SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
_ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____________ to ____________
Commission file number 0-18488
FIRST CHEROKEE BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
GEORGIA 58-1807887
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
9860 Highway 92, Woodstock, Georgia 30188
(Address of principal executive offices)
770-591-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
X Yes No
The number of shares outstanding of registrant's common stock par value $1.00
per share at September 30, 1998 was 553,804 shares.
Traditional Small Business Disclosure Format (check one): ___ Yes X No
<PAGE>
First Cherokee Bancshares, Inc.
Quarterly Report on Form 10-QSB
For the Quarter Ended September 30, 1998
Index
Page No.
Part I. Financial Information
Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet at September 30, 1998 2
Consolidated Statements of Earnings (unaudited)
for the nine months ended September 30, 1998 and 1997 3
Consolidated Statements of Earnings (unaudited)
for the three months ended September 30, 1998 and 1997 4
Consolidated Statements of Comprehensive Income (unaudited)
for the nine months ended September 30, 1998 and 1997 5
Consolidated Statements of Comprehensive Income (unaudited)
for the three months ended September 30, 1998 and 1997 6
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1998 and 1997 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
Item 7. Signatures 20
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Balance Sheet
September 30, 1998
(Unaudited)
Assets
Cash & due from banks, including $6,017,666
bearing interest .......................................... $ 9,372,587
Federal funds sold ............................................. 0
-
Total cash & cash equivalents ........................ 9,372,587
Investment securities available for sale,
at fair value ............................................. 592,646
Loans, less allowance for loan losses
of $1,403,874 ............................................. 78,814,480
Premises and equipment, net .................................... 3,831,854
Accrued interest receivable and other assets ................... 6,338,135
------------
Total Assets ............................... $ 98,949,702
============
Liabilities and Stockholders' Equity
Liabilities:
Deposits:
Interest-bearing deposits ................................. $ 75,994,661
Noninterest-bearing deposits .............................. 14,743,152
----------
Total deposits ....................................... 90,737,813
Accrued interest payable and other liabilities ................. 1,104,808
---------
Total Liabilities .......................... 91,842,621
Stockholders' Equity:
Common stock ($1 par value; 10,000,000
shares authorized, 591,544 shares issued) ................. 591,544
Additional paid-in-capital ..................................... 5,273,257
Retained earnings .............................................. 1,842,227
Treasury Stock (37,740 shares acquired
at cost) .................................................. (602,716)
Accumulated other comprehensive
income, net of tax ........................................ 2,769
-----
Total Stockholders' Equity ...................... 7,107,081
---------
Total Liabilities and Stockholders' Equity . $ 98,949,702
============
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Earnings
For the nine months ended September 30,
(Unaudited)
Interest income: 1998 1997
---------- ----------
Interest and fees on loans ...................... $5,920,810 $5,127,986
Interest on investment securities ............... 36,533 39,804
Interest on federal funds sold/overnight funds .. 238,418 182,890
---------- ----------
Total interest income ...................... 6,195,761 5,350,680
Interest expense on deposits ......................... 2,937,749 2,640,524
---------- ----------
Net interest income .................................. 3,258,012 2,710,156
Provision for loan losses ............................ 374,921 479,838
---------- ----------
Net interest income after provision
for loan losses ................................. 2,883,091 2,230,318
---------- ----------
Other income:
Gain on sale of investment securities ........... 0 0
Gain on sales of loans .......................... 1,029,760 1,037,856
Service charges on deposit accounts
and other income ........................... 774,001 644,878
Gain on sale of other assets .................... 40,036 0
---------- ----------
Total other income ................................... 1,843,797 1,682,734
---------- ----------
Other expense:
Salaries and employee benefits .................. 2,022,948 1,512,613
Occupancy ....................................... 506,784 373,433
Other operating expense ......................... 1,288,336 1,853,995
---------- ----------
Total other expense .................................. 3,818,068 3,740,041
---------- ----------
Earnings before income taxes ......................... 908,820 173,011
Income Tax expense ................................... 348,015 64,526
---------- ----------
Net earnings ......................................... $ 560,805 $ 108,485
========== ==========
Basic earnings per share ............................. $ 0.98 $ 0.19
========== ==========
Diluted earnings per share ........................... $ 0.85 $ 0.16
========== ==========
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Earnings
For the three months ended September 30,
(Unaudited)
Interest income: 1998 1997
----------- -----------
Interest and fees on loans ................... $ 2,008,289 $ 1,708,430
Interest on investment securities ............ 12,130 12,349
Interest on federal funds sold/overnight funds 111,089 59,675
----------- -----------
Total interest income ................... 2,131,508 1,780,454
Interest expense on deposits ...................... 1,027,575 910,887
----------- -----------
Net interest income ............................... 1,103,933 869,567
