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, 1998
[ ] 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 __
[Cover page continued on next page]
<PAGE>
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, 1998
were $11,105,493.
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant at March 19, 1999, was $6,698,419 based on an estimated market
price of $18.75 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 19, 1999, was 553,804 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended
December 31, 1998 are incorporated by reference into Parts I and II of this
report.
Portions of the Proxy Statement for the 1999 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days of the Registrant's 1998 fiscal year-end are incorporated by reference into
Part III of this report.
Transitional Small Business Disclosure Format (check one): Yes _____ No X
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
- ------- ------------------------
GENERAL INFORMATION
-------------------
First Cherokee Bancshares, Inc. (the "Company") was incorporated as a Georgia
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 and the Georgia Department of Banking
and Finance 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 and 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 a three-year capital plan, which is updated annually.
The plan represents management's 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 through December 31, 2001. Management uses the capital
plan as a tool to analyze various operating strategies. Most importantly, the
capital plan gives the Bank and the Company a measure of the relative success of
their operating strategies. At December 31, 1998, assets of the Bank were $5
million or 5% less than projected by the plan. Net earnings after taxes in 1998
were $872,608 or 10% less than projected by the plan. The updated plan projects
assets of the Bank to reach $130 million by the end of 1999. Net earnings after
taxes for 1999 are projected to be approximately $1,323,000, representing a
Return on Average Assets of 1.08%. 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.
<PAGE>
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 branch locations at
1185 North Cobb Parkway, Marietta, Georgia and 134 Keith Drive, Canton, 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, Georgia.
The Bank emphasizes personalized service to meet each customer's specific
banking needs. The business nature of the Bank's market area is 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, savings and loan associations, and other financial
institutions in its primary service area. Recent legislation, regulatory changes
by the regulators of the various financial institutions, and competition from
unregulated entities, has eliminated many traditional distinctions among
commercial banks, thrift institutions and other providers of financial services.
Consequently, competition among all financial institutions is virtually
unlimited with respect to their legal ability and authority to provide most
financial services.
Banks compete with other financial institutions through the banking products and
services they offer, the pricing of their services, the level of service
provided, the convenience and availability of services, and the degree of
expertise and personal manner in which services are offered. Management
anticipates that the Bank will continue to face strong competition from 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, and offer certain products, 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 allow the
Bank to compete effectively in its 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 long 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 permitted by law.
<PAGE>
LENDING ACTIVITIES
------------------
The Bank's philosophy is to make loans, taking into consideration the interests
of its shareholders, safety of the depositors' funds, preservation of Bank
liquidity, welfare of the community and adherence to federal regulations. Loans
will always be the major source of the Bank's income. Normal risk is associated
with each category of loan offered by the Bank. The economy plays an important
part in lending risks and these risks may be greater at times of economic
downturns.
As of the end of 1998, the Bank's loan portfolio consisted of approximately 8%
Consumer Loans, 9% Commercial Loans, 25% U.S. Small Business Administration
("SBA") - Unguaranteed portion of Loans, and 58% Commercial and Residential Real
Estate and Construction Loans. The Bank's net loan-to-deposit ratio was
approximately 84% as of December 31, 1998.
Total net loans as of December 31, 1998 were $85,171,903, with the percentage of
30 days or greater delinquent loans at year end at 1.61%. The percentage of
substandard rated loans was 1.78% of total outstanding loans, which represented
21.65% of risk-based capital. Eight loans were considered impaired requiring
specific reserves totaling $465,637. As of December 31, 1998 the Bank had eleven
borrowers in nonaccrual status totaling $1,314,170. During 1998, the loan loss
provision was $503,671, and gross charge-offs totaled $89,702; recoveries during
1998 amounted to $12,006. The balance in the loan loss reserve account was
$1,516,705, or 1.75% of loans, as of December 31, 1998.
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
construction site 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. 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 to develop acreage into single family lots on which houses will be
built. Loan disbursements require on-site inspections to assure that the project
is on budget and that the loan proceeds are being used for that development. 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 may
present a high degree of risk to a lender, depending upon 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. Commercial mortgage
lending risks include title defects, fraud, general real estate market
deterioration, inaccurate appraisals, violation of banking protection laws,
interest rate fluctuations and financial deterioration of a borrower.
<PAGE>
COMMERCIAL LOANS. The Bank market is commercial lending services to 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 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 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 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 has 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 mismanagement in terms of
interest rate, maturity and concentration. Traditionally, losses associated with
the investment portfolio have been minimal.
ASSET/LIABILITY MANAGEMENT
--------------------------
The Bank's objective is 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 responsible for developing and monitoring policies and
procedures designed to insure acceptable composition of the asset/liability mix.
It is the philosophy of management to support asset growth primarily through
growth of core deposits, which include deposits of all categories made by
individuals, partnerships and corporations. Management of the Bank seeks to
invest the largest portion of the Bank's assets in commercial and real estate
related loans. The Bank's asset/liability mix is monitored on a timely basis
with a report reflecting interest-sensitive assets and interest-sensitive
liabilities being prepared and presented to the Bank's Board of Directors on a
quarterly basis. The objective of this policy is to manage interest-sensitive
assets and liabilities so as to minimize the impact of substantial movements and
interest rates on the Bank's earnings. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Interest Rate Sensitivity."
EMPLOYEES
---------
At December 31, 1998, the Bank employed 62 full-time employees and 8 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.
<PAGE>
SELECTED STATISTICAL INFORMATION OF THE COMPANY
-----------------------------------------------
The following statistical information is provided for the Company for the years
ended December 31, 1998 and December 31, 1997. This data should be read 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 Interest 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,
1998 and 1997.
TABLE 1
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------
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) $75,176,275 $8,809,126 11.72% $65,733,060 $7,691,664 11.70%
Investment Securities (2) 1,284,686 83,710 6.52% 1,341,593 83,200 6.20%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investment 6,621,352 337,161 5.09% 4,252,140 230,466 5.42%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Earning Assets 83,082,313 $9,229,997 11.11% 71,326,793 $8,005,330 11.22%
Non-Earning Assets 12,546,118 12,157,876
----------- -----------
Total Average Assets $95,628,431 $83,484,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $5,832,606 $134,291 2.30% $4,929,867 $117,567 2.38%
Money Market Accounts 7,454,788 285,087 3.82% 7,094,029 259,508 3.66%
Savings 2,614,927 65,423 2.50% 2,283,814 57,110 2.50%
Time, $100,000 and Over 15,774,440 944,889 5.99% 12,975,607 782,429 6.03%
Other Time 43,020,084 2,598,227 6.04% 38,445,348 2,348,358 6.11%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Bearing Deposits 74,696,845 $4,027,917 5.39% 65,728,665 $3,564,972 5.42%
Note Payable and Other Borrowings 401,072 28,288 7.05% 314,574 17,770 5.65%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Bearing Liabilities 75,097,917 $4,056,205 5.40% 66,043,239 $3,582,742 5.42%
Non Interest-Bearing Demand Deposits 12,563,963 9,622,379
Other Liabilities 491,120 798,147
----------- -----------
Total Liabilities 88,153,000 76,463,765
Stockholders' Equity 7,475,431 7,020,904
----------- -----------
Total Average Liabilities and
Stockholders' Equity $95,628,431 $83,484,669
=========== ===========
Net Earning Assets $7,984,396 $5,283,554
Net Yield on Interest Earning Assets 6.23% 6.20%
Net Interest Rate Spread 5.71% 5.80%
Net Interest Margin $5,173,792 $4,422,588
</TABLE>
(1) When computing yields on interest-earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $349,182 and
$425,038 are included in interest income for the periods ending December 31,
1998 and 1997, respectively.
(2) All investment securities are taxable.
<PAGE>
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. The change in interest
attributable to rate is determined by applying the change in rate between years
to average balances outstanding in the prior year. The change in interest due to
volume is determined by applying the rate from the prior 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,
1998 vs. 1997 1997 vs. 1996
------------- -------------
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 $1,117,462 $12,606 $1,104,856 $1,218,139 $7,072 $1,211,067
Interest on investment securities 510 4,038 (3,528) (37,654) (17,630) (20,024)
Interest on federal funds sold and
interest-bearing deposits 106,695 (21,716) 128,411 (429,659) 2,195 (431,854)
------- ------- ------- -------- ----- --------
Total interest income $1,224,667 ($5,073) $1,229,740 $750,826 ($8,364) $759,190
---------- ------- ---------- -------- ------- --------
Expense from interest-bearing liabilities:
Interest on now accounts $16,724 ($4,761) $21,485 ($5,171) ($6,146) $975
Interest on money market accounts 25,579 12,375 13,204 71,376 4,858 66,518
Interest on savings accounts 8,313 35 8,278 (7,963) (2,874) (5,089)
Interest on time deposits, 162,460 (6,310) 168,770 (93,473) (29,844) (63,629)
$100,000 & over
Interest on other time deposits 249,869 (29,647) 279,516 (143,558) (131,592) (11,966)
Interest on note payable and
other borrowings 10,518 5,631 4,887 17,770 0 17,770
------ ----- ----- ------ - ------
Total interest expense $473,463 ($22,677) $496,140 ($161,019) ($165,598) $4,579
-------- -------- -------- --------- --------- ------
Net interest income $751,204 $17,604 $733,600 $911,845 $157,234 $754,611
======== ======= ======== ======== ======== ========
</TABLE>
<PAGE>
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, 1998.
TABLE 3
AS OF DECEMBER 31, 1998
(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 $13,360 $10,584 $6,711 $2,929 $23,785 $57,369
Real estate - Construction 14,568 - - - - 14,568
All Other Loans 3,459 8,990 1,245 420 638 14,752
----- ----- ----- --- --- ------
Total $31,387 $19,574 $7,956 $3,349 $24,423 $86,689
======= ======= ====== ====== ======= =======
</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, 1998 and 1997.
TABLE 4
<TABLE>
<CAPTION>
1998 1997
---- ----
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real Estate Construction $18,868,908 21.77% $17,635,088 24.25%
Real Estate Mortgage 30,995,083 35.75% 21,649,051 29.77%
SBA - Unguaranteed 21,955,805 25.33% 16,774,339 23.07%
Commercial 8,011,468 9.24% 10,983,107 15.11%
Consumer 6,857,344 7.91% 5,669,879 7.80%
--------- ---- --------- ----
Total Loans $86,688,608 100.00% $72,711,464 100.00%
=========== ====== =========== ======
</TABLE>
<PAGE>
Nonaccrual, Past Due and Restructured Loans
- -------------------------------------------
A loan is placed on nonaccrual status when it is 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 is 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, 1998, the Bank had
eleven borrowers on nonaccrual status in the total amount of $1,314,170 or 1.54%
of net loans, compared to $1,460,262 or 2.04% of net loans at December 31, 1997.
Two borrowers account for $721,798 or 83% of total nonaccrual loans. The
remaining loans average approximately $22,000 each. Specific reserves totaling
$465,637 have been allocated on certain nonaccrual loans considered impaired.
Had the loans been current in accordance with their original terms, the gross
interest that would have been recorded as of December 31, 1998 would have been
$346,113. The amount of interest on these loans that was included in net
earnings for the year ended December 31, 1998 was $230,285. One loan, totaling
$35,466 was past due greater than ninety days and still accruing due to
anticipated collectability of the loan. Two loans, totaling $356,666 were past
due greater than 90 days and were still accruing as of December 31, 1997. Loans
past due greater than 30 days but less than 90 days amounted to $1,415,268, or
1.61% of total loans as of December 31, 1998 compared to $3,201,666, or 4.40% of
total loans at the end of 1997. There were no restructured loans as of December
31, 1998 or December 31, 1997.
The Bank had one property held as "other real estate owned," with a total value
of $27,652 as of December 31, 1998. No material loss is anticipated on the sale
of the property. As of December 31, 1998, the Bank had repossessed two vehicles
with a fair value totaling $14,798. No material loss is anticipated on the sale
of these vehicles.
<PAGE>
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 Bank'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 1998 Annual Report to Shareholders.
Table 5 below presents the activity in the allowance for loan losses for each of
the periods ended December 31, 1998 and 1997.
