<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
_ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
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 or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9860 Highway 92, Woodstock, Georgia 30188
(Address of principal executive offices)
770-591-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
The number of shares outstanding of registrant's common stock par value $1.00
per share at June 30, 1998 was 565,304 shares.
Traditional Small Business Disclosure Format (check one): ___ Yes X No
<PAGE>
First Cherokee Bancshares, Inc.
Quarterly Report on Form 10-QSB
For the Quarter Ended June 30, 1998
Index
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet at June 30, 1998 2
Consolidated Statements of Earnings (unaudited)
for the six months ended June 30, 1998 and 1997 3
Consolidated Statements of Earnings (unaudited)
for the three months ended June 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income (unaudited) 5
for the six months ended June 30, 1998 and 1997
Consolidated Statements of Comprehensive Income (unaudited) 6
for the three months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited)
for the six months ended June 30, 1998 and 1997 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Item 7. Signatures 20
</TABLE>
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Balance Sheet
June 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
Assets
------
<S> <C>
Cash & due from banks, including $4,801,005
bearing interest $ 8,560,459
Federal funds sold 0
------------
Total cash & cash equivalents 8,560,459
Investment securities available for sale,
at fair value 594,794
Loans, less allowance for loan losses
of $1,325,134 74,396,675
Premises and equipment, net 3,851,964
Accrued interest receivable and other assets 7,752,545
---------
Total Assets $ 95,156,437
============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
Deposits:
Interest-bearing deposits $ 73,730,328
Noninterest-bearing deposits 13,432,859
----------
Total deposits 87,163,187
Accrued interest payable and other liabilities 796,099
-------
Total Liabilities 87,959,286
Stockholders' Equity:
Common stock ($1 par value; 10,000,000
shares authorized, 591,544 shares issued) 591,544
Additional paid-in-capital 5,273,257
Retained earnings 1,724,351
Treasury Stock (26,240 shares acquired
at cost) (393,408)
Accumulated other comprehensive
income, net of tax 1,407
-----
Total Stockholders' Equity 7,197,151
---------
Total Liabilities and Stockholders' Equity $ 95,156,437
============
</TABLE>
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Earnings
For the six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
Interest income: 1998 1997
---- ----
<S> <C> <C>
Interest and fees on loans $ 3,912,521 $ 3,419,556
Interest on investment securities 24,403 27,455
Interest on federal funds sold/overnight funds 127,329 123,215
--------- ---------
Total interest income 4,064,253 3,570,226
Interest expense on deposits 1,910,174 1,729,637
--------- ---------
Net interest income 2,154,079 1,840,589
Provision for loan losses 273,110 292,135
--------- ---------
Net interest income after provision
for loan losses 1,880,969 1,548,454
--------- ---------
Other income:
Gain on sale of investment securities 0 0
Gain on sales of loans 761,091 755,153
Service charges on deposit accounts
and other income 543,432 428,858
--------- ---------
Total other income 1,304,523 1,184,011
--------- ---------
Other expense:
Salaries and employee benefits 1,295,807 1,039,337
Occupancy 315,050 247,515
Other operating expense 843,635 759,847
--------- ---------
Total other expense 2,454,492 2,046,699
--------- ---------
Gain (Loss) on Sale of Assets (15,771) 0
-------- -------
Earnings before income taxes 715,229 685,766
Income Tax expense 272,300 258,865
------- -------
Net earnings $ 442,929 $ 426,901
======= =======
Basic earnings per share $ 0.77 $ 0.74
==== ====
Diluted earnings per share $ 0.66 $ 0.65
==== ====
</TABLE>
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Earnings
For the three months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Interest and fees on loans $ 2,051,891 $ 1,800,614
Interest on investment securities 12,237 13,681
Interest on federal funds sold/overnight funds 82,813 61,958
----------- -----------
Total interest income 2,146,941 1,876,253
Interest expense on deposits 974,147 878,558
--------- ---------
Net interest income 1,172,794 997,695
Provision for loan losses 222,520 219,800
--------- ---------
Net interest income after provision
for loan losses 950,274 777,895
--------- ---------
Other income:
Gain on sale of investment securities 0 0
Gain on sales of loans 585,861 577,819
Service charges on deposit accounts
and other income 280,243 207,544
------- -------
Total other income 866,104 785,363
------- -------
