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, 1999
[ ] 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, 1999 were
$12,562,229.
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant at March 17, 2000, was $7,081,782 based on an estimated market price
of $18.125 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 17,
2000, was 745,949 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1999 are incorporated by reference into Parts I and II of this report.
Portions of the Proxy Statement for the 2000 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission within 120 days of the
Registrant's 1999 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.
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 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
<PAGE>
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 FDIC up to the maximum amount
permitted by law.
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 1999, the Bank's loan portfolio consisted of approximately 6%
Consumer Loans, 8% Commercial Loans, 24% U.S. Small Business Administration
("SBA") - Unguaranteed portion of Loans, and 62% Commercial and Residential Real
Estate and Construction Loans. The Bank's net loan-to-deposit ratio was
approximately 99% as of December 31, 1999.
Total net loans as of December 31, 1999 were $109,209,866, with the percentage
of 30 days or greater delinquent loans at year end at .96%. The percentage of
substandard rated loans was 2.15% of total outstanding loans, which represented
21.05% of risk-based capital. No loans were considered impaired. As of December
31, 1999, the Bank had eleven borrowers in nonaccrual status totaling $338,825.
During 1999, the loan loss provision was $143,135, and gross charge-offs totaled
$324,546; recoveries during 1999 amounted to $3,397. The balance in the loan
loss reserve account was $1,338,691, or 1.21% of loans, as of December 31, 1999.
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.
<PAGE>
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.
COMMERCIAL LOANS. The Bank markets its commercial loans to parties whose demand
for funds falls within the Bank's legal lending limits and who 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 where 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.
<PAGE>
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 to insure an acceptable asset/liability mix. Management's philosophy
is 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. Management prepares a report
reflecting interest-sensitive assets and interest-sensitive liabilities for the
Bank's Board of Directors on a quarterly basis. Our objective is to manage
interest-sensitive assets and liabilities so as to minimize the impact of
substantial movements in 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, 1999, the Bank employed 69 full-time employees and 12 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, 1999 and December 31, 1998. 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,
1999 and 1998.
TABLE 1
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
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) $98,568,066 $10,708,238 10.86% $75,176,275 $8,809,126 11.72%
Investment Securities (2) 529,722 33,126 6.25% 697,800 38,566 5.53%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments 5,108,401 257,315 5.04% 7,208,238 382,305 5.30%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Earning Assets 104,206,189 $10,998,679 10.55% 83,082,313 $9,229,997 11.11%
Non-Earning Assets 14,849,749 12,546,118
-------------- -------------
Total Average Assets $119,055,938 $95,628,431
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $7,802,654 $179,872 2.31% $5,832,606 $134,291 2.30%
Money Market Accounts 11,075,780 439,480 3.97% 7,454,788 285,087 3.82%
Savings 3,684,209 91,079 2.47% 2,614,927 65,423 2.50%
Time, $100,000 and Over 20,472,091 1,158,000 5.66% 15,774,440 944,889 5.99%
Other Time 47,982,685 2,708,461 5.64% 43,020,084 2,598,227 6.04%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Bearing Deposits 91,017,419 $4,576,892 5.03% 74,696,845 $4,027,917 5.39%
Note Payable and Other Borrowings 2,355,833 148,071 6.29% 401,072 28,288 7.05%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Bearing Liabilities 93,373,252 $4,724,963 5.06% 75,097,917 $4,056,205 5.40%
Non Interest-Bearing Demand Deposits 16,639,224 12,563,963
Other Liabilities 118,849 491,120
-------------- -------------
Total Liabilities 110,131,325 88,153,000
Stockholders' Equity 8,924,613 7,475,431
-------------- -------------
Total Average Liabilities and
Stockholders' Equity $119,055,938 $95,628,431
============== =============
Net Average Earning Assets $10,832,937 $7,984,396
Net Yield on Interest Earning Assets 6.02% 6.23%
Net Interest Rate Spread 5.49% 5.71%
Net Interest Margin $6,273,716 $5,173,792
</TABLE>
(1) When computing yields on interest-earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $409,294 and
$349,182 are included in interest income for the periods ending December 31,
1999 and 1998, 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,
1999 vs. 1998 1998 vs. 1997
------------- -------------
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 $1,899,112 ($646,516) $2,545,628 $1,117,462 $12,606 $1,104,856
Interest on investment securities (5,440) 5,024 (10,464) 510 4,038 (3,528)
Interest on federal funds sold, interest-
bearing deposits and other investments (124,990) (18,741) (106,249) 106,695 (21,716) 128,411
--------- -------- ---------- ------- -------- -------
Total interest income $1,768,682 ($660,233) $2,428,915 $1,224,667 ($5,072) $1,229,739
---------- ---------- ---------- ---------- -------- ----------
Expense from interest-bearing liabilities:
Interest on now accounts 45,581 $583 $44,998 $16,724 ($4,761) $21,485
Interest on money market accounts 154,393 11,182 143,211 25,579 12,375 13,204
Interest on savings accounts 25,656 (784) 26,440 8,313 35 8,278
Interest on time deposits, 213,111 (52,056) 265,167 162,460 (6,310) 168,770
$100,000 & over
Interest on other time deposits 110,234 (172,080) 282,314 249,869 (29,647) 279,516
Interest on note payable and
other borrowings 119,783 (326,953) 446,736 10,518 5,631 4,887
------- --------- ------- ------ ----- -----
Total interest expense $668,758 ($540,108) $1,208,866 $473,463 ($22,677) $496,140
-------- ---------- ---------- -------- --------- --------
Net interest income $1,099,924 ($120,125) $1,220,049 $751,204 $17,605 $733,599
========== ========== ========== ======== ======= ========
</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, 1999.
TABLE 3
AS OF DECEMBER 31, 1999
(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 $12,722 $16,446 $10,356 $8,359 $25,357 $73,240
Real estate - Construction 19,048 - 1,688 - - 20,736
All Other Loans 4,587 9,332 1,099 682 873 16,573
----- ----- ----- --- --- ------
Total $36,357 $25,778 $13,143 $9,041 $26,230 $110,549
======= ======= ======= ====== ======= ========
</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, 1999
and 1998.
TABLE 4
<TABLE>
<CAPTION>
1999 1998
---- ----
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
------ -------- ------ --------
<S> <C> <C> <C> <C>
Real Estate Construction $25,209,898 22.80% $18,868,908 21.77%
Real Estate Mortgage $43,305,661 39.17% 30,995,083 35.75%
SBA - Unguaranteed $26,663,059 24.12% 21,955,805 25.33%
Commercial $8,807,965 7.97% 8,011,468 9.24%
Consumer $6,561,974 5.94% 6,857,344 7.91%
----------- ------ ----------- ------
Total Loans $110,548,557 100.00% $86,688,608 100.00%
============ ======= =========== =======
</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, 1999, the Bank had eleven borrowers on nonaccrual status in the
total amount of $338,825 or .31% of net loans, compared to $1,314,170 or 1.54%
of net loans at December 31, 1998. One SBA loan totaling $163,381 accounted for
48.22% of total nonaccrual loans at December 31, 1999. Had the loans been
current in accordance with their original terms, the gross interest that would
have been recorded as of December 31, 1999 would have been $35,938. The amount
of interest on these loans that was included in net earnings for the year ended
December 31, 1999 was $5,542. At December 31, 1999, one loan, totaling $20,000,
was past due greater than ninety days and still accruing. This loan was paid
current and renewed during the first quarter of 2000. Loans past due greater
than 30 days but less than 90 days amounted to $1,034,922, or .95% of net loans
as of December 31, 1999 compared to $1,415,268, or 1.66% of net loans at the end
of 1998. There were no restructured loans as of December 31, 1999 or December
31, 1998.
The Bank had two properties held as "other real estate owned," with a total
value of $494,907 as of December 31, 1999. No material loss is anticipated on
the sale of these properties.
<PAGE>
Allowance for Loan Losses
- -------------------------
Management continuously reviews the adequacy of the allowance for loan losses
based on its 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 cover credit risk in the loan
portfolio.
Management reviews all loans in the portfolio to identify potential loan
problems. Loans are evaluated on an individual basis. After considering the
financial strength of the borrower, appraisals and other estimates of collateral
value, management establishes specific reserves where appropriate. Additionally,
management sets general reserves for all other loans to cover their risk of
loss. Changing economic conditions affecting the Bank's market or borrowers may
affect 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 1999 Annual Report to Shareholders.
Table 5 below presents the activity in the allowance for loan losses for each of
the periods ended December 31, 1999 and 1998.
TABLE 5
1999 1998
---- ----
Balance at the Beginning of Year $1,516,705 $1,090,730
Charge-offs:
Real Estate Construction 5,674 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 198,000 11,833
Commercial 70,430 5,800
Consumer 50,442 72,069
------- ------
Total Charge-offs 324,546 89,702
Recoveries:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 0 5,768
Commercial 431 0
Consumer 2,966 6,238
----- ------
Total Recoveries 3,397 12,006
Net Chargeoffs 321,149 77,696
Provision for Loan Losses 143,135 503,671
------- -------
Balance at the End of Year $1,338,691 $1,516,705
========== ==========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.21% 1.75%
==== ====
Ratio of Net Charge-offs to Average Net
Loans Outstanding During the Year 0.33% 0.10%
==== ====
<PAGE>
At December 31, 1999, management determined that no loans required specific
reserves. At December 31, 1998, management determined that eight loans required
specific reserves totaling $465,637. 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 below sets forth the allocation of the allowance for loan losses as of
December 31, 1999 and 1998.