TABLE 5
1998 1997
---- ----
Balance at the Beginning of Year $1,090,730 $858,271
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 11,833 150,581
Commercial 5,800 198,791
Consumer 72,069 206,960
------ -------
Total Charge-offs 89,702 556,332
Recoveries:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 5,768 12,398
Commercial 0 67,983
Consumer 6,238 84,672
----- ------
Total Recoveries 12,006 165,053
Net Chargeoffs 77,696 391,279
Provision for Loan Losses 503,671 623,738
------- -------
Balance at the End of Year $1,516,705 $1,090,730
========== ==========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.75% 1.50%
==== ====
Ratio of Net Charge-offs to Average Net
Loans Outstanding During the Year 0.10% 0.60%
==== ====
<PAGE>
With respect to the information presented in Table 6, the Bank sets aside
specific reserves as a precautionary measure on a particular loan that may
deteriorate or on a group of loans that have a significant risk level or have
suffered notable levels 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, 1998, management determined that eight
loans required specific reserves totaling $465,637. At December 31, 1997, no
loans were considered impaired, therefore, no specific reserves were required.
For allocation purposes, the Y2K risk factor identified by management is
considered unallocated. The remaining allowance is attributed to the loan
categories based on the relative percentage of the particular category to total
loans and not according to risk.
TABLE 6
<TABLE>
<CAPTION>
1998 1997
---- ----
% of % of
Loss Loss
Amount Allocated Amount Allocated
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Real Estate Construction $320,753 21.14% $264,502 24.25%
Real Estate Mortgage 526,730 34.73% 324,711 29.77%
SBA - Unguaranteed 373,205 24.61% 251,631 23.07%
Commercial 136,139 8.98% 164,809 15.11%
Consumer 116,544 7.68% 85,077 7.80%
Unallocated 43,334 2.86% 0 0.00%
------ ---- - ----
Total Allowance for Loan Losses $1,516,705 100.00% $1,090,730 100.00%
========== ====== ========== ======
</TABLE>
<PAGE>
INVESTMENT PORTFOLIO
--------------------
Table 7 below sets forth the fair value of investment securities at December 31,
1998 and 1997.
TABLE 7
1998 1997
---- ----
U.S. Government Agencies $501,608 $499,531
Mortgage-backed Securities 40,737 102,872
------ -------
Total Investment Securities $542,345 $602,403
======== ========
The fair value at December 31, 1998 includes a $3,601 market value increase for
net unrealized gains while the fair value at December 31, 1997 includes a $2,703
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, 1998.
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>
Government $0 0.00% $501,608 6.26% $0 0.00% $0 0.00% $501,608 6.26%
Agencies
Mortgage-backed
Securities 13,276 8.00% 0 0.00% 27,461 9.50% 0 0.00% 40,737 9.01%
------ ----- - ----- ------ ----- - ----- ------ -----
Total
Investment
Securities $13,276 8.00% $501,608 6.26% $27,461 9.50% $0 0.00% $542,345 6.47%
======= ==== ======== ==== ======= ==== == ==== ======== ====
</TABLE>
<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,
-----------------------
1998 1997
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C>
Non Interest-bearing demand deposits $12,563,963 N/A $9,622,379 N/A
Interest-bearing demand deposits 13,287,394 3.15% 12,023,896 3.13%
Savings deposits 2,614,927 2.50% 2,283,814 2.50%
Time deposits 58,794,524 6.03% 51,420,955 6.09%
---------- ----------
Total Deposits $87,260,808 $75,351,044
=========== ===========
</TABLE>
The total of time certificates of deposit issued in amounts greater than
$100,000 as of December 31, 1998, are shown below by category, which is based on
time remaining until maturity of (a) three months or less, (b) over three
through six months, (c) over six through twelve months, and (d) over twelve
months.
(Dollars in
Thousands)
----------
Three months or less $4,523
Over three through six months 1,482
Over six through twelve months 3,917
Over twelve months 2,575
-----
Total $12,497
=======
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 1998 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, 1998 and
1997. The Company did not pay cash dividends to shareholders during 1998 and
1997.
TABLE 10
1998 1997
---- ----
Return on Assets .91% .26%
Return on Equity 11.67% 3.15%
Stockholders' Equity to Assets 7.82% 8.41%
<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.
<PAGE>
The BHC Act generally prohibits the Company from engaging in activities other
than banking or managing or controlling banks or other permissible subsidiaries
and from acquiring or retaining direct or indirect control of any company
engaged in any activities other than those activities determined by the Federal
Reserve to be so closely related to banking or managing or controlling banks as
to be a proper incident thereto. In determining whether a particular activity is
permissible, the Federal Reserve must consider whether the performance of such
an activity reasonably can be expected to produce benefits to the public, such
as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interest, or unsound banking
practices. For example, factoring accounts receivable, acquiring or servicing
loans, leasing personal property, conducting discount securities brokerage
activities, performing certain data processing services, acting as agent or
broker in selling credit life insurance and certain other types of insurance in
connection with credit transactions, and performing certain insurance
underwriting activities all have been determined by the Federal Reserve to be
permissible activities of bank holding companies. The BHC Act does not place
territorial limitations on permissible non-banking activities of bank holding
companies. Despite prior approval, the Federal Reserve has the power to order a
holding company or its subsidiaries to terminate any activity or to terminate
its ownership or control of any subsidiary when it has reasonable cause to
believe that continuation of such activity or such ownership or control
constitutes a serious risk to the financial safety, soundness, or stability of
any bank subsidiary of that bank holding company.
The bank subsidiary of the Company is a member of the Federal Deposit Insurance
Corporation (the "FDIC"), and as such, its deposits are insured by the FDIC to
the maximum extent provided by law. Such subsidiary is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations, and it is supervised and examined by one or more state or
federal bank regulatory agencies.
The Office of the Comptroller of the Currency (the "OCC") regularly examines the
operations of the Bank and is given authority to approve or disapprove mergers,
consolidations, the establishment of branches, and similar corporate actions.
The OCC also has the power to prevent the continuance or development of unsafe
or unsound banking practices or other violations of law.
Payment of Dividends
- --------------------
The Company is a legal entity separate and distinct from its banking subsidiary.
The principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends by the Bank. There are statutory
and regulatory limitations on the payment of dividends by the Bank to the
Company as well as by the Company to its shareholders.
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, 1998, 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 $1,110,000.
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.
<PAGE>
Capital Adequacy
- ----------------
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the appropriate federal banking
regulator in the case of Bank. There are two basic measures of capital adequacy
for bank holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be satisfied for a bank holding company to be considered in compliance.
The risk-based capital standards are designed to make regulatory capital
requirements more sensitive to differences in risk profile among banks and bank
holding companies, to account for off-balance-sheet exposure, and to minimize
disincentives for holding liquid assets. Assets and off-balance-sheet items are
assigned to broad risk categories, each with appropriate weights. The resulting
capital ratios represent capital as a percentage of total risk-weighted assets
and off-balance-sheet items.
The minimum guideline for the ratio (the "Total Risk-Based Capital Ratio") of
total capital ("Total Capital") to risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8%. At least half
of Total Capital must comprise common stock, minority interests in the equity
accounts of consolidated subsidiaries, noncumulative perpetual preferred stock,
and a limited amount of cumulative perpetual preferred stock, less goodwill and
certain other intangible assets ("Tier 1 Capital"). The remainder may consist of
subordinated debt, other preferred stock, and a limited amount of loan loss
reserves ("Tier 2 Capital"). At December 31, 1998, 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 9.53% and 8.28%,
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, 1998 was 6.95%. 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, 1998. 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.
<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.
<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>
Well Capitalized 5% or more 10% or more 6% or more Not subject to a
capital directive
========================== -------------------- ------------------------- ---------------------- ===================
Adequately Capitalized 4% or more 8% or more 4% or more --
========================== -------------------- ------------------------- ---------------------- ===================
Undercapitalized less than 4% Less than 8% less than 4% --
========================== -------------------- ------------------------- ---------------------- ===================
Significantly less than 3% Less than 6% less than 3% --
Undercapitalized
========================== ==================== ========================= ====================== ===================
Critically 2% or less -- -- --
Undercapitalized tangible equity
========================== ==================== ========================= ====================== ===================
</TABLE>
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, 1998, the Bank had the requisite capital levels to qualify as
well capitalized.
<PAGE>
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
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.
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
- ------- -----------------------
The Company and the Bank's main office is 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 that this expansion is sufficient
for the expected growth over the next two-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, 1998, were $1,404,331 and $487,673 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 regulator. 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 approximately $59,000 in total rentals under the ground lease during
1998. Management believes the lease agreement is fair and in the best interest
of the Company.
The North Marietta branch land and 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 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, 1998 were $185,201, $264,417, and $73,935, respectively.
In January 1997, the Bank acquired land in Canton, Georgia for the amount of
$401,683 for a branch site. The building, which was completed during 1998, is a
one-story block building with a total of 3,780 square feet which is fully
occupied by branch operations. The original cost of construction of the Canton
branch building was approximately $692,000. The cost of furnishing this
building, including teller facilities, vault door, safe deposit boxes and other
necessary furniture, fixtures and equipment was originally approximately
$300,000. The net book values of the land, building, and equipment as of
December 31, 1998 were $401,683, $681,333, and $274,073, respectively.
Management believes that 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."
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Bank was 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 was 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 sought to impose a Bankruptcy Code preference
and/or State law constructive trust on proceeds that may have been received by
the Bank. The Bank denied that any amounts were 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.
During the first quarter of 1999, a settlement of this litigation relieving the
Bank of related liability was agreed to by all parties. The Bank's cost for the
settlement of $100,000 will be paid in the second quarter. It is anticipated
that the settlement cost will be recoverable by the Bank's bond company.
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.
<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 1998 Annual Report to Shareholders. The Registrant did not have any
unregistered sales of equity securities during 1998, 1997 or 1996.
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 1998 Annual Report to Shareholders.
ITEM 7. FINANCIAL STATEMENTS.
- ------- ---------------------
The following report and statements are included in the financial section of the
Registrant's 1998 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, 1998 and 1997.
(iii) Consolidated Statements of Earnings for Years Ended December 31, 1998,
1997, and 1996.
(iv) Consolidated Statements of Stockholders' Equity for Years Ended
December 31, 1998, 1997, and 1996.
(v) Consolidated Statements of Cash Flows for the Years Ended December 31,
1998, 1997, and 1996.
(vi) Notes to Consolidated Financial Statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
- ---------------------
None.
<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 1999 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 1999 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 1999 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 1999 Annual Meeting of Shareholders
and is incorporated herein by reference.
<PAGE>
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
- -------- ---------------------------------------
<TABLE>
<CAPTION>
(A) EXHIBITS
Exhibit
Number Description
------ -----------
<S> <C>
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
10.5 Form of Incentive Stock Option Certificate to Purchase
Common Stock of First Cherokee Bancshares, Inc., issued
under the Key Employee Stock Option Plan effective
October 13, 1988 (3)
10.6 Form of Directors' Non-Qualified Stock Option Agreement (3)
13.1 Annual Report to Shareholders for the fiscal year ended
December 31,1998.Only those portions of the 1998 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)
- ------------------------
(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.
</TABLE>
(B) REPORTS ON FORM 8-K
None.
<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 30, 1999
--------------------------------------
Carl C. Hames, Jr., President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
on the signature page to this Report constitutes and appoints Carl C. Hames, Jr.
and Thomas D. Hopkins, Jr., and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place, and stead, in any and all
capacities, to sign any and all amendments to this Report, and to file the same,
with all exhibits hereto, and other documents in connection herewith with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<PAGE>
Signature Title Date
/S/ Alan D. Bobo Director March 30, 1999
- ---------------------------
Alan D. Bobo
/S/ Elwin K. Bobo Director March 30, 1999
- ---------------------------
Elwin K. Bobo
/S/ Michael A. Edwards Director March 30, 1999
- ---------------------------
Michael A. Edwards
/S/ Stanley Fitts Director March 30, 1999
- ---------------------------
Stanley Fitts
/S/ Russell L. Flynn Director March 30, 1999
- ---------------------------
Russell L. Flynn
/S/ Carl C. Hames, Jr. President, Principal March 30, 1999
- --------------------------- Executive Officer,
Carl C. Hames, Jr. and Director
/S/ C. Garry Haygood Director March 30, 1999
- ---------------------------
C. Garry Haygood
/S/ Thomas D. Hopkins, Jr. Director and March 30, 1999
- --------------------------- Secretary
Thomas D. Hopkins, Jr.
