<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
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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, 1997 were
$9,436,679.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at March 13, 1998, was $6,756,376, based on an estimated market price
of $17.25 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 13,
1998, was 582,304 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1997 are incorporated by reference into Parts I and II of this report.
Portions of the Proxy Statement for the 1998 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 1997 fiscal year-end are incorporated by reference into Part III of
this report.
Transitional Small Business Disclosure Format (check one): Yes No X
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PART I
------
ITEM 1. DESCRIPTION OF BUSINESS.
- --------------------------------
GENERAL INFORMATION
-------------------
First Cherokee Bancshares, Inc. (the "Company") was incorporated as a Georgia
business corporation on July 26, 1988, for the purpose of becoming a bank
holding company by acquiring all of the common stock of First National Bank of
Cherokee, Woodstock, Georgia (the "Bank"). The Company filed applications 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, gains 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, 2000. 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, 1997, assets of the Bank were $7 million or 8% less than projected
by the Plan. Net earnings after taxes in 1997 were $220,884 or 80% less than
projected by the Plan. The primary reason for the variance in budgeted net
earnings compared to actual net earnings for 1997 was a nonrecurring loss of
$654,395 as a result of a fraudulent "check-kiting" scheme. Additionally, the
costs associated with the resolution of nonperforming assets, such as lost
interest income, collection costs and legal fees were higher than anticipated.
The updated Plan projects assets of the Bank to reach $105 million by the end of
1998. Net earnings after taxes are projected to be approximately $991,000,
representing a Return on Average Assets of 1.02%. 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
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.
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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 1997, the Bank's loan portfolio consisted of approximately 8%
Consumer Loans, 15% Commercial Loans, 23% U.S. Small Business Administration
("SBA") - Unguaranteed portion of Loans, and 54% Commercial and Residential Real
Estate and Construction Loans. The Bank's net loan-to-deposit ratio was
approximately 91% as of December 31, 1997.
Total net loans as of December 31, 1997 were $71,620,734, with the percentage of
30 days or greater delinquent loans at year end at 4.40%. The percentage of
substandard rated loans was 2.61% of total outstanding loans, which represented
24.89% of risk-based capital. No loans were classified as impaired, therefore no
specific reserves were required. As of December 31, 1997 the Bank had eight
borrowers in nonaccrual status totaling $1,460,262. During 1997, the loan loss
provision was $623,738, and gross charge-offs totaled $556,332; recoveries
during 1997 amounted to $165,053. The balance in the loan loss reserve account
was $1,090,730, or 1.50% of loans, as of December 31, 1997.
REAL ESTATE LOANS. The Bank makes single-family residential construction loans
for one- to four-unit structures. The Bank requires a first lien position on
the land associated with the construction projects and offers these loans only
to qualified residential building contractors. Loan disbursements require on-
site inspections to assure the project is on budget and that the loan proceeds
are being used in accordance with the plans, specifications and survey for the
construction project and not being diverted to another project. The loan-to-
value ratio for such loans is predominately 75% of the lower of the as-built
appraised value or project cost, and is a maximum of 80% if the loan is
amortized. Loans for construction can present a high degree of risk to the
lender, depending on, among other things, whether the builder can sell the home
to a buyer, whether the buyer can obtain permanent financing, whether the
transaction produces income in the interim, and the nature of changing economic
conditions.
The Bank also makes acquisition and development loans to Bank-approved
developers for the purpose of developing acreage into single family lots on
which houses will be built. Loan disbursements require on-site inspections to
assure the project is on budget and that the loan proceeds are being used for
the development project and not being diverted to another project. The loan-to-
value ratio for such loans does not exceed 75% of the discounted value, as
defined in the appraisal report. Loans for acquisition and development can
present a high degree of risk to the lender, depending upon, among other things,
whether the developer can find builders to buy the lots, whether the builder can
obtain financing, whether the transaction produces income in the interim and the
nature of changing economic conditions.
Additionally, the Bank offers first mortgage loans on commercial real estate for
owner-occupied or investment real estate. Almost all conventional first
mortgage loans originated by the Bank have a loan-to- value ratio that does not
exceed 85% with a maximum term of 25 years and call provisions every three to
five years. Such loans typically carry adjustable interest rates. Risks
involved with commercial mortgage lending include, but are not limited to, title
defects, fraud, general real estate market deterioration, inaccurate appraisals,
violation of banking protection laws, interest rate fluctuations and financial
deterioration of borrower.
-5-
<PAGE>
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.
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."
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EMPLOYEES
---------
At December 31, 1997, the Bank employed 49 full-time employees and 7 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.
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SELECTED STATISTICAL INFORMATION OF THE COMPANY
-----------------------------------------------
The following statistical information is provided for the Company for the years
ended December 31, 1997 and December 31, 1996. This data should be read in
conjunction with the information incorporated by reference under the heading
"Item 6 - Management's Discussion and Analysis of Financial Condition" and "Item
7 - Financial Statements" appearing elsewhere in this Report.
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,
1997 and 1996.
TABLE 1
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------------------------
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) $65,733,060 $7,691,664 11.70% $55,373,204 $6,473,525 11.69%
Investment Securities (2) 1,341,593 83,200 6.20% 1,608,227 84,357 5.25%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments 4,252,140 230,466 5.42% 12,279,168 696,622 5.67%
------------ ----------- -------- ------------ ----------- --------
Total Interest-Earning Assets 71,326,793 $8,005,330 11.22% 69,260,599 $7,254,504 10.47%
Non-Earning Assets 12,157,876 11,605,219
------------ ------------
Total Average Assets $83,484,669 $80,865,818
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $4,929,867 $117,567 2.38% $4,891,026 $122,738 2.51%
Money Market Accounts 7,094,029 259,508 3.66% 5,241,153 188,132 3.59%
Savings 2,283,814 57,110 2.50% 2,477,314 65,073 2.63%
Time, $100,000 and Over 12,975,607 782,429 6.03% 13,992,042 875,902 6.26%
Other Time 38,445,348 2,348,358 6.11% 38,630,867 2,491,916 6.45%
------------ ----------- -------- ------------ ----------- --------
Total Interest-Bearing Deposits 65,728,665 $3,564,972 5.42% 65,232,402 $3,743,761 5.74%
FHLB Advances and Federal Funds Purchased 314,574 17,770 5.65% 0 0 0.00%
------------ ----------- -------- ------------ ----------- --------
Total Interest-Bearing Liabilities 66,043,239 $3,582,742 5.42% 65,232,402 $3,743,761 5.74%
Non Interest-Bearing Demand Deposits 9,622,379 8,480,285
Other Liabilities 798,147 681,630
------------ ------------
Total Liabilities 76,463,765 74,394,317
Stockholders' Equity 7,020,904 6,471,501
------------ -------------
Total Average Liabilities and
Stockholders' Equity $83,484,669 $80,865,818
============ =============
Net Earning Assets $5,283,554 $4,028,197
Net Yield on Interest Earning Assets 6.20% 5.06%
Net Interest Rate Spread 5.80% 4.73%
Net Interest Margin $4,422,588 $3,510,743
(1) When computing yields on interest-earning assets, non-accruing loans are included in average loan balances. Additionally, loan
fees of $425,038 and $ 187,432 are included in interest income for the periods ending December 31, 1997 and 1996, respectively.
(2) All investment securities are taxable.
</TABLE>
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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,
1997 vs. 1996 1996 vs. 1995
---------------------------------- ----------------------------------
Increase Changes Due To Increase Changes Due To
Increase (decrease) in: (Decrease) Rate Volume (Decrease) Rate Volume
---------- ---- ------ ---------- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Income from earning assets:
Interest and fees on loans $1,218,139 $7,072 $1,211,067 $207,934 ($211,033) $418,967
Interest on investment securities (40,817) (26,819) (13,998) (111,557) (19,699) (91,858)
Interest on federal funds sold,
interest-bearing deposits,
and other investments (426,496) 28,636 (455,132) 84,781 (26,395) 111,176
--------------------------------------- ------------------------------------
Total interest income $750,826 $8,889 $741,937 $181,158 ($257,127) $438,285
--------------------------------------- ------------------------------------
Expense from interest-bearing liabilities:
Interest on now accounts ($5,171) ($6,146) $975 $7,704 ($14,800) $22,504
Interest on money market accounts 71,376 4,858 66,518 (38,078) (7,600) (30,478)
Interest on savings accounts (7,963) (2,874) (5,089) (7,656) (7,947) 291
Interest on time deposits, $100,000 & over (93,473) (29,844) (63,629) 76,980 (20,988) 97,968
Interest on other time deposits (143,558) (131,592) (11,966) 182,124 47,270 134,854
Interest on FHLB advances and federal
funds purchased 17,770 0 17,770 0 0 0
--------------------------------------- ------------------------------------
Total interest expense ($161,019) ($165,598) $4,579 $221,074 ($4,065) $225,139
--------------------------------------- ------------------------------------
Net interest income $911,845 $174,487 $737,358 ($39,916) ($253,062) $213,146
====================================== ===================================
</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, 1997.
TABLE 3
AS OF DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
ONE YEAR > ONE YEAR
OR LESS TO FIVE YEARS > FIVE YEARS
------- ------------- ------------
Fixed Adjustable Fixed Adjustable
Rate Rate Rate Rate Total
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 4,571 $ 2,833 $2,084 $ 723 $15,855 $26,066
Real estate - Construction 15,636 - 1,070 - 906 17,612
All Other Loans 7,359 10,528 6,644 1,214 2,198 27,943
------- ------- ------ ------ ------- -------
Total $27,566 $13,361 $9,798 $1,937 $18,959 $71,621
- -------------------------------------------------------------------------------------------------
</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, 1997 and 1996.