TABLE 6
<TABLE>
<CAPTION>
1999 1998
---- ----
% of % of
Loss Loss
Amount Allocated Amount Allocated
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Real Estate Construction $292,619 21.86% $320,753 21.14%
Real Estate Mortgage 502,715 37.55% 526,730 34.73%
SBA - Unguaranteed 309,560 23.12% 373,205 24.61%
Commercial 102,288 7.64% 136,139 8.98%
Consumer 76,235 5.70% 116,544 7.68%
Unallocated 55,274 4.13% 43,334 2.86%
--------------- ----------- --------------- -----------
Total Allowance for Loan Losses $1,338,691 100.00% $1,516,705 100.00%
=============== =========== =============== ===========
</TABLE>
<PAGE>
Investment Portfolio
--------------------
Table 7 below sets forth the fair value of investment securities at December 31,
1999 and 1998.
TABLE 7
1999 1998
---- ----
U.S. Government Agencies $489,018 $501,608
Mortgage-backed Securities 29,246 40,737
------ ------
Total Investment Securities $518,264 $542,345
======== ========
The fair value at December 31, 1999 includes a $9,871 market value decrease for
net unrealized losses while the fair value at December 31, 1998 includes a
$3,601 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, 1999.
TABLE 8
<TABLE>
<CAPTION>
AFTER AFTER
ONE YEAR FIVE YEARS
ONE YEAR OR THROUGH THROUGH AFTER
LESS FIVE YEARS TEN YEARS TEN YEARS TOTAL
---- ---------- --------- --------- -----
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S.
Government $0 0.00% $489,018 5.47% $0 0.00% $0 0.00% $489,018 5.47%
Agencies
Mortgage-backed
Securities 8,070 8.00% 0 0.00% 21,176 9.50% 0 0.00% 29,246 9.08%
----- ----- -------- ----- ------ ----- -- ----- -------- -----
Total
Investment $8,070 8.00% $489,018 5.47% $21,176 9.50% $0 0.00% $518,264 5.67%
Securities ====== ===== ======== ===== ======= ===== == ===== ======== =====
</TABLE>
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,
-----------------------
1999 1998
---- ----
Weighted Weighted
Average Average
Amount Rate Amount Rate
------ ---- ------ ----
<S> <C> <C> <C> <C>
Non Interest-bearing demand deposits $ 16,639,224 N/A $12,563,963 N/A
Interest-bearing demand deposits 18,878,434 3.28% 13,287,394 3.15%
Savings deposits 3,684,209 2.47% 2,614,927 2.50%
Time deposits 68,454,776 5.65% 58,794,524 6.03%
---------- -----------
Total Deposits $107,656,643 $87,260,808
============ ===========
</TABLE>
<PAGE>
The total of time certificates of deposit issued in amounts greater than
$100,000 as of December 31, 1999, 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 $5,004
Over three through six months 1,839
Over six through twelve months 3,652
Over twelve months 2,324
-----
Total $12,819
=======
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 1999 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, 1999 and
1998. The Company did not pay cash dividends to shareholders during 1999 and
1998.
TABLE 10
1999 1998
---- ----
Return on Average Assets .87% .91%
Return on Equity 11.62% 11.67%
Stockholders' Equity to Assets 7.50% 7.82%
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 under the Bank Holding Company Act of 1956, as
amended. As such, the Company and any 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:
/o/ 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;
<PAGE>
/o/ it or any of its subsidiaries, other than a bank, may acquire all or
substantially all of the assets of any bank; or
/o/ 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 the effect of which may be
substantially to lessen competition in any section of the country, or that in
any other manner would be in restraint of trade, unless the transaction's
anticompetitive effects are clearly outweighed by the public interest. 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.
Permitted Activities
- --------------------
Until recently, the BHC Act generally prohibited 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 was permissible, the Federal Reserve considered
whether the performance of such an activity reasonably could be expected to
produce benefits to the public that outweigh possible adverse effects.
The Federal Reserve has determined that the following are among the activities
permissible for bank holding companies:
/o/ factoring accounts receivable,
/o/ acquiring or servicing loans,
/o/ leasing personal property,
/o/ conducting discount securities brokerage activities,
/o/ performing certain data processing services,
/o/ acting as agent or broker in selling credit life insurance and certain other
types of insurance in connection with credit transactions, and
/o/ performing certain insurance underwriting activities.
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.
New Legislation
- ---------------
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act, which
amends the BHC Act and greatly expands the activities in which bank holding
companies and affiliates of banks are permitted to engage. The Act eliminates
many federal and state law barriers to affiliations among banks and securities
firms, insurance companies, and other financial service providers. The
provisions of the Act relating to permitted activities of bank holding companies
and affiliates of banks will become effective on March 11, 2000. The following
discussion describes the activities in which the Company will be permitted to
engage under the BHC Act, as amended by the Gramm-Leach-Bliley Act.
Generally, if the Company qualifies and elects to become a financial holding
company, which is described below, it may engage in activities that are:
/o/ Financial in nature;
<PAGE>
/o/ Incidental to a financial activity; or
/o/ Complementary to a financial activity and do not pose a substantial risk to
the safety or soundness of depository institutions or the financial system
generally.
In determining whether a particular activity is financial in nature or
incidental or complementary to a financial activity, the Federal Reserve must
consider (1) the purpose of the BHC and Gramm-Leach-Bliley Acts, (2) changes or
reasonable expected changes in the marketplace in which financial holding
companies compete and in the technology for delivering financial services, and
(3) whether the activity is necessary or appropriate to allow financial holding
companies to effectively compete with other financial service providers and to
efficiently deliver information and services. The Act expressly lists the
following activities as financial in nature:
/o/ Lending, trust and other banking activities;
/o/ Insuring, guaranteeing, or indemnifying against loss or harm, or providing
and issuing annuities, and acting as principal, agent, or broker for these
purposes, in any state;
/o/ Providing financial, investment, or advisory services;
/o/ Issuing or selling instruments representing interests in pools of assets
permissible for a bank to hold directly;
/o/ Underwriting, dealing in or making a market in securities;
/o/ Other activities that the Federal Reserve may determine to be so closely
related to banking or managing or controlling banks as to be a proper
incident to managing or controlling banks;
/o/ Foreign activities permitted outside of the United States if the Federal
Reserve has determined them to be usual in connection with banking
operations abroad;
/o/ Merchant banking through securities or insurance affiliates; and
/o/ Insurance company portfolio investments.
To qualify to become a financial holding company, our depository institution
subsidiaries must be well capitalized and well managed and must have a Community
Reinvestment Act rating of at least "satisfactory." Additionally, we must file
an election with the Federal Reserve to become a financial holding company and
provide the Federal Reserve with 30 days written notice prior to engaging in a
permitted financial activity. Although we do not have any immediate plans to
file an election with the Federal Reserve to become a financial holding company,
one of the primary reasons we selected the holding company structure was to have
increased flexibility. Accordingly, if deemed appropriate in the future, we may
elect to become a financial holding company.
The Act also contains provisions that directly impact the following activities
and operations of the Bank:
/o/ Its insurance activities;
/o/ The activities of and qualifications for any Bank financial subsidiaries;
and
/o/ Its privacy policies and practices concerning disclosure of consumer
information.
<PAGE>
Other Banking Regulators
- ------------------------
The Bank is a member of the FDIC and, as such, its deposits are insured by the
FDIC to the maximum extent provided by law. The Bank is also subject to numerous
state and federal statutes and regulations that affect its business, activities,
and operations.
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 the Bank. The principal
source 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 appropriate federal 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 federal law, 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 pay
dividends only out of current operating earnings.
At December 31, 1999, under dividend restrictions imposed under federal and
state laws, the Bank, without obtaining regulatory approval, could declare
aggregate dividends to the Company of approximately $1,995,000.
The payment of dividends by the Company and the Bank may also be affected or
limited by other factors, such as the requirement to maintain adequate capital
above regulatory guidelines.
Capital Adequacy
- ----------------
The Company and the Bank are required to comply with the capital adequacy
standards established by the Federal Reserve and the OCC 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.
<PAGE>
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, 1999, 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 9.96% and 8.71%,
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, 1999 was 7.49%. 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 OCC's risk-based and leverage capital requirements for the Bank 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, 1999. The Company has not been advised by any federal banking
agency of any specific minimum capital ratio requirement applicable to it or the
Bank.
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."
In addition, Federal Reserve and FDIC regulations, which became mandatory on
January 1, 1998, require bank 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 interest rate 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.
Support of the Bank
- -------------------
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.
<PAGE>
Under federal law, 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:
/o/ the default of a commonly controlled FDIC-insured depository institution or
/o/ 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
- ------------------------
Federal law 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, federal law 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> <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. 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 federal law 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 federal law.
At December 31, 1999, the Bank had the requisite capital levels to qualify as
well capitalized.
FDIC Insurance Assessments
- --------------------------
The FDIC uses 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
<PAGE>
supervisor). An institution's insurance assessment rate is then determined based
on the capital category and supervisory category to which it is assigned.
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.
Based on the Bank's risk classification, the Bank was not required to pay an
assessment for deposit insurance in 1999, nor will it be required to pay a
deposit insurance assessment in 2000. The Bank was required to pay the Bank
Insurance Fund Financing Corporation ("FICO") assessment in 1999 and will also
pay this assessment in 2000. During the fourth quarter of 1999, the FICO
assessment rate was 1.184 cents per $100 of Bank deposits.
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
- --------------------------------
Main Office
- -----------
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 several years.