/S/ Bobby R. Hubbard Director March 30, 1999
- ---------------------------
Bobby R. Hubbard
/S/ R. O. Kononen, Jr. Director March 30, 1999
- ---------------------------
R. O. Kononen, Jr.
/S/ Dennis W. Lord Director March 30, 1999
- ---------------------------
Dennis W. Lord
/S/ Larry R. Lusk Director March 30, 1999
- ---------------------------
Larry R. Lusk
/S/ Dr. Stuart R. Tasman Director March 30, 1999
- ---------------------------
Dr. Stuart R. Tasman
/S/ Kitty A. Kendrick Principal March 30, 1999
- --------------------------- Accounting
Kitty A. Kendrick and Financial Officer
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
<S> <C> <C>
Exhibit Page
Number Description Number
------ ----------- ------
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
10.5 Form of Incentive Stock Option Certificate to Purchase Common Stock of First
Cherokee Bancshares, Inc., issued under the Key Employee Stock Option Plan
effective October 13, 1988 (3) .........................................................
10.6 Form of Directors' Non-qualified Stock Option Agreement (3) ...........................
13.1 Annual Report to Shareholders for the fiscal year ended December 31, 1998.
Only those portions of the 1998 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.
Exhibit 10.5
THE SECURITIES REPRESENTED BY THIS OPTION CERTIFICATE MAY NOT BE OFFERED FOR
SALE, SOLD, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND
APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN EXEMPTION FROM REGISTRATION
UNDER THE ACT OR SUCH STATE SECURITIES LAWS.
INCENTIVE STOCK OPTION CERTIFICATE
TO PURCHASE COMMON STOCK OF
FIRST CHEROKEE BANCSHARES, INC.
THIS CERTIFIES THAT, on the effective date hereto, ____________________
(sometimes hereinafter referred to as the "Holder") is the owner of ________
options, each of which represents the right to purchase from FIRST CHEROKEE
BANCSHARES, INC. ("FCB") one share of the common stock, $1.00 par value, of FCB
(such shares purchasable upon exercise of the options being hereinafter called
the "Shares of Common Stock") at a purchase price of $17.71 per share (the
"Exercise Price") before the expiration of ten (10) years from the date thereof,
in the City of Woodstock, Georgia, at the offices of FCB, or such other place as
may be designated by FCB, on a day on which banking institutions are not
authorized by law to close, and subject to the conditions hereinafter set forth
or as may be incorporated herein. Anything herein to the contrary
notwithstanding, if at the time of the grant of the option herein, Holder owns
(or is deemed to own under Sections 422 and 425 of the Internal Revenue Code of
1986, as amended) stock possessing more than ten (10%) percent of the total
combined voting power of all classes of stock of FCB or any parent or subsidiary
of FCB, then this option must be exercised before the expiration of five (5)
years after the grant thereof. The options evidenced by this Option Certificate
(hereinafter, the "Option") are issued pursuant to FCB's Key Employee Stock
Option Plan, effective October 13, 1988 (hereinafter, the "Plan"), the terms and
provisions of such Plan are incorporated herein. Any inconsistency between the
Plan and this Certificate shall be controlled by the Plan.
1. EXERCISE. The Option shall vest and become exercisable in twenty percent
(20%) annual increments beginning with the first anniversary of the effective
date of the Option and continuing over the next four anniversaries thereof so
long as the Holder remains an employee of FCB or any subsidiary. However, the
Option shall become fully vested and exercisable thirty (30) days (or any
earlier date determined by the Compensation Committee of FCB) prior to the
effective date of any dissolution or liquidation of the Company or any merger or
consolidation in which FCB is not the surviving entity. Any exercisable portion
of the Option may be exercised only with respect to whole Shares of Common Stock
in minimum blocks of one hundred (100) shares unless the then remaining shares
subject to this Option are less than one hundred (100), in which case such
remaining shares (but not less than all such remaining shares) may be purchased.
The Option shall be exercised by delivery to the principal office of FCB, (a)
written notice of the exercise of the Option, including the amount of Option to
be exercised; (b) this Option Certificate; and (c) payment in full of the amount
of the Exercise Price for the Shares of Common Stock as to which this Option
Certificate is then being exercised, in cash or by other methods as may be
approved by the Compensation Committee of FCB. All other matters not
specifically contained in this Certificate pertaining to the Option and the
exercise of the Option shall be in accordance with the applicable provisions of
the Plan, such Plan provisions being hereby incorporated herein. In the event of
an exercise of less than all of the Option represented hereby, a new Option
Certificate evidencing the number of options not exercised will be delivered to
the Holder.
<PAGE>
2. TRANSFER. This Option evidenced by this Option Certificate is
non-transferable by the Holder except for certain transfers pursuant to the
death of Holder and other matters as may be described in the provisions of the
Plan.
3. EXECUTION OF ADDITIONAL DOCUMENTS. FCB, as a condition precedent to
FCB's delivery of any certificate evidencing Shares of Common Stock, may require
execution of such other documents and instruments as FCB deems necessary for
compliance with applicable state and federal securities laws, the Federal
Reserve System and the Georgia Department of Banking and Finance rules and
regulations and all other applicable law.
4. RESERVATION OF SHARES. FCB hereby agrees that at all times there shall
be reserved, for issuance and delivery upon exercise of this Option Certificate,
such number of Shares of Common Stock as shall be required for issuance or
delivery upon exercise of this Option Certificate. FCB covenants and agrees that
all Shares of Common Stock that may be issued upon the exercise of this Option
Certificate will, upon issuance, be validly issued, fully paid and
non-assessable, and free from all taxes, liens and charges with respect to the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue), and with the exception of restrictions on
subsequent transfers of such shares pursuant to applicable securities and other
laws and as described in the Plan for purposes of qualification for treatment of
this Option as an Incentive Stock Option under the Internal Revenue Code.
5. NO RIGHTS AS SHAREHOLDER. This Option Certificate shall not entitle the
Holder hereof to any of the rights of a shareholder of FCB, including, without
limitation, the right to vote, to receive dividends and other distributions, to
exercise any preemptive right, or to receive any notice of or to attend meetings
of holders of common stock or other proceedings of FCB.
6. EMPLOYMENT STATUS. Holder must be an eligible employee of FCB or its
subsidiary, First National Bank of Cherokee, as provided in the Plan, on the
effective date.
7. APPLICABLE LAW. This Option Certificate shall be governed by and
construed in accordance with the laws of the State of Georgia. FCB may deem and
treat the Holder of this Option Certificate as the true and lawful owner hereof
for all purposes.
IN WITNESS WHEREOF, FCB has caused this Option Certificate to be
executed, effective as of the 18th day of March, 1998.
ATTEST: First Cherokee Bancshares, Inc.
By:
___________________ _______________________________
Secretary Carl C. Hames, Jr.
Exhibit 10.6
THIS AGREEMENT, made as of the 18th day of March, 1998 (the "Grant
Date"), by and between FIRST CHEROKEE BANCSHARES, INC. (the "Company") and
___________________ (the "Optionee");
W I T N E S S E T H:
WHEREAS, in recognition of services performed and as an incentive in
connection with the performance of future services as a member of the Board of
Directors of the Company, the Optionee has been granted options to purchase
shares of Company common stock, $1.00 par value per share (the "Common Stock");
and
WHEREAS, the Company and Optionee wish to confirm the terms and conditions
of those options;
NOW, THEREFORE, in consideration of the mutual covenants contained herein,
it is hereby agreed between the parties hereto as follows:
1.OPTIONS GRANTED. Subject to the terms, restrictions, limitations and
conditions stated herein, the Optionee is granted a non-qualified stock option
(the "Option") to purchase all or any part of 1,200 shares of Common Stock (the
"Shares").
2.TERM AND EXERCISE OF OPTION.Subject to the provisions of this Agreement:
(a) The Option shall vest and become exercisable in twenty
percent (20%) annual increments beginning with the first anniversary of
the Grant Date and continuing over the next four anniversaries thereof
so long as the Optionee continues to serve as a member of the Board of
Directors of the Company; provided further, however, that the Option
shall become fully vested and exercisable thirty (30) days (or any
earlier date determined by the Compensation Committee of the Company)
prior to the effective date of any dissolution or liquidation of the
Company or any merger or consolidation in which the Company is not the
surviving entity.
(b) Subject to Section 7 hereof, the Option may be exercised
with respect to all or any portion of the vested Shares at any time
during the Option Period by the delivery to the Company, at its
principal place of business, of (i) a written notice of exercise in
substantially the form attached hereto as Exhibit 1, which shall be
actually delivered to the Company no earlier than thirty (30) days and
no later than ten (10) days prior to the date upon which Optionee
desires to exercise of all or any portion of the Option; (ii) payment
to the Company of the Exercise Price, defined in Section 3 below,
multiplied by the number of Shares being purchased (the "Purchase
Price") in the manner provided in Subsection (c) hereof; and (iii)
payment of all applicable withholding tax obligations (whether federal,
state or local) imposed by reason of the exercise of the Option. Upon
acceptance of such notice, receipt of payment in full of the Purchase
Price, and receipt of payment of all withholding tax obligations, the
Company shall cause to be issued a certificate representing the Shares
purchased.
(c) The Purchase Price and all applicable withholding tax
obligations shall be paid in full upon the exercise of an Option and no
Shares shall be issued or delivered until full payment therefor has
been made. Payment of the Purchase Price for all Shares purchased
pursuant to the exercise of an Option and of any tax withholding
obligations shall be made in cash or by certified check; by tendering
shares of previously owned Common Stock held at least six (6) months;
or, to the extent available, by a cashless exercise through a broker.
<PAGE>
3. EXERCISE PRICE. The exercise price for each of the Shares for which
the Option is exercised shall be $17.71, subject to adjustment as set forth in
Section 7 hereof (the "Exercise Price").
4. TERM AND TERMINATION OF OPTION. Except as otherwise provided herein,
the term of the Option (the "Option Period") shall expire on the date of the
first to occur of the following events:
(a) March 18, 2008; or
(b) the ninetieth (90th) day following the date the Optionee
no longer serves upon the Board of Directors of the Company.
Upon the expiration of the Option Period, this Option, and all unexercised
rights granted to Optionee hereunder shall terminate, and thereafter be null and
void.
5. RIGHTS AS SHAREHOLDER. Until the stock certificates reflecting the
Shares accruing to the Optionee upon exercise of the Option are issued to the
Optionee, the Optionee shall have no rights as a shareholder with respect to
such Shares. The Company shall make no adjustment for any dividends or
distributions or other rights on or with respect to Shares purchased pursuant to
the Option for which the record date is prior to the issuance of that stock
certificate, except as this Agreement otherwise provides.
6. RESTRICTION ON TRANSFER OF OPTION. The Option evidenced hereby is
nontransferable other than by will or the laws of descent and distribution, and,
shall be exercisable during the lifetime of the Optionee only by the Optionee
(or in the event of his disability, by his personal representative) and after
his death, only by his personal representative.
7. CHANGE IN CAPITALIZATION, CHANGE IN CONTROL, ETC. If the number of
shares of the Common Stock shall be increased or reduced by a stock split,
payment of a stock dividend, a subdivision or combination of shares,
reclassification, merger or consolidation, or similar capital adjustment, an
appropriate adjustment shall be made by the Company in the number and kind of
shares as to which the Option, or the portion thereof then unexercised, shall be
or become exercisable, to the end that the Optionee's proportionate interest
shall be maintained as before the occurrence of the event. The adjustment shall
be made without change in the total price applicable to the unexercised portion
of the Option and with a corresponding adjustment in the Exercise Price. No
fractional shares shall be issued or optioned in making the adjustment. All
adjustments made by the Board of Directors of the Company under this Section
shall be conclusive.
8. SPECIAL LIMITATION ON EXERCISE. Notwithstanding anything contained
herein to the contrary, no purported exercise of the Option shall be effective
without the written approval of the Company, which may be withheld to the extent
that its exercise, either individually or in the aggregate together with the
exercise of other previously exercised stock options and/or offers and sales
pursuant to any prior or contemplated offering of securities, would, in the sole
and absolute judgment of the Company, require the filing of a registration
statement with the United States Securities and Exchange Commission, or with the
securities commission of any state. The Company shall avail itself of any
exemptions from registration contained in applicable federal and state
securities laws which are reasonably available to the Company on terms which, in
its sole and absolute discretion, it deems reasonable and not unduly burdensome
or costly. If the Option cannot be exercised at the time it would otherwise
expire due to the restrictions contained in this Section, the exercise period
shall be extended for successive one-year periods until it can be exercised in
accordance with this Section. The Optionee shall deliver to the Company, prior
to the exercise of the Option, such information, representations and warranties
as the Company may reasonably request in order for the Company to be able to
satisfy itself that the stock to be acquired pursuant to the exercise of the
Option is being acquired in accordance with the terms of an applicable exemption
from the securities registration requirements of applicable federal and state
securities laws.