TABLE 4
<TABLE>
<CAPTION>
1997 1996
----------------------- -----------------------
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real Estate Construction $17,635,088 24.25% $9,606,039 15.56%
Real Estate Mortgage 21,649,051 29.77% 20,872,411 33.81%
SBA - Unguaranteed 16,774,339 23.07% 13,698,354 22.19%
Commercial 10,983,107 15.11% 13,101,300 21.22%
Consumer 5,669,879 7.80% 4,459,337 7.22%
--------- ----- --------- -----
Total Loans $72,711,464 100.00% $61,737,441 100.00%
=========== ======= =========== =======
</TABLE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
A loan is placed on nonaccrual status when it has become 90 days delinquent,
unless such loan is adequately collateralized 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. At December 31, 1997, the
Bank had eight borrowers on nonaccrual status in the amount of $1,460,262 or
2.04% of total loans compared to $1,444,709 or 2.30% of total loans at
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<PAGE>
December 31, 1996. One borrower accounts for $721,798 or 49% of total nonaccrual
loans. It is anticipated that this borrower will be current by June 1998.
Another borrower had two construction loans totaling $208,283 at December 31,
1997. One of these loans paid off in full in January 1998. The other was
foreclosed in January 1998 and the property is scheduled to be sold with no loss
in March 1998. The remaining loans average approximately $88,000 each. No
specific reserves have been allocated on nonaccrual loans because management
believes the collateral is adequate and no impairment exists. Had the loans
been current in accordance with their original terms, the gross interest that
would have been recorded as of December 31, 1997 would have been $87,123. The
amount of interest on these loans that was included in net earnings for the year
ended December 31, 1997 was $132,578. Two loans, totaling $356,666 were past
due greater than 90 days and were still accruing as of December 31, 1997, due to
anticipated payoffs. 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 $3,201,666, or 4.40% of total loan as of December 31,
1997 compared to $1,823,981, or 2.93% of total loans at the end of 1996. There
were no restructured loans as of December 31, 1997 or December 31, 1996.
The Bank had four properties classified as Other Real Estate Owned totaling
$794,361 as of December 31, 1997. The largest of these properties consists of 95
acres of land in Cherokee County with a balance of $510,047 and an appraised
value of $515,000. The property is currently under a contract which would net
the Bank approximately $700,000 and is scheduled to close by July 31, 1998. Two
of the other four properties are scheduled to be sold during March 1998 with no
loss. Additionally, no material loss is anticipated on the resolution of the
fourth property. As of December 31, 1997, the Bank had repossessed 24 vehicles
with fair value totaling $141,155. 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 1997 Annual Report to
Shareholders.
Table 5 below presents the activity in the allowance for loan losses for each of
the periods ended December 31, 1997 and 1996.
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<PAGE>
TABLE 5
<TABLE>
<CAPTION>
1997 1996
-----------------------
<S> <C> <C>
Balance at the Beginning of Year $858,271 $685,706
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 150,581 0
Commercial 198,791 182,161
Consumer 206,960 146,092
------- -------
Total Charge-offs 556,332 328,253
Recoveries:
Real Estate Construction 0 41
Real Estate Mortgage 0 0
SBA - Unguaranteed 12,398 0
Commercial 67,983 104,999
Consumer 84,672 22,268
------ ------
Total Recoveries 165,053 127,308
Net Chargeoffs 391,279 200,945
Provision for Loan Losses 623,738 373,510
------- -------
Balance at the End of Year $1,090,730 $858,271
========== ========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.50% 1.39%
Ratio of Net Charge-offs to Average
Loans Outstanding During the Year 0.60% 0.36%
===== =====
</TABLE>
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, 1997, no loans were
considered impaired requiring specific reserves. 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. 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, 1997, management's
analysis calculated the surplus to be $260,643. At December 31, 1996,
management's analysis calculated the surplus to be $100,000.
-12-
<PAGE>
TABLE 6
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
% of % of
Loss Loss
Amount Allocated Amount Allocated
---------- --------- -------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $ 125,426 11.50% $ 93,192 10.86%
Real Estate Mortgage 191,501 17.56% 202,492 23.59%
SBA - Unguaranteed 247,117 22.66% 174,092 20.28%
Commercial 201,296 18.46% 245,233 28.57%
Consumer 64,747 5.94% 43,262 5.04%
Unallocated 260,643 23.90% 100,000 11.65%
---------- ------ -------- ------
Total Allowance for Loan Losses $1,090,730 100.00% $858,271 100.00%
========== ====== ======== ======
</TABLE>
INVESTMENT PORTFOLIO
Table 7 below sets forth the fair value of investment securities at December 31,
1997 and 1996.
TABLE 7
<TABLE>
<CAPTION>
1997 1996
===========================================
<S> <C> <C>
U.S. Government Agencies $499,531 $500,000
Mortgage-backed Securities 102,872 293,735
-------- --------
Total Investment Securities $602,403 $793,735
===========================================
</TABLE>
The fair value at December 31, 1997 includes a $2,703 market value increase for
net unrealized gains while the fair value at December 31, 1996 includes a $7,330
market value increase for net unrealized gains in the investment portfolio.
Table 8 below presents the maturities, weighted average yields and total
carrying value of the Bank's investments as of December 31, 1997.
TABLE 8
<TABLE>
<CAPTION>
======================================================================================================================
AFTER AFTER
ONE YEAR FIVE YEARS
ONE YEAR OR THROUGH THROUGH AFTER
LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
----------- ---------- --------- --------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Government
Agencies $0 0.00% $499,531 6.62% $0 0.00% $0 0.00% $499,531 6.62%
Mortgage-
backed
Securities 46,248 7.50% 17,544 8.45% 0 0.00% 39,080 9.50% 102,872 8.42%
------- ----- ------ ----- - ----- ------ ----- ------- -----
Total
Investment
Securities $46,248 7.50% $517,075 6.68% $0 0.00% $39,080 9.50% $602,403 6.93%
================================================================================================================
</TABLE>
-13-
<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,
---------------------------------------------
1997 1996
---- ----
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non Interest-bearing demand deposits $9,622,379 N/A $8,480,285 N/A
Interest-bearing demand deposits 12,023,896 3.13% 10,132,179 3.06%
Savings deposits 2,283,814 2.50% 2,477,314 2.63%
Time deposits 51,420,955 6.09% 52,622,909 6.39%
-------------- --------------
Total Deposits $75,351,044 $73,712,687
============== ==============
</TABLE>
The amounts of time certificates of deposit issued in amounts greater than
$100,000 as of December 31, 1997, 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 $2,879
Over three through six months 1,243
Over six through twelve months 1,198
Over twelve months 2,737
-----
Total $8,057
======
</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 1997 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, 1997 and
1996. The Company did not pay cash dividends to shareholders during 1997 and
1996.
TABLE 10
<TABLE>
<CAPTION>
1997 1996
===========================
<S> <C> <C>
Return on Assets .26% .52%
Return on Equity 3.15% 6.46%
Stockholders' Equity to Assets 8.06% 8.69%
===========================
</TABLE>
-14-
<PAGE>
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, if
applicable, 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.
In response to the Interstate Banking Act, the Georgia General Assembly adopted
the Georgia Interstate Banking Act, which was effective on July 1, 1995. The
Georgia Interstate Banking Act provides that (a) interstate acquisitions by
institutions located in Georgia will be permitted in states that also allow
national interstate acquisitions and (b) interstate acquisitions of institutions
located in Georgia will be permitted by institutions in states that allow
national interstate acquisitions.
Additionally, on January 26, 1996, the Georgia General Assembly adopted the
Georgia Interstate Branching Act which permits 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 as of July 1, 1996. Beginning July 1, 1998, the number of de novo
branches that 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
-15-
<PAGE>
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.
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, 1997, under dividend restrictions imposed under federal and
state laws, the Bank, without obtaining governmental approvals, could declare
aggregate dividends to the Company of up to approximately $636,000.
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.
-16-
<PAGE>
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, 1997, 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 10.24% and 8.98%,
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, 1997 was 7.53%. The 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, 1997. 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' methodology for
evaluating interest rate risk requires banks with excessive interest rate risk
exposure to hold additional amounts of capital against such exposures. The
market risk rules 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.
-17-
<PAGE>
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
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.
-18-
<PAGE>
The capital levels established for each of the categories are as follows:
<TABLE>
<CAPTION>
===============================================================================================================
Total Tier 1 Risk-
Capital Category Tier 1 Capital Risk-Based Capital Based Capital Other
===============================================================================================================
<S> <C> <C> <C> <C>
Well Capitalized 5% or more 10% or more 6% or more Not subject to
a capital
directive
- ---------------------------------------------------------------------------------------------------------------
Adequately 4% or more 8% or more 4% or more --
Capitalized
- ---------------------------------------------------------------------------------------------------------------
Undercapitalized less than 4% Less than 8% less than 4% --
- ---------------------------------------------------------------------------------------------------------------
Significantly less than 3% Less than 6% less than 3% --
Undercapitalized
- ---------------------------------------------------------------------------------------------------------------
Critically 2% or less -- -- --
Undercapitalized tangible equity
==============================================================================================================
</TABLE>
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 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, 1997, the Bank had the requisite capital levels to qualify as
well capitalized.
FDIC INSURANCE ASSESSMENTS
Pursuant to FDICIA, the FDIC adopted a risk-based assessment system for insured
depository institutions that takes into account the risks attributable to
different categories and concentrations of assets and liabilities. The system
assigns an institution to one of three capital categories: (a) well capitalized;
(b) adequately capitalized; and (c) undercapitalized. 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
-19-
<PAGE>
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 risk-based assessment 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 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
in 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, 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).
In addition, the FDIC has implemented 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 Financing Corporation ("FICO") assessments. Effective
January 1, 1997, assessments to help pay off the $780 million in annual interest
payments on the $8 billion FICO bonds issued in the late 1980s as part of the
government rescue of the thrift industry were 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.
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 that contain wide-ranging
proposals for altering the structures, regulations and competitive relationships
of the nation's financial institutions. It cannot be predicted whether or what
form any proposed regulation or statute will be adopted or the extent to which
the business of the Company may be affected by such regulation or statute.
-20-
<PAGE>
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 was added over the drive-in facility
during 1997 at a cost of approximately $150,000. Management believes this
expansion is sufficient for the expected growth over the next five-year period.
The original cost of construction of the main office building was approximately
$1,310,000. The cost of furnishing this building, including teller facilities,
vault door, safe deposit boxes and other necessary furniture, fixtures and
equipment was originally $350,000. An elevator was installed during 1995 at a
cost of approximately $53,000. The net book values of the building and
equipment as of December 31, 1997, were $1,414,680 and $401,515 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 $57,054 in total rentals under the ground lease during
1997. 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, 1997 were $185,201, $275,201, and $66,854,
respectively.