Other expense:
Salaries and employee benefits 715,474 554,326
Occupancy 179,534 127,001
Other operating expense 472,877 436,778
------- -------
Total other expense 1,367,885 1,118,105
--------- ---------
Gain (Loss) on Sale of Assets (15,771) 0
-------- ---------
Earnings before income taxes 432,722 445,153
Income Tax expense 165,500 167,750
------- -------
Net earnings $ 267,222 $ 277,403
======= =======
Basic earnings per share $ 0.47 $ 0.48
==== ====
Diluted earnings per share $ 0.40 $ 0.42
==== ====
</TABLE>
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Comprehensive Income
For the six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net earnings $442,929 $426,901
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized gain (loss) arising during the period, net
of tax of $164 and $3,637, respectively (269) (5,962)
Less: Reclassification adjustment for gains
included in net earnings, net of tax 0 0
----- -------
Other comprehensive income (269) (5,962)
-------- --------
Comprehensive income $442,660 $420,939
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Comprehensive Income
For the three months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net earnings $267,222 $277,403
Other comprehensive income, net of tax:
Unrealized gains on securities available for sale:
Unrealized gain (loss) arising during the period, net
of tax of $269 and $37 respectively (441) 61
Less: Reclassification adjustment for gains
included in net earnings, net of tax 0 0
---- --
Other comprehensive income (441) 61
------- -------
Comprehensive income $266,781 $277,464
======== ========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Cash Flows
For the six months ended June 30,
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $442,929 $426,901
Adjustments to reconcile net earnings to net cash
provided (used) in operating activities:
Depreciation, amortization and accretion 83,142 49,549
Provision for loan losses 273,110 292,135
Provision for losses on other real estate 0 83,199
Securities gains 0 0
Change in accrued interest payable and
other liabilities (1,265,522) 213,215
Change in accrued interest receivable and
other assets (1,462,346) (2,076,900)
----------- -----------
Total adjustments (2,371,616) (1,438,802)
----------- -----------
Net Cash used by operating activities (1,928,687) (1,011,901)
Cash flows from investing activities:
Purchases of investment securities (500,000) 0
Proceeds from sale of investment securities 0 0
Proceeds from maturities and calls of investment 523,385 163,784
securities available for sale
Net change in loans (3,149,163) (4,522,130)
Purchases of premises and equipment (587,947) (503,837)
----------- -----------
Net Cash used by investing activities (3,713,725) (4,862,183)
Cash flows from financing activities:
Net change in deposits 8,679,355 8,836,630
Proceeds from exercise of stock warrants 0 277,300
Purchase of treasury stock (309,408) 0
---------- ---------
Net Cash provided by financing activities 8,369,947 9,113,930
Net change in cash and cash equivalents 2,727,535 3,239,846
Beginning cash and cash equivalents 5,832,924 6,383,874
--------- ---------
Ending cash and cash equivalents $8,560,459 $9,623,720
Noncash investing activities:
Change in accumulated other comprehensive
income, net of tax ($269) ($5,962)
Transfer of loans to other real estate $100,112 $805,423
Supplemental disclosure of cash flow information:
Interest Paid $1,915,899 $1,733,552
Income Taxes Paid $0 $165,000
</TABLE>
See notes to consolidated financial statements
<PAGE>
FIRST CHEROKEE BANCSHARES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1998
NOTE (1) - BASIS OF PRESENTATION
- --------------------------------
The consolidated financial statements include the accounts of First Cherokee
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary, First National
Bank of Cherokee (the "Bank"). All significant accounts have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with current year presentation.
The accompanying unaudited interim consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the Company's financial position as of June 30, 1998, and the results of its
operations and its cash flows for the six-month period then ended. All such
adjustments are normal and recurring in nature. The financial statements
included herein should be read in conjunction with the consolidated financial
statements and the notes thereto and the report of independent accountants
included in the Company's 1997 Annual Report on Form 10-KSB.
NOTE (2) - NET EARNINGS PER SHARE
- ---------------------------------
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period while the effects of potential common
shares outstanding during the period are included in diluted earnings per share.
The average market price during the year is used to compute equivalent shares.