Provision for loan losses ......................... 101,811 187,703
----------- -----------
Net interest income after provision
for loan losses .............................. 1,002,122 681,864
----------- -----------
Other income:
Gain on sale of investment securities ........ 0 0
Gain on sales of loans ....................... 268,669 282,703
Service charges on deposit accounts
and other income ........................ 230,569 216,020
Gain on sale of other assets ................. 55,807 0
----------- -----------
Total other income ................................ 555,045 498,723
----------- -----------
Other expense:
Salaries and employee benefits ............... 727,141 473,276
Occupancy .................................... 191,734 125,918
Other operating expense ...................... 444,701 1,094,736
----------- -----------
Total other expense ............................... 1,363,576 1,693,930
----------- -----------
Earnings before income taxes ...................... 193,591 (513,343)
Income Tax expense ................................ 75,715 (194,339)
----------- -----------
Net earnings ...................................... $ 117,876 ($ 319,004)
=========== ===========
Basic earnings per share .......................... $ 0.21 ($ 0.55)
=========== ===========
Diluted earnings per share ........................ $ 0.18 ($ 0.55)
=========== ===========
See notes to consolidated financial statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Comprehensive Income
For the nine months ended September 30,
(Unaudited)
1998 1997
--------- ---------
Net earnings .......................................... $ 560,805 $ 108,485
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities available
for sale:
Unrealized gains (losses) arising during the
period, net of tax of $667 and $2,026, respectively 1,093 (3,321)
Less: Reclassification adjustment for gains (losses)
included in net earnings, net of tax ............... 0 0
--------- ---------
Other comprehensive income (loss) ..................... 1,093 (3,321)
--------- ---------
Comprehensive income .................................. $ 561,898 $ 105,164
========= =========
See Notes to Consolidated Financial Statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Comprehensive Income (Loss)
For the three months ended September 30,
(Unaudited)
1998 1997
---------- ---------
Net earnings (loss) ................................... $ 117,876 ($319,004)
Other comprehensive income, net of tax:
Unrealized gains on securities available
for sale:
Unrealized gains arising during the period, net
of tax of $831 and $1,611 respectively ............... 1,362 2,641
Less: Reclassification adjustment for gains
included in net earnings, net of tax ................. 0 0
--------- ---------
Other comprehensive income ............................. 1,362 2,641
--------- ---------
Comprehensive income (loss) ........................... $ 119,238 ($316,363)
========= =========
See Notes to Consolidated Financial Statements
<PAGE>
First Cherokee Bancshares, Inc.
Consolidated Statements of Cash Flows
For the nine months ended September 30,
(Unaudited)
1998 1997
------------ ------------
Cash flows from operating activities:
Net earnings .................................... $ 560,805 $ 108,485
Adjustments to reconcile net earnings to net cash
provided (used) in operating activities:
Depreciation, amortization and accretion ........ 147,883 77,656
Provision for loan losses ....................... 374,921 479,838
Provision for losses on other real estate ....... 0 118,866
Securities gains ................................ 0 0
Change in accrued interest payable and
other liabilities ............................... (956,813) (124,482)
Change in accrued interest receivable and
other assets .................................... (39,373) (1,074,849)
------------ ------------
Total adjustments ............................... (473,382) (522,971)
------------ ------------
Net Cash provided (used) by operating activities 87,423 (414,486)
Cash flows from investing activities:
Purchases of investment securities .............. (500,000) 0
Proceeds from sale of investment securities ..... 0 0
Proceeds from maturities and calls of investment 533,102 173,276
securities available for sale
Net change in loans ............................. (7,668,779) (8,891,675)
Purchases of premises and equipment ............. (647,348) (873,942)
------------ ------------
Net Cash used by investing activities ........... (8,283,025) (9,592,341)
Cash flows from financing activities:
Net change in deposits .......................... 12,253,981 9,695,707
Proceeds from exercise of stock warrants ........ 0 277,300
Purchase of treasury stock ...................... (518,716) 0
------------ ------------
Net Cash provided by financing activities ....... 11,735,265 9,973,007
Net change in cash and cash equivalents ......... 3,539,663 (33,820)
Beginning cash and cash equivalents ............. 5,832,924 6,383,874
------------ ------------
Ending cash and cash equivalents ................ $ 9,372,587 $ 6,350,054
Noncash investing activities:
Change in accumulated other comprehensive
income, net of tax .............................. $ 1,093 $ (3,321)
Transfer of loans to other real estate .......... $ 100,112 $ 1,071,097
Supplemental disclosure of cash flow information:
Interest Paid ................................... $ 2,955,138 $ 2,648,580
Income Taxes Paid ............................... $ 160,000 $ 325,000
See notes to consolidated financial statements
<PAGE>
FIRST CHEROKEE BANCSHARES, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 1998
NOTE (1) - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of First Cherokee
Bancshares, Inc. (the "Company") and its wholly-owned subsidiary, First National
Bank of Cherokee (the "Bank"). All significant accounts have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform
with current year presentation.