In January 1997, the Bank acquired land in Canton, Georgia for the amount of
$400,000 for a future branch site. The building is currently under construction
and is expected to cost approximately $600,000. Management expects to open the
branch for business during the second quarter 1998.
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."
-21-
<PAGE>
ITEM 3. 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 has denied that any amounts have been received by the Bank
from the customers involved other than for loan payments, standard bank charges,
or in payment for floor plan lending from the Bank. 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 4. Submission of Matters to a Vote of Security Holders.
- ------------------------------------------------------------
None.
-22-
<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 1997 Annual Report to Shareholders. The Registrant did not have
any unregistered sales of equity securities during 1997, 1996 or 1995.
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 1997 Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS.
- -----------------------------
The following report and statements are included in the financial section of the
Registrant's 1997 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, 1997 and 1996.
(iii) Consolidated Statements of Earnings for Years Ended December 31,
1997, 1996, and 1995.
(iv) Consolidated Statements of Stockholders' Equity for Years Ended
December 31, 1997, 1996, and 1995.
(v) Consolidated Statements of Cash Flows for the Years Ended December
31, 1997, 1996, and 1995.
(vi) Notes to Consolidated Financial Statements.
Item 8. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure.
- --------------------
None.
-23-
<PAGE>
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
- ----------------------------------------------------------------------
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
- -------------------------------------------------
The response to this item is included in the information set forth under the
captions "Election of Directors" and "Principal Shareholders" in the Proxy
Statement to be used in connection with the Company's 1998 Annual Meeting of
Shareholders and is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
- --------------------------------
The response to this item is included in the information contained under the
caption "Director and Executive Compensation" in the Proxy Statement to be used
in connection with the Company's 1998 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 1998 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 1998 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)(3) Form of Key Employee Stock Option Plan
13.1 Annual Report to Shareholders for the fiscal year ended
December 31, 1997. Only those portions of the 1997 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(5) Subsidiary of First Cherokee Bancshares, Inc.
23.1 Consent of Porter Keadle Moore, LLP
24 Power of attorney (see signature page to this Annual Report
on Form 10-KSB).
27 Financial Data Schedule (for SEC use only)
-24-
<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.
(5) Incorporated herein by reference to Exhibit of the same number in the
Company's Annual Report on Form 10KSB for the year ended December 31,
1996.
(B) REPORTS ON FORM 8-K
-------------------
None.
-25-
<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 27, 1998
-----------------------
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:
-26-
<PAGE>
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Alan D. Bobo Director March 27, 1998
- --------------------------
Alan D. Bobo
/S/ Elwin K. Bobo Director March 27, 1998
- --------------------------
Elwin K. Bobo
/S/ Michael A. Edwards Director March 27, 1998
- --------------------------
Michael A. Edwards
/S/ Stanley Fitts Director March 27, 1998
- --------------------------
Stanley Fitts
/S/ Russell L. Flynn Director March 27, 1998
- --------------------------
Russell L. Flynn
/S/ Carl C. Hames, Jr. President, Principal March 27, 1998
- -------------------------- Executive Officer,
Carl C. Hames, Jr. and Director
/S/ C. Garry Haygood Director March 27, 1998
- --------------------------
C. Garry Haygood
/S/ Thomas D. Hopkins, Jr. Director and March 27, 1998
- -------------------------- Secretary
Thomas D. Hopkins, Jr.
/S/ Bobby R. Hubbard Director March 27, 1998
- --------------------------
Bobby R. Hubbard
/S/ Dennis W. Lord Director March 27, 1998
- --------------------------
Dennis W. Lord
/S/ Larry R. Lusk Director March 27, 1998
- --------------------------
Larry R. Lusk
/S/ Dr. Stuart R. Tasman Director March 27, 1998
- --------------------------
Dr. Stuart R. Tasman
/S/ Kitty A. Kendrick Principal March 27, 1998
- -------------------------- Accounting
Kitty A. Kendrick and Financial Officer
-27-
<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)(3) Form of Key Employee Stock Option Plan......................................................................... N/A
13.1 Annual Report to Shareholders for the fiscal year ended December 31, 1997. Only those portions of the 1997
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(5) Subsidiary of First Cherokee Bancshares, Inc...................................................................
___
23.1 Consent of Porter Keadle Moore, LLP............................................................................
___
24 Power of attorney (See signature page to this Annual Report on Form 10-KSB)....................................
___
27 Financial Data Schedule (For SEC use only).....................................................................
___
</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.
(5) Incorporated herein by reference to Exhibit of the same number in the
Company's Annual Report on Form 10KSB for the year ended December 31,
1996.
<PAGE>
Exhibit 13.1
FIRST CHEROKEE BANCSHARES, INC.
1997 ANNUAL REPORT
TO SHAREHOLDERS
P.O. Box 1238 . Woodstock, Georgia 30188 . (770) 591-9000
<PAGE>
MARCH 27, 1998
TO OUR SHAREHOLDERS AND FRIENDS:
I AM PLEASED TO PROVIDE YOU WITH THE 1997 ANNUAL REPORT FOR FIRST CHEROKEE
BANCSHARES, INC. THE REPORT COVERS THE COMPANY'S CONSOLIDATED FINANCIAL
POSITION AS OF DECEMBER 31, 1997 AND 1996 AND RESULTS OF OPERATIONS FOR EACH OF
THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997.
NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 1997 OF $220,884, REPRESENT A .26%
RETURN ON AVERAGE ASSETS AND DID NOT MEET EXPECTATIONS. THE PRIMARY REASON FOR
THE LOWER LEVEL OF EARNINGS WAS A NONRECURRING LOSS OF $654,395 AS A RESULT OF A
FRAUDULENT "CHECK-KITING" SCHEME. ADDITIONALLY, THE COSTS ASSOCIATED WITH THE
RESOLUTION OF NONPERFORMING ASSETS, SUCH AS LOST INTEREST INCOME, COLLECTION
COSTS, AND LEGAL FEES, SIGNIFICANTLY AFFECTED EARNINGS AGAIN IN 1997.
SIGNIFICANT TIME AND ATTENTION IS BEING SPENT TO RECOVER THESE COSTS AS WELL AS
TO PREVENT ANY FUTURE LOSSES. I CAN ASSURE YOU THAT THE PRIMARY FOCUS OF THE
BOARD OF DIRECTORS AND MANAGEMENT OF THE BANK IS TO RETURN THE BANK TO A
RESPECTABLE LEVEL OF EARNINGS. ASIDE FROM THE NONRECURRING ITEMS AFFECTING THE
BANK'S EARNINGS, CORE EARNINGS ARE IMPROVING, AND THE BANK REMAINS WELL
CAPITALIZED. ASSETS GREW FROM $75.6 MILLION TO $87.6 MILLION AND LOANS GREW FROM
$60.9 MILLION TO $71.6 MILLION DURING 1997.
THE BANK'S INVESTMENT IN "STATE-OF-THE-ART" TECHNOLOGIES FOR OUR CUSTOMERS AND
EMPLOYEES HAS ENABLED US TO PROVIDE SUPERIOR QUALITY SERVICE. OUR OBJECTIVE OF
PROVIDING CUSTOMERS THE TOOLS TO MAKE THEIR BANKING RELATIONSHIP EASY AND
CONVENIENT WAS ENHANCED DURING 1997. DEBIT CARDS AND INTERNET BANKING BECAME
AVAILABLE TO CUSTOMERS; AND WHILE WE HAVE IMPLEMENTED THIS NEW TECHNOLOGY, WE
HAVE CONSISTENTLY MAINTAINED OUR HIGH LEVELS OF PERSONAL SERVICE. ACCOUNT
INFORMATION CAN NOW BE ACCESSED IN ANY OF SEVERAL WAYS: BY TALKING WITH ANY OF
OUR EXCEPTIONAL BRANCH REPRESENTATIVES; BY CALLING "FNBLINE", OUR TELEPHONE
BANKING SERVICE; OR VIA THE INTERNET AT OUR ADDRESS "FNBINTERNET.COM". PAYMENTS
CAN CONVENIENTLY BE MADE USING A DEBIT CARD, THEREBY ELIMINATING THE NEED FOR
CASH OR A CHECKBOOK. BUT SHOULD A CUSTOMER PREFER WRITING CHECKS, THEIR IMAGED
MONTHLY STATEMENT PROVIDES THE INFORMATION REQUIRED IN A CONVENIENT,
CONSOLIDATED MANNER, A SERVICE WHICH SIMPLIFIES ACCOUNT RECONCILING AND TAX
PREPARATION.
IN 1998, OUR OBJECTIVE IS TO CONTINUE TO EXPAND CONVENIENCES FOR OUR CUSTOMERS.
OUR THIRD LOCATION IS SCHEDULED TO OPEN IN MAY 1998, IN CANTON, GEORGIA, THE
COUNTY SEAT OF CHEROKEE COUNTY. WE PLAN TO ADD THE "BILL PAY" FEATURE TO OUR
INTERNET SITE. FURTHERMORE, WE ARE REENGINEERING OUR INTERNAL OPERATIONS IN
ORDER TO PROVIDE FASTER SERVICE TO OUR CUSTOMERS.
I AM PLEASED TO REPORT THAT MANY POSITIVE THINGS ARE HAPPENING. WE REMAIN
FOCUSED ON OUR GOALS AND CONTINUE TO BE COMMITTED TO MAKING FIRST CHEROKEE
BANCSHARES, INC. AND FIRST NATIONAL BANK OF CHEROKEE A SOUNDLY OPERATED, HIGHLY
CAPITALIZED AND PROFITABLE COMPANY AND COMMUNITY BANK. WE ARE EXCITED ABOUT THE
OPPORTUNITIES AHEAD IN 1998. THE MARKET VALUE OF YOUR STOCK CONTINUES TO
INCREASE AND REACHED $19 PER SHARE DURING THE FIRST QUARTER OF 1998. 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>
<TABLE>
<CAPTION>
FIRST CHEROKEE BANCSHARES, INC.