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. During 1999, internal improvements to the main
office totaled $47,412. Also during 1999, the Company purchased a lot behind the
main office in anticipation of future growth at a cost of $176,445. The net book
values of the land, building and equipment as of December 31, 1999, were
$176,445, $1,389,224 and $549,697, 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 $61,000 in total rentals under the ground lease during
1999. Management believes the lease agreement is fair and in the best interest
of the Company.
North Marietta Branch
- ---------------------
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, 1999 were $185,201, $253,634, and $73,116, respectively.
Canton Branch
- -------------
In January 1997, the Bank acquired land in Canton, Georgia for the amount of
$401,683 for a branch site. The original 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. An addition of approximately 1,500 square feet was added during 1999
to accommodate certain branch operations, at a cost of approximately $220,000.
Management believes that this expansion is sufficient for the expected growth
over the next several years. The net book values of the land, building, and
equipment as of December 31, 1999 were $401,683, $879,772, and $290,640,
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
- -------------------------
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 1999 Annual Report to Shareholders. The Registrant did not have any
unregistered sales of equity securities during 1999, 1998 or 1997.
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 1999 Annual Report to Shareholders.
Item 7. Financial Statements.
- ------------------------------
The following report and statements are included in the financial section of the
Registrant's 1999 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, 1999 and 1998.
(iii) Consolidated Statements of Earnings for the Years Ended December 31,
1999, 1998, and 1997.
(iv) Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 1999, 1998, and 1997.
(v) Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1999, 1998, and 1997.
(vi) Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998, and 1997.
(vii) 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 2000 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 2000 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 2000 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 2000 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 Articles of Incorporation (incorporated herein by reference to Exhibit of the same number in the
Company's Registration Statement No. 33-25075-A)
3.2 Bylaws, as amended through March 29, 1994 (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)
4.1 Instruments defining the rights of security holders (see Exhibits 3.1 and 3.2)
10.1* Employment Agreement (Carl Hames) dated May 11, 1995 (incorporated herein by reference to Exhibit
of the same number in the Company's Form 10QSB for the period ended June 30, 1995)
10.2* First Cherokee Bancshares, Inc. 1999 Stock Option Plan (incorporated by reference to Appendix A to
the Company's Proxy Statement filed on March 30, 1999)
10.3 Agreement for Lease/Purchase of Real Property for Bank Premises (incorporated herein by reference
to Exhibit of the same number in the Company's Registration Statement No. 33-25075-A)
10.4* Form of Key Employee Stock Option Plan (incorporated herein by reference to Exhibit of the same
number in the Company's Registration Statement No. 33-25075-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 (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1998)
10.6* Form of Directors' Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.6
to the Company's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998)
13.1 Annual Report to Shareholders for the fiscal year ended December 31, 1999. Only those portions of
the 1999 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.
21.1 Subsidiary of First Cherokee Bancshares, Inc. (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, 1996)
24.1 Power of attorney (see signature page to this Annual Report on Form 10-KSB).
27.1 Financial Data Schedule (for SEC use only)
* The indicated exhibits are management contracts or compensatory plans or
arrangements required to be filed or incorporated by reference herein.
</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, 2000
----------------------
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, 2000
- ----------------
Alan D. Bobo
/S/ Elwin K. Bobo Director March 30, 2000
- -----------------
Elwin K. Bobo
/S/ Michael A. Edwards Director March 30, 2000
- ----------------------
Michael A. Edwards
/S/ Stanley Fitts Director March 30, 2000
- -----------------
Stanley Fitts
/S/ Russell L. Flynn Director March 30, 2000
- --------------------
Russell L. Flynn
/S/ Carl C. Hames, Jr. President, Principal March 30, 2000
- ---------------------- Executive Officer,
Carl C. Hames, Jr. and Director
/S/ C. Garry Haygood Director March 30, 2000
- --------------------
C. Garry Haygood
/S/ Thomas D. Hopkins, Jr. Director and March 30, 2000
- -------------------------- Secretary
Thomas D. Hopkins, Jr.
/S/ Bobby R. Hubbard Director March 30, 2000
- --------------------
Bobby R. Hubbard
/S/ R. O. Kononen, Jr. Director March 30, 2000
- ----------------------
R. O. Kononen, Jr.
/S/ Dennis W. Lord Director March 30, 2000
- ------------------
Dennis W. Lord
/S/ Larry R. Lusk Director March 30, 2000
- -----------------
Larry R. Lusk
/S/ Dr. Stuart R. Tasman Director March 30, 2000
- ------------------------
Dr. Stuart R. Tasman
/S/ Kitty A. Kendrick Principal March 30, 2000
- --------------------- Accounting
Kitty A. Kendrick and Financial Officer
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
Number Description Number
------ ----------- ------
<S> <C> <C>
3.1 Articles of Incorporation (incorporated herein by reference to Exhibit of the same
number in the Company's Registration Statement No. 33-25075-A)................... N/A
3.2 Bylaws, as amended through March 29, 1994 (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).................................................... N/A
4.1 Instruments defining the rights of security holders (see Exhibits 3.1 and 3.2)... N/A
10.1* Employment Agreement (Carl Hames) dated May 11, 1995 (incorporated herein by
reference to Exhibit of the same number in the Company's Form 10QSB for the period
ended June 30, 1995)............................................................. N/A
10.2* First Cherokee Bancshares, Inc. 1999 Stock Option Plan (incorporated by reference
to Appendix A to the Company's Proxy Statement filed on March 30, 1999........... N/A
10.3 Agreement for Lease/Purchase of Real Property for Bank Premises (incorporated herein
by reference to Exhibit of the same number in the Company's Registration Statement
No. 33-25075-A).................................................................. N/A
10.4* Form of Key Employee Stock Option Plan (incorporated herein by reference to Exhibit
of the same number in the Company's Registration Statement No. 33-25075-A)....... 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 (incorporated by reference to Exhibit 10.5 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended December 31, 1998)............... N/A
10.6* Form of Directors' Non-Qualified Stock Option Agreement (incorporated by reference
to Exhibit 10.6 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1998)......................................................... N/A
13.1 Annual Report to Shareholders for the fiscal year ended December 31, 1999. Only
those portions of the 1999 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.................. N/A
21.1 Subsidiary of First Cherokee Bancshares, Inc. (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)......................................................... N/A
24.1 Power of attorney (see signature page to this Annual Report on Form 10-KSB)...... ____
27.1 Financial Data Schedule (for SEC use only) ...................................... ____
- ------------------------------------
</TABLE>
* The indicated exhibits are management contracts or compensatory plans or
arrangements required to be filed or incorporated by reference herein.
FIRST CHEROKEE BANCSHARES, INC.
1999 ANNUAL REPORT
TO SHAREHOLDERS
P.O. Box 1238 * Woodstock, Georgia 30188 * (770) 591-9000
<PAGE>
March 30, 2000
To Our Shareholders and Friends:
On behalf of the Board of Directors and management, I am pleased to provide you
with the 1999 annual report for First Cherokee Bancshares, Inc. The report
covers the Company's consolidated balance sheets as of December 31, 1999 and
1998, and results of operations for each of the three years in the period ended
December 31, 1999.
I am proud to report a notable improvement in net earnings for 1999 as compared
to 1998. Net earnings for 1999 improved to $1,036,851, an increase of $164,243,
or 19%, as compared to net earnings for 1998. The Company's asset size also
increased impressively to $126 million as of December 31, 1999, from $110.2
million as of December 31, 1998, representing a growth rate of 14%.
1999 was a year of accomplishment for the Company. The Bank successfully
converted to a new data processing system in April 1999, which in turn has
helped us to achieve significant improvements in efficiencies. We resolved many
problem asset issues during 1999, and ended the year with much improved asset
quality. We offered our employees the opportunity for ownership in the Company
through the Bank's 401k plan. And, because of their belief in the Company, your
Directors exercised all of their original stock warrants, resulting in a capital
infusion of approximately $1.4 million.