The accompanying unaudited interim consolidated financial statements reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the Company's financial position as of September 30, 1998, and the results of
its operations and its cash flows for the nine-month period then ended. All such
adjustments are normal and recurring in nature. The financial statements
included herein should be read in conjunction with the consolidated financial
statements and the notes thereto and the report of independent accountants
included in the Company's 1997 Annual Report on Form 10-KSB.
NOTE (2) - NET EARNINGS PER SHARE
Basic earnings per share is based on the weighted average number of common
shares outstanding during the period while the effects of potential common
shares outstanding during the period are included in diluted earnings per share.
The average market price during the year is used to compute equivalent shares.
All net earnings per share amounts have been restated to conform to the
provisions of SFAS No. 128.
Reconciliation of the amounts used in the computation of both "basic earnings
per share" and "diluted earnings per share" for the periods ended September 30,
1998 and 1997 are as follows:
For the nine months ended September 30, 1998:
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share .... $560,805 572,103 $ 0.98
Effect of dilutive securities
Stock options ............... 10,333
Warrants .................... 80,851
-------- -------- -----
Diluted earnings per share .. $560,805 663,287 $ 0.85
======== ======== =====
For the nine months ended September 30, 1997:
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share .... $108,485 579,857 $ 0.19
Effect of dilutive securities
Stock options ............... 9,680
Warrants .................... 69,790
-------- -------- -----
Diluted earnings per share .. $108,485 659,327 $ 0.16
======== ======== =====
<PAGE>
For the three months ended September 30, 1998:
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share .... $117,876 562,358 $ 0.21
Effect of dilutive securities
Stock options ............... 13,353
Warrants .................... 83,130
-------- -------- -----
Diluted earnings per share .. $117,876 658,841 $ 0.18
======== ======== =====
For the three months ended September 30, 1997:
Net Earnings Common Shares Per Share
(Numerator) (Denominator) Amount
------------ ------------- ---------
Basic earnings per share .... ($319,004) 582,304 ($0.55)
Effect of dilutive securities
Stock options ............... *
Warrants .................... *
-------- -------- -----
Diluted earnings per share .. ($319,004) 582,304 ($0.55)
======== ======== =====
* The effect of conversion of options and warrants would have an anti-dilutive
effect on earnings per share.
NOTE (3) - RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, "Reporting Comprehensive Income". This Statement establishes
standards for the reporting and display of comprehensive income and its
components in the financial statements. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. For the Company,
comprehensive income includes net income reported in the statements of earnings
and changes in the fair value of securities available for sale reported as a
component of stockholders' equity.
In February 1998, the Financial Accounting Standards Board issued Statement No.
132, "Employer's Disclosures about Pensions and Other Postretirement Benefits".
The new statement revises employers' disclosures about pension and other
postretirement benefit plans but does not change the measurement or recognition
provisions of those plans. Statement No. 132 provides additional information to
facilitate financial analysis and eliminates certain disclosures which are no
longer useful. The statement is effective for fiscal years beginning after
December 15, 1997. The statement is not expected to have a material impact on
the consolidated financial statements of the Company.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivative instruments by requiring that all
derivatives be recognized as assets and liabilities and measured at fair value.