SELECTED FINANCIAL DATA
As of and for the year ended December 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Selected Statement of Earnings Data:
Total Interest Income $8,005,330 $7,254,504 $7,073,346
Net Interest Income 4,422,588 3,510,743 3,550,659
Provision for Loan Losses 623,738 373,510 255,471
Net Earnings 220,884 418,220 1,077,466
Basic Earnings per Share 0.38 0.76 1.95
Diluted Earnings per Share 0.33 0.68 1.85
Cash Dividends per Share 0 0 0
- ------------------------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
Average Balances:
Total Assets $83,484,669 $80,865,818 $74,757,186
Total Loans, net 65,733,060 55,373,204 51,902,061
Total Deposits 75,351,044 73,712,687 67,998,500
Stockholders' Equity 7,020,904 6,471,501 5,632,546
End of Period Balances:
Total Assets 87,609,352 75,612,198 82,856,287
Total Loans, net 71,620,734 60,879,170 54,236,513
Total Deposits 78,483,832 68,397,118 76,121,001
Stockholders' Equity 7,063,899 6,568,583 6,152,760
Book Value per Share $12.13 $11.90 $11.15
- ------------------------------------------------------------------------------------------------------------
Financial Ratios:
Return on Average Assets 0.26% 0.52% 1.44%
Return on Average Shareholders' Equity 3.15% 6.46% 19.12%
Stockholders' Equity as a Percent
of Total Assets 8.06% 8.69% 7.43%
Net Interest Rate Spread 5.80% 4.73% 5.11%
Loan Loss Reserve/Loans 1.50% 1.39% 1.25%
- ------------------------------------------------------------------------------------------------------------
Asset Quality:
Nonaccrual Loans as a percentage
of Total Loans 2.04% 2.30% 3.23%
Loans Past Due 90 Days or More
as a Percent of Net Loans 0.50% 0.00% 0.04%
Loan Chargeoffs as a Percent
of Net Average Loans 0.85% 0.59% 0.12%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<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's main office 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 following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto, which are included
elsewhere in this report.
Results of Operations
---------------------
The Company's goals are to sustain profitability while maintaining prudent
banking practices and maximizing its contributions to its community. 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. The Company met these goals with net earnings in 1997 of $220,884,
representing a .26% return on average assets. However, earnings were
significantly less than expectations, primarily as a result of a loss of
$654,395 from a fraudulent "check-kiting" scheme.
NET INTEREST INCOME
Net interest income for the year ended December 31, 1997 was $4,422,588, a
25.97% increase compared to $3,510,743 for the year ended December 31, 1996. The
increase in net interest income is attributable to an increase of .75% in
average yield on earning assets combined with a .32% decrease in average cost of
funds on interest bearing liabilities, resulting in an increase in the net
interest rate spread of 1.07%.
Total interest income for the year ended December 31, 1997 was $8,005,330
(including $425,038 resulting from the amortization of deferred loan fees), a
10.35% increase compared to $7,254,504 for the year ended December 31, 1996. The
average yield on earning assets was 11.22% in 1997, compared to 10.47% in 1996.
The increase in yields is the result of a change in the mix of earning assets
between the two years. Loans comprised 92% of average earning assets during 1997
as opposed to 80% during 1996.
Interest expense for the year ended December 31, 1997 was $3,582,742, a 4.30%
decrease compared to $3,743,761 for the year ended December 31, 1996. The Bank's
average cost of funds was 5.42% in 1997, a decrease of .32% compared to 5.74%
in 1996. The decrease is primarily attributable to the repricing of maturing
certificates of deposit to lower rates. Interest-bearing deposits for the year
1
<PAGE>
ended December 31, 1997 averaged $65,728,665, a .76% increase compared to
$65,232,402 for the year ended December 31, 1996.
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, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ----------------------------------
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) $65,733,060 $7,691,664 11.70% $55,373,204 $6,473,525 11.69%
Investment Securities (2) 1,341,593 83,200 6.20% 1,608,227 84,357 5.25%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments 4,252,140 230,466 5.42% 12,279,168 696,622 5.67%
----------- ---------- ------ ----------- ---------- ------
Total Interest-Earning Assets 71,326,793 $8,005,330 11.22% 69,260,599 $7,254,504 10.47%
Non-Earning Assets 12,157,876 11,605,219
----------- -----------
Total Average Assets $83,484,669 $80,865,818
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $4,929,867 $117,567 2.38% $4,891,026 $122,738 2.51%
Money Market Accounts 7,094,029 259,508 3.66% 5,241,153 188,132 3.59%
Savings 2,283,814 57,110 2.50% 2,477,314 65,073 2.63%
Time, $100,000 and Over 12,975,607 782,429 6.03% 13,992,042 875,902 6.26%
Other Time 38,445,348 2,348,358 6.11% 38,630,867 2,491,916 6.45%
----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Deposits 65,728,665 $3,564,972 5.42% 65,232,402 $3,743,761 5.74%
FHLB Advances and Federal Funds Purchased 314,574 17,770 5.65% 0 0 0.00%
----------- ---------- ------ ----------- ---------- ------
Total Interest-Bearing Liabilities 66,043,239 $3,582,742 5.42% 65,232,402 $3,743,761 5.74%
Non Interest-Bearing Demand Deposits 9,622,379 8,480,285
Other Liabilities 798,147 681,630
----------- -----------
Total Liabilities 76,463,765 74,394,317
Stockholders' Equity 7,020,904 6,471,501
----------- -----------
Total Average Liabilities and
Stockholders' Equity $83,484,669 $80,865,818
=========== ===========
Net Earning Assets $5,283,554 $4,028,197
Net Yield on Interest Earning Assets 6.20% 5.06%
Net Interest Rate Spread 5.80% 4.73%
Net Interest Margin $4,422,588 $3,510,743
(1) When computing yields on interest-earning assets, non-accruing loans are included in average loan balances. Additionally,
loan fees of $425,038 and $ 187,432 are included in interest income for the periods ending December 31, 1997 and 1996, respectively.
(2) All investment securities are taxable.
</TABLE>
2
<PAGE>
ALLOWANCE FOR LOAN LOSSES
The loan loss provision for the year ended December 31, 1997 was $623,738
compared to $373,510 for the year ended December 31, 1996. Charge-offs during
1997 amounted to $556,332, and recoveries amounted to $165,053. This compares to
1996 charge-offs of $328,253 and $127,308 in recoveries. Two loan relationships,
one Small Business Administration ("SBA") and one Commercial, accounted for
approximately 48% of chargeoffs. The consumer loan chargeoffs were primarily due
to losses associated with automobile floor plan lending. (The Bank is in the
process of discontinuing this type of lending.) The allowance for loan loss at
December 31, 1997 was $1,090,730, or 1.50% of total loans, compared to $858,271,
or 1.39% of total loans, at the end of 1996. Management increased the allowance
for loan loss during 1997 in an effort to keep up with the growth in the loan
portfolio. Additionally, the Bank continued to experience an above average level
of nonperforming assets and chargeoffs during 1997 and 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, 1997 and 1996.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
---------- ------------
<S> <C> <C>
Balance at the Beginning of Year $ 858,271 $685,706
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 150,581 0
Commercial 198,791 182,161
Consumer 206,960 146,092
---------- --------
Total Charge-offs 556,332 328,253
Recoveries:
Real Estate Construction 0 41
Real Estate Mortgage 0 0
SBA - Unguaranteed 12,398 0
Commercial 67,983 104,999
Consumer 84,672 22,268
---------- --------
Total Recoveries 165,053 127,308
Net Chargeoffs 391,279 200,945
Provision for Loan Losses 623,738 373,510
---------- --------
Balance at the End of Year $1,090,730 $858,271
========== ========
Percentage of Allowance for Loan
Loss to Loans Outstanding
as of Year End 1.50% 1.39%
Ratio of Net Charge-offs to Average
Loans Outstanding During the 0.60% 0.36%
Year ========== ========
</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,
1997, no loans were considered impaired, therefore no specific reserves were
required. 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 for which the individual
loan is included. 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, 1997, management's analysis calculated
the surplus to be $260,643. At December 31, 1996, management calculated the
surplus to be $100,000.
The following table presents the allocation of the Allowance for Loan Losses as
of December 31, 1997 and 1996.
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
% of % of
Loss Loss
Amount Allocated Amount Allocated
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $125,426 11.50% $93,192 10.86%
Real Estate Mortgage 191,501 17.56% 202,492 23.59%
SBA - Unguaranteed 247,117 22.66% 174,092 20.28%
Commercial 201,296 18.46% 245,233 28.57%
Consumer 64,747 5.94% 43,262 5.04%
Unallocated 260,643 23.90% 100,000 11.65%
---------- ------- -------- -------
Total Allowance for Loan Losses $1,090,730 100.00% $858,271 100.00%
=========== ======= ========= =======
</TABLE>
The Bank had four properties classified as Other Real Estate Owned totaling
$794,361 as of December 31, 1997. The largest of these properties consists of 95
acres of land in Cherokee County with a balance of $510,047 and an appraised
value of $515,000. The property is currently under a contract which would net
the Bank approximately $700,000 and is scheduled to close by July 31, 1998. Two
of the other four properties are scheduled to be sold during March 1998 with no
loss. Additionally, no material loss is anticipated on the resolution of the
fourth property. As of December 31, 1997, the Bank had repossessed 24 vehicles
with fair value totaling $141,155. No material loss is anticipated on the sale
of these vehicles.
At December 31, 1997, the Bank had eight borrowers on nonaccrual status in the
amount of $1,460,262 or 2.04% of total loans compared to $1,444,709 or 2.30% of
total loans at December 31, 1996. One borrower accounts for $721,798 or 49% of
total nonaccrual loans. It is anticipated that this borrower will be current by
June 1998. Another borrower had two construction loans totaling $208,283 at
December 31, 1997. One of these loans paid off in full in January 1998. The
other was foreclosed in January 1998 and the property is scheduled to be sold
with no loss in March 1998. The remaining loans average approximately $88,000
each. No specific reserves have been allocated on nonaccrual loans because
management believes that the collateral is adequate and no impairment exists.