In 2000, we will continue to invest in superior people and technology in order
to support our strategy of providing quality service to our customers. We remain
focused on our goals and 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 2000, our eleventh 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,
1999 1998 1997
-------------------------------------------
<S> <C> <C> <C>
Selected Statement of Earnings Data:
- ------------------------------------
Total Interest Income $10,998,679 $9,229,997 $8,005,330
Net Interest Income 6,273,716 5,173,792 4,422,588
Provision for Loan Losses 143,135 503,671 623,738
Net Earnings 1,036,851 872,608 220,884
Basic Earnings per Share 1.76 1.53 0.38
Diluted Earnings per Share 1.75 1.31 0.33
Cash Dividends per Share 0 0 0
- --------------------------------------------------------------------------------------------
Selected Balance Sheet Data:
- ----------------------------
Average Balances:
Total Assets $119,055,938 $95,628,431 $83,484,669
Total Loans, net 98,568,066 75,176,275 65,733,060
Total Deposits 107,656,643 87,260,808 75,351,044
Stockholders' Equity 8,924,613 7,475,431 7,020,904
End of Period Balances:
Total Assets 126,059,704 110,229,513 87,618,335
Total Loans, net 109,209,866 85,171,903 71,620,734
Total Deposits 110,721,414 101,397,797 78,483,832
Stockholders' Equity 10,339,195 7,418,348 7,063,899
Book Value per Share $13.86 $13.40 $12.13
- --------------------------------------------------------------------------------------------
Financial Ratios:
- -----------------
Return on Average Assets 0.87% 0.91% 0.26%
Return on Average Stockholders' Equity 11.62% 11.67% 3.15%
Stockholders' Equity as a Percent
of Total Assets 8.20% 6.73% 8.06%
Net Interest Rate Spread 5.49% 5.71% 5.80%
Loan Loss Reserve/Loans 1.21% 1.75% 1.50%
- --------------------------------------------------------------------------------------------
Asset Quality:
- --------------
Nonaccrual Loans as a percentage
of Net Loans 0.31% 1.54% 2.04%
Loans Past Due 90 Days or More
as a Percent of Net Loans 0.02% 0.04% 0.50%
Loan Chargeoffs as a Percent
of Net Average Loans 0.33% 0.12% 0.85%
- --------------------------------------------------------------------------------------------
</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:
/o/ projections of revenues, income or loss, earnings or loss per share, the
payment or non-payment of dividends, capital structure and other financial
items;
/o/ statements of plans and objectives of the Company or its management or Board
of Directors, including those relating to products or services;
/o/ statements of future economic performance; and
/o/ 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:
/o/ the strength of the U.S. economy in general and the strength of the local
economies in which operations are conducted;
/o/ 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;
/o/ inflation, interest rate, market and monetary fluctuations;
/o/ the timely development of and acceptance of new products and services and
perceived overall value of these products and services by users;
/o/ changes in consumer spending, borrowing and saving habits;
/o/ technological changes;
/o/ acquisitions;
/o/ the ability to increase market share and control expenses;
/o/ 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;
/o/ 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;
/o/ changes in the Company's organization, compensation and benefit plans;
/o/ the costs and effects of litigation and of unexpected or adverse outcomes in
such litigation; and
/o/ 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 1999,
the Company met its goals with net earnings of $1,036,851, representing a .87%
return on average assets.
Net Interest Income
- -------------------
Net interest income for the year ended December 31, 1999 was $6,273,716, a
21.26% increase over net interest income of $5,173,792 for the year ended
December 31, 1998. The increase in net interest income is primarily attributable
to the increase in net earning assets. Net average earning assets as of December
31, 1999 were $10,832,937, a 35.68% increase from $7,984,396 as of December 31,
1998.
Total interest income for the year ended December 31, 1999 was $10,998,679, a
19.16% increase over total interest income of $9,229,997 for the year ended
December 31, 1998. The average yield on earning assets was 10.55% in 1999
compared to 11.11% in 1998. The decrease in average yield is the result of
compressed margins on loans. Loans comprised 95% of average earning assets
during 1999 compared to 90% during 1998.
Interest expense for the year ended December 31, 1999 was $4,724,963, a 16.49%
increase over interest expense of $4,056,205 for the year ended December 31,
1998. The Company's average cost of funds was 5.06% in 1999, a decrease of .34%
from 5.40% in 1998. The decrease is primarily attributable to the repricing of
maturing certificates of deposit to lower rates. Also, the percentage of
non-time-deposits, which carry lower rates, to total deposits increased during
the year. Interest-bearing deposits for the year ended December 31, 1999
averaged $91,017,419, a 21.85% increase over interest-bearing deposits of
$74,696,845 for the year ended December 31, 1998.
<PAGE>
The Company'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 Company. The majority of the Company's
loans adjust daily, monthly or quarterly to changes in the Company's prime
lending rate. In addition, the Company has interest rate floors in individual
loan agreements on approximately half of its loan portfolio. These floors
protect the Company's interest margin should rates decrease significantly.
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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
------------------------------------------------------------------------------------
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) $98,568,066 $10,708,238 10.86% $75,176,275 $8,809,126 11.72%
Investment Securities (2) 529,722 33,126 6.25% 697,800 38,566 5.53%
Federal Funds Sold, Interest-Bearing
Deposits and Other Investments 5,108,401 257,315 5.04% 7,208,238 382,305 5.30%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Earning Assets 104,206,189 $10,998,679 10.55% 83,082,313 $9,229,997 11.11%
Non-Earning Assets 14,849,749 12,546,118
-------------- -------------
Total Average Assets $119,055,938 $95,628,431
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-Bearing Liabilities
Interest-Bearing Deposits:
NOW Accounts $7,802,654 $179,872 2.31% $5,832,606 $134,291 2.30%
Money Market Accounts 11,075,780 439,480 3.97% 7,454,788 285,087 3.82%
Savings 3,684,209 91,079 2.47% 2,614,927 65,423 2.50%
Time, $100,000 and Over 20,472,091 1,158,000 5.66% 15,774,440 944,889 5.99%
Other Time 47,982,685 2,708,461 5.64% 43,020,084 2,598,227 6.04%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Bearing Deposits 91,017,419 $4,576,892 5.03% 74,696,845 $4,027,917 5.39%
Note Payable and Other Borrowings 2,355,833 148,071 6.29% 401,072 28,288 7.05%
-------------- ------------- ---------- ------------- ------------ ---------
Total Interest-Bearing Liabilities 93,373,252 $4,724,963 5.06% 75,097,917 $4,056,205 5.40%
Non Interest-Bearing Demand Deposits 16,639,224 12,563,963
Other Liabilities 118,849 491,120
-------------- -------------
Total Liabilities 110,131,325 88,153,000
Stockholders' Equity 8,924,613 7,475,431
-------------- -------------
Total Average Liabilities and
Stockholders' Equity $119,055,938 $95,628,431
============== =============
Net Average Earning Assets $10,832,937 $7,984,396
Net Yield on Interest Earning Assets 6.02% 6.23%
Net Interest Rate Spread 5.49% 5.71%
Net Interest Margin $6,273,716 $5,173,792
</TABLE>
(1) When computing yields on interest-earning assets, non-accruing loans are
included in average loan balances. Additionally, loan fees of $409,294 and
$349,182 are included in interest income for the periods ending December 31,
1999 and 1998, respectively.
(2) All investment securities are taxable.
<PAGE>
Allowance for Loan Losses
- -------------------------
The loan loss provision for the year ended December 31, 1999 was $143,135,
compared to $503,671 for the year ended December 31, 1998. Charge-offs during
1999 amounted to $324,546, and recoveries amounted to $3,397. Charge-offs during
1998 amounted to $89,702, and recoveries amounted to $12,006. One commercial
loan relationship accounted for approximately 46% of chargeoffs during 1999. The
allowance for loan losses at December 31, 1999 was $1,338,691, or 1.21% of total
loans, compared to $1,516,705, or 1.75% of total loans at the end of 1998.
Management believes that the lower ratio of the allowance for loan losses to
total loans at December 31, 1999 is appropriate based on the improvement in
asset quality and our evaluation of the current 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 Company'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
Company's allowance for loan losses. Such agencies may require the Company 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, 1999 and 1998.
1999 1998
---- ----
Balance at the Beginning of Year $1,516,705 $1,090,730
Charge-offs:
Real Estate Construction 5,674 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 198,000 11,833
Commercial 70,430 5,800
Consumer 50,442 72,069
------- ------
Total Charge-offs 324,546 89,702
Recoveries:
Real Estate Construction 0 0
Real Estate Mortgage 0 0
SBA - Unguaranteed 0 5,768
Commercial 431 0
Consumer 2,966 6,238
----- ------
Total Recoveries 3,397 12,006
Net Chargeoffs 321,149 77,696
Provision for Loan Losses 143,135 503,671
------- -------
Balance at the End of Year $1,338,691 $1,516,705
========== ==========
Percentage of Allowance for Loan Loss to Loans
Outstanding as of Year End 1.21% 1.75%
==== ====
Ratio of Net Charge-offs to Average Net
Loans Outstanding During the Year 0.33% 0.10%
==== ====
<PAGE>
The Company 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, 1999,
management determined that no loans required specific reserves. For allocation
purposes, the "Y2K" risk factor of $55,274 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
% of % of
Loss Loss
Amount Allocated Amount Allocated
------ --------- ------ ---------
<S> <C> <C> <C> <C>
Real Estate Construction $292,619 21.86% $320,753 21.14%
Real Estate Mortgage 502,715 37.55% 526,730 34.73%
SBA - Unguaranteed 309,560 23.12% 373,205 24.61%
Commercial 102,288 7.64% 136,139 8.98%
Consumer 76,235 5.70% 116,544 7.68%
Unallocated 55,274 4.13% 43,334 2.86%
--------------- ----------- --------------- -----------
Total Allowance for Loan Losses $1,338,691 100.00% $1,516,705 100.00%
=============== =========== =============== ===========
</TABLE>
The Company had two properties held as "other real estate owned," with a total
value of $494,907 as of December 31, 1999. Both properties were sold during the
first quarter of 2000 with no loss on the sales. As of December 31, 1998, the
Company had one property held as "other real estate owned," with a total value
of $27,652.
At December 31, 1999, the Company had eleven borrowers on nonaccrual status in
the total amount of $338,825 or .31% of net loans, compared to $1,314,170 or
1.54% of net loans at December 31, 1998. One SBA loan totaling $163,381
accounted for 48% of total nonaccrual loans at December 31, 1999. The remaining
loans average approximately $18,000 each. One loan, totaling $20,000, was past
due greater than ninety days and still accruing. This loan was paid current and
renewed during the first quarter of 2000.
Noninterest Income
- ------------------
Noninterest income was $1,563,550 for the year ended December 31, 1999, compared
to $1,875,496 for the year ended December 31, 1998. Noninterest income for 1999
consisted primarily of gains on sales of SBA loans of $603,480 and service
charges on deposit accounts of $532,551. 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.
Gains on the sales of loans are a recurring source of income for the Company.