This statement is effective for fiscal years beginning after June 15, 1999. The
Company does not believe the provisions of SFAS No.133 will have an impact on
the consolidated financial statements upon adoption.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
FORWARD LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-QSB and the
exhibits hereto which are not statements of historical fact constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act (the "Act"). In addition, certain statements in future
filings by the Company with the Securities and Exchange Commission, in press
releases, and in oral and written statements made by or with the approval of the
Company which are not statements of historical fact constitute forward-looking
statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (1) projections of revenues, income or loss,
earnings or loss per share, the payment or non-payment of dividends, capital
structure and other financial items; (2) statements of plans and objectives of
the Company or its management or Board of Directors, including those relating to
products or services; (3) statements of future economic performance; and (4)
statements of assumptions underlying such statements. Words such as "believes,"
"anticipates," "expects," "intends," "targeted," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements.
Forward-looking statements involve risks and uncertainties which may cause
actual results to differ materially from those in such statements. Facts that
could cause actual results to differ from those discussed in the forward-looking
statements include, but are not limited to: (1) the strength of the U.S. economy
in general and the strength of the local economies in which operations are
conducted; (2) the effects of and changes in trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System; (3) inflation, interest rate, market and monetary
fluctuations; (4) the timely development of and acceptance of new products and
services and perceived overall value of these products and services by users;
(5) changes in consumer spending, borrowing and saving habits; (6) technological
changes; (7) acquisitions; (8) the ability to increase market share and control
expenses; (9) the effect of changes in laws and regulations (including laws and
regulations concerning taxes, banking, securities and insurance) with which the
Company and its subsidiary must comply; (10) the effect of changes in accounting
policies and practices, as may be adopted by the regulatory agencies as well as
the Financial Accounting Standards Board; (11) changes in the Company's
organization, compensation and benefit plans; (12) the costs and effects of
litigation and of unexpected or adverse outcomes in such litigation; and (13)
the success of the Company at managing the risks involved in the foregoing.
Such forward-looking statements speak only as of the date on which such
statements are made, and the Company undertakes no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which such statement is made to reflect the occurrence of unanticipated events.
<PAGE>
The following narrative should be read in conjunction with the Company's
consolidated financial statements and the notes thereto.
FINANCIAL CONDITION
Total assets as of September 30, 1998 were $98.9 million compared to $87.6
million as of December 31, 1997. Assets of the Company increased approximately
$3.8 million during the third quarter of 1998 as compared to an increase of
approximately $200,000 during the third quarter of 1997. These fluctuations are
due to normal business transactions.
Loans increased from $71.6 million at December 31, 1997 to $78.8 million at
September 30, 1998. Management anticipates loan production will continue to
increase during the remainder of the year. The following table presents major
classifications of loans at September 30, 1998:
Total % of
Total Loan
Loans Portfolio
----- ----------
Commercial .................... $ 7,420,362 9.25%
SBA - unguaranteed ............ 21,581,518 26.90%
Real estate - mortgage ........ 32,339,542 40.32%
Real estate - construction .... 13,479,794 16.80%
Installment and other consumer 5,397,138 6.73%
------------ ------
Total loans ................... 80,218,354 100.00%
======
Less: Allowance for loan losses (1,403,874)
------------
Total net loans ............... $ 78,814,480
============
Net premises and equipment were $3.8 million at September 30, 1998 compared to
$3.4 million at December 31, 1997. Other assets increased from $5.5 million as
of December 31, 1997 to $6.3 million as of September 30, 1998. The increase was
primarily attributable to SBA guarantees of approximately $615,000 on sold SBA
loans pending cash receipt as of September 30, 1998 as compared to $287,000 as
of December 31, 1997. Cash is normally received within fourteen days of a sale.
Total deposits were $90.7 million at September 30, 1998 compared to $78.5
million at December 31, 1997. As of September 30, 1998, interest-bearing
deposits and non interest-bearing deposits were $76.0 million and $14.7 million,
respectively. As of December 31, 1997, interest-bearing deposits and non
interest-bearing deposits were $66.9 million and $11.6 million, respectively.