<PAGE>
9. LEGEND ON STOCK CERTIFICATES. Certificates evidencing the stock to
be distributed pursuant to the Agreement shall, to the extent appropriate at the
time, have noted conspicuously on the certificates a legend to the following
effect, which is intended to give all persons full notice of the existence of
the conditions, restrictions, rights and obligations set forth in this
Agreement:
(a) That the securities evidenced by the certificate were
issued without registration under the Securities Act of 1933, as
amended (the "1933 Act"), or under the applicable laws of any state or
states (collectively referred to as the "State Acts"), in reliance upon
certain exemptive provisions of the 1933 Act or any applicable State
Acts;
(b) That the securities cannot be sold or transferred unless,
in the opinion of counsel reasonably acceptable to the Company, the
sale or transfer would be:
(1) Pursuant to an effective registration statement
under the 1933 Act or pursuant to an available exemption form
registration; and
(2) A transaction which is exempt under any
applicable State Acts or pursuant to an effective registration
statement under or in a transaction which is otherwise in
compliance with the State Acts; and
(c) That the securities evidenced by the certificate were
issued in accordance with the provisions of the Agreement and are
subject to the provisions thereof and may not be sold or transferred
except in compliance with said provisions.
10. GOVERNING LAWS. This Agreement shall be construed, administered and
enforced according to the laws of the State of Georgia; provided, however, the
Option may not be exercised except, in the reasonable judgment of the Board of
Directors of the Company, in compliance with exemptions under applicable state
securities laws of the state in which the Optionee resides, if applicable, and
any other applicable securities laws.
11. SUCCESSORS. This Agreement shall be binding upon and inure to
the benefit of the heirs, legal representatives,successors and permitted
assigns of the parties.
12. NOTICE. Except as otherwise specified herein, all notices and other
communications under this Agreement shall be in writing and shall be deemed to
have been given if personally delivered or if sent by registered or certified
United States mail, return receipt requested, postage prepaid, addressed to the
proposed recipient at the last known address of the recipient. Any party may
designate any other address to which notices shall be sent by giving notice of
the address to the other parties in the same manner as provided herein.
13. SEVERABILITY. In the event that any one or more of the provisions
or portion thereof contained in this Agreement shall for any reason be held to
be invalid, illegal or unenforceable in any respect, the same shall not
invalidate or otherwise affect any other provisions of this Agreement, and this
Agreement shall be construed as if the invalid, illegal or unenforceable
provision or portion thereof had never been contained herein.
<PAGE>
14. ENTIRE AGREEMENT. This Agreement expresses the entire understanding
and agreement of the parties regarding the Option. This Agreement may be
executed in two or more counterparts, each of which shall be deemed an original
but all of which shall constitute one and the same instrument.
15. VIOLATION. Any transfer, pledge, sale, assignment, or hypothecation
of the Option or any portion thereof shall be a violation of the terms of this
Agreement and shall be void and without effect.
16. HEADINGS. Paragraph headings used herein are for convenience of
reference only and shall not be considered in construing this Agreement.
17. SPECIFIC PERFORMANCE. In the event of any actual or threatened
default in, or breach of, any of the terms, conditions and provisions of this
Agreement, the party or parties who are thereby aggrieved shall have the right
to specific performance and injunction in addition to any and all other rights
and remedies at law or in equity, and all such rights and remedies shall be
cumulative.
IN WITNESS WHEREOF, the parties have executed and sealed this Agreement
as of the day and year first set forth above.
FIRST CHEROKEE BANCSHARES, INC.
By:
______________________________
Title:
ATTEST: ______________________________
______________________________
Title:
______________________________
[CORPORATE SEAL]
OPTIONEE
______________________________
<PAGE>
EXHIBIT 1 TO NONQUALIFIED STOCK OPTION AGREEMENT
NOTICE OF EXERCISE OF
FIRST CHEROKEE BANCSHARES, INC.
STOCK OPTION TO PURCHASE
COMMON STOCK
Name______________________
Address___________________
__________________________
Date______________________
First Cherokee Bancshares, Inc.
_______________________________
_______________________________
_______________________________
Re: Exercise of Non-Qualified Stock Option
Gentlemen:
Subject to acceptance hereof in writing by First Cherokee Bancshares,
Inc. (the "Company"), I hereby give at least ten days but not more than thirty
days prior notice of my election to exercise options granted to me to purchase
______________ shares of common stock of the Company (the "Common Stock") under
the Non-Qualified Stock Option Agreement dated as of March 18, 1998. The
purchase shall take place as of __________, 199_ (the "Exercise Date").
On or before the Exercise Date, I will pay the applicable purchase
price as follows by delivery of cash or a certified check payable to the order
of First Cherokee Bancshares, Inc. for $___________ for the full purchase price.
I understand that I must also pay the required federal, state and local
tax withholding obligations, if any, on the exercise of the option on or before
the Exercise Date.
As soon as the stock certificate is registered in my name, please
delivery it to me at the above address.
If the Common Stock being acquired is not registered for issuance to
and resale by the Optionee pursuant to an effective registration statement on
Form S-8 (or successor form) filed under the Securities Act of 1933, as amended
(the "1933 Act"), I hereby represent, warrant, covenant, and agree with the
Company as follows:
The shares of the Common Stock being acquired by me will be
acquired for my own account without the participation of any other
person, with the intent of holding the Common Stock for investment and
without the intent of participating, directly or indirectly, in a
distribution of the Common Stock and not with a view to, or for resale
in connection with, any distribution of the Common Stock, nor am I
aware of the existence of any distribution of the Common Stock;
I am not acquiring the Common Stock based upon any
representation, oral or written, by any person with respect to the
future value of, or income from, the Common Stock but rather upon an
independent examination and judgment as to the prospects of the
Company;
The Common Stock was not offered to me by means of publicly
disseminated advertisements or sales literature, nor am I aware of any
offers made to other persons by such means;
I am able to bear the economic risks of the investment in the
Common Stock, including the risk of a complete loss of my investment
therein;
I understand and agree that the Common Stock will be issued
and sold to me without registration under any state law relating to the
registration of securities for sale, and will be issued and sold in
reliance on the exemptions from registration under the 1933 Act,
provided by Sections 3(b) and/or 4(2) thereof and the rules and
regulations promulgated thereunder;
<PAGE>
The Common Stock cannot be offered for sale, sold or
transferred by me other than pursuant to: (A) an effective registration
under the 1933 Act or in a transaction otherwise in compliance with the
1933 Act; and (B) evidence satisfactory to the Company of compliance
with the applicable securities laws of other jurisdictions. The Company
shall be entitled to rely upon an opinion of counsel satisfactory to it
with respect to compliance with the above laws;
The Company will be under no obligation to register the Common
Stock or to comply with any exemption available for sale of the Common
Stock without registration or filing, and the information or conditions
necessary to permit routine sales of securities of the Company under
Rule 144 under the 1933 Act are not now available and no assurance has
been given that it or they will become available. The Company is under
no obligation to act in any manner so as to make Rule 144 available
with respect to the Common Stock;
I have and have had complete access to and the opportunity to
review and make copies of all material documents related to the
business of the Company, including, but not limited to, contracts,
financial statements, tax returns, leases, deeds and other books and
records. I have examined such of these documents as I wished and am
familiar with the business and affairs of the Company. I realize that
the purchase of the Common Stock is a speculative investment and that
any possible profit therefrom is uncertain;
I have had the opportunity to ask questions of and receive
answers from the Company and any person acting on its behalf and to
obtain all material information reasonably available with respect to
the Company and its affairs. I have received all information and data
with respect to the Company which I have requested and which I have
deemed relevant in connection with the evaluation of the merits and
risks of my investment in the Company;
I have such knowledge and experience in financial and business
matters that I am capable of evaluating the merits and risks of the
purchase of the Common Stock hereunder and I am able to bear the
economic risk of such purchase; and
The agreements, representations, warranties and covenants made
by me herein extend to and apply to all of the Common Stock of the
Company issued to me pursuant to this Option. Acceptance by me of the
certificate representing such Common Stock shall constitute a
confirmation by me that all such agreements, representations,
warranties and covenants made herein shall be true and correct at that
time.
I understand that the certificates representing the shares being
purchased by me in accordance with this notice shall bear a legend referring to
the foregoing covenants, representations and warranties and restrictions on
transfer, and I agree that a legend to that effect may be placed on any
certificate which may be issued to me as a substitute for the certificates being
acquired by me in accordance with this notice.
Very truly yours,
__________________________
AGREED TO AND ACCEPTED:
FIRST CHEROKEE BANCSHARES, INC.
By:_____________________________
Title:__________________________
Number of Shares
Exercised:______________________
Number of Shares
Remaining:______________________ Date:_____________________
FIRST CHEROKEE BANCSHARES, INC.
1998 ANNUAL REPORT
TO SHAREHOLDERS
P.O. Box 1238 * Woodstock, Georgia 30188 * (770) 591-9000
<PAGE>
March 30, 1999
To Our Shareholders and Friends:
On behalf of the Board of Directors and management, I am pleased to provide you
with the 1998 annual report for First Cherokee Bancshares, Inc. The report
covers the Company's consolidated balance sheets as of December 31, 1998 and
1997 and results of operations for each of the three years in the period ended
December 31, 1998.
I am proud to report a significant improvement in net earnings for 1998 as
compared to 1997. Net earnings for 1998 improved to $872,608, an increase of
$651,724, or 295%, as compared to net earnings for 1997. The Company's asset
size also increased impressively to $110.2 million as of December 31, 1998 from
$87.6 million as of December 31, 1997, representing a growth rate of 26%.
During 1998, the Company achieved many of the objectives set forth for the year.
Our third branch, located in Canton, Georgia, opened in June 1998 and achieved a
level of approximately $10 million in deposits by December 1998. We implemented
new operational procedures in our branches which have significantly shortened
the time necessary to process transactions. We also added the "bill pay" feature
to our Internet site, "fnbinternet.com."
In 1999, our primary objective is to continue to streamline processes and
improve efficiencies in order to provide superior quality service for our
customers. 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, well capitalized and profitable Company and community bank. We are
excited about the opportunities ahead in 1999, our tenth year of operation. 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,
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Selected Statement of Earnings Data:
- ------------------------------------
Total Interest Income $9,229,997 $8,005,330 $7,254,504
Net Interest Income 5,173,792 4,422,588 3,510,743
Provision for Loan Losses 503,671 623,738 373,510
Net Earnings 872,608 220,884 418,220
Basic Earnings per Share 1.53 0.38 0.76
Diluted Earnings per Share 1.31 0.33 0.68
Cash Dividends per Share 0 0 0
- --------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
- ----------------------------
Average Balances:
Total Assets $95,628,431 $83,484,669 $80,865,818
Total Loans, net 75,176,275 65,733,060 55,373,204
Total Deposits 87,260,807 75,351,044 73,712,687
Stockholders' Equity 7,475,431 7,020,904 6,471,501
End of Period Balances:
Total Assets 110,229,513 87,618,335 75,612,198
Total Loans, net 85,171,903 71,620,734 60,879,170
Total Deposits 101,397,797 78,483,832 68,397,118
Stockholders' Equity 7,418,348 7,063,899 6,568,583
Book Value per Share $13.40 $12.13 $11.90
- --------------------------------------------------------------------------------------------
Financial Ratios:
- -----------------
Return on Average Assets 0.91% 0.26% 0.52%
Return on Average Stockholders' Equity 11.67% 3.15% 6.46%
Stockholders' Equity as a Percent
of Total Assets 6.73% 8.06% 8.69%
Net Interest Rate Spread 5.71% 5.80% 4.73%
Loan Loss Reserve/Loans 1.75% 1.50% 1.39%
- --------------------------------------------------------------------------------------------
Asset Quality:
- --------------
Nonaccrual Loans as a percentage
of Net Loans 1.54% 2.04% 2.30%
Loans Past Due 90 Days or More
as a Percent of Net Loans 0.04% 0.50% 0.00%
Loan Chargeoffs as a Percent
of Net Average Loans 0.12% 0.85% 0.59%
- --------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report which are not statements of
historical fact constitute forward-looking statements. 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) Year 2000
issues and 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 the Bank 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>
MANAGEMENT'S DISCUSSION AND ANALYSIS
First Cherokee Bancshares, Inc. (the "Company") is a bank holding company whose
sole, wholly-owned subsidiary is First National Bank of Cherokee (the "Bank").
The Company was incorporated on 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 began banking operations on November 27, 1989.
The Company's main office is located at 9860 Highway 92 in Woodstock, Georgia.