These gains depend on the Company's ability to originate SBA guaranteed loans
and/or on the market price for such loans. During 1999, SBA sales totaled $8.5
million compared to sales of $12.0 million in 1998, representing a 29% decrease.
Gains on sales of loans decreased to $603,480 in 1999 from $996,250 in 1998,
representing a 39.42% decrease. The market price paid by the secondary market
for SBA loans decreased during 1999 primarily because of compressed margins and
the high level of prepayments of SBA loans nationally.
<PAGE>
Service charge income for the year ended December 31, 1999 was $532,551, an
18.57% increase over $449,161 for the year ended December 31, 1998. The increase
is primarily attributable to the increase in transaction accounts that pay
service charges.
Net gains on sales of other real estate were $1,044 in 1999 compared to net
gains on sales of other real estate in 1998 of $218,093. Miscellaneous income
increased to $426,475 in 1999 from $211,992 in 1998, representing a 101.18%
increase. The Company recognized $220,000 in income from the Company's bond
company settlement of outstanding claims.
Noninterest Expense
- -------------------
Noninterest expense for the year ended December 31, 1999 was $6,111,028, a
16.69% increase over $5,236,791 for the year ended December 31, 1998.
Noninterest expense is primarily composed of salaries and other personnel
expenses, occupancy and miscellaneous operating expenses.
Salary expense and employee benefits was $3,103,429 for the year ended
December 31, 1999, a 9.60% increase over $2,831,528 for the year ended
December 31, 1998. At December 31, 1999, the Bank employed 69 full-time
employees and 12 part-time employees, compared to 62 full-time employees and 8
part-time employees at December 31, 1998. The increase in the number of
personnel and routine performance-based raises accounted for the increase in
personnel costs.
Occupancy and equipment expense was $877,443 for the year ended December 31,
1999, a 25.45% increase over $699,453 for the year ended December 31, 1998. The
increase is primarily due to the addition of a new branch in June 1998 and
increased depreciation costs relative to new computers.
Other operating expense was $2,130,156 for the year ended December 31, 1999, a
24.88% increase over $1,705,810 for the year ended December 31, 1998. The
primary reason for the increase was additional data processing costs related to
the change in core systems during April 1999. The Company also paid more for
advertising in an attempt to attract new customers in the market and had
increased legal fees relative to problem assets.
For the years ended December 31, 1999 and 1998, the Company's effective tax rate
was 35% and 33%, respectively. The increase in the effective tax rate during
1999 was primarily attributable to the increase in pre-tax income.
Financial Condition
-------------------
Assets
- ------
Total assets as of December 31, 1999 were $126,059,704, compared to $110,229,513
as of December 31, 1998. This represents an increase in total assets of 14.36%
for 1999. Total average assets for the year ended December 31, 1999 were
$119,055,938, an increase of 24.50% from $95,628,431 at December 31, 1998.
Investment securities, federal funds sold, interest-bearing deposits and other
investments accounted for 2% of total assets at December 31, 1999 and 11% of
total assets at December 31, 1998. Non-earning assets accounted for 11% of total
assets as of December 31, 1999, compared to 12% as of the end of 1998.
Management invested funds predominantly into loans during 1999 and 1998.
<PAGE>
Loans
- -----
The Company's net loan portfolio for the year ended December 31, 1999 was
$109,209,866, a 28.22% increase over $85,171,903 for the year ended December 31,
1998. Outstanding loans for the year ended December 31, 1999 averaged
$98,568,066, a 31.12% increase over $75,176,275 for the year ended December 31,
1998. Loan growth is attributable to continued loan demand, as well as the
Company's aggressive efforts to change the mix of earning assets. The loan
portfolio had an average yield of 10.86% during 1999 and 11.72% during 1998. 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, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
---- ----
% Loans % Loans
to Total to Total
Amount Loans Amount Loans
------ -------- ------ --------
<S> <C> <C> <C> <C>
Real Estate Construction $25,209,898 22.80% $18,868,908 21.77%
Real Estate Mortgage $43,305,661 39.17% 30,995,083 35.75%
SBA - Unguaranteed $26,663,059 24.12% 21,955,805 25.33%
Commercial $8,807,965 7.97% 8,011,468 9.24%
Consumer $6,561,974 5.94% 6,857,344 7.91%
----------- ------ ----------- ------
Total Loans $110,548,557 100.00% $86,688,608 100.00%
============ ======= =========== =======
</TABLE>
Deposits
- --------
Total deposits as of December 31, 1999 were $110,721,414, a 9.2% increase over
$101,397,797 as of December 31, 1998. Average outstanding interest-bearing
deposits were $91,017,419 for 1999, a 21.85% increase from $74,696,845 for 1998.
Interest-bearing deposits cost the Company an average of 5.03% during 1999,
compared to 5.39% for 1998. 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 $16,639,224 in 1999, a
32.44% increase from $12,563,963 for 1998.
<PAGE>
During 1999 and 1998, the Company used available overnight credit lines in the
form of Federal Home Loan Bank advances and federal funds purchased. During
1999, the Company renewed an existing $1 million line of credit from another
financial institution. Company borrowings averaged $2,355,833 during 1999
compared to $401,072 during 1998. The average cost of the Company's borrowed
funds was 6.29% for 1999 and 7.05% for 1998. 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 Company'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 1999, federal funds sold, interest-bearing deposits and other investments
averaged $5,108,401 compared to average overnight investments of $6,621,352 in
1998.
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.
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,
1999, the interest rate sensitivity analysis was as follows:
<PAGE>
<TABLE>
<CAPTION>
Repricing Within
----------------------------------------------------------------------
0-90 Days 91-365 Days >1 Yr. - 5 Yrs.> 5 Yrs. Total
-------------- -------------------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Investment Securities $0 $0 $497 $21 $518
Federal Funds Sold, Interest-Bearing
Deposits and other Investments 1,979 0 0 0 $1,979
Loans 71,016 4,929 24,418 8,847 $109,210
-------------- ------------- ----------- --------------- ------------
Total Earning Assets $72,995 $4,929 $24,915 $8,868 $111,707
============== ============= =========== =============== ============
Interest Bearing Demand Deposits $20,908 $0 $0 $0 $20,908
Savings Deposits 3,935 0 0 0 $3,935
Certificates of Deposit 15,989 34,346 18,889 0 $69,224
Note Payable and Other Borrowings 3,000 975 0 0 3,975
-------------- ------------- ----------- --------------- ------------
Total Interest Bearing Liabilities $43,832 $35,321 $18,889 $0 $98,042
============== ============= =========== =============== ============
Interest Sensitivity GAP $29,163 ($30,392) $6,026 $8,868 13,665
Cumulative GAP $29,163 (1,229) $4,797 13,665
% of Earning Assets to
Interest Bearing Liabilities 166.53% 13.95% 131.90% N/A
Cumulative % of Earning
Assets to Interest
Bearing Liabilities 166.53% 98.45% 104.89% 113.94%
% of Cumulative GAP to Total
Earning Assets 26.11% -1.10% 4.29% 12.23%
</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 8.20% at
December 31, 1999, compared to 6.73% at December 31, 1998. The Company's common
stock had a book value per share of $13.86 at December 31, 1999, compared to
$13.40 at December 31, 1998. During 1999, 182,681 shares were issued upon the
exercise of stock options and stock warrants totaling $1,717,651. During 1999,
the Company sold 9,464 shares of its common stock to the Company's employee
benefit plans at $18.46 per share, totaling $174,698. Shares repurchased during
1998 were held in treasury at December 31, 1999 for issuance under employee and
director benefit plans.
<PAGE>
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, 1999 and 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, 1999:
Total Capital (to Risk-Weighted Assets)
Consolidated $10,557 9.96% $8,481 8.00% N/A N/A
Bank $11,144 10.51% $8,481 8.00% $10,602 10.00%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $9,231 8.71% $4,241 4.00% N/A N/A
Bank $9,819 9.26% $4,241 4.00% $6,361 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $9,231 7.49% $4,928 4.00% N/A N/A
Bank $9,819 7.97% $4,928 4.00% $6,160 5.00%
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%
</TABLE>
<PAGE>
Year 2000
- ---------
During 1999, the Company incurred actual costs of approximately $25,000 for its
Y2K efforts, not including indirect salary expenses for personnel working on
this issue. The Company experienced no operational problems during the year 2000
date change. However, the Company is aware that risks associated with Y2K
remain. These risks involve future critical dates that may cause system
problems, risks associated with suitable Y2K records retention, and general and
specific risks related to borrowers, depositors, and capital markets/asset
management counterparties. Management believes that the Company has adequate
systems and procedures in place to continue to monitor and respond to these
risks. Based on current information, the Company does not expect to incur
significant additional costs related to Y2K risks.
MARKET PRICE AND DIVIDEND INFORMATION
As of December 31, 1999, there were approximately 500 shareholders of record and
745,949 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, 1998.
<TABLE>
<CAPTION>
Sales Price Sales Price
----------- -----------
Calendar Period High Low Calendar Period High Low
- --------------- ---- --- --------------- ---- ---
1999 1998
- ---- ----
<S> <C> <C> <C> <C> <C>
First Quarter $19.25 $18.00 First Quarter $19.00 $17.00
Second Quarter $18.50 $16.50 Second Quarter $18.50 $17.25
Third Quarter $18.50 $16.50 Third Quarter $18.50 $16.75
Fourth Quarter $20.00 $18.125 Fourth Quarter $18.75 $17.00
</TABLE>
Management believes that the above prices reflect sales 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 are dividends paid to the Company by the Bank. Certain regulatory
requirements restrict the amount of dividends that the Bank may pay the Company.