Two loans, totaling $356,666 were past due greater than 90 days and were still
accruing as of December 31, 1997, due to anticipated payoffs. There were no
loans past due greater than 90 days and accruing interest as of December 31,
1996.
4
<PAGE>
OTHER INCOME
Other income was $1,431,349 for the year ended December 31, 1997, compared to
$1,286,452 for the year ended December 31, 1996. Other income for 1997 consisted
primarily of gains on sales of SBA loans of $825,569 and service charges on
deposit accounts of $381,427. 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.
Gains on the sales of loans represent a recurring source of income for the Bank.
They are dependent upon the Bank's ability to originate SBA guaranteed loans, as
well as the market price for such loans. During 1997, SBA sales totaled $9.6
million compared to sales of $6.1 million in 1996, representing a 57% increase.
Gains on sales of loans increased to $825,569 in 1997 compared to $791,793 in
1996, representing a 4.3% increase. Effective January 1, 1997, the Bank adopted
Statement of Financial Accounting Standards ("SFAS") No. 125 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
The new standard accounts for gains on sales of SBA loans in a more conservative
manner than the rules in place prior to 1997. The Bank anticipates approximately
the same level of income from the sale of SBA loans in 1998. ("See Forward-
Looking Statement.")
During 1997, service charges on deposit accounts increased due to the increase
in transaction accounts that are assessed service charges as well as higher
fees. For example, fees on checks returned due to insufficient funds were
increased to $25 from $20 per check during 1997. Service charge income for the
year ended December 31, 1997 was $381,427, a 38% increase compared to $276,305
for the year ended December 31, 1996. Management believes service charges on
deposit accounts will continue to increase in 1998 as a result of marketing
efforts towards increasing demand deposit and savings accounts as well as fee
increases. ("See Forward-Looking Statement.")
OTHER EXPENSE
Other expense for the year ended December 31, 1997 was $4,963,268, a 29%
increase compared to $3,839,716 for the year ended December 31, 1996. Other
expense is primarily composed of salaries and other personnel expenses,
occupancy and other miscellaneous operating expenses.
Salary expense and employee benefits was $2,106,356 for the year ended December
31, 1997, an 8% increase compared to $1,950,415 for the year ended December 31,
1996. At December 31, 1997, the Bank employed 49 full-time employees and 7
part-time employees, compared to 40 full-time employees and 6 part-time
employees at December 31, 1996. 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 and the expected opening
of a new branch in 1998.
Occupancy and equipment expense was $510,441 for the year ended December 31,
1997, a 5% decrease compared to $537,810 for the year ended December 31, 1996.
The new branch, which is scheduled to open in May 1998, is anticipated to cause
an increase in occupancy expense during 1998.
Net loss on sales of other real estate were $106,531 in 1997. The sale of one
SBA property accounts for 81% of the loss. Management anticipates no loss from
the disposition of other real estate owned as of December 31, 1997. (See
"Forward-Looking Statement.")
Other operating expense was $1,585,545 for the year ended December 31, 1997, a
17% increase compared to $1,351,491 for the year ended December 31, 1996. The
primary reason for the increase was increased
5
<PAGE>
legal fees of $236,473 in 1997 compared to $69,005 in 1996. The increased legal
fees relate to the resolution of nonperforming assets and litigation. Management
does not expect legal fees to be as high in 1998 and anticipates recovering some
of these fees from the Bank's bonding company. Additionally, the Bank invested
in improved technology and consultants to aid with the implementation. During
1996, 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 1998.
During 1997, the Bank recorded a nonrecurring loss of $654,395 as a result of a
fraudulent "check-kiting" scheme in which a customer was allowed to gain access
to deposited funds before the Bank was able to collect them from the institution
on which they were drawn. While management is diligently pursuing recovery of
this loss, it is uncertain whether recovery will be forthcoming. Management of
the Bank has implemented more stringent procedures in an effort to prevent such
a loss from occurring again.
For the years ended December 31, 1997 and 1996, the Company's effective tax rate
was 17% and 28%, respectively. The decrease in the effective tax rate during
1997 was attributable to increased deductions as well as a lower tax bracket due
to lower earnings.
Financial Condition
-------------------
Assets
Total assets as of December 31, 1997 were $87,609,352, compared to $75,612,198
as of December 31, 1996. This represents an increase in total assets of 16% for
1997. Total average assets for the year ended December 31, 1997 were
$83,484,669, an increase of 3% compared to $80,865,818 at December 31, 1996.
Investment securities, federal funds sold, interest-bearing deposits and other
investments accounted for 7% of total assets at December 31, 1997 and December
31, 1996. Non-earning assets accounted for 11% of total assets as of December
31, 1997, compared to 12% as of the end of 1996. Management emphasized the
investment of funds predominantly into loans during 1997 and 1996.
LOANS
The Bank's net loan portfolio for the year ended December 31, 1997 was
$71,620,734, an 18% increase compared to $60,879,170 for the year ended December
31, 1996. Outstanding loans for the year ended December 31, 1997 averaged
$65,733,060, a 19% increase compared to $55,373,204 for the year ended December
31, 1996. The growth is attributable to the continued loan demand the Bank has
experienced in the last few years as well as the Bank's aggressively working
toward changing the mix of earning assets. The loan portfolio carried an average
yield of 11.70% during 1997 and 11.69% during 1996. The majority of the Bank's
loans reprice immediately, monthly, or quarterly with changes in the prime rate.
6
<PAGE>
The following table presents the loan portfolio stratified by type and the
corresponding percentage of total loans as of December 31, 1997 and 1996.
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------------
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
----------- -------- --------- ---------
<S> <C> <C> <C> <C>
Real Estate Construction $17,635,088 24.25% $9,606,039 15.56%
Real Estate Mortgage 21,649,051 29.77% 20,872,411 33.81%
SBA - Unguaranteed 16,774,339 23.07% 13,698,354 22.19%
Commercial 10,983,107 15.11% 13,101,300 21.22%
Consumer 5,669,879 7.80% 4,459,337 7.22%
----------- ------ ----------- ------
Total Loans $72,711,464 100.00% $61,737,441 100.00%
=========== ====== =========== ======
</TABLE>
Deposits
Total deposits as of December 31, 1997 were $78,483,832, a 15% increase compared
to $68,397,118 as of December 31, 1996. Average outstanding interest-bearing
deposits were $65,728,665 for 1997, a .8% increase compared to $65,232,402 for
1996. Interest-bearing deposits cost the Bank an average of 5.42 % during 1997,
compared to 5.74% for 1996. Certain high-yielding certificates of deposit
repriced during the year at lower rates, resulting in a decrease in cost of
funds. Average noninterest-bearing demand deposits were $9,622,379 in 1997, a
13% increase compared to $8,480,285 for 1996.
Total time deposits represented 66% of total deposits at December 31, 1997,
compared to 69% at the end of 1996. Time deposits averaged 68% of total
average deposits for 1997, compared to 71% during 1996. The average cost of time
deposits decreased to 6.09% during 1997 from 6.39% during 1996, while the cost
of other funds increased to 3.03% during 1997 as compared to 2.98% during 1996.
During 1997, the Bank utilized available overnight credit lines in the form of
Federal Home Loan Bank advances and Federal Funds Purchased. The borrowings
averaged $314,574 during the year and had an average cost of funds of 5.65%.
Management anticipates the utilization of the lines in the future as a funds
management tool.
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 1997, federal funds sold, interest-bearing deposits and other
investments averaged $4,252,140 compared to average overnight investments of
$12,279,168 in 1996. Management intentionally managed liquidity more actively to
improve the yield on assets while maintaining more than sufficient funds
necessary 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,
1997, the interest rate sensitivity analysis was as follows:
<TABLE>
<CAPTION>
Repricing Within
------------------------------------------------------------------------------------
0-90 Days 91-180 Days 180-365 Days >1 Yr. - 5 Yrs. > 5 Yrs. Total
------------------------------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment Securities $0 $0 $46 $518 $38 $602
Federal Funds Sold, Interest-Bearing
Deposits and other Investments 5,022 0 0 0 0 5,022
Loans 53,485 700 528 5,713 11,195 71,621
-------- ------ ------ ------ ------- -------
Total Earning Assets $58,507 $700 $574 $6,231 $11,233 $77,245
======= ====== ====== ====== ======= =======
Interest Bearing Demand Deposits $13,114 $0 $0 $0 $0 $13,114
Savings Deposits 2,250 0 0 0 0 2,250
Certificates of Deposits 15,240 10,170 9,005 17,082 0 51,497
-------- ------ ------ ------ ------- -------
Total Interest Bearing Liabilities $30,604 $10,170 $9,005$ $17,082 $0 $66,861
======= ====== ====== ====== ======= =======
Interest Sensitivity GAP $27,903 ($9,470) ($8,431) ($10,851) $11,233 $10,384
Cumulative GAP $27,903 $18,433 $10,002 ($849) $10,384
% of Earning Assets to
Interest Bearing Liabilities 191.17% 6.88% 6.37% 36.48% N/A
Cumulative % of Earning
Assets to Interest
Bearing Liabilities 191.17% 145.21% 120.09% 98.73% 115.53%
% of Cumulative GAP to Total
Earning Assets 36.12% 23.86% 12.95% -1.10% 13.44%
</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 8.06% at
December 31, 1997, as compared to 8.69% at December 31, 1996. The Company's
common stock had a book value per share of $12.13 at December 31, 1997 compared
to $11.90 at December 31, 1996. In January 1997, 30,500 shares of stock were
issued as a result of the exercise of certain directors' warrants, resulting in
a capital infusion of $280,000.
There are two federal measures of capital adequacy for national banks and their
bank holding companies: risk-based capital guidelines and the leverage ratio.
The risk-based capital guidelines developed by regulatory authorities assign
weighted levels of risk to asset categories to measure capital adequacy. These
guidelines established a minimum requirement of 8.00% of total capital to risk-
adjusted assets. 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.
The following table sets forth information with respect to the risk-based and
leverage ratios for the Bank at December 31, 1997, when compared to minimum
ratios required by regulation. The Company's capital ratios are similar to
those of the Bank and exceed the minimum risk-weighted requirements of the
Federal Reserve Bank.