The Company's primary mission is to provide quality service to loan and deposit
customers while maintaining adequate security for depositors' funds and
shareholders' investments.
The following discussion should be read with the Company's consolidated
financial statements and the related notes, which are included elsewhere in this
report.
Results of Operations
---------------------
The Company's goals are to be profitable, to maintain prudent banking practices,
and to maximize its contributions to its community. Maintaining profitability is
essential to the Company's long-term viability, and a strong equity position
allows the Company to take advantage of future opportunities to grow. In 1998,
the Company met its goals with net earnings of $872,608, representing a .91%
return on average assets.
Net Interest Income
- -------------------
Net interest income for the year ended December 31, 1998 was $5,173,792, a
16.99% increase over net interest income of $4,422,588 for the year ended
December 31, 1997. The increase in net interest income is primarily attributable
to the increase in net earning assets. Net earning assets as of December 31,
1998 were $7,984,396, a 51.11% increase from $5,283,554 as of December 31, 1997.
Total interest income for the year ended December 31, 1998 was $9,229,997
(including $349,182 resulting from the amortization of deferred loan fees), a
15.30% increase over total interest income of $8,005,330 for the year ended
December 31, 1997. The average yield on earning assets was 11.11% in 1998
compared to 11.22% in 1997. The decrease in average yield is the result of
increased percentages of short-term investments at lower rates during 1998 than
1997. Loans comprised 90% of average earning assets during 1998 compared to 92%
during 1997.
Interest expense for the year ended December 31, 1998 was $4,056,205, a 13.22%
increase over interest expense of $3,582,742 for the year ended December 31,
1997. The Bank's average cost of funds was 5.40% in 1998, a decrease of .02%
from 5.42% in 1997. The decrease is primarily attributable to the repricing of
maturing certificates of deposit to lower rates. Interest-bearing deposits for
the year ended December 31, 1998 averaged $74,696,845, a 13.64% increase over
interest-bearing deposits of $65,728,665 for the year ended December 31, 1997.
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. Therefore, interest rate sensitivity, as discussed later in this report,
is an important consideration for the Bank. The majority of the Bank's loans
adjust immediately, monthly or quarterly to changes in the Bank's prime lending
rate. However, the Bank has interest rate floors in individual loan agreements
on approximately half of its loan portfolio. These floors protect the Bank's
interest margin should rates decrease significantly.
<PAGE>
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, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
-----------------------------------------------------------------------
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) $75,176,275 $8,809,126 11.72% $65,733,060 $7,691,664 11.70%
Investment Securities (2) 1,284,686 83,710 6.52% 1,341,593 83,200 6.20%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investment 6,621,352 337,161 5.09% 4,252,140 230,466 5.42%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Earning Assets 83,082,313 $9,229,997 11.11% 71,326,793 $8,005,330 11.22%
Non-Earning Assets 12,546,118 12,157,876
----------- -----------
Total Average Assets $95,628,431 $83,484,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $5,832,606 $134,291 2.30% $4,929,867 $117,567 2.38%
Money Market Accounts 7,454,788 285,087 3.82% 7,094,029 259,508 3.66%
Savings 2,614,927 65,423 2.50% 2,283,814 57,110 2.50%
Time, $100,000 and Over 15,774,440 944,889 5.99% 12,975,607 782,429 6.03%
Other Time 43,020,084 2,598,227 6.04% 38,445,348 2,348,358 6.11%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Bearing Deposits 74,696,845 $4,027,917 5.39% 65,728,665 $3,564,972 5.42%
Note Payable and Other Borrowings 401,072 28,288 7.05% 314,574 17,770 5.65%
----------- ---------- -------- ----------- ---------- --------
Total Interest-Bearing Liabilities 75,097,917 $4,056,205 5.40% 66,043,239 $3,582,742 5.42%
Non Interest-Bearing Demand Deposits 12,563,963 9,622,379
Other Liabilities 491,120 798,147
----------- -----------
Total Liabilities 88,153,000 76,463,765
Stockholders' Equity 7,475,431 7,020,904
----------- -----------
Total Average Liabilities and
Stockholders' Equity $95,628,431 $83,484,669
=========== ===========
Net Earning Assets $7,984,396 $5,283,554
Net Yield on Interest Earning Assets 6.23% 6.20%
Net Interest Rate Spread 5.71% 5.80%
Net Interest Margin $5,173,792 $4,422,588
</TABLE>
(1) When computing yields on interest-earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $349,182 and
$425,038 are included in interest income for the periods ending December 31,
1998 and 1997, respectively. (2) All investment securities are taxable.
<PAGE>
Allowance for Loan Losses
- -------------------------
The loan loss provision for the year ended December 31, 1998 was $503,671
compared to $623,738 for the year ended December 31, 1997. Charge-offs during
1998 amounted to $89,702, and recoveries amounted to $12,006. Charge-offs during
1997 amounted to $556,332 and recoveries amounted to $165,053. Two consumer loan
relationships and one commercial loan relationship account for approximately 55%
of chargeoffs during 1998. The allowance for loan losses at December 31, 1998
was $1,516,705, or 1.75% of total loans, compared to $1,090,730, or 1.50% of
total loans, at the end of 1997. Management increased the allowance for loan
losses during 1998 to cover growth in the loan portfolio and management's
evaluation of the level of risk in the portfolio.
After considering current appraisals, comparable sales values, discounted cash
flows and other evidence of current value, management believes that the
allowance for loan losses is sufficient to cover losses inherent in the loan
portfolio. While management uses available information to project losses on
loans, future additions to the allowance may be necessary if economic conditions
change. For example, the Bank's loan portfolio depends in part on real estate
collateral values for repayment. If real estate values decrease, management may
need to adjust the allowance for loan losses. In addition, various regulatory
agencies, as part of their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to increase its
allowance based on information available 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, 1998 and 1997.
1998 1997
---- ----
Balance at the Beginning of Year $1,090,730 $858,271
Charge-offs:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 11,833 150,581
Commercial 5,800 198,791
Consumer 72,069 206,960
------ -------
Total Charge-offs 89,702 556,332
Recoveries:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 5,768 12,398
Commercial 0 67,983
Consumer 6,238 84,672
----- ------
Total Recoveries 12,006 165,053
Net Chargeoffs 77,696 391,279
Provision for Loan Losses 503,671 623,738
------- -------
Balance at the End of Year $1,516,705 $1,090,730
========== ==========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.75% 1.50%
==== ====
Ratio of Net Charge-offs to Average Net
Loans Outstanding During the Year 0.10% 0.60%
==== ====
<PAGE>
The Bank sets aside specific reserves as a precautionary measure on a particular
loan that may deteriorate or on a group of loans that have a significant risk
level or have suffered notable levels of loss 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, 1998, management
determined that eight loans required specific reserves totaling $465,637. At
December 31, 1997, no loans were considered impaired, therefore, no specific
reserves were required. For allocation purposes, the Y2K risk factor identified
by management is considered unallocated. The remaining allowance is attributed
to the loan categories based on the relative percentage of the particular
category to total loans and not according to risk.
The following table presents the allocation of the allowance for loan losses as
of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
% of % of
Loss Loss
Amount Allocated Amount Allocated
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Real Estate Construction $320,753 21.14% $264,502 24.25%
Real Estate Mortgage 526,730 34.73% 324,711 29.77%
SBA - Unguaranteed 373,205 24.61% 251,631 23.07%
Commercial 136,139 8.98% 164,809 15.11%
Consumer 116,544 7.68% 85,077 7.80%
Unallocated 43,334 2.86% 0 0.00%
------ ---- - ----
Total Allowance for Loan Losses $1,516,705 100.00% $1,090,730 100.00%
========== ====== ========== ======
</TABLE>
The Bank had one property held as "other real estate owned," with a total value
of $27,652 as of December 31, 1998. No material loss is anticipated on the sale
of the property. As of December 31, 1997, the Bank had repossessed two vehicles
with a fair value totaling $14,798. No material loss is anticipated on the sale
of these vehicles.
At December 31, 1998, the Bank had eleven borrowers on nonaccrual status in the
total amount of $1,314,170 or 1.54% of net loans, compared to $1,460,262 or
2.04% of net loans at December 31, 1997. One borrower accounts for $578,318 or
44% of total nonaccrual loans, while another borrower had one SBA loan totaling
$514,664 or 39% of total nonaccrual loans at December 31, 1998. The remaining
loans average approximately $22,000 each. Specific reserves totaling $465,637
have been allocated on certain nonaccrual loans considered impaired. One loan,
totaling $35,466 was past due greater than ninety days and still accruing due to
anticipated collectability of the loan. Two loans, totaling $356,666 were past
due greater than 90 days and were still accruing as of December 31, 1997.
<PAGE>
Noninterest Income
- ------------------
Noninterest income was $1,875,496 for the year ended December 31, 1998, compared
to $1,324,818 for the year ended December 31, 1997. Noninterest income for 1998
consisted primarily of gains on sales of SBA loans of $996,250 and service
charges on deposit accounts of $449,161. Noninterest income for 1997 consisted
primarily of gains on sales of SBA loans of $825,569 and service charges on
deposit accounts of $381,427.
Gains on the sales of loans are a recurring source of income for the Bank. They
depend on the Bank's ability to originate SBA guaranteed loans and/or the market
price for such loans. During 1998, SBA sales totaled $12.0 million compared to
sales of $9.6 million in 1997, representing a 25% increase. Gains on sales of
loans increased to $996,250 in 1998 from $825,569 in 1997, representing a 20.67%
increase.
Service charge income for the year ended December 31, 1998 was $449,161, a
17.76% increase over $381,427 for the year ended December 31, 1997. The increase
is primarily attributable to the increase in transaction accounts that are
assessed service charges. Management believes that service charge income will
continue to increase in 1999 as a result of the Bank's marketing of demand
deposit and savings accounts, as well as its fee increases.
Net gains on sales of other real estate were $218,093 in 1998 compared to net
losses on sales of other real estate in 1997 of $106,531. The gain on the sale
of one property accounted for 91% of total gains in 1998.
Noninterest Expense
- -------------------
Noninterest expense for the year ended December 31, 1998 was $5,236,791, a 7.83%
increase over $4,856,737 for the year ended December 31, 1997. Noninterest
expense is primarily composed of salaries and other personnel expenses,
occupancy and miscellaneous operating expenses.
Salary expense and employee benefits was $2,831,528 for the year ended December
31, 1998, a 34.43% increase over $2,106,356 for the year ended December 31,
1997. At December 31, 1998, the Bank employed 62 full-time employees and 8
part-time employees, compared to 49 full-time employees and 7 part-time
employees at December 31, 1997. The increase in the number of personnel,
primarily due to the addition of a third branch and routine performance-based
raises, accounted for the increase. Personnel expense is anticipated to increase
commensurate with asset growth.
Occupancy and equipment expense was $699,453 for the year ended December 31,
1998, a 37.03% increase over $510,441 for the year ended December 31, 1997. The
increase is primarily due to the addition of a new branch in June 1998.
Other operating expense was $1,705,810 for the year ended December 31, 1998, a
7.59% increase over $1,585,545 for the year ended December 31, 1997. The primary
reason for the increase was increased data processing costs due to growth and
increased advertising costs. Additionally, the Bank continued to invest in
improved technology and consultants to aid with its implementation. Other
operating expense as it relates to variable expense is expected to increase in
future periods commensurate with applicable transaction volume.
During 1997, the Bank recorded a nonrecurring loss of $654,395 as a result of a
fraudulent "check-kiting" scheme. The customer involved gained access to funds
deposited in the Bank before the Bank had collected them from the institution on
which they were drawn. Management is trying diligently to recover this loss, but
is uncertain whether its efforts will succeed.
For the years ended December 31, 1998 and 1997, the Company's effective tax rate
was 33% and 17%, respectively. The increase in the effective tax rate during
1998 was primarily attributable to the increase in pre-tax income.
<PAGE>
Financial Condition
-------------------
Assets
- ------
Total assets as of December 31, 1998 were $110,229,513, compared to $87,618,335
as of December 31, 1997. This represents an increase in total assets of 25.8%
for 1998. Total average assets for the year ended December 31, 1998 were
$95,628,431, an increase of 14.54% from $83,484,669 at December 31, 1997.
Investment securities, federal funds sold, interest-bearing deposits and other
investments accounted for 11% of total assets at December 31, 1998 and 7% of
total assets at December 31, 1997. Non-earning assets accounted for 12% of total
assets as of December 31, 1998, compared to 11% as of the end of 1997.
Management invested funds predominantly into loans during 1998 and 1997.