A provision of $101,811 was added to the allowance for loan losses during the
third quarter of 1998, bringing total provisions for the year to $374,921. The
provision is primarily attributable to the increased level of loans at September
30, 1998 compared to prior periods. The allowance had a balance of $1,403,874 at
September 30, 1998, representing 1.75% of loans. Chargeoffs were $72,984 while
recoveries were $11,207, resulting in net chargeoffs of $61,777 during the first
three quarters of 1998. Chargeoffs relative to one borrower account for
approximately 40% of total chargeoffs. Management believes this allowance is
adequate to cover possible loan losses. The following table presents the
activity in the allowance for the first three quarters of 1998. At September 30,
1998, the Company had eight loans (all classified as nonaccrual) to two
borrowers requiring total specific allocations of $473,366. The remaining
allowance after any required specific reserves, less any surplus in the
allowance based on an internal analysis, is attributed to the loan categories
based on the relative percentage of the particular category to total loans. Any
surplus is considered unallocated.
FIRST CHEROKEE BANCSHARES, INC.
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
Balance, December 31, 1997 $ 1,090,730
Chargeoffs ................ (72,984)
Recoveries ................ 11,207
Provision for Loan Losses . 374,921
-------
Balance, September 30, 1998 $ 1,403,874
===========
<PAGE>
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
At September 30, 1998, the Company had sixteen loans (made to eight borrowers)
classified as nonaccrual totaling $822,465, all of which are secured by real
estate, vehicles, equipment or inventory. The Company's impaired loans consist
of these nonaccrual loans that are either greater than 90 days delinquent as of
September 30, 1998 or are classified as nonaccrual by management because the
collection of interest from the borrower is doubtful. Specific reserves have
been identified on those loans where losses may occur. Interest income from
impaired loans is recognized using a cash basis method of accounting during the
time within that period in which the loans were impaired. If interest income on
the total nonaccrual loans had been accrued, such income would have approximated
$53,096 as of September 30, 1998. Interest income on such loans, recorded only
when received, was approximately $220,997 for the first nine months of 1998. As
of September 30, 1998, the Company had one property classified as Other Real
Estate Owned, totaling $510,047. The property is currently under contract for
sale. The ratio of loans past due 30 days or more to total loans was 2.66% at
September 30, 1998 compared to 4.40% at December 31, 1997. There was one loan
totaling $515,000 past due greater than 90 days that was on accrual status as of
September 30, 1998. The loan has a Small Business Administration ("SBA")
guarantee which ensures payment of interest to the Company for uncollected
interest from the borrower up to 120 days. Two loans totaling $356,666 as of
December 31, 1997 were past due greater than 90 days and accruing. There were no
restructured loans as of September 30, 1998 or December 31, 1997.
LIQUIDITY
The Company's primary sources of funds are increases in deposits, loan
repayments, and sales and maturities of investments. Liquidity refers to the
ability of the Company to meet its cash flow requirements and fund its
commitments. The Company manages the levels, types, and maturities of earning
assets in relation to the sources available to fund current and future needs to
ensure that adequate funding will be available at all times. The Company
monitors its compliance with regulatory liquidity requirements and anticipates
that funding requirements will be satisfactorily met.
CAPITAL RESOURCES
At September 30, 1998, consolidated stockholders' equity was $7,107,081 or 7.18%
of total assets compared to $7,063,899 or 8.06% of total assets at December 31,
1997. During the third quarter of 1998, the Company repurchased 11,500 shares of
treasury stock at a price of $18.20 per share, to provide shares that will be
issued on exercise of warrants and stock options. The Company's common stock had
a book value of $12.83 per share at September 30, 1998 based on outstanding
shares of 553,804. The Company's common stock had a book value of $12.13 per
share at December 31, 1997 based on outstanding shares of 582,304. At the end of
the third quarter of 1998, the Company had approximately 650 stockholders of
record.
The Bank and the Company are subject to the capital requirements of the Office
of the Comptroller of the Currency ("OCC") and the Federal Reserve Bank (the
"FRB"), respectively. The OCC and FRB have adopted risk-based capital guidelines
for all national banks and bank holding companies, respectively. To be
"adequately capitalized," all national banks are expected to maintain a minimum
ratio of total capital (after deductions) to risk-weighted assets of 8% (of
which at least 4% must consist of Tier 1 Capital, as defined). The Bank was
well-capitalized at September 30, 1998.