<TABLE>
<CAPTION>
AMOUNT RATIO
------- -----
(in thousands)
<S> <C> <C>
RISK-BASED CAPITAL RATIOS:
Tier 1 Capital $6,584 8.98%
Minimum Requirement per regulations 2,934 4.00%
------ -----
Excess $3,650 4.98%
====== =====
Tier 1 and Tier 2 Capital $7,511 10.24%
Minimum Requirement per regulations 5,868 8.00%
------ -----
Excess $1,643 2.24%
====== =====
LEVERAGE RATIOS:
Tier 1 Capital $6,584 7.53%
Minimum Requirement per regulations 3,498 4.00%
------ -----
Excess $3,086 3.53%
====== =====
</TABLE>
9
<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. (See "Forward-Looking Statement.")
FORWARD-LOOKING STATEMENT
The foregoing statements are forward-looking statements which reflect
significant assumptions and subjective judgments believed by management to be
reasonable as of the date of this Report. They do 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 statements 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.
10
<PAGE>
MARKET PRICE AND DIVIDEND INFORMATION
As of December 31, 1997, there were approximately 650 shareholders of record and
582,304 shares of the Company's common stock outstanding. Since the first
quarter of 1996, the investment banking firm of J.C. Bradford and Co. has acted
as principal market-maker for the common stock of First Cherokee Bancshares,
Inc. 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, 1996.
<TABLE>
<CAPTION>
SALES PERIOD SALES PRICE
---------------- ----------------
CALENDAR PERIOD HIGH LOW CALENDAR PERIOD HIGH LOW
- ---------------- -------- ------ ---------------- ------ ------
1997 1996
- ---- ----
<S> <C> <C> <C> <C> <C>
First Quarter $16.50 $13.50 First Quarter $15.00 $11.00
Second Quarter $16.50 $15.00 Second Quarter $18.25 $14.50
Third Quarter $18.25 $16.50 Third Quarter $18.37 $17.00
Fourth Quarter $18.00 $17.00 Fourth Quarter $17.00 $14.00
</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.
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, 1997, the Bank could pay approximately $636,000 to
the Company in dividends without obtaining prior approval. The Company does not
anticipate paying cash 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, 1997 and 1996, 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, 1997.
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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
January 16, 1998
12
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
Assets
------
<TABLE>
<CAPTION>
1997 1996
--------------------- ----------------
<S> <C> <C> <C>
Cash and due from banks, including reserve requirements
of $327,000 and $190,000 $ 811,253 2,518,342
Interest-bearing deposits with banks 5,021,671 3,865,532
---------- ----------
Cash and cash equivalents 5,832,924 6,383,874
Securities available for sale 602,403 793,735
Other investments 697,800 650,800
Loans, net 71,620,734 60,879,170
Premises and equipment, net 3,380,329 2,017,236
Accrued interest receivable and other assets 5,475,162 4,887,383
---------- ----------
$ 87,609,352 75,612,198
========== ==========
Liabilities and Stockholders' Equity
--------------------------------------
Deposits:
Demand $ 11,622,913 8,034,616
Interest-bearing demand 13,114,251 10,751,941
Savings 2,249,558 2,299,246
Time 43,439,801 40,635,475
Time, in excess of $100,000 8,057,309 6,675,840
---------- ----------
Total deposits 78,483,832 68,397,118
Federal Home Loan Bank advances 1,000,000 -
Accrued interest payable and other liabilities 1,061,621 646,497
---------- ----------
Total liabilities 80,545,453 69,043,615
---------- ----------
Commitments
Stockholders' equity:
Common stock, par value $1, authorized 10,000,000 shares, issued
591,544 and 561,044 shares, outstanding 582,304 and 551,804 shares 591,544 561,044
Additional paid-in capital 5,273,257 5,026,457
Retained earnings 1,281,422 1,060,538
Unrealized gain on securities available for sale, net of tax 1,676 4,544
---------- ----------
7,147,899 6,652,583
Less treasury stock at cost, 9,240 shares (84,000) (84,000)
---------- ----------
Total stockholders' equity 7,063,899 6,568,583
---------- ----------
$ 87,609,352 75,612,198
========== ==========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
Interest income:
<S> <C> <C> <C> <C>
Interest and fees on loans $ 7,691,664 6,473,525 6,265,591
Interest on federal funds sold 3,371 26,941 37,254
Interest on deposits with other banks 227,095 633,184 543,420
Interest and dividends on investments:
U.S. Government agencies and mortgage-backed 43,540 84,357 195,914
Other 39,660 36,497 31,167
--------- --------- ---------
Total interest income 8,005,330 7,254,504 7,073,346
--------- --------- ---------
Interest expense:
Interest on deposits:
Demand 377,075 310,870 341,244
Savings 57,110 65,073 72,729
Time 3,130,787 3,367,818 3,108,714
--------- --------- ---------
3,564,972 3,743,761 3,522,687
Interest on FHLB advances and federal funds purchased 17,770 - -
--------- --------- ---------
Total interest expense 3,582,742 3,743,761 3,522,687
--------- --------- ---------
Net interest income 4,422,588 3,510,743 3,550,659
Provision for loan losses 623,738 373,510 255,471
--------- --------- ---------
Net interest income after provision for loan losses 3,798,850 3,137,233 3,295,188
--------- --------- ---------
Other income:
Service charges on deposit accounts 381,427 276,305 214,724
Gains on sales of loans, net 825,569 791,793 1,062,554
Miscellaneous 224,353 218,354 164,150
--------- --------- ---------
Total other income 1,431,349 1,286,452 1,441,428
--------- --------- ---------
Other expenses:
Salaries and employee benefits 2,106,356 1,950,415 1,608,589
Occupancy 510,441 537,810 501,061
Loss on sales of other real estate 106,531 - -
Other operating 1,585,545 1,351,491 996,724
Nonrecurring loss on deposit account 654,395 - -
--------- --------- ---------
Total other expenses 4,963,268 3,839,716 3,106,374
--------- --------- ---------
Earnings before income taxes 266,931 583,969 1,630,242
Income tax expense 46,047 165,749 552,776
--------- --------- ---------
Net earnings $ 220,884 418,220 1,077,466
========= ========= =========
Basic earnings per share $ 0.38 0.76 1.95
========= ========= =========
Diluted earnings per share $ 0.33 0.68 1.85
========= ========= =========
</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, 1997, 1996 AND 1995
<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> <C>
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
Exercise of stock warrants 30,500 246,800 - - - 277,300
Change in unrealized gain
(loss) on securities available
for sale, net of tax - - - (2,868) - (2,868)
Net earnings - - 220,884 - - 220,884
------- ---------- --------- ------------- -------- ---------
Balance, December 31, 1997 $ 591,544 5,273,257 1,281,422 1,676 (84,000) 7,063,899
======= ========== ========= ============= ======== =========
</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, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 220,884 418,220 1,077,466
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Depreciation, amortization and accretion 212,046 128,716 189,344
Provision for loan losses 623,738 373,510 255,471
Gain on sales of loans, net (825,569) (791,793) (1,062,554)
Deferred income tax benefit (57,924) (120,718) (74,789)
Loss on sales of other real estate 106,531 - -
Change in:
Interest receivable (25,964) (17,526) (128,745)
Other assets (330,402) 888,235 (1,231,630)
Interest payable 10,977 (590) 120
Other liabilities 404,147 64,562 (139,583)
----------- ----------- -----------
Net cash provided (used) by operating activities 338,464 942,616 (1,114,900)
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from maturities and calls of securities
available for sale 185,236 5,694,188 2,735,402
Purchases of securities available for sale - (5,450,344) (495,441)
Purchases of other investments (47,000) (58,500) (188,500)
Proceeds from sales of loans 9,569,405 6,116,575 7,222,903
Net increase in loans (20,583,384) (12,894,896) (15,325,100)
Purchases of premises and equipment (1,539,420) (150,024) (119,930)
Proceeds from sales of other real estate 194,066 79,277 -
Improvements to other real estate (32,331) (75,695) (4,300)
----------- ----------- -----------
Net cash used by investing activities (12,253,428) (6,739,419) (6,174,966)
----------- ----------- -----------
Cash flows from financing activities:
Net change in demand and savings deposits 5,900,919 (3,159,237) 7,385,093
Net change in time deposits 4,185,795 (4,564,646) 11,724,368
Proceeds from FHLB advances 1,000,000 - -
Proceeds from exercise of stock warrants 277,300 - -
----------- ----------- -----------
Net cash provided (used) by financing activities 11,364,014 (7,723,883) 19,109,461
----------- ----------- -----------
Net change in cash and cash equivalents (550,950) (13,520,686) 11,819,595
Cash and cash equivalents at beginning of year 6,383,874 19,904,560 8,084,965
----------- ----------- -----------
Cash and cash equivalents at end of year $ 5,832,924 6,383,874 19,904,560
=========== =========== ===========
Supplementary disclosures of cash flow information:
Cash paid during the year for:
Interest $ 3,571,765 3,744,351 3,522,567
Income taxes $ 355,000 275,000 963,000
Noncash investing activities:
Change in unrealized gain (loss) on securities
available for sale, net of tax $ (2,868) (2,397) 89,675
Transfer of loans to other real estate $ 1,018,383 1,092,545 934,219
Financed sales of other real estate $ 544,137 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 Office
of 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 1996 amounts have been reclassified to
conform to the 1997 presentation.
The accounting principles followed by the Company and the Bank, 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, 1997 and 1996, all
investment securities were classified as available for sale.
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 from sales
of 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.
A loan is considered 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 when received.
Effective January 1, 1997, the Bank adopted Statement of Financial Accounting
Standards ("SFAS") No. 125 "Accounting for Transfers and Servicing of
Financial Assets and Extinguishment of Liabilities." The standard requires,
among other things, that servicing assets and liabilities be measured by the
amortization in proportion to and over the period of estimated net servicing
income and that servicing assets and liabilities should be assessed for
impairment or increased obligation based on their fair values. The standard
also requires the recognition of two separate categories of assets, servicing
assets and interest-only strips receivable, in instances in which excess
servicing fees are recognized.