Loans
- -----
The Bank's net loan portfolio for the year ended December 31, 1998 was
$85,171,903, an 18.92% increase over $71,620,734 for the year ended December 31,
1997. Outstanding loans for the year ended December 31, 1998 averaged
$75,176,275, a 14.36% increase over $65,733,060 for the year ended December 31,
1997. Loan growth is attributable to continued loan demand over the last few
years, as well as the Bank's aggressively working toward changing the mix of
earning assets. The loan portfolio had an average yield of 11.72% during 1998
and 11.70% during 1997. The majority of the Bank's loans reprice immediately,
monthly, or quarterly with changes in the prime rate.
The following table presents the loan portfolio categorized by type and the
corresponding percentage of total loans as of December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
<S> <C> <C> <C> <C>
Real Estate Construction $18,868,908 21.77% $17,635,088 24.25%
Real Estate Mortgage 30,995,083 35.75% 21,649,051 29.77%
SBA - Unguaranteed 21,955,805 25.33% 16,774,339 23.07%
Commercial 8,011,468 9.24% 10,983,107 15.11%
Consumer 6,857,344 7.91% 5,669,879 7.80%
--------- ---- --------- ----
Total Loans $86,688,608 100.00% $72,711,464 100.00%
=========== ====== =========== ======
</TABLE>
<PAGE>
Deposits
- --------
Total deposits as of December 31, 1998 were $101,397,797, a 29.20% increase over
$78,483,832 as of December 31, 1997. Average outstanding interest-bearing
deposits were $74,696,845 for 1998, a 13.64% increase from $65,728,665 for 1997.
Interest-bearing deposits cost the Bank an average of 5.39% during 1998,
compared to 5.42% for 1997. 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 $12,563,963 in 1998, a
30.57% increase from $9,622,379 for 1997.
Total time deposits represented 67% of total deposits at December 31, 1998,
compared to 66% at the end of 1997. Time deposits averaged 67% of total average
deposits for 1998, compared to 68% during 1997. The average cost of time
deposits decreased to 6.03% during 1998 from 6.09% during 1997, while the cost
of other funds increased to 3.05% during 1998 as from 3.03% during 1997.
During 1998 and 1997, the Bank used available overnight credit lines in the form
of Federal Home Loan Bank advances and federal funds purchased. During 1998, the
Company obtained a $1 million line of credit from another financial institution.
Company borrowings averaged $401,072 during 1998 compared to $314,574 during
1997. The average cost of the Company's borrowed funds was 7.05% for 1998 and
5.65% for 1997. Management plans to use the credit lines in the future as a
funds management tool.
Liquidity
- ---------
Liquidity management involves matching the cash flow needs of customers, either
depositors wanting to withdraw funds or borrowers needing sufficient funds to
meet their credit needs, and the Bank's ability to meet those needs. The Bank
matched the cash flow needs of its customers primarily by managing short-term,
interest-bearing deposits with correspondent banks, overnight investments and
amortizing loans.
During 1998, federal funds sold, interest-bearing deposits and other investments
averaged $6,621,352 compared to average overnight investments of $4,252,140 in
1997.
Another source of liquidity is the repayment of maturing loans. The Bank has
relationships with several correspondent banks that can provide funds on short
notice. Management monitors closely and maintains appropriate levels of
interest-bearing assets and liabilities so that the Bank has adequate funds to
meet customer withdrawals and loan requests and so that net interest margins are
maximized. The Company believes that its liquidity will remain adequate to meet
its expected business needs.
<PAGE>
Interest Rate Sensitivity
- -------------------------
The objective of interest rate sensitivity management is to minimize the effect
of interest rate changes on the Bank's 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 at 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,
1998, 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 $0 $516 $26 $542
Federal Funds Sold, Interest-Bearing
Deposits and other Investments 10,770 0 0 0 0 10,770
Loans 58,528 1,770 1,014 7,598 16,262 85,172
------ ----- ----- ----- ------ ------
Total Earning Assets $69,298 $1,770 $1,014 $8,114 $16,288 $96,484
======= ====== ====== ====== ======= =======
Interest Bearing Demand Deposits $15,072 $0 $0 $0 $0 $15,072
Savings Deposits 3,091 0 0 0 0 3,091
Certificates of Deposit 14,293 13,090 18,413 22,516 0 68,312
Note Payable and Other Borrowings 519 0 0 0 0 519
--- - - - - ---
Total Interest Bearing Liabilities $32,975 $13,090 $18,413 $22,516 $0 $86,994
======= ======= ======= ======= == =======
Interest Sensitivity GAP $36,323 ($11,320) ($17,399) ($14,402) $16,288 9,490
Cumulative GAP $36,323 25,003 7,604 ($6,798) 9,490
% of Earning Assets to
Interest Bearing Liabilities 210.15% 13.52% 5.51% 36.04% N/A
Cumulative % of Earning
Assets to Interest
Bearing Liabilities 210.15% 154.28% 111.79% 92.19% 110.91%
% of Cumulative GAP to Total
Earning Assets 37.65% 25.91% 7.88% -7.05% 9.84%
</TABLE>
Based on this gap analysis and assuming no change in the mix of earning assets
or interest bearing liabilities, rising interest rates generally would increase
the Bank's net interest margin. Falling interest rates generally would decrease
the Bank's net interest margin. However, 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 on a monthly basis the effect of potential
interest rate changes and prepayments on its entire portfolio.
Capital Resources
- -----------------
Capital, as measured by total stockholders' equity to total assets, was 6.73% at
December 31, 1998, compared to 8.06% at December 31, 1997. The Company's common
stock had a book value per share of $13.40 at December 31, 1998 compared to
$12.13 at December 31, 1997. 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. During 1998, the Company purchased 28,500 of its
common shares at $18.20 per share, totaling $518,716. All of the repurchased
shares were held in treasury at December 31, 1998 for issuance under employee
and director benefit plans.
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 that 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 that
have received the highest supervisory rating from their regulators. Institutions
that 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 operate 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 Company and Bank at December 31, 1998, compared to the
minimum ratios required by regulation.
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
(in thousands) (in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk-Weighted Assets)
Consolidated $8,413 9.53% 7,059 8.00% N/A N/A
Bank $8,940 10.13% 7,059 8.00% 8,823 10.00%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $7,305 8.28% 3,529 4.00% N/A N/A
Bank $7,832 8.88% 3,529 4.00% 5,294 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $7,305 6.95% 4,202 4.00% N/A N/A
Bank $7,832 7.45% 4,202 4.00% 5,253 5.00%
As of December 31, 1997:
Total Capital (to Risk-Weighted Assets)
Consolidated $7,499 10.22% 5,868 8.00% N/A N/A
Bank $7,511 10.24% 5,868 8.00% 7,335 10.00%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $6,572 8.96% 2,934 4.00% N/A N/A
Bank $6,584 8.98% 2,934 4.00% 4,401 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $6,572 7.51% 3,498 4.00% N/A N/A
Bank $6,584 7.53% 3,498 4.00% 4,372 5.00%
</TABLE>
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 (1) the core processing system for loans, deposits, and general
ledger, and (2) the wide area computer network. The existing core processing
system was successfully tested by proxy in May 1998 and October 1998 and
directly by the Company in August 1998. 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. Additionally, independent testing by consultants has
been performed.
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 this plan in the future to address Y2k
issues specifically. The Company has established a methodology for defining Y2k
risk in the loan portfolio, including assessing the specific risk of each
commercial customer with total debt in excess of $100,000. Currently, the
allowance for loan losses includes a factor of approximately $43,000. This
factor will be adjusted as necessary as information on the risk assessment of
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 proxy and directly by the
Company. The Company's correspondent bank reports that its organization expects
to achieve full Year 2000 compliance by July 1999.
The Company incurred approximately $50,000 in 1998 and has 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 assurance that all
hardware and software that the Company uses 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, to be completed and adopted shortly, will
address these potential issues.
The Company has decided to change core processors in order to improve
efficiencies from new technology. The decision to change is not associated with
Y2k issues. After extensive investigation, the Company has chosen a new
third-party vendor and anticipates that the conversion will occur during the
second quarter of 1999. The new vendor has represented to the Company that it
complies 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>
MARKET PRICE AND DIVIDEND INFORMATION
As of December 31, 1998, there were approximately 650 shareholders of record and
553,804 shares of the Company's common stock outstanding. The following table
sets forth high and low sales price information for the common stock for each of
the quarters in which trading occurred since January 1, 1997.
<TABLE>
<CAPTION>
Sales Price Sales Price
----------- -----------
Calendar Period High Low Calendar Period High Low
- --------------- ---- --- --------------- ---- ---
1998 1997
- ---- ----
<S> <C> <C> <C> <C>
First Quarter $19.00 $17.00 First Quarter $16.50 $13.50
Second Quarter $18.50 $17.25 Second Quarter $16.50 $15.00
Third Quarter $18.50 $16.75 Third Quarter $18.25 $16.50
Fourth Quarter $18.75 $17.00 Fourth Quarter $18.00 $17.00
</TABLE>
Management believes that the above prices reflect sales were between individuals
or entities that had various reasons and degrees of motivation for their
purchases and sales. Further, there may have been sales between private
individuals who have not presented their 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, 1998, the Bank could pay approximately $1,110,000
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.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
First Cherokee Bancshares, Inc.