<PAGE>
The following table sets forth information with respect to the Company's capital
ratios at September 30, 1998 and 1997 compared to minimum ratios required by
regulation.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of September 30, 1998:
Total Capital $8,002,508 9.93% 6,444,338 8.00% 8,055,422 10.00%
(to Risk-Weighted Assets)
Tier 1 Capital $6,984,437 8.67% 3,222,169 4.00% 4,833,253 6.00%
(to Risk-Weighted Assets)
Tier 1 Capital $6,984,437 7.24% 3,859,120 4.00% 4,823,900 5.00%
(to Average Assets)
As of September 30, 1997:
Total Capital $7,167,046 10.22% 5,610,177 8.00% 7,012,722 10.00%
(to Risk-Weighted Assets)
Tier 1 Capital $6,280,352 8.96% 2,805,089 4.00% 4,207,633 6.00%
(to Risk-Weighted Assets)
Tier 1 Capital $6,280,352 7.43% 3,379,149 4.00% 4,223,936 5.00%
(to Average Assets)
RESULTS OF OPERATIONS
The Company recognized earnings of $560,805 for the first nine months of 1998.
In comparison, net earnings for the first nine months of 1997 were $108,485.
Net interest income for the first nine months of 1998 was $3,258,012 as compared
to $2,710,156 for the first nine months of 1997. The average yield on earning
assets for the first three quarters of 1998 remained at 9.96% as compared to
9.96% for the first three quarters of 1997. The average cost of funds on
interest-bearing deposits increased slightly for the first three quarters of
1998 to 5.42%, as compared to 5.39% for the first three quarters of 1997.
Consequently, the net interest spread for the first nine months of 1998
decreased to 4.54% compared to 4.57% for the first nine months of 1997.
Total other income for the first three quarters of 1998 was $1,843,797 compared
to $1,682,734 for the first three quarters of 1997. This increase is primarily
due to increased transaction volume on deposits as well as increased fees
relative to the transactions.
The annualized ratio of operating expenses to average assets decreased to 5.48%
for the first nine months of 1998 from 5.82% for the year ended December 31,
1997. Salary expense and occupancy expense have increased during 1998 primarily
due to the opening of a new branch in June 1998. The difference in other expense
is primarily attributable to the kiting loss incurred in 1997.
<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 Company'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 for confirming compliance, and testing dates. The Y2k Plan also
addresses the potential risk to the Company from the impact of Y2k on Company
customers.
The Company has identified the two most mission-critical information technology
areas to be a) the core processing system for loans, deposits, and general
ledger, and b) the wide area computer network. The core processing system has
been successfully tested by proxy in May 1998 and October 1998 and directly by
the Company in August 1998. Additionally, regulatory testing according to the
Federal Financial Institutions Examination Council ("FFIEC") found the core
processor's Y2k efforts to be satisfactory (which is the highest rating
possible). The wide area network has been tested successfully on two occasions
in July 1998 and August 1998 by the Company in a simulated Y2k environment.
The Company has identified the most significant non-information technology areas
to be liquidity, customer impact including potential loan losses, and loss of
power, telephone, and water. While the Company currently has a liquidity
contingency plan, management will amend the plan to address Y2k issues
specifically in the near future. The Company has established a methodology for
defining Y2k risk in the loan portfolio, including assessing specific risk on
each commercial customer with total debt in excess of $100,000. Currently, the
allowance for loan losses includes a factor of approximately $23,000. This
factor will be adjusted as necessary once the risk assessment on specific loans
is completed. Y2k risk from deposit customers has been determined to be minimal
and will be considered in the liquidity contingency plan. The Company has
received written documentation from its local power, telephone and water
companies assuring successful transition to the Year 2000.
The Company has identified third-parties with which it has a significant
relationship to include its core processor and its correspondent bank. The core
processing system has been successfully tested by both proxy and directly by the
Company. Also, regulatory testing according to the Federal Financial
Institutions Examination Council ("FFIEC") found the core processor's Y2k
efforts to be satisfactory (which is the highest rating possible). The Company's
correspondent bank reports that its organization expects to achieve full Year
2000 compliance by July 1999.
The Company has incurred approximately $40,000 in 1998 and budgeted $50,000 in
1999 for Y2k issues. Based on information currently available, management does
not believe that the Company will incur significant additional costs in
connection with the Y2k issue. Nevertheless, there can be no assurances that all
hardware and software that the Company will use will be Y2k compliant, and the
Company cannot predict with any certainty the costs the Company will incur to
respond to any Y2k issues. Further, the business of the Company's customers and
vendors may be negatively affected by the Y2k issue, and any financial
difficulties incurred by the Company's customers and vendors in solving Y2k
issues could negatively affect their ability to perform their agreements with
the Company. Therefore, even if the Company does not incur additional
significant direct costs in connection with responding to the Y2k issue, there
can be no assurance that the failure or delay of the Company's customers,
vendors, or other third parties in addressing the Y2k issue or the costs
involved in such process will not have a material adverse effect on the
Company's business, financial condition and results of operations.