When the bank sells the portion of a loan guaranteed by the U.S. Small
Business Administration ("SBA") the investment in the entire loan is
allocated between the guaranteed and unguaranteed portions of the loan, as
well as the servicing assets and interest-only strip receivable, based upon
their respective fair market values at the date of sale. Gains on sales of
loans, calculated by taking the net proceeds from the sale less the allocated
sold portion of the loan, are presented in the statement of earnings net of
brokerage expenses.
Servicing assets and interest-only strips receivable recognized from the
sales of the portion of loans guaranteed by SBA with the retention of loan
servicing are carried at the present value of estimated future net servicing
income over the estimated lives of the related SBA loans, less amounts
amortized. Amortization of these assets is computed using a level yield
method over the estimated remaining lives of the related SBA loans taking
into consideration assumed prepayment patterns. Servicing assets and
interest-only strips receivable are measured for impairment periodically via
stratification of the assets by predominant risk characteristic such as loan
term and interest rate. No valuation allowances were required based upon the
evaluation for impairment at December 31, 1997. There were no SBA loans held
for sale at December 31, 1997 and 1996.
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 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 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,
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 3 - 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 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
----------------------
SFAS No. 128 "Earnings Per Share" became effective for the Company for the
year ended December 31, 1997. This new standard specifies the computation,
presentation and disclosure requirements for earnings per share and is
designed to simplify previous earnings per share standards and to make
domestic and international practices more compatible. 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.
SFAS No. 128 requires the presentation on the face of the statement of
earnings of net earnings per share with and without the dilutive effects of
potential common stock issuances from instruments such as options and
warrants. Additionally, the new statement requires the reconciliation of the
amounts used in the computation of both "basic earnings per share" and
"diluted earnings per share" for the years ended December 31, 1997, 1996 and
1995 as follows:
19
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
Net Earnings Per Share, continued
---------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
----------------- ------------------- ----------------
<S> <C> <C> <C>
Basic earnings per share $220,884 580,390 $ 0.38
=======
Effect of dilutive securities:
Stock options - 10,401
Warrants - 72,357
-------- -------
Diluted earnings per share $220,884 663,148 $ 0.33
======== ======= =======
FOR THE YEAR ENDED DECEMBER 31, 1996
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------ ----------------
Basic earnings per share $ 418,220 551,804 $ 0.76
=======
Effect of dilutive securities:
Stock options - 7,378
Warrants - 59,056
--------- --------
Diluted earnings per share $ 418,220 618,238 $ 0.68
======== ======== ========
FOR THE YEAR ENDED DECEMBER 31, 1995
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------ ----------------
Basic earnings per share $ 1,077,466 551,804 $ 1.95
=======
Effect of dilutive securities:
Stock options - 3,294
Warrants - 26,367
----------- -------
Diluted earnings per share $ 1,077,466 581,465 $ 1.85
=========== ======= =======
</TABLE>
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS No.
130 establishes standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. SFAS
No. 131 specifies the presentation and disclosure of operating segment
information reported in the annual report and interim reports issued to
stockholders. The provisions of both statements are effective for fiscal years
beginning after December 15, 1997. The management of the Company believes that
the adoption of these statements will not have a material impact on the
Company's financial position, results of operations or liquidity.
20
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair value of securities available for sale
at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C><C> <C> <C> <C>
1997
----
U.S. Government agencies $ 500,000 - 469 499,531
Mortgage-backed securities 99,700 3,172 - 102,872
------- ----- ---------- -------
$ 599,700 3,172 469 602,403
======= ===== ========== =======
1996
----
U.S. Government agencies $ 500,000 - - 500,000
Mortgage-backed securities 286,405 7,330 - 293,735
------- ----- ---------- -------
$ 786,405 7,330 - 793,735
======= ===== ========== =======
</TABLE>
The amortized cost and estimated fair value of securities available for sale
at December 31, 1997, 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>
Amortized Estimated
Cost Fair Value
------------ --------------
<S> <C> <C> <C>
One to five years $ 500,000 499,531
Mortgage-backed securities 99,700 102,872
------- -------
$ 599,700 602,403
======= =======
</TABLE>
There were no sales of securities during 1997, 1996 and 1995.
Securities with a carrying value of approximately $546,000 and $608,000 at
December 31, 1997 and 1996, respectively, were pledged to secure public
deposits as required by law.
21
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS
Major classifications of loans at December 31, 1997 and 1996 are presented
below:
<TABLE>
<CAPTION>
1997 1996
----------------- -------------
<S> <C> <C> <C>
Commercial $ 10,983,107 13,101,300
SBA - unguaranteed 16,774,339 13,698,354
Real estate - mortgage 21,649,051 20,872,411
Real estate - construction 17,635,088 9,606,039
Installment and other consumer 5,669,879 4,459,337
---------- ----------
Total loans 72,711,464 61,737,441
Less allowance for loan losses 1,090,730 858,271
---------- ----------
Total net loans $ 71,620,734 60,879,170
========== ==========
</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, 1997 and 1996 of approximately $29,588,000 and $28,020,000,
respectively. Servicing assets amounted to $486,000 and $974,000 at December
31, 1997 and 1996. Interest only strips receivable totaled $598,000 at
December 31, 1997.
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, 1997, 1996 and 1995 is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ----------
<S> <C> <C> <C>
Balance at beginning of year $ 858,271 685,706 461,030
Provision charged to operations 623,738 373,510 255,471
Loans charged off (556,332) (328,253) (64,094)
Recoveries 165,053 127,308 33,299
--------- -------- -------
Balance at end of year $ 1,090,730 858,271 685,706
========= ======== =======
</TABLE>
22
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------
<S> <C> <C> <C>
Land $ 586,885 185,202
Buildings and improvements 2,085,187 1,834,311
Furniture, fixtures and equipment 835,839 569,267
Construction in progress 635,193 14,904
--------- ---------
4,143,104 2,603,684
Less accumulated depreciation 762,775 586,448
--------- ---------
$ 3,380,329 2,017,236
========= =========
</TABLE>
Depreciation expense was approximately $176,000, $152,000 and $135,000 for
the years ended December 31, 1997, 1996 and 1995, respectively.
(5) TIME DEPOSITS
At December 31, 1997 the scheduled maturities of time deposits are as
follows:
<TABLE>
<S> <C> <C>
1998 $29,197,562
1999 11,054,154
2000 6,146,136
2001 2,290,002
2002 and thereafter 2,809,256
----------
$51,497,110
==========
</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 collateralized 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. At December 31, 1997, the Bank had one variable rate (currently 6.5%)
advance outstanding totaling $1,000,000 which matures in December 1998. The
Bank had no borrowings from the FHLB outstanding as of December 31, 1996.
(7) INCOME TAXES
The following is an analysis of income tax expense for the years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------- -----------
<S> <C> <C> <C> <C>
Current $103,971 286,467 627,565
Deferred (57,924) (120,718) (74,789)
------- -------- -------
$ 46,047 165,749 552,776
======= ======== =======
</TABLE>
23
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) INCOME TAXES, CONTINUED
The differences between income tax expense and the amount computed by
applying the statutory federal income tax rate to earnings before taxes for
the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ---------- ----------
<S> <C> <C> <C> <C>
Pretax income at statutory rates $90,756 198,549 554,282
Add (deduct):
Increase in cash surrender value of life insurance (25,817) (14,208) (14,634)
State taxes, net of federal tax effect (17,996) (14,918) 4,376
Other (896) (3,674) 8,752
------- ------- -------
$46,047 165,749 552,776
======= ======= =======
</TABLE>
The following summarizes the components of the net deferred tax asset. The
net deferred tax asset is included in other assets at December 31, 1997 and
1996.
<TABLE>
<CAPTION>
1997 1996
------------------ -----------
Deferred tax assets:
<S> <C> <C> <C>
Allowance for loan losses $339,027 277,305
Deferred gains on SBA loans 102,643 149,223
State tax credits 28,263 14,918
Deferred gains on sales of other real estate 8,053 19,681
Nonaccrual loan interest 46,529 19,334
Deferred compensation 32,197 18,742
Core deposit intangible 24,920 20,498
------- -------
Gross deferred tax asset 581,632 519,701
------- -------
Deferred tax liabilities:
Premises and equipment (38,072) (34,065)
Unrealized gain on securities available for sale (1,027) (2,785)
------- -------
Gross deferred tax liability (39,099) (36,850)
------- -------
Net deferred tax asset $542,533 482,851
======= =======
</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, 1997, the Bank could pay approximately $636,000 to the
Company in dividends without obtaining prior regulatory approval.
On January 17, 1995, 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.
24
<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 (adjusted for stock dividends) of $9.09 per share. These
warrants expire in November 1999. During 1997, 30,500 warrants were exercised
at $9.09 per share.
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. All options are vested immediately at the date
of grant.
A summary status of the Company's Employee Stock Plan as of December 31, 1997
and 1996, and changes during the years ending on those dates, is presented
below:
<TABLE>
<CAPTION>
1997 1996
-------- -------
Wtd. Avg. Wtd. Avg.
Option Exercise Option Exercise
Shares Price Shares Price
------------- ------------ ---------- -------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 24,531 $ 9.09 24,531 $9.09
Granted during the year 5,000 $14.00 - -
Canceled during the year (2,200) $ 9.09 - -
------ ------
Outstanding, end of year 27,331 $ 9.99 24,531 $9.09
====== ======
Options exercisable at year end 27,331 $ 9.99 24,531 $9.09
====== ======
Weighted average fair value of options
granted during the year $ 6.56
======
</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 plans 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. As there were no awards granted in
1996, only proforma effects of 1997 and 1995 awards are presented below.
<TABLE>
<CAPTION>
1997 1995
-------- --------
<S> <C> <C> <C> <C>
Net earnings As reported $220,884 1,077,466
Proforma $200,548 1,041,760
Basic earnings per share As reported $ 0.38 1.95
Proforma $ 0.35 1.89
Diluted earnings per share As reported $ 0.33 1.85
Proforma $ 0.30 1.79
</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 1997 and 1995: volatility of .18% and .01%,
respectively, no dividend yield, a risk free interest rate of 5.9% and 5.0%,
respectively, and an expected life of 10 years.