At December 31, 1999, the Bank could pay dividends of approximately $1,995,000,
plus earnings to the Bank in 2000, to the Company 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>
FIRST CHEROKEE BANCSHARES, INC.
AND SUBSIDIARY
Consolidated Financial Statements
December 31, 1999, 1998 and 1997
(with Independent Accountants' Report thereon)
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
/s/ Porter Keadle Moore,LLP
Atlanta, Georgia
January 26, 2000
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
Assets
------
<S> <C> <C> <C>
Cash and due from banks, including reserve requirements
of $590,000 and $429,000 $ 3,431,915 4,549,595
Interest-bearing deposits with banks 1,027,657 10,770,141
Federal funds sold 100,000 -
--------- ----------
Cash and cash equivalents 4,559,572 15,319,736
Securities available for sale 518,264 542,345
Other investments 851,800 697,800
Loans, net 109,209,866 85,171,903
Premises and equipment, net 4,199,410 3,789,718
Accrued interest receivable and other assets 6,720,792 4,708,011
----------- ----------
$ 126,059,704 110,229,513
============= ===========
Liabilities and Stockholders' Equity
------------------------------------
Deposits:
Demand $ 16,654,068 14,922,682
Interest-bearing demand 20,907,618 15,071,709
Savings 3,935,278 3,091,456
Time 56,405,587 55,814,726
Time, in excess of $100,000 12,818,863 12,497,224
---------- ----------
Total deposits 110,721,414 101,397,797
Note payable and other borrowings 3,975,299 518,712
Accrued interest payable and other liabilities 1,023,796 894,656
----------- -----------
Total liabilities 115,720,509 102,811,165
----------- -----------
Commitments
Stockholders' equity:
Common stock, par value $1, authorized 10,000,000 shares, issued
774,225 and 591,544 shares, outstanding 745,949 and 553,804 shares 774,225 591,544
Additional paid-in capital 6,896,897 5,273,257
Retained earnings 3,190,881 2,154,030
Accumulated other comprehensive income (loss), net of tax (6,120) 2,233
--------- ---------
10,855,883 8,021,064
Less treasury stock at cost, 28,276 and 37,740 shares (516,688) (602,716)
---------- ---------
Total stockholders' equity 10,339,195 7,418,348
---------- ---------
$ 126,059,704 110,229,513
============= ===========
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 10,708,238 8,809,126 7,691,664
Interest on federal funds sold 28,261 - 3,371
Interest on deposits with other banks 167,832 337,161 227,095
Interest and dividends on investments:
U.S. Government agencies and mortgage-backed 33,126 38,566 43,540
Other 61,222 45,144 39,660
---------- --------- ---------
Total interest income 10,998,679 9,229,997 8,005,330
---------- --------- ---------
Interest expense:
Interest on deposits:
Demand 619,352 419,378 377,075
Savings 91,079 65,423 57,110
Time 3,866,461 3,543,116 3,130,787
--------- --------- ---------
4,576,892 4,027,917 3,564,972
Interest on note payable and other borrowings 148,071 28,288 17,770
--------- --------- ---------
Total interest expense 4,724,963 4,056,205 3,582,742
--------- --------- ---------
Net interest income 6,273,716 5,173,792 4,422,588
Provision for loan losses 143,135 503,671 623,738
--------- --------- ---------
Net interest income after provision for loan losses 6,130,581 4,670,121 3,798,850
--------- --------- ---------
Noninterest income:
Service charges on deposit accounts 532,551 449,161 381,427
Gains on sales of loans, net 603,480 996,250 825,569
Gain (loss) on sales of other real estate and repossessions 1,044 218,093 (106,531)
Miscellaneous 426,475 211,992 224,353
------- ------- -------
Total noninterest income 1,563,550 1,875,496 1,324,818
--------- --------- ---------
Noninterest expenses:
Salaries and employee benefits 3,103,429 2,831,528 2,106,356
Occupancy 877,443 699,453 510,441
Other operating 2,130,156 1,705,810 1,585,545
Nonrecurring loss on deposit account - - 654,395
--------- --------- ---------
Total noninterest expenses 6,111,028 5,236,791 4,856,737
--------- --------- ---------
Earnings before income taxes 1,583,103 1,308,826 266,931
Income tax expense 546,252 436,218 46,047
--------- --------- -------
Net earnings $ 1,036,851 872,608 220,884
============ ======= =======
Basic earnings per share $ 1.76 1.53 0.38
============ ======= =======
Diluted earnings per share $ 1.75 1.31 0.33
============ ======= =======
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C><C> <C> <C>
Net earnings $ 1,036,851 872,608 220,884
Other comprehensive income (loss), net of tax:
Unrealized gain (loss) arising during the period, net of
tax of $4,303, $287 and $1,477, respectively (8,353) 557 (2,868)
----- --- -----
Comprehensive income $ 1,028,498 873,165 218,016
============ ======= =======
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive
Common Paid-In Retained Income (Loss), Treasury
Stock Capital Earnings Net of Tax Stock Total
----- ------- -------- ---------- ----- -----
<S> <C><C> <C> <C> <C> <C> <C>
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 (loss),
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 (loss),
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
Sale of treasury stock - 88,670 - - 86,028 174,698
Exercise of stock options,
including related tax
benefits 16,831 193,150 - - - 209,981
Exercise of stock warrants 165,850 1,341,820 - - - 1,507,670
Change in accumulated other
comprehensive income (loss),
net of tax - - - (8,353) - (8,353)
Net earnings - - 1,036,851 - - 1,036,851
------- --------- --------- ----- ------- ---------
Balance, December 31, 1999 $ 774,225 6,896,897 3,190,881 (6,120) (516,688) 10,339,195
========= ========= ========= ======= ========= ==========
</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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C><C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,036,851 872,608 220,884
Adjustments to reconcile net earnings to net cash provided (used)
by operating activities:
Depreciation, amortization and accretion 439,378 436,339 349,424
Provision for loan losses 143,135 503,671 623,738
Gain on sales of loans, net (603,480) (996,250) (825,569)
Gain on sales of premises and equipment, net (217) - -
Deferred income tax benefit 114,816 (110,031) (57,924)
(Gain) loss on sales of other real estate and repossessions (1,044) (218,093) 106,531
Change in:
Interest receivable (104,643) (92,175) (25,964)
Other assets (1,559,027) (79,413) (602,324)
Interest payable 34,802 (444) 10,977
Other liabilities 36,508 (175,504) 404,147
------ --------- -------
Net cash provided (used) by operating activities (462,921) 140,708 203,920
--------- ------- -------
Cash flows from investing activities:
Proceeds from maturities and calls of securities available for sale 513,525 61,017 185,236
Purchases of securities available for sale (500,000) - -
Purchases of other investments (257,500) - (47,000)
Proceeds from call of other investments 103,500 - -
Proceeds from sales of loans 8,506,416 11,964,064 9,569,405
Net increase in loans (32,534,794) (25,538,943) (20,448,840)
Purchases of premises and equipment (825,144) (690,639) (1,539,420)
Proceeds from sales of premises and equipment 7,625 - -
Proceeds from sales of other real estate and repossessions 73,562 1,672,411 194,066
Improvements to other real estate and repossessions - (35,767) (32,331)
---------- ----------- -----------
Net cash used in investing activities (24,912,810) (12,567,857) (12,118,884)
------------ ------------ ------------
Cash flows from financing activities:
Net change in demand and savings deposits 8,411,117 6,099,125 5,900,919
Net change in time deposits 912,500 16,814,840 4,185,795
Proceeds from (repayment of) FHLB advances 3,000,000 (1,000,000) 1,000,000
Net proceeds from note payable 456,587 518,712 -
Proceeds from exercise of stock warrants 1,507,670 - 277,300
Proceeds from sales of treasury stock 174,698 - -
Proceeds from exercise of stock options 152,995 - -
Purchase of treasury stock - (518,716) -
--------- ---------- ---------
Net cash provided by financing activities 14,615,567 21,913,961 11,364,014
---------- ---------- ----------
Net change in cash and cash equivalents (10,760,164) 9,486,812 (550,950)
Cash and cash equivalents at beginning of year 15,319,736 5,832,924 6,383,874
---------- ---------- ----------
Cash and cash equivalents at end of year $ 4,559,572 15,319,736 5,832,924
============ ========== ==========
</TABLE>
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Consolidated Statements of Cash Flows, continued
For the Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest 4,690,161 4,056,649 3,571,765
Income taxes, net of refunds received 455,000 223,740 355,000
Noncash investing and financing activities:
Change in accumulated other comprehensive income, net of tax (8,353) 557 (2,868)
Transfer of loans to other real estate and repossessions 815,622 789,132 1,018,383
Financed sales of other real estate and repossessions 364,862 110,141 544,137
Tax benefits related to stock options exercised 56,986 - -
</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 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 1997 and 1998 amounts have been reclassified to conform
to the 1999 presentation.
The accounting and reporting policies of the Company and the Bank, and the
methods of applying these principles, conform with generally accepted accounting
principles ("GAAP") and 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, 1999 and 1998, 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 derived by using the specific identification method for determining
the cost of securities sold.
<PAGE>
Other Investments
- -----------------
Other investments include equity securities with no readily determinable fair
value. These investment securities are carried at cost.
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.
<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, continued
- -----------------------------------------------
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 are calculated by taking the net
proceeds from the sale less the allocated sold portion of the loan and are
presented in the statement of earnings net of brokerage expenses.
