSSES> 373,510
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,839,716
<INCOME-PRETAX> 583,969
<INCOME-PRE-EXTRAORDINARY> 583,969
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 418,220
<EPS-PRIMARY> $.66
<EPS-DILUTED> $.65
<YIELD-ACTUAL> 10.47
<LOANS-NON> 1,444,709
<LOANS-PAST> 1,823,981
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 685,706
<CHARGE-OFFS> 328,253
<RECOVERIES> 127,308
<ALLOWANCE-CLOSE> 858,271
<ALLOWANCE-DOMESTIC> 858,271
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 100,000
</TABLE>