Woodstock, Georgia
We have audited the accompanying consolidated balance sheets of First Cherokee
Bancshares, Inc. and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of earnings, comprehensive income, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1998. 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
/s/Porter Keadle Moore, LLP
Atlanta, Georgia
January 22, 1999
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets
------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C> <C>
Cash and due from banks, including reserve requirements
of $429,000 and $327,000 $ 4,549,595 811,253
Interest-bearing deposits with banks 10,770,141 5,021,671
---------- ---------
Cash and cash equivalents 15,319,736 5,832,924
Securities available for sale 542,345 602,403
Other investments 697,800 697,800
Loans, net 85,171,903 71,620,734
Premises and equipment, net 3,789,718 3,380,329
Accrued interest receivable and other assets 4,708,011 5,484,145
--------- ---------
$ 110,229,513 87,618,335
============== ==========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 14,922,682 11,622,913
Interest-bearing demand 15,071,709 13,114,251
Savings 3,091,456 2,249,558
Time 55,814,726 43,439,801
Time, in excess of $100,000 12,497,224 8,057,309
-------- ---------- ---------
Total deposits 101,397,797 78,483,832
Note payable and other borrowings 518,712 1,000,000
Accrued interest payable and other liabilities 894,656 1,070,604
------- ---------
Total liabilities 102,811,165 80,554,436
=========== ==========
Commitments
Stockholders' equity:
Common stock, par value $1, authorized 10,000,000 shares, issued
591,544 shares, outstanding 553,804 and 582,304 shares 591,544 591,544
Additional paid-in capital 5,273,257 5,273,257
Retained earnings 2,154,030 1,281,422
Accumulated other comprehensive income, net of tax 2,233 1,676
----- -----
8,021,064 7,147,899
Less treasury stock at cost, 37,740 and 9,240 shares (602,716) (84,000)
-------- -------
Total stockholders' equity 7,418,348 7,063,899
--------- ---------
$ 110,229,513 87,618,335
============== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 8,809,126 7,691,664 6,473,525
Interest on federal funds sold - 3,371 26,941
Interest on deposits with other banks 337,161 227,095 633,184
Interest and dividends on investments:
U.S. Government agencies and mortgage-backed 38,566 43,540 84,357
Other 45,144 39,660 36,497
------ ------ ------
Total interest income 9,229,997 8,005,330 7,254,504
--------- --------- ---------
Interest expense:
Interest on deposits:
Demand 419,378 377,075 310,870
Savings 65,423 57,110 65,073
Time 3,543,116 3,130,787 3,367,818
--------- --------- ---------
4,027,917 3,564,972 3,743,761
Interest on note payable and other borrowings 28,288 17,770 -
------ ------ ---------
Total interest expense 4,056,205 3,582,742 3,743,761
--------- --------- ---------
Net interest income 5,173,792 4,422,588 3,510,743
Provision for loan losses 503,671 623,738 373,510
------- ------- -------
Net interest income after provision for loan losses 4,670,121 3,798,850 3,137,233
--------- --------- ---------
Noninterest income:
Service charges on deposit accounts 449,161 381,427 276,305
Gains on sales of loans, net 996,250 825,569 791,793
Gain (loss) on sales of other real estate and repossessions 218,093 (106,531) -
Miscellaneous 211,992 224,353 218,354
------- ------- -------
Total noninterest income 1,875,496 1,324,818 1,286,452
Noninterest expenses:
Salaries and employee benefits 2,831,528 2,106,356 1,950,415
Occupancy 699,453 510,441 537,810
Other operating 1,705,810 1,585,545 1,351,491
Nonrecurring loss on deposit account - 654,395 -
--------- --------- ---------
Total noninterest expenses 5,236,791 4,856,737 3,839,716
--------- --------- ---------
Earnings before income taxes 1,308,826 266,931 583,969
Income tax expense 436,218 46,047 165,749
------- ------ -------
Net earnings $ 872,608 220,884 418,220
============ ======= =======
Basic earnings per share $ 1.53 0.38 0.76
============ ==== ====
Diluted earnings per share $ 1.31 0.33 0.68
============ ==== ====
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 872,608 220,884 418,220
Other comprehensive income, net of tax:
Unrealized gain (loss) arising during the period, net of
tax of $287, $1,477 and $1,235, respectively 557 (2,868) (2,397)
--- ------ ------
Comprehensive income $ 873,165 218,016 415,823
============ ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income, Treasury
Stock Capital Earnings Net of Tax Stock Total
----- ------- -------- ---------- ----- -----
<S> <C><C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 561,044 5,026,457 642,318 6,941 (84,000) 6,152,760
Change in accumulated
other comprehensive
income, 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 accumulated
other comprehensive
income, 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
Purchase of treasury stock - - - - (518,716) (518,716)
Change in accumulated
other comprehensive
income, net of tax - - - 557 - 557
Net earnings - - 872,608 - - 872,608
--------- --------- --------- ----- ------- -------
Balance, December 31, 1998 $ 591,544 5,273,257 2,154,030 2,233 (602,716) 7,418,348
========= ========= ========= ===== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 872,608 220,884 418,220
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation, amortization and accretion 436,339 349,424 244,401
Provision for loan losses 503,671 623,738 373,510
Gain on sales of loans, net (996,250) (825,569) (791,793)
Deferred income tax benefit (110,031) (57,924) (120,718)
(Gain) loss on sales of other real estate and repossessions (218,093) 106,531 -
Change in:
Interest receivable (92,175) (25,964) (17,526)
Other assets (79,413) (602,324) 676,083
Interest payable (444) 10,977 (590)
Other liabilities (175,504) 404,147 64,562
-------- ------- ------
Net cash provided by operating activities 140,708 203,920 846,149
------- ------- -------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 61,017 185,236 5,694,188
Purchases of securities available for sale - - (5,450,344)
Purchases of other investments - (47,000) (58,500)
Proceeds from sales of loans 11,964,064 9,569,405 6,116,575
Net increase in loans (25,538,943) (20,448,840) (12,798,429)
Purchases of premises and equipment (690,639) (1,539,420) (150,024)
Proceeds from sales of other real estate and repossessions 1,672,411 194,066 79,277
Improvements to other real estate and repossessions (35,767) (32,331) (75,695)
------- ------- -------
Net cash used in investing activities (12,567,857) (12,118,884) (6,642,952)
----------- ----------- ----------
Cash flows from financing activities:
Net change in demand and savings deposits 6,099,125 5,900,919 (3,159,237)
Net change in time deposits 16,814,840 4,185,795 (4,564,646)
Proceeds from (payment of) FHLB advances (1,000,000) 1,000,000 -
Proceeds from exercise of stock warrants - 277,300 -
Net proceeds from note payable 518,712 - -
Purchase of treasury stock (518,716) - -
-------- --------- ---------
Net cash provided (used) by financing activities 21,913,961 11,364,014 (7,723,883)
---------- ---------- ----------
Net change in cash and cash equivalents 9,486,812 (550,950) (13,520,686)
Cash and cash equivalents at beginning of year 5,832,924 6,383,874 19,904,560
--------- --------- ----------
Cash and cash equivalents at end of year $ 15,319,736 5,832,924 6,383,874
============ ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4,056,649 3,571,765 3,744,351
Income taxes, net of refunds received $ 223,740 355,000 275,000
Noncash investing activities:
Change in accumulated other comprehensive income, net of tax $ 557 (2,868) (2,397)
Transfer of loans to other real estate and repossessions $ 789,132 1,018,383 1,092,545
Financed sales of other real estate and repossessions $ 110,141 544,137 1,512,764
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
First Cherokee Bancshares, Inc. (the "Company") is a bank holding company
whose business is conducted by its wholly owned bank subsidiary, First
National Bank of Cherokee (the "Bank"). The Company is subject to
regulation under the Bank Holding Company Act of 1956.
The Bank is a commercial bank that serves Woodstock, Georgia, a community
located approximately 20 miles north of metropolitan Atlanta and
surrounding Cherokee and Cobb counties. The Bank is chartered and
regulated by the 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 1996 and 1997 amounts have been
reclassified to conform to the 1998 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, 1998 and 1997, 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.
<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.
Servicing assets and liabilities are assessed for impairment or increased
obligation based upon their fair values. 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, 1998. There were no SBA loans held for sale at December 31,
1998 and 1997.
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. The Bank supplements its internal
review process through the use of an independent external loan review
performed on an annual basis.
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.
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
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
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
----------------------
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. The reconciliation of the amounts used in the
computation of basic earnings per share and diluted earnings per share for
the years ended December 31, 1998, 1997 and 1996 is as follows:
For the Year Ended December 31, 1998
------------------------------------
Net Common Per Share
Earnings Shares Amount
-------- ------ ------
Basic earnings per share $ 872,608 572,103 $ 1.53
============= ======= ======
Effect of dilutive securities:
Stock options - 13,059
Warrants - 81,707
------- ------
Diluted earnings per share $ 872,608 666,869 $ 1.31
============= ======= ======
<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
---------------------------------
For the Year Ended December 31, 1997
------------------------------------
Net Common Per Share
Earnings Shares Amount
-------- ------ ------
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 Common Per Share
Earnings Shares 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
========= ======= ======
Comprehensive Income
--------------------
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 established standards for the reporting and
display of comprehensive income and its components in the financial
statements. Accumulated other comprehensive income is solely related to the
net of tax effect of unrealized gains and losses on securities available
for sale.
Recent Accounting Pronouncements
--------------------------------
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for hedging and for derivative
instruments including derivative instruments embedded in other contracts.
It requires the fair value recognition of derivatives as assets or
liabilities in the financial statements. The accounting for the changes in
the fair value of a derivative depends on the intended use of the
derivative instrument at inception. Changes in fair value for instruments
used as fair value hedges are recorded in earnings of the period
simultaneous with accounting for the fair value change of the item being
hedged. Changes in fair value for cash flow hedges are recorded in
comprehensive income rather than earnings. Changes in fair value for
derivative instruments that are not intended as a hedge are recorded in the
earnings of the period of the change. SFAS No. 133 is effective for all
fiscal quarters beginning after June 15, 1999, but initial application of
the statement must be made as of the beginning of the quarter. At the date
of initial application, an entity may transfer any held to maturity
security into the available for sale or trading categories without calling
into question the entity's intent to hold other securities to maturity in
the future. The Company believes the adoption of SFAS No. 133 will not have
a material impact on its financial position, results of operations or
liquidity.
<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, 1998 and 1997 are presented below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1998
----
U.S. Government agencies $ 500,000 1,608 - 501,608
Mortgage-backed securities 38,744 1,993 - 40,737
------ ----- ----- ------
$ 538,744 3,601 - 542,345
========= ===== ===== =======
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
========= ===== === =======
The amortized cost and estimated fair value of securities available for
sale at December 31, 1998, 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.
Amortized Estimated
Cost Fair Value
---- ----------
One to five years $ 500,000 501,608
Mortgage-backed securities 38,744 40,737
------ ------
$ 538,744 542,345
========= =======
There were no sales of securities during 1998, 1997 and 1996.
Securities with a carrying value of approximately $502,000 and $546,000 at
December 31, 1998 and 1997, respectively, were pledged to secure public deposits
as required by law.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) LOANS
Major classifications of loans at December 31, 1998 and 1997 are presented
below:
1998 1997
---- ----
Commercial $ 8,011,468 10,983,107
SBA - unguaranteed 21,955,805 16,774,339
Real estate - mortgage 30,995,083 21,649,051
Real estate - construction 18,868,908 17,635,088
Installment and other consumer 6,857,344 5,669,879
--------- ---------
Total loans 86,688,608 72,711,464
Less allowance for loan losses 1,516,705 1,090,730
--------- ---------
Total net loans $ 85,171,903 71,620,734
============ ==========
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. 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.
The Bank services SBA loans for others that are not included in the
accompanying consolidated balance sheets with unpaid principal balances at
December 31, 1998 and 1997 of approximately $34,345,000 and $29,588,000,
respectively. Servicing assets amounted to $631,000 and $486,000 at December 31,
1998 and 1997, respectively. During 1998, the Bank recognized servicing assets
of $299,000 and amortized approximately $154,000. Interest only strips
receivable totaled $573,000 and $598,000 at December 31, 1998 and 1997,
respectively. Servicing assets and interest only strips receivable are included
in accrued interest receivable and other assets on the consolidated balance
sheet.
An analysis of the activity in the allowance for loan losses for the years
ended December 31, 1998, 1997 and 1996 is presented below:
1998 1997 1996
---- ---- ----
Balance at beginning of year $ 1,090,730 858,271 685,706
Provision 503,671 623,738 373,510
Loans charged off (89,702) (556,332) (328,253)
Recoveries 12,006 165,053 127,308
------ ------- -------
Balance at end of year $ 1,516,705 1,090,730 858,271
=========== ========= =======
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(4) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 1998 and 1997 are summarized as
follows:
1998 1997
---- ----
Land $ 586,885 586,885
Buildings and improvements 2,828,108 2,085,187
Furniture, fixtures and equipment 1,401,683 835,839
Construction in progress 17,068 635,193
------ -------
4,833,744 4,143,104
Less accumulated depreciation 1,044,026 762,775
--------- -------
$ 3,789,718 3,380,329
=========== =========
Depreciation expense was approximately $281,000, $176,000 and $152,000 for
the years ended December 31, 1998, 1997 and 1996, respectively.
(5) TIME DEPOSITS
At December 31, 1998 the scheduled maturities of time deposits are as
follows:
1999 $ 45,795,549
2000 12,542,110
2001 3,032,865
2002 3,193,246
2003 and thereafter 3,748,180
---------
$ 68,311,950
============
(6) NOTE PAYABLE AND OTHER BORROWINGS
In April 1998, the Company obtained a $1,000,000 line of credit with
another financial institution. The debt is collateralized by 100% of the stock
of the Bank and calls for interest to be paid quarterly at the prime rate less
50 basis points. The loan matures on March 5, 1999; interest is due on a
quarterly basis. The loan agreement contains covenants relating to the level of
the allowance for loan losses, payments of dividends, regulatory capital
adequacy and return on average assets. At December 31, 1998, the Company was in
compliance with all loan covenants.
The Bank has 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 on 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 advance outstanding totaling $1,000,000
which matured in December 1998. The Bank had no borrowings from the FHLB
outstanding as of December 31, 1998.
(7) INCOME TAXES
The following is an analysis of income tax expense for the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
---- ---- ----
Current $ 546,249 103,971 286,467
Deferred (110,031) (57,924) (120,718)
-------- ------- --------
$ 436,218 46,047 165,749
========= ====== =======
<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, 1998, 1997 and 1996 are as follows:
1998 1997 1996
---- ---- ----
Pretax income at statutory rates $445,001 90,756 198,549
Add (deduct):
Increase in cash surrender value of life insurance (22,876) (25,817) (14,208)
State taxes, net of federal tax effect (709) (17,996) (14,918)
Other 14,802 (896) (3,674)
------ ---- ------
$436,218 46,047 165,749
======== ====== =======
The following summarizes the components of the net deferred tax asset. The
net deferred tax asset is included in other assets at December 31, 1998 and
1997.
1998 1997
---- ----
Deferred tax assets:
Allowance for loan losses $ 504,092 339,027
Deferred gains on SBA loans 64,688 102,643
State tax credits 16,240 28,263
Deferred gains on sales of other real state - 8,053
Nonaccrual loan interest 37,876 46,529
Deferred compensation 49,774 32,197
Core deposit intangible 29,254 24,920
------ ------
Gross deferred tax asset 701,924 581,632
------- -------
Deferred tax liabilities:
Premises and equipment 48,333 38,072
Unrealized gain on securities available for sale 1,368 1,027
----- -----
Gross deferred tax liability 49,701 39,099
------ ------
Net deferred tax asset $ 652,223 542,533
========= =======
(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. The amount of dividends that the Bank could pay in 1999 without obtaining
prior regulatory approval is approximately $1,110,000 plus 1999 earnings of the
Bank.