All net earnings per share amounts have been restated to conform to the
provisions of SFAS No. 128.
Reconciliation of the amounts used in the computation of both "basic earnings
per share" and "diluted earnings per share" for the periods ended June 30, 1998
and 1997 are as follows:
<PAGE>
For the six months ended June 30, 1998:
- ---------------------------------------
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share $442,929 577,055 $0.77
Effect of dilutive securities
Stock options 9,357
Warrants 80,916
-------- ------- -----
Diluted earnings per share $442,929 667,328 $0.66
======== ======= =====
For the six months ended June 30, 1997:
- ---------------------------------------
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share $427,489 578,613 $0.74
Effect of dilutive securities
Stock options 9,278
Warrants 68,483
-------- ------- -----
Diluted earnings per share $427,489 656,374 $0.65
======== ======= =====
- --------------------------------------------------------------------------------
For the three months ended June 30, 1998:
- -----------------------------------------
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share $267,222 571,864 $0.47
Effect of dilutive securities
Stock options 12,263
Warrants 80,916
-------- ------- -----
Diluted earnings per share $267,222 665,043 $0.40
======== ======= =====
For the three months ended June 30, 1997:
- ---------------------------------------
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share $277,403 582,304 $0.48
Effect of dilutive securities
Stock options 9,998
Warrants 70,131
-------- ------- -----
Diluted earnings per share $277,403 662,433 $0.42
======== ======= =====
<PAGE>
NOTE (3) - RECENT ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. For the Company,
comprehensive income includes net income reported in the statements of earnings
and changes in the fair value of securities available for sale reported as a
component of stockholders' equity.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits".
The new statement revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
provisions of those plans. Statement No. 132 provides additional information to
facilitate financial analysis and eliminates certain disclosures which are no
longer useful. The statement is effective for fiscal years beginning after
December 15, 1997. The statement is not expected to have a material impact on
the consolidated financial statements of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1998
FORWARD LOOKING STATEMENTS
- --------------------------
Certain statements contained in this Quarterly Report on Form 10-QSB and the
exhibits hereto which are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act (the "Act"). In addition, certain statements in future
filings by the Company with the Securities and Exchange Commission, in press
releases, and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (1) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends, capital
structure and other financial items; (2) statements of plans and objectives of
the Company or its management or Board of Directors, including those relating to
products or services; (3) statements of future economic performance; and (4)
statements of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Facts that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development of and acceptance of new products and
services and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) technological
changes; (7) acquisitions; (8) the ability to increase market share and control
expenses; (9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with which the
Company and its subsidiary must comply; (10) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (11) changes in the Company's
organization, compensation and benefit plans; (12) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; and (13)
the success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
<PAGE>
The following narrative should be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
FINANCIAL CONDITION
- -------------------
Total assets as of June 30, 1998 were $95.2 million compared to $87.6 million as
of December 31, 1997. Assets of the Company increased approximately $4.8 million
during the second quarter of 1998 as compared to an increase of approximately
$2.1 million during the second quarter of 1997. These fluctuations are due to
normal business transactions.
Loans increased from $65.2 million at June 30, 1997 to $71.6 million at December
31, 1997 and $74.4 million at June 30, 1998. Management anticipates loan
production will continue to increase during the remainder of the year. The
following table presents major classifications of loans at June 30, 1998:
<TABLE>
<CAPTION>
% of
Total
Total Loan
Loans Portfolio
----- ---------
<S> <C> <C>
Commercial $7,536,449 9.95%
SBA - unguaranteed 22,180,228 29.29%
Real estate - mortgage 29,022,455 38.33%
Real estate - construction 12,197,512 16.11%
Installment and other consumer 4,785,165 6.32%
---------- -------
Total loans 75,721,809 100.00%
---------- =======
Less: Allowance for loan losses (1,325,134)
----------
Total net loans $74,396,675
===========
</TABLE>
Net premises and equipment were $3.8 million at June 30, 1998 compared to $3.4
million at December 31, 1997. Other assets increased from $5.5 million as of
December 31, 1997 to $7.7 million as of June 30, 1998. The increase was
primarily attributable to SBA guarantees of approximately $1.8 million on sold
SBA loans pending cash receipt as of June 30, 1998 as compared to $287,000 as of
December 31, 1997. Cash is normally received within fourteen days of a sale.