As a result of the successful completion of the majority of Y2k testing, the
Company believes the risk from areas under its control to be minimal. While the
worst case scenario could include a loss of power and/or loss of communications
with its core processor, the Company is reasonably assured that this will not
occur. The Company's contingency plan will address these potential issues and
will be complete by December 31, 1998.
The Company has made a business decision to change core processors in order to
improve efficiencies from new technology. The decision to change is not
associated with Y2k issues. After extensive due diligence, the Company has
chosen a new third-party vendor and is currently in negotiations with the
processor. It is anticipated that the conversion will be complete by the end of
the first quarter of 1999. The new vendor has represented to the Company its
compliance with Y2k regulatory requirements. The Company will perform required
Y2k testing on the new system during the conversion period and immediately
thereafter and anticipates continued compliance.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Bank is a named Defendant in an Amended and Consolidated Bankruptcy
Adversary Proceeding in the United States Bankruptcy Court, Northern District of
Georgia, Atlanta Division, styled as follows: Issac LeaseCo, Inc. v. L. C. Smith
Sales and Leasing, Inc., James W. Ballew, Lewis C. Smith, Ford Motor Credit, and
First National Bank of Cherokee, USBR Northern District of Georgia Case Number:
96-6734. Issac LeaseCo, Inc. was an automobile wholesaler that did business with
a customer of the Bank, L. C. Smith Sales and Leasing, Inc. ("Sales and
Leasing"). Among other lending to Sales and Leasing and its Principals, the Bank
had a secured floor plan lending arrangement for the financing of Sales and
Leasing automobile inventory. The Consolidated Adversary Proceeding claims that
Issac LeaseCo, Inc. was defrauded by Sales and Leasing and its Principals. The
Bank is named in the litigation to establish the relevant lien rights on
inventory supplied to Sales and Leasing through various arrangements with Issac
LeaseCo, Inc. The Trustee also seeks to impose a Bankruptcy Code preference
and/or State law constructive trust on proceeds that may have been received by
the Bank. The Bank denies any actual or constructive knowledge that funds used
to pay loan payments, standard bank charges, or payments for floor plan lending
were either preference payments or payments generated from sales of property of
the bankrupt estate. A tentative settlement has been agreed to by the Trustee
and the Bank and documents evidencing the settlement have been prepared and are
in circulation for review and comment. When the documentation is finalized, the
agreement will be presented to the Court for approval. The settlement will have
no material effect on the operations or financial condition of the Company or
the Bank.
Apart from the foregoing, neither the Company nor the Bank is a party to any
pending legal proceedings which management believes would have a material effect
upon the operations or financial condition of the Company or the Bank.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
3.1(1) Articles of Incorporation
3.2(2) Bylaws, as amended through March 29, 1994
10.1(3)(4) Employment Agreement (Carl Hames) dated May
11, 1995
10.2(1) Form of Organizers' Stock Warrant Agreement
10.3(1) Agreement for Lease/Purchase of Real Property
for Bank Premises
10.4(1)(3) Form of Key Employee Stock Option Plan
27 Financial Data Schedule (for SEC use only)
for quarter ended September 30, 1998 and
September 30,1997 as amended
- ------------------------
(1) Incorporated herein by reference to Exhibit of the same
number in the Company's Registration Statement No.
33-25075-A.
(2) Incorporated herein by reference to Exhibit of the same
number in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 1994.
(3) The indicated exhibits are management contracts or
compensatory plans or arrangements required to be filed or
incorporated by reference herein.
(4) Incorporated herein by reference to Exhibit of the same
number in the Company's Form 10QSB for the period ended June
30, 1995.
(b) The Company has not filed any reports on Form 8-K during the
nine months ended September 30, 1998.
Item 7. Signatures - attached
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FIRST CHEROKEE BANCSHARES, INC.
(Registrant)
DATE: November 12, 1998 BY: /s/Carl C. Hames, Jr.
----------------- ----------------------
Carl C. Hames, Jr.
President & CEO/Principal
Executive Officer
DATE: November 12, 1998 BY: /s/Kitty A. Kendrick
----------------- ----------------------
Kitty A. Kendrick
Principal Financial Officer
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