During 1998, the Company purchased 28,500 of its common shares at an
aggregate purchase price of $518,716, or $18.20 per share. All of the acquired
shares are held in treasury for issuance under employee and director benefit
plans.
<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.
No warrants were exercised in 1998.
The Company 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 granted prior to March 1998 vested
immediately at the date of grant. All options granted subsequent to February
1998 vest over a five-year period.
In March 1998, the Company reserved 15,000 shares of nonqualified stock
options for the benefit of the Company's directors which allows them to purchase
Company stock at a price equal to the fair market value at the date of grant.
The options vest over a five-year period and are exerciseable no later than ten
years from the date of grant.
A summary status of the Company's director and employee option activity as
of December 31, 1998, 1997 and 1996, and changes during the years ending on
those dates, is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Option Exercise Option Exercise Option Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 27,331 $ 9.99 24,531 $ 9.09 24,531 $ 9.09
Granted during the year 39,400 $17.64 5,000 $14.00 - -
Canceled during the year - - (2,200) $ 9.09 - -
------ ------ ------
Outstanding, end of year 66,731 $14.51 27,331 $ 9.99 24,531 $ 9.09
====== ====== ======
Options exercisable at year end 27,331 $ 9.99 27,331 $ 9.99 24,531 $ 9.09
====== ====== ======
Weighted average fair value of
options granted during the year $ 8.89 $ 6.56
====== =======
</TABLE>
The weighted average remaining contractual life for options with exercise
prices ranging from $9.09 to $14.00 is 2.8 years and with exercise prices
ranging from $17.00 to $17.71 is 9.3 years at December 31, 1998.
All director and employee options 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
director and employee options been determined based upon the fair value of the
options at the grant dates consistent with 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 1998 and 1997 awards are
presented below.
1998 1997
---- ----
Net earnings As reported $ 872,608 220,884
Proforma $ 840,031 200,548
Basic earnings per share As reported $ 1.53 0.38
Proforma $ 1.47 0.35
Diluted earnings per share As reported $ 1.31 0.33
Proforma $ 1.26 0.30
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) EMPLOYEE AND DIRECTOR BENEFIT PLANS, CONTINUED
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 1998 and 1997: volatility of 0.28 and 0.18,
respectively, no dividend yield, a risk-free interest rate of 5.0% and 5.9%,
respectively, and an expected life of 10 years.
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, 1998 and 1997, the cash
surrender value of the insurance contracts was approximately $1,528,000 and
$1,461,000 and is included as a component of other assets. Expenses incurred for
benefits were approximately $36,000, $21,000 and $18,000 during 1998, 1997 and
1996, 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 $43,000, $36,000 and
$26,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
(10) RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, deposits from directors, executive officers
and their related interests aggregated approximately $2,328,000 and $1,833,000.
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 1998:
Balance at December 31, 1997 $ 1,977,000
New loans 698,000
Repayments (1,985,000)
----------
Balance at December 31, 1998 $ 690,000
============
(11) REGULATORY MATTERS
The Company and the Bank are 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 financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company and the
Bank must meet specific guidelines that involve quantitative measures of assets,
liabilities and certain off-balance-sheet items as calculated under regulatory
accounting practices. Capital amounts and classifications 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 maintenance of 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, 1998, that the Company and the
Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 1998, 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
and 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.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) REGULATORY MATTERS, CONTINUED
The Company's and the Bank's actual capital amounts and ratios are also
presented below.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C><C> <C> <C> <C> <C> <C>
As of December 31, 1998:
- -----------------------
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 8,412,824 9.53% 7,058,639 8.00% N/A N/A
Bank $ 8,939,662 10.13% 7,058,639 8.00% 8,823,299 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)
Consolidated $ 7,304,803 8.28% 3,529,320 4.00% N/A N/A
Bank $ 7,831,641 8.88% 3,529,320 4.00% 5,293,979 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated $ 7,304,803 6.95% 4,202,147 4.00% N/A N/A
Bank $ 7,831,641 7.45% 4,202,147 4.00% 5,252,684 5.00%
As of December 31, 1997:
------------------------
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 7,498,803 10.22% 5,867,832 8.00% N/A N/A
Bank $ 7,510,691 10.24% 5,867,832 8.00% 7,334,790 10.00%
Tier 1 Capital
(to Risk-Weighted Assets)
Consolidated $ 6,572,082 8.96% 2,933,916 4.00% N/A N/A
Bank $ 6,583,970 8.98% 2,933,916 4.00% 4,400,874 6.00%
Tier 1 Capital
(to Average Assets)
Consolidated $ 6,572,082 7.51% 3,497,880 4.00% N/A N/A
Bank $ 6,583,970 7.53% 3,497,880 4.00% 4,372,350 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, 1998, 1997 and 1996, rental payments of
approximately $59,000, $57,000 and $55,000 were made to the director.
Additionally, the Bank leases certain furniture, fixtures and equipment under
operating leases from unaffiliated lessors. Total rent expense for both
affiliated and unaffiliated lessors was approximately $145,000, $147,000 and
$176,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
<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:
Year Ending
December 31,
------------
1999 $ 60,529
2000 62,344
2001 64,215
2002 66,141
2003 68,126
Thereafter 392,828
-------
$ 714,183
==========
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.
Approximate
Contract Amount
---------------
1998 1997
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 15,532,000 10,461,000
Standby letters of credit $ 309,000 316,000
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 collateralized by real estate, certificates of deposit or other
personal assets at December 31, 1998 and 1997.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 continues to pursue collection of this amount,
however, the outcome is currently unable to be determined.
(14) SUPPLEMENTAL FINANCIAL DATA
Components of other operating expenses in excess of 1% of total interest
and noninterest income for the years ended December 31, 1998, 1997 and 1996 are
as follows:
1998 1997 1996
---- ---- ----
Legal and professional fees $ 298,463 357,640 123,558
Data processing $ 359,750 323,600 242,134
FDIC assessment $ 19,802 5,115 139,071
Stationery and supplies $ 140,902 85,914 87,310
Collection expense $ 11,128 29,774 87,714
Other real estate expense $ 14,233 112,890 54,186
(15)FIRST CHEROKEE BANCSHARES, INC. (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Balance Sheets
December 31, 1998 and 1997
Assets
------
1998 1997
---- ----
Cash $ 2,251 11,888
Investment in bank subsidiary 7,945,186 7,052,011
--------- ---------
$ 7,947,437 7,063,899
=========== =========
Liabilities and Stockholders' Equity
------------------------------------
Note payable $ 518,712 -
Other liabilities 10,377 -
Stockholders' equity 7,418,348 7,063,899
--------- ---------
$ 7,947,437 7,063,899
=========== =========
Statements of Earnings
For the Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
---- ---- ----
Interest income (expense) $ (20,010) 3,206 -
Equity in undistributed
earnings of bank subsidiary 892,618 217,678 418,220
------- ------- -------
Net earnings $ 872,608 220,884 418,220
========= ======= =======
<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, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C><C> <C> <C>
Net earnings $ 872,608 220,884 418,220
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Equity in undistributed earnings of bank subsidiary (892,618) (217,678) (418,220)
Change in other liabilities 10,377 - -
------ ------- -------
Net cash provided (used) by operating activities (9,633) 3,206 -
------ ----- -------
Cash flows from financing activities:
Net proceeds from note payable 518,712 - -
Proceeds from exercise of stock warrants - 277,300 -
Capital infusion to bank subsidiary - (280,000) -
Purchase of treasury stock (518,716) - -
-------- ------- -------
Net cash used by financing activities (4) (2,700) -
-- ------ --
Net change in cash (9,637) 506 -
Cash at beginning of the period 11,888 11,382 11,382
------ ------ ------
Cash at end of the period $ 2,251 11,888 11,382
Noncash investing activities:
Change in accumulated other comprehensive income,
net of tax $ 557 (2,868) (2,397)
=========== ====== ======
</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 and interest-bearing deposits with other banks,
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.
<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.
Note Payable and Other Borrowings
---------------------------------
Because the note payable and other borrowings 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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Assets:
-------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 15,319,736 15,319,736 5,832,924 5,832,924
Securities available for sale $ 542,345 542,345 602,403 602,403
Other investments $ 697,800 697,800 697,800 697,800
Loans, net $ 85,171,903 84,968,921 71,620,734 71,380,704
Servicing assets $ 631,000 631,000 486,000 486,000
Interest-only strips receivable $ 573,000 573,000 598,000 598,000
Liabilities:
Deposits $ 101,397,797 101,715,663 78,483,832 78,727,000
Note payable and other borrowings $ 518,712 518,712 1,000,000 1,000,000
Unrecognized financial instruments:
Commitments to extend credit $ 15,532,000 15,532,000 10,461,000 10,461,000
Standby letters of credit $ 309,000 309,000 316,000 316,000
</TABLE>
<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
Elwin K. Bobo --
MAILING ADDRESS Bobo Construction Company
P. O. Box 1238 Michael A. Edwards --
Woodstock, Georgia 30188 Edwards Tire Sales, Inc.
EXECUTIVE OFFICERS J. Stanley Fitts --
Reeves Floral Products, Inc.
Carl C. Hames, Jr .--
Chief Executive Officer Russell L. Flynn --
Century 21 Cherokee Realty
R. O. Kononen, Jr. --
President Carl C. Hames, Jr. --
First National Bank of Cherokee
Kitty A. Kendrick --
Executive Vice President/ C. Garry Haygood --
Chief Financial Officer Haygood Contracting, Inc.
Neal E. Davies -- Thomas D. Hopkins, Jr. --
Executive Vice President/ Hopkins and Son, Inc.
Asset Quality
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
GENERAL OFFICES BOARD OF DIRECTORS
9860 Highway 92
Woodstock, Georgia 30188 Alan D. Bobo --
Bobo Plumbing Company
Elwin K. Bobo --
MAILING ADDRESS Bobo Construction Company
P. O. Box 1238 Michael A. Edwards --
Woodstock, Georgia 30188 Edwards Tire Sales, Inc.
J. Stanley Fitts --
GENERAL COUNSEL Reeves Floral Products, Inc.
Powell,Goldstein,Frazer & 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.
Thomas D. Hopkins, Jr. --
EXECUTIVE OFFICERS Hopkins and Son, Inc.
Carl C. Hames, Jr .-- Bobby R. Hubbard --
Chief Executive Officer/ Lockheed Martin Aeronautical System
President R. O. Kononen, Jr. --
Kitty A. Kendrick -- First National Bank of Cherokee
Executive Vice President/ Dennis M. Lord --
Chief Financial Officer Bay, Lingerfelt & Lord, Inc.
Larry R. Lusk --
Industrial and Commercial Developer
Stuart R. Tasman --
Doctor of Optometry
ANNUAL MEETING
Date: April 28, 1999
Time: 4:00 PM Eastern Daylight Time
Place: Woodstock Public Library
7745 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.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1999, accompanying the consolidated
financial statements incorporated by reference in the Annual Report of First
Cherokee Bancshares, Inc. on Form 10-KSB for the year ended December 31, 1998.
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 30, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,549,595
<INT-BEARING-DEPOSITS> 10,770,141
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 542,345
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 85,171,903
<ALLOWANCE> 1,516,705
<TOTAL-ASSETS> 110,229,513
<DEPOSITS> 101,397,797
<SHORT-TERM> 518,712
<LIABILITIES-OTHER> 894,656
<LONG-TERM> 0
0
0
<COMMON> 591,544
<OTHER-SE> 6,826,804
<TOTAL-LIABILITIES-AND-EQUITY> 110,229,513
<INTEREST-LOAN> 8,809,126
<INTEREST-INVEST> 83,710
<INTEREST-OTHER> 337,161
<INTEREST-TOTAL> 9,229,997
<INTEREST-DEPOSIT> 4,027,917
<INTEREST-EXPENSE> 4,056,205
<INTEREST-INCOME-NET> 5,173,792
<LOAN-LOSSES> 503,671
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 5,236,791
<INCOME-PRETAX> 1,308,826
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 872,608
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.31
<YIELD-ACTUAL> 11.11
<LOANS-NON> 1,314,170
<LOANS-PAST> 1,415,268
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,090,730
<CHARGE-OFFS> 89,702
<RECOVERIES> 12,006
<ALLOWANCE-CLOSE> 1,516,705
<ALLOWANCE-DOMESTIC> 1,473,371
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 43,334
</TABLE>