Servicing assets and interest-only strips receivable are recognized from the
sales of the portion of loans guaranteed by SBA with the retention of loan
servicing being 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, 1999 or 1998. There were no SBA loans held for sale at December
31, 1999 and 1998.
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.
<PAGE>
Premises and Equipment
- ----------------------
Premises and equipment are stated at cost less accumulated depreciation. Major
additions and improvements are charged to the asset accounts while maintenance
and repairs that do not improve or extend the useful lives of the assets are
expensed currently. When assets are retired or otherwise disposed, the cost and
related accumulated depreciation are removed from the accounts, and any gain or
loss is reflected in earnings for the period.
Depreciation expense is computed using the straight-line method over the
following estimated useful lives:
Buildings 15 - 40 years
Furniture, fixtures and equipment 3 - 10 years
Other Real Estate
- -----------------
Properties acquired through foreclosure are carried at the lower of cost
(defined as fair value at foreclosure) or fair value less estimated costs to
dispose. Fair value is defined as the amount that is expected to be received in
a current sale between a willing buyer and seller other than in a forced or
liquidation sale. Fair values at foreclosure are based on appraisals. Losses
arising from the acquisition of foreclosed properties are charged against the
allowance for loan losses. Subsequent writedowns are provided by a charge to
income through the allowance for losses on other real estate in the period in
which the need arises.
Treasury Stock
- --------------
Treasury stock is accounted for by the cost method. Subsequent reissuances are
on a first-in, first-out basis.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
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 the
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 result
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, 1999, 1998
and 1997 is as follows:
For the Year Ended December 31, 1999
Net Common Per Share
Earnings Shares Amount
-------- ------ ------
Basic earnings per share $ 1,036,851 588,239 $ 1.76
Effect of dilutive securities: ======
Stock options - 4,733
Warrants - -
----------- -------
Diluted earnings per share $ 1,036,851 592,972 $ 1.75
=========== ======= ======
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
========= ======= ======
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
========= ======= ======
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(1) Summary of Significant Accounting Policies, continued
Recent Accounting Pronouncements
- --------------------------------
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards for hedging and 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 earnings in the period of the change.
SFAS No. 133 is effective for all fiscal quarters beginning after June 15, 2000,
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.
(2) Securities Available for Sale
The amortized cost and estimated fair value of securities available for sale at
December 31, 1999 and 1998 are presented below:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
1999
----
U.S. Government agencies $ 500,000 - 10,982 489,018
Mortgage-backed securities 28,135 1,111 - 29,246
--------- ----- ------ -------
$ 528,135 1,111 10,982 518,264
========= ===== ====== =======
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
========= ===== ====== =======
The amortized cost and estimated fair value of securities available for sale at
December 31, 1999, 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 $ 500,000 489,018
Mortgage-backed securities 28,135 29,246
--------- -------
$ 528,135 518,264
========= =======
There were no sales of securities during 1999, 1998 and 1997.
At December 31, 1999 and 1998, all securities were pledged against 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, 1999 and 1998 are presented
below:
1999 1998
---- ----
Commercial $ 8,807,965 8,011,468
SBA - unguaranteed 26,663,059 21,955,805
Real estate - mortgage 43,305,661 30,995,083
Real estate - construction 25,209,898 18,868,908
Installment and other consumer 6,561,974 6,857,344
------------ ----------
Total loans 110,548,557 86,688,608
Less allowance for loan losses 1,338,691 1,516,705
------------ ----------
Total net loans $109,209,866 85,171,903
============ ==========
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 which 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 depend 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, 1999
and 1998 of approximately $36,277,000 and $34,345,000, respectively. Servicing
assets amounted to $654,000 and $631,000 at December 31, 1999 and 1998,
respectively. During 1999, the Bank recognized servicing assets of $213,000 and
amortized approximately $190,000. Interest-only strips receivable totaled
$402,000 and $573,000 at December 31, 1999 and 1998, 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, 1999, 1998 and 1997 is presented below:
1999 1998 1997
---- ---- ----
Balance at beginning of year $ 1,516,705 1,090,730 858,271
Provision 143,135 503,671 623,738
Loans charged off (324,546) (89,702) (556,332)
Recoveries 3,397 12,006 165,053
----- ------ -------
Balance at end of year $ 1,338,691 1,516,705 1,090,730
=========== ========= =========
(4) Premises and Equipment
Premises and equipment at December 31, 1999 and 1998 are summarized as follows:
1999 1998
---- ----
Land $ 763,329 586,885
Buildings and improvements 3,093,667 2,828,108
Furniture, fixtures and equipment 1,653,282 1,401,683
Construction in progress - 17,068
--------- ---------
5,510,278 4,833,744
Less accumulated depreciation 1,310,868 1,044,026
--------- ---------
$ 4,199,410 3,789,718
=========== =========
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(4) Premises and Equipment, continued
Depreciation expense was approximately $410,000, $281,000 and $176,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(5) Time Deposits
At December 31, 1999 the scheduled maturities of time deposits are as follows:
2000 $ 50,456,470
2001 8,480,213
2002 3,847,251
2003 4,232,892
2004 2,020,882
2005 and thereafter 186,742
----------
$ 69,224,450
============
(6) Note Payable and Other Borrowings
In May 1999, the Company renewed 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 May 6, 2000, with interest 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, 1999, 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, 1999, the Bank had
one variable rate advance outstanding totaling $3,000,000, which matures in
April 2000. 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, 1999, 1998 and 1997:
1999 1998 1997
---- ---- ----
Current $ 431,436 546,249 103,971
Deferred 114,816 (110,031) (57,924)
------- --------- --------
$ 546,252 436,218 46,047
========= ======= ======
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, 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Pretax income at statutory rates 538,255 445,001 90,756
Add (deduct):
Increase in cash surrender value of life insurance (27,753) 22,876) (25,817)
State taxes, net of federal tax effect - (709) (17,996)
Other 35,750 14,802 (896)
------ ------ --------
$ 546,252 436,218 46,047
========= ======= ======
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(7) Income Taxes, continued
The following summarizes the components of the net deferred tax asset. The net
deferred tax asset is included in other assets at December 31, 1999 and 1998.
1999 1998
---- ----
Deferred tax assets:
Allowance for loan losses $ 414,199 504,092
Deferred gains on SBA loans 56,387 64,688
State tax credits 4,893 16,240
Nonaccrual loan interest 5,540 37,876
Deferred compensation 70,886 49,774
Core deposit intangible 33,588 29,254
Unrealized loss on securities available for sale 3,751 -
------- ------
Gross deferred tax asset 589,244 701,924
------- -------
Deferred tax liabilities:
Premises and equipment 46,718 48,333
Unrealized gain on securities available for sale - 1,368
------ ------
Gross deferred tax liability 46,718 49,701
------ ------
Net deferred tax asset $ 542,526 652,223
========= =======
During the year ended December 31, 1999, the Company recognized certain tax
benefits related to the Employee Stock Plan in the amount of $56,986. These
benefits were recorded as a decrease of income taxes payable and an increase in
additional paid-in capital.
(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 2000 without obtaining
prior regulatory approval is approximately $1,995,000 plus earnings of the Bank
in 2000.
During 1999, the Company sold 9,464 shares of its treasury stock at an aggregate
sales price of $174,698 or $18.46 per share. All of the shares were sold to the
Company's employee and director benefit plans.
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.
(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 allowed each holder to purchase one additional share of common stock
for each share purchased in connection with the initial offering and were
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
expired in November 1999. During 1999 and 1997, 165,850 and 30,500 warrants,
respectively, were exercised at $9.09 per share. No warrants were exercised in
1998.
The Company has an Employee Stock Plan whereby 96,000 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 exercisable no later than ten years
from the date of grant.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(9) Employee and Director Benefit Plans
A summary status of the Company's director and employee option activity as of
December 31, 1999, 1998 and 1997, and changes during the years ending on those
dates, is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
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 66,731 $ 14.51 27,331 $ 9.99 24,531 $ 9.09
Granted during the year - - 39,400 $17.64 5,000 $14.00
Exercised during the year (16,831) $ 9.09 - - - -
Canceled during the year (2,000) $ 17.71 - - (2,200) $ 9.09
-------- ------ -------
Outstanding, end of year 47,900 $ 16.27 66,731 $14.51 27,331 $ 9.99
====== ====== ======
Options exercisable at year end 17,980 $ 14.01 27,331 $ 9.99 27,331 $ 9.99
====== ====== ======
Weighted average fair value of
options granted during the year $ - $ 8.89 $ 6.56
======= ======= ======
</TABLE>
<PAGE>
The weighted average remaining contractual life for options with exercise prices
ranging from $9.09 to $14.00 is 1.3 years and for options with exercise prices
ranging from $17.00 to $17.71 is 7.0 years at December 31, 1999.
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.
1999 1998 1997
---- ---- ----
Net earnings As reported $1,036,851 872,608 220,884
Proforma $ 995,619 840,031 200,548
Basic earnings per share As reported $ 1.76 1.53 0.38
Proforma $ 1.69 1.47 0.35
Diluted earnings per share As reported $ 1.75 1.31 0.33
Proforma $ 1.68 1.26 0.30
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 Board of Directors and certain key
officers 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 certain key officers 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, 1999 and 1998, the cash
surrender value of the insurance contracts was approximately $1,996,000 and
$1,528,000, respectively, and is included as a component of other assets.