25
<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, 1997:
<TABLE>
<CAPTION>
Warrants Options
------------- ------------------
<S> <C> <C>
Number outstanding 165,850 27,331
Range of exercise prices $ 9.09 $9.09 - $ 14.00
Weighted average exercise price $ 9.09 $ 9.99
Weighted average remaining
contractual life (years) 2.00 5.42
</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, 1997 and 1996, the cash surrender value of the insurance contracts was
approximately $1,461,000 and $1,385,000, and is included as a component of
other assets. Expenses incurred for benefits were approximately $21,000,
$18,000 and $17,000 during 1997, 1996 and 1995, respectively.
The Company maintains a 401(k) profit sharing plan, 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 $36,000, $26,000 and
$29,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
(10) RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, deposits from directors, executive officers
and their related interests aggregated approximately $1,833,000 and
$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 interests, 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 1997:
<TABLE>
<S> <C> <C> <C>
Balance at December 31, 1996 $ 1,382,000
New loans 2,457,000
Repayments (1,862,000)
Balance at December 31, 1997 $ 1,977,000
==========
</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 (all
as defined). Management believes, as of December 31, 1997, that the Bank
meets all capital adequacy requirements to which it is subject.
26
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) REGULATORY MATTERS, CONTINUED
As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation 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
--------- ------- --------- ----------- --------- -------------
AS OF DECEMBER 31, 1997
Total Capital
<S> <C> <C> <C> <C> <C> <C> <C>
(to Risk-Weighted Assets) $ 7,510,691 10.24% 5,867,832 8.00% 7,334,790 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) $ 6,583,970 8.98% 2,933,916 4.00% 4,400,874 6.00%
Tier 1 Capital
(to Average Assets) $ 6,583,970 7.53% 3,497,880 4.00% 4,372,350 5.00%
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%
</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, 1997, 1996 and 1995, rental payments of
$57,054, $55,393 and $55,123 were made to the director. Additionally, the
Bank leases certain furniture, fixtures and equipment under operating leases
from unaffiliated lessors which expired in January 1997. Total rent expense
for both affiliated and unaffiliated lessors was approximately $147,000,
$176,000 and $215,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
27
<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
<S> <C>
December 31,
- --------------------
1998 $ 58,765
1999 60,529
2000 62,344
2001 64,215
2002 66,141
Thereafter 404,517
--------
</TABLE>
$716,511
========
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 to support financial instruments
with credit risk.
<TABLE>
<CAPTION>
Approximate
Contract
Amount
-----------------------
1997 1996
----------- ----------
<S> <C> <C> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 10,461,000 14,704,000
Standby letters of credit $ 316,000 242,000
</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, 1997 and 1996.
(13) NONRECURRING LOSS ON DEPOSIT ACCOUNT
During 1997, the Bank recorded a loss of $654,395 as a result of a "check-
kiting" scheme in which a customer was allowed to gain access to deposited
funds before the Bank was able to collect them from the institution on which
they were drawn. The Bank is involved in litigation to collect this amount,
however, the outcome of this litigation is unable to be determined at this
time.
28
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest and
other income for the years ended December 31, 1997, 1996 and 1995 are as
follows:
1997 1996 1995
-------- ------- -------
Legal and professional fees $357,640 123,558 56,658
Data processing $323,600 242,134 192,326
FDIC assessment $ 5,115 139,071 85,997
Stationery and supplies $ 85,914 87,310 68,548
Collection expense $ 29,774 87,714 48,589
Other real estate expense $112,890 54,186 57,759
(15) FIRST CHEROKEE BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
1997 1996
---------- ---------
ASSETS
------
Cash $ 11,888 11,382
Investment in bank subsidiary 7,052,011 6,557,201
--------- ---------
$7,063,899 6,568,583
========= =========
STOCKHOLDERS' EQUITY
---------------------
Stockholders' equity $7,063,899 6,568,583
========= =========
Statements of Earnings
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- ---------
<S> <C> <C> <C>
Interest income $ 3,206 - -
Equity in undistributed earnings of bank subsidiary 217,678 418,220 1,077,466
------- ------- ---------
Net earnings $220,884 418,220 1,077,466
======= ======= =========
</TABLE>
29
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) FIRST CHEROKEE BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION, CONTINUED
Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 220,884 418,220 1,077,466
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Equity in undistributed earnings of bank subsidiary (217,678) (418,220) (1,077,466)
-------- -------- ----------
Net cash provided by operating activities 3,206 - -
-------- -------- ----------
Cash flows from financing activities:
Proceeds from exercise of stock warrants 277,300 - -
Capital infusion to bank subsidiary (280,000) - -
-------- -------- ----------
Net cash used by financing activities (2,700) - -
-------- -------- ----------
Net change in cash 506 - -
Cash at beginning of the period $ 11,382 11,382 11,382
-------- -------- ----------
Cash at end of the period 11,888 11,382 11,382
======== ======== ==========
Noncash investing activities:
Change in unrealized gain (loss) of subsidiary's
securities available for sale, net of tax $ (2,868) (2,397) 89,675
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to disclose 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 Cash Equivalents
-------------------------
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.
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.
30
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS, CONTINUED
Servicing Assets and Interest-Only Strips Receivable
----------------------------------------------------
The fair value of servicing assets and interest-only strips receivable is
estimated by discounting future net servicing income over the estimated
life of the related loan adjusted for changes in prepayment speeds of the
related loans.
Deposits
--------
The fair value of demand deposits, savings accounts and 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.
FHLB Advances
-------------
Because FHLB advances are made at variable rates, the carrying value is a
reasonable estimate of fair value.
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, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
----------------- ----------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 5,832,924 5,832,924 6,383,874 6,383,874
Securities available for sale $ 602,403 602,403 793,735 793,735
Other investments $ 697,800 697,800 650,800 650,800
Loans, net $ 71,620,734 71,380,704 60,879,170 60,814,127
Servicing assets $ 436,000 436,000 974,000 974,000
Interest-only strips receivable $ 598,000 598,000 - -
Liabilities:
Deposits $ 78,483,832 78,727,000 68,397,118 68,815,000
FHLB advances $ 1,000,000 1,000,000 - -
Unrecognized financial instruments:
Commitments to extend credit $ 10,461,000 10,461,000 14,704,000 14,704,000
Standby letters of credit $ 316,000 316,000 242,000 242,000
</TABLE>
31
<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 Sales, Inc.
EXECUTIVE OFFICERS
J. Stanley Fitts --
Carl C. Hames, Jr .-- Reeves Floral Products, Inc.
Chief Executive Officer
Russell L. Flynn --
R. O. Kononen, Jr. -- Century 21 Cherokee Realty
President
Carl C. Hames, Jr. --
Kitty A. Kendrick -- First National Bank of Cherokee
Executive Vice President/
Chief Financial Officer C. Garry Haygood --
Haygood Contracting, Inc.
Neal E. Davies --
Executive Vice President/ Thomas D. Hopkins, Jr. --
Asset Quality Hopkins and Son, Inc.
Bobby R. Hubbard --
Lockheed Martin Aeronautical System
R. O. Kononen, Jr. --
First National Bank of Cherokee
Dennis M. Lord --
Bay, Lingerfelt & Lord, Inc.
Larry R. Lusk --
Industrial and Commercial Developer
Stuart R. Tasman --
Doctor of Optometry
<PAGE>
FIRST CHEROKEE BANCSHARES, INC.
GENERAL INFORMATION
ANNUAL MEETING
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 Sales, Inc.
GENERAL COUNSEL J. Stanley Fitts-
Powell, Goldstein, Frazer & Reeves Floral Products, Inc.
Murphy, LLP Russell L. Flynn-
Century 21 Cherokee Realty
INDEPENDENT CERTIFIED Carl C. Hames, Jr.-
PUBLIC ACCOUNTANTS First National Bank of Cherokee
Porter, Keadle, Moore, LLP C. Garry Haygood-
Haygood Contracting, Inc.
EXECUTIVE OFFICERS Thomas D. Hopkins, Jr.-
Carl C. Hames, Jr.- Hopkins and Son, Inc.
Chief Executive Officer/President Bobby R. Hubbard-
Lockheed Martin Aeronautical
Kitty A. Kendrick- System
Executive Vice President/ Dennis M. Lord-
Chief Financial Officer Bay, Lingerfelt & Lord, Inc.
Larry R. Lusk-
Industrial & Commercial Developer
Stuart R. Tasman-
Doctor of Optometry
Date: April 22, 1998
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 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 16, 1998, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of First
Cherokee Bancshares, Inc. on Form 10-K for the year ended December 31, 1997. We
hereby consent to the incorporation by reference of said report in the
Registration Statement of First Cherokee Bancshares, Inc. on Form S-3 (File No.
333-16885, as amended, effective January 7, 1997).
/s/PORTER KEADLE MOORE, LLP
Atlanta, Georgia
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 811,253
<INT-BEARING-DEPOSITS> 5,021,671
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 602,403
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 71,620,734
<ALLOWANCE> 1,090,730
<TOTAL-ASSETS> 87,609,352
<DEPOSITS> 78,483,832
<SHORT-TERM> 1,000,000
<LIABILITIES-OTHER> 1,061,621
<LONG-TERM> 0
0
0
<COMMON> 591,544
<OTHER-SE> 6,472,355
<TOTAL-LIABILITIES-AND-EQUITY> 87,609,352
<INTEREST-LOAN> 7,691,664
<INTEREST-INVEST> 83,200
<INTEREST-OTHER> 230,466
<INTEREST-TOTAL> 8,005,330
<INTEREST-DEPOSIT> 3,564,972
<INTEREST-EXPENSE> 3,582,742
<INTEREST-INCOME-NET> 4,422,588
<LOAN-LOSSES> 623,738
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,963,268
<INCOME-PRETAX> 266,931
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220,884
<EPS-PRIMARY> $0.38
<EPS-DILUTED> $0.33
<YIELD-ACTUAL> 11.22
<LOANS-NON> 1,460,262
<LOANS-PAST> 356,666
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 858,271
<CHARGE-OFFS> 556,332
<RECOVERIES> 165,053
<ALLOWANCE-CLOSE> 1,090,730
<ALLOWANCE-DOMESTIC> 830,087
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 260,643
</TABLE>