Total deposits were $87.2 million at June 30, 1998 compared to $78.5 million at
December 31, 1997. As of June 30, 1998, interest-bearing deposits and non
interest-bearing deposits were $73.7 million and $13.4 million, respectively. As
of December 31, 1997, interest-bearing deposits and non interest-bearing
deposits were $66.8 million and $11.7 million respectively.
A provision of $222,520 was added to the allowance for loan losses during the
second quarter of 1998, bringing total provisions for the year to $273,110. The
provision is primarily attributable to the increased level of loans at June 30,
1998 compared to prior periods. The allowance had a balance of $1,325,134 at
June 30, 1998, representing 1.75% of loans. Chargeoffs were $47,152 while
<PAGE>
recoveries were $8,446, resulting in net chargeoffs of $38,706 during the first
half of 1998. Chargeoffs relative to one borrower account for approximately 70%
of total chargeoffs. Management believes this allowance is adequate to cover
possible loan losses. The following table presents the activity in the allowance
for the first two quarters of 1998. At June 30, 1998, the Company had no loans
requiring a specific allocation. The remaining allowance after any required
specific reserves, 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.
<TABLE>
<CAPTION>
FIRST CHEROKEE BANCSHARES, INC.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<S> <C>
Balance, December 31, 1997 $1,090,730
Chargeoffs (47,152)
Recoveries 8,446
Provision for Loan Losses 273,110
----------
Balance, June 30, 1998 $1,325,134
==========
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
- -------------------------------------------
At June 30, 1998, the Company had sixteen loans (made to eight borrowers)
classified as nonaccrual totaling $795,824, all of which are secured by real
estate, vehicles, equipment or inventory. The Company's impaired loans consist
of these nonaccrual loans that are either greater than 90 days delinquent as of
June 30, 1998 or are classified as nonaccrual by management because the
collection of interest from the borrower is doubtful. No material loss is
anticipated on the nonaccrual loans so no specific reserves or writedowns are
considered necessary at this time. 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. If interest income on the total
nonaccrual loans had been accrued, such income would have approximated $23,419
as of June 30, 1998. Interest income on such loans, recorded only when received,
was approximately $90,732 for the first half of 1998. As of June 30, 1998, the
Company had two properties classified as Other Real Estate Owned, totaling
$685,121. Both properties are currently under contract for sale. The ratio of
loans past due 30 days or more to total loans was 1.12% at June 30, 1998
compared to 4.40% at December 31, 1997. There was one loan totaling $9,208 past
due greater than 90 days that was on accrual status as of June 30, 1998 compared
to two loans totaling $356,666 as of December 31, 1997. There were no
restructured loans as of June 30, 1998 or December 31, 1997.
<PAGE>
LIQUIDITY
- ---------
The Company's primary sources of funds are increases in deposits, loan
repayments, and sales and maturities of investments. Liquidity refers to the
ability of the Company to meet its cash flow requirements and fund its
commitments. The Company manages the levels, types, and maturities of earning
assets in relation to the sources available to fund current and future needs to
ensure that adequate funding will be available at all times. The Company
monitors its compliance with regulatory liquidity requirements and anticipates
that funding requirements will be satisfactorily met.
CAPITAL RESOURCES
- -----------------
At June 30, 1998, consolidated stockholders' equity was $7,197,151 or 7.56% of
total assets compared to $7,063,899 or 8.06% of total assets at December 31,
1997. During the second quarter of 1998, the Company repurchased 17,000 shares
of treasury stock at a price of $18.20 per share, to provide shares which will
be issued on exercise of warrants and stock options. The Company's common stock
had a book value of $12.73 per share at June 30, 1998 based on outstanding
shares of 565,304. The Company's common stock had a book value of $12.13 per
share at December 31, 1997 based on outstanding shares of 582,304. At the end of
the second quarter of 1998, the Company had approximately 650 stockholders of
record.
The Bank and the Company are subject to the capital requirements of the Office
of the Comptroller of the Currency ("OCC") and the Federal Reserve Bank (the
"FRB"), respectively. The OCC and FRB have adopted risk-based capital guidelines
for all national banks and bank holding companies, respectively. To be
"adequately capitalized," all national banks are expected to maintain a minimum
ratio of total capital (after deductions) to risk-weighted assets of 8% (of
which at least 4% must consist of Tier 1 Capital, as defined).