Expenses incurred for benefits were approximately $45,000, $36,000 and $21,000
during 1999, 1998 and 1997, 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 $46,000, $43,000 and $36,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(10) Related Party Transactions
At December 31, 1999 and 1998, deposits from directors, executive officers and
their related interests aggregated approximately $2,645,000 and $2,328,000.
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 1999:
Balance at December 31, 1998 $ 690,000
New loans 2,753,000
Repayments (1,444,000)
-----------
Balance at December 31, 1999 $ 1,999,000
============
(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 Capital 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, 1999, the Company and the
Bank met all capital adequacy requirements to which they are subject.
As of December 31, 1999, 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.
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>
As of December 31, 1999:
------------------------
Total Capital (to Risk-Weighted Assets)
Consolidated $ 10,556,774 9.96% 8,481,328 8.00% N/A N/A
Bank $ 11,144,065 10.51% 8,481,328 8.00% 10,601,660 10.00%
Tier 1 Capital (to Risk-Weighted Assets)
Consolidated $ 9,231,400 8.71% 4,240,664 4.00% N/A N/A
Bank $ 9,818,691 9.26% 4,240,664 4.00% 6,360,996 6.00%
Tier 1 Capital (to Average Assets)
Consolidated $ 9,231,400 7.49% 4,928,120 4.00% N/A N/A
Bank $ 9,818,691 7.97% 4,928,120 4.00% 6,160,150 5.00%
</TABLE>
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(11) Regulatory Matters, continued
<TABLE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------ ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 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%
</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, 1999, 1998 and 1997, rental payments of
approximately $61,000, $59,000 and $57,000 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 $157,000, $145,000 and
$176,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
Future minimum payments required for all operating leases with remaining terms
in excess of one year are presented below:
Year Ending
December 31,
------------
2000 $ 62,345
2001 64,215
2002 66,142
2003 68,126
2004 70,710
2005 and thereafter 322,658
-------
$ 654,196
=========
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.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(12) Commitments, continued
In most cases, the Bank requires collateral to support financial instruments
with credit risk.
Approximate
Contract Amount
---------------
1999 1998
---- ----
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $20,430,000 15,532,000
Standby letters of credit $ 487,000 309,000
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, 1999 and 1998.
(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, 1999, 1998 and 1997 are as
follows:
1999 1998 1997
---- ---- ----
Legal and professional fees $ 316,859 298,463 357,640
Data processing 472,393 359,750 323,600
Stationery and supplies 127,765 140,902 85,914
Other real estate expense 837 14,233 112,890
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(15) First Cherokee Bancshares, Inc. (Parent Company Only) Financial Information
Balance Sheets
December 31, 1999 and 1998
1999 1998
---- ----
Assets
------
Cash $ 1,387,494 2,251
Investment in bank subsidiary 9,889,633 7,945,186
Other assets 56,986 -
--------- ---------
$ 11,334,113 7,947,437
============ =========
Liabilities and Stockholders' Equity
------------------------------------
Note payable $ 975,299 518,712
Other liabilities 19,619 10,377
Stockholders' equity 10,339,195 7,418,348
---------- ---------
$ 11,334,113 7,947,437
============ =========
Statements of Earnings
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Interest income (expense) $ (59,273) (20,010) 3,206
Other noninterest expense (6,676) - -
Equity in undistributed
earnings of bank subsidiary 1,102,800 892,618 217,678
--------- ------- -------
Net earnings $ 1,036,851 872,608 220,884
=========== ======= =======
<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, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C><C> <C> <C>
Cash flows from operating activities:
Net earnings $ 1,036,851 872,608 220,884
Adjustments to reconcile net earnings to
net cash provided (used) by operating activities:
Equity in undistributed earnings of bank subsidiary (1,102,800) (892,618) (217,678)
Change in other assets and liabilities, net 9,242 10,377 -
----- ------ ---------
Net cash provided (used) by operating activities (56,707) (9,633) 3,206
-------- ------- -----
Cash flows from investing activities consisting of
capital infusion to bank subsidiary (850,000) - (280,000)
--------- ------- ---------
Cash flows from financing activities:
Net proceeds from note payable 456,587 518,712 -
Proceeds from exercise of stock warrants 1,507,670 - 277,300
Proceeds from sales of treasury stock 174,698 - -
Proceeds from exercise of stock options 152,995 - -
Purchase of treasury stock - (518,716) -
--------- --------- -------
Net cash provided (used) by financing activities 2,291,950 (4) 277,300
--------- --------- -------
Net change in cash 1,385,243 (9,637) 506
Cash at beginning of the period 2,251 11,888 11,382
----- ------ ------
Cash at end of the period $ 1,387,494 2,251 11,888
=========== ===== ======
Noncash investing and financing activities:
Change in accumulated other comprehensive income, net of tax $ (8,353) 557 (2,868)
Tax benefits related to stock options exercised $ 56,986 - -
</TABLE>
(16) Fair Value of Financial Instruments
The Company is required to disclose fair value information about financial
instruments, whether or not recognized on the face of the balance sheet, for
which it is practicable to estimate that value. The assumptions used in the
estimation of the fair value of the Company's financial instruments are detailed
below. Where quoted prices are not available, fair values are based on estimates
using discounted cash flows and other valuation techniques. The use of
discounted cash flows can be significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. The following
disclosures should not be considered a surrogate of the liquidation value of the
Company, but rather a good-faith estimate of the increase or decrease in value
of financial instruments held by the Company since purchase, origination or
issuance.
Cash and Cash Equivalents
- -------------------------
For cash, due from banks, interest-bearing deposits with other banks and federal
funds sold, the carrying amount is a reasonable estimate of fair value.
Securities Available for Sale
- -----------------------------
Fair values for securities available for sale are based on quoted market prices.
Other Investments
- -----------------
The carrying amount of other investments approximates fair value.
<PAGE>
FIRST CHEROKEE BANCSHARES, INC. AND SUBSIDIARY
Notes to Consolidated Financial Statements, continued
(16) Fair Value of Financial Instruments, continued
Loans
- -----
The fair value of fixed rate loans is estimated by discounting the future cash
flows using the current rates at which similar loans would be made to borrowers
with similar credit ratings. For variable rate loans, the carrying amount is a
reasonable estimate of fair value.
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.
<PAGE>
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, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C><C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 4,559,572 4,559,572 15,319,736 15,319,736
Securities available for sale $ 518,264 518,264 542,345 542,345
Other investments $ 851,800 851,800 697,800 697,800
Loans, net $109,209,866 109,507,000 85,171,903 84,969,000
Servicing assets $ 653,586 654,000 631,065 631,000
Interest-only strips receivable $ 401,691 402,000 572,911 573,000
Liabilities:
Deposits $110,721,414 111,531,000 101,397,797 101,716,000
Note payable and other borrowings $ 3,975,299 3,975,299 518,712 518,712
Unrecognized financial instruments:
Commitments to extend credit $ 20,430,000 20,430,000 15,532,000 15,532,000
Standby letters of credit $ 487,000 487,000 309,000 309,000
</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 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.
J. Stanley Fitts --
GENERAL COUNSEL Reeves Floral Products, Inc.
Powell, Goldstein, Frazer & Murphy, LLP Russell L. Flynn --
INDEPENDENT CERTIFIED Century 21 Cherokee Realty
PUBLIC ACCOUNTANTS Carl C. Hames, Jr. --
Porter Keadle Moore, LLP First National Bank of Cherokee
C. Garry Haygood --
Haygood Contracting, Inc.
EXECUTIVE OFFICERS Thomas D. Hopkins, Jr. --
Carl C. Hames, Jr. -- Hopkins and Son, Inc.
Chief Executive Officer/President Bobby R. Hubbard --
Kitty A. Kendrick -- Lockheed Martin Aeronautical System
Executive Vice President/ R. O. Kononen, Jr. --
Chief Financial Officer First National Bank of Cherokee
R.O. Kononen, Jr. -- Dennis M. Lord --
Executive Vice President Bay, Lingerfelt & Lord, Inc.
Larry R. Lusk --
Industrial and Commercial Developer
Stuart R. Tasman --
Doctor of Optometry
ANNUAL MEETING
Date: April 26, 2000
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.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,431,915
<INT-BEARING-DEPOSITS> 1,027,657
<FED-FUNDS-SOLD> 100,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 518,264
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 109,209,866
<ALLOWANCE> 1,338,691
<TOTAL-ASSETS> 126,059,704
<DEPOSITS> 110,721,414
<SHORT-TERM> 3,975,299
<LIABILITIES-OTHER> 1,023,796
<LONG-TERM> 0
0
0
<COMMON> 774,225
<OTHER-SE> 9,564,970
<TOTAL-LIABILITIES-AND-EQUITY> 126,059,704
<INTEREST-LOAN> 10,708,238
<INTEREST-INVEST> 94,348
<INTEREST-OTHER> 167,832
<INTEREST-TOTAL> 10,998,679
<INTEREST-DEPOSIT> 4,576,892
<INTEREST-EXPENSE> 4,724,963
<INTEREST-INCOME-NET> 6,273,716
<LOAN-LOSSES> 143,135
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,111,028
<INCOME-PRETAX> 1,583,103
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,036,851
<EPS-BASIC> 1.76
<EPS-DILUTED> 1.75
<YIELD-ACTUAL> 10.55
<LOANS-NON> 338,825
<LOANS-PAST> 1,034,922
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,516,705
<CHARGE-OFFS> 324,546
<RECOVERIES> 3,397
<ALLOWANCE-CLOSE> 1,338,691
<ALLOWANCE-DOMESTIC> 1,283,417
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 55,274
</TABLE>