The following table sets forth information with respect to the Company's capital
ratios at June 30, 1998 and 1997 compared to minimum ratios required by
regulation.
<TABLE>
<CAPTION>
For Capital
Actual Adequacy Purposes
-------------------- ----------------------
Amount Ratio Amount Ratio
------ ----- ------ -----
<S> <C> <C> <C> <C>
As of June 30, 1998
- -------------------
Total Capital
(to Risk-Weighted Assets) $7,630,791 10.07% 6,060,480 8.00%
Tier 1 Capital
(to Risk-Weighted Assets) $6,682,777 8.82% 3,030,240 4.00%
Tier 1 Capital
(to Average Assets) $6,682,777 7.26% 3,681,480 4.00%
As of June 30, 1997
- -------------------
Total Capital
(to Risk-Weighted Assets) $7,461,039 10.99% 5,429,600 8.00%
Tier 1 Capital
(to Risk-Weighted Assets) $6,615,344 9.75% 2,714,800 4.00%
Tier 1 Capital
(to Average Assets) $6,615,344 8.09% 3,271,520 4.00%
</TABLE>
RESULTS OF OPERATIONS
- ---------------------
The Company recognized earnings of $442,929 for the first six months of 1998. In
comparison, net earnings for the first six months of 1997 were $426,901.
Earnings for the first half of 1998 were approximately $62,000 or 16% above
projections.
Net interest income for the first six months of 1998 was $2,154,079 as compared
to $1,840,589 for the first six months of 1997. The average yield on earning
assets for the first half of 1998 increased to 10.50% as compared to 10.06% for
the first half of 1997. The improvement was primarily due to the collection of
previously nonaccrued interest. The average cost of funds on interest-bearing
deposits decreased for the first half of 1998 to 5.41%, as compared to 5.44% for
the first half of 1997. The improvement was primarily a result of the Bank's
on-going effort to restructure the deposit base from higher rate institutional
certificates of deposit to core deposits. Consequently, the net interest spread
for the first six months of 1998 increased to 5.09% compared to 4.62% for the
first six months of 1997. The net interest spread is expected to remain stable
for the remainder of the year.
Total other income for the first two quarters of 1998 was $1,304,523 compared to
$1,184,011 for the first two quarters of 1997. This increase is primarily due to
increased transaction volume on deposits as well as increased fees relative to
the transactions.
The annualized ratio of operating expenses to average assets decreased to 5.39%
for the first six months of 1998 from 5.82% for the year ended December 31,
1997. The improvement is primarily due to the increase in average assets.
<PAGE>
YEAR 2000
- ---------
The Company recognizes the operational risk from technology as the Year 2000
("Y2k") approaches. The Company has established an internal committee to
identify and address how the century change may affect its operations. A Y2k
Plan has been approved by the Board of Directors detailing the steps the
committee plans to take to comply with regulatory directives. The Company has
developed a tracking report which identifies and monitors the areas that the
century change is expected to impact, including the Bank's data processor, its
computer hardware and software, its telephone system, etc. The tracking report
also documents whether the area is "mission critical", the individual
responsible and testing dates. The Y2k Plan also addresses the potential risk to
the Bank from the impact of Y2k on Bank customers. The Bank's analysis of its
Allowance for Loan and Lease losses includes a factor addressing the possibility
of loan losses due to the century change. In addition, the Bank has budgeted
$50,000 in 1998 for Y2k issues.
Based on information currently available, management does not believe that the
Company will incur significant additional costs in connection with the Y2k
issue. Nevertheless, there can be no assurances that all hardware and software
that the Company will use will be Y2k compliant, and the Company cannot predict
with any certainty the costs the Company will incur to respond to any Y2k
issues. Further, the business of the Company's customers and vendors may be
negatively affected by the Y2k issue, and any financial difficulties incurred by
the Company's customers and vendors in solving Y2k issues could negatively
affect their ability to perform their agreements with the Company. Therefore,
even if the Company does not incur additional significant direct costs in
connection with responding to the Y2k issue, there can be no assurance that the
failure or delay of the Company's customers, vendors, or other third parties in
addressing the Y2k issue or the costs involved in such process will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a named Defendant in an Amended and Consolidated Bankruptcy
Adversary Proceeding in the United States Bankruptcy Court, Northern District of
Georgia, Atlanta Division, styled as follows: Issac LeaseCo, Inc. v. L. C. Smith
Sales and Leasing, Inc., James W. Ballew, Lewis C. Smith, Ford Motor Credit, and
First National Bank of Cherokee, USBR Northern District of Georgia Case Number:
96-6734. Issac LeaseCo, Inc. was an automobile wholesaler that did business with
a customer of the Bank, L. C. Smith Sales and Leasing, Inc. ("Sales and
Leasing"). Among other lending to Sales and Leasing and its Principals, the Bank
had a secured floor plan lending arrangement for the financing of Sales and
Leasing automobile inventory. The Consolidated Adversary Proceeding claims that
Issac LeaseCo, Inc. was defrauded by Sales and Leasing and its Principals. The
Bank is named in the litigation to establish the relevant lien rights on
inventory supplied to Sales and Leasing through various arrangements with Issac
LeaseCo, Inc. The Trustee also seeks to impose a Bankruptcy Code preference
and/or State law constructive trust on proceeds that may have been received by
the Bank. The Bank denies any actual or constructive knowledge that funds used
to pay loan payments, standard bank charges, or payments for floor plan lending
were either preference payments or payments generated from sales of property of
the bankrupt estate. The Bank's Counsel continues to investigate the
circumstance underlying the litigation, including the application of bond
coverage, and is unable at this stage to assess the likely outcome of the
proceedings.
Apart from the foregoing, 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 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
(a) An Annual Shareholders Meeting was held on April 22, 1998.
(b) All of the twelve incumbent directors were elected to serve one-year
terms until the annual meeting of shareholders in 1999. Additionally, R. O.
Kononen, Jr. was also elected to serve a one year term until the annual meeting
of shareholders in 1999. The following table sets forth the number of votes cast
for and withheld with respect to each nominated Director. There were no
abstentions or broker non-votes.
<PAGE>
Name of Nominee Votes for Votes Withheld
--------------- --------- --------------
Alan D. Bobo 308,107 41,050
Elwin K. Bobo 308,107 41,050
Michael A. Edwards 308,107 41,050
J. Stanley Fitts 308,107 41,050
Russell L. Flynn 308,107 41,050
Carl C. Hames, Jr. 308,107 41,050
C. Garry Haygood 308,107 41,050
Thomas D. Hopkins 308,107 41,050
Bobby R. Hubbard 308,107 41,050
R. O. Kononen, Jr. 308,107 41,050
Dennis M. Lord 308,107 41,050
Larry R. Lusk 308,107 41,050
Dr. Stuart R. Tasman 308,107 41,050
Pursuant to Rule 14a-4(c)(1) promulgated under the Securities Exchange
Act of 1934, as amended, shareholders desiring to present a proposal for
consideration at the Company's 1999 Annual Meeting of Shareholders must notify
the Company in writing at its principal office at 9860 Highway 92, Woodstock,
Ga. 30188, of the contents of such proposal no later than February 10, 1999.
Failure to timely submit such a proposal will enable the proxies appointed by
management to exercise their discretionary voting authority when the proposal is
raised at the Annual Meeting of Shareholders without any discussion of the
matter in the proxy statement.
Item 5. Other Information - None
Item 6. Exhibits 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)(3) Form of Key Employee Stock Option Plan
27 Financial Data Schedule (for SEC use only)
for quarter ended June 30, 1998 and
June 30, 1997 as amended
- ------------------------
(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) The Company has not filed any reports on Form 8-K during the six
months ended June 30, 1998.
Item 7. Signatures - attached
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST CHEROKEE BANCSHARES, INC.
(Registrant)
DATE: August 12, 1998 BY: /s/Carl C. Hames, Jr.
--------------- ----------------------
Carl C. Hames, Jr.
President & CEO/Principal
Executive Officer
DATE: August 12, 1998 BY: /s/Kitty A. Kendrick
---------------- ----------------------
Kitty A. Kendrick
Principal Financial Officer
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